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Healthcare Reform:Saving For a Rainy Day
Lifetime Health Savings Accounts
We propose a comprehensive reform of American healthcare finances, resulting in a drastic drop in costs. This is payment reform, not medical reform, although the practice of Medicine cannot escape upheavals in its finances. It must all withstand critical review, but some of the future is simply not knowable. Defense of future predictions relies on extrapolations of history, but brief explanation nevertheless forces some things out of chronological order. We must, however, begin somewhere, repeating ourselves a little when the loop is finally closed.
So, we begin with Medicare, which has worked well for fifty years. Its data are easily confirmed on the Internet. Costs are known, minor faults have had time to be been corrected. Medicare is not the central focus of this book, but it's familiar. Seeing where Medicare fits in, gets the reader a long way toward understanding the system and where it needs to be modified.
Begin understanding Medicare with how it gets paid for, in three parts. (1) About a quarter is pre-paid, originating as a payroll deduction from the paycheck of every working person and mostly matched by an equal amount from his employer. (2) A second 25% of Medicare expenditure is supplied by the retirees themselves, as various sorts of insurance premiums. (3) And the remaining half is contributed by the federal government, but it originates in everybody's graduated income tax. In recent years, national finances have been strained, so a considerable part of the subsidized half is "temporarily" borrowed from foreign countries. There is general approval of the Medicare program, but it has grown expensive, a crisis usually blamed on the approaching retirement of the baby boomer generation. In a sense, maybe Medicare is a little too popular. Everybody likes a dollar that seems to cost fifty cents.
Focus attention on the pre-paid quarter of the costs, the payroll deduction. It's to be found in a mass of other numbers on any paycheck stub, often mixed with pre-payment of Social Security, and consists of 1.45% of salary for most people, 3.8% for those who earn more than $200,000 a year. The average worker earns $42,000 per year, and thus contributes $630; half of the workers contribute less, half of them, more. Persons earning less than $200,000 are matched by equal contributions from their employer. This has been going on for so long, most people could not guess how much it costs, would overestimate the proportion of their contribution, and underestimate its full cost.
In our proposal, we ask that $360 (of this average of $609), a dollar a day per working person, be set aside in an untouchable "escrow" fund every year, $180 from the beneficiary, $180 from the employer. Essentially, that's a seventh (14%) of the matched average $1218 pre-payment already being made on behalf of the average worker, although it might constitute all of his personal pre-payment if that worker only earned $5,000 a year. (It's a flat tax, but it does not go to zero at zero income.) In forty years of working life, the escrow would total $14,400. (It currently becomes the government's money, so the transaction is a tax reduction as well as an increase in personal income. For the moment, let's skip over the people below the poverty line, who obviously have to be subsidized, and ask, "What do you propose to do with a seventh of a quarter (3.6%) of the average total cost of Medicare coverage?" We're asking for $14,400 spread over forty years, which is 7% of what a person costs for a lifetime of Medicare ($200,000), or 4.5% of what is generally guessed to be one person's health cost for an entire lifetime ($325,000). What are we proposing to do with the money?
Answer: We propose to invest the $14,800 at 8%, and offer one choice about some of it on the individual's 65th birthday, as well as a second choice about it at any time thereafter, including his will. Because we plan to earn 8% interest on it, the $14,800 has turned into $93,260, and by the way, $7400 of the $14,800 was probably contributed by the employer, who got at least $3700 in a tax deduction for it. Furthermore, most economists agree employer contributions effectively reduce the paycheck by an equivalent amount, describing all fringe benefits as just part of employee costs. We will unravel this later, but the point right now is illustrating the largely unappreciated power of compound interest. This little exercise was conjured up to illustrate the power of compound interest, which it does quite nicely; but we aren't quite through. A dollar a day has resulted in 93,260 by age 65, but by age 83 (the present life expectancy) the 93,260 has turned into $360,000, just by sitting in Medicare unused, and $360,000 is the generally accepted figure for the total lifetime healthcare cost of an individual. One conjecture is 8% interest is too high, but we devote a whole later chapter to defending that number, which is merely the highest that can readily be defended.
Remember, however, this gain. equal to Medicare's total cost was achieved by investing only $360 of the $609 actually paid in salary withholding for Medicare. There is another $249 paid to the Medicare "trust fund". At 8%, this has reached $64,505 by the 65th birthday and grows by $6054 a year until age 70. Medicare averages $11,000 a year costs until age 83, the expected age at death. If the second fund makes up the $5946 difference. The two funds are in the position of earning 8% and shrinking at a total of $11,000 per year in combination. By the age of xx, the escrowed fund is growing at more than $11,000 a year, and the surplus fund is shrinking to make up the difference between $11,000 a year and the deficits of the escrow fund. Once the escrow fund is earning more than $11,000, there is a growing surplus which at present would transfer to an IRA.
Well, obviously no one is actually going to do what's suggested in the example, at least not more than once, but it does bring out some important points. The first is that apparently Medicare could be privatized for about one-quarter of what it is now costing, just by depositing and investing what is already collected in payroll deductions. Is it really possible we could also stop collecting Medicare premiums from the beneficiaries entirely, and stop accepting its 50% federal tax subsidy entirely, which we must now borrow from foreigners? Well, sort of. It would all depend on whether you could get 8% from Wall Street, as well as an income tax deduction from the IRS. Since the government doesn't pay itself taxes, the comparison boils down to whether you can get that 8%. A later chapter is devoted to the question.
Data has not been collected to test this idea directly, but some suggestions are intriguing. Medicare reports it spends about $11,000 per year per Medicare subscriber, whose average life expectancy is to age 83. That would imply Medicare is now costing about $200,000 per subscriber per lifetime. Future longevity is unknowable in advance, but it seems plausible it will level off at 93, sometime this century. One way of looking at this is to multiply $11,000 per year, times 27 years instead of 17, and get a future total lifetime Medicare average cost of $352,000. That's quite a wallop, but revenue from compound interest of 8% would be paid longer as well, taking it from $198,000 to $726,000. Old people getting cheaper is quite a surprise. Among the various things suggested is we have no idea how much 2035 technology would cost if it's good enough to extend longevity by ten years. Take a cure for cancer, for example. Would it be $100,000 per treatment, or would it be like aspirin, just lying around waiting to be discovered lowering heart attacks by 50%, at a nickel a pill? Or take another direction: perhaps living ten years longer would result in ten more years on the golf course or bridge table, followed then by the same terminal illness. An unchanged lifetime medical cost, in other words, just spread out over a longer time. Like a tulip on a longer stem. Since we obviously don't have the faintest idea about these projections, we will just have to strike an average, and hope for the best. But to return to a deeper question latent in the discussion: Do we have to worry that living on investment income will reach a point where it can't maintain a decent living in the face of improving technology? The encouraging answer seems to be: There's nothing on the horizon to suggest it.
Choices at age 65 have therefore become more complicated. If you had already reached your 66th birthday, and your choices included taking the $180,000 in cash, of course, you can just take the money and run. You might well be required to pay income tax on the lump sum, reducing its net amount by 15-30%, depending on your tax bracket. Perhaps a better choice has already been created, to roll it over into an IRA. In that case, the tax is deferred until you take minimum distributions for retirement purposes, which start paying a gross taxable amount (calculated by dividing it by your life expectancy, which at 66 is currently 17 years) of $10,500 per year. Considering this the return on an original $7400 cash investment, that's pretty substantial. And even recognizing your employer contributed half of it, it's still pretty good.
But consider another direction, entirely. Suppose by then the laws have been liberalized to allow "grandparents" to transfer a certain limited amount (see below) from their own Health Savings Account into a child's newly-created unique Health Savings Account if the recipient child is any age less than 35. At "grandpa's" death, again if the laws then permit it, the amount (specified below) may be transferred to other accounts. In the past, a child's account would have had more than three doubling opportunities in a 26-year span, but an infant baby has no money to double, and occasionally no way to create an account.
Whereas under our proposed new hypothetical rules, the baby's HSA might contain $8,000 at age 26, if grandpa transfers $1000 at birth and nothing else is spent out of the account until the child is 26, as a hypothetical illustration. The proposal is made that special Catastrophic insurance is also needed for this situation. Nevertheless, the potential should be exploited to create a bridge which connects an age group which is often overfunded with a generation that is usually underfunded, and always incapable of managing its own financial affairs. The extra $8000 at that particular moment in a 90-year cycle would have an immense effect on the cost of the entire scheme at all ages. So immense, in fact, that it undoubtedly would require safeguards against creating a nation of perpetuities in a few generations. My own suggestion is that a surplus from inherited sources should reach its conclusion at age 35, after which any surplus from "grandpa" sources should be transferred to the U.S. Treasury, subject to appeal to the local Orphan's Court. With such a rule in place, the system would readjust its arithmetic in the great majority of cases to accommodate special circumstances. The compound investment income alone will start this cycle all over again, if it throws off $325 a year for, say, the last ten years, including consuming its principal to do so. To repeat, an estimated $6000 of the eventual $8000 is consumed by the process of paying for the baby's birth and pediatric expense, with perhaps $2000 used to fund the child's own HSA up to $3250 at age 36, getting consumed in the process. Since this hypothetical began with only $1000, the starting amount could easily be tripled without disturbing the conclusion. With actual experience, these estimates can be fine-tuned. Tax-exempt funds like this should probably not be permitted to become perpetual, but allowing them to extend to a grandchild's 35th birthday would provide very desirable bridge funding for a period of life from birth to 36, which is both medically and financially quite vulnerable, and hence requires real-life insurance data (i.e. not hospital charges). He's going to have to go out and earn a living to sustain his own health insurance (see below), but his retirement Medicare costs are already a third paid up.
Just imagine: such a scheme might encourage more women to have children at an earlier age, which would be biologically very desirable, poorer people would be able to go to college without health financing concerns, and probably with reduction of the burden of disease from untreated medical conditions. At the same time, money would remain available for grandpa's health because he got to it first. Invisibly in the background, it assures generosity in the disability costs of the increasing volume of elderly indigents, which have been widely viewed with apprehension. And although all such benefits would entail some costs, at least they could not break the national fisc, within this financing design.
Other choices for the use of this "found" money are suggested in later chapters, and still, others are readily imagined, including perhaps some undesirable ones. At this point in the narrative, we will break off in order to heighten attention to the central feature of this health "reform", perhaps better described as reformulation. The central feature of this reformulation, is to exploit the sociological changes in healthcare created by advances in science: a much longer life expectancy, with an initial period of low health expenses, followed by a shift of burdensome illness toward its far end. Such change in lifestyle is ideal for gathering compound income early in life, augmenting it while it remains idle, and spending it toward the end. Since the reformulation pushes money toward an uncertain end, it inevitably creates some surpluses, which can best be recycled to assist the difficult costs of some relative's young life that, in the larger view, are quite modest.
So far, we have only looked at reformulation as a way to generate revenue. Another proposal to choose as an alternative is to drop Medicare, and simply pay medical bills out of the health savings account plus fail-safe catastrophic coverage. While at the moment few would have the courage to make such a switch, a credible threat to do so would at least perform the public service of discouraging mission creep, cannibalism by other agencies, and/or administrative bloat. It will always be impossible to determine how much of the present cost overrun was avoidable, but it's a fact, and a source of restlessness. Its best preventative is some viable competition.
Viable competition would include both luxury care for those willing to pay extra, and bare-bones care for those who cannot afford the standard variety. Both these desirable competitors would require some mechanism for extracting a fair financial equivalent from the standard product's expense account, and transferring it to the competitive systems. Needless to say, the existing system would resist, but a proposal might additionally be devised to resolve state/federal Constitutional problems in parallel with the money.
The Constitution's Tenth Amendment is decisively opposed to any centralized national healthcare system so this issue will continue to arise. To drive a not-so-subtle point home, it is only fair to conclude that many perhaps most citizens would prefer to impair employer-based health insurance -- if the only alternative offered, is to impair the Constitution. To state the matter in a conciliatory manner, there exists a widespread consensus not even to speak critically about the Constitution, unless a sincere bipartisan effort has first been conducted, trying to work around a problem. We tried the nullification alternative in 1860, and the results proved discouraging.
So, I propose we have at least two state-based healthcare systems, and eventually, a third national system exclusively limited to interstate issues, conflicts between jurisdictions, etc. That's what the Constitution wanted, and until we give it a chance, the state/federal uproar will be recurrent. It appeals to me to envision a hospital-based system and a retirement-village-based system, taking care to restrain medical schools, the federal government, or major employers from dominating either one. That gives state governments a chance to dominate locally, but the condition of state governments makes it unlikely that more than a handful would be up to the task. Governors, possibly, but legislatures, not so likely. A unique obstacle is to discover many sparsely settled states do not have the actuarial numbers necessary to support more than one health insurance company.
And so, since big changes are expensive, we need to find some extra money. As the reader will see, I believe Medicare could be paid for by reformulation at a fraction of its present cost, with a compound income of about 8%. The precise fraction and its compound income can be juggled around, but it looks achievable. If finances are tight, and 8% is unachievable, perhaps the Federal government could supply block grants which would support 8%, just as an example. However, any such expedient is a stunt that can probably only fail once, so we better study it hard. But if it can be done with Medicare, the pattern can be repeated with other age groups.
Finally, there really is a scientific end in sight, to a problem which science largely created. Just find an inexpensive cure for five or six diseases, and the main problem which will loom is spending too much money on non-serious complaints, cosmetic enhancements, and flummery. It may surely come to that in another fifty years.
Because of the extent and complexity of the problems, this first chapter only states the premises and gives a few examples; later chapters will explore more details needed to understand certain poorly understood features. But if there is doubt about the goal, let's make an explicit statement of it. We have been convulsed by health care reform since at least the time of President Theodore Roosevelt, but every ten years it keeps coming back. Let's stop thinking small and start thinking big. Let's fix it right and get on with it.
Originally published: Monday, January 05, 2015; most-recently modified: Wednesday, May 15, 2019