Philadelphia Reflections

Waiting for Roberts

It seemed foolish to publish a book on healthcare financing, just on the eve of the United States Supreme Court announcement of what it had decided about Obamacare. Why not wait a little? So I got ready for the announcement by writing half a book and imagining several potential endings. At the end of this section, I plan to add a comment about what the Court did decide, which may be a long or short commentary, depending.

First, let me summarize the book up to this point. The Health Savings Account has had thirty years to ripen and mature, and it could be described as moderate success in supplementing the existing system of employer-dominated health care. HSA saves money for most subscribers, and even makes money for a few people who are shrewd about finances.

When President Obama hammered the Affordable Care Act past a reluctant Congress in 2008, the Health Savings Account developed a new mission. It had been originally devised as an alternative to a tired old system of employer-based health insurance. With Obamacare as a new issue, it got contrasted with a new and untried system, whose direction and purpose had been left quite unclear. With dozens of flaws, the employer-based system had created a great need for reforms, but the Affordable Care Act addressed almost none of them, and it was uncertain whether it ever would. In my view, the purpose of the ACA was to seize control of the finances, after which the President would be able to reform whatever he pleased. First, defeat the enemy, and then announce what your plans are.

That left me with a quandary. I strongly believe in reform, but I strongly resist a blank check. So I decided to write down my views on Health Savings Accounts, in case the public wanted to make use of them during the period when -- by default -- we continued to operate under the old employer-based system. That was particularly vexing, because employers seemed to be the strongest opponents of the new system, and delayed its implementation by at least two years. My strongest opinion was, the public didn't seem to understand how good Health Savings Accounts were, because their best features are latent, hidden within what seem like simple ideas. Their advantages begin to emerge when you encounter difficulties with alternatives. With HSA, almost every problem you encounter seems to uncover a ready-made solution, whereas a flawed concept usually leads to more problems every time you try to fix something.

But now we have reached a point where it is natural to ask how much further we could take Health Savings Accounts. For that, we need an organizing theme. The most natural theme is that Americans would really like to give outstanding medical care to everyone, with perhaps a few points of hesitation. We are not sure the nation can afford to give the style of care we admire, to everyone. Since the employer-based system was mainly criticized for being so costly, and since what we could see of Obamacare was going to be even more expensive, it looked like the end. There seemed a significant danger that making things better for the poor would be paid for by making them worse for the rest of us. By speaking to community groups I had the feeling that elderly people, women, in particular, are not so much in love with Medicare, as fearful it will be stripped to pay for Obamacare. All fifty states have Medicaid programs for the indigent, and all fifty of them are under-funded. That raises the question of how genuinely the public wants to give good care to the poor. There's one exception, however; rich folks, the top one percent, do seem to have a genuine wish to help the poor, no matter how populists denounce them. The rest of the country is often perilously close to competing with poor people and is therefore uneasy about being upended by a leader who wants to spend their money helping the competition. There's a lot of churning between the classes in America; in Thomas J. Stanley's The Millionaire Next Door we read that most millionaires in this country made the leap upward in a single generation.

There's another obstacle to expensive universal care, which the public recognizes only dimly. The whole medical system is already riddled with cost-shifting, at every level. The family unit cross-shifts within family insurance plans. Surgeons support the "feeders" with cross-shifted hospital costs. The rich in private rooms are charged more than the middle-class in semiprivate rooms, for the same care. The doctors in blue-stocking districts pay for medical society services of free-loading doctors in poor neighborhoods. Every conceivable cost-shifting strategy has been used up to smooth out cost differences and for hardly any other reason.

Grandpa Gives a Gift to Grandchildren. But one vehicle for cost-shifting hasn't been analyzed very well. Almost all money in the medical system ultimately depends on a single age group, from age 21 to 66. Parents almost always pay for their children, and the elderly plan to fall back on their working children if resources run low, although they hope not to. To a limited extent, the pricing of health insurance premiums shifts money around, but holds back uneasily, when it comes to shifting between family units. The Scandanavians regard whole language groups as "family" to a much greater degree than we do, explaining most of their different attitude about nationalizing health costs. Through most of these schemes runs the idea of taxing the necessary money into a government pool, and then redistributing it to the worthy poor. The resistance to this approach mostly concentrates on the political step in the middle, easily denounced but leaving true public attitudes unclear. A more serious concern would be the cost of an extra layer of administration, but most substitutes just seem to add one of their own.

So it seemed only natural to ask whether some of the unused surplus generated by the conservative elderly might be used to fund the costs of having grandchildren. Perhaps a grandchild would be better accepted than a stranger. Some resistance comes from misjudging longevity, but most of it is an underestimation of the way earnings accelerate during late-stage interest compounding. True, it might take eighty years to break even with generational transfer, but even that could be turned to the advantage of eight doublings @ 7%. Since we are dealing with paying childhood costs in the range of 10% of $350,000, the investment of one dollar (doubled eight successive times) should pay for it all in eighty years, and it really doesn't have to pay for all of it, in order to be a big deal. A variation of this line of musing follows shortly, but it isn't an easy concept and must be studied to be understood.

Buying Out of Medicare. The other group who paradoxically often need the support of some sort of cost-shifting, are the elderly, among whom the variation in wealth is wide. It might appear otherwise because Lyndon Johnson took care of them with Medicare. Except he really didn't. The Medicare budget, according to its own reports, is supported in quarters: one quarter from payroll deductions from young workers, one quarter in premiums from the elderly themselves, and two quarters from general taxpayer funds, because it's a subsidized deficit. In this case, the "general taxpayer funds" are the pool, currently replenished by foreign borrowing, mostly from the Chinese. The voting public is shielded from this deficit at the moment, but this program is destined to suffer badly unless something is done. Politicians may tell you that tinkering with Medicare is the third rail of politics (touch it and you're dead), but alternatives would plainly be welcome. It is difficult for an average layman to obtain reliable data on government operations, and they are indeed quite bulky. Therefore, the amount of accumulated foreign debt attributable to Medicare is unclear, as is the yearly or current state of it. Nevertheless, the Medicare program might well be a bigger problem than Obamacare; it is certainly quite large. Putting a stop to further borrowing, not to mention paying off previous years' debt, would be a major achievement. Unacknowledged perhaps, but particularly welcome to elected politicians.

Someone just has to make the suggestion of making it possible for some people to buy their way out of the Medicare program. Don't gasp. Depending on what age was made eligible, and depending on the effective interest rate the HSA was able to earn, there are ways it might be possible to do it and save appreciable money. The ultimate goal would be to make the program self-sustaining, and to shift its costs from those in retirement to those still in the 21-66 age group, (plus the interest income on the residual buy-out fund during retirement). No group likes to have costs shifted to it, but as we mentioned, all revenue ultimately derives from the working age group. Aligning costs and revenue almost always clarifies and, for the most part, reduces the cost of any program, by reducing "moral hazard". For an idea like this, it makes it simpler to assume the HSA fund was earning income from birth to death at age 93. Some of this is double-counting because it is uncertain whether the future is a sole new program or if it is part of a cradle-to-grave project. It might start out as one, and evolve into the other. As a quick guess, either one might become feasible with the assumption that a voluntary program would have a gradual rather than abrupt rise in costs.

Other assumptions are: an average investment income of 5% net, for 93 years of life, and a steady inflation rate of 3%. We accept a lifetime medical cost of $350,000 and that Medicare will continue to be half of it. Let's take it in two steps. In order to cover a cost of $175,000 from age 66 to 93, an individual account with a net income of 5% must achieve a $90,000 escrowed balance by age 66. And, in order to have a balance of $90,000 at age 66, the individual must start with a "gift" of $4000 at birth. That is to say, an individual can buy his way out of Medicare for a single payment of $4000 at birth. That's not the exact story, but it establishes the framework.

The calculation assumes an individual will still pay half his costs, (one quarter as payroll deductions, and one quarter as premiums). Including the interest on these sums, the single-premium cost of buyout at birth would be reduced to either $3000 or $2000. Remember, the Government stops going deeper into debt, but the outstanding debt is unchanged. Let's call that a wash because a good deal is a good deal for everyone involved. Yes, the Government is losing the tax income from the individual's HSA tax deduction, but on the other hand, it doesn't have to keep paying so many administrators in Baltimore, on Social Security Boulevard.

Lifecycle Health Savings Accounts. So there's a plan for children, and another for the elderly. They consist of a Medicare buy-out, and an inheritance. Some of the latter derives from unused balances after the buy-out. For working people, there remain employer-sponsored plans, Obamacare, and Health Savings Accounts. Everybody's covered by one of these five variations, somehow. But let's explore going further in the opposite direction, by having a unified plan, cradle to grave. The superiority of one big unified plan over three smaller ones has yet to be demonstrated, and I would personally challenge anyone to defend taking such giant steps for no particularly good reason. That is, the default position is to reduce or eliminate cost-shifting, rather than add to it.

The final step would be to develop Lifecycle Health Savings Accounts, combining the gift from Grandpa, the Medicare buyout, and Health Savings Accounts -- all under one big tent. Some of that has been explored in a separate section, but what hasn't been defended is the advantage of doing it all at once, instead of step by step. As long as we are talking Blue Sky, let's explore the advantages and disadvantages of a unified Whole-life Insurance Company which even absorbed the functions of the Health Savings Account, internally, with a guaranteed rate of return. A century ago, some major companies devised this arrangement for life insurance, and I would advise talking to such companies to learn what they think of it. In short, you pay a regular premium, the company invests the premiums and waits for you to die. This proposal would then substitute a Health Savings Account for the death benefit, but why not, let's include that, too. In Sherman antitrust terms, that's called vertical integration, but vertical integration has now been deemed appropriate in the State Oil v. Kahn case. You'd probably find yourself in a tangle of state insurance regulations, administered by people untrained in all the added skills, but let's just say we found a reason to overcome such obstacles. Essentially, this proposal would be to transfer a group of quarreling government agencies from the public sector to the private one, using income guarantees instead of passive investing. The experience might resemble watching a train wreck, but perhaps it would demonstrate some overall advantages for the combination of conservative investors and adventuresome insurers.

Without stating a preference, that seems to be the range of possibilities.

Originally published: Wednesday, June 10, 2015; most-recently modified: Wednesday, June 05, 2019