Philadelphia Reflections

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SECTION THREE: Classical Health Savings Accounts: Many Surprises
One of the originators of Health Savings Accounts describes their advantages over existing health insurance. Improvements are suggested for the regular HSA. More dramatic cost improvement emerges from a lifetime HSA version, substituting whole-life approaches for pay-as-you-go. Most of this requires legislation, but could reduce health costs dramatically.

John C. Bogle
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New topic 699 2020-09-15 17:51:02 TITLE Federal Reserve :
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Almost Good Enough (HSA) Blog 3369 :

That's the good side of C-HSA. What continued to bother me was it was close to providing lifetime healthcare financing, but without much latitude. Perhaps it would be better to settle for half, or a quarter, which would certainly have plenty of latitude for revenue shortfalls. Better still, perhaps a way could be found to phase it in, but stop when it runs low on money. Because it contained so many little pleasant surprises, however, I decided to press onward to see if others could be found.

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Whole-life insurance is more profitable than term insurance, but it requires more capital. {bottom quote}

What emerged were these new ideas:

1. Multi-year policies. To go from a term-insurance model to a whole-life model, using the life insurance approach. This would take advantage of the uptick of the yield curve in compound interest discovered by Aristotle long ago, inflecting at about the forty year mark. And advances in science would provide some extra years of longevity, to take advantage of it.

2. Escrowed Sub-Accounts. Instead of one big balance, it became apparent that some funds were intended for long-term use, and were therefore entitled to different interest rates ( checking account, savings account, investment account), which the account manager would wish to have locked for a given time or purpose (66th birthday, ten-year certain, $10,000 minimum, etc.).

3. No age limitations. Further longevity could be introduced by making HSA a lifetime compounding experience, cradle to grave, but how to fund it remains an issue concentrated on the life alternatives facing those, age 21-66.

4. Birth and death insurance, catastrophic, disability, etc. Exploring the idea of HSA from birth, I came to realize the extra cost of the first year of life was a serious impediment to all pre-funded health schemes, since one can scarcely expect a newborn child to finance a debt of 3% of lifetime costs, in advance. To make matters worse, the same is even true of the 8% of lifetime costs up to age 21. Thinking that one over, I came to see why nobody had ever devised a really adequate scheme for lifetime coverage. Seen in that light, it became clear the consequences justified solutions which might upset ancient viewpoints about a vital and sensitive subject. Whether recent turmoil (about same-sex marriage, unmarried mothers and the like,) would soften resistance or harden it, was just a guess. The result of this thinking was birth-and-death insurance, covering only the first and last years of life. Furthermore, it became easier to contemplate the issue of perpetuities, or inheritance from grandparent to grandchild. The laws already sanction inheritance to 21 years after the birth of the last living descendant, generally adequate for the purposes in mind here. All such special-needs insurance tends to reduce the remaining liability of general-purpose insurance, and typically is not workable unless the two insurers coordinate with each other and keep adequate records of their compacts.

5. Passive Investing and Dis-intermediation.The whole concept of "passive" index investing was borrowed from John Bogle of Vanguard and Burton Malkiel of Princeton. Recent difficulties in the fixed-income market make stocks seem just as safe as bonds to more people, and generally they provide more yield. The historical asset tables of Roger Ibottson of Yale inspired further confidence in the approach. Having absorbed this lesson, the concept of replacing an advisor with a safe deposit box emerged, although custodial accounts are not expensive. This maneuver could shift the "black swan" risk from the agent to the investor, assuming the agent has not shifted it, already. Ownership of common stock may not be entirely perpetual, but partial ownership of an index fund containing a trillion dollars worth of common stocks, certainly does seem perpetual enough for ordinary purposes.

6. Zero-balance protection devices. The potential that someone might figure out a way to game this system had to be considered, in view of the staggering magnitude of this proposed funding system if it caught on. The brake which suggested itself was to force the balances to return to zero at least once in a time period, and possibly many times oftener, if necessary. Offhand, I do not see how this system could be gamed, so the power to impose zero balances at a trigger level of balance, is a credible threat if it impends.

7. Total-market Index funds as a currency standard. One throw-away idea emerges from this analysis. The world economy went off the gold standard some years ago, and since then has adjusted its currency by inflation targeting. In the recent credit crash, however, the Federal Reserve has been unable to reach the 2% goal for some time, for unknown reasons. If the reason for this remains unclear, or if the reason is unsatisfactory, it seems to me the total market index of the nation's common stock would be a superior proxy for re-basing the currency on the national economy. If other nations copied this standard, their central banks could agree on a system of leveraging it between currencies, but the essential fact would remain that each nation's currency was a proxy related to its national economy, ultimately based on the marketplace. That might even restore matters to where they stood before 1913, when the Federal Reserve was created. This certainly would be superior to what some people accuse the Federal Reserve of plotting (expunging our considerable debt to the Chinese by inflating our currency.) As people say, this matter is above my pay grade, but it certainly would have the advantage of stabilizing the medical system, and ultimately the retirement system. The need for protection against bit-coins might be kept in mind. If it prevented entitlements from off-the-books accounting, I would consider index funds as a currency standard, a considerable advance.

The addition of some or all of the above seven or eight features would provide more than enough extra money to fund the entire medical system until such time as it was forced, by scientific advances, to become a retirement fund with a small medical component. We have the rough estimate of $350,000 average lifetime medical cost, but no way at all of judging the average retirement cost, so this concept will have to terminate in fifty years or so, or when the data catches up with the theory. After all, the limit of desirable retirement income is not infinite for everybody, but it is obvious it is infinite for some people.

This synopsis of the additional concepts for Health Savings Accounts concentrates on paying for healthcare with a cash cushion in reserve, so it does not dwell on technicalities, favorable or unfavorable. It does however skip over one theoretical issue of some importance: where does this money come from? Linked to that is the wry observation that it proposes to reduce medical costs by spending gambling money from the stock market. Since people who would say that, show no reluctance to hurt my feelings, let me make a forceful reply.

The designers of the Medicare program in 1965 faced a huge transition problem, too, and nevertheless, plunged ahead in spite of badly underestimated future costs. So, although revenue surfaced in the HSA proposal had been there all along, it was never gathered and put to use -- wasted, let us quietly say. I do not blame Wilbur Cohen or Bill Kissick for making concessions to get it started. There is little else they could do from 1965 to 1975 except adopt a "pay as you go" strategy. But sometime after 1975 that was no longer the case, and the new opportunity was neglected in a befuddled realization that costs were going to escalate rapidly, although hidden from sight. A great many free-loaders were added during the transition, and there was little to do except wait for them to die. So, yes, things were allowed to get worse than they needed to get, but as a nation we happened to be even luckier than we deserved to be, as scientists eliminated dozens of diseases we might have had to pay for. Until the end of that race between costs and revenues had come into sight, it was not possible to guess which one would win.

So now it is our turn to make proposals. We must face similar daunting problems of transition by a partially paid-up constituency, headed into a fully-expanded set of benefits for at least thirty years. Plus a huge and undeclared national debt from borrowing to pay for previous mistakes. I have tried to be generous in my assessment of the 1965 achievement, which was considerable. Let us see whether the opposition party can bring itself to respond generously and without intransigence, however vigorously they may subject the issue to adversary process. It doesn't mean to be a punishment, it means to be a rescue.

Originally published: Monday, August 24, 2015; most-recently modified: Saturday, September 19, 2020


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