Philadelphia Reflections

Paying for the Last Year of Life: Everybody an Investor

What is proposed in this section sounds a little funny the first time you hear it. Since so much of health cost is concentrated in the terminal illness of the last year of life, and since everybody has the last year, why not lump it with life insurance? That is if we pay for distressed widows and orphans, why not also pay for the terminal illness costs? Everyone who hears such a proposal asks why would you pay to cover what is already covered by Medicare? And although there is no mechanism in existence to do it, it still isn't clear why you would want to do things differently.

In the first place, when you are dead, someone knows exactly how much it cost. It would put an end to over-insurance and under-insurance, either one of which is efficient. Furthermore, someone would know how much everybody costs, so you could reimburse Medicare (mostly) in a lump sum for the average of what they spent, greatly simplifying the path overhead. Why would you want to do that? Well, Medicare is 50% subsidized by selling bonds to the Chinese, and neither Medicare nor China can afford to continue being so casual. Furthermore, Medicare costs are destined to be pretty volatile for a while, but eventually to be reduced to nothing but everybody's terminal care costs. If that's where we are eventually going, why not plan for it in advance, and gradually adjust for what it will cost, as the final costs emerge? Let's describe how it might work.

In the first place, we can predict that health costs will be comparatively small in childhood and early life, slowly growing to that final terminal illness. It's clearly suited for low premiums gradually growing by compound interest to pay a huge final debt, just like life insurance. When you look at how we are doing it at present, you see it almost has to save money. Because we are running a huge transfer system from working people to non-working ones, we only start the compound income after 25 years of childhood, followed by forty years of paycheck deductions, followed by thirty or so years of paying Medicare premiums. Its premises dictate you must do it somewhat like that, but there's the entirely too much-hidden cost for too long a period of time, subject to political and regional whims. If you only focus on the certain conclusion of the dance of death, you have a steadier goal and a more efficient mechanism. What's being proposed here is a second insurance company, steadily building up a reserve to pay a second insurance company (Medicare) which continues to run on term-insurance principles. When one insurance company pays the debts of a second insurance company, it's called re-insurance. Terminal care re-insurance. One year's risk should be sufficient to begin the process, but eventually, it could cover the last two or three years of life, just as well. As the money rolled in, it should be possible to direct the last few years premium to other generations, as will be described in subsequent sections of this book, and skipped over, here.

So, it might be replied, we are here proposing two insurance companies for the health of the elderly, instead of only one, which we already have trouble paying for. That's true enough, except the premiums don't have to remain the same. The steadily lengthening longevity of the population should easily take care of the problem, although the grim experiences of Fannie Mae and Freddy Mac might suggest more precautions would be wise. I plan to stay away from this dangerous topic since the politicians who would need to consider it is probably even more cynical than I am. Perhaps they can devise mixtures of public and private companies to protect us from ourselves.

========================================================================================================================================= But it could be possible if less than a dozen words of the law were changed. At present, a Heath Savings Account terminates at age 66, and the residual contents are transferred into an IRA. The original hope was your health worries were over as soon as you were eligible for Medicare.

If this termination were to become optional, or if it could be supplemented with the last year of life escrow, the following would become possible: Sufficient money could be deposited, sufficient to generate enough investment income to pay it off at death. The final amount required would be the average amount Medicare is now paying, times an inflation growth factor, also obtained from Medicare records. The investment growth factor would be somewhere between the average long term interest rate on Treasury bonds, at a minimum, and the average total American common stock index fund growth rate, over the past 50-100 years, as an upper bound. It will surprise many to discover that the latter has averaged about 11% for the past century because of compounding. Figuring backward from these two historical values will arrive at a required growth rate, for the average aged person, obtainable from census records. From this data can be calculated how much growth would be required. Having this, the amount of deposit necessary could be calculated.

My own estimate is the last year is 8% of the total of the $350,000 total life cost generally assented to, or $28,000. At 6.5% average return (my estimate), this would generate $28,000 after 84 years from a single deposit at the birth of $150. However rough these estimates may be, they suggest a project along the lines suggested, is entirely feasible. If safety technicalities are an issue, it should be possible to take delivery on an index fund, and put it in a bank lockbox until it is needed.

A second purpose of establishing an end of life transfer now emerges: It could generate a considerable portion of its costs by pre-funding itself at prevailing rates of return. The last year of life is the most suitable for this treatment. Whether to extend the concept to the entire of catastrophic health care, is riskier, and should probably be undertaken in steps.

Originally published: Friday, September 25, 2015; most-recently modified: Friday, May 31, 2019