Philadelphia Reflections

The musings of a physician who has served the community for over six decades

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The Staggering Full Cost of Healthcare plus Retirement: $40 Trillion Plus Retirement

Study of Health Savings (and Retirement) Accounts was begun thirty years ago, increasing rapidly in the past five years. During that time, paying for unknowable health costs emerged as the central concern. At a recent Congressional hearing, the actuary testified his estimate of the first ten years of costs for "Medicare for everybody" to be 40 trillion dollars in addition to present costs, which will themselves require additional revenue in 5 or so years to avoid bankruptcy. Retirement costs would require even more additional revenue. Furthermore, it would take at least five years to make such a massive transition, possibly ten years.

This emergency testimony before the "Speaker's Rules Committee" seemed to be Nancy Pelosi's signaling we should lower our sights on such impossible spending proposals, no matter how many Democrat candidates for President endorse them. Paying a big chunk of health costs would be a significant achievement, paying for two issues simultaneously might just be an impossible dream. Nevertheless, paying for the whole healthcare system was something the public expected to happen quite soon, and would punish the ruling political party if it didn't sacrifice everything else to achieve it. We might afford to leave Medicare alone. But when eventually Medicare came into focus as the main impediment to solving a double problem for exactly the same age group; "saving" it becomes a relatively minor issue. New revenue must be found, the quality of care must not be injured, and -- most of all -- public opinion must be satisfied. This is a specialist's game, but avoidance of a disappointing outcome is becoming a decisive player. As Congress dithers, it only becomes clearer that deficit financing from foreign enemies cannot continue much longer.

Resource Assessment. Adding up all the economies of Health (and Retirement) Savings Accounts, but now also including the retirement costs, the conclusion is left that HSAs might somehow pay for health costs, plus some but not all retirement costs. Much of the shortfall comes from difficulty stating a "decent" retirement payment which would satisfy most people. What is enough for a Trappist monk is not enough for a movie star, and what will be called decent in 60 years is pretty hard to say. So at most, we should aspire is healthcare plus some retirement; supplementing retirement as we can. Even promising that much is a stretch, but is certainly superior to government healthcare plans without the discipline of individual ownership. Unfortunately, that forces the individual to some choices he must make for himself, versus allowing some big anonymous corporation to do it all for him at a hefty administrative markup. Let's specify the two big dangers the individual must navigate:

Imperfect Agents Theoretically, even the best anyone could provide from HSAs (we jump ahead, here) would be to give a newborn baby a couple of hundred dollars at birth, let a big corporation do the saving and investing, and pay out a million dollars for medical bills (that's what total health costs over the next ninety years might cost} on his behalf, at no charge. The long investing period could provide some astonishing returns, but it would not be entirely carefree for the customer. For example, it might actually cost that much, not just be borrowed with every intention of defaulting on the loan.

Unfortunately, experience over thousands of years has demonstrated agents -- especially governments--will eventually extract much of the resulting profit for themselves. Countless kings have been known to shave the edges of gold coins, some of them have been found to have employed inflation of the currency to pay their own bills. Investment managers are almost invariably well compensated, usually for mediocre returns, so this cost must be automated with index funds. William Penn, the largest private landholder in history, was put into debtors prison by his wayward agent, as was Robert Morris, the financier of the American Revolution. Whole-life insurance companies are the closest approximation of an agent for a Health Savings Account who might propose to get paid a level premium for decades before paying out a benefit for a dead client. They seem to survive by promising a single defined fixed-dollar benefit and counting on inflation to work for them as it sometimes does for dictators, overseen by an honest insurance commissioner. Unfortunately, they have the moral hazard of falling back on other surviving firms to bail out bankruptcies, and the political hazard of trying to force premiums downward for the taxpayer without reliable benchmarks or overgenerous recompense. Just how much they have been rescued by lengthened longevity is something only an actuary knows. Long ago, the imperfect agency situation was summarized by the question, "And where are the customers' yachts?"

Inexperienced Solo Management. If Warren Buffett had an HSA, he would have no problem managing it, and neither would a great many other savvy folks. The problem is to make the management so simple and standard that expenses can be kept low without injuring investment returns -- for the average citizen. This consideration almost drives the conclusion that lifetime health costs might be best divided into at least three component parts, with benchmarks and averages published regularly, since the medical and beneficiary problems divide into the same three (childhood, working age, and retirement) components. It begins to look as though a new profession of fee-for-service advisors needs to become educated and distributed widely, perhaps in local bank branches. As will be described in later sections, the need is for the income stream to be kept in balance with the probable expenditures, adjusted for inflation or deflation. It is not, to achieve the maximum possible revenue return, regardless of risk. That is to say, the purpose of the HRSA is not to make as much money as possible, but to be sure as much medical need as possible can be satisfied by the revenue available. Let's put it all in a nutshell: There's a big difference between designing a system to cover a public need inexpensively -- and designing a business model to make a profit. But even that's not nearly as big a problem, as trying to do both at the same time.

After Assessing Obstacles Comes Strategy. Most HSAs make payments with a debit card suitable for passive investing (utilizing total market index funds) for inexperienced investors and for otherwise undesignated accounts. However, there's a technical problem: the earning period is not the first stage of life; it's the second, following nearly a third of life in childhood and educational dependency or debt. Health expenses in the childhood third of lifespan may be comparatively small, but the earning capacity is essentially zero. This unconquerable fact leads to splitting investment considerations into three stages, the first and last thirds subsidized by the middle one. The result is, two systems feeding off the middle third in opposite ways, requiring opposite approaches, and jumping between generations. Somehow, it must all come out in balance at the end. And remember, it starts with a deficit in the obstetrical delivery room unless we re-arrange something else. There is no choice but to take things one at a time.

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If you spend too much too early, you won't have anything left for later. {bottom quote}

Originally published: Tuesday, July 12, 2016; most-recently modified: Monday, June 03, 2019