Philadelphia Reflections

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

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Social Politics

After the Second World War, the medical costs of children were small enough to be written off cheerfully. We entered an era of lavish gifts to children's hospitals, probably prompted in part by the memory of obstetrical write-offs. Many of these gifts paid for research costs, but part of them went for rather lavish hospital facilities, making it impractical to consider recovering the losses of the past. In all this uproar there was room to develop a credit system, but our mindset had been changed. Primarily, the child was not legally responsible for the debts. From the point of view of the indigent mother, her only recourse was to disappear from sight. If she had several children, it was beyond her imagination. As it still would be today, in many cases. If we had taken the legal position that half of those costs were the responsibility of the child, they at least would not have multiplied within a multi-child family, so the prospect of a hopeless situation might not appear so soon.

Equal Pay for Equal Work(?) The same problem now surfaces when the girl first applies for a job with health benefits. She is of an age group with trivial medical costs on average, except for pregnancy and all its associated costs. Her premium cost is high, a similar male would be quite low. Even with considerable cost-shifting, the male is a cheaper employee. In fact, males can easily take their chances of being uninsured, while females would be terrified of being uninsured. It is not going too far to suggest the whole configuration of employer-based health insurance is a result of trying to patch up this situation, working with what you have. I believe the whole system of employer-based health insurance would not have got so advanced and intractable, but for lack of an alternative to this patchwork. After all, a rationalization of this issue by male-female pooling would not affect the employer, the tax deduction would be the same for him in any case. For people in marginal finances, there is too little flexibility to provide room for gradual workarounds, and the employer generally has other things on his mind. It might take ten years to show an effect, but a system of re-assigning personal responsibility on a legal level is the first step in taking risks with a benefits program. Let's summarize it this way: health insurance up to age 40 is insuring obstetrics plus the risk of getting sick. After age 40, it becomes less a matter of risk, and more a matter of reimbursing actual health costs. Obstetrics needs to be taken out of this equation, and the cheapest way to do it is through a hundred dollars added to the contingency fund of an HSA at the time of birth, but that's a later step.

Mandates do get immediate attention, but the distraction often makes evasion of mandate seem a quicker route to savings than slow, steady efficiency improvement. We invite the reader to revisit the major advantages of incentives over rigid mandates. In particular, the concentration of medical care into the end of life permits idle income to be invested, creating wholly new revenue in the meantime, and making less borrowing cost necessary. Potentially, savings might be doubled by reversing some borrowers and lenders. Contrariwise, the limitation of government revenue to taxation and borrowing lowers interest rates, ultimately favoring inflation of medical costs. That's just supply and demand. It's not unusually true of healthcare financing, and we don't advocate changing it. It's just a fact we might as well use to general advantage in health insurance re-design.

Equity Investing Within IRAs. Workers tend to overvalue labor and undervalue risk-taking, so they use their voting power to force interest rates down by increasing government debt. As a consequence, interest rates are generally too low, and debt levels too high, even though demographics are now forcing nearly everybody to become an investor for his old age. Ruminations along these lines suggest a more efficient balance results from increased equity investing by everyone, regardless of how he earns his primary living. Medical care is just an example of consumer necessity, big enough (18 % of GDP) to bend the curve back to commodity levels without undue resistance. If the topic became hula hoops, these ideas probably wouldn't work, because people would simply eliminate hula hoops. And by the way, by "equity" investing we mean the use of total market index funds, not direct investments in companies themselves.

We previously calculated passive investment of healthcare payment float returning 7.5% might do the entire job, of reaching a lifetime individual health cost averaging $300,000 in the year 2000 dollars, without private supplements. It's another way of saying equity investing could reduce costs on average by $200,000 per lifetime. But that's on average, and people get sick in bad market years, too. If you want to do it all without supplements or subsidies, you must increase the interest return, engage in a risky investment, or reduce the lifetime medical cost with research. But the investing approach promises to make a substantial improvement without affecting medical care very much. That's the better approach when you have no precise way of estimating future costs. Experience is showing there are better investing years and worse ones too, but it gets pretty tough to average more than 5%, net. So if we could find 2.5% extra somewhere, a cost-free health system might be in sight. Successful corporations can probably expect to make 10% profits for their stockholders, so the addition of 50% worth of stock producing a 10% return, might result in an overall portfolio yielding 7.5%. It wouldn't be easy to get there, but it identifies the goal.

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Protracted retirement is a hidden cost of improved medical care. {bottom quote}
Passive Investing at Birth for Medicare(?) That's only one way to put it. A radically different one would grow out of imagining a gift of $100 at birth, with a dollar a month added to the balance, starting at age 25, and assuming a 90-year life expectancy. That would cover a lifetime of medical care to a total of $300,000, assuming the account itself was generating 5% interest. That isn't precise, because people will get sick at different ages, but it clarifies a different approach to the same set of facts.

Retirement Costs Attributable to Medicare (?) However, we regard prolonged retirement as a hidden cost of improved medical care, currently unfunded except for Social Security. To cover this cost for the twenty-five years from age 65 to 90 would require an additional $876,000 at the 65th birthday, assuming we get the 7.5% return. What we have come to is the problem of making every inhabitant of the nation into a millionaire. But compare that with $2500 at birth and $29 a month (from age 25 to 65) to supplement Social Security by $1,000 a month. Although it may not sound it, this is really a bargain, incompletely certain of success. If a married couple both did this, they would enjoy a comparatively modest retirement of $4000 per month, including Social Security. It can thus be seen that although retirement is still a bargain, it is far more expensive to provide extra retirement than the healthcare which, in a certain sense, created the need for it. In that sense, the later protracted retirement living is the most expensive part of healthcare costs. It needs no apology, it is what it is.

However, the difficulty we have in proposing a system for reducing the cost impact is primarily explained by the rather ambitious size of the cost, which is likely to get even worse. It is not entirely to my taste to propose a Scandinavian cooperative system to pay for it, and no doubt some will propose short-cuts and expedients, but at least this approach has a chance of breaking even, whereas pay-as-you-go and inflation financing just kick the can down the road, for another generation to face the grim realities of still higher costs. The only remaining alternative which might work is to continue spending as much on research as we spend on Medicare. It seems likely science will eventually cure cancer. But unless it cures cancer cheaply, all is for nothing. Even in spite of being offered a bargain, a great many people will take their chances on a government bail-out, rather than accept the frugality being suggested. That's why membership has to remain voluntary, and why hard times are surely ahead of us.

Summary. We seem to wander from the subject, but it is intentional. Emphasizing the difficulty of solving the health financing problem by conventional means, makes it easier to consider unconventional ones. We ask for sober reflection on the advantages of the following:

1. Considering at least half of the cost of Obstetrics. to be a financial debt of the child.

2. Considering each grandparent to owe a replacement debt of one grandchild's medical costs, up to age.26.

3. Considering it a government obligation to subsidize those who cannot afford these obligations.

Conflicts of Interest. In order to avoid turning this idea into either a boondoggle for hedge funds or a gigantic tax dodge, it might be wise to limit the portfolio to health-related corporations. Over the past century, we have seen Medical Societies own malpractice insurance companies, medical journals, post-graduate educational tape recordings, health insurance companies, and probably a few hospitals. Even more enticing would be drug companies and medical device makers. In all of these areas, the danger of conflict of interest would arise, but somehow it has always been managed. In fact, medical ownership or control of ancillary services has probably declined, although it is likely the medical owners have usually been happy to be rid of the distraction. Medical malpractice insurance is probably an example of medical owners filling an unfilled need. When competition returned to the field, the owners have generally preferred being rid of the unpleasantness, rather than enjoying profits from conflicts of interest.

If to all these associated for-profit corporations, is added the educational loan system for healthcare providers, plus the myriad institutions to house the patients, it starts to become clear the danger of monopoly control is a small one. While there is no doubt local monopolies would arise, and some instances would occur of subscriber control of them, the industries now making up 18% of a gross national product would greatly dwarf the number of providers. Physicians were paid 20% of the healthcare dollar in 1980, but only 8% today, as an example of how great the field has become dominated by non-professionals. The scientific field has become so huge and so attractive in itself, that comparatively few professionals of eminence are interested in business careers. It is true professionals lacking eminence are sometimes more attracted to such activities, but the resulting peer pressures strongly favor the power of a few eminent professionals who allow themselves to get involved. In a power play, the rest of their colleagues will support them.

Originally published: Wednesday, August 03, 2016; most-recently modified: Wednesday, June 05, 2019