Philadelphia Reflections

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

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Escrowed Subaccounts

Homer, the blind Greek poet, portrays Odysseus on his voyage home from the Trojan War, mistrustful of his own good intentions about approaching the Sirens, beautiful women with an enticing song. Odysseus lashed himself to the mast of his ship, as a precaution against temptation. The modern version is an escrow account, which protects more useful later expenditures against youthful temptations to spend, or else against hysterical reactions to less serious problems. In an escrow account, the owner specifies legitimate use, deviating only with the consent of some third-party custodian. Escrow has in mind the need for healthy young persons to save for more serious illnesses when tempted to spend on less serious ones, while there does remain an outside possibility for early spending to be more sensible. Buying a red convertible roadster with money set aside for retirement might be one issue best restrained, but not absolutely forbidden.

Escrow subaccounts become necessary when long-term saving is more central to some purposes than others. In a Health Savings Account, the bulk needs to be available for bruises and checkups, but an irreducible amount is set aside for serious distant spending. In the general account, partial escrow meets current needs, but a portion is forced into an untouchable future account. An entire age group may be solvent, while any individual member of it remains in serious deficit. So, insurance spread-the-risk covers some, while escrow protects against others. Both have a cost, kept as small as possible. The depositor must keep in mind, his fears invigorate his counterparty's business plan to make a profit. This whole issue depends upon the J-shaped cost curve of health care. The non-escrowed, general funds are mostly limited by deposits into them, but it must be recalled that health insurance itself adds 17% to medical costs. Escrowed funds depend more on frugal spending habits multiplied by investment and compound interest, boiled down to a few tenths of a percent increment over many decades. Long after bruises and check-ups have been forgotten.

Here's the battlefield. Professor Ibbotson of Yale has shown total stock market returns have averaged 11% for a century, and other investigators using other sources suggest it may have been true for two centuries. Never mind that future predictions may not follow past results -- it's all we have to judge by. Three percent inflation reduces 11% to 8% real return. Serious unexpected recessions ("Black swans") come along every 20 years or so, it has been traditional to protect against them by investing 40% in bonds, reducing the real return to 5%. Our calculation of the present rate of healthcare spending requires 6.7% for the plan we will sketch in later. On the other hand, it will be noticed the finance industry consumes investment returns in a manner which reduces 8% to 5% and meanwhile shifts most of the risk to the customer. Because of computers and productivity, it does not seem unreasonable to hope for 6.7% to the depositor. But it won't come easily since the finance industry is resisting fee-only approaches which the Wall Street Journal estimates would add 1% to the depositor's return. Since bigshot investors refuse to pay more than 0.4% for investing large amounts, and since HSA investors do not have a payroll to meet in recessions, it should be possible to approximate everybody's goals. After a struggle.

Most of our projections assume a 7% investment return for a simple reason. Money at 7% doubles in 10 years; $100 turns into $200 in a decade. Since the life expectancy at birth is now about age 83, eight decades of 7% doubles eight times and $100 at birth turns into (200, 400, 800, 1600, 3200, 6400, 12800, 25600) or more than 250 times as much as you started with. This simple calculation allows you to check data in your head. It is a subset of the "rule of 72", which says any interest rate within reason divided into 72 gives an answer of how long it takes to double. Thus, 7% doubles in 10 years, 6% takes 12 years to double, 8% takes 7 years, 10% takes 7. If you prefer, the Internet supplies many compound interest calculators, but be wary of false answers when a computer cache fails to empty completely. If you use an internet calculator, be sure to use one of the simple formulas for checking answers in your head. That summarizes why we used 7% investment returns instead of 6.7%. No matter what you use, projecting the future contains some uncertainty.

If math of all sorts bothers you, the following chapter may be skipped, since plenty of people with green eyeshades will check it. Ultimately, however, all projections of the future involve some guesswork, and therefore probably some errors. I stand in awe of the life insurance industry, which managed to make a stable business out of almost the same problem. They had to pick a premium decade in advance, invest it in a sea of uncertainty, and return a fixed but attractive guarantee decades later -- and still stay in business. That doesn't mean it will work every time, or that just anyone can succeed. But it does seem to show it is possible.

Let's summarize. The present system is going broke. Unless something changes, the Government will be unable to continue its present level of Medicare spending for more than a decade or so. The public is complaining about how much Medicare costs, but in spite of straining at the limits, 50% of its spending is borrowed by bond issues, and it does not provide any retirement benefits beyond present Social Security. Mrs. Clinton proposed lowering the age limit at a calculated extra cost of $7800 per enrollee per year, eight years ago; probably a third more in today's inflation, which the government protests are too little inflation to erase their deficits. And yet, Medicare covers half of all healthcare costs in the nation. As the Affordable Care Act demonstrated, the healthcare needs of the rest of the country cannot subsidize Medicare, Medicare is more likely to be asked to support other age groups. Medicare is the "third rail of politics, just touch it and you're dead." And yet, additional really sick people are moving into the Medicare age group; eventually, we will reach the point where, except for self-inflicted disorders, there will be no health costs except the first and last years of life. If we are on a pathway toward concentrating all, or mostly all, of healthcare costs into Medicare, it is futile to imagine doing away with Medicare. That's where we are, and it is pretty grim, forget about math to prove it. Please look now at our counter-proposal.

We propose to change the financing, not the delivery system. The total revenue is unchanged, the style and methodology of healthcare delivery are unaffected. Continuing bond issues to cover deficits are not contemplated, although one-time transition costs may have to be. Childhood costs are included, obstetrical and pediatric costs are transferred to Medicare. A moderate retirement benefit (nevertheless larger than sickness costs) is provided. Provision is made to include other programs, like additional pearls on a necklace, but only if they are self-sustaining, every ship on its own bottom. Everything is based on incentives and voluntary enrollment; nothing medical is mandatory. It may take longer than everyone wants, and it may include some approaches that offend some people, but at least they don't have to join if they don't want to. Since mathematical precision is impossible, it may fall short of its goals. In that case, it will only partially cover expenses. In that case, it will require supplementation. But it's hard to see how anyone would be worse off. If you think I am just ranting and raving, read on.

Originally published: Tuesday, December 20, 2016; most-recently modified: Thursday, May 16, 2019