Philadelphia Reflections

Two Central Mistakes In The Design of Health Insurance.

Concentrate on two flaws in healthcare. If uncorrected, no scoring -- dynamic or otherwise -- will conceal collective failure to address health costs seriously. Other problems should stand aside while these two are considered.

The first is pay-as-you-go. Its name misleads, because the younger generation, enjoying good health, pays its parent's high health costs toward the end of life, passing their own to their children. Medicare's first generation thus was given a free ride, so my mother who died at the age of 103, represents a whole generation who paid essentially nothing for thirty years of expenses. This example of debt being passed along for fifty years, got bigger with time throughout 18% of Gross Domestic Product, even with low-interest rates. We must liquidate that debt, invest the idle savings until needed for healthcare, and eliminate the annual 50% Medicare deficit to creditors. Quite a task.

An important result would be the incentive to save, replacing the incentive to spend. HSAs demonstrate net savings in health- the cost of at least 20% because, in a Health Savings Account, young people of each generation earn interest while they save for their own subsequent health costs, instead of spending immediately for anonymous demographic groups of strangers. At this point, another unexpected bonus appeared:

Some people have the luck not to get very sick, thus able to accumulate tax-exempt money in the account until they turn 66. Since everyone gets Medicare eventually, current law turns HSA accumulations into largely unnoticed tax-exempt retirement funds. (It's mandatory, whereas I would prefer an option.)

A second blunder reached the surface. Medicare provided better medical care, but made longevity increase, laying bare it had added thirty years of retirement cost. Sickness cost is episodic, but retirements are continuous. Consequently, additional retirement costs can become several times as costly as the sickness costs they replace. Talk about sweeping something under a rug.

It will not be easy to produce packages of proposals to cover the transition to a less costly funding system. But no health funding scheme other than Health Savings Accounts provides even the flimsiest scaffold for addressing this issue. Social Security has such a mission but is hopelessly underfunded. So the second of two big problems facing us, is: we failed to anticipate success.

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There is a third big elephant in this room to be wiped out with a paragraph of legislation. Scratch any regulation and you find a lobbyist underneath it. Half the population enjoys a tax deduction denied the other half, and that other half is restless. Unless big corporations yield to the demand for equality, there will be continued agitation. No doubt lobbyists promise to address this issue under tax reform and perhaps plan to reserve their concessions for later trade-offs. But one half of the public owes such a large debt to that other half, little quid pro quo is justified. Permitting HSA to pay the premiums for required high-deductible insurance could accomplish it in a handful of sentences.

The fourth big issue offers hope, instead of despair. Medicare coverage for young unemployable persons ("disabled") was effectively broadened to over 90 %, by unemployed effectively changed to unemployable. Higher costs were thus added to basic costs for 9 million of the 46 million regular Medicare recipients, rather than remaining lumped with the 30 million uninsured unemployables (requiring specialized programs.) These higher costs of average Medicare per employable person, have been overlooked by most commentators, making ordinary Medicare seem costlier than it really is. It's bad, all right, but not quite as bad as it seems. Documenting that fact, as well as shifting the medical income tax inequity to the tax bill, leaves only two new issues to address: pay-as-you-go, and retirement funding. That's quite enough for a first round.

Originally published: Wednesday, March 29, 2017; most-recently modified: Thursday, May 09, 2019