Philadelphia Reflections

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

6 Volumes

Health Reform: A Century of Health Care Reform
Although Bismarck started a national health plan, American attempts to reform healthcare began with the Teddy Roosevelt and the Progressive era. Obamacare is just the latest episode.

Health Reform: Children Playing With Matches

Health Reform: Changing the Insurance Model
At 18% of GDP, health care is too big to be revised in one step. We advise collecting interest on the revenue, using modified Health Savings Accounts. After that, the obvious next steps would trigger as much reform as we could handle in a decade.

Second Edition, Greater Savings.
The book, Health Savings Account: Planning for Prosperity is here revised, making N-HSA a completed intermediate step. Whether to go faster to Retired Life is left undecided until it becomes clearer what reception earlier steps receive. There is a difficult transition ahead of any of these proposals. On the other hand, transition must be accomplished, so Congress may prefer more speculation about destination.

Surmounting Health Costs to Retire: Health (and Retirement) Savings Accounts

Consolidated Health Reform Volume
To unjumble topics

Health Savings Accounts, Regular, and Lifetime

We explain the distinction between Health Savings Accounts, Flexible Spending Accounts, and Lifetime Health Savings Accounts. Sometimes abbreviated as HSA, FSA, and L-HSA. Congress should make it easier to switch between them. All three are superior to "pay as you go", health insurance now in common use, only slightly modified by Obamacare. It's like term life insurance compared to whole-life. (

CHAPTER FOUR: Proposals to Extend Regular
Health Savings Accounts

Improvements in Regular Health Savings Accounts: Introduction.

Health Savings Accounts have always been a good idea since their enactment in 1996 and reaffirmation by Congress in 2003. But they could be vastly improved by six simple amendments, plus one moderately complicated one, to be described shortly. Right now, without such new legislation, they produce roughly 30% savings (for an estimated 12 million subscribers) by providing subscribers an incentive, to use insurance frugally for medical expenses and keep the savings for themselves. That's by contrast with regular health insurance which actually encourages more health spending, as the only available way to get something back for the money. Alone of the options available in American health insurance, HSAs invest "unused" premiums and credits them to the subscriber. Ultimately, it rolls over any surplus to a regular IRA retirement account, at age 65 or whenever Medicare supplants it.

It is mandatory to link HSAs to high-deductible insurance for big medical expenses (so-called "re-insurance"), whereas the Affordable Care Act aims at the same goal by placing a "cap on out-of-pocket expense", in addition to the deductible limit. The approaches are not completely comparable, however, because the cap approach forces the basic insurance to re-absorb such costs, while a high deductible approach actually pays the bill. It is not clear whether there is any resulting cost difference to the subscriber, on this feature. However, the overall net cost is appreciably less for HSAs than traditional health insurance, while with the "metals" plans of the Affordable Care Act, the price differential is even wider because of the subsidies it extends. It is too early to judge whether these subsidies will have to be cut back to maintain solvency.

Traditional insurance requires the complexity of filling out and processing millions of claim forms, whereas the HSA approach has generally been to use a bank debit card for small expenses. For large hospital costs, each high-deductible plan has its own approach but generally seeks to apply Medicare's DRG approach where the hospital will agree to it. DRG stands for Diagnosis-Related Groups, paying by the diagnosis rather than itemized charges.

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The higher the deductible, the lower the premium. {bottom quote}
Small-cost Items Are Expensive to Process
Alone among insurance alternatives, HSAs permit the growing number who remain fairly healthy during their working years, to transfer any remaining surplus from unused insurance into an ordinary IRA at age 65, where they help finance retirement. Essentially, this means the restriction to use them for medical purposes is lifted. Thus, they can reward healthy people who live too long, just as surely as other people who seem to spend most of their time in a doctor's office. Better stated, the real distinction is between the (shrinking) number who develop serious illnesses while young. And the (growing) number who delay developing serious illnesses until they are elderly.

Before we plunge into the weeds of compound interest, notice the feature which started the idea: high deductibles. The higher the deductible, the lower the premium -- in any kind of insurance. Several decades ago, there was once sold an extreme illustration, of a twenty-five thousand dollar deductible health insurance. Its premium was a hundred dollars a year. That dramatizes the idea, but it was never very popular. Insurance is seldom purchased, as they say; it is sold. There can't be much profit in a hundred-dollar premium.

Reform Proposals for Regular Health Savings Accounts

If they are so attractive, why doesn't everyone choose HSAs for their health coverage? Legalistically, although deposits into an HSA are tax-deductible, the high-deductible reinsurance portion must come from after-tax income. That is, the law specifies, HSAs are not permitted to pay the premiums of health insurance, even though high-deductible insurance is required as a condition for buying an HSA. In practice, the insurance portion is denied a tax deduction unless it is purchased separately by the subscriber's employer . No reason has been advanced for this strange unfairness, but the only party visibly gaining by it would be its insurance competitors, who mostly sell conventional large-group insurance through the Human Relations departments of big-business sponsors.

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A 35% Federal Corporate Tax Reduction, plus State Tax. {bottom quote}
Understanding Big Business
Probably a more satisfying explanation is that maximum American corporate taxes (state and federal) are stated to be the highest in the world, varying from 15% to 48%, depending on the state of domicile and the size of the earnings. The number of employees is quite unrelated to either the earnings or the state, so the tax deduction for health insurance is also unrelated to those factors, probably more related to the type of business. Generally, corporate behavior is more influenced by differences between competitors than absolute costs. Let's take the average employee health insurance premium as published by the government to be somewhat more than $5000. Let's say the employer has 10,000 employees and pays $50 million a year for the insurance, with a business deduction of $25 million reductions in taxes. Quite often, an employee is asked to pay 30-50% of the cost, sometimes not. Economists are unanimous in the opinion that employees eventually pay all of an insurance benefit themselves, through a gradual reduction in take-home pay. If the corporation is profitable, it is very likely the cost of insurance is reduced at least 40% by tax abatement and an unknown amount by the employee absorption of the cost into his paycheck. In good years, it would not seem impossible for an employer to calculate he pays nothing at all for the insurance. It is safe to say that in a high-tax state with many employees contributing, the employer cost is very little. Even if he fails to make a profit on the transaction, he certainly becomes less sensitive to the rising cost of health insurance. This cannot be a useful ingredient in the battle over health costs. In fact, it even creates a motive to be indifferent to high corporate tax rates, which might even lead to a worse effect on the economy than rising health costs. A major employer thus is faced with some major ambiguities in his stance on these public issues, and very likely feels pressure to resist the idea of even opening up the issue for discussion.

(Proposal #1) We, therefore, suggest this unfair differential could be most easily remedied by providing HSA owners the option of paying the mandated insurance premium of catastrophic high-deductible insurance in two steps: first to the HSA, which is itself tax-exempt, and secondarily transferred by the HSA to the reinsurance company without hindrance or tax. Whether this change could be made by regulation or would require legislation is not clear, because reasons behind the existence of this discriminatory prohibition are not entirely clear. Treasury's revenue loss from extending a tax exemption to unemployed people must, of course, be very small. And since now the Affordable Care Act contains almost no policy without a high deductible, there begins to be legal standing at the Supreme Court for those who are forced by law to pay differentially higher premiums for it.

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1. Tax deduction.
2. FSA/HSA RollOver
3. Direct Pay
4. Obstetric cost
5 Inpatients=DRG, Outpatients=HSA 6..Un-disable Catastrophic Insurance {bottom quote}
Six Small Changes

(Proposal #2)Meanwhile, enrollment in HSAs would be immensely stimulated by permitting Flexible Spending Accounts to roll over unspent balances into HSAs from year to year. Some other small but questionable features of FSA are discussed separately in, For now, it is important to realize they are not the same thing, but they could, and should, be combined by permitting rollovers of the employee's own money to Health Savings Accounts. In the cases where the employer provides the money, his permission is of course required. But it should not be overruled by a rule that has adverse cost consequences.

(Proposal #3) The electronic insurance exchanges proposed by the Affordable Care Act have perhaps begun too ambitiously, but it continues to seem like a good idea to reduce administrative costs by direct marketing of insurance plans, direct premium payments, and direct payment of claims to providers. When such features are implemented, they should, of course, be extended to Health Savings Accounts. As discussed later, small-balance accounts of any sort are an expensive nuisance for banks and investment companies. Perhaps freezing withdrawals until the accounts reach $10,000 would accomplish this, as would the issuance of discounted bonds in lieu of opening accounts until they reach a minimum size. Brokerage houses which issue super-low-cost index funds might consider issuing single-purpose bonds to buy them on a sort of "lay-away plan". The whole issue of reducing administrative costs might need to be deferred until interest rates return to normal levels, and the transition from teller windows to electronic banking is more complete.

(Proposal #4) Because of societal conflict over who is responsible for obstetrical costs, the father, mother or child, there is some uncertainty in health insurance about the same matters. However, if obstetrics and childcare costs could be clarified as joint investments by the parents and the child, it might clear the way for Health Savings Accounts to add an additional 26 years to the duration of internal compounding for HSA reserves of all three persons. More professional legal consultation might be advisable, but the intent is to make a change of ownership cast a long but inexpensive benefit through distant enhancement of HSA value for whoever eventually uses it. The child will usually outlive the parents, eventually narrowing the scope of the adjustment. This change alone might make small single-premium gifts at birth more attractive to people who had never before considered them. With an additional 26 years to compound, discounted lifetime health costs at birth could be in the astonishing range of a hundred dollars. Narrowing the scope to a bond with limited transferability might also help. In the long run, we can expect health costs to narrow down to the first and last years of life. Early recognition of this trend might reduce the cost of migrating to it.

(Proposal #5)The linkage of Health Savings Accounts to high-deductible insurance creates a logical division of payments, into using bank debit cards to pay only outpatient costs, but the high-deductible insurance to pay only inpatient costs, especially where pre-payment can be based on a diagnosis. Since hospitals may well differ, this matter should be clarified in regulations. There is also the problem of emergency room payments, which are often switched to inpatient costs if the accident victim is later admitted to the hospital. Remarkably, this often lowers the payment.

One of the great muddles of present healthcare payment is the translation of Diagnosis-Related Groups (DRG) into indemnity equivalents. The present tendency to collapse many medically unrelated disorders into the same "diagnosis-related" code, should be reversed. The DRG code should be completely revised, utilizing the SNOMED code rather than ICDA, then reconnecting them to indemnity equivalents. At the very least, this would reduce the number of "all other" diagnoses, which are not diagnosed at all. It is suggested that each basic DRG payment should be uniform nationwide but subsequently adjusted to the individual institution, through audited direct and indirect overhead supplements. This might reduce the reluctance to post base prices on the Internet for competitive reasons, thus expanding their detail without significant cost, and facilitating prompt "pre-payment".

(Proposal #6) Add some stripped-down Catastrophic Plans to the "Metals" Plans of ACA. For mysterious reasons, Catastrophic health insurance is one of the options for the Affordable Care Act but is limited to persons under the age of 30, unless they are hardship cases. There may be some conflict between the authors of the legislation and the authors of the regulation, which will require the Supreme Court interpretation of the intent of Congress. To use even the cheapest plan available, the Bronze Plan, adds considerable premium expense and therefore reduces the amount available for producing investment income. At one time, $25,000 deductible policies were available for a $100 annual premium, although that was decades ago. Nevertheless, they illustrate the principle that the higher the deductible, the lower the premium can be. That intention may be in conflict with some other intention.

(Proposal # 7) Segmental, Single-Premium, Advance Payments for Lifetime Health Savings Accounts (L-HSA)

Unlike the first six proposals which are almost self-explanatory, the seventh proposal would provide spectacular cost savings, but at a price of considerable rearrangement, and probably incremental introduction. The first six, fairly simple, proposals would greatly enhance existing Health Savings Accounts and make them able to compete with the awkwardness which has been patched into one-year term health insurance, over the past century. If Lifetime Healthcare Savings Accounts begin to demonstrate attractiveness, demand will rise for enhanced features which may require further preparation and debate.

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Lifetime Health Savings Accounts: Biggest cost reduction, greatest disruptiveness. {bottom quote}
...and one big one.
In the next chapter, we speculate about some of the potentials for using HSAs to reduce Medicare indebtedness, finance retirements, and essentially pay for all healthcare with investment income, if the reader can believe such a thing, which sounds almost too good to be true. It is certainly too ambitious to undertake without careful study and adversary debate. Most of the problems which bedazzle the viewer relate to the century-long transition period imposed by everybody being of different age at the beginning of the transition. Our solution is to have multiple solutions, some more suitable for different age groups than others. To this end, our illustrations adopt the convention of imagining single-premium policies, beginning at the start of each natural age period with a different single payment to cover all of the healthcare within the segment, and possibly the rest of the life. Segmentation makes it possible to split lifetime coverage into several layers for transition and illustration purposes. But it is not imagined that very many people would elect single-premium as an actual payment mechanism. As one example, Medicare is not included in the Affordable Care Act at all, but it remains necessary to demonstrate the effect of its isolation, on the economics of the rest of the same life.

Amending HSAs To Include Tax Sheltering

Bill Archer

There is nothing the matter with Bill Archer's law to enable Health Savings Accounts, except one thing: it forbids payment of health insurance premiums via the Accounts. Probably, that provision was a necessary compromise, to get the bill passed. But just imagine what would happen if it were amended to permit such payments: money legitimately passing through the accounts gets an income tax deduction.

Henry J Kaiser

Anybody can start an HSA, so with a small amendment, anyone could get an income tax deduction for health insurance, by writing a check from the Account to pay the premium on his present health insurance, or even just notifying his bank's Bill-Pay to do it automatically. By this simple maneuver, everyone would be eligible for the Henry Kaiser tax exemption now limited to employer-paid insurance. This simple change would eliminate a festering sore of unequal treatment under the law which has been allowed to persist for eighty years. Except possibly for those who don't want a tax exemption or don't want to take the trouble to use the HSA. It's hard to imagine anyone taking that attitude, so a powerful incentive to create HSAs would leap into place. As we have said in many places, if the tax cost of the universal exemption to the government is an objection, it could easily be paid for by lowering the exemption for employer-based insurance. The number with the exemption at present so greatly outnumbers the population excluded from it, that the reduction in tax exemption making it equal is surely less than 25%. It will nevertheless be resisted, not because of the small tax cost, but because the present inequality drives people toward employer basing. Even employers would not lose much because all the business competitors would be treated equally. The main resistance would come from insurance companies which specialize in the weird forms of health insurance specially designed to adjust to existing law. Perhaps they should be compensated for their loss, although that sort of thing is seldom done in our system of government. Rather, they would be expected to accommodate the new rules of business or go out of the business. That's traditional, and it is traditional for their stockholders to insist that they resist it, leading to the eternal struggles of "creative destruction," which is universally praised as an ornament of our culture, except when it applies to yourself.

Conversely, insurance companies which provide Health Savings Accounts will flourish with new customers, so existing health insurance companies are urged to add a new form of business and prosper. Any change of the rules requires time to re-adjust, so there will be room for both kinds of health insurance, for a long transition period, perhaps permanently. Let a hundred flowers bloom. In fact, all of the current plans being offered under Obamacare contain deductibles of at least $6000, so the designers of that Act have grasped the right idea, which includes tacit phasing out co-payments. A copayment of 20% is well demonstrated not to be enough to influence patient behavior, and a copayment of 50% is seen by the public as no insurance at all. Copayment has always been a way of making the premium cost appear smaller than it really is, and it's very simple to calculate in a bargaining negotiation. A twenty percent copayment reduces the premium by twenty percent, and that's about all there is to it. Total costs are largely unaffected, except they trigger the invention of another layer of insurance to cover them.


It presently is difficult to know how many people will have health insurance after Obamacare settles down, and how much it will cost. But the Wall Street Journal reports that all of the plans being offered by the Insurance Exchanges have at least $6000 deductibles, and the various approved insurance plans cost between $187 and $590 a month. The Obama administration seems to have grasped the idea that paying small claims with three layers of insurance is a pretty expensive way to pay your bills. Therefore, it is possible to imagine an agreement between the Democratic Senate and the Republican House of Representatives, for reasons of cost, alone. Later in this book, we propose that all small claims by everyone be paid out of Health Savings Accounts, and all hospital claims are paid by diagnosis since the bedfast patient has no opportunity to bargain in the marketplace. Getting the hospitals to charge everyone the same, is an entirely different issue. The concern about such a rule is that it may contain an incentive to perform elective surgery as an inpatient when a vast number of small surgeries are adequately managed as less expensive outpatient procedures. Special accommodating adjustments such as patient discounts will probably prove necessary to prevent such an unwise migration of the locus of care. Indeed, the small but irritating local monopolies of ambulances may need to be addressed, as well, since a patient may be well enough to recover at home, but not well enough to drive himself home.

For the moment, let's not get down into the weeds of this thing. Let's just pass it, and immediately.

Some Unintended Opportunities

The present state of healthcare legislation is, to put it delicately, immature. Both Health Savings Accounts and the Affordable Care Act are the law of the land, but the Obama Administration defiantly slipped in some regulations, and quietly slipped in others, which have no precise authorization in the law. Everything may claim to be mandatory, but until enforcement begins, neither enforcement nor appeal to the Supreme Court about constitutionality seems completely feasible. When no one has been injured, no one has "standing" in the eyes of the courts.

Funding the Deductible. For example, every one of the governmental "metal" plans has at least a $1250 front-end deductible, going up to $6300 for full coverage. Meanwhile, non-government health insurance is rapidly replacing copay with high deductibles, too. (Co-pay is the main cause of supplemental insurance, a doubling of administrative burden.) Unless a person is eligible for the subsidy, this mandatory large deductible makes the insurance hard to use unless the individual has saved up some cash for his deductible, somewhere else. So why not provide a tax incentive to have the deductible in escrow? At the moment, Health Savings Accounts are the only feasible approach to this goal, but that does not exactly mean they have been authorized to do so since double coverage is more or less frowned upon. The deductible means nothing until you get sick, so Obamacare gave itself a few years to figure this out, but the public is apparently in jeopardy if it tries to invent a workaround. It begins to look as though the voters may not give the originators of this plan enough time in office to see this as a problem they must address. So, if this is going to be everybody's problem, why not see if the Health Savings Account can offer to do it. By doing so, the individual apparently must drop his existing insurance, so go figure.

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By accident or by design, All Obamacare policy choices have high deductibles. {bottom quote}
The Bronze Plan is Cheapest

People who have no illnesses, naturally have little present concern with ambiguities in health insurance. But health insurance will matter as soon as illness appears. Therefore, the present state of limbo will increasingly be of concern to more people. Seemingly, there is a race between the three branches of government to start an action. Either a compromise must be reached between the Executive and Legislative branches, or else the Courts will be forced to intervene by some injured person. Curiously, the only Justice to express displeasure with the present Constitution is Ruth Ginsburg, whose two cancers make her likely to be the next Justice to retire.

A piggy-bank for Millennials. Whatever someone may think of Obamacare, the front-end deductibles provide a pretty substantial incentive to maintain at least $1250 per person cash reserve somewhere, and an HSA would be just a wonderful place to keep it. If that is somehow blocked, an IRA would be almost as satisfactory. If Congress addresses the matter, an IRA could later add a feature to roll over the deductible from such IRAs to HSAs. If the individual avoids spending what is in the HSA, it eventually will revert to an IRA on attaining Medicare eligibility, anyway. Calculating a 10% investment return, age 25, and assuming no medical expenses, it might then have grown to $51,000 taxable, or somewhat less if lower interest rates are assumed. For someone who stays healthy, its minimum distribution as an IRA at age 65 would start paying a taxable retirement income of over $775 a year. That's pretty good for an investment of $1250. Obviously, everybody older than 25 gets less, but in no case does anyone get less than the $1250 he/she put in, just to cover a possible deductible. The issue of the high investment return is taken up in Section Four. As will then be seen, there are two issues: whether such a return can be safe and consistent; and whether hidden fees will undermine the return.

It's true you can't spend the same money twice. If the fund is depleted by spending for a deductible, it must be promptly and fully replaced to keep the fund growing. However, Aetna studied and GAO confirmed, that only 50% of enrollees in employer-sponsored HRAs withdrew any of their funds (which might have been used for outpatient as well as high-deductible purposes). Apparently, these clients were more anxious to preserve the tax shelter, than to protect their health, which is a slant I hadn't considered. This was true, even though the employers' efforts to enhance the compound income were not particularly strenuous. In a sense, it is a flattering sidelight on the frugality of many Americans. But the power of compound interest lies in re-investing the profits, so reasonably prompt restoration of the enhanced principal would not materially reduce the final outcome, just so long as internal profits remained untouched. It would be fairly simple to impose this requirement, creating a distinction between "balance" and "available balance", but doing things for people's own good, is always a questionable adventure.

We mentioned earlier, Roger G. Ibbotson, Professor of Finance at Yale School of Management has published a book with Rex A. Sinquefield called Stocks, Bonds, Bills and Inflation. It's a book of data, displaying the return of each major investment class since 1926, the first year enough data was available. A diversified portfolio of small stocks would have returned 12.5% from 1926 to 2014, about ninety years. A portfolio of large American companies would have returned 10.2% through a period including two major stock market crashes, a dozen small crashes, one or two World Wars hot and cold, and half a dozen smaller wars involving the USA. And even including one nuclear war, except it wasn't dropped on us. The total combined American stock market experience, large, medium and small, is not displayed by Ibbotson but can be estimated as roughly yielding about 11% total return. Past experience is not a guarantee of future performance, but it's the best predictor anyone can use. The supply of small-cap stocks is probably a limiting factor. As we will see, your money earns 11%, but that isn't necessarily how much its owner will earn. But inflation throughout the period remained close to 3%. In this sense, the income net of inflation was never higher than 9%, so we have to presume 9% sets a theoretical limit to what can be achieved by passive investment, even after heroic efforts to reduce middle-man costs. Most of our estimates are based on 6.5%, and most investment managers produce less than that. Nevertheless, very substantial program gains are possible in every tenth of a percentage point which can be further squeezed out. The next candidate for streamlining cost is the Catastrophic insurance premium.

Catastrophic insurance has not been popular for many decades, so presumably, there is room for competition to reduce premiums, marketing costs, profit margins, and other conventional competitive tools. The reimbursement to hospitals has suffered from favoritism directed toward some of its client corporation groups, who indirectly force Catastrophic to absorb some of their costs. And finally, there is likely to be overlapping provision for the same costs in a year-to-year system, which might be wrung out by five-year, ten-year or even lifetime policies. One can see potential economies on every side, but they will not come easily. In the long run, a perfect system might generate the revenue equivalent of 10.5% as a top limit instead of 9%. As everybody came up to speed, the potential is there for easily managing what might now be borderline achievable results. In fifteen years, that is. In the meantime, we will have to be satisfied with less ambitious projections for our present approach of term insurance.

So, in the meantime, we take things in a different direction, based on the whole-life insurance model. But one point may not be so clear: the Savings Account part of HSA is already lifetime, in the sense of rolling over and accumulating after-tax income for the rest of life. So for that matter, Catastrophic high-deductible insurance would be an easy next step, requiring only some adjustment of the present unfortunate tendency to assume an equivalence between "mandatory" and "exclusively mandatory". Money is money, and the courts will have to decide what sort of entirely fungible money is satisfactory for meeting minimum, maximum or any other coverage requirements. Since the "metals" plans all have high deductibles, but also have unduly high premiums, it seems likely the idea was to force insurance premiums to cover the subsidies for the uninsured. Such confusions of language and intent are ordinarily corrected by technical amendments. At age 66, right as it now is, every HSA turns into an IRA for retirement purposes. But up until age 65, it can be used for medical expenses, getting a second tax deduction. We are close enough so that changes to enable a whole-life approach are imaginable, but not yet feasible.

FIFTH: Having Invested, How Do You Reimburse the Providers of Care?

In its early configuration, Health Savings Accounts were envisioned as only paying for outpatient services, so why wouldn't it suffice to pay such claims with a debit card? Inpatient services, where market mechanisms are not practical for a helpless bed patient to negotiate, might be paid by using DRG values and approaches -- payment by diagnosis rather than individual services. It still remains a mystery why this approach isn't taken since the savings would seem to be considered as compared with the cumbersome claims form approach. How long it takes for a hospital or a drugstore to be paid by claims forms are not public knowledge, but it seems to take at least six weeks for a report to go to the patient that the claim has been acknowledged. For inpatients, the delay is usually twice as long and maybe six months. Whatever is the cause for this delay is unclear, and it may somehow be linked to whatever it is that insurance companies do with a claim form. If an auto dealer will accept a credit card, why a hospital can't do the same is unclear, indeed.

Health Savings Accounts for outpatient services are their own business, and how the high-deductible insurance linked to them handled claims was its business. Nobody asked why service benefits companies did things the way they did them, and it is still regarded as a sort of a company secret. Right now, the focus of public attention is on the 10% administrative cost of health insurance, and eventually how they conduct their business enters the discussion slowly. It really is a little hard to see why it costs so much to have someone pay your medical bills, and to outsiders, the whole approach seems bizarre. Since a debit card charges 1-2% for what it does, it really does not matter how either type of business does its work, what matters is demanding to know what value is created by the extra 8-9%, which amounts to quite a lot in aggregate. The same applies to DRG, except that the cost shifting between inpatient and outpatient has reached epic proportions. Today as I write this, I am told that a visit to a teaching hospital outpatient area for myself is billed for over two thousand dollars when as a physician I would suppose it might be less than a hundred dollars. But then, don't worry about it, you personally owe nothing at all. Is the public supposed to sit still for this sort of thing? Business ethics be hanged, I deserve to know what's going on, a lot better than I am being told. And even I understand better than most of the public that the general gist of it is to transfer costs between inpatients and outpatients while attempting to maintain the illusion of equal approaches.

On this level, we continue to ask why the claims form is used, or at least used so often, why the administrative cost is so high, why the service is so slow, and what we could suggest as a better way of doing things. When those questions settle down, the insurance company is entitled to return to its normal stance, that it is none of my business.

Meanwhile, perhaps public agitation on this level will stir up some competition, who will at least improve matters by making itself more clear.

--------------------------------------------------------------------------- Financing healthcare has four defined parts. You can get the money by contributing it to a Health Savings Account. You can accumulate more money by tax-free investment income added to what's in the fund. You can pay big expenses (mainly hospital inpatient costs) with a high-deductible insurance policy. And finally, if you don't have enough money, the government can subsidize you. The object of this hierarchy of choices is to pay for as much of it as you can, from investment income, which is a source of income no one had before. If that's not enough (usually because you got very sick much younger than average), you make it up by personal supplement, and if you exhaust even personal money, you get a government subsidy. If you are lucky and live to a ripe old age with money to spare, you can spend it on the extended thirty-year vacation at the end of life. This last point is important since without it there is no incentive to spend it carefully. For emphasis, let's repeat: for bookkeeping purposes, all Revenue collection is into the Health Saving Account , independent of disbursements or insurance for health care payments.

That's the basic plan, but there is a huge Medicare deficit, built up over years of failing to pay for it, and some may have to be spent on reducing that debt. We may have more financial crashes or other miscalculations, and premiums may have to be increased to pay for all this. Because no one can predict the future, there will have to be a judicial body to oversee how all of this is working out, and recommend mid-course corrections to Congress. The object of all this is to provide a fund to each individual which covers lifetime health costs so that subsidies are minimized, giving preference to subsidizing your own health costs but at a different time of life, perhaps under different financial circumstances. That's the easy part since the management of the pooled funds has a single mandate: make as much investment income as you possibly can, with as little investment expense as you can manage. If private investment funds do better than you do, be prepared to explain it to the judicial body which is made up of outstanding investors and is empowered to replace the management for poor performance. Meanwhile, the President is empowered to replace the judicial body itself for the poor performance of the fund, in consultation with the Senate. As long as the investment pool does as well as the average fund of its size, it should minimize the need to supplement revenue from individuals as well as subsidies, offset by the reduction of debt. And that is its main function.

While the revenues of this pooled lifetime fund are hard to predict, the managers need only assure that it is enough to pay legitimate costs, by informing Congress of the need to raise or lower subsidies. Failing to balance the books subsequently means only one thing: subscriber contributions must be raised or lowered. However, raising contributions should require the consent of Congress.

---------------------------------- Disbursements. Revenues may be hard to predict, but future health costs sixty or eighty years in advance, are impossible to predict. Certain principles seem fairly clear. Whether to include the premium for the high-deductible health insurance, should be an open option, allowed but not required. Individual marital, employment and other circumstances are too varied to justify a general rule. Whether to include patent remedies and unorthodox treatments, combined with the universal instinct to game the system, pretty much mandate the creation of a permanent oversight body to adjudicate such issues. It should be semi-independent of the government, which has the greatest temptation of all to shade its decisions with budget considerations. The managers of the revenue side should aim for at least 10% overfunding, and during the early transition phase may have to create a special transition (borrowing) fund, with plans to phase it out as the funds grow internally. A special re-insurance fund is also a suitable alternative. Ten years should be the limit to such transition funds, but the exact timing should be estimated at the onset and readjusted once after five years of operation. To do its job it will require a data collection and monitoring system. In most of these areas, it would resemble the Federal Reserve, able to regulate, but bound by the mandates of Congress. An additional, judicial body for the disbursements should be created, to create a pathway for appeals. determine the worth of new additions to claims, to render an opinion on whether obsolete claims costs are diminishing appropriately, and to make industry comparisons about expenses. Its composition should provide representation to major cost components of the claims, and Congress should hold hearings about nominations to the judicial body. Representatives of various industry groups should be allowed access to both the meetings of the board, and related subcommittees, but a suitable conflict of interest rules should be devised. The judicial body should be provided with data on demand, and pay close attention to trends, up or down. Industry groups should be free to introduce data of its own, and in the event of a protest, an appeal to a Congressional oversight committee.

It is the intention that funds in the Health Savings Accounts may be used to pay outpatient costs and catastrophic health reinsurance premiums, while hospital inpatient costs should be reimbursed by DRG methods out of the catastrophic health reinsurance. However, flexibility at the beginning of the program may well be required. Overall, however, subscribers should be encouraged to protect the build-up of their Health Savings Accounts by paying small costs out of pocket even if funds exist in the funds. When funds are utilized, the nature of the claims must be subject to limitation as to true medical need, until the funds grow comfortably above lifetime requirements. Debit cards are encouraged for HSA use, with usage matching a list of allowable claims; other electronic payment methods may appear in the future, and the managers are encouraged to permit reasonable flexibility in their adoption or experimentation. Subscribers should be provided with yearly reports, including a comparison with the experience of peer groups. Since the health coverage is intended to be a lifetime, the records should be a lifetime. The accounts may not be overdrawn, but private credit is permitted within industry-standard boundaries. In short, a myriad of details require some sort of address, and careful thought should be given to concentrating accounting, investing, technological, congressional and medical decisions into review by the appropriate sort of experts.

------------------------ Additional required legislation 1. Once data is available, the Secretary shall negotiate an agreement to reduce or eliminate Medicare payroll deductions and/or Medicare premiums in consideration that a) adequate funds are available in the individual HSA to pay for average Medicare claims costs in the last year of life, providing that contributions continue to grow at a sustainable rate b) that access to the funds for other purposes is then frozen awaiting appropriate balances to be achieved or c) that the age of the subscriber and the size of the fund assure a safe margin. d) Appropriate arrangements for certain age groups can be made to divert payroll deductions to be applied for this purpose, particularly during the transition period. e.)At the time of the individual's death, the HSA will reimburse Medicare for the average cost of the subscriber peer group's last year of life costs, plus any advances made in order to fund this arrangement. f) If more money is available than needed fore), the Secretary shall provide the option to increase or decrease the funds transfers to include more years of average claims costs than the last year of life (the accordion principle). This provision is primarily intended to cover the possibility of major changes in health costs, such as a cure for cancer, or epidemics of new diseases. It might also cover the slow build-up or decline in average costs over a period of time, requiring a major adjustment to keep the arrangement working as intended. This whole arrangement is built upon the assumption of a roughly continuing ratio between terminal care costs and earlier presumptions about them. It must adjust if the ratio changes.

2. Transparency and Price Controls. A satisfactory mechanism must be provided for any patient to learn, at least three months in advance, the price of any item or procedure for which a fixed price can be determined, and to which the provider is then held liable, regardless of whether insurance is involved or not. After six months of operating under this rule, a survey shall be conducted, after which the Secretary has the discretion to publish price comparisons between providers in the region. Further, providers are required to devise a match between outpatient costs (subject to competitive pricing) and DRG component costs, resulting (within 10%) in outpatient costs which are no lower or higher than the calculated inpatient costs, and comparable inpatient DRG ingredient costs which are no more than 10% higher than the competitive regional costs for the same item. Because of extra overhead costs resulting from the night, weekend and holiday operation, a hospital-wide overhead adjustment should be made, compared with regional levels, and made public. This overhead allowance may be made for inpatient and emergency care, but not for outpatient care. Furthermore, all indirect overhead costs shall be subject to an independent audit, frequently, routinely, and in both detailed and aggregate form made public.

SIXTH: Indemnity, Not Service Benefits

About eighty years ago, Blue Cross organizations started paying service benefits. Before that time, most casualty insurance paid an indemnity, which is to say, a certain amount of money if you had a certain type of "loss". If you had a fire, the indemnity would pay up to a stated amount, not a bit more. Auto insurance would pay what it cost to repair your car, but at their option, they could just impose a top limit, after which they "total" your car. So pure indemnity for healthcare gradually added service benefit features; it made the insurance a lot easier to sell, as in "Paying for everything you need, no questions asked". Health insurance would generally pay for appendicitis, no matter what it cost, or a broken leg, or hospitalization for terminal care. They were able to do this because they were often started by hospitals; and while the hospitals shared the risk of overpayment, they naturally had some control over the cost or at least some way of paying for it from charity funds. In the course of time, almost all health insurance preferred the image of "Don't you worry about cost, just get better."

{top quote}
When you reach a point where average health insurance costs exceed 5 %, you are probably in such a spiral. Unfortunately, the tax reduction for employer-basing often averages more than 5 %, so it pays to continue something which ought to be stopped. And those who ought to denounce the system, quietly defend it. {bottom quote}
Service Benefit Cost Spiral
Sometimes it takes a struggle to keep that promise, but it reassures clients, and the industry struggles to maintain it. Meanwhile, it has been a long time since anyone said, "Don't you worry about big bills. Your insurance covers everything medically necessary above $5000, and if not the hospital carries re-insurance paid for by your employer." Naturally, first-dollar service benefits with no upper limit seem preferable, until it becomes unaffordable. Having reached the limit of affordability, the next step should be to reduce coverage for small claims, not for big ones. If even that fails to cover costs, the hospital must submit to individual service limits. Each step in this rationing process increases administrative costs, so a spiral is created. When you reach a point where average insurance costs (including hospital costs to administer it) exceed 5%, you are probably entering such a spiral. For comparison, bank debit cards profitably charge 1-2% to pay your bills, including fraudulent bad bills. Unfortunately, the Henry Kaiser tax reduction for employer-basing often averages revenue gains of more than 5%, so it pays to continue something which ought to stop. Those who ought to denounce the system, quietly defend it.

{top quote}
We didn't promise to pay for a hernia repair, we promised to pay five hundred dollars if you have a hernia repair. {bottom quote}
However, complaints in the news media lately, suggest that this approach has reached some sort of limit. Instead of having one doctor in one hospital, people move around, so they change employers and hospitals; they frequently change doctors, by shifting their primary focus on a new specialist in a field that becomes primary to them. That is, women shift their primary focus from obstetrician to a pediatrician to the internist, perhaps to a surgeon or dermatologist, perhaps back to gynecology, perhaps finally to the geriatrician. The insurance companies have struggled to keep up with this, and state licensure of both health insurance and hospitals linked them to local employers. It is almost as though health insurance companies are trying to push the clock back to something they can manage, as a futile resistance to the way the society is changing and is going to continue to change.

Job mobility is increasing, shifting hospitals is just as common, and shifting doctors to respond to the disease of the moment remains feasible. But when insurance flirts with becoming national, or interstate, the fortuitous links are greatly stretched. Teaching hospitals may remain situated in the center of cities, posh hospitals may migrate to the high-rent districts everywhere. But it begins to get hard for an insurance company in Connecticut to maintain informal assessments of hospitals a thousand miles away. Potentially, every insurance would have to have an opinion about every hospital and doctor in the country, in order to shift into investigative mode about a rapidly escalating variety of service prices and underlying price structures which influence their claims. To simplify matters, insurers have begun to limit their availability to specific hospital networks, physician groups, and specialties. Clients promptly howl with indignation, and it can be pretty hard to guess where all this is leading. But in general, when the public conflicts with a vendor, it is the vendor who had better change.

Meanwhile, the role of the state Insurance Commissioner is indeed changing. Starting perhaps with Herb Dannenberg of Pennsylvania forty years ago, the insurance commissioner is seen as a consumer advocate, holding down prices. Before that, the main job of the Insurance Commissioner was to assure that the insurance company didn't go bankrupt, leaving a lot of customers without the insurance they had paid for. They protected the public in a different way, by assuring that premiums were realistic, and its administration was following the rules. In recent years, however, the Commissioner has tended only to hold premium prices down, which in the long run probably makes insurance harder to get. Meanwhile, the insurance company sits in its office tower, trying to find its way among a myriad of demands on it, watching the familiar local social structure fragment to the point where big data analysis supposedly fulfills the role of community gossip. Sometimes data is better than shop talk, sometimes it is hopelessly left behind. Sometimes you can trust it, sometimes you can't. So, in fact, you can never trust it.

It certainly seems useful to reduce the proportion of service benefit and increase the proportion of indemnity, for the protection of the insurance concept, not merely for the protection of the companies. That is, to transfer some of the risks from the insurer to the public. John Wanamaker once made a fortune using the slogan, "The customer is always right." But when the customer is on the other side of a failing bargain, some means of persuading the public it is wrong must be searched for. Otherwise, the service demanded will disappear. In fact, it is probably true that a few insurers will go bankrupt, just to persuade the public to pay attention. In the present stressful introduction of Obamacare, insurers are experimenting with limiting certain policies or price ranges to certain hospitals or lists of physicians. But the public is starting to shake off the flounderings of populist insurance commissioners, and essentially announces this just won't do, because it goes far beyond the mandate extended to insurance companies to pay the bills. Take our premiums, pay our bills, take your fee, and then -- please go away. A quick way to get back to basics is for the insurers to declare they will pay a certain (indemnity) amount for a certain type of claim. Providers can raise prices if they wish, but this is the limit of what we promised to pay. Anything more must be supplemented by the subscriber, not by us. We didn't promise to pay for a hernia repair, we promised to pay five hundred dollars if you have a hernia repair.

Which Obamacare Plan Fits Best With Health Savings Accounts?

Health Savings Plans were designed over thirty years ago, well before the Affordable Care Act. The ACA does include pure catastrophic coverage. But it inexplicably limits such coverage to persons under the age of 30, and over that age, only in hardship cases. The paradox exists: Obamacare in fact imposes high-deductible features to every one of its products but includes too much baggage. The catastrophic options are far overpriced for such limited use. The new regulations should be dropped to remedy that awkwardness. Later in the book, it is of central interest to see how lifetime coverage compares in cost, against a "naked" catastrophic policy costing about $1000 a year. (see below)

Proposal (K): Congress should permit the sale of excess ("Catastrophic") indemnity health insurance, without any specified service benefit provisions or age limitations, with a deductible approximated to exclude most outpatient costs while including most inpatient ones. If future medical science should evolve to exclude an unmanageable proportion of outpatient procedures, the line may be adjusted. If inpatient and outpatient costs fail to segregate roughly around the deductible, a numerical deductible should be abandoned, and wording should be substituted which has that general effect. The designation of payment for emergency care should depend on whether the patient is admitted afterward. Reasonable limits may be negotiated on ambulance costs and other outriders such as expensive drugs and equipment use.
Furthermore, the ACA introduces the interesting concept of an upper limit to cash out-of-pocket costs, which creates a quasi re-insurance effect. That seems like a useful innovation, which mitigates the need to design a special re-insurance program for Health Savings Accounts. The unknown person who devised this idea is to be congratulated for simplifying the problem. Commercial catastrophic insurers are urged to take a look at imitating it, and the Secretary is urged to write regulations which permit the use of it, at the option of the insurer in consideration of the required flexibility of Catastrophic insurance regulation. This is an area where the use of dollar limits (indemnity) is clearly preferable to enumerated service benefits. When bills are large enough to exceed the deductible threshold, they are likely to be paid to institutions, where subsequent non-medical use is comparatively easy to identify.

{top quote}
None of the Obamacare "metal" options is entirely suitable for a Health Savings Account. {bottom quote}
A high deductible is itself a desirable feature, while co-pay or coinsurance, is undesirable. The typical 20% co-pay feature has proven too small to have a restraining effect on usage and would have been dropped as useless, except for one thing. A 20% co-pay will reduce the premium by 20%, a 34% co-pay would reduce premiums by 34%. Therefore, in the heat of a salesman making a pitch, it is useful to be able to adjust the premium to just about anything requested, so the marketing departments usually press for inclusion of a "flexible" co-pay feature. But that is really just a smoke-screen. The effect of a deductible on premiums, on the other hand, is rather tedious to calculate, but its effect on outpatient shopping behavior is striking because a host of small claims are swept away when their price becomes too low to justify expensive individual claims processing. Just think for a moment of the effect: the higher you raise the deductible, the lower you make the premium. I seem to remember a time when the AMA offered a $25,000 deductible for $100 yearly premium. If we had stayed with that approach during the following fifty years, we might be in less of a pickle about rising health care costs.

{top quote}
But, the bronze plan currently has the highest deductible and the lowest premium. {bottom quote}
So the bottom line is this: even the Obamacare "metal" plans demonstrate that the higher the deductible, the lower the premium. With the highest deductible and the lowest premium, bronze plan is currently the one to choose for linking to a Health Savings Account. It's nowhere close to a $100-dollar-a-month premium, however, and is not at all what I would have designed for the purpose. But if you must have an ACA high-deductible, take this one. And indeed, you probably must. The U.S. Supreme Court decision that it isn't a penalty, it is a tax, has been worked around by saying you have to pay a penalty of 1% of your income, unless the small tax penalty is larger, which it probably seldom will be. A young person might be able to pay the small tax penalty with his first job, but one hopes it will soon creep up on him that he actually has to pay 1% of his income when the happy day arrives he is so unlucky as to get a raise in salary. It's hard to interpret the rumor circulating around that the premium for a Bronze plan will double in 2015. Since by definition, a Bronze plan only covers 60% of the cost, it must be presumed all other plans will similarly double in price. That hardly seems credible, since it would push all Obamacare premiums into the unaffordable range, causing the system to collapse. If you are a gambler, try gambling this rumor is just a hustle, intended to get more people to sign up before it happens, thus allowing enough money to arrive, so it won't happen.

{top quote}
The higher the deductible, the lower the premium. {bottom quote}
The Iron Law of Insurance.
So the way we would advise using the HSA has three components: 1. Choose the cheapest plan with the highest deductible. 2. Try to build up the HSA to $10,000 as quickly as you can, by contributing the full $3300 annual limit ( or $6000 family unit) even when you otherwise don't need to. 3. Try not to spend the funds in this best tax-sheltered account, unless you don't have any other funds at your disposal when you get sick. Bear in mind it is more favorably taxed than even an IRA.

If your Health Savings Account contains a $10,000 special-purpose fund for unexpected medical costs, compound investment income will make it grow considerably faster when you are young. That's a time when mathematics will make it grow fastest in the long run. Remember, you aren't required to do this, but take my word for it; it will make for much easier lifetime health financing if you can spare the funds.

And by the way, if you can think of any legitimate reason why we should forbid the sale of this type of insurance for any age group whatever, I wish you would come forward and explain it.

Lifetime Health Coverage, Summarized in Advance

We propose the development of a lifetime health insurance product, for the main purpose of gathering investment income on the insurance premiums. It reduces the cost of health care by adding that new revenue source, which at the moment is simply lost. The longer compound interest is allowed to work, the more income will be produced, to the point where it can be imagined that this income source would more than cover the cost of health care. For the most part, it would really only cover a portion of the cost, but a very large one. If things are cheaper, more people can afford them, so the problems of the uninsured are eased. This system would take many years to make the transition to wide-spread coverage, so many features of the Affordable Care Act might be temporarily useful. Many people who resist Obamacare are unable to see an end to it. As a transition, Obamacare would become a success if some other program is a success, first.

First, the law requires two things to be purchased at once: an investment account, and catastrophic health insurance. Deposits into the Account are tax-exempt. Withdrawals are restricted to health costs, not including the premiums of the catastrophic insurance, but the internal investment income on the deposits compounds tax-free. The framers of the enabling act apparently did not anticipate that many or most children would, under Obamacare, already have mandatory coverage on their parent's policies up to age 26, under their parents' policies, so the overlap is a little ambiguous. Apparently, however, there is no limitation to single health policy, so dual policies appear to be allowed. As long as the law requires money to be withdrawn from an Account only for health expenses, many people during the transition will find they already have health insurance, but not enough money in the account to cover the required minimum deductible. Unless they can make a deposit and see it grow, they will never be able to start an account. So, especially for children, the required deductible should match the amount in the account, not the other way around. It scarcely matters which it is, except the child rarely has control over the parent's policy, so the law should be amended to allow an HSA to be created without catastrophic coverage, until such time as some flexible minimum deductible is reached, even if it is necessary to prevent all withdrawals until the minimum is reached.

Perhaps this issue could be addressed for children with a single-payment deposit. It seems a great pity to prevent lifetime accounts which could be made for a nominal single payment, simply because the parent has a low-deductible policy and cannot or will not change it. Alternatively, it is an equal pity to require a child to have two other health insurance policies, when the reality is the healthiness of such children seldom requires even one policy. Since lifetime health coverage is within reach for a single payment of less than a thousand dollars, it is much easier to envision subsidies for the poor of that amount. Lifetime average health expenditures in the range of $300,000 are largely made up of inflation costs which reduce a dollar to the value of a penny, over an ensuing century. There are few ways for the poor to escape inflation, but this would be one of them.

That gets us to age 26 when employer-based insurance makes an appearance. Or makes a disappearance, replaced by Obamacare; we must wait to see what happens. Present law permits a deposit of a maximum of $3300 in the accounts, until retirement at age 65, when Medicare takes over. That could result in a deposit of $128,700 at age 65, which with 7% compound income within the account would amount to $610,000 total in the account, but an unknown amount subtracted for exceeding the insurance deductible. Since additional deposits are not permitted to people receiving Medicare benefits, $610, 000 will have to last for the duration of life expectancy, calculated to be age 90 by then. Assuming the same 7% return on investment, that amount is short of the $3 million single payment deposit which would be required (at age 65) to pay for average health costs to the end of that life at 2014 prices. And probably not nearly what year 3004 prices might become.

To achieve that, 10% compounded income would be necessary, both to reach the end of life, and to augment those deposits of $3300 yearly to $4.5 million, the point where they and their investment income would meet the need. Although Ibbotson's curve encourages the hope that 10% return might persist for a century, there is little doubt that long periods of 1% income would bankrupt the system, resulting in only $156,000 gross before illness expenses at age 65, and unguessable effects on medical costs after that. Large numbers of people would not even be able to afford annual $3300 deposits into their Accounts. But there are two ways out of this trap.

In the first place, no one claimed that 99% of future medical costs must be met by this approach. The claim is only that large amounts would be "found money", not found at present; don't be greedy, since not a penny of this money is being utilized at present. And secondly, it would be manifestly unfair for Medicare to continue to collect payroll taxes from one age group, and Medicare premiums from another, if the plan is for this individual to bear his own costs. Accordingly, these payments could partly be waived, and partly deposited directly into the Accounts rather than into the U.S. Treasury. The Treasury itself would be amply compensated by putting an end to the present 50% subsidy of Medicare costs by the taxpayer, assisted of course by foreign loans, mostly Chinese. There is a political risk, of course, that opposition politicians would encourage the elderly to believe that Medicare is about to be taken away from them. Almost everyone enjoys getting a dollar for fifty cents and is suspicious of claims that, otherwise, they will get a penny for a dollar. It would thus seem better timing to begin at the other end of the age spectrum, building up a constituency for compound interest, the Ibbotson curves, and Health Savings Accounts, and meanwhile waiting for competitive proposals to flop. It would take six months of intensive publicity to convince people who don't want to believe it, that Medicare is 50% taxpayer subsidized. It would take another six months to iron out all the unsuspected technical flaws in the proposal.

And it would take time to create a bipartisan think-tank, to collect the necessary data and make the necessary calculations. Perhaps some philanthropists will offer to do it privately, saving us from the criticisms of agencies like the Federal Reserve, which are accused of being less "independent" than they claim to be. The first step would be to put it somewhere other than Washington DC since there is no need to be seen as close to those who threaten your independence. The divergence between costs and revenues must be monitored and adjusted to; sudden changes in direction must be responded to.

Health Insurance Design.

Around 1970, the American Medical Association offered a supplemental health insurance policy to its members. It was a $25,000 deductible policy, costing $100 a year. That is, it offered insurance against the worst possible health disasters, and its cost was negligible. Even then, the marketing department struggled with a catchy name for it, and finally produced terms like "excess major medical coverage." Right away, you know the marketing department wasn't terribly anxious to sell it.

Nevertheless, the major difference in cost between catastrophic coverage, which I needed, and Blue Cross/Shield which I didn't particularly need because of my employer, was the germ of the Health Savings Account idea. It snapped into place when John McClaughry of Vermont told me that Senator Roth of Delaware was preparing to offer IRAs as a tax-exempt savings idea. Linking the two together, you got Health Savings Accounts, which the Texans Bill Archer and John Goodman finally got enacted. A third component was the cross-product of my son and an old surgery professor of considerable renown. One day, he leaned over to me and muttered, "The only reason to have health insurance is to keep the hospital from fleecing you."

My son gave real substance to this reasoning by telling me a famous Boston hospital had sent him a bill, charging $12,000 for a screening colonoscopy. I responded I thought it was far too much, worth at a guess $500. So he called his insurance carrier, who got him a revised bill for $1000. Overcome with gratitude, he immediately sent a check for $1000 to the hospital because he had just saved eleven times that much. Any $500 overpricing seemed trivial compared with saving a much larger surcharge. And this particular insurance company had been clever enough to notice it was this larger surcharge they were really selling protection against, not some minor markup from audited costs.

But let's get back to the catastrophic insurance, which under the name of "excess major Medical" had started this whole train of thought, decades earlier. The insurance pattern followed by excess major medical was the model of maritime insurance of Lloyds of London, one of the oldest and best-established forms of insurance. Maritime insurance made handsome profits using combined deductibles plus catastrophic coverage with a "cap". That is, the top limit to the liability was definable because by an act of Parliament it was the value of the hull. The English treasure their juries, but the Common Law knew better than to leave the upper limit of any liability, up to a jury to decide. Why then, couldn't health insurance follow the same pattern of defining liability limits? Malpractice liability is the case in mind, but it might be any disputed issue.

One suspects that hospitals in 1955 had a virtual bed surplus created by better home environments and transportation. But in 1965, Medicare and Medicaid really created an actual surplus of (40-person) ward beds, by offering to pay for semi-private accommodations. Given a choice of paying for insurance or accepting a 40-bed assignment, enough of the public chose ward beds rather than pay for extra insurance, so insurance patterns became fixed around the reality; an invisible ceiling was created over what they would provide for in pre-payment health insurance. The illusion of employer payment and the politically consequent tax exemption promoted the continuation of this obsolete pattern of two beds in a room. The substitution of "service benefits" for indemnity was, among other factors, a concession to the primitive hospital accounting systems, once again a holdover from the glory days of private charity. When you have no idea what something costs, you guess.


That continues to be true. The struggling hospital industry responded slowly to the implications of Payment by Diagnosis in the 1980s, and only recently began to shift inpatient care to outpatient care in satellite clinics. Up until that time, outpatient care in doctors' offices had been markedly cheaper, but hospitals began to imagine that free-standing physician practices were a threat to their business plan. For twenty years, this friendly competition expanded into a life-and-death struggle, which physicians largely lost. It was a fairly slow process, held back by the ability of physicians' offices to raise prices, even in spite of differential reimbursement for the same services, often by the same doctors inside hospital walls. After 2000, a new carnivore entered the gladiator ring: the parent university of university-owned hospitals. Innocent new entrants into a competitive situation often over-react by adopting aggressive behavior they eventually come to regret.

Doctors in teaching hospitals were put on salaries where that was possible, but the bulk of the public had individual preferences for certain physician practices and resisted enlistment into hospital clinics, which had a welfare sound to them. Some patients preferred a hybrid: large group practices, many of them controlled by physicians or physician organizations. For the most part, the finances of such group clinics can be stated as paying generous salaries to "feeder" physicians, subsidized by procedural surgeons who could still generate, and share with the hospital, rather large surpluses from a large volume of surgical procedures which the feeders could provide to them. The public has difficulty estimating the quality of its surgeons, but when they can, or when the group's aura suggests it, they will willingly pay extra for procedures which are dangerous or painful, or both. Innumerable entrepreneurs in the hospital industry have broken their lances against this irresistible force of human nature because the public has so far drawn a red line in the sand around a matter affecting their own personal well-being.

Not all universities have medical schools, but current agitation about doctor shortages is colored by the wish of many universities to catch up with those who do have such schools. Since the central function of most university presidents is to raise money, it has not escaped their attention that the budgets of many universities of international rank are heavily lopsided toward their medical schools. Or that the revenues of most medical schools are heavily weighted toward research grants with 70% "indirect overhead" allowances. Or that the captive teaching hospitals only generate a 2% profit on inpatients (suppressed by the DRG payment method), but a 15% profit on emergency care, and a 30% profit on satellite clinics. Tuition and other medical student revenue can run $50,000 a year, for which the students go heavily into debt, but which the parent university can often easily do without. Transfers from medical student revenue to non-medical student costs of the rest of the university are a closely guarded secret, and very few people are in a position to speak of them. But it would be a very strange world if long-haired undergraduate students in the arts, much given to demonstrations about "rich doctors", were not, in fact, subsidized by medical students carrying quarter-million-dollar educational debts. One might even conjecture that some of the multi-million dollar salaries of university presidents are enhanced by trickles from this same stream, although I have no proof of it, and perhaps this is too crude a formulation. The fact is, these prestigious universities do contain some very attractive honey-pots of medical revenue, and also contain a few egregious salaries for administrators in a position to decide how the surplus, or excess, revenue should be spent.

This brief excursion into the "inside baseball" of medical economics is meant to be convincing about one central point: this is all getting to be too complex to survive. Instead of responding to complexity with more complexity, we must simplify. We have tried little dictatorships; they don't simplify, they make more rules. We have tried virtual finance, substituting concepts and abstractions for a cash transaction. We have tried subsidies, interjecting moral principles and elaborate circumvention into the simple process of just doing a few things free of charge. We have stopped firing people for incompetence and sloth, we must re-educate them. We even are considering a raise in the minimum wage, in order to keep welfare payments from exceeding the labor market. Eventually, this must come to an end, so let's start with paying for medical care.

Let's start with paying for it in cash; indemnity insurance rather than service benefits, debit cards instead of claims forms. But let's also be realistic; when people are helpless in a hospital bed, they need a financial surrogate, or at least a payment system that does not require personal judgments. The DRG system needs to be calculated with a computer, not a table look-up, and therefore made much more precise.

Let's save for lifetime medical costs within a highly mobile real lifetime, by allowing the patient to identify the state which regulates his policies as he moves around, but transfer between policies by establishing a medical exchange on the pattern of the stock exchange. Direct-pay from patient to insurance should be permitted but phased involuntarily. It will be noticed that this system eases out the employer as a middle-man, but permits it to continue when it is mutually agreeable. And let's devise a scheme for a maximum safe investment of the savings between those of healthy youth and a sickness-prone retirement. And that means, not merely guaranteed renewal, but lifetime policies. All of that seems to be a Health Savings Account, but notice what it doesn't include. It definitely isn't one insurance for 80%, second insurance for 20%, a third, major medical, for outliers. Nor is it one insurance for hospitals, another for drugs, another for doctors, and eventually as many insurance components as there are medical components. It's, like, simple. Cash or cash equivalents. And for a mobile society, an end to state monopolies, by the expedient of national exchanges for sales transactions while administrative regulation remains true to the Tenth Amendment, largely state-regulated.

The final simplification is -- that's enough for now. The managers know perfectly well there is more to be done, but they deliberately don't do it, out of respect for getting started and seeing how it goes. However, some future projects can be foreseen, so as you go along, you try not to make things harder to do in the future. And one thing that can be done is to foresee that we must start thinking about paying for a lifetime of healthcare, not just healthcare for next year. Why should I pay insurance including care for appendicitis, when my appendix has already been removed? Why should I join interest groups and carry placards to include my condition (whatever it is), when I have plenty of money in my HSA to pay for it? And why can't I have guaranteed insurance renewal after decades of paying my premiums?

In short, we must try our best to devise a system of life insurance to supplement, if not replace, the year at a time term insurance we now have. Its advantages are numerous and there are no natural opponents. The hesitation all relates to getting the mechanics of it right, or right enough to get started. Since working age people ultimately pay for all of it, we need a system for young people to borrow from themselves when they get older, and another system for old folks to pay for themselves when they earned the money earlier in life. We need a way to dispose of unintended surpluses, and a way to subsidize the poor. We need a way for the individual to own his own policy, but pool his investments to reduce administrative costs. Someone must monitor the system, to notice changes in the environment, suggest mid-course changes, but have the integrity not to warp the system to his own advantage. It is possible to see ways to accomplish all of these things, but some things are easier than others, and doing almost any of it for 300 million people is a daunting prospect. We, therefore, propose that we go ahead with the relatively simple structure outlined in Chapter FOUR, but start talking right now about how much we could add, and how gradually we could add it, in the rest of this Chapter FIVE. My preliminary advice is we start with a monitoring system.

The Outlines of Lifetime-Funded Health Insurance

It is misleading to make precise predictions, about almost anything, eighty or ninety years in advance. However, predicting the average of millions of people is more accurate than predicting any individual future, whereas mathematical principles like compound interest are precise, forever. But let it be clear; what follows is rounded off, estimated, and largely based on projecting past experience into future performance. You must do so, if you want to talk about it, at all.

Investments are more predictable than health costs. At 10% they will double in seven years; at 7%, doubling investments takes ten years. Ten in seven; seven in ten. From birth to age 91, there will be time for thirteen doublings of investments. At seven percent, only nine doublings. With a focus on health economics, Americans divide into four groups: children from birth to 26, working people from 26 to 65, retirees over 65, and poor people of any age. We assume only people from 26-65 are able to deposit money in Health Savings Accounts; children and poor people are dependent on working people to help them, while retirees must live on money they earned while they were 26-65. Businesses and governments are pass-throughs which sign checks, but in our way of thinking, only individuals make and spend money in the national accounting of it. These are the assumptions, please read them twice.

1. Investment predictions are based on Ibbottson's compilation of actual market performance since 1926 of all investments in all classes. It's safe to assume index funds, now available in the trillions of dollars, will follow Ibbottson's patterns for the next hundred years, only because they were remarkably steady during the last century. Two major depressions and a dozen minor ones, one World War and a dozen smaller ones, were unable to shake the long-term trends for more than a blip in the lines.No such prediction can be guaranteed, of course. Highly diversified, Index funds have management fees of about a tenth of a percent, making them steady passive investments for people who have little investment experience, and probably equalling performances of most people who do. Using Ibbottson's raw data, half the population will do better and half will do worse--by managing their own money, even with professional advice. But if everybody buys the index fund without advice, everybody will perform the same. Collectively, the average common stocks of "small" American corporations (but nevertheless greater than one billion dollars of market value each) achieved a ninety-year performance of 12.2%, which we here discount to 10% by using diversified ETF (index funds) of really big stocks with familiar names.

2. At present, the only realistic source of deposits into a Health Savings Account is by individual investors within the age group 26-65, except for investment income. Contributions made on behalf of children derive from money earned by working parents or by -- somebody else aged 26-65. Retirees invest, but the core of what they invest was earned earlier, again 26-65. We ignore exceptional cases. The population 26-65 supports their own costs and those of everybody else. Nevertheless, it is impossible to make precise predictions about the time and amount of shortfalls in individual Accounts when sudden withdrawals must be anticipated. For the most part, transfers are made from accounts in surplus to accounts in deficit, but particularly during the phase-in period, supplements may be necessary. However, everybody's Health Savings Account is a separate piece of property and not a pool. This difficulty is managed by slightly overfunding everything to keep transfers to a minimum, and pooling these surplus amounts by agreement to reimburse them at some later time for some specific purpose. Furthermore, the principle is announced in advance that if shortfalls are unavoidable, the accounts to be billed for it are to be limited to the working-age group from 26 to 65. The ultimate fallback is the full faith and credit of the taxing power of the U.S. Government; but we hope to avoid using it except in dire emergencies like a national nuclear attack or something else of this order of severity, eventually establishing a reputation of a self-funding program. Within that program, the real fallback is to the 26-65 generation who are earning a living. They are expected to care for their children, and aging parents, but by individual agreement. Since the plan is to stop collecting 6.5% payroll deductions from this age group, and anticipated deficits are of the nature of 0.5% of income, assessments should be comfortably met, although it is too much to expect them to be cheerfully met. A whole chapter is later devoted to this sensitive topic.

2.5 Transfers are necessary, however. Because of the security risk, it is probably wise to introduce the extra step of transfer into and out of an insurance or insurance-like pool, so that transfers between Health Savings Accounts can be performed by a tightly controlled security organization which maintains permanent transaction records as its main or only function. Pooling would actually ease the accounting burden of linking every account in surplus with every account which runs a temporary deficit when actually it is only necessary to account for the balances between individual accounts and the pool. If newborns have individual accounts, they will have to be linked to their parents or guardians, and perhaps transferred from their parents' accounts at age 26. Although making health insurance a personal rather than a community activity is a step forward, there will be much occasion for reducing individual volatility while the accounts are still too small to provide their own liquidity reserves. This is also the place to put subsidies for the poor, and payroll tax assessments on the 26-65 age group, replacing the 6.5% payroll tax for Medicare pre-payment, which has been eliminated out of consideration for dropping later Medicare coverage. After the transition phase is complete, the pool will be less necessary, but it may take decades before money spent on obstetrics comfortably matches up with money pre-funded for cancers and strokes.

3. Medical costs essentially do not matter for lifetime plan design, since this is "found money". Rising costs are of course the main concern, and of course, we should pay all of them, but not necessarily by investment income, entirely. We strive to generate as much new revenue as possible and are confident it will raise appreciably more than the present system. If more is needed, additional sources must be sought. It might, if all went as planned, generate half of the cost of healthcare in the far future. But it will never seem like that much, because we are already outspending our revenue, and borrowing the shortfall. Only after our books balance on a current basis, will the public notice any difference. Congress will notice it sooner and be tempted to spend it. If it generates more than we need for healthcare, then if we are wise we really should spend the surplus on retirement costs for an aging population.

However, the outlines of what is possible can be made out. Likely, future medical costs for younger individuals under the age of 65 should remain constant, or even decline in the future. However, medical costs of the elderly are assumed to rise in the future, as people live longer and get more expensive chronic diseases. CMS says 5% of the elderly generate 50% of costs for their age group. Conditions related to obesity are a new source of such costs, while Managed Care has had no effect. Exceptions will appear but predicted cost curves seem likely to assume the shape of a dumbbell, bulging at the ends, but shrinking in the middle. Since working cash for inter-person transfers and unexpected illness are laid on the working age group, it is a lucky happenstance that future predictions almost always show a dumbbell or wasp-waist shape to the cost curve, making it possible to design budget shortfall levies to concentrate on this level. The biggest threat to future healthcare financing may well lie in the likelihood that people who now die at the age of 60 will live to be 85, and be afflicted with the same high expenses as we now see in people aged 85. If present trends continue, the rising costs after age 85 contain a mixture of falling sickness costs, hidden within rising domiciliary costs, or nursing home costs, which possibly belong in a different budget. This outcome seems more likely that the present rate of longevity extension, which is more likely to level off. However, the original point is the strongest on: it is a mistake to pretend to predict a future which cannot be predicted.

4. We assume average health costs for a lifetime to be $300,000, based on a Blue Cross of Michigan study, confirmed by AHRQ and CMS to be of that general magnitude. It is a critical number since it is the burden workers age 26-65 must carry for the whole medical system at every age--averaging $7800 per year apiece for the working person. It is important to know how it is calculated, to understand what it means -- and what it doesn't.

Calculated as described, the $7800 pays for one working person, plus averaged contributions for dependents and charity obligations. Because of cost-shifting, the proportion of redistribution is unclear. But, remember, these are lifetime costs, using current prices. If costs remain otherwise identical, a 3% inflation rate means the answer, calculated the same way next year, will be $309,000. This point is made to convince the reader, that even if we do not know the precise costs, we can be fairly sure that costs will soon outrun our ability to cope with them.

In order to include present costs and present practices, a hypothetical person is constructed from current costs at each level, reassembled in order to reflect current costs for current treatments, as if they all occurred in the year of death. It, therefore, includes 3% inflation over the time span from birth to each particular age. The modest costs of childhood are thus inflated the most, while the expensive last year of life is not inflated at all. Since it will be adjusted in the next paragraph, it is probably not a serious error.

Predicted Future Healthcare Costs. If the $300,000 we spent on each person's health in the last 90 years should merely increase at 3% inflation, lifetime costs will become $4.5 million, 91 years from now. That's sobering enough. But if medical costs increase as much as they actually did in the past century, lifetime costs will come to an unthinkable $1.5 billion dollars a person. Therefore, we accept the present hypothetical lifetime cost, including inflation, to have been $300,000, and assuming no change other than 3% inflation, will be $4.5 million, 91 years from now.

Nevertheless, we know in retrospect that a solitary deposit of $55 in 1926 at the 10% rates which actually prevailed last century, would have kept even with it without later additions. Today, to keep up with the costs of a newborn great-grandchild could apparently be accomplished with a deposit of $796, over twelve times as much. It's still an achievable goal, but it's drawing away from us. Remember, $800 will only pay for present prices, plus 3% inflation. Unlike the last century, the next century cannot add thirty years to life expectancy, or eliminate thirty diseases. In fact, only five remaining diseases account for half the cost, and life expectancy has no room left to increase by another thirty-year extension. The medical profession has the scientific tools to make it work, provided the financial and political professions create the right environment. The present prospects are for science to deflate disease costs in every age group except the oldest, but to quantify is impossible. Since 1913 when the Federal Reserve was founded, a dollar then is worth a penny, now. The medical profession can't help with inflation. Perhaps no one can, but at least a monitor exists to make mid-course corrections of the currency.

More than that, notice the difference between $300,000 and $796. The difference, although roughly estimated, suggests the savings possible by switching to lifetime costs, and investing the difference between "whole life" and "pay as you go" annual payments. It is unnecessary to come even close to actual costs to see the savings from financing the medical system longitudinally, outstripping anything imaginable in extra administrative costs, or price escalation from moral hazard. Cut it in half, or take only a tenth, the savings are so appreciable you begin to wonder if they might upset the stock market. There are even safeguards from miscalculation, remaining inherent in other approaches to cutting the cost of medical care.

For example, we fervently hope, but make no assumption in the example, for an extension of working life, both down and up, to 24-75. That is, we favor a reduction of the two great vacation periods in American life, by a parallel extension of the lifetime of significant work. We recognize most Americans do not agree, and in a democracy that's how decisions are made. But this safety valve remains available to those with bad luck or bad timing; it's how you recover your finances if they have slipped along the way.

Let's cut wasteful practices, particularly the habit our government has of making hospitals into welfare programs, or our insurance administrators have for making them into banana republics, and the habit the public has of wanting everything for free. Let's structure costs in such a way that if an individual doesn't overspend for healthcare, the money saved gets applied to better retirement. It gives the individual some skin in the game, which is the essence of bringing costs down by competition.

Right now, however, it is necessary to examine how we might extract the savings from Health Savings Accounts, gradually transitioning from one-year term to whole life with investment, without upsetting the system. And examining what useful things might be done with a cash windfall before too many extra noses push into the trough. After all, you cannot spend the money after you are dead.

Let's start backward from an assumed guess of $300,000 average lifetime expense, from the viewpoint of someone aged 90, which is also only guessed-at future longevity, to the day of death. To have $300,000 at age 90, you must have $30-40,000 set aside at age 65 in index funds. Remember, in the elderly, we are talking about the period of greatest health costs by present projections, in an age group where few people are working and thus must entirely depend on investments and pensions. It can be done but it's a stretch. In many ways, the greatest obstacle would be the mindset of elderly people themselves. We are talking about buying common stock for elderly people, who must overcome the main reason they buy high and sell low. Left to themselves, they will lean toward the safety of low-yielding bonds.

We have repeatedly alluded to The Monitoring System, which will take time and experience to design. Whether the monitor resides within the Treasury, the Department of Health or some independent agency is a political question that others probably feel they have a better right to decide. Such an agency might have many functions, but since it must have the power to make myriads of mid-course adjustments, it probably requires a self-balancing oversight board like that designed for the Federal Reserve, and we favor that approach. At least once a year, that monitoring body will have to recalculate the estimates of the emerging trend of the balances between costs and revenues, and the distribution of the balances among each yearly cohort from birth to age 91.

Those yearly recalculations would set the price of entry into the system for latecomers, calculating what it would cost to make up for failing to pay for it all at birth. And if the system makes a revision for new information about trends in motion, everybody will in a sense be a newcomer, subject to a late deposit levy. And since the working adults 26-65 will be picking up the extra costs for birth to 26, plus charity cases at all ages, there will have to be secondary and tertiary adjustments in the levy. Furthermore, there may be a recalculation of the cost of a particular age cohort for current medical expenses, and that will have to be set as an additional deposit required for that age cohort. Meanwhile, the investment managers will report on how close they came to their target, and further adjustments made. The Federal Reserve will make a report on current inflation rates, leading to more adjustments. The ultimate goal is to set a price for late entry at each year, so that continuing future income distributions will be equal, for current entrants, as for those who made a lump-sum investment at birth. This monitoring system will also be responsible for smoothing out short-term volatility, as in an influenza epidemic, and possibly long-term readjustments of internal lending and borrowing which were not anticipated at the outset of the program.

The Elderly Investor. Although the Libertarian view is that people ought to be able to do what they please with their own money, this is one case where it probably would be advisable to mandate the pooling of investments, in spite of the obvious introduction of political risk. The argument runs: it might be possible for most people to save $30-40,000 by any number of ways before the age of 65. But after 65 it becomes a little unwise for a growth fund to place trust in the investment judgment of a class of people who rightly prize security overgrowth. They will predictably have a very hard time shaking the perceptions of their age group. On the other hand, if there is ever a chance people will accumulate $45,000 in savings, it would be at the time they stop working. Let's hurry on; our present purpose is to illustrate the principle we are driving at.

Working people 26-65. Between the time they get their first job and the time they retire, working people have children, send them to college, buy a house, and try to come up in life a little. They get dozens of claims for their support, so in our example, to have perhaps $35,000 to surrender at age 65, using our system they might alternatively have to have $500 available at age 27, from Santa Claus. And then let it grow, untouched, to the next goal of $35,000 when they reach 65. That sounds easy, but it often has its problems. If somebody, say their parents, gives them the $500 as a present, it's all pretty easy. But if they have to work for it, then somebody has to give them $35 at birth, because the daisy chain is connected from start to finish. That's right, $35 turns all the way into $300,000 at age 90 if each step is coordinated. It pays for an entire lifetime of health costs. But it doesn't need to. If just about everything goes wrong, a quarter of that would still amount to a big chunk of money. Are you going to tell me no one could afford to give $7 to a newborn? There's no rule against making a partial contribution to your own care. There are practical problems to be addressed, but the power of compound interest isn't one of them. In fact, you might easily find that no investment house would accept a $7 deposit for a 90-year forward account.

Children. After the elderly, the second subsidized group is composed of children, including obstetrics and pregnancy. There is overlap here between child and two parents, and for conceptual purposes, there is nothing to do but be arbitrary. The addition of 26 years of compounding is too tempting to quibble about ambiguities, which might be solved by giving it to any of them, or to all three. That heightens the unfairness to those who do not have children, but it also creates an incentive for the mother to have her first child younger. Medically, that would be a desirable thing. Our society, perhaps even our biology, has created a tradition that the parents subsidize the health costs of children. The Health Savings Account system formalizes that tradition or at least does not conflict with it. For the surprisingly small amount of one single payment of $150 at birth, the child would have $40,000 at age 65, assuming a 10% investment return. Investment advisors might rebel at their costs for accepting amounts that small, but a single-payment zero-coupon bond or credit might be created. That would ease the mechanics, as well as reduce the outcry against federal subsidy to people who might be indigent when the child is born, but are far from it later in life. The disadvantage is a bond makes no provision for the health care of children even though it pays for it, so some patchwork is still needed. A birth deposit of $150 would be worth about $2000 at age 26, and average childhood medical costs might be somewhat greater, so a transfer of ownership could imply a net liability.

The Poor. The third and last category of subsidized people consists of those who are both poor and sick at the same time. Unfortunately, we have tried and rejected two methods of dealing with their problem. The first was defined by the original Good Samaritan: "Take care of him, and I will repay thee." And the second method was almshouses, now a relic of the past. The disadvantages of both approaches are now obvious. The third method was to eliminate poverty, which has worked pretty well. Fifty years ago, sixty percent of the hospital beds in Philadelphia were "ward" beds. Nowadays, there are few enough of them to scatter among paying patients. But the disadvantage soon appeared that the public became determined to prevent the inevitable rationing from spilling over to more fortunate components of society, in an era when hospitals are fearful of discrimination. Mindful of the long history of charity for the sick poor, and the spotty history of using government to cover the costs, we propose that governmental charity be paid out of the pool for inter-account transfers. That preserves an independent audit of just how much is paid by whom, and it is linked to an assessment process on people who must pay the bill. That will not prevent government from discounting its contribution, as it does not prevent Medicaid from discounting hospital bills. But it widens the audience who are instantly aware of it, all of whom will be heard from in the November elections. Individuals are compassionate, governments only pretend to be. You would almost have to say it is the one remaining good feature of having a King -- to symbolize the nation's simultaneous aspirations, of opulence and compassion.

Since America has rejected the obvious approaches to caring for the sick poor (almshouses and blank checks), our institutions are in some disarray. We even seem to be rejecting a mixture of the two, which was the hospital reaction to the 1965 entitlements. Until we identify and concentrate the sick poor in some way, we cannot even measure the size of the problem. But at least concentrating the rest of the population's sickness on paper allows us to measure their cost and (by subtraction) estimate a health budget for the sick poor. It will inevitably cost more than average, and result in worse outcomes. But only after we measure it, can we even decide how much we can afford.

What you have, including the three demographic subsidies, is what it seems to cost working people in today's environment to care for themselves and their obligations. It's distributed over forty years of working, but not everybody works that whole period of time. If you wish, you can contribute $100 a year from age 25-65, a surprisingly small amount which after compounding at 10% should pay the lifetime costs of one person (yourself). Calling it $150 to be safe, it is no more than a tenth of what most people suppose they pay for annual health insurance. Therefore, it is safe to suppose a family of four could afford to pay for ten poor people (in addition to themselves) at the cost they are already spending. Remember please, our goal is not to pay for all health care to the last penny. Our goal is to devise ways to pay for as big a chunk of it as we can.

And by the way, devising some method to get the latent money out of these accounts for medical care, since $300,000 does no good in a frozen account of somebody aged ninety. Please read on.

How Do I Pay My Bills With These Things?

To summarize what was just said, we noted the evidence that a single deposit of about $55 in a Health Savings Account in 1923 would have grown to more than $300,000, today in the year 2014 because the economy achieved 10% return, not 6.5%. Therefore, with a turn of language, if the Account had invested $100 in an index fund of large-cap American corporate stock at a conservative 6.5% interest rate, it might have narrowly reached $6000 at age 50, which is re-invested on the 65th birthday, would have been valued at $325,000 at the age of 93, the conjectured longevity 50 years from now. No matter how the data is re-arranged, lifetime subsidy costs of $100 can be managed for the needy, the ingenuity of our scientists, and the vicissitudes of world finance-- within that 4% margin. We expect that subsidies of $100 at birth would be politically acceptable, and the other numbers, while stretched and rounded, could be pushed closer to 10% return. Much depends on returns to 2114 equalling the returns from 1923 to 2014, as reported by Ibbotson. At least In the past, $55 could have pre-paid a whole lifetime of medical care, at the year 2000 prices, which include annual 3% inflation. An individual can gamble with such odds, a government cannot. So one of the beauties of this proposal is the hidden incentive it contains, to make participation voluntary, and remain that way. No matter what flaws are detected and deplored, this approach would save a huge chunk of health care costs, even if they might not be stretchable enough to cover all of it.

And if something does go wrong, where does that leave us? Well, the government would have to find a way to bail us out, because the health of the public is "too big to fail" if anything is. That's why a responsible monitoring agency is essential, with a bailout provision. Congress must retain the right to revert to a bailout position, which might include the prohibition to use it without a national referendum or a national congressional election.

This illustration is, again, mainly to show the reader the enormous power of compound interest, which most people under-appreciate, as well as the additional power added by extending life expectancy by thirty years this century, and the surprising boost of passive investment income to 10% by financial transaction technology. The weakest part of these projections comes in the $300,000 estimate of lifetime healthcare costs during the last 90 years. That's because the dollar has continuously inflated a 1913 penny into a 2014 dollar, and science has continuously improved medical care while eliminating many common diseases. If we must find blame, blame Science and the Federal Reserve. The two things which make any calculation possible at all, are the steadiness of inflation and the relentless progress of medical care. For that, give credit to -- Science and the Federal Reserve.

Blue Cross of Michigan and two federal agencies put their own data through a formula which creates a hypothetical average subscriber's cost for a lifetime at today's prices. All three agencies come out to a lifetime cost estimate of around $300,000. That's not what we actually spent because so much has changed, but at such a steady rate that justifies the assumption, it will continue for the next century. So, although the calculation comes closer to approximating the next century than what was seen in the last, it really provides no method to anticipate future changes in diseases or longevity, either. Inflation and investment returns are assumed to be level, and longevity is assumed to level off. So be warned.

The best use of this data is, measured by the same formula every year, arriving at some approximation of how "overall net medical payment inflation" emerges. That is not the same as "inflation of medical prices" since it includes the net of the cost of new and older treatments and the net effect of new treatments on longevity. Therefore, this calculation usefully measures how the medical industry copes with its cost, compared with national inflation, by substituting new treatments for old ones. Unlike most consumer items, Medicine copes with its costs by getting rid of them. Sometimes it reduces costs by substituting new treatments, net of eliminating old ones. It also assumes a dollar saved by curing disease is at least as good as a dollar saved by lowering prices, and sometimes a great deal better, which no one can measure. Our proposals therefore actually depend on steadily making mid-course corrections, so we must measure them.

Our innovative revenue source, the overall rate of return to stockholders of the nation's largest corporations, has also been amazingly steady at 10% for a century. National inflation has been just as non-volatile, and over long periods has averaged 3%., perhaps the two achievements are necessary for each other. Medical payments must grow less than a steady 10%, minus 3% inflation, before any profit could be applied to paying off debt, financing the lengthening retirement of retirees, or shared with patients including rent seekers. But if the profit margin proves significantly less than 10%, we might have to borrow until lenders call a halt. No one can safely say what the two margins (7% + 3%) will be in the coming century, but at least the risks are displayed in simple numbers. Parenthetically, the steadiness of industrial results (in contrast to the apparent unsteadiness of everything else) was achieved in spite of a gigantic shift from control by family partnerships to corporations. Small businesses (less than a billion dollars annual revenue) still constitute half of the American economy, however, and huge tectonic shifts are still possible. Globalization could change the whole environment, and the world still has too many atom bombs. American Medicine can escape international upheavals in only one way -- eliminate the disease. Otherwise, the fate of our medical care will largely reflect the fate of our economy. To repeat, it is vital to monitor where we are going.

Revenue growing at 10% will relentlessly grow faster than expenses at 3%. Our monetary system is constructed on the gradations of interest rates between the private sector and the public sector. It would be unwise to switch health care to the public sector and still expect returns at private sector levels. Repayment of overseas debt does not affect actual domestic health expenditures, although it indirectly affects the value of the dollar. Without all its recognized weaknesses, a fairly safe description of present data would be that enormous savings are possible, but only to the degree, we contain last century's medical cost inflation closer to 3% than to 10%. The simplest way to retain revenue at 10% growth is by anchoring the leaders within the private sector.

How Do You Withdraw Money From Lifetime Health Insurance?

Four ways should be mentioned: Debit cards for outpatient care, Diagnosis pre-payment for hospital care, Transfers from escrow, and Gifts for specified purposes.

Special Debit Cards, from the Health Savings Account, for Outpatient care.Bank debit cards are cheaper than Credit cards, because credit cards are a loan, while the money is already in the bank for a debit card. Some pressure has to be applied to banks or they won't accept debit cards with small balances. Somehow, the banks have to be made to see that you start with a small account and build up to a big one. So it's probably fair for them to insist on some proof that you will remain with them. The easiest way to handle this issue is to make the first deposit of $3300, the maximum you are allowed to deposit in one year. That's difficult for little children and poor people, however, so there must at least be some way to have family accounts for children. You just have to shop around, that's all.

After that, all you do is pay your medical outpatient bills with the debit card, but we advise paying out of some other account is you can, so that the amount builds up more quickly to a level where the bank teller quits bothering you. Remember this: the only difference between a Health Savings Account and an ordinary IRA for practical purposes, is that medical expenses are tax-exempt from an HSA. Both of them give you a deduction for deposits, and both collect income tax-free. If for some reason you do not expect a tax deduction, don't use the HSA, use something else like an IRA. Alternatively, if you can scrape together $6000, you are completely covered from deductibles, and co-payment plans are to be avoided, so then an HSA with Catastrophic Bronze plan is your best bet. If you have a bronze plan, you probably get some money back if you file a claim form, but those rules are still in flux at this writing. The expense of filing and collecting claims forms is one of the reasons the Bronze plan is more expensive, but that's their rule at present.

1. Spend it on medical care. Specially modified benefit packages are possible.

2. Spend less, but spend the savings on something else. The program should not be permitted to do this, but Congress should do it in the general budget.

3. Borrow it, and inflate it away on the books. But inflate the borrowings at some lower rate. The customary techniques of a banana republic.

4. Fail to collect the premiums/payroll deductions.

After 1., which is the essential purpose of the whole thing, the most attractive choice is 4. because a gradual transition is needed, with incentives offered only to those who choose to participate. However, borrowing may be necessary to transfer surplus revenue to age groups in deficiency.

Spending Health Savings Accounts. Spending Less. In earlier sections of this book, we have proposed everyone have an HSA, whether existing health insurance is continued or not. It's a way to have tax-exempt savings, and a particularly good vehicle for extending the Henry Kaiser tax exemption to everyone, if only Congress would permit spending for health insurance premiums out of the Accounts. To spend money out of an account we advise a cleaned-up DRG payment for hospital inpatients, and a simple plastic debit card for everything else. Credit cards cost twice as much like debit cards, and only banks can issue credit cards. Actual experience has shown that HSA cost 30% less than payment through conventional health insurance, primarily because they do not include "service benefits" and put the patient in a position to negotiate prices or be fleeced if he doesn't. Not everybody enjoys haggling over prices, but 30% is just too much to ignore.

No Medicare, no Medicare Premiums. We assume no one wants to pay medical expenses twice, and will, therefore, drop Medicare if investment income is captured in lifetime Health Savings Accounts. The major sources of revenue for Medicare at the present time fall into three categories: half are drawn from general tax revenues, a quarter come from a 6% payroll deduction among working-age people, and another quarter are premiums from retirees on Medicare. All three payments should disappear if Medicare does, too. Therefore, the benefit of dropping Medicare will differ in type and amount, related to the age of the individual. Eliminating the payroll deduction for a working-age person would still find him paying income taxes in part for the costs of the poor, as it would for retirees with sufficient income.

Retirees would pay no Medicare premiums. Their illnesses make up 85% of Medicare cost, but at present, they only contribute a quarter of Medicare revenue. However, after the transition period, they first contribute payroll taxes without receiving benefits, and then later in life pay premiums while they get benefits, to a total contribution of 50% toward their own costs. But the prosperous ones still contribute to the sick poor through their income taxes. There might be some quirks of unfairness in this approach, but its rough outline can be seen from the size of their aggregate contributions, in this scheme. At any one time during the transition, working-age and retirees would both benefit from about the same reduction of money, but the working-age people would eventually skip payments for twice as long. Invisibly, the government subsidy of 50% of Medicare costs would also disappear as beneficiaries dropped out, so the government gets its share of a windfall, in proportion to its former contributions to it. One would hope they would pay down the foreign debt with the windfall, but it is their choice. This whole system -- of one quarter, one quarter, and a half -- roughly approximates the present sources of Medicare funding and can be adjusted if inequity is discovered. For example, people over 85 probably cost more than they contribute. For the Medicare recipients as a group, however, it seems like an equitable exchange. This brings up the subject of intra- and extra-group borrowing.

Escrow and Non-escrow. When the books balance for a whole age group, the managers of a common fund shift things around without difficulty. However, the HSA concept is that each account is individually owned, so either a part of it is shifted to a common fund, or else frozen in the individual account (escrowed) until needed. It is unnecessary to go into detail about the various alternatives available, except to say that some funds must be escrowed for long-term use and other funds are available in the current year. Quite often it will be found that cash is flowing in for deposits, sufficient to take care of most of this need for shifting, but without experience in the funds flow it would be wise to have a contingency fund. For example, the over-85 group will need to keep most of its funds liquid for current expenses, while the group 65-75 might need to keep a larger amount frozen in their accounts for the use of the over-85s. In the early transition days, this sort of thing might be frequent.

The Poor. Since Obamacare, Medicaid and every other proposal for the poor involves subsidy, so does this one. But the investment account pays 10%, the cost of the subsidy is considerably reduced. HSA makes it cheaper to pay for the poor.

Why Should I Do It? Because it will save large amounts of money for both individuals and the government, without affecting or rationing health care at all. To the retiree, in particular, he gets the same care but stops paying premiums for it. In a sense, gradual adoption of this idea actually welcomes initial reluctance by many people hanging back, to see how the first-adopters make out. Medicare is well-run, and therefore most people do not realize how much it is subsidized; even so, everyone likes a dollar for fifty cents, so there will be some overt public resistance. When this confusion is overcome, there will still be the suspicion that government will somehow absorb most of the profit, so the government must be careful of its image, particularly at first. Medicare now serves two distinct functions: to pay the bills and to protect the consumer from overcharging by providers. Providers must also exercise prudent restraint. To address this question is not entirely hypothetical, in view of the merciless application of hospital cost-shifting between inpatients and outpatients, occasioned in turn by DRG underpayment by diagnosis, for inpatients. A citizens watchdog commission is also prudent. The owners of Health Savings Accounts might be given a certain amount of power to elect representatives and negotiate what seem to be excessive charges.

We answer this particular problem in somewhat more detail by proposing a complete substitution of the ICDA coding system by SNODO coding, within revised Diagnosis Related Groupings,(if that is understandable, so far) followed by linkage of the helpless inpatient's diagnosis code to the same or similar ones for market-exposed outpatients. (Whew!) All of which is to say that DRG has been a very effective rationing tool, but it cannot persist unless it becomes related to market prices. We have had entirely enough talk of ten-dollar aspirin tablets and $900 toilet seats; we need to be talking about how those prices are arrived at. In the long run, however, medical providers are highly influenced by peer pressure so, again, mechanisms to achieve price transparency are what to strive for. These ideas are expanded in other sections of the book. An underlying theme is those market mechanisms will work best if something like the Professional Standards Review Organization (PSRO) is revived by self-interest among providers. Self-governance by peers should be its theme, ultimately enforced by fear of a revival of recent government adventures into price control. Those who resist joining should be free to take their chances on prices. Under such circumstances, it would be best to have multiple competing PSROs, for those dissatisfied with one, to transfer allegiance to another. And an appeal system, to appeal against local feuds through recourse to distant judges.

Deliberate Overfunding. Many temporary problems could be imagined, immediately simplified by collecting more money than is needed. Allowing the managers some slack eliminates the need for special insurance for epidemics, special insurance for floods and natural disasters, and the like. Listing all the potential problems would scare the wits out of everybody, but many potential problems will never arise, except the need to dispose of the extra funds. For that reason, it is important to have a legitimate alternative use for excess funds as an inducement to permit them. That might be payments for custodial care or just plain living expenses for retirement. But it must not be a surprise, or it will be wasted. Since we are next about to discuss doing essentially the same thing for everybody under 65, too, any surplus from those other programs can be used to fund deficits in Medicare. But Medicare is the end of the line, so its surpluses at death have accumulated over a lifetime, not just during the retiree health program.

Better, but More Complicated: Lifetime HSAs

Health Savings Accounts are a big improvement over traditional health insurance, and this book stands behind them -- as is, without major adjustments. Go ahead and get one right now, regardless of what other coverage you have. Let me repeat: Their secret "economy" lies in keeping everyone spending insurance money as carefully as he would spend his own -- but not being too dictatorial about it. No one washes a rental car, as the saying goes, so you can't act as if someone has committed a crime, just because he doesn't do everything for you. But just you let the individual keep what he saves, and millions of HSA owners will find ways by themselves to save up to 30% of traditional healthcare costs. HSAs provide an incentive for the medical consumer to shop more carefully, and consumers seem to respond. The difficulty is, some people are too sick to worry about rules. So, substitute a catastrophic high deductible for your present coverage if the law lets you do it (which is presently uncertain) but go ahead with a Health Savings Account and add to it when you can.

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Looking ahead to what might follow HSA, is one of the main reasons for doing it. {bottom quote}
In practice, the Savings Accounts (and their debit cards) are almost entirely used for out-patients, where an effective shopper can arrange a reduction in costs. For hospital bed patients there is no choice but to allow the hospital to set its own prices, except those prices must more fairly correspond to direct costs. Fair prices are mostly an accounting effort, concentrating on reducing indirect overhead cost attributions, with a few legal rules to ensure uniformity. But everyone must wait for that to resemble true costs more precisely after indirect costs have been evaluated. Having repeated it all as a preamble, we now look ahead to how we might extend it to lifetime coverage, instead of the year-at- a-time variety. Looking ahead to what might follow it, is one of the hidden complexities of doing it.

One further simple idea: costs not prices. We have all assumed that catastrophic coverage is basic. If everybody ought to have something, he ought to have a very high deductible for a bare-bones indemnity policy. But just consider an addition: insurance for the health costs of the first year of life, plus the last year of life. That's technically simple to do retrospectively, although it takes most people a few moments to get it. And 100% of the population would receive both benefits, at a restrained cost by remaining uncertain just what the last year of life is until it is too late to run up its cost. Indeed, transition costs would be minimized by eliminating the historical part of costs for the transitioning population and phasing in the ongoing expense. Ask your friendly actuary; he'll get it, immediately.

Revised DRG coding and Methodology. Either way, if you guarantee to provide something for everyone, you better have a plan for controlling its boundaries. Inpatient costs affect patients too sick to argue about price, so hospital bed patients might as well be presented with some different options. They are more or less suitable for the DRG approach, but we have gone to some length to show what's wrong with the DRG coding methodology. The coding, among other things, must be fundamentally modified. As informed doctors will tell you, ICDA-11 isn't it.

DRGs ("Diagnosis Related Groups") is something Medicare started, which with more precise coding could be made ideal for the catastrophic insurance part of Health Savings Accounts. Medicare now contributes half of average hospital revenue, so its rules effectively dictate most other methods of hospital reimbursement. There are many problems with Medicare, but paradoxically, escalating inpatient cost is not one of them. Inpatient billing has been so muddled, most people do not realize that DRG has been a somewhat overly-effective rationing device. Like all rationing schemes, it causes shortages, as inpatient care is shifted toward the outpatient area. Office and hospital outpatient costs are quite another matter, so the whole hospital accounting system has been turned on its ear. In particular, components of inpatient costs must be re-linked to identical outpatient charges, in the instances where they are really market-based. Then, a system of relative values needs to be applied to that base. For that, we will need a Google-like search engine for translating the doctor's exact words into more precise code.

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Single payer is not a solution, it is pouring gasoline on the flames. {bottom quote}
The Single-Payer Delusion. If the eyes glaze over at this endless complexity, take a moment to unveil this thing called single payer, which sounds as though it ought to be a great simplification. It's just Medicare for all ages, what could be better? Entirely too many people now spend their money on luxuries which they really can't afford. In a sense, the whole country plays make-believe that serious sickness is for old folks, who will be generously cared for, by Medicare. The facts are that Medicare is already running unsupportable budget deficits, and depends on foreigners to lend the money to pay for it. Extending that process to a lifetime of single payer is not a solution, it is pouring gasoline on the flames.

Furthermore, both catastrophic insurance and last year of life insurance are more similar than they sound. What most people don't appreciate is the risk of a catastrophic health cost is rather remote in any given year. But in a whole lifetime, it is almost certain to happen at least once, which is often the last year of life. When you consider an entire lifetime, you cannot delude yourself it won't happen. Someone must plan for it, and the books must roughly balance.

Add Many Years to Lifetime Compound Income. Mathematically, it is fairly easy to show that healthcare costs will go down at the end of life; it's cheaper at 95 than at age 85. But that's probably a trick. We don't know what diseases will terminate life a century from now, so we can't count them. They are not cheaper, they are just unknown, and so we record the cost of the survivors of the race of life, not the average runner who will take time to catch up. If we are looking for lifetime healthcare revenue, recognize that practically all revenue is now generated by members of the working-age 21-66. A lifetime system needs to extend its revenue even further to other lifetime age groups. It seems only right that everyone's longevity should be included, but laws may currently block the way.

It would help a lot to include the first 21 years, adding several doubling-time periods. It would also be useful to let HSAs run for a full lifetime instead of mandatory rolling-over to IRAs at 66. Obviously, the idea behind terminating at age 66, was that Medicare would take care of everyone's medical needs. But with time, Medicare has consistently run big deficits, to the point where it is 50% subsidized by competition with other federal funds, or by international borrowing. Adding forty years would multiply extra investment returns by four doublings at 6%, and at little cost to the government. This would be particularly useful during the transition, when many people start their Accounts at zero balance, but at a more advanced age. It would be a significant improvement to all these programs to end them with at least one optional alternative; terminating a health program at a fixed age is something to avoid.

Proposal 13: Health Savings accounts should include the option to be individual rather than family-oriented, and therefore should include an option to extend from the cradle to the grave, rather than age 21-66, as at present, and consider options for Medicare buy-out and transfers within families between accounts.

Permit Tax-free Inheritances of Funds Sufficient to Fund One Child's Healthcare to Age 21. In other words, we should make some sort of beginning to the knotty difficulty of making The State responsible for what used to be the family's responsibility. A second adjustment would recognize that essentially all children are dependent on their parents for healthcare support until they themselves start to work. Children's health costs are relatively modest, except for costs associated with the first year of life, and the bulge would be even greater if insurance shared obstetrical costs better between mother and infant. Even as we now calculate it, the baby's health costs, from birth to age 21, are 8% of lifetime costs. A cost of 3% for the first year of life alone, makes lifetime investment revenue essentially impossible for many young families to support lifetime costs because any balance would start from such a depleted level. So, the idea occurs that a considerable surplus appears when many people become older if grandpa could effectively roll over enough of his surplus to one grandchild or designee. The average American woman has 2.1 children, so it comes close to a 1:1 ratio of children to grandparents. Young parents often have a big problem financing children, whereas in a funded system, the transfer from grandparents could be supported by a fraction of it, by application of compound interest.

With two statutory adjustments along these lines, financing of lifetime healthcare by its investment revenue becomes considerably easier.

Whole-life Health Savings Accounts. (WL-HSA) It has developed in my mind that Lifetime Health Insurance would become even better for cost savings, with the addition of one more feature, copied from life insurance, and combined with the needed DRG revision. It is, broadly, the difference between one-year term life insurance, and whole-life insurance, which offers lifetime coverage as a variant of multi-year coverage. Life insurance agents frequently argue that whole-life is much cheaper in the long run than term life insurance. What they may not tell you is that most of the apparent profitability of term insurance derives from so many people dropping their policies without collecting any benefits at all. Comparing apples with apples, whole-life insurance is not just cheaper, but vastly cheaper.

For those who don't understand, one-year term insurance covers illnesses for a single year and then is open for renegotiation. By contrast, a whole life policy covers a lifetime of risk, overcharging young people for it in a certain sense, meanwhile investing the unused part for later years when health risks are greater. Does that start to sound familiar? The client is seemingly overcharged at first, but in the long run, his life insurance cost is far cheaper. Not just a little cheaper, but just a fraction of what a chain of yearly prices would cost.

It doesn't mean you must enroll at birth and remain insured until death; it means any multi-year insurance becomes cheaper, depending on the age you begin and the age you cash out -- often at death but not necessarily. What makes the saving so astonishing is the way life expectancy has lengthened. We have been so uneasy about rising medical costs we didn't much notice that people were living thirty years longer than in 1900. As a rule of thumb money earning 7% will double in ten years; in thirty years, it becomes eight times as big. If you lose half of it in a stock market crash, you still end up with four times as much. This is what would be new about lifetime accounts, and it can be easily shown that overall savings for everyone would be more than anyone is likely to guess.

Let me interject an answer before the question is asked. Why can't the government do the same thing? And the answer is, maybe they could, except two hundred years of history have shown the American public is extremely averse to letting anyone be both a player and an umpire. For more than a century at first, there was a strong political suspicion of the government running a bank, or even borrowing money with bond issues. Yes, the government could invest in businesses, but we would then be guaranteed a century of rebellion if we tried to have the government do, what any citizen is free to do on his own. Indeed, a review of Latin American history shows what disaster we have avoided by retaining this negative instinct to allowing the camel's nose under the tent. The separation of church and state is a similar example of how our success as a nation has been based on gut feelings. The separation of business and state is at least as fundamental as separating church and state. And for the same reason: we instinctively avoid having the umpire play on one of the teams.

Proposal 14: Congress should authorize a new, lifetime, version of Health Savings Accounts, which includes annual rollover of accounts from any age, from cradle to grave, and conversion to an IRA at optional termination. Investments in this account are subject to special rules, designed to produce a maximum safe passive total return, and limiting administrative overhead to a reasonable, competitive, amount. The account should be linked to a high-deductible catastrophic health insurance policy, with permanently guaranteed renewal, transferable at the client's annual option. The option should also be considered of linking the HSA to a policy for retrospective coverage of the first year of life and last year of life, combined. These two years are disproportionately expensive, and they affect 100% of the population. Subtracting their costs from catastrophic coverage should greatly reduce catastrophic premiums.

Lifetime Health Savings Accounts (L-HSA) would differ from ordinary C-HSA in two major ways, and the first is obvious from the name. In addition to meeting each medical cost as it comes along, or at most managing each year's health costs, the lifetime Health Savings Account would try to project whole lifetimes of medical costs and make much greater use of compound income on long-term invested reserves. The concept seeks new ways to finance the whole bundle more efficiently, and one of them is health expenses are increasingly crowded toward the end of life, preceded by many years of good health, which build up individually unused reserves and earn income on them. Since the expanded proposal requires major legislation to make it work, it must be presented here in concept form only, for Congress to think about and possibly modify extensively. This proposal does not claim to be ready for immediate implementation. It is presented here to promote the necessary legal (and attitudinal) changes first needed to implement its value. And frankly, a change this large in 18% of GDP is better phased in gradually, starting with those who are adventurous. By the time the timidest among us have joined up, the transition will have become routine. As a first step, let's add another proposal for the present Congress to consider:

Proposal 15. Tax-exempt Hospitals Should be Required to Accept the DRG method of payment for inpatients from any Insurer, although the age-adjusted rates should be negotiable based on a percentage surcharge to Medicare rates. The DRG should be gradually restructured, using a reduced SNOMED code instead of enlarged ICDA code, and intended to be used as a search engine on hospital computers rather than printed look-up books, except for very common hospital diagnoses. Also to be considered for those who are too sick for arms-length negotiation of hospital costs, are uniform reimbursements among insurance carriers and individuals, and between inpatients and outpatients, including emergency rooms, as well as a major expansion of specificity in DRGs.

Overfunding and Pooling. Lifetime Health Savings Accounts, besides being multi-year rather than annual, are unique in a second way : they overfund their goal at first, counting on mid-course correctionsto whittle down toward the somewhat secondary goal of precision -- amounting to, "spending your last dime, on the last day of your life". To avoid surprising people with a funding shortfall after they retire, we encourage deliberate over-estimates, to be cut down later and any surplus eventually added to retirement income . For the same reason, it is important to have attractive ways for subscribers to spend surpluses, to blunt suspicions the surpluses might be confiscated if allowed to grow. An acknowledged goal of ending with more money than you need runs somewhat against public instincts and is only feasible if surpluses can be converted to pleasing alternatives.

Saving for yourself within individual accounts is more tolerable than saving for impersonal groups within pooled insurance categories, but probably must constantly defend itself against the administrative urge to pool. Pooling should only be permitted as a patient option, which creates an incentive to pay higher dividends for it. The menace of rising health cost at the end of life induces more tolerance of pooling in older people, whereas small early contributions compound more visibly if pooling is delayed. Young people must learn it gets cheaper if you don't spend it too soon. The overall design of Lifetime HSAs is to save more than seems needed, but provide generous alternative spending options, particularly the advantage of pooling later in life. Because it may be difficult to distinguish whether underfunded accounts were caused by bad luck or improvidence, the ability to "buy in" to a series of single-premium steps should both create penalties for tardy payment, as well as create incentive rewards for pooling them. This point should become clear after a few examples.

Proposal 16: Where two groups (by age or other distinguishing features) can be identified as consistently in deficit or surplus -- internal borrowing at reduced rates may be permitted between such groups. Borrowing for other purposes (such as transition costs) shall be by issuing special purpose bonds. These bonds may also be used to make multi-year intra-family gifts, such as grandparents for grandchildren, or children for elderly parents.

Smoothing Out the Curve.There is a considerable difference between individual bad luck with health costs and systematic mismatches between average costs of different age groups. Let's explain. An individual can have a bad auto accident and run up big bills; as much as possible, his age group should smooth out health costs by pooling within the age cohort to pay the bill. On the other hand, compound investment income sometimes favors one age group, while illnesses predominate in a different experience for another. It isn't bad luck which concentrates obstetrical and child care costs in a certain age range, it is biology. No amount of pooling within the age cohort can smooth out such a systemic cost bulge, so the reproductive age group will have to borrow money (collectively) from the non-reproductive ones. With a little thought, it can be seen that subsidies between age groups are actually more nearly fair, than subsidies based on marital status or gender preference, or even employers, who tend to hire different age groups in different industries. On the other hand, if interest-free borrowing between age cohorts is permitted, there must be some agency or special court to safeguard that particular feature from being gamed. All of these complexities are vexing because they introduce bureaucracy where none existed; it is simply a consequence of using individual ownership of accounts to attract deposits which nevertheless must occasionally be pooled later. Because these borrowings are mainly intended to smooth out awkward features of the plan, every effort should be made to avoid charging interest on these loans. However, if gaming of the system is part of the result, interest may have to be charged.

Proposal 17: A reasonably small number of escrowed accounts within a funded account may be established for such purposes as may be necessary, particularly for transition and catastrophe funding. Where escrowed accounts are established, both parties to an agreement must sign, for the designation to be enforceable. (2606)
Escrowed Subaccounts. Both Obamacare and Health Savings Accounts are presently expected to terminate when Medicare begins, at roughly age 65. Nevertheless, we are talking about lifetime coverage, where we have a rough calculation of the cost ($325,000) and the Medicare data is the most accurate set, against which to make validity comparisons. We want to start with $325,000 at the expected date of death, spend some of it in roughly 20 installments, and see how much is left for the earlier years of an average life. Then, we repeat the process in layers down to age 25 and hope the remainder comes out close to zero. There are several things missing from this, most notably how to get the money out of the fund, but let's start with this much, in isolation for the Medicare age bracket, age 65-85. We are going to assume a single-premium payment at age 65, which both life expectancy and inflation in the future will increase in a predictable manner, and changes in health and health care eventually reduce healthcare costs, not increase them. Not everyone would agree to the last assumption, but this is not the place to argue the point.

We know:

(a) The average cost of Medicare per year ($10,900)

(b) How many years the beneficiaries on average are in the age group (18).

(c) Therefore, we know how much of the $325,000 to set aside for Medicare ($196,200),

(d) And know how much a single premium at age 65 would have to be, in order to cover it. ($196,000 apiece)

(e) We thus know how much all the working-age groups (combined as age 25 to 65, 60% of the population) must set aside, in advance for their own health care costs, when they reach Medicare age ($196,000 apiece).

(f) And by subtraction therefore how much is left for personal healthcare within age 25 to 65 ($128,800).

(g)We can be pretty certain average Medicare costs will exceed those of anyone younger, setting a maximum cost for any age.

(h) All of this calculation ignores the payroll deductions for Medicare and premiums. Since this is nearly half of the cost, it changes the conclusions considerably, depending on how you treat these points. During the transition phase, several approaches may be necessary. Furthermore, the size of accumulated debt service is unknown, or what the alternative plans are, for it.

Shifts in the age composition of the population produce large changes in total national costs, but should by themselves not change average individual costs. What they will do is increase the proportion of the population on Medicare, thereby paradoxically making both Obamacare and Health Savings Accounts relatively less expensive. Obamacare can calculate its future costs with the information provided so far. But the Health Savings Account must still adjust its future costs downward for whatever income is produced by investments. We don't yet know how much each working person must contribute each year, because we haven't, up to this point, yet offered an assumption about the interest rate they must produce. We should construct a table of the outcome of what seem like reasonably possible income results. There are four relevant outcomes to consider at each level: the high, the low, and the average. Plus, a comparison with what Obamacare would cost. But there are two Medicare cost compartments: the cost from age 25 to 64, and the cost from 65-85 advancing slowly toward a future life expectancy of 91-93. These two calculations are necessary for displaying the relative costs of Medicare and also Obamacare.

Children's Healthcare. Someone is sure to notice the apportionment for children is based on income rather than expenses. The formula can be adjusted to make that true for any age bracket, and a political decision must be made about where to apply an assessment if income is inadequate; we made it, here. We have repeatedly emphasized that if investment income does not match the revenue requirement, at least it supplies more money that would be there without it. Somewhat to our surprise, it comes pretty close, and we have exhausted our ability to supply more. Any further shortfalls must be addressed by more conventional methods of cost-cutting, borrowing, or increased saving. In particular, attention is directed to the yearly deposit of $3300 from age 25-65, which is what the framers of the HSA enabling act set as a limit, somewhat arbitrarily.

Privatize Medicare? And finally but reluctantly, the figures include provision for phasing out Medicare, which everyone treats as a political third rail, untouchable. But gradually as I worked through this analysis, I came to the conclusion that uproar about medical costs would not likely come to an end until the Medicare deficit was somehow addressed. I believe we cannot keep increasing the proportion of the population on Medicare, paying for it with fifty-cent dollars, and pretending the problem does not exist. So it certainly is possible to balance these books by continuing our present approach to Medicare. But it would be a sad opportunity, lost.

In summary, we have concocted a guess of the outer limit of what the American public is willing to afford for lifetime health coverage ($3300 per person per year, from age 26 to 65), and added an estimate of compound income of 8% from passive investing, to derive an estimate of how much we can afford. From that, we subtract the cost of privatizing Medicare if our politicians have the courage for that ($98,000 -196,000) and thus derive an estimate of how much is available for health care of the rest of the population ($128,000). Because of the longer time spans available for compound income, at 8% it would cost more out-of-pocket to finance the $128,000 than the $196,000; it would actually be financially better to include it. The non-investment cost, on average, would only be $ 148,000 per lifetime, for an expense which otherwise almost insurmountably crowds out everything else in the national budget. It might be $98,000 less because of Medicare payments, or it might prove to be more, depending on interest rates and scientific progress. Believe it or not, that could be a wide improvement over the present trajectory.

That's how it seems at first when you approach the topic of multi-year health insurance. But there are several exciting additions when you really get into it. It plods along, and then it explodes.

How Certain Numbers Were Derived

How Certain Numbers Were Derived

These are important numbers to know, but difficult for most people to understand what they mean. That will, of course, depend on how they are derived, a subject of much less interest to many people. Therefore, the more controversial numbers are discussed in this chapter, which the reader may skip if he chooses.


Most people in the past did not live as long as they do today, so the "average person" is a composite of people who had illnesses as children which we seldom see today, plus older people who may well live beyond recent expectations, but who were additionally not born to experience the costs of their parents at the same age. One surmises this tends to include among "average" some or many hypothetical people who had both more illnesses as children, and who will have more illnesses as retirees. This would lead to an average with more illness content than the future likely contains.

Prices in the calculation have been adjusted to 2000 prices, slightly less than in 2014. Furthermore, there has been a 2% inflation adjustment, which reflects that a dollar in 1913 is now worth a penny, so we expect the penny to be worth 0.0001 cents in 2114. It is hard for most people to wrap their heads around such calculations. There is a $ 25,000-lifetime difference between the sexes, but the highly hypothetical result is this statement: The Average Person Can Expect Lifetime Health Costs of $325,000. Since most assumptions lead to an overestimate of future real costs, this number is conservatively on the high side. Comparatively few people would think they can afford that much. That is, plenty of people are going to feel stretched to adjust their savings to that level of inflation. It's the best estimate anyone can make, but by itself alone it seems to justify organizing a government agency office to match average income with average expenses, and to make the ingredient data widely available to many others outside the government on the Internet, to maximize the recognition of serious errors, unexpected financial turmoil, the development of new treatments, and changes in disease patterns. Inevitably, these calculations will be applied to other nations for comparison, but that is a highly uncertain adventure.


Like Archimedes announcing he could move the World if he had a long enough lever and a place to stand, accomplishing this little trick could arrive at impossible assumptions. Our basic assumption is that paying for your grandchildren is equivalent to having your parents pay for you, even though the dollar amounts are different. It's an intergenerational obligation, not a business contract, and you are just as entitled to share good luck as bad luck when the calculation is shaky at best. Since children's costs are relatively small, little damage is anticipated from taking present costs, adjusted for inflation, for both past and future.

Is it reasonable and/or politically possible to lump males and females together, when females include all the reproductive costs, and have a longer life expectancy? How do we apportion the pregnancy costs between mother and child, with or without including the father? What is fair to those who have no children? What costs do we include as truly medical? Sunglasses? Plastic Surgery? Toothpaste? Dentistry? The recent hubbub about bioflavonoids threatens to convert what was mainly regarded as a fad, into a respectable therapy for allergy. When allergists and immunologists agree it is a fad, you don't pay for it; if substantially all of them think it is medically sound, pay for it. The opinion of the FDA informs the profession, it does not substitute for that opinion. Quite aside from cost issues, all of these issues affect the statistical ground rules, and may not have been treated identically among investigators. Unverifiable 90-year projections must be thoroughly standardized to be useful, and that's one committee I shall be glad to avoid because I do not believe the improved accuracy is worth the distinction. When somebody discovers a cure for cancer or Alzheimers, rules may have to be revised, net of the cost of the treatment, and net of the increased longevity. Government accounting, private accounting, and non-profit accounting are three different schools of thought for three different goals; when a government borrows outside of its accounting environment to reimburse providers of care, misunderstandings of the "cost" consequences result, in the three definitions of medical costs. In short, only broad qualitative trends can be credible at the moment.

Borrowing Your Own Money

The accumulation of earned income within a Health Savings Account is pretty nearly a straight-line accumulation according to the principles of compound interest. It reaches the estimated lifetime medical costs of the owner at the time of his death. The withdrawals from the account pay for medical care, and therefore the two curves end at the same point, but by different routes. Medical care expenses rise much faster toward the end of life so that in general revenue grows faster than health expenses -- a favorable relationship. It seems likely the average medical cost and the average savings to pay for it will differ according to distinctions in their underlying theories, and it is a certainty that any particular individual will see wide patches of difference along the way. The biggest problem is to find a way to use the patches of surplus to pay for the patches of a deficit. There seem to be three ways to do it:

1. Over-invest. The effort up to this point has been to find the lowest contribution possible, so poorer people could afford to buy the insurance. However, over-investment leads to more compound interest and is actually much cheaper in the long run. Besides affordability, the only obstacle to over-depositing is the limit imposed by the law, which is $3300 per year. Everyone is encouraged to do so since a safe, tax-exempt return of about 10% is more than is usually available. The maximum anyone could contribute from 26-65 is $326,700 with annual increases planned. Because of the $3300 yearly limit, however, extreme investment returns are not possible. At $3300 yearly, the compound interest at 10% would double the principle in ten years but it would require perfect health to accumulate $66,000 that way. Keep in mind that money in the account may only be spent on health care of an approved sort, and when heavy medical expenses start to appear, longevity is likely to be appreciably shortened. Present rules prevent further payments to an HSA after beginning Medicare coverage so it would be prudent to be fully funded before that time, but getting greedy would probably mean much is wasted.

2. Persuade Medicare to deposit advance payments (payroll deductions and Medicare premiums) into the Account rather than lose their compounded investment income in the meat-grinder of the pay-as-you-go. There is a transition issue, but otherwise, this item alone would pay for half of Medicare, and its investment income would further add to it.

3. Borrow from yourself. Although payments from the Account are normally made with a bank debit card, and all banks lend money, the administrative costs of many calculations of relatively small amounts could be considerable. It seems much more attractive to seek ways to do the predictable borrowing and repayments by age cohorts in bulk, as a sort of wholesale product. If for just an example, the age group from four to twelve has so little medical expense that the Accounts are always in surplus, it might be borrowed at five percent interest and re-deposited in the cohort from age forty-five to sixty-five which we imagine being constantly in deficit. The outcome would be that the surplus was earning fifteen percent, and the deficit only earning five percent. External borrowing from the banks' own funds, would probably require a shift in the underlying securities in the fund, from equities to fixed income, during the period of the loan. With this sort of safety measure, interest rates for external borrowing might prove to be attractive enough to make short-term loans available from the banks which held the debit card. The distinction here might be made along the lines of structural deficits inherent in the age groups, and transient deficits caused by payments for illnesses. The latter might be riskier, but more short-term. Some sort of pooling might be more useful for re-insurance of outliers, or catastrophe insurance.

But it would be wise to avoid borrowing, except as a final extremity. Naturally, it is better to borrow than to accept destitution while six-figure sums sit idle in your Account, but the experience with 401(k) is cautionary. Around the bar in investment circles, it is easy to hear careless comments that 401(k) is a failure, because borrowing to buy fancy cars or expensive vacations is altogether too common, and the fees charged by investment advisors are regularly so high that attractive investments turn into losers or at best break even. Charges of $200 per trade are quoted when several trillion-dollar firms charge less than $10. Advisory fees are set at 1% or more of assets managed when major firms -- with equal or superior investment results -- charge seven-hundredths of a percent.

Charges of this sort are justified in speculations on drilling oil, or computer start-ups, or foreign dabbling. Perhaps the zero-sum game of fixed-income trading justifies such fees from professional gamblers. In other words, advisors are needed for investments you shouldn't even consider. Trust fund babies, or bewildered old folks holding hands, don't need investment advisors, they need to grasp a few simple facts. The vast majority of profits in the stock market are made in 10% of the days it is open. Don't time the markets, buy and hold, waiting for that 10%. Don't be a stock picker; stock pickers always seem to buy high and sell low. Buy an index fund with thousands of stocks represented, don't pay more than a tenth of a percent. Just forget you have it, except once a year to see how it compares with others. Don't believe what you are told about fees; they are mostly hidden. If your results don't compare well with market performance, just re-read the last paragraph. Borrowing? All that will do is magnify your gains or losses, so be sure what you are doing is superior before you borrow. I'm willing to bet it isn't superior.

Children, From Birth to Age 26

It's hard, nowadays, to know what age to select as dividing childhood from working adults. The age transition is slowly getting older, at least in the public mind. According to the Wall Street Journal, quoting William Kremer of BBC, the following was a quote from the Venetian Ambassador to England in 1500:"The English keep their children at home until the age of seven or nine at the utmost, then put them out, both males and females, to hard service in the houses of other people, binding them generally for another seven or nine years. Everyone, however rich he may be, sends away his children into the houses of others, whilst he in return, receives those of strangers into his own." In the 14th Century, Florentine merchant Paolo of Certaldo advised: "If you have a son that does nothing good, deliver him at once into the hands of a merchant who will send him to another country or send him yourself to one of your close friends. Nothing else can be done. While he remains with you, he will not mend his ways."

In the 20th Century, children were considered adults at 18, when they graduated from high school, then it became 21 or 22 corresponding to a college graduation. And now it is 26, as set down by the rules of the Affordable Care Act, which probably has Graduate School in mind. Or, because of the recession, perhaps it reflects the current difficulty of even a 26-year-old to find employment. This is a book about medical financing, not sociology or anthropology, but it must be noted that the official age of the end of childhood tends to reflect the difference between taking advice from your family and taking the advice of your classmates. In that sense, the education industry is crowding out the advice of the family, with resultant conflict during the period between nine and twenty-six. It seems to be the main source of friction from ninth grade to the end of graduate school, and probably also hastens the decline of religion as an influence since the teachings of school and the teachings of religion are sometimes in conflict. Religion may well play a central role in the coming revulsion against the education industry, judging by the undercurrents of teen-age rebellion. Underneath it, all would appear to be a dispute about the responsibility for paying the child's expenses, in collision with surrendering control of how expenses are to be spent. Just as there is growing rebellion about college expenses, medical care expenses will probably share in the coming rearrangements that appear inevitable. Finally, to get back to it, it is possible that age 26 will be lowered to a new point where parents really could be expected to pay the medical expenses of children, willingly. Meanwhile, the abrupt outwelling of sympathy for a sick person can be expected to blur these boundaries more than in other dependencies.

Admitting it is arbitrary, and mostly to maintain comparable statistics with the Affordable Care Act, we now define children as comprising the age group from birth to age 26, even though they may have risen to officer rank in the military forces, where many would be offended by the idea. For the same reasons, 26 is accepted as the age whose medical bills are "normally" considered the responsibility of parents, within the Health Savings Account system. We would like to recommend they be enrolled in an HSA at birth, with a single payment gifted by the parents at birth, sufficient to pay for all medical care to age 26, and including the option of including the child's own obstetrics in that calculation as well. That is what would be most convenient for insurance administration. Let's do some hypothetical math, along the line of what worked fairly well for somewhat older adults.


Grandparents Making a Gift of Lifetime Healthcare

Single Payments,($1000) at Birth; Longevity 85 yrs.

(Health Savings Account Must Achieve Growth to $10,850 at Age 26, $325,000 at Age 85.)

Interest Rate..........10%..............................7%............................3%.....

Achieved Age 26 $10,800.......................$5,000......................$2,100...........

Achieved Age 85 $3,000,000................$293,000..................$12,000...........


The purpose of this table is to illustrate that much might easily be achieved with a 10% return, but the same result cannot be confidently expected from lower returns. Lower returns are a definite possibility over a 26-year span of time. To achieve total health coverage with lower rates of prevailing return will almost certainly require more capital to be invested at the beginning, perhaps four times as much. A 3% return during a 3% inflation period, such as we have had for many years, would amount to standing still. Therefore, a gift of $1000 is going to stretch a great many budgets, so the best this approach can promise is to reduce, not eliminate, childhood health costs. Success can only be achieved by raising premiums later in life to make up the shortfall. It would take a skillful politician indeed to persuade half the population to stretch its budget this way, but we make the calculation in case politics demand it. Because this reproductive controversy would quickly degenerate into wrangles about which parent has what moral duty in the case of a divorce, this looks like an option which the affluent population should probably try, but government intervention in this direction is not easily foreseen.

One virtue in waiting for something to turn up lies in the mathematical near-certainty that things will be much more favorable if the trend toward increased longevity persists. For both mathematical and biological reasons, the curves of revenue and expense are not parallel straight lines. The laws of compound interest which make childhood investing risky, also make investing by old folks easier. While almost ridiculous amounts of money accumulate at 10% in the eighties, even more, ridiculous amounts are generated in the nineties. In the present example, 10% investing heads north of 3 million dollars at age 85, but comfortably exceeds 6 million at age 93. This mathematical pressure is made even greater if terminal care moves eight years later, without much more illness cost in the interval. The longest of long-term trends is for health costs to concentrate in the first year and last years of life: everyone is born, everyone dies. There's a gamble, of course. Living eight years longer may simply present the old geezers with eight additional years of medical costs, or eight more years in a nursing home.


Same Thing, With Longevity Increased to Age 93

Single Payments, ($1000) at Birth; Longevity 93 yrs.

(Health Savings Account Must Achieve Growth to $10,850 at Age 26, $325,00 (?) at Age 93.)

Interest Rate.........10%................................7%................................3%.....

Achieved Age 26 $10,800.........................$5,000........................$2,100..........

Achieved Age 93 $6,400,000..................$505,000....................$15,000...........


But at least an optional choice becomes necessary because obstetrics and neonatal care are presently included with the mother's health insurance, but sometimes not. A complicating issue with small-amount investing is that the amounts are ordinarily so small that managers of Health Savings Accounts rebel at the administrative overhead. On the other side of it, the generation of compound interest for 26 additional years significantly reduces the cost to the parents to the point almost anyone who achieves middle-class status could afford the single payment option. Generously estimating the lifetime average medical cost, of a child from birth to age 26, to be $10,000, it would take a payment of $925 to cover it all, at interest rates not likely to reappear soon. However, that same $925 would more than generate $4.9 million lifetime revenue to age 91. Assuming, at the other extreme, the mother's investing age to start at 26, her lifetime costs using present prices would be covered up to $412,000 to age 91. All of these suppositions are based on the strong hunch that the present Medicare deficits are unsustainable, not on any wish for them to be so.

When a child, who has been covered by a single payment at birth, reaches his 26th birthday, he finds his medical costs insured to the day of his death aged 91, but perhaps that was not the purpose of the gift. If the parents want the money back, they are probably entitled to it, since financial obligation only extended to age 26. Therefore it is important that some of the surpluses in the fund should be transferable to the original donor as an option. The annual gift tax exclusion probably removes the tax consideration, although it is true that that the Account has carried an option to supplement it, throughout the 26-year interval, and therefore the Account might contain enough money to buy out the second policy. The tax implications are therefore uncertain; when they are clarified, the issue of splitting the policy may be clarified, as well. It would seem that the birth of the first child might be a good time to start the parent's policy, since the parent would want to have some coverage for the obstetrical costs, and therefore often be the owner of ordinary health insurance for that purpose.

One thing remains as an absolute: very few newborn children pay for their own delivery. As a normal thing, all health costs of a child up to age 26 are born by the parent, who either makes the child a gift or loans him the money. Any changes in the law ought to follow the habits of society about this overlap of responsibility.

Childhood Coverage, A Summary. It remains attractive to search for ways to include childhood health costs in an HSA. The small amounts administrative cost could be addressed by issuing an interest-bearing bond at birth, redeemable at age 26, and preferably redeemable by rolling it over into an adult policy. However, no presently foreseeable opportunity to issue 10% bonds with 26-year call protection is available; the bond market simply will not sustain it. If it did sometimes sustain it, its repetition is uncertain. Single-premium insurance might be purchased by grandparents, but any government involvement would probably cause populist resentment. The only available non-subsidy method of funding this problem seems to be to borrow the money from later years when the revenue curve is more favorable.

Borrowing from a pool, especially if funded by unused surpluses which appear at death, might be acceptable as an interest-free return of a moral debt, but most sources are going to require the payment of interest on the loan, which defeats the investment purpose of the HSA. All in all, the best available interest-free loan equivalent would be to raise the cost from the individual's later account. After all, all childhood costs are paid by adults, as an interest-free loan to the next generation. When the child gets to be thirteen years old, the generosity may temporarily seem to have been foolish, but one that is eventually revised. Nevertheless, borrowing from yourself is only fair justice, and if the parents wish to give gifts, let them do it without coercion.

Pay As You Go

The traditional architecture of health insurance is called "Pay as you go", which like many political titles, means the opposite of what it says. When Lyndon Johnson started Medicare in 1965, he was faced with two simultaneous decisions: medical bills were coming in to be paid, and payroll deductions rolled in, intended to pay out for someone else's medical bills in the future. It seemed a simple thing to use the money on hand to pay the bills. Money was money, and it didn't care what it was for. For a while, more money came in than went out, so there was a surplus Medicare fund, but that is now gone. Almost entirely, today's' bills are paid with money intended to be spent years from now. To be brief, cash flow is used to pay current expenses, disregarding future obligations. That's very close to a Ponzi scheme, with the difference that the federal government can print reserve currency and, therefore, can borrow almost unlimited amounts from foreign countries. We quickly passed the point where we could invest the surplus money and got into the habit of borrowing it.

{top quote}
Pay As You Go is unable to generate income from premium reserves. {bottom quote}
Why Not Pay/Go?
To restate: In addition to not earning income, we make interest payments, for a double cost. If we could find a way to get out of this blunder, we could greatly reduce overall Medicare costs. Meanwhile, most people are unaware that Medicare costs are 50% subsidized by taxes and borrowing during this process, and think it must be very well run, indeed. However, the rules of accounting were conveniently changed, so that when one arm of the government loans money to another department, it isn't called a liability, it's called an asset. After all, if you are on both sides of the transaction, it is both things, and it is also neither thing. You can find it in the CMS Medicare annual report on your home computer, listed as "Transfers from the general fund", and sure enough, it's 50% of the total cost. While we are on the subject, let us digress for a moment and say that payroll deductions from working people are 25% of the cost, and the Medicare beneficiaries themselves contribute only 25%, as premiums. Since everybody likes to get a dollar for 25 cents, the public is so approving of the balance sheet that there is a major movement to extend it to everybody, flying the flag of "single payer".

{top quote}
Medicare is 50% subsidized, so by implication, a Single-Payer system expects 50% subsidy, too. {bottom quote}
Why Not Single Payer?
However, for present purposes this little lesson in accounting is offered to explain a much more significant feature: it might be possible to increase the revenue of Medicare by re-directing the funds' flow. The insider joke is that by adding income, the accounting system would then display a loss, and the opposition party could make a big fuss about it.

Investing for the Common Man

Some of my best friends are investment advisors. They are some of the most urbane, pleasant, and smart people around town, and until recently some of the most prosperous, not to say, rich. Many brokerages were founded as private offices to service the particular needs of one very rich family, and then expanded to include the public for a fee. They are not and never were, fiduciaries. They have no legal obligation to put the customer's interest ahead of their own, and they are very careful to tell you that, in the body language of behavior. For that reason, they were very careful with new customers, and the customers had the perception that they were privileged to be accepted as customers. Such old-line brokerages were a 19th Century sideline for people who owned family businesses but had some capital to spare. Shortly after World War I, brokerages thrived as family stockholder businesses declined, gradually morphing into a world dominated by public stockholder corporations. A specialized business, investment banking, concentrated on merger and acquisitions, and at first, converted most large family businesses into stockholder corporations. As that opportunity gradually dried up, investment banks began to trade on their own accounts, sold bond flotations, and created derivatives. By the end of the 2008 crash, there were only two independent stock brokerages in Philadelphia; all the many others had been absorbed into national firms. Only about five of them dominated the field in 2014. In about a century, family businesses of all sorts had disappearpreaed; that unrecognized fact was a major factor underlying the social uproars of the 1960s. No longer did the owner of family business expect his son to take it over; in fact, no longer did the fathers of daughters organize local social events to throw the next generation of local leaders together at parties. If you want to hire someone to run your business today, the natural thing is to hire a search firm to find somebody in San Francisco to run your business. This phenomenon spread out to almost all traded and professions, including shoemakers and stock brokers. It's all rather sad.

During that century the cream was skimmed off, leaving family businesses as a relic of the past, and brokerage houses were threatened with the loss of their main product to convert, as well as their main supply of respectful clients to buy them. The electronic computer had a lot to do with this, making mass production of a Savile Row business into a low cost, mass producing mass marketing organization. No longer did you learn the trade by associating with a master of it; you went to business school to learn the techniques. Your SAT score became more important than your Rolodex. Or your city club, or your prep school, or golf handicap. Or, for that matter, whose daughter you married.

Nowadays, there are even more private offices, but the owner is apt to have made his pile as a chemical engineer, and his manager went to business school, polished up his skills in a big investment firm, and got hired as the local expert on what to do with all that money, on how to educate the clueless owner, and how to manage his worthless children. If he did well in the private office, he was fixed for life. If he did well but felt restless, he was apt to start his own hedge fund. In all this professionalization of an artisan trade, nestled within a relentlessly competitive environment, the customer relations retained many of the mannerisms and attitudes of its family business origins. For one thing, most new investors have either inherited money or earned it in some totally non-financial arena, and are totally at sea in their new unfamiliar role. Realizing their helplessness, and probably foreseeing a lifetime of dependence on investment, they are scared. Anticipating failure, they are preparing the IBM defense. That is, they are like beginners put in charge of buying a computer in the early days. If you bought an IBM computer, it might cost more and do less, but no one would criticize you for selecting IBM. That's how customers approach the problem. The financial advisers feel entitled to a luxury lifestyle, and charge the generous fees which will lead to it. Neither client nor adviser allows the relationship to consider the only thing which matters: how does your track record compare with cheaper competitors? What a nasty low-class question to ask.

Let's ask an even nastier question, anyway. How does the whole class of active managers compare with a random walk on Wall Street? In fact, if you subtract the fees they charge, almost everyone does worse than index funds. In fact, if you take Warren Buffet, the most famous investor alive, and compare the performance of his company, Berkshire Hathaway, with Vanguard's total market index (VTI), it is pretty hard to tell the difference. Warren Buffet is one of the richest men alive, but his performance including administrative costs does not justify the purchase of his stock, or in fact the performance of any stock-picker. If you pick out the best manager you can find, regardless of his fluency with words like alpha and moveable alpha, and make sure to include the fees he charges, you will almost invariably find you would have done just as well with an index fund. Do two things: make certain you pick the beginning date and put several years of performance through an internet website known as BigCharts. Remember, almost any numerical series can be manipulated by selecting a favorable beginning date, so you choose it, and preferably chose several of them. BigCharts is free, and it provides for automatically plotting the historical charts of several funds at once, different colors for each. You can if you wish, browse through Ibbotson's atlas of the prices of all classes of stock for the past century. What Ibbotson demonstrates in overwhelming detail, is that different classes of stock differ from each other, but they consistently revert to the same mean. Using a logarithmic scale and plotting total return (stock price plus dividends), small and mid-cap stocks hold steadily to a 12% annual return, while large capitalization stocks (the ones you have probably heard of) "command a premium price", which is to say they return 10%. Bonds return less, U.S. Treasury bonds return still less, and inflation has been a little more than 3%.

The first thing this study proves is that if you made less than 3% return, you lost money, by allowing inflation to eat it up. If an investment manager cannot show better results than 3% inflation, you are better off avoiding him. Don't avoid the question. Ask it.

Secondly, it's hard to answer why you should not put your money in a small-cap index fund, with administrative fees well below a fraction of one percent. Several index funds with several billions of dollars of deposits have fifteen-year administrative fees of less than a tenth of a percent, and total returns of 12%. Why not buy them, and never sell them except in emergencies? It's hard to see why that is the wrong thing to do, but it means concentrating investment in hundreds or thousands of companies too small to recognize. Admittedly, some of these stocks will go broke, but others will skyrocket. However, it is easy to understand the fearfulness of a new investor, who wants to own big companies he has heard of. He wants to own IBM and General Electric. Very well, buy an index fund with low fees, and try never to sell it. That way, you will make 10% and both minimize taxes and transaction costs. But remember that inflation is going to reduce the results by 3%, so the difference between 12% and 10% is really the much greater difference between 9% and 7%. If you reduce it further by buying a hedge fund with a typical 2% surcharge, it is the difference between 7% and 5%. If you fail to put the funds into a tax-exempt retirement fund, you will reduce your after-tax return to either 4% or 3%. Perhaps from this simplified example, it becomes clear how sales fees of $250 per transaction may seem fair to both you and your manager, but they soon reduce the investment return to such pitiful levels that it isn't worth the risk. Don't do it. Don't let it happen. Transaction fees of $7 a trade are available from several investment companies with deposits in the trillions. The marketplace says this service is worth $7 a trade and 0.07% yearly administrative cost. Your broker has to make a living, yes. But you have to afford retirement, also yes.

Actually, that isn't all. Most qualified retirement funds are retail, and the funds they choose are wholesale. Beware of funds which charge you $250 to make a monthly or quarterly, or even annual minimum required distribution, for sending you the money you could ask to be sent to you directly for a fee of $7. Some of the biggest banks in America do exactly that. Your fund was inexpensive, but your agent was very dear. Unless your manager sends you regular performance reports and includes every penny of fees; and unless the net of inflation is 5%, you have a reason to move your account. Past results are no predictor of future performance, that is true. But past behavior is a very good predictor of future behavior, as my grandfather told me, and as I tell you. No second chances allowed.

Raising Cash and Investing Cash

Since all investments are eventually sold, else what's the point of investing. It seems to be a universal practice among professional investment advisors to liquidate stock immediately, once a decision is made to spend (substantially) from the investment fund. Having been on a number of investment committees, I noticed the decision to build a new building or buy a big piece of equipment brings the investment manager immediately out of his normally silent attendance. When the general cost is announced, he immediately will announce that he is liquidating that amount, and setting it aside. Since large capital expenditures are often finally spent a year or two later, it means losing appreciable income to do that. So I asked, and sure enough, it is a firm policy. The reasons given have a strong tinge of self-interest in them, so I was never quite sure. The stock market might well go up during the interval between decision and payment, but if it goes down enough to thwart the plan, the investment manager may feel he could get the blame for ruining a good business idea. So he prefers to play it safe. What he fears, may sometimes happen, but probably not regularly. This sort of behavior is universally applauded as a sound business practice. A company is supposed to know its business, and ordinarily plans to make more money from its business than from its piggy-bank.

Where policy dispute exists, it is on the opposite sort of decision, whether to invest a windfall all at once or drag it out. Of course, if the amount of cash is truly substantial, there is a risk the purchase will itself raise the price of the stock being bought, but if that's a likelihood it probably only affects very big investors or very small businesses. Big shots don't need or welcome outside comments. For ordinary folks most likely, the concern is that the market will constantly fluctuate, and cause you to spend your windfall (or inheritance, or gift) at the time of a bump up. If you spread it around at least you get the average price during the interval. There's at least one consideration to the contrary, however. Roughly speaking, ninety percent of the gains, take place in 10% of the time interval. If you spread your investments out, you will likely miss out on most of the gains. You may think you can time the purchases adroitly, but it is almost universally agreed that market-timing is futile, and nobody can consistently win by trying it. Most young people disregard that advice and therefore encounter the truth of a second maxim. The best thing that can happen to you is to lose some money when you are young.

The matter has been thoroughly studied, and leads to the general agreement: it is true at all times and seasons, with perhaps a weak tendency for the market to go up a little at the end of the year. Robert J. Schiller and Jeff Sommer each had articles in the August 17, 2014, New York Times of studying all the one-week periods since 1926, when modern record-keeping began. It was possible to lose a significant amount of money by investing in the year before the major stock market crashes of 1929, 1999 and 2007, but even in these extreme pre-crash situations, the markets recovered the losses in 2-3.5 years. Otherwise, lump-sum investing beats dollar-cost averaging by about 4%. Accompanied of course by the usual advice that past performance is no guarantee of future performance.

In fact, the two styles have a lot in common. The human fact of the matter is that selling a business, or getting an inheritance is a relatively rare occasion in life. When cash accumulates suddenly, it is best to hold your nose, diversify widely, and plunge ahead. When you think about it, dollar-cost averaging is really much the same, except you get much smaller amounts once a month in a paycheck -- but then invest them immediately. The true advantage arises, not in how quickly you do it, but just in making a decision to buy a diversified index fund. Dollar-cost averaging -- Investing a fixed amount regularly -- is pretty much the same, except more frequent. When you make those two decisions and go to sleep on them, you will one day wake up and discover you have accumulated much more money than you expected. That only leaves the occasional windfall investment, which comes along every fifteen years or so. Unless you are dreadfully unlucky, the time to hold off investing has a pretty small chance of coinciding with the windfalls of life. Only if you feel you will develop a pressing need to raise cash in the next three or four years, should you hesitate.

Remember, there is only one reason to hold cash or bonds that everyone agrees to. Whether it is to meet a payroll or to time the markets, you want at all costs to avoid the situation of being forced to sell temporarily depressed stocks, at a loss. If there is any significant chance of that during the next few years, you had better assemble the cash on hand, right now. If you haven't had this degree of prudence in the past, receiving any windfall cash infusion is a good time to put it aside.

And finally, as far as selling is concerned, sell your losers and hold on to your winners, for tax reasons. To thwart the habit of bad news creeping up on you gradually, like the frog getting boiled in the pan, check your winners and losers every October. If you have accumulated three thousand dollars of losses, and three thousand dollars worth of winners, sell them both. Two months later, buy back six thousand dollars worth of the winners. This will probably generate a little profit bump from the "end of the year effect", gets rid of your losers, strengthens your portfolio, and reminds you to look at your results, once in a while.

Shifting Money Backward in Time: Managing the Transition

We have got to the point where the individual subscriber has a well-funded HSA, and also has Medicare, both of whom could use the money to pay for terminal care, since everyone dies. If the money in the HSA is used to repay Medicare for medical expenses incurred during the last year of life, that comes close to being the same thing. How do we transfer this money around so that someone who is dead can use it? It would take Medicare's agreement, or Congress's, but meanwhile, as this money accumulates, more money is being deposited in Medicare by payroll taxes, Medicare premiums, and a 50% subsidy from the taxpayers.

Here's the deal: Medicare gets reimbursed for the average last-year-of-life costs (which it is obliged to pay) and agrees not to collect payroll taxes or premiums up to the present value of that amount. Furthermore, Medicare agrees that half of the proceeds go toward paying off the Medicare debt. For simplicity and promptness, nationwide average terminal care costs are used, rather than actual itemized ones.

True, it may take some time for transition to take place, during which some fair apportionment should be worked out. For example, some portion of the payroll tax etc. might go immediately into the HSA until there is enough to make a full transition. This latter amounts to a loan from Medicare, with suitable interest rate adjustments.

It is here suggested that the transfer be limited at first to the last year of life but expanded in time to a larger number of years of Medicare benefits, and eventually get into an "accordion-like" arrangement as the law of large numbers permits greater certainty of the cost/revenue balance. That's it. That's how you approach the goal of changing from a term to a whole-life approach, or insurance policies which promise healthcare coverage for the rest of a lifetime, rather than for just one year. By itself, this might absorb the pre-existing condition issue, but perhaps only part of it during the transition years.

Admonitions: Using the Transition to Lifetime Health Insurance as an Inflation Restraint

Inflation Protection. Let's imagine the typical individual has reached the point where he is writing his will at the age of 90. He has followed our advice, created an HSA, dutifully funded it, and reached the point where his medical expenses are mostly behind him, but -- he has a meaningful amount of money left in the HSA. The existing legislation is pretty relaxed about that, allowing him to convert his HSA into an IRA, and follow its rules for inheritance. That's fine because it has created an incentive all these years, to save just a little extra money in the HSA for contingencies; after paying taxes, he can spend it as he pleases.

The Escrow Fund. It may be fine, but it eventually comes to an end in the face of terminal care costs; at that point, the future is damned. Since most people never know for certain which episode will be the last, indifference to insured costs is fairly general. There needs to be additional restraint against medical cost inflation. We propose that a compartment of Medical Savings Accounts be designated as a single-purpose escrow fund, adhering to the model of buying a life membership in a club, except in this case, it can only buy lifetime health coverage from Medicare. Annually, his fund manager transfers a sum to the individual escrow fund, calculated to reach a buyout price for Medicare coverage at some later age, and assuming the investment income achieves a stated goal. The individual may borrow against the escrow to pay current medical expenses and may need a subsidy to do so, but the escrow may not be spent down. (It continues to generate investment return to the fund which in normal circumstances would exceed the loan interest). At any time he has enough money, our Medicare subscriber can make a voluntary deal with Medicare as follows: If he will turn his escrow fund over to Medicare at his death, then Medicare will no longer collect his full Medicare premiums, starting today. That's a good offer or a bad one, depending on his life expectancy and how much is in the escrow fund; as of today's rules that would typically be several thousand dollars. That's a bad deal for the government if there is inflation. However, for individuals at any age down to age 26, it would seemingly always have made a better deal if he had only made it a year or two earlier. If it had been offered at age 65, it would have made a tremendously better deal than at age 90, because so many more premiums would lie ahead. And before that, if the deal were offered to a working person it could extend to skipping the 6% Medicare payroll tax deductions, which could be a stupendous deal. So let's go back and make a counter-offer using this inflation restraint. It's called the accordion plan, where both the government and the individual must agree on the best year to clinch it, depending on how everything is going. Unfortunately, any system like this requires an unimpeachable monitor.

Buying Out of Medicare. The average person over age 65 is haunted by the possibility that his living expenses will someday exceed his income, so he likes to have as much of his anticipated expenses pre-paid as possible. (He likes to be offered life membership in a club, for example.) So, he proposes to Medicare that they do the arithmetic and tells him at what age they think he could stop paying payroll taxes and/or Medicare premiums to Medicare and pay them into his escrow fund so that he becomes paid-up and no longer cares about medical cost inflation. And if there is no point in time when the two are clearly equal, then how much would he have to supplement the escrow fund from his savings to reach the goal. Since the law of large numbers enables Medicare to predict its average costs with greater precision than the individual can predict his own, a difference between the two prices represents the individual's fear that he might incur substantially higher than average costs. Half of the Medicare beneficiaries will, and half won't, but any individual's actual chances are largely a lottery. So, a substantial number of people would take the deal on terms favorable to Medicare. This isn't exactly the proposal we plan to make, but it illustrates the principle.

Part of the secret of the current proposal is that the individual can have the advantage (and bear the risks) of investing in the equity of private companies, whereas we would squirm if the government owned a big chunk of American private business. Notice for example how quickly the government sold back the stock of General Motors after it had bailed it out. Private individuals might indeed make 10% return on index funds of the entire U.S. stock market, given a 90-year horizon, (and under the discipline that you can't buy high and sell low, because we won't let you sell other than for medical costs). Furthermore, the government can't sell it for you, because you own it independently. This deal would fall apart if inflation unbalanced it, but the value of stocks and the cost of medical care will respond to inflation at about the same rate, providing you wait long enough and use big enough numbers. Nevertheless, it would only seem prudent to appoint an independent agency to monitor and control matters, particularly because stockbrokers are not considered to be fiduciaries, putting the client's interest ahead of their own. In spite of that fact, most people would be astonished at how fast a fund will grow at 10%. Medicare can't get such investment income, because in 1965 it was decided to use the "pay as you go" system, but it is clear that Medicare would sustain much higher debts if we abruptly cut off its payroll tax and premium income. So this process should require each individual to take at least ten years to switch completely, holding each person's "paid up" goal as ransom if he participates in reckless medical spending, and delaying the government's acquiring the escrow if they permit such spending. We are apparently never going back to using gold bars to frustrate government-endorsed inflation of the currency, so we have to devise other self-balancing restraints like this one.

In these days of burdensome health insurance costs, it is useful to consider how health insurance might emulate what is normally done with "whole-life" life insurance. Most life insurance clients to understand that total premiums amount to less than the face value of the policy, while considerably more than the face value is often paid out to the beneficiary. The apparently miraculous appearance of extra money is accounted for, by the ability of the insurance company to invest the premiums until they are needed for benefits. True, life insurance has also prospered from the stretching of longevity by improved healthcare, but that windfall also applies to health insurance. In both cases, improved longevity is hoped-for but not guaranteed, and adds to the safety reserves. The issues to be pondered are how to set final rates so far in advance. Or, if you wait to see how costs actually develop, how to give a useful benefit to someone who by that time is already dead. The life insurance companies have devised their way of managing this awkwardness, which requires public trust in the good faith of their counterparty. Results vary between companies, but in the long run, it doesn't pay to cheat.

The Need for Transparency and the Image of Fair and Square. Transition from an old system to a new one is a familiar problem for legislators. In our case, it may actually facilitate matters by restraining the impulse to take on too much difficulty, all at once. Every citizen is covered for hospital costs in Medicare Part A, and the great majority are covered for physician and outpatient costs by Medicare Part B. Part C is only partial and voluntary, Part D is still on trial. For this discussion, we need not describe the varying ways that Medicare Part A, B, C, and D collect premiums or the historical reasons why they differ. It should be emphasized early, however, that overall direct income falls short of covering overall Medicare benefit costs by 50%, so Medicare is 50% subsidized, and therefore not nearly as stable as the public assumes. It would help a lot, for example, if debt just stops being called an asset on the balance sheets. Everybody enjoys getting a dollar for fifty cents, so the program is more popular than it would be if euphemistic revenue descriptions were discontinued. It is particularly worrisome, that the popular alternative of a "single-payer system" implies simply extending Medicare to persons of all ages. But it also implies extending the 50% hidden tax subsidy to all ages so single-payer consolidation would add an even more unsustainable burden to the national deficit. This apparently irrelevant comment helps explain why the public expected Obamacare to be cheaper than it proved to be, and adds considerably to the urgency to find other revenue sources during a protracted economic recession, for what are proving to be unexpectedly high prices. Hence, the need for more subsidy than was anticipated. The consequent income redistribution is widely resented. Time and again we return to George Washington's central maxim as president: honesty is the best policy.

{top quote}
How To Recycle the Income {bottom quote}
Terminal Care is Mostly Medicare
Go With the Flow. To return to the point, almost everybody now dies with terminal expenses covered by Medicare. The medical industry waits for about six months, and eventually gets paid for its services by Medicare, incompletely perhaps, but for the most part. From this is derived the insurance shorthand concept of the "last year of Life costs" which largely represents terminal illness. Along with the obstetrical costs of being born, these two costs are the only two we can safely assume will continue forever. Everything else is like the Federal Reserve's Quantitative Easing. We can be certain it will stop, but we have no idea how long it will take. While we can perceive that medical progress is largely a matter of removing diseases from the list, the allied perception is that younger people are always going to be somewhat healthier than older ones. There will be exceptions like HIV/AIDS, but the perception is probably permanent. Since progressively older people are supported by savings and wealth transfers, the concept of investing the savings of younger people in order to sustain them when they get older, seems a dependable one. It also seems safe to assume that people will resent it less if it is their own money, rather than drawn from a public pool. That is, savings will be resented less than taxes, incentives will be resented less than coercion, and the final outcome will be the accumulation of more savings within private hands than within national treasuries.

Now add the idealized extra specifics: if subscribers by contribution, gift or subsidy create a Health Savings Account early in life, and Medicare can be induced to reduce its own premiums out of recognition of equivalent reserves in the funds, the future payment of (at least) last-year-of-life costs could be assured -- and current premiums for Medicare could be accordingly reduced, putting the money back in people's pockets. In this way, Medicare and the subscriber would adjust to the benefits of a major new revenue source, the investment proceeds of the Health Savings Accounts. A whole bundle of uncertainties absolutely do remain -- the zig-zag of interest rates, the volatility of the stock market, the elimination of some diseases, the creation of expensive new treatments, the actual longevity of the population, and the constant menace of inflation -- but one certainty survives. To a significant degree, a new source of income would effectively lower the cost of health care, even though it may not have paid for all of it precisely. No rationing, no income redistribution, no great change in how medicine is practiced. The opportunity seems too attractive to dismiss, but it must be continuously and openly monitored.

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Income is fairly predictable, Future Costs are not. {bottom quote}
Balancing the Books
Simplify. Since the ultimate outcome is uncertain and will surely vary from predicted, adequate provision must be made for both the possibility of surplus and deficiency. Because of possible surplus, residuals should be allowed to pass through inheritance, or to be spent for non-medical purposes, or both, as incentives to compliance rather than circumvention. Because of potential shortfalls, some process for early detection and freezing of shortfalls should also be created, leading to subsidies, and restitution of subsidies, under defined circumstances. To the maximum degree feasible, the "accordion" principle should be employed, whereby benefits are expanded or contracted to reflect surplus and deficiency in the individual Health Savings Account, and indirectly, the growing success or failure of the scheme. Furthermore, the use of average costs rather than specific ones is encouraged, thus making it easier to deal with average lifetime health costs. In a computer age, it is almost as easy to report 300 million individual accounts as to measure by average performance, but it leads to intolerable public confusion about what is happening to the program. If achievable, a transformation from annual bills to lifetime costs would allow the elimination of pre-existing condition exclusions almost without effort, since lifetime liability would remain unlinked to HSA balances, and even largely unaffected by individual catastrophic illness if pooling is added. It might require considerable research, however, to detect the creation of unforeseen loopholes to game the system. Ultimately, that is a gigantic undertaking. The more we can simplify it with self-enforcing incentives, the more likely we can perform the essentials well, side-stepping all the work and aggravation of playing cops and robbers.

Get Started. The two quickest ways to induce large numbers of people to create Health Savings Accounts would be to add a permanent rollover feature to Flexible Spending Accounts, which currently contain a use-it-or-lose-it feature. Because of the cost to employers, it would be a useful opportunity to remind them of the inequity they have enjoyed from seventy years of Henry Kaiser tax exemption. And the second accelerant would be to eliminate the income tax discrimination against it, by allowing health insurance premiums to qualify for purchase by Health Savings Accounts, and thus to become tax-deductible like almost everybody else's health insurance.

Predictions of Future Healthcare Costs: Quis Custodiat Ipsos Custodes?

Those with long experience on audit, budget, and finance committees will recognize the truth of the maxim: Most of the weak points in any budget are to be found as unrealistic revenue projections. The committee will generally begin with a fairly good estimate of future costs, almost always just last year's costs, plus a little. Next year's revenues are harder to challenge, so they are stretched to achieve a "balanced" budget. In seeking to apply the Health Savings Account idea to American healthcare, however, the reverse is -- amazingly -- more likely to be true. Ibbotson and others have published extensive data on past experiences with large-scale investing. This data lends credence to projections of what large masses of passive investors are likely to earn over long periods of time. These data can be adjusted for taxes and inflation, leaving a pretty good idea of what "real" returns for Health Savings Accounts are likely to be. However, in the case of rapidly improving healthcare and rapidly expanding lifespan, it is the costs which are unpredictable. The HSA accounts are tax-exempt. Furthermore, the stock market is apt to rise faster than medical costs at first, and then to rise more slowly. In this analysis, we adopt the position that medical costs and stock prices are both inflated at the same rate at the same time, and result in washing each other out. That may or may not balance out over long periods, but will have to remain the assumption until we have enough data to make mid-course corrections for it. For now, gross stockmarket returns will have to remain a surrogate for net, or "real" returns. At least, we do have nearly a century of reliable data about gross stockmarket returns.

So, let's convert a problem into an advantage: Using the Health Savings Account to represent revenue, we propose that the goal is just to make as much revenue as we can. We could pretend future revenue is greater than it is likely to be, but that self-deception only leads to the sudden discovery of future deficits. Our refurbished goal is to wring as much revenue as we can get out of circumventing the "pay as you go" approach, and let it go at that. We do have good data about gross revenue from different asset classes, so we can make an adjustment for short-term liquidity needs. It the result proves to be more than we need, we'll let our grandchildren figure out what to do with the excess. If it proves to be less than we need, why cry about it? We might still go over the fiscal cliff, but it will take more time. Meanwhile, we can set up monitoring systems which can tell us how much we have to cut, or subsidize, and how long it will probably take to get to that point. If anyone has a better proposal, let him step forward.

If we employ U.S. equity total-market index funds, as I advise, plus U.S. Treasury bonds for a small proportion of cash needs, it would be difficult to challenge the safety of the investment, or its low management cost (less than a tenth of a percent), or even its political neutrality. Fifty percent of investors will claim they can do better than this, but fifty percent will certainly do worse. Because Health Savings Accounts are federally tax-exempt, it is a practical certainty that much more than fifty percent of ordinary investors will do much worse, therefore will express delight and disbelief at how well the accounts have done. Not everyone will do exactly as well, however, because the investments are made at different times. It could be argued that an index fund of small stocks would do better than the total market, but the price you would pay is more volatility.

Because everyone is not born on the same day, some will begin to invest at the top of a cyclical market and be forced to watch the market go down; others will do the reverse, and get better returns for a while. In the long run, this sort of thing will not make much difference, but some will start investing later in life and have less time to recover their losses (or lose some of their gains). That will be particularly true at the beginning of the program, so early frugality will be rewarded and early squandering will be punished. Some will be unable to afford to invest the full amount for variable periods of time, and the later this happens, the less it will be smoothed out in time. But the government and life insurance companies keep statistics; it is possible to adjust these predictions with as much preciseness as desired. Those with access to the data can certainly provide the public with as much predictive accuracy as needed. About revenue.

Predictions about expenses, or in this case medical costs, are a medical issue more than a Wall Street one. Epidemics will occur, diseases will be eliminated by science, patents will expire, societal attitudes will change. There is nothing we can do about some things, other things require effort and investment. Let's return to the conclusion which is reached by most people: make as much money as you can, and hope fervently that it will be sufficient. Meanwhile, we can monitor trends, argue about causes, occasionally avert mistakes. From the design point of view, the biggest mistakes we can make are to put the wrong people in charge, and the founding fathers had a solution for that: create an adversarial tension between the revenue advisors, like actuaries, accountants, and financial experts--and the spending advisors, like physicians, architects, drug manufacturers and technologists. When the original plan has to be amended, the public must be involved, through the press, the academics, and the politicians. Considerations like this lead to the supposition that we need two secretariats and a constitution. Overlooking the secretariats would be civil society, so some linkage should be constructed between the secretariats and professional membership organizations. In constructing a constitution, later amendment should be made somewhat difficult but it must be made possible. Because large amounts of money are involved, access to it should be discouraged, and information about it should be extensive.

Experience with a number of "independent" public/private entities is available. The big mistakes of the World Bank and International Monetary Fund were made at the Breton Woods Conference when they were created, and although some towering geniuses like Maynard Keynes were involved, some simple tinkering with the minutes of the meeting got past the final review. In the case of the Federal Reserve, the originators in 1913 were determined to balance public and private control, but over time, political influence has steadily increased. In the case of benevolent legacies, the intention of the donor has gradually been undermined by the professional managers of the institution, to the point where it is virtually certain that many donors are rolling in their graves. The conclusion I reach is that the best way to reinforce the best intentions of founders of perpetual organizations is to prevent their product from having a perpetual horizon. After seventy-five or a hundred years, they should be disbanded and subject to a fresh look at their constitution.

Smothered to Death in Greenbacks

Here's my macroeconomic nightmare, brought on by thinking too much about paying for health care costs, and supposing, just supposing, we were successful in doing it. The equivalent nightmare would be to imagine that some multi-billionaire walked into the offices of Vanguard or Fidelity, and said he would like to speak to the manager. After he had a cup of coffee, he would explain that he wanted to make a deposit of $5 trillion dollars in a total-market index fund. After an initial reaction resembling a Grade B comedy movie, the manager would begin to see the idea was pretty disruptive.

In the first place, $5 trillion is more than twice the size of the largest index fund currently in existence. We're getting there, but at the moment no one can be entirely certain what it would do. It might take months or even years to feed that much money into the markets without creating violence. That one buyer alone would dominate the stock markets of the world, bankrupting some, enriching others. In the Grade B movie I envision, dozens of beautiful starlets would be sent around for the sole purpose of learning what our buyer was buying next week. And what would he care, he would tell them. If he decided to make a big sale, markets would tumble, maybe crash.

Now, assuming this money was honest and not "dirty" as they say, the consequence of steady buying in huge amounts would be to flood the markets with liquidity. There might well be spurts of both directions, but in general, the addition of this much money concentrated in the stock market would send the price of stocks up, in response to supply and demand. If the price of a stock is generally raised without underlying business transactions to justify it, earnings per share would go down. In the long run, that could send the value of stocks down, resulting in inflation, because it would be possible to sell more stock without raising prices. In any event, reducing the scarcity of stocks would lessen the value of capital, compared with the value of labor. Reducing the value of capital would itself cause disorders in the economy before the markets regained equilibrium. Prices of labor-intensive goods would rise, prices of things which could be automated by using capital would fall. It would create new winners and losers; new elites.

For these reasons, students of economics generally hate macroeconomics. It's important, but it's hard to make final conclusions. In our Grade B movie, the bald-headed little manager ends the scene by jumping out the window.

Average Lifetime Medicare Balance Sheet

Lifetime Medicare revenues are about $55,000 in premiums from Medicare recipients, about $87,000 from payroll taxes paid by working people, and about $140,000 in general revenue, mostly from income taxes. These are soft numbers, approaching one quarter from the Medicare recipients themselves, one quarter from working people, and one half from income taxpayers. The best we can calculate is our proposal would generate about three-quarters of that. It's not enough, but what do you want for nothing?

The following average revenues of Medicare come from the CMS website, and must exactly balance Medicare expenditures:

Thirty-five years of Medicare Part B and D premiums $55,300. Plus, thirty-five years of 6.2% payroll deductions. $87,000. Plus, a 50% subsidy from income taxpayers, or debt owed to foreigners, as you might please to call it: $142, 360. Total lifetime expenditure (probably an underestimate): $285,000, per person.

A Three-Compartment HSA. At present, we pay for this expenditure year by year, as it comes due, in a process called "pay as you go". We are about to propose that we gradually stop that, and pay off the accumulated debt, thereby reducing the expenditures, and effecting some savings by consolidating programs from birth to death. We propose to pay off the rest of it in yearly installments from birth to death, collecting investment revenue on escrowed payments, and gradually reducing duplicate payments for the same expenses. It will be wise to collect more savings than are calculated to be necessary, just in case expenses or net revenue prove more unfavorable than we hope for. And because of the poor, a certain amount of subsidy for them is required. The government is the payer of last resort, but the program is intended to be self-supporting with interest on loans calculated in the final assessments. An independent agency is probably needed to manage unforeseen developments and make mid-course corrections. To minimize the adjustments, it is envisioned that revenue for lifetime coverage be escrowed , with a reserve fund , so the higher interest rates for long-term can be kept separate from the lower rates for short-term cash needs. Separate from both of these would be a regular Health Savings Account for yearly health costs and the averaging of yearly volatility between the funds. The lifetime escrowed fund would not be permitted to fall below current estimates of lifetime needs at that age, with interest-bearing borrowing used when it is in deficit, but no borrowing to return the debts when it is in surplus. It is envisioned that millions of accounts be reported annually, but invested collectively. It is envisioned that, after startup adjustments, the escrow fund and the reserve fund would be entirely in large-cap, domestic, total market, index funds with a maximum administrative fee no higher than that of the largest such fund on the market. The regular HSA would be entirely in short-term U.S. Treasury certificates, with an age-specific proportion kept in the reserve fund. Formulas should be devised to maintain transfers from regular to reserve, at a level maintaining only necessary liquidity for the pooled universe, but ultimately reaching for maximum achievable returns in the long-term funds. After satisfying itself with the performance of these formulas, the committee should turn its attention to the minimum deposit flow into these funds needed from subscribers to idealize returns, and then recalculate the formulas from experience. To the extent this is possible, permanent formulas for the whole structure with safety corridors should be devised and exposed to public comment, with the goal of public satisfaction that some average income experience would reflect the best possible money management. At that point, the committee should turn its attention to the developing perception of what long-term trends, combined with demographic data, are being projected for the growth of the escrowed fund to a point where the phase-down of Medicare is possible, and at what rates. The opinion of Congress should be sought as to whether these projections need to be changed, disregarding any other suggested use for the funds. Preparatory to any changes, the opinions of the professional advisory groups should be sought and forwarded to Congress. The Secretariats need not follow Congressional advice, but any deviations from it should be addressed in a public white paper and resubmitted to Congress for a white paper response sixty days before the next election.

A working example of our proposal is the average person contributing $250 per year to the escrowed compartment of a Health Savings Account, from age 28 to age 65, which reduces the after-tax, out of pocket, contribution to about $200 a year, or $4 a week. Other non-escrowed contributions to the HSA would pay for current expenses during a transition, but a certainly guaranteed revenue stream through thick and thin is absolutely necessary for the success of this idea. The source of this contribution is less critical, and if Obamacare may subsidize, this plan may also subsidize the poor to the same extent. It is estimated in our example to generate 10% tax-free income, based on the work of Ibbotson, but the expenses of the system have yet to be determined. It is intended that a private fund manager may be chosen if preferred by the subscriber, and performance records are periodically reviewed. Generally speaking, private advisors are reluctant to deal with amounts less than $10,000, so that transfer provisions should expose the fund to competition at that point, and the implications of trends should be taken seriously. The fund would continue to generate income until the end of life expectancy, here stated to be age 90, at which time it is transferred to a regular IRA. If these are close to average numbers, the individual would have at least $35,000 in the account at the time of death, and according to Ibbotson, it might be $120,000, plus another $100,00 if 26 extra years could be recovered by including childhood.

Please adjust these numbers any way you please, using the calculator provided in:

(In particular, try out your own numbers.)

Matching $35,000, the result of 3% income return, with $285,000, is about a quarter of it. Tripling the hypothetical interest rate to 9% would mean that investment income could pay well more than half the average lifetime costs of healthcare, and following Ibbotson's charts, 10% is not at all impossible over the span of a century. At the worst, however, you could surely match income and revenue by quadrupling the contributions to the HSA (to $800 yearly), which is still considerably cheaper than present term insurance costs. But finally note this well: we are planning to take actual healthcare expenditures out of the same revenue pool, so all of this calculation assumes $200-$800 in addition to current expenses for checkups and illnesses. Although the transition can muddle up appearances, a good person, or even a prosperous sick one, could set aside this much money by paying health expenses out of after-tax income (in order to preserve the tax-advantaged fund for compounding). And indeed this would happen automatically if the population continues its present pattern of sustaining its heaviest medical expenses when it is older, allowing it to compound among people while they remain young and healthy. This idea underlies Obamacare also, although the assumption that uninsured people are mostly healthy is a little dubious. It seems much safer to place the necessary money in a special-purpose escrow fund, where it could be spent away only in approved emergencies. When approved emergencies do occur, the escrow should remain unspent, and the expenses get paid by borrowing from a special reserve fund set up for this sole purpose, administered by some independent agency. Ultimately the U.S. Treasury remains the payer of last resort, so there must be Government oversight. One would hope that bad experience with Fannie May and Freddie Mac has taught us how to design such oversight.

-------- When all of the kinks and special pleading have been worked out, you only have solved Medicare. There's the healthcare for the rest of your life which has to be figured into the equation, so double it, for the purposes of discussion. It's my guess we could do it with this approach alone, but being Americans, we would try everything else first. And there is one big thing to try. We could try to lower costs. Everyone would agree there are waste and inefficiency in the system, but everyone would also agree there are lots of truly sick people to tend, and lots of important research to do, before we can assess that healthcare costs are as reasonable as we can make them.

--------- In this regard, it would seem reasonable to raise the retirement age in steps to age 70. I retired at the age of 83 and didn't feel it hurt me a bit. Ending life with a thirty-year vacation is about twenty years too much, no matter how badly your back aches.

The experience with Health Savings Accounts surprises even me. The actuaries report that the nine million people who now have HSA are running costs 30% lower than average. Whether it will scale, that is whether it will be true of ninety million subscribers, is unknowable. But moral hazards, the savings from not spending someone else's money, are not a fairy tale, by any means.

The savings to be achieved from getting tort reform are probably equally surprising. But the psychological effect on health care providers from tort reform is worth it, even if we didn't save a penny. The natural leaders of the Law Profession have always really been a decent sort. Just how the unnatural leaders of that profession gained control of the Bar Associations and Trial Lawyers Association, is open to debate. But it is high time the natural leaders of the Law profession reasserted control of it, perhaps led by the Chief Justice, the corporate law firms, the law schools, and the Judicial Conference.

In case that isn't enough, there are some suggestions to be made for healthcare cost reductions, some of which concern features of health finance which date back many decades.

Economics of Chronic Disease and Catastrophic Illness

Until rather recently, most wounded soldiers could expect to die from their wounds. George Washington died of an infected throat, an unlikely outcome today. Infectious diseases are now much less likely to be fatal, while preventive measures are in the process of eliminating fatal heart attacks and strokes. It was mentioned in earlier sections that the two most medically expensive years of anyone's life are likely to become the first and last years of a considerably extended lifetime.

If we could be sure of that, or its timing, it would make modern health insurance design easier. Some people can be expected to outlive a formerly fatal condition, and it should be possible to raise annual premiums a little to account for it. If we were smart, we would try to lower premiums by taking advantage of the extended time for investments, which results. But a new and largely unexpected health cost is the treatment of chronic conditions. That might lead to fewer diseases but more expensive ones. In the past, it was possible to regard chronic illnesses as incompletely cured ones, just a step away from total elimination. However, the cost of diseases in the chronic category has risen so much it undermines attempts to fund it with insurance. People with chronic disease are also living longer. Take atrial fibrillation, from which your author happens to suffer, as an example.

Atrial fibrillation, or AF, is a pretty common disorder whose causes and mechanics do not concern us here. It has occasionally fatal or hospitalizable flare-ups, but for the most part, the patients (before 1990) would make one or two visits to the doctor a year, for checkups and renewal of inexpensive digitalis prescriptions. It was then realized that a small but definite proportion of the patients would have a serious stroke related to forming a clot within the chamber of the heart and throwing it into the brain. That is, although the patients were living a long time with their chronic condition, they were often later actually dying prematurely from preventable strokes. Accordingly, the patients were urged to take anti-clotting pills and monitor progress with weekly blood tests. Although it is true the maintenance costs of this disorder were abruptly raised, these costs would have to be offset by reducing the costs of hospital confinement and wheelchair life at the other end of life. To that would, unfortunately, have to be added the hospitalization and transfusion costs for the rare patient whose anti-clot medication gets out of control and provokes a massive bleeding episode. The net financial cost and gain from this change of treatment have not been completely worked out, but insured patients don't much care about that; they would rather have a weekly blood test than the gruesome experience of paralysis from a stroke. One thing is clear, however. A great many people paid for their blood tests with insurance that covered them when they were 40 or 50 years old and eventually saved money for Medicare because they didn't get a stroke when they were older. The tension between the two coverages held the potential for conflicts of interest to emerge between insurers.

Going forward, further changes occurred in the treatment of atrial fibrillation. By 2012, several medications emerged which did not require the cost and nuisance of weekly blood tests. Switching over to this improved medication, I discovered that the co-payment on my insurance was $68 a month, for the pills alone. By the formula which used to apply, this would imply another 80%, or $270, was paid by Medicare to the drug industry each month. There is no way the patient can be sure of these facts in a cross-subsidy world, but on the face of it, it becomes entirely possible for the drug costs to exceed my share of the cost risk of having a stroke. Since there are several of these drugs, it is possible that competition may drive down the drug cost. In any event, the drug cost will drop substantially when the patents expire, and we will finally be able to estimate the enduring cost/benefit of the new drug compared with its blood-test predecessor. But that's probably not the end of it. Sooner or later, someone will discover a way to prevent or cure atrial fibrillation, generating a new cost cycle, we hope a final and lower one. We go through this history of a single disease entity for the purpose of asking a simple question: How can you predict future health care costs in such a violently changing environment, well enough to construct an insurance design?

You can't. You cannot predict what mixture of diseases will lie in the future, but you can rouse yourself when they start to grow in frequency. You can't predict, so you monitor. And for that you need a professional monitoring organization, preferably acting in conjunction with other monitoring agencies throughout the world while remaining in competition with them for the glory of being right. It might also be well to isolate the monitors from the regulators, just enough to enable them to criticize each other's work because they didn't participate in it.


The line of reasoning we have been following leads to an unexpected conclusion. When the insurance company is big enough and rich enough, it can ride out occasional additions to the chronic disease category, calculate its per-person cost, and run a responsible insurance company. Just how big it has to be, and how much it has to save in reserves, will, unfortunately, vary with the state of medical science. Eventually, we will get to that end-game of first and last years of life, with only accidents, epidemics, and self-inflicted disease during the interval. My first suggestion is we stop paying insurance for the first year after a new drug's introduction, giving the insurance company a chance to know about its new cost center that was unknown when they set the premiums. The patients could get the drug, but they would have to pay cash in full. While we are being fair, we should extend patent protection by a year to compensate. It would reduce premiums somewhat, because at present they have to set aside a reserve fund for such contingencies, and there might be other ripple effects, like giving competitors an extra year to catch up.

In the meantime, we must still make a guess as to the "actuarial sound" size of a viable subscriber group. In the environment which thinks about these things, the minimum actuarial size of the group is about 2000 subscribers, but only if coverage is limited to a single year. More conservative theorists would put the minimum actuarial size at 5000 members for a one-year premium. At either size or in fact at any size, there is a small but diminishing risk that some quirk will bankrupt the insurance. Therefore, we must return to the insurance, or reinsurance, described at the beginning of this section; that is, excess major medical insurance. The difference is that its proper role is to re-insure groups, not individuals. Although the risk becomes vanishingly small by increasing the size of the subscriber group, some risk always remains for reinsurance coverage. Although there are many twists and turns to be considered, it is worth mastering these complexities. Taken all together, they explain why the insurance industry favors large groups over small ones, one-year coverage instead of lifetime coverage, and either employer-based or government-based re-insurance with a deep pocket. These are entirely legitimate attitudes for people placed in charge of insurance solvency, and woe unto anyone who accepts this responsibility without providing for its inherent risks.

However, in recent years society has been acting as if the advice of insurance executives is to be taken without understanding its parochial limits. Yes, the biggest group we can imagine is the whole nation, and the biggest re-insurance carrier would be the Federal Government. But nothing in such stipulation suggests that it would be desirable for the government to run the insurance, or for national participation to be mandatory, or for a single size to fit everyone. To get to specific problem areas, it is much more desirable to design specific programs for the prison inmates, the mentally handicapped, and the non-citizens for a total of about thirty million people -- than to twist around the whole insurance system which is serving non-retarded, non-prisoner, non-illegal citizens moderately well. To say nothing of ending up with forty million who are still excluded, and an extra cost, estimated by the Congressional Budget Office to be a trillion dollars in ten years. Along with with the introduction of all the other curses of bigness, plus a certainty of political meddling. At the very least, don't make things worse.

Secondly, there is nothing in these ancient insurance cautions to preclude the gathering of investment income on the premiums, while at the same time despairing of predicting the costs of the medical care it is assigned to mitigate. There are risks to investing, but they are accepted every day by consenting adults. There is a great deal of bad investment advice in circulation and some outrageous fees. We can expect to hear plenty of it in discussions about sums this large. But surely our political system has the wit to consult with a variety of advisors, and ultimately let the public decide whether letting our elected leaders administer the matter, is cheaper than losing the opportunity entirely.

Third. It should be obvious that there are many important unknowns in the discussion of this subject and a deficit of timely monitoring information. The nation needs a monitoring system of great probity, immediate responses of experts to sudden developments, and the power to invade privacy occasionally to get the data. It is debatable whether a monitoring organization should have regulatory power, but it certainly should have close contact with those who have the power to act. There has to be a defined pathway between the complaint of any citizen, leading to access to those who have the power to do something about it. Both the legal and the medical professions have models to examine which are centuries old, functioning well in spite of having no official power to act. The Federal Reserve, on the other hand, has the power to command and the power to investigate within its field; it is its vaunted independence which might be questioned. It could even be suggested that its independence rests on the public perception that its viewpoints are more likely to be accurate, than are those of whoever seeks influence.

Fourth. Let us have incremental patchwork, by all means. That is the conservative approach to public affairs of great moment. But until the Supreme Court finds a way to remove the anti-trust blockade of Maricopa (1982) and medical malpractice's destruction of practitioner discretion, things are unlikely to make great leaps forward. The path to influencing the Legislative Branch is perhaps more direct, but its seventy-year continuation of income tax preferences for employer-purchased health insurance sends a clear warning. The Sustainable Growth Factor (the "Doc fix") sends a similarly unfortunate signal. Fifth. But who will watch these watchdogs? The careful reader will perceive how many of the proposed reforms in this book have little to do with the Affordable Care Act, except help ACA exploit public perception that something is wrong, and relies too much on special pleading. The electronic medical record is an example, reflecting reliance on advice from group practices. The dismal failure of the electronic insurance exchanges has indelibly stained the Administration's reputation as a computer authority, so this feature is now up for political sale. Nevertheless, it remains a good idea to permit interstate competition between health insurance companies, since that could create competition between fifty actuarily-sized monopolies while encouraging other insurance companies who do not enjoy similar hospital discount prices to seek equal treatment. It is almost a century past time to insist on equal prices for equal services, by imposing a "most favored nation" requirement, or fixed relationships between hospital costs and hospital prices, regardless of whether they apply to inpatients, emergency room, or outpatient satellite clinics. Strict segregation of patient-care revenues from research funding and totally non-medical activities in teaching hospitals within universities -- ought to require no mentioning. Oversight, perhaps regulation, of the whole accounting system of the medical industry definitely ought to be a function of the monitoring system mentioned in point Three.

Indemnity and Payment by Diagnosis: Fair Prices For Healthcare

In America, the closest thing to an oriental bazaar is the auto showroom, where a salesman will spend an hour evading the price question, knowing some customers will eventually buy a car rather than spend unlimited time shopping. Lack of price transparency favors the merchant, so prices are higher. It probably does follow that healthcare prices would be lower if prices were more widely advertised and therefore, more standard.

But healthcare also varies in quality and effectiveness, so prices need to be flexible enough to compensate. Even eminent practitioners, therefore, squirm at the idea of price transparency. Flexible pricing is in fact a useful thing, without it, prices do rise, but not as much as supposed, and not without some justification. The practitioner is tangled in a web of comparisons, with his colleagues, with clinics and institutional salaries, with memories of other prices for nearly the same thing, with all the other alternatives available to a customer who can walk around and shop. Under the circumstances, the patients generally want to have a fond relationship with a doctor they can trust to know what the market is saying, and trust him to make the best guess about what his own services are worth. Therefore, a physician is a fiduciary, expected to put the patient's interest ahead of his own. Insurance is not a fiduciary: Our modern third-party system systematically replaces trust with: standard prices, blind faith in low prices as always better than higher ones, and determination that medical quality had better always be top-notch, or else we will sue.

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Competitive market solutions are never an even match, once someone takes away your clothes. {bottom quote}
Our system of third-party payment has firmly fixed its goal on a single price for the same service, no matter what its quality may be. By its very nature, a remote third-party payer cannot judge which person wasted the doctor's time, which doctor took extra care, which offices are shabby and which are unnecessarily plush. A surgeon leaves his showroom office empty most of the time he is in the operating room, while a dermatologist barely moves his feet for eight hours in the office; both of them are paid uniform rates. Any effort to modify the price in response to variables is only listened to if the outcome is to lower the price. The industry term for this process is "service benefits". A physical exam is a physical exam, a history is a history, a gastrectomy is a gastrectomy. Oh, yeah? If you believe that, said the Duke of Wellington, you will believe anything.

The best way to handle the situation is to pay, in part, by indemnity. In effect, indemnity makes the promise to pay $800 for a gastrectomy. If the surgeon thinks he is worth more than that, it must be agreed to by the patient in advance and paid out-of-pocket. Not paid in advance, agreed to in advance, with the implicit understanding it can be reduced by sincere dispute, after the fact, and without recourse before the fact. Back at the beginning of the system, this feature was bargained away. I cannot resist telling the story of my father-in-law's advice to me, doctor to doctor, at the time of my wedding. "Never let your wife keep your books," said he. "To you, the patient is a poor old devil down on his luck. To your wife, he just represents a steak dinner, if she can collect the bill." Our third-party payment system has succeeded in projecting the image of protecting the patient against voracious "providers of care", just the reverse of their natural postures, and something my father in law never dreamed of. It's very simple: basic payment by indemnity, extras by a negotiated patient supplement. Since consumer representatives are so intransigent about "give-backs", it might at well include a COLA on the basic, and otherwise put inflation into the patient supplement.

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It's very simple: basic payment by indemnity, extras by negotiated patient supplement {bottom quote}
At this point, we should probably pause and notice that the imperfect DRG system for inpatients, has nevertheless proved to be an extremely effective rationing tool. It quite effectively put an end to relying on the bed patient to be unable to walk away. In a little research project of mine, the eighteenth-century patients were in the hospital bed for exactly the same reason they are today: they couldn't walk, or couldn't be allowed to walk. Competitive market solutions are never an even match, once someone takes away your clothes. If the DRG system could be improved by substituting a better coding system (SNODO recommended), it would answer every objection except one. That objection is the relentless instinct of Society organized as institutions to squeeze payments and quality, once the helpless patient is out of sight of visitors.

At present, DRG is mainly forcing patients out who was once enticed into the hospital by the previous payment system. Once that backlog is exhausted, the DRG pressure will start to hurt, since all rationing systems lead to shortages. Like the Volstead Act, this government mandate was successful in its original purpose, but the unintended consequences were worse. When DRG starts to hurt, a new coding system had better be ready. Because the resultant growth of hospital outpatient services has been so extreme, it will cause a bigger bubble to burst unless attention is given to service benefits inflating the cost of outpatient care. To repeat, the cure for medical cost inflation is not to apply rationing, it is to improve the payment methodology so that rationing is unnecessary. The current repetitious chorus denouncing fee for service is just a cry of desperation from people too unimaginative to devise any substitute more sophisticated than salaried rationing. The problem here is not fee for service, it is service benefits. And the problem lies, not with the provider, but with the carefree beneficiary -- carefree because he is insured. And furthermore the solution is not salaried practitioners bossed by salaried politicians, it is a hybrid of indemnity with basic pricing. Under Health Savings Accounts, we bring the public into power over its own affairs. The remaining problem is to let the individual control his own monster, by making waste and luxury his affair, not an affair of the public at large. A good beginning would be to forbid the use of collection agencies, forcing the institution to confront its irate customers.

Classical Health Savings Accounts (C-HSA)

Cost Shifting, Reconsidered


Cost-shifting is a necessary accounting evil, without which no large organization could survive. Confusingly large amounts of it, however, undermine trust in the leadership. More specific criticism of current healthcare leadership is its reliance on moralizing rather than an apology. That is a sure sign that oppressors (i.e. insurance and government) made it necessary, and suggests that leadership is toadying to them.

Since managers have no choice but to engage in cost-shifting, it seems better to cost-shift with some hope of repayment. By switching to lifetime health insurance to replace the one-year version, many more opportunities can be developed for repaying the older individual what had been "borrowed" from him as a youth. Even without the notion of paying interest on the loan with investment proceeds, it seems more comfortable to seek loan forgiveness from yourself at a later stage of life, if that proves the necessary insurance metaphor.

The proposal to revise insurance architecture also contains a transfer of the site of cost-shifting from hospitals to the external insurance mechanism, where the underlying problems originated. There is a certain justice to that, but its main attraction is to make it visible and consensual, and therefore more generally accepted. It is one thing to convince a classroom of business students, quite another to convince the whole public, of the regrettable need for cost-shifting that will never seem completely fair.

And finally, there is the investment income. The public is no more likely to forgive its mercenary features than it is to accept that bankers are interested in more than profits from the interest on a loan. After all, interest-bearing loans were forbidden by law for centuries. When it first hears of the fairly astonishing 10% return from a passive investment, and the even more astonishing sums to be derived from ninety years of investing, the public will likely scoff at some sort of trickery. A great many people still prefer managed accounts to passive ones, in spite of Professor Ibbottson's rather convincing data from the immediately preceding century.

Two sources of concern are nevertheless impossible to answer. America may lose its dynamism, as even the Roman Empire eventually did, and nothing can withstand the financial consequences. And secondly, so many people might switch to passive investment that it loses its edge, and eventually pays less than hiding all savings in a mattress. That is to say, high returns imply high risk; without risk, there will be no returns. These considerations are long term and have nothing to do with healthcare. For this reason, I have reluctantly made the suggestion that we establish an independent organization, for all its flaws, to study whatever is happening and continuously make mid-course corrections to adjust for it.

Proposal Number Seven: Buy-In Prices at Different Ages

If we aim for lifetime (or "whole life") health insurance, using a Health Savings Account, provision must be made for the vast majority of people who do not buy it with a single premium at birth, as we use for a simple example. If we know the lifetime goal and the expected average rate of return, it is easy to project the average growth of accounts by any future year. A simple table of such projections becomes useful for displaying the "buy-in" costs for any age. Naturally, it incidentally underlines how costs increase for late-comers since essentially the same costs are distributed among fewer remaining years. Conversely, compound investing while you are young is very attractive. These are important selling points and are valuable lessons to learn. But no strong argument is improved by exaggeration. This is not a way to reduce the cost of medical care, it is a way to pay for some unnecessarily added costs inherent in choosing a "pay as you go" design. The use of compound income does indeed give the initial appearance of something for nothing but should be viewed as a more efficient insurance design.

If it does nothing else, lifetime health insurance clarifies where this money is coming from. Under Medicare, for example, a person contributes all his life but gets no income on that contribution. At some advanced age, he spends that money at prices which reflect the Federal Reserve's 2% inflation of the money, but he pays no taxes on the gain. Meanwhile, some younger person pays his bills at the inflated rate, and in due course inflates it again before he spends it. In the case given, the last of three generations are spending money which includes eighty years of inflation at 1-2% tax-free. However, he has an opportunity cost: the money could have been invested in index funds which Ibbotson has shown would have grown at 12% per year over the same time period, tax-exempt if he put it in a Health Savings Account. And it wasn't even mostly his own money at work. It really doesn't sound impossible for that amount of compound earning to pay for a great deal if not all of the lifetime cost of one person's healthcare, providing he does not pay excessive investment costs to do it. And since this conclusion is based on considerations which have almost nothing to do with the cost of medical care or increasing longevity, it is nevertheless impossible to make precise predictions. Any investment outside the insurance plan will result in a considerable revenue gain, probably a big gain, and possibly pay for all medical costs. Fundamentally, this money is generated by obtaining a higher return on the money, and not sharing much of it with financial agents, or other contestants for your wealth, like the health industry, or like the luxury goods industries. In that sense, it's just like any other wealth.

It also should not matter much whether the planning design aims for the account to terminate at death or when Medicare takes over. Naturally, the same lesson applies to the terminal end as to the buy-in date; the more you delay withdrawals, the more time there is for growth of the principal. With a growing tendency for costs to cluster around the last year of life, many "young old" retirees have only minimal medical expenses for ten or more years after retirement. Since invested money at 7% will double in ten years, there would be a considerable advantage for latecomers in transition. If the latecomer intends to terminate deposits at an attained age of 65, he will need about $40,000 to see him out. If he intends to terminate at death, he will need about $300,000, but the buy-in price at any age before 65 should be the same. As experience gathers, there probably will emerge some distinctions matching health status changes, but curiously the costs seem to decline after age 85. After the preliminary layering by age, the annual lump sum can be broken into installments more realistically matching the income and health practicalities of individuals. Each annual step of a table would represent the "buy-in" price at that age, which is also the average account size achieved by a lump-sum at birth by that age, without withdrawals. The point about "without withdrawals" should be seriously considered as a reason to substitute out-of-pocket payments for trivial expenses. With the passage of time, it can be made more precise by experience. But it should be kept in mind that a regular HSA only hopes to make as much income as possible, while a lifetime HSA seeks an average lifetime target. As experience accumulates, it may be found that required balances actually shrink with advancing age, as the individual lives past the time when expenses had been expected but not experienced. However, without experience, the best conservative assumption is that expenses steadily rise with age.

Since a Health Savings Account tries to serve several purposes, a particular account may not have enough deposit content to match the deductible, for example, because the cost of an individual's illness has little to do with his investment history. The manager of an account will create rules designed to protect his own position, and for example might have a minimum designed for investment purposes, which happens to be considerably short of what the high-deductible insurance company needs as a deductible for a particular age-group's sickness experience. For another example, a gift from a grandparent at birth may be adequate to cover lifetime expenses, but not at first. Only after it has multiplied several times will it be enough to meet the deductible. Some managers impose fees on the first $10,000 of deposits rather than reject the account, and it really only becomes an attractive investment a decade or more later. At present, accounts have an annual limit of $3300 for deposits, so it takes three years to reach a suitable size, and perhaps ten years if only a single deposit is made. Investors must learn to be highly resistant to brokerage fees, especially in new accounts. True, the regulations are likely to be highly changeable in the first few years, so investors much learn to pay fees from outside sources, in order to protect the tax advantage when it is most needed. Unfortunately, educating young investors about complex new regulations can be expensive for the investment advisor, so it is, unfortunately, true that the interests of broker and client are not well aligned in the early years.

The rules should be adjusted to recognize this problem, even though many people would find it unnecessary. A subscriber may have enough savings to make a single-payment deposit but is hampered by the $3300 rule. Finally, an account might once be large enough to be self-sustaining, but be reduced below that level by one or two depletions to pay deductibles. Generally speaking, the conventional HSA does not need to concern itself with such issues, which only become a serious problem if lifetime Health Savings plans are contemplated.

Consequently, the regulations should be modified in the following ways:

1. A family of tables is prepared, showing the deposit required to equal the total average future health cost for each yearly age cohort of life, from now until the average death expectancy, using various extrapolation assumptions. It is possible to reach the same goal with almost any investment assumption, or almost any time period, or almost any starting deposit, but only so long as the other variables are adjusted to conform to that specification. A family of tables would show several investment levels of compound interest reaching the same goal, let us say $40,000 at age 65, at ten percent; seven percent; and five percent. Obviously, a higher interest rate gets you to the goal sooner. Attention should be focused on achieving $40,000 at age 64.

Any subscriber should be allowed to buy into the lifetime Health Savings Account for a one-time deposit of $30,000 at age 48 assuming 5% return, at age 55 assuming 7%, or at age 57 assuming 10%, merely as a rough example. The subscriber may not have savings of that size, of course, and a separate calculation should be made for time payments, also reaching the same goal. If such tables are displayed on a computer terminal, it should not be difficult to make a selection, but "user friendliness" is often more difficult to achieve. As are later modifications, if life circumstances change. The relentless mathematics will soon demonstrate that the more money deposited, and the earlier it appears, the more attractive the investment becomes.

2. Salesmen for HSA should be required to carry their illustrations out to the goal of $40,000 at age 64, supplying achievement benchmarks along the way. So long as the account contains less than the buy-in amount for the subscriber's age, the manager of a fund should be allowed to wager a guaranteed band of investment results; let us use an example of 7% and 10%. If the funds make more than 10%, the manager keeps the excess. If the fund achieves less than 7%, the manager must make up the difference, either by reinsurance or by offering to be at risk for it. If fund results fall between 7 and 10%, the investor retains it all. This mandatory arrangement may (not must) terminate when the fund reaches a buy-in level, so long as it resumes if illness depletes the account.

The actual limits should be set after consultation with managers in active practice since the purpose is to create incentives to get the funds to self-sustaining levels without kickbacks to investment vehicles. The tension is between a subscriber who has investment choices to make, and a fund manager who must cover his expenses. In the long run, it is to everyone's advantage to maintain a steady view of the risks and rewards of income compounding, while serving the goal of paying as much as possible toward everyone's health care costs in a free-market system. It is best if the limits are realistic, and they should be chosen to drive all the participants toward the highest safe level of performance. Ultimately, the subscriber should recognize that an unsafely high level (with leverage, for example) will make paying his health bills more difficult, not easier.

3. The easiest definition of the top limit is the running cumulative average of the stock market, so total-market index fund results are ideal for the purpose. However, index funds differ in their results, so transparent competition should even be able to squeeze out somewhat better results than the 10% compounding which has characterized the past 90 years. Curiously results significantly worse than the market is not a sign of safety. Consequently, freedom to change managers should be as unhampered as possible, comparative results and costs widely available, and exit fees discouraged.

4. In general, single premium policies are rarely used. However, since starting an HSA at birth adds 26 years to the compounding, and while the amounts at first are so small they are somewhat unattractive to HSA managers, they could nevertheless become an important feature of their future. Throughout childhood, the paradox will be common that the necessary deposits in an account for lifetime coverage of health costs are nevertheless far too small for a deductible which is sensible for children with such low health expenses. Therefore, provision should be made for supplemental policies which cover this gap in childhood between the amount in the account and the amount of the deductible, which is often set with an eye to the parents' situation, not the child's. Intuitively, such insurance supplements ought to be quite cheap.

Proposed: A Republican and/or Conservative Healthcare Solution

Foreward: Written as Obamacare is beginning implementation amidst considerable resistance, the following paper offers an alternative proposal which is perhaps no less sweeping, but includes much more reform of the existing system than does Obamacare, and much more emphasis on the use of competition and individual responsibility. It is divided into three sections, I: Correcting Non-Cost Issues, II: Correcting the Cost Problem, III: Forestalling Unfortunate Side-Effects.

I: Correcting Non-Cost Issues

The Uninsured. Gail Wilensky, who once ran Medicare, recently commented about Obamacare, "It isn't reforming at all, it is merely coverage extension." Unfortunately, even though it seems to promise universal coverage by mandating it, the GAO estimates that over thirty million people will remain uninsured after Obamacare is fully implemented. Indeed, it is very difficult to see how to include illegal aliens (11 million), the mentally retarded or impaired (8 million), and those in jail (7 million) within one big program which adjusts to the situation of the rest of the American community. The proposal here is to revise downward the idea of universal coverage, to whatever extent the usual form of health insurance is unsuitable for these three (and possibly other) groups. Their special health needs are not easily adaptable to conventional health insurance and would be better served by specialized healthcare programs, structured with their particular problems at the center of the design.

Pre-existing Conditions The American public has become convinced that sick people have only two choices, Mandatory Insurance with compulsory community rates (i.e. Obamacare), or go without insurance. As a matter of fact, every textbook of insurance will list at least three ways of coping with "impaired risks." The industry terms are "Assigned-risk Pools", and Joint Underwriting Associations (JUA). One highly successful model exists for fire insurance, called the Fair Plan. A new insurance company was formed by selling stock to existing fire insurers, which sells fire insurance at standard rates, but only to someone who has been rejected by an ordinary fire insurance company. This form of impaired risk management was the preferred vehicle of the Pennsylvania fire insurance industry because the stock ownership enables the owners to take a tax reduction for losses. Somewhat to their surprise, the Fair Plan proved to be counter-cyclic in a cyclic industry, and actually produced a profit (for the insurance company owners) during economic downturns. An additional source of revenue was provided when other states than Pennsylvania requested to be included. Fire insurance is not the same as health insurance, but they are similar enough to appear workable for managing bad risks with a medical Fair Plan, which deserves at least a pilot study.

Under Obamacare, the problem of pre-existing conditions is solved by individual subsidies, an endless prospect, and by forcing those who do not want insurance to pay the bill for it. The main resistance to a JUA will probably be found among dominant health insurance companies, who have enjoyed near-monopoly status for many decades. Sharing risk is unattractive to them: when there is hardly anyone to share it with, and while historical "sweetheart" arrangements still remain ensconced. To the extent that a JUA would force readjustments, Ms. Wilensky would certainly not lack topics for revision.

Income Tax Reform. Representatives of large major corporations have twice disrupted Federal health proposals at the last moment, after a long period of lobbying as a supposed friend of reform. To that extent, they are friends of conservative forces in medical care. Nevertheless, it is now well past time to demand that their income tax preference devised by Henry Kaiser during World War II be eliminated. The employer gets a tax deduction, and their labor force escapes federal taxation for the gift of health insurance outside the pay packet. Meanwhile, the self-insured and uninsured are asked to pay for health insurance with after-tax income. In summary, the favored arrangements of their insurers with hospitals lead to a preposterous result (which would continue under Obamacare) that the people least able to afford high costs are the ones required to subsidize the people with the best jobs. This situation has three possible solutions: eliminate the tax preference of employed persons, or give the same to the rest of the country. Since there is little likelihood that this situation will be self - correcting, the obvious third choice is to cut the exemption in half and give the same to the rest of the population. No one needs to give Congress a lesson in such compromises, so obviously, progress will require a public uproar.

Interstate Health Insurance Competition The amateurish introduction of Obamacare's health insurance exchanges poisoned public opinion; it may now be even harder to address the political problem they tried to solve with computers. Tracing back to Constitutional restraints on Federal activities, health insurance has always been regulated by states. As a consequence of growing scope and complexity, many states had to choose between multiple small health insurance companies displaying vigorous competition, and a single large-but-effective monopoly in each state. To exaggerate, the result verged on fifty monopolies exhibiting monopolistic behavior.

Instead of devising a Constitutional work-around, Obamacare devised computer solutions to basically political difficulties, using computer subcontractors. It is possible some legislative designers understood the model of the New York Stock Exchange, which permits an interstate exchange to perform the single function of conducting competitive financial transactions between buyers and sellers of corporations which are themselves state regulated. They may have observed that computers superseded manual systems at the stock exchanges, so they took a short-cut. Integration would have required insurance experts and computer implementers to work together, preferably under one roof. A one-step version of this two-step idea might have transformed fifty local monopolies into a system of competitive interstate pricing. But this would have been and continues to be, a daunting time-consuming political process requiring very considerable negotiation with deep skepticism about advice from industry experts with axes to grind. As it now stands, any benefits will prove just as delayed by rushing computer solutions first, as by making the computer system the mathematical statement of a negotiated design. Indeed, negotiations among pseudo-cooperative partners commonly prove more filled with traps and smoke-screens when linked to other objectives, than if the exchange idea had been selected as the single, otherwise unencumbered, goal. It might have taken several election cycles, but the outcome would have been more acceptable.

II: Correcting the Cost Problem

Health Savings Accounts Unless Obamacare regulations somehow cripple the idea, there is nothing right now to keep anyone from starting a Health Savings Account and gather tax-sheltered income for the inevitable rainy day. Everyone should do so, regardless of any other insurance they may have, and right away.

However, Health Savings Accounts once assumed the need would terminate when the individual enrolled in Medicare. The turbulent arrival of Obamacare now raises concern that Medicare will be stripped in order to pay for Obamacare. Since the "single payer" system is the fall-back or possibly even the goal of Obamacare, its final goal is also redefined as lifetime coverage. Whatever the path, it becomes important to project what it might cost. The additional compound interest feature of Health Savings Accounts creates the possibility that HSA is the only approach which could succeed or at least be the first to reach achievability. The steady conquest of disease by Science, the steady increase in productivity by Commerce, the expiration of patent protection, and the relentless tendency of expensive illness to concentrate near the last year of life -- all suggest a feasible lifetime approach is likely within the next sixty years. The best path to feasibility is not speculative borrowing, but inducing the upper 50% of the population by income to overfund their HSAs, by allowing some acceptable ways to spend the unspent surplus. Over time, financial goals should become more precise, and deliberate surplus progressively lessened. As a matter of fact, considerably more than half the population could afford this approach right now, an extension to the rest of the population faces resistance which is more psychological than financial.

In the meantime, individuals need reinsurance. Competitive and political obstacles to high-deductible reinsurance are numerous, but almost all forms of traditional (formerly first-dollar) insurance are arriving at high deductibles by themselves. If that takes too long, individuals with funded HSAs are driven to become over-insured rather than re-insured, by distorting traditional insurance into reinsurance. That is a wasteful approach. Elimination of co-payments (and secondary or tertiary insurance to cover it) with no proven cost-restraining ability, would greatly accelerate the trend to high front-end deductibles, and that trend should be encouraged. Other foreseeable issues would be the sudden appearance of an expensive treatment which greatly prolongs life. Since everyone ultimately dies, this might transform a steady rise in lifetime health costs into two distinct bulges, which is more expensive than one bigger terminal bulge. At the present time, however, new cures for disease merely push back the inevitable average terminal care costs, to a later age. Another way for the future to confound predictions is for the cost of labor to rise more sharply than the Gross Domestic Product since medical care is labor intensive. Finally, life-sustaining organs could become enhanced more than life-enhancing organs, giving us an epidemic of blind people in wheelchairs in place of the charming wits and sages we imagine for our future. None of this is within the control of insurance reform, so we may just have to wait and see. Meanwhile, it would help a great deal for the information-gathering to begin steps toward the goal of continuous monitoring of costs, and projections of future moving cost trends. A universal HSA program will be slowed more because it is new, than because it is impossible.

The Health Savings Accounts uniquely provide a way to circumvent the problems created by "pay as you go," mainly making it possible to gather compound investment income on the unused premiums of young people, no matter how long it takes them to get sick and use the funds. Lifetime HSA also eliminates the issue of "pre-existing conditions", since all costs are calculated into the premiums; and thus it also eliminates gaming the system by those who delay the purchase of the insurance policy. These last two features of lifetime HSA require up-to-the-minute cost data, whereas the compound investment of idle premiums in an HSA terminating at age 65 probably does not. Either way, compound investment income is an intrinsic and unique feature, which has the great advantage of already having the sanction of law. Individually owned HSAs are portable, as employer-based insurance is not, and offer equal tax exemption.

Health Savings Accounts are disadvantaged by a general lack of discount arrangements with hospitals, long arranged for Blue Cross organizations and grudgingly given to newcomer competitors. HSAs lack a large sales force and are sometimes neglected by salesmen of high-deductible insurance, as well as exploited by debit card agencies with unnecessary fees, and investment advisors with excessive fees. All of these things are based on competitive resistance and are not inherent in the insurance plan. More effort should be made to ease them.

Compound Investment Income. Most people, strongly conditioned not to believe in any "free lunch", underestimate the power of compound interest, and fail to appreciate its tendency to accelerate over time. 2,4,8, 16, 32, 64, 128, 256, 512. The big gains are toward the end, while sickness costs get higher as we age; there's a fortunate match of timing. Luckily for illustration, money at 7% interest will double in ten years. Therefore, a dollar at birth is worth $512 at age 90. And it is slow to start; which means if you wait until your 40th birthday, it only costs $16 to catch up and have the same $512 by age 90. Another fact: the average healthcare cost of the last year of life is at present about $5000. That's less than most horror stories would have it, and this low average is explainable by the fact that many people just drop dead without any cost. Let's do some calculating.

Since current regulations permit a maximum $2500 contribution to an HSA, a deposit only once at birth and none subsequently, would find $1,250,000 in the account, surely enough to cover almost any health catastrophe. Depositing $2500 into the account every year from birth to death at age 90 would produce an unimaginably larger result, well beyond any reasonable expectation of average escalation of healthcare costs. Depositing nothing until age 40 and then depositing the $2500 would result in a death benefit at age 90 of only $80,000, but still 16 times the present average cost of the last year of life. Contributing a total of $2500 over twenty years would achieve the same result at twelve or fifteen dollars a year, but would actually encounter resistance from the investment people, who would object to handling such small amounts. But that's a welcome problem, indeed. If all you are worried about is the cost of the last year of life, get an HSA and stop worrying. Unfortunately, our government isn't investing at 7%, it is borrowing at 4%. That's the way we transform a $2500 deposit in an HSA into paying a bill that costs the government at least $10,000. The source of it: using the 1965 expedient of "pay as you go", which means today premiums immediately go to pay for the debts of the past, leaving nothing to invest. And with a retiring baby boom larger than the working generation, the government borrows from foreigners to make up the shortfall.

What's To Be Done With This? Simply paying for the last year of life is as simple as buying insurance to pay for your coffin. We can surely do better than that, but first, we need a transfer vehicle. The fact that Medicare is paying for just about everyone's death means we can transfer the money to Medicare to reimburse them for what they have already paid. They can accordingly reduce the payroll deductions and Medicare premiums by a comparable amount in advance, as an inducement for anyone who agrees and has enough money in his account. We can also use the "accordion" principle and pay for more years prior to death if there is money for it. Even using some of it to pay off the entitlement debt is better than not generating any income at all; only the Chinese benefit from the present approach. Don't forget that "the beneficiary" is really a constant stream of successive people. Although one is now dead, his successor is alive and will do other things once the government threatens to take some away.

It is tempting to consider whether lifetime healthcare costs could be covered by an extension of this idea. Not only present costs are incompletely available, but future costs and future investment returns are not predictable by anyone. The best that can be done is to overfund at first, extend in a deliberate manner, providing bailout avenues for both subscriber and government, and provide incentives to compensate for the overfunding. Seven percent projected income is perhaps generous and tax-sheltered, but still, must contemplate the possibility of a great deal of inflation in after-tax dollars. If it should not, more money will have to be deposited, and the subscribers must agree to that. Against that unpleasant eventuality, it should be a voluntary program, and thus slow to expand.

But therefore it must have enough reserves from the start, with latitude to use the surplus for non-medical purposes once the medical purpose is served. Perhaps something like the Federal Reserve should be considered to protect and regulate it -- public, but reasonably independent within a narrow mission mandate. The pressures to move authority entirely into the public sector, or into the private sector, should be somehow balanced to prevent either one from prevailing. At some times, the deductible will have to be shifted up or down, to keep it midway between the bulk of either outpatient or inpatient costs. Contributions will eventually have to be raised and lowered within broad bands. Alternatives will have to be found for approaches which are new or become obsolete. It is very clear that two insurance systems will have to run concurrently, one to invest and store the money, the other to pay the bills. They will need an umpire, especially if they are successful.

A Note About Investment Vehicles. In speaking of people of all ages and conditions, it must be assumed they are inexperienced, naive investors; some will chafe at this, emphasizing it is their money to do with as they please. There should be some appeal mechanism for this sort of person, but the best defense is good investment performance. Although Index Funds are relatively new, an equity index fund of U.S. stocks above a certain size should be both politically safest and reasonably profitable. The managers should have a certain discretion to use U.S. Treasury bonds, but nothing else without a formal appeal process. In view of the gigantic size, perhaps a few other options might be considered for those who demand them. The administrative costs of such a large fund should be quite low. The management should be aware that the investment advisory industry may not be completely pleased with this arrangement, so the opinion of experts should be treated carefully. The purpose of this fund is not to innovate financially, it is to pay medical bills efficiently, and with the minimum of public uproar.

III: Forestalling Unfortunate Side-Effects.

In the meantime, the Diagnosis-based payment system -- and the reaction of the hospitals to it -- has introduced a new dynamic. It usefully illustrates how far-reaching the unintended consequence of even a small reform can go, before it is even recognized as causing it.

Diagnosis-Related Groups (DRG) To change the subject, a budget reconciliation bill two decades ago slipped in a feature of paying hospitals one of two or three hundred flat rates (there are actually over a million possible diagnoses) for the whole hospitalization. It did not matter how long the patient remained in the hospital, nor how many tests or treatments he underwent -- same flat rate. In spite of efforts to look for "Episodes of Care", ambulatory medical care is not nearly so amenable to this rationing device. As a consequence, hospitals average a 2% profit on inpatient beds, 15% profit on accident rooms, and 30% profit on satellite clinics. Since most dual-use items have the same basic cost whether used for inpatients or outpatients, escalation of outpatient prices results in carrying some pretty fanciful prices over to itemized inpatients, for those items not covered by insurance.

The basic issue is severing connections between costs and prices, and exploiting the public's trust that some connection remains. This situation caused a notable surgeon to exclaim that the "only purpose of having health insurance is to keep the hospital from fleecing you." It is not clear to what extent discounts from inflated prices are used as a competitive weapon in the outpatient area, but the tightly controlled and overpriced ambulance arena suggests that practices bordering on antitrust violations may well exist in some regions. There seems to be the considerable exploration of the legal limits of the present system; medical school tuition is largely set by what the market will bear, and surpluses soon have a way of seeping out of the hospital system into the university's general finances. Colleges without medical schools are upset by this unequal financing mechanism. It is not clear how far this complexity is extending, but such unexplained disruption is bound to cause many eventual problems, return to cost-based pricing is an urgent need. The first step might be to require public disclosure of price/cost ratios in more relevant detail. To abandon cost-based pricing always invites governmental price controls.

Interest Rates, Investment Income, and Inflation When there is inflation, the value of money goes down, so you might expect interest rates -- the rental cost of money -- to go down, too. However, people anticipate higher prices, so lenders build a premium into the interest rate structure to compensate for the value of the money to be lower when it is repaid. That raises interest rates, and the Federal Reserve will generally raise them even higher to put a stop to inflation. So, buying and selling bonds is a zero-sum game, far riskier than it sounds. Consequently, there is a flight toward the common stock, thus raising its price. Meanwhile, inflation usually hurts business, tending to lower the stock prices. As a consequence of all these moving parts, long-term investors are urged to buy at a "fair" price and never sell, no matter what. Even that strategy fails for any given stock because somehow corporations seldom thrive for more than seventy-five years. So, the advice is to diversify into a basket of stocks, and the cheapest way to get that basket is to buy an index fund. In a sense, you can forget about the stock market and let someone else manage the index, for about 7 "basis points", that is, seven-hundredths of a percent. All of this explains the choice suggested for Health Savings Accounts of buying total market index funds. Limiting the universe to American stocks is based on a political hunch that it reduces the chances of harmful Congressional protectionism. Having said that, a Health Savings Account must raise cash from time to time, and to guard against forced selling in a down market, some average amount of U.S. Treasury bonds will have to be maintained. Ideally, the number of Treasuries would be small for young people, and grow as they get older, and therefore more likely to get sick. Pregnancy is the one universal cost risk for younger people, and they know better than anyone what the chances of that would be in their own case.

This approach is greatly strengthened by reference to the modern theory of a "natural" interest rate, to which the whole system has a tendency to revert, if only we knew what the natural rate is. It is not entirely constant, but over time it seems to be something like 2%. If we knew for certain what it was, we could set a goal for perpetuities like the Health Savings Account to be "2% plus inflation". Since inflation is targeted by the Federal Reserve as 2%, that would amount to an investment goal of 4%. If you can buy an American total market index fund consistently gaining at 4.007 % per year, you should buy and hold. If it rains less than that, it is either run by incompetents, or it is a bargain which will eventually revert to 4.007% and pay a bonus. If, on the other hand, it gains more than that, there exists a risk it will revert to the mean. That it is being run by a genius is sales hype to be ignored. We suggest buying into it in twenty yearly installments, which should balance out the ups and downs, so then you can forget about even this issue.

But don't count the same issue twice. In order to assure a 2% real return, it is necessary to obtain 4% in the real world of 2% inflation, and the compounded income of 4% accounts for both in equal measure. A compound income of 6%, however, is two-thirds inflation / one third "real", so artificially raising interest rates to control inflation can progressively overstate the requirement, and hence overdo the deflationary intent. Conversely, when the Federal Reserve fails to raise interest rates as Mr. Greenspan did, the result can be an inflationary bubble. The central flaw in adjusting prevailing rates to current natural rates is that we do not know precisely what the natural rate is. To go a step further for immediate purposes, we are also uncertain how much deviation there is between medical inflation and general inflation. As a result, the best we can expect is to make as much income on the deposits as we safely can, and continuously monitor whether the premium contributions to Health Savings Accounts might need to be adjusted. And the safest way to do that is to have two insurance systems side-by-side, one of them a pay-as-you-go conventional policy for basic needs during the working years, and a second one whose entire purpose is to over-fund the heavy expenses at the end of life and the retirement years, permitting any surpluses to be spent for non-medical purposes. With luck, the beneficiary might retain a choice between increased premiums, and increased (or decreased) benefits.

If these calculations are even approximately close, the financial savings would be several percents of GDP, a windfall so large that mid-course adjustments could be tolerated.

Competition With Hospitals, Not Necessarily Between Them It is comparatively effective for small hospitals to compete with each other, but as transportation improved they grew bigger and greatly expanded their market areas. At that point, they share with big banks the awkwardness of being too big to be permitted to fail. Exploiting this, they have more freedom to raise prices. As they become more efficient, the size which matters is their capacity to support a geographically wider community. It is mostly transportation feasibility which matters, so breaking up ambulance monopolies may hold part of the solution. Satellite clinics have many advantages, but price control is not one of them.

The institutions which suggest themselves as possible hospital competitors are Retirement Communities (CCRC). Because land is cheaper, they tend to be built in the suburban and exurban rings around cities, but the elderly population is growing. Severe illness and disability tend to increase with advancing age, so they suggest themselves as concentration points for all medical care in their region. Almost all of them have infirmaries, many of them have rehabilitation and assisted care capacity. It would seem that what they mostly need is inexpensive ambulance service and a relaxation of regulations which inhibit overlap with lower-level hospital facilities. And, let it be emphasized, an extension of health insurance coverage to allow them to be reimbursed. If general practitioners and pediatricians began to locate offices on the grounds of a retirement community, specialists would soon follow, along with laboratory collection stations and x-rays. Over time, they could be expected to transport surgical patients to distant hospitals, and return them to the local infirmary for convalescence. Some would acquire hospital satellite clinics, but there are too many of them for a single type of development. It is vastly preferable for them to have unlimited hospital connections and unlimited access to their facilities. Their great contribution is potentially to compete with hospitals for certain services, which would be greatly inhibited by single limited franchise affiliations. If competition is encouraged at this level, it could make the usual sort of governmental wage and price control much less necessary. The fear of abusive pricing is one of the major inhibitors of generous health insurance, and it is in the long term self-interest of all health care providers to resist it.

Internal Borrowing Between Health Savings Accounts

The DRG system constrains hospital inpatient revenue so directly, that hospitals themselves constrain costs, although they generally seek ways to maintain revenue first. It never hurts to verify such impressions, but allowing a 2% profit margin while the Federal Reserve targets a 2% inflation, is probably already too severe. Since the only way to "upcode" this rationing system lies in admitting too many patients, the regulators designed a penalty system for "unnecessary" re-admissions. It largely had no effect. That is, patients who were re-admitted within 30 days, were generally found to need it, so after a time the penalty may even be repealed. Congress probably does not yet realize what a blunt instrument it has created. The DRG system is so draconian it probably incentivizes the hospital to constrain admissions of all kinds, since all admissions may be turning unprofitable. Consequently, the first step in reducing induced use, and charges, in the outpatient area would be to increase the profit margin to 4%, which is to say, 2% plus the inflation rate. We have already mentioned the need to discard the underlying ICDA code and replace it with a simplified SNOMED code, to improve its specificity and remove the upcoding temptation. Having done this, there would remain little reason to worry about inpatient costs; they are what they are, providing the cost accountants find a better way to handle indirect overhead.

This preamble may at first seem irrelevant, but its point is this: both the old employer-based system and the evolving Obamacare variant need to focus on the same problem which faces the Health Savings Account. Whether you overpay or underpay, the main cost distortion lies in the outpatient area. All three systems seem to agree that the use of high deductible insurance will solve the small-claims problem. But the history of health financing is that the medical system is entirely too willing to shape itself to the reimbursement climate. It may take some time, but it is highly predictable that medical practice will further evolve toward substituting outpatient care for inpatient care. The cost of shifting the locus of care is astronomical, and if we switch it back again it will be doubly astronomical. All of this cost should be attributed to the reimbursement rule-maker, not the provider or the patient.

Within the area we are discussing, higher than the deductible but lower than the inpatient cost, the ACA insurance approach tends to push up costs because internal cross-subsidy makes it appear cheaper, but it also makes it far easier to shift the cost of subsidies. Because by contrast, the HSA approach creates individual, not pooled, accounts, it is cheaper because the patient has the incentive of sharing the savings. But its lack of pooling makes it seem less benevolent for elective outpatient surgery, cancer chemotherapy, radiation therapy, and whatever else will be stimulated to migrate to this borderland between inpatient and outpatient. The stimulation will come from both the hospitals and the small-cost ambulatory areas, both being effectively excluded from alternatives. The managers of HSA need to anticipate this coming demand and facilitate it by pooling the funds to cross-subsidize it, struggling to consume much of the profits generated by shifting the locus of care from inpatient facilities and shifting volume profits from drugstores, pharmaceutical companies, and nursing homes. It isn't universally obvious how to do this. so the task must be assigned to someone.

Maintaining the solvency of HSAs encounters two types of problems, endogenous and exogenous. Endogenous means the growth curves of revenue and cost are not two parallel straight lines. A person may have a pitiful amount of money in his own account to pay a bill, but his age group collectively may have huge reserves, on average. Furthermore, a young person may not have enough cash to pay a bill, even though his future accumulations should be more than ample. Both of these problems depend on how much illness is found in young people, and one would hope will progressively diminish. However, the expected shortfalls at all ages must be somehow calculated, and matched against expected surplus; after providing a margin for error, an amount calculated to cover net shortfalls at each age should be escrowed in a "taxation" account, and later returned to individual HSAs as they balance out. There will be administrative costs, but one would hope there would not be much interest or borrowing cost. The goal would be to phase this process out, well before age 65, essentially returning the accounts to the same level of progress they would have achieved without the intervening disruption. My prediction is that most of this need will concentrate around pregnancy and neonatal care, with a low-level background cost of accidents and illnesses in other years. The general idea is to have each age cohort support itself, within the current year if possible, but borrowing against later years on a current-value basis, if necessary. Borrowing from other age cohorts should be seen as an emergency fallback only.

Whoever manages these "taxation" escrows would be well positioned to identify intergenerational anomalies, and therefore to manage the same sort of exogenous pressures. Such managers must look askance at all inter-generational appeals, but migrations from inpatient to outpatient must be matched by reducing the premiums of the catastrophic insurance and transfers to individual accounts. The catastrophic insurance stockholders will not cooperate without evidence of need, nor will pharmaceutical firms lower their prices without argument. Therefore, the managers of the "taxation" fund must establish adequate data resources, and negotiate small frequent changes rather that steep-step infrequent ones. To the extent this activity can stimulate anti-trust concerns, Congress might consider what issues there are, in advance.

Balancing the Books

Earlier, we introduced the concept that all health care costs ultimately are paid from earnings someone accumulated during the working years of, roughly, age 26 to 65. That reality doesn't change, whether the contributor was the individual covered by the insurance, or his parents, or grandparents. The contributor was almost surely earning a living at the time and therefore was in the working age group. Ultimately, the limit to what our nation can regularly spend on medical care traces back to what we can predictably earn, not on what we have saved, even though the same is not true for any particular individuals. The baby boom "bulge" illustrates the danger of overlooking this reality. It is now time to make additional use of the theory.

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HSA deposit limits were based on a maximum of $3300 per year, from 26 to 65. {bottom quote}
First, recall the calculations of HSA deposit limits were based on a maximum of $3300 per year, from 26 to 65. That sum is the maximum contribution now legally permitted for ordinary (non-lifetime) Health Savings Accounts. It was probably arbitrary, but in a decade of use, there has been no great complaint it is too low. It is surely greater than the indigent population can afford, so for them, the pressing need is to identify the level below which subsidies are justified. An upper limit applies to people who may be solvent, but who could not afford the protection without a tax deduction. These are both important limits to determine by experience. Right now, the more important question is: what affordable average level can cover the lifetime medical costs of the entire population, probably just accepting the Obamacare subsidy levels. An average cost is a number which is not a matter of opinion, even though at present it may be unclear. From this the conclusion emerges, we should start with what we have, the present HSA deposit limit, and later improve the other two Obamacare benchmarks by experience. "Experience" raises the question of how to assemble the data.

Data Collection. To monitor this system, and to derive these benchmark numbers, we must contend with the immensity of such data, keeping the administrative costs low by restraining it. Furthermore, the number of different companies managing such accounts might grow very large, thus multiplying the cost of data aggregation. At a minimum, we need monthly data from each managing company of 1) how many individual accounts it manages, 2) what the aggregate deposits were, 3) what the aggregate withdrawals were, and what the aggregate month-end balances were. In return, the agency selected to consolidate this data centrally should return quarterly aggregate numbers for the entire universe to raise alarms about outliers. These four numbers should not be an administrative burden, but unfortunately, the initial transition cannot be managed without data for every year age cohort separately. Ultimately, that will require a spreadsheet containing eighty or more rows representing each birth year cohort, listed in four columns. In view of the high national divorce rate, the temptation should be resisted to sub-aggregate the collection data by families, thus greatly complicating the reporting complexity. Other data for special purposes, like gender and marital status, disability, and employment, should be handled on a sampling basis, since they change infrequently, but vastly multiply the data cells. Income data is the most sensitive data of all, which HSA managers ordinarily do not possess. If at all possible, data required for establishing eligibility for a subsidy, should be obtained by maintaining a separate HSA entry on the IRS 1040 form, occasionally requesting unidentified aggregate data from the IRS. It is hoped it will not be necessary to collect data indefinitely, once the main transition is accomplished, perhaps eventually reducing it to quarterly reports, then annual ones.

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A lifetime HSA system can be passive with regard to health costs, leaving behavioral issues to other agencies, {bottom quote}
From the foregoing description, it should be possible to derive a skeleton description of the central planning required to run a nationwide program, which is large in expenditure, but comparatively small in administrative overhead, thus capable of remaining largely in the private sector. It is possible subscriber income will need to be added to the data set, but such temptation should be resisted. After all, the private insurance industry seems able to function without it. At most, the goal should be annual income reporting, otherwise running on a sample basis, and need-to-know. With deposits concentrating on people of working age, patient income data should already exist in the IRS system. Meanwhile, the HSA focus would be on whether its investment and deposit income match its medical expenses, both short-term and long-term. That is, predicting whether cash shortfalls will disappear with time, or whether investment income will chronically be in surplus for certain age groups, but in shortage for others. In the latter case, some borrowing facility may be needed. In addition, a monitoring function will probably be needed for investment managers who produce less than average gains for their customers, suggesting difficulties with overhead, investment skill, or kickbacks. Although subsidies for indigent patients will be necessary, it is not necessarily the function of the HSA to set the limits. In any event, overlapping agencies should share experience, not duplicate it. It is to be hoped DRG for hospitalized patients, plus market forces for outpatients can control provider charges without reliance on financial strictures. Regional medical cost norms must nevertheless be maintained for comparison with local ones, particularly comparing Medicare data with HSA data for the same services. The overall hope is a lifetime health savings account system can in time become largely passive with regard to health costs, leaving behavioral issues to other agencies, once the HSA has detected questionable data. Otherwise, as the cop on the beat, it could become unable to detect or define solutions for emerging changes in health science.

Let's summarize with specific numbers, however uncertain their precision. Our approximations of the functioning of lifetime HSA were based on parents making virtual loans or gifts of the obstetrical and pediatric costs to their child, and of Medicare paying for grandparents with money, they or the taxpayers earned while they were wage-earners. We are proceeding from the premise: health expenses are lifelong, but revenue for them derives only from the working population. The concept thus highlights affordability for the working population as the main limiting factor, which it surely is. We make the second premise: $132,000 total contribution seems to suffice for regular HSA coverage up to the 65th birthday. If compound investment income spread over forty years could generate about $75,000 in addition to the $132,000 contribution, the $75,000 at 6% on the 65th birthday will also pay for Medicare as if it was a single-premium insurance, based on CMS statistics, providing it continued to earn 6% as it is spent down over the next 20 years. Then, we envision a yearly escrow of $1400 to achieve $75,000 on the 65th birthday, while everything else in the HSA has been spent for current medical expenses of the earning worker. Even though current medical insurance is floundering financially, its present health insurance premiums suggest a yearly contribution of $1400 is attainable for most people, and a 6% interest rate does not seem unachievable, either. One additional little quirk of the numbers is $75, 000 will cover an increase in life expectancy from 78 to 91. This last little zinger is based on the uncertain but conceivable premise that future increased longevity will be achieved by moving the terminal illness costs backward 13 years, since everyone must die, but nothing says that an extra serious illness must intervene, and be survived, during the 13 years. It probably will, but you can't be sure.

So to carry this forward, an extra contribution of unknown size would include the childhood expenses. The reason it is unknowable is that much of it is buried in the parents' costs already, especially obstetrics, and the extra cost of childhood illness (take the CHIP program for an example) is pretty trivial. Unfortunately, the timing of childhood costs comes at a time in life when the parents have very little medical costs themselves, and for this purpose that's a bad thing. Costs early in life affect the compounding of income, more than the same cost later would. But let's say $600 a year extra would do it, which seems pretty generous. With conservative estimates of everything except coming scientific advances, $2000 a year, per person, from age 26 to age 65 should pay for the whole lifetime medical experience, assuming two children per two adults. If we remember that we sort of have a $3300 budget, and index funds of large-cap funds have risen at 10% ever since 1926, it all seems pretty safe to bet on. (The uncertainty is probably not the 6% or the $132,000, but rather in how much would be left in the accounts unspent, for what periods of time. That is, whether $132,000 is really enough or whether it must be increased to generate a cushion.) We have no data on how much would have to be devoted to subsidizing the poor, or to paying off the Chinese for Medicare borrowing, but these numbers suggest we could have a stab at even doing some of that. One thing is sure: if we pre-paid for Medicare, it ought to eliminate the present payroll deductions and premiums, which now make up half of Medicare cost. And put a stop to borrowing from foreigners, which makes up the other half.

If you're an optimist, that isn't the end of the reasons for optimism. Nothing is forever, and so projecting this good luck will last forever is bound to be disappointed, somewhere. But surely this discovery of compound investment income on unused premiums can generate $100,00 in savings per person before our luck runs out. That's an awful lot of money for a "failure" when you multiply it by 300 million people. Meanwhile, the candle of hope burns brightly that our medical scientists can eliminate most of our remaining diseases at a reasonable cost. The hope is that scientific research can, in the meantime, eliminate the cost by eliminating the diseases.

The really important issue here is to understand that estimates of extra revenue, to come from investing idle premiums, are pretty strong. Much more difficult is to figure out a workable way to get the money out of the system in order to spend it. Insurance has demonstrated it has great weaknesses as a method to pay for medical care. In particular, it stimulates unnecessary spending by the illusion of getting something free. However, insurance has two big advantages over HSAs, quite aside from the undeserved advantages it has acquired by lobbying Congress. In the first place, insurance automatically achieves pooling among many subscribers for the current expenses of a few. Health Savings Accounts are individually owned and controlled, so everybody has a voice to be heard about pooling. As a consequence, every contingency has to be agreed, in writing in advance. Or else recourse has to be made to the coercive force of government, which gets you back to lobbying. The second advantage of insurance is the ability to move funds around internally, without paying a fee to a counterparty. In this particular case, insurance can take money from the elderly and pay it to the young, or the reverse, and adapt more readily to the countless possibilities that the revenue curve may not precisely match the expense curve, over a period of eighty years. All in all, these two disadvantages are not enough to undermine switching the country away from a course which threatens to lead to bankruptcy. Having been present at the beginning, I know that the inclusion of catastrophic insurance linkage was fortuitous, but it is what makes this new system workable when it is a success, as contrasted to avoiding added nuisance at times when it might fail. Curiously, this may well be of importance in the approaching Constitutional debate. On the one hand, the federal government has a legitimate interest in programs with such huge tax implications. On the other hand, the Tenth Amendment to the Constitution is very explicit about situating non-federal powers in the states, and the McCarran Ferguson Act has additionally defended continued state control of the business of insurance for over sixty years. With good leadership, the political position of Health Savings Accounts could enlist considerable support as a workable compromise between the two regulatory approaches.

If Health Savings Accounts generate more funds than required, the surplus flows over to a regular IRA, where it is available for supplementing retirement income; that's pretty easy. If hospital costs are generated, they are paid by the Catastrophic Health Insurance required to accompany all HSAs. That insurance has a deductible, usually with a fixed upper limit to out-of-pocket assessments. So, it is possible to generate more medical costs than remaining in the HSA account, by a combination of these hospital residuals, as well as outpatient charges. This is more likely to occur in young people before the Account has a chance to accumulate, but it could happen at any age. On the level of theory, it is intended to threaten everyone a little, in order to restrain unnecessary spending. Furthermore, if the subscriber has other sources of savings, it is clearly better to use them than the money in the account, in order to preserve the tax shelter. Increasingly, all insurance is adopting "patient participation" features, so the difference between insurance and HSA is progressively narrowing. Indeed, the nearly universal adoption of high deductibles, co-pay features, and a new feature of Obamacare is likely to generate considerable resistance when it becomes generally applied. That new feature is the "metals" concept of covering only 60% (bronze), 70% (silver) or 80% (gold) of the bills, leaving the patient to pay the increasingly burdensome residual. Paradoxically, this could easily combine into 50% of the health cost operating outside of the insurance, considerably more than most HSAs experience. In time, this will provide an interesting experiment, testing whether coercive measures are more or less effective than the enticement of keeping part of what you save, which is the HSA approach.

Therefore, it is intriguing to conjecture whether lowering effective patient costs might help attract Medicare patients to switch from insurance to individual accounts, substituting savings from prudent health purchasing, for coercive "patient participation in costs". Since Medicare premiums are taken as deductions from Social Security, rebating some of the payroll tax would be simple to add to the check. And eliminating Medicare premiums could have an immediate impact. After a few years, many Medicare patients might have $75,000 in the account. Those who do not would build up the account rather rapidly with the payroll and premium rebates, remembering it would require an investment return of 6% to produce the same benefit as in the example given earlier. Although we have used the "lifetime" convention extensively in this book, it has seemed likely that politicians would scarcely dare mention the possibility of eliminating Medicare, triggering the "third rail" of senior citizen politics. However, the serious disease progressively concentrates into the Medicare age group, relentlessly raising the Medicare budget into the far future. The idea that the Medicare age group would begin to demand the substitution of a cheaper alternative, never occurred to me or many politicians, because it was difficult to imagine an alternative for the old folks which would seem cheaper to them. But a comprehensive approach, eliminating the Medicare premium, and the payroll deduction might just do it. To which, most politicians would reply, we must wait to see. Voluntary, to be sure, and probably very hesitantly, a few who were pleased with HSA during working years might want to continue it after they retire, using rebate of their payroll deductions, and possibly adding to it somewhat.

Annotated Table of Contents

CHAPTER ONE: Where Are We, And How Did We Get There?

--- Teddy Roosevelt started it, but politicians have shorter memories than historians. For practical purposes, Obamacare 2012 is an extension of the Clinton health proposal of 1991, with HMOs deleted, and computers added. It is useful to conjecture Bill Clinton's strategy, which would explain much of the present muddle. If Hillary runs, we could even see it tried for the third time.

2589 Clintoncare and Obamacare: Historical Foreword

1729 Picking Out the Raisins From the Pudding

2670 Welcome to Welfare

1714 Reforming Health Reform, New Jersey Style

2622 Children, Playing With Matches

2602 Text of AFFORDABLE CARE ACT, PL 111-148, March 23, 2010, Renamed HR 3590

2594 The Real Obamacare, Unveiled

2672 Text of Section 1501, renamed Section 5000A: MINIMUM COVERAGE

2639 Text of Section 1251 (H.R. 3590):PRESERVATION OF RIGHT

TO MAINTAIN EXISTING COVERAGE 2673 Proposal: Coordinate Sections 1501 and 1251

2676 Health Care and Education Reconciliation Act of 2010

CHAPTER TWO: The Supreme Court Has Its Say

--- The U.S. Supreme Court had nursed certain Constitutional issues since Franklin Roosevelt's court-packing days, but it was state Attorney Generals who propelled States' Rights into the central Constitutional issue of the first few days of Obamacare. Liberal academics have long flirted with remaking the whole Constitution, and President Obama once taught Constitutional Law. While extreme Liberals nurse Constitutional revision, most Liberal politicians would prefer to split Republican voters with a third party. It is too early to predict which party would suffer.

2624 State and Federal Powers: Historical Review 2250 Obamacare's Constitutionality

2289 Roberts the Second

2592 More Work for the U.S. Supreme Court: Revisit Maricopa

2625 What Can Supreme Court(s) Do About Tort Reform?

2613 ERISA Is Thrust Into the Battle

CHAPTER THREE: Sudden Fiasco Of Electronic Insurance

----At first, it seemed a minor programming problem had temporarily inconvenienced the Electronic Insurance Exchanges. The realization soon emerged that the whole program was sloppy and untested, requiring months of repair, if not the abandonment of Obamacare. If direct marketing gets discredited, it would be a pity. The underlying idea was good and achievable. But this implementation was a disaster.

1288 Money Bags

2603 Electronic Insurance Exchanges

2626 Streamline Health Insurance?

2604 Redesigning Electronic Insurance Exchanges

2611 Phasing In A Direct Premium Payment

2615 Creative Destruction for Health Insurance Companies

CHAPTER FOUR: Small, Quick Proposals to Extend Health Savings Accounts

----Here's our alternative proposal, first devised by John McClaughry and George Ross Fisher in 1980, enacted into Law in 19xx by Bill Archer, and now numbers more clients than Obamacare. It requires publicity more than legislation, but six small technical amendments could rapidly turn an experiment into a national program. It seems to save as much as 30% of premiums, without much disturbance of the healthcare delivery system.

2637 FIRST PROPOSAL, Amending HSAs To Include Tax Sheltering

2573 SECOND PROPOSAL:Spending Accounts into Savings Accounts

2611 THIRD : Phasing In Direct Premium Payments

2584 FOURTH: Investments Pay the Bill: Obstetrics Lengthens Duration, Deductible Reserve is the Kernel.

2607 FIFTH: Having Invested, How Do You Reimburse the Providers of Care?

2630 SIXTH: Indemnity and Service Benefits

2585 Foreword: Children Playing With Matches: Investigating and Debating the Healthcare System 09 2636 2606

CHAPTER FIVE: HSAs, Backwards and Forwards

----The above describes the HSA and how it might be more useful if tweaked a little. This next chapter is a much more grandiose version, expanding the simple idea into a proposal for lifetime health insurance and describing the enormous unsuspected potential. Ninety-year projections are never accurate and require many mid-course corrections. We propose a new institution to monitor and steer it and attempt to describe what might be encountered. The power of compound interest could well pay for most of healthcare, but it is unnecessary to over-reach. Paying for a third of our costs would be accomplishment enough.

2590 Health Insurance Design.

2638 Pay As You Go

2587 Predictions of Future Healthcare Costs: Quis Custodiat Ipsos Custodes?

2628 Average Lifetime Medicare Balance Sheet

2627 Shifting Money Backward in Time: Managing the Transition

2593 Economics of Chronic Disease and Catastrophic Illness

2634 Comments on Diagnosis Related Groups (DRG)

2635 Admonitions: Using the Transition to Lifetime Health Insurance as an Inflation Restraint

2473 An Unending Capacity to Generate New Problems

1734 Healthcare Reform for Lobbyists

2485 Cost Shifting, Reconsidered

2571 Proposed: A Republican and/or Conservative Healthcare Solution


CHAPTER SIX; Reforms More Basic Than Obamacare

----Obamacare is just coverage extension by subsidies. The biggest flaws in our payment system are fifty years old and are the cause of most of the delivery system flaws. Meanwhile, Science is reducing disease costs by reducing disease, for all income brackets. By switching "medical" care into "health" care we keep authorizing new carpetbaggers to bill the insurance. Physicians received 20% of payments in 1980; now it is 7%, half of which is spent on overhead. Nevertheless, compound interest income could reduce costs greatly without changing healthcare. Lifetime insurance (above) could pay for about a third of future costs; direct cost efficiencies could probably save another third, leaving a third to be paid in cash. But don't make it entirely free, unless you want to make it entirely ruined.

2633 Stepping out of the Obamacare Frame

1730 What Obamacare Should Say But Doesn't

2616 The Coonskin Hat

2404 "They Don't Make That, Anymore"

2564 Last Cow in Philadelphia

2112 Paying for Assisted Living

1431 July 4, 1776: Patients in the Pennsylvania Hospital on Independence Day

1733 Obamacare And Its Repair, Executive Summary

2453 What's The Matter With a Conservative Answer?


31 Blogs

CHAPTER FOUR: Proposals to Extend Regular Health Savings Accounts
Extending the Henry Kaiser Tax Exemption to everybody is very simple. Just allow HSAs to accept the premiums for health insurance. (

Amending HSAs To Include Tax Sheltering
Extending the Henry Kaiser Tax Exemption to everybody is very simple. Just allow HSAs to accept the premiums for health insurance.

Some Unintended Opportunities
A concept is offered, hoping others can find a way to make use of it.

FIFTH: Having Invested, How Do You Reimburse the Providers of Care?
What's the matter with using a debit card to pay for relatively small outpatient claims, and an improved version of the DRG to pay for inpatients?

SIXTH: Indemnity, Not Service Benefits
Indemnity pays a benefit in dollars (without paying much attention to how it is spent), service benefits pay benefits in services (without regard to what they cost). Obviously, open-ended service benefits run up costs.

Which Obamacare Plan Fits Best With Health Savings Accounts?
Which Obamacare "metal" plan coordinates best with HSAs?

Lifetime Health Coverage, Summarized in Advance
Lifetime coverage cannot be envisioned without some changes in existing law. Most people need to see the goal before they will inconvenience themselves to get it.

Health Insurance Design.
New blog 2013-12-13 22:03:25 description

The Outlines of Lifetime-Funded Health Insurance
To illustrate projections eighty years in advance, approximations are as useful as precise figures.

How Do I Pay My Bills With These Things?
Assigning responsibility is easy; it's paying bills that's hard.

Better, but More Complicated: Lifetime HSAs
Start with a Health Savings Account (a tax-exempt IRA with catastrophic insurance backup, payable only for Healthcare). Add a concept: add other age groups, like working people (26-65) who indirectly pay almost all health costs and children. We try to integrate this pattern into a lifetime health insurance design:
Obstetrics and Pediatrics through age 25 are really special loans from parents to children, usually not repaid.
Medicare, on the other hand, owes an unpaid debt for their 50% subsidy. Failure to recognize the subsidy tempts the public to extend it with "Single payer" disasters. Public education is the first, and rather major, a step toward fixing this before it ruins us.

How Certain Numbers Were Derived
How can we predict future health experience? Mostly by extrapolation, sometimes by guesses, and sometimes we are content with the opinion of experts. None of this is totally reliable. (

Borrowing Your Own Money
Accumulating money in an HSA may not be easy, but it is straightforward. Getting your money out is much more complicated, but fairly easy.

Children, From Birth to Age 26
New blog 2014-03-27 16:28:19 description

Pay As You Go
"Pay as you go" isn't an exactly accurate picture of Medicare.

Investing for the Common Man
An ancient and honorable profession had better re-invent itself, quickly.

Raising Cash and Investing Cash
New investors are apt to be timid investors. It may be better to hold your nose and dive in, but be sure you are diversified.

Shifting Money Backward in Time: Managing the Transition
Everyone dies; just about everyone is reimbursed for final expenses by Medicare because just about everyone gets Medicare Part A without asking for it. Medicare is paid for by payroll deductions, premiums and 50% tax subsidy. If someone had a Health Savings Account with adequate funds in it, Medicare ought to be willing to waive the payroll deductions and premiums, in return for escrowed money in the HSA. Since half of the cost of Medicare was paid by general taxation, half of the escrowed HSA should be used to pay down the federal debt. Much, or even most, of the HSA money would in time be generated by the investment income of the HSA.

Admonitions: Using the Transition to Lifetime Health Insurance as an Inflation Restraint
Create an escrowed compartment within HSAs, Borrow against funds in the escrow if need be, but spend escrows only to make a deal with Medicare.

Predictions of Future Healthcare Costs: Quis Custodiat Ipsos Custodes?
Predictions are difficult, especially about the future.

Smothered to Death in Greenbacks
New blog 2014-07-18 23:55:26 description

Average Lifetime Medicare Balance Sheet
Doing much estimating, lifetime Medicare costs average somewhere between $250,000 and $300,000 per person, not counting a great deal of custodial care.

Economics of Chronic Disease and Catastrophic Illness
Until the antibiotic era, all illness was a catastrophe. Nowadays, chronic illness can be financially catastrophic, too.

Indemnity and Payment by Diagnosis: Fair Prices For Healthcare
Trust, but verify.

Classical Health Savings Accounts (C-HSA)
In a big legislative package, there are technical areas where the lobbyists have considerable sway in the outcome. Here are a few.

Cost Shifting, Reconsidered
New blog 2013-07-16 16:55:35 description

Proposal Number Seven: Buy-In Prices at Different Ages
For one reason or another, an HSA may not be able to match the deductible for a number of years.

Proposed: A Republican and/or Conservative Healthcare Solution
There certainly is a negative case to be made about Obamacare. Here is a positive alternative that should unite all Conservatives, and maybe some Democrats.

Internal Borrowing Between Health Savings Accounts
The linkage between Health Savings Accounts and Catastrophic insurance creates easy pooling for heavy inpatient expenses, but short-term cash for outpatient costs may occasionally present a problem. Various alternatives are considered.

Balancing the Books
Lifetime health savings accounts may cover total medical expenses, or they may just reduce the cost somewhat. The place to make readjustments is in the size of deposits during the working years of 26-65.

Annotated Table of Contents

Table of Contents