Philadelphia Reflections

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


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

Healthcare Reform:Saving For a Rainy Day

Lifetime Health Savings Accounts


Direct Premium Payments, Constitutional Issues

In earlier sections I said I like computerizing a health insurance exchange. But confessing does not suggest the difficulties are trivial. To enroll by computer implies access to a computer. Since millions of people are still frightened to touch a computer, it implies an army of instructors to guide newcomers through the process. And since the insurance choices confront applicants with a bewildering set of choices, some person they trust must explain the choices to them. Since no insurance system imaginable could satisfy every reluctant hesitater, a considerable complaint and re-assignment process would probably be necessary for years to come. Many people will choose the wrong policy, regret it, and ask to transfer. To continue, you wouldn't expect a person to trust his private data to a system, without a personal password. Fine, but what do you do with seven million passwords? People will forget them, leave them lying around in public, and disremember them. The crooks in the cyber underground will get seven million opportunities to break into the system and steal things. If insurers of older policies undertake passive resistance, things could get tangled for years. So why undertake all these headaches?

There may be other answers to this question, among which is likely to be a set of imperatives contingent on making it mandatory. We will let others make their own arguments since once the vague mandatory feature is dropped, related conjectural problems diminish or disappear. The Affordable Care Act does not proclaim health insurance is mandatory; it only states a tax is required if you don't meet its requirements. The language really does suggest you have a choice between taking the insurance and paying the penalty tax. The Supreme Court mandates the tax must be small, to avoid being coercive to the states. The Constitution forbids the federal government to regulate the business of insurance, a provision heavily emphasized by the McCarran Ferguson Act. If the Health Savings Account with an attached high deductible is allowed to substitute for minimum requirements, any medical requirement is satisfied if someone has the money, and the HSA provides the money. True, it would allow someone with the money to reject the medical requirements, but what objection can there be to that?

There is a legitimate need to facilitate interstate health insurance. That means a minimal set of information exchange items is useful. The person must be confidently identified, and the terms and limitations of one state's policies must be matched with those of a second state. The credit status must be roughly described, and the current premium payments verified. If there is a current illness, its previously related history must be exchanged. Subsequent communication should be conducted between insurance companies, not between 300 million subscribers. Having established the basics, a communications channel(client to-and-from insurance company) must be provided for later use, particularly for expenses, even diagnoses, which might apply. And while this list may not be complete, it is close to adequate and can be expanded a little. It is nearly enough to get travelers, transferees and money exchanges to be organized. It will be sufficient for current needs and can be supplemented between particular states at conferences. And it would satisfy the Constitutional issue without needlessly inflaming it. If the Obama Administration expresses a willingness to compromise, these are the lines it might follow. On the other hand, if the issue is forced to the Supreme Court, the Court might be persuaded to follow these lines. We present three other liberalizing proposals for Electronic Insurance Exchanges:

One. Let a Thousand Flowers Bloom. The Affordable Care Act provides for selling high-cost health insurance products, meeting certain specifications, on the Electronic Health Insurance Exchanges. It's not obvious why the government has a legitimate interest in promoting one kind of health insurance over another, but perhaps a case can be made. Uniform interstate protocols are legitimate between insurance companies, along with standardized codes. And a website is a legitimate means for citizens of one state to communicate with insurance for sale in another state. Beyond setting standardized definitions, the communication between customer and insurer can be left to the individual companies. The case for excluding many existing types of policies has not been made, and this has particularly infuriated the subscribers of such policies, particularly those cheaper than the preferred variety. So why not enable or even facilitate the construction of such exchanges in every state which wants them, privatize the electronic programming and operations, possibly even subsidize them. And then permit every one of them to set its own rules for the products to be sold across state lines, setting its own prices as long as the prices clearly relate to the same products for every state-licensed insurance client who wants to utilize a particular product. Nobody must use the system, but everyone may use it. If no one uses it, it needs improvement. There could be multiple exchanges in each state, but the state may set limits, and no state is required to have any. In return for federal assistance, the federal government is limited in its involvement in setting rules which guarantee access to every system for every insurance company, and every citizen.

Two. Specify That Health Savings Accounts are Acceptable Options. In fact, if Health Savings Accounts (linked to a matching high deductible), were available as an option among many other options in the Electronic Insurance Exchanges, only the worth of the option would be in dispute. The claim of HSAs to being listed, is they are cheaper than any other option. That's a feature which is certainly desirable for a Law which puts emphasis on helping the poor. It could potentially add tax-free investment funds to a pool which helps fund the program or fund its deficit. Such windfall income could provide revenue for the costs of educating and coaxing people into making better choices, and is much less apt to provoke the irritation of mandating people to do unpleasant things for their own good.

{William Bingham class=}
Tenth Amendment

Three. Be brief(in requirements), and let who will be clever(in details). The threat of the Tenth Amendment hangs over all federalizing initiatives, not just the Affordable Care Act. If Electronic Health Insurance Exchanges would limit their scope to the flexible enlargement of interstate insurance sales, the insurance would clearly be part of interstate commerce, and thus safe from any revival of the Court-packing disputes of the 1930s. There is almost no justification for interposing the Federal Government into the middle of most communication between subscriber and insurance company. Permitting smaller states to enlarge their markets might by itself relieve many of the indirect pressures now limiting competition as a force to suppress healthcare prices; and could limit the damage to established insurance carriers, who will probably need time to recover from the changes it would force on their marketing.

Proposal 6: Congress should mandate the licensing to sell health insurance to be widely inclusive, including Health Savings Accounts and Catastrophic Coverage, and subject to regulation in the state of corporate domicile, subject to objection by the state of residence of the insured. When there is conflict, an appeal may be federal.
Furthermore, the spread of computers has reached a point where people are sensitive about being commercially manipulated by computers. Fifty years ago, the department store had a computer and the customers didn't. Nowadays, even children have them, and just about everyone is touchy about the way early-adopters try to bamboozle the innocent, putting their own products on the first page, in big letters, and "all others" under a button that doesn't work. Considering all the compromises needed to satisfy a common denominator, it seems very likely some other products would be more suitable for some people. "Hogging the limelight" and forgetting to mention other alternatives have become such common practices, people are on the lookout for them. The term "user-friendly" is now a part of the English language, people immediately bristle at signs of high-handedness, of which there is great plenty in the computer world. It is no secret businesses will tolerate most taxes or indignities, just so all of their competitors are seen to endure the same. It was once a common experience to have one competitor offer to design a computer program for the industry, quietly slanting the terms of entry to favor its own products. Was this just another example of it?

Therefore, allowing privatized insurance exchanges to become available for all variants of health insurance might have allowed time for discovering other features which might require special adjustments. After all, health insurance would remain half-state and half-federal, and undiscovered problems may yet surface. Even if the President planned to run healthcare like an Egyptian Pharoh, a gradual switch to individually owned and selected life insurance would have-- in time -- eliminated the need for pre-existing condition exclusions. It might even have provided an opportunity to reduce premiums for insurance which protects against the cost of appendices, indirect hernias, cataracts, uteri, prostates, and gall bladders --that have already been removed. Not everyone would want such features, but that's a small price to pay for the freedom to want them. A long-term shift to lifetime health insurance might very well require other adjustments, but it would be best to wait to see what they are. Meanwhile, the public will get the idea, teach each other, and get where it wants to be in a few years. That's at least as quick as a mandatory system can respond to industry lobbying, and still, get wherever it wants to go.

However, after all the uproar about the introduction of computerized direct-pay insurance has subsided, a great many opportunities are probably lost for decades, and any suggestions are probably futile. One thing remains, however, in view of the likelihood the issue of the Tenth Amendment will soon arise. How can we preserve the Constitution and still take advantage of our continent-wide marketplace?

The Argument Against National Uniformity of Prices.

It is abundantly clear the Founding Fathers were concerned with unifying a collection of thirteen sovereign states and had to make concessions. Furthermore, it is also clear no other nation in two hundred years has been able to match the achievement, even with massive wars and millions of casualties. So the instinct is strong to leave our Constitution alone. If it was not originally clear, the Civil War made it so. Nevertheless, the nation is laced with successful interstate corporations, for the most part, regulated by the state, not national, law. It seems to have been accomplished by establishing stock exchanges in a few states, operating under a few states' regulations, and otherwise allowing each corporation to choose a state of domicile, where the corporation can be regulated by the laws and courts of that state. The arrangement lasted for two centuries, and only later is starting to bend, under the pressures of electronic innovation. We seldom hear much uproar about the corporate arrangement under the state-federal problem. Why can't health insurance companies accomplish the same thing without federal oversight?

Well, for one thing, some states are still so sparsely settled, they cannot assemble the actuarial minimum numbers to have more than one viable health insurance company, or more than one HMO (Mrs. Clinton please note). Other states are densely populated enough to have several viable insurance companies, so the two-state sizes resist changes made to accommodate each other. The two have a great many dealings with the major corporations in their states, allowing them to pressure state legislatures into favoring state "champions", or else resisting the power of large insurance companies to dominate one state marketplace.

However, this is all pretty small peanuts, and it would seem fairly simple to separate the buying and selling of insurance companies from the buying and selling of insurance. After a while, one or two state exchanges would come to dominate and cluster in one area; while a handful of companies would start to dominate national health insurance business, and therefore migrate their health insurance operations into some different legal climate. In particular, our history of the migrating frontier made local communities restless about the distribution of doctors and hospitals. They could, of course, pass a law if one cabin is built on Pike's Peak, there must be two neurosurgeons within a hundred feet of it. The futility of such laws was soon apparent, and almost all resorted to some sort of incentives to attract medical resources found to be in short supply. State licensing was sometimes a way to create a local monopoly as a reward for a hospital to locate, or some specialist to open an office. But the development of health insurance provided an ideal way to attract specialists in short supply, by the simple expedient of overpaying them. Naturally, such communities resist the proposal to have national uniform fees, as interfering with the laws of supply and demand. Large cities, on the other hand, see national uniform fees as a way to suppress high fees. Our Founding Fathers recognized what was going on, and responded by letting anything commercial be regulated by the local states, flying the flags of states rights or state sovereignty. Franklin Roosevelt, a big-state resident, thought he could accomplish the big-state goal by calling it "court packing", but the nation soon told him his landslide electoral victory had some limits if it had that kind of result. Although Roosevelt largely accomplished his goal by other means, repeated attempts to make medical care nationally uniform has resulted in some kind of Presidential disaster. Things like medical care should become nationally uniform when the country becomes nationally uniform, but not sooner. Actuarial facts change pretty rapidly, as the discovery of gas shale in the Dakotas recently demonstrated. Any fixed but ideal arrangement will eventually fall victim to an agile and geographically flexible competitor.

Two personal examples have emphasized the point to me. In 1947, the Society for the Study of Internal Secretions (later known as the Endocrine Society) held its international meeting in a single lounge in a Chicago hotel. Nowadays, seven thousand national members meet in three concurrent ballrooms, and the shortage of Endocrinologists is over. To my surprise, a gentleman who looked like a Roman Senator approached me after a speech, and invited me, first to dinner, and then to become a paid consultant in his state which had no Endocrinologist. The other example was being approached by a lady in a pink hospital volunteer's uniform, asking me if I would like to become the sole doctor on a resort island of very rich folk, an hour from New York City. I accepted the first offer and declined the second, but the point is, people, protect their own personal needs when national health insurance is under discussion. And they often do not mean to be thwarted by supposed needs for national uniformity.

Congress and the Supreme Court are urged to view the Tenth Amendment as a compromise between big and small states which still enjoys wide support. Big states desire uniformity in order to suppress prices, while sparsely populated states reject uniformity in order to maintain control of local interests.

Proposal 5: Congress is urged to permit the domicile of health insurance corporations to be in one state chosen by the corporation. But all health insurance should be freely sold interstate, subject to regulation by the state of domicile.(2611)

Diagnosis Related Groups (DRG), in Relation to Medical Electronic Records.

The American Medical Association

For a concept supposedly working moderately well, the Diagnosis Related Groups (DRG) system for inpatient reimbursement has a bizarre history. It has led to some unconfessed, and widely unrecognized, disastrous results, and should be thoroughly reworked as soon as possible. In a scholarly sense, the story begins eighty years ago. The American Medical Association decided all of the diseases, ultimately all of the medical care would be better understood if reduced to a systematized code. Originally, the code was visualized as a six-digit complex, with the first three digits defining an anatomical location, followed by a second set of three digits specifying the cause of the disease affecting that location.

SNODO That 6-digit structure limited code to a thousand diseases in a thousand locations, or a million "disorders" just for a beginning. Roughly half those theoretical combinations have no biologic existence, although even fanciful codes had some value for detecting coding errors. Other regions of the code exceeded the number of conditions actually found to exist, but originating in a digital structure then allowed virtually unlimited expansion, but sacrificed the significance of a particular position within the code. IBM was enlisted as a consultant, who advised the AMA to stop worrying about it; just provide a numerical code for everything, in the finest detail possible. Mathematicians could later easily make it usable for calculating machines, the forerunners of computers; and non-existent conditions created no harm. Some of those consultants had worked with a system which produced great success for the U.S. Census and perceived no advantage to limiting the code numbers while planning for them to be manipulated by machines. The third group of three digits was soon added, making a nine-digit Standard Nomenclature of Diseases and Operations , familiarly known as SNODO, which could identify a million different operations, whether actually performed or not. Actually, groups of three or more digits separated into groups of three digits by hyphens transferred the significance of code-position to the cluster level, which proved adequate.

SNOMED The pathology profession subsequently added still the fourth set of digits, for microscopic features, so the potential was soon up to a hundred million microscopic conditions. The team of physicians who worked on coding the medical universe contains many names now famous, notably including Robert F. Loeb and Dana Atchley of The College of Physicians and Surgeons of Columbia University. For at least thirty years, the Joint Commission on the Accreditation of Hospitals (an AMA and AHA joint affiliate) enforced a rule: every discharge summary from every accredited hospital in America must code and index every discharge diagnosis in SNODO code. It was tedious work, kept alive by the glittering future prospect of developing an Electronic Medical Record by 1940.

Robert F. Loeb

ICDA After twenty years or so of this enormous task, the Medical Records Librarians rebelled. The labor effort was burdensome, and the librarians were in an occupational position to observe how little use was being made of it. On their demand, an alternative simpler coding system was adopted, called the International Classification of Diseases (ICDA). At first, it was limited to the one thousand commonest discharge diagnoses , therefore limited to the charts which the librarians could confidently observe would be used. In time, it was expanded to ten thousand commonest diagnoses. Limiting medical codes also limited the cost and effort of coding and was considered an important retreat from over-enthusiasm. Meanwhile, expansion of the SNODO code by a handful of true believers continued to fill up the coding gaps, soon using and exceeding the capacity of the 80-column IBM punch card (originally, ten digits plus metadata), one card per diagnosis.

Unfortunately, the code was in danger of collapsing from this unanticipated expansion, since computers had not yet advanced to the point where they could rescue SNODO from the limitations apparent to its users. It was a classic case of a hypothetical system appearing to be better than the one in actual use, but not living up to its promise when both systems encountered actual use. The ICDA coding scheme did suffice for immediate purposes, and the "calculator" system was at least a decade away from evolving into the more flexible "computer" which could skip around the limitations of a punched card input system.

The professional difference was this: the doctors roughly understood the coding logic and could devise an understandable code for most charts through the logic of a structured language. The record librarians had not been trained to encipher (or even dither, as photographers say) the code by logic; a thousand codes was about the limit of what anyone could memorize. The burden of manual coding eventually overran the code design, before practical results could defend its utility in other areas of the hospital or the profession.

All the medical record world promptly abandoned SNODO; except for the pathologists who intuitively recognized ICDA could never approach their own greatly expanded needs. Eventually, pathologists took SDODO over, expanded and redesigned the basic framework, and produced what they are rightly proud of, an elegant codebook called SNOmed which obeyed meaningful internal coding rules. It still came, however, as a large and expensive book, which most practitioners were reluctant either to buy or to use.

Dana Atchley

DRG Meanwhile, a group at the School of Hospital Administration at Yale under the leadership of John Thompson lurched in the opposite direction of drastically reducing the ICDA code (initially expanded to 10,000 entries, which proved too large for some purposes, while still lacking specificity in many others), back down to only 468 of the commonest "diagnosis clusters". The purpose was to find clusters of diagnoses with common characteristics, which could be used by unskilled employees to identify diagnosis submissions which normally fell within certain bounds, but who in a particular case were sufficiently deviant to warrant investigation as "outsiders". This gross sorting by machine was then examined by the PSRO (Professional Standards Review Organizations), especially in the central feature of the length of stay. They termed their product Diagnosis-Related Groups (DRG) , which made no pretense of being complete but was complete enough to encompass the majority of outrider events. The computer version of their concept was called Autograph, which had some attraction to hospital administrations as a way to predict outriders. To summarize what happened next when Medicare adopted DRG for payment purposes: both DRG and ICDA started to expand, and SNOMED was relegated to the role of the codebook for Neanderthal pathologists.

{top quote}
Two million diagnoses are compressed into two hundred payment groups. {bottom quote}
Diagnosis "Related" Groups

Using the standard diagnosis codes, one-size-fits-all did not help the hospital and insurance accountants a bit, since my habit they tend to believe all businesses are about the same, no matter what the business produces. Their complaint was coded with thousands of codes were too big and complicated. Simultaneously the medical professionals were finding them much too small for the job. Meanwhile, ICDA was fast losing its reputation for being compact and inexpensive, while the opposite feeling immediately developed: the DRG was far too small for what physicians could now realize was going to play a very large and important role in everybody's finances. Two vital areas of the hospital had difficulty communicating from the beginning; now, there was no longer even a common language to use. There was no quick fix, either, because both DRG and the underlying ICDA designs were based on the frequency of occurrence, rather than precision and logic. Furthermore, the copyright was owned by professional societies who had little interest in finances, and considerable interest in reducing their burdensome coding workload. In the background, however, computers had made the task of code translation a trivial one. A third profession, the computer department, scarcely knew what the other two were talking about, but they came closer to affinity with the accountants.

Like the three bears of Goldilocks, some codes were too large and some were too small, but at least there were three of them, each crippled in a different way. Comparatively few doctors understood what was going on, and in spite of their vital interest at stake, had trouble getting over their hatred of the boring coding task. Since this whole issue of data coding and summarization has taken on major importance to the success of the Affordable Care Act, in some circles the uproar has become a political war dance. Let Obama do it if he likes coding so much. Basically, the librarians were saying they resented being criticized for making important mistakes in a task they didn't understand very well. In summary, everybody hates coding.

Overview of the Future.One a faction of the small field of those who are interested in such matters has decided to expand both the specificity and the reach of ICDA, which is now up to its tenth edition of revision. Unfortunately, it does not seem to some of the pathologists to be a sensible approach. We have an elegant code in SNOMED, they protested, which is arguably too big to use; expanding ICDA seems destined to reach the same destination, on the rebound from being too small. We now have ample data on what is common. The most efficient approach would at first seem to be condensing the highly specific SNOMED to a useful size, based on the frequency of use. The approach would stand in contrast to making a list of diseases by frequency, and then subdividing their specificities. While such a condensed volume could be printed as a book, we are now at a point where every record room within the hospitals of the nation is equipped with several computers, so the elasticity of the code should no longer be anyone's problem. Let the machines do the drudgery.

This whole process could now rather easily be automated for much more than its original purpose of classifying disease populations, and in a pinch it could even substitute 26-digit letters for 10-digit numerals, imparting some clues in the process. Further condensation of an already condensed version began to be used for payment purposes, adding still greater amounts of practical nuance. You might suppose everyone could see paying the same amount of money for treating the same disease (tuberculosis, let's say) of two different organs (let's say of bone, and of the kidney) was either going to bankrupt someone or enrich someone else. And that's only money. Any scientific or diagnostic decision based on a code of "All other" will make computerized medical records sprint faster toward worthlessness. At the rate it's going, lumps of "all other" will have no relation to each other, except to justify the same reimbursement for treatments of vastly different value. Or difficulty. Or cost. Or contagiousness.


In automated form, SNOMED is quite ready to be revised still further in other directions for other purposes. It could, for once, integrate the accounting and demographic functions with the rest of medical care. But a great many other useful functions can be imagined, once computers have a stable platform on which to build, and the task of coding can be safely undertaken without much physician input burden. Safe, that is, from the danger, the whole coding framework will get changed, again and again. In a certain sense, this is similar to the brilliant choice by Apple of the Unix skeleton, when Microsoft Windows seized on quicker expedients. A great many sub-professions seem to wish to have their own codes for their own purposes and resist the idea a physician code should be imposed on them. When you encounter such obstructionism, it is easy to suspect motives. But the general rule is: when it comes to a choice between scheming and incompetence, it's incompetence, nine times out of ten.

However, medical care and hospital care are medical functions, and their accounting and demographics will always eventually return to their medical professional core. Meanwhile, notice what happened to DRG, a code so crude it relegates most refinements to the category of "All Other". The fact of the matter is, it is a crude approximation, some cases paying on the high side, some on the low side of true costs. If the hospital loses money on inpatients, well, just build another wing to the outpatient department. Underlying this response was the enduring misconception that outpatient care is inherently cheaper than inpatient. If it's the case, well, we'll just have to fix it.

The surprising lack of chaos from such experience has almost nothing to do with medical content, and almost everything to do with having insufficient case volume to remain in balance. That is, the big hospitals smudge it out, and the small hospitals don't understand it. The highly prized profit margin of 2% or 3% can easily be achieved by admitting slightly more cases of a profitable kind (ie hire a surgeon expert in certain profitable operations), or by the government adjusting just a few DRGs to profitable status (like reducing tariffs on behalf of favored industries in Congress). Meanwhile, the rest of the enterprise becomes progressively more expensive, because there is no fixed relationship between service benefit prices and audited costs, and now an even less regular relation, to cost-to-charge ratios.

It is a precarious thing for institutional solvency, to depend on a financial balancing of a particular caseload within one set of four walls, and then complain hospitals are too small to survive. Between their accountants and their record librarians, this outcome drives the smaller institution into a futile chase after higher patient volume. Of course, we need to change with the times. But some basic truths never change, and one of them is every ship should be able to sail on its own bottom. You don't approach that by giving every ship a new hull.

Let's get specific. In the first place, allowing only a 2% profit margin during a 3% national inflation is to walk on the edge of a dangerous cliff. If some fair profit margin could be agreed to, it is only an average among hospitals. You might as well reduce the DRG to four payment levels, and reimburse hospitals on the basis of which of the four walls the patient faces. With enough tinkering, you might arrive at the desired total hospital reimbursement to match any profit margin you establish, totally disregarding the diagnoses of all patients. Quite obviously, you must code the diagnosis to whatever number of digits it requires to identify the unique condition. You could match up all of the hundred dollar cases and all of the fifty thousand dollar cases, call the two codes, and pay only two prices.

But such an effort is just a delusion. Somebody-- or some machine-- has to go to the trouble of coding every single diagnosis down to the point where the code is no longer meaningful to costs and assign relative values among them. Only at that point would it be legitimate to assign a dollar amount to each relative value. You have to maintain the code as treatments change, which will be quite frequently. You can do it, and you can computerize it. A computerized version of this process would scarcely be any different from copying the English description and, like a Google search, getting back a number to copy; it might even be done by voice transcription. But there is still no guarantee charging itemized bills wouldn't turn out to be cheaper, and at least have a different meaning. DRG in its present form is nothing but a crude rationing system; get rid of it, or spend the money to make it work. I can't guarantee if you put a doctor in charge, it would work. But I can guarantee that if you don't put a doctor in charge, it won't.

Proposal 5: Congress should be asked to commission a computer program to translate English language diagnoses into SNOMED code, preferably by voice translation. Suggested format: a search engine where English variants of discharge diagnoses are entered, and a SNOMED code number returned, along the general lines of entering common phrases into Google and receiving file location numbers in return, except it returns the SNOMED code. If the code is not found, the computer accepts a manual entry by a trained person. verified by an expert over the Internet to become officially entered into a master list which is periodically circulated as an update. The search program and its supplements should be produced on DVD disks to be used on hospital record room computers by other professional users. It should provide "hooks" so the Snomed codes and patient identification can be transferred electronically to related programs, such as payment codes and billing.

So that's how DRG got to be what it is. It's perfectly astounding such a crudity, devised for other purposes, could be so "successfully" employed to pay for billions of dollars of Medicare inpatient care, such that payment by diagnosis-lumps threatens to spread to all medical care. There is even another way to describe it: inpatient hospital care has been lumped into a rationing system which constrains national inpatient care to a 2% overall average profit margin. That's just as surely true as if someone deliberately tried to make it that way.

Payment by diagnosis ignores both cost and content, based on the mistaken assumption those features have already been carefully accounted for. It does not matter in the slightest how long the patient stays or how many tests he gets, or how many expensive big hospitals swallow up inexpensive little ones. Meanwhile, emergency rooms and satellite clinics also do not affect the cost inherent in a supposed linkage between the diagnosis and the cost. The failure to link drug prices into this modified market system is particularly noticeable.

The exciting potential has been lost to have the patients who can shop frugally as outpatients, set the price for inpatients who are helpless to act frugally. Their much more generous profit margins support what is essentially a hospital conglomerate. Any corporate conglomerate executive could tell you what happens when one department is subsidized, while another is treated as a cash cow. And the fun part is this: squeezing physician income against an unsustainable "Sustainable" Growth Rate creates the "doc fix", which annually blackmails physicians into acquiescence past the next November elections.

SGR: Sustainable growth rate, earmarks by a different name. SGR is a term borrowed from financial economics, signifying the rate at which a company is able to grow without borrowing more money. It is easily calculated by subtracting dividends from return on investment. Any variation from this definition will produce different results. A sustainable growth rate in Medicare is calculated by a formula, modified every year in special ways which closely resemble "earmarks", but contain special adjustments for changing work hour components, malpractice cost components, etc. It is a large task for the Physician Payment Commission to determine yearly changes in thousands of services, and it must be frustrating for them to see their painstaking calculations tossed aside every year by Congress, in response to howls from the various professions. Whenever this occurs it is a fair guess the calculation has been misused. The discussion has long since transformed from a simple calculation to a simple threat: physician reimbursement will be cut. Each year it is cut, and each year Congress relents on the cut at the last moment. But ultimately its design will prevail: on the pie-chart of healthcare expense, physician reimbursement will shrink, and hospital reimbursement will expand, as physicians migrate to salaried hospital employment, and enjoy an instant 40-hour week amidst a physician shortage. This keeps the AMA in a constant state of agitation, and physicians in a constant posture of supplication. At the end of 2013, the proposed cut in reimbursement had grown to 26%. When almost every physician has an overhead of 50%, a cut of 26% is beyond meaningful. And every year the financial attractiveness of joining a hospital clinic for a dependable salary grows, with consequent improvement in the overall power of the hospital conglomerate, and steadily decreasing relation to market-set pricing readjustments.

Insurance Reimbursement, The Missing Item on the Itemized Bill. The DRG system threatens patients, too. After discharge from a hospital, the patient is sent a multi-page itemized bill, which purports to be what the patient would owe without insurance. Such bills traditionally omit any mention of the insurance reimbursement, which is the only payment the hospital receives if it has contracted to accept "service benefits" as payment in full. Since that is almost always the case, the "total of service benefits" is exactly equal to the "total patient responsibility". Since the patient will pay nothing if patient responsibility is limited to service benefits, and service benefits are exactly equal to whatever the patient received, the explanation goes round and round without ever revealing what has been paid. The illusion that you have been told something worth hearing, is maintained by providing an almost endless list of itemized charges.

Most hospital employees do not have the foggiest idea why the list is even produced, and its accuracy is therefore questionable. A variety of specious explanations, therefore, emerge, usually with a focus on billing a handful of uninsured people, or insured people whose service benefits have expired as "outsiders". There may be a particle of truth to this, easily refuted by showing the supposed items on the bill were often fabricated by employees who know very well they are seldom used for anything. Most likely, the purpose is to conceal the true insurance reimbursement from competitive insurances who might undercut them. As profit margins shrink, it becomes increasingly dangerous to let competitors know what they are. As margins widen, it is even easier for competitors to undercut them. As a matter of common observation, most retailers in any business are less than forthright about their profit margins, so perhaps this concealment can be forgiven as normal commercial behavior. It becomes more questionable when seen as an industry-wide practice, intended to defend a system of double-pricing. In this case, it defends the employer tax discount as the lowest price around, when compared with those rascals, the uninsured or the insured but fully taxed.

The DRG payment to the hospital is not zero, but it is far less than the total on the itemized bill and is seldom revealed. One central message it sends is however pretty clear: "This is how much you would be charged if you didn't have Insurance X." The shortfall in revenue is made up by overcharging the emergency room and the outpatients, who are unsuitable for anything resembling the present DRG. If the hospital does not have enough outpatient work to sustain the inpatient losses, its only recourse at present is to call the architects and build a bigger outpatient department. To fill it, just buy up a neighboring group practice or two of neighborhood doctors. Fix the DRG, and it would be hard to say what would eventuate.

Bottom Line: Who is Injured? For a long time, service benefits insurance was the only thing supporting the hospital industry, and commercial behavior by the hospitals was justified as the only way to support their charitable mission. Now that Health Savings Accounts have reached 12 million clients, with assets reaching $22.8 billion, a viable way to provide indemnity insurance has definitely arrived. Not only are HSAs cheaper for the customer, they very likely provide higher payments to hospitals. This last point will only be clarified when we learn what discounts the catastrophic high-deductible insurance have been able to extract, but hardly anything else will affect the answer. To the extent one competitive method receives major discounts and the others generally do not, this service benefit discount is probably only of benefit to the insurance companies who enjoy it. A personal episode in my family illustrates.

My son went to a well-known Boston hospital for outpatient colonoscopy and received a bill for $8000.00. When told that was outrageous, he protested and promptly received a bill reducing the charge to $1000. He was delighted to send a check for that reduced amount, even though I told him a fair price was probably around $300. He reminded me of a comment from a famous surgeon now deceased, whose name is emblazoned on a tall pavilion in another city. The old surgeon growled, "The only reason to carry health insurance is to keep the hospital from fleecing you." In a sense, that growl applied directly to the colonoscopy, which that hospital had converted from markup into a holdup.

Discounts for Health Savings Accounts? HSAs scarcely have to penetrate the market much further before they have the market power to command an equal discount. That may still take a little time, because some states have hardly any penetration, while California has a million subscribers. In the meantime, the patient needs to be careful to ask for prices in advance. Almost every health insurance has started to impose high deductibles, so their proper stance is to insist on equal treatment. The old system of "First-dollar coverage" was responsible for making outpatient care a target for this sort of thing. The next advance, after making all outpatient care match market prices, is to insist a hospital charge the same thing for the same service for inpatients as it does with outpatients. To make that possible, it has to return to fee-for-service billing, and management of Health Savings Accounts should settle for no less. That's the main reason DRG billing offends me, although there are lots of other reasons, and lots of other people are injured in different ways.

Front Stuff, Health Savings Accounts: Planning for Prosperity;SECTION ONE: HSA and its Competitor, in brief

...Also by the same author:

The Hospital That Ate Chicago, Saunders Press, 1980

Health Savings Accounts: A Handbook, Ross & Perry, Inc. 2015 (Forthcoming)


Ross & Perry Book Publishers

3 South Haddon Avenue

Haddonfield, New Jersey 08033



Copyright: 1-2540412791

ISBN #: 978-1-931839-44-0



For advice and support about the thrust of this book, I owe spiritual debts to John McClaughry of Vermont, the late F. Michael Smith, Jr. of Louisiana, and the late Bill Niskanen of Minnesota and Washington, DC. It's heartening to remember strong support coming from wide corners of America, and from strata of society ranging from a country doctor to the former Chairman of the President's Council of Economic Advisors. All three of these men worked their way up to being either a candidate for Governor of his state, the President of his State Medical Society, or the Chairman of a famous Washington think-tank. All three brushed aside the problems they created for themselves by constantly thinking outside of the box. My fellow Philadelphian John Bogle, whom I have only fleetingly met twice, deserves a lot of credit for demonstrating in his books how to invent a complicated concept, and then simplify it for outsiders. I've adopted his investing strategy.

And for personal support and tolerance from my family editorial board, consisting of my two sons and two daughters. My son George took time out from climbing the tallest mountains in the world, to develop a computer algorithm that instantly created the answers to a multitude of math problems hidden in certain assertions I blithely make, but now have confidence in. Likewise, my CPA daughter, Miriam told me some things which may be commonplace among corporate Chief Financial Officers, but astonish the rest of us. And her siblings Stuart and Margaret, who understood my tendency to wise-crack, but having long practice with its consequences, talked me out of most of it. Especially Margaret, who persuaded me it was more important for the title to be accurate than to be witty.

Good Ol' Health Savings Accounts

In 1981 at what was then called the Executive Office Building of the Reagan White House, John McClaughry and I conceived the Medical Savings Account, later known as the Health Savings Account. John was at that time Senior Policy Advisor for Food and Agriculture, but he had read my book The Hospital That Ate Chicago, and it inspired him to think about a better way of financing health care. He asked me to come down to Washington to discuss the issue. We met and fleshed out the idea. Little did we then suspect how many delightful features would pour out of the simple little invention with only two moving parts.

It was patterned after the tax-deductible IRA (Individual Retirement Account) which Senator Bill Roth of Delaware was bringing out the following year. But with two major variations: our account contained the unique feature of a second tax exemption, given on condition the withdrawal was spent on health care. Otherwise, a regular IRA subscriber pays the usual income tax on withdrawals and gets only one tax deduction, the one he gets when he deposits money into the account. Bill Roth later produced his second kind, the Roth IRA, which allowed a tax-exempt withdrawal but took away the tax-exempt deposit. Only the Health Savings Account gives you both. In Canada, by the way, they do allow both deductions in their IRA, but in America only the HSA offers it.

Garlands of Unexpected Good Features. So the first part of a Health Savings Account is just that, a tax-exempt savings account, obtainable in the same way you get an IRA or a Roth IRA, although a few eligible outlets were slow to take ours up. And the second combined feature was to require a high-deductible, "catastrophic", stop-loss health insurance policy -- the higher the deductible, the cheaper the premium gets.

Further, the more you deposit in the account, the higher is the deductible you can afford, so you save money going either way and get extra benefit in your account for having a tailor-made insurance program. The industry term for this kind of insurance is "excess major medical", which the two of us wanted to avoid because of its implication it was somehow frivolous or unnecessary, when in fact it is central to the whole idea. Linked together, the two parts enhanced each other and produced results beyond the power of either, alone. The savings account was first envisioned to cover the deductible, but nowadays it also commonly attaches a special debit card to purchase relatively inexpensive outpatient and prescription costs. That led to further administrative savings to the subscriber if he shopped frugally for optimum proportions of deductible insurance. Right now, it's a little uncertain what the current Administration will permit in the way of catastrophic health insurance, so, unfortunately, it is just about impossible to give concrete examples of what the ultimate cost will prove to be. But we do know that in the old days, a $25,000 deductible was available for $100 a year. Nowadays, a $1000 premium is more likely. When we get to explaining first year and last year of life insurance, it will become clear that this premium can be appreciably reduced.

But while the savings account allowed someone to keep personal savings for himself, the insurance spreads the risk of an occasional heavy medical expense at what ought to be a bargain price for bare-bones insurance. You needn't spread any risk for small expenses because you control them yourself, but no one can afford some of those occasional whopper expenses. There's no reason why you couldn't set the deductible level yourself, weighing your own ability to withstand bigger risks. In practice, the actual savings were reported to approach 30% (compared with "First-dollar" health insurance), quite a pleasant surprise. But because of the younger age group of the early adopters, much of this saving was achieved in the out-patient area.

(Let's start using the present tense to talk about it, although right now it's hard to know what politics will permit.) So, hidden in this bland dual package are lower premiums, less administrative red tape, less moral hazard, but complete coverage. Right now, that's somewhat subject to change. It provides complete coverage in the sense that the insurance deductible can be covered by the savings account, but contains the option to be saved, invested or used for small outpatient expenses. Furthermore, the account carries over from year to year and employer to employer. So it eliminates job-lock, use-it-or-lose annoyances, and allows a healthy young person to save for his sickly old age. Curiously, many of the subscribers have elected to pay small expenses out of pocket, in order to make the tax deduction stretch farther.

In one deceptively simple feature, many of the drawbacks of conventional health insurance have been removed. The bank statement from the debit card can even do the bookkeeping. The first part of the two-part package, the savings account, creates portability between employers, opens up the possibility of compound interest on unused premiums, eliminates pre-existing conditions even as a concept, and creates a vehicle for transferring the value of being a "young invincible" forward into age ranges when the money really is likely to be needed for healthcare. Maybe some other features can be added later, but introducing an unfamiliar product is always greatly assisted by having it all appear so simple. The HSA only has two features, but they solve a dozen pre-existing problems.

To return to its history, nearly 15 million accounts have been opened, containing $24 billion. John McClaughry and I (neither of us received a penny for any part of this) were seeking a way to provide a tax exemption to match the one which employees of big business get when the employer buys insurance for them. That is, Henry Kaiser inspired us to do it. Although we got the general tax-free savings idea from Bill Roth, we did him one better by giving a deduction at both ends, provided only -- you must spend the money on healthcare to get the second tax relief. An additional novelty at that time was a high deductible, which permits a "share the risk" feature unique to all insurance, but invisibly limits it too expensive items. It wasn't the original idea, but it turns out you get spread-the-risk and limits to out-of-pocket patient costs in the same package. Who could have guessed?

Volume control versus Price Control in Helpless Patients.We did know a third automatic advantage, not fully exploited so far: it seems possible the hateful DRG system (with its codes restructured) could become a useful tool for dealing with a major flaw in the Medicare system. Professional peer review has become pretty good at controlling the volume of services, but prices still escape effective control. No amount of volume control can, alone, address the price issue. Controlling vital services for helpless people is a delicate matter.

Quite a few of those services match (or contain) identical items in the outpatient area. The outpatient area faces outside competition from other hospitals, drugstores or vendors. Instead of letting helpless inpatients generate unlimited prices for the outpatients, why not let competition in the outpatient area define standards of prices for inpatient captives? Outpatients and inpatients overlap in the ingredient components, considerably more than most people suppose. Inpatients may have higher overhead because of the need to supply their needs at all hours, but a standard extra markup around 10% ought to take care of that. No doubt some services are unique to the inpatient area, but a relative value scale is then easily constructed, thereby linking unique costs to other services which are exposed to competition. Ultimately, provable relationships to market prices might even discipline big payers demanding unwarranted discounts. This last is a deal breaker, provoking suspicions of abused power by a fiduciary. The government in the form of Medicaid is often the worst offender, so we need not imagine laws will prevent discounts so long as law enforcement remains crippled. Every business school teaches that discounts below cost are a path to bankruptcy, but business schools have apparently not had enough experience with governments to suggest an effective remedy.

Other than two variations (double tax deductions, and incentives if used for health care), a Roth IRA would be nearly the same as an HSA, with independently purchased Catastrophic backup. But the assured presence of low-cost, high-deductible insurance provides security for another needed feature: Using individual accounts with year-to-year rollover , we could introduce the notion of frugal young people pre-paying the healthcare costs of their own old age. For all we knew, there weren't any frugal young people, but we were certainly pleasantly surprised. And catastrophic insurance added the ability to share the opportunity of that feature -- subsidizing the poor at bearable prices. As we will shortly see, it also offers an incentive to save for retirement. Think of it: almost nobody can afford a million-dollar medical bill, but almost everybody welcomes low premiums. Catastrophic coverage offers the only chance I know, of approaching both goals at once. And it offers the fall-back, that if you are lucky and don't get sick, you can use it for your retirement.

As the only physician in the room, I also pointed out another pretty gruesome fact: either people end their lives have a lot of sicknesses, or they end up paying for a protracted old age. Only infrequently, do real people encounter both problems. It can happen of course; breaking a hip after long confinement in bed would be an example.

{top quote}
People end their lives with sickness, or else they must pay for protracted old age. {bottom quote}
Still More Good Features. Including these self-canceling needs in a single package allowed some flexibility between them -- something badly needed for a century. We cannot go on passing a new regulation for every quirk of fate; a good program must allow some latitude. Extended longevity tends to be hereditary, and so separate policies (sickness care and long-term care) are more expensive individually than the two combined because the patient can out-guess an insurance company. Health Savings Accounts balance an incentive to save for one's own future health costs "at the front end" with reasonable cost limitations "at the time of later service", even though two time periods are decades apart. That's obviously superior to increasing the sickness subsidy at the back end, because, among other things, the patient will later have even more clues about his impending future. If cost reduction goes too far at either end, it amounts to an incentive to spend carelessly. Saving becomes fruitless.

A tax deduction is a tax deduction, but this one has two: An incentive to save, and a later option to spend the savings on either healthcare or retirement. That's nearly specific enough. Furthermore, it offers a choice between saving preferences -- you can have interest-bearing savings accounts, or you can invest in the stock market, or a mixture of both. The HSA automatically converts to a regular IRA (for retirement) at age 66 when Medicare appears; that should be optional for all health insurance, but isn't. The IRA up in Canada includes both front and back features, but in the United States the HSA is the only savings vehicle to have dual deductions, so it's more flexible. As the finances of Medicare become shaky, it may be time to provide additional alternatives. At least, we ought to consider extending age 66 to a lifetime coverage option.

This harnessing of two familiar approaches makes a deceptively simple package which ought to be considered in other environments, unconnected with medical care. In most public policy proposals, the deeper you dig, the more problems you turn up. In this one, we found the proposal already had hidden answers to most concerns we could discover. It's possible to fall in love with an idea that does that for you. It lets you sleep at night, secure in the knowledge you aren't mucking things up for people.

Another surprise. Overall, the Affordable Care Act has probably helped sales of HSAs, since all four "metal" plans of the ACA contain high deductibles, serving in a (rather over-priced) Catastrophic role. This may be a way of covering the bets in a confusing situation. The ACA is a needlessly expensive way to get high-deductible coverage because it pays for so many subsidies. Frankly, it baffles me why subsidies swamp the costs of Obamacare but are made unworkable for HSAs. Many of the details of the subsidies are obscure, including their constitutionality, so we have to set this aside for the moment.

One good motto is don't knock the competition, but we must comment on a few things. The Bronze plan is the cheapest, therefore the best choice for those who choose to go this way. But uncomplicated, plain, indemnity high-deductible, would be even cheaper if its status got clarified. The good part is, the current rapid spread of high deductibles suggests mandatory-coverage laws may, in time, slowly go away. At first, the ACA looked like a bundle of mandatory coverages, all made mandatory at once. But they may be learning a few basic lessons as they go. Mandatory benefits are an example of mixing fixed indemnity with service benefits, with the usual dangerous outcome. Like many dual-option systems, they create loopholes. The HSA seems to avoid this issue by effectively being two semi-independent plans, for two separate constituencies -- who are the same people at different ages. Once more, we didn't think of it, the features just emerged from the plan.

That's about as concise a summary of Health Savings Accounts as can be made without getting short of breath. But of course, there is more to it, particularly as it affects the poor. For example, there is an annual limit to deposits in the Health Savings Account of $3350 per person, and further deposits may not be added after age 65. They can be "rolled over" into regular HSAs when the individual gets Medicare coverage, and supposedly has no further financial needs. So plenty of people have health care, but can barely support their retirement. These plans are absolutely not exclusively attractive to rich people, but it must be admitted, poor people start with such small accounts that companies can't operate profitably unless the client sticks with them for a long time. If people possibly can, they should scrape together one $3300 maximum payment to get a running start.

The problems of poor people can nevertheless be eased, within the limits of the plan's design. Since people will be of different ages when they start an HSA, it might be better to set lifetime limits, or possibly five-year limits, to deposits, rather than yearly ones. Some occupations have great volatility in earnings, and sometimes a health problem is the cause of it. To reduce gaming the system, perhaps the individual should be permitted to choose between yearly and multi-year limits, but not use both simultaneously. As long as the self-employed are discriminated against in tax exemptions, that point could certainly be modified. There remains only one major flaw, which we propose should be fixed:

Proposal 6: Congress should permit the individual's HSA-associated Catastrophic health insurance premiums to be paid, tax-exempt, by Health Savings Accounts, until such time as elimination of the present tax exemption for employer-based insurance is accomplished by other means.

Subsidies for the Poor? Here's my position. If poor people could get subsidies for HSA to the same degree the Affordable Care Act subsidizes them, Health Savings Accounts should prove at least as popular with poor people as the Administration plan. Mixing the private sector with the public one is always difficult. Why not make subsidies independent of the health programs? There is no point in having the poor suffer because someone prefers a different health system. Quite often, a subsidy program is mixed with a public program, in order to make its passage more attractive; that's not necessary.

Proposal 7:That health care subsidies be assigned to patients who need them, rather than attached specifically to one or another health system that happens to serve them.
Let's just skip away from all those digressions, and return to the poor in other sections. If the concern is, health care is too expensive, why in the world wouldn't everyone favor the cheapest plan around? Part of the answer, politics aside, is that young people have comparatively little illness cost, while old folks have a lot. Since Medicare, therefore, skims off the most expensive healthcare segment of the population, the fairness of any health subsidy program is difficult to assess. Evening out the tax deduction for the catastrophic portion equalizes the unfair tax deduction for self-employed and unemployed people. Perhaps the equality issue should be re-examined after each major revision since many moving parts get jostled, every time.

The government is going to have trouble affording the existing subsidy, so it may not endure, particularly at 400% of the current poverty level. But if we can subsidize one plan, we can subsidize the other, instead. The government would then be seen, and given credit for, saving a great deal -- by inducing destitute people to use HSA as an alternative option, equally subsidized by an independent subsidy agency. As for single-payer, the government for fifty years borrowed to continue Medicare deficit financing and got it to 50% universal subsidy without much notice. That's like boiling the frog too gradually to be noticed until it is too late. But suddenly expanding the 50% subsidy to the whole country at once, would definitely be noticed. Extending such levels to the whole country should anyway be buttressed with accurate cost data. Administrative cost savings are just a smoke screen. Total costs are the real cost. Other people also point out Medicare was financed after we had won some wars, but now we seem to be losing wars.

Rollover of Unspent Flexible Spending Accounts

FOREWORD, written June 28,2015

This book was originally based on a notion, on a dream if you will. A whole lifetime of healthcare might be purchased, for what now only covers a quarter of a half -- those scarcely-noticed payroll deductions for Medicare, listed on everybody's payroll stub. But then politics and Supreme Court decisions came along. Turning over each pebble on a new heap, it nevertheless seems that amount might still stretch to cover all of the nation's average lifetime costs, although payroll deductions wouldn't resemble the way to do it. Reducing prices by 28% of $350,000 is a ton of money, particularly when multiplied by 300 million people. Let's lower expectations by saying the new narrower proposal might only reduce prices by 14%. That would be $39,000 times 300 million, or twice the combined fortunes of Bill Gates and Warren Buffett. The $39,000 is a substantial amount for anybody, and $ 11.7 trillion is an astonishing aggregate for the nation. That's once in a lifetime, but it's still $140 billion a year.

I decided to ignore the 42% of historical costs which Obamacare covers (age 21 to 66) until its facts emerge. Just add the cost of the earning segment (21 to 66) to estimate whole lifetime costs. That does leave a gap of one third in the middle of life. If you don't know what the Affordable Care Act will eventually cost, you can't be confident what lifetime healthcare will cost. I'm confident lifetime Health Savings Accounts would cost much less. The Affordable Care Act has not yet convincingly described any cost reductions. But to be fair, neither do Health Savings Accounts. They reduce the price by adding revenue.

{top quote}
The issue is how to transfer $238,000 from individuals in one group, to another group. {bottom quote}

Quick calculation now follows. Average lifetime healthcare expenditure (in the year 2001 dollars per person) is in the neighborhood of $350,000. That's the estimate of statisticians at Michigan Blue Cross, confirmed by Medicare. Medicare takes half of the annual cost, from birth to age 21 takes another 8%, and we don't know the cost of the unemployable of working age, but they are 10% of the population. So, the new segment we assigned ourselves, involves at least 68% of national health costs, and probably somewhat more. That represents the basis for saying the working population 21-66 must pay its own costs and somehow transfer at least 68% more to what we will call the dependent sector. At a minimum, that's 68% of $350,000 per lifetime, or $238,000. Don't take it too seriously, but that's the ballpark.

Endowment funds traditionally aim for 8% annual return (3% from inflation, 5% net). The stock market has averaged 12% gain for a century, so 4% isn't exactly missing, but its disappearance requires convoluted explanation, later in the book. Starting with those bits of information and adding a few more, just re-arranging payments would get to the same final result-- by spending one-third as much money. The cost of separating employer-based insurance from all the rest of it exceeds my abilities, so it will have to dangle. How we got to that conclusion isn't rocket science, but it isn't obvious, either. So let's make the conclusion easier: you can make a ton of money doing what is suggested. Don't complain it isn't two tons or only half a ton, it is what it is. You can put this data through a big data computer, or use a slide rule, but you are still dealing with predictions about the future, which will contain lots of uncertainty. Although it will not make healthcare free, it implies savings of about $38,000 per person, per lifetime. View that saving in two ways: it's only about $500 per person, per year. Or, viewed as a nation of 316 million inhabitants, it saves $150 billion per year. Skeptics could attack the math as exaggeration, and still get an answer in billions per year. Tons instead of billions would be even more accurate, just sound less precise.

Next might come nit-pickers. You can't get 8% investment income returns a year, unless this, or unless that. Very well, just say this is the top limit of what is possible as an average, using average investment advice. The Federal Reserve confidently promised to keep inflation at 2%, but actually experienced 3% over the past century. Chairman Bernanke tried his best to "target" inflation up to 2% but inflation just resisted going up that far, and it's pretty hard to get any agreement about why it resisted. Accuracy just isn't possible when you are predicting the economic future. That's why the unit of measurement is in tons. Tons of money. Who will save it and who will steal it, is much harder to predict.

Some doctors, deans, drug companies, financiers and politicians will always try to increase their spending to equal any available revenue. About forty percent of the public will line up at the same trough. All that is beyond my control. You won't find one word in the accompanying book to suggest I endorse such behavior. All I did was write a cookbook. The cooking is up to you.

George Ross Fisher, MD


June 28, 2015

Some Ruminations About the Far Future.

George Washington soon learned he couldn't defend the country without taxes, so in time the Constitutional Convention lodged firm control over taxes in Congress. If we must have taxes, the people must control them. Except for defense, Congress has ever since been cautious about imposing taxes. Reducing taxes is quite in accord with this attitude, except net reduction of taxes, after raising them first, may be a little tricky.

Net reduction of taxes is an important argument in favor of tax subsidies for Health Savings Accounts, using them as incentives to healthy people to "tax" themselves while they remain young and healthy. Investing the money internally, the subscribers can meanwhile protect it for their own use when they inevitably grow old and sickly. If interest greater than the rate of inflation is paid, the money returned should exceed the money invested. Investing the money tax-free, further helps the process. If people get back more than they contributed, they recognize it as frugal, saving for a rainy day, and so on. Lifetime Health Savings Accounts were designed as a way to enhance this thinking, and are described in Chapter Two. Over thirty years have elapsed since John McClaughry and I met in Ronald Reagan's Executive Office Building in Washington, but there has been a continuing search for ways to strengthen personal savings for health, while avoiding temptations to tax our grandchildren, or to mace money out of harmless neighbors. Many of the financial novelties naturally derive from models in the financial and insurance industries. This book in largely a result of such thinking.o

But the biggest advance of all has nevertheless come from medical scientists, who reduced the cost of diseases by eliminating one darned disease after another, and meanwhile increased the earning power of compound interest -- by lengthening the life span. We thus luckily encountered a "sweet spot", where conventional interest rates of 6% or better take a sharp turn upward, while 3% inflation still remains fairly constant. My friends warn me it must yet be shown we have lengthened life enough, or reduced the disease burden, enough to carry all of medical care. That may well be true, but we seem close enough to justify giving it a trial as a partial solution. Before the debt gets any bigger, that is, and class antagonisms get any worse.

While Health Savings Accounts continue to seem superior to the Affordable Care proposals, you can seldom be quite sure about details until both have been given a fair trial. The word "mandatory" is therefore better avoided at the beginning, and awarded only after it has been earned. As a different sort of example, the ERISA (Employee Retirement Income Security Act of 1974) had been years in the making, but eventually came out pretty well. In spite of initial misgivings, ERISA got along with the Constitution and its Tenth Amendment, and the McCarran Ferguson Act which depends on them. We had the Supreme Court's assurance the Constitution is not a suicide pact. So with this general line of thinking, and still grumbling about the way the Affordable Care Act was enacted, I had decided to hold off and watch. The 1974 strategy devised in ERISA, by the way, turned out to be fundamentally sound. The law was hundreds of pages long, but its premise was simple. It was to establish pensions and healthcare plans as freestanding companies, substantially independent of the employer who started and paid for them. Having got the central idea right, other issues eventually fell into place. Perhaps something like that could emerge from Obamacare.

Nevertheless, growing costs are ominous for a law proclaiming it intends to make healthcare Affordable. After several years of tinkering, this program stops looking like mere mission-creep, and starts to look like faulty reasoning, maybe even the wrong diagnosis. While waiting for the Obama Administration to demonstrate how the Act's present deficiencies could justify rising medical prices and greatly increased regulation, I brushed up seven or eight possible improvements to Health Savings Accounts, just in case. They had been germinating during the decades after Bill Archer, of the House Ways and Means Committee, got Health Savings Accounts enacted. However, my proposed new amendments wouldn't change the issues enough to cause me to write a hostile book. More recently, some newer variations grabbed me: Health Savings Accounts might become lifetime insurance, and thereby save considerably more money, without the fuss Obamacare was causing. Furthermore, in 2007 the nation immediately stumbled into an unrelated financial tangle, almost as bad as the Great Depression of the 1930s. A depression might lower prices, but if it provoked accelerating deflation, we could be cooked. And thirdly, the mistake of the Diagnosis Related Groups was such a simple one, failure to understand it might not be a complete description. Seen in their best light, unrecognized mistakes were about to disrupt a functioning system, while simple solutions were sometimes ignored. Maybe the problem was trying to spend our way out of extravagance, made worse by massive transfers from the private sector to the public one -- actually, just the opposite of what Keynes proposed. And finally, individually owned and thus portable polices, always held the potential for a small compound investment income. But the recent thirty-year extension of average life expectancy is what really changed the rules. The potential for much greater revenue from compound interest made an appearance, simply waiting for the recession to clear, and to be given a chance to prove itself with normal interest rates.

Cost is the main problem. The Affordable Care Act might be making the wrong diagnosis, even though it used the right name. Employer-based insurance did create pre-existing conditions, and job-lock; losing your job did mean losing your health insurance, and often it was a hard choice. If employer-basing caused the problem, why didn't the business community fix it? Is the only possible solution to pass laws against pre-existing conditions and job lock? Maybe, even probably, a better approach was to break, soften, or change the link between health insurance and the employer. Sever that linkage, and the other problems just go away; perhaps less drastic modification could even achieve the same result. ERISA had discovered such a new concept, forty years earlier. Employers might well bristle at the obvious ingratitude, but real causes were creeping up on them unawares. Generations of patronizing legislators had found it easier to raise taxes on the big, bad corporations, than on poor little you and me. Employers had always received a tax deduction for giving away health insurance to employees, but now, aggregate corporate double taxation made it approach fifty percent of corporate revenue. Nobody gives away fifty percent of his income graciously; for its part, the Government thought it couldn't afford to lose such a large source of tax revenue. Big business prefers to avoid the subject, while big government tends to mislabel things. It's mainly a difference in style.

Another issue: the approaching retirement of baby-boomers slowly revealed that Medicare, wonderful old Medicare with nothing whatever wrong with it, had been heavily subsidized by the U.S. Treasury, which was now paying its 50 percent subsidy out of borrowing from foreign countries, notably Communist China. Medicare's companion, Medicaid, subsidized by an elaborate scheme of hospital cost-shifting, transferred most of its losses back to Medicare. And, guess what, the Affordable Care Act transferred 15 million uninsured people into Medicaid. By this time, Medicaid had become hopelessly underfunded and poorly managed, and 15 million angry people were about to find out what they had been dumped into. Other maneuvers affecting the employees of big business are delayed a year or two, so we may not discover what they amount to, until after the next election, four or even five years after enactment. Meanwhile, the Federal Reserve "solved" the problem of mortgage-backed securities by buying three trillion dollars worth of them. That may not seem to have anything to do with Obamacare, except it pretty well crowds out any hope of buying our way loose of this new trouble. And it sure underlined our central problem. There was nothing all that bad about the quality of a fee-for-service healthcare system which gave everybody thirty extra years of life in one century. Two extra years of life expectancy even emerged in the past four calendar years, in fact. Our problem is lack of money. Lack of money, big-time, and Obamacare was going to cost even more. Health Savings Accounts, new style, emerged from all this confusion as a possible rescue for the cost problem. All this, helped me decide to write this book.

There are some who persuasively argue our even bigger problem is Constitutional. Perhaps because I'm a doctor rather than a lawyer, I don't consider the Constitution to be our problem, I consider it to be Mr. Obama's problem. Because the 1787 Constitutional Convention was convened to unite thirteen sovereign colonies into a single nation -- and splitting it into more pieces wasn't on anybody's mind at all -- they reached a compromise, brokered by two Pennsylvanians, John Dickinson and Benjamin Franklin. The small states wanted unity for defense, but they also wanted to retain control of their local commerce. They knew very well big states would control commerce in a unified national government, unless something fundamental was done to prevent it. Speaking in modern terms, a uniform new health insurance system risks being designed to please big cities who mostly want to hold prices down and wages up. Sparsely settled regions want -- or need -- to be able to raise prices, here and there, when shortages appear, of neurosurgeons or something like that. The full algorithm is: price controls always cause shortages, so shortages are only cured by paying a higher price. Eventually the Constitution was engineered to give power over all commerce to the several states; otherwise, the small states declared there would be no unified nation.

That's how we got a Federal government with only a few limited powers, reserving anything else to the states. Absolutely everything else was to be a power of the states, except to the degree the Civil War caused us to reconsider some details (which Franklin Roosevelt's Supreme Court-packing enlarged). So, that's why the 1787 Constitution effectively lodged health insurance regulation (among many other things) in the fifty states. Furthermore, The Constitution in the later form of the 1945 McCarran Ferguson Act thereby definitively insulates health insurance from federal regulation, reinforcing the point in a very explicit Tenth Amendment. This may regrettably create difficulties for interstate businesses, and for people who get new jobs in new states. Many states have too small a population to support the actuarial needs of more than one health insurance company, thus creating monopolies in many states, and consequent resentment of monopoly behavior. So, work it out. But don't give us a uniform national health system.

There, in a nutshell you have a brief restatement of the Constitution's commerce issue in language of the Original Intent point of view. The Constitution as a living document is all very well, but there must be some limits to stretching its plain language; otherwise, it becomes hard to understand what in the world people are talking about.

City dwellers have trouble imagining anyone in favor of either higher prices or lower wages, let alone negotiable prices as the central bulwark of a different way of life. The Civil War toned it down a little, but if it is nothing else, our system is tough-minded and realistic, doesn't surrender easily. The U.S. Supreme Court may soon make the Constitution and its central compromises into the central issue of the day, or they may wiggle and squirm out of it. But as long as they keep squirming, cost containment will remain the central commotion of the Affordable Care controversy. In certain parts of the country, price controls are seen as just one step before shortages appear. That's not entirely unsophisticated. As we will see when we come to it, lifetime Health Savings Accounts could materially reduce the sting of the cost issue, and thus made the final decision for me to write this book. The Constitutional issue, possibly, lurks for another day.

The case in point. On the particular Constitutional point, I would comment whole-life insurance companies in the past seem mainly to have addressed the Federal-State issue by obtaining multiple licenses to sell their products, state by state. Which might bring the Constitutional issue right back, because most insurance companies in practice attempt to be compatible with the largest states, just as John Dickinson predicted they would. In effect, the smaller states are forced to accept whatever regulations the big states have chosen first, or else they might have to do without some new product. Whole-life insurance seems rather less subject to the problem of conflicting regulations, because that industry inadvertently acquired another trump card. Life insurance mostly uses bonds in its portfolio, matching fixed income with fixed liability. That's a noble thought, but the additional practicality has surely occurred to insurers that state governments issue a lot of bonds, and insurance companies are major customers for bonds.

Lifetime HSAs could solve the problem of differing state regulations by allowing the individual subscriber to select a managing organization domiciled in "foreign" states, and thus indirectly if the individual chooses, select a different home state for its regulatory climate. After all, the nation has changed in two centuries from a culture of farming in the same local region most of your life, to one where it seems normal to change home states almost yearly. Businesses tied to local laws like insurance, do not move easily. The consequence for lifetime Health Savings Accounts might be a niche market for health insurance in small or sparsely settled states, or others which reject specific California or New York State regulations. Paradoxically, California presently has over a million HSA subscribers, so we must not underestimate the ingenuity of necessary work-arounds. Eventually, local pressure mounts to change local regulation, doubtless balanced by the attractiveness of acquiring disaffected customers from out-of-state. All of this could be accelerated by internet direct billing. Consequently, to avert this, we propose:

Proposal 6: Companies which manage health insurance products, particularly Health Savings Accounts, should be permitted to select the state in which they are domiciled, but must therefore accept the domicile-state's regulation of corporations. Such licensed corporations may sell direct billing products into any other state; but products sold in another state must mainly conform to the regulations of the state in which the particular insurance operates, even to the point of disregarding any conflicting regulations by the state of corporate domicile.

Comment: Fifty years ago, the main function of any State Insurance Commissioner was to assure the continued solvency of insurance companies, so insurance would be available when the customers needed it. In the past few decades, however, many insurance commissioners with populist leanings have viewed themselves as protectors of the public against price gouging. That is, they adopt the big-city, big-state, point of view. One Insurance Commissioner attitude might thus insist on high premiums, Commissioners with another attitude might reward low premiums. Insurance companies should therefore welcome laws which make it easier to switch the state of domicile, since the attitudes of insurance commissioners can change very quickly.

Comment: Lifetime insurance was pressed forward by discovering the investment world's computer-driven innovations might make lifetime coverage far easier, less chancy, and considerably more financially attractive, than coverage in self-contained annual slices. It is common knowledge in insurance circles that most term life insurance would be unprofitable, except so many people drop their policies. Therefore the attitudes of different states are not completely predictable. Some states are more aggressive than others in adopting new technology, for example.

Changes in Future Cost Volatility. At an advanced age, illnesses are more severe and more sudden. Right now, increasing longevity also mostly affects elderly people who live longer toward the end of life, by widening the interval between the last two major illnesses. You can never be entirely sure that will continue to be the case, because medical care and its science constantly evolve. Furthermore, the cost of care often has more to do with the patent status of a drug or device, than with its manufacturing cost, sometimes turning a cheap illness into an expensive one.

One thing you can be sure of, restructuring health insurance in the way to be suggested in Chapter Two, would result in a general reduction of health insurance markup, by exposing local insurance to more nationwide competition. Health costs themselves might skyrocket, or they might largely disappear, but in any event will probably end up cheaper than by using other payment methods. No doubt critics will find large numbers of nits to pick, since states retain the right to design idiosyncratic regulations; but new regulations would remain semi-optional for residents to the extent some neighboring state disagreed with them. No matter what else turns up, it will be pretty hard to match the cost variation from national marketing, demonstrated by ten minutes of internet cruising. In fact, the great obstacles to an effective system in the past, like "job lock" and "pre-existing conditions", present no obstacle at all to lifetime HSA within an HSA regulatory framework. Many problems would stand exposed as artificial creations of linking health insurance to employers, at least as long as health insurance remains modeled on term life insurance. Just change to a more natural system, tested for a century as whole-life insurance, and such technical problems might simply vanish. Even slow adoption, based on public wariness about a new idea, has its advantages.

Although prediction of future sea change is uncertain, a brief review suggests future healthcare financing could very well become highly volatile, in both frequency and costliness. Therefore, spreading the risk with insurance gets more attractive to age groups unable to recover from major financial setbacks. Planners would do well to consider such things as last-year-of life insurance, or some other layer of special reinsurance. Immediately, such ideas raise the question of multiple coverages, with multiple tax exemptions providing room for gaming the system. No doubt, this was the thinking behind imposing regulations prohibiting multiple coverages with HSA, and probably eventually ACA as well. There must be a better way to handle this dilemma than forbidding multiple coverages. Multiple coverages are very apt to be exactly what we will need to encourage. Since living too long and dying too soon are mutually exclusive, consideration should be given to placing tax-deductibility at the time of service, and permitting deductions for the one that actually happens to you. It is thus possible to envision having four or five different coverages, but only one tax deduction. Since the purpose is to spread the risk, we might even go to the extreme of limiting the number of policies that charge premiums, into the one that actually happens to you, but paid out of a common pool. Planners with more conventional background might well snort at such ideas. Until, of course, they themselves need a life-saving drug costing ten thousand dollars an injection for an extremely rare condition, under a patent which will expire in a year.

So, Let's Get Started with Pilot Experiments in Willing States. The original idea of modestly improving the original Health Savings Accounts, continues to stand on its own two feet. It's what I would point to right away, if you feel unsuited to the Affordable Care Act, or even to ERISA plans. Right now, anybody under 65 (who does not have, or whose spouse does not have) other government health insurance, including Veteran's benefits can enroll in an HSA, and any insurance company can offer a product containing minor variations of the idea, within the limits of the law. A number of Internet sites list sponsors for HSAs. For ease of understanding we present this idea as if we had two proposals, term and whole life.

Actually, the term-insurance version is the only one which is currently legal, whereas the whole-life variety remains only a proposal. It seems necessary to regard the whole HSA topic as: one proposal for immediate use, and a second proposal as a goal for future migration. In fact, almost 12 million people already are subscribers to the term variety, having deposited a total of nearly 23 billion dollars in them. The internet contains brief summaries of their policy variations. At this early stage of development, it is only possible to conjecture that small and sparsely populated states will probably develop more liberal regulations, while bigger and more densely populated states will probably develop bigger and more sophisticated sponsoring organizations. Any one of the fifty states, however, might some day change its regulations to make itself attractive as a "home state", and at present it is possible to transfer allegiance.

Unfortunately, current regulations exclude members or dependents of government health insurance programs including veterans' benefits, from depositing new funds in HSAs. It's easy to see why loopholes might allow an individual to get multiple tax exemptions in an unintended way. But loopholes are a two-way street. The early subscribers tend to be younger, averaging about 40 years of age, and probably of better than average health, because it would probably require a horizon of two or three years to build up the size of an account to the point where an individual feels adequately protected. That's a result of a $3300 annual contribution limit, and a scarcity of variants of affordable high-deductible catastrophic coverage. This is one instance where "the lower the deductible, the higher the premium" puts the subscriber at risk for the first few years. And that, rather than loophole-seeking, is the reason early adopters are younger, healthier and wealthier; the regulations give them an incentive to be. Let's stop saying, "My way or the highway." If there is reasonable fear of double tax exemption, the regulation ought to state its real purpose. Otherwise, "Let a hundred flowers bloom", regardless of oriental origins, is a better flag to fly. If a national goal is to get more people to have health insurance, we should be hesitant to impose impediments on it.

Passive Investing by Unsophisticated Investors

Burton G. Malkiel published A Random Walk Down Wall Street in 1973, and John Bogle founded Vanguard Group in 1974. Without getting into quarrels over originality, the timing makes it hard for an outsider to judge who thought of what, first. It could diplomatically be said there are two concepts mixed together to make a more general concept called passive investing. Professor Malkiel is associated with the idea that the stock market contains all the information publicly known about corporations, so therefore random selection of stocks will result in the same yield as stock analysis will, and involves less trouble and expense.

Jack Bogle is in the stock brokerage business, and offers a closer, more critical, view of his competitors in the business. In his view, whatever extra profit there might be in stock-picking by experts, is eaten up by the experts themselves in the form of fees and salary. So, why bother with any small differences, when the vast multitude of ordinary investors would be better off with passive investing. There is little practical difference between the messages of the two essayists, although John Bogle's Vanguard has already achieved deposits in the trillions, growing so fast they have largely closed their retail outlets. Both men advocate the advantages of wide buy-and-hold diversification, with low brokerage fees. And because of low turnover, fewer taxes. John Bogle is more censorious about retail brokerage practices.

Ultimate Goals of Passive Investing. These two offer somewhat different reasonings, but they come to the same conclusion: The average investor will do better for himself, using random stock selection, than by picking individual stocks, even with the help of experts. John Bogle offers the simple packaged randomization of the capital-weighted Index Fund, which allows the manager of the fund to maintain the same randomization if it wanders, and he has his reasons for thinking one particular method (capital-weighted) of indexing is best. You might add other factors, like cost saving through computers in the "back room" shuffling of orders and payments, or narrowing of the buy-sell margins by greatly increased transaction speed and capacity of computers. Who cares, it's now cheaper.

In any event, it was John Bogle's insight into how to take practical advantage of these stockbroker ideas, which produced index funds mirroring the whole stock market, and their close relative, ETF, or stock-traded units of index funds. Taken all together, these features make up the concept of "passive investing", which includes the advantages of buy-and-hold over more frequent trading; the considerable reduction of advisory fees; broad diversification; and taking advantage of the payments float. Substituting randomization for stock research introduces economies of scale, and shifts the profits from stock research to computer research. Unfortunately, many other methods of random selection have been offered which give the investor different returns, and they too call themselves Index funds. Some day, someone may well devise a formula for constructing an index which produces results superior to those weighted for company capitalization; keep an eye out, but be careful of fly-by-nights. Furthermore, index funds ordinarily start small, using a sampling technique; in time, they can get big enough to contain a proportionate share of all stocks listed in the index and be picked by "big data" methods. But which index? If you buy a small-stock index, some of the stocks will grow right out of that category and into the need to be replaced. A few of the components of a large-stock index will fail and be dropped. In a mid-cap index, there can be migration both up and down. The simplified method at present is to restrict the list to index funds which are 15 or more years old, and pick the index which has performed best. Switching around among index funds defeats the transaction-cost saving, achieved by just buying one index and sticking to it.

That is, some day the system may improve still further, but at the moment an innovation seems just as likely to harm results, as improve on them. Nevertheless, the quest continues, because a variation of a trillion-dollar fund by a tenth of a percent, produces enormous overall savings (and bonus) for the fund manager. The manager is looking at totals, the individual investor looks at averages. Eventually, profitability may shift from computer research to tax research, or from tax research to marketing skill.

In what follows, we are suggesting trillion-dollar Index Funds, so big they might contain some of every listed stock in America, or in the whole world. As any tiny stock rises, it gets included; and as any listed stock fails, it is dropped. Even the largest stocks individually affect the average to only a slight degree. Right now, John Bogle's books and speeches emphasize the brokers' fees and commission as what the investor captures, while Burton Malkiel tends to emphasize the essential randomness of the entire stock market. Both men are surely correct to some degree, and the investor need not care why the system works. It's called "passive investing", with the central advantages of avoiding the selection of individual companies or industries, and at the extreme, emphasizing the economies of the whole world. In the case of American investors, there is the great good luck that American stocks are both the biggest and the best performing. If you think this will change in a lifetime, an argument can be made for the superiority of world-wide indexes. In the long run, all sovereign nations can change their rules and their taxes. While the average investor is encouraged to buy the biggest and cheapest, it is possible to go too far. Every passive investor is urged to compare the results of his choice with a broad range of 15-year competitors, once a year, just in case. At least one fund, the Pitcairn Fund, restricts itself to family-owned businesses, and that has a certain logic to it.

It makes some difference which factor most explains the improved performance of passive investing, because they reach limits of penetration at different times. Index investing is increasing by trillions of dollars a year, but must flatten out eventually when the market finally segments into those who wish to vote their shares, and those who are content not to meddle. John Bogle irritates his colleagues by repeating, the financial industry takes 85% of the total return for themselves, but even if that is accurate, it must come to an end when the financial industry threatens suicide if it isn't better paid.

Further Growth of Returns. It does appear that Bogle has so far won his argument, but eventually one-off things like this always flatten out. It would be my opinion that Roger Ibbotson's book of the century-long returns on various asset classes sets final limits to the running average to be achieved by this approach. To whatever degree the index funds fall short of Ibbotson's figure, the manager of an index fund has further work to do. To be blunt: The difference between the long-term results of index funds, and the price index for the asset class, probably results from the degree to which the index fund manager or his company is himself eating up the total returns. But some of it is the difference between doing it with pencil and paper, and actually doing it. For example, small-cap index funds should closely approach 12.7 % long-term total returns. (i.e. dividends plus realized and unrealized capital gains.) Strangely, big business corporations you have likely heard of, average only 10.4%, so the executives of firms of over a billion dollars in capitalization are extracting a 2.3% premium from stockholders for something unidentified, which needs to be clarified. Long-term U.S. Treasury bonds average 5.4%, and U.S. Treasury bills average even less at 3.7%. All of these various premiums for "safety" would seem to be the market's estimation of their true value, and that premium must surely disappear if they cannot justify it. Inflation averaged 3%. The far superior results by Warren Buffett and David Swensen, the endowment manager at Yale, represent the somewhat different advantages of being a large, immortal, tax-exempt investor buying things like Canadian lumber forests, totally beyond the reach of the average small investor. When someone devises a way to capture these advantages for the small investor, their new price advantages might possibly be considered achievable by average investors, but if so that advantage should be reflected in the index, to some extent.

Buy-and-hold Index Fund Investing. Index funds will vary in their returns, and the difference between 0.25% commission and 0.06% will only become noticeable in larger accounts. But the difference between $7 retail trades (passive) and $300 trades (active) is simply absurd. If an index fund is composed of the stocks of American companies in the same proportion as the stock market, investing in an American index fund becomes the same as investing in the American economy. Investing in a total world index is comprehensive in a different sense, but there is merit to the idea we owe this success to the American economic style, so Americans ought to climb aboard the American lifeboat. If they do, there is reason to argue they should eventually reach a limit of an effort-free 12.7% return on their money; any higher return probably entails unrecognized risk. But remember, high corporate taxes have driven many American corporations to Ireland, Cayman Islands and other tax havens. If this trend gets out of hand, it may be necessary to turn to world index funds. But when the broker gets fancy and makes up an index of his own recommended stocks, the maneuver gets too fancy to be called passive. That's a variant of active investing, and it's not what we are talking about, or recommending.

Short and Long-term Volatility. Every business has cash overhead, endowment funds have volatility; put those two ideas together and you find periods of time when there isn't enough cash to run the business or pay the dividends. According to Ibottson, the yearly volatility of the stock market is 11%, meaning 70% of the time the market is within 11% (one standard deviation) of the mean. It would thus seem prudent for a fund manager to hold 10-15% of the portfolio in cash, recognizing that when a fund is growing there will be considerable cash inflows from new deposits. For this reason, an index fund should probably be only 90% in stocks, 10% in cash. There are also long-term cycles of 28-40 years (remember 1929 and 2008), with volatility of 50% followed by a recession of 10 or so years. For a fund to continue to pay out 8% during those cycles requires long-term reserves of about 20% in long-term fixed income securities averaging 5.5%. This is what underlies the old adage of 60/40 portfolios, although most observers see the cycles are lengthening, suggesting smaller portions of fixed income are safe enough. In all likelihood, the appropriate asset mixture is a gamble on which stage of the long term cycle you are in. If you start at the very depths of a new cycle, it is probably appropriate to have no long term reserves at all, but scarcely anyone has that degree of self-confidence. In the long run, the amount of needed reserves will depend on the attitudes and ages of the investors.

The Past is (usually) Prologue. All those historic events, plus several severe recessions and the invention of the computer, seemed like earth-movers at the time, but in retrospect scarcely affected the long-run relative values of various asset classes. Unfortunately, many of John Bogle's insights were not available during long stretches of this experience, so data is not available for precisely the mixtures we wish had been collected. It is also useful to keep in mind the man who drowned while crossing a river which averaged six inches deep. Nevertheless, it seems safe to conclude U.S. Treasury bills will closely follow U.S. inflation, and stocks will do better than bonds.

Traditional Endowment Lore. The endowment community contains a great many serious investors whose livelihood and reputation depend on arriving at the right combination of safety and income return on their endowments. Among such persons it is the wide-spread belief that a long-term return of 8% is about the limit of safe return of an endowment. The reasoning focuses on the perpetual need to return a safe maximum, in spite of unpredictable hills and valleys of investment return. In those circles, the most devastating mistake they can make is to be forced to sell good stocks at the bottom of a decline in the market. Seeking to avoid that squeeze at all costs, the 8% maximum return is the conventional answer of these professionals. Their stocks return 10%, but they are diluted by holding enough bonds or cash to reduce the effective overall return down to 8%. The exact proportion of bonds will depend on how much cash flow they can expect from new contributions during a recession, and that is variable between endowments. For this reason, we tend to use 7% in our illustrations, because the formula of -- 7% doubles the principal every ten years -- makes it rather easy to do long calculations mentally. So that's the working goal: invest your Index stock portfolio so it returns between 10% and 12.7% annually, and dilute the stocks with cash or bonds until the total portfolio reaches 8% as return on investment. If that overall running average is not maintained, questions need to be asked. Individual accounts may vary from these benchmarks because people do get sick unexpectedly, but the aggregate account of all subscribers needs to achieve this goal to be considered healthy, and its index fund to be considered well-run.

What if We Start Investing Just as a Long Depression Begins? John Bogle was recently on a television program, asserting long-term passive investing will probably average 5% total return for the next decade. Since the stock market is up 20% in the past year alone, one interpretation is this is a way of saying he expects a major decline in stocks of 25% fairly soon, from which there would be a recovery of 30%, leaving a 5% gain for the whole cycle. (He might well squirm at this interpretation of his remarks, which definitely were not that specific.) At his age, with his heart problem, he probably regards 10 years as long-term, while this book is looking at an 80-year horizon of 10%. In that sense, all of us could mean the same thing. I am urging the belief that if the market closely followed 10% for the past century, it will probably return to 10% for the next century. Of course, it might turn out that it follows 5% for half a century, then follows 15% for the last half of a century; that would have mathematical truth, but would be essentially worthless information for everyone who dies in the next fifty years. Those people would be like the inhabitants of Asian Angkor Wat, or the Mexican Yucatan, dreaming of past glory for a while, but eventually just forgetting it all during a parade of ancient relics. But since I am willing to concede 5% for the next century is a possibility, it is necessary to wish for some enduring wisdom to emerge from the wars of civilizations, not just within national economies, or the transient achievements of a single stock market.

Rising Above Mere Investing. Running one of these funds is not child's play, even though individual stock-picking is superseded. The only reason for investing amateurs to play with such numbers is to get a feel for what size of total return should be expected, in the light of what others are doing. The reader is invited to study Ibbotson's yearbook, and see for himself whether he agrees that a 10% total return on stocks seems safe to bank on; or whether the whole permanent staff devoted to management of some favorite fund needs to be replaced. Best of all might be to invest in several private funds, and reward the ones that do best. To go just a little further, Congress might even consider whether a management which consistently produces less than the long-run return of a related index is eligible to be replaced. But that's not reasonable. To be reliant on such approaches alone, is unlikely to be successful. One only needs to watch how quickly an investment committee clusters around the consultant they have hired, glowingly eager to ask him for investment tips, while ignoring the business at hand.

But that's not what this book is about, nor what is ordinarily expected of bean counters in a bureaucracy. Someone must devote himself to such issues, but there's investing and there is finance. About the best we can hope for is to include in our planning some national agency to monitor the economic environment. That agency should feel obliged to warn Congress and the nation that we must apparently reduce our goals for the program. We might need to develop some other plan for paying off foreign debt for Medicare, for example. Or the Health Savings Accounts might only be able to pay 50% of our bills, saving the rest for unexpected contingencies. Or we might need to require a 50% larger annual deposit in the HSA accounts. Or we might need to float some bonds for the duration of some sudden national emergency. All because it becomes apparent in the future that some national or international upheaval has changed the basic terms of trade. It's important to be a good investor, but when a program gets as large as this one ought to become, its finances are pretty much the same as the national economy, and each will influence the other.

The take-away points are that the better funds can and should produce total returns which are superior to what an ordinary citizen can produce for himself, and some way to measure it is mandatory. And also, that there is no point to getting into this, unless Congress establishes -- and monitors -- policies which deliver on the promise. If you think Fannie Mae and Freddy Mac affected the economy, just consider what this one could do.

This program will fail unless we maintain a narrow margin between what the stock market is earning, and what its owners are earning.

{top quote}
Your money earns 11%, but that isn't necessarily what you will earn. {bottom quote}
Expecting it and getting it, can be two different things. Because, for one thing, most expenses for a management company also come in its first few years, on their first few dollars of revenue. Wide experience with a cagey public therefore teaches experienced managers to get their costs back as soon as they can. Until most managers get to know their customers, in this trade, charging investment managing fees amounting to 0.4% annually is considered normal for funds of $10 million, so charging 1-2% for accounts under a thousand dollars is common practice. These things make it understandable that brokers are slow to lower their fees, or 12(1)bs, or $250 transaction fees to distribute proceeds. But our goal as customers, is to negotiate fees reasonably approaching those of Vanguard or Fidelity, which have fees of about 0.07% on funds amounting to trillions of dollars. Such magic can only be worked by purchasing index funds from a broker who aggregates them to deal in large quantities, and also develops a service with minimal marketing costs to cover the debit card, help desk, hospital negotiating, and banking costs. And who, by the way, derive serious side income from managing corporate pension funds for higher fees. Corporations get a tax deduction for such fringe benefit fees, so even the US Treasury may be said to have a conflict of interest. Remember, stock brokers are not fiduciaries; they are not required to put the customer's interest ahead of their own. One of the better-known brokerage houses advertises charges of $18 a year for HSA accounts over $10,000, but only after it reaches that size will it permit the customer to choose the index fund. If kickbacks are suspected, the incentive it creates is obviously for the client to get the account to be over $10,000, as fast as he possibly can. Under present contribution limits, even with a family account, this cannot be accomplished in less than two years.

Proposal 14: Congress should remove all upper (and lower) age limits to opening Health Savings Accounts.(2584)

Proposal 15: Congress should impose transparency rules on fees and net returns for Health Savings Accounts, including mention of the fees available from the least expensive local competitor.(2584)

There needs to be an added layer of investment in government securities, to provide liquidity to all HSAs, in the general range of 10% of the total investment. There must be some available cash in any business; there are bills to be paid. For example, in the case of Obamacare insurance, the first purchase in the deductible fund might well be $1250 in indexed Treasury Bills, reverting to total stock market index purchases, thereafter. Other liquidity needs are an individual matter, remembering cash reserves will lower the overall return of the fund and slow its growth. At the moment, interest rates are artificially low; leaving the reserve in cash is nearly as good. At this writing, we have experienced several years of essentially zero short-term interest rates, so long-term bonds are not for an amateur to buy.

The investment alternative of purchasing in-house stock-picking funds, or funds with a concealed kick-back to your broker, is probably the riskiest of all alternatives available, and to be avoided. The goal here is to get 10% long-term return as cheaply as possible, or else as soon as possible. With an index, 50% of customers do better than the average, and 50% do worse. For health costs, just be sure to avoid the bottom 50%, and the rest becomes fairly easy. There is one other common hazard: the tendency of all investors, small and large, to buy high and sell low. Dollar-cost averaging is the simplest way to avoid it.

In recent years, health insurance has tended to avoid co-pay and therefore to raise deductibles. For people living from paycheck to paycheck, any hospitalization encounters a cash shortage, soon translated into a hospital bad debt. It is not entirely clear what plans have been made to meet this shortfall. There needs at least to be an added layer of investment in government securities, to provide liquidity to all HSAs, in the general range of 10% of the total investment. On the other hand, it is possible to be too cautious, maintaining a duplicate cash balance for a investment fund which is itself maintaining a 10% fixed-income portfolio. In the case of Obamacare insurance, the first purchase in some deductible fund might well be $1250 in indexed Treasury Bills, reverting to total stock market index purchases, thereafter. Indeed, because of the universality of high deductibles, it looks as though an HSA ought to be the first step in any health insurance with a high deductible. Always remembering not to duplicate the safeguards put in place by the fund manager. Specific investor cash needs should also be kept in mind: regardless of fund composition, just how available is your fund's cash to the customer? Excessive cash reserves will lower the overall return of the fund and slow its growth. At the moment, interest rates are so artificially low, leaving the reserve in cash is nearly as good. At this writing, we have experienced seven years of essentially zero interest rates on Treasury bills, so long-term bonds are not a for an amateur to buy.

The investment alternative of purchasing volatile stock-picking funds, or low-return funds with a concealed kick-back to your broker, is probably the riskiest of all alternatives available, and to be avoided. The goal here for HSA owners, is to approach a 10% long-term return as cheaply as possible, or else as soon as possible. With an index, 50% of the customers do better than average, and 50% do worse. For health costs, just be sure you aren't in the bottom 50%, and the rest becomes fairly easy; passive investing assures it. There is one other common hazard: the tendency of all investors, small and large, to buy high and sell low. Just avoid selling stock; if you plan not to keep it there for long, just put some cash in the bank.

Fun With Numbers

The principles of compound interest are thought to have been a product of Aristotle's mind. The principles of passive investing are more recent, mainly attributed to John Bogle of Vanguard, although Burton Malkiel of Princeton has a strong claim. In the present section, we propose to merge the two methodologies, compound interest with passive investing, trying to give the reader some idea why the combination could supply Health Savings Accounts with seriously augmented revenue. Because there is so much political flux, it cannot be an actual plan until the politically-controlled numbers have some finality to them.

The proposal to accumulate funds, however, shifts responsibility to the customer to spend wisely, even resorting to employing some of the individual's taxable money to pay small medical costs, thus preserving the tax shelter. (Or to use escrow accounts, or over-deposit in some other way, such as reducing final goals.) HSA doesn't directly reduce health costs, it eliminates some unnecessary ones but provides lots of extra money to pay for essential ones. At the outset we want to state, schemes of this sort have a history of working effectively up to a certain level, and then begin to interfere with themselves as eager money rushes in. There's no sign of that so far, but it might appear. Therefore, we advise modest hedged experiments rather than attempts to pay for all of healthcare, reducing health costs perhaps by only a quarter or a half, since those smaller levels would still amount to large returns. Balancing the risks with investments outside the HSA -- is just another prudent way of hedging the bet.

{top quote}
Money earning seven percent will double in ten years. {bottom quote}
The rough rule of thumb is, money earning seven percent will double in ten years; money at ten percent will double in seven years. Seven in ten, or ten in seven. You can use simple maxims to verify the attached ideas. An early realization is that compound interest accelerates with time, and is highly sensitive to small interest rate changes. An improved rate of interest generated by (Twenty-First Century) passive investing gets multiplied by (Twentieth-Century) extended life expectancy. This idea might not have worked, a generation ago. And it will not work in the future if future catastrophes shorten life expectancy, or interest rates rattle around. As happenstance, interest rates today rest near the "zero boundaries", but interest risk is not totally eliminated. Interest rates have a way of bouncing, and irrational exuberance is part of our system.

In fact, we have a tragic example in the nation's pension funds. A few decades ago, pension managers were tempted to invest in stocks rather than bonds, and then the stock market crashed, stranding pensioners with low rates of return, rather than the high ones they had hoped for. I want readers to understand I am well aware of the cyclicity of markets, and make these suggestions, regardless. As long as we include a thirty-year "Black swan" contingency by limiting coverage to a quarter or a third, it should be reasonably safe, but savings would still be enormous. There are other, more traditional ways of protecting endowments from stock crashes. With people of every age to consider, the long transition period alone would almost automatically buffer out black swans.

Having issued a warning to be a conservative investor, let's now introduce some notes of reassurance. Younger people are always likely to be healthier. Those who save their money while young therefore need not use all of it for healthcare -- for several decades. Compound interest works to magnify savings, the longer its horizon the better. We'll describe passive investing later, but it too should increase the average rate of return. These investments after some successes increase the incentives to save. If no one buys Health Savings Accounts, the incentives were apparently not large enough. If everyone rushes to buy, perhaps the incentives were unwisely too attractive. Right now, the financial industry is observing a rush to passive investing; nearly fifty percent of mutual fund investors are switching to "index funds" in spite of capital gains taxes on selling other holdings. Since the marvel of compound interest has been accepted for thousands of years, a mixture of compound interest and passive investing isn't an especially radical idea.

What's radical is the idea that all those highly-paid advisors can't do better than random coin-flippers. What's radical is to discover that the main ingredient of poor performance is high middle-man fees. Low fees won't assure high returns, but high fees will assuredly lead to low returns. If that new idea gets replaced in turn, it will be replaced by something better, and everyone should switch to it. But if compound interest is here to stay, this proposal is safer than it sounds. The investment income rate or continued employment of your agent is what isn't guaranteed, which is why business relationships (between customers and managers of HSAs ought to remain portable and transparent by law. Your manager might move, or you might decide to move away, from him.

Start by looking at what happens if you jump your interest rate curve from 5% to 12%, or if you lengthen life expectancy from age 65 to age 93. That's what the graph is intended to show, and we stretch the limits to see what stress will do. Jumping to the highest rate (12%)the interest rate gets the balance to a couple of million dollars pretty quickly and lengthening the time period further enhances that gain. The combination of the two easily escalates the investment far above twenty million. The combination of extra time and extra interest rate thus holds the promise of quite easily paying for a lengthening lifetime of medical care, regardless of inflation. In fact, it gets the calculation to giddy amounts so quickly it creates suspicion.

{top quote}
Average lifetime health costs: $350,000 per lifetime {bottom quote}
The actuaries at Michigan Blue Cross, verified by the Medicare agency, estimate average lifetime health costs to be around $350,000 per lifetime. That's just an educated guess, of course, but increasing interest rates and life expectancy will very easily surpass that minimum estimate. How do we go about it, and how far dare we go? Remember, our whole currency is based on the notion of the Federal Reserve "targeting" inflation at 2%, but in spite of spending trillions of dollars, they seem unable even to achieve more than 1.6%. We had better not count completely on schemes which require the Federal Reserve to target interest rates, because sometimes, they can't.

One person who does have practical control of the interest rate an investor receives is his own broker. The broker shares the income, but usually takes the first cut of it, himself. Covering a full century, Roger Ibbotson has published the returns on various investments, and they don't vary a great deal. Common stock produces a return of between 10% and 12.7% in spite of wars and depressions; if you stand back a few feet, the graph is pretty close to a straight line. You wouldn't guess it was that high, would you? If you don't analyze carefully, a number of brokerages offer Health Savings Accounts which produce no interest at all -- to the investor -- for the first ten years. Indeed, the income of 2% also amounts to nothing at all during a 2% inflation. In ten years, 2% approaches a haircut of nearly 20%, explained by the small size of the accounts, and by the fact that customers who know better will generally just politely look for another vendor. Since the number of accounts has quickly grown to be more than fifteen million, it might be time for some sort of consumer protection. The prospective future size of these accounts should command greater market power, quite soon. After all, passive investment should mainly involve the purchase of blocks of index funds, all with fees of less than a tenth of a percent . Much of this haircutting is explained by the uncertainties of introducing the Affordable Care Act during a recession and taking six years just to get to the point of a Supreme Court Test, to see if its regulations are legal and workable. It can be used to provide high-deductible coverage, but it's expensive.

That's the Theory. The rest of this section is devoted to rearranging healthcare payments in ways which could -- regardless of rough predictions -- easily outdistance guesses about future health costs. When the mind-boggling effects are verified, skeptics are invited to cut them in half, or three quarters, and yet achieve a worthwhile result. The purpose here is not to construct a formula, but to demonstrate the power of an idea. Like all such proposals, this one has the power to turn us into children, playing with matches. By the way, borrowing money to pay bills will conversely only make the burden worse, as we experience with the current "Pay as you go" method. By reversing the borrowing approach we double the improvement from investment, in the sense we stop doing it one way and also start doing the other. In the days when health insurance started, there was no other way possible. The reversal of this system has only recently become plausible, because life expectancy has recently increased so much, and passive investing has put that innovation within most people's reach. The environment has indeed changed, but don't take matters further than the new situation warrants.

Average life expectancy is now 83 years, was 47 in the year 1900; it would not be surprising if life expectancy reached 93 in another 93 years. The main uncertainty lies in our individual future attainment of average life expectancy, which we don't know, but probably could guess with a 10% error. When the future is thus so uncertain, we can display several examples at different levels, in order to keep reminding the reader that precision is neither possible nor necessary, in order to reach many safe conclusions about the average future. Except for one unusual thing: this particular trick is likely to get even better in the future. Even so, it is best to do only conservative things with a radical idea.

Reduced to essentials for this purpose, today's average newborn is going to have 9.3 opportunities to double his money at seven percent return and would have 13.3 doublings at ten percent. Notice the double-bump: as the interest rate increases, it doubles more often, as well as enjoying a higher rate. If you care, that's essentially why compound interest grows so unexpectedly fast. This widening will account for some very surprising results, and it largely creeps up on us, unawares. Because we don't know the precise longevity ahead, and we don't know the interest rate achievable, there is a widening variance between any two estimates. So wide, in fact, it is pointless to achieve precision. Whatever it is, it will be a lot.

{William Bingham class=}
One Dollar: Lifetime Compound Interest

Start with a newborn, and give him a dollar. At age 93, he should end up with between $200 (@7%) and $10,000 (@10%), entirely dependent on the interest rate. That's a big swing. What it suggests is we should work very hard to raise that interest rate, even just a little bit, no matter how we intend to use the money when we are 93, to pay off accumulated lifetime healthcare debts. Don't let anyone tell you it doesn't matter whether interest rates are 7% or 12.7%, because it matters a lot. And by the way, don't kid yourself that a credit card charge doesn't matter if it is 12% or 6%. Call it greed if that pleases you; these "small" differences are profoundly important.

If that lesson has been absorbed, here's another:

In the last fifty or so years, American life expectancy has increased by thirty years. That's enough extra time for three extra doublings at seven percent, right? So, 2,4,8. Whatever amount of money the average person would have had when he died in 1900, is now expected to be eight times as much when he now dies thirty years later in life. And even if he loses half of it in some stock market crash, he will still retain four times as much as he formerly would have had at the earlier death date. The reason increased longevity might rescue us from our own improvidence is the doubling rate starts soaring upward at about the time it gets extended by improved longevity. In particular, look at the family of curves. Its yield turns sharply upward for interest rates between 5% and 10%, and every extra tenth of a percent boosts it appreciably.

Now, hear this. In the past century, inflation has averaged 3%, and small-capitalization common stock averaged 12.7%, give or take 3%, or one standard deviation (One standard deviation includes 2/3 of all the variation in a year.) Some people advocate continuing with 3% inflation, many do not. The bottom line: many things have changed, in health, in longevity, and in stock market transaction costs. Those things may have seemed to change very little, but with the simple multipliers we have pointed out, conclusions become appreciably magnified. Meanwhile, the Federal Reserve Chairman says she is targeting an annual inflation rate of 2% of the money in circulation; the actual increase in the past century was 3%. If you do nothing at 3%, your money will be all gone in thirty-three years. If you stay in cash at 2%, it will take fifty years to be all gone.

But if you work at things just a little, you can take advantage of the progressive widening of two curves: three percent for inflation stays pretty flat, but seven percent for investment income starts to soar. Up to 7%, there is a reasonable choice between stocks and bonds; but if you need more than 7% you must invest in stocks. Future inflation and future stock returns may remain at 3 and 7, forever, or they may get tinkered with. But the 3% and 7% curves are getting further apart with every year of increasing longevity. Some people will get lucky or take inordinate risks, and for them, the 10% investment curve might widen from a 3% inflation curve, a whole lot faster. But every single tenth of a percent net improvement will cast a long shadow.

But never, ever forget the reverse: a 7% investment rate will grow vastly faster than 4% will, but if people allow this windfall to be taxed or swindled, the proposal you are reading will fall far short of its promise. Our economy operates between a relatively flat 3% and a sharply rising 4-5%. In other words, it wouldn't have to rise much above 3% inflation rate to be starting to spiral out of control. Our Federal Reserve is well aware of this, the public less so. A sudden international economic tidal wave could easily push inflation out of control, in our country just as much as Greece or Portugal. On the other hand, as developing nations grow more prosperous, our Federal Reserve will control a progressively smaller proportion of international currency. Therefore, we would be able to do less to stem a crisis that we have done in the past.

To summarize, on the revenue side of the ledger, we note the arithmetic that a single deposit of about $55 in a Health Savings Account in 1923 might have grown to about $350,000 by today, in the year 2015, because the stock market did achieve more than 10% return. There is considerable attractiveness to the alternative of extending HSA limits down to the age of birth, and up to the date of death. It's really up to Congress to do it. If the past century's market had grown at merely 6.5% instead of 10%, the $55 would now only be $18,000, so we would already be past the tipping point on rates. In plain language, by using a 10% example, $55 could have reached the sum now presently thought by statisticians -- to be the total health expenditure for a lifetime. By achieving a 6.5% return, however, the same investment would have fallen short of enough money for the purpose. Like the municipalities that gambled on their pension fund returns, that sort of trap must be avoided. Things are not entirely hopeless, because 6.5% would remain adequate if our hypothetical newborn had started with $100, still within a conceivable range for subsidies. But the point to be made provides only a razor-thin margin between buying a Rolls Royce, and buying a motorbike. If you get it right on interest rates and longevity, the cost of the purchase is relatively insignificant. That's the central point of the first two graphs. For some people, it would inevitably lead to investing nothing at all, for personal reasons. Some of the poor will have to be subsidized, some of the timid will have to be prodded. This is more of a research problem than you would guess: a round-about approach is to eliminate the diseases which cost so much, choosing between different paths of research to do it, or rationing to do it. Right now we have a choice; if we delay, the only remaining choice would be rationing.

Commentary.This discussion is, again, mainly to show the reader the enormous power and complexity 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 toward 10% by financial transaction technology. Many conclusions can be drawn, including possibly the conclusion that this proposal leaves too narrow a margin of safety to pay for everything. The conclusion I prefer to reach is that this structure is almost good enough, but requires some additional innovation to be safe enough. That line of reasoning will be pursued in a later chapter.

Revenue growing at 10% will rapidly grow faster than expenses at 3%. As experience has shown, it is next to impossible to switch health care to the public sector and still expect investment returns at private sector levels. Repayment of overseas debt does not affect actual domestic health expenditures, but it indirectly affects the value of the dollar, greatly. Without all its recognized weaknesses, a fairly safe description of present data would be that enormous savings in the healthcare system are possible, but only to the degree, we contain next century's medical cost inflation closer to 2% than to 10%. The simplest way to retain revenue at 10% growth, on the other hand, is by anchoring the price to leading healthcare costs within the private sector. The hardest way to do it would be to try to achieve private sector profits, inside the public sector. This chapter describes a middle way. It's better than alternatives, perhaps, but not miraculous.

Cost, One of Two Basic Numbers. Blue Cross of Michigan and two federal agencies put their own data through a formula which created a hypothetical average subscriber's cost for a lifetime at today's prices. The agencies produced a lifetime cost estimate of around $300,000. That's not what we actually spent because so much of medical care has changed, but at such a steady rate that it justifies the assumption, it will continue into the next century. So, although the calculation comes closer to approximating the next century (than what was seen in the last century) it really provides no miraculous 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. This Classical HSA proposal, particularly with merely an annual horizon, proposes a method to pay for a lot of otherwise unfunded medical care. The proposal to pay for all of it began to arise when its full revenue potential began to emerge, rather than the other way around. If a more ambitious Lifetime HSA proposal ever works in full, it has a better chance, but must expect decades of transition before it can. Perhaps that's just as well, considering the recent examples we have of being in too big a hurry. Rather surprisingly, the remaining problem appears merely a matter of 10-15% of revenue, but all such projection is fraught with uncertainty.

Revenue, The Other Problem. The foregoing describes where we got our number for future lifetime medical costs; someone else did it. Our other number is $150,750, which is our figure for average lifetime deposit in an HSA. It's the current limit ($3350 per year of working life) which the Congress applied to deposits in Health Savings Accounts. No doubt, the number was envisioned as the absolute limit of what the average person could afford, and as such seems entirely plausible. You'd have to be rich to afford more than that, and if you weren't rich, you would certainly struggle to afford so much. To summarize the process, the number amounts to a guess at what we can afford. If it turns out we can't afford it, this proposal must be supplemented, and the easiest expedient is to raise the contribution limits. Other alternatives are pretty drastic: to jettison one or two major expenses, like the repayment of our foreign debts for past deficits in healthcare entitlements, or the privatization of Medicare. Not privatizing Medicare sounds fine to most folks, but they probably haven't projected its coming deficits. It would leave us considerably short of paying for lifetime health costs for quite a long transition period, but it might be more politically palatable, like Greece leaving the Euro, than paying more. Almost anything seems better than sacrificing medical care quality, which to me is an unthinkable alternative, just when we were coming within sight of eliminating the diseases which require so much of it.

Escrow Accounts and Over-Depositing. The main unpredictable feature of these future projections is you can't predict when you will get sick and deplete the account. Money withdrawn early is much more damaging than money withdrawn late in the cycle. Catastrophic insurance will somewhat protect against this risk, but the safest approach is to use segregated, somewhat untouchable, escrow accounts for future heavy expenses. That, combined with deliberate over-depositing, is the safest approach. If Obamacare would settle down, it might serve that function, as well, but the political situation is pretty unsettled until a large-group design is made final, and that seems to mean November 2016 at the earliest.

Summaries for the Book Jacket and Elsewhere.

Short Summary for Book Jacket:

This book presents a physician's viewpoint on a specific healthcare Reform. Much of the hidden economics of healthcare, a major topic of the first book, was omitted. In its place is an expanded description of Health Savings Accounts as they stand right now -- a dual provision linking medical advances with the expanding need for retirement income, the need for which is mainly the consequence of better health care. It is put to the public in two different ways: take care of your health or you won't get much retirement. Alternatively, invest your healthcare savings wisely, or you will never be able to afford retirement.

Most people don't really like to save, they like to spend. And to a degree, what you save reduces the income of those who need to help you. They aren't evil, but they will take your money if you offer it to them. Because of these two obstacles, I have come to feel spreading present Health Savings Accounts is all that can be accomplished in a decade. But improving the Account system could probably generate much more savings than the present one. Having some idea of where it all would lead, would greatly enhance the incentive to do some things the public ought to do, anyway. So a second section is added, for future generations to modify its future if they please, and if the whims of circumstance permit.

Once again, I express my gratitude to John McClaughry, the former Republican leader of the Vermont legislature and Senior Policy Adviser in the Reagan White House, for suggesting basic features. The flaws in such future features are all my own.

But remember, the classical form only needs a little tweaking. All you have to do is buy it and urge Congress to tweak its tax exemption to be level with every other plan. Removing small mandated benefits (which reduce the market power of high deductibles) might also help.

Public Misconceptions

(Healthcare for Citizen Lobbyists)

There are a few other ideas about the cost of medical care, which I would say are widely held, but the truth of which seems dubious. In fact, I would characterize them as misconceptions. If misconceptions are held long enough, they eventually work their way into the tax code.

Is Preventive Medicine Always and Everywhere Less Expensive? As heads nod vigorously in support of prevention, please notice in general usage it suggests several different things. The overall implication is that small interventions for everyone are less expensive to society; less expensive, that is, than large expenses for the few who get the disease. That is clearly not invariably the case, and unfortunately in a compulsory insurance world, it may seldom be the case. The point is not that preventive care is a bad thing, because it is often a very good thing, even by far the very best thing. It's just not necessarily cheaper.

Take for example a tetanus toxoid booster, which ten years ago cost less than a dollar for the material. Recently in preparation for a vacation trip, I was charged $85 dollars by my corner drugstore, just for the material. If you do the math, $85.00 times millions of Americans is a far greater sum than the present aggregate cost of Americans actually contracting tetanus, especially following the advice to have a booster shot every ten years. This becomes more certain if one adds in the cost of administration. The vaccine is quite effective, Americans had almost no cases in the Far Eastern Theater in World War II. The British who did not vaccinate routinely, had large numbers of often fatal cases. Furthermore, even if the tetanus patient survives, the disease is hideously painful. Is it better to immunize routinely? Yes, it is. Is it cheaper? I'm not entirely sure, because I have no access to production costs of tetanus toxoid. But it certainly seems likely it isn't cheaper. Malpractice costs, which are a different issue entirely, complicate this opinion.

{top quote}
Better, yes. Cheaper? No. {bottom quote}
Preventive Medicine

Something, probably malpractice liability, has transformed an effective preventive procedure from clearly cost effective to -- probably not cheaper for a nation which no longer has horses on the streets, but still has horses on farms and ranches. This is presently mostly a malpractice liability problem for the vaccine maker, not a preventive care issue. Take another well-known example. In the case of smallpox vaccination, it is now clearly more expensive to vaccinate everyone in the world than to treat the few actual cases. The waffle currently being employed is to limit vaccination to countries where there are still a few cases, hoping thereby to eradicate the disease from the planet.

Over and over, examination of individual vaccinations shows the answer to be: better, yes, cheaper, no; with the ultimate answer depending on accounting tricks in the calculation of cost, cost inflation because of third-party payment, and related perplexities. To be measured about it, excessive profitability of some preventive measures could act as a stimulant for finally calling off prevention, by taking on a briefly more expensive campaign to achieve final eradication. Somewhere in this issue is the whisper that "natural" gene diversity of any sort must never be totally eliminated, a viewpoint which even the diversity philosopher William James never openly extended to include virulent diseases.

Routine cervical pap tests, routine annual physical examinations, routine colonoscopies and a host of other routines are in general open to questioning as to cost effectiveness. The issue is likely to increase rather than go away. Much of the current denunciation of "Cadillac" health insurance plans focuses on the elaborate prevention programs enjoyed by Wall Street executives, college professors, industrial unions, and other privileged health insurance classes. A more useful approach to a borderline issue might focus on removing such items from health insurance benefit packages, particularly those whose cost is subsidized, either directly or by income tax deductions. Those preventive measures which demonstrate cost effectiveness can have their subsidy restored, or be grouped together into a category which must compete for eligible access to limited funds.

The inference is strong that unrestrained substitution of community prevention for patient treatment escalates costs rather considerably, and -- at the least -- needs to demonstrate more cost effectiveness before subsidy is extended. While self-interest is a possibility if only physicians are consulted, total reliance on bean-counters could eliminate benevolent judgment entirely. Community cost effectiveness is a ratio, and both sides must be fairly argued. Don't forget many people quietly recognize the need for gigantic cost-shifting between age groups. Spending money on young workers to pay for shots is one way to shift the cost of elderly illness, backwards to the employer they no longer work for. It can be a pretty expensive way to do it.

In the final analysis, without some form of patient participation in the cost, this issue is probably unsolvable. To launch a host of double-blind clinical trials to find out the truth will lead to answers of some sort, which will quickly be undermined by price/cost confusion, leading to increasingly futile regulation. Including preventive costs in the deductible at least allows public participation in the decisions and true balance to begin; which is to say, even universal preventive care admiration cannot be adequately assessed except in the presence of a substantial open market for the product.

Much "preventive" care is really "early detection" or "early management". That's entirely different. When the goal changes so subtly, it is often not possible to judge what is worthwhile, except by placing some price on pain and suffering. The abuse by the trial bar of the monetization of pain and suffering in the malpractice field, ought to be a gentle reminder of that. Preventive colonoscopy has clearly caused a decline in deaths from colon cancer; that's a medical judgment, and a transitional one. Whether the cost of catching those cancers early was cost effective is largely a matter of colonoscopy cost, and on digging into it, will be found to be as much an anesthesia issue as a colonoscopist one. In any event, it is not one where the opinion of insurance reviewers should be decisive. If the litigation industry moves to make omission of prevention a new source of action, it will surely be a sign it is past time, to caution the public about the direction of things.

{top quote}
Average Hospital Profit Margins: Inpatient 2%, Accident Room 15%, Satellite Clinics 30% {bottom quote}
Payment By Diagnosis

Outpatient is Not Necessarily Cheaper Than Inpatient For the Same Problem. Medicare provides half of hospital revenue; the other half is often dragged into a uniform approach. The reimbursement mostly has nothing to do with the itemized bills hospitals send, and may have little to do with production costs. The DRG (Diagnosis-Related Groups) system for reimbursing hospitals for inpatients is thus not directly based on specific costs in the inpatient area. It is related to clustered diagnoses lumped into a DRG group, and then assumes overpayments will eventually balance underpayments within individual hospitals.

That last point, depending on the Law of Large Numbers, is questionable, and especially so in small hospitals. When two million diagnoses are condensed into 200 Diagnosis groups, group uniformity just has to be uneven. Reimbursement means repayment, but this interposed step often interferes with that definition. Someone in the past fifty years discovered the reimbursement step was an excellent choke point. Manipulating the reimbursement rates without changing the service is a handy place to choose winners and losers; it's largely out of sight of the people who would recognize it for what it is. Furthermore, for various DRG groups, or for all of them, it becomes possible to construct a fairly tight rationing system for inpatient costs.

The degree to which actual production costs match a particular DRG reimbursement rate, is blurred by inevitable imprecision in the DRG code construction. It is impossible to squash a couple of million diagnoses into two hundred code numbers without imprecision. It works both ways, of course. The coders back at the hospital will seek weaknesses out, experimentally. A grossly generalized code is placed in the hands of hospital employees, resulting in a system which suits both sides of the transaction, but is one which ought to be abolished, on both sides, by computerizing the process. At least, computers could avoid the issue of mistranslating the doctors' English into code.

The overall outcome with Medicare is an average 2% profit margin on inpatients during a 2% national inflation. This is far too tight to expect it to come out precisely right for everybody. And in fact, inflation has averaged 3% for a century, but is 1.6% right now. The Federal Reserve Chairman desperately tries to raise it, but it just won't go up. If you don't think this is a serious issue, just reflect that our gold-less currency is supported by a 2% inflation target which the Federal Reserve is proving unable to maintain.

For technical reasons, the same forced loss is not true of outpatient and emergency services, which usually use Chargemaster values. Emergency services are said to approximate 15% profit margins, and outpatient services, 30%. It is therefore difficult to believe anyone would start anywhere but the profit margin, and work backward to managing the institution. In consequence the buyer's intermediary has stolen the pricing process from the seller. Without the need to communicate one word, prices rise to the level of available payment, and then stop there. But let's not be too specific in our suspicions. Some incentive to direct patients to the emergency and outpatient areas must develop, and is acted upon in the pricing. It just doesn't have to be so confusing and so high-handed.

Any assumption by the public that outpatient care is cheaper than inpatient hospital care is likely to be quite misleading. Short of driving the hospital out of business, revenue in this system is whatever the insurance intermediary chooses to make it. There was a time when the intermediary was Blue Cross, and behind them, big business. Nowadays, it is Medicare, but Obamacare probably aspires to the turf.

Let's test the reasoning by using different data. Because hospital inpatient care is reimbursed at roughly 106% of overall cost, while hospital outpatient care is reimbursed at roughly 150%, hospitals are impelled to favor outpatient care, no matter which type of care happens to have the cheapest production cost, the best medical outcomes, or enjoys the greatest comforts. Instead, the rates and ratios are ultimately determined by magazine articles and newspaper editorials. At some level within the government, a political system responds to what it thinks is public opinion, vox populi est vox dei. No matter what their personal feelings may be, hospital management encounters more quarrelsomeness on wages in the inpatient area, less resistance in the outpatient and home care programs. So, true costs must actually rise in the outpatient area, sooner or later, following the financial incentives. Personnel shortages follow, as does friction between hospitals and office-based physicians. The process is circular, but the origin of favoring outpatient care over inpatient care was primarily driven by some accountant reading a magazine article.

A highly similar attitude underlies the hubub for salaried physicians rather than fee-for service. It's a short-cut to a forty-hour week, and following that, to a doctor shortage. And following that, to enlarged medical school budgets. If anyone imagines that will save money, the reasoning is obscure.

Everybody can guess what it costs to wash a couple of sheets and buy a couple of TV dinners. Everyone fundamentally understands Society's need to transfer medical costs from the sick population to the well population. Nothing known about hotel prices justifies a 50% difference in price between inpatient and outpatient care, all else being equal. The room price mainly supports overhead costs which are unrelated to direct patient care, so those fixed costs are like migratory birds, settling to roost where it's quiet. Remember, it isn't costs driving the system, it is now profit margins.

The Return of a Discharged Hospital Patient Within 30 Days is not Necessarily a Sign of Bad Care. Rather, it reflects the fact that hospital inpatient reimbursement is entirely based on the bulk number of admissions, not the sum of itemized ingredients. Having undermined fee for service, Medicare must resort to taxing the whole admission.

Early re-admission can of course be a sign of premature discharge or careless coordination with the home physician. But these issues are so remote from the basic reason for admission, that bulk punishment is unlikely to change the criticised behavior. That behavior may mean a convalescent center is convenient to a hospital, making it reasonable to move the patient without much loss of continuity of care; and treating his return to the acute facility becomes a matter of small consequence. It is also a matter of cost accounting; when you claim a hundred dollar hotel cost to be worth thousands of dollars, many distortions are inevitable. If a hospital essentially shuts down on weekends, for example, there actually might be better care available somewhere else.

Imposing a penalty for returns to the hospital post-discharge, has certainly changed behavior, but it is far from clear whether institutions are better as a result. Without a detailed study of longitudinal effects and costs, this threat is no more than an untested experiment. Without access to accounting practices, doctors assume the penalty for a high re-admission rate merely affirms that hospital insurance reimbursement by DRG is solely dependent on the discharge diagnosis, therefore bears little relation to the quality of care. Given a particular diagnosis, reimbursement is totally independent of any other cost. When all you have is a hammer, everything looks like a nail to the DRG.

The legitimate reasons for re-admission to the hospital are many and varied. Collectively, they could well constitute a general attitude on the part of a particular hospital that it is reasonable to send many patients home a little early in order to achieve greater overall cost savings -- in spite of sustaining a few re-admissions. But this is somewhat beside the point. The insurance companies accept the fallacy that favoring readmission is the only way a hospital can increase reimbursement under a DRG system. This is merely a debater's trick of redefining the issue, from true cost to reimbursement amount. More or fewer tests, longer or shorter stays have no effect, but readmission can double reimbursement. Consequently, re-admission has been stigmatized as invariably signifying careless treatment, justifying a penalty reduction of overall reimbursement. This is high-handed, indeed. It would require a research project to determine which of the alleged motives is actually operational.

The Doughnut Hole: Deductibles versus Copayments. To understand why the doughnut hole is a good idea, you have to understand why copay is a flawed idea. In both cases, the purpose is to make the patient responsible for some of the cost in order to restrain abuse. As the expression goes, you want the patient to have some skin in the game. The question is how to do it; the doughnut has not been widely tried, but the copayment approach is very familiar: charge the patient 20% of the cost, in cash.

This co-pay idea finds great favor with management and labor in negotiations, because the premium savings are immediately known. If the copayment is 10%, then employer cost will be decreased 10%; if it is 50%, the cost is reduced 50%. In midnight bargaining sessions, such simplicity is much appreciated. However, the doughnut hole was not devised to make negotiations simpler for group insurance, it was devised to inhibit reckless spending, theoretically unleashed once the initial deductible has been satisfied.

Health insurance companies also like both co-pay and doughnuts for questionable reasons. Both offer an opportunity to sell two insurance policies as two pieces of the same patient encounter, adding up to 100% coverage, but eliminating the patient's skin in the game. Doubling the marketing and administrative fees seems like an advantage only to an insurance intermediary, while it totally undermines the incentive of restraining patient overuse. In practice, having two insurances for every charge has led to mysterious delays in payment of the second one, even though they are often administered by the same company. Physicians and other providers hate the system, not only because it involves two insurance claims processes per claim, but because it often makes it impossible to calculate the residual after insurance, i.e., patient cash responsibility, until months after the service has been rendered. Patients often take this long silence to imply payment in full, and disputes with the provider are common. Long ago, older physicians warned the younger ones, "Always collect your fees while the tears are hot."

It has long been a mystery why hospital bills take so long to go through the system; at one time, protracting the interest float seemed a plausible motive. However, the persistence of delayed processing during a period of near-zero interest rates makes this motive unlikely. It now occurs to me that the reimbursement of health insurance costs by the business employer is related to corporate tax payments, and hence to the quarterly tax system. Using the puzzling model of a monthly bank statement for online reporting would have some logic, but great confusion, attached to the bank statement approach for group payment utility. But in the end, I really do not understand why health insurance reimbursement or even reporting to the patient, should take so many months, and cause so much difficulty. Recently, the major insurance companies have started to imitate banks by putting the monthly statement continuously online on the Internet. If doctors find a way to be notified, the billing cycle could be speeded up considerably, and even the deplorable custom of demanding cash in advance may abate. The intermediaries probably won't do it, so it is a business opportunity for some software company, and a minor convenience for the group billing clerk.

So, the idea of a doughnut hole was born, after empirical observation about what was owed on two levels, one for small common claims, and another for big ones. Formerly, the patient either paid cash in full or was insured in full, so arriving at the Paradise of full coverage is purchased in cash within the first deductible. Unfortunately, once that last threshold was crossed, the sky became the limit. Some way really had to be found to distinguish between extravagant over-use, and the use of highly expensive drugs, particularly those still under patent protection. The idea was generated that if the two levels of the doughnut hole were calculated from actual claims data, there might often be a clear separation of minor illnesses from major ones. Since the patient would ordinarily be uncertain how far he was from triggering the doughnut hole, the restraint of abuse might carry over, even into areas where the facts were not as feared.

It is too early to judge the relative effectiveness of the two different patient-responsibility approaches, but it is not too early to watch politicians pander to confusion caused by an innovative but unfamiliar approach, while the insurance administrators simplify their own task by applying a general rule, instead of tailoring it to the service or drug. And by the way, the patients who complain so bitterly about a novel insurance innovation, are deprived by the donut hole of a way to maintain "first-dollar" coverage, which is a major cause of the cost inflations they also complain so much about. Some people think they can fix any problem just by loudly complaining about it. Perhaps, in a politicized situation, it works; but it doesn't fool anyone.

Plan Design. The insurance industry, particularly the actuaries working in that area, have long and sophisticated experience with the considerations leading to upper and lower limits, exclusions and exceptions. Legislative committees would be wise to solicit advice on these matters, which ordinarily have little political content. However, the advisers from the insurance world have an eye to bidding on later contracts to advise and administer these plans. They are not immune to the temptation to advise inclusion of provisions which invisibly slant the contract toward a particular bidder, and failing that, they look for ways to make things easier, or more profitable, for whichever insurance company does get the contract. The doughnut hole is a recent example of these incentives in action; no member of any congressional committee was able to explain the doughnut for a television audience, so it was ridiculed. The outcome has been a race between politicians to see who could most quickly figure out a way to reduce the size of the hole. The idea that the size of the hole was intended to be an automatic adjustment to experience, seems to have been totally lost in the shuffle. Asking industry experts for advice is fine, but it would be well to ask for such advice from several other sources, too.

Fee-for-Service Billing. In recent years, a number of my colleagues have taken up the idea that fee-for-service billing is a bad thing, possibly the root of all evil. Just about every one who says this, is himself working for a salary; and I suspect it is a pre-fabricated argument to justify that method of payment. The obvious retort is that if you do more work, you ought to be paid more. The pre-fabricated Q and A goes on to reply, this is how doctors "game" the system, by embroidering a little. I suppose that is occasionally the case, but the conversation seems so stereotyped, I take it to be a soft-spoken way of accusing me of being a crook, so I usually explode with some ill-considered counter-attack. My basic position is that the patient has considerable responsibility to act protectively on his own behalf. That is unfortunately often undermined by excessive or poorly-designed health insurance. Nobody washes a rental car, because that's considered to be the responsibility of the car rental agency. A more serious flaw in the argument that we should eliminate fee for service, was taught me in Canada.

When Canada adopted socialized medicine, I was asked to go there by my medical society, to see what it was all about. That put me in conversation with a number of Canadian hospital administrators, and the conversation skipped around among common topics. Since I was interested in cost-accounting as the source of much of our problems, I asked how they managed. Well, as soon as paying for hospital care became a provincial responsibility, they stopped preparing itemized bills. Consequently, it immediately became impossible to tell how much anything cost. The administrator knew what he bought, and he paid the bills for the hospital. But how much was spent on gall bladder surgery or obstetrics, he wouldn't be in a position to know.

So I took up the same subject with the Canadian doctors, who reported the same problem in a different form. Given a choice of a surgical treatment or a medical one for the same condition, they simply did not know which one was cheaper. After a while, the hospital charges were abandoned as a method of telling what costs more, and eventually no effort was made to determine comparative prices at all. There's no sense in an American getting smug about this, because manipulation of the DRG soon divorced hospital billing charges from having any relation to underlying costs, and American doctors soon gave up any effort to use billing as a guide to treatment choices. We organize task forces to generate "typical" bills from time to time, but these standardized cost analyses are a crude and expensive substitute for the immediacy of a particular patient's bill.

My friends in the Legal Profession make a sort of similar complaint. The advent of cheap computers created the concept of "billable hours", in which some fictional average price is fixed to a two-minute phone consultation. In the old days, my friends tell me, they always would have a conference with the client, just before sending a bill. The client was asked how much he thought the services were worth to him, and often the figure was higher than the actual bill. In the cases where the conjectured price was lower, the attorney had an opportunity to explain the cleverness of his maneuvers, or the time-consuming effort required to develop the evidence. A senior attorney told me that never in his life did he send a bill for more than the client agreed to pay, and he was a happier man for it. Naturally, the bills were higher when the attorney won the case than when he lost it, which is definitely not the case when a hospital is unsuccessful in a cancer cure. Similarly, you might think bills would be higher if the patient lived than if he died, but income maximization always takes the higher choice. So the absence of this face-to-face discussion is a regrettable one in medical care, as well.

Lifetime HSA and Whole Life Insurance: A Basic Difference

Over the years, much experience and lore have accumulated about running a life insurance company. Because the managers ordinarily are responsible to others who have risked private capital, more latitude can be extended to them than to taxpayer-owned entities. Consequently, it may be wise to obtain experienced counsel to suggest some business limits and latitudes which need to be authorized by law. The following is meant to suggest some areas which may need attention. And a lifetime Health Savings Account has at least one unique difference with whole-life insurance. A moment's thought about Lifetime Health Savings Accounts immediately highlights it. Life insurance has only one benefit claim, the death benefit. Once the flow of premiums begins, only one liability by a life insurer has to be made, the length and risk of individual longevity. The relationship goes on autopilot and a rough match can be made between the pool of bonds and the pool of policies at any time, adjusting only for policy additions and subtractions, or for fluctuations in the bond market. A Health Savings Account, on the other hand, must anticipate a possibly constant stream of deposits and withdrawals.

It is probably true, more money will be deposited in whole-life insurance in response to a fixed annual premium billing, than if deposits are optional in date and amount, so it probably would be wise for the manager of a lifetime Health Savings Account to calculate annually what deposit is needed, for each client to meet his goal, judged by his age and past progress. He should send reminder notices for the "suggested" amount. The purpose of health insurance is to provide money for healthcare when absolutely needed, building up a fund for potentially even more urgent future emergencies. We have partially surrendered the right to mandate the amount, in favor of creating incentives to save it. Consequently, there will be a more constant drain on the investment reserves, matched by a somewhat greater inflow needed from outside sources. The Law of Large Numbers will smooth this out as it does with bank balances, but some volatility is unavoidable.

Since the general inclination is to limit the Catastrophic health coverage to hospitalizations, the attrition to their independent reserves in the account balance should be constrained (not limited) to paying at least one deductible, by adding one deductible to the escrow section, to reassure the hospital it is available. The non-escrowed balance would then more closely reflect the growing retirement savings earned by the arrangement. Since the Catastrophic Insurer is ordinarily an independent company, coordination is essential for long-term coverage. We can get more specific, but for now, the risks to be managed are outpatient costs, less frequent but larger inpatient deductibles, and what for now we can call "all other". All three could usefully use reasonably independent escrows, which repeated display would encourage.

Overdrawn Claims. Since any client might be hit by a truck within a week of establishing an account, new customers present the biggest problem with getting escrowed reserves established. A large front-end payment can be required, and eligibility for benefits can be delayed. Lines of credit may have a place. Otherwise, established customers must fund and be compensated for the risk of early claims. Most organizations will probably elect some combination of the several approaches, with some combination of selecting which phase of the combined insurance should or should not subsidize the others, and how it should be repaid, and at what age. Bond issues are a possibility.

Overestimated Reserves. In the long run, solvency will depend on deliberate over-reserving, gradually reduced as experience accumulates. The basic premise is young people are comparatively healthy, whereas most of the heavy sickness costs will appear as the client approaches and attains retirement, many years later. Compound investment income will grow over time. There may be periods of mismatch between accumulating and invading reserves, so there should also be a provision for intergenerational borrowing and repayment, the size of which will be established at the onset. Every effort should be made to reduce these shortfalls by overestimating the need for them, possibly based on archived statistics from the term-insurance era. Nevertheless, future shortfalls and future bubbles will both be steadily predictable, and unexpectedly volatile, so over-reserving must be seen as permanently advisable. The consequence of all this is a continuing need for some allowable non-medical use of surpluses, such as conversion to retirement accounts, in order to generate reluctance to invade the reserves. The importance of this easily overlooked necessity is very great.

Proposal 8: Congress should state the principle that necessary Health Savings Account reserves should be somewhat overestimated at all times, linked to the incentive that individual non-medical uses of surpluses should be permitted at times when they are generally unneeded for health purposes.

Underestimated Reserves. And almost of equal importance is the need for early warning when reserves are threatening to become inadequate, in spite of every effort to overestimate them. Some sophisticated body must be created to oversee the growth of aggregated reserves, mandating increased contribution rates from subscribers. Since some subscribers could discover an increased contribution rate is a hardship, the oversight body must have the right to reduce benefits to uncooperative subscribers. That is, instead of reimbursing at 100% of the cost, they may have to impose a seldom-used rate of less than that. In order to perform this unpopular task, the oversight body must have access to better information than the public does, to be in a position to impose small steps rather than big steps. Under all these unpleasant circumstances, Congress could make the upper limit for contributions more flexible. At the moment, it is $3300 a year. However, while that amount now seems adequate enough, the figure is entirely arbitrary, probably set to prevent speculators from abusing the tax exemption. Therefore, if the upper limit is raised to address underestimated reserves, money might well be forthcoming to address the underestimate, which by then might have proved to be no underestimate at all.

Proposal 9: Congress should authorize the Executive Branch to raise the upper annual limit for deposits to Health Savings Accounts, whenever (and for such time as) average HSA reserves fall below an advisable level.

Half-Started HSAs

There's another quirk in the law, which may or may not endure. You don't need a linked high-deductible insurance policy to withdraw money from an HSA, but you do need it, to deposit more money. If you take advantage of that, watch out for the rule that you can't have two government plans at once, including Obamacare, Medicare, Medicaid, and Veterans Health Benefits. So it's best to take out the HSA first, then the other insurance. This is such a complicated process, it might very well change, so be sure to ask before taking any action.

In any event, the suggestion seems valid at the moment, that the worst to happen to you is to acquire a tax-deductible account which you aren't entirely free to liquidate until you retire. And it has a health insurance feature which is also tax-deductible to the extent it has been funded, but which can be used to empty the account if you are strapped for money. If you have other sources of funds, it probably would be best to spend the first, since doubly-deductible health insurance is hard to find.

A Change in Direction

For whatever reasons, much of the Affordable Care Act is still shrouded in mystery. After three years, an employer-based system is still predominant, and it remains unclear where a big business wants it to go, or perhaps what makes business reluctant to go ahead. It is even conceivable big business just wants a vacation from healthcare costs, hoping to go back to the old system of supporting the healthcare system by recirculating tax deductions. Once an economic recovery restores profits enough to generate corporate taxes, it will once again be worth saving them by giving away health insurance and taking a tax deduction. Otherwise, it is hard to see what value there is, in a year's respite. Under the circumstances, it begins to seem time to look at some new proposal, neither sponsored by an opposition party nor motivated by antagonism to the Administration initiative. Let's reverse its emphasis, testing how much it is true the financing system now drives the health system, not the other way around.

Both big business and big insurance have been remarkably silent about their goals and wishes for the medical system, while quite obviously agitating for some sort of change by way of government, and quite obviously leaving their own agendas off the visible negotiating table. Let's illuminate the situation, with the medical system speaking out about how employers, insurance, and investment should change while leaving the medical system alone until we better understand the finances which are driving it. The proposed way to go about all this is to harness Health Savings Accounts, with its two different ways of paying for healthcare (cash and insurance), with two-time frames for the public to explore (annual and lifetime), and passive investment of unused premiums versus concealed borrowing. So yes, it's technical, and necessarily it's been simplified. Two important features, multi-year insurance and passive investing, are outlined in this book. But one theme runs throughout: the customers, individually, should have choices. Nothing should be mandatory, everything possible should be left for individual customers to select.

Don't take on too much at once. Health Savings Accounts have grown to over 12 million clients, so it isn't feasible to do more than repair a few loopholes, and let it grow. The next logical step is to get rid of "first-dollar coverage". Not by eliminating insurance, but by making high-deductible the normal standard for health insurance. If we must make something mandatory, it ought to be ensuring big risks before insuring small ones. Catastrophic indemnity insurance is a well-established, known quantity; it's not likely to need pilot studies to avoid crashes. It doesn't need government nurturing; it needs big insurance companies to see the writing on the wall. So let's get along with it, without any mandatory coverage rules. If the old system of employer-based and tax-warped coverage can get its act together, that's fine. Because as I see it, the main danger in Catastrophic coverage is it will penetrate the market too quickly; let people have a level playing field to watch the game unfold. When we have two viable competitive systems, the customers can decide between them, and both will emerge healthier.

An observation seems justified. In a system as large as American healthcare, changes should be piecemeal and flexible; win-win is strongly preferred to zero-sum. Sticking to finance for the moment, we slowly learn to avoid zero-sum approaches, while strongly applauding aggressive competitors. Napoleon conquered Europe, and Genghis Khan conquered Asia by smashing opposition, but it isn't an American taste. Since everyone would prefer saving for when he needs that money for himself, (compared with being taxed to support someone else's healthcare), let's see how far and how fast we can arrange that. The recent extension of life expectancy creates a long period between healthy youth and decrepit old age. About 20% of those born in the lowest quintile of income, will eventually die in the highest quintile. That's a good start, but the process can't go much faster just because someone beats on the table with his shoe.

Nevertheless, a larger proportion of people could save a small amount of money when they are young, and by advantageous investing in a tax-sheltered account, accumulate enough money to support their healthcare costs while old. Some people will never be self-supporting, of course, but the idea is to shrink the size of the dependent population as much as we can. We can at least try it out, on paper so to speak. And if it produces good numbers, perhaps we are ready for pilot projects. That ought to be the next step in our long-term plan to reform the health system without attacking it -- switching from one-year term insurance, to multi-year whole-life insurance. The underlying insurance principle is called "guaranteed re-issue". We aren't ready for that yet, but we are ready to call in the experts in whole-life life insurance and ask for their guidance while setting up information gathering systems to navigate the reefs and shoals. The exercise does seem feasible and is partially explored in the rest of this book. Meanwhile, medical science is steadily reducing the pool of acute illness and lengthening the average longevity. Actuaries are my best friends in the whole world, but I think they are wrong about one prediction. Like retirement planners, both professions assume future taxes and future health costs are going to go up. But I am willing to predict, net of inflation, they will go down as longevity increases. Just wait until you see an enthusiastic medical profession attack the problem of chronic care costs. The nature of retirement living must change. Both things will change because of changes in the nature of investing and finance, the lowering of transaction costs, and the effect it has on the economy. Because: investing is based on perceptions, and a general disappearance of the acute disease will certainly re-direct perceptions of what is important.

Over thirty years have elapsed since John McClaughry and I met in the Executive Office Building in Washington, but a search for ways to strengthen personal savings for health marches on, trying to avoid temptations to shift taxes to our grandchildren, or make money out of innocent neighbors. Most of the financial novelties to achieve better income return originated with financial innovators and the insurance industry. But the central engine of advance has come from medical scientists, who reduced the cost of diseases by eliminating some darned disease or another, greatly increasing the earning power of compound interest -- by lengthening the life span. My friends warn me it must yet be shown we have lengthened life enough or reduced the disease burden, enough. That's surely true, but I feel we are close enough to justify giving it a shot. Before debt gets any bigger, that is, and class antagonisms get any worse.

While Health Savings Accounts continue to seem superior to the Obama proposals, there is room for other ideas. For example, the ERISA (Employee Retirement Income Security Act of 1974) had been years in the making but eventually came out pretty well. In spite of misgivings, ERISA got along with the Constitution. And we had the Supreme Court's assurance the Constitution is not a suicide pact. So, still grumbling about the way the Affordable Care Act was enacted, I eventually stopped waiting to describe an alternative. The long-ago strategy devised in ERISA, by the way, turned out to be fundamentally sound. The law was hundreds of pages long, but its premise was simple and strong. It was to establish pensions and healthcare plans as freestanding corporations, more or less independent of the employer who started and paid for them. Having got the central idea right, almost everything else fell into place. Perhaps something like that can emerge from Obamacare, but its clock is running out.

Passive Investing Increases Yield.

Spending Rules--Same Purpose As Escrow Accounts

Useful features are buried in the spending-rule idea. A portfolio would never go to zero if spending is held below a certain level; an endowment on auto-pilot. This magic number was once 3%, now is thought to be 4%. In trust funds for irresponsible "trust fund babies", spending rules are particularly common. In taxable circumstances, it is a vexing complication for non-profit institutions that federal tax rules require minimum annual distributions of 5%, somewhat more than a taxable account can sustain indefinitely, at least according to present theory, and assuming present costs. Every effort should be made to reduce middle-man costs, and the present rate of progress is encouraging. As long as medical progress continues to depend on a top level of talent, efforts to attack the cost of care itself may prove counter-productive.

In my opinion, a spending rule is pretty much the same as a budget, and the same goals can be accomplished with an escrow account, permitting no expenditures at all until a certain date, and then only for a stated purpose. And furthermore, there can be several spending rules, just as there are several lines in a budget. There surely ought to be both a discretionary spending rule and an inflation spending rule, for example, since inflation is beyond citizen control. As a practical matter, planning will generally mean 5% discretionary, and 3% inflation, for a total of 8%. Until recently, it was generally assumed if the Federal Reserve instituted, or Congress mandated, an inflation target of 2%, it would mean 2% was dependable because the Fed had unlimited power to print money. However, in 2015 the inflation rate is 1.5%, in spite of heroic efforts to use "Quantitative Easing" to bring it to 2% by buying two or more trillion dollars worth of bonds. Inflation has remained at 1.5%, resulting in much wringing of hands. So spending rules help establish responsibility for deviations.

It is not useful to engage in political arguments over why this is so, it must be adjusted for. The consequence is we have an Inflation Spending Rule of 3% and actual inflation of 1.5%, leading to a national inflation surplus of 1.5%. If a Health Savings Account has an Inflation Spending Rule of 3% only because that is what we have seen in the past century, our inflation is 1.5% under budget, which could easily be misinterpreted as an extra 1.5% to spend. When we figure out what this means, we can puzzle what to do with it, but until that happens, no spending allowed. Another precaution would be to have two spending rules, totaling 8%, only 5% of which is actually spendable. If we create special escrow funds for buying out Medicare or passing to our grandchildren -- the same thing.

{top quote}
If you don't limit yourself, Others will limit you. {bottom quote}
Spending Rules

In the case of Health Savings Accounts, a spending rule of 6.5% within an investment yielding a net of 9%, is a special case, but a good one. The central purpose of the whole HSA idea is to lower the effective cost of medical care, by generating funds to pay for it. The more income generated, the lower the effective price of medical care, so why impose a spending rule? In fact, a spending rule for an HSA does not reduce the income, it only delays the spending of it, because either the funding account gets exhausted by the time of death, or it is rolled over into an IRA. Either way, there is no final end to HSA spending, only postponements. When spending is postponed, it eventually earns more income; the ultimate effect is more availability for health care. If a cash shortage forces the HSA to curtail health spending, the bills must be paid from other sources, usually taxable ones. So even in this situation, there is more health spending power ultimately generated, but it is generated by not spending tax-sheltered money. It could even be argued that diseases later in life tend to be more serious. Indeed, if a spending rule is under consideration for an HSA, it could be voluntary as long as there is no way to game it. Unfortunately, that can lead to coercion for someone's own good, always a dubious idea.

If a portfolio generates 8% but only spends 5%, there's a safety factor of 3%, almost exactly matching the long-term effect of inflation. We hope moreover, the inflation issue is addressed by using the theory that inflation of expenses should match inflation of revenue, but you never can be sure of it. It is, in fact, more likely they won't match. A spending rule increases the power to shift surplus revenue to years of high medical cost, which will be later years, and will, by compounding, actually increase the total amount of it. This consequence is not necessarily obvious. The spending rule guards another easily forgotten thought: the purpose of an HSA is not to pay for every cent of health care. It is meant to pay for as much of it, as it can. It is likely, to invent an example, to encourage skipping cosmetic surgery, so there will be money enough for cancer surgery at a later time.

The purpose of this soliloquy is to justify the establishment of escrow accounts within Savings Accounts, to keep the fund from wandering from its purposes, or at least to recognize it early if it does. There should be a Medicare buy-out escrow fund, with a suggested budget calculated to make it come out right. And a Grandparent's escrow fund, and Permanent Investment Escrow fund, budgeted to pay for a future lifetime of care, alerting the owner how much it is below budget. These escrow funds are intended to be flexible but intended to serve their purpose. HSA Account managers are encouraged to use them and to explain them. By making certain escrows mandatory and uniform, big data monitoring is facilitated. Other government access should be minimized.

First Two, and Last Two, Years of Life

Before we get too deep into slicing average lives into average medical partitions, the reader should remember there is another way of viewing health care. Declaring we simply can't pay for everything because there are limited resources, we imply we agree on life's priorities when we really don't.

If this were a contest on TV, no two people might rank priorities the same way. But physicians would come closer. Reflecting common professional experience, most of them would give a special place to the first two years of life, and the last two. Health care costs concentrate there, and special reverence is paid to the patients. The rest of life has long quiet periods, but just about everyone is seeing or trying to see a doctor, during their first two and last two years. If we really must ration care, these are the years to be spared. These are the four years of maximum helplessness. We must keep it in mind. Special consideration is in order.

Children, 0-26

Everyone agrees there is a tangle about the rights and responsibilities which begin when childhood begins. We wish to avoid this issue as much as we can, but partitioning the costs of the average child requires stating some point or other, as its beginning.

Keeping the practicalities of paying for it in mind, we hope no one will object if we say childhood begins, the day you are born.

We next consider the healthcare costs of children, from birth until age 25, linked with the costs of the elderly, for a reason. One of the points made in this book as an arguable alternative to the present employer-based system is to keep it within your family, rather than tax other people as a class. However, although the system now claims to begin with the first full-time employment, a newborn provokes about $18,000 of medical expense including obstetrics before that, right from the beginning, before the child can even feed him or her self. Age 26 might be a reasonable place to begin self-support, not because of tax deduction, but since that's typically the age group with the lowest health costs. Even that starting age has its problems because the parents are not much more accustomed to managing finances than the child is. The central question remains the same. Who is to supply the $18,000?

The Progressive movement started the idea of "family plans" about a century ago, but Henry J. Kaiser is credited with noticing an employer's gift of the insurance would supply two tax deductions, the employer's and the employee's, during World War II. That "reduced" the cost of health insurance by at least 50% (for the employer and employee), but it made a married employee seem more expensive than unmarried ones, made healthcare seem a free cost to the recipients and therefore boosted its cost, introduced a religious note by discouraging multiple pregnancies, and was unfair to unemployed or self-employed persons who were excluded from getting the gift. It is impossible to determine how much this new twist distorted employment and medical prices, but by suspicion the unfairness was major. It surely prompted a response, and this is one. If a big business can get tax deductions for giving away healthcare, why can't everyone else?

So it is proposed -- hold your breath -- HSAs give the equivalent of $18,000 at the death of an older relative, to a newborn's HSA at birth. The average childbearing mother has 2.1 children, which works out to one grandchild per grandparent, and helps smooth out the cost of multiple children. Because births and deaths cannot be forced to coincide, some sort of fund has to be created to make all this come out fairly, but the result should equal a zero balance between two generations. And because everyone who is alive has somehow already paid his birth cost, there is less urgency to begin this feature at the onset of the program--it becomes a feature of the transition. And, going back to the pros and cons of including Medicare premiums in the compounding, the more surplus is generated, the shorter the transition period should become. Ultimately, of course, the cost of health insurance for the mother is reduced; but the main beneficiary of the transfer is whoever is now paying for the mother's health insurance. That would sometimes be the father, sometimes the employer, and sometimes the Affordable Care insurance.

A few children are cursed with horrendous medical bills, which quite often predict lifetime disabilities. For the most part, however, childhood medical costs are pretty small. It would seem to produce an < b>ideal configuration for insurance, leading to mostly small premiums, affording a lot of protection against a fearful risk which is nevertheless relatively uncommon. However, a newborn is unable to walk, talk or feed him or her self, beyond even mentioning his or her lack of savings. Parents are now expected to pay such bills, and when they are very large it is common for grandparents to help out. So it sort of fits the common situation to group the two dependent periods of life (childhood and old age) together, as a continuous loop skirting the income-producing period of life entirely. The underlying purpose is to shift overfunded money to an underfunded time, compensating the childhood cohort for the fact that compound interest appreciates very little during childhood, but very greatly toward the end of life. This configuration fairly shouts "risk pool" but requires legislative action because it is more a metaphor than legal reality. It serves to explain to people why we have struggled to close the loop for twenty or more years because what is true for children is definitely not true for Medicare, where the main costs congregate. To meet the disparity, we chose to employ patchwork solutions for a single generation, counting on the enhanced generosity of the public for disabled children to meet the major expense. This appearance contrasts sharply with the deceptively low average cost of ordinary childhood healthcare. The only danger is for this temporary expedient to become a career.

Please note the fiscal dilemma. Even if subsidies or gifts provided a $100 nest egg to start health savings account at birth, 2.5 doublings at 7% would only create a fund of $525 by age 25. That's not nearly enough to fund healthcare for individuals at risk of auto accidents and HIV while trying to pay for college, home mortgages or the like. By contrast, $100 a year for forty years might well pay for all of Medicare while retaining leverage of eight dollars out, for one dollar in. Adding $1400 a year for 20 more years would be much better, at 80 to one. For lucky people, $8127 might work, but its safety margin is too narrow for launching a lifetime medical system. The actual plan proposed is a complicated variant of this approach. As the reader will see, there will be ample funds available for a lump sum donation, once the system has closed the loop, because just 8.5 extra doublings from the beginning of lifetimes to the end of other lifetimes, without supplementation, should silence any remaining doubts, at 256 to one leverage.

Once it gets underway, the two-generation process is very simple, requiring only a few amendments to existing legislation. Extend the age limits of catastrophic high-deductible insurance down to the date of birth, and allow the premiums to compound up to the date of death or 104, the length of a perpetuity. After that, allow surplus Health Savings Accounts of the parents or grandparents to flow over to the HSAs of the child, and allow surplus funds of grandparents and designated others to be transferred (from the date of death of one, to the date of birth of the other) via the HSAs of both. Gifts of this sort might even become a popular item in obituaries, in lieu of flowers.

Springing such a radically different proposal on an unprepared public is potentially to provoke ribald rejection, so it's gradually introduced here as a challenge to provoke alternative proposals. At the moment, I don't see what they would be. We are combining the advantages of two systems, for the young and for the old, which separately they cannot achieve, except through the socially threatened but biologically inescapable, concept of "family".

HSA Lifetime Payments: Limits of Feasibility

The two traditional ways to pay for healthcare are paying directly with cash, or paying indirectly with insurance. Each has advantages, and we return to them later. This book proposes a third payment method which ought to be cheaper, while medical care itself ought to be unaffected. The payment idea grows out of a quirk of modern health care: Children up to age 20 consume only 8% of current medical costs; 92% of healthcare expenses arise decades later. Most families of young people could save up money during the long low-expense period, adding extra compound interest to use later. If this approach reduces overall costs, some of the saving could be used to subsidize the poor. No one doubts some extra interest could be gathered. The really critical question then sharpens: Is it enough to be worth the trouble?

The calculation is not an easy one. In the past century, the nature and cost of healthcare changed dramatically and will change more in the future. Nevertheless, attempts are often made to estimate national health costs; lifetime costs are now widely accepted to range around $350,000 per person, in the year 2000 dollars. Women cost about $50,000 more than men. That's partly a result of the statistical convention of attributing all costs of pregnancy to the mother, and it also reflects females living longer than males. These are daunting amounts of money, but at least we can estimate some upper limit to costs from them. At the other boundary, we know some interest could be earned on almost any balance. So the problem has a solution. The real feasibility issue is whether it produces enough savings to be worth the trouble.

The ability to save varies considerably between families, interest rates vary, longevity increases; no one can know precisely what health care will cost when newborns of today live to be a hundred. On the other hand, estimating national totals is often easier. Dividing national data by the size of the population generates individual averages, which are more natural to comprehend. Furthermore, sometimes we know the available revenue but not the costs. It seems a little cynical to say so, but since one limits the other, they are often (roughly) interchangeable. The rest is a little speculative, and sometimes you just have to make an educated guess.

What a hypothetical average person could afford to pay is one of those speculative matters, and what the average person would willingly pay is even harder to guess. But there are limits to reasonableness; some boundaries can be recognized. So, let's now test what the plausible limits might be, starting with a range of interest rates. As a further preliminary, present longevity is to age 83, and one plausible guess about where it might go next century is age 93. The limit to what almost everyone could afford for a newborn child is guessed to be $500; it seems to be a bargain the government would readily accept as a subsidy to the poor, in order to cover a $350,000 expense. Table # 1 displays the first stab at an estimate. It leads to a conclusion: the proposal of pre-funding health care seems feasible enough under certain circumstances, to justify further investigation.

Interest Return According to Roger Ibbotson, the acknowledged authority on investment statistics, inflation has closely approximated 3% per year for the past century. United States stock market assets have appreciated in a range from 10% (large-cap stocks) to 12.7% (for small-caps) for a century. Growth stocks and value stocks have followed different cycles, but over a span of a century have generated almost identical returns. This table makes the hypothetical assumption that average parents already contribute as much as they can at the birth of their child, and all further additions to the child's fund our investment income. Can the cost of a lifetime of health care be supported by a $500 contribution at birth? Under certain imagined circumstances, the answer seems to be a tentative "Yes" -- if the fund can be invested at 7 to 8%, or the average longevity is between 83 and 93 years. Although it may take a little explanation, these do not seem like unreasonable expectations. It might, therefore, be said that if there are no interruptions or withdrawals (a totally unreasonable expectation by the way), the presently expected cost of an average lifetime of healthcare could be accumulated from the investment of $500 at birth. With no further expenditures than the original $500, although it may be a little too early in the discussion for a skeptical reader to accept that. How about this for an alternative: Although the devil is most assuredly in the details, the goal of paying for a substantial amount of healthcare in this way, is at least conceivable.

Having said that, it should also be firmly stated that paying for all of healthcare costs this way, is neither necessary nor probably even desirable. In the first place, when you make things totally free, they lose their perceived value in the eyes of the recipient. He treats the gift as worthless and is induced to spend money even more carelessly than he does with insurance. Secondly, by placing a cap on the upper bound, we adopt indemnity principles of shifting the risk to the person in control of them. It thus removes the temptation to favor inflation as a way of escaping from debts. Third, the explanation acquires specific numbers to replace vague promises. So, let's set the far more realistic goal of paying for half of it, and seeing if that seems even more feasible by using somewhat reduced limits.

The achievement of $175,000 cannot be made by simply cutting one of the ingredients in half, because that reduces his balance(and its resultant later income) by half, also. The result is the recipient soon gets into a downward spiral, just as the miraculously enhanced income sent his spiraling balance upward. We develop a family of curves (figures 2a to 2d) for different contribution levels in the next chapter, but must first digress to meet an unexpected development There's a sweet spot, and we are already close to it. To test this point, we have some very rough estimates from the AHRQ (the Agency for Healthcare Research and Quality) of the distribution of average health costs by age. If we subtract these costs from the data already mentioned, we would choose 8% as the most likely income, and age 88 as the most likely average longevity. The results are seen in Graph #1 and summarized in Table #2. To assist in the verification, the AHRQ data show that 8% of costs are in the age group 0-20; 13% in age 21-39; 31% in the age group 40-64; and 49% are over 65. The preliminary results are seen in Figure 1a.

Whoops! It is immediately obvious our preliminary description has forgotten something important. We will correct the graph in a minute, but first, we must explain something about paying for healthcare. All of the revenue for healthcare must be generated during the working years of, roughly, 18 to 66 years of age. Ignoring a few trust-fund exceptions, the costs of childbirth, neonatal costs, and childhood are currently borne by the parents of a child. To some extent, the fall-back costs of the grandparents are also covered by people in the working age group. To go even further, when the government pays for dependent healthcare, this too is covered by taxes, which are generated by working people. To summarize, no matter what the direct source, ultimately all healthcare costs are derived from working-age earnings.

In table 1b, we remove the 8% of health costs generated by children, as well as the $44 in revenue which is their portion of the $500 seed money, and redraw the graph; we move the beginning of the revenue curve to the time of birth, gaining three doublings of revenue. The anomalous excess of costs over revenues is reduced but not eliminated. The expected surplus appears as promised, but at the end of life, where it becomes considerably enhanced. The general financial idea is vindicated, but what of the children? Their costs are incorporated into an independent Health Savings Account. The legitimacy of doing so, and the financial consequences, are discussed in the following section. For the present, we can see from Figure 3a. that this approach helps but does not entirely reconcile the financing.

The revenue for that account is introduced at age 35 when health costs are predictably low, and ownership is transferred from the parents to the child. That is, we recognize the validity of such a transfer of responsibility, but during the transition from one system to the next, must yield to the requirements of transition. Because of the overlaps, it may well be desirable to keep the two funds separate for quite a long time. It would seem premature to anticipate dynamic effects on the culture of marriage, divorce, and multiple family health insurance plans, and let the consolidation of accounts remain optional until much later in the unfolding of this scheme. Figure 1b illustrates the effect of consolidating accounts in figure 5c, and considerable experience with this issue probably exists within the life insurance industry. A reverse case can even be made for splitting the account into smaller age subgroups by logical age groups, as a way of easing the entanglements which people get themselves into.

Martin Feldstein Does It Again: Eliminate Tacit Tax Exemption for 70% of Workers Denied To the Rest

Headlines in the Wall Street Journal announced collapse of Congressional healthcare reform. In the same edition, a small short article buried in its depths described a possibly major step toward its reform. Martin Feldstein calmly observed, a tax exemption for healthcare insurance of 2.9% really amounts to a wage increase whose elimination might go a long way toward paying for the eighty-year mess Henry J. Kaiser had created. (In fact, it was effectively taxable income of 4%.)

It was all so simple: healthcare extended longevity, created thirty years of new retirement cost. In turn, exempting the premium for healthcare became a tax-exempt increase in wages -- for the 70% of employees getting insurance as a gift. Maybe not at first, but wages adjust to expect it during eighty years. Social Security could not cope with an extra thirty years, so SSA was going broke, while health insurance was actually the main cause of increased longevity.

But notice how unused Health Savings Accounts automatically turn into retirement accounts (IRAs) for Medicare recipients. So if you are lucky and prudent with healthcare, or if you overfund an HSA, unused healthcare money makes a reappearance in retirement funds where it belongs. If you have used up the money, you have probably been sick, and maybe won't need so much for a shortened retirement. Increasingly, expensive healthcare hits the elderly hardest, so there are many years during which compound interest overcomes inflation. At the rate things are going, retirement may become four times as expensive as Medicare, so let's consider that future.

Medicare doesn't save its withholdings, it uses "pay as you go" and spends the money on other things, like battleships. Therefore, to make any use of this windfall, it is necessary to save it, invest it, and use it for retirement. Just doing that much might redirect the other 30% of the withheld tax to its intended purpose. So the economic effect would be considerable, just by stirring around in that corner of it.


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Direct Premium Payments, Constitutional Issues
New blog 2014-01-02 19:15:22 description

Diagnosis Related Groups (DRG), in Relation to Medical Electronic Records.
The DRG classification system was developed independently of the hospital payment system, for a different purpose. The hybrid use for hospital reimbursement has worked surprisingly well but needs extensive revision.

Front Stuff, Health Savings Accounts: Planning for Prosperity;SECTION ONE: HSA and its Competitor, in brief

Good Ol' Health Savings Accounts
Possible fixes in health savings account to adjust to Obamacare. HSAs remain available and have millions of pleased subscribers. A debit card pays (tax deductible) medical expenses, and does the book keeping. High-deductible health insurance is also required, mostly to cover hospitalizations, but primarily to smooth out the unevenness of disease. Bronze plan is the cheapest Obamacare option, but private catastrophic coverage would be cheaper.

Rollover of Unspent Flexible Spending Accounts
Flex Spending is use-it or lose-it. Employer-based insurance, only.So, wasteful things are bought at year-end. It made some sense when it was the employer's money. But now FSAs surplus is mostly the employees own money, the option to roll-over, as in Health Savings Accounts, seems only fair.

FOREWORD, written June 28,2015
Obamacare and Health Savings Accounts briefly summarized.

Some Ruminations About the Far Future.

Passive Investing by Unsophisticated Investors
As long as you buy the whole market, it doesn't matter why you buy it: Malkiel says all the information is in the stock price, so don't try to beat it. Bogle says there might be a difference, but the finance industry doesn't give it to the customers.

Fun With Numbers

Summaries for the Book Jacket and Elsewhere.
Left jacket fold-over.

Public Misconceptions

Lifetime HSA and Whole Life Insurance: A Basic Difference
Lifetime Health Savings Accounts resemble whole-life insurance, but there are significant differences.

Half-Started HSAs
If you create a mandatory high deductible, you must create a way to pay for it.

A Change in Direction
Health Savings Accounts take a new direction, adds some features borrowed from other professions, and sets sail.

Passive Investing Increases Yield.
After the architecture of the system is settled, its final advantage is multiplied by investment management. The final yield is determined by the economic marketplace, but it's also determined by longevity (medical management), frugality (choices by patients), and waste (managers and caregivers). That's always been true, but the new players are longevity, investment, and frugality.

Spending Rules--Same Purpose As Escrow Accounts
Invisibly, a corporate spending rule is a way to increase the size of the reserve fund.

First Two, and Last Two, Years of Life
Medically speaking, the four most eventful years of almost anybody's life.

Children, 0-26
Everyone agrees there is a tangle of rights and responsibilities about the beginning of childhood.

HSA Lifetime Payments: Limits of Feasibility
New blog 2015-02-12 18:46:07 description

Martin Feldstein Does It Again: Eliminate Tacit Tax Exemption for 70% of Workers Denied To the Rest
The Henry Kaiser tax exemption for health would pay toward Social Security, indirectly paying for retirement, which health insurance prolonged.