Philadelphia Reflections

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

2 Volumes

HEALTH SAVINGS ACCOUNT: New Visions for Prosperity
If you read it fast, this is a one-page, five-minute, summary of Health Savings Accounts.

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.

FRONT STUFF: Health Savings Accounts: Planning for Prosperity; SECTION ONE: HSA and its Competitor, in Brief

Editorial material for book construction.


Front Stuff: Surviving Health Costs to Retire: Health (and Retirement) Savings Accounts

...Also by the same author:

The Hospital That Ate Chicago, Saunders Press, 1980

Health Savings Accounts: Planning for Prosperity, Ross & Perry, Inc. 2015


Ross & Perry Book Publishers

3 South Haddon Avenue

Haddonfield, New Jersey 08033



Surmounting Health Costs to Retire: Health Savings (and Retirement) Accounts Copyright: 1-2540412791

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



For advice and support about the thrust of this much-revised book, I owe new debts to the many people who read the first version and commented. The first book was written as ideas developed in my mind, and rather in a hurry. The present revision was written so later thoughts could be introduced earlier in the argument. It also gave me a chance to distinguish between, what is immediately practical, and grander ideas at the mercy of intervening events. I briefly considered omitting the long-term viewpoint, but include it to suggest alternatives which may or may not be achievable immediately, but would seem like blunders if passed over when there was room for them. Voters want representatives (and authors) who are clear what they hope to achieve, even if events bring them short of it.


Foldback, Front Cover

This book outlines the hidden advantages of Health Savings Accounts, which the author had a hand in creating in 1981, along with John McClaughry of Vermont when John was Senior Policy Advisor in the Reagan White House. HSAs have achieved 30% savings among early subscribers. The most popular advantage appeared later: to convert the left-over tax-exempt savings to an IRA, at the time of beginning Medicare Coverage. Because of the popularity of this retirement savings feature, this book suggests renaming them to Health and Retirement Savings Accounts, to emphasize the dual possibilities.

In a later section, the book looks ahead to still other features which take advantage of compound interest income during an era of lengthening longevity. Substantial savings appear to become possible from reversing the system, from paying interest, into one of receiving and compounding it. Individual private accounts rather than group insurance contain a number of other hidden advantages, as do high deductibles but absent co-pays. The public currently embraces Medicare but needs to foresee the advantages of gradually shifting its funding whenever research reduces Medicare costs in the future. The mathematics appears to be sound, but resistance might appear, from the political and social disruptions entailed.


Foldback, Back Cover

George Ross Fisher III M.D.

George Ross Fisher, MD, the author of this book, graduated from the Lawrenceville School in 1942, from Yale University in 1945, and from Columbia University, College of Physicians and Surgeons in 1948. After postgraduate training at Pennsylvania Hospital, Thomas Jefferson University, and the National Institutes of Health, he spent 60 years practicing medicine in Philadelphia. During that time, he spent 25 years as a delegate to the American Medical Association, and as a trustee of a number of medical organizations.

Following retirement, he formed a publishing company, Ross and Perry, Inc, which has published several hundred books, mostly reprints. He is personally the author of eleven books about Philadelphia history, from William Penn to Grace Kelly. He is the author of the following three books about medical economics:

The Hospital That Ate Chicago; Health Savings Accounts: Planning for Prosperity; Surmounting Health Costs to Retire: Health (and Retirement) Savings Accounts,(the current volume.)


Dedication Page

To Robert Morris of Philadelphia, who taught Alexander Hamilton about credit, but personally learned it had its limits.


"Christmas Saving Fund" for Medical Care

After listening to a description of a Health Savings Account (HSA), the nice Quaker lady exclaimed, "Why, it's just a Christmas Saving Fund for health care!" And so it is. First, you buy a health insurance policy which pays the cost of major illnesses above a fairly high cash deductible. And second, you create a special savings account -- independently and tax-free. That one is to build up the cash deductible, and/or outpatient health expenses below (too small to trigger) the insurance.

Once your savings account has at least reached the deductible level, you are totally covered for major health expenses -- from the first dollar to last, just like Blue Cross used to be, long ago. True, you still must pay small outpatient costs, but passing them through the account reduces their cost by the income tax deduction. We hope you just keep on adding to the account as you are able, tax-free up to $3350 per year ($3400 next year), but the decision is yours alone.

Something significantly extra emerges at the age you become eligible for Medicare. We therefore even suggest a name-change of HSAs, to Health and Retirement Savings Accounts,(HRSA), because any surplus from remaining healthy turns into an Individual Retirement Account (IRA) when you convert to Medicare. For some people, this retirement addition is more important than the health care part. It will all depend on whether your health has been robust, average, or sickly. For most people, it has been robust.

As far as healthcare coverage is concerned, many speeds of differing amounts will reach the same finish line, so the Health Savings Account invites the subscriber to choose the speed he can afford to risk, periodically, to reach the deductible (or even more). In fact, there are incentives at every turn to save more, because some people won't save unless prodded a little. In fact, the average American spends $2000 annually on loan interest, because he can't resist the temptation to buy things.

But you can always delete this particular account's balance for an illness, then restore or exceed it tax-free, if part of the balance does happen to be needed for healthcare. Meanwhile, the account earns tax-free income. It isn't hard to understand, particularly if you read the description twice, but its hidden power may be less obvious. The old Blue Cross system had a "use it or lose it" quality to it, but the Health (and Retirement) Savings Account gives you back anything left over, as an incentive to save for retirement. The first part of this book tries to make clear how important the difference is. (See the table at the bottom of this first section.)

Because both deposits and medical withdrawals are untaxed, the system offers the advantages of both a regular IRA and a Roth IRA, combined. The only disadvantage to overfunding the account is to pay a penalty for non-health expenditures from it before age 65. After the HSA subscriber reaches Medicare eligibility, it all turns into an Individual Retirement Account, which you can spend on anything you please. Since you can't predict what your health will be, the harmless incentive is to keep it overfunded to get more tax abatement, but nevertheless, that's not required.

* * *

That's unique and simple, and all quite true, but it describes only a fraction of the full potential of HSAs, which require the rest of this book to explain. Read the first four short paragraphs again if they seem unclear. Much of their potential wasn't dreamed up by the originators (John McClaughry and me) at all but just tumbled out as patient experimentation and experience accumulated. It's tested, all right. Between fifteen and twenty million Americans already have these accounts. As things turn out, they are not merely attractive to poor people, although that's how they began. The original goal was to help people of average income afford what most people who work for big corporations had been given by their employers for decades, but innovative thinking has gone far beyond that modest beginning.

The Traditional, or Employer-based System. In spite of all the talk about healthcare reform, about half the population still retains the employer-based design, and they passively imagine the employer design only requires tweaking to be perfect. However, it remains relentlessly connected to the kind of job someone has. It begins when you get a job, and ends when you quit that job; that's a difficulty, right there. In employer groups, you don't buy it, your employer buys it and gives it to you as part of your salary, but you need not suppose your pay-packet is as big as it would be without it. The result is, the core of the employer system has become largely funded by tax deductions -- the employee's, (20-30%), and particularly his employer's at a higher rate (40%). The relentlessly rising costs it provokes are not the employee's problem nor his employer's problem; they are the government's borrowing problem and a big one. But the source of its cost inflation is the false appearance it is free. It isn't free. It may well be the main reason America's corporate income tax remains so high, driving our corporations abroad. Otherwise, it suppresses profits, take-home pay, dividends and tax revenue.

Employer-based health insurance is so full of cross-subsidies (both inside and outside the hospital), it would be hard to say who supports what. But clearly, young employees subsidize older ones and may lose out entirely if they change jobs, as they frequently do. Unfortunately, the Affordable Care system uses the same configuration but superimposes income groupings. Unless the Affordable Care Act changes, thirty million people will be specifically excluded from it. While it mandated uniform subsidies, its subsidy designations conflict with existing ones and cause problems which have not been solved in two extensions of the employer insurance mandate. Some subscriber groups match the government subsidy limits fairly well and prospered. But the components in other insurer groups do not happen to match the subsidies well and are threatened with considerable disruption. Stay tuned to hear how this works out.

Overall, the whole system is unbalanced, with the working third of the population struggling to support the non-working two thirds, too young or too old to be working. Thirty years have indeed been added to life expectancy in the past century, so it's hard for anyone to complain about the effectiveness of the American health system, except notice: not getting sick means a longer retirement, requiring more retirement income. Everyone wants to live longer, but few can afford a long vacation after the working years. Employer-based insurance encourages more spending; the illusion of being free encourages wasteful spending because neither the patient nor his employer have much "skin in the game". Its biggest problems grow out of its most attractive features. Everybody hates to admit it, but longer retirement costs are merely deferred, unfunded, healthcare costs, in a new form.

Further Advantages of Health Savings Accounts. Before going further, let's go back and notice what else tumbles out of the simple structure of the HRSA, or Health and Retirement Savings Account, which now becomes our central topic. First of all, it's usually lots cheaper. Sometimes it's hard to prove where the savings originate, probably about 15% from the account itself, and another 15% from the catastrophic (indemnity) health insurance. Eventually, any savings get greatly multiplied by compound interest.

Cost-Savings. The higher the deductible, the smaller the premium, is just mathematics, but it's a big reason this package appeals to financially struggling people. But notice what's obviously also true: the lower the deductible, the higher the premium. Seemingly, it should all come out the same, but in fact, it's cheaper. The HSA (Health Savings Account) started out as a new way to lower premiums temporarily, for people who didn't happen to be sick at that moment. However, if someone becomes sick, the average total of premium plus deductible, in the aggregate, surprisingly often turns out to be lower than regular insurance. That's when we started noticing its hidden features, trying to explain such hidden power. First of all, this approach probably does induce more young people who aren't sick, to buy insurance.

Having larger numbers of young subscribers lowers the average premium for everybody else because healthy youngsters essentially buy protection, not health services. Subscribers acquire some control of the premium price, but it's incomplete and they sense it, depending on insurance design. For the most part, young people overpay for protection. Nowadays, the Affordable Care Act sets mandatory deductibles for all health insurance plans, while ostensibly forcing everybody (except for 30 million embarrassing exceptions) to buy health insurance, too. That's supposedly a way of forcing premiums down, except it upsets people to be forced. And anyway, premiums for what satisfied the Affordable Care Act quickly went up higher(and alarmingly went up faster) than before. The cops and robbers approach didn't save money, probably because all government projects are "one size fits all", responding to the equal protection clause of the Constitution. That's nice, but it can't defy the law of gravity.

In better economic times, appreciable interest income is earned when young healthy people stay healthy for fifty years before they do get sick. Effectively, with an HSA you can pick any residual deductible you want, by taking more risk, or less, for a few early years. As the Christmas Fund builds up to the deductible and beyond, eventually you take no financial health risk at all and begin to take retirement risk. Let's say that again: by partially funding the insurance company's posted deductible, what's left unfunded is setting the true deductible. Most HSRA subscribers eventually fund it all and have no true remaining deductible when they get sick. But a funded deductible has changed the nature of the cost resistance. It now becomes one of protecting your investment, because you are surely going to need it, some time.

The amount of subscriber risk can remain only fuzzily described, whereas insurance companies must pay to the penny, and usually can't accept vague financial risks. This one stretches over too many years to be safe for them to predict, even in bulk numbers. Mismatches are numerous, between income and sickness experience. When you have enough money in the Health (and Retirement) Savings Account to pay a deductible, you essentially have first-dollar coverage. That doesn't exploit the full potential of HSAs, but it's at least one of the things it does. The fact that excess spending is less provoked is proof that a particular issue can be addressed. In addition, almost all modern insurance also has an upper limit to total cash out-of-pocket medical costs, but those limits are higher than the deductible. They were added to cover the remote possibility someone might have more than one illness in a limited time period. This soon gets to be a complicated insurance theory, but it includes a warning: you must know the risk if you are to assume it.

The designers of the Affordable Care Act evidently underestimated the amount of backlogged health maintenance they were assuming, and probably underestimated it by vaguely ascribing it to "pre-existing conditions." All you really need is to read the newspapers to see the Affordable Care Act is very close to getting insurers into financial trouble. (My local Blue Cross organization lost $56 million last year, and the whole industry probably lost a $billion.), thereby eventually passing big trouble on to the public. One of the major sources is an unsophisticated gap between the deductible and the lower limit of out-of-pocket costs. If you take a risk, you must know how much it is, or else who will assume it for you. To base that gap on the insurance company's need for risk limitation is a pretty crude approximation, which in fact presumes the government will assume it. Insurance executives surely knew this; whether the politicians did, is less certain. Obscuring the risk possibly doubles it, as two parties seek to protect themselves.

By contrast, the HSA subscriber does run a small but definable risk during the time the account is building up to the deductible level. He can guess at that risk, which is extremely small for young people, and hopes he won't get very sick for several years. Inevitably, older people have a greater risk because they have worse health. So right now everybody's safety rests on hustling to build up the account as fast as possible. Because it's a pretty good investment, it's a good idea to overfund the account whenever the subscriber has spare funds, just in case. Lots of poor people are too unsophisticated to have bank accounts. That's fine -- just overfund your HSA. Unfortunately, the Administration just applied a penalty for doing that in an unspecified way, a pretty vague if not unenforceable threat. I do suppose someone could get hit by a truck on the way home from buying insurance, but in that situation, the limit for uninsured costs would be the size of the deductible; if deposits had been made to the account, it would be less.

Once the gap is filled, you can change the premium or fill the account up a second time, but many people are often too unfamiliar with the twists and turn to achieve absolutely minimum costs. Rest assured, HSA is a pretty good investment although not a windfall, so unsophisticated people don't have much if anything to lose by overfunding it. Some have suggested the gap can be narrowed by buying life insurance, but cost statistics are not available to evaluate that possible approach. Someday, some enterprising insurance company will offer an automatic re-adjusting feature, but it would add cost. It requires a company to get involved without charging high fees, hoping only for big volume for a reward. Hoping for big volume implies heavy marketing investment; annuities are probably too expensive to serve the purpose.

{top quote}
The Retirement part is more important than the Medical part. {bottom quote}

Note: The Standard and Poor 500 index has averaged 6.6% modal net return after inflation, for the past century (1916-2016), including two major depressions, two World Wars, and innumerable recessions and minor wars.

Eventually, the subscriber will discover more money in his account than he absolutely needs for healthcare (and the sooner he does, the better). Some people will buy a newer car, or a bigger house, send someone to college or pre-pay some future lean year of his own when he is between jobs. If those events describe his entire future, he needs to read no further. For some people, a sudden illness may, however, terminate their planning. For the rest, however, the big problem will be to avoid outliving their retirement income, usually because they remain so healthy, not because they spent their reserves on illness. We all secretly hope the future will be good to us.

In fact, paying for retirement in the future threatens to become such a large problem, it could dwarf illness as a threat for almost anybody. It begins to raise the question of what the main threat facing any particular person, really is. Thirty years of extra longevity are wonderful, but everyone needs a way to pay for them, particularly if they should turn into forty years. Taking the long, long view is what the rest of this book is all about: We seriously propose a solid foundation of Health and Retirement Savings Accounts as a bulwark for just about everyone's far future. Meanwhile, unless someone changes the rules, it's hard to see how very many people could lose money by getting started. The rest of this book shows ways to do still better than that, without getting hurt.

Retirement Income by Overfunding Healthcare

All right, Health Savings Accounts once appeared to be merely Christmas Savings Funds, helping people of modest means accumulate the money for their high "front-end" deductibles. The high-deductible design of health insurance paradoxically reduces the premiums of catastrophic health insurance policies. At least that's how they began; with higher deductibles on the claims, annual premiums could become lower, and the effective deductible gradually disappeared with contributions to the Christmas Fund. Subscribers to the savings accounts did run a small risk they might not deposit the full deductible before serious illness appeared, but the serious illness itself was otherwise fully covered. In fact, the effective deductible was reduced by whatever they had deposited but the premium did not rise; after a few years most of them had no out-of-pocket deductible left to pay, at all, and no extra premiums to pay for it.

So the first consequence to appear from Health Savings Accounts was first-dollar coverage without higher premiums. A small risk of small ongoing outpatient costs remained, but after a few more years even that was covered, again without raising premiums. Financial protection gradually increased with time, starting first with the worst disasters, working down to trivial ones, eventually to none at all. To repeat, without a rise in premiums, so gradually the whole package provided better coverage without increased premiums. That's why they got cheaper; the former insurance profit turned into a consumer investment. Wasteful spending was also restrained by subscribers protecting their investments, an impact which actually increases over time. With a little luck, or else starting young enough, it was possible to slide past the risky period of time, unaffected. That pretty much summarizes the medical part of the two-part plan to surpass "first dollar coverage" as fast and as cheaply as possible. The power of the Christmas Savings Fund was much greater than it appeared to be.

But after that, subscribers still had an increased cost of retirement income to worry about. It's an integral part of the medical issue because retirement costs inevitably rise with improved longevity. That's not hard to see, but if it's forty years away, it's easy to neglect. However, it becomes almost impossibly hard to get this result, if it's only two years away. That's called the "transitional problem"; everybody isn't twenty years old on the same day, and some people have simply lost their chance. Some people are already sixty-four, with variable amounts of savings. Since they can't arrange thirty years of retirement funding in a single year of saving, they have to fall back on the next-best approach. Which is to make the whole thing cost as little as possible, thereby reducing the number of people hurt by differences in age.

Fine, but how would all that theory enhance retirement income, except in pitiable amounts? What's been accomplished so far, has been accomplished collectively. The rest is up to the individual. Everyone can, for himself, make it less pitiable.


At 6.5% compounded quarterly, it's impossible to catch up with $400 at birth, with annual deposit limits of $3350 after age 59.

Be Frugal If You Must Spend From This Pocket. It's surely pitiable if you spend it as fast as you save it, but can build to a meaningful level in retirement if you just don't spend it. Our national leaders often say we don't spend enough. But they are talking about investing in factories, not spending on hula hoops. Nobody seriously sees any value in useless spending except a salesman. Frugality almost has to become a way of a person's life, because its impact consists of many small savings in accumulation, then multiplied by compound interest. For example, people have trained themselves to avoid paying cash for whatever insurance already covers. Here, many must deliberately re-learn to pay cash for small services, even if covered by insurance. That may sound like paying double for medical service, but its intention is to save the tax exemption for bigger things later. Let's examine that in detail, later.

Usually, premiums are set a little high to provide a margin of safety; a resulting surplus is diverted to reducing future premiums. If you think it through, the insurance company shifts its own risk onto future subscribers. (If the company goes broke, the remaining subscribers may find the risk shifted to former subscribers who dropped their policies.) Insurance companies call this a defined-term, or "term" insurance model because employer-based groups contain people of all ages, so a one-year term of insurance risk is safer for them in dealing with older subscribers. That's a good thing, by the way; you don't want your insurer to go broke.

In employment-group health insurance, surplus or deficit is made up after a year or two of "experience rating", because final health insurance risk reaches an artificial end at age 65-66, with Medicare then shouldering the remaining healthcare risk. Unfortunately, the sharp pencils of the company groups tend to make the individual (non-group) policies serve as a sort of contingency-risk fund, although employers are generally unaware they are having this effect on people who do not share their tax exemption. Nevertheless, someday, current low-interest rates must go back up to normal levels, investment income once more becoming a meaningful gain; so look for investment income to return to normal for individual policies. There are myriad reasons behind the yield curve slope, which relentlessly defeat the convenience of any Federal Reserve Chairman who wishes to continue low rates. Call it supply and demand, for shorthand.

Individual ("non-group") insurance also contains people of many ages, but people using it are expected to know how old they are. Health Savings Accounts are always individual accounts, not pooled ones. (The required pooling of risk is situated within the catastrophic health insurance, attached to every savings account.) Individual unpooled accounts offer two advantages to younger people: of a longer time horizon to work out the leads and lags, plus some savings from not subsidizing older subscribers, as employer group policies tend to do. In an HSA you subsidize yourself at a later age, which is a whole lot different.

You do share your major health risks in the insurance part, but you don't share your individually compounded savings from frugality, in the savings account. Older working people might be wise to set aside some personal savings to supplement the one-year term health insurance, adjusting for the more frequent risk of a second sickness in older people. Because the Affordable Care Act mandates the deductible, it also mandates an "out of pocket limit" to recognize the risk of a second illness coming along too soon. So Health Savings Accounts usually do the same. That's safer but raises the cost. Furthermore, interest rates have been unusually low for nearly a decade, so banks have made a habit of paying lower cash dividends longer than rising earnings can justify. However, in spite of the superficial theory that Health Savings Accounts cannot accumulate much money for retirement, demand for them has been heavy and fairness has become balanced. At present, their aggregate deposits are already reported to be over $30 billion.

Deductibles vs. Copayments. This seems a good time to emphasize the good feature of a front-end deductible, compared with the uselessness of copayments (traditionally 20% of claims cost.) Both of them reduce premium levels, but for different purposes. Deductibles induce patient frugality, as we have noted.

The purpose behind the typical 80/20 co-pay is less obvious since it is only calculated after a claim is made, or let's say after a wasteful procedure has already been performed. Repeated studies have shown it has a little net effect on premiums or service usage. Instead, it is favored by negotiators who must make quick decisions in a bargaining session, because a 20% co-pay results in a 20% reduction of premium, a 40% co-pay would result in a 40% premium reduction, etc. Co-pay has the additional perverse effect of making a second supplemental insurance policy attractive to most subscribers, including a doubling of its insurance profit and overhead.

Consequently, we favor high "front-end" deductibles, but reject copayments from insurance design. And subscribers ought to do the same.

Perhaps not surprisingly, most new subscribers to HSA have been younger than age fifty, and forty percent have so far never made a single withdrawal from their accounts. It's hard to measure, but the aggregate small incentives of saving for retirement have resulted in 30% less spending for disease, so the size of account balances grows faster than expected in spite of the current recession. Ultimately there must be some surplus because competition will force at least some savings to be distributed to subscribers. Subscribers are nevertheless on the lookout for investments which pay more than ordinary bank savings accounts; stock index funds ("passive investing") are the most popular alternative. Please notice that all of these explorations grow out of the unusual feature that Health (and Retirement) Savings Accounts are the only available form of health insurance which surrenders all termination surplus directly to the consumer, rather than return it to him via the insurance company as lower premiums. In theory, the amounts should eventually seem to be about the same, but compound interest over the fifty-year interval spreads them apart. (See the graph, above.)

Portability in a Larger Sense, Leading to Hidden Cost savings. The fact that HSA accounts are proving financially attractive, is surely a sign they may contain some previously unsuspected advantages, in addition to just being portable between employers. Additional portability -- between only paying for health care and paying for retirement in addition -- is more smooth and natural than we expected. Improvements in longevity reflect improvements in health care and are the natural consequence of the population getting healthier. (The saving in one compartment, is a cost for the other, with compound interest exaggerating the difference.) Furthermore, there is a consequence more evident to physicians than to patients: if you get really sick, you won't need to worry much about retirement costs, so here too a saving in one is still a cost in the other but in reverse. By far the largest accelerator to the balance is to overfund it up to the legal limit. No attempt is made in this book to claim we know what future costs will be, except to point out -- whatever they are -- increasing longevity will clearly push costs into different compartments, some upward, and some downward. It seems certain flexibility between compartments will become more desirable over time and might save considerable money. The clause in Health and Retirement Savings Accounts that any leftover tax-exempt surplus transforms into an IRA (Individual Retirement Account) when Medicare eligibility is attained, is probably the forerunner of others. More potential flexibilities are explored in this book, and advocates of other systems are invited to add features to their favorite program. In other words, at age 65, a subscriber does lose a doubly tax-exempt HSA with a surplus, but gets back Medicare plus a regular Retirement Account (IRA) in return, unless middle-men eat up the float. It's logical it would save money, but the heartening discovery is, it actually does.

The Battlefield. The HSA derives a double tax deduction in the sense that whatever is spent on qualified health service is not taxed, neither when it is deposited nor when it is spent. That appears to be a major inducement for HSA subscribers to be frugal, and the longer it continues the more it accelerates. That's in itself the main reason not to tamper with the incentive since the alternative incentive is to employ brute force to hold prices down, a probably futile gesture of amateurish administrators. Since a few dollars saved while young, compounds into many more dollars later, the double exemption is often the best investment an average person can find. It is, to say the least, an attractive alternative investment vehicle, if not a windfall.

Splitting the healthcare product into two compartments (savings account and Catastrophic health insurance) has proved particularly suitable for saving within the account for out-patient costs. Price-shopping for cheaper medical expenses seems irrelevant to truly sick persons in a hospital bed, however. Spread-the-risk insurance was inevitable for disrobed patients, whatever the related temptation for overspending. It's important for customers to be convinced the spread-the-risk quality of insurance continues but is confined to circumstances where it has no real alternative. Those professions coming from different cultures who scoff at the self-restraint of physicians are in some danger of enraging doctors into behavior everyone will regret, encouraging behavior which is being resisted. Nevertheless, some degree of slippage is inevitably part of insurance. As soon as you spread the risk, for example, it gets harder to itemize the bill fairly.

Be Careful Who Your Subsidy Partners Are. Insurance companies and hospitals both share risks with clients, and boast it reduces premiums. Young people almost always have lower costs than older ones, so it's tempting to mix a few expensive old folks with a large number of young ones in group policies. However, the client doesn't usually consider the overall effect of his choosing either a particular insurer or a particular hospital. No matter how old he is, he should want to be mixed with a lot of young clients (except premature babies).

The Affordable Care Act seems to have overlooked the refinements of this homily; by striving to include all the uninsured, they managed to include a large number of newborns and specialty children's hospitals, who are effectively (however reluctantly) subsidized by the rest of the community. Employer groups trying to do the same thing, necessarily avoid most people under 25 years old, who were suddenly included in population-wide averages of uninsured, by the new law. Patients over 65 may be similarly under-represented. Furthermore, about twenty cancer hospitals have been exempted from DRG constraints. Regardless of how it got composed, the ACA found it was subsidizing more than it expected, and (because they were the subsidizers) premiums for good people consequently threatened to rise more than expected, even though sometimes enjoying incomes which exceed the uninsured.

Employer groups were thus cross subsidized, but to differing degrees; outcomes were hard to predict and smaller groups proved more agile than larger demographic subgroupings. Out of these unexpected aggregate costs, arose a need to subsidize employer groups unexpectedly, and explains some unlikely favoritism for prosperous political groups originally targeted for income redistribution. In most employer groups, young people subsidize older ones; that's definitely not the same as rich people subsidizing poor ones. The detailed extent of these problems will probably not emerge until after the November elections.

Hospitals differ in their costs for similar case-mixture reasons. If you don't need a big-city tertiary hospital, you need to ask why you should pay for it by secondarily cross-subsidizing its expensive clients. This may explain some of the surprising successes and failures of HMOs, private insurance companies, and other allegedly share-the-risk groupings. Small, agile and for-profit companies seem to maneuver more readily than big non-profit ones.

Cheaper. These and other mechanisms probably underlie the claim that HSAs are 30% cheaper. Because there are many small explanations rather than a few big ones, they will be harder to imitate. Such an accumulation, doubly tax-exempt, over a period of several decades aggregates to a surprising amount of compound interest. Money at 7% only takes ten years to double, for example. Most people would have difficulty finding a superior way to save for retirement, then by reflexly putting any spare cash into an HRSA. It's true you have to get sick to be entitled to the double deduction, and you may not survive severe illnesses with much savings. But the peace of mind of just knowing you have been covered by shrewd exertions of skillful management creates some cost-free benefit not to be scoffed at. Everybody needs a consolation in despair, and this one turns out to be powerful.

"Overfunding" the Account. Therefore, enlisting patient participation extends the argument for durably separating the account from the insurance. Indeed, it makes a significant argument for overfunding the account among young people, who badly need to hear it. "Overfunding" in this case means trying to spend as little of the account as you carelessly might spend. If a considerable number of people become so-minded, a relatively realistic market price can emerge for out-patient costs. This is America, after all. That's not so true of inpatient costs, but it nevertheless provides a relative-value base for even those costs -- with a few adjustments in the regulations related to major changes in the diagnosis code employed.

Summary. So that's how we see the simple change in the payment structure into a Christmas saving account transforms a device for helping poor people afford insurance, and adds to it an incentive for the patient to be frugal for his vulnerable old age. Instead of paying to borrow money, he is paid to save it. Pinch pennies for healthcare, in order to save dollars for retirement. And then multiply it by compound interest A mutually beneficial system actually reducing medical costs, is the underlying description. It does this by providing a pathway, and an investment vehicle, for deriving meaningful retirement insurance out of unused health insurance. (This boils down to a sterner message: if you abuse the healthcare system, your own retirement will suffer.) The demographic group may not suffer, but because it's individually owned, the careless individual may shoot himself in the foot.

Resistance to Disintermediation. But, it must be noted, since this can also transform health insurance from a cost center into a revenue center, it creates some uncomfortable resistance from the financial community (because it seems to them to be a zero-sum loss). The resistance is this: financial transaction costs have declined 70% in the past ten years, so the financial community is hurting, at least compared with the Gilded Age. After all, declining prices of anything are a major reason for profitability to fall. If, in addition to attrition in revenue, a formerly insignificant income for the subscriber (interest on the accounts) transforms into an important mechanism for building up a retirement fund in six figures lasting thirty years -- it starts trouble with its zero-sum counterparty. Subscribers begin asking uncomfortable questions and making cost comparisons, at a time when the financial community sees its own income under stress. Already, there is agitation in Congress to replace buyer-beware with fiduciary advisors. The subscribers will win because they have the votes, and control the flow of funds into accounts. But it may turn out to be a slow bloody battle, notwithstanding its far more dignified potential for transforming into an attractive opportunity for both sides.

The Source of Subscriber Sluggishness. When individuals compete with corporations (tax authorities and investment managers), it is usually a matter of youthful inexperience futilely competing with the experience and immortality of corporations. It seems to take a long time for young people to discover how much difference a steady, small interest rate can make to the process of converting small savings into big ones -- providing one starts early in life. Immortal corporations do have a more distant horizon and an indelible memory. But the immortality isn't as great as many think; for a glaring example, it's a comparatively rare corporation which stays in business for a hundred years. The greater advantage which a corporation has is it has been given a solitary legal mandate to make as much money as possible. The movies call that "greed" but a corporation either sticks to its business (making money) or falls out of that business, sometimes after being sued by its stockholders.

A large corporation can lose lots of money. Those who wish to penalize excessive profits should more logically favor elimination of corporate income taxes, allowing high profits and large losses both to fall upon richer individuals. The present system, allowing profits to go to stockholders at lower rates than corporate taxes would, encourages corporations to get bigger, less profitable, and to flee the country which started them. None of these outcomes is likely to appeal to populists. Since healthcare has grown to 16-18% of GDP, the present tax arrangement of health insurance probably exerts an appreciable drag on the economy.

Imposed Self-control by Escrow Accounts. Young people constantly face the competing priority of consumption, and many never do learn to restrain it in order to accumulate larger savings. Others learn but too late, after several decades of potential doubling have been forever lost. Odysseus knew this but he also understood himself, so he had himself lashed to the mast of his ship while he sailed past the temptations. The shocking truth is that very small differences in interest rates, differences which some would have you believe are trivial, accelerate savings faster than most young people ever imagine. Taxing authorities and investment companies have already learned compound interest grows best over long stretches of time, and small differences in interest rate (as little as 0.1%) are quite sufficient if continued for a lifetime. This is a simple point, but so vital we must soon devote more time to the requirement of "escrow" accounts, perhaps more aptly termed "Siren Song Accounts". Call them to lose insurance or even credit default swaps if you please, but at least recognize they impose an opportunity cost.

True, many banks do offer Health Savings Accounts without either an attached health insurance policy or brokerage service. Both services are essential, but selecting insurance managers in these cases remains the customer's problem. You might think banks would have a similar response to the investment management of savings, except they have a complicated relationship with insurance companies they may not wish to disturb. By contrast, they also have a losing competition with investment banks, who have found cheaper ways to acquire large-sized investable funds by selling bonds and stock certificates. The time-honored method for banks to acquire funds is by dribs and drabs from the float of deposits -- quite an inefficient source, compared with $100 million bond sales. From time to time, as in the recent mortgage disaster, the government puts its thumb on the scales, and right now all banks are afraid to lose market share to competitors. Secret kickbacks may play some role in all this, so acquiring and integrating a whole company's operation seems a safer business alternative for them. One way or another, your account may be transferred to a different manager without your knowing it.

The conflicted outcome at present is for the potential HSA customer to discover which HSA vendor declines to make choices between insurance companies, but does look for ways to acquire the investment end of the business and overcharge for it, either directly or with kickbacks. In a curious twist, this pressure shifts to the customer to choose stock-pickers, whereas his best interest is usually served by choosing total-market index funds. Watch out for fees, however, which can upset any generalization about investment type. This situation can shift rapidly in the present environment since it would not be surprising for these financial behemoths to purchase market share indirectly, or else for failing stockpicker firms to sell themselves to banks of various descriptions. A much more productive approach for the small investor would be to look for a firm which will segregate accounts into "escrow, and non-escrow", leaving the choice of a high-deductible health insurer to the customer. Likewise, accounts could still be designated "captive, or self-selected", and leave the choice of investment management to the customer. It's true the average investor is often poorly equipped to make such choices but should have no difficulty in telling 1% from 8%, when (see below) the difference of one-tenth of a percent can result in a lifetime swing of $30,000. The importance of escrow accounts is described in the section which follows this one. Essentially, you can get a higher income if something forces you to shift short-term into a long-term investment.

The Importance of Small Differences in Interest Rates. To pay expenses in a stripped-down HSA, banks often charge for smallish balances, waived when the balance reaches their business break-even point, usually about $5000 per account. Similarly, investment latitude is often stratified, with larger accounts are given more choice of investments. Those are generally good arrangements because of their flexibility and elimination of conflicts of interest, but they impose some responsibility on the customer -- who must be willing to make security selections in return for possibly greater return. It's all quite understandable and suggests novel uses of the account. The best example before us is to "Overfund" it at the beginning, and use its surplus after compound interest, to supplement retirement income decades later; let's explain.

Improving the Retirement Benefit At present, the HSA law permits a maximum deposit of $3350 per year per person, with even higher limits for whole families. By constraining out-patient expenses or paying cash for them, the balance can thus build up to $5000 in less than two years, eliminating bank surcharges of roughly $50 a year by immediately reaching the waiver level. Since doing this also eliminates any remaining question whether the HSA will provide full coverage for hospital charges, it's pretty easy to endorse a $5000 investment which produces $50 a year tax-exempt income until Medicare kicks in, and then compounds it, adding more than 1% tax-free to its investment income. If the transaction then permits investment in total market indexes, paying off the investment was very wise. Let's now extend the frugal idea to more prosperous customers.

The Outer Limits of What is Possible. If an employee deposits the full limit of an HSA and makes no withdrawals from age 20 to age 65, his balance will be increased by $154,550. In fact, it should grow by more than that, possibly much more, if the income compounds. He can start with the present abnormally low-interest rate of 1%, and find annual maximum payments compound the balance to $196,225 in 45 years. With a more normal interest rate of 4%, this rises to $442,527. At 6.5% interest rate (which probably requires stock index investment to achieve), the result would be $959,760. Since the stock market for the past century has averaged 11% return, and inflation has averaged 3%, a net-of-inflation return of 8% is conceivable -- before taxes and expenses -- and so we'll set 8% as the theoretical maximum goal. $1,578,977 retirement account (at 8% net) is thus the utmost goal which is realistically achievable, adjusted for inflation. But the difference between roughly $908 thousand and $1.5 million ($650,000) is a difference still worth pondering since it identifies the maximum potential difference attributable to middle-man costs, and that's a lot. And if you think the bank is entitled to something, it probably can get compensated by compounding daily but paying compounding quarterly, and additionally by requiring deposits monthly but crediting them yearly. As far as inflation is concerned, these are uninflated numbers, both at deposit and withdrawal. That is to say, they are all in 2016 currency, and leave a generous potential profit for the manager.

Just squeezing out 6.6% instead of 6.5% makes for a final difference of $30,500, or roughly a fifth of the net (of medical outpatient expenses) deposited. Without resorting to insulting language, this large difference achieved by such a small income increment is a legitimate goal for technology improvements and management streamlining. The amount is seemingly within reach, and the consequences are worth it. So although the Standard and Poor 500 actually averaged 6.6%, and the modal return was even higher, we round it off to 6.5% in most of our illustrations. Several such small yield improvements can boost net returns by 1%, which makes an enormous difference in eventual yield after decades of compounding. That's particularly true in a compound yield curve which turns up at its far end. Since transaction costs have decreased by 70% in the past ten years, it definitely seems possible to extract an equal amount again by relentlessly pressing for it. It misjudges the public mood to say there is no room for improvement by educating the public. Right now, everybody involved would probably agree it is high time to increase the deposit limits, after several decades of their having remained stationary. That alone would significantly assist the transition from a nuisance to a central bulwark of retirement security. The financial industry wrongly misjudged this transformation to be trivial, so it's getting a little late to adjust it gracefully. Working out some examples from beginning to end, is very persuasive.

True, about a fifth of the contribution to this scheme is provided by income tax reduction, but the line between public and private obligations to health care is already too blurred to hope for an agreement on the fairness issue. Just look at the combined state and federal tax contribution to the cost of group employer-based insurance, which probably approaches 60%. Still more important is the hidden contribution to increased longevity made by medical care. It seems hardly debatable that improving health was largely responsible for lengthening the time in retirement. The problem of outliving savings is pretty much a by-product of improving medical care; if you want one, you must cope with the other. For this reason alone, it seems entirely proper to include rising retirement costs as part of the cost of improving health care. If you want to solve the whole problem, however, you look for any solution and forget about assigning blame. Is there anyone reading this chapter who doesn't want to live an extra thirty years?

What will Future Healthcare Costs Be, and Will Such Revenue Be Available?

At present, average American lifetime costs of health care are thought to be roughly three hundred thousand dollars in the year 2000 currency, per individual. Females cost more than males, mostly because they live longer. Much of the original data was produced by Blue Cross of Michigan and confirmed by two Federal agencies. Our goal is to see if it is reasonable to hope: that a "small" subsidy at birth, invested in total stock market index funds over a reasonably projected life expectancy, might (in addition to lifetime healthcare) pay whatever retirement income it is reasonable to expect over anticipated longevity. The tricky part is that good health leads to less health cost, but it also leads to higher (longer) retirement costs. This last age differential seems to be most pronounced toward the end of life. The age differential is almost enough to count on, but not quite.

Our Answer: It turns out in theory, confirmed by historical experience from the stock market, that a total subsidy of $400 at birth will just barely scrape by at 6.5%. But the transition would be such a close thing, Congress might have to increase contribution limits to impart more safety. We assume the law as presently written, using a "term insurance" approach with technical amendment. The transition would no longer be a serious issue, using a "whole life" approach, but its duration becomes so extended it might be politically unfeasible. We end up recommending: an extension of the contribution limits, then starting with the safer "term insurance" approach first. A few years to study emerging outcomes of the term approach should lead to a safer whole-life projection since assumptions would become less fuzzy. No one seriously questions "pay as you go" is more expensive. What's difficult to arrange is a transition from the more expensive to the cheaper system.

Specifically, the politically tolerable subsidy was selected to be $400, the average future life expectancy was projected to be 90, and the modal retirement age was chosen as 65. Since both theoretical projections and backward analysis of a century of Standard and Poor 500 data do confirm it is practical to expect success with this approach, a practical way to achieve it could then be offered in the present Health Savings Account, using American total stock market index funds as an investment. The biggest problem encountered would be the transition from present healthcare finance to the proposed one. A crisis might precipitate action, while a cure for cancer might make it unnecessary. The fallback position is if HSA proves not to cover all of healthcare and retirement for everyone, at least it would provide a large part of it. In that sense, it appears superior to present systems.

That is, we recognize the superiority of a "whole-life" approach, rather than the present proposal, which is based on "one-year term" coverage. However, the time periods are so long it seems unwise to commit such huge sums to untested theories for nearly a century. We feel a purely political decision would come to the same general conclusion, even though the application of many minds could undoubtedly improve on this approach. Nevertheless, we explore whole-life approaches in the hope of adding them piece-meal to a term approach, which is less comprehensive but safer to try.

Anyway, healthcare is expensive, has a fair amount of waste, and certainly costs more than it used to. No one would write a check based on such a summary, but the goal of the question is more modest. Whole-life insurance is acknowledged to be appreciably cheaper than term life insurance. So, after a few chapters on other details, we examine how much cheaper lifetime health coverage might be than year-by-year ("term") funding. Admittedly, it would introduce intermediary costs. To roll all the complexities into one monthly premium for life would indeed introduce great efficiency. It must be remembered the savings account approach captures the largest component of growth, the flexibility to begin saving at any age, and the accommodation of any variations to the duration at the other end where income is more certain.

If it's vital to recognize how much difference small differences in interest rates matter it's also important for public opinion to be in favor of price stability, remembering 1980. (That's when the Federal Reserve found it was necessary to incite a recession deliberately, in order to stop rampant inflation.) A third subtle variable of investor growth is the frequency of compounding (see below), which should match the quarterly distribution of dividends, but may not if the investor is unwary.

{American Revolutionary}

Will We At Least Cure the Expensive Diseases? Several thousand diseases are currently recognized, and more can be expected to turn up. But the National Institutes of Health, largest research-funder in the world, calculates eight or ten diseases currently account for 80% of current costs. Remembering NIH also distributes 33 billion dollars a year, it seems possible for one or two of the expensive ones to be picked off by lucky research in the next decade or two. Perhaps it is possible for all ten expensive diseases to be cured in three decades. There are at least two main disappointments lurking in such projections, however.

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Diseases requiring institutionalization consume more resources than other conditions. {bottom quote}
The first is the heaviest contributor to cost has long been the need to admit the patient to an institution. When Thorazine came along, President John Kennedy jumped the gun a little and effectively closed five hundred thousand chronic psychiatric beds. In retrospect, it might have been wiser to restrain that impulse by a quarter or a half, so we might now find fewer psychotic souls lying on sidewalk steam grates in the winter. Nevertheless, the general idea was understandable that diseases requiring institutionalization consume more resources than other conditions which might be judged more dire by a different standard than governmental cost. In a sense, institutional costs are a variable, independent of the cost of treatment. These are "low-hanging fruit", as the saying goes, and could be used up fairly quickly, except that shortening the length of stay may simply increase daily costs -- and so end up at about the same place, by adding a lot of administrative overhead. Some time ago, I wrote a little paper on the diseases afflicting the patients in bed at the Pennsylvania Hospital on July 4, 1776, the very first Independence Day. There was considerable similarity with the present, because of the tendency of leg conditions and brain conditions to require help with daily living, not because the treatment hadn't changed a lot. What with air conditioning, high-speed elevators and private rooms, daily living costs have also risen faster than the cost of living.

Quarantining contagious diseases is another costly treatment approach, similarly mixing treatment cost with the cost of daily living. An independent, less satisfactory, factor contributing to institutional cost is cultural; providers and manufacturers failing to exercise self-restraint in black-mailing helpless patients to achieve unwarranted profits. You do see some of that, particularly near vacation areas where patients are generally strangers. Perhaps we should re-classify these as vacation costs. Our culture has discovered a deeper artificial cost issue: rationing always provokes shortages, which are ultimately self-defeating in a free society. When you threaten this balance in matters of life and death, you find you get still higher costs. Perhaps someone should try reclassifying rationing costs as independent variables.

Unfortunately for prediction purposes, five or six thousand uncured conditions have a way of expanding to fill vacancies created by the diseases we cure, since everybody has to have something to die of. Generally, this transfer cost makes its appearance as a cost of lengthened longevity.

Meanwhile, improved housing does make it possible for more people to die at home, or at peace with their fate in some other location. Some houses even have elevators, and almost all apartments do. The spread of higher education makes it more expensive to provide kindly, basic care, and our instinct to use automation to replace caregivers, somewhat coarsens the substitution. Architects report it is always more expensive to build vertically than horizontally; therefore calling into question whether we have fully considered the high-rise incremental cost, or the alternate cost of moving institutions to the suburbs. In a nearby high-rise office building, I noticed the elevator shafts took up fully half of the floor space on upper floors. Someone has to commute; whose time is cheapest? Putting patients in hospices and calling it scientific care has not improved costs much, at least so far. Whatever else you might think of HIV, its swift eradication is a marvel of science, so the degree of patient clamor has to be a consideration. Copyrights and patents do run out, competition does work if unobstructed by regulation, so the prospect is for future health care to proceed through spurts of astonishment, but on balance for healthcare to get slowly cheaper, per year of added life. Much of the cost problem will nevertheless be buried in a mountain of double-talk, simply renaming retirement issues, and possibly employing some sugar-coated euthanasia.

Will Support-Environments Become Friendlier to Medical Cost-saving? In my opinion, improvements in the supporting environment hold at least as much promise as medical research itself, for making medical care cheaper. Improved support systems could also make medical care more expensive. Medical research is somewhat force-fed at the moment, in the hope of breakthroughs which may emerge from expanding chromosome and protein chemistry. Changes in architecture, infrastructure, clothing technology, and similar drab subjects are probably due for a major upheaval from advances in electronics, which have so far neglected such prosaic matters. My own insight into such matters was advanced by seeing how greatly medical efficiency has been enhanced by widely-denounced advances in finance and banking. How much a one percent change in interest rates can affect medical costs, barely scratches the surface of what can potentially happen. If people can commute to work in half the time, or must commute in twice the time, makes all the difference in the hidden costs of healthcare. When the millennial generation gets back on its feet, they will be more surprised than we will be, at how much they can accomplish with comparatively prosaic advances.

Frequency of Compounding and Depositing. A feature of compounding is, the more frequently you compound and the more frequently you deposit, the faster it grows. That is, if you pay $365 at a dollar a day, it will grow considerably faster than if you deposited $365 on December 31, but less than if you had deposited it all on January 2 of the same year. If you compound the money in a similar manner, it gets another boost. Most stock dividends are issued quarterly but on dates of the company's choosing. Once the money is invested in an index fund, the bulk of it compounds nearly continuously, but the dividends compound a little less than quarterly. Overall, an index fund indexes a little oftener than quarterly, but quarterly is easier to show on a graph. That's an appreciably better return than annual compounding, which is often how the results are shown in publications. Just who profits from these subtleties is not commonly revealed but is something to keep in mind. With a single deposit of $400 at birth, the compounding frequency, often left unclear, is generally assumed to be quarterly. In actual practice, fresh deposits extend from age 20-65, somewhat at the whim of the depositor's trips to the bank. The expenses of doing it are a negative factor, so at least you should inquire about these two features when comparison shopping. Of course, the bank may change its frequencies over long periods of time.

We next show the single-deposit for escrow accounts, which guarantee long-term rates to a fund which guarantees not to withdraw until the end, modified by the frequency of compounding. The following graph shows what is possible from the multiple-deposit, which reaches its extreme with depositing the annual limit of $3350, modified by starting at different ages. More probable actual results lie somewhere between these two examples.

And then, who knows? Somebody with a bomb may blow us all to cinders, taking our premises with it. Predicting future revenue might prove easier than predicting future costs, and force us to cut our suit to fit our cloth. That probably leads to rationing, so it's a last resort. But it ignores the central fact that "costs" respond quickly to available reimbursement.

What emerges is that small variations in the frequency of compounding, plus small variations in investment income, plus small variations in longevity -- combined -- are somewhat within our control, and collectively make an enormous difference. But fundamentally it was the increase in longevity which put this new vision before us. It will be up to financiers and politicians to make this vision come within our grasp, or oppose it, fighting it every inch of the way. But it was fundamentally the medical profession, responding to the tub-thumping of that Rainmaker, Abe Flexner, who made it even seem possible in our lifetimes.

Employer-Based Health Insurance in a Nutshell

Modern health insurance is a century old in America, and much of its interesting history is irrelevant to present controversies. However, a few features are important to know as a preliminary. It started as benevolence by business to its employees after the First World War, at a time when most businesses were family-owned. In 1945, Henry J. Kaiser discovered health insurance could mostly be financed by successful corporate employers donating it to their employees, thus transforming a gift of health insurance into a business expense.

The gift soon became accepted as a normal part of wages, so the pay packet drifted downward to expect it. The employer paid the same total tax, but the employee got a tax reduction. When the corporate income tax rate became double the individual rates, the employer got twice the deduction the employee got. As other taxes began to be based on the remaining pay packet rather than the total wage cost, employers escaped the extra tax. The employer overall got more benefit from the tax shelter than the employee did, and he got it for every one of his employees. Less successful businesses (with less tax to pay) often could not share in these last two features, and often preferred to remain with Subchapter S incorporation, although their employees lost out on deductions and in general were the only losers. If this is new to you, read that last paragraph again.

In this way, the tax exemption became a normal part of business life, and tinkering was greatly resented. By a century later, CEOs have turned this matter over to Personnel offices and financial officers, forgetting its complicated mechanics, and have gone on to other matters. It was a gift, so the employees were seldom consulted about its details, and in time most employees became oblivious to them. The situation began to be known as "third-party" insurance, and in time the basic decisions were made without much consideration of either the employer or the employee, who seldom raised a fuss. In the course of a century, it was the wishes of the insurer that mainly dominated the decisions, mostly because decisions had to be made, and nobody else cared very much. A century of unopposed decision-making gradually warped the employer-based system into a very expensive, inexplicably complicated combination of incentives, all leading to escalating prices for healthcare. The foxes were in charge of the hen house, and everybody's incentive was to let healthcare prices drift upward.

It is the organization of incentives rather than greed or malice which led to this predicament, so it is not justified to attack anyone. But someone who has benefits to defend can become quite offended when the benefits are disparaged. For insurance company reasons, the useless and expensive 20% copayment system has persisted, while the deductible has remained too small to serve a purpose. For political count-the-votes reasons, the benefits package has favored numerous small pills over major surgery, warping the reimbursement system in favor of more transactions. As the disease has receded in younger people, young people have demanded "something for their money", even though it distorted the benefits package unwisely to use limited funds for small bills rather than large ones. Short-term gains repeatedly triumphed over long-term considerations, slowly but relentlessly warping it away from intended directions.

It is my feeling the average reader needs a little more background: in overfunding for Retirement, buying out Medicare gradually, first and last year-of-life insurance, and the plight of the latecomer to lifetime health insurance-- before we are ready to solve problems in the last five sections of this book. There are a few other salient issues to learn, and a century of history to skip before the casual reader is likely to be ready to address the issues in central contention. So, skip it or study it, that's what the rest of this section is all about.

Health Savings Account in a Nutshell

There are now reported to be 15 million subscribers to Health Savings Accounts, growing at about a million new subscribers a year, with hardly any advertising. It' s really a very simple concept, consisting of two parts. The Savings Account is pretty much like any other savings account, and I understand one New York Bank has 700,000 accounts. You are allowed to make deposits up to $2350 a year, terminating when Medicare begins, at age 66. At that point, any balance in the account is turned into an IRA, and may be used for any purpose after paying income tax. When you make withdrawals for other purposes there is a penalty tax of 20%. They may be used for legitimate healthcare purposes, without taxation. The statutory basis for this is that deposits are tax-deductible, and withdrawals for health are tax-sheltered; the rest of the rules are regulation. Most accounts are linked to a debit card for medical purchases.

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Two working parts:(1) Tax-exempt savings fund (2) Catastrophic (high deductible) health insurance. {bottom quote}
HSA in Essence
In order to make deposits, the subscriber must link the account to a high-deductible health insurance policy. It is often difficult to obtain a public quote on price, which must mean the price is highly competitive and variable. Changes in the environment make for price changes which are almost not worth printing in a pamphlet. Many account managers insist on linking to a specific brokerage account, either subsidiaries, or linked by fee arrangements; such details are to be frowned upon. The new investor should be aware that most index funds of the entire domestic market return slightly less than 12%, but the manager of a fund subtracts overhead and passes on a variable amount to the customer. The amount of this return on investment is critical, and the ability to move accounts to a new manager if dissatisfied is an important feature but an optional one. It is also important for the catastrophic insurer to have made price arrangements with local hospitals which are competitive. A price of one and a quarter times the Medicare rate is on the high end.

Most investment manager are not fiduciaries, they are brokers. That is, they have no legal obligation to put the customer's interest ahead of their own. It is reported that most new subscribers are between the age of 30 and 45. That is, old enough to have some savings, young enough to gather meaningful income before being used. Actuaries report the average yearly cost is about 30% less than conventional health insurance, but price quotes are difficult to get on anything but an individual basis, and there may be some tacit underwriting.

First and Last Years of Life, Health Insurance

Here's an idea which has been bouncing around in my head for several decades. The first year of everybody's life resembles the last year in several unique ways. Everybody has a first and last year of life, but essentially no one pays for his own healthcare during those two years. They are pretty expensive years, amounting to 3% for the birth year and something like twenty percent for the last one, so if these costs were removed from the calculation of health insurance premiums, it would make a substantial relief. So, why don't we invent a kind of health insurance which pays for those two years, relieving the rest of the system of this cost? Paying for it during years of employment would shift the cost to the earning third, from the non-earning two thirds.

This kind of health insurance would have to be retrospective, but the dates alone would make it fairly easy to administer. Someone else would have to pay these costs first, so it's likely this insurance would largely be a new insurance company. It would reimburse another insurance company which could prove it legitimately paid the cost, that the prices were fair, etc. Whether this was a mandatory requirement for people who had this payment responsibility or a function of the government on everybody's behalf -- makes less difference because this health issue is universal, so it might as well be unspecified. On the other hand, if it is made a voluntary liability of people who have payment responsibilities, they would require some proof the whole arrangement is on the up and up.

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Health care can't get more basic than being born or dying. {bottom quote}
Irreducible Minimums.
Insurance executives would seek some way to pay average costs for the whole country since it would simplify their job not to get into the nitty-gritty of itemized charges. That's what has happened with the Affordable Care Act, and it hasn't proved to be acceptable to all parties. They might have to be satisfied with partial steps in that direction, paying hospital bills only, or institutions only, since arguing over the cost of diapers and babysitting might be too contentious. There are, after all, many costs incurred during the first and last years of life which are probably not legitimate health care costs, but under the circumstances would naturally have a sort of medical flavor to them. It thus would seem like a good beginning to have the people who are interested in one side of the business or the other, get together and construct a joint proposal which they consider workable. The people who are likely to be presented with the bill would have slightly different viewpoints, and several proposals might result.

This idea, in somewhat greater detail, might be examined in conjunction with universal Catastrophic health insurance. There would be many overlaps, and practicality might dictate the choice. But when we seem to have got it about right, either one of these choices or possibly some hybrid of both, would likely be a better thing to make into mandatory coverage. Or at least mandatory in the sense it might become illegal to have coverage for less universal, and less urgent coverage -- unless you have one of these more basic coverages, first. Society, whatever it may claim, has almost always proved to be pretty stingy. So, other coverages would have to be depended on to provide the extras and to defend their practicality as insurance. It would seem to be a useful thing, to have one insurer arguing cost, and the other insurance company arguing quality, so that neither one would try to threaten the other with unbearable legal costs as the main pressure.

Overfunding for Retirement

Independence Blue Cross (of Philadelphia) has imaginatively designed a Health Savings Account product for retirement purposes, by allowing the employer or the employee to overfund an HSA with $750 annual contributions, looking ahead to the employee's retirement. The HSA part is presented as an add-on to conventional Blue Cross, although it is unclear whether that is required. Independence Blue Cross should be given credit for a good idea. Whether it supplements health insurance before retirement, is apparently left up to the employee, but of course, it does supplement any other after-retirement arrangements the employee may have because the HSA continues on after Blue Cross itself terminates at age 66.

Since employers may soon face an un-suspended requirement to provide health insurance meeting ACA requirements, the high deductible from the government plan might simultaneously supply the high-deductible requirement for the HSA. This seems an efficient way to address present uncertainties and could provide the basis for compromise discussions between the two political parties on the whole subject of fringe benefits. High-deductible is good; adding subsidies confuses the intent. Keep them separate.

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Savings unused for healthcare are available for retirement living. {bottom quote}
Overfunding is always a good idea for subscribers to HSA, whatever their other program features. Politicians avoid overfunding anything because of voter reaction, so private plans are generally more flexible than public ones, while voters tend to complain that instead of overfunding, taxes should be reduced. The program is so new, and its time periods so distant, that unintentional gaps in coverage are always possible. If worries prove unfounded, overfunding leads to more money for retirement, hardly a tragedy.

Over-investment in Health Savings Accounts -- The Retirement Alternative. Because it's a new program, with financing uncertainties, we advise everyone with an HSA to consider overfunding it as a precaution. Just about everyone could readily use surpluses for some of his retirement. Although the employer only donates $750 per year, the law allows a total of $3350 as a maximum, and so a $2600 personal supplement is required in the following three hypothetical but typical situations. At this level, the employer contribution is a small factor; what really matters are inflation and interest return. And starting at an early age.
Example One. Let's say an employee starts the program at age 21 and remains with the company until retiring at age 66, contributing $3350 per year to the HSA (in the Blue Cross plan, $750 comes from the employer, and the employee must supplement $2600 from personal funds). (It makes no difference whether the employee rises through promotions or remains at an entry level; the maximum is the same.) Result: the employee receives a taxable retirement income at age 66 from the HSA to IRA transfer of $81,616 per year until age 83, dropping to 66,642 with 3% inflation. If the life expectancy of 93 is anticipated, the yearly annuity drops to $65,621, dropping to 48,595 with inflation..

Example Two. Another employee enrolls at age 21 but retires to get married at age 26. At age 66, until death, there is a yearly $23,423 retirement income assuming a life expectancy of 83, and dropping to 19,125 with 3% inflation. Assuming 93, the annuity is $ 18,832 with and $ 13,946 without 3% inflation.

Example Three. An employee joins the firm at age 61 and remains until age 66. His retirement income is $1,886 per year, dropping to $ 1,540 with inflation, Assuming expectancy of 93, he gets $1,516 yearly, or $1,123 after 3% inflation.

In the examples, many things jump out. The first is the large disparity between what five years of work will get you, starting at age 21, compared with the almost pitiful amount a person age 61 will get for the same absolute, and maximum allowable, contribution. The difference between examples is the difference between whole social classes. That difference, of course, is made up out of the income compounded internally for 40 years. And the moral is clear, a small steady investment at an early age is worth far more than the same investment at the end of working life. It happens to cost the employer the same, either way, and he may not realize it. His viewpoint will depend on what value he places on maturity and experience in an older employee, as compared with vigor and strength in a younger one; the pension costs would be the same.

However, this is a major change in pension design, and people should familiarize themselves with it. The employer can make far more difference in an employee's life with the selection of savings plan, than with salary. Perhaps another way of looking at it is the employee gets to keep the interest compounding in an HSA, whereas in other plans the employer gets to keep it. Or, depending on how the contract is written, some middle-man gets to keep it. The old defined benefit plans placed much more emphasis on training and experience and much less on the age and duration of enrollment. It's a new ball game. For example, there is no reason why an employer couldn't have two plans, with an optional choice, one for young people, the other for latecomers.

The second point revolves around the interest rate being paid. The investment manager, whether in-house or by way of a vendor, is able to earn and should be able to earn, 12% on an index fund of the common stock of the whole American market. Inflation at a steady rate of 3% for a century, reduces that return to 9%, net of inflation. How much is the employee entitled to?

Much depends on whether inflation is pre-deducted in advance, or calculated at some later time. If an employee is paid less than 3% per year for his HSA, he actually loses money on the exchange. If he is paid 7.5% gross, he only receives 4% net of inflation, in spite of surrendering half of the net gain (4.5% of 9%) to the broker or manager.

In this example we have arbitrarily assigned him 6.5%, which is 3.5% net of inflation, yielding well over half of the margin to the broker. I have to wonder whether the services provided are really worth more than 1% (for example, one nearby trillion dollar firm only charges a tenth as much), so it seems as though a fair return to the investor/subscriber should be 5%, net of inflation, net of fees, or 8% gross. So, be careful to identify whether inflation is anticipated, or only calculated after it happens. Sometimes, both approaches are adopted, and someone is seriously affected by not noticing it.

That means the price debate ranges between 3% (no profit to the investor at all) and 8% (essentially the wholesale price). Throughout this book, I have generally adopted 6.5% as an average, mainly to be safely conservative and avoid arguments. The marketplace will eventually settle on the "right" price, but if it's less than 3.5% net of inflation, it's less than a quarter of the wholesale price. Eventually, I expect the price to be knocked up to 8%, net of inflation, or 11% gross. The ultimate effect of this price pressure on the cost of health care would be considerable, indeed. Sustainable retirement would come into sight, and as we have mentioned, the price of healthcare is linked to it.

Now, I don't want to be accused of starting a revolution, but my calculator tells me if the passive investment could achieve 6.5% income return, the first of the three examples cited above would receive a retirement income of $81,616 per year. And the old fellow who decided to work for a few years to build up his retirement would receive $1,866. The youngster who worked for five years and then quit could look forward to a pension of $23,423 per year. Something tells me this is too destabilizing, so I'm not going to get impaled on the barricades discussing it. Ultimately, it probably reflects a reduction of transactional costs by electronics, which has not yet worked its way through to retail consumers. So, one way or another, something is going to happen, and it's up to all of us to make sure it is benevolent.

Overfunding health insurance by one means or another is a very good idea if you can afford it -- and you keep your wits about you.

Buying-Out Medicare

On his 66th birthday, a Health Savings Account owner has only one choice at present: to turn any surplus from healthcare into an IRA (Individual Retirement Account), for taxable retirement living. However, that's a step better than Medicare or employer-based insurance alone, which return unused surplus to the donor of the gift, either the government or the employer, in the guise of the reduced premium cost. However, economists agree the salary soon adjusts downward to treat the confidently expected gift, as part of wage costs. Therefore, health insurance is more expensive than it would be if the surplus were returned to the beneficiary directly. These forms of health insurance have been dominant so long, everyone feels they describe necessary features of health insurance, rather than terms of a contract negotiated by parties other than the beneficiary.

The presumption is made the individual has Medicare, so any accumulated surplus in his HSA needs to be spent after age 66, but not on health, since he assumes he will then be completely covered. This presumption is strengthened when the employees of a group plan are merged into a group, but quickly emerge when transfers are made. So any surplus is an average of the group, not specific to the individual. Data is not available to determine whether the size of this issue is enough to worry about. But a pathway probably was not created for overfunding Medicare to create retirement savings through employer-based insurance. In the first place, the surplus does not exist. In the second place, any surplus was probably expected to flow back into Medicare to reduce its cost. In 1965, it was probably expected that Social Security would fill this need, but increasing longevity has created resistance to enhancing all entitlement programs. It scarcely matters, today.

However, if changes in laws and regulations would make it possible, there might be other choices, one of which would be to overfund Medicare coverage, continue the HSA, and spend the generated surplus on retirement. But notice this: as things stand, if you don't need Medicare anymore, you don't get anything back and the government can spend the surplus on battleships. Just as, in plain fact, a commercial insurance company can spend a surplus on executive salaries. It's not fair to say Medicare will "never" have a surplus. By design, any surplus will always be used for healthcare, because that's thought to be part of "share the risk". It's a design feature common in sharing the risk programs, although not a devastating one.

In short, the designers of Medicare never imagined it would run a surplus, and at present, it is far from it. But in the long, long run, scientists will eventually cure those chronic diseases of the elderly, and then there might actually be such a surplus. It is already clear things are moving in the direction of making Social Security a larger if not more important program than Medicare -- in the short run -- and could largely replace Medicare, in the long run. Because expensive illness is often fatal illness, a great many people do not survive it. So, one ray of hope in this situation is that relatively few people will have both devastations, so the future is probably one expensive entitlement transforming into the other with relatively little overlap. In that case, dual catastrophes are best addressed by insurance. With luck, the people who drop dead without warning or cost will equal the number of overlaps, smoothing down national expense to only two groups, which eventually merge into one as science merges chronic disease into the growing group whose problem is outliving their savings. There are other ways of approaching that problem, but at least a flexible health program could provide a source of funding for it and a general outline of where it might be headed. Notice that compound interest works in favor of this solution, and could be an important component. In fact, unknown treatments will increase future expense, but by definition are not counted. Therefore, statistical projections can show a revenue surplus after the age of 90, which may in fact never materialize.

Therefore it would be easier to pass a seemingly meaningless amendment, right now, while it doesn't cost anything. We've just shown how HSA does it, and Medicare could do it too if it tried. The more likely circumstance would be to get a reduction of either payroll deductions or Medicare premiums in return for surrendering some particular benefit, like transfusions for members of Jehovah's Witnesses. At the moment, religious objectors cause lawsuits and other commotion, just because they don't want some particular feature of health insurance, and actually I can think of no reason why we should make it mandatory. In fact, doing things for someone's own good is a suspect idea, generally.

The long-range reasoning, however, is this: in 2015 the great need is for flexibility. Some of us will need to spend every dime we have on staying alive. And some of us will need to save every dime we can, in order not to outlive our retirement funds. But that probably won't be the same dilemma, fifty years from now. Almost every one of us could be threatened with poverty during extended retirement into undefinable longevity. It strains the imagination to think of ways to pay for both the present elaborate Medicare and an extended retirement in addition. So, by that time, I fully expect people to have come to the realization that Medicare must be liquidated piece by piece. Not to fund Obamacare, but to pay for their own retirement. When you go to a funeral every week, the idea doesn't usually occur that dying too early might ever become a thing of the past.

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Neither employer-based nor Medicare returns an unused surplus to subscribers. {bottom quote}
For one thing, I expect "rent-seeking" to soak up a lot of the savings from people not getting quite so sick. Rent-seeking will take many forms, like Botox injections and cosmetic surgery. Or like elaborate hospital equipment and excessive salaries, or like too much stand-by but essentially unused equipment. It may sometimes be hard to tell where the money is going, but costs will surely fail to fall as rapidly as illness can disappear. We will need a way for people to perceive this, and for them voluntarily to start saving for it by gradually opting out of Medicare. It won't be an all-or-none issue; people will perceive it at different rates. Therefore, we need to provide a way to get out of Medicare in steps, and individually one by one, over a period of decades. For political reasons, the use of a surplus should be limited to your own retirement living. All of this is called "planning ahead".

Proposal 1:At present, Health Savings Accounts are limited to age 21-66. There should be no age limits at either end, and some provision should be made for inheritance of surplus to newborn children, sufficient to cover their healthcare up to age 21. (3320)
Proposal 2: At present, contributions to Health Savings accounts are limited to $3500 per year, age 21 to 66. This should be changed to an aggregate lifetime amount, at least until latecomers have had an adequate transition to the program. (3320)
Health Savings Accounts provide the flexibility to do this, but at present many Medicare program details are awkwardly designed to anticipate the need. Right now, the program is not sufficiently modular to permit dropping one feature but retaining others and letting the funds follow the needs. And designing partial proposals is inhibited by a political terror that the public will misinterpret motives. So the first step is for people like me, who have nothing to lose, to step forward and start talking about it. The need for retirement money is looming ahead; we need to prepare Medicare for gradual liquidizing, to pay for it.

The first step is probably to design a way to buy out of Medicare, save some money by substituting an HSA for their healthcare, and buy something more appealing with the surplus. The first version will probably be crude and awkward, but it provides a platform to build on. Most politicians, whatever they may think of Medicare and its financing, regard talk of privatizing Medicare as political suicide, so we should be thinking of pilot studies, think tanks, and experimental projects. The old folks who have, or will soon have, Medicare coverage regards it as such a treasure, they tell their elected representatives that privatizing Medicare is the third rail of politics: touch it and you are dead. But a Washington sage once remarked that if things can't go on, they will stop. So, what would it require, induce potential Medicare beneficiaries to select something else, before circumstances abruptly force it on them?

That's probably not the best way to go about it. The early initiatives should be generated by scientific advances. The likelihood is great that science will cure one or two of the big five (cancer, diabetes, Parkinsonism, Alzheimer's Disease, schizophrenia) and bit by bit, Medicare will get cheaper in spite of the rent-seeking. As it does, it will seem attractive to increasing numbers of people, to consider cheaper health insurance, shifting Medicare funding to retirement income. The rules should be relaxed to let early-adopters test the changing environment. We already have a flexible funding vehicle in Health Savings Accounts, and fifteen million existing subscribers who will endorse it.

The Problem With Medicare. Medicare is 50% self-funded by payroll deductions and premiums and is 50% subsidized by the federal government. The old folks get a dollar for fifty cents and are not about to give it up. They obviously should get their own fifty cents back. It's the fifty cents of government subsidy which is at issue, and the published budget should reflect that fact. Just notice how retirees display almost no interest in the Obamacare controversy, except for one thing. Old folks are uneasy that funding for Medicare might get squeezed in order to finance Obamacare, particularly if the two were in the same budget compartment. When the conversation gets around to that point, retirees suddenly wake up and start talking loudly. If the discussion centered on the subsidy, things might subside, somewhat.

But hold on. A retiree approaching his 66th birthday has already pre-paid approximately a quarter of the costs of Medicare, and when he joins, his premiums will later amount to another quarter of the cost. That 50% is the retiree's share of the present costs of Medicare, and naturally, he doesn't expect to see it disappear. The 50% subsidy provided by the government, on the other hand, is what concerns everyone. Even the people who advocate "single payer" systems are talking about extending Medicare to the whole population, gradually perhaps, but probably including the 50% subsidy to everyone. Since healthcare now consumes 18% of Gross Domestic Product, are we willing to see 9% of GDP go from the private sector to the public sector in extra taxes? Or in increased borrowing from foreign nations? We will have to let the politicians wrestle with issues like that, but it will be hard to persuade the public to go along with it.

Meanwhile, let's see what persuasion can do if we offer a good enough deal. For a start, let's presume someone in his late fifties had invested in his HSA while he was young, and is approaching the age where he could augment his retirement income from a substantial balance in his IRA (recently converted from HSA). Then, let us say he also wakes up to the realization he gets a second tax deduction from an HSA if he spends extra retirement money on medical care, either on Medicare payroll deductions or Medicare premiums. And if he stops spending some other obligation, he effectively gets a further tax deduction from spending the money on something else which is tax-free. Potentially, that could add a few thousand dollars a year to his income from age 21 to the day he dies. It's a very attractive goal, and while it really would be legitimately spent on healthcare, Congress might well decide they can't afford to lose that much tax revenue.

So, the rumination goes, the proposal must somehow save some money for the Government, too. If the subscriber were allowed to make a deal to buy out his Medicare, he might make a payment out of his HSA of about $86,000 untaxed, which with 6.5% declining income, would repay the costs of Medicare throughout his remaining life expectancy, all from the invested lump sum. That might seem like enough on paper, but the government has been going in debt for some time to foreigners and would like to stop doing that. If possible, it would like to pay back the earlier loans. If you include this debt, the Medicare cost is revealed as greater than it seems. Furthermore, the GAO will quickly tell you, if you save tax money, you, unfortunately, make it harder to balance the federal budget. The details of all this may be hard to explain, but the general sense of it all is pretty clear.

Let's qualify the simplifications. Different people will have different payroll deductions, at different ages. To some extent, these balance out, because if you have a larger balance in your HSA, you are likely to be older, and likely to have paid more into your Medicare payroll deductions. And to some extent, averages will cancel out and vary with the economy from time to time. A change in the tax code would scramble all of these numbers, but it's preliminary. Medicare is best privatized in pieces, and for that you need prices, so preliminary pricing should be devised for those people who for religious or other reasons, would be interested. Furthermore, accumulating money of this order will require normal interest rates, not abnormally low ones as at present. Since that time is hard to predict, it is necessary to supply minimum interest guarantees, best approximated by index funds of 10-year treasury bonds. Buying out Medicare is a very delicate matter, and should be approached very slowly. The first step is to talk about it without starting a panic. The initial appeal will be found among those who perceive a greater risk from outliving their income than their risk of a major illness cost. They are rare at present, but times will change,

The Plight of the Latecomer to HSA

Medicare had been in existence for fifteen years when Health Savings Accounts were designed. Medicare was popular and apparently permanent. Accordingly, the HSA proposal was intended to phase out when the individual became a Medicare recipient. Since there might be an unspent surplus at that time, it was provided that the surplus be turned into an IRA, partly as a gesture of deference to Senator William Roth of Delaware, who was the originator of the tax-exempt fund idea.The consequence is that the HSA now bridges the transition, between health care and prolonged longevity. That's a feature now seen to be an enhancement.

However, experience with the program shows we overlooked something. The plans are attracting a following between the ages of 35 and 50, which is to say they turn unattractive to people 50 to 66, who ought to be in their highest years of earning. On interviewing them, the difficulty seems to be that diseases start increasing at about that age, and a depletion of the account gives it scant opportunity to recover before the program terminates. Compound interest is fine, but if you have used it up for disease A, it cannot compound enough to support disease B. By contrast, a subscriber at age 35 might well be in a position to pay for one bout of illness, followed by compound interest build-up. So the plan covered two or three more severe illnesses before age 66 is attained. The contribution limit of $3300 annually is just not enough to provide a comfortable margin. Furthermore, the purpose of the limit is not clear. If a subscriber contributes more, it would be his own money, not the governments. True, it would be tax exempt, but a very large proportion of the population are tax-exempt through their employer, anyway. People whose income is concentrated may be especially affected, such as those who sell a farm or business, or athletes. Finally, everything said about unexpected illness would be true of unexpected stock market fluctuations.

Proposal 3: The annual limit of deposits to HSA should be increased by a COLA based on medical costs, rather than the cost of living. Furthermore, the limit should be a lifetime limit rather than an annual one. At present, this would substitute a lifetime limit of $132,000 for an annual limit of $3300.
This proposal, while welcome, may still not be enough. The employee with recent experience with healthcare costs, has by the age of 50 come to realize that the personal cost of an HSA has three sources: the deposits which we have mentioned; plus the premium of his required Catastrophic insurance; plus the compound interest rate which his HSA manager is allowing to pass through to him. Additional deposits cost the manager nothing, but the insurance premium and the interest rate are passed through to him from vendors, and their cost is largely obscure to the customer. "Kickbacks" are particularly obscure.

First, the interest rate. The stock market has gone up 12% a year for a century. With transaction costs of perhaps 0.5%, the customer should also subtract 3% for inflation. That creates the remote possibility of paying 8.5% to the customer, and we have in this book generally assumed a net return of 6.5%, with a profit to the middle-men of 2.0%, assuming the middle-man accepts the risk of "black swan" volatility. This is generally about 50% every 28 years. However, the broker probably does not look at it that way. He notices the stock market has gone down in the past few months, may go down more in the next year, and might then take ten or fifteen years to recover to a profitable level. Furthermore, new HSA subscribers may well be young and improvident, have few assets to supply a cushion, and background of judging a consultant's value by the labor he applies, rather than the risks he takes. The customer wants 6.5%, the broker offers 1%. Each sincerely believes the other is cheating him.

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Disintermediation, def. Eliminate the middle-man. {bottom quote}
The Nut of It.

So, there are other places to look for the difference. The employer can afford to give up the difference, providing he gets a 40% tax deduction directly, borrows the money at 6%, and is making profits this year. The HSA manager can afford to make up the difference, providing he treats the HSA deposit as a pass-through rather than a paid service and makes it up by adding a surcharge to the insurance premium. The insurance company can make up the difference by lowering its prices and profits. It would take subpoena power and open books to know what was a fair proportion for each to contribute. However, the customer must receive a higher income rate, or the complicated interactions will not work. That's where we start. The HSA becomes feasible because transaction costs have been lowered by computers and near-zero interest rates. The customers cannot enter into the bargain if the finance industry refuses to share the windfalls along with the risks. The customer is going to get 6% or forget the whole thing.

Perhaps a simpler way to summarize the unfortunate confrontation is to recognize it is going to be difficult to support 6.5% retail interest rates in an environment of 1% bank rates, and historically low-interest rates, generally. That is particularly true in an environment of falling stock market prices. Unless it can be convincingly shown that someone in this circle is making outrageous profits, or unless someone is willing to put up the capital to buy this business at a discount, the following dangers must be faced and surmounted:

1. The medical customer will eventually resort to what he did in the 1930s. He will neglect his teeth, his gallstones, his varicose veins and hemorrhoids, his eyeglass refractions, and other optional, delayable, services. Consequently, the accident rooms of hospitals will be full of treatable but neglected cases.

2. The stockbrokers will recognize that the era of $250 commissions is over, and the retail customer is going to buy index funds over the Internet from wholesalers, and conduct his medical business dealings out of a bank safe deposit box. The history of discounts in closed-end investment funds is part of this conversation.

3. The insurance companies will surrender their surveillance role, and strip down to a re-insurance role. Something like the PSRO (Professional Standards Review Organization, see Senator Wallace Bennett of Utah) will take their place.

4. The hospitals can survive a long time on their present surplus assets, particularly buildings. In time, much of their role will be taken over by retirement villages. Doctors and pharmaceutical companies will be squeezed in ways unique to maintaining their function, more or less.

Which will we choose, if we are headed toward a 1930s depression? All of them. But assuming for the moment that things aren't so bad, let's start with #2. The stockbrokers are doomed, anyway. Almost all banks have some empty floor space, where a fee-only wealth advisor can function with his computer terminal. Alternatively, CPAs can absorb a new business model, in addition to filling out tax forms. One thing is not going to remain the same: the finance industry has a whole lot of disintermediation to do.

Classical Health Savings Accounts (C-HSA): In Summary

It's only a beginning, but the reader now has a summary of where the Classical Health Savings Account stands, with a few suggested amendments to make it better. Remember, with essentially no changes and with minimal marketing effort, C-HSA has acquired fifteen or so million subscribers. Certain features need to be emphasized before it can extend to the rest of life, and harmless modifications made to accommodate the extensions. At the moment, the appeal is mostly to people between the ages of thirty and fifty, while with a few additions it could extend to everyone who wants it. Beyond that, it stumbled onto some features which would make an excellent foundation for wealth creation, for those who don't believe everyone should just invent something and become a billionaire. But to achieve it we have to get past the idea that everything in the public sector must disappear into a black hole, never to return to private hands. Read on, but handle with care.

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FLEXIBILITY: Health Insurance, plus Retirement Income if you survive. {bottom quote}

Hidden Advantages, Mostly Unexploited. C-HSA has the flexibility to manage the transition between health insurance and retirement income. Health insurance is the primary need of the past, retirement income the primary need of the future. It's a lucky feature that relatively few people have both problems because very few of us could afford to address both of them. At one time, health care was a major concern of employees; nowadays, it is a major concern of retirees. The day will eventually come when so few get seriously ill, other than terminal care, that we can fund retirees for retirement living, and let them dip into the savings if they occasionally get sick. But that's at least a generation away. At every stage, there must be some who generate a surplus, because otherwise, some will remain impoverished.

The C-HSA lets you judge your own needs as they come up, rationing what you think you need less of, in order to pay for what you suppose is your likely future need. That's the 2015 problem, and it has no good solution except flexibility -- and good luck. Because of the fruits of research, the 2050 problem is going to be retirement income, and it will need a source of revenue. The flexibility of C-HSA allows this choice to be made individually and eventually permits Medicare to be liquidated to finance it. C-HSA scarcely needs any changing to make this adjustment; Medicare is the program which needs to face the future, make itself modular, and provide ways for people to buy their way out of it, in pieces. Until changes are made to invite partial buy-outs, there is little HSA can do except buy out of Medicare entirely. It will be a long time before many people will take such a big step, but much sooner, they will surely see parts of it they would like to drop in favor of -- flexibility.

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BOUNDARIES: Any surplus belongs to the subscriber. {bottom quote}

Substantial Improvements, Without Disturbing the Basic Structure. Much will depend on the early administration of the Affordable Care Act. If it cannot accommodate the needs of big business in their suspended negotiations, or if it proves to be inordinately expensive, it will collapse. Most of the many Republican candidates for President have endorsed HSA as a substitute policy, and Mrs. Clinton has yet to reveal how she will get out of her HMO proposal of ten years ago. By this time, she surely has learned how distasteful the American public finds HMO when run by non-physicians. In coming chapters, we will describe how essentially the same idea was earlier proposed by physicians, and blocked by the Maricopa Decision of a minority of the United States Supreme Court. Physicians never dreamed anyone would direct a medical organization, except physicians, so there is room for revised opinions; but the twists and turns of politics will eventually dictate where physicians will stand. It is amazing how many people want to run medical care, but how few of them want to go to medical school.

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Once we all have basics, we can look around for luxuries. {bottom quote}
Benefit Package

The present stance of HSA proposals is that the Affordable Care Act would be improved by substituting Catastrophic health insurance, or else First and Last Years of Life Insurance, for the present hodge-podge collection small mandatory benefits. The alternatives, either the employer-based system or the European single-payer system, similarly become unaffordable when made universal. Universal coverage is indeed desirable, but not to the point of defining that nothing is permitted unless it is universal. If we must have mandatory health insurance, let it cover basics alone --either universal experiences like birth and death or universal fears, like a massive expense. Any degree of choice by politicians or bureaucrats is intolerable, and choice by physicians is barely tolerable. Once we all have basics, we can look around for luxuries. Is that too much to ask?

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WEALTH CREATION: Tax Exemption, Compound Interest, then Passive Investing. {bottom quote}
Future Dreams

The Golden Surprise. In this book, once we have explored some of the Hidden Economics of Healthcare, we will be ready for the big surprise, which is how much money can be created by changing the insurance design. It might take us a decade to perfect, and several chapters to describe. When lifetime coverage seemed to become possible through the pathway of the tax-exempt Savings Account, supported by Catastrophic fail-safe coverage, we made an amazing discovery. As one of the creators of the idea, I can tell you we had no idea the invested income in these accounts could generate so much money.

That came about by our determinedly avoiding government control and seeking new pathways the government could not follow. It may be a delusion on my part, but I believe the temper of the public will never tolerate government ownership of a private business. Although some far Eastern nations have tried it, their present direction is away from it. Even the Indian subcontinent and the more socialist members of the European Union have found it doesn't work. Very few American college students, however liberal, persist in the notion of government running a business, once they emerge from the campus into the real world. The African and South American dictatorships wallow in failures of the oligarchy approach, even when supported by economies based on natural resource discoveries. Consequently, I believe we will emerge from this and future recessions with the cultural belief that collective government ownership of the means of production, is a bad idea. I believe the wide-spread distribution of common stock will make us stronger capitalists, not weaker ones. That's a hint of what follows.

SECTION ONE: Health Savings Accounts and its Competitor, in Brief

Health Savings Accounts and its Competitor, in Brief


12 Blogs

Front Stuff: Surviving Health Costs to Retire: Health (and Retirement) Savings Accounts

"Christmas Saving Fund" for Medical Care
New blog 2016-02-29 21:24:17 description

Retirement Income by Overfunding Healthcare
New blog 2016-03-01 15:44:27 description

What will Future Healthcare Costs Be, and Will Such Revenue Be Available?
New blog 2016-03-02 01:03:04 description

Employer-Based Health Insurance in a Nutshell
New blog 2015-09-15 18:38:46 description

Health Savings Account in a Nutshell

First and Last Years of Life, Health Insurance

Overfunding for Retirement

Buying-Out Medicare

The Plight of the Latecomer to HSA
New blog 2015-08-23 21:04:57 description

Classical Health Savings Accounts (C-HSA): In Summary

SECTION ONE: Health Savings Accounts and its Competitor, in Brief
New blog 2015-07-15 22:59:27 description