Philadelphia Reflections

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


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.

Handbook for Health Savings Accounts
New volume 2015-07-07 23:31:01 description

Consolidated Health Reform Volume
To unjumble topics

SECTION FIVE: Multi-Year, the Future of HSA

Lifetime Health Savings Accounts are only a dream, to be worked on for months or years, because they invade so many turfs, and will require extensive legislation to become a reality.

It seems remarkable in retrospect it took me so long to think of extending "term" health insurance into lifetime multi-year health insurance. As the reader will notice, it rapidly expands to suggesting to some (probably astonished) life insurance companies that they take a look at the idea of doing the whole job, from investing to paying hospitals. Spreading in quite a different direction, it could expand to becoming a money machine which needs prudential restraint, even supervision by the Federal Reserve. Some of it may sound cockeyed, like putting a man on the moon, or a drone over the planet Pluto. But the reason it hasn't been tried has little to do with innovation. It relates to connecting health insurance to the place where you work. It's the employer who is reluctant to extend his involvement more than one year, because employees can be so mobile.

The required extra ingredients are pretty simple, since the central one of pouring left-over funds from one year into the succeeding year is already part of the classical Health Savings Account. The genie is out of the bottle, so to speak. It is highlighted that one-year term insurance primarily protects the insurance company, limiting its exposure to a single year. The investments are already pooled, and the many years of a lifetime can be covered by successive one-year catastrophic insurances, although lifetime catastrophic health insurance would be preferable, because it eases the "guaranteed renewable" issue. Tax exemption is already part of life insurance, but this tax exemption is sort of special. If the catastrophe to be covered is really a catastrophe, few people will experience more than one in a lifetime. But if you define a catastrophe as anything more than a thousand dollars, I'm afraid it is increasingly common.

About all the product needs is the willingness of the insurer to do it, and the willingness of government to permit it. When you do the numbers, however, you find that what then blocks it on a technical level is closing the loop, connecting the end of one life, back to the beginning of another.

This in turn is inhibited by the heavily borrowed healthcare costs of a child from birth to age 21, before he can earn a living. It's just about impossible to design a self-funded plan which begins with a $28,000 deficit.The rising costs from age 21 to 66 are quite suitable, but there just aren't enough years of compound interest to make the package viable. From where I sit, you can't have lifetime insurance unless you agree to pour funds from a different generation which has the money (and is willing to give it up or loan it) to cover that initial cost of being born. But if you concede that one point, oh, my, what a product you will have. I'm afraid that is unfortunate for poor people without a sponsor, although you will see how I do my best to work around that difficulty.

We started out with the difficulty of assembling enough money to do the job. With the notion of multi-generation involvement, we run into the reverse problem. There's if anything an excess of money-generation, mandating the addition of a limitation, which I would suggest is bringing the balance to zero after one grandchild has been funded. There should be no need for entanglement in the laws of perpetuities if the protection is built-in. I'm afraid I see no other feasible way to prefund any appreciable number of newborns, and getting over that particular hurdle is the main obstacle to lifetime health insurance. Otherwise, prolonged life expectancy would probably need to add another fifteen years to manage it.

SECOND FOREWORD (Whole-life Health Insurance)

This second Foreword is a summary of a radically modified proposal. It cannot be implemented without further changes in the law or at least some clarifications of the Affordable Care Act. To state the issue, it is that increasingly larger proportions of American lifetimes are not employed, and therefore are not able to take full advantage of an employer-based system. It becomes increasingly doubtful that thirty years of employment can sustain sixty years without earned income if you include childhood. Further, there is every reason to expect further migration of illness out of the employable age group. And finally, while there are signs of reasonableness, the mandatory stance of Obamacare is not greatly different from a package of mandatory "benefits" imposed on all attempts at innovation before they can be tested. If changes in the law are required before implementation, liberalization might as well be in place before innovations are proposed. No private company could proceed at arm's length without advance assurances resembling cronyism. Everything else is negotiable, but the notion of mandatory pre-approval of any modification must be softened to something less sovereign.

Sickness itself has moved into the retiree age group and will continue to migrate there. The means of payment cannot move from the employee group, so a two-step process is resorted to, with the middle-man government controlling the flow of money between age groups. If we are ever to remove middle-man costs, this feature must be removed, as well. Meanwhile, the paraphernalia of medical care, the medical schools, hospitals, and doctors, remain largely in the urban areas where employment formerly centered. So the government once more becomes a middle-man, and the system begins to resemble a virtual system, based on computer systems which do the job without actually moving. Until everyone stops moving, such duplication increases costs degrade the quality and start riots. We must move people less, and move money more. At one careless first glance, that sounds like shifting money between demographic groups, but picking winner and loser demography has repeatedly been shown to be too divisive; almost a prescription for a second Civil War. In short, we have fallen in love with a computerized virtual model, based on the faulty assumption that it is without cost. Here and there it might be tried experimentally, but it is far too early to make it mandatory. Consequently, it proves much easier to re-design the payment system, shifting money between different stages within individual lives, than to make everyone find a new doctor, just because the insurance compartment changed. It is absurd to make everyone move to Florida on his 66th birthday. Even redesigning transaction systems is not easy, but it is by far the easiest choice. Nevertheless, there is still too much friction in the various systems to make such improvements mandatory.

The best model to adopt is that of the university president who ordered a new quadrangle to be built without sidewalks. Only after the students had worn paths in the lawn along their favored routes to class, did he cover the paths with concrete sidewalks.

The issue at the moment is that money originates with employers, supporting the whole system, but their employees no longer get very sick. To reduce complaints, they are given benefits to spend which they really don't need, raising the cost of transferring the money to retirees who do need the money but are covered by Medicare. We are in danger of repeating that whole cycle with Medicare, piously calling it a single payer system, when in fact it would be a single borrower system as long as the Chinese don't collapse. Expensive sickness now centers in the retirees, but within fifty years a dozen diseases will be conquered, and we will then need the Medicare money to pay for retirement living. Constructing massive systems without that vision will just make it harder to replace them. We are, in summary, in great need of a gigantic funds transfer system, since moving the people and institutions to match the funding is preposterous. But as long as the system has two champions (Medicare and the Employer-based system) in possession of all the money, we flirt with collapses in order to force rearrangements.

All of this is divisive, indeed. For years to come, the easiest thing to move around will be money. Eventually, institutions and clients can sort themselves out for geographical unity, and probably improved efficiency. But a financing system with the money for sickness in the hands of people who aren't sick, plus a governmental, system dedicated to an age group with almost all the coming sickness but unsustainable finances -- is a wonder to behold. Therefore, we offer the Health Savings Account as having the flexibility to collect money from the young and healthy, invest it for decades, and use it for the same people when they get old. It can cross age barriers and follow illnesses, or it can remain with survivors and pay for their protracted retirement. If Medicare is modularized, it can supply the money to buy pieces as they begin to appear less desirable. It can redistribute subsidies to the poor if an agency gives it money, and it can adjust to changes in geography and science, since all it works with, is money. And it avoids redistribution politics by giving the same people, their own money.

For all these reasons, Health Savings Accounts on a lifetime or whole-life model seem the logical place to fix the broken vehicle, while we somehow keep its motor running. If successful, it will grow too big, so it should remain modular from the start. It has feelers in the insurance, finance and investment worlds. It could easily arrange branch offices for retail marketing and service. It should have networks for research and lobbying. But as long as it retains the branch concept and avoids the imperial one, it should manage to keep the doctors, patients and institutions functioning as the whole universe rearranges itself -- at its own speed. The first major step in this process would be to clear up some regulations which did not anticipate it. With Classical HSA adjusted for the interim role, the design stage can be undertaken to link the pieces of a person's health financing. Variations of lifetime Health Savings Accounts can be tried in demonstration projects, perhaps staying out of the way of the Affordable Care Act by unifying parts other than age 21 to 66, as the New Health Savings Account. And then seeing which version of lifetime HSA survives the squabbling. That isn't all. The really big picture is to absorb the pieces of Medicare, one by one, as sickness retreats from being the central cost, and the cost of retirement becomes the real threat.

Better, but More Complicated: Lifetime HSAs

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

We know:

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

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

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

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

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

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

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

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

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

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

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

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

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

Converting Term Health Insurance Into Lifetime Health Insurance

We start with the lucky circumstance that everyone has belonged to Medicare for half a century, and before that, large populations had Blue Cross and Blue Shield. The cost of healthcare at various ages is pretty well known for large populations. Since lifetime life insurance is cheaper than term life insurance, it is safe to assume lifetime health design is cheaper than year-to-year health insurance. The present inflexibility is one of the relics of an insurance system based on employer gifts to employees who are no longer as sickly as they once were. To go further, it also seems pretty safe to convert from a more expensive system to a cheaper one, and expect profits, except for the quirks of the tax laws. At the least, marketing costs should be reduced, the provision would no longer be needed for gallbladder and cataract removals in people who have already had the surgery, and interest could be earned on unused premiums over long periods -- if we could unify around patient insurance rather than yearly renewals based on place of employment. The system would become vastly more efficient, and interstate transfers would be facilitated. The methods employed by ERISA would be a good model for a start, and its experience would be useful.

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Accounting theory has it, every cost must be attached to a charge. So charges inflate to accommodate them. {bottom quote}
What Costs So Much?
Whole-life insurance has its differences. Whole-life experiences fewer drop-outs but makes an extra profit from investing the unused premium money for many more years. The additional investment income allows the premium to be lowered because it is not constantly threatened with non-renewal, and enhanced health care regularly creates greater longevity than the original estimate. So, whole-life insurance really can withstand careful investigation as a model. The bottom line is that healthcare would be less expensive if we shifted to the whole-life approach.

This book's present proposal is to do roughly the same thing, converting term health insurance into lifetime health insurance, year by year. After all, that would start from a 15-million subscriber base. That's just the basic revenue source, however. Health insurance has a number of jumbled issues during a long transition period. The purpose of stressing the life insurance model first is to overcome a natural suspicion that we intend to claim magical powers of predicting the future. That risk is assumed to be stipulated, and we will not bore you with constantly repeating it.

Let's start at the far end, with the final answer to the test. In the year 2000 dollars, the average American spends an average of $325,000 on health care in a lifetime. Women spend about 10% more than men. The main problem is to take a lump of money at the end and restore it to different young people as they get sick. When they remain well, the problem of balance transfers is fairly simple. To ensure the entire lives of 340 million Americans, the cost would be trillions of dollars. That's 110,500 trillion, in fact, give or take a few trillion. Or 110 of whatever is one thousand times bigger than a trillion. The original mind-boggling figures were developed by Michigan Blue Cross from its own data and confirmed by several federal agencies; the future projections are my own. By the end of this book, we will have suggested it should be possible -- to cut that figure in half, without changing the medical part of it very much.

It is legitimate to be skeptical since a ninety-year lifetime history involves a great many diseases we don't see any more. They afflicted many people who would have been readily cured with present medications except the drugs weren't invented. As if that weren't complex enough, it also involves predictions about the health costs of people who are still alive, destined to be treated with drugs nobody has seen, yet. To hammer this last point home, it is roughly estimated that fifty percent of drugs now in use, was not available only seven years ago. Since we must go back ninety years to get data about the childhood illnesses of our presently oldest citizens, the unreliability of also looking ninety years forward from 2015 must be clear. And to do that for a population constantly in the transition from very young to very old is daunting, indeed. But the facts of life, that people are born, go to school, get jobs, get sick, and then die -- never change. What's new, is it takes longer to run the course, and thus opens up gaps between steps. If we gather the gaps and meanwhile charge premiums on the longer time intervals, we produce a brand new source of revenue. While the intricacies sound complicated, in the end, we rely on going from a more expensive process to a cheaper one, assuming the transition costs can be supported.

The value of attempting it is considerable. We already have a technique which the statistical community agrees is reasonable, which tells us lifetime insurance would require something over $350,000 per person. Future trends can be estimated well enough, to show whether costs-after-inflation are going up or down, and roughly by how much. A penny in 1913 money is called a dollar today, just for illustration. Naturally, we then assume a dollar today will be called 100 dollars, a century from now. Regardless of numbers games with the value of a dollar, we have a tool to estimate the general magnitude of health costs, and by how much they will likely change. It's useful, even when its answers are surprising.

Theoretically, there is room for a change in expectations. Some people may decide living eighty years is long enough, and then decline to pay for more. However, I've tried it, and I don't feel eighty is enough. So, for my own benefit if for no better reason, I decided to see what could be done with the cost problem. One solution is to work longer than retiring at age 65. If future medical care changes direction drastically, its payment system might also be forced to change. But if health care doesn't change much, the payment system won't need to predict the future. That reasoning reflects the insurance industry's own history, where the marketing department eventually asserts dominance over the actuaries, by declaring it is more important to predict generally, than with precision.

The approach has its limits. Health insurance did historically underestimate how much the payment system could warp the medical one over long periods, primarily because it initially misapprehended who its customers were. Payment methodology is now relentless in persuading its true customers, who are businessmen in the Human Relations departments of large corporations. They don't like to hear it phrased that way, but we now have a four-party system, not just a third party insurance, and its fourth-party directors, big employers. As corporate taxes rose, the system invented by Henry Kaiser in 1944 used corporate tax deductions to fund the third-party system with 60-cent dollars. In fairness to Mr. Kaiser, much of the system has migrated to take advantage of the tax deduction, and the tax rates themselves are higher.

Looking back over an expedient system designed for short-term goals, a shocking realization now begins to dawn: most current "reform" thinking is about how to twist the medical system to fit some unrelated budget. Even more shocking is the business customers discovered how modified tax laws could let them buy health insurance with a discounted business dollar. When donated to employees, another 15 or 20 cents could be clipped off. Obviously, if health insurance is subsidized by business tax deductions, and Medicare is 50% subsidized directly by tax infusion, health reform can't claim to be a reform until finance is fixed. Essentially, the employer-based system amounts to this: by giving health insurance instead of salary, the employer skips paying for extraneous things which have been linked to the salary level. Union domination of state legislatures has assisted this goal. Just, for example, the Philadelphia wage tax is based on 4% of wages, the New Jersey income tax is based on wages, and so on. If you can find a way to pay the same, but claim the pay packet is smaller, you've got the idea.

Gradually we reach the point of rebellion; if it is legitimate for insurance executives to tell physicians how to practice medicine, it must, of course, be equally legitimate for physicians to re-design the payment system. So let's have a go at it.

Footnote: In the thirty years since I wrote The Hospital That Ate Chicago about medical costs, the newspapers report physician reimbursement has progressively diminished from 19%, to 7% of total "healthcare" costs, so perhaps now it's legitimate for some related professions to answer a few cost questions, too.

As patient readers will gradually see, considerable extra money is already in the financial system, leaving difficult problems of how to get it out and spread it around. This isn't snake oil or a mirage. The beneficiaries would scarcely see any difference in medical care if Health Savings Accounts fulfilled their promise. But frankly, the insurance providers would have to make some wrenching changes. Since millions make their living from sticking with the present, it is undoubtedly harder to design a new system which would please them. We're not going to mention it further in this book, but the easiest way to remove a big business from the equation would be to eliminate the corporate income tax and shift the tax to individual stockholders. It is not corporate revenue which finances the medical system, it is corporate tax deduction, largely because we have imposed a system of double taxation of corporate profits. Eliminate one of the taxes, and business might complain less about losing the tax deduction. Meanwhile, health insurers would have a new line of work offered to them. Corporate officers should, and often do, regard themselves as custodians of the capital in use, which in fact belongs to the shareholders.

What about the public? Well, medical care now costs 18% of Gross Domestic Product (GDP) and 18% is pretty surely crowding out other things the public might prefer to buy. In a sense, the political beauty of the premium-investment proposal we are about to unfold lies in its primary aim of cutting net costs by only adding new revenue. Critics will say we pretend to lower costs by raising them. But essentially the money is spent to eliminate hidden subsidies and red tape which are off the books, and by other means which have been overlooked in the past. The accounting theory is that every cost must be attached to a charge, so charges have been inflated to accommodate that notion.

Lifetime HSA and Whole Life Insurance: A Basic Difference

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

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

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

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

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

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

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

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

Escrow Accounts for Future Needs.

One of the important advantages of Health Savings Accounts over historical health insurance lies in the contrasting sacrifices you must make if you can't afford everything. Traditional health insurance ("first dollar coverage") paid for the small things, but if you ran out of money, you had to sacrifice some big things. The Health Savings approach is to provide money for the big things first and sacrifice little things if you must. That's the essential philosophy, and it has become exaggerated by increased longevity. We need to add a simple way to by-pass small expenses and save money for later. That's the reasoning behind adding escrow accounts to high-deductible insurance.

Think about it: when a subscriber faces a medical expense costing more than his account balance, he has three choices. He could forego the medical service, he could pay cash out of pocket, or he could borrow the money. Sometimes he will have enough money in the account, but saves it for some later purpose; in that case, he might be both a borrower and an investor at the same time. When it comes time to pay off his loans, that obligation should have a higher priority than investing new money, since otherwise, the subscriber is investing on margin. Margin investing is generally a bad idea, but it can be made less risky through using an escrow account. That's a designated-purpose account, which is more difficult to invade. So, he may divide his account into three escrow accounts, and the managers may decide they need even more. It becomes inflexible if it can never be invaded, but it shouldn't be easy and paying cash or tax-unsheltered money is always better if you can.

Borrowing Escrow. It's wise to pay off debts early, so the program should require its permission to do anything else with a new deposit. Not all managers of HSA will advance overdrafts, but some will, probably at rather high-interest rates. More commonly other subscribers will have surplus money they would like to lend like a credit union, because deposits up to their annual limit are tax deductible, and they would be reluctant to pay the taxes to redeem them.

{top quote}
If you will need it later, Set it Aside, Now. {bottom quote}
Escrow Subaccounts

It's possible to imagine gaming such arrangements of differing tax liability, so Congress must decide what circumstances permit it. With insurance, considerable pooling of resources happens without tax consequences, but when bank accounts are individually owned, pooling is not allowed without legal provision. Depositing unencumbered money in the escrow account is the same as investing it, except its presence indicates availability for loans in certain circumstances. Nevertheless, it is inevitable that gaps between the two curves, revenue, and expense, will develop, even though the hills eventually exceed the valleys.

My suggestion is to limit structural borrowing at low-interest rates to smoothing out the valleys characteristic of entire age levels, rather than provide individual banking arrangements between subscribers. Over time, these variations will standardize. And since the accounts will collectively grow, the quirks will eventually stabilize the investment accounts, possibly even augmenting income. However, if a surplus or deficit is exhausted, it should not be perpetuated with outside financing. The accounts operate under the principle that they come out right at the end. It, therefore, ought to be possible to adjust age-determined structural imbalances in bulk, while attempts by subscribers to game such variations should be countered by modifying interest rates.Wholesale buyouts have their advantages, but piecemeal buy-outs are better.

Proposal 5: Congress is urged to permit pooling (at low interest) between the accounts of an age group inconsistent surplus, -- and other age groups in consistently deficit status,-- occasioned by persistent divergences between revenue and medical withdrawals at differing ages. If there are other imbalances created by differential depositing, they should be corrected by adjusting internal interest rates. (2735)

Medicare Escrow. There are a number of reasons why some people would want to buy their way out of Medicare, whereas others would become terrified at any mention of changes in their Medicare plan. The incentive for the government to permit Medicare buy-outs would lie in ridding itself of its deficit financing, with secondary borrowing from foreign nations. And the advantage for the plan itself is providing a cushion for a transition to lifetime accounts, ultimately a better cushion for revenue misjudgments.

By noting the average annual cost of Medicare, the number of Medicare beneficiaries, and the average longevity of subscribers, the average lifetime Medicare costs of Medicare can be calculated. Assuming inflation to affect both revenue and healthcare expenses equally, inflation is ignored. Then, with various compound investment assumptions, a range of future income can be estimated. All of this can be estimated as requiring a lump-sum payment of $60,000 at the 65th birthday in order to make a fair exchange for the Medicare entitlement and guessed at $80,000 if accrued debts are serviced. However, the individual would have paid about half of that with previous payroll deductions during his working life (a quarter of the total), and by buying out of it at age 65, would be relieved of Medicare premiums which amount to another half of what is left, or a quarter of the total cost. However, that complexity of description eventually leaves half of the total to be made up by Federal subsidy from the taxpayers because loans must be repaid. It's complicated because every revenue source available has been tapped.

The biggest issue is a foreign debt to be paid back for financing Medicare deficits in past years. Consequently, in order to put a stop to further borrowing, the buyout price must be raised. Obviously, if a past debt is serviced, more contribution is needed. Unfortunately, information about prior indebtedness is not readily available, so the entirety is here guessed to require a single-payment premium of $80,000 at the 65th birthday, for a full Medicare buyout. If the entire Medicare program, past and present, is to be paid off, they're very likely will have to be a tradeoff between increased revenue from HSA deposits and diminished service of foreign debts. As a guess, the elasticity of HSA revenue of $3350 per year, from age 26 to 66, has already more than reached its limit. For the moment, we have accepted the present Congressional limit, which was presumably rather arbitrary. While it is possible to imagine this arbitrary limit could be made to stretch to cover lifetime health costs, more likely it will only cover a portion. But to cover the Medicare unfunded debts of half the past century in addition to current costs, will require some new concept, as yet undevised, and a good deal more information than is presently public.

"All-other" Escrow. It is difficult to foresee which escrows will prove so popular they will require limits, and which others will be so unattractive they will require minimums. Moreover, it can be anticipated some people will wish to use account surplus as an estate-planning tool, while others will have no estate. A provision in law directing the uses of account surplus at death may thus appeal to the majority of subscribers, but actually may be highly unsuitable for the majority. Therefore, while it seems harmless to provide a vehicle for such individualization, too much should not be expected of it.

To most readers, these sums will seem prodigious, and indeed they are. Few people at present are in a position to consider them. We can pray for some relief from scientists, from the economy, and from demographics, because downsizing Medicare is a growing requirement, provoking even more drastic remedies if we sweep it under the rug. We need, first, to make Medicare more modular so it can be downsized in pieces, instead of all-or-none. In time, we need to downsize it and use the pieces to fund protracted retirement costs. The long-term goal, for the scientists, the politicians, and the patients, is to make it unnecessary to spend so much money on health. Beyond that, the funding of retirement has no logical limit. This long-term vision of our future must first become commonplace in our culture so we will seize every chance opportunity to advance it in fact.

Spending Rules--Same Purpose As Escrow Accounts

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

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

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

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

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

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

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

Paying for the Healthcare of Children

It has been said by others that eventually healthcare will shrink down to paying for the first year of life, and the last one. Right up to that final moment, medical payments must somehow evolve in two opposite directions. We might just as well imagine two complimentary payment systems immediately because the two persisting methodologies could eventually conflict unless planned for. Paying in advance is fundamentally cheaper than paying after the service is rendered because there is no potential for default in payment.

The two methods even result in different aggregate prices; in one case you pay to borrow, while in the other you get paid to loan the money. Dual systems are a fair amount of trouble; remember how long it took gasoline filling stations to adjust to credit cards versus cash. When gas prices eventually got high enough, they just charged everybody a single price, again. This isn't just lower middle-class stubbornness. Dual payment systems slow you down, and profit is generated from repeated rapid transactions. The buyer wants the goods and the seller wants the money. The profit comes from doing exchanges as fast and often as you can manage them.

In a well designed lifetime scheme, with balances successively transferred from one pidgeon-hole to another, it becomes possible to maintain a positive balance for years at a time (thereby reducing final prices, because the income from compound interest keeps rising toward its far end). That was a discovery of the ancient Greeks, but sometimes Benjamin Franklin seems like the only person to have noticed.

{top quote}
The last year of life is more expensive, But the first year of life may cause more financial pain. {bottom quote}

However, In real-life health costs, there is one intractable exception. Because obstetrics can be costly, particularly the high costs of prematurity and congenital abnormalities, the first year of life averages $10,500, or 3% of present total health costs. It, therefore, results in pricing which many young parents cannot afford, in spite of insurance overcharges to catch up later. And thereby a multi-year stretch of interest income is jumbled up, often lost entirely. It gets worse: childhood costs from birth to age 21 average 8% of lifetime healthcare. Please notice: Single-year term insurance premiums always rise to a much higher level than a lifetime, or whole-life, premium costs, because of internal float compounds in whole-life. Modern medicine has also resulted in rising lifetime costs, with only this obstetrical exception. Someone surely would have figured this out, except excessive taxation of corporations created a motive not to notice the effect on tax exempted expenditures.

This problem obviously could be approached by borrowing or subsidizing. Someone might even envision a complicated process of transferring obstetrical costs to the grandparents for thirty-five years, then transferring the costs back to the parent generation. Since we are describing a cradle-to-grave scheme, it seems much better to imagine a single person's costs eventually becoming unified. Grandparents do in fact share continuous protoplasm with grandchildren, but before that was recognized, the courts had decided a new life begins when a baby's ears reach the sunlight. Stare decisis beats biology, almost every time. A society which already has a high divorce rate and plenty of other family upheavals probably feel better suited to the principle of "Every ship on its own bottom." -- except for this financing issue. For childless couples and parentless children, some kind of pooling is possibly more appealing, and the complexities of modern life may eventually lead that way.


In the meantime, lawyers, who see a great deal of human weakness, are probably better suited to suggest a methodology for transferring average birth costs between generations, and back, although a voluntary process seems more flexible. It would seem grandparents are often most likely to be in a position to leave a few thousand dollars to grandchildren in their wills, and age thirty-five to forty seems the time when competing costs are at a lifetime low, making that the best time to pay it back.

Some grandparents are destitute, however, and some parents are basketball stars. There are surely generalizations with many exceptions. The process is happily simplified by a birth rate of 2.1 children per couple, which is also 1:1 at the grandparent/grandchild level and our Society has an unspoken wish to increase the birth rate if it could afford it. For legal default purposes, matrilineal rather than patrilineal descent may be more workable. But -- if every grandparent willed an appropriate amount to some grandchild's account, it would work out (with a small balancing pool), creating a small incentive for the intermediate generation to have more children.

The answer to this dilemma probably lies in revising the estate-resolution process, making HSA-to-HSA transfers largely automatic within families, devising a common law of special exceptions and adjustments, and creating a pooling system for special cases which defy simple-minded equity. A large proportion of grandparents have an indisputable defined obligation, and a large proportion of grandchildren have an indisputable entitlement. The difficult problems reside in the exceptions and require a Court of Equity to decide them. We leave it to others to fill in the details because there could be many ways to accomplish this, and some people have strong preferences. The basics of this situation are the grandparents with surplus funds are likely to die later, but they are still likely to die, close to the age when newborns are appearing on the scene.

When you get down to it, the problem isn't hard if you want to solve it. By arranging lifetime deposits in advance, a large number of grandparents could die with an HSA surplus of appropriate size. A large number of children will be born without a standard-issue family and need the money. After the standard-issue cases have been automatically settled, these outliers can be referred to a Court of Equity charged with doing their best. After a few years of this, the results can be referred back to a Committee of Congress to revise the rules.

A basic fact stands out: most newborn children create a healthcare deficit averaging 8% of $350,000, or $29,000, by the time they reach age 21. Most young parents have difficulty funding so much, and so all lifetime schemes face failure unless something unconventional is done to help it. A dozen more or less legitimate objections can be imagined, but seem worth sacrificing to make lifetime healthcare supportable. The main alternative is to pour enormous sums into the government pool, and then redistribute them. I am uneasy about letting the government get deeply mixed into something so personal. So, speaking as a great-grandfather myself, about all that leaves as a potential source of funds, is grandpa, and even grandpas sometimes have an aversion to long hair and rock music.

Some Underlying Principles

Casualty insurance formerly contained a clause making it noncancellable and guaranteed renewable. Except for disability insurance, most insurance no longer has those contractual promises, but the better ones will still "stand by their product". Prices were too unstable to permit a continuation at the same price as a legally enforceable right. In 1945, the Henry Kaiser caper changed the whole nature of the relationship, at the end of which the employees walked away with no individual renewal right at all, but got really great benefits while they had them. That was not a good bargain. Without a right of renewal, there is no good way to make internal transfers from young healthy employees to aging sick ones. Apparently, labor and management felt it was more important to get something out of the situation than to come away empty-handed. Most of these negotiations were private, and there may have been unrevealed considerations.

{top quote}
No individual renewal right, but really great benefits while they lasted. {bottom quote}
Bad Bargain.

But the one sure outcome of this turmoil was a young employee had no assurance of health insurance if he changed jobs, and no sure way of transferring surplus benefits to his later years, even after remaining within the same employer group for decades. Older employees were plainly getting more value for their health benefit, but young ones could not be sure they would stay around long enough to enjoy it. In retrospect, this may have been a driving force in the enactment of Medicare in 1965. Employees experienced "job lock", which definitely meant they could not take stored-up benefits to a new employer, or into retirement. Furthermore, casualty health insurance was gradually changed by employers donating the policy to the purchaser, so ownership of the policy migrated into the employer's hands. The employer had to change insurance companies for the whole employee group, or not at all, so slavery begat more slavery. The negotiated group rates naturally reflected this change. The business plan of health insurance does not differ greatly from automobile insurance: Premiums are paid to an insurer at the beginning of the year; and at some time during that or subsequent years, the insurer uses the pooled money to pay the claims. In practice, there does exist one important difference between the two types of casualty insurance. Many auto insurance companies imply they hope to renew a policy if the premiums remain paid, but hardly any health insurance is "guaranteed renewable" in any sense. You can pay individual health insurance premiums for many years to the same insurer, but the insurer still reserves the right to drop you.

This largely unanticipated disadvantage grows out of the sponsorship of health insurance by employers since applicant employees are in no position to put strings on a gift. Its hidden unpleasantness was emphasized when millions of people were recently dropped from long-standing policies which did not conform to the Affordable Care Act's regulations. Original motives and understandings became unprovable after the passage of time. One could, however, easily imagine employers felt they might acquire new duties by law, and were reluctant to stand behind unmeasurable ones. One could imagine the insurers were uncomfortable with the risk an employee might move to a new state, and because of the Tenth Amendment to the Constitution, be facing insurers with no duty to continue coverage. This ACA dilemma came about in an environment with so little competition, neither the employers nor the health insurer felt compelled to wander into unforeseeable conjectures.

In this single subsequent event during the Obamacare confusion, a serious disadvantage of employer-based insurance discarded its tradition as harmless boiler-plate, revealing the enforceable facts of the matter. A health insurance company can unexpectedly walk away from an employer-based contract, even when it is needed most. The patient gets it as a gift and doesn't own it. This dispute over fairness and the original intent was surely involved in the government's decision to delay implementation of Obamacare for large employer groups.

By contrast, we must point out the Health Savings Account leaves unspent money with the individual as permanently as he can restrain himself from spending it. For this, he loses the ability to pool with others and must buy high-deductible insurance to provide the pooling feature for large costs. Interest gathered on his idle money remains his alone. By retaining ownership in the hands of the employee, HSA gains protections against much broader health-finance risks, than the Affordable Care Act's pre-existing condition-exclusion does, for its population segment.

In fact, this sweeping violation of a gentleman's agreement may make such arrangements unacceptable in the future. If the employer community finds it impossible to live with guaranteed renewability, they may feel forced to drop the fringe benefit. Not everyone wants to exchange the freedom of choice for freedom from the expense of it, but some do. Consequently, opening this can of worms could lead to the dissolution of the present system, which depends heavily on the tax-deductibility of the gift for employers. There is essentially no difference between an individual income tax, and a corporate income tax, except the corporate tax, is higher. The world's highest corporate tax necessarily creates the world's highest tax deductions for employers. Reduce their wage costs, and you will reduce their income tax. But reduce your own tax, and you reduce what it has been paying for. That's the bargain, and no stalling will change it.

We must, however, introduce an observation which applies to all defined-contribution plans. The advantage has switched from the older "new hire" rather markedly toward the younger "new hire", because of the addition of investment income for the younger one. This is an advantage for one, not a disadvantage for the other, but negotiators seldom recognize such arguments. The terms of the agreement should probably be adjusted for this new development, which is illustrated in the first section of this book. But since the change is due to the mathematics rather than the judgment of the donor, experts will have to see what they can do about it, before it becomes a punching bag, desired by no one, but forced on everyone.

{top quote}
Some rude things it would not hurt to know. {bottom quote}
Employer-based health insurance was once a well-intentioned gift, with a regrettable lack of guaranteed renewability. Until the First World War, most corporations were controlled by founding families, and more employees enjoyed lifetime job security. The switch to stockholder controlled to fewer benign gifts to lower-level employees. After a century of modification, the employee still is forced to bear the risk of losing his paid-for health insurance when he loses his job. The implicit good-faith guarantee of guaranteed renewability is however likely to vanish. Its implicit risk was transferred to the employee, but money to pay for it was not until the Health Savings Account came along. With that, surprising discoveries emerged. Thirty years had been added to longevity, now making compounded interest money a truly substantial issue. Furthermore, many diseases had disappeared, generating overall a protracted interval of smaller expenses during working life.

As long as the (term insurance) risk of losing the premium flow remained, it was not prudent to invest the money in higher-paying assets, so the insurance intermediary was in no position to maximize float. Curiously, the famous Warren Buffett became one of the richest men on earth by buying entire auto insurance companies to transform the one-year "premium float" into a virtually permanent source of cash flow. Substituting health insurance for auto policies, essentially the same strategy is proposed by this book, for employees to consider. Except for Jimmy Hoffa, few unions have considered such a role, and in view of colorful union history, perhaps employers resist it.

Is there enough money in this approach? Some of the limitations to be encountered in paying for healthcare are specific and final; longevity would be one of them. At present, the average longevity at birth is 83. It would take some dramatic research discovery to extend it much beyond 93, but it is reasonably safe to project it will slowly rise from 83 to 93 during the next century. The medical costs of achieving such a goal are almost impossible to know in advance, but attempts are regularly made, and the best available estimate is $350,000 on average per lifetime, using the year 2000 dollars. Women cost about 10% more than men, partly because of increased longevity, partly because of the statistical convention of attributing all obstetrical costs to the mother. There is a reason to believe all late-developing diseases originate in the dozen genes residual in the mitochondria of the mother's cells, so the conquest of diabetes, cancer, Alzheimer's disease, Parkinson's disease, and arteriosclerosis -- during the next century -- is a reasonable prediction. Furthermore, new cures while generally expensive at first, eventually become cheap. Mix it all together, and while the costs of the next century may at times be towering, it seems entirely conceivable healthcare costs will become comfortably sustainable, a century from now. If we can generate the means to get to that point, give some of the credit to Warren Buffett, and John Bogle.

John Bogle may not have invented the idea you can't beat the index, but he certainly evangelized the news that 80% of mutual funds managed by experts, somehow don't beat the index. Let's explain. When you finally get over the idea of getting rich by out-performing the stock market, the idea reverses itself. The whole stock market is a proxy for the economy, and so although some people do get rich faster than the stock market grows, hardly anybody gets richer in the stock market without using some form of leverage, a genuinely risky approach. Professor Roger Ibbotson of Yale has compiled extensive data for the previous century, and convincingly demonstrated how relentlessly the American equity stock market has grown quite linearly, depending on the asset class, but largely disregarding stock market crashes, and numerous wars, large or small. While small stocks have grown at a rate of 12.7%, blue-chip stocks have consistently grown at about 11%. With big cheap computers, we can see investors in stocks have received a return of 8%, paying a penalty for the small investor's inability to ride out really long-term volatility in any way but buy and hold. Perhaps, over time, we can find ways to narrow the overhead and return more than 8%. But for the time being one must be satisfied with 8% net, although 11% might become some ultimate goal. To go on, the 8% we get is made up of 3% inflation, so we better not count on more than 5% actual return. What will that achieve toward paying an average lifetime cost of $350,000?

The table plots how $400 will grow, starting at birth and ending at 83 and 93 years, with 5% compound interest. We've already described why 83, 93, and 5% were chosen, but why $400? It's a personal guess. It represents the amount I think would be achievable as a subsidy to "prime the pump". It might someday be a government subsidy for handicapped people who could never support themselves. And since it would be at birth, it would have to seem bearable to young parents. Many readers would react that $400 is too stingy, but politics is politics, and what people can afford is not the same as what they will vote to afford. In any event, we here are testing the math as a preliminary to announcing we can save a bundle of money by changing the system we are used to. Choose your own number, remembering we are attempting to reduce what is now reliably estimated as 18% of the Gross Domestic Product, and competing with a presidential proposal to give it to everyone. Further, the only thing you need to know about dynamic scoring is that making it free will assuredly escalate its eventual true cost.

Compound interest always surprises people with its power, and in this example, 5% just about makes the goal. There's not much room for error or contingencies. All of the known factors are conservatively estimated, and it passes the test. What isn't covered is the unknown factor, atom wars, a stock market collapse, an invasion from Mars. To be on the safe side, we had better not count on this approach to pay for all of the health care. Just a big chunk, like 25%, seems entirely feasible. In the immediately following section, we examine the first "technical" problem. The first year of life is effective as unaffordable as the last year of life, and newborns generally can't dip into savings.

Transitions To Donated HSAs, for Children

Let's proceed on the assumption Congress will authorize intergenerational transfers between HSA accounts, to the extent it becomes possible to create single payment accounts of the kind we have described. Presumably, most of these will be authorized in wills, but some donors may prefer to be alive when a transfer happens. It may happen at the birth of the child, or in anticipation of it; but accidents happen, so contingency plans should be allowed, with a default of some sort if this point has been neglected. If Congress authorizes these transactions, Congress should retain some control of them.

On the other hand, the child's parents retain fall-back responsibility too and have a right to be represented in any changes. Congress should authorize a system of transition oversight, which includes state representation, and representation of parents, as well as experts with experience in related fields, like single-deposit annuities. The transition oversight committee (or court) should have a right to suggest technical and substantive amendments to the enabling legislation, have a right to hear appeals, and the right to obtain expert advice, and such other relevant duties as the enabling body may delegate.

Someone must be placed in charge of oversight over the amount of a single payment to start these accounts, adjust necessary supplements, and to adjust for any surplus. There must be an accounting system and a public report of it. Experts in single-deposit annuities should be consulted, and future projections should be kept current. Since each year of life from birth to 21 years will eventually establish a "normal" budget, records should be maintained for the purpose of increasing or decreasing each year's average revenue assignment out of an overall children's budget. The purpose is estimating whether the overall budget needs adjustment, or whether only individual years do.

The presumption should be, the actual experience will be a near-zero balance at the 21st birthday. The possibility of surplus or deficit must be envisioned, however, and supplementation of the fund is preferred. However, if supplementation is not forthcoming, all payouts should be proportionally reduced to maintain a balanced budget. Supplements should then be sought from the parents of covered children, assuming such deficits cannot be maintained by transfers from funds intended for later ages of the recipients. It is not intended for fund sources for children born earlier or later to supplement deficits of other programs, although enough surplus should be generated to make lifetime funding possible. It should be recognized this is a sensitive point in the cycle, sometimes necessary as a break, sometimes useful as a reserve. To use the surplus to fund food stamps or agricultural subsidies is the beginning of the end.

The general principle should apply that a reimbursement agency should not be responsible for costs which were unknown before the revenue became fixed. In fairness, a new drug, instrument or procedure should not be reimbursed unless the next annual budget anticipated its existence. However, this accommodation should be reasonable, devoting more attention to the date of the annual opportunity to readjust the budget, than to political issues.

Here's the Deal

So that's what I have to offer on Lifetime Health Savings Accounts. It's about as far as a physician ought to go in meddling in related professions. It looks to me as though creating lifetime accounts on a model of whole-life life insurance would be a great improvement over our present term insurance model. But I am quite uncertain whether a project this large should be monolithic or have competition between an organization with experience, like an existing life insurance company, an evolved version of one of our health insurance companies, or an entirely new organization formed for the purpose. This topic alone is worth debate and a white paper. Several existing professions are involved and may have special legal obstacles, just as they would have special qualifications. Perhaps several demonstration projects should be launched to find out some answers before we get into a century-long, horrendously expensive, failure.

On the other hand, it would appear the financial savings would be too big to ignore. Because it would take ninety years to conduct a full experiment, it would appear fairly clear we ought to test this in component pieces and then figure out how to unify them. If we must make mistakes, let them be fairly early, drop them, and re-direct our efforts. By all means, ask the life insurance companies what their experiences were. How did they overcome the long testing period? What are the problems which term-insurance companies uncovered in their efforts?

In sum, we ought to spend a year debating the issue, several years testing likely solutions, and another year debating what we have learned. Only by following some such path, is there a chance we will end up with something we are proud of.

SECTION FIVE: Multi-Year, the Future of Health Savings Accounts


Details of Lifetime Health Savings Accounts (L-HSA)

If we propose to adopt the whole-life model for Health Savings Accounts, then why don't we just add it as a new product for the companies who are already in the whole-life business? It's a good question, and most of the answer is I don't happen to own an insurance company. Somebody has to invest a pile of money to own one. You almost never hear of corporate pirates attempting a take-over, and many insurance companies make their profits on subscribers who drop their policies, although that's mostly term insurance. Come to think of it, these are mostly 19th Century organizations who sort of had the good luck to encounter windfall profits when subscribers lived longer than was necessary to break even, and then even kept living on some more. It isn't exactly the background of people who start new businesses with new ideas. Nevertheless, they do sell their products to young people, invest the premiums for many years, and eventually pay their bills to old folks, on time and cheerfully. And there would seem to be plenty of incentive. Aggregate retirement income fifty years from now will probably be many times as large as the present face value of insurance, and probably include a larger proportion of the population. They already have actuaries on their payroll who could do the math, and who yearn for the day a new product would give them a shot at being CEO. Like me, they have already had a look at the C-suite offices, and like me, compare them favorably with the Temple of Karmac.

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Who will run L-HSA, once it is legal? {bottom quote}
However, I don't know any of them personally, so the assumption must be made that L-HSA will grow out of companies that package C-HSA at present and sort of have a term insurance point of view. Elements of it have been around for almost two centuries, but even the life insurance industry might become dubious to hear whole-life coverage of health insurance presented as an investment. As the level of income taxation rises, tax-free internal transfers assume new value, but resistance to higher taxes will grow. Extending life expectancy gives compound interest much longer to grow, it thus transforms what it can do. In addition, if you desire intergenerational cost shifting for health costs, you probably must incorporate some form of insurance as a pooled transfer vehicle. This combination also enables funds to shift within the account to a later time in life. It's a more attractive individual incentive for savings, than threateningly proposing your generation must support mine.

As a final feature, Catastrophic high-deductible is here added, providing stop-loss protection. Call it re-insurance if you prefer. It's single-purpose coverage, based on the idea that the higher the deductible, the lower the premium. So it follows that the longer you are a customer, the more catastrophic insurance you can afford. Cost saving runs through all multi-year ideas, but lifetime coverage is a cost-saving whopper, because of the way Aristotle discovered compound interest turns up at the far end. (By the way, that's why I suspect we have rules against perpetuities of inheritance.) It transforms Health Savings Accounts into a transfer vehicle for funds, from one end of life to the other, and must add debit-card health insurance for current expenses. Forward from the surplus of the present. And backward from the compound interest of the future. The last-year-of life could be chosen as an example because the last year comes to 100% of us, and is usually the most expensive year in healthcare, not greatly different from the face value of life insurance. But needs differ, and a ton of money sounds pretty good at any age. A Health Savings Account can also be used as a substitute for day to day health insurance. Another synonym might be Whole-life Health Insurance, although multi-year health insurance is probably more precise. The idea behind presenting this concept piecemeal is to provide flexibility for both overfunding and underfunding, since the time periods for coverage can be so long (and the transitions so variable) that both eventualities would occur simultaneously to different individuals.

The simple idea is to generate compound investment income -- not presently being collected -- on currently unconsumed health insurance premiums. And eventually, to apply the profit to reducing the same individual's future premiums. Even I was then startled, to realize how much money it could save. It's a scaled-up version of what whole-life life insurance does for death benefits. Since lessened premiums generate greater investment income, the math is complicated even when the theory is simple, but every whole-life insurer has experience with smoothing it out. For example, if someone had deposited $20 in an HSA total market Index fund ninety years ago, it would now be worth $10,000, roughly the average present healthcare cost of the last year of life. Neither HSAs nor Index funds existed ninety years ago, and of course, we cannot predict medical costs ninety years from now. This is only an example of the power of the concept, which we can be pretty certain would save a great deal of money, but skirts the guarantees about just how much.

There's one other advantage to using HSAs within the whole-life insurance model. It has always bothered me that life insurance tends to gravitate toward bond investments, matching fixed-income revenue with fixed-outgo expenses. But insurance companies largely support the bond market, which is many times as large as the stock market. In effect, their situation encourages them to increase the amount of leverage in the economic system, thereby increasing its volatility, and its tendency to experience black swans.

Furthermore, the insurance industry has accumulated a great many special tax preferences, based on the notion its social value is a good one. Placing life insurance in competition with non-insurance providers of the same services would justify extending the tax preferences to the others as well. The resulting competition would invigorate what has become a pretty stolid plodding citizen, with somewhat unique power over state legislatures. State legislatures, in turn, would benefit from increased competitive points of view among their lobbyists.

People would be expected to join at different ages, so the ones who join at birth in a given year have accumulated funds which would be matched by late-comers. In our example, if a person waited until age twenty (and most people would wait at least that long), he would need to deposit $78 -- not $20 -- to reach $10,000 at age 90. It's still within the means of almost anyone, but the train is pulling out of the station. Participation is voluntary, but no one saves any money by delaying and learns a bitter lesson when he tries. Notice, however, no one pays extra for a pre-existing condition, either; it costs more to wait, but it does not cost more to get sick while you wait. If the government wants to pay a subsidy to someone, let the government do it. But nothing about the whole-life retirement system compels increased premiums for bad health or justifies lower premiums for good health.

Whole-life health insurance takes advantage of the quirk that the biggest medical costs arise as people get older, and similarly, health insurance premiums are collected early in life when there is considerably less spending on health. The essence of this system is to reform the "pay as you go" flaw present in almost all health insurance. Like most Ponzi schemes, the new joiners do not pay for themselves, they pay for the costs of still-earlier subscribers, a system that will only work if the population grows steadily and/or prices rise. When the baby boomers bulge a generation, they bankrupt the system, but only when they themselves start to collect. Everybody knows that. What is less generally known is that "pay as you go" systems fail to collect interest on idle premium money; the HSA system does that, and it turns out to be a huge saving unless the Industrial Revolution stops. Medicare and similar systems don't collect interest during the many-year time gap between earlier premiums and later rendered service; potential compound interest is therefore lost because payroll deductions are used for other purposes. "Pay as you go" is only half of a cycle; adding a Health Savings Account converts it into a full cycle like whole life insurance, and furthermore returns the savings to the individual, rather than using them for insurance company purposes. Whole-life life insurance is more than a century old, but health insurance somehow got started without half of it, the half which could lower the premiums. Nobody stole those savings, they just weren't part of the gift.

All this creates an incentive to overfund the Health Savings Account. The surplus which remains after death is a contingency fund, probably useful for estate taxes or other purposes; but on the other hand, the uncertainty of estate taxes creates an incentive not to overfund by much. Most people would watch this pretty carefully, and soon recognize the most advantageous approach of all would be to pay a lump sum at the beginning, at birth if possible. Before someone roars in outrage about the uninsured, let me say this would work for poor people with a subsidy, and it begins to look as though the Affordable Care Act won't work unless it is subsidized. In that case, a downward adjustment doesn't reduce premiums, it reduces the subsidy.

Investment It seems best to confine the investments of a nation-wide scheme to index funds of a weighted average of the stocks of all U.S. companies above a certain size, and thus offering to pool for those who are (rightly) afraid of investing. This will disappoint the brokerage industry and the financial advisors, but it certainly is diversified, fluctuates with the United States economy, and has low management costs. In a sense, the individual gets a share in nation-wide whole-life health insurance which substitutes long-run equities for conventional fixed income securities. It removes the temptation to speculate on what is certain to occur, but on dates which are uncertain. Treasury bonds might be added to the mix, but almost anything else is too politically vulnerable to political temptations. Even so, it will have downs as well as ups, and therefore participation must be voluntary to protect the index manager from political uproar when stocks go down, as from time to time they certainly will.

One danger seems almost certainly predictable. This book has chosen 6.5 percent assumed return, mostly because it happens to make examples easy to calculate. The actually required return is probably closer to 4% plus inflation. Supposing for example that 7 % is the right number, there is little doubt a steady investment return is only achieved on an average of constant volatility, sometimes returning 20% in some years, and sometimes declining as much or more in other years. Judging from past experience, there will be a temptation for some people to make withdrawals in years of bull markets, which could reduce average returns to 3 or 4 percent in bear market years, and fall short of the 7% average at the moment it is needed. In addition, the officers of Medicare are likely to be tempted to pay Medicare more than a 7% average in windfall years, leaving the running annual average to decline below 7%, just as the trust officers of pension funds once deluded themselves by temporary runs of bull markets. Ultimately this issue reduces itself to a question whether a temporary surplus is really temporary, and if not, whether the subscribers should benefit, or the insurance company. After that is decided, extending or contracting the accordion would get consideration. It seems much better to negotiate these philosophical questions of equity in advance, and establish firm rules before sharp temporary fluctuations are upon us.

Ensuring the Uninsured. Because universal coverage has great appeal, I have gone through the exercise of calculating whether the impoverished uninsured might be included by using subsidy money to provide a lump sum advance premium on their behalf. It would work, in the sense, it would be less costly, but I do not recommend beginning by including it. Reliable government sources have calculated that even after full implementation, the Affordable Care Act will leave 31 million people uninsured. That is, there are 11 million undocumented aliens, 7 million people in jail, and about 8 million people so mentally retarded or impaired, that it is unrealistic ever to expect them to be self-supporting. In my opinion, it is better to design four or five targeted special programs for these people and keep their vicissitudes out of conventional insurance. Better, that is, than to include them in any universal scheme which the mind of man can devise. But to repeat, the mathematics are adequate to justify the opinion that it would save money to include them in this plan with a front-end subsidy of about five thousand dollars, adjusted backward for fund growth since birth. I refuse to quibble about investment size since no one can be certain what either investments or medical science will do in the future. It seems much better to make annual recalculations for inflation and medical discoveries, and then make adjustments through an accordion approach for coverage. There seems to be no need to make precise predictions since any benefit at all is an improvement over relying on taxpayer subsidies, which now run 50% for Medicare itself. This plan will help somewhat, no matter what the future brings, and as far as I can see, it would make the presently unmanageable financial difficulties, more manageable.

George Ross Fisher, M.D.

First Year-of Life and Last Year, Combined

The most casual reader must have noticed compound interest curves make these lines crawl along the bottom for young people, but widen greatly for older ones. The consequence is the money is to be found in the old ones, who incidentally have less time left to spend it. Therefore, strategies must be devised to transfer money or credit from grandparents to their newborn grandchild. It is violently in conflict with our economic structure to suggest the government become a competitor in the private sector, so why not go along with our culture, and make the transfers by inheritance? It's an ancient problem, and the Society has finally decided the limit of perpetual transfer is one lifetime, plus 21 years. That's plenty of leeways to solve this healthcare issue, without either creating new rules for an aristocracy or allowing the umpire to play in the game.


Each woman now has 2.1 children in America, so it works out that each grandparent has one. Each grandparent also has four grandchildren, because of marriages, and with his wife, they have eight grandchildren to favor. Beyond that, the courts can figure out what to do with outsiders. The grandparent has just been shown to have money to burn if we recirculate it among generations, always stopping at one lifetime plus 21 years. It's easy to see that some grandparents and grandchildren cannot stand the sight of each other, but that is not for this book to worry about. The essence of this scheme is to transfer less than a thousand dollars between generations, somehow staying within existing laws and conventions. One transfer would be about $400, as a contingency fund to generate ample excess to smooth out faulty planning, especially the first time around.

Eventually, the plan is to transfer $25,000, to pay for the first 25 years of the grandchild's healthcare. That comes from the surplus generated at the death of the grandparent, which in turn is generated by compound interest gathered from invested withholding taxes of the grandparent, which the grandparent supplied by being employed. The extra money in circulation is gathered by his Health Savings Account, invested in the whole national economy by way of total market index funds. In a sense, the whole nation becomes an investor in the whole economy. Just as the idea of affordable housing had unexpected consequences, this also would need to be carefully studied, even pilot studied, before final implementation. The function of this book is to point out this source of revenue exists and has not been fully exploited.

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

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

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

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

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


Please Let Us Know What You Think


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SECOND FOREWORD (Whole-life Health Insurance)
A short summary of the proposal to fund health insurance, so far. The proposal supplements and funds almost any health insurance, and does not replace it.

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

Converting Term Health Insurance Into Lifetime Health Insurance
Instead of estimating future health care costs individually, we calculate what is now spent on health care and extrapolate its future trajectory. Working backward from an overestimate, we could come closer than traditional approaches. Health Savings Accounts invest and return the unused surplus to the beneficiary, consequently with less resistance to aiming a little too high. Extracting extra revenue from invested premiums provides a layer of safety to estimates. We suggest peeling back Medicare from last-year-of-life, one year at a time, as revenue justifies. (

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

Escrow Accounts for Future Needs.
Within a Health Savings Account, it is necessary to have some nest eggs that the subscriber can touch, but he would rather not. And other accounts which are borrowed, which ought to be paid off, first. That's just the way life is, of course, but it's better to keep escrow accounts, to indicate different designated purposes.

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

Paying for the Healthcare of Children
New blog 2015-02-18 20:16:10 description

Some Underlying Principles
New blog 2015-03-03 19:33:22 description

Transitions To Donated HSAs, for Children
New blog 2015-06-11 15:21:09 description

Here's the Deal

SECTION FIVE: Multi-Year, the Future of Health Savings Accounts

Details of Lifetime Health Savings Accounts (L-HSA)
New blog 2015-08-13 20:22:30 description

First Year-of Life and Last Year, Combined
New blog 2016-05-25 22:26:26 description

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