Philadelphia Reflections

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

3 Volumes

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

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

Consolidated Health Reform Volume
To unjumble topics

SECTION SIX: Condensed Summaries


SECTION SIX: Condensed Summaries


Summmary and Synopsis

The Health Savings Account and its proposed additions endeavor to provide the following four most important benefits, which existing payment systems do not provide:

1. A system which encourages the subscriber to keep the savings he makes by letting him spend them, although it does not compel him to do so. It thus encourages frugal health care spending, with savings up to 30% of outpatient costs.

2. It allows him to overfund his health coverage, even up to $3350 per year, get a second tax exemption if he spends it on healthcare, and keep the rest for retirement income if he doesn't.

3. It provides a framework to take advantage of recently extended longevity, and recently improved investment methods, to earn appreciable income from his savings, with compound interest greatly magnifying them.

4. The only feature which is hard to explain is to transfer funds across generations through reinsurance rather than hospital cost-shifting ("Last year of life insurance"). At present, there is little public awareness of how dangerous it is to have one-third of the population with diminishing health costs of their own, supporting the other two-thirds who increasingly have most of the health costs. As this realization grows, this feature will seem more important than it presently does..

The key to all this is to relax the ties between health insurance and the place of employment; the cooperation of business management and labor is essential to a peaceful transition.

This book suggests two dozen other small reforms. But if the public accepts the first three important goals, the fourth will come in time, and the rest is technicalities.

Simple Summary

Columbus and the Egg

Let's summarize, in a slightly different way. We started with the classical Health Savings Account (C-HSA), which may need a little updating, but appeals to millions of frugal people as a simple way to avoid the tangles of present-day healthcare financing. The law hasn't changed much, but used by millions of subscribers has turned up many surprising features, all good ones. Deliberately overfunding them has unexpectedly useful results, for example, in providing retirement income if you have been lucky with your health.

On that foundation then was devised New Health Savings Accounts (N-HSA), combining six more innovations, each of which is easy to explain, but in combination utterly transform the basic design. The extended longevity of the 21st Century makes compound interest in passive investing into a powerful investment tool and is used to reduce healthcare costs to the consumer, markedly. Secondly, improved healthcare for the working years has unbalanced the employer-based model, so sickness costs are getting crowded into retirement years. For this, the accounts permit extraction of the first year and last years of life, transferring their heavy costs to the working generation where employment-basing still makes sense. These complicated shifts may provoke suspicion until it is realized the cost would be almost imperceptible. And so on. With very little new legislation, most of this package is ready to go.

Lifetime Health Savings Accounts (L-HSA are patterned on a whole-life model. L-HSA won't work without some new legislation to edge around recent regulations and some outmoded premises. Multi-year coverage is cheaper but requires a longer commitment, so it needs to be precisely designed. Starting fresh, it directly addresses a host of problems hiding behind a century of habit. Its flexibility accepts a range of designs, stretching from self-insurance out of a bank's safe deposit box, stretching all the way to letting life insurance companies run everything. What you find here are my ruminations on the subject. They are not definitive, they are just a beginning.

That's a summary of the health insurance part of this book. There's also a long section on the Hidden Economics of Healthcare, the kind even most doctors don't know much about, and the public knows almost nothing. Some doctors will even disagree violently, and either say it is biased or decry washing our linen in public. At my age, there isn't much to worry about, so I feel the public will make better judgments about us if they know some of it.

Summary: The Shifting Environment of Health Savings Accounts.

And yet another way to describe Health Savings Accounts, is as a series of places to put money, voluntarily moving from one category to another in response to the age of the owner, but potentially to environmental pressures. If the environment changes, the money might need to migrate, but it never disappears unless the owner spends it. Ideally, the money moves smoothly around in a circle, but it could pile up if some subscriber had unexpected personal situations. It's the subscriber's money, so we wanted to avoid locking him in, except by suggesting the most advantageous way to grow it or spend it. Many voluntary features could have been mandatory, with about the same result, but we wanted subscribers to innovate. The philosophy was that of the college president who built a new college without sidewalks. Only after the students had worn paths of choice in the lawn, did he order the paths to be covered with concrete? Here is a summary of the environmental factors we felt might change enough to warrant new pathways. The same idea applies to repair the lawn after a hard summer.

Demographics. China found it didn't work to limit families to one child, and selective abortions in India caused the same disruptions. The baby boom bulge is a notorious example of a population bulge working its way through the steps, until it finally came to rest in Medicare, threatening the program with bankruptcy when later generations don't bulge enough to support their parents. Some bulges and shortfalls are predictable almost a century ahead, and while the migration of illness and good health is slower, it will pretty surely boil down to two enduring health costs: birth and death. So, the demographics of each generation are basic, and they are often predictable. In our society's view, there is little you could or should do about it, so although we can predict demographic surplus and shortage, we should accommodate the effects, not directly modify the cause.

Wars and Depressions; Inflation and Deflation. Major disasters affect all generations, but sickness concentrates by age. Furthermore, health disabilities from war affect those of military age and their successors, and recessions cast a long shadow over later income potentials. It might be helpful to set aside funds for these disasters since it is possible to estimate the coming economic effects and to start generating income for approaching shortages. There may even be usable information about earlier wars and recessions on which to base such estimates.

Economics is known as the dismal science, reflecting skepticism about the predictions of economists. However, they are getting better at prediction, and should be given a chance to estimate the future effects on health care costs, to the degree they modify the modifiers. The more we do this sort of thing, the more we may find certain predictions cancel each other out. And economists' predictions are likely to reinforce the opinion that the best option is to steer for price stability, rather than resort to violent course reversals, a view not universally held by politicians.

The Nozzle of Transfer Points. It took the Federal Reserve a long period of experimentation to discover its most effective tool for modifying economics in the currency markets was to adjust short-term interest rates. In the economics of health care, I would venture the most effective can be had with the least commotion, by adjusting the transfer limits as money flows between age groups. When the leverage at age 21 approaches over 500-fold, the ranges of power over health spending are enormous. Therefore, regular transfers from the federal Treasury may be quite small, but probably should be prevented from going to zero. Since it is envisioned that grandparents might bequeath a certain portion of their death surplus generated from Medicare without reducing Medicare benefits, the small initial cash deposit is a point which would be noticed least in a panic. Alternatively, adjustments of the amount the grandparent was allowed to bequeath could have a similar multiplier on far larger sums of money. Ultimately, such modifications would have to be reversed when such funds start to accumulate income, but considerable time would pass, between age 21 and 65, to accomplish it. Both government and subscriber must learn the cheapest time to pay bills is while they are small.

A second adjustment tool exists in the ability to require account balances to shrink or go to zero. The money would be given to the account holder, but would simply stop generating income until the required adjustment took place. Opportunities would appear at birth, at age 21, at age 65, and at death. Furthermore, large populations would achieve these ages at different times, so opportunities for adjustment would extend over a range of time. It took the Federal Reserve a long time to learn the sensitivity of adjusting interest rates, and it would take an equally long time to learn how to use these tools as well. It took a particularly long time to learn the most important lesson of all: what the limits were, for accomplishing anything worth-while with these tools, at all. Everything speaks in favor of establishing a monitoring agency, with defined powers and required limits, permanently devoted to this subject alone, periodically reporting its findings to the public.

HSA Proposals Summarized

This book evolved while it was being written. It had to because the implementation and judicial status of the Affordable Care Act kept changing. It primarily summarizes five proposed alternatives to that Act, all of them resting on variations of the Health Savings Account idea. They emerge in varying stages of readiness, but three are just about complete: (1) Classical HSAs, (2) The "grandparent" method of funding dependent children's health with compound interest, (3) The five-part proposal of the last chapter which begins with catastrophic coverage as basic, adds both-ends-of- life coverage to shift costs, and funds much of itself with compound interest. Two of the five proposals are expanded for discussion, but while cheaper, seemingly require too much transition time for present purposes (whole-life health insurance, and gradual Medicare buy-outs).

That summarizes the variants of Health Savings Accounts. The rest of the many proposals now summarized, either clear the way for the HSA variants or else aim to correct some of the flaws in employer-based insurance. Not all of them are small and technical; the revision of the role of employers would involve a major change in the tax laws. And restructuring the DRG payment system would greatly revise the balance of power within hospitals. Inclusion of proposals on this list should not be taken to endorse a public sector approach over a private sector one. Nevertheless, many regulations do potentially stand in the way, so the way must be cleared. They are offered piecemeal because of different congressional committee jurisdictions. There has long been a question whether health insurance should be considered a health matter or an insurance matter, and the question is complicated by the Tenth Amendment making it appear the Federal Government is excluded from either activity. Special bond issues might further complicate jurisdiction.

The proposals generally omit mention of their purposes, most of which are self-evident. However, each is accompanied by a citation number within the body of the book, where a fuller argument can usually be found.


Proposal 8A: Health Savings Account Age Limits Should be Extended, from the Cradle to the Grave. The effect would be to create a continuous account, which could still grow over long periods of apparent inactivity.

One alternative option is to buy an American total stock index fund, order reinvested dividends, take delivery, and keep the certificate in a safe deposit box until needed decades later. (2718)

Proposal 1A:At present, Health Savings Accounts are limited to age 21-66. Provision should be made for inheritance of surplus to the accounts of newborn children and specified others, sufficient to cover their healthcare up to age 21, within an HSA of their own. (3320)

Proposal 2A: At present, contributions to Health Savings accounts are limited to $3300 per year, age 21 to 66. This should be changed to aggregate lifetime amounts, at least until latecomers have made the adequate transition to the program. (3320) (2718)

Proposal 10A: Instead of the present annual limit of contributions to Health Savings Accounts of $3300 per year, Congress should permit a lifetime limit of $132,000 or more, with annual deposit limits adjustable to bring accounts at their present age, up to what they would have been if $3300 annually had been deposited since age 21.(2718)

Proposal 13A: Health Savings accounts should include more convenient options 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 partial, gradual, Medicare buy-out, and transfers within families between accounts.(2606)

Proposal 3A: The annual limit of deposits to HSA should be increased by a COLA based on medical costs, rather than on the general cost of living. (3368)

Proposal 11A: Congress should reserve decisions to itself for changing the lifetime contribution level with technical amendments, and review final rules or appeals from contract terms which seem to threaten imminent, major. adjustments to the general public lifestyle. (2718)


Proposal 6A: Congress should permit the individual's HSA-associated Catastrophic health insurance premiums to be paid, tax-exempt, by Health Savings Accounts, as long as present tax exemption for employer-based insurance is unmodified. This would make HSAs fully tax-exempt. (2687)


Proposal 7A:That health care subsidies be assigned to patients who need them, rather than attached specifically to one or another health program intermediary that serves them. (2687)


Proposal 15A: As long as Medicare imposes DRG, tax-exempt hospitals should accept the DRG method of payment for inpatients from any Insurer, although the age-adjusted rates might 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. 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. There is no medical advantage to limiting the number of diagnosis groups, and if there is an accounting advantage, a larger set is more easily translated into a smaller one -- than the reverse. (2606)


Proposal 20A: The political parties would agree that both Catastrophic Health Insurance and Health Savings Accounts, singly or jointly, become specifically allowable options under the Affordable Care Act without age or occupational limits and that all other interfering languages in the Act or its regulations be removed. An appeal mechanism should be provided, not merely from judgments, but from regulations themselves. In particular, uniform tax deductibility is conferred by permitting health insurance and/or Catastrophic back-up coverage to be purchased by, or through, Health Savings Accounts. (3221)


Proposal 4B: That a scheduled reduction of both the tax exemption of employer-based health insurance and the corporate income tax be prepared along the following lines: That in consultation with the Federal Reserve, the corporate income tax rate be reduced until it matches the average blended individual tax rate. And the tax exemption for employer-based health insurance be reduced in a step-wise fashion until it disappears. The process shall take no longer than three (3) tax years, keep the two reductions in balance, and be reviewed by the Federal Reserve, and an appropriate committee of both House and Senate. (3106)


Proposal 12C: Congress should create and fund a permanent Health Savings Account Monitoring and Research Agency. It should have representation from subscribers and providers of these instruments, with the power to hold hearings and make recommendations about technical changes. It should meet jointly with the Senate Finance Committee and the Health Subcommittee of Ways and Means periodically. It should have extensive access to the appropriate Executive Branch department, to review current activity, detect changing trends, and recommend changes in regulations and laws related to the subject. On a temporary basis, it should oversee inter-cohort and outlier loans, leading to recommendations about the size and scope of inter-subscriber loan activity. At first, it might conduct the loan activity itself, with an eye toward eventually overseeing a commercial vendor. By this time, Congress should be aware that it cannot cope with a program so large without an enlarged staff. (2718)


Proposal 16C: 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. (2606)(2735)

Proposal 18C: Congress is urged to permit pooling (at low interest) between the accounts of an age (or other) group inconsistent surplus, -- and other age groups inconsistent deficit status,-- occasioned by persistent divergences between revenue and medical withdrawals at different ages. If there are temporary imbalances created by differential depositing, they should be corrected by adjusting internal interest rates. (2735)

Proposal 17C: 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 agree, for the designation to be enforceable. (2606)

Proposal 19C:At this point, it probably would be wise to add some legislation clarifying the ground rules, if several professions would have to cooperate in allowing a new line of business for whole-life insurance, which seems a desirable outcome. (3277)

Proposal 25G: That hospitals and others involved in cost accounting be encouraged to cost-shift the indirect costs of obstetrics to other departments of a general hospital, to whatever extent is possible, to reduce the strain on the first year of life, a constantly vulnerable point.(3255)


Proposal 14D: Congress should authorize exploration of 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 any termination. The model would be whole-life insurance instead of term insurance. 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, and be 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. (2606)


Proposal 5E: Congress should be asked to commission a computer program to translate English language diagnoses into SNOMED code, preferably by voice translation. Suggested format: a search engine where English variants of discharge diagnoses are entered, and a SNOMED code number returned, along the general lines of -- entering common phrases into Google and receiving file location numbers in return, except it would return the SNOMED code. If the code is not found, the computer accepts a manual entry by a trained person. verified by an expert over the Internet to become officially entered into a master list which is periodically circulated as an update. The search program and its supplements should be produced on DVD disks to be used on hospital record room computers by other professional users. It should provide "hooks" so the Snomed codes and patient identification can be readily transferred electronically to related programs, such as payment codes and billing. (2634)

GRANDPARENT ROLLOVER SYSTEM. All children are dependents of their parents, and the heavy costs of obstetrics (magnified by the unusual concentration of malpractice claims) make it impossible to devise pre-funding schemes. Young parents are often strapped for funds, so the lack of pre-funding is a growing problem in a Society uncertain of its family structures. Therefore, we have devised the grandparent roll-over. Tort reform would improve but not eliminate this workaround. (3252)

Proposal 24G: That a new form of "tail" insurance is devised for children and obstetrics, which covers economic damages but not "Pain and Suffering". Comment: the great majority of awards are not for economic damages, because that is generally covered by health insurance. The vast majority of spectacular awards are for pain and suffering, which cannot be measured, denied or remedied. (3255)

Proposal 23G: Congress should enable one voluntary transfer initiated per person between the Health Savings Accounts of members of the same family, especially grandparents and grandchildren, and one transfer to a general pool for balances left over from the family transfer. Members of the grandparent generation who have no grandchildren may choose one substitute from outside the family. (3254)


Proposal 22G: Congress should study the practicality of modularizing Medicare, in order to facilitate gradual buyouts. Voluntary buy-outs from the Medicare program might become desirable if Medicare costs should fall as a result of scientific progress, and religious exemptions are already desirable for a few. Consideration should be given to returning payroll deductions, and fair accounting for premiums, copayments and benefits already paid for by age groups in transition, as early candidates for study. (3254)



Proposal 25G: Combine the high cost of the first year of life with the very high-cost last year of life, as the basic foundation of minimum health insurance.
It would undeniably be universal. What I am technically trying to achieve, is to combine one life situation, which sometimes generates surplus it can't use, with another situation, where every baby creates a difficult debt for someone else to pay. And whereas 100% of the population experiences birth and life at the two ends of life, there are societal constraints about sharing liabilities outside of families which must be explored.

Proposal 25I: And then, add Catastrophic coverage regardless of age, less the cost of overlaps. Title for the Package: Tri-Challenge Basic Coverage. (2882)

We thus design the basic benefit package to include two universally-unavoidable costs, plus the universally-inescapable risk of unpayable health costs at any age. It does not include any named service benefits. It is clearly superior to less universal, and more unaffordable, coverages. (2882)
Proposal 25H: Require the necessary coverage to age 21 for one grandchild per grandparent to be transferred between HSAs at grandparent's death or earlier option. Grandparent need not have a Health Savings Account but must assure the required transfer amount, and grandchild must have an HSA to accommodate the gift. Probably it would go to a designated grandchild by inheritance, or to a designated pool of unassigned third-generation recipients -- either without grandparents or from large families. (2882)

This childhood feature adds about $28,000 to the cost of needed coverage, but because a century of compound investment income intervenes it would only require $42 at the child's birth to his death to fund the succeeding generation. (added of course to the other two premiums, at 6.5% interest compounded from one year of age). The transferred sum at birth would have a declining balance and be entirely consumed by the 21st birthday. Because transition at grandparent age 42 (for example) would require $400 one-time contribution to catch up with late enrollment, rising to $28,000 for someone aged 65, it might be better during the transition to assess $200 a year for three years to latecomers, so as to reduce the even greater cost of even later joiners (over age 40) to the plan.

The latest of latecomers must be enticed, however, because they are the ones closest to activating the transfers, and hence represent the most important support to enlist to an innovation. That $28,000 seems like a high figure, and should also be investigated. Although it is only one of three cost components, paying for children is the most stubborn one, requiring the greatest contortion to resolve. The cost of the last year of life can be obtained from Medicare, and although the premium of Catastrophic coverage will vary with the deductible, its costs have been well worked out in the past.

The plan is not entirely complete: it offers the three components of the benefits package, the intergenerational funding mechanism, the HSA transfer mechanism, and the passive investment concept. How they are linked together is negotiable.

Its two important uncertainties are the size of the deductible, and the net investor return on investment in index funds.

Proposal 25I: This is voluntary Tri-Challenge Basic Coverage. Whether to make it mandatory, whether to subsidize it for the poor, and whether to replace Obamacare with it -- are political decisions, not questions of insurance design. (2882)

What I Have Learned (1)

This book has been an education for its author. Ordinarily, an author starts with a general principle and offers a specific example of how it works. But I repeatedly found this field changed so quickly, changes in the numbers made the example seem awkward, if not invalid. Or one component changed, and balancing numbers were unobtainable. But I believe the underlying principles remain valid. It's better to earn interest on idle money than not to earn it, for example. But when the circumstances shift, the amount of interest to be earned -- and consequently the proportion of healthcare costs it will cover -- also shifts, allowing opponents to bring the underlying principle into doubt. When this process repeatedly leads to rewriting a whole book before it can be published, it essentially stifles debate. So I finally decided it was better to open the debate than worry about ridicule from hired political consultants over "framing the question" , or protecting my offended feelings. At my age, what would I care about that, for heaven's sake?

So let's follow the trail of the book, and put together what I think I have learned, in the order in which it appears.

Pay for important things, first. Health insurance began a century ago, with good motives, but the wrong approach. It's upside down, in the sense it started with the problems of poor people and extended the approach to non-poor ones. Consequently, it offered "first dollar coverage" but threatened savings running out for truly expensive items, life-threatening ones. The most suitable way to get around this seems to be to have a high-deductible policy, which lets the patient decide what is truly most important. But two things then come in conflict: the higher the deductible, the lower the premium. That's good, but what's bad is the higher the deductible, the fewer people can afford its out-of-pocket component. So the Health Savings Account addressed this dilemma by linking high-deductible ("catastrophic") insurance to a tax-deductible savings account. In effect, the poor person could build up the deductible on-time payments. It isn't perfect, but it was enough better so 15 million people adopted it, and their premiums became 30% lower. And so, more people could afford it.

Earn interest on savings. Then the patients taught me a lesson. In spite of abnormally low interest rates, people seemed to perceive that major illnesses come late in life, and longevity had lengthened considerably this century. And they liked the ability to judge their own health, letting the healthy ones pick stock investments if they chose to because low-interest rates shift many investors from bonds to stocks, which then rise. Sickly people could choose bonds or tax-exempt savings accounts. Quite unique to American retirement funds, this one gives a second tax deduction when you spend it (if you spend it on health).

If there is money left over, you get to keep it. Conventional health insurance spends any left-over money to reduce premiums, they claim. This one gives any money you save back to you, as an incentive to be frugal. I suspect some people thought a bird in the hand was worth two in the bush, which means they didn't exactly trust insurance companies to lower premiums fully, but might raise the salaries of insurance employees with some of the savings.

In time it develops a different significance: if you are lucky and healthy, you spend the left-overs at age 66, for retirement income. The news about the approaching insolvency of Social Security encourages that choice. At least, it begins to look as though Social Security benefits might not be raised, so you may need the money more at a later time; compound interest makes Health Savings Accounts worth more, later. Frugality early, leads to more income later.

If anybody gets a tax deduction, everybody wants the same. For eighty years, employees of corporations got health insurance with a tax exemption, but half of the population didn't. That amounts yearly to a couple of thousand dollars for a family, twice that much for the corporation itself (at its higher tax rates), and the possibility that even more of it escapes to foreign tax havens. By simply allowing the Health Savings Account to buy the catastrophic insurance which is required, this egregious inequity would disappear. If that gets blocked in Congress, then simply reduce the corporate tax rate, which corporations don't pay anyway because of the tax deductions. You might appear to be rewarding corporations, but you really are only shifting their deduction.

Save your deductions for later. It was a surprise to find 40% of subscribers to Health Savings Accounts paid for small health expenses out of pocket rather than take the tax deduction. It suddenly made sense that if the account would grow, and in any event, you would get it back at age 66. You should pay out of pocket when it is small, saving the deduction until later when it has grown.

Split the payment system. Cash for outpatients, insurance for helpless inpatients. When you take away someone's clothes, and he is too sick in the hospital to argue, competitive prices are meaningless to him. Prices should be set by outpatients, who are free to trade elsewhere. A surprising number of inpatient services are identical to outpatient services, which should set the price for both. Some are unique, so a relative-value scale should be constructed to include them in the relationship.

Both the DRG system and co-payments are abominations. Payment by diagnosis is akin to service benefits, wrapped in a rationing system. Pay a fair fee for a necessary service, don't pay for unnecessary ones. As for copayment, it simplifies collective bargaining, but creates two insurances for one service, and has been repeatedly shown to have no deterrence value.

Reverse the Maricopa Decision, preferably with legislation. Mrs. Clinton's plan of ten years ago was for a system of Health Maintenance Organizations (HMO). She can thank her lucky stars it didn't pass because the public rejected them. HMOs were in fact invented by groups of doctors and worked quite well. The essence of why they didn't work lies in the Maricopa decision that doctors were forbidden to run them. The Maricopa decision (4/3 on the Supreme Court) was based on a motion for summary judgment and never had a trial of the facts. Let's see if Congress can improve on that.

Substitute Catastrophic health insurance for any and all versions of limited benefits, including the Affordable Care Act. Catastrophic insurance is now privately run, and it is difficult to obtain data on costs and expenses. No doubt the plans vary considerably. But the system of indemnity insurance is superior to that of service benefits, and high deductible is superior to mandatory benefits. Catastrophic plans seem vulnerable to kickbacks, and should be examined to minimize that; perhaps I am wrong. Nevertheless, catastrophic was seemingly the cheapest of what's available and is certainly more flexible. If we must have mandatory health insurance -- and I'm not saying we must -- mandatory Catastrophic coverage sounds better than any alternative. But if we go that way, we need better studies of it.>/p>

What I Have Learned (2)

That's what I believe I have learned from the Classical Health Savings Account of 1981, and what I think will improve it still further. Essentially, that's a correction of the tax inequity, removal of the age restrictions to make it optional at any age, and an enlargement of the deposit limits. It requires very little legislation to accomplish those three things.

But my own horizons have been expanded by the reception of the original, simple proposal. So I have some additional suggestions for Congress to consider, for a New HSA which is an extension of the classical variety. These ideas tend to bump into other programs and require negotiation of the apparent difficulties, with resultant adjustments of other plans, originally intended or other purposes.

Encourage the use of index funds as sources of investment income for HSAs In this era of abnormally low interest rates, the public seems to like the substitution of common stock, even though it seems risky. I'm afraid we have learned that bonds are just as risky. But they pay considerably less, except in rare moments of "black swan" recovery from a stock market crash. Roger Ibbotson of Yale has published the long-term results of the entire stock market, which today we would equate with total market index funds. He found the results over the past century have averaged 11-12%. At a viewing distance of about three feet, regardless of many wars and stock crashes, if you had bought the whole market and forgot you had it, the average looks pretty much like a straight line. That's no guarantee it will be the same in the coming century, but it's the best guess you can make, particularly if you don't read the newspapers very often. Buy-and-hold almost becomes buy and forget.

That's the wrong risk to worry about, however. Inflation and imperfect agency are much greater risks for buy and holders. At 3% a year, inflation has reduced a dollar to a penny, in the past century. So, instead of 11-12 %, a buy-and-hold investor really only gets 8-9%, net of inflation. In addition to that, every 28-30 years he encounters a black swan stock market, loses at least 50% and lacks the courage to buy it back at its low point. From that point forward, the market "climbs a wall of worry", and he finally buys it back just when it regains its peak. The time-honored remedy is to buy a mixture of 60% stocks, 40% fixed income (bonds), which further reduces real income to 4-6%. If we ever cure this habit, gross stock prices will probably gravitate toward paying 5-7%, gross. Unfortunately, middle-man fees and kickbacks now result in the customer getting 4-6%, trying to avoid getting zero. Unfortunately, the majority of experts actually surrender somewhat less than that, and the reasonable investor simply buys index funds and forgets about them. That is, it comes out about the same, unless you get greedy, in which case most people end up losing money. For the most part, whether you win or lose, mostly has to do with where the market was when you started.

Consequently, we here advise "passive" investing, in an index mixture of total American stocks and bonds. You will do better than most people, and that's a pretty good badge of success. However, the puzzle is whether rules and regulations can improve on this result still further, by a tenth of a percent, here and there. Those who promise more will probably deliver less.

Stretch out the compound interest as long as possible. Since Aristotle, it has always surprised people to find compound interest rises at the end of its term, so the longer the better makes the best outcome. We make three suggestions:

1. Don't buy term insurance (like most health insurance), buy whole-life. You might turn the whole business over to whole-life life insurance companies with experience in these matters, but they are private companies who can do as they please. The next-best choice is a Health Savings Account, which rolls any unspent balance over to later years, and gives it back to you at age 66. It's tax-exempt, and if you spend it on healthcare, it is doubly so. If you waited another twenty years, it would grow quite surprisingly.

2. Use last year of life reinsurance. People die at different ages, but the last year is usually the most costly, and it happens to everyone. If you set aside a comparatively small amount of money at birth, it will multiply 289 times at 6.5%, by the age of 84, the current average longevity. If you got a 7% net, it would grow nearly 1000-fold. If transferred to Medicare, it reduces Medicare costs by at least a quarter, and Medicare really should refund a quarter of your payroll deductions as well as your Medicare premiums, maybe even more. The arithmetic is pretty complicated, but with luck, it might pay for all of Medicare, except for existing debts for borrowing earlier when we ran a deficit. Furthermore, Medicare is 50% subsidized, so that has to be figured, too. Extending this subsidy to everyone is a big argument against single payer, by the way.

3. Use first year of life reinsurance. This is the reverse of the above because the 3% of healthcare costs now thought to affect newborns is almost invariably donated by another generation. Young parents without much savings are strained to subsidize their children, so you might as well include children to the age of 21, which is 8% of healthcare costs. If you overfund Medicare by $100 at birth, it will grow by enough to subsidize grandchildren by the time grandpa dies. There are laws against perpetuities, but they limit inheritances to one lifetime, plus 21 years--plenty of time. This is a new concept which will take time to adjust to, but I can think of no other way to pre-pay a newborn. If you use some variant of this approach, health costs could be reduced by another 8%, for an additional cost of less than $100.

In closing, let me remind the reader health insurance is turning into a gigantic transfer system. The middle third of life is supporting the two-thirds, before and after. And only the last third has much sickness. People who are well don't like to subsidize those who are sick, and eventually may rebel. It's much better for young individuals to subsidize their own old age than for one demographic group to subsidize another group of strangers. Particularly if those few who are lucky and escape much sickness, get to keep the savings for their protracted retirement.


(To be added in later printings.)


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8 Blogs

SECTION SIX: Condensed Summaries

Summmary and Synopsis
New blog 2015-10-23 13:15:06 description

Simple Summary
New blog 2015-10-15 19:52:14 description

Summary: The Shifting Environment of Health Savings Accounts.
New blog 2015-10-25 23:19:55 description

HSA Proposals Summarized
The proposals have linked the text of the book, grouped by subject, and limited to proposals relating to Health Savings Accounts, and Lifetime Health Savings Accounts.

What I Have Learned (1)
New blog 2015-11-19 17:43:31 description

What I Have Learned (2)
New blog 2015-11-20 20:38:38 description

New blog 2015-10-15 18:19:28 description