Philadelphia Reflections

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


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

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

Consolidated Health Reform Volume
To unjumble topics

(2) Obamacare: Spare Parts for a Book

New topic 2015-07-22 16:02:02 description

New topic 2015-07-22 16:02:02 contents

Replacing the Gold Standard

Some Unintended Opportunities

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

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

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

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

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

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

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

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

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

Direct Premium Payments, Constitutional Issues

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

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

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

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

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

{William Bingham class=}
Tenth Amendment

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

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

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

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

The Argument Against National Uniformity of Prices.

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

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

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

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

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

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

Which Obamacare Plan Fits Best With Health Savings Accounts?

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

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

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

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

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

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

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

Some Ruminations About the Far Future.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Math of Predicting the Future

The accuracy of predicting future longevity, future health costs, and future stock markets -- is individually very low, so aggregated numbers can be (at least) equally misleading. However, they are the best available guides to the future. The purpose of deriving them (Mostly from CCS data) is to surmise whether it is safe to proceed with a trial of concepts. While the differences are great their direction is nevertheless pretty clear: Substituting the HSA would surely save a great deal of money, compared with Obamacare or Medicare. Why not substitute it for both Obamacare and Medicare? Transition costs are not estimated, and no doubt would be considerable, even if one plan replaced several others. Overall HSA cost is inversely related to investment income; three levels of income are presented, but a conservative conclusion is argued.

In short: HSA could just about replace both ASA plus Medicare, with a long transition period. But one must be more hesitant to suggest they can stretch to reducing accumulated Medicare debts from past spending. My guess is preventing more international debts is all we can promise. Someone else must figure out how to pay the existing debts. Why include Medicare, then, if predictions are sketchy?Two main reasons: my opinion is that funding Medicare is a worse problem than insuring younger people; it it is not fixed, nothing else can be successfully fixed.

Second, it is such a political third rail of politics to talk of revising Medicare that someone with nothing personal to lose, like myself, must start the discussion. Some other funding source must probably be found to eliminate the existing Medicare debt, but there's not much risk of needing the money very soon. I am also a little apprehensive about the decline of existing Treasury bonds when interest rates rise, because so many of them have been issued to cope with the recession. Any appreciable reduction of Medicare costs could accelerate a rise in bond interest rates, which would send the market price of existing bonds downward. Therefore, even a move in the right direction must include a reverse button, and be coordinated with the Federal Reserve. It is most unfortunate that Medicare is both more serious and more manageable, while at the same time it is so politically dangerous.

Paying to Replace Medicare and Debts with Health Savings Accounts. At least, savings to the consumer for the combined ASA and Medicare replacement would be returned to the subscriber as payroll-deductions and premiums-eliminated, (i.e., About half of the Medicare cost.) Savings from replacing Obamacare would be even greater, but from my viewpoint such savings would all be poured into rescuing Medicare. That's ironic, because it is the reverse of what the elderly are fearing. Even Obamacare advocates should welcome the elimination of Medicare, because its losses are dragging everything else down. Unfortunately, this is not well understood by the public, who love Medicare. (Everybody loves to get a dollar for fifty cents.) Somebody has to say this can't last, and I guess I'm it.

To be confident Medicare's costs plus its debts would actually be manageable, the average subscriber would have to contribute about $1600 a year for 40 years to an escrow fund at 6% annual income. That's to achieve a total of $246,000 on his 65th birthday, paying his ordinary health debts from 25 to 65 with the other $1700 of his allowed Health Savings Account deposits, to pay average medical expenses for age 25-65. In my opinion, it can't be done.

You might subsidize poor people in the name of fairness, but this is how much you have to find, somewhere, to pay present costs. You might try raising the anual limits for deposits into Health Savings Accounts, but this would prove futile if too few people could afford to pay it. If you please, health expenses would then have to be cut enough to pay for the subsidies, unless the subsidies are cut to pay the health expenses. With that, and a continuation of 6% return as long as the paying subscribers live and the fund remains solvent, we might make it. It is my hope that using private markets rather than Treasury rates, paydown of the debt can be accomplished with higher interest rates, but it is uncertain even this can be done. High rates like that are only likely to appear if inflation starts to gallop, or some other cataclysm intervenes, with the following result: the virtual value of the Medicare debt erodes, and the creditors lose much of their loan in real value. Some individuals might be able to manage their cost, but it's very hard to believe it could be an average performance for the whole nation. This is not an easy problem, and it becomes impossible if disillusioned Democrats block it.

And yet, the nation has already made it official it is going to spend nearly twice that amount, while only getting Obamacare in return. If the President is right about his side of it, then getting Medicare free in addition, is do-able by this Lifetime Health Savings Account alternative. If not, then both have to be scaled back. Big business is about the only hope, using a cut in corporate taxes as bait. This would be a big step since if they don't pay corporate taxes, they don't need a tax exemption for healthcare; they already have cut their tax bill.

Present law permits $3300 annual HSA deposits to age 65, or $132,000. With only 6% compounded interest income included to reduce the cost, Health Savings Accounts could only have a net lifetime out-of-pocket cost of $58,000, no matter what healthcare expenses are actually incurred. By my estimation, this is only half of enough. Some time in the future, inflation will force this limit to be raised, and it should be linked to some external inflation measure like the Cost of Living Index, although a healthcare cost of living index would be closer to what is needed. Inclusion of tax exemption for the premium of catastrophic high-deductible policy which is required by law, would not only be more equitable, but perhaps could provide both a superior COLA and an external measure of average Catastrophic premiums for marketplace judgments. It is probably undesirable to create an arbitrage opportunity between taxable and after-tax choices with infrequent, steep-step, changes in the deposit limits, so these limits should somehow be adjusted annually. Annual limits should be supplanted with lifetime limits whenever the account is depleted below a certain fraction of the buy-out price, which should be maintained and upgraded for this purpose. Since expenditures are limited to healthcare, a liberalization of this catch-up limit is urged.

There is thus room to spare, here, as well as for increasing 6% return in the direction toward 10%. Since the investment scene is in flux, more experience may be necessary for better guidelines. Depending on the interest rate actually achieved, and the choice between maximum allowable, or less out-of-pocket, lifetime Health Savings Accounts could cost somewhere between 58 and 132 thousand dollars, lifetime total average, in year 2014 dollars. The Medicare escrow part of that would be $10,000, and Catastrophic coverage for 58 years of Medicare life expectancy would add $58,000. The deposit costs for the Obamacre years 25-65 would themselves total $10,000, and estimated Catastrophic insurance would add $16,000, to a total lifetime cost of $26,000. If contributions are raised, there's room for it under the $3300 yearly limit. The hard question is whether we could get $3300 on average for forty years, and I'm not sure we can. Please note: HSA deposit costs should remain linked to the 40 working years 25-65, but investment income would be realized over the entire 58 years. For the purpose of extending interest income, HSA coverage could be extended another 40 years, but this would mostly be an illusion. Real wealth is only generated during the working years. Depositing extra money in an HSA is not entirely a bad thing, because if you deposit more than you need for medical care, you will get the excess back, multiplied by tax-free investing. However, if people can't afford to do it, they won't. Obviously, the same cannot be said of buying too much insurance, where the insurance company profits from those who drop their policies..

Compared With the Affordable Care Act. Now, compare: the cheapest bronze Obamacare cost (covering 60% of healthcare, age 26 to 65) is $288,000, accumulated and paid for over a 40 year span. Adding Medicare adds $95,400, made up of $23,800 of payroll deductions, $23,800 of premium collections, and $47,700 of debt, accumulated over 18 years, paid for over 40 working years. Obamacare followed by Medicare is what we are officially destined to get. Total average lifetime costs are thus projected to be $383,300, plus the 40% estimate of uncovered ACA costs under the Bronze plan. Considering different inflation assumptions and rounding errors, that's pretty close to the $325, 000 which was calculated by Michigan Blue Cross and confirmed by federal agencies, for year 2000. To repeat, this is what we will get unless it is changed. Restating the calculations in words, healthcare is therefore being treated as if it were entirely self-funded, generating no losses but also generating no income on the sequestered premiums. The hidden restatement would be: the present and projected healthcare system is running at a loss, it generates no net income on what ought to be very large reserves, and nothing is being done to make it break even, to say nothing of generating income.

This outcome makes me absolutely confident we can do better. The lifetime Health Savings Account would create immense savings, which by rough calculations would be somewhat less confidently stated to be savings of $190,000, in year 2014 dollars, per lifetime. Multiply that number times 340 million citizens, and you get a result in the trillions of dollars. It's pretty staggering to confess that even this much improvement may not be enough.


Comparisons of Health Savings Accounts Escrow for Medicare Costs (est.)

Lifetime Health Savings Account (68 yrs.)............vs................Medicare alone.

..............$80,000 single payment(40 yr. deposit of $850 =$32,000 cost, 68 yrs.@4% cmp. Interest)..*(+$18,000)

..............$160,000 single p. plus existing-debt service (40 yr. annual deposit of $1700=$68,000 cost, 68 yrs.@4% cmp. Interest)*(+$18,000)..

..............$150,000 both + subsidy (40 yr. annual deposit of $1600=$32,000 cost, 68 yrs.@4% cmp. Interest)*(+$18,000)..

..............$246,000 stretching (40 yr. deposit of $1600=$64,000 cost, 68 yrs.@6% cmp. Interest)*(+$18,000)..

..............$706,000 workplace insurance (40 yr. deposit of $3300=$132,000 cost, 68 yrs.@10% cmp. Interest)*(+$18,000)..

..............*$18,000 (Catastrophic Insurance, est. @$1000/yr for 18 extra years)

--->Total Extra Cost per Individual including Catastrophic for 18 yrs. estimate: $98,000 (18-118,000)<---

--->Present Medicare Pre-payment Costs: $196,200 plus 196,200 in debt.<---



Lifetime Cash:$2600 plus $58,000=$60,600Lifetime Cash:$1600 plus $58,000=$76,600Lifetime Cash:$88,000 plus $58,000=$146,000Lifetime Cash:$132,000 plus $58,000=$190,000

Yearly Personal Expense for Forty Years, Age 25-64 (HSA vs. Obamacare)

Health Savings Account Deposits
@ 10%.....$65 per year (plus $1000 for Catastrophic coverage.)
@6%......$400 per year (plus $1000 for Catastrophic coverage.)
@ 2%......$2200 per year (plus $1000 for Catastrophic coverage.)
....$3300(Maximum Legal Limit)............
Affordable Care Act "Bronze" Premiums: $5500-$7200 (for 60% coverage of Healthcare costs)Lifetime Cash:$220,000-$288,000



Medicare Advance Payments, Age 25-83 Under Two Systems (HSA Escrow vs. Medicare Costs)

Health Savings Account,Escrow Deposit............||||||...................................... Medicare Yearly Program Costs......................................

@10%...............@6%...................@2% ..|||||...............Payroll tax...................Premiums......................Debt............
$45.................$250.00..................$1400...........|||||||............$1320......................$2640 (x18yrs).............$2725 (x18yrs.).............




Total Cost per Individual including Catastrophic for 68 yrs. estimate: $127,500.

Total Cost if health insurance were tax deductible including Catastrophic for 68 yrs. estimate: $88,800.


Limit per Individual, Exclusively used for Medicare Pre-payment: ($3300/yr x40= $132,000, realizing $1,460,000 at age 65 @10%.)............................


Multi-year Health Savings Account (40 yrs.)............vs..............60% of Affordable Care alone.

...............$56,000 (1800-58,000)............................$288,000


Total Cost per Individual, median estimate.


Multi-year Medicare Escrow Deposits (40 yrs.)............vs..............80% of Affordable Care alone.


Multi-year Medicare Escrow Deposits (40 yrs.)............vs..............60% of Affordable Care alone ("Bronze").

...............$80,000.($850/yr @4%, 150/yr @10%, contributing from age 25-65 ). ..........................$288,000

Estimated $18,000 Catastrophic Coverage Escrow (18 yrs.), escrow released at age 65

...............$ 8000 ($200/yr @4%, $40/yr @10%, contributing from age 25-65)

Total Medicare Escrow Cost per Individual, median estimate: $89,600 ($1050/yr @4% investment income, $190/yr @10%)


Lifetime HSA plus Medicare............vs................Affordable Care plus Medicare

.........$120,000 (1800-58,000)............................$484,000 plus 196,000 in debt.

................($166/mo}.......................................................................... Total Savings per Individual, median estimate: $190,000


All costs assuming age 25 to start depositing. Transition costs at later ages are not calculated. ---------------------------------------------------------------------------------------------------------------------------------------

Some Brief Examples of HSAs .


Obamacare does not include Medicare recipients. However, it is a familiar topic, and its data are fairly accurately available in a unified form. So future Obamacare costs are readily understood by subtraction of Medicare costs from lifetime totals, and future changes can be more readily integrated. The average lifetime medical costs are roughly $325,000, as calculated by Michigan Blue Cross, who devised a system for adjusting costs to year 2000. The results have been verified by several Federal agencies, although the method includes diseases and treatment which we no longer see, and adjusts for inflation to a degree that is startling. Medicare data are more precise, but have the same trouble adjusting for the changes of half a century. By this method, we get the approximation of $209,000 for Medicare. By subtraction we get the data approximating what Obamacare would cover, slightly confounded by including the small costs of children. That is estimated by subtraction to be $116,000. The revenue to pay for these costs is assumed to come entirely from the working years of 25 to 65. In the examples which follow, the Health Savings Account data are the maximum annual allowable ($3350) multiplied by 40, representing the working years, so they represent the maximum contribution, adjusted for compound investment income at 6.5%, and paying for lifetime costs.The aggregate cash contribution is thus $134,000, which without being disturbed by withdrawals, at 6.5% would hypothetically grow to the astonishing figure of $3.2 million by age 93. A more conservative interest rate of 4% would reach nearly a million dollars. The conclusion immediately jumps out that there is plenty of money in the approach, with the main problem remaining, somehow to devise a way to get it out in adequate amounts when the average is adequate but an occasional outlier cost is extreme. In these examples, inflation in revenue is assumed to be equal to inflation in costs, an assumption which is admittedly arguable.

HSA and ACA BRONZE PLAN: A FIRST LOOK. Although a catastrophic high-deductible plan must be attached to a Health Savings Account, and the Affordable Care Act provides a catastrophic category, those plans are not available after age 30 except in hardship cases. Therefore, at the present writing it is necessary to select the plan with the highest deductible and the lowest premium, which happens to be the Bronze plan. "Lifetime" coverage with this, the cheapest ACA plan, would amount to $170,000, or $38,000 more than the most expensive HSA allowed by law. That's about a 22% difference. And furthermore, the bronze plan does not allow for internal investment income accumulation, which could amount to five times the actual premium revenue if held untouched until the end of projected life expectancy.

A more conservative analysis would end at age 65, because that is where the Affordable Care Act presently ends. Stopping the investment calculation at age 65 would lead to the same $170,000 for the bronze plan, compared with an adjusted price of HSA of $132,000, less a 6.5% gain of $xxxx, or $xxxx. To be fair about it, the gain would have to be adjusted for inflation, which at 2% would amount to $xxxx, a xx% difference. Let's make a more dramatic assertion: The difference between the most expensive HSA and the cheapest Bronze plan, would be $xxxx. In a minute we will discuss the reasoning applied to Medicare, but it will show that a deposit of $80,000 at the 65th birthday would pay for the entire average lifetime of twenty years as a Medicare recipient. In a manner of fast talking, you get a lifetime of Medicare coverage free, somehow buried within the HSA approach. That's an exaggeration, of course, but at a quick glance it could look that way. We haven't accounted for Medicare payroll deductions or premiums. Or government subsidies. And we haven't depleted the fund for the medical expenses it was designed to pay.

HSA AND MEDICARE. Medicare Part A (the hospital component) is free, and the system while generous, is pretty ramshackle. Furthermore, it isn't free, since it collects a payroll tax from working people, and collects premiums from the beneficiaries. Almost no one understands government accounting, but it has the unique feature that its debts are often described as assets. That is, transfers from another department are assets, so money which is borrowed, from the Chinese let's say, is placed in the general fund and transferred internally, so such debts are assets. And the annual report (available from CMS on the Internet) shows that 50% --half-- of the Medicare budget is such a transfer asset, otherwise known as a subsidy. Medicare is a popular program, because a fifty percent discount is always popular; everybody likes a fifty-cent dollar. Unfortunately, the elderly Medicare recipients perceived the Obamacare costs were underestimated, and became suspicious Medicare would be raided to pay for it. Therefore, every elected representative regards Medicare as the "third rail of politics" -- just touch it, and you're dead.

THE OUT-OF-POCKET CAP FUND. The Affordable Care Act contains two innovative insurance ideas for which it should be given full credit: the electronic health insurance exchanges which unfortunately caused such havoc from poor implementation, nevertheless have great potential for reducing marketing costs with direct marketing, and should be given full credit. And secondly, the cap on out-of-pocket payments is really a form of re-insurance without the cost of creating a re-insurance middleman. It is this which is the present focus. Three of the "metal" plans have deductibles of about $6000, and two of the plans have $6000 caps on out-of pocket cash expenses by the beneficiary. How these two features will be co-ordinated is not yet clear, and does not concern the present discussion.

The point which emerges is the original Health Savings Account was based on the concept of a high deductible, matched with enough money in the fund to pay it. Effectively, it provided first-dollar coverage without the cost-stimulating effect, and experience in the field showed it worked out that way. However, the forced match of HSA with one of the metal plans interfered to some unknown degree with the comfort of virtual first-dollar, and the cost reduction of a psychological high deductible. The premium is higher, because an increased volume of small claims is covered, and may be exploited. And an increased pay-out means less cash is available for investment. The result could be either higher costs or lower ones. And therefore, the idea arises of a single-payment fund of initially $6000, deposited at age 25 (Since that might well be a hardship for many young people, an additional feature is required). But the power of compound interest is such that this reserve would eventually become seriously overfunded. If the hypothetical client deposited $6000 at age 25, he would have accumulated $80,000 from this source alone. That's enough so that if it were paid to Medicare on the 65th birthday, it would pay for Medicare for the rest of the individual's life. But since it would not be needed from age 50 to age 65, further compounding (at the arbitrary rate of 6.5%) to $320,000 or some such amount, at age 65. Therefore, the following uses can be envisioned: ( 1.) Lifetime health insurance without premiums after 65. (2.) Since Medicare premiums would not be required, the Medicare premiums would not be required and should be waived. Money which flows in from earlier payroll deductions could be diverted to paying off the Chinese Medicare debt. (3.) We have glossed over this matter, but everyone was born at someone else's expense, and should pay off his debt for the first 25 years of his own life. (4.) If circumstances permit, the client should be able to transfer $6000 to other members of his family for the same funding as he got it. (5.) Surpluses might persist in exceptional circumstances, and the option to supplement his own retirement funds might be offered. Eventually, it seems inevitable that the premiums for "metal" plans would be reduced.

At the very least, one would hope that this dramatic example of the power of compound investment income would encourage wider use of the principle.

How Certain Numbers Were Derived

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


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

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


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

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


Some of the foregoing examples are lurid, and perhaps a little dramatized for effect. But the effect of compound investment income is so impressive, that there really is little question there is plenty of money to do just about everything which needs to be done in health financing. The problem, however, is how to get enough money to pay the right bills, at the right time. The temptation to steer the money into the wrong places has been present since Isaac and Esau, and while the pooling principle of insurance (and government) solves that problem, excessive use of that flexibility is what mainly got us into the present mess. The intrusion of government can be traced to the "pay as you go" system, which amounts to paying long-term debts with current cash flow. This money has been present right along, but political considerations created pressure to begin the government system, right away, and for everyone right away. The citizens are partly responsible, since they have taught politicians they must respond to people taking off their shoes and pounding the table with them. So, yes it's true that compound interest gives an advantage to frugal people, and to some extent to people who are already prosperous. But egalitarianism doesn't justify refusing to do what is in the general interest of everyone. We are currently in a pickle because we took egalitarian short-cuts in 1965, and have preferred to borrow money for healthcare, ending up paying many times what we need to pay, rather than yield to mathematical principles discovered by Euclid, or perhaps it was Archimedes.

But while Health Savings Accounts, individually owned and selected, have more investment flexibility to take advantage of the necessarily higher returns of the private sector, and the flexibility to choose superior investment techniques as they are invented, and the flexibility to adjust to personal circumstances rather than universal absolutes,-- they lack the flexibility to pool resources between different persons and times. Perhaps this flexibility could be extended to whole families, since there are shared perplexities of pregnancy, age group and divorce which must be addressed in a communal forum, and perhaps churches or clubs could fill that role. But in our system sooner or later you get mixed up with a lawyer, judge or investment advisor. And therefore must contend with moral hazard, and disloyal agents. By this time, I hope we have learned the weaknesses of that new branch of government, the government agencies. As Adlai Stevenson quipped, "It used to be said, that a fool and his money are soon parted. But nowadays -- it could happen to anyone."

So I recognize that although some people in a Health Savings Account system will have barrels of money, while others will be desperately in need, the fact that on average there is plenty of money to fund everybody isn't quite good enough. Somewhere a pooling arrangement must be created, and the fact that the people running it will be overcompensated must be shrugged off as inevitable. But since the people who trust it will be fleeced, they might as well be the ones to create or select it.

Public Misconceptions

(Healthcare for Citizen Lobbyists)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Disadvantages of Lifetime Health Care

So, right off, what are the disadvantages of lifetime coverage? They would seem to be:

1. At the moment, persons receiving Medicare are excluded from starting Health Savings Accounts. During the debate about Obamacare, seniors were therefore remarkably uninterested in two topics which didn't affect them: Obamacare and Health Savings Accounts. Very few seem to realize that Medicare is 50% subsidized by the federal taxpayer, and therefore few realize they are quite right to be uneasy Medicare might be "robbed" to pay for Obamacare. No politician is comfortable discussing this issue, for fear his party will be blamed for injuring a perfectly blissful status quo. Naturally, everybody likes buying a dollar for fifty cents, and everybody likes to imagine payroll deductions and premiums create an impregnable entitlement. The sad truth is the 50% subsidy, paid for by borrowing from foreigners, practically guarantees Medicare will be eyed as a victim, using the "fairness" argument. Seniors on Medicare, of which I am one, should be immediately in favor of a proposal which forestalls such pressure. Unfortunately, right now every one of them is looking toward the sunset, gambling on outliving a threat they hope will go away.

2. The computer revolution, which makes lifetime health insurance even imaginable, has severely impacted the investment community. It is still difficult to foresee which branch of the existing financial community would be natural allies, or natural enemies, of Health Savings Accounts. A remarkably large segment of the investment community already has HSAs for their personal affairs, and the banking community sees a chance that Bank Debit Cards could displace the huge industry of insurance claims processing. Meanwhile, insurers remain uncertain whether HSAs are a new revenue source, or a threat to existing lines of business. The Dodd Frank legislation is so large and complex it confuses everyone about net winners and losers. Investment advisors have been hit hard by the recession, and are forced to charge $250 per trade when their competitors charge $7.50 for the same service. Just about everybody in the HSA business is uncertain whether HSAs are insurance policies with an attached savings account, or whether they are are investment vehicles with stop-loss insurance attached. Things are tough when lobbyists don't even know which committee to lobby. It takes time for HSAs to achieve profitable size, so industry leadership hangs back to see what they look like when bigger.

3. There are lots of small advantages, but one big disadvantage. The transition from one system to another takes a long time, perhaps a lifetime for some.

How can we navigate a transition that might take a century to complete?

Transition Strategy. The general answer to the long transition period lies in providing more than one method to close the transition gaps. Start from both ends, and then find one or more methods to break into the middle. If lifetime insurance saves money, use some of it to overfund parts of the system as an incentive. When you find people are gaming the system, drop the feature which permits it. If some goal is accepted to speed up the transition, calculate what it is worth to accomplish it, and limit the feature as the transition speeds up. The method proposed in the ****previous**** chapter will certainly work out, but a newborn baby will be a Medicare recipient before children's insurance is complete for everyone. The rest of us have already lost some years for compounding, while some of us are already on Medicare and are, as they say, entitled. Therefore, we propose two additional ways of getting to the goal. Reducing the cost of healthcare is one, to be taken up in Chapter ****. That one works for everyone's finances at any age.

The other method, which suits people of working age, is the present topic. It has two possible solutions, the issuance of special revenue bonds, and offering inducements for dropping Medicare. In the present environment, just using Medicare as a transfer vehicle is unthinkably unwise, politically. Reducing Medicare can only be brought up as a voluntary exchange, long into the future when the financial attractiveness of the HSA approach is so well established it has no political downside. It can be used to pay for non-medical retirement costs after HSAs demonstrate they can comfortably cover medical ones. At that point, it would no longer have the stigma of "robbing" Medicare, but might be politically acceptable as making some use of unspendable double coverage.

Special Bond Sales. The safer approach is therefore to issue bonds to smooth out bumps in what is in some respects an equity investment. To match present cultural patterns, it should be recognized that working parents now fully assume the medical costs for their children, but have only a moral liability for the medical costs of their retired parents. Therefore, our culture might accept bond indentures with similar structure, but in one of the cases resist an identical bond issuance which differs significantly from accepted local patterns. In fact, it is difficult to imagine enacting any proposal which does not generally respect societal patterns. An important feature would be to start HSAs at an early age, adding as much as 26 years to the duration available for compounding. At 10%, that would be almost four doublings of the investment, and a fairly good start toward the initial goal of $80,000 in the account by age 65, while still starting with relatively small investments in childhood. True, a bond issue would have interest to pay, but since the interest payment stays within a family it might be designed to seem less burdensome than taxes. It is a curiosity that U.S. Treasury bonds are entirely general obligations, unlike state bonds. There may be a good reason why federal bonds for specific projects are agency bonds, but someone else will have to explain it. The two purposes for which special bond issues might be considered are: respect for society's wishes with regard to parent/child discipline, divorce and illegitimacy issues; and to smooth out gaps in coverage necessitated by nonlinear relationships between revenue and expenses at different ages.

Proposal 16 :Congress should authorize special limited-use bond issues (or Federal agency bond issues) for two Health Savings Account purposes: to fund accounts of late age at enrollment within the transitional stage who have difficulty attaining self-sustaining status; and to create a permanent bridge between age groups which are in chronic deficit and age groups which are in permanent surplus, to the extent that such particular age disparities remain in balance. In both of these cases, it is calculated the accounts will eventually come into permanent balance after full transition has taken place within current demographic trends.

Comment: With the passage of time, it should be possible to identify age groups (for example, the first five years of enrollment) which will eventually come into balance with other age groups which permanently generate a surplus. Knowing aggregate lifetime coverage will itself bring these two groups into permanent balance, it is sensible to borrow from one and loan to the other during early transitions, at minimal interest rates. Having provided for eventual coverage of these secular risks, it becomes more reasonable to extend favorable rates to them during early transition. When the slots are fully loaded, so to speak, there will always be secular fund imbalance between age groups, where market rates are always needed to cover the overall plan design. The intent of these two interest rate levels is to distinguish between a transitional phase which is temporary, leading to an equilibrium loan imbalance which is a natural part of the design.

As a practical demonstration of the superiority of equity investing over zero-sum fixed income, invisible psychological value cannot be overstated. If our nation expects for longer longevities to rely increasingly on investments rather than salaries, it must broaden its experience with sensible risks. Whether we like the idea or not, we are collectively taking long strides toward a rentier culture, where our main hope of advancement lies in greater willingness to understand and buffer the reasons for market volatility. One of the features of even this attenuated risk-taking, is to recognize that a few people will start their investing at the bottom of a dip, while most will start at the top of a peak. The long-term result will smooth it out, but some people are destined by the luck of their birthday to make more profit in an equity market, than others. And some people are destined by the timing of their illnesses to end up with less money in the account than others, too. It may not seem fair, but tampering with investment cycles will not improve it. By establishing a system of buy-ins, both as a transition step and also for late-comers, the opportunity of market-timing is created. Almost nothing is more discredited as an investment strategy than market-timing by amateurs, but it probably cannot be completely avoided here, and will probably exaggerate the differences in account size achieved by members of the same age cohort. Somehow, the attitude must be made general, that nobody can make anything at all in the accounts if we return to annual premiums; all extra money in these accounts is "found" money. The books will not balance completely at all stages, so it becomes a political question whether to forgive the difference (as Lyndon Johnson did in 1965), or to define it as a subsidy (as Barack Obama seems to be planning for his start-up insurance system.) Perhaps in accounting for residual medical costs at the end of life, a way can be found to equalize outcomes, but it seems unwise to tamper directly with such large amounts which are mainly responding to the world's inherent volatility.

There are several other serious matters. They will be briefly noted, and then an omnibus solution presented, the IIOO. Let's answer one inevitable jibe immediately: How can poor folks afford this? Answer: They have to be subsidized, that's all, just as they are in every other proposal including Obamacare. It's important to face this, because neglecting it is the route by which every deficit has been incurred, every budget unbalanced. People who spend other people's money for healthcare characteristically have higher than average health costs themselves. But the novel discovery is Health Savings Accounts have generally proved to reduce costs by 30%. When both approaches operate at the same time, results are not reliably predicted, but can be monitored. Miscalculations usually result in debts, dropped options and dropped amenities. A politically appointed board would be wise to refuse an assignment to address this, unless contingency instructions are clear, and remain out of their hands. When Congress eventually discovers how to put a ceiling on the national debt, effective answers to this related issue may become more apparent.

Transition from Term Most transition problems (shifting from one-year coverage to lifetime coverage) have to do with whether you are a child, whether your children are gone and forgotten, or whether you are supporting everybody else in your family. As the saying goes, how you stand will depend on where you sit. The unique borrowing problem here, is complete transition takes so long, groups will differ significantly on whether to unify forward (child to grandparent) or backward (grandparent to child), until it can be worked out how to borrow as a child and borrow for a time as a grandparent, depending on particular situations. What's to be avoided is intergenerational borrowing as groups; we've tried that. The benefits of invested premiums are obvious to all groups, but the arrangements must be debated thoroughly in order to avoid just kicking the can down the road. Almost any arrangement would suffice for a brief transition, but this transition would take so long it would amount to a Constitutional Convention when it was over. The eventual goal is to place the cost burden largely on working people age 26-75, since that is the only age group in direct contact with the national economy. The tricky part is to utilize other age groups during the transition -- and then slowly work out of it. Don't forget a third generation will intervene -- their own children, as well as their parents and grandchildren. The whole construction is a job for actuaries, but the modern use of index funds puts on the table the potential of diversified investment, absolutely without stock-picking, at favorable rates of interest, allowing room for cyclicity of the economy. America seems to need increased fertility, and the compound income might make it possible, but if it is not carefully examined, it might act as an inducement for women to delay their first child even longer than they presently do. As long as you don't get overwhelmed by too many transition issues at once, almost any intergenerational problem would be eased by generating more revenue. At ten percent, money compounds to double itself every seven years, and the resulting sums can boggle the mind. But if they are not planned for, the extra money will either vanish or induce people to act like a deer frozen in the headlights.

Making ten or twelve percent on safe investments may seem impossible to those who have recently lost thirty percent on the stock market, and of course it is not guaranteed. That is why lifetime health insurance based on fixed income securities cannot be presented as guaranteeing payments for future services; only equity securities (stocks) can do that, and even they, mostly don't succeed in real terms, or net of inflation. Lifetime health insurance should only promise to supply a substantial portion of future health costs, and has little hope of doing so except for two possibilities. If the taxpayers would stand for it, you might deliberately overfund the accounts; since they won't, it is necessary to induce some to do it voluntarily, and shrug your shoulders at those who don't. That probably won't work, either, so we are left dependent on our scientists to reduce or eliminate medical costs. They are willing enough to try, but of course they can's guarantee. You can gamble on its happening, or your can wait until it is a sure thing. We are decades into a fiat currency without semblance of backing by monetary metals, and must feel our way. However, the bright side of our present finance system is that transaction costs are steadily declining for reasonably safe passive investing. Professor Ibbotson has demonstrated that total market averages have been remarkably steady for asset classes over the past eighty years, and probably will safely remain so for another century, but that's another assumption which might go wrong. When you get down to it, you either go ahead or you don't. That's all. Investing in the total domestic stock market of America, the investment is guaranteed by the full faith and credit of America, just as surely as if invested in U.S. Treasury Bonds, and it pays a little better in return for its increased volatility.

Still another question comes from people who rightly believe there is no free lunch: Where does the extra money come from? A fast answer is that it comes from correcting a blunder of long standing, called the "pay as you go" system. To some extent, this problem began with the original Blue Cross plans of the 1920s, but it was elevated to its present stature by the Medicare and Medicaid proposals of 1965. By the pay/go approach, this year's premium money is spent for this year's sick people, not the people who paid the premiums. That ruse helped get the program started, but it means current unspent premium money is quickly gone, and thus it means no compound interest or investment income is generated by rather huge revenue collections in the future. Since health expenses rise with advancing age, a great deal of floating premium money might be invested for many decades, if only it had not already been spent. Actual projections are surprisingly large, but I would prefer that others announce their calculations, employing the motto of "Underpromise, but over-perform."

Other substantial sources of reserves exist, nevertheless. Health Savings Accounts now in operation are reporting 30% savings; since it is unlikely this record can be maintained with inpatients, who are generally older, overall savings may well turn out to be closer to 15%. Inflation helped a lot to pay off the original startup costs of 1965, but at least nominally it is true the debt has been paid. We are now free to invest that ancient transition cost, so to speak, as long as we don't try to spend the same money twice. But there is considerable squeamishness about the public sector acquiring equity in the private sector, so Treasury bonds are about the only public sector investment the public will easily allow. Investment experts are however almost unanimous in feeling that equities provide greater long-term income (see graphs by Ibbottson) and security against inflation. On the other hand, if private individuals invest in common equity with index funds, less resistance is encountered. Any way you look at it, some investment income is better than no income, and for long-term investment, equity is better than debt. For political purposes, it would seem best to restrict investments to U.S. companies, and index funds are less controversial (i.e. "gambling with my money") for most small investors than actively managed funds, because the savings mostly come from reduced investment expenses. John Bogle is telling the world that 85% of most total return is diverted back to the financial industry, and this is one way to rebalance that. Fifty percent of investors would do better than average, fifty percent would do worse because of broad diversification, but not much worse, because total index diversification is fast approaching a maximum. Meanwhile, compound interest would be at work, and most people would be astonished to learn how large the long-term appreciation would grow. Tax-free, diversified, and long-term.

Finally the question arises: how can you tell whether income from this source would equal the terminal care costs of fifty years from now? You can't, of course you can't. But this transfer and invest scheme would generate a whole lot of money that presently isn't being generated. If it isn't enough, we will have to do something in addition. The monitor and mid-course correction system is expected to detect when more money is required to balance the books, and therefore more money will have to be invested in the Health Savings Accounts. If savings are insufficient, either subsidies or borrowing will have to be resorted to. Experts sometimes will be wrong, so revenue should be raised somewhat higher than the experts think we need. And if it all goes wrong, if we have an atomic war or an expensive cure for cancer, there is always the national debt. Which is where we began, isn't it?.

Independent and Impartial Oversight Organization. (IIOO)After reviewing the complexities, it seems best to create an oversight body with more time and expertise than can be expected of representatives who are subject to periodic election. However, Congress must make it clear that it retains ultimate authority to break from normal routine, occasionally concentrating its attention on conflicts between expert opinion and public opinion.

Working backwards, a mixed public/private system needs an official backer of last resort, a function which cannot be delegated, and an experienced crisis management team in place with the authority to act within defined limits, most of the time. The last resort has to be the full credit of the United States, just as unfortunately it now is with Medicare. What's mainly needed is a sort of Federal Reserve in the very narrow sense of an independent management team, under the direct governance of a Board whose composition is half public, half private. To be useful, it needs a monitoring authority provided by a mandate from Congress, a comparatively limited amount of regulatory authority of its own, intentionally limited by adequate board representation from all stakeholders. The Board needs to be constantly told what is going on, and it needs general authority and trust to act in an emergency. Many proposals require a system of mid-course corrections particularly in the first decade of operation, at the same time the Board must not usurp Congressional authority.

Congress, on the other hand, must have the restraint of private oversight by technical experts who can appeal to the public, to make very certain it does not feel it has a new piggy bank. Corruption is one thing; misjudgments are quite another. Once in a while, we manage to construct such an agency.

Pit Stop: Some Features Regular HSA and Lifetime HSA Have in Common

This book was primarily written to explain the difference between regular Health Savings Accounts and Lifetime Health Savings Accounts. The first is available right now although in somewhat crippled form, and the second requires enabling legislation to become available in a year or two. Naturally, the emphasis is on differences between them. They have several features in common however, based on obscure quirks in law which are vital for the reader to understand. So at the risk of a little repetition, let's review the DRG, the Flexible Spending Account, and the income tax deduction.

The Income Tax Deduction, for Employees Only. Seventy or more years ago, wartime wage freezes interfered with moving steel workers to the West Coast, so as a temporary war measure, fringe benefits were not considered taxable income. Big business and big labor never allowed this situation to be rectified, so in time it became the principle basis for employer-based health insurance. Employees got a tax deduction but self-employed and unemployed people did not. Much was made of this unfairness, but it never was changed.

Meanwhile, no one called attention to the fact that big business was getting an income tax deduction, too, which amounted to fifty percent in state and federal corporate income tax. Added to the fifteen to thirty percent deduction for the employee, this indefensible inequity became the main financing method for the American health system. And it was the main pressure behind the Clinton Health Plan, as well as the Affordable Care Act, or Obamacare. Like a smiling Cheshire cat, big business hardly said a word about it.

The DRG Diagnosis-Related Groups were a group of two hundred payment groups, used to pay for Medicare's hospital in-patient costs, and widely imitated because Medicare payments are half of hospital revenue. They replaced nearly a million specific diagnoses, so they were extremely crude approximations. More important, they replaced fee-for-service billing. It no longer mattered how long you remained in the hospital or what services you received, hospitals were paid by the DRG. Being essentially meaningless lumps of diagnoses, their translation into money was easily manipulated, eventually resulting in a 2% profit margin, spread around rather unevenly. Many hospitals lost money, which was easy to do in a 2% inflation. Consequently, hospitals shifted their costs internally to exaggerate the effect that the Emergency room generated a 15% profit, and the out-patient area, formerly the domain of physician offices, became an extension of the hospital and had a 30% profit. The distorting effect, and the consequent uproar, is easily imagined.

The Flexible Spending Account. Essentially the same as a HSA or Health Savings Account, the FSA had one major difference. At the end of the year, any unspent money was returned, in what was soon called "Use it or Lose it." A large number of health related luxuries, like prescription sunglasses, were consequently purchased in order to get some value out of the system; many people dropped the policy. However, they were heavily sponsored by Employers and Health Insurers, so were widely adopted. If the law could be changed to permit unused surplus to be "rolled over" to future years, essentially millions of employees would find themselves with what amounted to Health Savings Accounts. This would appear to be a gift by employers to employees, but gradually the terms of agreements changed. Much of the money sacrificed at the end of the year is effectively now the employees' own money, as a result of employee participation in the premiums, and in co-payments for the benefits.

There are many other quirks and unfairnesses in the existing employer-based system, particularly as they disadvantage non-employees. But in a very simple paragraph of reforms to these three, the Health Savings Account would emerge as a major reform, whether one-year term, or lifetime. A cleanup of the diagnostic code underlying DRG is badly needed, income taxes should be leveled for everyone regardless of type of employer, and rolling over the year-end surplus of Flexible Spending Accounts would give a big boost to HSA enrollment.

That's all, the rest is in this book. Making healthcare cheaper is a bigger project, so let's return to where we were. We were about to talk about passive investment.

Half-Started HSAs

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

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

Epilogue: Where Does All This Money Come From?

Although this book promised, and I hope delivered, a detailed discussion of how Health Savings Accounts might work if Congress unleashed them, the original question remains. Where does so much money come from? Well, in one sense, it comes from saving $350 per year, starting at age 25 and ending at 65, earning 8% compound interest. That's if longevity remains at 83. We assume the average person has medical expenses, but we don't know how to estimate them, so we put $350 a year in escrow, and average person has to contibute more cash for medical expenses at 80 cents on the dollar (the tax exemption) until experience shows he has five or ten years pre-paid, or until he reaches an estimated cash limit. Somewhere around that point, he can can stop contributing, both to the escrow fund and to incidental medical costs, until the fund catches up with him. In plain language, he gives himself a loan if his expenses are too high. These figures are based on current average costs, so the money is calculated to be present in the fund, but poorly distributed. After experience accumulates, these numbers can be readjusted from present over-estimates..

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The prudent way to manage future uncertainties, is to over-fund them and transfer any surplus to a retirement fund. {bottom quote}
Planning For The Future.
Curiously, if longevity goes to 93, it would seemingly only require $150 per year in escrow instead of $350. Longevity could only add ten years if we had some medical discoveries in the meantime, so let's say both the added longevity, and the added cost of it, appear fifty years from now. Our hypothetical average person born today contributes $150 per year from age 25 to age 50, when he discovers increased longevity requires him to contribute $ yearly until he is 65. After that, he is all paid up until he dies at age 93. Yes, he has Medicare to account for, but his payroll withholding has already paid a quarter of Medicare cost, and if he pays Medicare premiums he will have paid another quarter of Medicare. His lifetime Health Savings Account escrow contribution would contribute $ per year, which is the present deficit of Medicare, currently being subsidized.

The amount of contribution to the escrow fund could be reduced to actual costs over time, but the prudent way to manage uncertainties is to over-fund them, planning to roll any surplus over to a retirement account. Three hundred-fifty million Americans, times $350,000 apiece in lifetime medical costs, results in a number so large it requires a dictionary to pronounce it correctly. Cutting it in half still suggests a financial dislocation of major proportions, so out of whose pocket would it come? Even if it's a win-win game, dumping that much money into the economy sounds destabilizing. These are not legitimate reasons to avoid it, but it seems hardly creditable it could happen without someone noticing a big difference. What does it do to the monetary system?

If it is assumed funds generated by this system are ultimately used to pay off accumulated debts, the result should be some degree of deflation. The Federal Reserve has already purchased several trillion dollars worth of bad debt, so debt repayment would not seem to pose a threat. By contrast, inflation could become a threat if corporate taxes are reduced too rapidly, but presumably we have learned the lesson of lowering Irish corporate taxes too rapidly. Because of international ramifications we have to assume this threat would be recognized. Because of the nature of compound interest, it has least effect in its early stages, and there would be sufficient warning of inflation to mobilize an action. Interest rates would probably rise, but there is a cushion of several years of subnormal rates, and most people would feel the elderly have suffered enough from low rates to justify some relief.

A certain amount of trouble resulted from using the "pay as you go" model, in which current premiums pay for current expenses. That is, the money from young healthy subscribers pays the bills of old, unhealthy, ones. By that reasoning, the original subscribers in 1965 got a free ride from Medicare and never paid for it. The debt has been carried forward among later subscribers, and although it is a debt which still remains to be paid, it seems very likely no one would ever collect it. Each generation makes it a little bigger by adding subscribers and running up hidden debt charges, but at least it is accounted for. In a way, there is enough guilt feeling about this matter, that it would probably be politically safe to create a balancing fund, to be used in case there are monetary issues with this unpaid indebtedness.

Let's remember that a major part of the health financing problem can be traced to the unequal taxation exemption of big business, which traces back more than seventy years to World War II. No one welcomes reducing net income in half by any means, but reducing corporate income taxes might just be one of the few ways it could be an inducement. No taxes, no tax exemption; it sounds pretty simple, until you review the trouble the Irish Republic got into when it reduced them too fast. But when corporate taxes are the highest in the world, and international trade is threatened -- is certainly the best time to do it. And politically, when wealth redistribution has just been given a thorough pounding in the polls, is also a good time to advance the idea. If everyone would be reasonable about the details, an important tool for managing international trade could be fashioned out of a needed healthcare reform. It certainly is a double opportunity.

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A fiduciary puts his customer's interest ahead of his own. {bottom quote}
The End of The World?
One way or another, the success of Health Savings Accounts will depend on crossing the tipping point, where investment income is greater than borrowing cost. These accounts will be forced to do a great deal of internal borrowing, particularly at first, when some financial information does not exist, and therefore must be deliberately over-funded. We have a reasonably workable idea of total health care costs, and longevity, but an uncertain grasp of the shape of the revenue and cost curves in the middle. Inevitably, certain age groups will be in chronic debt, and others will run protracted surplus; the situation demands low-cost internal borrowing. Meanwhile, the overall prediction can be made that healthcare costs will generally be lower for young people, higher for the elderly. If the premiums of young people can be invested at at least 8% net, the system should work. When we learn common stocks are averaging 11% returns, and investment intermediaries frequently capture 85% of it, the whole idea of passive investing is ruined until this is repaired. Requiring Health Savings Account agents to be, and to act like, fiduciaries is just about mandatory. A fiduciary puts his customer's interest ahead of his own. The day of opaque pricing must come to an end.

We mentioned earlier, Roger G. Ibbotson, Professor of Finance at Yale School of Management has published a book with Rex A. Sinquefield called Stocks, Bonds, Bills and Inflation. It's a book of data, displaying the return of each major investment class since 1926, the first year enough data was available. A diversified portfolio of small stocks would have returned 12.5% from 1926, about ninety years. A portfolio of large American companies would have returned 10.2% through a period including two major stock market crashes, a dozen small crashes, one or two World Wars hot and cold, and half a dozen smaller wars involving the USA. And almost even including a nuclear war, except it wasn't dropped on us. The total combined American stock market experience, large, medium and small, is not displayed by Ibbotson, but can be estimated as roughly yielding about 11% total return. Past experience is not a guarantee of future performance, but it's the best predictor anyone can use.

During that most recent prior century, we had a lot of crisis events, which normally bump the stock market up and down. A standard deviation is the amount it jumps around; and one standard deviation plus or minus, includes by definition two thirds of all variation. During the past ninety years, the standard deviation has been 3 percent per month or 11% per year. Standard deviations for the whole century are not meaningful because of more or less constant inflation. Throughout this book, we repeatedly describe investment income as 10%, for a simple reason: money compounded at 10% will double every seven years. Using that quick formula, it is possible to satisfy yourself what 11% can do if you hold it long enough. Since no one knows what will happen in the next 100 years, it is futile to be more precise. We may have an atomic war, or we may discover a cheap cure for cancer. But 10% is about what you can reasonably expect, doubling in seven years if you can restrain yourself from selling it during short periods when it can deviate less or more. The most uncertain time is immediately after you buy it, before it has time to accumulate a "cushion". As we see, your money earns 11%, but it isn't necessarily what you will earn.

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Your money earns 11%, but that isn't necessarily what you will earn. {bottom quote}
Expecting it and getting it, can be two different things therefore. And even if Congress establishes it, as they say in Texas, "You can't turn your head to spit." Because, for one thing, most expenses for a management company also come in its first few years, on their first few dollars of revenue. Wide experience with a cagey public therefore teaches experienced managers to get their costs back as soon as they can. Until most managers get to know their customers, in this trade, charging investment managing fees which amount to 0.4% annually is considered normal for funds of $10 million, so charging 1-2% for accounts under a thousand dollars is common practice. These things make it understandable that brokers are slow to lower their fees, or 12(1)bs, or $250 charges to distribute some of your proceeds. But our goal as customers is to negotiate fees reasonably approaching those of Vanguard or Fidelity, which have fees of about 0.07% on funds amounting to trillions of dollars. Such magic can only be worked by purchasing index funds from a broker who aggregates them, and also develops a smooth-running standardized service with minimal marketing costs to cover the debit card, help desk, hospital negotiating, and banking costs. And who, by the way, may make really serious income from managing pension funds, so they remain wary of antagonizing corporate customers who get a big tax deduction from giving employees their subsidized health insurance. Remember, stock brokers are not fiduciaries; they are not expected to put the customer's interest ahead of their own. A broker sells stock to anyone who wants to buy it, even if two successive customers are bitter rivals of each other. One of the better-known brokerage houses advertises charges of $18 a year for HSA accounts over $10,000, but only after it reaches that size will it permit the customer to choose a famous low-fee index fund. With $3300 annual deposit limits, it eats up three years of your earnings even to get there. You really have to feel sorry for an industry experiencing such a general decline of net worth, but the incentive it creates is obviously for you to get the account to be over $10,000, as fast as you possibly can. To many people, those sound like staggeringly large amounts, but they are realistic at this stage of the market, if not entirely accessible to everyone.

The last few paragraphs sound like a digression, but they aren't. The question was, Where does all this money come from? Would there be wealth creation if the system favored the retail customer more, or wouldn't there be. I don't know the answer, but one likely approach is, let's try it.

A Change in Direction

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

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

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

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

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

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

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

Lifetime Health Savings Accounts:How Much is Enough?

The Duchess of Windsor was reported to say, a woman can never be too rich or too thin. Perhaps, but with insurance you state -- in advance -- how much insurance you can buy, best not expect more. In healthcare, it's my hunch something drastic would have to change before the American public voted an assessment for more than $3300 per person, for every working year from age 26 to age 65. In fact, if it went much higher, many people would probably look for a way to escape the burden. Perhaps we could supplement 3% per year, the historical rate of inflation for the past century. That's fair, because although it would reach $10,000 at age 65 instead of $3300, everything else would have readjusted to give it the same financial impact. Similarly, asking people 26-65 to pay for all ages is more palatable if it's arranged as your own childhood and retirement to be supported.

Excluded: Past debts, and Custodial Care. In any event, any payments for past debts, for health or otherwise are not envisioned in the following plan. The term "fixed income" reminds us debt and equity obey different rules, and the premise is the income supplement of this calculation will be based on equity, common stock. Furthermore, we know the National Debt, but how much of it once paid for health services, is fuzzy. When I started this analysis, I really never dreamed all of current healthcare costs might be covered by investment income from common stocks, and it's going to take some experience to be sure even that is reasonable. It allows us to take a stance: if it won't pay current costs, at least it will pay for some of them. If it more than pays for them, annual deposits should be reduced, never confiscated. To avoid circumvention by changing definitions, it might be well to state custodial care costs are not included, either, because they are treated as retirement income.

Medicare. Making it easier to explain, let's begin at the far end of the process, the day after death, looking backward. This proposal didn't initially include a Medicare proposal, but the accumulation of its unpaid debt has become so alarming, considering Medicare within Health Savings Accounts could fast become a national priority having no other solution. In addition, most factual health data come from Medicare, so the reader gets accustomed to hearing about it. So, while the Medicare situation is fraught with political obstacles, we might have to risk them. While debt overhang from earlier years continues to grow, Health Savings Accounts cannot be confidently promised to rescue Medicare by itself. But perhaps at least the Savings Account discussion could put a stop to going deeper into debt. Even a stopgap would have to get started pretty soon, but there is also a chance an improving economy might partially reduce the indebtedness.

Medicare-HSA Overlaps. At present, Catastrophic coverage is required for Health Savings Accounts, but its premiums are not tax-exempt. To extend HSA for the life expectancy therefore, requires an additional average of 18 years of after-tax premiums. We have split lifetime HSA into two parts at age 65 and assume a single-premium ($80,000) exchange for Medicare, possibly traded for partial forgiveness of premiums and rebate of payroll taxes. It is important not to count the $80,000 twice, if it assumed to be self financed. One quarter from payroll taxes, one quarter from premiums, and half from the $80,000 which used to be from the taxpayers. If pre-payment begins at an early age, Medicare costs might be quite modest after growth from income. Even when we show all the costs, including double payments, using an HSA at conservative rates like 4% will reduce the Medicare cost by 75%. Better performance depends heavily on approaching 12.7% by passive but hard-boiled investing. To pay down the existing debt back to 1965, is not contemplated by this proposal. At present, it grows by 50% of annual costs by addition; and an unknown amount by compounding. The amount of debt service is probably going to depend on the national ability to pay it down, regardless of its written terms. The same is likely to be true of subsidies for the poor. Ultimately, both of these decisions are political, limited by ability to pay. Because of the long time periods, comparatively modest interest rates could convert this impending disaster into a manageable cost, but it should not be contemplated until net investment returns approach 12.7 %. The outcome of these intersections is that the terms and benefits become largely a matter of political choice. That has been true for a long time, yet no effective corrections have been made. It is perhaps unbecoming of a citizen to say so, but the political system needs some steps taken to increase its sense of urgency.

Disintermediation of Investment Returns. By this reasoning, the rescue of Medicare depends on the political choice to do it, and the avoidance of a collision with the financial industry. Without a solution to the Medicare problem, a solution to paying for healthcare at younger ages becomes quite feasible, but it would be useless. Conversely, solving Medicare would be possible if the problems of younger people were ignored, but that is equally unlikely. To solve healthcare financing for all ages depends on introducing some new feature, and the easiest solution to imagine is to raise effective net interest rates. Interest rates are unusually low at present, and the Federal Reserve probably feels it would be dangerous to raise them. However, that's the easy part, because interest rates are certain to rise, eventually. What's much harder to envision is to flow the improved rates and the transaction-cost efficiencies through the financial system without wrecking it. What's hard to imagine is not hard to seem feasible, however. It is to take investments averaging 12.7%, flowing 10% past the intermediaries to the investor; and keeping it up for a century. Disintermediation, so to speak.

Rationalizing Fragmented Payments The transition to a solvent system could be greatly eased by the present premiums and payroll deductions, which are largely age-distributed, and can therefore be forgiven in a graduated manner for late-comers to the program. Most redistribution of high-cost cases should be handled through the catastrophic insurance, which is well suited for invisible and tax-free redistribution. Because of hospital internal cost-shifting, inpatients are overpriced, rapidly heading toward underpricing. This distortion of prices is achieved by squeezing inpatient prices with the DRG to shift costs and overpricing to hospital outpatients. In the long run, distorting prices has the effect of raising them. This will more immediately affect the relative costs of Catastrophic and Health Savings Accounts, and should be more carefully monitored, with an eye toward re-achieving equilibrium.

Dual Reimbursement Systems are Better Than One At present costs, statisticians estimate average lifetime healthcare costs at about $325,000 in year 2000 dollars; we could discuss the weaknesses of that estimate, but it's the best that can be produced. Women experience about 10% higher lifetime health costs than men. Roughly speaking, how much the average individual somehow has to accumulate, eventually has to equal how much he spends by the time of death. At this point, we must work around one of the advantages of having separate individual accounts. On the one hand, individual accounts create an incentive to spend wisely, but it is also true that pooled insurance accounts make cost-sharing easier, almost invisible, and (for some) tax-free. Therefore, linking Health Savings Accounts with Catastrophic insurance provides a way to pool heavy outlier expenses, while the incentive for careful money management resides in the outpatient costs most commonly employed (together with a special bank debit card) to pay outpatient costs. Such expenses are much more suitable for bargain-hunting anyway, because dreadfully sick people in a hospital are in no position to bargain or resist.

Internal Borrowing. Furthermore, there is significant difference between mismatches of aggregate revenue-to-expenses of an entire age group, and outliers within the same age cohort, the latter much likelier to be due to chance. To put it another way, somebody has to pay these debts, and the plan has been designed to break even as an entirety. Surely we must have a plan about who should pay them when enough revenue is not yet present in a new account. Surely some groups are always in surplus, other groups are always in arrears; the two should be matched, at low or zero interest rates. Borrowing between sick outliers and lucky well people within the same age cohort should pay modest interest rates, and borrowing between different cohorts for things characteristic of the age (pregnancy, for example) should pay none. Unfortunately, some people may abuse such opportunities, and interest must then be charged. Until the frequency of such things can be established, this function of loan banking should be part of the function of the oversight body. When it's limits become clearer, it might be delegated to a bank, or even privatized. While it is unnecessary to predict the last dime to be spent on the last day of life, incentives should be identified by the managing organization, separating structural cash shortages from abusive ones. Much of this sort of thing is eliminated by encouraging people to over-deposit in their accounts, possibly paying some medical bills with after-tax money in order to build them up. Such incentives must be contrived, if they do not appear spontaneously. User groups can be very helpful in such situations. People over 65 (that is, those on Medicare) spend at least half of that $325,000 lifetime cash turnover, but just what should be counted as their own debt, can be a matter of argument (see below.)

Proposal 10: Current law permits an individual to deposit $3300 per year in a Health Savings Account, starting at age 25, and ending when Medicare coverage appears. Probably that amount is more than most young people can afford, so it would help if the rules were relaxed to roll-over that entitlement to later years, spreading the entire $132,000 over the forty-year time period at the discretion of the subscriber.

Bifurcated Health Savings Accounts. When Health Savings Accounts were first devised, it never seemed likely that Medicare might be supplanted. However, Medicare has grown both highly popular and severely under-funded, probably running at a large loss. The rules should be modified to permit someone who has health insurance through an employer to develop a Health Savings Account which he funds but does not spend while he is of working age. The funds would then build up, enabling him to buy out Medicare on his 65th birthday or thereabout, with a single-premium exchange at present prices, (exchanging about $100,000 funded by forgiveness of Medicare premiums and some portion of payroll deductions from the past). He would have to purchase Catastrophic coverage at special rates. If this approach proved popular, it might supply extra funds for loaning to HSA subscribers in the outlier category. While there is no thought of phasing out Medicare against the subscribers' will, Congress would certainly be relieved to have subscribers drop out of a program which must be 50% subsidized.

Proposal 11: The present closing age for HSA enrollments at the onset of Medicare should be extended a few years older. And single-premium buy-outs of Medicare coverage, including the possible return of payroll deductions where indicated, should be permitted as an option.

Proposal 12: Congress should create and fund a permanent Health Savings Account Agency. It should have members representing subscribers and providers of these instruments, with power to hold hearings and make recommendations about technical changes. It should meet jointly with the Senate Finance Committee and the Health Subcomittee of Ways and Means periodically. It should be involved with 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 concerning the size and scope of this activity.

Single-Premium Medicare, age 65 Hypothetically, if anyone could live to his 65th birthday without spending any of the account, a prudent investor would have accumulated $132,000 in pure deposits on his 65th birthday. He only needs $80,000 to fund Medicare as a single-payment at age 65, however, so he can even afford to get sick a little. If he starts later than age 25, he has already paid for Medicare somewhat, with payroll taxes. That could be considered payment toward reduction of the Medicare debt.

If someone makes a single deposit of $80,000 on his/her 65th birthday, there will accumulate $190,000 in the account over the next 18 years, the present life expectancy if he spends nothing for health and invests at 5%; and $190,000 is what the average person costs Medicare in a lifetime. Since the average person spends $190,000 during 18 years on Medicare, enough money will accumulate in Medicare to pay its expenses, and after some shifting-around, this should make Medicare solvent, in the sense that at least the debt isn't getting bigger because of him. Furthermore, index funds should be returning 10-12% over the long haul, so there should be some firm discussions with the intermediaries about some degree of dis-intermediation. Please don't do the arithmetic and discover that only $40,000 is needed. That seems plausible, but that's wrong, because the costs remain the same , and previously the government has been borrowing half the money from foreigners. In effect, the subscribers have been paying the government in fifty-cent dollars, while claiming the program is entirely self-funded. There has been an exchange of one form of revenue for another, so the required revenue actually does demand $80,000 for a single deposit stripped of payroll deductions and perhaps premiums. An end would be put to further borrowing, but the previous debt remains to be paid. I have no way of knowing how much that amounts to, but it is lots. All government bonds are general obligations, mixed together, while access to Medicare reports back to 1965 is not easily available. What we can more confidently predict is the limit young working people can afford for the sole purpose of paying off the Medicare debts of earlier generation. If there are other proposals for paying off this foreign debt, they have not been widely voiced. And the debt is still rapidly growing.

Escrow the Single Premium A young subscriber would have to set aside an average of $850 per year (from age 25 to 64) to achieve $247,000 on his 65th birthday, assuming a 5% compound investment income and relatively little sickness. This might seem like an adequate average, but occasional individuals with chronic illnesses would easily exceed it in health expenditures. Assuming a 10% return, he would have to contribute $550 yearly. It is not easy to estimate the size and frequency of expensive occurrences in the future, so someone must be designated to watch this balance and institute mid-course adjustments. As an example, simple heart transplants costing $200,000 are already being discussed. To some unknown extent, the cap on out-of-pocket expenses would have to be adjusted to pass these cost over-runs indirectly through the Catastrophic insurance. Insurance does greatly facilitate sharing of outlier expenses, but usually requires a time lag whenever new ones appear.

It does not require much political experience to know taxpayers greatly resent paying debts that benefitted earlier generations. They complain, but complaining does not pay off the debts of the past. To double required deposits in order to pay off past debts, as well as using forgiveness of payroll deductions and premiums, would require an additional $120,000 per year escrow, for each year's debt accumulation. At present, roughly $ 5300 per beneficiary, per year, is being borrowed, and there are roughly twice as many current beneficiaries as people in the tax-paying group, but for only 18 years, as compared with 40 years as a prospective beneficiary. So that comes to liquidating roughly $1300 a year of debt to balance the two populations, or $2600 a year to gain a year. That's for whatever the debt happens to be, which surely someone can calculate. To accomplish it, one would have to project an average of ??% income return. That's definitely the outer limit of what is possible, and it probably over-reaches a little. Therefore, to be safe, one would have to assume some other sources of income, a change in the demographic patterns, or an adjustment with the creditor. Assuming inflation will increase expenses equally with inflation seems a possibility. And it also seems about as likely that medical expenses will go down, as that they go up. You would have to be pretty lucky for all these factors to fall in line over an 80-year lifetime.

Medicare: Optional, Mandatory, or Third Rail? It is this calculation, however rough, which has made me change my mind. It was my original supposition that multi-year premium investment would only apply up to age 65, and that would be followed by Medicare. In other words, it should only be implemented as a less expensive substitute for the Affordable Care Act. It seemed to me the average politician would be very reluctant to agitate retirees by proposing a plan to eliminate Medicare. They would feel threatened, the opposing party would fan the flames of their fears, and the result would be a high likelihood of undermining the whole idea for any age group, for many years. Better to take the safer route of avoiding Medicare, and confining the proposal to working people, where its economics are overwhelmingly favorable.

But when the calculations show how close this proposal under optimistic projections would come to failure, and when nothing remotely close to it has been proposed by anyone, the opportunity runs the risk of passing us by. So, I changed my mind. The moment of opportunity is too fleeting, and the consequences of missing it entirely are too close, to worry about the political disadvantages of doing the right thing. The transition to a pre-funded lifetime system will take a long time to get mature, and the political obstacle course preceding it is a daunting one. However, there is another way of saying all this, which is perhaps more persuasive that Medicare must be changed. It begins to look as though the unfunded and accumulated debts of Medicare are such a drag on our system of government, that very little can be accomplished by anyone, until this central problem is addressed. In that sense, our problem is not the uninsured or the illegal immigrants, or an expensive insurance system. Our problem has become Medicare underfunding, and our second problem is that everyone loves Medicare.

The "simplified" goal is therefore for everyone to accumulate $80,000 in savings by the 65th birthday, remembering that savings get a lot harder when earned income stops, and definitely remembering that people approaching retirement are not likely to part readily with $80,000. With current law, you would have to start maximum annual depositing in an HSA of $3300 by your 52nd birthday, to reach $80,000 by age 65, and you would still need 10% internal compounding to make it. With 5% return, you would have to start at age 48. But notice how easily $200 a year would also get you there, starting at age 25 (see below) but it immediately gets questionable to assume $700 a year deposit for a 25 yr-old receiving 5% returns. We are definitely reaching a point where the ideas proposed in this book will no longer bail us out of our Medicare debt. Because -- the most optimistic of these projections are achieved by assuming there will be no contributions at all from people aged 25-65, for their own healthcare, babies, contraceptives and whatever. Many frugal people might skin by with looser rules; But the universal goals of the past are just that, the goals of the past. If we are going to cover lifetime health costs instead of just Medicare, many more will need $80,000 to do it, and have something left to share with the less fortunate. But to repeat, that still compares very favorably with the $325,000 which is often cited as a lifetime cost. Unfortunately, that just isn't enough, the Chinese will have to wait for repayment. This book was not written to propose a change in Medicare, but in writing it I do not see how we get out of our healthcare mess without addressing Medicare. If politicians can be persuaded of that, at least we will no longer need to invent reasons for urgency.

Starting with the Medicare example. Notice that forty years of maximum contributions, would amount to far more than the necessary $40-80,000 by age 65. We haven't forgotten that the individual is at risk for other illnesses in the meantime, so in effect what we need is an individual escrow fund for lifetime funding intended (at first) only to replace Medicare coverage. (We are examining lifetime coverage, piece by piece, trying to accommodate an extended transition period.) Depending on a lot of factors, that goal could cost as little as $100 a year deposited for forty years at high interest rates, or as much as the full $1000 per year with low rates. It all depends on what income you receive on the deposits in the interval. In a moment, we will show that 10% return is not impossible, but it is also true that a contribution of $1000 per year would not seem tragic, compared with the present cost of health insurance (now averaging over $6000 a year). I have unrelated doubts about the current $325,000 estimate of average lifetime health costs, but that is what is commonly stated. For the moment, consider these numbers as providing a ballpark worksheet for multi-year funding, using an example familiar to everyone, but not necessarily easy to understand after one quick reading.

The Cost of Pre-funding Medicare. Rates of 10% compound income return would reduce the required contribution to $100 per year from age 25 to 65, but if the income were only 2% would require $700 contributed per year, and at 5% would require $300 per year. Remember, we are here only talking of funding Medicare, as a tangible national example, Obviously, a higher return would provide affordability to many more people than lesser returns. Let's take the issues separately, but don't take these preliminary numbers too literally. They are mainly intended to alert the reader to the enormous power of compound interest. Let's go forward with some equally amazing investment discoveries which are more recent, and vindicated less by logic than empirical results.

How Do You Withdraw Money From Lifetime Health Insurance?

Four ways should be mentioned: Debit cards for outpatient care, Diagnosis pre-payment for hospital care, Transfers from escrow, and Gifts for specified purposes. The comments which follow apply to regular, old, single-year HSAs. The multi-year variety has more similarity to insurance than to retail banking, and probably would favor the "cash balance" approach used to withdraw money from whole-life insurance. In the long run, that would probably lead to lower costs, but actual retail experience does produce a different culture.

Special Debit Cards, from the Health Savings Account, for Outpatient care and Insurance Deductibles. Bank debit cards are cheaper than Credit cards, because unpaid credit card payments are a loan, whereas the money is already in the bank for a debit card. It could be argued credit cards are a little safer than debit cards, because "possession is nine points of the law". Sometimes pressure has to be applied to banks or they won't accept debit cards with small balances. Somehow, the banks must be made to see that you start with a small account and only later build up to a big one. So it's probably fair, for them to insist on some proof you will remain with them. The easiest way to handle this issue is to make the first deposit of $3300, the maximum you are allowed to deposit in one year. Even better would be a family account with a $6000 deductible, which probably gets to the $10,000 threshold in less than two years. That's difficult for little children and poor people, however, so some way ought to be devised to have family accounts for children. At the moment, you just have to shop around, that's all. Unfortunately, the tendency of banks to merge into bigger entities headquartered in another city, leads to powerlessness at the local level.

After negotiating that hurdle, you should pay your medical outpatient bills with the debit card, although we advise paying out of some other account when you can, so the balance can more quickly build up to a level where the bank allows more latitude. Remember this: the only practical difference between a Health Savings Account and an ordinary IRA, is that medical expenses are tax-exempted, when paid with money proven to come from an HSA. Both debit and credit cards are tax-sheltered for deposits, and both (in normal economic times) internally generate income, un-taxed. If you can scrape together $6000, you are completely covered from Obamacare deductibles, and since co-payment plans are to be avoided, an HSA with Catastrophic Bronze plan is your present best bet. If you have a bronze plan, you probably get some money back if you file a claim form, but those rules are still in flux at this writing. The expense of filing and collecting claims forms is one of the reasons the Bronze plan is more expensive, but that's their rule. The bronze plan is thus easier to get, but harder and more expensive to use, and carries a political risk of changing rules with political motives. Another curiosity is that big banks tend to be more customer-friendly than small ones, although that may well be temporary. The tendency of traditional HSAs would be to act like banks: checking accounts with reinsurance in the background for emergencies. The multi-year approach would probably behave like insurance with occasional withdrawal privileges, very likely treating cash withdrawals as a nuisance which increases costs. Their experience is with "cash balances" which are somewhat smaller than true balances, and a preference for big-ticket hospital payments.

There are some other important things to say about outpatient vs. inpatient care, but first it seems best to describe how inpatient care is envisioned to work in this system, before returning to the tension between one-year and multi-year approaches. Increasing ease of use might create the problem of making it a little too easy to spend money foolishly.

Payment by Diagnosis Bundles, for Inpatient care. In 1983 a law was included as a largely unnoticed section of the annual Budget Reconciliation Act, which nevertheless later proved to have a huge effect on the hospital financing arrangement. The proposal was to stop paying for Medicare inpatients on the basis of a bill for itemized services, but rather to pay lump sum based on each patient's elaborated diagnosis. The argument was accepted that most cases of a given diagnosis were pretty much the same, so small variations soon average out. Such a casual approach to complexity was justified by arguing any patient sick enough to be in a hospital bed, was too overwhelmed by his frightening situation to dispute what was done to him. Market mechanisms, in short, were futile is situations with such imbalances of power. Consequently, why waste money on accounting systems to arrive at prices which were actually arbitrary.

This overly simple argument prevailed in a Congress desperate about relentless cost increases. Misgivings that the hospital accounting system was a large part of its administrative information system, were brushed aside. To the extent such objections were valid, they could be addressed later. In retrospect, it can be seen the administrative and medical parts of a hospital act largely independently of each other, communicating through prices as a sort of abbreviated language. The administrative mission of bottom-line efficiency thus became even more insulated from those who saw patient satisfaction as far more important. In fact, the unresisted expedient emerged, for prices of the DRG ( diagnosis "related" groupings) to migrate toward a 2% profit margin on the bottom line, no matter how delicate the medical issues happened to be. You might suppose anyone could see a 2% profit margin was unsustainable during a 2% inflation, but normal hospital behavior is to seek uncomplaining work-arounds.

The hospitals might have rebelled, or might have collapsed. Instead, they just accepted 2% for inpatients as additional administrative nonsense, and set about adjusting the cost-accounting to aim for 15% profit margin on the Emergency Room, and 30% profit on outpatient services. Cost shifting of established cost accounting was difficult to achieve at first, so Emergency rooms were enlarged, and much expanded outpatient facilities were built, requiring hospitals to purchase physician practices to keep them filled. The entire healthcare system was put under strain, and hardball became the game of the day. New lifesaving drugs were priced at $1000 per pill, less expensive institutions were merged out of existence, the office practice of medicine was in turmoil, and a year in business school could make someone a millionaire if he could appear calm in the midst of such confusion.

I tell this story to explain why, with great reluctance, I advise the managements of Health Savings Accounts to base their inpatient payment system on some variation of Diagnosis Related Groups. It's a terrible system, designed for other purposes and adopted for hospital billing by Congressmen. It does protect the paying agency from being fleeced, once it gets past negotiated rebalancing of a reduced list of prices, aggregating toward a politically dictated bottom line. It chases everyone else out of attempting to understand it, with the consequence that a handful of people have brought hospitals dangerously close to quick destruction by a sudden change in the rules. Whatever it may call itself, it is a rationing system. And rationing invariably leads to shortages.

Resolving Tension Between The Two Payment Systems. Evidently, some shrewd thinking by some smart people has brought them to the ruthless conclusion that a two-class system of medical care is preferable to the way we were otherwise going. Rich people will have their way if their own health is at stake, and poor people will have their way if they exercise their votes. Both of these conclusions were correct, but they lead to Medieval monks retreating into monasteries. The cure of cancer and a few brain diseases might make monasteries unnecessary, and so would a drastic reduction in health care costs. Huge research budgets and major regimentation are big-government approaches, of willingness to accept some loss of freedom to achieve equality of outcome.

But we can't completely depend on either choice, so the remaining choice is to undermine a lot of recent culture change, by devolving back to leadership on the local level of small states and big cities. This is a small-government approach, willing to accept wider inequalities in order to find the freedom to act. Mostly using the licensing power, competition will reappear if retirement villages and nursing homes are licensed to be hospitals. If not, nurses and pharmacists can be licensed as doctors. Some of this could become pretty brutal, and all of it leads to patchy results. But of its ability to restrain prices temporarily, there can be little doubt.

Escrow Subaccounts within HSA Accounts. Whether anything can restrain reckless spending of "found" money, is quite a different matter, however. It may be that supply and demand will balance, even if it takes generations. There is some satisfaction to be gained from watching reckless teenagers become penny-pinching millenials, but dismal reminders of improvidence will also be found in ninety year-old millionaires marrying teen-aged blondes, further reinforced by watching the blondes run off with stable-boys. The net conclusion is that if certain portions of a Health Savings Account must be set aside for mandatory later expenses, then the money should be set aside within partitions, as an escrow account. Even that will have limits to its effectiveness, as I have noticed when trust-fund babies in my practice worked around the restraints their grandfather's lawyer took care to put in place.

Specified Gifts to be Encouraged. Only limited restraints on spending the client's own money can ever be justified, but certain types of gifts can still be better justified than others. One of them would be the special $6000 escrow fund for deductibles and caps on out-of-pocket spending. Particularly in the early transitional years, the fund's solvency may be threatened by leads and lags, where these escrow funds could save the day. Therefore, if someone accumulates large surpluses in his account by the fortuitous conjunction of events, he should be encouraged to consider donating a $6000 escrow to one of his grandchildren or other impecunious relatives. Quite often, a prudent gift to a grandchild can lighten the burdens of his parents or other members of the family. If they wish, any number of $6000 transfers to the escrow funds of others should be encouraged.

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

No Medicare, no Medicare Premiums. We assume no one wants to pay medical expenses twice, and will therefore want to drop Medicare if investment income is captured in lifetime Health Savings Accounts. Such a change of attitude might take twenty or more years, however. The major sources of revenue for Medicare at the present time fall into three categories: half are drawn from general tax revenues, a quarter come from a 6% payroll deduction among working-age people, and another quarter are premiums from retirees on Medicare. All three payments should disappear in time, but the 50% subsidy may actually block it. Therefore, the benefit available for dropping Medicare would differ in type and amount, related to the age of the individual. Eliminating the payroll deduction for a working age person would still find him paying income taxes in part for the costs of the poor, as it would for retirees with sufficient income.

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

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

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

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

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

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

That outline may not be more accurate, but it displays its assumptions better. Michigan Blue Cross has calculated we calculate lifetime costs and Obamacare costs by starting with lifetime average health costs of $325,000 and subtracting Medicare. Although Medicare is reported by CMS to have average costs of $11,000 a year, for which we prefer to assume a Health Savings Account "present value" cost of $80,000 on the 65th birthday (at a 6.5% interest rate). At the same 6.5% rate, a $3300 annual deposit from age 25 to 65 (the earning years) would total $132,000 of deposits. The striking fact is, however, that Medicare alone could be pre-paid by an escrow of $150 to $350 a year, from age 26 to 65, providing it can generate 8% compounded investment income. The entire staggering cost of Medicare would hardly add any expense, within a lifecare financing system. Preliminary goals for a hypothetical average person are: To accumulate $57, 000 in the Medicare escrow fund by the age of 65, to pay off the 25-year health costs of 2.0 children per couple as a gift to them, and to pay his own relatively modest average healthcare costs from 25-45, somewhat higher costs 45-65. The Medicare goal of $57,000 is what is estimated to be what is required for a single-deposit investment fund (paid on the 65th birthday) to pay the health costs for an average person aged 65-93,(a guessed-at future average longevity), with an estimated compound investment income continuing at 8%, also guessed. Inflation is ignored, assuming revenue and expenses will inflate at the same rate. Our average consumer will have to set aside $150-350 per year from age 25 to 65, and earn 8% compounded, to do it. Different contributions at different interest rates will produce different results. We defend 8% in a later chapter.

Those who disagree with the underlying assumptions should feel free to substitute their own assumptions. The interest rate of 8% is deliberately high, in order to make room for disagreements which are higher. The upper limit of lifetime insurance ($132,000) is set to match the HSA contribution limits of 3300 times 40, becoming hypothetically the upper bound of revenue which can ever be anticipated, and from which $150-350 is escrowed for Medicare replacement. Anticipating two children per couple and full employment from 25 to 65, this revenue effectively covers one full lifetime, from cradle to grave. Childhood illnesses and elderly disabilities notwithstanding, this is all the revenue we allow ourselves in this particular example. Quite frankly, $3000 per year for age 26-65 is the weakest part of the estimation, because it is most dependent on the general state of the economy, the amount of indigent immigrations we permit, and the competition of other worthy goals for the same resources.

Let us assume that an average person can start contributing to an H.S.A. at the age of 25, even though perhaps a quarter of the population at that age are burdened with college debts, etc. and cannot. We are well aware of the Pew Foundation poll that many of those under 30 are still living with their parents, and many others have college debts. The present ceiling of $3300 annual contribution is otherwise taken as the upper boundary of what is possible for the sake of example, and theoretical deficits have to be made up from whatever surplus is created by such maximums. To plunge ahead with the example, our average person sets aside $3300, starting at age 25 toward lifetime health costs. To simplify the example, he does so whether he can afford it or not, and what he can't supply himself is provided by a subsidy or a loan. Since present law prohibits spending from the H.S.A. for health insurance premiums (this should be reconsidered by Congress, by the way), an estimated premium of $300 for his own Catastrophic insurance is taken from the set-aside, and the remainder is placed in the H.S.A., paying an estimated 8% tax-free. Within this he eventually needs to set aside a Dependent Escrow premium (remember, this example covers lifetime expenses, even though everyone has Medicare), which for twenty years (until age 45) is zero for Medicare and available for medical gifts to children. After that, it is exclusively used for Medicare, as explained in later sections.

Health Savings Accounts are tax-exempt, and they can earn tax-free investment income. Except it isn't all it could be. Professor Ibbotson of Yale, the acknowledged expert in the long term results of investment classes, has regularly published data going back nearly a century. In spite of military and economic disasters of the worst sort, investment classes have remained remarkably steady throughout the past century, and presumably will maintain the same relationships for some time to come. John Bogle of Philadelphia has translated that into index funds of investment classes, with negligible administrative costs. (Caution: Many index funds are sold with very high trading costs, typically in hidden charges when money is withdrawn. Be careful of your counterparty, particularly if he specifies the index fund, because he may limit it to one who gives kickbacks to him.) With this warning, there is a reasonably good chance of getting gross returns approaching 10% for investments in index funds of well-known American stocks, even though the typical HSA at present is yielding less. This investment income can grow to the point where it constitutes a fairly large part of the health revenue.


Instead of starting at birth and ending at death, this book reverses the process for finance reasons. For social and political purposes however, that may not be where further expanding the program can make the most difference. Let me explain. During the first two years of life it seems likely excellent care would do the most enduring good. The same can be said of the last two years of life because they contain the highest proportion of mortal illness. But after the first two years, there are many decades before healthcare makes the same difference. The same is true of terminal care in reverse; it's preceded by decades of golf, bridge and television. If we must concentrate expenditures, these four, bookend, years of a lifetime are where to do it most effectively.

There is also a big transition problem in alternative proposals, since voters will be of different ages, and the system must work without gaps. It will take decades to prove any of them have much effect. Concentrate in these four years, however, and changes will be both prompt and wide-spread, a politician's dream. Everybody has already been born, and for a long time to come, everybody will have a piece of his life behind him that he does not want to pay for. The time has passed when Lyndon Johnson could solve the transition problem by simply giving a gift of many years free coverage to most of the new entrants to his system. So, although it will probably spook a number of old folks just to hear the discussion, let's begin with Last Year of Life Coverage, where the data is most accurate. Two years may be a little safer. Next, for political reasons, we would jumpt to First Two Years of Life coverage. If it is planned to have anything permanent, these are the two minimum goals you would start with. In our wildest dreams, after we have cured just about everything, these are the two features which would remain. Both of those apply to 100% of Americans, and in one sense would be basic coverage. Other end-games are possible, like universal heath insurance, or universal good health, or universally top-notch quality care for everybody. But only the year of birth and the year of death are universal, and finite. Only these two would be essential to any other scheme of healthcare reform, and therefore teach us the most. If we had to retrench, these two would be the last to disappear. If any health insurance should be universal, these four years have the strongest medical arguments. Unfortunately right now, they seem to have the least chance of political success. Therefore, it is likely that they will be voluntary and self-pay if they are adopted at all.

Footnote:That isn't quite the case however. Since third party (insurance) payers were placed in the middle of the transaction, and after electronic computers arrived, piles of individual payment data made analysis irresistible. That approach was repeatedly discredited when everyone with a computer found out that increasing the volume of useless data never improves its lack of relevance. The watchword of the 1960s became GIGO, garbage in, garbage out. Expanding the dataset with large volumes of medical data is nevertheless a dream lingering on, eventually running up against a new stone wall. It makes no economic sense to shift the clerical data-entry burden to a physician, the most expensive employee in the system. Although the Affordable Care Act mandates something close to that, it is safely predicted we will restrain the impulse when cost is fully appreciated. Meanwhile, the utility of just applying more reasoning to aggregate data, opened up the vista of a reversed health insurance system. In a sense, this book is a product of that line of thinking; more pieces of data contribute very little, but a new concept changes everything. Unfortunately, although a radical idea can be developed in six months, it may take decades to prove it had the predicted effect.

What Is Our Final Goal?

The reader will have encountered much talk about interest rates in this book, but there are really two interest rates, public sector and private sector. Our economy is balanced on the steadiness of definitions. The definition of medical care has been steadily eroded by including new features, to the point where there is even an effort to re-name it "health care". Obviously, it is impossible to plan for paying the cost of something whose definition changes. Similarly, changing the definition of private sector and public sector befuddles the discussion at one peculiar point. It is commonly said deflation is a spiral condition which is almost impossible to rescue. Why should that be? Are these unrelated issues, or is there a common theme?

Lord Maynard Keynes invented the discipline of macroeconomics, and eventually invented the idea of curing private-sector recessions by transferring funds from the public sector to the private one. Sometimes that works, and sometimes it doesn't. Even Keynes admitted there was a limit to what public-private transfers could do, a condition called deflation. Since public sector debt is entirely in fixed income securities of up to thirty years duration, it is difficult to reduce public debt. Therefore, when private-sector prices fall in a recession, they must not fall below the point where even more money shifts out of the private sector into the public sector, where higher interest rates are to be found, and a deflationary spiral begins.

Two more things. As interest rates go up, the value of bonds go down; that's simple enough, but easy to forget. And the approaching danger of deflation is found in the ratio of GDP (Gross domestic product) to the national debt. By definition, recession is threatened when GDP goes down, or at least fails to go up. It must be qualified, however, by the size of the public sector to be used to rescue it, inversely represented by the size of the national debt. A few lucky countries have a small ratio of debt to DGP, perhaps 20%, while the dangerously unstable nations of southern Europe are running over 200%. The US ratio is now about 100%, roughly stating the public and private sectors to be about equal in size. But the point I am trying to make is that transferring large amounts of the health care industry to the public sector is invisibly reducing the borrowing power of the public sector, hence it is reducing the future power of the Federal Government to moderate a recession. At some unspecified point between 20% and 250%, nobody will lend more money to your public sector. Or if they will lend, they will demand a higher interest rate, which will reduce the value of existing government bonds. You have started a spiral, from which even Lord Keynes cannot rescue you.

The reader will thus perceive that privatization of health care, whether Medicare, Medicaid, or subsidized private programs, diminishes the ratio of national debt to GDP and reduces the danger of deflation. Paradoxically, it thereby probably increases the ability of the Federal government to borrow for other purposes.

Buying Out Your Medicare?

The public is vaguely aware there is a problem with Medicare indebtedness, but for the most part this issue is swept aside, for fear agitation might injure the chances of funding healthcare for those of working age. The size of this debt is not well known, but can be guessed at by realizing Medicare costs are 50% borrowed. The current CMS data show a line for contributions from the general fund, equalling 50% of the total. Because cost accounting for government accounts has its special features, inter-agency transfers are referred to as assets. It's a debt, all right, and a large part of it is owed to the Chinese. For whatever reason, Treasury debt is entirely "general obligation", so it is not usually possible to tell from Treasury debt, how much is assigned to particular debts. They would have to be totalled from Medicare annual reports, which are not generally available for much of the past. So we don't -- right now -- know how much we owe foreigners for Medicare debts; but it is considerable, very likely going back to the days when deficits began to appear. That gives me a choice: I can keep quiet about the subject, or I can conjecture. I choose to conjecture.

Some, maybe all, of the transfer from general taxes in the latest year to Medicare, was borrowed. Medicare started in 1965, but during the early years the receipts from payroll deductions were larger than the expenses of the Medicare program. But when the program was fully underway, it ran a deficit. For how many years, and for what amounts, is only a guess. But I assume guessing the debt to be equal to a full year of Medicare expense, is large enough to make the point I wish to make, but may well be larger. For present purposes, let us assume the existing debt is equal to a full year's cost of Medicare, which we do know is 549.1 billion dollars. This guess is selected for illustration because it is large enough to cause alarm, but is probably on the small side. I hope it will provoke some official figure to be released, and sincerely hope my own proves to be too large..

Because, if it proves close to the guess, it presents a future problem for paying off the debt, which would actually be worse than the healthcare cost now under such heavy debate. The past indebtedness is currently not under debate, and is still getting worse. The public, including my colleagues in the medical profession, often point to Medicare with admiration. Since everybody likes a dollar for fifty cents, that's perfectly natural. And so it is also perfectly natural for elected officials to treat the matter of replacing Medicare as if it were the "third rail of politics." Just touch it and you'll be dead. That's also fair play, until it is proposed the whole medical system of the country be covered with a "Single Payer System", which is a fancy way of proposing everything should be funded like Medicare; and that's just too much.

So I propose, discomfiting friend and foe alike, that we buy our way out of this problem by allowing the public to buy its way out of Medicare. One by one, as they approach the 65th birthday, they should have the opportunity to relinquish Medicare, by depositing $80,000 in a Health Savings Account. Assuming 10% compound income return (see Chapter Four), $40,000 should generate $433,000 by the age of 91, which I assume to be the average longevity in a few years. By taking a guess at the size of the debt, the remaining $40,000 would throw off an additional $433,000 for paying it off. With 25 million Medicare recipients paying that much, let's hope it is more than adequate right now, although it will clearly become inadequate if we delay. These numbers ought to seem like a bargain to the public, and they certainly would seem like a bargain to the government. If there is any other proposal for managing this debt, we have yet to hear it. That's probably because of "third rail" concern, but unfortunately it may also reflect there is no other solution to talk about.

Issues and Problems In the first place, $40,000 at 10% will only yield $202,000 by age 83, the present average longevity. It will slowly grow, as will the medical expenses from 83 to 91. The debt is already too conjectural to justify more precision, but a decade or so is not unusual for oriental negotiations. Sooner or later, we must expect this progressive longevity to flatten out, and make the problem harder to solve.

In the second place for a long time to come, people arriving at their 65th birthday will have a history of payroll deductions when they were young. This will eventually dwindle down, but it begins as a quarter of Medicare costs, and must be returned as part of the buy-out. Meanwhile, persons older than 65 will have fulfilled their payroll deduction, and are paying annual premiums, which also equal a quarter of Medicare costs. This seems to be approximately prorated, so only the payroll deduction is owed these people during the transition.

And to go on, there will surely be medical developments. Some of them may raise costs, some lower them, and all of them summarized by a hoped-for cure for cancer, which may raise costs or lower them, more likely raising them before eliminating them. Once the discovery is made and announced, its price will be known, and appropriate adjustments demanded. For this and a host of similar issues, only a scientific body with the power to adjust prices can be expected to make the appropriate response with mid-course corrections. Given the present affection of the public for subsidized Medicare, it appears likely, voluntary buy-outs will be a slow and protracted process. They should provide ample time for basing reasonable adjustments to what would be mainly favorable developments.

Pit Stop #2: What Are the Foreseeable Consequences?

We have now traversed the outline of the Health Savings Account proposal to finance the growing burden of its cost. It can be viewed as a transfer mechanism to shift a great deal of money from the savings of the population, into the common stock of its major businesses, generating a great deal of wealth in the process intended to pay for payment shortfalls which would otherwise disrupt the economy. Eventually, this growing shortfall would otherwise become so large it would curtail the medical progress we wish to expand.The direct losers in this disruption would be the financial industry, and probably the insurance industry, but the ripples would spread far and wide. The following discussions center on features familiar to the author, more than they do on issues better known to others. In time, experts in related fields are invited to participate, because predicting the future is always fraught with uncertainty.

The groups to be discussed as primarily affected are:

The Recipients of Care: CHAPTER SIX

The Providers of Care: CHAPTER SEVEN

The Financial Services Industry: CHAPTER EIGHT

International Finance : CHAPTER NINE


The Education Industry: CHAPTER ELEVEN

Recipients of Care: CHAPTER SIX

Under the HSA plan, subscribers between age 26 and 65 are in the age group most likely to be employed, and so the original act provides a maximum annual contribution of $3300. A maximum was probably thought necessary to prevent gaming and arbitrage between taxable and non-taxable income, and it has proved ample for most HSAs of the regular, annual, kind. Now that enrollments have been frozen at the age of 30, this limit probably is adequate for the moment, although it generates a need for catch-up contributions to equal the amount that more affluent subscribers were able to contribute. Looking forward to a hoped-for relaxation of the age 30 limit, another catch-up will probably be necessary, possibly included under a provision allowing cumulative amounts to be deposited, to replace year-by-year limits. Otherwise, the $3300 limit is probably not burdensome, since it would stretch the abilities of young subscribers to meet other expenses characteristic of their age group.It's quite a bargain, however, potentially offering $325,000 worth of healthcare for $132,000.

Whether or not this offer is greeted with gratitude or with jeers, it will surely stretch the budgets of many young families. Perhaps the age group should be segregated into two or three groups to meet the resources more realistically, but the invincible facts of compound interest are that the younger you are when you contribute, the cheaper the package becomes.

Looking beyond the paycheck, this $132,000 includes the likliehood that the Medicare payroll deduction might be forgiven. It is hard to know how this age bracket would respond to the offer of buying out Medicare for $80,000, or even $40,000 if the decision is made to pay off the existing Medicare debts in some other way.For some people, $40,000 is the price of a mid-sized car, but for others it would seem an insurmountable goal. However, attitudes may well change. As this generation approaches age 65, the difficulties of accumulating enough money for a thirty-year retirement will surely be more apparent, and $40,000 will seem less formidable.

The other side of it will appear when interest rates return to normal. At the moment, $40,000 in index funds compares very favorably with the 1 or 2% available in a savings account. Much will also depend on whether the tax exemption for employer-paid health insurance is continued. At present, health insurance provided by an employer appears to be free. That appearance will fade as the pay packet adjusts upward to compensate, but the employee will probably have to fight for it, and harbor some resentment that something has been taken away.

Removing the tax advantage. At the moment, I have two suggestions for making this transition easier. The first would be to extend the tax preference to self-employed and unemployed persons. Following that, lower the tax preference for everyone by at least 25%. That would be approximately revenue-neutral.

The other suggestion is bolder, but more advantageous. That is, to leave the Henry Kaiser tax exemption on the books, but lower the corporate income tax. It's double-taxation to begin with, and the employer would enjoy no tax benefit if he became tax-free. Unfortunately, the experience of Ireland was that lowering the tax too abruptly caused foreign companies to move in Ireland, and the disruption to Ireland was extreme.The Irish experience is a vivid example of the need for monitoring these changes closely, and making quick mid-course adjustments. International agreements with trading partners would also be helpful. It must be remembered that corporate donation of health insurance is a major financial support to healthcare, the tax abatement representing almost half of corporate revenue, and almost an equal amount from the employee taxes. It is something of a puzzle to know whether the double taxation of corporations does or does not double the support of business to healthcare costs. The other side of it is the apparent free lunch comes close to doubling the cost of healthcare through using the insurance mechanism to make it appear free. It is very hard to escape the suspicion that this tax preference puzzle can explain most of our cost escalation, compared with other developed nations.

Providers of Care: CHAPTER SEVEN

Since it's pretty clear the widespread use of health insurance has led to increased healthcare prices, it follows that curtailing insurance will lead to lower prices. Let's repeat that: Health Savings Accounts will lower healthcare prices. In the case of physician fees, downward pressure on prices might be somewhat lessened by whatever price resistance had been successful since the administration of Lyndon Johnson. But at least the medical profession has a long and formal history as a fiduciary, and both the voluntary hospitals and the retail pharmacists have a similar tradition of placing the interests of the patient ahead of their own. Local corner drugstores have essentially disappeared since the chain stores put in an appearance, however, and it's a bad omen for any others with some history of fiduciary behavior. On the other hand, more recent entrants to the third-party world, like nursing homes, therapists, and vendors of medical supplies, have little tradition of charitable behavior. They can expect a purely commercial response to reduction of insurance, which the more benevolent professions will feel is justified, even to the extent of seeing the others disappear, just as the other professions resisted their inclusion in insurance, in the first place. Most of this infighting will take place far below the surface of the water, and the public may be spared much insight into why the acupuncturist survives or even prospers, while the occupational therapist may not.

The hospitals and the doctors will probably have an interesting time together. We have earlier described how DRG suppressed hospital inpatient prices, leading hospitals to emphasize emergency room and outpatient services with some pretty fancy pricing. What's more, to fill up these outpatient areas, an epidemic of purchasing physician practices has been encouraged, not merely by the hospitals, but by the administrative rules of the insurance companies. This trend has been most pronounced in rural areas, and rural areas will probably lead the response when the rules change. A rather alarming town-gown schism has made its appearance, with group practices and university hospitals directly attacking the ability of office physicians to select the hospital or group practice which suits them best. When more control of referrals inevitably reverts to unsalaried and unaffiliated physicians, some of the retaliations may be rather unseemly.

In the long run, it is the patients who will decide the bulk of these little quarrels, and the ultimate loyalty of the patients has not been especially cultivated by the teaching hospitals. In England, the loyalty of patients to the Health Service has been surprising even to the politicians, whereas the physicians have been less than thrilled. In Canada, however, the loyalty of physicians to the system of fee-less practice has been at least as strong as their irritation at its regimentations. That is, the position of Canada is strangely reminiscent of its position in the Revolutionary War, midway between the Mother Country and its rebellious colonies. Whether or not this reflects the same sociological causes, must be left to historians to reflect upon. To the South of us, the same persistence of cultures can be found, but with the prosperous classes demonstrating their understanding of the power of money, and the poor classes affiliating with the position of give-aways in class warfare. In all of these local examples, there is a strange tendency for personal self-interest to have less influence than economists typically would suppose.

It is hard for most people to remember the dilapidated, run-down conditions of American hospitals in 1945. This is usually blamed on the Great Depression or the two great World Wars. But a glance at public buildings of the various eras, or public transportation in the same economic cycles, brings up a different possibility. Perhaps neglect of the public sector is the default position of democratic societies, only breaking free of it, during periodic episodes of prosperity. Or, conversely, perhaps the default position in everybody's mind, is the condition he noticed in his own childhood.


Retirees are the main readers of newspapers and periodicals, so it is not surprising to find the media full of stories about the retired elderly. What seems underestimated in all this discussion, is the plain fact that civilization has never experienced such an expansion of more or less healthy longevity, ever or anywhere. We dare not rely on tradition or our own experience, because there is none. Whatever will old folks do without Medicare? Or, when the money runs out, without Social Security, defined benefits pensions, nursing homes or retirement villages (CCRC). Are ya gonna need me, are ya gonna feed me, when I'm a hundred twenty?

The point to quoting the Beatles song of the sixties, is their punch line of "sixty-five" has become "hundred-twenty" in less than a generation. For a while, President Bush thought the depletion of Social Security would be the first snowflake in a blizzard, but now we have forgotten that particular misjudgment, and find that paying for Medicare is going to seem a problem, first. The problem is not one or the other, the problem is longevity. The impossible dream has become very possible, and we don't know what to do with it.

It seems to me, one thing is very clear: we cannot expect to work for forty years but live an additional fifty years being supported. It is childish to suppose someone else (the millionaires and billionaires, our parents and grandparents, or the taxpayers) will support us for 20% longer than we support others, or that on average we can do it for ourselves. Earning interest on savings will help the present problem, and I have here contributed some suggestions about it. But in the long run, the long run will win. So if there is any solution possible for this longevity problem, it must lie in most people remaining gainfully employed, at least ten years longer than we now think is reasonable.

Any further extensions of longevity will have to be paid for by working still longer. In the meantime, we must save and invest more wisely, at whatever cost to the retail financial industry. I have scarcely ever met a stock broker I didn't like, and it pains me to ask the retail brokers to do what the medical profession is committed to doing: do our job so well, we put ourselves out of business. The financiers stand astride the information pool, from which a solution to this problem would be expected to arise, and they resist the idea they are fiduciaries. That's got to stop, not because an occasional account is being churned, but because they are the logical people to devise a solution to society's current big problem. Ordinarily, you wouldn't expect doctors to solve a financial problem, you would expect financiers to do it. Maybe college professors of economics would stop crabbing so much, and help with the theoretical problems of finance; but generally speaking one would expect the solution to financial problems to arise from the financial community. Where are the customers' yachts?

The problems financiers need to help us with, are not so much the sharing of profits generated by efficiency, either. Looking further ahead, it worries me to have so large a proportion of common voting stock in the hands of people who, although the owners all right, are not in the least interested in voting their stock. As the proportion of voting stock shrinks in the hands of those who know something about the company they own, the welfare of the company is not necessarily improved. The way family-controlled corporations outperform public-controlled ones by 15-25% is maybe a signal we are making things worse. And furthermore, if essentially unlimited amounts of money pour into the stock market, the value of money is lessened, the value of stock is temporarily increased, and we suddenly wake up to realize by going off the gold standard we have not replaced it with anything else. The resulting temptation to print bitcoins or paper without value, seems ominous. What is proposed we do about it, if Argentina or similar public servants somewhere else, start printing money? I am not comfortable letting Mr. Putin decide such questions, but if he tries it, what are our plans?

Beware the Middle-man: Common Stock Index Fund Earnings are Not the Same as Investor Returns.

There's quite a lot to passive investing, if you mean running an Index fund. The rewards of this hired complexity can nevertheless be lost by carelessness in choosing an expensive middle-man. Or even by having a reliable agent who works for an organization, remorselessly devoted to its own income maximization -- in the middle. Or having a small reliable agency bought out by a corporate raider with entirely different goals from the ones you thought you selected. But if your long-term common stock index results approach 10% total return, at least you have passed the first test. As my mother repeatedly told her granddaughters: Don't marry the first man who asks you.

Asset Allocation Managing the funds of a Health Savings Account has important similarity to managing a pension or endowment fund. An important distinction: healthcare imposes random cash requirements on an HSA, compared with the steady, predictable cash requirements of an endowment fund. After the Health Savings Account has matured to a steady state, its fund balance becomes predictable, just as cash balances in a big bank eventually do. Nevertheless, the HSA is probably destined to require larger cash reserves while maturing, and a second period of volatility after age fifty, when more serious illnesses get more frequent. On top of that, when a securities crash comes along, it may take as long as two years for the market average to stop falling, and as long as three years to recover. That's by contrast with normal ripples in the markets, where 90% of important gains or losses are made in 10% of time periods. The rest of the time the market dawdles.

If most "dips" are followed by recoveries, why not just wait it out? Here, almost all organizations have the same problem of "meeting the payroll". The uproar of being late with a payroll must be experienced to be believed. While most employees will quietly accept a short, reasonable delay, the few who are stretched by a brief interruption for any reason, can be very vocal. The financial management of any fund faces the same issue, and is very reluctant to repeat it. All of them face the possibility of some sudden decline in the value of the portfolio, when at first it would be general opinion it is wiser to avoid selling from the portfolio and wait for a quick recovery. Reserve portfolios are set aside for sudden cash requirements, of course, but human nature induces most people to wait and hope for better times. In more tangible terms, it is generally the business of the investment manager to cope with a lot of small waves, but only the Board of Directors can decide to liquidate the whole reserve. In for-profit situations, there is also a question of paying taxes.

Conventional advice is to maintain a portfolio of 60% stocks, 40% bonds, with the cash flow from the bonds intended to bridge the gaps. Since bonds pay less than stocks, overall portfolio yield is lowered. If interest rates are unusually low, it may be the bond component which is itself the risk, but at least in theory, mixed assets "balance the risk." As a consequence, an 8% steady yield from an endowment or pension fund is the best performance many professionals expect, with most funds even happy to achieve 7.5%. But happiness is relative. We have just demonstrated the first step in how a 10% total return can turn into 4%. You're already down to 7.5%.

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 an 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, totalling 8%, only 5% of which is actually spendable. If we create special escrow funds for buying out Medicare, or passing to our grandchildren -- 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, bigdata monitoring is facilitated. Other government access should be minimized.

The Big Picture

The main purpose of fitting a small picture of health financing reform, into a big picture of health financing, or even into a bigger picture of national financing -- is to help judge whether the proposed reform is even remotely feasible. In constructing this assessment, our first task is to see whether healthcare as we project it can be self-sustaining. If not, we would have to look around for something else to subsidize it, because healthcare is not going to go away. We would have to shrink its ambitions, or else shrink the ambitions of something else, like abolishing the rich in order to subsidize the poor. Therefore, balancing the books in this context, means showing how the health system can become self-sustaining.

Revenue Let's start with available revenue, which must ultimately come from people of working age. That is to ask, how much can people from age 26 to 65 afford to devote to healthcare? Their children are too young to contribute, and after they retire, the retirees are living on what they accumulated while they were wqrking. Everybody hopes to save a little more than that, but what they have is probably best put in the category of retirement costs. Other derivative savings categories, like corporate income and government subsidies, either come directly from working people as taxes, or indirectly from organized charities, inheritances, and savings. Since 1965, aggregate foreign transfers have all been negative.

Painless Augmentation of Revenue. All budgets seem to start this way. Everybody's appetite seems bigger than his wallet. But few budget discussions begin with the proposal that we perpetually find new sources of revenue for two-thirds of projected expenses. That is, most organizations assume you have to borrow in order to meet your goals. Eventually, you find new sources of revenue, or else the debt service grows to a point it destroys the vision thing.

Substitute Investment for Debt. We presently regard the diverging curves of revenue and expense as a tragedy, when they could be turned around as good luck. The pay as you go system allowed employer-based health insurance to forget about the early costs of people who had not pre-paid them. In a sense, pay-go borrowed its capital costs, and never expects to repay them. It may have assumed later generations would pay off the debts, but the later generations just continued the minuet, and let it grow. Like all insurance companies, it rejoiced in the gift of protracted payment periods, growing out of unexpectedly extended longevity.

There's a tipping point in such developments: if the interest you earn on savings is greater than the interest paid to your creditors, your debt burden shrinks; if it's the reverse, you probably go broke. In the favorable case, the more longevity keeps extending, the cheaper it becomes to extend the debt. The health industry has permitted the insurance and finance industries to enjoy this windfall. It's time for the Health Industry to take possession of what it created, but you need not expect the insurance and finance industries to cooperate gracefully. As John Bogle so annoyingly pointed out, the finance industry has absorbed 85% of the income from investments. The insurance industry is allowed to charge 10% to collect healthcare bills. And big business finances the transfers by paying half of its inflated tax liability in taxes, while denying the same advantage to its foreign and small-business competitors. No one expects these three giant industries to roll over on command, but government can be pressured to stay out of the road while the healthcare industry switches from being a debtor to being a creditor, hence avoiding bankruptcy in order to be rewarded for extending everyone's lifespan by thirty years. In short, by switching from pay/go to Health Savings Accounts. From debt-pay to pre-pay.

Substitute Independent Multi-year for Employer-based One-year Term Insurance. Since both the Clinton and the Obama health reform teams had extensive contact with business interests, there is little doubt they were well aware of two flaws in the employer system. It is not portable, leading to the campaign agitation about "job-lock"(Clinton), and it does not roll over from year to year, resulting in furor about pre-existing conditions(Obama). These are both manefestations of employer control, inherently consequences of employment mobility. It is unclear what combination of pressures impelled both administrations and their political associates to avoid the ERISA solution of shifting employer control to an independent insurance company, funded by employers. Perhaps it was fear of union domination of ERISA plans, perhaps it reflected resistance from non-profit insurance, perhaps something else. In any event, this resistance stands in the road of the many advantages of multi-year coverage, perhaps forcing attention to inferior solutions less directly distasteful to employers.

In any event, the lifetime cost of whole-life insurance is roughly a quarter of the cost for equivalent coverage in year to year term insurance. Furthermore, the term product is generally less attractive as a revocable product, hence even more expensive than it seems. It is certainly troubling to hear that term insurance would be unprofitable if fewer people dropped their policies. We would defer to insurance experts on the relative merits of different ways to extract cash from them for medical requirements. Using the cash balances is one way, reducing the terminal benefit is another. Nevertheless, the HRA experience is only half of accounts have any yearly withdrawals at all, so perhaps the whole-life approach contributes only half as much as its final balance to paying for healthcare. If it eliminated the need to prohibit pre-existing conditions, it might save even more. Perhaps whole-life and term would have appeal to different age groups, so the ability to transfer should be protected. The need to create an information and research center for healthcare is evident in questions like this.

Where Should the Retail Outlets be Located? Health Savings Accounts can be regarded as insurance plans with a banking front end, or else regarded as Savings accounts with fail-safe insurance attached. Instead of a fight to the finish, it is exciting to envision one plan as part of existing insurance offices, and the other as part of brokerage houses. The resulting competition might quickly surface important advantages to different customer needs. It might also adjust more easily to shifts from inpatient care to outpatient, or different state regulatory postures. Some thought might also be given to facilitating foreign medical tourism.

Zero-sum (Painful) Augmentation of Revenue. For health insurance to cross the tipping point between debtor and net creditor, it must receive a greater return on its investments. The investment community is struggling with a recession and a hostile regulatory climate, and will resist a loss of margin unless it is accompanied by a considerable increase in sales volume. They are entitled to make their case, but are not entitled to make their own facts. The government needs to assure that prices are more widely transparent, and cost-free transferability is easy. Fees for deposits, withdrawals and transfers should be both low and immune to kick-back arrangements. Fiduciary status should be encouraged if not mandatory. Competition in the sunshine should be the goal, so long as investor income is comfortably above the tipping point. Health Savings Accounts already report $22 billion in deposits, while potential volume is a hundred times that much. There is room here for all participants to prosper, and for optimum rules to emerge. Somebody without narrow boundaries should be empowered to watch, to prevent, and to enforce. With some imagination, the Constitutional quarrel between Federal and State regulation could be turned to advantage, not to obstruction.

Balancing the Books. In this summing-up exercise, balanced books imply health industry self-sufficiency. Even if it is decided to unbalance them by, let's say, subsidies to the poor, the size of the subsidy should be measured against the size of the budget, and the size of the populations involved. Somebody or some agency must be charged with doing so, because health financing is very fluid.

As a first step, health savings Accounts at their most optimistic, fall $50-$80 thousand short of stretching $132 thousand into $350 thousand. That's a whole lot better than falling $200 thousand short, which is the present plan. Almost by definition, we don't believe it can be done by raising cash contributions, but it is sure one big step toward it. As data accumulates and the economy clears, we hope the figures will seem more favorable. As medical research progresses, we hope overall costs will go down, but an expensive cure for cancer could blow that hope away.

We might expand the international trade of healthcare, both by sending Americans abroad where labor costs are lower, and by importing foreign nationals for expensive forms of care, at a fee. For a long time, there was a weekly flight between the Netherlands and heart surgery in Texas, to the financial benefit of both countries. We have not made much effort in that direction, since that time. And finally, there has been very little progress in converting the infirmaries of retirement villages into low intensity hospitals, an advance with considerable promise if helicopter transfers were facilitated and telemedicine advanced. Because of hospital zero-sum resistance, this trend would best begin in remote regions, and might even require some pilot studies. Finally, it would help a great deal if the retirement age spontaneously moved several years older. Perhaps to age 75. Beyond that, we are going to have to resort to subsidies and cost-cutting to balance the books. That's not the best solution, but it's all this approach can provide. By the way, that's not exactly peanuts. Try multiplying $100,000 times 340 million to see what an advance we have made on solving an apparently unsolvable problem.

If anyone is still listening, we seem to be forced to start experimenting with lifetime Health Savings Accounts. They have more promise, but less experience to back them up. Very likely, they might produce an additional lifetime $100,000 revenue, but they have one immediately important obstacle. We might very well find they cannot do what we want, unless the nation is willing to surrender Medicare. No one needs to tell me the politicians regard that as political suicide, because almost no one is willing to face the fact we cannot pay for it, to the degree it is itself probably a bigger problem than the rest of the population's healthcare, and almost no one will face it. I won't repeat the mathematics here, but Medicare is 50% government subsidized. Think it over. Even I am forced by public opinion to soft-pedal the facts, hoping other people who have nothing to lose, will start to speak up.

Financial Overview

A More Uniform Healthcare Accounting. Here is how to pay for lifetime healthcare. Consider it's a flat tax, in the sense of everyone of the same age paying the same amount. But it's also progressive, in the sense that average amounts vary at different ages. You might say it's a flat tax, more realistically adjusted for age. At least in theory, children borrow from parents, paying back when older. Old folks, by contrast, use up savings they themselves had accumulated while middle-aged. The existing healthcare payment system is not greatly different, except for how Medicare is sourced out.

Thus, the average child and young person in theory ought to borrow from, and repay, his parents. But ordinarily there isn't enough money in his account to allow it. If there isn't enough aggregate money within the whole healthcare system, it must be supplied from tax subsidies. There are no social classes of permanently rich and poor; just people of different ages, so income tax subsidies are add-ons, considered separately. Income tax is not a flat tax, so subsidies derived from it represent richer people paying for poorer ones. To summarize: all new wealth can be traced back to people of working age. They pay for their children, and they save for themselves, for later. Their children may never pay them back, and their savings may not cover the needs of old age. Nevertheless for practical purposes, all wealth is generated between ages 26 and 65, often in differing amounts.

The Medicare Exception. It reduces complexity to view it uniformly, and it immediately unravels Medicare as an outrider. There's a great contrast in Medicare, where we only pay for one quarter of Medicare with payroll deductions in the normal way of saving to pre-pay a coming expense. A second quarter of the cost is paid by elderly subscribers themselves as premiums. But the real problem is generated by paying the remaining half of the cost, in appearance by taxing the working class, but actually by immediately borrowing it from foreigners. If it's ever going to be paid in the future, it adds additional hidden interest cost, so more than half really isn't in full circulation, yet. No wonder it's popular; the public thinks it's getting a dollar's worth of health care for fifty cents.

{top quote}
Tell me what you can spend, and I will predict costs. {bottom quote}
Getting back to our book keeping, we accept the figure in common use, that average lifetime healthcare costs, are roughly $350,000 in current dollars. Somewhat more than half of the amount is Medicare, so somewhat more than a quarter is not fully funded. While we accept the approximation that inflation will affect costs about as much as inflation affects revenue, that equilibrium does not apply to fixed-income debts. Major upheavals, like wars and cures for cancer, just have to be dealt with as they arise. The basic premise of estimating future costs is this: we are going to spend as much as we possibly can on healthcare, and we are going to contribute as much as we possibly can, to pay for it. We adopt the cynical premise that politicians and doctors may force us to spend up to every bit we can, but no one can force us to spend more than we possess. So we can predict costs if we can predict revenue.

For example, if you think a 26 year old can invest more than $3300 a year in his lifetime healthcare, go right ahead and asume more revenue is available for politicians to spend. I happen to think this is at, or beyond the ability of a 26 year old, so anything more than $3300 must come from some other age group, which will naturally resist. Anything borrowed from foreigners makes the whole thing -- non-self sustaining. You will have to elect magicians to make it come true for very long. From age 26 to 65, the system thus acquires $132,000 aggregate per person, but spends $350,000. If that isn't good enough, just spend less, die younger, or rely on the black magic called outside debt. Where does the difference come from? From 8% compound investment return, passively invested in nation-wide index funds. And it won't come easily; you will have to scratch and claw for every penny of it.

Total revenue is $350,000, composed of $132,000 in direct contributions by working-age people, plus $218,000 in that compound investment income. To accomplish it, you must be dealing with agents who will leave you 8% after their administrative overhead and periodic episodes of bad stock markets. Therefore, you must get over any prejudices against investing in common stock, and any dreams of getting rich by plunging in them. By passive investing in index funds of the entire American (or perhaps entire World) economy, you should really expect at least 12.5% return, fairly steadily. As can be seen throughout this summary, we have consistently under-estimated future revenue and overestimated future costs. Making 8% net out of 12.5% gross is not easy.

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$132,000 in contributions, plus $218,000 at 8% compounded. {bottom quote}
Lifetime Revenue
If you get and accept the option to consolidate multi-year management (whole life insurance model) out of more conventional term-insurance models, revenue could be enhanced by internal efficiencies, perhaps to 11 % net, instead of 8%. We'll surely hear from insurance actuaries about it, but this feels like a conservative number, which has room to generate compound income in millions per person. This giant step introduces many new complications, but eventually the enhanced revenue projection would make privatization of Medicare seem almost mandatory; but on the other hand would generate many controversies. My guess is we would adopt parts of it, step by step. The long transition time creates the main concern, however. Stretching so long over several presidential election cycles, consistent planning for a transition from term insurance to a whole-life model, might prove very difficult until the idea has proved itself. That's revenue. Total expenditures are equally difficult to predict, except by the cynical assumption we will spend every cent we get. Therefore, it is vital the public have the ability to capture excess medical funds for retirement costs, at least creating a tension between two contenders for the money -- health, and retirement. This issue repeatedly arises, and makes some reformulation of Medicare a very desirable feature for planners. For instance, working out the calculations for Medicare is now fairly easy, because so many of the figures are actual data. But politicians say Medicare is the third rail of politics; touch it and you're dead. Politicians ought to know. We're not going to touch it, but we must discuss it. Medicare is itself the source of many difficulties, because its costs crowd out competitive costs. That's also why it is political dynamite.

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Expenditures: $200,000 Deposited:$8,400 {bottom quote}
Medicare, Longevity 83
Carving Out Medicare, into Escrow. For the sake of discussion, we must be arbitrary about both Medicare's beginning and ending ages. Arguably, Medicare begins at 65, probably soon will progress to 70, probably ought to begin at 75. On the other hand, many people retire in their fifties, creating resistance to raising the year at all. We're going to call it 65, following our principle of being conservative. Medicare's ending is death, with longevity moving from 83 to 85 relatively soon, and probably leveling out at 93 in ten or so years. Sometimes the conservative guess would be 83, sometimes 93. We're just going to be inconsistent, giving a range between the two projections of longevity. There might be a profit in having longevity increase to 93 and then level off. A cure for cancer, Alzheimer's Disease, or diabetes might turn out to be terribly expensive; but patents do expire, so the long-term cost of drugs is headed downward. In summary, one assumption is that Medicare will cover costs from age 65 to 93, averaging $11,000 per year, or $308,000. A lower assumption begins at age 65 to 83, reaching $198,000. Medicare, by the way, is responsible for 50% of all hospital costs, so that's where the crowding-out is coming from.

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Expenditures: $308,000 Deposited:$6,000 {bottom quote}
Medicare, Longevity 93
Spending What's Left, on Working Folks. If a person makes one lump-sum deposit of between $198,000 and $308,000 at age 65, a pre-existing escrow deposit would have pre-paid it with only $150 to $325 yearly contributions from age 26 to 65. That may seem hard to believe, but that's the math. Going back to the original budget of $3300 (see Chapter One), his HSA between ages 26-65 would then be reduced to deposits of between $3150 and $2975 annually, left over to spend on his current health expenses between 26 and 65. (That's the same $3300, split into a Medicare escrow fund of $150 to $325, plus $3150 to $2975 for current costs.) Looking ahead to age 65 in the escrow fund, much of Medicare's cost would be paid by new income generated from funds transferred to Medicare, and remaining unspent at the time of transfer. In spite of the fuzziness of some of these estimates, it is remarkable they come within $11,000 of the old saying of "Spending your last dime on the last day of your life." This is largely due to the hefty size of the 8% return and the bulk of the money being transferred at age 65. That's before serious expenses become the norm, but after the deposited principle has ceased to be main source of income. As such, they may be somewhat fortuitous, but most of the trends seem favorable. Rounding errors and unpredictable future events can be brushed aside as inevitable consequences of any attempt to predict the future. The real and enduring weakness will lie in depending on average college students to save money, and average stock brokers to give it up. Both the early savings and the continuing high returns of this general proposal will have to be struggled for, no matter how precise the predictions in a book.

Financing Health in Middle Age. So, having between $187,000 and $297,000 to spend, what are the expected health costs for a middle-aged person? They will be quite moderate between age 26 and 55, starting to rise considerably in the last ten years, from 55 to 65. During all of this period, the individual will have to save $3300 per year, and in addition will have to pay for obstetrics and pediatrics out of that. If children had any money, these costs would rightfully be theirs to pay. But children do have one asset to contribute: 26 years of additional compound income. In a theoretical sense, the children need to borrow their own medical costs from their parents. It might be said they should pay this back to their parents directly, but it is the grandparents who will be experiencing the rising medical costs of their fifties. By legally merging children and parents until the children are 26, a choice can be made between encouraging fertility and helping the kids with college costs, or helping the grandparents with unexpected health costs. Ideally, it would be preferable to let the family unit decide such choices, but matrimonial courts are full of examples of family dissension, and quarrels between headstrong adolescents and their neurotic parents. It's only a suggestion, but it seems best to me to let the parents decide until the child is 21, and let the child decide after that. Invisibly, the quirks might have to be adjusted in the parents' wills and estates.

Financing System Shortfalls. There's one final question to answer. What if, for whatever reason, there isn't enough money in the system to pay all the legitimate bills? We can fumble around with eliminating fraud and abuse, but that won't make much difference. The government can be the banker, but someone might well have to be individually responsible. There is no escaping it, extra money will have to come from additional deposit contributions by people with an income. Probably, extra deposits will have to be levied on people 50 to 65, who will be at the top of their lifetime earning capacity, and beginning to experience a greater share of the costs. At that point, it may seem easier to repay the grandchildren costs by repaying the health loans of children to grandparents instead of parents. It could be done quietly by assessing extra deposits on 50-65, while shifting childhood repayments to grandparent accounts. Immediately, a much smaller amount could be deposited in the children accounts, where compound interest for 26 years would multiply it back to where it started.

Let's Do It All, Backwards. Children's healthcare is paid by the parents. In order to capture 26 years of compound interest, we try to unify the legal family until the child is 26. The child owes a debt, to be repaid to parents or grandparents, later. At age 26, the individual starts depositing $3300 yearly into a tax-exempt Health Savings Account, paying back at least 8% on passive investing in American or World-wide index funds of common stock, essentially capturing a diversified share of the entire market. This HSA can pay health expenses, but those who can afford it would be wise to pay their medical bills out of other accounts and save the tax-free feature for bigger sums, later. A high-deductible health insurance policy pays big bills, the HSA can (but need not) pay the high deductible. This is how things go until the individual is 65, except between $150 and $325 is placed into an escrow, which will be used on the 65th birthday to buy out of Medicare. It's possible for the individual to deposit less, perhaps $3075 to $2975, but the alternative is to buy out of Medicare, a much better deal.

That's how it goes until the 65th birthday, when Medicare appears. The working person has already paid for a quarter of Medicare's costs by payroll taxes. He now faces an equal amount as Medicare insurance premiums, as well as double that premium cost in federal subsidies, plus accumulated foreign debts for earlier subsidies. Right now, only the foreigners are worried about repayment of the debt, but somehow or other it has to be paid. The alternative was to have deposited $150 to $325 yearly, but now it will cost you $187,000 to $297,000, so for most people it is too late. Meanwhile, the government has collected a quarter of Medicare's cost in payroll deductions, so it should owe you something for that, too.

Oh, yes. If you happen to have been unusually healthy, you didn't spend much money on health. All of that accumulated money is available to pay for your long, long, retirement.

Healthcare Financing, Up to Medicare Age

We have just estimated the lifetime healthcare cost of people up to age 65 as $128,000. That estimate was largely derived from guessing the limit of what people could afford for a lifetime of healthcare ($325,000), and observing you can't spend more than you have, indefinitely. From the total was subtracted the present known cost of Medicare, leaving the younger people with a healthcare budget of $128,000 from birth to 65.We then calculate how much compound income could be derived from $128,000 at 8%, recognizing it would arrive in yearly limits of the Health Savings Account Law of $3300 per year, from age 26 to 65. We calculate under two assumptions, with and without privatizing Medicare, and in two other assumptions, average life expectancy of 83 (the present figure) and life expectancy of 93 (the projected life expectancy). Curiously, the longer life expectancy has a lower projected cost, probably because it does not include the treatment costs of whatever lengthens life expectancy by ten years. But it does include the extra revenue from the lengthened period of compound interest on reserves.

It is most unfortunately true that present law prohibits paying for high-deductible insurance which is mandated to accompany a Health Savings Account. By striking a single sentence of the law, the injustice of unequal tax deductability for employer-paid insurance would disappear, but for the moment this feature must simply be accepted. First, let's define it. A high deductible could be as little as $1250 per year, or as high as $6000 for family plans. Its top limit, however, is simpler. It need not be higher than $10,900, the average cost of Medicare, since average young people will almost always cost less than the elderly. Furthermore, let's state the great virtue of high-deductibles: the higher the deductible, the lower the premium. As a consequence, the sellers of high-deductible Catastrophic healthcare insurance are very reluctant to advertise or even quote over the telephone, what their typical annual premium would cost, particularly when pre-existing condition riders are forbidden. This last feature creates an incentive to search for group memberships, higher premiums, younger clients, higher deductibles and lower ceilings. A longer waiting period for insurance to take effect might be a partial solution. As would rebates for longer subscriptions without claims. Obamacare has withdrawn its pure Catastrophic coverage in favor of paying subsidies for higher premiums to fairly high income groups. Increasingly, it is difficult to obtain this type of coverage without either being in a group or having a personal interview. With a change of party control in Congess, this would be a very good time to hold hearings on the problem. In the meantime, for discussion purposes, we use the hypothetical limits of $5000 deductible with an $11,000 maximum limit, for a premium of $1000 annual premium. Probably no policy exactly matches this example, but the difficulties could be ironed out by agreed rebates, or guaranteed issue, after 5 years of policy-holding. All of this does increase the administrative costs of what started out to be an ultra-lowcost product.

This approximation would consume $39,000 of a $128,000 budget, allowing $3300 annually to be deposited in the account. With compound income at 8%, this would purchase $xxxx worth of deductibles and outpatient costs over the 39 years of coverage, and including childhood costs. Except for unusual medical circumstances in the first few years, this should suffice. Indeed, after the first five or ten years, the fund would grow to the point where additional savings could be derived from less expensive fail-safe insurance policies, or even smaller deposits into the fund.

That Dratted Third Rail

During the Obamacare uproar, I was giving some speeches, and I can tell you that old folks didn't care a hoot, one way or the other. Obamacare wasn't going to affect their medical care at all, so they had only one passing concern. They were afraid Obamacare would cost so much, it would be necessary to raid Medicare to support the promises. As long as no one brought up that issue, retirees didn't care. But as soon as I tested them on the point, they uncoiled like a spring. Plenty of politicians saw the same phenomenon, and nick-named Medicare insurance reform "the Third Rail of Politics". Just touch it, and you're dead. The mathematics are already so strong, no mathematical argument is going to influence any opinion. Essentially, there's a way to make Medicare almost free, but it doesn't matter. What matters is if politics get ugly, political candidates will say almost anything. Right now, and for some time to come, nobody wants to listen to mathematical arguments. They want to know if a red-mouthed opponent can upset them at the polls, by using reckless attacks. They can, and will, and there isn't much that can be done about it. The consequence is, the easiest argument for using compound interest to pay for health insurance is to privatize Medicare, but it has the most political obstacles to overcome.

Whereas, using the same approach for younger people has difficult math because of the shorter time periods. But it has a much easier time of it politically, because young people often don't have insurance, or need insurance, and so they have very little to lose. Furthermore, the regulations issued for Obamacare were often selected for the purpose of hindering Heath Savings Accounts. Much of the coming battle in Congress will be fought over trenches and fences, seemingly erected for the purpose of making progress difficult. That will be true for more than Health Savings Accounts, but that fact is just another irrelevance.

Here's another unexpected twist which will influence future trends. When Medicare emerged from the sausage factory of legislative construction, the hospital part (Part A) was entirely funded by government subsidy, and therefore is an obvious target for adding revenue, based on the fairness argument. That tends to crowd this heavy expense into the category funded by something else, and makes the pressure stronger. By another quirk of legislation, Medicare is a subchapter of the Social Security Act, which is now starting to need revenue. So the mechanism already exists to merge retirement income with Medicare surplus, if we ever get a Medicare surplus. The doctor reimbursement part of the Act (Part B) is what people nominally pay for when they pay their Medicare premiums. Now, add the DRG squeeze into the mixture.

Seeing hospital revenue for inpatients squeezed by the DRG, the hospitals have responded by enlarging their outpatient areas and hiring practicing doctors to join their staff on (somewhat above-market level) salary. Although hospitals pay the higher salaries, there can be little doubt they would squeeze those inflated salaries if revenue got squeezed. Meanwhile, Medicare is confronted with a mass movement of doctors from Part B to Part A, and so it raises the premiums in extraordinary jumps, which that only affects the premium still more. Unless things are changed, that means there will be less money for Social Security, and the hope of merging the two programs will be greatly injured. Meanwhile, if the hospitals squeeze the salaries, there will be a surge of physician returnees to private practice, ultimately raising Part B premiums, or else lowering physician incomes, leading to a doctor shortage unless reimbursement is raised, and new medical schools founded. Patchwork will be applied. The long-run consequence of single-payer would be to slow the merger of Medicare with Social Security. The latter merger would have some mutual advantages, whereas merging Medicare with private insurance would be an acrimonious take-over of one way of life by the other. What a tangled web we weave.

The Streets of Philadelphia, on Ben Franklin's Birthday

Benjamin Franklin 309th Birthday

They changed the calendar in the Eighteenth Century, so it's always confusing to talk about the birthdays of the Founding Fathers. Benjamin Franklin for example was born on January 6, 1705, but by the time he got around to being famous, he was born on January 17, 1706. Scholars handle this awkwardness by saying he was born on January 17, 1706 [OS, January 6, 1705]. That's not all the problem, however. This year on January 17 he had his 309th birthday, unless you wish to say he had his 310th birthday on January 6. The novelty has long since worn off, and nowadays most birthday celebrants prefer just not to mention the matter. You might think Don Smith would think this is of vital importance, but he cheerfully brushes it off with a chuckle.

BenFranklin Celeabration

Don Smith is the current leader of the Ben Franklin Birthday Celebration, which is held at 9 AM every year, on January 17th [NS], starting at the American Philosophical Society's Franklin Hall on Chestnut Street, once a very substantially-built bank building. The constituent members are affiliated with one of the thirty-odd organizations which Franklin founded, although anyone interested is welcomed. On what usually turns out to be the coldest day of the year, the birthday celebrants gather for hot drinks and cookies, followed by one or two really outstanding lectures about Franklin. Sometimes the lecture's connection to Franklin is a little stretched, but all of them are excellent. At 11 AM, the group marches together to Ben's grave at 5th and Arch for a short ceremony, led by Franklin re-enactors and honest-to-goodness members in the uniform of the National Guard, which Franklin founded. He did so when the Spanish and French ships were bombarding the coast, and as the editor of the town's newspaper, Franklin called for troops to defend us. The Quaker government declined to be violent, so Franklin published an invitation for volunteers to bring their guns and join him. Ten thousand showed up, and Franklin's career in public life was established. He was a hero to everyone -- except Thomas Penn, who saw him as a threat. Much subsequent Colonial history revolves around this episode and its consequences.

After the march, the group settles down for a good lunch, and hears yet another outstanding lecture. This year it was given by Paul R. Levy, the President of a planning organization called the Center City District. Steve's message this year was about how the streets of Center City Philadelphia were constructed for walking, or at most riding horseback. That is, they were narrow. They widened somewhat as they went West and had to accommodate a city of carriages. That was quite good enough through the Gilded Age, when Philadelphia could credibly claim to be the richest city in the world.


But then what happened was not the two World Wars, the stock market crash of 1929, or anything resembling that. What happened in Paul Levy's view, was the automobile. Hundreds, then thousands of autos filled the streets, scattering chickens and children, and eventually making the city impassible. Nothing would do but to move to the suburbs, which among other things provided the thrill of driving too fast and too carelessly, and reducing the pedestrians while increasing the business of accident rooms. There was certainly no room for bicycles, which were driven away without a tear being shed, and defying the efforts of city planners to find a safe place for them. Europe, good old Europe where we came from, was more successful in hounding the imposter autos off the bike paths of Amsterdam and Copenhaven. And preserving intercity high speed train service, at great taxpayer expense. Those Europeans really know how to live, in sidewalk cafes, unaffected by bicycles, preserving a much older collection of narrow city streets leading to empty cathedrals, in Germany, France, and Central Europe. That wasn't the American way, at all. We just pulled up sticks and moved to the suburbs, abandoning the dirty old defeated cities to their ethnic neighborhoods.

It's a novel theory, and maybe even a correct one. It could explain a lot, if Philadelphia is seen as a victim of Detroit, strangling on their mutual industrial excesses.

New blog 2015-02-18 17:49:07

New blog 2015-02-18 17:49:07 contents

"Scores of Centimillionaires"

John Bogle

John Bogle is an investor with an evangelistic twist. He sold over 800,000 copies of his various books about Mutual Funds, donating the royalties to charity. One theme running throughout his writing is that no unmargined investment manager can focus exclusively on equities in his portfolio and expect to have a higher return than the index itself, whether he is an index investor, or is more activist as a portfolio manager. About five or ten percent of managers do beat the index each year, but they are generally managers of small funds, and generally cannot repeat the performance consistently. It's a very useful message, since the conclusion seems to follow that if a manager simply imitates the index, he will surely reduce his research costs, and will therefore almost surely have consistent final results which beat the average competitor. Ultimately, the best results will be found in long-term index funds with the lowest costs. That's a conclusion both logical and borne out by results; no amount of denial can refute the logic of it.

However, it is also possible to take it as a challenge. What approaches might be tested, to see if they can beat it? Mr. Bogle himself admits success might defeat a front-runner, by attracting so many investors the portfolio is forced to limit itself to large-size, when the supply of frisky small stocks gets used up. If the small newcomers out-perform the blue chips, average big-fund performance will suffer by comparison with small boutique funds. Indeed, small-fund indices often display a 2% outperformance, compared with large-cap indices. It would probably be useful to consider closing a large fund to new purchases, when the average size of its investment is forced to contract downward. Since such a reaction benefits the investors but not the managers, the right to close or reopen funds should be transferred to the shareholder investors.

Common Sense on Mutual Funds

New Tools. It is common for mutual funds to limit or forbid short-selling, as well as buying on margin. That's obviously less risky than engaging in such activity, but most investors understand greater returns require greater risk. That seems to be the approach adopted by hedge funds, although the success of it is often shrouded in secrecy for good reason, and has nothing in common with other stockmarket talents like demanding high fees. The main limitation on hedge fund competition comes from the excessive fees (2% annually, regardless of profits, plus 20% of profits themselves, and a five-year lock-in.) In effect, such activities can be simulated by funds controlled by a single university or pension fund. A fund with a large float of incoming deposits can treat the float as a virtual loan, and an organization which needs to mortgage a large construction project can treat the construction loan on the building as a virtual mortgage on the stock portfolio. It might further be argued that other organizations without a stock portfolio are overweighted in fixed assets whenever they take out a mortgage. Closed-end investment trusts seldom leverage overtly, but they usually are sold at a 10-20% discount to net asset value, and thus are effectively leveraged. Warren Buffett, the greatest stockmarket manager in history, owes much of his success to buying an auto insurance company outright, and then using its float from premium deposits as if they were part of his portfolio. He tends to buy entire companies; their dividends disappear. In special circumstances with 1% prevailing interest rates, it can be difficult to make the case that borrowing is too risky for long-term investments; the issue now is liquidity.

And one final warning. When too many people get overleveraged, by whatever method, they generally sense the approaching dangers, but often are restrained from selling by the tax consequences they would experience. But when it looks as though everybody sees the same thing, there may be a rush for the door. It's called a crash. So don't you dare buy on margin. Let me do it, and together we'll blame the speculators.


Common Sense on Mutual Funds: Fully Updated 10th Anniversary Edition: John C. Bogle ISBN: 978-0470138137 Amazon

Lifetime Healthcare, Using Health Savings Accounts (1)

Can it be done? What would it cost? Since no one can predict future healthcare costs, no one knows how to pay for them. Conclusions like that over-state the difficulty. It's fairly easy to predict minimum available revenue, and fairly good cost extrapolations already exist. Payment feasibility can amount to comparing "no more than" with "no less than". With luck, we can judge the relative probability of success among payment proposals. Since that still sounds like a scam, what follows is step-by-step. We apologize to actuaries and mathematicians, who may find simplified explanations tiresome.

Medical Costs. We use someone else's estimate of present costs, and the foreseeable rate of growth. Blue Cross of Michigan, confirmed by federal agencies, estimates the average lifetime cost in America today roughly approximates $350,000 for a male, and about 10% more for females, using year 2000 dollars. An 83 year overall lifespan necessarily includes history, and prediction. The gender difference rests mainly on women's somewhat longer life expectancy, as well as the statistical convention of attributing all obstetrical costs to the mother; it's likely to be a stable ratio. A million dollars for a family of three is pretty daunting. Because there have been so many changes in medical care in the past century, likely to be repeated in the next century as well, $350,000 must be considered a soft number. Most extrapolation errors will arise from it, so an analysis reduces to this question: How close could we come to covering a $350,000 cost, without distorting medical care? To simplify explanation, the cost goal is reckoned in year 2000 dollars, so inflation and other adjustments are taken from revenue, to make them match. Inflation has remained steady at 3% in the past century, so 3% per year is accepted for the future in this analysis. Medical inflation is somewhat different; greater than 3% in the past, recently diminished. Only revenue projections are discussed, with costs taken as a given. It isn't perfect, but it can serve as a base for mid-course corrections, providing a margin for error is adequate.

Revenue, per average person. It is easier to estimate future bulk numbers for the whole nation, than to predict any individual's future cost. Therefore, our approach is to take national costs, divide them by the population, and concentrate final analysis into a hypothetical "average" person. Since the goal is to compare average costs with average revenue, it is important to avoid using revenue as a basis for costs. The temptation is great, however, because of the well-known tendency of costs to rise to the level of available funding. To the extent possible, such behavioral adjustments are reserved for "dynamic scoring."

Other Data Points. Longevity has risen by 30 years in the past century, but is now relatively stable at age 83. Where practical, we have extended calculations to 93, which seems a reasonable guess for where longevity might go in the coming century. How much an average person could or would be likely to accept as a personal expenditure is hard to say, just as it is hard to say how much cost the country would be willing to pay for subsidies to the poor. There is a temptation to use present costs as a surrogate because there is so much uproar about them, but that approach has too much circularity to its logic. After all, the public is complaining. So, whenever practical, we have presented a family of curves which permit the reader to choose between alternatives. The final data point is the maximum achievable interest rate, a matter of enough complexity to require special discussion, which follows after voicing an opinion about the medical future underlying this subject.

The medical side of it. There is fair reason to believe most or all late-developing diseases might originate in the dozen or so complete genes in the mitochondria of cells. These genes are only inherited through the mother, and probably originated in the plant kingdom. So the conquest of our currently most expensive diseases -- diabetes, cancer, Alzheimer's disease, Parkinson's disease, and arteriosclerosis -- during the next century -- is not a totally unreasonable prediction. Furthermore new cure discoveries, 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 payments could become self-sustaining without financial intervention, a century from now. If we generate the means to get to that point, curiously we should give some credit to financiers, like Warren Buffett and John Bogle. If that sounds confusing, read on.

What passive investment income for a Health Savings Account is generally achievable? Essentially, this proposal advocates saving in advance instead of paying after the fact (often called "Pay as you go.") That translates into being paid interest instead of being charged interest. For this, we steer the reader toward investing his savings as much as possible in an HSA (Health Savings Account), rather than an IRA (Individual Retirement Account), or a 401(k) plan, the employer-based equivalent to IRA. There's nothing the matter with these other tax shelters; they are just not as good as an HSA. The only qualified American savings plan to contain a tax shelter on both deposits and withdrawals is the HSA, and even its tax shelter on withdrawals is limited to approved medical expenditures. The Canadian savings plans do have this dual advantage, but in every other qualified American plan it is necessary to reduce either the deposit or the withdrawal by its estimated taxes at different ages. All graphical representations of IRAs and 401(k)s likewise require a mental adjustment for taxes. In amounts this large, taxes make a vital difference. After-tax savings vehicles are necessarily less generous, and are not discussed.

So far, so good. Probably the greatest reluctance this proposal will encounter will come from an almost absolute need to invest the HSA in common stocks, which many people sincerely feel is a form of gambling. But to reflect on history for a moment, it took over a century for Americans to overcome their resistance to banks, which are now found on practically every street corner. Pioneer families were obedient to Shakespeare's, "neither a lender nor a borrower be," which indeed remains pretty good advice in most circumstances. But banks were also the foundation of the Industrial Revolution, and their process could also be called a form of gambling. Modern index funds are a far cry from 19th Century mining and railroad stocks. Their risks, while not totally eliminated have been tamed, so the modern economy really has no savings vehicle quite as safe for those who must live in the real world. At this particular moment in time, almost no stock is as risky as bonds, and in Europe cash in the mattress can lose 50% of its value in a month, responding to central-bank changes in currency rates. True, approximately every thirty years stocks fall almost as much, but modern investment has ways of coping with the "black swan" risk, by somewhat sacrificing some of the investment return. Every company eventually comes to an end in about a century, and the only real safety comes from wide diversification of risks substituting for agility in jumping among them. The current total-market index fund model allows for investment in the whole economy at once, counting on remorseless market pressure to purge the index of failing companies, while constantly adding new ones who are succeeding. Holding several thousand successful stocks at once, is the new definition of safety. Meanwhile, the new definition of success is moderate but relentless growth, from low costs and low taxes.

John C. Bogle of Philadelphia probably did not invent the notion you can't beat the index (he means the stock market averages like Dow Jones, Standard and Poor, Russell, etc.), but he certainly evangelized the idea. Let's explain. When you finally overcome the idea of getting rich by out-performing the stock market, the idea reverses itself. The entire stock market is a proxy for the whole economy, and although some people do get rich faster than the stock market grows, hardly anybody gets appreciably richer than the index in the stock market without using leverage , and leverage is only for gamblers who can disguise the nature of their leverage.

Professor Roger Ibbotson of Yale has compiled extensive data for the previous century, and demonstrates how relentlessly the American equity stock market has grown quite linearly, varying by asset class but largely disregarding stock market crashes, or numerous wars large and small. While small stocks have grown at a rate of 12.7% per year over the past century, safer Blue chip stocks have consistently grown at about 11%. With big computers we can see investors in stocks have only received a return of 8%, which sometimes implies the financial industry is absorbing 3% for its expenses and profits. That may not be a fair comment, since a considerable portion of the 11% must be invested in lower-yielding bonds to protect against periodic black swan disasters like 1929 and 2008; this point is expanded later. Vanguard, Bogle's fund, reduces overhead cost by matching his portfolio to the index and letting it run indefinitely, a process known as passive investing, which at least minimizes taxes and expenses. Perhaps, over time, ways can be found to widen the investor's lifetime return to more than 8%, but for the time being one must be satisfied with 8%, and 11% remains the ultimate goal for the far future. Warren Buffett does better than that by buying whole insurance companies and leveraging with their cash float; that's not exactly possible for other people. To rephrase the whole business, a total-market index fund offers the 8% current safe limit to passive investing, within a bumpy unsafe 11% world. Furthermore, the 8% contains steady 3% inflation, so investors better not count on more than 5% spendable return. A disappointingly low five percent, relatively safe, after-tax and after-inflation, return. What will that achieve toward paying an average lifetime cost of $350,000? Remember, this is compounded , which has a magic of its own.

Table xxx plots how $400 will grow in response to compounding, starting at birth and ending at 83 to 93 years, at 5% to 12% compound investment return. We've already described why 83, 93, and 5% were chosen, but why $400? It's a personal guess, shown at the bottom of a family of curves which go up to 12%, the current maximum. It represents the amount I guess would be privately regarded as within almost everyone's reach, and if lost wouldn't financially cripple them forever. It would admittedly have to come as 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. Also included in this family of curves, are 12% (the limit of growth in the stock market over the past century) and other 1% levels down to 5%, so the effect of taxes, overhead, inflation, and bond protection against stock crashes, can be judged. Note in particular how the curves widen around age 60, exposing the new opportunity created by the 30-year increase in longevity during the past century. The consequence of every improvement in the investment return is multiplied appreciably, after you reach that bend in the curve. In my personal opinion, this growth is both staggeringly large, but disappointingly inadequate to pay for all future health care with enough margin to justify committing the whole country to risking it. It will pay for a big chunk of it, however.

Another central point of the graph however is that a lifetime of investing a relatively small amount -- at reasonably achievable interest rate -- has apparently come within our grasp. In my view, however, we have to do better than this. We have to tweak this basic idea enough to generate more than $400 at birth. Although prosperous people could use it to make a large reduction in their lifetime medical costs, there is not enough room for error, to permit the nation to risk so much for millions of people with only a marginal income. In the following sections we apply a variety of other variations to convert an attractive idea into a widely useful one.

************* 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, the atom wars, a stock market collapse, an invasion from Argentina. To be on the safe side, we had better not count on this approach to pay for all of health care. Just a big chunk, like 25%, does seem feasible. In the immediately following section, we examine the first "technical" problem. The first year of life is just as expensive as the last year of life, and you can't dip into savings.

Basic Coverage: Three Big Problems, No Little Ones

Columbus and the Egg

Let's summarize. We started with the classical Health Saving 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 use 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 on 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. And so on. With very little new legislation, most of this package is ready to go.

Lifetime Health Savings Accounts (L-HSA), 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.

We conclude insurance of every sort "shares the risk" for expensive problems, but generates extra expense when little problems get insured that don't need to be. Little medical problems swamp the fixed overhead of insurance unnecessarily. When you only insure essentials -- as true catastrophic insurance does -- it costs far less than insuring everything. So, here's an outline of a major variation, adding features, one by one. It's a Health Savings Account, on steroids.

Proposal 25A: Let's combine the high cost of the first year of life with the really high-cost last year of life, as a basic foundation of minimum health insurance.
The dual combination could surely include everyone. What I am technically trying to achieve, I admit it, is to combine one life situation, which sometimes generates a 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 is ancient uneasiness about sharing liabilities outside of families, and even, how far the boundaries of families will stretch. Ancient fear of violating obsolete family boundaries sometimes hinders useful proposals. Because of increased longevity, grandparents are now real people, not just a picture on the wall. And by no means are they all senile.

A sly feature of all this is, people still alive are willing enough to overfund the costs of the terminal care lying ahead of them, but few still alive have their own birth costs on their minds, even if they were never paid. That lopsided initial generation might generate sizeable reserves for a circular program, if we imaginatively link accounting between generations, carrying those birth costs forward. Another unrecognized feature is the costs of these first and last years of every life are in fact both paid in retrospect, and often not by the patient.

Furthermore, most of the heavy expenses of both ends of life are created within a hospital, which often delays final billing until the issue of responsibility is settled, creating blind spots in which final responsibility is unclear. Nevertheless, the hospital aggregates many services in a total hospital bill, so bulk payments by diagnosis or even by age, are tempting but as yet crudely perfected. When all these matters finally get standardized, reimbursement from one insurance entity to another should become commonplace. The final transaction in both end-of-life insurance as well as beginning of- life insurance easily and more naturally evolves into who reimburses some other entity who (temporarily) paid the bills.That's about all there is to say about the funds flow, which should become very simple, but come in larger lumps. At such esoteric levels, no one cares whose money it is, so long as it gets paid. At the local patient level, family transfer issues can be troublesome. It can be recalled we have gone into detail about grandparent/grandchild transfers in the section on New Health Savings Accounts, and indeed it emerges as the main innovation of that effort. Still earlier, we described the compound interest hidden in the background, paying for a great deal of it. As an aside, most people will eventually find it is desirable to use overfunded accounts as a basis for tax-sheltered retirement costs, and will therefore often die with a small surplus, which is the basis for closing the loop between generations. That may take time to evolve.

Proposal 25B: And then, add catastrophic coverage regardless of age, less the cost of overlaps. Title: Tri-Challenge Basic Coverage.

Here's the universal catastrophic coverage we promised in the first chapter, minus the first and last years of life overlaps.

Overlaps. One passing word about overlaps. Reducing overlaps is one of the main mechanisms for reducing costs, but the insurance entities will fight fiercely over who gets the reductions. For example, what about a six months old child who dies with an expensive hospital bill? My suggestion is that the beginning of life insurance pays first, the end of life insurer pays second, and then the catastrophic insurer pays for the balance. This gives the savings to the catastrophic carrier, but most of the cost is given to grandpa, who is dead, and anyway most of it is investment income, leading to less complaints.

We thus design the basic coverage to include two universally-unavoidable costs, plus the universally-inescapable risk of unpayable health costs at all ages in-between. It is clearly superior to less universal, and more unaffordable, coverages.
Proposal 25C: Require the unused birth coverage to be transferred, either at the time of death or optionally at other times, to either a designated grandchild by inheritance or to a designated pool of unassigned third-generation recipients. The grandchild's Health Savings Account would begin at birth, capturing 21 extra years of compound interest, compared with employer-based insurance.

The purpose of beginning a HSA at birth is to add 21 years to the compounding, while staying within the laws of perpetuities.

A 1:1 ratio of national grandparents to national grandchildren does exist, but so do multi-children families, no-children families, unmarried families, divorces, etc. There is definitely a need for a pool within which, mis-matched funds are administered.

The childhood transfer feature adds about $28,000 to the coverage, but it would only require $42 a year (added to the last-year of life premiums, at 6.5% interest compounded from one year of age). Because catch-up transition at age 40 would require $200 annual contribution to catch up with newborns, rising to $28,000 for someone aged 65, it might be better to add $25, or so, at birth to reduce the even greater cost of late joiners (over age 40) to the plan. They must be enticed, however, because they are the ones closest to activating the transfers, and hence are the most important support to enlist to an innovation.

Proposal 25D: 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.

This coverage probably approaches half of the entire health costs of the nation, depending on how you treat the cost of prison inmates, the unemployables and illegal immigrants. If science should ever succeed in eliminating every major disease and therefore every other cost of healthcare, 18% of present costs would very likely persist. And in fact the cost of prisoners, mentally retarded and illegals show no signs of changing much, either.

They are costs most likely to be permanent, but what we spend on the rest will depend on where we place the limits on "Catastrophic" care insurance. That cost depends on the size of the deductible, and the upper limit of coverage. You can readily predict the debate: the higher the deductible, the lower the premium, so the out of pocket cost depends on the deductible, too. But while controversy would remain, the great beauty of this design is the lessened political resistance from every voter who would likely benefit, which is 100%.

There is no escaping these realities, and in the meantime the rest of health costs will dwindle down to the cost of birth and death, which change their nature very slowly. Therefore, although it is not traditional in the health insurance field, I propose it has long seemed an entirely natural thing, for the costs of childbirth to be an obligation of some other generation, usually but not always of the same family.

The problem is indeed complicated by the unusual concentration of malpractice claims in obstetrics, as well as the marginal finances of parents at this stage of their careers. But the hidden effect is to create more, or less, valuable babies, depending on how you judge the impact of emotions versus supply and demand. It was almost an unknown issue a century ago.

Any resistance to this proposal is thus likely to be more instinctive than rational, since we have had so many generations of channeling such issues within the family unit. The relatively trivial cost of funding children's health care through 104 years of compound interest does generate a temptation to overfund the program, which if necessary can be frustrated by requiring one or more zero balances per lifetime. That is particularly true in this particular instance, when compound interest could generate almost any amount of leveraged money at the death of a grandparent, simply by increasing the modest amount impounded at the grandparent's birth, and waiting long enough for it to grow. People in charge of managing the currency are then drawn into the discussion. Indeed, the relatively confiscatory level of estate taxes (60-70%) is a sign our society is not comfortable with perpetuities, although available remedies are fairly simple. Indeed some states also levy inheritance taxes on the recipients as well as the donor's estate taxes.

Whatever the traditional resistance, it's permanently true that costs of the first year of life will always greatly exceed what a newborn is able to pay. And therefore it surely follows that this obstacle has hindered health financing for a very long time.There must be some mechanism for inter-generational transfer of funds, or life cannot continue. At present, it's called a family, and families are under strain. Conditions of modern life have evolved to the point where interference with some generational transfers will cause more suffering than relaxation of such attitudes. There will be resistance, but it must be persuaded to re-consider its position and bilateral compromise must result.

Warning: Start Saving While You are Young. Health Costs for the first year of life are reportedly 3% of the total, and while the last year of life (15%) is worse, those costs laid on young families are particularly disruptive because of still higher costs later if neglected. At best they compete with college, housing and automobile costs, and probably reduce the birth rate of the middle class. The enclosed graph shows a family of curves based on subsequent investment income from different invested external-contribution levels at birth, to help readers judge how much surplus might likely be generated at the end of a lifetime of average costs. Our goal is to estimate the cost of overfunding grandpa's health costs at birth, so there would remain an incentive for him to spend wisely, but still generate enough surplus to fund a grandchild's juvenile health costs. That is, to estimate the cost of transferring the obligation of grandchild costs from parents to grandparents. But it must ultimately be recognized that the full consequences of such a basic change, are unpredictable.

First, however, we must determine the size of grandchildren's costs. 3% of all costs ($10,500) for the first year of the child's life sounds plausible. But 5% of costs from the first birthday cake to the 21st birthday ($17,200) sounds surprisingly high and needs to be challenged, if only to defend it properly from rapidly escalating educational costs. That's one of the great advantages of starting with a demonstration project; you can see where the bills are coming from. But that's mostly a quibble, because even $17,000 is manageable, and the legal boundary of age 21 is strongly defended.

Let's take just a moment to examine the laws of perpetuities, which mostly focus on intergenerational inheritance. Established about three hundred years ago as common law, they permit transfers for 21 years after the birth of the last person to be alive at the time of the bequest. I'm not a lawyer, but those do not seem like a handicap for what is proposed.

The pool would also pay for multiple children in a family or those newborns who do not have a willing grandparent. I never met any of my four grandparents, so I don't know if they would have been willing or not. As the father of fourteen living children, one of my two grandfathers would surely have wanted some adjustments. If it becomes an issue, the government could easily afford to donate the $7 yearly required to avoid the issue. During the early transition phase it might possibly be necessary to have government backup if temporary mismatches appear, eventually repaid by adjusting the initial cash deposits. It happens the birthrate is 2.1 per mother, which easily matches one-half per grandparent, greatly relieving but not eliminating the occasional mismatches. It would seem a fairly simple task to charge 1:1 (grandparent to child) for the first three or four years, and gradually re-adjust if more precise data becomes available. It could even be possible to to pay for the child-generation completely, but this is not entirely desirable. It should not require dynamic scoring to understand that making healthcare free would increase its cost.

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Not everything which is desirable to do, is desirable to do in a big hurry. {bottom quote}
The political advantages are wide-spread. Much tax resistance to paying for healthcare would be deflated by knowing that almost all cost was absolutely essential, and for the most part universal. The parent generation would be relieved of the cost of the healthcare of children. During transitions, there probably will be problems with overlapping coverage. Not only is Medicare reducible for overlapping costs, but the U.S. government is relieved of some of the embarrassment of borrowing 50% of Medicare from foreign countries in order to pay for it. But, sorry, we're getting down into the weeds.

If desired, the 1.6% salary withholding for Medicare can be reduced, relieving working people and their employers of about one quarter of Medicare costs. The tax inequity between employees and self-employed should be eliminated anyway, but this somewhat reduces the disparity. The doughnut hole was a good idea, but it is part of copayments which are a bad idea. It should be self-evident that making hospital insurance free but doctor payment subject to Part B premium, creates unmanageable distortions. Many healthcare financing problems are like the fable of Columbus and the egg -- once explained, anybody can do it. Nevertheless, it would seem much better to proceed slowly according to a defined plan, using demonstration projects and experimental trials, mid-course adjustments and careful monitoring. Because not everything which is desirable to do, is desirable to do in a big hurry.

Finally, someone does need to calculate the cost of adding catastrophic stop-loss insurance to birth-and-death insurance. It isn't possible for an insurance outsider to calculate the overlaps between the two types of insurance, which are probably considerable. But, particularly if there is a lot of overlap making it relatively cheap, that combination would constitute the kind of basic insurance which covers what everyone needs, and very few would be able to fabricate. If you linked it to a more sensible diagnosis related code, as a basis for DRG for inpatients, and firm association with market-based outpatient costs, you might get a firm basic package. It then only requires a relative value index for items which do not overlap, and a firm rule that the same items be charged the same amount, for helpless inpatients and not-so-helpless outpatients.

What are vital but uncovered by this basic package are new scientific discoveries, so self-evidently essential they create temptations to exact extortionate prices. I'd say it would be shooting yourself in the foot to go hard on such discoveries for their first few years. Overall, that which is left uncovered by this hybrid tri-insurance may be hated for its commercial motives, but nevertheless remains something we clearly want to encourage. Managing costs of that sort ought to be left to the Food and Drug Administration, the Patent Office and competition. And silently endured by insurance.

Lifetime Healthcare, Using Health Savings Accounts (3)

Let's return for the moment to the difference between what a total market index earns (11%) and what just about every foundation and endowment earns (8%). That 3% difference is so large it has a major effect on what an HSA can provide. If the 3% represented what the financial industry imposed as a middle-man cost, it would be an outrage we should work to change. However, it likely has a more benign explanation with standard available protections. Remember, there are two cycles recognized in the stock market, one of which is the daily or weekly volatility which can be ignored by long-term investors. For a century it has had a standard deviation of about three percent, conventionally referred to as if "risk" can be represented as one standard deviation in amount.

However that is not the risk most long-term investors fear. Roughly following a 30 year cycle, although don't count on that, it has recently been termed a "black swan" risk, of 30-50% volatility. Such disturbances usually last a couple of years, and can be utterly disruptive to foundations and nonprofits who meet a payroll to keep their doors open. The market has always recovered in a few months or years, but meanwhile how can you function?

Available solutions vary, but generally come down to a choice between a contingency reserve, and a "balanced" portfolio of stocks and bonds, usually in 60/40 ratio. Since bonds generally return about 5% instead of the blue chip stock average of 10%, the nominal return on a balanced portfolio is reduced from 10% to 8%; the real return after inflation is further reduced from 8% to 5%. However, in the case of a lifetime HSA the lifetime at risk of a black swan crash stretches from birth to age 66, much longer than 30 years. We suggest the after-inflation bond content of the portfolio should grow 2% a year from age 43 to 66, when the eventual bond content of the portfolio should roughly equal the required lump-sum payment to Medicare. Once the disbursement is made, the remaining portfolio can return to 100% stocks.

It could still fund a Medicare buy-out without disturbing the rest of the investment program if by bad luck the time for a buy-out coincides with a bear market. If there is no bear market, the cost of this safety measure can be shrugged off as just the price of safety, because it also permits the extra risk of 43 years of a 100% stock portfolio. The overall effect -- 43 years of 100% stocks ignoring the risk in the background of a black swan -- is to increase the portfolio's overall total return from 5% to 6%, as well as mostly guaranteeing the fund will be undisturbed by black swans at just the wrong time. This safety assumes no withdrawals from the fund except this one, so no amount of volatility needs to be considered except volatility at the one moment of liquefying a portion to buy out of Medicare. That's individual black swan risk; the black swan risk for the entire population is otherwise practically certain to afflict someone at some time within a 66 year interval. The tiny proportion of people wealthy enough to weather the storm with outside funds can elect not to do it at any time up to the 43rd birthday. However, they should probably be required to fund their own contingency arrangement, because for a poor person to neglect safety is a risk of unraveling the scheme they should not run. Remember for a moment the scheme promises to cost $xxxx for the avoidance of lifetime costs of $350,000, and thus is entitled to insist on reasonable protective rules if someone wants to share the benefits.

Lifetime Healthcare, Using Health Savings Accounts (4)

At the time this book is written, newspapers report 12 million people have Health Savings Accounts. Unfortunately, newspapers also report the Affordable Care Act ("Obamacare") is awaiting Supreme Court decision as to its Constitutionality. Like the rest of the healthcare world, we must wait to see how the decision affects the financing. At the hearing, Justice Alito hinted the effective date of the decision might be delayed longer than the decision itself. Therefore I decided to proceed with a discussion of really radical health insurance reform, necessarily treating working-age people as a later add-on. The whole matter of paying for healthcare amounts to shifting resources from people who are able to work, to paying for people who are too sick to work. Insurance is one way to accomplish it, but is the ideal way for only some of it. For one thing, insurance has proved to be remarkably expensive. It involves a major shift of funds from those who can work, to those who can't, but administrative income from the transfers somehow gets dissipated. We can do better than that, by hundreds of millions of dollars.

Furthermore, the financial strain has overwhelmed the political obstacles. To speak of Medicare as a political "third rail" is no longer tolerable. It is the job of politicians to persuade the elderly that no one wants to ruin their entitlement, shorten their lives, or ration their care. Protection from all that would be strengthened, not weakened, by making the system sustainable. And the time is long past for believing the government will protect the funds better than having the money within one's own possession. At the other age extreme, the parents of children will do a better job of protecting the kids, than treating the whole age group as if it were in a child-care center. Mind you, there must exist a fail-safe or catastrophic, health insurance against legitimately huge medical expenses, plus a system of oversight for overcharging. But the first level of price resistance must rest with the patient's family, who have an avenue of appeal if they are bullied. We need an appeal mechanism, not a system of regulators. We need catastrophic insurance, not first-dollar coverage. With these two basics in place, the next level of decision must be restored to the patient's family. While of course frugal shopping is useful, the main decision a family must make is whether to spend their funds now, or save them for a later rainy day. A public education program might well prove useful, reinforcing but not supplanting the advice of a family physician. By improving the investment choices of the administrators of Health Savings Accounts, the investment experience of the whole country would be enhanced by educating the public in personal investment. That would be an invisible advantage of an enlightened HSA investment service; the visible part would be to set realistic goals, and then achieve them. Assuming legal or legislative clearance, the total lifetime cost would be one single payment at birth of $2200 (invested @ 6% compounded), in addition to whatever it turns out Obamacare charges for coverage from age 22 to 66.

In return for that, Medicare could stop borrowing 50% of its costs from foreigners, and each individual would cover the cost of one child per subscriber, up to age 21. (Remember, the present birthrate is 2.1 children per mother.) That is, individuals with children would get coverage for one designated child from birth up to age 21, for $220, which would be a bargain price for what is now 8% of lifetime medical costs, or $25,000. The government would get a far larger benefit of 50% of Medicare costs for one person. That would be a far more attractive part of the bargain, paying for coverage worth $82,500, for $2000. Although this would be a bargain package for many subscribers, it would only be of tangible value to those who had children. Very likely, it would be a futile selling opportunity, whose only virtue from presentation is to illustrate how we already start with solvency instead of subsidy. Subsidy -- and advantage to working people -- comes later, when compound interest makes the other, more customer-attractive, features vastly cheaper to provide. For that, we must await the Supreme Court's decision, followed by bipartisan debate and eventually, election results.

So, that's sort of a disappointment until we begin to envision what some regulatory changes could make, in addition. Remember, unless there is a change in the law, one quarter of Medicare's cost is supplied by payroll deductions from working people, and one quarter from the premiums paid by Medicare subscribers. Therefore, this proposal would only pay for half of the cost of Medicare, the rest being an elimination of the present deficit spending. If a system of voluntary Medicare buy-outs could be established, these costs would disappear, and both working people as well as present Medicare subscribers would be appreciably better off financially. At first, only the adventurous first-adopters would take the bargain, but even that slow beginning would allow a new program to get started, picking up more timid subscribers gradually. The whole population would now be offered a voluntary bargain. The next legislative step with significance would be to provide for an overfunded Medicare buy-out, which with a lump sum payment gives the customer a Medicare buy-out plus the surplus, which goes to cover the first 21 years of medical cost for a designated grandchild. Where does this extra money come from?

Taxing the Working Generation We won't know the realities of financing Obamacare for quite some time to come, but we can estimate how painful the revenue effect would be for working people, in addition to their Obamacare costs. For an extra $5 a month, from age 22 to 66, a small tax on working people would generate (with 6% compound interest) an extra pool of $xxxxx by age 66. That would seem easily adequate to supplant the $2220 pump priming at birth we postulated at the beginning of this section. Since it is paying for subsidies to the poor as well as the well-off, it probably should be discounted by a third or even a half. So, if that seems insufficient margin, it could be raised in incremental amounts of $5 per month, depending on how much saving could be effected in Obamacare costs, which at present we do not know. Nevertheless, the numbers inspire reasonable confidence that this general approach is at least worth a demonstration project. At present, the main uncertainty revolves around the consistent ability to generate a 6% return through index funds, including adequate provision for the "black swan" sort of recession every few decades.

Technicalities of Transition Once transfers from the "grandparent" HSA to the "grandchild" one are working smoothly, the working-generation contribution can be eased by up to 8% (the cost of children). Furthermore, if the option of buying-out Medicare is made legal and feasible, it should no longer be necessary to deduct Medicare withholdings from paychecks; prior payments might be open to negotiated rebate. That should eventually reduce the price of lifetime coverage, but unfortunately might make any remaining gaps less appealing for poor people until the entire life cycle gets into operation. Looking ahead, considerable premium costs would be less necessary, and are therefore up for consideration in the new scheme.

Repealing Obamacare's present prohibition of Catastrophic Health Insurance after age 30, is certain to be very popular, and should be an early priority, leaving extra room for compromise after the removal of childhood costs. All Obamacare policies are high-deductible, but their premiums have been raised to cover the uninsured. Once this funding concept has proven itself, that should be less necessary. Since the HSA covers everyone who wants it, and anticipates subsidies for those who cannot afford it, a compromise phase-in should be possible. How much real re-insurance would then cost is probably fairly well known to its recent insurers, although recent uproars will probably make new bidders rather protective. In this sense, public opinion is important to the price which would be demanded. As far as subsidy to the poor is concerned, Obamacare originally anticipated hospitals would be able to lower their prices if everyone became insured and internal cost-shifting would stop; this would provide a test of that hope. Really serious planning may have to be deferred until a concerted effort is made to clarify the extent of internal hospital cost-shifting; one hopes this is already under way. If the approaching Judicial outcome produces a mixture of priorities which cannot be balanced, there will just have to be a later Congressional action to balance it. Since it can be anticipated that piecemeal introduction of lifetime coverage will seem attractive to many, perhaps there will be several opportunities to get things more optimal. Transition into a new system must coincide with transition out of the old one. Unfortunately just the fear of deadlock, could slow smooth advancement.

Since John McClaughry and I were the two originators of Health Savings Accounts in 1981, we obviously are pleased with the notion that so many fellow citizens see our idea as the main alternative to comprehensive government involvement. The previous few chapters outline how I think the HSA can be stretched to finance and reduce the cost of all medical care, how its segmentation would assist a stepwise transition to it, and how it would essentially leave the scientific details to scientists while leaving more decision-making to the patient. Having once been in charge of the Professional Standards Review Organization in my area, I am completely satisfied that professional self-governance can quickly control abuses, if there must be an iron fist hidden somewhere inside this velvet glove. Doctors are generally no more interested in administration than Senators are, or than executives of unrelated businesses once were; but doctors are disciplined and bright, which is the main qualification. I share Senator Wallace Bennett's view that a small but adequate minority can be found to do the work, although overstaffing will seldom prove a problem.

Health Savings Accounts were originally designed to replace employer-based health insurance, but millions of subscribers would be relatively satisfied with either one. Like any one-size fits-all solution, each will seem uncongenial to some people, who should be left free to make a choice. By leaving enrollment voluntary, institutions can gradually expand or contract to adjust to demand. I have an enduring but blurred memory of the chaos which ensued in 1966 when Lyndon Johnson on television invited old folks to start sending the government their medical bills, when it was soon discovered Medicare did not even have a listed telephone number. A vacant supermarket was found in Camp Hill, Pennsylvania, to store the unopened mailbags of Medicare claims, floor to ceiling.

All the HSA needs, to integrate almost any reasonable working-person health insurance into lifetime coverage, is a reliable stream of enough money to function. Starting at age 21, this money would link the roll-over money from the "grandparent's" surplus Medicare funds after death to the newborn's new HSA. Judging from this untried analysis, the likely limiting step would appear in organization of the proposed Medicare "buy-out" program, since infirm old folks in the last years of life would have little incentive to switch. In fact, demographic mis-matches might appear between any two segments of a lifetime program. Therefore, a contingency fund to cover these anticipated short-falls, especially for the first year of life, would probably have to be regarded as a main hindrance to smooth start-up. From my talks at public meetings I detect that elderly people have accepted Medicare as a fact of their lives, and are surprisingly indifferent to the Obamacare commotion. They even express the unlikelihood that anyone could ever change the present entitlement, in time to make a personal difference to them. This attitude must be gradually persuaded to yield, and then secondarily reflected by their elected representatives. A surplus is welcome at any juncture; it is the shortages which will hurt. The key to smooth transition is to devise the right incentives, well in advance of the uproar.

Steve Brill: Healthcare Without Insurance Companies

Stephen Brill

Stephen Brill has written a very professional description of the "Inside baseball" of the Affordable Care Act, from the decision to go ahead with it, through the turmoil of ramming it through Congress, to the badly mismanaged introduction of the insurance exchanges. At the conclusion of this largely critical description entitled America's Bitter Pill , Mr. Brill devotes fifty pages to his own proposal for a better system.

America's Bitter Pill

Essentially, the proposal is for large hospital chains or multi-hospital groups to merge with, or otherwise take over the function of, health insurance companies. And, indeed, there is one little paragraph buried within the Source Notes which seems to be adequate justification for that idea. It's a quotation from a January 5, 2014 article in the Journal of the American Medical Association to the effect there were 831,000 American physicians in 2011, compared with 1,509,000 health insurance employees. The question it raises is plain enough. Why does it take twice as many employees to manage the insurance, as it takes physicians to deliver the care? Surely, a great deal of money could be saved by reducing the health insurance cost, and Mr. Brill's proposal is to let the hospital conglomerates take over the insurance industry.

An important truth is stated, but this particular conclusion is too drastic because it would strip the public of its normal expectation for impartial decisions between two counter-parties. At least, for rare and expensive disputes it would; many other problems need fixing only because employer-based insurance created them. It redefined many small risks as big ones, mostly in response to unwarranted lobbying to extend unwarranted tax dodges. But extending the expendable argument to include what insurance does well (spread the risk of low-volume, high-cost unpredictable expenses), requires proof that other institutions would do it better. I am reluctant to give up catastrophic health insurance, while admitting the rest of current health insurance is too costly and expendable.

Bill Gates and Warren Buffett

Others have said the same thing, and no doubt the health insurance industry will mount a defense. My own proposal could be twisted to mean something else, except my way of saying it is that individual patients should take over much of the non-insurance insurance function, by using Health Savings Accounts, and thereby reduce their net costs by passive investing in index funds. Since Obamacare was probably only a first step toward something else, replacing health insurance with governmental solvency assurance may have been in the President's mind. But any way you massage the message, there is an essential contribution by insurance which probably cannot be adequately replaced. Anybody at all could suddenly develop a huge medical expense, and be unable to pay for it. The chances of that happening are small, so the cost per person is also modest. Ignoring exceptional cases like Bill Gates and Warren Buffett, everyone needs a catastrophic insurance plan. No proposal for general use is probably workable without "stockholder risk in calculated balance with customer risk-taking". My own succinct criticism of Obamacare is that it has made Catastrophic health insurance illegal for everyone over the age of 30. If a feature like that is essential to ACA success, its own future is doomed, in my opinion.

Theodore Roosevelt

In a sense, the whole thing the matter with the existing system of employer-based insurance is that it boxed itself into a corner of first-dollar coverage, and only modestly retreated from it. That is, instead of initially insuring the worst health disasters with lowest premium cost, and progressively lowering the deductible as people could afford it, the Health Insurance industry did it in reverse. It started out with insuring the cheap stuff before it reached expensive stuff. No wonder one President after another, starting with Teddy Roosevelt, proposed some kind of reform. It's far too late to assign the blame for this misjudgment of the past century, but it is not too late to confess the error and re-design systems with the hope of fixing it. Yes, it is true it would have been cheaper to address the issue thirty or forty years ago, but meanwhile the thirty-year extension of longevity during the 20th Century has a good side, too. The essence of our problem is that, right now, it is whatever it is.

Finding the Sweet Spot

Every tennis racquet has a "sweet spot", a place within the stringed area that hits the ball just exactly right with minimum effort, and for that matter, does so with a minimum of noise. If your aim is good, the shot is much improved by whacking it with the sweet spot. In health savings accounts, the sweet spot is that combination of fixed choices over which you have no control, like your age, and independent choices over which you do have some control, like the amount you deposit into the account, or the shrewdness with which you choose your agent. There's a somewhat different sweet spot for males and females, and it will vary with the state of the stock market, or international warfare, during the era in which you had the highest earning potential. In other words, the cost of sickness is the only chance catastrophe we are aiming to protect against. For that narrow purpose, the uncontrollable factor which makes the most difference is

The age at which you started your spending account. Compound interest requires time to work; persons who start their accounts late in life no longer have to pay for their earlier expenses, but they must have some traditional insurance protection during the transition to full dependence on the account, or else some other form of savings. That's why you need catastrophic insurance coverage, but in the early stages of getting established, even that could be inadequate, and nothing can be offered unless the government offers to subsidize it. In order to find a way to capture twenty extra years of compound interest, it is tempting to begin depositing at birth, which is presently prevented by the HSA rule that you must be working to start an HSA. But children have health costs to be managed. In particular, 3% of all health costs are reported to occur in the first year of life. If Congress will allow it, we have a plan in later sections for doing it expeditiously.

Subsidies for the Unemployables, Such as Children. Please do not compare subsidy with lack of subsidy, because subsidy is always cheaper in the short run. . Furthermore, subsidies are created by government, and are therefore under pressure to demonstrate equity. Protection in extreme cases must rely on reasoning which placates the "Equal Protection" clause of the Fourteenth Amendment. All forms of insurance contain some incentive not to invest but to squander, and channeling that choice is part of insurance design. Here it attempts to balance a singular opportunity to select the best possible investment opportunity, with the unique ability to spend the proceeds on anything you choose after your health cost has been met. Unfortunately we have already gone so far with borrowing for health, that many people are of a mind to believe balance can't be achieved. We could go on with this, but a quick summary is there are thousands of possible sweet spots, most of which are partly beyond anyone's control or ability to predict. There are even some circumstances where an individual would be better off putting reliance on Obamacare, trusting the government to bail him out with subsidies; if the nation decided to give equal subsidies for every payment alternative however, most of these short-term advantages would disappear. The best we can suggest for people who dislike both HSA and Obamacare is, go see your congressman. In this book, we merely suggest that most people would be better off with HSA.

Trying not to be repetitious, there's nothing you can do about your age and sex, or previous state of health. You should have stopped smoking twenty years ago, but you can't help it now if you didn't. Twelve million people already have HSAs; if you aren't one of them, the best you can do is start one now. It's very difficult to imagine a situation in which a late start would inflict harm which subsidy couldn't help. On the other hand, if you make a bad choice of agency, make sure you are allowed to switch to a better one if you can find it. Some brokers charge too much, some of them pick poor investments to get a kickback. Some demand too large a front-end investment, although that may do you a favor in the long run. Essentially, your own choices affect the result, and your main recourse is to invest more than you planned. For the most part, the more you invest the better. If you invest as much as you can and it still isn't enough, you made an investment mistake. It's only a real catastrophe if you then get sick, and Congress didn't provide for those few who inevitably make such a double blunder. In that case, it will have required three misjudgments for a serious mistake to emerge, because even this mishap will be adjusted by aggregate subsidies costing less than the program is able to diminish overall costs -- a very likely outcome.

Interest Rates. Unless you are within a few years of death, or within a few weeks of a stock market crash, in the long run you are generally better off with stocks than with bonds or money market funds. According to Ibbotson who published the results of all asset classes for a century, the stock market has averaged 11-12% total return for the past century. However, if you maintain internal reserves against a depression, you will probably only receive about 8% as an investor, of which 3% is due to inflation, so figure on a steady 5% after-tax, after-inflation return over the long haul. Use 8% as your shopping guide, resign yourself to 3% inflation loss, and content yourself with complaining about the 4% attrition seemingly imposed by the financial industry. You will find our charts use 5% tax-free as a standard, but show a family of curves up to 12%, just in case someone figures out a better system for harvesting the retuurns. For 3-5 year depressions ("black swans" occur about every thirty years), we show curves of lower returns. Notice endowments and professional investors also figure on 5% overall from a 60/40 mixture of stocks and bonds, because they have a payroll to meet, but you may not. A conservative investor can feel comfortable with a 5% "spending rule", but that assumes a long horizon and the need to make expenditures. Some people have a short horizon, and may be able to gamble on a pure stock portfolio because they have some other way to meet medical expenses up to the deductible on their catastrophic high-deductible insurance. But they better know they are gambling, and may therefore encounter a black swan they can't cope with. Such people probably need financial advice, because it is also possible to be too conservative if your deductible is comfortably covered. Fear of underfunding may cause the account to become overfunded, but that is scarcely a tragedy, because you can withdraw your money without penalty after age 66. In fact, a policy of deliberately overfunding the account at all times never has any great downside, and lets everyone sleep better.

Age at Beginning an Account. If you begin to use an HSA during late working years, you have the consolation that you no longer need to plan for paying for the first forty or fifty years of your own health. However, the years of heavier medical expenses begin around age 45, by which time you have already paid for most of your Medicare payroll deduction, which is about a quarter of Medicare costs. The older you get, the more you have paid with a payroll deduction, but fewer years are left for compound interest to accumulate within the account. Balanced against this is the likelihood you are entering your highest earning years, which carried too far, may tempt you into unwise early retirement. You may need some accounting advice about what is best and still feasible. And you may need legal advice if the laws change.

Younger working people have contributed less to payroll deductions, but have longer to earn compound interest in their HSA. People seem to have figured this out, and the largest group of new subscribers are in their twenties and thirties. This is the group with most to gain by proposing a buy-out of Medicare. A quarter of Medicare is paid for with payroll deductions, another quarter by Medicare premiums after you reach 66. If Congress could be persuaded to drop these contributions, what would be left is the half the government pays by borrowing from foreign sources. If you in turn agreed to pay off this indebtedness, the government might be tempted to match it by foregoing part or all of your payroll deductions and premiums. Since one about balances the other, the compound interest you earn on your deposits is pure profit. From the government's viewpoint, it might seem a great relief to know the debt would stop growing. Older people are generally so deeply committed to Medicare they would resist, but younger people -- and the Treasury Department -- would find it quite a bargain. Once again, financial advice from somebody good at math, is highly advised. When the politics of this matter settle down, it should become possible to state a particular age, below which a Medicare buy-out is safely advisable for anyone. It's almost always in the Government's favor, so independent advice is only prudent. In summary, starting an HSA at almost any age is safe and wise. A Medicare buy-out is wise below a certain age, yet to be determined. In other circumstances, a buy-out is wise if personal finances are comfortable, but right now it would take financial advice to do it. And, of course, a friendly politician to convince Congress to make it legal.

There are two more steps to this transition. But before getting to them, it seems best to run dual systems while you phase one out and phase the other in. It may even prove to be best to run two systems indefinitely. Three principles emerge:

I. It would be pretty hard to run dual systems without also running subsidies for both. This would be part of Equal Justice Under the Law. It's hard to run dual subsidies until you know what the final rules would be. Some subsidies may be difficult to match, and require equivalent subsidies, which are harder to devise.

II. Dual systems and patchwork fixes always provide loopholes for someone seeking to take advantage. Some agency must be designated to keep this in line, using the principle of each system being charged with watching the other one. When you deal with one-seventh of the GDP, tremendous scams are entirely possible. A system of balanced whistle-blowing could effect great savings without the same surveillance costs.

III It isn't necessary to pay for everything. The reader will of course have noticed that paying for all of medical care would save perfectly stupendous amounts of money. But paying for half of it would also save stupendous amounts. And even paying for only a quarter or a third of everything medical would save the economy two or three percent of Gross Domestic Product. That wouldn't be a failure, it would be a tremendous success. In fact, it might be all the change the economy could withstand for a few years.

The Intergenerational Roll-Over.

The Coming Shift From InPatient to Outpatient Care.

Grandpa Makes a Gift

A point which cannot be emphasized enough is that a Health Savings Account is just about the best way to invest, if you have given little thought to investing. The deposits are tax-deductible, and the withdrawals are tax-free if they are medical in nature. Even if they aren't medical, they can be anything at all after you reach 66. You probably ought to give a lot of thought and investigation to the particular agent you choose, because they aren't necessarily legal fiduciaries, no matter how friendly they may be. They have no obligation like a doctor or lawyer to put the client's interest ahead of their own, and they can later hire partners you don't care for, so make certain you can terminate the arrangement and switch to someone else without penalty.

Be careful to choose a representative carefully. But whether to choose an HSA, at any age and stage of advancement, always leads to the same answer: Yes, do it. That being the case, a certain number of HSA owners will find themselves with an account they don't know what to do with. There's almost always an exit strategy, although you may need professional advice to judge which one is best for you.

If you started your account near or after retirement, you may have the idea you will never have surplus funds. But if Congress can be persuaded to make it legal, one of your options might be to roll the surplus over to a grandchild or grandchild-like person. If this suits your situation, please notice that a newborn child has some special medical problems. In the first place, the first year of life is unusually expensive; in the aggregate, 3% of all medical expenses are spent on the first year of someone's life. To anticipate a little, 8% of health cost are spent before age 21, which is generally held to be the beginning of the earning period. Children are generally pretty robust, but when a child is sick, he is vulnerable to lasting disabilities of a very expensive sort, so you don't like to see a family cut corners on child care.

But newborns have no earning power, their future is in someone else's hands. The average woman has 2.1 children today, two women thus have 4.2. Four grandparents roughly have one apiece. The way the law of averages is working out, if every grandparent took care of the health costs of one grandchild, things would be close to solved. Things would have to be adjusted for the non-average case, but they would be close to being solved by adding one grandchild's cost to each average Medicare cost for the elderly.

In this case, however, the legal and political problems are greater than the financial ones, so it would suffice for a beginning, just to permit those who want to volunteer, to be permitted to leave unused leftovers in their HSA to children under the age of 21. If there is concern about dynasties and perpetuities, it might be left to the child's HSA, to be exhausted by age 21, or transferred to the HSA of a second child. The sum in question might be around $8000.

Passive Investing

Roger Ibbotson

Roger Ibbotson compiled the results of investing in the past hundred years, and divided it into different aggregate classes of investments -- large capitalization common stock, small capitalization stock, bonds and whatnot. It happens that Burton Malkiel showed that such aggregates outperformed most mutual funds with the same goals, and John Bogle of Vanguard showed that index funds of such asset classes also outperformed stock-picker managed mutual funds, mostly because of lower costs.

Burton Malkiel

The eliminated costs included the cost of stock-pickers, who are often highly compensated, sales costs, and transaction taxes from frequent turn-over. He invented the term "passive investing" for the purchase of index funds rather than individual stocks, and it's easily understood why index funds would have lower costs than managed portfolios. Mr. Bogle's index funds in the Vanguard Group have an annual transaction cost of less than a tenth of a percent, while it is not uncommon for managed funds of common stocks to charge $250 or more, per trade. In a few years, index funds have grown to be half of the market, giving direct stock investing a very hard time of it. Buy them, hold them through thick and thin, and scarcely ever sell them. The consequence is that passive investing of this sort returns two or more percent more to the investor.

Vanguard Group

Multiplied by the compound income principles mentioned earlier, passive investing is pretty well sweeping the Health Savings Account field. In fact, most managers of HSA are having a difficult time deciding how to charge for other necessary services, like debit card management, sales, transactions, and advice. The most conservative of all small-investor vehicles, like money-market funds, bank certificates of deposit, and other savings vehicles, are currently suffering from such low interest rates that even they are being abandoned. In the peculiar financial environment of the present time, investors who shunned stock purchases as "gambling", find they have almost no other choice for their Health Savings Accounts. Investment management firms who depended on non-stock investments, are simply driven out of business if they don't switch to passive investments.

John Bogle

That's really all there is to say about passive investments for Health Savings Accounts, except to say it should be a good thing. Common stocks have out-performed just about everything else for a century. The small investor tends to be afraid of them because of the "black swan" crashes of 2008 and 1929, which students of the subject tell us occur about once every thirty years. We therefore should take a moment to address this problem, because various reactions to it, can have a very large effect on something the investor should be watching carefully, the percentage return on his investments. Multiplied by the compound interest effect of longevity, this is really the key to whether the HSA will be effective in lowering healthcare costs.

Consulting Agency for Medicare Buy-out Issues

Proceeding on the assumption Congress might authorize a system of Medicare buy-outs similar to the one outlined, some contractual obligations and procedures need to be established. Individuals need a fair opportunity to transfer payroll deductions, and later, Medicare premiums, in return for promising to re-direct payment to Health Savings Accounts to fund a buyout, and subsequently to do so. That's a single sentence, with several clauses. Essentially, since you can't move sickness to a different time, concentrate on moving revenue around to match the sickness.

As it happens, a conflicting principle emerges, that the greatest revenue comes from investing the most money, in the hands of as young an investor as can possibly be chosen. Remembering of course, that during transition some people are too old to start young. It reminds me, in reverse, of my father's observation the "best thing to happen, is to lose some money while you are young." At least, there may be time for a youngster to make up a loss, but it's still better if he also avoids losses when he is young. Making that choice favors both compound interest, and avoiding even the low health costs of the young. If the largest revenue source comes from Medicare premiums then it follows, newborn babies ought to be investing funds derived from grandparents on their deathbeds. Such twisting of original purposes probably will be motivated by knowing a dead donor will never notice. Supreme Court advocacy might argue the original purpose really was to finance Medicare painlessly, so this particular twisting results in the greatest revenue for the least complaints. The fact is, it is indeed advocated to take advantage of the greatest revenue for the least pain, but benefit is directed to someone who was largely unanticipated. And therefore the loyal opposition may oppose. We merely display the arithmetic.

If it is agreed the two primary sources should be Medicare premiums and Medicare withholding taxes, then the greatest revenue by sizeable amounts will result from assigning the Medicare premium source to age zero to age 25, followed as before by the Medicare withholding taxes, from age 25 to 65. Gifts to the HSA, presently limited to $3400 a year to employed persons, should be accepted at any time, whether employed or not, and gift limits should be raised to encourage it. The potential is in the millions of dollars per person. If objections are raised by doing such a thing, the revenue could be substantially less. It will be interesting to see how this is dealt with.

Most likely, many individuals would get this choice during the 40-year period of payroll withholding, and request a payroll change after a few years of having partially paid in some other sequence. Should any portion of an escrowed account already paid, be refunded? A similar but different situation can be anticipated after age 66, when the question will be raised whether paid premiums should be repaid, but by that time the buyout should be accomplished. Since the two payment methods are of the same total amount, forty years for payroll deduction, and twenty years for Medicare premiums, the premiums are twice the size of the deductions. For present purposes, there will be some people who recognize a bigger amount will grow at a faster rate and be a better investment, while other people either cannot afford the higher price, or else cannot live long enough to collect the benefits. So, if the sixty years of paying for Medicare are switched around, there will be five different twenty-year sequences with different prices, and different outcomes. Among the predicted outcomes will be better investments at higher prices, and worse investments at lower prices. Presumably, Congress does not want to get into the weeds of such details, but leaving it to the bureaucracy is the first step toward losing control. Congress needs an oversight subcommittee, but it also needs an executive body within the bureaucracy. Since there will eventually be a need for such a body, its skeleton should be started before the legislation is passed.

Each year of the transition will see somewhat smaller differences, some of which are inconsequential and some are not. If the cost and consequences of these entry points are worked out and explained, most people should have no difficulty recognizing their optimum sequence. Quotas may have to be imposed to keep the system in balance, but in general a voluntary choice would self-select the best choice. Generally speaking, a larger deposit is most suitable for early selection and longer compound interest. If you are in your nineties, you may not care, or you may care a great deal. On the government side, it is in everybody's interest to have the transition cleared as soon as possible, with disputed choices referred to a specified court system.

Obviously, Medicare should be consulted about what it sees to be the most appropriate procedure, and in reply Medicare will probably describe some problems with starting Social Security in the absence of Medicare premiums, as a deduction from Social Security checks. Again, a temporary transition team, with appropriate membership, should be established to iron out such issues. The number of clients involved suggests there will be numerous unanticipated administrative problems to be resolved, so Congress should not allow the basic decisions to get beyond its control.

The donation of surplus retirement funds to infants poses a similar problem, triggered by getting the revenue from Medicare buy-outs. It would seem the creation of separate escrow accounts within Medical Savings Accounts might be the simplest way to keep track of this segregation, since the child would be expected to require its own HSA to receive the funds, and later to distribute them. There are likely to be a number of incompetent elderly and newborns, whose custodians would be arguing for negotiations, and more rigid uniform procedures. After initial transition problems have mostly been resolved, there surely will remain a need for a permanent consulting agency for clients, and a need for a special court of appeals. This all sounds like a lot of trouble, but comparatively simple when compared with switching millions of people from one program to another, and then listening to their outcries.

This isn't as hard to understand as it sounds. We return to it later, when resolving the Obamacare transition is actually before us.

Early History of Health Savings Accounts


I soon persuaded the American Medical Association to endorse the plan, John Goodman of Texas wrote a popular book about HSA, which persuaded Bill Archer, the chairman of the House Ways and Means Subcommittee on Health to push a law through, enabling a pilot program. Today, the nonprofit Employee Benefit Association reports 11.8 million people have Health Savings Accounts, mostly in states without mandatory small-cost coverage laws to hamper the use and pricing of deductibles. Others report a third more. One clarifying example would be mandatory birth control pill coverage, which not only undercuts the purpose of a large deductible, but is politically inflammatory as well. Health Savings Accounts are popular in Indiana where Patrick J. Rooney was a heavy early supporter, but HSAs until lately were almost unknown in New York and California, which had extensive mandatory small-benefit laws , sometimes dozens of them. Today, to my amazement, California leads the fifty states in HSA enrollment, and JP Morgan Chase services 700,000 policies.

Not Casualty, but Life Insurance

In effect, the HSA concept could also become the basis for a whole-life insurance company, not merely an individual do-it-yourself project. Such a company would pay for health insurance instead of funerals. I'd love to see the whole-life insurance companies adopt the idea, which comes close to imitating their existing business model. Whole-life insurers could manage the money professionally, and would create much-needed competition for old-style health insurance companies, now operating on the "use it or lose it" principle. The large amounts of money the savings account approach would generate, almost discredit the idea as exaggerated; we'll therefore let the reader do some of the math. Perhaps you do need to dangle astonishing incentives to get people away from the something-for-nothing term-insurance approach which is now threatening to shoot itself in the foot. Full transition is a fifty-year project, but long-term progress usually doesn't seem so long looking back on it, and it gives everybody a chance to claim some credit. Remember, it's only long-term lack of progress you really need to fear.

Proposal 19:At this point, it probably would be wise to add some legislation clarifying the ground rules, since several professions would have to cooperate in allowing a new line of business for whole-life insurance, which seems a desirable outcome.
Let's not quibble. It might even be legally or financially possible to adopt one approach, year by year, or the other, spread over a life cycle; and hurry it all up by making it into a mandatory monopoly. But it is inconceivable that half of a whole unwilling country would tolerate a mandatory health system they widely resent. Preferably, it seems possible to implement parts of both approaches voluntarily right now, without major disadvantages except extra cost. You can do that, or you can read the Lifecycle-HSA as just an alternative proposal to consider. The main dream offered here prefers to cut average lifetime health costs in half ($175,000), but might be expanded to full lifetime coverage of $350,000. Or reduced by individual vendors to some more affordable fraction, such as by a reduction of average costs by only a quarter ($85,000) or a tenth ($35,000). To do this requires some legislation, but $35,000 times 300 million population is scarcely trivial. Even Bill Gates isn't worth half of that.

Let us all reason together, shall we?

Assorted Proposals

In fact, the employer probably gets more of a gift than the employee. State and local corporation taxes vary, but a profitable corporation pays 38% federal corporate tax, and the total tax burden is about 50%, the highest in the developed world. By defining fringe benefits as a cost of doing business, major corporations effectively increase their net income by half. It becomes their choice to reduce prices more than their foreign competitors are able to do, or to increase their dividends, or to pay more lavish salaries to executives. All of these things help support the price of their stock, so the stockholder benefits. Since the employee gets both a gift and a tax deduction, he is happy, although some of the benefit is illusory. Those who lose from the transfers are mainly foreign and domestic competitors, and the rest of the public has to pay higher healthcare costs, because no one is deceived about the effect of insurance on prices. Free trade, domestic competition, and healthcare prices are bearing this burden.

The competitor deserves a word, here. About half of business is made up of big business, and half is small business. Wall Street and Main Street, if you will. The accidents and opportunities which Henry Kaiser stumbled upon in 1945 only apply to big business, and probably much of that anomaly can be traced to the fact that big business is more likely to be profitable because that's how it got to be so big, and also is more likely to be engaged in international trade, where the competitors don't get a vote. Some of the tax benefits like Subchapter S, are probably an effort to help small domestic competitors without helping foreign competitors. But self-insured people, and uninsured ones, are excluded. Very likely, much of the politics of healthcare is intended to help these people, without helping small business, without helping big business, and without helping foreign competitors. Pretty soon, you have a tangle of interests which would be affected by removing the obvious tax inequity which Henry Kaiser is given credit for discovering. Just about everybody has something to gain, something to lose. So it begins to be impossible to say, whether on net balance, the country would be better for abolishing it. That's essentially what would happen, if we changed the health system to something different; and unnoticed in the process, abolished the tax inequity which everyone agrees is a bad thing.

Just how bad things are, is hard to say. We know about job lock and the other features directly attached to employer-based insurance, and we more or less decided to live with them. But the escalation of healthcare costs, and the soaring international debts being used to pay for them, are getting too much to handle. We can tolerate a lot of things, but it's not clear we can tolerate devoting 18% of GDP to healthcare, particularly if the price keeps going up. It's hard to imagine anything one would want to spend his money on, more than on longevity. But when serious people, or at least people who take themselves seriously, start talking about euthanasia as a solution to our health cost problem, you know the costs are starting to hurt. In my opinion, we have reached the point where a lot of unthinkable cost reductions, must be taken out and reviewed. My own solution is to switch from a debt-based system to a savings-based system, with savings of immense size which have to be stretched a little to suffice. But get this: you can only do it once.
Proposal (N) Congress should set a reasonable time goal, and then mandate that the DRG be rewritten based on SNOmed, and reduced to a DRG which is much larger than at present, and capable of easy expansion. As mentioned, the hospitals which are winners under the old system will identify themselves by opposing this, and they should be asked if they can suggest alternatives.

Proposal (L) Congress should periodically investigate whether an intermediate insurance category of high-priced outpatient services has been created. If so, hearing should be held with an eye to creating one. It must be recognized that the nature of medical care is continually evolving, and this is one direction which may be emerging.

Compound Investment Income. Here, we have the heart of the whole arrangement. It's not a bonus, but rather the source of the new revenue to pay for burdensome health care expenses. Call it the Ben Franklin approach, that allowed him to retire at the age of 41 and live comfortably for another forty years. John Bogle's discovery of buy-and-hold index fund investing is safe and effortless. It makes it unnecessary to rely on a high-commission stock picker to achieve first-class results. In fact, the results of passive investing have recently been so superior that you wonder why anyone does anything else. Unfortunately, there is evidence that the financial industry has been so stressed that it has resorted to taking a majority of total returns, to itself. Therefore, the novice investor must be warned that stock market trades are widely available for less than $10, but are frequently charged $300. The investment returns should be, but seldom are, displayed, so it is often impossible to compare different brokerages, and even harder to compare a company's gross returns with its net, returned to the investor. So trust, but verify. If you are prudent, a cash deposit of $132,000 spread over 40 years, can pay for $325,000 of lifetime health care, the present national average. That's not exactly free, but it represents an average saving of $192,000, multiplied by 350 million people, which seems to mean $68 trillion in health revenue released for medical use. These back-of-the-envelope calculations are so dizzying that, pick all the nits you please, and the same conclusion would emerge. We'll return to that after going into more description of how the proposal should work.

Proposal (T) Congress should require all managers of Health Savings Accounts to display to the customer, and publish to the world, quarterly, their average total returns, as compared with average net total returns to HSA subscribers,and to the individual subscriber if there is meaningful variation. If the difference between net and gross exceeds 1%, the manager should be required to complete a form explaining it. There are several trillion-dollar funds who would find this proposal no hardship.

Proposal (P) Managers of HSA investments should be qualified as fiduciaries under standard definitions, or make it clear to the customer that they are not. It must be recognized that the nature of medical care is continually evolving, and this is one direction which may be emerging.

Proposal (S) A cost comparison and returns comparison of all managers of HSA, by location, should be annually published, at least on the Internet, or in some other way made available to the public. Those who are wise in the ways of investing have no idea, of how innocent many people are.

Footnotes to N-HSA Table

Footnotes run from 1-6, vertically, and each line represents a type of New Health Savings Account. The headers are repeated several times for ease of reading, and represent the age of the subscriber at the time of action. He is born at 0, reaches adulthood at 21, achieves Medicare at 66, and dies at either age 83 (as at present) or 93 (estimated longevity in a few decades). A(+) sign indicates money is added to the account, a (-) means a transfer out of it. Sacrificing precision for clarity, these numbers are severely rounded off.

Spending for healthcare is not shown, and spending for retirement requires a little explanation. The value given is what would be expected to be the balance if no money is spent for retirement at the age of death. Much of this amount, especially in later years, is what would be expected to be in the account if its income averaged a steady 6.5%. Therefore, any spending will not only reduce the balance by that amount, but will reduce the future balances by 6.5% times the number of years remaining in his life. This could be considerable at age 66, but less so as the final year approaches.

To come closer to actual amounts, estimate your own life expectancy and divide it into the remaining balance. This will still overestimate future balances by the lost income. Since there are no medical expenses if the individual retains Medicare coverage, the retirement income is merely the surplus overflow, to show that funding a grandchild HSA is easily possible. The retirement income can be raised by making extra deposits before age 66, resulting in a gross increase of about tenfold, but requiring more calculation to reduce it by IRA taxes and the aforementioned loss of income. A conservative guess is to triple the deposit.


Line 1 Shows the experience of a child who Receives $22,000, and immediately invests $2000 of it, but uses Obamacare to fund his health from 21 to 66, and Medicare from then on. Any costs from that source are not shown, and it is presumed his $20,000 is consumed from birth to age 21. He has ample funds to transfer $22,000 to his own grandchild, plus the indicated gross retirement amount.

Line 2 Shows the same child, who decides to buy out his Medicare coverage, and adds a $40,000 tax deductible deposit at age 66 on the assumption costs will go up. He retains a small retirement fund.

Line 3 The same child is worried about retirement, and adds $80,000 tax deductible, and increases his maximum retirement fund by $200,000. In this case, the profit is taxable, unless it is used for approved medical expenses.

Lines 4-6 Assume a buy-in of the children's program at age 21.

Lines 1-3 Assume a subsidy of $2000 into escrow at birth, and the initial $20,000 children cost is only an arbitrary assumption.

Lines 2,3,4,5 No provision is made for payroll deduction, premiums, or debt. All of these could affect buyout price.

In summary, the New Health Savings Proposal is suggested to wrap around the Affordable Care Act, assuming it to be in force, but requiring no cross-involvement. The calculation of its income stream through passive investing is clearly able to support children's health care from birth to age 21, plus either a Medicare buyout, or a considerable advance in retirement funding.

Following its first generation, it would be self-funding, and the startup cost should not exceed $2000 per person at birth, or $7500 at age 21. Beyond those ages, its funding is scanty for more than one feature, either a Medicare buyout or a meaningful retirement supplement. Its viability would be considerably enhanced by removing the age limits for Health Savings Accounts, and tax deductibility for catastrophic health coverage.

Concept Behind New Health Savings Accounts

At present, the Classical variety of Health Savings Accounts is reported to have 15-17 million subscribers and 25 billion dollars deposited. It seems to be growing at the rate of a million new subscribers a year. Let me confide it is very satisfying to discover millions of people are intrigued enough to commit money to an idea John McClaughry and I put together thirty years ago. It happened without any money of our own devoted to promoting it, and from which John and I have derived no personal gain. I even have an eventual goal, which requires some legislative help to get going. It's called the Lifetime Health Savings Account. It builds on the original idea of the year- to- year Classical HSA, but follows the whole-life insurance plan, so familiar to purchasers of life insurance. It is, to lifetime health care, what whole-life life insurance is to term insurance. A single lifetime marketing effort, internal professional investing of its float, early overfunding followed by later distribution of surpluses.

However, you can't buy lifetime health insurance right now, and won't be able to, until certain laws are modified. Furthermore, the various steps will take decades to come together into a unified lifetime demonstration. Therefore, two strategies were tried out. The first was to omit some steps, and work around The Affordable Care Act as if it didn't exist. That's easier on paper, called the New Health Savings Account (N-HSA), but takes just as many decades to prove itself, and is forced to surrender much of the financing cushion which gives it a safety factor. Therefore, it is only included in the book to display some of the hidden technical features which tend to make it workable. These details are then extracted like pearls from oysters, and strung into a necklace of ideas. The eventual outcome is the last chapter of the book, which is able to refer to these pearls as if the reader is familiar with them. Which he will be, if he reads the book sequentially, and which he can be, if he refers back to the sources in other chapters in other guises. The result is a description which is quite simple, but each feature of which has explanations which are not entirely self-evident.

If I started over and re-wrote the whole book, it would be much smoother. However, I made a conscious decision to sacrifice smoothness, in order to get the book into the national debate in time to make an impact. Even now it seems a little late, while many fast-breaking events just have to be ignored because there is no time to include them. It's primary difficulty, for which I apologize, is the math of the examples keeps changing.

Meanwhile, I decided two things: to go ahead with the book with its final goal largely sacrificed to immediate needs. And, to prepare an interim, or new, Health Savings Account proposal. The new proposal would go ahead with a few advances toward Lifetime Health Savings Accounts which might be acceptable enough to political combatants to pass Congress, but which could advance the concepts of Lifetime HSA through some experimental stages. Even that proved too ambitious, because It would require decades to prove the concepts by example. So it was stripped down some more, creating the last chapter of this book. Instead of taking a few ideas and struggling with them for a lifetime, I finally came to the view that a lifetime was a series of events, some of which worked out, and some didn't. Like a string of beads, I finally strung them together, recognizing that some would have to be replaced. Essentially a pilot study of proof-of-concepts, it prepares the way for more grandiose plans after most demonstrated flaws had been cleaned up. I called it New Health Savings Accounts (N-HSA), and thought it would work to include all of healthcare except for age 21-66. Although that would cover 58% of health costs, it would not conflict with the Affordable Care Act, and might eventually seek greater compatibility as the ACA evolved. If the ACA got thrown out, it would be a concept prepared to take its place, without tumbling us into healthcare chaos. But until some upcoming elections clarified where the public stood, the two ideas could essentially stay out of each other's way.

A description of N-HSA follows in this section. Because the calculations of the Lifetime goal-model showed L-HSA could generate considerably more money than required, I was misled into thinking abbreviated N-HSA would generate ample funds. That turns out to be only narrowly true, and it has such a thin margin of safety that a major war or a major recession would probably sink it before it had enough public support as a pilot study. That didn't stop Lyndon Johnson from going ahead with a program which was only 50% funded, together with a Social Security program which has a similarly bleak balance sheet, and a Medicaid program which is a notorious failure to do a good job, or to come close to paying for itself. But those were different times. In 1965 the international balance of payments of the United States had been positive for 17 years in 1965, but has been steadily negative for fifty years subsequent to that time. It shows no sign of improving. The Vietnam semi-revolution destroyed Lyndon Johnson's political career in the Sixties. His entitlement programs lingered on as unsupportable public generosities for fifty more years, but they simply must change if we are to survive as a nation.

The Health Savings Account is based on a different set of fundamentals. We have saved enormous sums by stamping out thirty diseases, but at a different sort of cost which has increased as we extend our generosity to essentially everybody, even non-citizens. We have created a tidal wave of rising expectations which even the most optimistic surely cannot imagine can continue indefinitely. And a rising rebellion of envious foreigners with nuclear capability, and an unstable monetary system without any definable standard; which puts us at the mercy of ambitious foreign rulers. And yet, we continue to throw huge amounts of money at research, in a typically American mixture of hope and calculation. We have narrowed most medical costs to about five chronic diseases: cancer, Alzheimer's, diabetes, Parkinsonism and self-inflicted conditions, and we aren't going to stop until those five conditions are cured. Nobody told us to do such a thing, but everybody secretly hopes it will work. If we eliminate diseases, well, everybody can then afford not to pay for them. Unfortunately, it created a bigger, unanticipated, problem.

We bifurcated medical payments into three compartments: working people age 21-66 who earn almost all new wealth, but mostly don't get very expensively sick. Secondly, the elderly from 66-100 who don't earn much money, but increasingly have all the expensive diseases. And third, the children from birth to age 21, who only consume 8% of the health care costs, but who have no opportunity, either to pre-fund their costs, or to earn enough to pay for them. This third group, as I found out, unexpectedly upset almost all plans for comprehensive care, cradle to grave. Rich and poor folks, about whom we have heard so much, are distributed within these three groups. What we have mindlessly created is the need for an enormous transfer of wealth from the people who earn it, to the rest of the nation, who have most of the disease and little of the earning power. This wealth transfer is just more than the generosity of the country can comfortably support, and it's been growing steadily from President Teddy Roosevelt to President Barack Obama.

My concept, right from 1980 onward, has been to find a way for individuals to store up their own wealth while they are working, so they can support their own costs when they grow older. Doing it by demographic classes is too much altruism to tolerate -- just listen to what young people are saying about their lucky elders, and to what the baby boomers are saying about the millennials. The nick-names will change, but that's the way all interest groups talk about each other. I had assumed medical science had already reduced the disease burden to the point where self-funding your own old age -- in advance -- would cover a majority of the population. But I now have to admit we are only part-way. Enough volunteers would probably support N-HSA to make the experiment a success in normal times, but it doesn't have enough cushion to be completely confident it could survive a war or a depression. Every time we make a scientific advance, the day of feasibility comes a little sooner. So, it boils down to whether you are willing to take the risk now, or not. I'd like to see a pilot study of volunteers iron out the kinks, first. But a great many impatient people are boiling to take the risk right now, and if we are lucky on the international and economic level, it might work. Every bull market "climbs a wall of worry." If we approach it more gradually, it is more certain to work. Judge for yourself.

First and Last Years of Life, Health Insurance

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

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

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

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

The evolution of the HSA Idea.

Meanwhile, I decided two things: to go ahead with the book with its final goal largely sacrificed to immediate needs. And, to prepare an interim, or new, Health Savings Account proposal. The new proposal would go ahead with a few advances toward Lifetime Health Savings Accounts which might be acceptable enough to political combatants to pass Congress, but which could advance the concepts of Lifetime HSA through some experimental stages. Even that proved too ambitious, because It would require decades to prove the concepts that way. So it was stripped down some more, creating the last chapter of this book. Instead of taking a few ideas and struggling with them for a lifetime, I finally came to the view that a lifetime was a series of events, some of which worked out, and some didn't. Like a string of beads, I finally strung them together, recognizing that some would have to be replaced. s essentially a pilot study of proof-of-concepts, preparing the way for more grandiose plans after most demonstrated flaws had been cleaned up. I called it New Health Savings Accounts (N-HSA), and thought it would work to include all of healthcare except for age 21-66. Although that would cover 58% of health costs, it would not conflict with the Affordable Care Act, and might eventually seek greater compatibility as the ACA evolved. If the ACA got thrown out, it would be a concept prepared to take its place, without tumbling us into healthcare chaos. But until some upcoming elections clarified where the public stood, the two ideas could essentially stay out of each other's way.

A description of N-HSA follows in this section. Because the calculations of the Lifetime goal-model showed L-HSA could generate considerably more money than required, I was misled into thinking abbreviated N-HSA would generate ample funds. That turns out to be only narrowly true, and it has such a thin margin of safety that a major war or a major recession would probably sink it before it had enough public support as a pilot study. That didn't stop Lyndon Johnson from going ahead with a program which was only 50% funded, together with a Social Security program which has a similarly bleak balance sheet, and a Medicaid program which is a notorious failure to do a good job, or to come close to paying for itself. But those were different times. In 1965 the international balance of payments of the United States had been positive for 17 years in 1965, but has been steadily negative for fifty years subsequent to that time. It shows no sign of improving. The Vietnam semi-revolution destroyed Lyndon Johnson's political career in the Sixties. His entitlement programs lingered on as unsupportable public generosities for fifty more years, but they simply must change if we are to survive as a nation.

The Health Savings Account is based on a different set of fundamentals. We have saved enormous sums by stamping out thirty diseases, but at a different sort of cost which has increased as we extend our generosity to essentially everybody, even non-citizens. We have created a tidal wave of rising expectations which even the most optimistic surely cannot imagine can continue indefinitely, and a rising rebellion of envious foreigners with nuclear capability, and an unstable monetary system without any definable standard; which puts us at the mercy of ambitious foreign rulers. And yet, we continue to throw huge amounts of money at research, in a typically American mixture of hope and calculation. We have narrowed most medical costs to about five chronic diseases, cancer, Alzheimer's, diabetes, Parkinsonism and self-inflicted conditions, and we aren't going to stop until those five conditions are cured. Nobody told us to do such a thing, but everybody secretly hopes it will work. If we eliminate diseases, well, everybody can then afford not to pay for them. Unfortunately, it created a bigger, unanticipated, problem.

We bifurcated medical payments into three compartments: working people age 21-66 who earn almost all the new wealth, but mostly don't get very expensively sick. Secondly, the elderly from 66-100 who don't earn much money, but increasingly have all the expensive diseases. And third, the children from birth to age 21, who only consume 8% of the health care costs, but who have no opportunity, either to pre-fund their costs, or to earn enough to pay for them. This third group, as I found out, unexpectedly upset almost all plans for comprehensive care, cradle to grave. Rich and poor folks, about whom we have heard so much, are distributed within these three groups. What we have mindlessly created is the need for an enormous transfer of wealth from the people who earn it, to the rest of the nation, who have most of the disease and little of the earning power. This wealth transfer is just more than the generosity of the country can comfortably support, and it's been growing steadily from President Teddy Roosevelt to President Barack Obama.

My concept, right from 1980 onward, has been to find a way for individuals to store up their own wealth while they are working, so they can support their own costs when they grow older. Doing it by demographic classes is too much altruism to tolerate -- just listen to what young people are saying about their lucky elders, and to what the baby boomers are saying about the millennials. The nick-names will change, but that's the way all interest groups talk about each other. I had assumed that medical science had already reduced the disease burden to the point where self-funding your own old age -- in advance -- would cover a majority of the population, but I now have to admit we are only part-way. Enough volunteers would probably support N-HSA to make the experiment a success in normal times, but it doesn't have enough cushion to be completely confident it could survive a war or a depression. Every time we make a scientific advance, the day of feasibility gets a little sooner. So, it boils down to whether you are willing to take the risk now, or not. I'd like to see a pilot study of volunteers iron out the kinks, first. But a great many impatient people are boiling to take the risk right now, and if we are lucky on the international and economic level, it might work. Every bull market "climbs a wall of worry." If we approach it more gradually, it is more certain to work. Judge for yourself.

Random Suggestions for The New HSA

1. They could add twenty or more years to the opportunity for extending compound interest still further. That would be after a long buildup of compounding, which works best after forty years (see the graph). Compounding already introduces a 512-fold multiplier. Adding three more doublings would extend it to 4096 to one. You need this extra cushion, not for the ultimate result, but to get through a protracted transition. For this purpose, we might consider the 21st birthday-- a moment of the lowest medical costs --to be the beginning of financial life. It would supplant the present obstetrical moment of the baby's ears emerging from the birth canal, which is the second most expensive moment in lifetime healthcare. This has its pros and cons.

2. Closing the inheritance loop would provide a social bridge between grandparent and grandchild generations, who until recently scarcely met each other. Therefore, we should avoid making transfers completely automatic; to a certain extent, they should be earned. And there should be some latitude to modify them while money remains in the declining fund after the first year of life, for various contingencies. The new method of transfer provides surplus funds for the grandparent generation indirectly to overcome the heavy first year of life costs of their own child, seemingly by relieving medical costs for their grandchild. Other than that, there should be some latitude.

3. Since Medicare recipients are retired, there is a ready use for surplus funding to be used for retirement. Other alternative uses should be considered. Provision of a roll-over from HSA to IRA has already been enacted.

4. Eventually as science progresses, the Medicare population will contain most of the severe illnesses of life. If they get sick, they won't need so much retirement income. If they don't get sick, they will need the money to live on. If the transfer to a grandchild is made at death, the whole retirement issue disappears. Congress should consider whether it wishes to devote so much attention to this one issue, or whether it would be better to designate the Judiciary or an agency.

Summary. A childhood health insurance, linked to a health insurance for senior citizens, owned by two people linked by redefining a birthday or some other strategy, may well sound like a peculiar-looking idea. Using its surpluses for retirement, and also to fund the permanently unemployable, makes it look even more peculiar. But let me persuade the reader to do a little math. At 7%, there are 9 doublings in a 90 year life. 2,4,8,16,32, 64, 128,256, 512. That's rounding up on 6.5% and 85 years, which are closer to realistic estimates of future longevity and interest rate return, but who can predict? Every dollar at birth (possibly redefined as the 21st birthday) is multiplied 512 times. Since lifetime healthcare costs are estimated by others to be $350,000 adjusted for 3% inflation, and half of that is attributed to Medicare costs, the grandparent would have to donate the sum of $350 at the child's birth to pay for all of Medicare, no payroll deduction, no premiums paid. That's a rough estimate, of course, and we still have to account for the notch caused by birth costs, and the gap created by age 21-66, now covered by Obamacare. Uncertainties about the legal status might reduce this to $70,000, which leads to the $39,000 conservative promise. Restoration of age 21-66 might lead to a tripling of these estimated savings.

Proposal 22: Congress should enable one voluntary transfer 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.

Proposal 23: Congress should permit voluntary buy-outs from the Medicare program, which include consideration of returning payroll deductions, and fair accounting for premiums, copayments and benefits already paid for, by age groups in transition.

NewHSA for children

That results in no small effort, however, because our focus programs require a transfer of at least 68% of healthcare costs from people who are not seriously sick, to the places where costs more naturally concentrate. It's the case for every broad-based plan ever proposed, but this is the first one to concentrate on nothing else, because we are blocked from diluting them with the costs of well people. Since we cannot force well people to agree to funds transfer, we merely relieve them of the need to pay the costs, and expect they will take advantage of the opportunity. Similarly, we cannot force sick people to make use of the program, so we must rely on their recognizing the advantages.

First Year and Last Year of Life Coverage. We start with the simplest case. Everybody gets born, everyone dies; there are no exceptions. Furthermore, these two years are the most expensive ones, and likely to remain so. Medical advances of the future may raise the costs of terminal care, but even that is uncertain, and the costs may go down. And it is likely to remain true that just about everybody who dies, dies at the expense of Medicare, so we start with firm data, readily available. To simplify boundary disputes, using the calendar dates of the first year and the last year eliminates that particular fuzziness. Furthermore, obstetrics and terminal care contain elements found in no other age groups, concentrating the scientific issues. When I first presented the idea to a medical audience, one wit rose to the microphone and recalled a town in Pennsylvania that passed a law stating: "Every fireplug in the town must be painted white, ten days before a fire." He was of course quizzing me how you knew when the last year of life began. The answer is, you wait until the person dies and count backward, and you get the cost data from Medicare. Since everyone knows how imprecise hospital costs may be, it is probably better to reimburse average terminal care costs for the year and the region. If the patient retains Medicare coverage, a simple funds transfer to Medicare simplifies both administration and coverage disputes.

The big problem is the long transition, unless Medicare and the Administration should agree to prime the pump. Therefore, the program must remain voluntary, and may even have waiting lists at times, depending on its popularity. Certain tricks known to financial managers may help to shorten the transition to self-sufficiency. For example, CSS reports the first year of life absorbs 3% of healthcare costs, and the last year about 6%. That is, $10,000 should be more than ample for the first year and $20,000 for the last year of life. By externally supplementing the first, the surplus after ten years can be applied to accelerating the funding of the last year. But even doing that could take twenty-five years to complete the process. Funds could be borrowed with a bond issue, of course, but eventually that would raise costs and prolong the transition. "Sweet spots" can be found, but at the best, the transition is a long one, certainly spanning several turnovers of political power. Nevertheless, at the end of it, these pivotal medical coverages would acquire a major funding source, and other programs could experience a major reduction, up to 9%, in cost duplication.

In this, as in other parts of the book, we round off investment returns to 7% when we really expect only 6.5%. Using the old adage that money doubles in ten years at 7%, the reader can verify approximate accuracy by doing the sums in his head as he reads.

The Rest of Childhood, Seniority, and Permanent Unemployability. So that was the first Proposal 21: , to which the second one is a natural extension. 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 work-around. Therefore children are lumped with senior citizen costs, and hence to a buy-out of Medicare.

The permanently unemployable are included by using surplus funds from the other two, mainly because there is no way to establish eligibility except by starting a program and seeing what it costs if you monitor it. Those may not seem like adequate reasons to lump them together, but it will be seen the details feel congenial, to do so. That is always a good sign in new proposals.

Multiple Programs in Multiple Years. The transition problem is always vexing in a new program, but reaches some sort of new limit when the ambition is to work toward uniformity and maximum patient control, across the entire nation; fragmentation always sounds easier. The temptation is always there to order and threaten to use force, but it must be resisted. Furthermore, enormous cost savings are readily available if programs are multi-year, and cost is a paramount issue, here. It's hard to beat compound interest, the longer the better.

We explain the reasoning of the grandpa transfer in the next section. It's simple (one grandchild's worth of costs per person), it uses surplus cash after a grandpa has no further use for it, and it comes at an optimum time on the compound interest curve. It greatly stretches the lifetime for compounding, but it is readily suited for a limitation on perpetuity. It even follows established family patterns, although families are under considerable stress, these days. True, it jumps over a new barrier for the first time, but it doubles the duration of compounding, skips over the issue of leaving a dark hole around Obamacare, skips over the issue of pre-funding obstetrics, simplifying a host of unnecessary red tape obstacles. And it reduces costs by half.

No Employer Involvement, No Obamacare Contributions. At first, it seems like a relief not to have to deal with the two thorniest issues of the past, but in fact it doesn't quite do that. If the patient has duplicate coverage, there must be cordial negotiations to see which coverage should be dropped. And while significant savings can be readily demonstrated, there will be some residual revenues which have to be transferred along with the patient, or the new program will starve. The complicated systems we have evolved to facilitate cost-shifting will probably invalidate old statistics, and perhaps some old ideas. Transferring six percent of the gross domestic product is by definition a tedious, difficult task, even if you reduce it to four percent in the process. Everyone is hesitant to name the individuals who will lose their jobs, or their pensions, or their seniority, if the program shifts significantly. But if the savings aren't significant, what good are they?

Health and Retirement Savings Accounts: to Privatize Medicare and Save Money, Too

As earlier sections outlined, Health Savings Accounts were developed by John McClaughry and me in 1981, as a bare-bones health insurance scheme for financially struggling people. The package consisted of the cheapest insurance we could imagine (a high-deductible catastrophic indemnity plan with no co-pay features), attached to what others have aptly described as a tax-sheltered Christmas Savings Fund. That's essentially what you get if you sign up, today. What was this linkage supposed to accomplish? The Account part was intended for folks who must accept a high deductible to lower the cost of health insurance, but who then struggle to assemble the deductible. A combination package thus became the cheapest healthcare coverage we knew how to devise -- the higher the deductible, the lower the premium.

As deposits build up in the account, the remaining deductible falls toward zero, but the premium of the insurance does not rise because the extra cost is excluded from the insurance part. At that point, you could easily describe it as "first-dollar coverage for a high-deductible premium." Stepping through the process should clarify for anyone, how expensive it had always been to include the deductible costs inside the insurance! It certainly compares well with so-called "Cadillac" plans, where the underlying motivation really was to include as many benefits as possible, money no object, with someone else paying for it and then writing off its cost against artificially high corporate tax rates -- which were then eliminated by the same healthcare deduction. If the government elected to subsidize our plan to provide it even more cheaply to poorer people, inter-plan subsidies could easily be arranged for seriously poor people, just as the Affordable Care Act does, by offering to transfer the same subsidy to it. Although HSA is itself absolutely the cheapest, neither it nor the Affordable Care Act is completely free of any cost, so additional features like charity must be supported by additional revenue from somewhere. Cheaper is simpler, simple is easier to understand. But cheaper doesn't mean free.


First-dollar coverage by any mechanism generates the danger of spending health money unwisely. That undesirable feature was neutralized by letting subscribers keep what is left over at age 65, thereby generating (and greatly increasing) retirement income. Retirement income is generally in short supply, and there may exist a future danger, that well-meaning attempts to supply generous retirements would destroy this incentive to be frugal. But right now it isn't a worry.

Other Incentives. One thing we didn't immediately verbalize was, making it a bargain entices people to save, even when they are sort of inclined to consume. We didn't think to include regular paycheck withdrawals, but that's another common savings incentive with proven effectiveness. Having loose cash does seem to create a vague itch to spend. But the Health Savings Account specifies an invitation to save for health care, using any surplus for retirement, a much more specific appeal. With that addition, it became a more attractive program, appealing to a larger segment of the population without reducing its appeal to the original ones. Our reaction was that everyone was complaining about high health costs, so the more people Health (and Retirement) Savings Accounts appealed to, the better.

The real game-changer was this: When a subscriber later acquires Medicare coverage, anything left in the fund is automatically turned into a tax-exempt retirement fund, an IRA. As enrollments in HSAs began to boom, it was realized this provision creates an unmatchable retirement fund if someone puts extra money into the account. I wish I knew whose idea originated that. So you might as well say the basic package has three parts: a high-deductible health insurance, a spill-over retirement fund, and a Christmas savings fund to multiply savings with compound interest -- useful for both purposes.

It's amazing how many people think HSA has only one feature. It is a double savings vehicle for two sequential stages of life, with the tax advantages of the first stage getting it on its feet. The separation of the account from its re-insuring catastrophic health insurance, also identified the incentive to save, distinguished from a natural desire to share the risk like a hot potato. Adding compound interest adds particular attractiveness for the later stages of life, because compounding takes a long time before it means much. It connects two benefits end-to-end, lengthening the time for compound interest to become meaningful for the second one, as it would not, if it waited for retirement to begin. We eventually realized the deductible-funding and overlapped retirement-funding package, was the most attractive investment vehicle most ordinary folks could find. Beating it as a retirement fund alone was therefore nearly impossible.

Hence the double-strong incentive to save, sadly missing from every other form of health insurance. We strongly suggest adding this feature to Medicare, which badly needs some such incentive, although retirement is parallel to Medicare, not sequential. Experience shows this unique set of double incentives to buy HSA was effective, so a 30% reduction in premiums for total health insurance began to emerge among pioneer clients, not merely claimed in theory. The recognition of all these advantages led millions of frugal people to sign up without an expensive marketing effort. Everything seemed to fall in place. Even though mandated coverage might have speeded up acceptance, slower adoption avoided the catastrophes of taking on more than could be handled.

So that's where HSA stands today -- the best little health insurance idea available anywhere, unless someone monkeys with it. Even the remote possibility of getting very sick very often, was covered by adding the feature of a top-limit to out-of-pocket costs, paid for by dipping into a small portion of savings generated by other features. Anyone who thinks of a better health insurance plan than this one, is welcome to offer it. Every addition added to its complexity, but every feature added to its cost-saving.

Let's whisper a reminder to resisters: the policy is owned by the individual rather than his employer, so it doesn't suddenly stop when you change employers or move between states. To a different audience we could whisper, it could bring a second bad feature closer to an end, the business of paying for Medicare with debts which have to be borrowed from foreigners. The Account gathers interest, instead of costing interest. The best part is: it induces the subscriber to hold back from using the account, saving it for more distant requirements, which inconveniently come without warning. Paying for your old age is wonderful, but starting to save while young is vital, and more likely to work. Most plans now maintain an upper limit to the subscriber's out-of-pocket costs, protecting against a second illness with its second deductible. When we say, "That's all there is to it," we really mean that's all the advantages which have so far emerged. It's ready to be renamed HRSA, the Health (and Retirement) Savings Account.

Technical Amendments, Needed at Present.

Now, let's pick the nits, noticing how hard it gets to improve on it. If Congress could pass a few amendments, the following flaws could be more or less immediately repaired:

1. Full Tax-Deductibility. Attractive as it is, HSA still isn't as fully tax-deductible as the health insurance many employed people are given at work. The savings and retirement portions are indeed tax-sheltered, but unlike some of its competitors, the high-deductible health insurance itself stands outside the funds (as what insurance experts might call re-insurance) and isn't covered. Employers get around this difficulty for their employees by buying the insurance themselves and "giving" it to the employees. Without monkeying around with this rather dubious maneuver to maintain tight control, we propose the premiums for the Catastrophic health portion of the HRSA might instantly become tax-exempt if the Savings Account paid the premium. That would appear cheaper for the Treasury, than proposing to make the whole package deductible. Because the other parts are already tax-exempted.

To permit something like that would require a one-line amendment to the HSA enabling act, but would restore fairness to the system, and bring out how much cheaper the Health Savings Account really is. Making it cheaper means more people could afford it, thus relieving the Treasury of the need to subsidize those people under the Affordable Care Act. That would compensate for some of the loss of revenue to the IRS of making the Catastrophic Health Insurance tax-exempt. Regardless of how the CBO scores this complexity, it should be remembered that poverty is not a lifelong condition for most poor people; after a temporary period of poverty, many if not most of them rise toward becoming tax-payers. Equal treatment under the law is itself a valuable asset; it could paradoxically be provided by lowering the corporate income tax, since many corporations already eliminate the corporate tax with the healthcare deduction. But that's not so self-evident, and politically hard to explain. If the Congressional Budget Office would extend its dynamic scoring to include retirement taxation on the HSA's eventual compound interest (instead of limiting its horizon to ten years), it would visibly be better to choose the compromise of letting the Accounts buy the re-insurance.

2. A better Cost of Living Adjustment for HSA deposit limits. There is presently an annual limit of $3400 for deposits into Health Savings Accounts, whose limits have seldom been raised very much. This new COLA should be formalized into a continuing cost-of-living adjustment which is somehow related to the current rate of inflation in the medical economy, and perhaps takes account of a potential transition to HRSA by people over age 60. These late arrivals simply do not have sufficient time to catch up within the present deposit limits, even should they possess the savings to do so.

{top quote}
Young people contribute more time for interest to grow, old people must contribute more money to catch up. {bottom quote}
3. Age Limits for HSAs It is a quirk of compound interest (originally noticed by Aristotle) that interest rates rise with the duration of investment. Consequently, much or most of the revenue appears after forty years, and consequently HSAs get more valuable with advancing age. To put it another way, young people contribute more time for interest to grow, old people must contribute more money to catch up. At present, HSA age limits are set to match employment, but the HSA will inevitably focus on funding retirement. Removing all age limits might go a little too far, but would substantially increase the amount of investment income generated, at almost no extra cost to the government. It might also supplement the platform for funding childhood health costs, a problem age group which stubbornly resists improvement. It might greatly enhance revenue for older subscribers as well (by reducing their health insurance cost), the surplus from which could be used at their death for the grandchildren generation.

Extending the age limits would potentially also serve as a platform for re-adjusting dangerous imbalances in the healthcare financing system. We are fast approaching a demography of thirty years of childhood and education, followed by thirty years of working life, followed by thirty years of retirement. Substantially all of the revenue comes from the middle third, while the remaining two thirds of the population contain most of the health costs. To some extent this is unavoidable, but the whole health financing system becomes a dangerously unbalanced transfer system for well people to subsidize sick ones. It is possible to foresee the beginnings of class warfare, based on age alone. Consequently, society would be well served to create the more stable system of subsidy between yourself as the donor and yourself as the beneficiary. The alternative is to continue the process of having one demographic group collectively subsidize two other groups of strangers who generate most of the cost. Eventually this could induce well people to dump the burdensome sick people. I hope I am unduly concerned, but to extend the age limits for individual self-financing seems a very cheap way to begin stepping out of that particular mud puddle.

Finally, there is the conflict with inheritance laws. By extending the age limits for the funds to the legal boundary of perpetuity (one lifetime, plus 21 years), the ability to transfer funds between generations is enhanced without the perplexities of inheritance. It would be particularly useful to permit the fund to remain active until a grandparent's death, or even extend to the birth of the designated grandchild's 25th birthday. Like a trust fund, it could gather interest after the death of the owner, leaving the selection of heir to the last possible moment.

To return to the subject narrowly at hand, it is easy to see so many projects are made possible, you end up with an aggregate of goodies which eventually sink the lifeboat. Something must be chosen, something must be deferred, and the choice should be a delayed one, left to individual choice as much as possible. It can be commented in advance that retirement costs potentially dwarf sickness costs, and small single payments held at interest for long stretches have the greatest efficiency. There seems little choice but to constrain retirements to what the individual can manage independently, rather than permit retirements to absorb all the benefit of a new windfall. The theme is, and should be, one step at a time.

As an aside, it's true the subscriber to a Health Savings Account is not fully covered in his first few years, until the account builds up to the deductible. That makes a very good argument for starting the accounts while you are quite young. At first, that was a concern, but it has proved largely unnecessary to provide for it, among young healthy subscribers. Apparently, by the age hospital-level illness becomes common, ability to meet the deductible has mostly been achieved. Nor has it proved necessary to resort to sliding-scale deductibles hidden in the slogan, "the higher the deductible, the lower the premium" -- probably because lower premiums immediately transform into more money for saving. These features might be reviewed when self-selected frugal applicants taper off, since HSA enrollment has so far attracted younger enrollees. For the moment, sales incentives seem adequate; everything else may be indirectly changed by HSAs, but very little is changed directly.

Future Expansions.

How far these three short amendments would extend retirement solvency, is hard to predict into the future, but it would be considerable. Aside from any improvement never seeming like enough, it is almost impossible to guess the future timing of health costs, even when you can see them coming. But while the amendments might assure a comfortable future for Health and Retirement Savings Accounts, they do seem unlikely to address the full over-expectations of retirement. So the problem for many, many afternoons' deliberation, would be to expand the potential of HSAs until they become objectionable to competitive concerns. For that, I have four additional proposals which might work, but inevitably collide with professions who would be quick to suggest narrower limits. Let's describe them, meanwhile waiting to assess objections from those they would discomfit:

1. A re-insurance scheme (insurance company to insurance company), called First and Last Years-of-Life Re-Insurance.This has already been described.

2. Medicare should be modularized but without other basic change, so recipients need only buy pieces they need, using the invested proceeds for retirement. Obstetrical coverage immediately comes to mind. Sometime during the next fifty years it can be predicted at least one of the five most expensive diseases (Alzheimers, diabetes, cancer, psychosis, and Parkinsonism) will be inexpensively cured, once the initial cost increase is absorbed. We need a way to fine-tune the transfer of such medical savings into retirement income, understanding many competitors will hope to divert a windfall to themselves. Redirecting the Medicare withholding tax makes an easy way to channel the funding, as would reductions of Medicare premiums. Scientifically, Medicare is eventually destined to shrink as we find cures, but funding the resulting longevity must be given first call on the savings.

3. The investment component of Health Savings Accounts should be dis-intermediated, partially if not completely.Ibbotson reports the stock market has produced--for a century--10%-11% long-term returns on large-cap stocks and less steadily, 4-5% on bonds, minus 3% inflation. You might not expect that, judging from the returns investors often receive; investors are definitely absorbing most of the risk. The volatility is much less than most people imagine, and there is every reason to suppose Index funds of these entities should perform better with less volatility at far less cost, perhaps 0.1-0.3%. The days fast fade, when the public will continue to surrender the present level of stockmarket transfer costs and fees, which now sometimes erode investor return to as low as 1%. The fast-growing and simpler system is "passive" investing with index funds, and its goal should be an average return to the retail customer of at least 6.5% after inflation and costs. The struggle will be a fierce one, but the retail finance industry must re-examine who is at risk, and who is rewarded for taking that risk.

{top quote}
The wrong people are doing the medical commuting. {bottom quote}
4. The center of medical care should migrate from medical centers toward shopping centers attached to retirement villages. Architects report it will always be cheaper to build horizontally than vertically. Since we seem destined to spend thirty years in retirement, and the principal occupation of retired people is taking care of their own medical needs -- the wrong people are doing the medical commuting. Teaching hospitals were located close to the poor, in order to use them for teaching material. But now "meds and eds" are fast becoming the principal occupations of high-rise cities. If there is ever a good time to place medical care closer to the patients, this is it.

And if ever there is a way to put the doctor back in charge of medical care, decentralization is the way to do it smoothly. We will always need tertiary care, but we don't need indirect overhead, skyscraper construction, or multiple layers of overcompensated administration. Even continuing-education is becoming a revenue center. No one can claim the present centralization made things cheaper, and the disadvantages of medical silos certainly call the quality issue into question. The Supreme Court failed us in the Maricopa Decision; so let's see what Congress can do with reconciling the Sherman Act with the Hippocratic Oath.

Problems of Newborn Babes

Future Medicare costs are more predictable verbally than with data. Half a dozen diseases make up most of the cost of Medicare, and it can be predicted that research will eliminate some of them. Although at first the new cost of treatment will raise costs, eliminating the disease will eventually lower them. The last year of life will almost certainly remain expensive, because everyone will eventually die. In that sense, it is easier to predict continuing high costs for the last year of life, than for Medicare as a whole, except for scientific progress driving disease out of lower age groups into Medicare. In fact, enduring costs of the last year of life are about the only thing predictable about Medicare. So the old folks needn't worry; no one will seriously propose eliminating the program until the future becomes clearer.

However, diseases will surely be eliminated, longevity will increase, and the last year will be expensive. It seems rational to give Medicare recipients the same incentive to be frugal about spending which younger ones get from Health Savings Accounts: if your medical costs go down, we will transfer the savings into retirement funds which many of you badly need. In the case of Medicare beneficiaries, that probably means transferring them into current Social Security payments. Another purpose is also served, which is to make the offer while there are no surplus funds. It would serve the purpose of assuring the elderly that funds going into their medical care will be diverted to the consequences of good care, which is improved longevity. The consequences of not staking out this position in advance, might be, just might be, the diversion of funds into battleships, sugar subsidies and other worthy causes. And having been shown clean hands with this proposal, perhaps the seniors would calm down and consider other proposals about Medicare.

For example, how the books are kept. Medicare is funded by three sources, the wage tax on working people (3%) of their income, the premiums the old folks pay, and the subsidy from the general fund. However, the money is not put into a big Medicare pot, but rather designated to particular parts of the program. The fiction is maintained that hospitals are almost entirely funded by the wage withholding tax, more or less guaranteeing that the hospitals will be paid, no matter what, because the wage tax has already been collected as cash in hand. The rest of it is less certain subsidies and premiums, much of it borrowed from foreign nations. You can see the hospital lobbyist in this: hospitals get paid first, no matter what. And so far, it hasn't mattered much, because everyone got paid in full. But however meaningless, it represents a give-back which the hospitals would probably be reluctant to give up.

Since it represents a reason to resist reductions in Medicare funding by the federal government, it potentially stands in the road of gradually reducing Medicare funding for other purposes. Including shifts from medical care to retirement funding, let's say. And it serves no other purpose I know of.

shows the "costs" we already spend per person for healthcare, adapted from Dale Yamamoto, the actuary who has written most on the subject. You will pardon a brief excursion into jargon. Costs are compared with revenue variations. Costs are ordinarily more reliable than revenue projections, both of which must reach the same final amount. But in this case they are based on reimbursement reports, both overpayments and underpayments, themselves responding to cost shifting and artifacts of cost-to-charge distortions. Reimbursements are modified by competitive loss-leaders, mis-projections, and changes over time. They are then further distorted by changes in the Law by politicians. An example of that was the imposed rule, cross-age ratios may not exceed a certain ratio to each other. Costs change over time, and they respond with alacrity to reimbursement decisions. They are then further distorted by changes in the Law by politicians, as in the imposed rule on cross-age ratios of the Affordable Care Act, which is really a roundabout method of introducing cross-subsidies between age groups. We have to take the actuary's word that approximating the deductibles and co-pay costs makes little difference in the final result, but one caution is firm. Since these figures represent the cost which providers send to the insurance company, they necessarily omit the cost of health insurance itself. It would be informative to know whether insurance costs add 1% or 20% to the average cost, and then decide for ourselves whether it makes a significant difference. Since it is obvious these curves are all approximations, their apparent precision can be treated with less caution than the selection of inputs. The shape of the curves is accurate enough, but since we are mainly interested in comparisons between insurance approaches, it is disappointing to find so little data to use.

Turning now to the above graph as introduction to the topic, its revenue projection comes from investing $400, at birth and in escrow. Seven percent is easy to calculate in your head, since it doubles every decade. Eight percent is what we estimate to be the highest (safe, net, average long-term) return an investor could expect to maintain for decades, also happening to dramatize the major improvement in final income which is possible from very small, but consistent, efficiencies. Stated another way, it illustrates what it costs not to resist HSA intermediaries who suggest interest-free deposits for long periods of time, but to propose instead to put the money in escrow at long-term rates. By current law, deposits stop at age 65, and the decline in balance to age 85 represents retirement income. Somebody is going to gather this income, and it might as well be the HSA depositor. If you put it in escrow so you can't spend it, you become entitled to long-term rates, but if you insist on a demand account, you get demand rates, which right now are quite low. To solve this dilemma, we propose using an escrow to pay for your last year of life, which is a pretty certain long-term bet. That leaves the rest of the account available for routine health costs, and the government should be persuaded that removing up to 30% of their costs is a good deal for them, too.

(While only 50% of total health costs are paid by Medicare, 30% of what Medicare does pay is for the last year of life. It grows to 50% of costs for people over 85 in the last year of life, and improved longevity pushes more people into that group. The sole financial advantage to growing old, is compound income increases considerably at the far end, too. At this distance, it is not possible to see how these two factors balance.)

Actually, we are about to propose that part of the Medicare withholding tax, collected between ages 25-65, be isolated (escrowed) as the source of long-term money deposited in HRSA accounts, because the money is collected for Medicare -- whose own total costs would be reduced by expunging the last year of life costs. Because all such innovations have uncertainties, the $400-at-birth illustration is offered to show the way shortfalls could be supplemented at low cost, but if unneeded, used as more retirement income. Another direction to take might be to expunge costs for the last two years of life. Or three, or four. Half of Medicare costs right now occur in the last four years of life. This is merely the flexibility feature which makes long-term uncertainties bearable. The real proposal is simple: just use a portion of the Medicare withholding tax to buy yourself the means to acquire the last-year-of-life costs. At the moment, that tax is 3% of income. Also at the moment, terminal care is about 25% of last-year costs, but it probably will eventually be over 50%, as the population ages and crowds death expectancy, not merely into Medicare, but into people older than 85.

That briefly sketches the plan for Medicare -- phase it out gradually and voluntarily (as research eliminates the ten most expensive diseases), offering a choice of more retirement funds whenever the individual prefers them. It's intended to be linked to first-year of life coverage, but the impossibility of pre-funding newborns forces an entirely different approach. Meanwhile, everybody alive has already been born, so there is less urgency. We take them up separately, and later integrate the two ends of life.

The graph is merely illustrative of the concept. Of course we cannot predict stock market performance from past history, nor can we be sure inflation will continue at 3%. The point being made is the escrow concept allows part of the balance to remain untouched for early medical expenses, but remains free to be released for designated ones, later.(The rest of the account balance has no such limitation, and thus is available for medical expenses.) The second point is the astonishing growth of a small amount of money, if you give it time. And the final point is that you aren't going to get 7% passive return on your money unless you fight for it, even if you are investing in a stock market which has returned more than that for over a century. Right at the moment, it is in one of its doldrums, but even in a booming market, you have to watch out for those fees. You can even hear it prophesied that the market will have a 2% total return for the next ten years. But that isn't what is important, what's important for this kind of thinking is What Will it Do, thirty years from now? And although no one can give an answer, it has been repeatedly said that a bull market climbs a wall of worry.

To return to the nitty gritty, income could be further enhanced by extending the time period, compounding frequently, depositing earlier, and eliminating investment fees. In the background is the implication the depositor is well advised to be frugal in his early spending, pressuring his medical providers by being mindful of frugality, himself. Any action which pushes revenue toward the left (and away from the right) helps the customer put it to work with compound interest. The customer is always right, as John Wanamaker got rich by saying. Since the particular year the subscriber was born will probably exert more influence over his retirement affluence than anything he can manipulate, he had better do what he can. And that is the basic argument for politically trying to extend the time period for compounding. At least on that issue, single payer advocates have a point.

True, effective net income can also be increased by restraining inflation and/or middle-men lobbyists, but we are trying to make a larger point at the moment. We should aim the system time frame to be as long as possible, most easily achieved by linking programs (childhood, adulthood and post-retirement) together. The only thing which needs to be continuous, is the account into which money is deposited. There are significant disadvantages to bigness in organizations, so if you aren't going to compound the income, I'm not sure you are wise to advocate single-payer. Our first step would thus be, to try to include the time period covered by Medicare, since that's where most medical expense seems destined to originate in the future -- along with age 25-65, since that's when significant money is usually earned. Including any time period at all helps the math, but these two periods are particularly vital.

Since Medicare comes up immediately, let's start with it.

The problems of last year-of-life almost seem simple, compared with the problems of insuring the health of children. For the last year of life, the funding source already exists (payroll deductions), Medicare records already exist to define the costs to be reimbursed for dying, and the transfer mechanism from one insurance company to another ("re-insurance") is already well worked out. Funding the transition presents difficult choices, but there are existing models for that sort of choice. What remains as a significant problem is to get Congress to agree to stop diverting the funds to other purposes. That issue must not be left to incumbents, but the public is pretty clear where it wants to go. That's a big problem, to be sure, but it is one easily described, and you either establish a third-party to hold the money or you don't.

By significant contrast, the beginning of life, from conception to graduation from college, is fraught with controversy and contested obligations. In the health insurance world, the funding is backwards. You can't pre-fund childhood costs, particularly when you can't assign responsibility for those costs without fear of dispute. It's a medical issue, a religious issue, a political issue -- and an insurance anomaly. It's a legal tangle that everyone would like to avoid by calling it a minor cost. It isn't minor at all. Compared with the resources normally available to the parents, childbirth is a cost so large it changes the life of everyone involved. It has the potential of destroying the largest nation on earth, China. And the second-largest, India, isn't doing so well with it, either. The rest of the developing world doesn't even try very hard.

The big social problem with prefunding obstetrics and newborn care, is its present uncertainty about who legally is responsible for the bills of a newborn babe. The baby's cost can be called part of the mother's cost, and the mother's cost can be called part of the family cost, but everyone understands family relationships are in great flux at the present. About half of marriages end in divorce or separation, too chancy an environment for insurance companies to design long-term solutions, and politicians are no clearer. In a way, the abortion controversy is part of it, where women ask for decision power, but have trouble resolving the financial responsibility which would follow. Babies cannot make lifetime decisions for themselves, and are showing signs of rebelling at those their parents make for them. The trial lawyers offer solutions, but no one can afford them, particularly if they involve some exuberant jury decisions. But let's not get into all that. It's sufficient that the situation has been too unsettled to encourage lifetime solutions, whereas we are here seeking a lifetime solution because we think it might be loads cheaper.

So, our work-around approach is to take the most difficult case and seek a solution to fit it, hoping less difficult cases may be less difficult to solve. That is, we choose to assume the baby's lifetime health costs begin at birth, and the mother's obstetrical costs are her own, not the baby's. By sometimes lumping the two costs together, we arrive at a manageable line item, which can be split into two items whenever the situation warrants. That's not a solution, it is a device. Decision-making thus can be fairly satisfying all around, but it probably presumes a general acquiescence by the nation, based on its assessment of the culture.


Our own insurance solution assumes the social situation will stabilize. Assuming lifetime compound interest from individually small investments will approximate, over an average lifetime, lifetime average healthcare costs, its benefits will significantly exceed its costs. Compound interest income greatly expands toward the end of sixty years, so including the additional 21-26 lifetime years of children adds two doublings to the revenue. That's a significant contribution, right there. But it helps the childbirth year (8% of the cost) very little without something else added, and there are twenty more years at risk without insurance. Continuous compounding for 90 years will pay for almost anything, starting from almost nothing at birth. A lifetime of health care for $250 at birth, always seems within our reach, but is always judged unreachable.

The trick I suggest is to add, donate, transfer, or declare two extra decades of compounding as a transferable item within his HRSA, and transfer it to his grandparent or surrogate within the baby's own Health Savings Account established at birth. The condition made, is it returns to his own account when he reaches his grandparent's age. Or variations of the same idea. Compound interest greatly increases with advancing age. The grandparent couldn't take advantage of his own two doublings, but in this situation now could sure make great advantage of two extra doublings; it's worth a lot to him, nothing to the child. Notice a full average lifetime is now almost nine decades long. easily restated to be nine doublings at 7%, which is thus multiplied 500 times. The eventual evolution of Medicare into a retirement fund is only part of the idea. It brings us to the final step in the proposal: transfer it to himself at a later age and let him reap the benefit. Loan it to his grandparent, and restore it to his own generation later. Or, special index funds could be created, escrowed, and transferred at the two different ages. Created at birth, transferred at death, re-transferred to the next grandchildren generation. In various ways, this valuable unused item could be monetized, and kept out of the hands of middle-men. And unfortunately, it could also be diverted, stolen or misappropriated. That means to me it should not be monetized until its destination is at hand. Take your time; get it right.

The Argument for Designating Obstetrical Cost, As a Cost of the Child.

It may seem strange we shifted obstetrical costs in our proposal from cost-to-mother, to cost-to-child, but here's why it was done. In the first place, it smooths out the huge cost of large families, into an identical cost per child. Persons who prefer small families may think this favors religious preferences, but its real motive was to create insurance neutrality for people in choosing family size. If the consequence turns out to be families like my grandmother's with thirteen children (or Ben Franklin's with eleven), the formula could, and probably would, be adjusted. At the same time, it should be pointed out this shift allows insurance to overcome the present nearly insurmountable tendency of women to delay their first child until it becomes both a medical (Down's Syndrome for example) and social (male-female employment inequality) problem. There may be other ways to accomplish this goal, but I can't think of any.

The proposal, remember, is to begin employment insurance at age 25, and to make zero to age 24 health coverage into a gift from a designated grandparent's escrow account, paid out of the grandparent's surplus accumulated during a lifetime of his last-year-of-life re-insurance. The necessary assumption is that the Affordable Care Act can do as it pleases with insurance for a worker, just so long as it neither adds nor subtracts from the child's escrow fund, but lets the balance continue to grow its compounding investment income. This is the price asked from both the Affordable Care Act and employer-based insurance, in return for eliminating the expensive part of obstetrical costs from their cost obligations.


This clarification returns us to the medical cost curve derived from multiplying the average yearly weight provided by Dale H. Yamamoto by the lifetime dollar cost provided by insurance carriers. I must thank both these sources for their data, and my son, George IV, for performing the conversion. The resulting U-shaped curve is missing obstetrical cost from the first year of life, but largely contains it buried in the upward bulge in female costs from age 20-40. (To be fair, it also contains it in the low cost of male health insurance during the same period, if you believe family plans assume an equally-divided present responsibility between the two parents. That's the assumption we make when we draw a hypothetical line between the two during that interval. It makes no claim on precision, but for plan-design purposes, it is close enough. One must remember the way these calculations are made, results in omitting the insurance company overhead and profit. It also makes the cash payments for deductibles and copayments into an approximation. The resulting curve is in the planning ballpark, but must not be quoted as precise.

In the second graph, we dotted-in the two consequences, one of which shows the average woman probably could not afford to finance her retirement from HSA surplus, while the other shows it would become more comfortable by transferring away some obstetrical cost and compounding it. By itself, that fact is convincing this approach is a necessary one, but it may require legislative approval. For the time being, it remains the government's choice. For that combination of reasons, we offer first and last-year of life re-insurance as a planning suggestion for discussion, rather than a proposal for immediate action.

And in the third graph we have presented a schematic of what we just said. It isn't very complicated in the schematic, but it may well be a little confusing to hear it described. Just in case it still isn't clear, the grandparent account pays all childbirth costs, or about $18,000 for both childbirth and the first 25 years of the child. The mother is relieved of the childbirth part of her obstetrical costs as a gift from her parent, and this gift is paid for by compound interest. Things are mostly handled this way to keep them within the donor's account, thereby avoiding disputes about ownership. The grandparent is regarded as having earned this money and therefore controls how it is to be spent. He/she spends it this way in order to receive the last-year-of-life and retirement benefits as a consideration.

Buying Into Medicare, Several Decades Early

Campaigning for President, Hillary Clinton brought up a proposal in 2016 to permit the uninsured to buy into Medicare coverage between the ages of 55 and 65. Eight years earlier, the Congressional Budget Office estimated such coverage would cost about $7600 a year per added client. The appeal is particularly strong for divorced women, because employer-based coverage ends when employment does. Nevertheless, the CBO estimate would make this segment the most expensive component of Medicare, so gradualism may have to wait for some enhancements.

It happens I was working on similar calculations for this book; the CBO estimate of what medical care once cost this 55-65 age group before 2008, seemed reasonable. The shape of the curve has probably not changed much in eight years. Nevertheless, there are now several reasons present estimates may be underestimated. The Consumer price Index for medical care has jumped around, but increased 3.4% a year, or over 30% more than the level eight years ago. Health insurance costs have probably exceeded overall costs for fifty years, so forecasting health insurance premiums has always included some guesswork. The cost curve for 55-65 is at the high end of a rising rate. Including more sick people also means fewer well ones, so there is a leverage. The data is based on aggregating claims data from still earlier years, so insurance costs tend to struggle to catch up with community costs. The cost of care inflates, but this portion of the population is at the high end of commercial coverage, so it probably escalates disproportionately.

In addition to statistical underestimation, there are probably invisible sources of confoundment. With Medicare just ahead, these people hold back on elective expenses, with lack of insurance exaggerating the tendency. If the experience with Medicare in 1965 or the ACA more recently, is used as a guide, we can expect a backlog of untreated gallstones, varicose veins, perforated eardrums and the like, to make an appearance once they regain insurance. That's quite different from pre-existing diabetes, heart failure or strokes, and will take longer to appear because it is more deferrable. It would not be surprising to find that post-insured costs are 50% higher than the 2008 CBO estimate, and will remain abnormally high for a decade. Finally, the method of data collection almost guarantees a low result. The published papers relate insurance companies were asked to report their claims, but no mention is made of insurance overhead, while the deductible and copayment ingredients are merely estimated. What seems to be implied is the data does not include insurance costs, probably for competitive reasons. And all of this is before we debate how much to subsidize, or how much it will encourage unemployment if we are too generous.

I surely do not know what is fair and proper to subsidize, and can see no good way to estimate it. Medicare is already financed by about 50% government subsidy from the general fund, as well as another 25% from payroll deductions, which have already been collected at a probably lower level. With inflation at 3%, a 3% payroll deduction is less than it seems. No mention was made of the revenue sources for this proposal, but hidden extra subsidies of $5000-6000, per person per year, would seem to be buried in it for someone to pay. While no one disputes the genuine hardship this group experiences, this proposal would only be a bumpy introduction to the practical difficulties of the "single payer" idea.

There is little doubt working women are handicapped in many ways by higher health care costs attributable to pregnancy, and this handicap results in a number of undesirable social consequences. My suggestion has been to shift the cost of obstetrics from the mother's insurance to the baby's, which usually amounts to saying they should be shared by the father's employer through the father. While this shift would have the undesirable feature of shifting costs from the working age group to a childhood group which requires some sort of compensating cost-shifting, it mainly lengthens the period for compound interest to generate investment income, thus lowering the effective cost. A glance at the following chart clearly shows the bump in female costs between ages 15-45, transfer of which would go a long way to bringing the costs of males and females to much the same level. Since this cost would ultimately be born by a transfer of surplus revenue from the Medicare group, it would heighten the attractiveness of First year of Life Insurance, which will be our next topic.



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Replacing the Gold Standard
If you don't like the gold standard, and are uneasy about no currency backing at all -- just what would you choose as a way to back the currency?

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

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

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

Some Ruminations About the Far Future.

The Math of Predicting the Future
New blog 2014-09-17 17:51:15 description

Some Brief Examples of HSAs .

Public Misconceptions

Disadvantages of Lifetime Health Care
Disadvantages? What disadvantages?

Pit Stop: Some Features Regular HSA and Lifetime HSA Have in Common
Both types of Health Savings Accounts, the Regular and the Lifetime, contain some important modifications of existing health insurance.

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

Epilogue: Where Does All This Money Come From?
Reflections on a multi-trillion dollar mystery.

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

Lifetime Health Savings Accounts:How Much is Enough?
There's an old Quaker saying: The way to be certain you have enough, is to have too much.

How Do You Withdraw Money From Lifetime Health Insurance?
New blog 2014-11-18 20:55:08 description

What Is Our Final Goal?
Some final goals should be set, even if we don't know how to achieve them.

Buying Out Your Medicare?
New blog 2014-11-26 19:40:08 description

Pit Stop #2: What Are the Foreseeable Consequences?
The creation of a system of Health Savings Accounts to pay for American healthcare, would have consequences far beyond the medical ones. They are hard to predict.

Recipients of Care: CHAPTER SIX
New blog 2014-11-27 17:38:09 description

Providers of Care: CHAPTER SEVEN
New blog 2014-11-27 17:38:09 description

Rapidly increasing longevity is something entirely new.

Beware the Middle-man: Common Stock Index Fund Earnings are Not the Same as Investor Returns.
Investing is only part of running an endowment.

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

The Big Picture
How does this all fit together?

Financial Overview
You earn from age 26 to 65. You borrow the rest.

Healthcare Financing, Up to Medicare Age
New blog 2014-12-29 00:14:24 description

That Dratted Third Rail
The math of privatizing Medicare is easy; no improvement could persuade someone who was determined to resist.

The Streets of Philadelphia, on Ben Franklin's Birthday
New blog 2015-01-22 23:44:26 description

New blog 2015-02-18 17:49:07
New blog 2015-02-18 17:49:07 description

"Scores of Centimillionaires"

Lifetime Healthcare, Using Health Savings Accounts (1)
New blog 2015-03-06 01:37:12 description

Basic Coverage: Three Big Problems, No Little Ones
New blog 2015-03-10 20:34:33 description

Lifetime Healthcare, Using Health Savings Accounts (3)
New blog 2015-03-11 19:51:17 description

Lifetime Healthcare, Using Health Savings Accounts (4)
New blog 2015-03-13 21:34:27 description

Steve Brill: Healthcare Without Insurance Companies
Stephen Brill suggests healthcare would be less expensive if hospital chains merged with, and then absorbed, health insurance companies.

Finding the Sweet Spot
New blog 2015-04-25 17:16:36 description

Grandpa Makes a Gift
New blog 2015-04-29 19:54:18 description

Passive Investing
New blog 2015-06-07 15:17:51 description

Consulting Agency for Medicare Buy-out Issues

Early History of Health Savings Accounts
New blog 2015-07-15 18:29:06 description

Not Casualty, but Life Insurance

Assorted Proposals

Footnotes to N-HSA Table

Concept Behind New Health Savings Accounts
New blog 2015-07-31 22:02:57 description

First and Last Years of Life, Health Insurance

The evolution of the HSA Idea.
New blog 2015-09-01 01:31:01 description

Random Suggestions for The New HSA
New blog 2015-09-02 00:22:44 description

NewHSA for children
New blog 2015-09-03 22:28:04 description

Health and Retirement Savings Accounts: to Privatize Medicare and Save Money, Too

Problems of Newborn Babes
New blog 2016-03-31 20:46:42 description

The Argument for Designating Obstetrical Cost, As a Cost of the Child.
New blog 2016-05-12 19:08:08 description

Buying Into Medicare, Several Decades Early