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
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
Retirees: CHAPTER TEN
The Education Industry: CHAPTER ELEVEN
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 likelihood 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.
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 a 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 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 retaliation 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 specially 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 giveaways 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 the 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 stockbroker 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 are 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 a 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?
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 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 annual 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, pay down 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. Sometime 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 the 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 Obamacare 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.
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.<---
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.)Lifetime Cash:$2600 plus $58,000=$60,600|
|@6%......$400 per year (plus $1000 for Catastrophic coverage.)Lifetime Cash:$1600 plus $58,000=$76,600|
|@ 2%......$2200 per year (plus $1000 for Catastrophic coverage.)Lifetime Cash:$88,000 plus $58,000=$146,000|
|....$3300(Maximum Legal Limit)............Lifetime Cash:$132,000 plus $58,000=$190,000|
|Affordable Care Act "Bronze" Premiums: $5500-$7200 (for 60% coverage of Healthcare costs)Lifetime Cash:$220,000-$288,000|
@10%...............@6%...................@2% ..|||||...............Payroll tax...................Premiums......................Debt............
$45.................$250.00..................$1400...........|||||||............$1320......................$2640 (x18yrs).............$2725 (x18yrs.).............
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.
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. ---------------------------------------------------------------------------------------------------------------------------------------
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 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..
The prudent way to manage future uncertainties is to over-fund them and transfer any surplus to a retirement fund.
|Planning For The Future.|
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 credible 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 the least effect in its early stages, and there would be sufficient warning of inflation to mobilize 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 needed healthcare reform. It certainly is a double opportunity.
A fiduciary puts his customer's interest ahead of his own.
|The End of The World?|
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 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 an 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.
Your money earns 11%, but that isn't necessarily what you will earn.
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 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 outsider. 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.
Tell me what you can spend, and I will predict the costs.
For example, if you think a 26-year-old can invest more than $3300 a year in his lifetime healthcare, go right ahead and some 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.
$132,000 in contributions, plus $218,000 at 8% compounded.
Expenditures: $200,000 Deposited:$8,400
|Medicare, Longevity 83|
Expenditures: $308,000 Deposited:$6,000
|Medicare, Longevity 93|
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, the 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 Worldwide 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.
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 working. 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 minute, 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 the 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 a furor about pre-existing conditions(Obama). These are both manifestations 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 the 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 a 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 investment 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 the 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.
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 general 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 stock market 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
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 Unemployable, Such as Children. Please do not compare subsidy with lack of subsidy, because the subsidy is always cheaper in the short run. . Furthermore, subsidies are created by the 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 return. 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 the 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.
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.
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 ensuring the worst health disasters with the 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 ensuring 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.
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 Benefits Association reports 11.8 million people to 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.
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 benefits are 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 the business is made up of big business, and half is a 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.
SOME BRIEF EXAMPLES, EXPLAINING LIFETIME 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 the 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, an 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 reinsurance 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.
WHAT IS THE AVERAGE LIFETIME HEALTH CARE COST, PER PERSON, AT PRESENT RATES?
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 in 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.
HOW DO YOU CALCULATE CHILDREN'S HEALTH COSTS?
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 hubbub about bioflavonoids 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.
CRUCIAL FINAL QUESTION: FUNGIBILITY (Shifting money around)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 a 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.
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 the 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.
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.
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.
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.
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 to 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.
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 proofs-of-concept, 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 most 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.
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 workaround. 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 the 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?
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 the 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 proofs-of-concept, 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 the 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 most 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.
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 on 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 on 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.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.
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.
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.
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, the 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 an 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 the last year-of-life almost seem simple, compared with the problems of ensuring 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 backward. 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 lives 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 the 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 life 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 fix 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.
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 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 the First year of Life Insurance, which will be our next topic.
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 the 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 have 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.
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. The 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?
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
Retirees: CHAPTER NINE
Rapidly increasing longevity is something entirely new.
The Math of Predicting the Future
New blog 2014-09-17 17:51:15 description
Epilogue: Where Does All This Money Come From?
Reflections on a multi-trillion dollar mystery.
You earn from age 26 to 65. You borrow the rest.
The Big Picture
How does this all fit together?
Finding the Sweet Spot
New blog 2015-04-25 17:16:36 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.
Early History of Health Savings Accounts
New blog 2015-07-15 18:29:06 description
New blog 2015-02-18 17:49:07
New blog 2015-02-18 17:49:07 description
New blog 2015-06-07 15:17:51 description
The evolution of the HSA Idea.
New blog 2015-09-01 01:31:01 description
NewHSA for children
New blog 2015-09-03 22:28:04 description
Concept Behind New Health Savings Accounts
New blog 2015-07-31 22:02:57 description
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