Consolidated Health Reform Volume
To unjumble topics
Introduction: Surviving Health Costs to Retire: Health (and Retirement) Savings AccountsNew topic 2016-03-08 22:42:53 contents
First, Define the Unit. Before we can describe a coherent plan for the entire life cycle, healthcare for children is the final link in the chain, as well as its beginning. In some ways, it is the hardest link, because self-funding for newborns is pretty hard to imagine. Some other age group must supply the money and supervision, and traditionally the family as a unit organizes both. But although it is understandable for employer-based insurance to copy the family-unit approach, the family itself is now under strain, often ending in dissolution. Two-earner families mixed with one-earner families also strain notions of fairness in the employer-unit approach. When one-earner families have children or two one-earner families share children in common, or two two-earner families do, it's not easy to devise consistent rules. In response to present obsolete-sounding solutions, we, therefore, find it useful to adopt two modified notions: a single life begins on the day of delivery, and childhood dependence upon outside financing ends on the 25th birthday. Those don't sound so radical when stated alone.
These admittedly expedient distinctions then allow a large and definable portion of obstetrical costs to be shifted to the child, ultimately to be recycled to the individual-unit for 25 years. Although this re-arrangement disturbs tradition, its simplification of many issues is an asset. No one argues this strategy should be extended beyond health insurance, which has a nation-unit quality for share-the-risk purposes. The HRSA already has a dual structure, an individual financial fund attached to community-unit insurance . When a premature baby can incur costs of a million dollars, a new notice must be taken of old problems, previously dumped on the extended family, or perhaps on the hospital, which has a deeper pocket. Our culture would surely rebel at making childhood costs the responsibility of government, but perhaps it could stomach government as custodian of a funding cycle, chosen and run by parents for the first 25 years of life, and by the individual thereafter. Let's at least see how far we get with that revised idea. The first problem it eases is to make age 25 (ordinarily the cheapest moment for healthcare) the starting point for self-financing, instead of the day of birth, the second most expensive one. The second problem is to mitigate the temptation to cost-shift against inescapable health events, of which childbirth is supposedly one.
It might be objected we make no direct connections between either Health and Retirement Savings Accounts or the Affordable Care Act, for the working years between 25 and 65. But medical financing issues for working-age people have become so scrambled, there remains little choice but to skip past judgments until politics settle down. Whether covered by Health Savings Accounts or something else, non-HSA approaches are here assumed to be revenue neutral. That's improbable, of course, but that suspension of judgment allows consideration of how to finance the other two-thirds of life, later re-adjusted to the working-age coverage whenever we finally know what it is to be. We have made our proposal in the first section of this book; let's see how well it works.
A second cultural change needs to be accommodated: women must find their own adjustment to combining work with procreation. The real career cost of pregnancy lies in time-off from work. But at least we might more fairly reduce the maternal cost of childbirth in the eyes of the employer, transferring its cost to the beginning of the child's life. Eventually, that might curtail the cost-shifting of hospitals and insurance toward childbirth by using investment income to do the shifting. Unless we do something along those lines, the lifetime difference in wage costs of young females and young males will continue to undermine the careers of women, increasing the stridency of futile protest against marriage, and the tendency of males to walk away. For this purpose, a forced accounting shift fools no one.
An objection might be raised that parents need extra leverage to control adolescent behavior. Conversely, the adolescents, at least, believe parents already have too much control, causing generational conflict. However, in practice grandparents are now dying after their own children are recovering from expenditures for grandchildren college and their own retirements. There is still time (for some of them) for more doublings of compound interest between the time of greatest family need, until the time when savings have no further use for grandparents. Further extension of life expectancy might alter this balance, but right now it is the grandparent whose death releases most money at the time it is needed, with least inconvenience for its legal owner. The choice of heirs is a closely treasured asset for the older age group, of course, so they have to be motivated to give up a little of it, in return for a more assured retirement. That's why first-year and last-year of life are combined in one package. Since on average, compound interest turns upward after four doublings, it helps to extend the investment process upward to the age of grandparents' death, and downward to the child's twenty-fifth birthday. But to reduce the date further to the day of the child's birth would increase the fund's value by 400%. The revenue issue is then vastly simpler for the grandparent than for any other generation, although there will always be exceptional cases.
The Overall Game Plan. The next step has already been addressed, as a proposal of last-year of life reinsurance. Taking this step next would allow a gradual -- voluntary -- substitution of retirement financing for Medicare's present inadequate healthcare financing, anticipating science will eventually make health funding less urgent than retirement funding. The timing is up to science and therefore unpredictable. Investment income takes a long time to build up, so it is best to get started immediately and wait for opportunities to convince the public. The history of the Standard & Poor averages suggests there might eventually be enough surplus left over to pay for the healthcare of children, as well. But since at first there is no backlog of unpaid births to makeup, there is an opportunity to get started there, as well. So, the last remaining issue is to devise a way to recycle such funds-flow from grandparents to grandchildren. The suggested approach is to keep the grandparent's HSA account open until the grandchild is 25. That way, a transfer can be made without getting tangled in the inheritance process. The cultural readjustment to be made is that three lengthened generations now overlap, instead of traveling the medical highway sequentially. We will, of course, continue to have intensive sickness care, but first, it will be increasingly concentrated in the grandparent generation. Meanwhile, the early adopters of HSAs will find ways to improve investment returns and demonstrate the validity of the overall scheme of funding retirement costs with unneeded healthcare resources.Excluding inflation, the transition cost comes down to $300 for the people already alive, pro-rated downward for the people who have already lived part of their working career, but mainly pro-rated upward because their seed money has less time to grow. The basic idea is to fund the public system in compounded income from working people alone, eventually forgiving more Medicare premiums once the system is established, but maintaining the payroll withholdings as a funding source. That effectively completes the funds transfer from the age group which is working and well, to the age groups who cannot work but have lots of illness -- and gather interest on it, rather than borrowing it.
Obstetrical cost and Other Contrivances. Furthermore, it also simplifies discussion to consider the life of the child as beginning at the onset of labor since doing so permits us to ignore family size as a variable. All childbirths can then be considered as costing roughly the same unless there is a complication or disease. Vaginal deliveries and caesarian cost the same by being merged and averaged; whatever justified the Caesarian section is responsible for adding its extra cost. In recent decades, hospitals and obstetricians have sometimes taken to charging equally for the two procedures, to prevent cost from influencing the choice. You might do that; I found it to be an unnecessary contrivance for a proposal at this stage.
The Grandparent Transfer. To justify including the child's first two doublings with the seven doublings from 25 to 90 probably requires including their benefits as well. Estimating the total cost of delivery by any means to be $10,000, the total intergenerational transfer would be about $25,000 -- at the death of one grandparent and the birth of one grandchild, with the government financing timing mismatches. Redistributionists will like the idea of an equal start for everybody from government funds, conservatives will like the idea that success or failure depends on successful individual management of the equal start. This compromise probably contains enough verifiable facts to survive the temptation to divert it to unintended purposes, like battleships.
Shortfalls and Perpetuities Every individual fund theoretically arrives at a zero balance at age 25, and by thus re-adjusting the amount of total required subsidy at the time of least medical risk, allows shortfalls to be corrected at least cost, while surplus is prevented from becoming a perpetuity. Perpetuity has long been defined as one life, plus twenty-one years, and this stays within that traditional definition. With an added contingency cushion of $400 at the child's birth rising to about $60,000 at age 65, there is probably room for yearly mid-course adjustments, up or down, at age 25, with surplus beyond that need applied to extra retirement funding, in competition with serving to pay off international debts for previous deficit spending. (Since births are distributed over the entire year, this would be a continuous process). The contingency funding (mentioned earlier) operates along with the same principles, except for its re-adjustment point, at birth. Eventually, that leads to a diplomatic summit between the two creditor funds, negotiating with the two debtor funds (Medicare and, probably, the Affordable Care Act.) Meanwhile, the two approaches can operate independently, until finally events expose the cards in their hands, and force a showdown merger.
The Purpose of Final Merger. There are two main ones: a consolidated system ends the debate about poached boundaries shifting investment income. And a consolidated system makes whole-life insurance possible. Allowing a major insurance company to manage all of the complexities internally would certainly improve the quality of management, but the offsetting cost is the need to make a profit. At the moment, it is hard to imagine a responsible company taking on a 90-year vaguely definable risk and actually planning to pay off at the end.
First-Year and Last-Year, Combined. Essentially, we propose overfunding Medicare escrows by an amount of money sufficient to pay one-day obstetrical and the first 25 years of childhood costs (23% of total lifetime costs) after 90 years of compounded interest, surely beginning with a hundred dollars at most. The transaction would be voluntary and hence gradual, leaving existing systems in place. Since everybody alive has somehow already paid for being born in some way, the funding could be much less for a considerable early period of transition to this system. (This might be considered some sort of payback for the previous free ride of the 1965 generation.) Eventually, the escrow funds would be adjusted to generating approximately $100 in 2016 currency for people in all subsequent years.
Meanwhile the transition costs would be supported from the Medicare phase-out option, which is in turn supported by diverting a portion of the wage withholding tax. (Earlier details of the last-year-of-life system have already been outlined.) Very roughly speaking, this would approximately amount to a total escrow of $400 at birth, including funding for the last year of life. Remember, this is the funding which eventually catches up with the transition costs we offered earlier by different approaches and eases the question of how much to sacrifice for a precisely workable transition. But it ought to ease the political pain to know there is an end in sight, for both redistributionists and merit-advocates.
Our earlier calculations show at least this total amount might be generated by compounding interest at 7% on the Medicare withholding taxes presently collected on working people. So the premiums on actual Medicare retirees would serve as another initial fall-back cushion, just in case we make a gross miscalculation. Meanwhile, taking out these two main cost factors (birth and terminal care) should reduce residual lifetime costs by half, so everybody immediately benefits considerably. Parenthetically, subsidizing half of the system by the present gigantic transfer system is politically a very dangerous thing to continue. That's particularly true when you realize that people 25-60 years of age, are not very sick, and remember that even the Affordable Care Act had to exclude 30 million special cases. In the background is science, which could both temporarily worsen, and permanently improve, health costs. We must gamble on science's success, but simultaneously rely on compound interest, for longer or shorter ways out of our problems.
If that ideal cannot be reached, by experience or people with sharp pencils, only a certain proportion of Medicare premiums would have to be waived. It once seemed to me almost anything would suffice as an incentive for old folks to give up Medicare and have major premium forgiveness as compensation for extending Health Savings and Retirement Accounts in their place. But they often don't see it that way, because their time horizon shortens. When the final feelings of the public about this have been determined, more precise numbers can be offered, but the conservative inclination of old folks will probably persist. When it finally became clear that Medicare could not be totally eliminated any time soon, a partial advance became clearly preferable. What's proposed here is not exactly a plan, it is an insurance design, which must first be debated -- and readjusted. If the plan could be fleshed out and decided by the 2020 elections, it could be said to have been ratified. By the way, the present government subsidy of Medicare would diminish, too. The Chinese would just have to buy bonds from someone else.
In case it hasn't been noticed, the childhood portion is the last piece needed, to complete a circular "single payer" system. It is a far cry from just extending unsupportable Medicare to everyone at public expense, and the number of intermediary payers would probably be in the dozens. But that's a compromise for you; nobody gets everything he asked for.
Here emerges yet another plan for the intermediate transition step. As a gesture toward the legality of gifts and estates, the two ends of life are consolidated into a single "First and Last Year of Life Escrow Account", created at birth in the child's name. It is funded with about $400 and allowed to grow, undisturbed, to something approaching $100,000 at age 90. At that point, it repays the last-year-of-life costs to Medicare and distributes about half of that to the HRSA of a single previously-designated grandchild for his obstetrical and pediatric care until age 25. Meanwhile, a new escrow is established at birth with $400 from the grandparent's funds, to re-establish the cycle. Healthcare finance for the child-grown-into worker is not included in this plan, because the politics are still too unsettled. However, we recommend the HRSA, which I guess would sort of make it into a single-payer system.
Much ink has been spilled by arguments about Obamacare, compared with almost anything else. That's a pity, because the Affordable Care Act ends up as only a variant of how it originally started, with correcting the defects of employer-based health insurance. No matter how the Obamacare dispute turns out, it fails to address the central cost problem. So, without getting into a detailed history, let's focus on what needs to be addressed, hoping it will help the present cost escalation.
If an employer gives health insurance to his employees, the insurance necessarily terminates when the employee changes jobs. The employee, in short, doesn't own his own policy. The result is "job lock" where an employee dares not change jobs for fear he might lose the renewability of the insurance he paid for, along with the associated hospitals, doctors, etc. with whom he affiliated during the course of his employment. Either that, or go through the grief of re-assembling his medical care under new insurance with new attachments he either fears or has good reason to reject. And all this, at a moment when he is applying for a new job and is necessarily reluctant to make demands.
His employer's grandparents created the problem for benevolent reasons, but the present generation of employers now finds itself blamed for its details, largely steered by his finance department exploiting tax loopholes. Discovering the tax loophole -- remembering the income tax itself was started at about the same time as Blue Cross -- it really is pretty hard to devise a system which is paid for by employers, and tax-deductible by them as a corporate business expense, while still respecting the interests of the rest of the community. Naturally, the employer resists arrangements which would either absorb costs growing out of illnesses occurring before employment ("pre-existing illnesses"), or after an employee is terminated, becoming pre-existing illnesses for the following employer. Furthermore, ever since World War I, family domination of businesses has become unusual.
While the employer community, now largely selected by head-hunters, had a century to devise a cross-generational pooling system, a satisfactory one has trouble emerging in an intensified antitrust atmosphere, involving huge expenses by employers whose stockholders regard healthcare as a minor concern. The Obama Administration was determined to take a stab at it. At first, their solution was essentially to have the government pick up the cost above a certain level (now about $7000), and the opposition Congress became equally determined to frustrate this doorway into eventual total cost control by government. The business sponsors were also indifferent or displeased with this maneuver, because they had devised ways of having the government pay most of the bills by tax deductions of a "gift", while leaving effective control in the hands of business management. And anyway, a recession was not the best time to add new cost centers.
Buried among these details was a dominant payment system based on "service benefits" instead of indemnity, or cash, benefits. Everyone understands that ten dollars is less than a thousand, but not everybody agrees a blinding migraine headache deserves less attention than a hopeless brain tumor. The indemnity system had its flaws, but over the course of a century, labor negotiations readjusted to insurance coverage focused increasingly on illness episodes, rather than on the itemized price of treatments. This was much more advanced in hospitals than doctors' offices, but it fitted specialization better than general practice. To a certain extent, this arrangement originally did make it possible for employees to choose their own doctors and hospitals, regardless of price variation. Fine points could be overlooked, but the ability to draw a line could never be surrendered to a counterparty in wage negotiations. "Service benefits" were particularly unable to migrate into a blank check for the illness, regardless of when it had been contracted. That still left high-cost outliers, particularly those extending after employment had been terminated. If the employee left his employer on bad terms, the line could still be invoked, even if it was often ignored.
Two responses ensued: The government made assurances to insurers they would stand as re-insurers to cover cost over-runs ("risk corridors"), a feature which the political opposition greeted with great suspicion. And secondly luxury treatment was able to exploit the tax-shelter, eventually becoming sufficiently expensive to permit less reckless insurance to under-cut it. Younger employees were cheaper than older ones, certain geographic locations, ethnic groups and employer advantages became health advantages as well; a ruthless employer could injure a more generous competitor by concentrating on health costs by indirect approaches. In other words, a benevolent system imposed disadvantages on a benevolent employer, and retained customer control in the hands of employers. Over time, employers lost control of a major cost center and had to stand by, while the interests of employees and employer took different directions. Over time, employers solved their cost problem by taking a tax deduction at higher tax rates than individuals, shifting much of the cost problem to the government without losing control. The government promptly responded to accepting more of the cost by demanding more of the control. Underlying much of this evolution was the decline of the family-owned business, gradually replaced by much less benevolent stockholders and headhunter-selected managers.
Let's summarize the evolution, to state that patients will not tolerate it when decisions about what is important are made by his employer, his insurance, or his government. In turn, those entities can not tolerate a blank check. The only solution left was for the third party to set a price limit and leave other decisions to the patients and their doctors. That is, patients, doctors and insurance companies were better off with an indemnity insurance system, and should return to it. Unfortunately, the twists and turns of the process have left all three participants without much say in the matter. This is what you get when you allow lawyers to describe your employer's tax dodge, as a gift.
Lots of other things changed materially in the course of a century, and a variety of approaches might mitigate the bad things. Giving health insurance to everyone might solve matters, but it would surely cost more, and the present Obamacare controversy is already largely whether we can afford it at 16% of Gross Domestic Product. You can blame 16% on the haste of Lyndon Johnson and Wilbur Cohen, to the extent it isn't 8%. It's that extra 8% this book is struggling to recover, the rest of the waste is often transfers, not real expenses.
Mr. Obama's abandonment of the limitation on pre-existing conditions, however, additionally undercuts a traditional expedient the insurance industry, one it suspects it cannot cope without. Insurance companies were given assurance of government support in case an alternative didn't work. That might be a separate issue. None of these, however, prevented standard care from migrating from wards to semi-private rooms, and semi-private to start to migrate toward single rooms. It's rather chilling to imagine what would happen if events continue in that direction. Expanding Medicaid to cover all poor people might facilitate this particular flaw in the present system, but falls foul of the Tenth Constitutional Amendment, which was the original basis for fifty Medicaid programs rather than one national one. And so it goes. The proposal I make is far simpler, and is admittedly not a total solution to any problem except pay-as-you go. And even pay-go existed for fifty years before 1965.
Market-Based Outpatient Costs as a Cornerstone. It is to try to approach a cash or debit-card system for paying for outpatients at market-set prices, thereby greatly reducing processing costs, while constraining insurance payment and review to the helpless inpatient -- with an improved DRG coding system, related to true costs by overlapping with the market based outpatients. The dual nature of the Health Savings Account readily suits itself to a dual system of this sort. As far as the insurance is concerned, if cost and portability are seen as the main problems, the change with least disruption seems to get back to indemnity insurance with a high front-end deductible, which coordinates better with a second more or less invisible, reinsurance. That's such a concentrated summary it will take the rest of the book to explain its reasoning. So, let's come back to the re-insurance part in a later chapter, and concentrate on the indemnity insurance for ordinary hospital costs. Should the hospitals be consulted? Obviously, yes. Should they be given veto power? No, because they have a rather daunting conflict of interest. You can't blame hospitals for preferring a blank-check approach to any alternative which isn't a blank check for hospitals. But the nation is more or less united on the idea, we now have to be more careful with public money -- because in the long run, it's our own. High-handedness destroys this image, so they would do well to act humble.
The case for indemnity insurance also boils down to this: the premiums are collected in cash, and the providers are paid in cash. All that expensive processing in the middle is on trial as redundant, time-consuming, and ultimately ineffective in suppressing costs. The burden of proof is on it, that it can justify its own costs, let alone restrain an army of bill-collectors. Demonstration projects are welcome, stonewalling is useless. I suspect it has a minor utility for preventing fraud.Medical Reform Through Payment Reform, not Payment Reform as a Club. Affordable Care, the nation's current "healthcare reform" really concentrates on the payment mechanism for healthcare. It may nurse grander ambitions, but it directly confronts only one of many problems with healthcare delivery -- whether poor people can afford it. Much is made of the electronic medical record but its impact is mostly one of user annoyance with increased overhead. Instead of calling doctors rigid resisters, consider their point of view: The electronic record adds four hours a week to the doctor's limited time. The extra overhead cost means more employees, which means the doctor never takes a vacation. Working harder means he can quit, but he can't slow down. After six years, EMR still hasn't justified itself. And so it remains in a class with driverless cars -- it's coming, but it isn't here. The fundamental structures of hospitals and medical practice, growing out of the much older employer-based system, are pretty much unchanged. The configuration remains mainly the employer-based system.
In the far future, control of payments may eventually be used as a hammer to control healthcare, but that goal has never been articulated, and the slow pace of the past six years suggests any such goal is distant, indeed. For practical purposes, the Affordable Care Act (ACA) reduces to a payment mandate -- universal health insurance for everyone regardless of cost, subsidizing those whose insurance costs exceed 8% of income (presumably, a pretty elastic number). Opponents reply: Since 87% of the people who bought insurance on a Federal Exchange did so with subsidies, the cost could seemingly bankrupt the country, at least crippling more important priorities. In general, I sympathize with both emotional responses (care for the poor but don't wreck the economy), except for one essential point. In almost every foreign health plan, the government becomes generous with trivial items and stingy with expensive ones. Plenty of cough drops, but not many chest x-rays. Or plenty of chest x-rays, but woefully few MRIs. When you see what others have done, you get a clearer idea of what we might be facing.
The deal-breaker for me is the kind of insurance selected to be mandatory. Catastrophic (high-deductible) health insurance without frills would be far more suitable, and considerably cheaper. Linking it to a tax-exempt savings fund makes it even more flexible with first-dollar coverage, and doesn't raise the cost of the insurance standing behind it by one penny. Somewhat to my surprise, cash overfunding leads to retirement income, and creates the incentive for the patient to be frugal.
Its bare-boned catastrophic insurance has both a top limit and a bottom limit, and uses money as an indemnity measure, not elastic definitions like "service" benefits. (Indemnity pays for your itemized bills, not your disease.) Without prior experience, new insurance entrants cannot guess at their risks, either individually or collectively. Service benefits might be considered after long and stable experience, but for a beginning new program, they tilt the balance between patient risk and insurer risk, entirely too much in favor of patients whose real client is the elected politician. If diagnostic payments have any utility it is in detecting odd-ball charges, but it would take a lot of persuading to convince me the fraud in the system amounts to 8% of GDP.
The deal-breaker for me, is the type of insurance made mandatory.
The higher the deductible, the lower the premium.
|High-Deductible Catastrophic Insurance|
The effect of all this seems to suggest high-cost items are the enemy, but in fact they are the most important benefit to insure. Collecting all small benefits into Health and Retirement Savings Accounts substitutes patient choice for unlimited bureaucracy, shifting the selection burden to the subscriber, and if uncertain, his doctor. High deductibles make them turn to their doctors for advice when they are worried. That's quite different from requiring a slip of paper from a doctor whenever things are expensive.
As earlier sections outlined, Health Savings Accounts were developed by John McClaughry and me in 1981, as a bare-bones health insurance scheme for financially struggling people. The package consisted of the cheapest insurance we could imagine (a high-deductible catastrophic indemnity plan with no co-pay features), attached to what others have aptly described as a tax-sheltered Christmas Savings Fund. That's essentially what you get if you sign up, today. What was this linkage supposed to accomplish? The Account part was intended for folks who must accept a high deductible to lower the cost of health insurance, but who then struggle to assemble the deductible. A combination package thus became the cheapest healthcare coverage we knew how to devise -- the higher the deductible, the lower the premium.
As deposits build up in the account, the remaining deductible falls toward zero, but the premium of the insurance does not rise because the extra cost is excluded from the insurance part. At that point, you could easily describe it as "first-dollar coverage for a high-deductible premium." Stepping through the process should clarify for anyone, how expensive it had always been to include the deductible costs inside the insurance! It certainly compares well with so-called "Cadillac" plans, where the underlying motivation really was to include as many benefits as possible, money no object, with someone else paying for it and then writing off its cost against artificially high corporate tax rates -- which were then eliminated by the same healthcare deduction. If the government elected to subsidize our plan to provide it even more cheaply to poorer people, inter-plan subsidies could easily be arranged for seriously poor people, just as the Affordable Care Act does, by offering to transfer the same subsidy to it. Although HSA is itself absolutely the cheapest, neither it nor the Affordable Care Act is completely free of any cost, so additional features like charity must be supported by additional revenue from somewhere. Cheaper is simpler, simple is easier to understand. But cheaper doesn't mean free.
First-dollar coverage by any mechanism generates the danger of spending health money unwisely. That undesirable feature was neutralized by letting subscribers keep what is left over at age 65, thereby generating (and greatly increasing) retirement income. Retirement income is generally in short supply, and there may exist a future danger, that well-meaning attempts to supply generous retirements would destroy this incentive to be frugal. But right now it isn't a worry.
Other Incentives. One thing we didn't immediately verbalize was, making it a bargain entices people to save, even when they are sort of inclined to consume. We didn't think to include regular paycheck withdrawals, but that's another common savings incentive with proven effectiveness. Having loose cash does seem to create a vague itch to spend. But the Health Savings Account specifies an invitation to save for health care, using any surplus for retirement, a much more specific appeal. With that addition, it became a more attractive program, appealing to a larger segment of the population without reducing its appeal to the original ones. Our reaction was that everyone was complaining about high health costs, so the more people Health (and Retirement) Savings Accounts appealed to, the better.
The real game-changer was this: When a subscriber later acquires Medicare coverage, anything left in the fund is automatically turned into a tax-exempt retirement fund, an IRA. As enrollments in HSAs began to boom, it was realized this provision creates an unmatchable retirement fund if someone puts extra money into the account. I wish I knew whose idea originated that. So you might as well say the basic package has three parts: high-deductible health insurance, a spill-over retirement fund, and a Christmas savings fund to multiply savings with compound interest -- useful for both purposes.
It's amazing how many people think HSA has only one feature. It is a double savings vehicle for two sequential stages of life, with the tax advantages of the first stage getting it on its feet. The separation of the account from its re-insuring catastrophic health insurance, also identified the incentive to save, distinguished from a natural desire to share the risk like a hot potato. Adding compound interest adds particular attractiveness for the later stages of life because compounding takes a long time before it means much. It connects two benefits end-to-end, lengthening the time for compound interest to become meaningful for the second one, as it would not if it waited for retirement to begin. We eventually realized the deductible-funding and overlapped retirement-funding package, was the most attractive investment vehicle most ordinary folks could find. Beating it as a retirement fund alone was therefore nearly impossible.
Hence the double-strong incentive to save, sadly missing from every other form of health insurance. We strongly suggest adding this feature to Medicare, which badly needs some such incentive, although retirement is parallel to Medicare, not sequential. Experience shows this unique set of double incentives to buy HSA was effective, so a 30% reduction in premiums for total health insurance began to emerge among pioneer clients, not merely claimed in theory. The recognition of all these advantages led millions of frugal people to sign up without an expensive marketing effort. Everything seemed to fall in place. Even though mandated coverage might have speeded up acceptance, slower adoption avoided the catastrophes of taking on more than could be handled.
So that's where HSA stands today -- the best little health insurance idea available anywhere, unless someone monkeys with it. Even the remote possibility of getting very sick very often was covered by adding the feature of a top-limit to out-of-pocket costs, paid for by dipping into a small portion of savings generated by other features. Anyone who thinks of a better health insurance plan than this one is welcome to offer it. Every addition added to its complexity, but every feature added to its cost-saving.
Let's whisper a reminder to resisters: the policy is owned by the individual rather than his employer, so it doesn't suddenly stop when you change employers or move between states. To a different audience we could whisper, it could bring a second bad feature closer to an end, the business of paying for Medicare with debts which have to be borrowed from foreigners. The Account gathers interest, instead of costing interest. The best part is: it induces the subscriber to hold back from using the account, saving it for more distant requirements, which inconveniently come without warning. Paying for your old age is wonderful, but starting to save while young is vital, and more likely to work. Most plans now maintain an upper limit to the subscriber's out-of-pocket costs, protecting against a second illness with its second deductible. When we say, "That's all there is to it," we really mean that's all the advantages which have so far emerged. It's ready to be renamed HRSA, the Health (and Retirement) Savings Account.
Technical Amendments, Needed at Present.
Now, let's pick the nits, noticing how hard it gets to improve on it. If Congress could pass a few amendments, the following flaws could be more or less immediately repaired:
1. Full Tax-Deductibility. Attractive as it is, HSA still isn't as fully tax-deductible as the health insurance many employed people are given at work. The savings and retirement portions are indeed tax-sheltered, but unlike some of its competitors, the high-deductible health insurance itself stands outside the funds (as what insurance experts might call re-insurance) and isn't covered. Employers get around this difficulty for their employees by buying the insurance themselves and "giving" it to the employees. Without monkeying around with this rather dubious maneuver to maintain tight control, we propose the premiums for the Catastrophic health portion of the HRSA might instantly become tax-exempt if the Savings Account paid the premium. That would appear cheaper for the Treasury, than proposing to make the whole package deductible. Because the other parts are already tax-exempted.As an aside, it's true the subscriber to a Health Savings Account is not fully covered in his first few years, until the account builds up to the deductible. That makes a very good argument for starting the accounts while you are quite young. At first, that was a concern, but it has proved largely unnecessary to provide for it, among young healthy subscribers. Apparently, by the age hospital-level illness becomes common, the ability to meet the deductible has mostly been achieved. Nor has it proved necessary to resort to sliding-scale deductibles hidden in the slogan, "the higher the deductible, the lower the premium" -- probably because lower premiums immediately transform into more money for saving. These features might be reviewed when self-selected frugal applicants taper off since HSA enrollment has so far attracted younger enrollees. For the moment, sales incentives seem adequate; everything else may be indirectly changed by HSAs, but very little is changed directly.
To permit something like that would require a one-line amendment to the HSA enabling act, but would restore fairness to the system, and bring out how much cheaper the Health Savings Account really is. Making it cheaper means more people could afford it, thus relieving the Treasury of the need to subsidize those people under the Affordable Care Act. That would compensate for some of the loss of revenue to the IRS for making the Catastrophic Health Insurance tax-exempt. Regardless of how the CBO scores this complexity, it should be remembered that poverty is not a lifelong condition for most poor people; after a temporary period of poverty, many if not most of them rise toward becoming tax-payers. Equal treatment under the law is itself a valuable asset; it could paradoxically be provided by lowering the corporate income tax since many corporations already eliminate the corporate tax with the healthcare deduction. But that's not so self-evident, and politically hard to explain. If the Congressional Budget Office would extend its dynamic scoring to include retirement taxation on the HSA's eventual compound interest (instead of limiting its horizon to ten years), it would visibly be better to choose the compromise of letting the Accounts by the reinsurance.
2. A better Cost of Living Adjustment for HSA deposit limits. There is presently an annual limit of $3400 for deposits into Health Savings Accounts, whose limits have seldom been raised very much. This new COLA should be formalized into a continuing cost-of-living adjustment which is somehow related to the current rate of inflation in the medical economy, and perhaps takes account of a potential transition to HRSA by people over age 60. These late arrivals simply do not have sufficient time to catch up within the present deposit limits, even should they possess the savings to do so.
3. Age Limits for HSAs It is a quirk of compound interest (originally noticed by Aristotle) that interest rates rise with the duration of the investment. Consequently, much or most of the revenue appears after forty years, and consequently HSAs get more valuable with advancing age. To put it another way, young people contribute more time for interest to grow, old people must contribute more money to catch up. At present, HSA age limits are set to match employment, but the HSA will inevitably focus on funding retirement. Removing all age limits might go a little too far, but would substantially increase the amount of investment income generated, at almost no extra cost to the government. It might also supplement the platform for funding childhood health costs, a problem age group which stubbornly resists improvement. It might greatly enhance revenue for older subscribers as well (by reducing their health insurance cost), the surplus from which could be used at their death for the grandchildren generation.
Young people contribute more time for interest to grow, old people must contribute more money to catch up.
Extending the age limits would potentially also serve as a platform for re-adjusting dangerous imbalances in the healthcare financing system. We are fast approaching demography of thirty years of childhood and education, followed by thirty years of working life, followed by thirty years of retirement. Substantially all of the revenue comes from the middle third, while the remaining two-thirds of the population contains most of the health costs. To some extent this is unavoidable, but the whole health financing system becomes a dangerously unbalanced transfer system for well people to subsidize sick ones. It is possible to foresee the beginnings of class warfare, based on age alone. Consequently, society would be well served to create the more stable system of subsidy between yourself as the donor and yourself as the beneficiary. The alternative is to continue the process of having one demographic group collectively subsidize two other groups of strangers who generate most of the cost. Eventually, this could induce well people to dump the burdensome sick people. I hope I am unduly concerned, but to extend the age limits for individual self-financing seems a very cheap way to begin stepping out of that particular mud puddle.
Finally, there is a conflict with inheritance laws. By extending the age limits for the funds to the legal boundary of perpetuity (one lifetime, plus 21 years), the ability to transfer funds between generations is enhanced without the perplexities of inheritance. It would be particularly useful to permit the fund to remain active until a grandparent's death, or even extend to the birth of the designated grandchild's 25th birthday. Like a trust fund, it could gather interest after the death of the owner, leaving the selection of heir to the last possible moment.
To return to the subject narrowly at hand, it is easy to see so many projects are made possible, you end up with an aggregate of goodies which eventually sink the lifeboat. Something must be chosen, something must be deferred, and the choice should be a delayed one, left to individual choice as much as possible. It can be commented in advance that retirement costs potentially dwarf sickness costs, and small single payments held at interest for long stretches have the greatest efficiency. There seems little choice but to constrain retirements to what the individual can manage independently, rather than permit retirements to absorb all the benefit of a new windfall. The theme is and should be, one step at a time.
How far these three short amendments would extend retirement solvency, is hard to predict into the future, but it would be considerable. Aside from any improvement never seeming like enough, it is almost impossible to guess the future timing of health costs, even when you can see them coming. But while the amendments might assure a comfortable future for Health and Retirement Savings Accounts, they do seem unlikely to address the full over-expectations of retirement. So the problem for many, many afternoons' deliberations, would be to expand the potential of HSAs until they become objectionable to competitive concerns. For that, I have four additional proposals which might work but inevitably collide with professions who would be quick to suggest narrower limits. Let's describe them, meanwhile waiting to assess objections from those they would discomfit:
1. A re-insurance scheme (insurance company to insurance company), called First and Last Years-of-Life Re-Insurance.This has already been described.
2. Medicare should be modularized but without other basic change, so recipients need only buy pieces they need, using the invested proceeds for retirement. Obstetrical coverage immediately comes to mind. Sometime during the next fifty years, it can be predicted at least one of the five most expensive diseases (Alzheimer's, diabetes, cancer, psychosis, and Parkinsonism) will be inexpensively cured, once the initial cost increase is absorbed. We need a way to fine-tune the transfer of such medical savings into retirement income, understanding many competitors will hope to divert a windfall to themselves. Redirecting the Medicare withholding tax makes an easy way to channel the funding, as would reductions of Medicare premiums. Scientifically, Medicare is eventually destined to shrink as we find cures, but funding the resulting longevity must be given the first call on the savings.
3. The investment component of Health Savings Accounts should be dis-intermediated, partially if not completely.Ibbotson reports the stock market has produced--for a century--10%-11% long-term returns on large-cap stocks and less steadily, 4-5% on bonds, minus 3% inflation. You might not expect that judging from the returns investors often receive; investors are definitely absorbing most of the risk. The volatility is much less than most people imagine, and there is every reason to suppose Index funds of these entities should perform better with less volatility at far less cost, perhaps 0.1-0.3%. The days fast fade, when the public will continue to surrender the present level of stockmarket transfer costs and fees, which now sometimes erode investor return to as low as 1%. The fast-growing and simpler system is "passive" investing with index funds, and its goal should be an average return to the retail customer of at least 6.5% after inflation and costs. The struggle will be a fierce one, but the retail finance industry must re-examine who is at risk, and who are rewarded for taking that risk.
4. The center of medical care should migrate from medical centers toward shopping centers attached to retirement villages. Architects report it will always be cheaper to build horizontally than vertically. Since we seem destined to spend thirty years in retirement, and the principal occupation of retired people is taking care of their own medical needs -- the wrong people are doing the medical commuting. Teaching hospitals were located close to the poor, in order to use them for teaching material. But now "meds and eds" are fast becoming the principal occupations of high-rise cities. If there is ever a good time to place medical care closer to the patients, this is it.
The wrong people are doing medical commuting.
And if ever there is a way to put the doctor back in charge of medical care, decentralization is the way to do it smoothly. We will always need tertiary care, but we don't need indirect overhead, skyscraper construction, or multiple layers of overcompensated administration. Even continuing-education is becoming a revenue center. No one can claim the present centralization made things cheaper, and the disadvantages of medical silos certainly call the quality issue into question. The Supreme Court failed us in the Maricopa Decision; so let's see what Congress can do with reconciling the Sherman Act with the Hippocratic Oath.
Once your savings account has at least reached the deductible level, you are totally covered for major health expenses -- from the first dollar to last, just like Blue Cross used to be, long ago. True, you still must pay small outpatient costs, but passing them through the account reduces their cost by the income tax deduction. We hope you just keep on adding to the account as you are able, tax-free up to $3350 per year ($3400 next year), but the decision is yours alone.
Something significantly extra emerges at the age you become eligible for Medicare. We therefore even suggest a name-change of HSAs, to Health and Retirement Savings Accounts,(HRSA), because any surplus from remaining healthy turns into an Individual Retirement Account (IRA) when you convert to Medicare. For some people, this retirement addition is more important than the health care part. It will all depend on whether your health has been robust, average, or sickly. For most people, it has been robust.
As far as healthcare coverage is concerned, many speeds of differing amounts will reach the same finish line, so the Health Savings Account invites the subscriber to choose the speed he can afford to risk, periodically, to reach the deductible (or even more). In fact, there are incentives at every turn to save more, because some people won't save unless prodded a little. In fact, the average American spends $2000 annually on loan interest, because he can't resist the temptation to buy things.
But you can always delete this particular account's balance for an illness, then restore or exceed it tax-free, if part of the balance does happen to be needed for healthcare. Meanwhile, the account earns tax-free income. It isn't hard to understand, particularly if you read the description twice, but its hidden power may be less obvious. The old Blue Cross system had a "use it or lose it" quality to it, but the Health (and Retirement) Savings Account gives you back anything left over, as an incentive to save for retirement. The first part of this book tries to make clear how important the difference is. (See the table at the bottom of this first section.)
Because both deposits and medical withdrawals are untaxed, the system offers the advantages of both a regular IRA and a Roth IRA, combined. The only disadvantage to overfunding the account is to pay a penalty for non-health expenditures from it before age 65. After the HSA subscriber reaches Medicare eligibility, it all turns into an Individual Retirement Account, which you can spend on anything you please. Since you can't predict what your health will be, the harmless incentive is to keep it overfunded to get more tax abatement, but nevertheless, that's not required.
* * *
That's unique and simple, and all quite true, but it describes only a fraction of the full potential of HSAs, which require the rest of this book to explain. Read the first four short paragraphs again if they seem unclear. Much of their potential wasn't dreamed up by the originators (John McClaughry and me) at all but just tumbled out as patient experimentation and experience accumulated. It's tested, all right. Between fifteen and twenty million Americans already have these accounts. As things turn out, they are not merely attractive to poor people, although that's how they began. The original goal was to help people of average income afford what most people who work for big corporations had been given by their employers for decades, but innovative thinking has gone far beyond that modest beginning.
The Traditional, or Employer-based System. In spite of all the talk about healthcare reform, about half the population still retains the employer-based design, and they passively imagine the employer design only requires tweaking to be perfect. However, it remains relentlessly connected to the kind of job someone has. It begins when you get a job, and ends when you quit that job; that's a difficulty, right there. In employer groups, you don't buy it, your employer buys it and gives it to you as part of your salary, but you need not suppose your pay-packet is as big as it would be without it. The result is, the core of the employer system has become largely funded by tax deductions -- the employee's, (20-30%), and particularly his employer's at a higher rate (40%). The relentlessly rising costs it provokes are not the employee's problem nor his employer's problem; they are the government's borrowing problem and a big one. But the source of its cost inflation is the false appearance it is free. It isn't free. It may well be the main reason America's corporate income tax remains so high, driving our corporations abroad. Otherwise, it suppresses profits, take-home pay, dividends and tax revenue.
Employer-based health insurance is so full of cross-subsidies (both inside and outside the hospital), it would be hard to say who supports what. But clearly, young employees subsidize older ones and may lose out entirely if they change jobs, as they frequently do. Unfortunately, the Affordable Care system uses the same configuration but superimposes income groupings. Unless the Affordable Care Act changes, thirty million people will be specifically excluded from it. While it mandated uniform subsidies, its subsidy designations conflict with existing ones and cause problems which have not been solved in two extensions of the employer insurance mandate. Some subscriber groups match the government subsidy limits fairly well and prospered. But the components in other insurer groups do not happen to match the subsidies well and are threatened with considerable disruption. Stay tuned to hear how this works out.
Overall, the whole system is unbalanced, with the working third of the population struggling to support the non-working two thirds, too young or too old to be working. Thirty years have indeed been added to life expectancy in the past century, so it's hard for anyone to complain about the effectiveness of the American health system, except notice: not getting sick means a longer retirement, requiring more retirement income. Everyone wants to live longer, but few can afford a long vacation after the working years. Employer-based insurance encourages more spending; the illusion of being free encourages wasteful spending because neither the patient nor his employer have much "skin in the game". Its biggest problems grow out of its most attractive features. Everybody hates to admit it, but longer retirement costs are merely deferred, unfunded, healthcare costs, in a new form.
Further Advantages of Health Savings Accounts. Before going further, let's go back and notice what else tumbles out of the simple structure of the HRSA, or Health and Retirement Savings Account, which now becomes our central topic. First of all, it's usually lots cheaper. Sometimes it's hard to prove where the savings originate, probably about 15% from the account itself, and another 15% from the catastrophic (indemnity) health insurance. Eventually, any savings get greatly multiplied by compound interest.
Cost-Savings. The higher the deductible, the smaller the premium, is just mathematics, but it's a big reason this package appeals to financially struggling people. But notice what's obviously also true: the lower the deductible, the higher the premium. Seemingly, it should all come out the same, but in fact, it's cheaper. The HSA (Health Savings Account) started out as a new way to lower premiums temporarily, for people who didn't happen to be sick at that moment. However, if someone becomes sick, the average total of premium plus deductible, in the aggregate, surprisingly often turns out to be lower than regular insurance. That's when we started noticing its hidden features, trying to explain such hidden power. First of all, this approach probably does induce more young people who aren't sick, to buy insurance.
Having larger numbers of young subscribers lowers the average premium for everybody else because healthy youngsters essentially buy protection, not health services. Subscribers acquire some control of the premium price, but it's incomplete and they sense it, depending on insurance design. For the most part, young people overpay for protection. Nowadays, the Affordable Care Act sets mandatory deductibles for all health insurance plans, while ostensibly forcing everybody (except for 30 million embarrassing exceptions) to buy health insurance, too. That's supposedly a way of forcing premiums down, except it upsets people to be forced. And anyway, premiums for what satisfied the Affordable Care Act quickly went up higher(and alarmingly went up faster) than before. The cops and robbers approach didn't save money, probably because all government projects are "one size fits all", responding to the equal protection clause of the Constitution. That's nice, but it can't defy the law of gravity.
In better economic times, appreciable interest income is earned when young healthy people stay healthy for fifty years before they do get sick. Effectively, with an HSA you can pick any residual deductible you want, by taking more risk, or less, for a few early years. As the Christmas Fund builds up to the deductible and beyond, eventually you take no financial health risk at all and begin to take retirement risk. Let's say that again: by partially funding the insurance company's posted deductible, what's left unfunded is setting the true deductible. Most HSRA subscribers eventually fund it all and have no true remaining deductible when they get sick. But a funded deductible has changed the nature of the cost resistance. It now becomes one of protecting your investment, because you are surely going to need it, some time.
The amount of subscriber risk can remain only fuzzily described, whereas insurance companies must pay to the penny, and usually can't accept vague financial risks. This one stretches over too many years to be safe for them to predict, even in bulk numbers. Mismatches are numerous, between income and sickness experience. When you have enough money in the Health (and Retirement) Savings Account to pay a deductible, you essentially have first-dollar coverage. That doesn't exploit the full potential of HSAs, but it's at least one of the things it does. The fact that excess spending is less provoked is proof that a particular issue can be addressed. In addition, almost all modern insurance also has an upper limit to total cash out-of-pocket medical costs, but those limits are higher than the deductible. They were added to cover the remote possibility someone might have more than one illness in a limited time period. This soon gets to be a complicated insurance theory, but it includes a warning: you must know the risk if you are to assume it.
The designers of the Affordable Care Act evidently underestimated the amount of backlogged health maintenance they were assuming, and probably underestimated it by vaguely ascribing it to "pre-existing conditions." All you really need is to read the newspapers to see the Affordable Care Act is very close to getting insurers into financial trouble. (My local Blue Cross organization lost $56 million last year, and the whole industry probably lost a $billion.), thereby eventually passing big trouble on to the public. One of the major sources is an unsophisticated gap between the deductible and the lower limit of out-of-pocket costs. If you take a risk, you must know how much it is, or else who will assume it for you. To base that gap on the insurance company's need for risk limitation is a pretty crude approximation, which in fact presumes the government will assume it. Insurance executives surely knew this; whether the politicians did, is less certain. Obscuring the risk possibly doubles it, as two parties seek to protect themselves.
By contrast, the HSA subscriber does run a small but definable risk during the time the account is building up to the deductible level. He can guess at that risk, which is extremely small for young people, and hopes he won't get very sick for several years. Inevitably, older people have a greater risk because they have worse health. So right now everybody's safety rests on hustling to build up the account as fast as possible. Because it's a pretty good investment, it's a good idea to overfund the account whenever the subscriber has spare funds, just in case. Lots of poor people are too unsophisticated to have bank accounts. That's fine -- just overfund your HSA. Unfortunately, the Administration just applied a penalty for doing that in an unspecified way, a pretty vague if not unenforceable threat. I do suppose someone could get hit by a truck on the way home from buying insurance, but in that situation, the limit for uninsured costs would be the size of the deductible; if deposits had been made to the account, it would be less.
Once the gap is filled, you can change the premium or fill the account up a second time, but many people are often too unfamiliar with the twists and turn to achieve absolutely minimum costs. Rest assured, HSA is a pretty good investment although not a windfall, so unsophisticated people don't have much if anything to lose by overfunding it. Some have suggested the gap can be narrowed by buying life insurance, but cost statistics are not available to evaluate that possible approach. Someday, some enterprising insurance company will offer an automatic re-adjusting feature, but it would add cost. It requires a company to get involved without charging high fees, hoping only for big volume for a reward. Hoping for big volume implies heavy marketing investment; annuities are probably too expensive to serve the purpose.
The Retirement part is more important than the Medical part.
Eventually, the subscriber will discover more money in his account than he absolutely needs for healthcare (and the sooner he does, the better). Some people will buy a newer car, or a bigger house, send someone to college or pre-pay some future lean year of his own when he is between jobs. If those events describe his entire future, he needs to read no further. For some people, a sudden illness may, however, terminate their planning. For the rest, however, the big problem will be to avoid outliving their retirement income, usually because they remain so healthy, not because they spent their reserves on illness. We all secretly hope the future will be good to us.
In fact, paying for retirement in the future threatens to become such a large problem, it could dwarf illness as a threat for almost anybody. It begins to raise the question of what the main threat facing any particular person, really is. Thirty years of extra longevity are wonderful, but everyone needs a way to pay for them, particularly if they should turn into forty years. Taking the long, long view is what the rest of this book is all about: We seriously propose a solid foundation of Health and Retirement Savings Accounts as a bulwark for just about everyone's far future. Meanwhile, unless someone changes the rules, it's hard to see how very many people could lose money by getting started. The rest of this book shows ways to do still better than that, without getting hurt.
All right, Health Savings Accounts once appeared to be merely Christmas Savings Funds, helping people of modest means accumulate the money for their high "front-end" deductibles. The high-deductible design of health insurance paradoxically reduces the premiums of catastrophic health insurance policies. At least that's how they began; with higher deductibles on the claims, annual premiums could became lower, and the effective deductible gradually disappeared with contributions to the Christmas Fund. Subscribers to the savings accounts did run a small risk they might not deposit the full deductible before serious illness appeared, but the serious illness itself was otherwise fully covered. In fact, the effective deductible was reduced by whatever they had deposited but the premium did not rise; after a few years most of them had no out-of-pocket deductible left to pay, at all, and no extra premiums to pay for it.
So the first consequence to appear from Health Savings Accounts was first-dollar coverage without higher premiums. A small risk of small ongoing outpatient costs remained, but after a few more years even that was covered, again without raising premiums. Financial protection gradually increased with time, starting first with the worst disasters, working down to trivial ones, eventually to none at all. To repeat, without a rise in premiums, so gradually the whole package provided better coverage without increased premiums. That's why they got cheaper; the former insurance profit turned into a consumer investment. Wasteful spending was also restrained by subscribers protecting their investments, an impact which actually increases over time. With a little luck, or else starting young enough, it was possible to slide past the risky period of time, unaffected. That pretty much summarizes the medical part of the two-part plan to surpass "first dollar coverage" as fast and as cheaply as possible. The power of the Christmas Savings Fund was much greater than it appeared to be.
But after that, subscribers still had an increased cost of retirement income to worry about. It's an integral part of the medical issue, because retirement costs inevitably rise with improved longevity. That's not hard to see, but if it's forty years away, it's easy to neglect. However, it becomes almost impossibly hard to get this result, if it's only two years away. That's called the "transitional problem"; everybody isn't twenty years old on the same day, and some people have simply lost their chance. Some people are already sixty-four, with variable amounts of savings. Since they can't arrange thirty years of retirement funding in a single year of saving, they have to fall back on the next-best approach. Which is to make the whole thing cost as little as possible, thereby reducing the number of people hurt by differences in age.
Fine, but how would all that theory enhance retirement income, except in pitiable amounts? What's been accomplished so far, has been accomplished collectively. The rest is up to the individual. Everyone can, for himself, make it less pitiable.
|At 6.5% compounded quarterly, it's impossible to catch up with $400 at birth, with annual deposit limits of $3350 after age 59.|
Be Frugal If You Must Spend From This Pocket. It's surely pitiable if you spend it as fast as you save it, but can build to a meaningful level in retirement if you just don't spend it. Our national leaders often say we don't spend enough. But they are talking about investing in factories, not spending on hula hoops. Nobody seriously sees any value in useless spending except a salesman. Frugality almost has to become a way of a person's life, because its impact consists of many small savings in accumulation, then multiplied by compound interest. For example, people have trained themselves to avoid paying cash for whatever insurance already covers. Here, many must deliberately re-learn to pay cash for small services, even if covered by insurance. That may sound like paying double for medical service, but its intention is to save the tax exemption for bigger things later. Let's examine that in detail, later.
Usually, premiums are set a little high to provide a margin of safety; a resulting surplus is diverted to reducing future premiums. If you think it through, the insurance company shifts its own risk onto future subscribers. (If the company goes broke, the remaining subscribers may find the risk shifted to former subscribers who dropped their policies.) Insurance companies call this a defined-term, or "term" insurance model because employer-based groups contain people of all ages, so a one-year term of insurance risk is safer for them in dealing with older subscribers. That's a good thing, by the way; you don't want your insurer to go broke.
In employment-group health insurance, surplus or deficit is made up after a year or two of "experience rating", because final health insurance risk reaches an artificial end at age 65-66, with Medicare then shouldering the remaining healthcare risk. Unfortunately, the sharp pencils of the company groups tend to make the individual (non-group) policies serve as a sort of contingency-risk fund, although employers are generally unaware they are having this effect on people who do not share their tax exemption. Nevertheless, some day, current low interest rates must go back up to normal levels, investment income once more becoming a meaningful gain; so look for investment income to return to normal for individual policies. There are myriad reasons behind the yield curve slope, which relentlessly defeat the convenience of any Federal Reserve Chairman who wishes to continue low rates. Call it supply and demand, for shorthand.
Individual ("non-group") insurance also contains people of many ages, but people using it are expected to know how old they are. Health Savings Accounts are always individual accounts, not pooled ones. (The required pooling of risk is situated within the catastrophic health insurance, attached to every savings account.) Individual unpooled accounts offer two advantages to younger people: of a longer time horizon to work out the leads and lags, plus some savings from not subsidizing older subscribers, as employer group policies tend to do. In an HSA you subsidize yourself at a later age, which is a whole lot different.
You do share your major health risks in the insurance part, but you don't share your individually compounded savings from frugality, in the savings account. Older working people might be wise to set aside some personal savings to supplement the one-year term health insurance, adjusting for the more frequent risk of a second sickness in older people. Because the Affordable Care Act mandates the deductible, it also mandates an "out of pocket limit" to recognize the risk of a second illness coming along too soon. So Health Savings Accounts usually do the same. That's safer, but raises the cost. Furthermore, interest rates have been unusually low for nearly a decade, so banks have made a habit of paying lower cash dividends longer than rising earnings can justify. However, in spite of the superficial theory that Health Savings Accounts cannot accumulate much money for retirement, demand for them has been heavy and fairness has become balanced. At present, their aggregate deposits are already reported to be over $30 billion.
Deductibles vs. Copayments. This seems a good time to emphasize the good feature of a front-end deductible, compared with the uselessness of copayments (traditionally 20% of claims cost.) Both of them reduce premium levels, but for different purposes. Deductibles induce patient frugality, as we have noted.Perhaps not surprisingly, most new subscribers to HSA have been younger than age fifty, and forty percent have so far never made a single withdrawal from their accounts. It's hard to measure, but the aggregate small incentives of saving for retirement have resulted in 30% less spending for disease, so the size of account balances grows faster than expected in spite of the current recession. Ultimately there must be some surplus because competition will force at least some savings to be distributed to subscribers. Subscribers are nevertheless on the lookout for investments which pay more than ordinary bank savings accounts; stock index funds ("passive investing") are the most popular alternative. Please notice that all of these explorations grow out of the unusual feature that Health (and Retirement) Savings Accounts are the only available form of health insurance which surrenders all termination surplus directly to the consumer, rather than return it to him via the insurance company as lower premiums. In theory, the amounts should eventually seem to be about the same, but compound interest over the fifty-year interval spreads them apart. (See the graph, above.)
The purpose behind the typical 80/20 co-pay is less obvious, since it is only calculated after a claim is made, or let's say after a wasteful procedure has already been performed. Repeated studies have shown it has little net effect on premiums or service usage. Instead, it is favored by negotiators who must make quick decisions in a bargaining session, because a 20% co-pay results in a 20% reduction of premium, a 40% co-pay would result in a 40% premium reduction, etc. Co-pay has the additional perverse effect of making a second supplemental insurance policy attractive to most subscribers, including a doubling of its insurance profit and overhead.
Consequently, we favor high "front-end" deductibles, but reject copayments from insurance design. And subscribers ought to do the same.
Portability in a Larger Sense, Leading to Hidden Cost savings. The fact that HSA accounts are proving financially attractive, is surely a sign they may contain some previously unsuspected advantages, in addition to just being portable between employers. Additional portability -- between only paying for health care and paying for retirement in addition -- is more smooth and natural than we expected. Improvements in longevity reflect improvements in health care, and are the natural consequence of the population getting healthier. (The saving in one compartment, is a cost for the other, with compound interest exaggerating the difference.) Furthermore, there is a consequence more evident to physicians than to patients: if you get real sick, you won't need to worry much about retirement costs, so here too a saving in one is still a cost in the other, but in reverse. By far the largest accelerator to the balance is to overfund it up to the legal limit. No attempt is made in this book to claim we know what future costs will be, except to point out -- whatever they are -- increasing longevity will clearly push costs into different compartments, some upward, and some downward. It seems certain flexibility between compartments will become more desirable over time, and might save considerable money. The clause in Health and Retirement Savings Accounts that any leftover tax-exempt surplus transforms into an IRA (Individual Retirement Account) when Medicare eligibility is attained, is probably the forerunner of others. More potential flexibilities are explored in this book, and advocates of other systems are invited to add features to their favorite program. In other words, at age 65, a subscriber does lose a doubly tax-exempt HSA with a surplus, but gets back Medicare plus a regular Retirement Account (IRA) in return, unless middle-men eat up the float. It's logical it would save money, but the heartening discovery is, it actually does.
The Battlefield. The HSA derives a double tax deduction in the sense that whatever is spent on qualified health service is not taxed, neither when it is deposited nor when it is spent. That appears to be a major inducement for HSA subscribers to be frugal, and the longer it continues the more it accelerates. That's in itself the main reason not to tamper with the incentive, since the alternative incentive is to employ brute force to hold prices down, a provably futile gesture of amateurish administrators. Since a few dollars saved while young, compounds into many more dollars later, the double exemption is often the best investment an average person can find. It is, to say the least, an attractive alternative investment vehicle, if not a windfall.
Splitting the healthcare product into two compartments (savings account and Catastrophic health insurance) has proved particularly suitable for saving within the account for out-patient costs. Price-shopping for cheaper medical expenses seems irrelevant to truly sick persons in a hospital bed, however. Spread-the-risk insurance was inevitable for disrobed patients, whatever the related temptation for overspending. It's important for customers to be convinced the spread-the-risk quality of insurance continues, but is confined to circumstances where it has no real alternative. Those professions coming from different cultures who scoff at the self-restraint of physicians, are in some danger of enraging doctors into behavior everyone will regret, encouraging behavior which is being resisted. Nevertheless, some degree of slippage is inevitably part of insurance. As soon as you spread the risk, for example, it gets harder to itemize the bill fairly.
Be Careful Who Your Subsidy Partners Are. Insurance companies and hospitals both share risks with clients, and boast it reduces premiums. Young people almost always have lower costs than older ones, so it's tempting to mix a few expensive old folks with a large number of young ones in group policies. However, the client doesn't usually consider the overall effect of his choosing either a particular insurer or a particular hospital. No matter how old he is, he should want to be mixed with a lot of young clients (except premature babies).Cheaper. These and other mechanisms probably underlie the claim that HSAs are 30% cheaper. Because there are many small explanations rather than a few big ones, they will be harder to imitate. Such an accumulation, doubly tax-exempt, over a period of several decades aggregates to a surprising amount of compound interest. Money at 7% only takes ten years to double, for example. Most people would have difficulty finding a superior way to save for retirement, than by reflexly putting any spare cash into an HRSA. It's true you have to get sick to be entitled to the double deduction, and you may not survive severe illnesses with much savings. But the peace of mind of just knowing you have been covered by shrewd exertions of skillful management creates some cost-free benefit not to be scoffed at. Everybody needs a consolation in despair, and this one turns out to be powerful.
The Affordable Care Act seems to have overlooked the refinements of this homily; by striving to include all the uninsured, they managed to include a large number of newborns and specialty children's hospitals, who are effectively (however reluctantly) subsidized by the rest of the community. Employer groups trying to do the same thing, necessarily avoid most people under 25 years old, who were suddenly included in population-wide averages of uninsured, by the new law. Patients over 65 may be similarly under-represented. Furthermore, about twenty cancer hospitals have been exempted from DRG constraints. Regardless of how it got composed, the ACA found it was subsidizing more than it expected, and (because they were the subsidizers) premiums for well people consequently threatened to rise more than expected, even though sometimes enjoying incomes which exceed the uninsured.
Employer groups were thus cross subsidized, but to differing degrees; outcomes were hard to predict and smaller groups proved more agile than larger demographic subgroupings. Out of these unexpected aggregate costs, arose a need to subsidize employer groups unexpectedly, and explains some unlikely favoritism for prosperous political groups originally targeted for income redistribution. In most employer groups, young people subsidize older ones; that's definitely not the same as rich people subsidizing poor ones. The detailed extent of these problems will probably not emerge until after the November elections.
Hospitals differ in their costs for similar case-mixture reasons. If you don't need a big-city tertiary hospital, you need to ask why you should pay for it by secondarily cross-subsidizing its expensive clients. This may explain some of the surprising successes and failures of HMOs, private insurance companies, and other allegedly share-the-risk groupings. Small, agile and for-profit companies seem to maneuver more readily than big non-profit ones.
"Overfunding" the Account. Therefore, enlisting patient participation extends the argument for durably separating the account from the insurance. Indeed, it makes a significant argument for overfunding the account among young people, who badly need to hear it. "Overfunding" in this case means trying to spend as little of the account as you carelessly might spend. If a considerable number of people become so-minded, a relatively realistic market price can emerge for out-patient costs. This is America, after all. That's not so true of inpatient costs, but it nevertheless provides a relative-value base for even those costs -- with a few adjustments in the regulations related to major changes in the diagnosis code employed.
Summary. So that's how we see the simple change in the payment structure into a Christmas saving account transforms a device for helping poor people afford insurance, and adds to it an incentive for the patient to be frugal for his vulnerable old age. Instead of paying to borrow money, he is paid to save it. Pinch pennies for healthcare, in order to save dollars for retirement. And then multiply it by compound interest A mutually beneficial system actually reducing medical costs, is the underlying description. It does this by providing a pathway, and an investment vehicle, for deriving meaningful retirement insurance out of unused health insurance. (This boils down to a sterner message: if you abuse the healthcare system, your own retirement will suffer.) The demographic group may not suffer, but because it's individually owned, the careless individual may shoot himself in the foot.
Resistance to Disintermediation. But, it must be noted, since this can also transform health insurance from a cost center into a revenue center, it creates some uncomfortable resistance from the financial community (because it seems to them to be a zero-sum loss). The resistance is this: financial transaction costs have declined 70% in the past ten years, so the financial community is hurting, at least compared with the Gilded Age. After all, declining prices of anything are a major reason for profitability to fall. If, in addition to attrition in revenue, a formerly insignificant income for the subscriber (interest on the accounts) transforms into an important mechanism for building up a retirement fund in six figures lasting thirty years -- it starts trouble with its zero-sum counterparty. Subscribers begin asking uncomfortable questions and making cost comparisons, at a time when the financial community sees its own income under stress. Already, there is agitation in Congress to replace buyer-beware with fiduciary advisors. The subscribers will win because they have the votes, and control the flow of funds into accounts. But it may turn out to be a slow bloody battle, notwithstanding its far more dignified potential for transforming into an attractive opportunity for both sides.The Source of Subscriber Sluggishness. When individuals compete with corporations (tax authorities and investment managers), it is usually a matter of youthful inexperience futilely competing with the experience and immortality of corporations. It seems to take a long time for young people to discover how much difference a steady, small interest rate can make to the process of converting small savings into big ones -- providing one starts early in life. Immortal corporations do have a more distant horizon and an indelible memory. But the immortality isn't as great as many think; for a glaring example, it's a comparatively rare corporation which stays in business for a hundred years. The greater advantage which a corporation has, is it has been given a solitary legal mandate to make as much money as possible. The movies call that "greed" but a corporation either sticks to its business (making money) or falls out of that business, sometimes after being sued by its stockholders.
A large corporation can lose lots of money. Those who wish to penalize excessive profits should more logically favor elimination of corporate income taxes, allowing high profits and large losses both to fall upon richer individuals. The present system, allowing profits to go to stockholders at lower rates than corporate taxes would, encourages corporations to get bigger, less profitable, and to flee the country which started them. None of these outcomes is likely to appeal to populists. Since healthcare has grown to 16-18% of GDP, the present tax arrangement of health insurance probably exerts an appreciable drag on the economy.
Imposed Self-control by Escrow Accounts. Young people constantly face the competing priority of consumption, and many never do learn to restrain it in order to accumulate larger savings. Others learn but too late, after several decades of potential doubling have been forever lost. Odysseus knew this but he also understood himself, so he had himself lashed to the mast of his ship while he sailed past the temptations. The shocking truth is that very small differences in interest rates, differences which some would have you believe are trivial, accelerate savings faster that most young people ever imagine. Taxing authorities and investment companies have already learned compound interest grows best over long stretches of time, and small differences in interest rate (as little as 0.1%) are quite sufficient if continued for a lifetime. This is a simple point, but so vital we must soon devote more time to the requirement of "escrow" accounts, perhaps more aptly termed "Siren Song Accounts". Call them loss insurance or even credit default swaps if you please, but at least recognize they impose an opportunity cost.True, about a fifth of the contribution to this scheme is provided by income tax reduction, but the line between public and private obligations to health care is already too blurred to hope for any agreement on the fairness issue. Just look at the combined state and federal tax contribution to the cost of group employer based insurance, which probably approaches 60%. Still more important is the hidden contribution to increased longevity made by medical care. It seems hardly debatable that improving health was largely responsible for lengthening the time in retirement. The problem of outliving savings is pretty much a by-product of improving medical care; if you want one, you must cope with the other. For this reason alone, it seems entirely proper to include rising retirement costs as part of the cost of improving health care. If you want to solve the whole problem, however, you look for any solution and forget about assigning blame. Is there anyone reading this chapter who doesn't want to live an extra thirty years?
True, many banks do offer Health Savings Accounts without either an attached health insurance policy, or brokerage service. Both services are essential, but selecting insurance managers in these cases remains the customer's problem. You might think banks would have a similar response to the investment management of savings, except they have a complicated relationship with insurance companies they may not wish to disturb. By contrast, they also have a losing competition with investment banks, who have found cheaper ways to acquire large-sized investable funds by selling bonds and stock certificates. The time-honored method for banks to acquire funds is by dribs and drabs from the float of deposits -- quite an inefficient source, compared with $100 million bond sales. From time to time, as in the recent mortgage disaster, the government puts its thumb on the scales, and right now all banks are afraid to lose market share to competitors. Secret kickbacks may play some role in all this, so acquiring and integrating a whole company's operation seems a safer business alternative for them. One way or another, your account may be transferred to a different manager without your knowing it.
The conflicted outcome at present is for the potential HSA customer to discover which HSA vendor declines to make choices between insurance companies, but does look for ways to acquire the investment end of the business and overcharge for it, either directly or with kickbacks . In a curious twist, this pressure shifts to the customer to choose stock-pickers, whereas his best interest is usually served by choosing total-market index funds. Watch out for fees, however, which can upset any generalization about investment type. This situation can shift rapidly in the present environment, since it would not be surprising for these financial behemoths to purchase market share indirectly, or else for failing stockpicker firms to sell themselves to banks of various descriptions. A much more productive approach for the small investor would be to look for a firm which will segregate accounts into "escrow, and non-escrow", leaving the choice of high-deductible health insurer to the customer. Likewise, accounts could still be designated "captive, or self-selected", and leave the choice of investment management to the customer. It's true the average investor is often poorly equipped to make such choices, but should have no difficulty in telling 1% from 8%, when (see below) the difference of one tenth of a percent can result in a lifetime swing of $30,000. The importance of escrow accounts is described in the section which follows this one. Essentially, you can get higher income if something forces you to shift short-term into long-term investment.
The Importance of Small Differences in Interest Rates. To pay expenses in a stripped-down HSA, banks often charge for smallish balances, waived when the balance reaches their business break-even point, usually about $5000 per account. Similarly, investment latitude is often stratified, with larger accounts given more choice of investments. Those are generally good arrangements because of their flexibility and elimination of conflicts of interest, but they impose some responsibility on the customer -- who must be willing to make security selections in return for possibly greater return. It's all quite understandable, and suggests novel uses of the account. The best example before us is to "Overfund" it at the beginning, and use its surplus after compound interest, to supplement retirement income decades later; let's explain.
Improving the Retirement Benefit At present, the HSA law permits a maximum deposit of $3350 per year per person, with even higher limits for whole families. By constraining out-patient expenses or paying cash for them, the balance can thus build up to $5000 in less than two years, eliminating bank surcharges of roughly $50 a year by immediately reaching the waiver level. Since doing this also eliminates any remaining question whether the HSA will provide full coverage for hospital charges, it's pretty easy to endorse a $5000 investment which produces $50 a year tax exempt income until Medicare kicks in, and then compounds it, adding more than 1% tax-free to its investment income. If the transaction then permits investment in total market indexes, paying off the investment was very wise. Let's now extend the frugal idea to more prosperous customers.
The Outer Limits of What is Possible. If an employee deposits the full limit of an HSA, and makes no withdrawals from age 20 to age 65, his balance will be increased by $154,550. In fact, it should grow by more than that, possibly much more, if the income compounds. He can start with the present abnormally low interest rate of 1%, and find annual maximum payments compound the balance to $196,225 in 45 years. With a more normal interest rate of 4%, this rises to $442,527. At 6.5% interest rate (which probably requires stock index investment to achieve), the result would be $959,760. Since the stock market for the past century has averaged 11% return, and inflation has averaged 3%, a net-of-inflation return of 8% is conceivable -- before taxes and expenses -- and so we'll set 8% as the theoretical maximum goal. $1,578,977 retirement account (at 8% net) is thus the utmost goal which is realistically achievable, adjusted for inflation. But the difference between roughly $908 thousand and $1.5 million ($650,000) is a difference still worth pondering, since it identifies the maximum potential difference attributable to middle-man costs, and that's a lot. And if you think the bank is entitled to something, it probably can get compensated by compounding daily but paying compounding quarterly, and additionally by requiring deposits monthly but crediting them yearly. As far as inflation is concerned, these are uninflated numbers, both at deposit and withdrawal. That is to say, they are all in 2016 currency, and leave a generous potential profit for the manager.
Just squeezing out 6.6% instead of 6.5% makes for a final difference of $30,500, or roughly a fifth of the net (of medical outpatient expenses) deposited. Without resorting to insulting language, this large difference achieved by such a small income increment, is a legitimate goal for technology improvements and management streamlining. The amount is seemingly within reach, and the consequences are worth it. So although the Standard and Poor 500 actually averaged 6.6%, and the modal return was even higher, we round it off to 6.5% in most of our illustrations. Several such small yield improvements can boost net returns by 1%, which makes an enormous difference in eventual yield after decades of compounding. That's particularly true in a compound yield curve which turns up at its far end. Since transaction costs have decreased by 70% in the past ten years, it definitely seems possible to extract an equal amount again by relentlessly pressing for it. It misjudges the public mood to say there is no room for improvement by educating the public. Right now, everybody involved would probably agree it is high time to increase the deposit limits, after several decades of their having remained stationary. That alone would significantly assist the transition from a nuisance to a central bulwark of retirement security. The financial industry wrongly misjudged this transformation to be trivial, so it's getting a little late to adjust it gracefully. Working out some examples from beginning to end, is very persuasive.
At present, average American lifetime costs of health care are thought to be roughly three hundred thousand dollars in year 2000 currency, per individual. Females cost more than males, mostly because they live longer. Much of the original data was produced by Blue Cross of Michigan and confirmed by two Federal agencies. Our goal is to see if it is reasonable to hope: that a "small" subsidy at birth, invested in total stock market index funds over a reasonable projected life expectancy, might (in addition to lifetime healthcare) pay whatever retirement income it is reasonable to expect over anticipated longevity. The tricky part is that good health leads to less health cost, but it also leads to higher (longer) retirement costs. This last age differential seems to be most pronounced toward the end of life. The age differential is almost enough to count on, but not quite.
Our Answer: It turns out in theory, confirmed by historical experience from the stock market, that a total subsidy of $400 at birth will just barely scrape by at 6.5%. But the transition would be such a close thing, Congress might have to increase contribution limits to impart more safety. We assume the law as presently written, using a "term insurance" approach with technical amendment. Transition would no longer be a serious issue, using a "whole life" approach, but its duration becomes so extended it might be politically unfeasible. We end up recommending: an extension of the contribution limits, then starting with the safer "term insurance" approach first. A few years to study emerging outcomes of the term approach should lead to a safer whole-life projection, since assumptions would become less fuzzy. No one seriously questions "pay as you go" is more expensive. What's difficult to arrange is a transition from the more expensive to the cheaper system.
Specifically, the politically tolerable subsidy was selected to be $400, the average future life expectancy was projected to be 90, and the modal retirement age was chosen as 65. Since both theoretical projections and backward analysis of a century of Standard and Poor 500 data do confirm it is practical to expect success with this approach, a practical way to achieve it could then be offered in the present Health Savings Account, using American total stock market index funds as an investment. The biggest problem encountered would be transition from present healthcare finance to the proposed one. A crisis might precipitate action, while a cure for cancer might make it unnecessary. The fallback position is if HSA proves not to cover all of healthcare and retirement for everyone, at least it would provide a large part of it. In that sense, it appears superior to present systems.
That is, we recognize the superiority of a "whole-life" approach, rather than the present proposal, which is based on "one-year term" coverage. However, the time periods are so long it seems unwise to commit such huge sums to untested theories for nearly a century. We feel a purely political decision would come to the same general conclusion, even though the application of many minds could undoubtedly improve on this approach. Nevertheless, we explore whole-life approaches in the hope of adding them piece-meal to a term approach, which is less comprehensive but safer to try.
Anyway, healthcare is expensive, has a fair amount of waste, and certainly costs more than it used to. No one would write a check based on such a summary, but the goal of the question is more modest. Whole-life insurance is ackowledged to be appreciably cheaper than term life insurance. So, after a few chapters on other details, we examine how much cheaper lifetime health coverage might be than year-by-year ("term") funding . Admittedly, it would introduce intermediary costs. To roll all the complexities into one monthly premium for life would indeed introduce great efficiency. It must be remembered the savings account approach captures the largest component of growth, the flexibility to begin saving at any age, and the accommodation of any variations to duration at the other end where income is more certain.
If it's vital to recognize how much difference small differences in interest rates matter it's also important for public opinion to be in favor of price stability, remembering 1980. (That's when the Federal Reserve found it was necessary to incite a recession deliberately, in order to stop a rampant inflation.) A third subtle variable of investor growth is the frequency of compounding (see below), which should match the quarterly distribution of dividends, but may not if the investor is unwary.
Will We At Least Cure the Expensive Diseases? Several thousand diseases are currently recognized, and more can be expected to turn up. But the National Institutes of Health, largest research-funder in the world, calculates eight or ten diseases currently account for 80% of current costs. Remembering NIH also distributes 33 billion dollars a year, it seem possible for one or two of the expensive ones to be picked off by lucky research in the next decade or two. Perhaps it is possible for all ten expensive diseases to be cured in three decades. There are at least two main disappointments lurking in such projections, however.
And then, who knows? Somebody with a bomb may blow us all to cinders, taking our premises with it. Predicting future revenue might prove easier than predicting future costs, and force us to cut our suit to fit our cloth. That probably leads to rationing, so it's a last resort. But it ignores the central fact that "costs" respond quickly to available reimbursement.
The first is the heaviest contributor to cost has long been the need to admit the patient to an institution. When Thorazine came along, President John Kennedy jumped the gun a little and effectively closed five hundred thousand chronic psychiatric beds. In retrospect, it might have been wiser to restrain that impulse by a quarter or a half, so we might now find fewer psychotic souls lying on sidewalk steam grates in the winter. Nevertheless, the general idea was understandable that diseases requiring institutionalization consume more resources than other conditions which might be judged more dire by a different standard than governmental cost. In a sense, institutional costs are a variable, independent of the cost of treatment. These are "low-hanging fruit", as the saying goes, and could be used up fairly quickly, except that shortening the length of stay may simply increase daily costs -- and so end up at about the same place, by adding a lot of administrative overhead. Some time ago, I wrote a little paper on the diseases afflicting the patients in bed at the Pennsylvania Hospital on July 4, 1776, the very first Independence Day. There was considerable similarity with the present, because of the tendency of leg conditions and brain conditions to require help with daily living, not because the treatment hadn't changed a lot. What with air conditioning, high-speed elevators and private rooms, daily living costs have also risen faster than the cost of living.
Diseases requiring institutionalization consume more resources than other conditions.
Quarantining contagious diseases is another costly treatment approach, similarly mixing treatment cost with the cost of daily living. An independent, less satisfactory, factor contributing to institutional cost is cultural; providers and manufacturers failing to exercise self-restraint in black-mailing helpless patients to achieve unwarranted profits. You do see some of that, particularly near vacation areas where patients are generally strangers. Perhaps we should re-classify these as vacation costs. Our culture has discovered a deeper artificial cost issue: rationing always provokes shortages, which are ultimately self-defeating in a free society. When you threaten this balance in matters of life and death, you find you get still higher costs. Perhaps some one should try reclassifying rationing costs as independent variables.
Unfortunately for prediction purposes, five or six thousand uncured conditions have a way of expanding to fill vacancies created by the diseases we cure, since everybody has to have something to die of. Generally, this transfer cost makes its appearance as a cost of lengthened longevity.
Meanwhile, improved housing does make it possible for more people to die at home, or at peace with their fate in some other location. Some houses even have elevators, and almost all apartments do. The spread of higher education makes it more expensive to provide kindly, basic care, and our instinct to use automation to replace caregivers, somewhat coarsens the substitution. Architects report it is always more expensive to build vertically than horizontally; therefore calling into question whether we have fully considered the high-rise incremental cost, or the alternate cost of moving institutions to the suburbs. In a nearby high-rise office building, I noticed the elevator shafts took up fully half of the floor space on upper floors. Someone has to commute; whose time is cheapest? Putting patients in hospices and calling it scientific care has not improved costs much, at least so far. Whatever else you might think of HIV, its swift eradication is a marvel of science, so the degree of patient clamor has to be a consideration. Copyrights and patents do run out, competition does work if unobstructed by regulation, so the prospect is for future health care to proceed through spurts of astonishment, but on balance for healthcare to get slowly cheaper, per year of added life. Much of the cost problem will nevertheless be buried in a mountain of double-talk, simply renaming retirement issues, and possibly employing some sugar-coated euthanasia.
Will Support-Environments Become Friendlier to Medical Cost-saving? In my opinion, improvements in the supporting environment hold at least as much promise as medical research itself, for making medical care cheaper. Improved support systems could also make medical care more expensive. Medical research is somewhat force-fed at the moment, in the hope of breakthroughs which may emerge from expanding chromosome and protein chemistry. Changes in architecture, infrastructure, clothing technology and similar drab subjects are probably due for a major upheaval from advances in electronics, which have so far neglected such prosaic matters. My own insight into such matters was advanced by seeing how greatly medical efficiency has been enhanced by widely-denounced advances in finance and banking. How much a one percent change in interest rates can affect medical costs, barely scratches the surface of what can potentially happen. If people can commute to work in half the time, or must commute in twice the time, makes all the difference in the hidden costs of healthcare. When the millennial generation gets back on its feet, they will be more surprised than we will be, at how much they can accomplish with comparatively prosaic advances.
Frequency of Compounding and Depositing. A feature of compounding is, the more frequently you compound and the more frequently you deposit, the faster it grows. That is, if you pay $365 at a dollar a day, it will grow considerably faster than if you deposited $365 on December 31, but less than if you had deposited it all on January 2 of the same year. If you compound the money in a similar manner, it gets another boost. Most stock dividends are issued quarterly, but on dates of the company's choosing. Once the money is invested in an index fund, the bulk of it compounds nearly continuously, but the dividends compound a little less than quarterly. Overall, an index fund indexes a little oftener than quarterly, but quarterly is easier to show on a graph. That's an appreciably better return than annual compounding, which is often how the results are shown in publications. Just who profits from these subtleties is not commonly revealed, but is something to keep in mind. With a single deposit of $400 at birth, the compounding frequency, often left unclear, is generally assumed to be quarterly. In actual practice, fresh deposits extend from age 20-65, somewhat at the whim of the depositor's trips to the bank. The expenses of doing it are a negative factor, so at least you should inquire about these two features when comparison shopping. Of course, the bank may change its frequencies over long periods of time.
We next show the single-deposit for escrow accounts, which guarantee long-term rates to a fund which guarantees not to withdraw until the end, modified by the frequency of compounding. The following graph shows what is possible from the multiple-deposit, which reaches its extreme with depositing the annual limit of $3350, modified by starting at different ages. More probable actual results lie somewhere between these two examples.
What emerges is that small variations in frequency of compounding, plus small variations in investment income, plus small variations in longevity -- combined -- are somewhat within our control, and collectively make an enormous difference. But fundamentally it was the increase in longevity which put this new vision before us. It will be up to financiers and politicians to make this vision come within our grasp, or oppose it, fighting it every inch of the way. But it was fundamentally the medical profession, responding to the tub-thumping of that Rainmaker, Abe Flexner, who made it even seem possible in our lifetimes.
There are many times in a lifetime when new opportunities to spend rather than save, appear. You have a little cash and must decide what to do with it, for example. This choice presents itself with every paycheck. We suggest an automatic paycheck deduction is the best way to handle it. Big specific temptations also come up. Your neighbor buys a new car, and you reflect whether it is your time for a bigger car, too. You are therefore tempted to make a big withdrawal from a retirement account to pay for it. Bad idea, don't do it. On the other hand, maybe you smashed up the old car and must have a way to get to work, so you do it. You want a way to resist big-ticket temptations, but you must not close that door entirely. We suggest an escrow account.
An "escrow" is a service often performed by a third party for a fee, to hold the two main parties to terms they independently agree on, and can only change if they both agree, or else a judge agrees. Escrow can be a variant of insurance. Please bear with us, for a paragraph or two on this remote subject. Escrow variations in real estate are common, many assume escrow must be limited to real estate. But in an HSA there also arises a frequent need to identify illiquid funds, set aside for some future purpose; the term escrow also comes to mind. Illiquid funds usually command higher interest rates, the "yield curve" is in the daily newspapers, but both parties must agree to change it. Some people are naturally frugal, others are spendthrifts; funds are needed for emergencies, others are saved for later. All that creates a need for what we describe as an escrow account, as distinguished from "demand" accounts; others may call it something else. Since fees are often hidden, let's just say custody account instead of escrow. But remember. Don't escrow yourself into unnecessary fees for a lifetime; do it only for the best interest rate. Words like "prime rate plus 1%" might be used.
Short term investments carry lower interest rates than long-term ones because there is more risk of default the longer the risk continues. Banks survive on the difference (yield) between the rate for them to borrow and the rate to lend; the "spread" varies with the duration of the loan -- overnight, say, or thirty years. The critical issue is the duration of quarantine, but in general U.S. Treasury bills and bonds are found in demand accounts, while common stocks, lines of credit, and other permanent investments must be guaranteed in some way for the duration of investment when their term is not already stated. It's a method of protecting the lender if he pays higher rates, but it's also useful to everybody if life situations change.
Therefore, whether you call it an escrow or not, investors should be given the option of setting certain HSA funds aside were, like Ulysses tied to the mast, they cannot touch the account until a certain time, by common consent, or with a court order. Their broker will respond with a higher investment return if he knows the investment can't be sold "out from under him". Getting back to Health and Retirement Savings Accounts, young people nowadays rarely get seriously ill; old folks often do. If a young investor knows he can ride out the bumps along the way, he is justified in hoping he can get 8% after-tax and after-inflation return. Otherwise, he might be lucky to get 1%. With really long-term investments, even a few tenths of a percent can make a major difference. Let's touch on a few examples.
Squeezing the Lemon Dry. Let's imagine he only spends 1.4% on investment expenses (at age 21); he thus gets back 6.6% on an 8% investment, net of inflation. If he spends 0.1% more on expenses, he will only net 6.5%, or $30,000 less at age 66. That's a lot of money for very little difference in effort, but he should have planned better. We are here suggesting passive investment in the entire stock market, using index funds, no tips, no stock-picking. In a pinch, the higher quality of "collateral" will command somewhat more favorable rates.In later sections of this book, we take up additional issues of, say, funneling money from Medicare to retirement. If science cures a few diseases; or transferring money from grandparents to grandchildren after research renders medical risk superfluous for retirements; or otherwise using extra funds for new purposes as chance and vigilance make it possible. But all of these windfalls require some sequestered fund to be protected against raids by pirates. Certain segments of the financial community will resist any or all of them. After all, most of the time your gain will be someone else's lost income.
"Active investment" or "stock picking by experts" may yield somewhat more for what is judged high-quality assets, although it is hard to see why they should, net of hidden fees. The extra yield is often eaten up by extra fees. And then there is the theory of "black swans", general stock market dips of 30-60%, occurring every twenty or thirty years. The older he gets, the less likely an investor will be, to have time to recover from a "black swan", and the more he needs deflation protection with up to 40% Treasury bond content. But that protection costs his yield another couple percent in fifteen years. To have the funds to manage it, a young borrower needs to squeeze out another .1%-.2% of expenses from his managing firm. If he starts saving later in life, he may need to squeeze 2-3% from expenses, which is probably impossible. The bulk of his retirement will have to come from somewhere else. That's a pity, but what other proposal promises even a fraction as much, most of the time? Most investment managers who must constantly meet payroll with endowment income feel pretty satisfied with 5% total return, employing the 60/40 method. The HSA investor has no payroll to meet, and often needs to do somewhat better to survive.
Just about the only way, one can give it all to him fairly safely, is to use passive investing for a long escrowed time. Lower fees, buy-and-hold. But watch yourself, since managers are often replaced by new managers. We're definitely not saying,"buy and neglect".
But more fundamentally than that, banks, in particular, are also in the business of taking short-term deposits and making a profit on turning them into long-term assets at higher rates. If you persist in keeping idle money at short-term rates, they will take your money and use it in this way. Curiously, globalization tends to create more short-term loans on components of what was formerly one single long-term loan on an assembled unit. This tends to unbalance the normal ratio of long-term to short-term, in the direction of excessive short-term availability. For the person approaching retirement without any way to pay for it, there is little choice but to take more risk. That is to say, if your goal is to avoid risk, don't dawdle until there is nothing you can do but take a risk. So, start saving young, start investing young, and learn your game. One old sage, maybe it was Ben Franklin, used to say, "The best thing which can happen to you, is to lose some money when you are young." Ben Franklin didn't like to lose money at any age. What he meant was, if you wait too long, you're likely to be stuck.
In the first place, we add "and Retirement" to the title of HSA, to make them Health Savings and Retirement Accounts (HSRA). Many years from now, it might be possible to imagine a reverse in the emphasis. That is, to see them as mainly retirement funds with an associated health care feature, but right now HRSA will do. The retirement option was always there, but little recognized or exploited. It is fast becoming the main incentive to be frugal, and frugal is what HRSA is all about.
To write about Healthcare Financing in the year 2016 is quite a challenge because national politics are shifting so fast. This is actually the third rewrite of this book, this year. Unexpected Supreme Court decisions, unexpected presidential nominees, unexpected implementations of the Affordable Care Act, and unexpected success of Health Savings Account availability have all combined to pester a proposal which seemed static for thirty years. The HRSA you can enroll in today at many local banks is much enhanced since it appeared as a strange new concept, so there is an audience asking for it to be explained. There are also politicians who would like to hear what useful additions might help or hinder it, and other politicians are searching for new ways to approach health care. On all sides, health care seems about to break down, but it actually hasn't changed much. It seems to be holding together better than home mortgages and the rest of the economy, but the politics of it are astounding. So this is what emerges:
The first part of the book, which I hope you have already read, is a description of what many millions of people have already started, a Health (and Retirement) Savings Account that can live together with the Affordable Care Act (which also mandates a high deductible.) You can have your choice of health insurance to go with it, although I prefer a low-cost indemnity plan. If you don't spend the account sooner, it should build up to a meaningful retirement supplement. That's something few people had previously viewed as a necessary outcome of improved healthcare.
Although it was never even contemplated in 1981, the retirement income feature is proving to be its greatest attraction, because nothing else matches it. In thirty years of testing, a few regulatory tweaks seemed advisable, and it would be helpful if this or the next Congress would bring it up to date with about three or four technical amendments. I have gone ahead and described them, on the assumption that neither political party would oppose the changes, at least on the merits. With these amendments, you could still have health insurance immediately available even if the present system falls apart. Increasingly, that's an important thing to say, as the newspapers filled with stories of health insurance deficits.
On the other hand, it could remain a Christmas Saving fund with bare-bones insurance for those who are financially struggling. With deposits over time, it transforms into first-dollar coverage at considerably lower costs. It provides a platform if the government chooses to subsidize seriously poor people. It might prove as much as 30% cheaper to switch, but without a retirement incentive, one can't be certain. It provides a mechanism for developing market-based outpatient costs, using relative values and an improved DRG, and could thus extend market mechanisms from outpatients to helpless-inpatient costs. Overall, it's a pretty fair investment, so you aren't taking as much risk as it would seem. Application to the past century shows no one would have lost money with it, and everybody would have made some, payable as reduced healthcare costs. That last statement includes and disregards World Wars, two world depressions, and countless small ones.
The second part of the book contains some bits of relevant history, mostly cautionary history. If I have time, I plan to issue a fourth book on this topic, focused more expansively on how we got into this tangle.
The third part of this book describes some future ideas which could be immediately debited for more serious savings but would require enabling legislation and considerable suspension of disbelief in new proposals which would upset the existing order of things. If you don't plan to live another ten years, perhaps you needn't read beyond this point, but you might better understand why certain things are necessary sooner. Some might say this is a waste of time because galloping inflation would ruin it. But my position is we need to see what we would be losing by permitting inflation. The fundamental position is pay-as-you-go funding substituted short-term expedience for long-term cost overruns, with unsustainable results. Figuring a transition path out of it is really difficult.
The third section, therefore, contains the novel proposal of insurance-to-insurance re-insurance, perhaps more explicitly termed "first and last years of life reinsurance." It shortens the long transition period by working at it from both ends at the same time. Building on the idea that young people have little need for healthcare, while old folks require a ton of it, the opportunity of compound interest for the first fifty years, paying for the whole thing, is explored. Breaking it into four parts shortens the transition. The concentration of revenue production to the working period of a lifetime also lessens the dangerous system of well people supporting the costs of sick people by an enormous transfer system -- which is what we are unsuccessfully trying to do, today. This is accomplished by creating a second insurance mechanism in reverse, starting with end-of-life reinsurance that everybody will need, and ending with a first-year-of-life addition, which most people have already paid for in some haphazard way or another, so the transition costs are reduced. The long transition time is still the weakest part of this proposal, not lack of money. Reinsurance cuts it in half, someone else will have to cut it further.
For a short summary of it, Medicare takes care of your terminal illness the same as before, but the new insurance reimburses Medicare for its cost. Meanwhile, at the other end of life, first-year pays for a grandchild by slightly overfunding the last year for grandpa, and compound interest builds it back up. This dual system would take fifty years to mature fully, but it could eventually pay for all healthcare out of investment income when it did mature. Perhaps by that time, a majority of the public will accept the idea that investment earning is here to stay. And maybe by that time, research would have whittled healthcare down to those two basic years (birth and death), anyway. This is at least a theoretical way to convert a hundred-year dream into a fifty-year dream, and suggestions are made for how it might be narrowed further. One of its great beauties would be that it would operate almost invisibly while it grows to take over a full lifetime. A second beauty would be to create a long-term plan to follow out of these crushing costs.
The third part of the book is also devoted to a way to phase out much of our present arrangements, gradually, as evolving circumstances make the component pieces obsolete. Remember, fifty percent of drugs now in use were invented less than seven years ago. The first and last years of life would continue much as they already are, but other pieces like CHIP, like Medicare, like healthcare as we mostly know it, will be gradually conquered by research in the next century. Even if you don't believe that will happen, you need planning for it, just in case we need to shift the funds. But if you are as sure as I am that it will happen -- we just don't know how soon-- it will be fun to devise a roadmap for it. However little it might resemble our conjectures, we'll all be better off for some advance thinking.
On March 16, 2016, the Chairman of the Subcommittee on Health, U.S. House of Representatives Committee on Ways and Means, held a hearing on Much-Needed Medicare Reforms. The Chairman of the Subcommittee, Rep. Pat Tiberi (R-OH) chaired the hearing, which included invited guests Robert Moffit, Senior Fellow of the Heritage Foundation, and Katherine Baicker, Harvard Professor of Health Economics. According to the Committee report, there was general agreement with Moffit's assessment that, "Of federal entitlements, Medicare presents the greatest challenge." Not the worst care, just the hardest to pay for, is what we presume he meant.
Essentially, Medicare is a modification of the Blue Cross/Blue Shield plans prior to 1965, anchoring the old employer-based systems into a cluster which was originally administered by Blue Cross; and to a great extent still is. The secondary insurance plans, to cover deductibles, copayments and uncovered charges became a central part of Blue Cross profitability in 1965. The sudden implementation of Lyndon Johnson's Medicare package caused so much administrative commotion at the time, that the final working product originally assembled by Ross Perot's group has approached subsequent changes with trepidation. The 2011 near-collapse of the Obamacare Insurance Exchanges stands as a repeat warning to bureaucrats to tinker with health insurance design -- with great caution, if not reluctance. Medicare has rightly been accused of providing too little advanced planing since its inception fifty years ago. But one of the important reasons, was it was so stretched to administer what it had.
Although the passage of time has created a need for many changes, reform has been slow in appearing. Medicare has become the largest non-military source of deficits, has seen its prices soar, contains a poorly-recognized 50% subsidy which is often financed by foreign bond sales, incorporates bewildering complexity into its patient reports, discourages outsiders from suggesting or even acknowledging design flaws, is physically located (Baltimore) at some distance from Washington oversight. In spite of all this, the program is wildly popular with the voters, primarily because of the subsidy -- because it provides a dollar of care for fifty cents. In fact, the collection of payroll taxes from younger people is scarcely noticed, leaving only the premiums visible to its beneficiaries. It appears to them to be a dollar of care for fifteen cents. Among politicians, Medicare is the "Third Rail of Politics; just touch it, and you're dead."
Neither the Heritage Foundation nor Harvard is famous for restraining its criticism of other people, but at this hearing, their proposals were only hesitant and dubious. Although gigantic, stability-threatening deficits were the big elephant in the room, these institutions confined themselves to hesitant and relatively insignificant changes to a program which has had fifty-one years to think of something. The book you are reading is primarily about Health (and Retirement) Savings Accounts, but several of the technical tweaks proposed at this hearing about Medicare would cripple HSA approaches, so I must comment.
Simplifying Parts A and B into a single plan has an efficient sound to it, but undermines a central concept of the Health Savings Account, the use of outpatient cash payments as a way of re-establishing market pricing. Part B isolates outpatient medical costs, and could be the basis for a market-based system of pricing. Part A, on the other hand, concerns inpatients in a hospital bed, who have neither an interest in costs compared with the illness which threatens them, nor the ability to shop around. If rationing is ever praise-worthy, this DRG arrangement is an excellent rationing tool. However, a great many of the services provided to inpatients, are also provided to outpatients. The main cost difference between inpatients and outpatients sometimes is whether the patient needs to be fed with a spoon. Those services which are unique to inpatients could easily be linked, by a relative value scale, with non-unique services. And thus secondarily linked to the market-based prices of outpatients. We are so close to a solution to the dichotomy, it's a pity to hear proposals which would make it more difficult.
Whether to use such market prices, or to envelop them within a Diagnosis-Related Group for a hybrid price, is a technical issue. It depends on revising the diagnosis coding system to be more detailed and relevant to the problem; the ICDA system now in use was mainly a response to complaints from record librarians that no one was retrieving charts that way. That's true, but irrelevant. What's needed is a code for physicians to describe the medical issue in the patient at hand, not one which describes the occurrence frequency of groupings. In spite of repeated revisions, ICDA still provokes disdain from physicians as aimed at diagnosis frequency, and not sufficiently concerned with diagnosis detail. The physician-developed code, SNODO, has been in use for a century, more recently brought up to date as SNOMed. Until the coding systems are reconciled, ignoring any consideration of frequency, there can be no relative value system for cost without years of effort; reimbursement assignments are a relatively trivial addition to a diagnosis. This whole process sounds complicated and it is; but most of the work has already been done. To combine Parts A and B may serve some administrative purposes, but the tail of insurance claim administration must stop wagging the dog of medical care, because it exerts a powerful but unjustified control. Without medical care at its core, cost-neutral Medicare might be strangled more cheaply by just abolishing it.
Re-targeting Medicare Benefits to lower-income enrollees. I'm afraid you will find almost everyone on Medicare-- not just low-income people -- is on a fixed income, has no idea how long his retirement money will last, and has all day available to explain his difficulties to anyone who will listen.
Updating Medicare's eligibility to 67. I'm afraid you will find the uninsured time gap (between retirement and Medicare eligibility) will then widen. With that problem recognized, this last idea does merit some consideration, but it conflicts with proposals to permit a Medicare buyout at age 55. It is important to know what price is envisioned for the buyout. If it's the present Medicare premium, it's about fifteen cents on the dollar. If it includes the Medicare wage-withholding tax, there is reason to suppose that has already been spent. And if it includes the subsidy by the general fund, the Chinese are under the impression you already owe that, to them.
On March 16, 2016, WSJ Opinion Page, Scott W. Atlas of the Hoover Institution directed attention to the defects in Medicaid, presumably as part of his forthcoming book Restoring Quality Health Care. Quite rightly identifying Medicaid as the weakest part of contemporary American medical care, he presumably feels the Obama Administration missed an opportunity to reform Medicaid as a central feature of the Affordable Care Act. I agree with both positions.
History. Because of money and the Tenth Amendment to the Constitution, Medicare emerged in 1965 as a fairly close copy of Blue Cross/Blue Shield, while Medicaid emerged as a plan funded by Federal money, but administered by the various states. Onlooker opinion also gives considerable weight to compromises between the King-Anderson proposal of the House and the Kerr-Mills proposal of the Senate, leading to Blue Cross administration for old indigents (Medicare) and State Welfare programs for young indigents (Medicaid). As observers would have it, one was generously funded so the other had to be underfunded with what was left, but there was much more parliamentary circus than that alone.In any event, Medicaid started out as an expansion of Aid for Maternal and Infant Care, with the hope other young indigents might be gradually included. Unfortunately for such dreams, 1965 was the last year America ran an international trade surplus, so Medicaid expansion was slow. Even with time state legislatures could never match the federal Congress's generosity, for reasons which trace back to the Civil War. There was never a pretense of fair test between equally funded but differently designed plans. Indigent care was supported by communities varying in generosity, and it had to cope with the Great Migration from the Reconstruction South, which imposed the disturbing realization that any generous indigent health plan will act as a magnet to attract more indigents, eventually, more than Northern communities could absorb. Possibly this was an important ingredient of the fact which emerged: enrollment in Medicaid was largely left to the hospital social workers, motivated by seeking reimbursement for the hospital when sick poor people made an appearance at their door. The final consequence of this was that nobody really knew the extent of coverage by the program until they got sick. Vast numbers of indigents might be eligible if they applied, but they appeared to be uninsured as long as they stayed well. There were certainly some uninsured indigents, but nobody could tell how many. The numbers were therefore exaggerated in both directions, by politicians who wanted to claim the numbers were disgracefully high, or the numbers were too low to warrant much concern. Later on, it would thus be hard to evaluate claims of what proportion of the uninsured had become insured by the Affordable Care Act. In particular, if you don't even know how many are potential to be covered, you can't judge the extent their healthcare contains a backlog of untreated disease. Judging from Medicare experience, it almost surely contains a big backlog, rather poorly described as a pre-existing illness.
If funding a disparity of untreated disease by direct federal payments could ever work, it certainly could not work in the midst of a major economic recession. That's one of the main lessons of the Affordable Care Act. Scolding people will not work, and the uplifting language of wellness programs won't cure much, either. The electronic medical record, wisely unmentioned by Scott Atlas, makes things worse by increasing the proportion of cost which could be described as overhead. Before 1965, doctors were accustomed to using their spare time to help the poor, pro bono. Packing in five-minute visits leaves no extra room. All that extra overhead keeps you from slowing down, but at least it must let you quit. When one doctor quits, another gets increased overhead. By the way, paying doctors a salary promotes an instant 40-hour week. Solution: build more medical schools.
Three things eroded the informal patchwork system for the indigents, although in established areas patchwork did, more or less, work. First of all, the electronic record takes up several extra hours of doctor time each week; there's less time for charity. Secondly, welfare doctors proved as competitive as anyone else. Foreign-trained doctors especially needed marginal income. But worst of all, welfare programs by consensus embraced the fortress exclusivity of HMO, the Health Maintenance Organization. I never turned away an indigent patient in my life, but they did gradually dwindle out of my office because I declined to join the welfare HMO. A two-class system is segregated of course; it does not necessarily deliver bad medical care. But the patients think it does, it sounds to them like separate but equal, and they won't have it. Previously, it had never occurred to me that discrimination works in both directions. The mainstream practicing profession was pushed out of Medicaid, just as surely as they were happy to leave it.
Linking low-cost high-deductible plans to catastrophic (no frills) coverage helps low-income people considerably more than it helps no-income ones. You need subsidies from somewhere else, for no-income. Loading a compulsory indigent plan with luxuries, and then funding it with cross-subsidies, sinks a plan with more costs than it can hide; because the lack of funding is never confessed. I have a suspicion I cannot exactly prove, which is that a lot of talk about preexisting conditions really talked about the untreated backlog.
As a general statement about insurance: it's a little surprising any of it works as well as it does. Most of us know the story line of Shakespeare's Merchant of Venice . It boils down to describing how a fairly decent merchant got into big trouble by pledging his life (in effect) to fulfilling the terms of his maritime insurance, which of course he never should have signed. There have always been terms of insurance no one should agree to, and no court should enforce; this was certainly one of them. However, there has long been a real need for maritime insurance, so over a period of several centuries an honorable, profitable and workable scheme was gradually patched together. Today it is possible for a shipowner with doubtful finances to make enforceable arrangements with insurers thousands of miles away, under terms of a contract written by shrewd lawyers, to pledge substantial sums derived in turn from investors who know very little about insurance, ships or navigation, to cover ships sailed by captains over whom they have no physical control, commanding crews who are often of the worst sort. It actually seems to work, if everybody involved is careful. And the same thing is true of health insurance. A workable system can be constructed, but some schemes forget their premises.
Regulations vs. Incentives. There was once a time for example, when the State Insurance commissioner was expected to protect the customer from claims against an insolvent insurance company. Insurer insolvency is a risk in buying any insurance. In recent years, however, insurance commissioners have appeared to have the main goal of protecting the customers from being overcharged. The two goals are in conflict, one pushing premiums up, the other pushing premiums down. Accounting procedures have grown arcane, dual systems of cost accounting are imposed, reserves are hidden. Many states require solvent companies to bail out an insolvent one, so an occasional slick operator escapes with a quick profit before the surviving competitors can protest. And so forth. When the state Medicaid program becomes an abuser it is difficult to trust the state's insurance commissioner to protect anybody. This resembles the environment which existed before the business community organized the non-profit Blue Cross plans. The deficiencies of service benefits and rising costs then seemed a small price to pay for a workable system. After a century, unfortunately, the employer-based system has trouble defending them.
Dread Diseases. And there once was a time when newsmedia agitated worries about certain diseases, so Dread Disease policies quickly appeared, insuring against polio or cancer, or whatever else was in the news. When hysteria subsided, people dropped these policies, and the insurance company could legally walk away with unpaid claim reserves. As a matter of fact, much of the profitability of life insurance even today resides in expired policies of those who drop their policies; like exercise clubs for the flabby, who could never actually accommodate the number of subscribers they vigorously enlist.
It is not possible to separate insurance for the other stages of life, until you stabilize the ACA, since the employed third originates most of the revenue.
On the other hand, it raises a question whether employer-based health insurance would also be dropped by well persons who get into non-medical financial difficulties -- except they mostly don't own their policies. Set aside the tax dodge and its inequity for small employers, prevention of employees dropping term insurance is still most likely the underlying purpose of businesses giving health insurance to employees. They want to make sure their employees are treated for illness before the business itself gets disrupted by absenteeism. They can't give lifetime coverage, because today most employees change employers frequently. It's important to see this motive is legitimate, because it must somehow be modified without the use of brute force.
Employees who own their policies might very well drop them, so the potential value of having insured employees with improved health must be balanced against its evident unsatisfactory features. As costs rise, at some point almost any IRS agent would question the imbalance of purposes. What seems to have tipped the balance was the discovery that tax exemption without loss of control could be created by giving it to employees as a gift, where the higher tax rate for corporations actually creates even higher tax exemptions for the employer than the employee. Times and attitudes change, but the argument that volume purchasing and other features secondarily make the health insurance cheaper for the employee seems to have been persuasive. The fact that non-union employees of competitors were treated unfairly, was highly unpersuasive until job mobility significantly increased. And converting high corporation taxes into high corporate tax deductions is increasingly seen to be just a step too far.
The time increasingly moves toward corporate willingness to surrender the tax inequity, with only unions belligerently opposed. The easiest way to accomplish it is for HSAs to be able to purchase it, since the rest of HSA is also tax-exempt. Employers might possibly prefer to use surrender as a bargaining chip in general tax reform legislation. At this point it scarcely matters which approach is adopted, either giving tax exemption to everyone, or denying it to everyone. In the present climate, giving it to everyone probably has the edge. The price of not extending the tax shelter to the catastrophic insurance portion of an HSA, is an unnecessary price for everyone who signs up for an HSA. The cost in Treasury revenue now begins to be less of a consideration than restoring fair play to the basic economy. Revenue can be restored by other means, but regaining a general atmosphere of equity is much more difficult.
Aside from this issue, catastrophic indemnity insurance continues to be confused with dread disease insurance. Let's insure cancer, but not indigestion, would be the general idea. One supposed alternative is: Let's insure illness, regardless of cause. But our goals have become confused; we should be advocating insurance against major health costs, regardless of medical cause. When you come right down to it, the underlying reason behind all this medical investigation of claims, is to prevent providers and patients from milking the insurance company. And a better way to accomplish that is to have the patient pay cash and be at subsequent risk seeking re-imbursement for his payment. The relative cost of the two approaches needs to be re-studied. In particular, it would be important to seek ways to separate direct from indirect costs, since the system of burying research in indirect overhead essentially makes research and teaching into beneficiaries of reimbursement abuse. In the outpatient area however, the experience of HSAs has been the issue is not a a significant one. For helpless patients in a hospital bed, a more sensible revision of diagnosis-related payment still makes sense.
Disability Insurance Has been praised by some as an alternative to funding health insurance, and amounts to concentrating funding into diseases which entail extended disability from employment. It is true the really astounding health costs have usually included a big dose of disability rehabilitation, and in fact organized health groups have concentrated considerable attention to it. However, these efforts have largely been subsidized experiments, and they have yet to demonstrate overall cost-effectiveness, themselves. When teams of six to eight professionals devote up to two months to a stroke patient, the cost can be overpowering at any income level, and only 4% of stroke victims currently receive fibrinolytic therapy. Extending the same generosity to 96% of stroke patients would be ruinous to this approach. Important standard of care conclusions can only be reached when 80-90% are treated, at least in a few regions, followed by 80-90% rehabilitation, followed by observation of the cost effectiveness for some time afterward. You almost don't need to do the experiment.
When the net benefit to the patient is often meager, the question is whether the rehabilitation approach must change or disappear when the current research subsidy does. Extending it to helicopter and police rescue, we do not have even preliminary data to encourage this essentially rehab approach as a cost saver, but it certainly sounds expensive within the present state of the art. The current price of ambulance service suggests this is an area of considerable abuse. At a recent medical symposium on the topic, the audience was asked how many would prefer a disabled outcome in 30%, to dying of the disease, and very few hands were raised. These investigations must be conducted before final decisions can be made, but the early results are a warning. The advanced age of most stroke victims suggests this noble effort at best will not cause much economic improvement, unless the rehab becomes much less elaborate. We hope treatment advances will appear quickly, but national cost effectiveness changes are so far, only partially encouraging.
Home Health Care is also quite expensive, but most people would prefer it to institutional care. At the moment, home health care insurance encounters its main problems from government caprice. If Medicare cannot be depended on, or if a benefit can be removed at the stroke of a bureaucrat's pen, the finances of this sort of insurance will remain precarious. The retirement village is probably a more viable approach, because most of them are located in suburbs, and could also serve the suburb as a partial substitute for hospitals, with doctors' offices, laboratories and radiology serving a dual community. They are not cheap, but are probably cheaper than holding on to oversize, underused, private homes, inconveniently located for medical service. By far the greatest problem with out-of hospital settings is the instability of rulings by insurance companies and governments. Whatever problems the teaching hospitals may have caused, they have historically been reliable in this one.
Although they seem to have the same design, employer groups don't fit the ACA plan very well. You will notice in current reports of 20% boosts in the individual health insurance contracts because of the Affordable Care Act, there was scant mention of employer groups. Their rates are negotiated privately, and usually at lower rates. They usually pay a different share of subsidies, too. In fact, it can be easier to deal with a plan with no subsidy at all, than with one which requires fitting several partial pieces together. Employer groups are often further subsidized by state and federal income tax deductions, with puzzling circular dependence. Employers make young employees subsidize older ones, while the ACA emphasizes rich ones subsidizing poor ones. (Young employees are seldom richer than older ones, so there's a mismatch, somewhere.) Young employees think of buying protection against unexpected illness, while older employees think of buying necessities at what they hope is a discount.
Some employed subscribers then find they are better off switching to Medicaid, which has historically been quite substandard. Others conclude their health risks cost less than the penalties for having no insurance at all. Some genius may be able to reconcile these issues, but at some point it seems better to start over. An important fact to remember: many poor persons are eligible for Medicaid, but haven't applied for it. That's a job the hospital social worker usually supplied in the Accident Room as they were being admitted. When it was decided to give ACA insurance to poor people, this awkwardness suddenly surfaced, in the form of implicit subscribers who were sicker than was planned for.
Mixing the subsidy with the service package usually causes trouble, lumping too many sick people with too few well ones.
Since Health Savings Accounts were begun independently of subsidies, they sometimes face the unjustified taunt they "do nothing for the poor man." If equal subsidies were distributed, the subsidy issue could become independent of the type of health care someone happens to have. It's too bad this wasn't examined from the beginning, since it definitely hampers the Affordable Care Act more than it helps it. Competition paradoxically does the opposite, no matter how hard that is to accept.
If you want to extend the same health subsidy to the HSA as is extended to ACA, go ahead, but stop using the addition of subsidy as a reason to prefer one payment system to the other, or one proposal to another.
Perhaps, poverty should be treated as economists treat unemployment -- a net absence of affluence, imitating unemployment as a net absence of employment. That says it might be temporary, which is not implied by saying it's a class of people, or a particular form of thinking. The Biblical description once implied both unemployment and poverty were two classes of society, quite likely permanent ones. But that was hundreds of years ago, and in a foreign land. A small demonstration program in several states might clarify whether this difference of viewpoint might actually lead to an improved subsidy approach. For a long while, I thought eliminating poverty would eliminate the sense of being poor. But it doesn't. Somehow we must get over the idea that the way we were born is the way we must remain, overlooking the plain fact that just about everybody is going to live thirty years longer, and that's generally a good thing. In fact, it's hard to think of anything most people would rather spend money on, than longevity.
...Also by the same author:
The Hospital That Ate Chicago, Saunders Press, 1980
Health Savings Accounts: Planning for Prosperity, Ross & Perry, Inc. 2015
Ross & Perry Book Publishers
3 South Haddon Avenue
Haddonfield, New Jersey 08033
Surmounting Health Costs to Retire: Health Savings (and Retirement) Accounts Copyright: 1-2540412791
ISBN #: 978-1-931839-44-0
For advice and support about the thrust of this much-revised book, I owe new debts to the many people who read the first version and commented. The first book was written as ideas developed in my mind, and rather in a hurry. The present revision was written so later thoughts could be introduced earlier in the argument. It also gave me a chance to distinguish between, what is immediately practical, and grander ideas at the mercy of intervening events. I briefly considered omitting the long-term viewpoint, but include it to suggest alternatives which may or may not be achievable immediately, but would seem like blunders if passed over when there was room for them. Voters want representatives (and authors) who are clear what they hope to achieve, even if events bring them short of it.
This book outlines the hidden advantages of Health Savings Accounts, which the author had a hand in creating in 1981, along with John McClaughry of Vermont when John was Senior Policy Advisor in the Reagan White House. HSAs have achieved 30% savings among early subscribers. The most popular advantage appeared later: to convert the left-over tax-exempt savings to an IRA, at the time of beginning Medicare Coverage. Because of the popularity of this retirement savings feature, this book suggests renaming them to Health and Retirement Savings Accounts, to emphasize the dual possibilities.
In a later section, the book looks ahead to still other features which take advantage of compound interest income during an era of lengthening longevity. Substantial savings appear to become possible from reversing the system, from paying interest, into one of receiving and compounding it. Individual private accounts rather than group insurance contain a number of other hidden advantages, as do high deductibles but absent co-pays. The public currently embraces Medicare but needs to foresee the advantages of gradually shifting its funding whenever research reduces Medicare costs in the future. The mathematics appears to be sound, but resistance might appear, from the political and social disruptions entailed.
|George Ross Fisher III M.D.|
George Ross Fisher, MD, the author of this book, graduated from the Lawrenceville School in 1942, from Yale University in 1945, and from Columbia University, College of Physicians and Surgeons in 1948. After postgraduate training at Pennsylvania Hospital, Thomas Jefferson University, and the National Institutes of Health, he spent 60 years practicing medicine in Philadelphia. During that time, he spent 25 years as a delegate to the American Medical Association, and as a trustee of a number of medical organizations.
Following retirement, he formed a publishing company, Ross and Perry, Inc, which has published several hundred books, mostly reprints. He is personally the author of eleven books about Philadelphia history, from William Penn to Grace Kelly. He is the author of the following three books about medical economics:
The Hospital That Ate Chicago; Health Savings Accounts: Planning for Prosperity; Surmounting Health Costs to Retire: Health (and Retirement) Savings Accounts,(the current volume.)
To Robert Morris of Philadelphia, who taught Alexander Hamilton about credit, but personally learned it had its limits.
The Progressive Era lasted several decades, some say it still continues. Around 1910, the Progressive Era, reacting to the Gilded Age which preceded it, started doing painful things in the best interest of the individual, like the graduated income tax, the War to End Wars, and employer-based insurance.
Regardless of originator or date, employer-based health insurance was imported as an idea from Germany in the nineteen-teens, getting started in the nineteen twenties, and becoming the prevailing standard by World War II. Although control later shifted from employers toward government during this period, Harry Truman was unable to move it further. It was only in 1965 that government control jumped forward, coming to a climax in the 1965 Medicare and Medicaid laws. Curiously, the employer-based format itself reached a peak in the Lyndon Johnson legislation. Since 1965, one president after another has struggled to convert the rest of health insurance to government-based but always retaining its same general employer-based form. Along the way, two people significantly modified the model: Abraham Flexner, promoting the research-oriented teaching hospital into custodian of the standard of care, replacing the physician guilds; and Henry J. Kaiser, retaining control of a wage cost by calling it a gift, with high corporate income taxes and exempted employee income taxes reducing its effective cost to the employer. In a curious way, high corporate income taxes increased the proportion of healthcare paid for by the Federal Government, by increasing the value of the deduction. Not everyone would agree with this description of the history, but I'm convinced of its essence.
Whether the gift comes from business or from government, makes little difference, except to the two contestants. Henry Kaiser seems to have become enlightened that corporate taxation higher than individual rates actually results in important tax advantages for the employer's gift. It allows employers to shift most of the cost to the government while retaining ultimate control in employers' hands. For many decades the commercial insurance industry tried to break in, but the greatest recent threat to this collusion was accidental. All insurance is a system of cross-subsidies, but the Obama Administration superimposed a subsidy of the poor by the rich, onto an employer system of the young employees subsidizing the older ones. The mismatch between the two seemingly similar subsidies now threatens the coherence of the medical finance system. It also brings out the advantageous warping of the insurance idea by calling it a gift.
Furthermore, the gift is ultimately one of money, so how did service benefits get mixed into this? What does the diagnosis have to do with paying hospital bills, except as a mechanism for obscuring the price? The insurance premiums begin with money, and the insurance intermediary ultimately sends money to the provider of care. Money-in, money-out is what the insurance industry calls indemnity insurance. They were using indemnity for centuries before health insurance came along. Why change to a unique and expensive accounting system, if final prices remain unchanged? This device probably started as a way for an insurance intermediary to check the medical validity of a remote claim, but has gradually evolved into an elaborate cost-shifting device. The unfortunate result is to blind the doctors in charge of the true costs of their options. So doctors nowadays totally disregard the posted prices which emerge, when they devise their treatment strategies. The result is very bad, no matter what the original purpose was.
There may be something to the idea that adding diagnoses and services adds enough mystery to the process to keep away competition, but there are business incentives which seem more central. Now that health cost consumes almost 17% of the gross domestic product, corporate taxes are an important part of the federal budget, largely explaining why the President might not want to lower them, even driving international businesses to consider moving abroad, rather than lower corporate tax rates. However, if the tax reduction which results from the gift is considered, the net corporate taxes actually paid are not too different from prevailing international rates. If corporate income taxes were eliminated, at least the employer would have to pay for his own wage costs masquerading as gifts. They might even discontinue them since employers could get the same tax abatement by calling them what they are, wage costs. Following this scenario, the main benefit appears as the tax exemption in the workers' pay package, and the main victims are the competitors who do not receive the gift. If the government is willing to lose the revenue from the tax-paying half of the workforce, they could permit the Health and Retirement Savings Accounts to pay the premiums, essentially providing tax exemption to everyone. If unwilling to lose revenue, the government could start taxing the large employers, which they are now prevented from doing by the seemingly high rates. It's hard to know whom to blame, except this sort of Byzantine structure creates winners and losers, and is ultimately unhealthy.
Two simple and comparatively painless steps -- equalization of tax preferences, and lowering of corporate income taxes -- might soften the objection to indemnity, so why continue the service benefits concept? For this answer, you must return to Abraham Flexner, who brought Bismarck's "der her Professor" system to America, stimulated much research, and ultimately made teaching hospitals vastly more expensive than community hospitals for routine medical care. And now it is necessary to understand the system of calling all activities which are unrelated to patient care "indirect overhead". Although research is largely funded by outside agencies like the NIH and drug companies, it is described as indirect overhead, and distributed among the patient care bills as additional indirect overhead. Unfortunately, a great deal of bloated administrative cost is classified as indirect overhead, as well. No modern corporation could exist without a certain amount of cross-subsidy, but the present amount of it in hospitals is unreasonable. Beyond a certain level, indirect overhead should be forced out of the hospital cross-subsidy system, funded independently, or at least forced into public view. In short, too much routine care is being reimbursed at a high tertiary care level in the teaching hospitals, and this may well stimulate excessive administrative costs as well, even though it may be hard to trace how it comes about. Their competitors in the community hospitals also probably get a little raise, indirectly, to help suppress their complaints. Wall Street was once lambasted for steak dinners and Superbowl tickets from vendors, but you don't hear much about the hospital administrator version.
To make a long story short, service benefits tend to equalize the cost differences between teaching hospitals and community hospitals, ultimately raising the cost of both, but particularly the cost of routine care in teaching hospitals. Historically, this surplus subsidized the research revolution, to which we owe a thirty-year lengthening of our life expectancy. So, go figure. But nevertheless, it now blinds physicians as much as the public to the true cost of their medical decisions until they are unable to respond effectively to rising prices, and don't try. A century of it is long enough to devise a better approach, so apparently, some pain is needed. But any way you go about lowering them, if you want to control costs, you must start and end with undiluted true costs, not accounting fictions.
Hospitals and doctors have a right to keep their account books, any way they please. The prices they charge, however, are a matter of negotiation with vendors. The case against mixing medical language into health insurance claims is clear enough; doing so adds considerable complexity and cost, without clear purpose in changing the price. It makes us do a lot of dumb things. A return to an indemnity system would increase payment efficiency. Subscribers pay the insurance companies premiums in cash; insurers pay the healthcare providers in cash. Cash in, cash out. Payments go out to vendors based on individual costs run up by individual subscribers. Premiums are split among individual subscribers as per capita shares of the total paid out. Research and charity should be accounted for separately, instead of being mixed into general patient care costs. A case for going slow, gradually phasing-out the present system, makes sense. What's the resistance?
Unwinding Cross-Subsidies. No strong argument is improved by exaggeration. Regardless of original intent, the main justification of a system designed to protect teaching and charity hospitals, has been research that extended average life expectancy by thirty years in a century. There are lots of nits to pick, but don't ever forget the baby you are going to throw out with the bathwater is what gave you thirty years longer to live. That outcome may have been unintentional -- many outcomes often are -- but a miracle of that magnitude should make us forgive quite a lot, indeed, it ought to make the whole world grateful,. But also unforeseen was a convoluted system costing ridiculous amounts of money, at a time we cannot afford it. Never mind it's the best there is; it could be better. Because it's the best there is, improvements should be American improvements, not imitations of how Otto Bismarck arranged things.
Today, and even more when this system was designed a century ago, there is considerable difference between the research and charity functions of different hospitals. Internal cross-subsidy hides the source of this, but it's fairly simple if you first subtract the different degrees of support the various hospitals receive from donations. Some hospitals do a lot of research and charity, others are located in different regions of differing composition. So a new layer of cross-subsidy was created to equalize the patient premiums for the same service, redistributing the "indirect overhead" costs to consumers to pay the bill. The result was the same health insurance premium, no matter which hospital you chose. To make sure everyone played fair with artificial numbers, the claims then passed through a medical process which we won't bother to describe. Over time, this just became the way things were done. I can remember having lunch with the board chairman of the local Blue Cross, who was also the board chairman of the largest hospital in Philadelphia, and I pointed this inter-hospital subsidy system out to him in 1970. He was astonished.
Since that time, Medicare has become the big gorilla for claims administration, essentially dictating methodology, although the methods have not changed much. What has changed is the composition of payments for research (now largely governmental), donations and charity (mostly much smaller), and administrative cost (which has gone out of sight.) How disruptive if would be to net out the overhead and pay it separately, is unclear to outsiders. I have the feeling hospital administrators are like a man holding a cat by the tail, afraid to let it go.
It is clear enough who benefits from the present blank-check approach, and therefore who would resist change. You certainly do not want to constrain either research or charity. Research added thirty years to longevity, and using the charity patients for teaching purposes is diminishing but still appreciable. In my own opinion, the disparity in luxury, between patients who pay for luxury and patients who do not, is a main dilemma facing reform. We like to say fairness itself provides for equal treatment under the law, but whether payment was included in the transaction has always been skirted.
As the Affordable Care Act plays out, we get closer to examining whether we must reduce research costs in order to provide private luxury care for indigents. That's a political question, but it largely ignores how luxurious even our free services have become. We might rationalize it after research eliminated about ten particular diseases, but at the moment we can't afford to do it. One who remembers hospitals in the summer without air conditioning, and hospitals built low because elevators were expensive, may see things differently. To provide stripped-down care for everyone just to make it equal to indigent care, seems a highly improbable alternative, to just about everybody except politicians. But while no corporation could survive long without a small amount of internal cross-subsidy, times seem to have changed enough to permit stripping out a large part of research and charity costs, funding them separately and perhaps displaying them unmerged on the patient bills. If the public is to decide this, the public must get the facts straight.
In addition, I propose we improve and enlarge Health and Retirement Savings Accounts on its present term and indemnity basis, and spend the following two or three years debating how to switch the rest of life to a whole-life approach as an integrated lifetime system. The cost improvement of whole-life over term insurance is another important argument for consolidating the vertically fragmented payment system. But I'm not really sure it can be done yet, although it deserves investigation. I wish others would explain what they mean by a single-payer system, but I fear whole-life insurance is not the goal in mind. This book envisions three hundred million individual owners, whereas single-payer sounds like just the opposite, a government system which remains a government system, no matter what. To further this debate, the rest of this book is devoted to the pieces we might like to add to HRSA, and how to go about adding them. You may notice taking off your shoe and pounding the table with it, is not one of the recommended options.
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With this point, we move away from the first section of the book, describing, endorsing and explaining Health Savings and Retirement Accounts in their present form, adding only a few tweaks to bring them up to date. In itself Health Saving and Retirement Accounts are a great improvement over competitive systems, but they could be smoother and less expensive overall if the term of insurance risk were lifelong instead of mostly one-year. But until the whole-life insurance companies give it their blessing, I urge we hold back.
That means insurance might be improved if based on whole-life principles like most life insurance, although I invite life insurance experts to show me differently. Right now, tampering with Medicare is politically impossible, and insuring children presents special difficulties. With those two gaps unsolved, you just can't devise lifetime plans that will work, so earlier patches probably do get in our road justifiably. The success of whole-life life insurance shows it can be done, sort of, but would require great care and long planning. After wrestling with the issue for years, I have come to believe we should concentrate on what is now legal but not fully exploited in HRSA, while we spend several years planning together before taking additional major steps into the unknown. Therefore, if you are only focused on the immediate future, you can stop reading, right now, and get busy adopting HRSA. But if you would like to know how much better (and cheaper) the idea of individually owned health insurance could be, read on. The country needs to decide whether to make one major improvement and stop, or to keep going in an agreed-upon but difficult direction. Launching a thirty year war is simply not necessary.
Single payer is a political slogan, not a program, and I for one don't know what it exactly implies. My guess is, no one was expected to know what it meant, so it could gather votes and provide "deniability" without explaining the bad parts. However, I'll take a chance and suppose single payer means extending Medicare to all ages, and eliminating every other form of competitive medical payment. I favor individual health and retirement savings accounts, and I'm in favor of trying to extend uniformity of them to all ages. I offer no proposals for significantly modifying Medicare itself, but even offer suggestions for extending it to retirement income. But I am not in favor of monopoly, therefore not in favor of "single", eliminating competition in this or any other field. Furthermore, I have a few stones to throw at Medicare.
But there's a technical problem lurking underneath this political description of single payer. Look far ahead, and you can foresee medical care steadily eliminated by huge research efforts, especially for ages 50-65. Eventually you can imagine sickness care reduced to two categories, problems related to being born, and problems associated with inevitable death. (The first year of life, and the last year of life, in insurance jargon.) Never mind how it narrows down, these two will persist. It's fairly easy to see how death can be anticipated decades in advance, and become pre-paid. But birth is a significant political problem. Some subcultures want a lot of children, some can't be bothered with any. Some say pregnancy is a subject for mothers alone to decide, some say it is a family decision, sometimes a paternal one. And some say it is a cost for the child to pay back, because it is basically the baby's cost. Notice: It can be pre-paid only when regarded as a cost of the parents, or a temporary cost for them to transfer back to the child later. Of course, this is merely a transfer. Birth control has made it optional, but you won't willingly pre-pay an option if it isn't an option you ever want. If you don't pre-pay childbirth, but it happens anyway, whose responsibility is the cost? Until this last matter is settled -- and it may never be settled -- any whole-life pre-payment system is precarious.
So the problem for a healthcare finance designer is to avoid politics, designing a system which will peacefully address all concerns, and that last step is the most difficult one. The whole idea of a government system with equal justice implies one size fits all, but equal justice for life-long solutions is often impossible in the face of cultural disagreement. You are forced to consider at least two systems, only one of which can possibly be prepaid for a naked, penniless child. (If you are a smart politician, you will avoid suggesting the culture should rearrange itself for the convenience of health insurance, because it won't.) And you also will be troubled by dual systems, since they create opportunities for loopholes. In other words, a workable scheme for pre-paying a cost for what can be expected to remain the second-largest health cost of the future, must also envision some massive transfer system for that cost, with methods for rebalancing the books. We started by criticizing intergenerational transfer systems, and here we are, creating a new one. Late-night talk hosts may ridicule if they please. It may not be necessary for everyone to adopt the system, but it must retain an option to remain out of it. Looking at it from any minority culture's perspective, the concept of forcing a minority to adopt one-size fits-all, must yield to the requirement there must be at least two, if there is to be any. The only reasonable resolution of such conflicts is to leave the choices about newborns to the consumer.
As for specific reasons to reject "single payer", one need add little more about Medicare than it is 50% subsidized by the government, so the government has to borrow that subsidy from (mostly Chinese) bondholders -- to question the wisdom of extending its post-payment model still further. Its popularity is no endorsement at all. Everybody likes to get a dollar for fifty cents. In fact, few people seem to notice the Medicare payroll tax, thus the only cost people really notice is the Medicare premium. To them it seems like a dollar of care for fifteen cents, because those other payments are in the past. I'm going to skip on, and assume we will all get Health Savings Accounts, liberalized perhaps in a few ways. Any description harms nothing if you don't use it; it must work, if you do use it. Or else, just describe Health (and Retirement) Savings Accounts as a single payer if you must. HRSAs are certainly cheaper than any other proposal, and provide an outlet for pouring unused surplus into retirement funding. If you wanted "to demagogue" the HSA idea, you might claim if you put enough money into it, a dollar's worth of care would come out the other end for a penny. But, please. HSAs might cut the price of care in half, but that's about the limit, after a lot of effort. The most recent rejector of single payer, defined by him as the Canadian system, was by Jonathan Oberlander in the New England Journal, who says he prefers the Affordable Care Act. It's more typical that Liberals advocate single payer, because it isn't the Affordable Care Act.
During all the uproar about the Affordable Care Act, the retiree population was very quiet. Even after the commotion about jamming the Act through Congress, the death of Senator Kennedy and loss of Senate Democratic control, the failure of the state insurance exchanges, and related Obamacare talk -- the retiree generation, characteristically so interested in political gossip, had almost nothing to say. In addressing Medicare-age groups about health insurance, I found they were largely oblivious to it. But let me tell you, when the discussion got around to the possibility that Medicare would be underfunded in order to pay for the new benefit, their voices suddenly became very loud. Apparently, all through the Affordable Care Act discussions, one concern had been uppermost in their minds. No one was going to take their Medicare away in order to pay for younger people. The politicians got a general idea quickly, too; no one of them was going to touch such a proposal.
No one else is showing the slightest sign of touching Medicare, either, no matter how deeply it goes into debt, and no matter what other expedients are resorted to. Everybody loves a fifty-cent dollar and safely presumes other people feel the same. But doctors suspected it couldn't last in its present form. Even though illness still continues to threaten the last ten years of the working age group, it seems only a matter of time before severe illness will predominantly be found only in the retiree group. Right now, for example, just about everyone who dies does so at Medicare's expense. It's impossible to believe life insurance companies have not noticed this fact and quietly made adjustments to it. The National Institutes of Health are currently spending 33 billion dollars a year on research, and Medicare itself is only spending fifty. We hear only eight diseases account for 80% of the expenditure of Medicare. It seems reasonable to suppose every few years the expenditure of 33 billion dollars would result in knocking off one of those expensive diseases. I realize that everyone has to die of something. When one of these expensive diseases disappears, it is reasonable to suppose a less expensive disease will take its place. But there remain plenty of cheap sudden ways to die, which might be replaced by expensive ones. Life expectancy will get a little longer, hospitals will need fewer beds. And so, regardless of whether Medicare spending went up or down last year, in the very long run, Medicare expenses will get smaller.
And of course, retirement costs will go higher, because an improvement in longevity leads to more time in retirement. At the moment, there is no provision made for Medicare surplus to be transferred to Social Security instead of into battleships, food stamps or agricultural subsidies. Medicare lengthens retirements. What you can save in Medicare becomes part of what you can spend in retirement, in actuality if not in overt shifts of finance. Right now there is no Medicare surplus, so right now there would be less resistance to changing the laws to mandate Medicare surplus become Social Security funding. It takes time for the public to adjust to any idea, and it helps a lot to have been the first mover. Passing a mandated surplus transfer (from Medicare surplus to Social Security) seems like one of the few painless things to be done about this financing tangle; once a surplus appears, competition for the money will also appear and the difficulty of mandating it will increase substantially. A related step that might even be taken is to deposit the cost-of-living increases of social security benefits, into the Health Savings Accounts of the elderly (without specifying how to spend it). That would open the way for later steps, even though many Social Security benefits would indeed be withdrawn and spent. But some would not, gathering compound income and requiring the Health Savings Accounts to remain open after age 65, which would be desirable for other reasons. The more preliminary steps of this sort which might be devised, the easier and more natural it would become to make large transfers, whenever some expensive disease does start to disappear. For example, Medicare recipients who spend significantly less than average on health care might be said to have "earned" an increase in their retirement funds. To extend the age of HSRAs to the time of death would permit some of these deposited surplus funds to be spent on health, get a double tax deduction, and advance funding-unification another notch toward enhanced compound income.
It's looking far ahead indeed, but at least in theory, everything about health care costs will eventually disappear as we cure disease -- except the first and last years of life. Everybody's born, and everybody dies, so the goal of all health insurance, single payer or single individual or other, is to reach the configuration of only two critical remaining years to be paid for. How long it will take, at $33 billion per year in research costs, is hard to say, probably a very long time. But at least we can be working in that direction, while we pursue shorter-term goals.
Our short-term goal is to lengthen the period of compound interest, and to get more of it deposited early. Ultimately, that should reduce the amount to be paid at the time of service. The more we reduce Medicare costs, the more these two features combined, lead to flattening out the lifetime bulges in costs at the time of service, which essentially means, from further evolution into Medicare. That, in turn, reduces the amount transferred to Medicare from working generations. As mentioned earlier, it is dangerously unbalanced to have the working population, which gets less and less sickly itself, pay for the healthcare of children and retirees, whose costs are steadily rising as the disease gets pushed into new categories of life. We must hope ultimately to achieve a reduction of the cross-subsidy, while we work to prolong the period of compound interest income, directly.
To a degree, it is a happy circumstance that young people are healthy, while old folks relentlessly concentrate a lot of sickness and death in their group. It's a moderate nuisance for cross-subsidizing employers who extract subsidy money without being able to guarantee benefits after an employee changes employers. There's not much they can do except hide when it happens. This nuisance has been regularly endured until by now it is becoming a serious problem. But it's so simple, really. All you need do is let the employees own their own policies, take them with them when they change jobs, and actually collect what they earned while they were young. A whispered appeal would be, to correct this difficulty before it causes rebellion.
If the Medicare payment system is reviewed, it can be seen we are already sequestering about a quarter of Medicare costs through the payroll withholding tax, collected from every workman's paycheck. What happens next is not so attractive. Instead of accumulating the withholdings within an interest-bearing account, they are absorbed into the general fund and can be spent on almost anything.
Accountants in the government will have to tell us the exact amounts that could accumulate, but Medicare spends about $50 billion a year. We can thus assume equilibrium at 25%, or $12.5 billion for payroll withholdings. Suppose for a moment the money could be put into total market index funds (which at 11% gross sustain inflation attrition of 3% and overhead of 1%) leading to a 7% net gain. Since money doubles every ten years at 7%, in fifty years the withholding float should produce five doublings or 3200%. Since we started with a quarter of Medicare expenditures, that's 800%, or eight years, of annual Medicare cost for each year you keep doing it. No doubt it's too drastic to remove 25% of withholdings, but we only need a fraction of the total to cover the last year of life. And we don't even have to pay that until the worker dies, which on average is going to be 21 years (two doublings) after he reaches 65. So it sounds to me as though you only have to wait sixty or so years before a set-aside of a portion of a year's Medicare cost would pay for current last-year-of-life costs. You probably wouldn't do it exactly that way, in order to shorten the time you must wait to get to the payoff. But this rough approximation illustrates that no amount of quibbling about the principle involved would reach any conclusion except that it's do-able. The issue is whether we wish to change our whole fiscal premise in order to do it. But let me suggest another consideration: if the Singapore government, for example, succeeds at doing it, can we withstand the pressure to go along? In my opinion, our rhetoric would rapidly change, because everyone knows nothing must ever happen for the first time.
And remember one more thing: if it works, it will reduce total Medicare costs by 20%, or whatever is found to be the true medical cost of the last year of life. Make it the last two years of life, and you almost wipe out the Medicare deficit. The last four years include half of Medicare cost.
We expect a more accurate assessment of the "exact" numbers from this source by people who own calculators, and it may be less, but it will still seem appreciable. In addition to payroll deductions from working people, Medicare obtains a similar amount from retirees as Medicare premiums. As you reduce the deficits, you can stop collecting premiums. Carried far enough, you can start reducing the Medicare budget -- and start sending the reduction to beef up the retirement funds, which in this case I would expect to define as the surplus within their Health and Retirement Savings Funds. There's more to this idea, starting with the first year of life, which is a wholly different matter.
In the usual funding and billing operation, the main concern is finding enough money to pay the balances. In this circular system, however, if a balance keeps going around and around for generations, it will eventually reach infinity. Anticipating this loophole, with the absolute certainty that someone will try to take advantage of it somehow, the laws of perpetuity provide that inheritances may only last a single lifetime, plus 21 years. The main concern, however, is to be sure there is enough money without pooling.
In this case, what individuals have available are sixty years duration(age 25-85), or 85 years if we start the clock at birth (0-85), and maybe 90 years if longevity inches up during the 90 years of a coming lifetime. Using the 7% in 10 years doubling rule, that's 9 doublings. Compounded quarterly, these age durations create a multiplier of the $400 we plan to donate, of 64x, 256x, and 512x, leading to contingency funds at death of $25,000, $102,000, or $205,000, respectively. Those are multipliers which surprise most people. Keeping the compound interest within present Medicare ranges just isn't enough, but $145,000 might scrape by, and $206,000 is quite comfortable for the purpose. The specified goal is to bequeath, donate or tax $18,000 to the designated grandchild, and $100,000 to Medicare as a last-year-of-life reinsurance transfer, all of which grew out of the original $400.
We compound 7% as an example because it's easy to double every ten years in your head, but 7% relates well to a century of large-cap common stock returns at 11% (re Ibbotson), less 3% inflation, less 1% more for overhead. And it correlates well with the mode for the last 50 years of the S&P, which comes to 6.6% (see my son George's calculations in the special index.) That's in the ballpark of what we seem to need. And remember, by doing this, the heaviest and most permanent expense of life (terminal care and death) has been transferred away from lifetime cost burdens, into Medicare. (Birth costs are not saving; they are merely transferred from the mother's account to the child's). For reasons we won't go into, reducing the volatility of buy-and-hold investments might lower their transaction cost somewhat.
Obviously, someone must be designated to watch this drama unfold, with latitude to make small mid-course corrections re-aiming it toward its goal. Eventually, Congress must reserve to itself the right to change the ground rules if serious miscalculations begin to appear. It may begin to fall short, which results in raising the initial donations. Or someone may figure out a way to game the system by overfunding it, turning it into a perpetual money machine.
For that rather vague goal, I advise adjusting the choke point at age 25. That's when childhood subsidy runs out and the adult funding for death begins; in a sense, it's the beginning of financial life. It fits the existing laws about perpetuity. Every dollar you change it, up or down, can have a leverage of roughly $300 at the time of the subscriber's death. Of course, there's such a thing as outright fraud, where you ultimately have to send someone to jail rather than allow him to topple the financial system.
Essentially what you would have done, is identify a safety buffer for first and last year of life insurance, with an approximate risk cost ($400), toward which we work as scientific advances slowly modify the rest. Any other surpluses go into the retirement fund for seniors, as healthcare surpluses appear. How long it will take to come into equilibrium is uncertain, but at least it's a plan. Leftovers from the first year of life gift from grandparent to grandchild will appear at birth, but shift over to the grandchild's own account at age 25. After that, he's on his own.
All problems start out as intended improvements.
As presently written, the law provides that HSAs turn into IRAs when Medicare coverage begins.
Money at 7% compound interest, doubles itself in ten years.
Money at 10% compound interest. doubles itself in seven years.
Consequence: Money at 7% multiplies itself 512 times in ninety years.
It may seem strange we shifted obstetrical costs in our proposal from cost-to-mother, to cost-to-child, but here's why it was done. In the first place, it smooths out the huge cost of large families, into an identical cost per child. Persons who prefer small families may think this favors religious preferences, but its real motive was to create insurance neutrality for people in choosing family size. If the consequence turns out to be families like my grandmother's with thirteen children (or Ben Franklin's with eleven), the formula could, and probably would, be adjusted. At the same time, it should be pointed out this shift allows insurance to overcome the present nearly insurmountable tendency of women to delay their first child until it becomes both a medical (Down's Syndrome for example) and social (male-female employment inequality) problem. There may be other ways to accomplish this goal, but I can't think of any.
The proposal, remember, is to begin employment insurance at age 25, and to make zero to age 24 health coverage into a gift from a designated grandparent's escrow account, paid out of the grandparent's surplus accumulated during a lifetime of his last-year-of-life re-insurance. The necessary assumption is that the Affordable Care Act can do as it pleases with insurance for a worker, just so long as it neither adds nor subtracts from the child's escrow fund, but lets the balance continue to grow its compounding investment income. This is the price asked from both the Affordable Care Act and employer-based insurance, in return for eliminating the expensive part of obstetrical costs from their cost obligations.
Dear reader, please bear with the next three paragraphs. There's nothing entirely new. All of these ideas have been around for a long time, but are reshuffled into a somewhat surprising recombination. We assume the reader has accepted our brief excursions into compound interest, escrow accounts, the J-shaped lifetime health expenses, and the complexities of pre-paying the cost of newborns. Our whole economy is built on debt and its extension, called credit. However, everyone guiltily knows is it better to be paid interest than to pay it. Everyone knows life expectancy has lengthened, but not everyone realizes the cost implications. And even Aristotle despaired of the way we ignore the way compound interest sharply increases at the far end; it's J-shaped, too. Let's start by re-emphasizing what everyone supposedly knows already.
The Cushion. The first hypothetical graph illustrates a tax-free escrow account, into which only $400 is deposited at birth, and terminates at death 90 years later, accumulating wealth until age 65 but then spending it down for retirement. The numbers are arbitrary. That is, it begins with a manageable sum but eventually produces a modest retirement, just by sitting still. This is the "accordion" we employ to substitute for our obvious inability to project costs and revenue for a century ahead. It assumes an average income of 6.5%, which is justified by the history of the past fifty years, which show a high of 8.6% and low of 4.5% in successive thirty-year slices. Actually, as my son shows in the appendix, it is the more conservative modal value rather than the average, to satisfy actuaries who will be asked about it. We have only partial data for fifty years before then, and even sketchier data for a century before that. But the data seem to justify the same conclusion for a long time, in spite of countless wars and recessions. This isn't the plan, it is the cushion which would support the plan if it failed, intended to show our proposals remain within the limit of what is conceivable. No one, of course, can claim to predict the future with precision.
Measurement Inaccuracies. According to accountants, revenue always equals costs, accountants then stretch things a bit to make it happen. But in projecting the future we sometimes substitute one for the other because data is more available. When you dig into how these numbers are produced, you see their premises, hence their inaccuracies, are sometimes quite different. That's a fact which misleads the reader when the two curves are superimposed, allegedly displaying profits and deficits as the difference between cost and revenue. Sometimes it also misleads executives, who have to scramble to keep the company (or the nation) afloat in a mismatch. Without going into boring details, this explains much of the empiricism of the planning process. Sometimes, just sometimes, the Board of Directors acting on logic, knows better than the CEO, acting on data. In healthcare, the central actor is the dismaying alacrity with which costs react to reimbursement.
A Harpoon for Leviathan. And having long experience with the conflict between the welfare of the individual patient and the welfare of the organization, doctors instinctively resist the efficiencies which allegedly result from placing centralized control more and more remotely. Remote, that is, from the patient, who then suffers from the choices being made. Therefore, the "disintermediation" which is implied by individual health accounts immediately appeals to physicians, and should appeal to patients, even though it is easily shown that running a tight ship is best for the organization. Therefore, while using Abraham Flexner's ideas as a model ultimately added thirty years to life expectancy, it could not stop its own momentum to adjust to the retirement consequences of improved longevity. People instinctively sense some control must be restored to the patient. Even if they were not so much cheaper, giving patients individual control of their own Health Account balances is the least disruptive place to give patients a harpoon for Leviathan. Prices have wandered too far from costs, and that's a fact.
The Plan in Outline. We assume many things will remain unchanged. Health costs will remain J-shaped, low at the beginning, high at the end. We assume life will continue in three stages: dependent children for thirty years, working and earning for thirty years, and retirement for thirty years, all more or less. We assume some transfer system must exist, so the one-third in the middle can support the two-thirds at the ends. And we assume that research efforts (now $33 billion yearly) will continue until there are essentially only two costs left: the first year of life and the last year of life. Diseases will first concentrate into Medicare, and then gradually fade away. There will be many ups and downs before it takes place, but eventually that will be the final configuration. Since there are many programs for health, broken up and overlapping, eventually most of the existing structures will change, merge, or disappear. We started with health costs paramount, but will end with retirement costs dominant, birth and death continuing as appreciable costs. Finally, most of the next century will be spent in transition from what we have now, to birth, education, retirement and death, with education perhaps going its own way.
The Plan. Technically, the plan revolves around birth and death re-insurance, possibly renamed First and Last-year of Life Re-insurance. Assuming this is the final configuration toward which we are working, our new plan should deliberately aim for it, meanwhile coping with the individual changes science forces on us. One lucky thing is that everybody alive has already been born, so it is not so urgent to cope with that transition quite so urgently. That's good, because the transition to last year-of-life will be complicated enough. Re-imbursing Medicare for terminal care costs should reduce the Medicare withholding tax for working people, allowing that amount to be directly transferred to escrowed partitions of individual HRSAs, instead of indirectly through intermediaries. Growth of this money in the escrow would be the new money for the system, so the individual must negotiate an income rate with his HSA vendor, at least matching the Medicare inflation rate, before he would be able to accept the system of transfers. However, the amount needed is astonishingly small, since it multiples many times in the process. The transfer, or whatever it is eventually called, of $100 from the withholding tax to the escrow fund at age 25, would generate (at 6.5%) $100,000 at the person's death at age 84. The cost of the last year of life, currently, is said to be $25,000. Paying for the rest of Medicare at current prices might require $300 more. Paying for all of Medicare plus a retirement income from 65 to 84 would depend on what you think is a moderate retirement. But paying an additional retirement of $20,000 a year (amounting to $40,000 per couple) would cost an additional $4000. That's a lot of money, but remember the present total contribution to the withholding tax is $227 billion, or roughly $6800 per worker per year. There's no need for precision in such numbers, but beneficiaries and benefits get added so quickly it is silly to be more precise. The conclusion is obvious that there is plenty of money in this approach. The potential difficulty lies in the transition.
Don't turn your head to spit. Please remember that the secret of this approach is to use two funds gathering income simultaneously from opposite directions. Since 7% income doubles the fund in approximately ten years, using two funds in opposite directions results in doubling the doublings. The success of the venture thus lies in maintaining a reasonable income in competition with your own intermediaries throughout, either through excessive fees or confiscation by the sovereign. Whether the danger is called default, inflation, or outright confiscation, the expression for this is "imperfect agency", and it has endured as long as governments. The only nation with a Constitution to last 200 years can be the only nation to resist imperfect agency, as well. But it won't happen without vigilance. Since some of the religious divines in my own family tarnished their record, the advice they give in Texas is, "Don't turn your head to spit."
There's a deficit in this system, occasioned in 1965 when generations of new Medicare recipients (like my own mother) were given Medicare without contributing to its costs. Congress will have to decide how to cope with this, possibly by absorbing it, possibly by taxing heirs of the beneficiary (like me), who will probably protest about ex post facto. If that approach is blocked, the new investment money will have to be taxed for it, somewhat delaying its benefits. However, transition costs are nothing new to Congress, and a variety of methods have historically been applied. This proposal eventually envisions enlargement to include the second-to-last year of life, etc, while the first year of life might even start from birth to age 25. Working from both ends, the transitions should eventually be complete, and Medicare should gradually shrink. So long as the excesses in the system eventually go to support retirement income, it should be possible to grow our way out of the Entitlement squeeze. Its long term hope probably rests on research discovering cures for expensive diseases, diminishing the costs of Medicare, but longevity will also increase, so increased retirement costs must be considered as well. This proposal must be considered a long-term transition plan of uncertain length. Present beneficiaries of Medicare can rest assured that dual systems are practically inevitable for quite some time.
It is the present intent to regard the Affordable Care Act as revenue-neutral, since it is not possible to predict what it will actually be. So the problem of the first-year-of-life may not need to be addressed immediately, but ultimately the plan is to over-fund the last-year costs by about $400 (sound familiar?) and distribute $100 to funding newborns by inheritance at the death of what would be their grandparent, reserving the remaining $300 for the last-year of their parents. To make all of this come out right, the present 2.1 births per mother would translate into $200 per child generation and $400 per grandchild generation. But there are four grandparents, so it remains $100 apiece per grandchild.
Let's now turn to health insurance for newborns, which pose new difficulties.
Ninety years, a full lifetime from birth to death, is a long time to project anything, in this case the future nature of medical care and retirement. Nevertheless, increased longevity in the past century suggests a trajectory of multiplying internal investments 512 -fold, with scanty costs in childhood and heavy costs as death approaches. The challenge arises whether we have the wit to find out how to manage this J-shaped investment, without waiting ninety years..
That medical care comes in several independent stages over a long lifetime, suggests a whole lifetime presents a sequence of different challenges. We can prove very right about some, very wrong about others. But the various transitions for a whole population must be tested simultaneously, since just about everyone is of a different age at the start. So the project must be tested in its various parts early and simultaneously. But on the other hand an advantage appears. You find out if it all can work, much earlier. Furthermore, the choices must be largely voluntary, because the possibility of failure of one step must be announced in advance, and either swiftly repaired or the segment gets dropped. Just because one of two intermediate choices proves superior to another, does not necessarily mean the inferior option must be removed. And finally, the classical Health (and Retirement) Savings Account always remains an option, particularly for those individuals who nurse suspicions that rent-seeking intermediaries will eventually devour all the savings from longer-term solutions.
Infants and Children Everybody alive has already been born, only fresh newborns will be concerned with these costs for a long time. Because of extensive cost-shifting, it's pretty hard to know how much getting born really costs. By the time this issue is a serious one, the true costs of this step will become defined. Furthermore, the step involves transfer of much of the cost from the working-age parents to the child, and generation of the cost of this gift from the grandparent. We address these issues by making it a gift, ultimately transferred from investment profits. Consequently, it may be some time before the employer plans see enough reduction in their costs to tempt them to cooperate. Since most of the true cost information is in the hands of negotiating counterparties, it may not be possible to start this phase in bulk for some time. Consequently, it is fortunate that most of this early part of life may be one of the last financial steps in the entirety of funds flow.
Working-age 25-65 This is the age group currently the center of controversy between employer-based, and the Affordable Care Act. At least until the November 2016 elections, it will not be possible to predict what these costs are, how much they include, or what future directions they may take. Consequently, we have decided to treat these costs as neutral, neither subsidizing nor being subsidized by other age groups. That's unlikely to be the case, of course, but at least it creates a baseline for negotiations. Ultimately, the here-projected system would be in a position to offer to absorb the costs of obstetrical delivery and to equalize the cost of male and female adults, so willingness to negotiate is likely. In return, this proposal would request permission to transfer a third of Medicare withholding taxes, intending to invest and grow them for the first-and-last year of life system. During such negotiations, it is likely the question of ACA cost overruns and subsidies will arise. However, in the past, the working age group has supported both the younger generations and the retired ones, so the incentives to bargain are certainly present.
Even though sickness care is migrating from employer-based to Medicare, the cost of the last twenty years of life is itself J-shaped, with half of Medicare expenditures currently falling in the last four years of life. That implies the last-year-of-life concept might develop enough funding to cover half of Medicare by the accordion principle of extending it to the "last four years of life", which could then result in a massive shift of funding possibilities.
The Elderly (Medicare and Old Age Retirement.) The unsupportable retirement costs of the elderly are a result of improved healthcare extending longevity by the unheard-of extent of thirty years in the past century. It isn't nice to say so, but this unfunded retirement cost is really just an unfunded benefit of Medicare. While it is true most old folks have elected to hunker down to protect what they have, it seems to me the politicians misread the signs. Medicare is regarded as the "third rail of politics-- touch it and you're dead". However, the seniors pay attention to the news and they vote in large numbers--they fully understand the interchangeability of health costs and retirement costs, as well as the vulnerability of the Medicare budget to the inroads of the Affordable Care Act's budget.
What's more, the funding of Medicare is so structured that changing it will have little effect on the seniors, themselves. The revenue is 50% subsidized by the general fund, 25% subsidized by payroll deductions from younger, working, people, and only 25% supported by premiums from the Medicare recipients, themselves. In fact, this division is a little outdated, with even more coming from payroll deductions. Unfortunately, the whirlwind rearrangements of the Affordable Care Act have outpaced the available data about them. It is probably more unchallengeable to state that at least three quarters of Medicare is a subsidy from other generations. The payroll tax, in particular, is calculated as 3% of the wages of younger people, entirely unrelated to how much Medicare spends, or on what. In fact, the disparity in size of the baby boomer generation and their age successors is a source of major budget headache. Take away a third of the payroll revenue, and the consequence will be a problem for Medicare administrators, but will not be felt by seniors, themselves. It is the upcoming younger generation which would be asked to invest in its own future retirement, and it is they who would chiefly benefit from its investment income. Divert the revenue to battleships and sugar subsidies, and it is this generation which would have a right to feel cheated, not the seniors.
So that's essentially the proposal for dealing with the third rail of politics: Start diverting a third of payroll deductions to investment accounts, and cycle the enhanced amount back to seniors, gradually increasing the payback over twenty years, as each year adds another layer of income. It will be small at first, but should grow to an important source of funds. Finally, give the seniors a choice of how they want to divide it: more years of Medicare replacement, or retirement income, or gifts to a grandchild health subsidy, or just a contingency fund. If that proposal could be made to sound like diversion to battleships or stockbroker yachts, it would take a major effort.
Much of this proposal amounts to transfer of funds rather than creation of them, but one novel addition is investment income, made newly significant by increased longevity. Both revenue and medical expenses increase with longevity. But along different curves, so we cannot always be sure whether the net result will be positive or negative, unless we keep revenue and expense separate until we actually spend some.
That is, unbundling the net averages, allowing revenue and expense to grow independently. A slavish substitution of average net balance for individual account values is of some assistance to share-the-risk third-party insurance calculations, but it also leads individuals to drop a policy if they cannot afford this year's average cost, when in fact they personally had no actual health cost at all. Because of the volatility of health costs, this may actually be the majority direction of financial strain. The ability of the individual to hold back on elective expenses or to supplement revenue out of personal funds is a hidden advantage of partially paying for things yourself. (Of course, there is another side to this, for sick people.) Both revenue and expenses are growing, but at different rates, so the account infrequently goes into actual deficit. Some people can't afford to handle this, but third-party rigidities give the impression no one can, when in fact most people are used to making temporary accommodations. Health Savings Accounts end up being assured of investment growth, while medical costs are whatever they turn out to be. Since there is no purpose served by merging revenue and expenses until the end of the process, the choice is deferred until circumstances are clear. The running net balance between revenue and expense, gets relegated into relative inconsequence.
What emerges is a subsidy of health care by those who use less of it, plus a subsidy of retirement by those who die too soon to enjoy it. That is, the average is the same, but the efficiency of allocation becomes far greater. In both cases, subsidy is increased by investment income, and to a large extent choice is a blind one, made after the individual is sixty-five years old, tempered by his financial state at the time. A claim for perfection cannot be made, but it will help get him through the transition period, by which time both the precision and the popularity of various choices will have been defined. One rule persists: the more he invests when young, the more he will have accumulated, later. How much incentive for medical frugality this creates is uncertain, but early signs are encouraging.
The Nature of the Investment. A century of experience shows the result of investing in the equity stock market is superior for the long term, and the more recent work of Bogle shows that buy-and-hold everything is about all the manager needs to know. New investors will soon be told that bonds may be superior for elderly people. That may have some truth to it if the markets happen to be in a temporary state of turmoil, but there is the yield curve to consider. Ordinarily, the longer the term of a bond, the higher its yield. But this buy-and-hold situation could eventually last ninety years, while very few "long-term" bonds have a term of more than thirty years. Presumably, the yield curve would flatten out sooner than ninety years, so it is conceivable a tailor-made bond would give a higher yield than stock indices, but it would take a long time to find out.
The Choice of Financial Intermediaries. When passively invested index funds of over a trillion dollars can be found which produce long-term returns equalling those of very smart active investors, some explanation should be found, and it seems to lie in the very high fees which active investors charge for their services. The experience of investing in 401(k), most active mutual funds, most retirement funds, annuities and even reverse mortgages has been that management absorbs a disproportionate share of the savings, leaving the investor with a disappointing return on his money. Since improved returns of only a quarter or half a percent can make astonishing differences in investor returns over long periods of time, the small-time investor has difficulty detecting inequities. It is particularly disheartening to observe indignant opposition to converting brokers into fiduciaries as a general principle, even in an election year.
The conclusion has to be made that significant changes in this imperfect agency issue must require firms to emphasize profits from large volumes rather than wide mark-ups. Since no one gets rich by giving money away, it is necessary to caution against relying heavily on the sense of fairness of large famous firms. Throughout this book, the figure of 6.5% has been used to illustrate what might be a fair return for the investor; just about all conclusions rest on whether this figure can be approached by returning half of the 11% which Roger Ibbotson reports has been the steady average for blue-chip stocks in the past century, and similar figures for the Standard and Poor Average for the past fifty. After subtracting 3% for inflation, 8% net return seems to be the size of the pie for dividing between the investor and his manager. Judging by the slow pace of progress, the competitive force to readjust mindsets may come from abroad, perhaps Singapore or similar places which unfortunately have the weakness of lacking political protection for the American investor.
The Contingency Fund.In the final analysis, the individual has to deal with the cards he was dealt by fate. His health costs may be more than he can cope with, his retirement may be longer than he can afford. He may have been born in a year of war, or general financial collapse, feast or famine. But no matter what fate has dealt him, he almost certainly would be better off with more money. Trying to anticipate every disaster he might possibly encounter is wasteful, however. Dreadful as future possibilities may be, he is unlikely to experience all of them. A contingency fund can cover whatever happens to him, in spite of remaining woefully inadequate for everything else which might happen. Because of the J-shape of medical contingencies, it is surprisingly cheap to anticipate the unanticipated -- if you start doing it while you are young.
Once more, we return to 7% because of the quirk that compound interest will double money invested at 7% in ten years. If you live to be 90, an investment at birth will increase (2,4,8.16, etc) nine times, or to 512 times its original size. Remaining within the traditions of inheritance, it could double every ten years for one lifetime, plus 21 extra years -- eleven doublings, or 2048 times its original size, without being considered a perpetuity. At least in theory, a "premium" of one dollar at birth could "insure" against $2048 of lifetime contingency, if you settle up after the end of it. It's a little fanciful to imagine that result without overhead costs and inflation, but that's the outer boundary of a general idea which is so powerful you can dismiss the details. So long as you stay within the bounds of about $200 at birth ($400,000 after eleven doublings), a wide variety of solutions will have a good chance of working. We suggest a gift for the first transition period, eventually becoming self-sustaining in later generations, and dipping into the contingency fund whenever arithmetic fails you. Everything else is a matter of waiting for time to tell what the real numbers ought to be, and shifting numbers around until they balance.
This is the second of several volumes on rearranging the pieces of lifetime healthcare financing. Without adding substantial sums of money, it begins to appear an entire lifetime of healthcare, plus the extended longevity it provides, might be paid for with rearrangements of what we already spend. It's a hope, not a promise.
One consideration is not ready for incorporation into the scheme, however. The working years of life, from age 25 to 65, are covered by disputed and undisputed portions of the Affordable Care Act, pending lawsuits before the federal courts, and the political positions of the two political parties about how they should be modified or repealed. Essentially, we have not decided how much working people should directly contribute to their own retirement, or what they must give up to do it.
This plan treats extended longevity and retirement costs as inherent costs of improved medical treatment, acknowledging the wide variety of opinions about defining a basic, a modest, or an overly generous retirement income. Without substantial resolution of these two gaps in the plans, it seems impractical to suggest lifetime financial coverages. Therefore, the Affordable Care Act is treated here as revenue neutral, and retirement income becomes whatever falls out of other plans, plus whatever the individual manages to accumulate, on his own. We all must continue to "plan" for our retirement by saving more than we think it will cost. That's the theory; the reality is, many or most Americans just "plan" to muddle through. That's only workable for a few more years. Eventually, we must decide whether to sacrifice retirement in order to preserve the Affordable Care Act, or the reverse.
The technical toolbox of alternative revenue sources for retirement is not exhausted, however. (1.-2.) We have not specified the direction of the remaining three quarters of the Medicare withholding tax, nor the Medicare premiums. (3.) Under this plan, working-age persons make minor direct contributions toward their own retirement, and shift the cost later, down the road. (4.) The last-years-of-life rearrangement would pay for half of Medicare's 20-year cost by expanding to the last four years of life (That's half of Medicare's 20-year cost in exchange for 20% of its revenue). (5.) Reduction of premiums for employer-based health insurance can actually be anticipated from shifting obstetrical costs to the baby, reducing childhood health costs from the employed parents. (6.) Similarly reduced Medicare deficits, now financed by bond sales to foreigners, should ease the government cost of healthcare. (7.) Even though group health insurance is heavily subsidized by employer tax deductions, the deductions are not entirely free, and employers should benefit. (8.) If savings of this sort are shifted to younger age groups and saved at compound interest, one could expect substantial contributions to retirement income to result. (9.) A rather small transfer of the foregoing savings to a contingency fund (begun at birth) should ease the competition for allocation of investment income between the public and its financial agents. There can be optimism, therefore, that the discord and unexpected reversals of such an elaborate scheme, can eventually be overcome by the basic axiom of compound interest. Start saving younger, in order to save for a longer time.
This is the second of several volumes on rearranging all the pieces of lifetime healthcare financing. Without adding any substantial money, it begins to appear an entire lifetime of healthcare, plus the extended longevity/retirement it provides, might be paid for with rearrangements of what we already spend. Notice what has been added: "plus the extended longevity/retirement it provides". Since retirement and Medicare coverage begin at the same time, and by some calculations average retirement is five times as expensive as Medicare, that's a lot of reduction of healthcare costs in order to fund retirement benefits out of a constrained funding source. So what's missing is a time limit. Medicare funding would increase quite a lot in fifty years, so fifty years from now the math might come out right. The hard part is to find a bearable transition during the fifty years, because you can't spend the same money twice. The public might well prefer no plan at all, if the alternative is to wait half a century to get what even seems a good plan on paper.
Moreover, two key steps are not exactly ready for incorporation into an extended scheme. The working years of life, from age 25 to 65, are covered by disputed and undisputed portions of the Affordable Care Act, pending lawsuits before the federal courts, and the political positions of the two political parties about how they should be modified or repealed. We must first debate the most realistic outcome for the ACA, and see if this or any other plan could coordinate with it.
The second gap is the same as the first, on a different level. We learned from the 1965 Medicare launch that much of the healthcare load was merely a catch-up of a backlog, far exceeding the cost of forgiving its revenue obligation. People like my own mother never contributed any revenue, but received benefits for forty subsequent years. If we repeat this blunder, our problems will multiply from it.
But don't get desperate. That does not exhaust the toolbox of leftover revenue sources for paying for retirement. After we learn what the public wants to do in the next few years, there are still many untapped financing sources, some of them only explainable later. For example: (1.-2.) We have not identified a retirement direction for the remaining three quarters of the Medicare withholding tax, nor any of the Medicare premiums. (3.) As mentioned, working-age persons make inadequate contribution toward their own retirement, because we were late in recognizing that improved healthcare resulted in longer retirements. (4.) The last-years-of-life rearrangement would pay for half of Medicare's twenty years with four years contribution at the present rate (That's half the cost in return for 20% of the revenue). (5.) Considerable reduction of premiums for employer-based health insurance can be anticipated from transferring obstetrical costs to the baby, removing childhood health costs from the employed parents. (6.) Reduced Medicare deficits, now financed by bond sales to foreigners, should ease the government cost of healthcare. (7.) Even though group health insurance is heavily subsidized by employer tax deductions, the system is not entirely free, and employers should benefit. (8.) If savings of this sort are aggregated and saved at compound interest, one expects substantial contributions to retirement income. (9.) A rather small transfer of the foregoing savings to the contingency fund should appreciably ease the competition for investment income between the public and its financial intermediaries. There can be guarded optimism, therefore, that the discord and unexpected reversals of any such elaborate scheme, can eventually be overcome.
At this stage in the book, these left-over revenue sources may not mean much to the reader. But they are repeated at the end of the book, to be taken up as actual revenue sources after the public has a chance to digest what the book has suggested, and the politics of the twenty-first century have defined what is left to do.The main new funding sources discussed in this book are:
1. Putting an end to pay-as-you go and collecting compound interest on unspent revenue.
2. Utilizing the Health and Retirement Savings Account to invest a lifetime of savings in the total equity market through index funds.
3. Re-arranging the financing of lifetime health care to optimize the first two mechanisms. In particular, recognizing compound interest rises faster at its far end. The J-shaped curve of Medicare financing already suits this need perfectly. The financing of childcare is the reverse, an L-shaped curve, however. It forces contortions on the system to pay for it.
In summary, our problem somewhat resembles a bank in a crisis. We hold long-term assets, making healthcare seem easy. But a shortage of ready cash makes insolvency seem inevitable. Many banks have collapsed in that dilemma, unable to work out a credible plan, find a patient backer, or the steadiness to stay a stormy course. Healthcare financing must be balanced more carefully, to avoid a similar fate.
Headlines in the Wall Street Journal announced collapse of Congressional healthcare reform. In the same edition, a small short article buried in its depths described a possibly major step toward its reform. Martin Feldstein calmly observed, a tax exemption for healthcare insurance of 2.9% really amounts to a wage increase whose elimination might go a long way toward paying for the eighty-year mess Henry J. Kaiser had created. (In fact, it was effectively taxable income of 4%.)
It was all so simple: healthcare extended longevity, created thirty years of new retirement cost. In turn, exempting the premium for healthcare became a tax-exempt increase in wages -- for the 70% of employees getting insurance as a gift. Maybe not at first, but wages adjust to expect it during eighty years. Social Security could not cope with an extra thirty years, so SSA was going broke, while health insurance was actually the main cause of increased longevity.
But notice how unused Health Savings Accounts automatically turn into retirement accounts (IRAs) for Medicare recipients. So if you are lucky and prudent with healthcare, or if you overfund an HSA, unused healthcare money makes a reappearance in retirement funds where it belongs. If you have used up the money, you have probably been sick, and maybe won't need so much for a shortened retirement. Increasingly, expensive healthcare hits the elderly hardest, so there are many years during which compound interest overcomes inflation. At the rate things are going, retirement may become four times as expensive as Medicare, so let's consider that future.
Medicare doesn't save its withholdings, it uses "pay as you go" and spends the money on other things, like battleships. Therefore, to make any use of this windfall, it is necessary to save it, invest it, and use it for retirement. Just doing that much might redirect the other 30% of the withheld tax to its intended purpose. So the economic effect would be considerable, just by stirring around in that corner of it.
The Deal Breaker
A brief synopsis of the argument.
"Christmas Saving Fund" for Medical Care
New blog 2016-02-29 21:24:17 description
Retirement Income by Overfunding Healthcare
New blog 2016-03-01 15:44:27 description
What will Future Healthcare Costs Be, and Will Such Revenue Be Available?
New blog 2016-03-02 01:03:04 description
Escrow and/or Escrow-like
New blog 2016-03-10 20:51:19 description
In Summary, Where Health Savings Accounts Now Stand.
New blog 2016-03-15 22:54:19 description
The Problems of Medicare Affect Health Savings Accounts
New blog 2016-03-16 20:44:24 description
Fixing Medicaid by the Obamacare Back Door
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Looking a Gift Horse in the Mouth
New blog 2016-04-06 16:44:14 description
New blog 2016-04-07 19:38:12 description
Third Section: A Single Lifetime System, Not Necessarily a Single Payer
New blog 2016-04-08 23:21:30 description
On Single Payer Systems
New blog 2016-04-08 23:32:22 description
More on Integrating Medicare into HRSA
New blog 2016-04-09 23:14:01 description
More on Last Year of Life Re-insurance.
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Building a Little Safety Into the Program
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Second Section. Related Issues.
New blog 2016-05-05 16:28:06 description
Section One: HSA becomes HRSA
New blog 2016-05-05 21:15:36 description
The Argument for Designating Obstetrical Cost, As a Cost of the Child.
New blog 2016-05-12 19:08:08 description
Re-shuffling Some Old Ideas
New blog 2016-05-18 17:55:27 description
New blog 2016-06-01 15:22:43 description
Thoughts on Transitions: Benefits
New blog 2016-06-11 17:07:14 description
Martin Feldstein Does It Again: Eliminate Tacit Tax Exemption for 70% of Workers Denied To the Rest
The Henry Kaiser tax exemption for health would pay toward Social Security, indirectly paying for retirement, which health insurance prolonged.