Philadelphia Reflections

Future Directions for Health Savings Accounts

New topic 2016-03-29 20:37:09 description

Getting Started

So it's simple to get started, although any obvious modifications like periodic payroll deductions, are between you and your vendor.

To repeat: you choose a high deductible health insurance plan which conforms to regulations. Since they vary in price and service, you are advised to shop around, probably starting with the Internet, or the personnel department of your employer, or your friends. At the moment, a number of features are fixed by the Affordable Care Act, so price and service are really the main issues.

Then, having identified a (high-deductible) insurer and an HSA vendor (perhaps a bank or investment adviser), you are free to switch later, but in the long run you are looking for more-or-less permanent relationships.

You now presumably have your health insurance policy, with a Christmas saving fund arrangement attached. Don't sign anything until you are satisfied with the answer to this question, "How much income can I expect and how much freedom do I have to invest in total market stock index funds, when and if I choose to?"

If you get evasive answers, you might silently plan to sign up, but plan to keep on looking for a better deal to switch to later. At first, it might not matter, but over time you need to find the best arrangement. A debit card attachment is nice. Big vendors are reassuring, but they tend to be inflexible. Bear in mind, there isn't much in it for your advisor unless you keep renewing for a long time, so if you persist, you will probably get an answer. If persistence doesn't work, the outlook for a favorable answer, however, is dim.

So you might suddenly improve the atmosphere if you offer plans to deposit the maximum allowable immediately because a lot of obstacles will likely be waived. Keep that up for as long as you can, at least until minimum balance requirements are fulfilled. If you can't manage it, then use the Christmas fund approaches of payroll deductions and income penalties for as long as you have to, but remember your counterparty really must somehow be paid, even though he always remains a counterparty. What about the retirement income features? You probably don't have to worry about retirement for many years, although it is always wise to check occasionally to see how income compares with the competition. As things now stand, you needn't do anything until you become eligible for Medicare, except keep score between your arrangement and others, reacting appropriately to differences. As the time approaches, you will probably find you have lots of choices of retirement plans, so don't be in a rush to freeze that option.

Whether it is explicit or not, let's say you have done everything necessary for both a health insurance plan and, following that, a retirement plan. The retirement plan will have no money in it until you shift it there from the health insurance plan, replaced with Medicare. There are penalties for early withdrawals, but they can be made if you must. So to summarize, there's a little nuisance when you start, and another bit when Medicare looms. But essentially the Health Savings Account is on auto-pilot if you keep funding it, and events continue to demonstrate you are getting the maximum available return.

That completes the first section of this book. It all may be a little hard to understand, but it's easy to do. The last part of the book is devoted to what else you and Congress might think about, to build additional features on top of this foundation. Most of these extensions would greatly enhance the finances of you and the rest of the country, but all of them must be debated in minute detail before implementation. And all of them require major legislation to be smooth and workable. The Health and Retirement Savings Account as it stands might use a few easy amendments, but it already has most of its kinks worked out. It's already reached the point where the claim can be made it's a whole lot better than any other term insurance plan.

One by one, let's examine the potential multi-year improvements to be debated, so at least you understand where all this might take you.

A Dream World: Lifetime Health Savings Accounts

For years I have regarded HSAs as "term insurance", or one-year term-of-risk insurance. That's being mindful of the difference between term life insurance and "whole life" life insurance, and universally regarding whole-life as much superior. That's because so many people drop their term life insurance without collecting anything, so the dirty secret is most of the profit of term insurance comes from people dropping their policies. That doesn't sound so good, but it's a free country and people can drop insurance if they want to. Originally, it could be said the dropped policies are a safety feature of term insurance, protecting the company against people who might otherwise bankrupt them by failing to do the sensible thing. Or it could be said term insurance is just insurance, making no claim of generating income. These are reasonable positions, with no cause for attacking them. I'm really quite indifferent to this issue; the important feature to me is that whole life seems to generate more income, and HSAs are premised on earning more income. So why not have Lifetime HSAs and generate more income for everybody?

To go on with this thought, consolidating all of the pieces into a single company ought to generate more income, and put the decisions in the hands of experts instead of the common man. Efficiency and good management could be rewarded, expert actuaries could guide policy. It just has to be better. However, term HSAs are savings accounts, not life insurance, so there is not much loss in stopping deposits, nor many points to dropping the account. The risk of escheat is lessened by having the deposits guarded by a company who could be sued for stealing it; after all, lots of people do forget they have what they have, or where they put it. Yes, you do have to worry about excess overhead. Life insurance started a few blocks away from my medical office in Philadelphia, and high taxes made it move away. So, I have observed the Taj Mahal excesses, or even the Temple of Karmac excesses, of the former president's offices in those converted buildings. Nevertheless, I still have the strong feeling that whole life insurance generates greater efficiencies than term insurance does, and am attracted to the idea of consolidating the whole operation into a whole-life insurer -- instead of depending on millions of individuals to do the same thing, and competently handle what they are doing.

True, life insurance companies have armies of salesmen to persuade young folks to pay higher premiums than term insurance would require. The amount of premium for term HSAs would, however, have to approximate the $ 350,000-lifetime medical costs which the average American now sustains. Perhaps that's a good enough balance, particularly if it is front-end loaded.

What really bothers me is that it would take such a long time, perhaps 90 years, to prove that what you were doing had clear superiority. As I mentioned before, it puzzles me that whole life companies could survive long enough to establish the little rules of the game which make a difference between success and failure. True, they have enjoyed favorable tax treatment, but there is nothing new about that. Somehow, they figured out how to vindicate their methods in shorter time periods than a lifetime, even though they were undertaking lifetime risks. If some of them know the secrets, I hope they will step forward with proposals, but at my age, I'm not going to try to undertake such a risky voyage without a compass. Meanwhile, term HSAs are pretty darned good.

Coming Shape of Health Costs (1) Serious Diseases

The final resting points for serious healthcare costs are easily foreseeable: they consist of the first day and the last day of life. How long it will take to get there is not predictable, but it is safe to say that everyone will always have the cost of being born and the cost of dying. Whatever other costs will intervene is somewhat up to us, and somewhat up to science. Why not build a reimbursement system which is flexible enough to include present and intervening costs, phased in and phased out, and eventually ending with the first year and last years of life? Let's look at what it might look like.

It must be flexible enough to include new remedies, but tough enough to exclude frivolous ones. When a disorder is eradicated, the money to treat it, or the programs intended to fund it should be transferred to retirement expenses. Otherwise, it is clear that Congress and/or human nature has a tendency to appropriate unused funds to other purposes, like battleships or bridges to nowhere. Even non-fatal illness can be an optional luxury item for entitlement. Even the treatment of fatal illness can evolve into bare-bones versus luxurious varieties, but such choices are more easily defended as legitimate options for society to decide at the time. If we stick to such principles, it seems clear the cost of healthcare will gradually decline, while the cost of retirement will gradually increase. For the savings in one category to flow over to the unfunded needs of the other, is hard to argue with. And that's what Health Savings Accounts already do, although there seems almost no limit to what might be required for retirements whose length is impossible to predict. Because we are nowhere near the final average retirement extension, it currently appears there is no need to limit overfunding. For a while, inheritance taxes will take care of any surplus. Indeed, adjusting inheritance taxes may be the best possible way to establish, and re-establish, and fight about, the upper limits to health care expenditure in the far future.

Reflections about the recent past are convincing. If we agree on these overall guidelines, we notice that health costs for working people, the ones who ultimately pay the bills for everybody, have already declined so much the system is unstable to a worrisome degree. Some people like to call it the hockey-stick, but it resembles a U, with higher costs already visible at the beginning and end of life. In fact, we appear to need nothing but the passage of time, before the hockey-stick (before, and after the beginning of Medicare) appears. Our problem then will take two forms: to reduce the cost of Medicare and to reduce the costs of early childhood. Surprisingly, the costs of early childhood are more difficult to pay for, so let's start with Medicare.

Don't You Touch My Medicare!

We have heard Medicare described by Senators as the "third rail of politics" -- just touch it, and you're dead. Unfortunately for clever phrases, the costs of the last decade of employment are shifting to a point we may foresee major health costs for working people getting heedlessly dumped onto Medicare as a desperation measure. Meanwhile, Medicare grows more expensive and national indebtedness grows worse. That's what single-payer enthusiasts demand, but even politicians on the campaign trail acknowledge that something must be sacrificed in the name of affordability. A growing gap in coverage for divorced women and early retirees already exists between the end of employer coverage and the beginning of Medicare, because no one has figured out either how to cover the increasing longevity, or how to assign the gap cost to multiple former employers. So, we might well pass through a phase where Medicare costs are rising, employer costs are declining, while the political parties merely blame each other for failing to cover the growing gap of uninsured which lies between dual coverages for elderly healthcare and simple retirement. Life insurance companies may suggest themselves merging Medicare with retirement insurance, but former employers reply "catch us if you can." Politicians describe "affordability," but that's what it amounts to.

If we could shift the cost of employee medical cost elsewhere, we might have an unbeatable wall against foreign goods, but there are perplexing limits, even to success. As we found at the Bretton Woods Conference, if we have all the money, foreigners can't buy anything. To be useful, a solution to the American hospital payment problem must be gradual, and it must be adjustable. Plenty of desperate foreigners stand ready to cut your throat if it isn't. So medical costs and retirement costs simply must be reduced as a painful but inevitable price to pay.

After we solve that issue -- wonder of wonders -- scientists will start to pick off the diseases of old age. We are already given to understand that the NIH has ordered a priority to grants for curing the most expensive ten diseases. That somewhat conflicts with the goals of scientists, who tend to concentrate their attention on the easiest diseases to cure. But money is money, and so we find that eighty percent of health care costs are caused by eight or ten diseases. With over thirty billion dollars flowing into research annually, relatively soon one or two of those dread diseases will disappear from concern, longevity will increase somewhat, and we hope some less expensive disease will finish off the temporarily lucky survivors. No doubt, we could use a few billion to pay off debts to the Chinese for our previous deficits. But the time will surely come when buccaneers will wish to spend the surplus generated in this manner, on something else more trendy than elderly health care.

Unless we have the foresight to anticipate this collision of interests, an unfortunate precedent might have been set. Leaders of the elderly and their concerns should anticipate this battle, and be better prepared to meet it. The best way to meet it is with a completed plan in operation to shift Medicare gains from research to retirement funding as they appear. The problem of funding Medicare (which is 50% subsidized by foreign bond sales to an insupportable degree) would then take the form of changing the name of Medicare to Retirement Care, because most of the money then goes to that purpose, a fairly meaningless and thus easier political problem to manage, because it will take a generation or two to happen.

By the way, Medicare represents the largest expense in the healthcare budget, so liquidating it gracefully will generate the largest source of new funding for the lifelong scheme. We now turn to the problem of funding the early years of life, which seems destined to be the hardest problem to address. In fact, it is so difficult there are essentially no competitive plans of any substance so a workable proposal might have surprisingly clear sailing.

Paying for the Last Year of Life: Everybody an Investor

What is proposed in this section sounds a little funny the first time you hear it. Since so much of health cost is concentrated in the terminal illness of the last year of life, and since everybody has the last year, why not lump it with life insurance? That is if we pay for distressed widows and orphans, why not also pay for the terminal illness costs? Everyone who hears such a proposal asks why would you pay to cover what is already covered by Medicare? And although there is no mechanism in existence to do it, it still isn't clear why you would want to do things differently.

In the first place, when you are dead, someone knows exactly how much it cost. It would put an end to over-insurance and under-insurance, either one of which is efficient. Furthermore, someone would know how much everybody costs, so you could reimburse Medicare (mostly) in a lump sum for the average of what they spent, greatly simplifying the path overhead. Why would you want to do that? Well, Medicare is 50% subsidized by selling bonds to the Chinese, and neither Medicare nor China can afford to continue being so casual. Furthermore, Medicare costs are destined to be pretty volatile for a while, but eventually to be reduced to nothing but everybody's terminal care costs. If that's where we are eventually going, why not plan for it in advance, and gradually adjust for what it will cost, as the final costs emerge? Let's describe how it might work.

In the first place, we can predict that health costs will be comparatively small in childhood and early life, slowly growing to that final terminal illness. It's clearly suited for low premiums gradually growing by compound interest to pay a huge final debt, just like life insurance. When you look at how we are doing it at present, you see it almost has to save money. Because we are running a huge transfer system from working people to non-working ones, we only start the compound income after 25 years of childhood, followed by forty years of paycheck deductions, followed by thirty or so years of paying Medicare premiums. Its premises dictate you must do it somewhat like that, but there's the entirely too much-hidden cost for too long a period of time, subject to political and regional whims. If you only focus on the certain conclusion of the dance of death, you have a steadier goal and a more efficient mechanism. What's being proposed here is a second insurance company, steadily building up a reserve to pay a second insurance company (Medicare) which continues to run on term-insurance principles. When one insurance company pays the debts of a second insurance company, it's called re-insurance. Terminal care re-insurance. One year's risk should be sufficient to begin the process, but eventually, it could cover the last two or three years of life, just as well. As the money rolled in, it should be possible to direct the last few years premium to other generations, as will be described in subsequent sections of this book, and skipped over, here.

So, it might be replied, we are here proposing two insurance companies for the health of the elderly, instead of only one, which we already have trouble paying for. That's true enough, except the premiums don't have to remain the same. The steadily lengthening longevity of the population should easily take care of the problem, although the grim experiences of Fannie Mae and Freddy Mac might suggest more precautions would be wise. I plan to stay away from this dangerous topic since the politicians who would need to consider it is probably even more cynical than I am. Perhaps they can devise mixtures of public and private companies to protect us from ourselves.

========================================================================================================================================= But it could be possible if less than a dozen words of the law were changed. At present, a Heath Savings Account terminates at age 66, and the residual contents are transferred into an IRA. The original hope was your health worries were over as soon as you were eligible for Medicare.

If this termination were to become optional, or if it could be supplemented with the last year of life escrow, the following would become possible: Sufficient money could be deposited, sufficient to generate enough investment income to pay it off at death. The final amount required would be the average amount Medicare is now paying, times an inflation growth factor, also obtained from Medicare records. The investment growth factor would be somewhere between the average long term interest rate on Treasury bonds, at a minimum, and the average total American common stock index fund growth rate, over the past 50-100 years, as an upper bound. It will surprise many to discover that the latter has averaged about 11% for the past century because of compounding. Figuring backward from these two historical values will arrive at a required growth rate, for the average aged person, obtainable from census records. From this data can be calculated how much growth would be required. Having this, the amount of deposit necessary could be calculated.

My own estimate is the last year is 8% of the total of the $350,000 total life cost generally assented to, or $28,000. At 6.5% average return (my estimate), this would generate $28,000 after 84 years from a single deposit at the birth of $150. However rough these estimates may be, they suggest a project along the lines suggested, is entirely feasible. If safety technicalities are an issue, it should be possible to take delivery on an index fund, and put it in a bank lockbox until it is needed.

A second purpose of establishing an end of life transfer now emerges: It could generate a considerable portion of its costs by pre-funding itself at prevailing rates of return. The last year of life is the most suitable for this treatment. Whether to extend the concept to the entire of catastrophic health care, is riskier, and should probably be undertaken in steps.

Insurance for the First Year of Life, Childbirth, and Childhood in General.

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.

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.

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.

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.

First Two, and Last Two, Years of Life

Before we get too deep into slicing average lives into average medical partitions, the reader should remember there is another way of viewing health care. Declaring we simply can't pay for everything because there are limited resources, we imply we agree on life's priorities when we really don't.

If this were a contest on TV, no two people might rank priorities the same way. But physicians would come closer. Reflecting common professional experience, most of them would give a special place to the first two years of life, and the last two. Health care costs concentrate there, and special reverence is paid to the patients. The rest of life has long quiet periods, but just about everyone is seeing or trying to see a doctor, during their first two and last two years. If we really must ration care, these are the years to be spared. These are the four years of maximum helplessness. We must keep it in mind. Special consideration is in order.

Coming Cost of Medical Care (2) Substituting Frills for Life-Threatening Disease.

Right now, what I am about to say has no urgency to it, because right now no new diseases have suddenly been cured. But nevertheless, the financial benefits of curing some diseases could be lost by substituting make-work for real work. That's a major flaw in predicting the cure of disease will cut costs. In the first place, there is a delay in transmitting the news that the disease can be sure-enough cured. These cures typically take place in urban medical centers, and often make their way to the remote practice areas when a doctor graduated from a medical center and takes new practices with him. If it's just a new pill, the manufacturer sends a salesman to inform the practicing doctors, who then have to discuss it with their colleagues, try it out, and circulate the news it really works. The average doctor only has time to attend one or two national conferences a year and read one or two journals a week. He depends on his colleagues to keep him current. Sometimes there is jealousy, and they don't. It may take a year for the news to settle in. You could speed this up, but if you do something else must make room for it, and costs would go up in a different way. Sometimes the cure isn't as wonderful as early reports of it, and you can be very glad the inertia of the system has reduced the damage. After all, most conditions a practicing doctor sees aren't new, aren't novel, and don't require a few months hurry-up by a young hotshot from out of town.

For one thing, a busy fee for service doctor is highly allergic to adding new overhead. It may be a thrilling experience to have five or six assistants to relieve you of tedious details, but they add overhead that continues when you are gone--it's hard to take a vacation, for example. Or to put it another way, it's fairly easy to quit, but it's very hard to slow down. Consequently, the Affordable Care Act introduced the electronic medical record without understanding that the practicing physician hoped it would reduce overhead, but it actually increases overhead, by adding three or four hours a week to an already overloaded schedule for the same number of patients. It has a few advantages which have been exaggerated, but they are mostly advantages to the management or the system, not to the doctor or the patient. It does not help that it might have been otherwise if the programmers had spent more time with the doctors. A salaried position tends to create an instant forty-hour week anyway, so adding more workload is no attraction. And automatically reminding him that his ten minutes with this patient have expired, merely infuriates him. Only a system which doctors have personally had a lot to do with designing will compensate him for interfering with what he has been doing for years. Most of the doctors I know who have quit have done so because of the electronic record.

Finally, with every advance of science, it takes time to adjust to the idea they are really cured. President John Kennedy had Addison's Disease, a rare and usually fatal condition. How often should you see this patient with Addison's disease, now that there is a useful treatment? Every week? Every year? President Kennedy took matters into his own hands and behaved the way we now know he behaved. He died of gunshot wounds, so it was all for naught. It takes a long time to adjust to people with fatal diseases when the rules of the game change. But they do change, and although I can remember making ward rounds on forty people, two or three of which died every day, I now observe ads in the paper for doctors who will adjust your diet and exercise for you. They don't feel they are doing anything dishonorable, but they and their patients are sustaining the cost of care.

Speculations Beyond My Remit

The task I set for myself was to design a cheaper better system of funding healthcare, utilizing individual accounts rather than government ones, and collecting compound interest rather than borrowing. Here it is, warts and all. And in retrospect, it isn't politics which worry me, so much as unforeseen consequences.

Always the first is the consequence of getting what you wish for. If compound interest pays for most of essential healthcare, will non-essential healthcare just take its place? Is the appearance of being free always invincible? Second, if we generate the funds for 16-18% of the gross domestic product, will the economy shrink by 16-18%, or grow by 16-18%? That is, would these proposals be inflationary, deflationary, or neither? I have no experience in such matters, although I have lots of experience reading nonsense on the editorial pages of distinguished media. In fact, I briefly served on the editorial board of the largest newspaper in America, and consequently, have some reluctance to accept opinions from that direction. In fact, I indirectly experienced the theories of John Maynard Keynes at work in two severe depressions and one devaluation of the currency, and am not a fan of his for the long run.

Maybe no one knows the answers, and careful study of pilot projects is the best you can expect for guidance. In the other direction, I was personally instructed in the economy by William Niskanen, couldn't understand why he said what he said, and later found he was probably right. So I can't trust my judgment about whose judgment to accept, and perhaps no one knows for sure. But it seems reasonable to ask what experts seem to think about the effect of these ideas on the currency, and on the economy.

For example, if our economy is based on bank debt, and bank debt supports several times its value in "credit" issuance, and if the Federal Reserve is unable to force inflation to 2% by some weird definition of inflation, what will happen if we remove 16-18% of GDP?

And finally, I have an idea which may be hare-brained and don't trust my judgment to advance it too openly. If we are moving toward index funds as the best available way to participate in an advancing economy, I am certainly advising folks to add several trillion dollars to the number of index funds in their Health Savings Accounts. The last I heard it was $30 billion and comparatively little of that is in index funds. But with a 90-year horizon, these accounts justify a very large equity proportion. Is it a good thing to leave so little residual stock in the hands of people who vote the underlying shares? Where does that lead us? If we are looking for a monetary standard, wouldn't index funds of our whole economy serve the dual purpose of universal desirability and flexibility?

So all that leads in entirely unexpected directions. We now have 8000 tons of gold which are supposedly unattached to the currency, and leads some commentators to say we are on a gold standard without admitting it. I have no idea whether that is a correct interpretation, but I remember the gold standard was criticized as being too inflexible, too much at the whim of some bearded prospector discovering a boatload of it somewhere, and too little connected to the real economy. If that is so, what is wrong with using index funds as a currency standard, to supplement or supplant the inflexibility of gold? What seems to be wrong with it is it effectively puts the money supply in the hands of the Legislative Branch. But if the gold in Fort Knox were used to sterilize that tendency, perhaps the money supply could regain its independence. If index funds grow much bigger it will be hard to corner the market or manipulate the price. The market price of index funds (the second dilution of control) certainly is related to the ups and downs of the stock market, if flexibility is what we crave in a currency standard. And if people follow the advice of this book, there will eventually be three hundred million owners of index funds, who can certainly impose their will on politicians through it. Would that be good or bad? As they say, it's beyond my pay grade.

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

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

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

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

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