Philadelphia Reflections

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

2 Volumes

Surmounting Health Costs to Retire: Health (and Retirement) Savings Accounts

Consolidated Health Reform Volume
To unjumble topics

Future Directions for Health Savings Accounts

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

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

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.

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.

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.

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.


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5 Blogs

Getting Started
New blog 2016-03-29 18:52:39 description

Don't You Touch My Medicare!
New blog 2016-03-31 19:53:23 description

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

First Two, and Last Two, Years of Life
Medically speaking, the four most eventful years of almost anybody's life.

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.