Philadelphia Reflections

Some Pages for a Book on HSA

Questions about Health Savings Accounts

Pertinent Questions: Three Current Tweaks to HSA.

1. Tax Equity. An alternative way to achieve more equitable taxation is to reduce corporate income tax rates since the tax deductions for donated employee health insurance is a way of making health benefits cheaper for the employer than wages would be. And health benefits are a reason corporations pay so little of the published corporate tax rate. Once benefits become equal they can be reduced, as eighty years have demonstrated. Tax equity first, then reduction, may be the best way to get corporate taxes reduced.

2. The transition-to-a-cheaper-system needs help, time, and more brackets for those who are already close to retirement. The private sector is inherently more flexible than the public sector in dealing with inflation, stock market volatility, and changing occupations. However, the public sector could readily be streamlined a great deal.

3. Longer durations for compound interest add flexibility and far greater returns without added cost to the government or client. In long duration, 6.5% returns rise far more rapidly than 3% inflation. This spread is an inherent feature of compound interest and can be enhanced by lengthening the duration. The historic spread between the curves at 11%/3% underlined by Professor Ibbotson is astounding -- and so costless it long seemed unachievable to shift its benefit a percent or two by John Bogle.

Pertinent Questions: Four Future Deep-Rooted Changes For Health Care, using HSA.

1. Although the whole-life insurance industry managed to accomplish it, a 90-year transition period is very difficult to plan for. As they say, life insurance is not purchased, it is sold. The last year of life proposal cuts the transition period to a manageable size, thus providing funding flexibility from the start. The first-year of life addresses the otherwise impossible task of pre-funding the year of your birth -- without help from somewhere. The present extended period of education before employment is being "addressed" by a declining birth rate, thus straining immigration policy. National defense alone argues this is an unwise policy to pursue in a present way. Luckily, the anti-perpetuity laws allow inheritance up to one life-span plus 21 years, an adequate period. The great danger in this is a revenue-starved government. Unfortunately, if public sector revenue became 100%, they would still claim to be starved, so their argument appears discredited. No strong argument is improved by exaggeration.

2. The public does not realize that Medicare is 50% subsidized, and therefore a single payer system aspires for the same treatment. We are already borrowing from the Chinese to pay for Medicare. As long as we have nation-states, this is too dangerous to continue. Although Medicare is regarded as sacrosanct, anything which cannot continue will stop, one way or another.

3. The balance between the harmful effects of having a rentier class must be balanced against the harmful effect (of overtaxing them) on the incentives of elderly rich people. So the proper balance probably varies with the state of the economy. When two-thirds of the population is to some degree rentiers, the situation must be approached with care. More retired people must be employed at home, while the finance industry must make more effort to prove its worth.

4. The business school and the law school are fast replacing the medical school as the preferred route to control medical care. The computer industry is not yet ready to join them. Controlling the hours and conditions of the workplace is not an acceptable route to control of a service industry, and in the long run, is self-defeating. The only way to gain respect from a professional is to be able to do what the professional does, only better and overall cheaper. Just how you accomplish that without going to medical school has not yet been explained, and "price fixing" is not an adequate description of its essence. The Professional Standards Review Organization (PSRO) devised by Senator Wallace Bennett of Utah comes pretty close, and although the AMA narrowly rejected it, reconsideration is recommended.

Health Savings Accounts: Bare-bones Brief Summary

Health Savings Accounts

Enacted 2003. Subscribers as of Jan.1, 2015: 17 million.

Provisions: Briefly stated, any approved high-deductible indemnity health insurance plan, when attached to an approved tax-deductible saving account for the accumulation of the insurance deductible, or payment of other medical expenses. Deposits are limited to $3,400 tax-deductible annually and are not taxable on withdrawal for medical purposes. Accounts presently may not be used to pay the insurance premium. The account is exchanged for a regular IRA at the time the subscriber begins Medicare coverage. (In this sense, an overfunded account earns interest until age 66 when unused funds are taxed but exchanged for any Individual Retirement Account which may then be used for any purpose. Up until that time, there is a 20% penalty for funds used for non-medical purposes.)

Suggested technical amendments: 1. Permit the account portion to pay the premiums for the insurance portion, making the entire Health Savings Account tax exempt. 2. Improve flexibility by eliminating age and employment limits. 3. Relax the deposit limits with a COLA and switch from annual limits to lifetime limits.

Suggested regulatory changes: 1. Limit costs and charges for deposits, withdrawals, and investment income to 1%, applying all the rest to the customer's account. The main purpose was not rationing, but to block expansion from Congressional intent of before-tax funding of deductibles, health expenses, and retirements. 2. Permit subscribers the option to purchase index funds and take delivery on the certificates into defined escrow sub-accounts.

Suggested Areas for Future Expansion:

1. First/Last Years-of-Life Re-insurance. (To shorten the transition but extend the period for compounding interest, plus reduction of Retirement cost.) These four years consume 50% of medical costs. They are seldom paid by the patient himself and affect 100% of the population. The present system is largely a transfer system to these four years, paid for by people who are not themselves sick.

2. Study how the savings from future disease cures could be applied to retirement (rather than misapplied to battleships, etc) by flowing such savings into HSAs. The planning should contemplate eliminating Medicare gradually as its need disappears, a feature seldom included in the design of entitlements.

3. Study the Dis-intermediation of HSA investing. Privatization creates complicated agency problems, sometimes with excessive costs. Savings are possible from investing rather than borrowing, but the savings should reflect the risks better. The problem is how to invest several percents of GDP without using price controls.

4. Decentralize. Centralization of medical care has led to running it at great intermediary cost, unlike most businesses which become cheaper if centralized. Old people have most of the disease and do most of the medical commuting. The effective way to restore physician control is to decentralize from urban silos to suburban retirement communities. To do so gracefully requires protracted planning. Begin with the Maricopa case of the U.S. Supreme Court.

Smothered to Death in Greenbacks

Here's my macroeconomic nightmare, brought on by thinking too much about paying for health care costs, and supposing, just supposing, we were successful in doing it. The equivalent nightmare would be to imagine that some multi-billionaire walked into the offices of Vanguard or Fidelity, and said he would like to speak to the manager. After he had a cup of coffee, he would explain that he wanted to make a deposit of $5 trillion dollars in a total-market index fund. After an initial reaction resembling a Grade B comedy movie, the manager would begin to see the idea was pretty disruptive.

In the first place, $5 trillion is more than twice the size of the largest index fund currently in existence. We're getting there, but at the moment no one can be entirely certain what it would do. It might take months or even years to feed that much money into the markets without creating violence. That one buyer alone would dominate the stock markets of the world, bankrupting some, enriching others. In the Grade B movie I envision, dozens of beautiful starlets would be sent around for the sole purpose of learning what our buyer was buying next week. And what would he care, he would tell them. If he decided to make a big sale, markets would tumble, maybe crash.

Now, assuming this money was honest and not "dirty" as they say, the consequence of steady buying in huge amounts would be to flood the markets with liquidity. There might well be spurts of both directions, but in general, the addition of this much money concentrated in the stock market would send the price of stocks up, in response to supply and demand. If the price of a stock is generally raised without underlying business transactions to justify it, earnings per share would go down. In the long run, that could send the value of stocks down, resulting in inflation, because it would be possible to sell more stock without raising prices. In any event, reducing the scarcity of stocks would lessen the value of capital, compared with the value of labor. Reducing the value of capital would itself cause disorders in the economy before the markets regained equilibrium. Prices of labor-intensive goods would rise, prices of things which could be automated by using capital would fall. It would create new winners and losers; new elites.

For these reasons, students of economics generally hate macroeconomics. It's important, but it's hard to make final conclusions. In our Grade B movie, the bald-headed little manager ends the scene by jumping out the window.

Traps, Pitfalls and Fallacies in Insurance Alternatives

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 storyline 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 fulfill 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, ensuring 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.

What Has This to Do with Health Insurance? Health insurance, being of more consequence to survival than exercise is, badly needs a system of multi-year coverage to protect customers from this hustle among others, And nowadays, against the same sort of dangers from government as it crowds itself into the health field, with eminent domain, escheat laws, devalued currency and just plain corruption. Unfortunately, health costs are still too unpredictable to permit cost predictions over long time periods. We would greatly like to go from "term" health (and retirement) savings accounts, to multi-year ("whole life") ones, but the prospect of predicting health costs a century ahead is too daunting for a major corporation which actually intends to pay its bills. Ultimately, almost all revenue for health insurance at any age derives from the one-third who are employed. Therefore, it is not possible to separate insurance for the rest of life, until you have stabilized the ACA in some way or another since that third originates essentially all the revenue to subsidize the other two thirds.

On the other hand, it raises a question of whether employer-based health insurance would also be dropped by good 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 ensure cancer, but not indigestion would be a 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 beat subsequent risk seeking reimbursement 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 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 a helicopter and police rescue, we do not have even preliminary data to encourage this essential 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.

The Subsidy Issue: Crossing the Line Between Private Sector and Public Sector

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.

In the case of the Affordable Care Act, a fear is raised, a migration away of either subsidized or low-cost clients would raise the premiums of those who remain. The suggested compromise emerges that if government subsidies are resorted to, they should be unwrapped from the service delivery package, and funded independently. So long as the subsidy is distributed by the same criteria for everybody, it might pass muster. To emphasize: mixing the subsidy with the service package usually causes trouble; confusing too many sick people with too few well ones, has often proved to be a disaster.

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.

Our culture is reluctant to subsidize poverty, for fear of encouraging it. We are somewhat more willing to subsidize poverty caused by addiction, but prefer to subsidize it less than poverty caused by other diseases, like blindness -- once again, because we are afraid we might encourage self-inflicted conditions. But hierarchy doesn't always stop with different diseases; we might prefer to subsidize one race, one region, or a whole host of other conflicting preferences. Nevertheless, it seems definitely better to subsidize individual poverty -- as such -- than to get into quarrels about the relative shamefulness of causes for health poverty, or the politics of their funding. My present conclusion is: 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 political party's proposal to another. Hidden in that preference is the delusion it is easier to control politics than the marketplace.

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.

Hospital Cost-Shifting by Patient Income

New blog 2015-04-13 01:43:42 contents

Second Edition: The Cost of Alternative Solutions

When the Democrats select their candidate for President, I will probably have more to say about their plans for paying for healthcare. Currently, Mrs. Clinton is defending Obamacare for the primaries, implying that she leans toward "Single payer" for a permanent program. If she reverts to HMOs as she once did for Clintoncare, I will definitely have something to say. At the moment, however, Mr. Sanders of Vermont looks like a promising candidate, and he is unabashedly in favor of Single Payer.

And he is supported in this by Henry J. Aaron, the economist at the Brookings Institute who for many years was a consultant for the real cause of the cost problem, the employer-based system. Other economists, such as Paul Krugman, have emerged with the cost argument against Single Payer (i.e. Medicare for everyone) that has frustrated them ever since Single Payer has been under discussion. It costs too much. Obamacare has suffered from this criticism with a budget of SEVERAL trillion dollars for ten years, which might have been sustainable under ordinary circumstances, but threatens to capsize the national economy in the midst of the worst recession in eighty years. Kenneth E. Thorpe of Emory University estimates the total ten-year spending of Mr. Sanders at above thirty trillion dollars. That's somewhat between five and ten times as much as the Obamacare era.

To repeat a point made in other places, Medicare is currently the big budget-buster. For all the premiums and payroll deductions, Medicare is supported by a 50% subsidy from general funds. General funds will not support such a deficit, so recently we have been borrowing it from the Chinese government, through the mechanism of selling them U.S. Treasury bonds. Is that what we have in mind, when we talk about Single Payer?

Cost to Charge Ratio (2)

of the community when all is said and done, this system is designed to keep indirect costs within reasonable boundaries. If that aggregate is spoken of as a single product, its costs can be grouped together as company-wide costs. In the case of Apple, the main costs outside direct production costs are research and development, marketing and administration. In the case of hospitals, in addition to direct production costs, there is usually less marketing cost than a manufacturer would experience and considerably more charity. By calculating the variation of prices to costs among different products, it is possible to see which particular product is carrying the burden, and which product is being subsidized. In the case of hospitals, this analysis would permit an outside opinion to form about the fairness of such cross-subsidy, which is most commonly motivated by local competition. The neighbor hospital has some expensive gizmo and we don't; we buy a gizmo to keep up with them and subsidize its cost by overcharging for everything else. Decades ago there was a rage for establishing planning commissions to determine how many gizmos a community needs, but it was largely dropped because of bickering about what is normal business flexibility in every industry. It is now generally agreed that hospitals should have the business latitude to make these choices themselves, and suffer the consequences if unrelated prices get pushed out of line by cross-subsidies of excessive expansion.

Indirect costs are a much harder matter to judge. Some administrators are paid too much, some renovations are excessive, some charity is really poor debt collection; but if these things are passed off to insurance companies, who pass them off to the public, they can unduly escalate. Direct costs are whatever they are, but indirect costs are more a matter of opinion. Some insight can be gained by measuring the ratios of direct to indirect costs, and then making a national comparison of those ratios with peer institutions, a process that is hampered by the traditional regulation by states instead of nationally. Since the cost of health care has long been rising faster than the cost of living, the suspicion is fostered that insurance companies put up less price resistance than a marketplace without them would. Since the cost of major illness is often beyond the means of its victims, insurance does seem to be called for, and the higher the cost the more that is true. For more than seventy-five years, health insurance has been in the middle, between the party who wants lower prices, and the party who wants higher ones. That may well have been a bad decision, requiring some experimentation with a return toward "indemnity insurance" and away from "service benefits". That is, the insurance pays money to the patient, and the patient then pays the bill. An indemnity system protects the insurance company from cost overruns, and this at least removes the pressure for the insurance company and the hospital to collude against the patients' financial interest. Once a suspicion arises that there could be some degree of collusion between the two, it is possible to see that using insurers to police a hospital's indirect costs may be something to discourage. Alternatively, it might be possible to apply patient copayment to the indirect, but not the direct, hospital costs. At the moment, copayments have little or no effect on patient utilization, but the selective application of them might be worth at least a pilot study, to see if they could dampen prices better than they affect service volume. A copayment of 20% of the indirect cost component of a patient's bill would certainly draw attention. Even a 1% copayment would dramatize the point.

Hospital prices have been inflated far too much, and far too irregularly, to serve as cost signals. In order to minimize the true cost of charity care, the services more heavily used by the indigent have had their indirect costs minimized by cost-shifting them away to better-reimbursed departments; it is a perfectly natural thing to do. Poorly utilized departments are subsidized by better-reimbursed ones; so what else is new? To assign a fixed ratio of charges to costs would greatly hamper the flexibility needed to keep the institution from failing. But without some understood relationship between the posted, stated price and its true cost, the hospital doctors are quite unable to design a cost-effective treatment strategy. Knowing very well the lack of relationship between prices and costs, the doctors freely admit they disregard the prices entirely. While allegiance to what is scientifically best is not completely bad, it is not necessary to be so blind to the economics of the various alternatives. In time, it will lead to the design of model treatment strategies by committees. That is not itself a bad thing, except for the way it undermines individual thinking by the professional who is closest to the specifics of a case. That is a debilitating thing; a bad thing if you wish. It certainly lessens the potential for minimizing the cost of care, which is the flag it is flying. Some way must be found to improve the usefulness of prices as a guide to costs, an imperative which is otherwise certain to lead to the use of some degree of force to achieve it. And that would be a really bad thing.

from the for the Hospitals tend to be either for-profit corporations like Apple or nonprofit corporations with a different accounting system. It may help a little to know that for-profit corporations are measured by their profitability, while nonprofits are measured by the increase (or decrease) in their assets compared with last year. Items enclosed on a balance sheet with parentheses have always gone in an (unfavorable) direction. Increases (or decreases) in assets are intended to include gifts and variations in stock market prices. However, increases (or decreases) in assets like fine art don't count at all. Sometimes that can be highly misleading, as when the Barnes Art Collection increased in value by billions of dollars. Other assets, like buildings and equipment, are measured by depreciation, which is not always parallel to market prices. There is a movement favoring "mark-to-market", but investment firms are particularly opposed to marking to market, because temporary drops in market price are sometimes unrealistic, only requiring a little time to recover, a phenomenon sometimes seen in endowment funds, as well. Conventional measures of success, like the profit margin and the increase in net assets for nonprofits, are generally useful. But they can also conceal many traps. The most prominent one is to introduce these concepts when someone questions why everything costs so much as if to imply that it is unlikely that a hospital could be overcharging when it is only generating a 2% profit.

The ten dollar aspirin tablet is usually introduced at this point in the discussion, balanced by descriptions of accident room patients who try to pay nothing at all. The discussion is now one of cost-shifting. It must be obvious that the cost to charge ratio is well over a thousand percent for the aspirin, whereas Apple probably is less than a hundred percent for everything they sell you. Perhaps not, perhaps it is over a thousand percent for a number of retail items. In any event, the problem for the hospital customer is he has no way of telling what is being given free to bring the overall cost to charges down to 5%. That is, he is given no role in choosing the charity he is supporting, but he knows it varies widely between hospitals. He has to have some trust that the institution is behaving in a responsible way, which is difficult when he sees new and glistening hospital interiors or reads of seven-figure executives. Perhaps it is a little unfair to blame the trustees for avoiding embarrassing questions with no particular justification, but it does not seem unfair to ask that the hospital cost accountant prepare meaningful reports to both the management and the trustees. To the management first, to allow them time to look into oddities in the reports before having to answer for them. But no matter how it is handled, the cost accountant should be made more central than he usually is.

Every item ought to be assigned a cost to charge ratio, both inclusive and exclusive of overhead costs. It is usual to include overhead by a so-called step-down process since overhead must be paid and it generates no charges at all, only costs. But to include it in the net cost to charge ratio is potentially to bury one of the things you are trying to discover: is the overhead excessive? Having determined that point, it may be legitimate to re-include overhead in the "net" calculation of the cost to charges. Hence the suggestion of reporting it both ways. No one doubts the books balance; the items of expenditure include most of the costs. The essential issue is whether this is all pretty expedient, whether too much frivolous expenditure is being permitted by shifting its cost to certain profit centers. When this cost to charge system is compared among other hospitals or other years in the same hospital, it is possible to recognize the unusual items or departments quickly. However, the beginning trustee or utilization reviewer may need to have the costs and charges stripped out and aggregated, to highlight the highly deviant figures for ready appraisal. Consequently, it may be necessary for the insurance company to require reports of certain items, structured in that way. Other such reports may be needed to identify overpaid employees, or overstaffed departments, usually as patients and dollars per employee, compared with other institutions. Ultimately, it may even be necessary to establish norms, but that begins to resemble micromanaged cost control, when peer pressure may be all that is required.

Paying for Children

By far the hardest part of healthcare to find a way to pay for, is the newborn child. There is no opportunity for pre-funding, the cost is considerable, and the parents are in marginal financial shape, themselves. No one has proposed a satisfactory solution, except those who say the cost is negligible, which is not true at all. Accordingly, I have proposed we take advantage of another feature of increasing longevity.

The grandparents, who were little more than a theory in 1900, have aged to the point where they often overlap by a generation. I propose we overfund Medicare at birth so that it grows to the size of a considerable inheritance at death. We can then take advantage of the extra 21 years of longevity thus included in the family. Thus an extra $28,000 bequest can be generated from investment income and put in trust for a grandchild as a dwindling asset, sufficient to cover the first 21 years of life. This is the present limit of the statute of perpetuities, and need not disturb it.

Although the details are complex, they follow the pattern of the death benefit, and will not be repeated here, The estimated extra cost is $42 per child, which seems to bring it within the boundaries of what the average person can afford, and/or the government could subsidize, with a considerable margin for error.

Although it is possible to imagine many extensions of the ideas in this short paper, I would caution against going too far without some experience to support it. In fact, what is proposed here, should e tested in an incremental manner.

The New Plan

Let's begin with the HSA Contingency Fund. It's simple and answers a lot of premature objections to changing Medicare, even ever so little. Because IRAs have been around for over forty years, let's call the cushion an IRA, and modify the IRA rules slightly to make it possible. The problem, take my word for it, is not one of financing a new Medicare system. It is the treacherous stepping-stones you have to negotiate in the transition from one system to another. So we start by saying you need a cushion for unexpected pratfalls on the way to any new system. You can't be comfortable about any proposal, including this one unless you have set aside a contingency fund. If you were absolutely confident about the unexpected, you wouldn't need a contingency fund, but who can predict his health for decades in advance?

First, Establish a Safety Net. You could call it a tax-exempt Christmas Savings Fund if you prefer. The idea is to provide a vehicle for saving small amounts in advance of the birth of a baby, for the purpose of later conversion into the baby's Health Savings (and Retirement) Fund. Without even knowing the sex of the coming baby, and therefore not even knowing its name. The new fund belongs to the parents until they give it to the baby, or the baby reaches age 25, whichever is sooner. And it's just an IRA with limitations. It can only be used for later conversion to some unborn child's contingency fund, unless it remains unused for thirty years, in which case it reverts back to an ordinary IRA. It's just an answer to the repeated question of, "Where does the money come from, to pay for the child's contingency fund?"

It also illustrates the principle underlying the magic of an expanded HSA. You start with a modest amount and let compound interest grow for years, just in case something goes wrong with the HSA that wasn't anticipated. If the money is invested in common stock index funds, on a buy and hold basis, it should grow at 7%. doubling every ten years. Since it would be hard to find a bank which would bother with a dollar deposit or even twenty dollars, it wouldn't be surprising if the bank required the assurance of sticking with them for, say, ten years, even after the conversion to a plain old Health Savings Account. That is, they would want some long-term profit to compensate for the short-term loss.

The long-term gain is surprisingly large. A fund which doubles every ten years will be doubled eight times in an eighty-year lifetime, or 2,4,8,16, 32,64,128, 256 times. That is, a tax-free dollar becomes 256 dollars, and a hundred dollar deposit grows to be $25,600 if you don't spend any of it. That's an important lesson for a child to learn, right there. And it's the foundation of the whole proposal for privatizing Medicare.

Everybody is now expected to pay $56.000 into Medicare -- $700 a year for forty years (25-65), followed by $1400 a year for twenty years more. But instead of having $534,000, we use a "pay as you go" system, spending current deposits for current expenses. Not only do we end our days with no money left over, the government pays almost equal that amount to borrow money for the shortfall. So the American people, one way or another, pay almost a million dollars per lifetime, for what a better system would pay $56,000. That's about twenty times what Medicare would cost if President Lyndon Johnson hadn't been in such a hurry. You can pick nits in the arithmetic. But cut it in half, or a quarter or a third -- and you reach the same conclusion about the two approaches.

In fact, the calculation has considerable conservative under-estimation. The transfer is about as simple as changing the postal address of your deposits, from sending the check to the U.S. Treasury, to sending it to your Health Savings Account manager. And you get a double tax exemption; it's tax deductible when you deposit the money, it is not taxable if you withdraw it to pay for healthcare. That is, $56.000 would require earning an average of 18% more income tax before you make the deposit, and the resulting $66,000 would grow to, not 534,000, but to $10,680,000 in healthcare. That ought to pay for every organ transplant you could imagine if you have the transplants toward the end of your life. If you have the transplant one day after your 65th birthday, it might stretch you a bit, but that's the sort of thing the contingency fund was designed to cover.

There are a number of other details to cover, but let's settle an important one as early as possible. The figure of $56,000 was obtained from the 2015 Medicare report on the Internet, and it was divided by the number of Medicare recipients without regard to their income. That is to say, the $700 yearly for 40 years, followed by $1400 per year for 20 years is not what the average subscriber pays for himself alone, it includes all those indigent and disabled people who cannot pay for themselves. In the case of Medicare, we are not speaking of subscribers, we are speaking of everybody over a certain age ("beneficiaries"). It absolutely is not true that Medicare is a rich man's entitlement, it's everybody's entitlement. It is certainly true that our silly way of managing "pay as you go" will bankrupt the nation, and rather soon. But the Health Savings and Retirement Account would accomplish as much without bankrupting the nation, and without one word mentioned about tightening the belt or radicalizing the delivery system. I'll help my critics a little. The serious problem is not starving the poor or all sorts of politically motivated objections smothered in a cloud of misinformation. The problem, the real problem in doing what I suggest, lies in devising a safe transition from a silly system to a better one. That's really what the contingency fund is for. Right now, we are saying you will have all the money you ever need, on your hundredth birthday. The hidden problem comes before you reach that promised land. So, when we speak of privatizing Medicare, we are speaking of managing the transition before we get there.

Two Central Mistakes In The Design of Medicare.

There are surely dozens of misjudgments in our health system but concentrate on two of them. If correct, they could transform the system, while if uncorrected, no scoring -- dynamic or otherwise -- will conceal our collective failure to address health costs seriously. Other problems can stand aside while these two are considered.

The first is pay-as-you-go. Its name is misleading, because the younger generation, mostly enjoying good health, pays for the previous generation's dauntingly high health costs toward the end of life. Medicare started in 1965 and grew for fifty years. The first generation thus was given a free ride, so my mother who died at the age of 103, represents a whole generation who paid essentially nothing for thirty years of expenses. This hot potato of debt was passed along for fifty years, getting bigger with time and baby booms. The burden of 18% of Gross Domestic Product became unsupportable, even with abnormally low-interest rates. We must now liquidate the debt burden, invest the idle savings until needed for healthcare, and thus eliminate the annual 50% Medicare deficit to foreign nations. Quite a task.

An important result of replacing pay-go with pre-payment is the incentive to save, replacing the historical incentive to spend. Actual experience with HSAs demonstrates net savings in health cost to be at least 20%. Using a Health Savings Account, young people of each generation save for their own subsequent health costs, instead of spending immediately for anonymous demographic groups of strangers. At this point, another unexpected bonus appeared:

Some young people have good luck not to get sick very much, thus accumulating tax-exempt money in the account when they turn 66. In fact, most people do escape serious illness until about age 55. Since everyone gets Medicare eventually, current law turns HSA accumulations into a tax-exempt retirement fund, a provision which went largely unnoticed. (It's mandatory, while I would prefer an option.)

At this point, a second blunder by the designers of Medicare reached the surface. Medicare provided better medical care, made longevity increase, but laid bare it had added thirty years to be financed as retirement cost. Sickness cost is episodic, but retirement costs are continuous. Consequently, these additional retirement costs may eventually become several times as costly as the sickness costs they replaced.

I cannot claim it will be easy to scrape together a package of proposals to cover the transition to a considerably less costly funding system. But I have tried, and suggestions follow in this book. No health funding scheme other than Health Savings Accounts provides even a flimsy scaffold for addressing this new issue. Social Security does have such a mission, but it is hopelessly underfunded. I'm afraid we have to say this impending disaster is largely a consequence of Medicare's success. So this is the second of two big problems facing us: we failed to anticipate success.

But there is a third big elephant in this room which might be wiped out with a paragraph of legislation. Scratch any regulation and you usually find a lobbyist underneath it. Somewhat over half of the population enjoys a tax deduction which is denied to the other half, and that other population is restless about it. Unless big corporations soon yield to the demand for equality of treatment, there will be continuing agitation. No doubt it is contemplated to address this issue in the looming tax reform, and perhaps the defenders of this inexcusable situation plan to reserve their concessions for later trade-offs. But after seventy years of this inequity, one half of the public owes such a large debt to that other half, little quid pro quo is justified. Permitting HSA to pay the premiums for its required high-deductible insurance could accomplish this in a handful of sentences, eliminating the grievance.

And what might be called the fourth big issue actually offers hope, instead of despair. Medicare coverage for young unemployable persons ("disabled") was effectively broadened to over 90% in 1984. Narrowly higher costs were thus added to basic Medicare costs for 9 million of the 46 million regular Medicare recipients, rather than remaining lumped with the 30 million uninsured unemployables (requiring specialized programs.) These higher costs of average Medicare per employable person, have been overlooked by most commentators, making ordinary Medicare seem costlier than it really is. It's bad, all right, but not quite as bad as it seems. Documenting that fact, as well as shifting the medical income tax inequity to the tax bill, thus leaves onlytwo new issues to address: pay-as-you-go, and retirement funding. That's quite enough for the first round.

Subsidiary Issues

But we are surely a long way from being able to predict the current cost of care, to say nothing of future care. Whatever it is, it is large and would be less if we switched from pay-go to Health Savings Accounts, cleaning up our books in the process.

Others may improve on them, but that states the goal. As the saying goes, "every ship on its own bottom". Even if the package fails to cover all costs, it is obvious that saving money at interest will result in more money than spending it immediately and gathering no interest. You will notice it makes a 3% inflation assumption. Shifting the money with interest promises more money for healthcare, than not shifting the money. The dynamic scoring has been found by experience to be at least 20%, and possibly as much as 30%. How long it will take to work off this burden is unpredictable. What is predictable is that with enough time it will do so, and the surplus can then be applied to the second mistake we have made.

Proponents of a single-payer system have focused their attention on the fact that every person attaining 66 years of age is eligible for Medicare, regardless of income level. So a start toward that goal was made by giving Medicare to disabled persons. Unfortunately, disabled persons under the age of 66 are usually disabled for life, and thus have a considerably higher cost to the program than the "normal" recipients. There are five million of these disabled persons, as against fourteen million regular members. The consequence is the addition of younger disabled persons greatly increases the average cost of all recipients. As a consequence, lifetime Medicare costs are overstated, and the pay-go problem is a little easier to solve. Unfortunately, shifting the cost of the young disabled to another program will not reduce their cost, but foreshadows the financial disaster which could befall us if we adopted a single-payer approach. The true cost of the program is further confounded by the tendency of people to store up a backlog of medical expense, in anticipation of free care in the future.

Proponents of a single-payer system have focused their attention on the fact that every person attaining 66 years of age is eligible for Medicare, regardless of income level. So a start toward that goal was made by giving Medicare to disabled persons. Unfortunately, disabled persons under the age of 66 are usually disabled for life, and thus have a considerably higher cost to the program than the "normal" recipients. There are five million of these disabled persons, as against fourteen million regular members. The consequence is the addition of younger disabled persons greatly increases the average cost of all recipients. As a consequence, lifetime Medicare costs are overstated, and the pay-go problem is a little easier to solve. Unfortunately, shifting the cost of the young disabled to another program will not reduce their cost, but foreshadows the financial disaster which could befall us if we adopted a single-payer approach. The true cost of the program is further confounded by the tendency of people to store up a backlog of medical expense, in anticipation of free care in the future.

Others may improve on them, but that states the goal. As the saying goes, "every ship on its own bottom". Even if the package fails to cover all costs, it is obvious that saving money at interest will result in more money than spending it immediately and gathering no interest. You will notice it makes a 3% inflation assumption. Shifting the money with interest promises more money for healthcare, than not shifting the money. The dynamic scoring has been found by experience to be at least 20%, and possibly as much as 30%. How long it will take to work off this burden is unpredictable. What is predictable is that with enough time it will do so, and the surplus can then be applied to the second mistake we have made.

The young disabled are part of the thirty million people who are unable to pay for their own care, regardless of whether the disability to earn was or was not self-inflicted. We must forget that aspect since no insurance changes will lessen it. Nor is cost-shifting within the hospital a sustainable approach, as innumerable examples demonstrate.