Philadelphia Reflections

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

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Health Savings Accounts: Replacing Affordable Care Act?

The Election is over. The health financing problem remains.

The Election is Over; The Work is Just Beginning

We knew this election was coming; we didn't know who was going to win it. Whether Hillary Clinton would replace the Affordable Care Act with her own plan, or whether Donald Trump would replace the ACA with a different plan, was far less certain. In either case, the many flaws in the Affordable Care Act would be addressed. One thing seems certain: the Affordable Care Act will start off 2017 with a bigger deficit than was expected. My previous four books on the subject were forced to assume the ACA was cost-neutral, offering proposals for lifetime health finance for every age group except age 26 to 65, the working years of life. This book mostly concentrates on that gap.

Cheaper. The core of this lifetime proposal is the Health Savings Account. It was devised by me and John McClaughry of Vermont in 1981, when John was Senior Policy Advisor in Ronald Reagan's White House and I was a Delegate to the American Medical Association's House of Delegates. It flourished after John Goodman of Texas wrote a book about it, Bill Archer of Texas pushed it through Congress, the American Academy of Actuaries found it saved 20-30% of the cost of more usual Health Insurance, the AMA endorsed it, and thirty million accounts were established by June 2015. It consisted of two ideas welded together: a high-deductible catastrophic health insurance policy, and a double tax-exempt Savings Account, acting as a sort of Christmas Savings Account for the deductible. It wasn't free, but it helped a poor man get coverage as cheaply as we could devise it. The individual patient or client owned his own account, so it had no "job lock" to hinder changing jobs. In that sense, it was patterned after Senator Bill Roth's IRA or Individual Retirement Account. A significant improvement followed the question of what to do with an unspent surplus which remained in the HSA (Health Savings Account) if you turned 65 after being healthy and then got Medicare. The Law was changed to turn such surplus into an IRA.

Retirement Funding. In correcting this oversight, the right thing was done for the wrong reason. Before anyone really understood Medicare was 50% underfunded, a retirement fund had been created. Since increased longevity was an inevitable consequence of better healthcare, it seemed natural for this "Medicare money" to pay for the extended retirement. It soon became apparent that retirement came at the same time as Medicare, and Medicare was thus underfunded. Even though the $3400 annual limit to Health Savings Account deposits was not enough to pay for soaring Medicare costs, it was not needed for that purpose for up to forty years. So augmented funds became available for healthcare at age 26 but had to be invested for fifty years or more until sickness made its appearance later in life. Emergencies might come up before then, but the Catastrophic health insurance took care of them. After many state laws mandating small-cost expenditures were amended, the high-deductible product took off, particularly in California and New York. Millions of policies were issued before anyone took the trouble to count them. When the Affordable Care Act made high-deductible insurance widely mandatory, Health Savings Plans took off like pursuit planes.

So, when competitive plans -- like HMOs, Preferred Provider Plans, First-dollar Coverage, Employer-sponsored plans, and a host of others -- started to encounter criticism, Health Savings Accounts became much more popular. Their flaws, instead of provoking consumer resistance, provoked demand for legislative relief. It was a mistake to limit ownership to people who were employed, or who were age 26 to 65; what good purpose did those age and employment restrictions serve? The advent of DRG payment limits to hospitalization and debit-card payment for outpatient services raised a question of the usefulness of insurance claims processing, which was certainly expensive. Prohibiting the HSA from purchasing the required catastrophic health insurance seemed to hamper unnecessarily a tax deduction which its competitors widely enjoyed. One or two amendments were all that would be needed to enhance sales considerably. People change jobs a lot; why would anyone want to prohibit dual coverage if someone wanted to pay for it, for his own personal reasons? The changes needed to enhance Health Savings Accounts were short and simple and could be enacted over a weekend. Why wait?

Improved Investment. Changes in the HSA Law to permit higher returns on invested deposits, are certain to provoke resistance but should be addressed very soon. If you are serious about replacing the old with the new, there are some zero-sum tradeoffs, especially within the finance industry. Go to the library or the internet, and look up the graphs of Professor Ibbotson of Yale about the performance of stocks and bonds for the past century. You will surely find the total stock market has risen at 9-11% for the past century, and what people describe as crashes and disasters seem like small wiggles in the line -- in retrospect. Some opportunities are better than others, but the main determinate of investing is the year you happen to have been born. In spite of these retrospective results, you will find very few investors who received half of that, but John Bogle and Burton Malkiel have demonstrated that random selection of stocks in a total market index fund beats expert active investors more than half the time, at a hundredth the cost. Bogle has something like 3 trillion dollars invested in his funds, and they have grown so fast he has trouble satisfying the demand. The average investor should be getting 5% on his money over the long run, and regulatory changes ought to aim for 7%. Money invested at 7% tax-free will double every ten years. With an average life expectancy approaching 90 years, that's ten doublings, or 512 times the initial investment in 90 years. And it still leaves 9-12% minus 7% (2-5%) for the finance industry.

But that's only half the problem. If you invest massive amounts of money for 90 years, there are plenty of cheerful brigands out there. Inflation is the main one -- it averages 3% a year -- because governments issue bonds, and enjoy low-interest rates. Federal Reserve and other central bankers are the nicest people in the whole world, mandated to preserve independence from the rest of the government. But they read newspapers and know who appoints whom. Bankers and brokers are also nice people, overvaluing rigidity because counterparties cheat when vigilance gets relaxed. One way or another, spreads should be narrowed.

The present system, plus stronger management, plus a few simple legislative amendments, would suffice to get us started with something workable, while we immediately roll up our sleeves and plan for a revolutionary future, better, system.

Plans for Healthcare Financing Retirement, Too

The preceding chapter seems like enough to say about the existing Health Savings Account. It should suffice for anyone who is stranded without health coverage, since it is already existing law, tested many times, and ready to go in a pinch. The handful of technical amendments are only about what you would expect from any fairly new program, and with any luck, they will slide through and suffice. The public, however, would be entitled to be disappointed with such thin gruel after so much hubbub, although repealing Obamacare outright would certainly make things more exciting. There has been an insufficient time in a lame duck session to render it effectively booby-trapped, but the pre-existing Obamacare law and its regulations are voluminous. After passing legislative actions to repeal it dozens of times, I have to assume the low-hanging fruit has already been picked by Congress. I would hate to see a relaxation of forwarding progress at the present stage; the resulting chaos would be considerable.

The J-Shaped Cost Curve. From a high altitude viewpoint, the healthcare of an average lifetime costs about $350,000 in the year 2000 dollars. It divides easily into roughly three thirty-year compartments: childhood up to age 25, employment from 25 to 65, and retirement from age 65 to death at age 84. Childhood is necessarily a gift from someone else, retirement costs are a gift of at least 50% from the government, and the lifetime operation is almost entirely funded by the working age group from 25 to 65 if you consider the government as being funded by the employed segment's taxes. Last year's NIH research budget was $33 billion, the Medicare budget was $55 billion.

This is quite a natural consequence of the way money is earned and spent in our society, but I consider it hazardous. Remember, the working segment (age 25-65) is not terribly sick. For a non-sick third to be supporting the sick two-thirds, is asking for a grievance to be expressed, and for somebody to be tossed out during economic upheaval. Let's put it another way: the people earning money aren't sick. The people who are sick may seem to have some money, but if they lose it, look out. The curve of health spending is said to be J-shaped: a childbirth expense and neonatal costs, then gradually increasing expenses clustered toward the end of life. Later on, we will discuss the proposal for First and Last Years of Life Reinsurance, which seems to me to match the future much better than what we now have.

Self-Funding, Rather Than Bulk Funding of Subsets. Furthermore, a long period of saving precedes a reasonably short period of spending. So a person's early saving would pay for later healthcare claims cost if we judiciously match savings with insurance. That's the Health Savings Account function, to which is added using surplus funds for retirement, by overfunding the premiums and keeping the invested surplus for later use. Somebody in 1965 made the serious blunder of overlooking the extended longevity provided by better healthcare. The awkward fact is retirement and Medicare begin at the same age, and retirement by some reckonings can cost five times as much. Retirement costs are continuous, while sickness comes in episodes. Further, saving for your own future needs will create an incentive to save; paying for whole classes of strangers creates an incentive to spend other people's money. Because when you create such a system, the money belongs to someone else. The newspapers report that health insurance averages 17% to pay its own costs, and the other 83% still goes to someone else. It isn't too hard to see where 30% of savings might come from.

To synthesize an example of a $5000 annual premium, 30% savings, for 40 years at 7% compound interest, would generate $13,600. At 6%, it would only generate $6800.


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The Election is Over; The Work is Just Beginning
New blog 2016-12-12 21:07:49 description

Plans for Healthcare Financing Retirement, Too