Philadelphia Reflections

Medicare: Begins, Not Ends, Reform

The elderly consume a disproportionate share of total health expense. That soon forces Medicare, the "Third Rail of Politics", to get first attention in any lifetime health plan -- even Lifelong Health Savings Accounts, our central proposal.

Rescuing Medicare from Its Short-Term Thinking.

Ben Franklin expected a hospital to pay for itself by returning sick people to employment. That misconception runs through medical payments even today.

Instead, our good intentions have created a more expensive problem, with its solutions always just out of reach. If you live longer, you get more retirement to pay for, because society also asks for an age limit to employment. Like Franklin, we might miss our target, but at least we see the goal. Right now the inevitable consequence of eliminating the disease is the extension of longevity. Because retirement is continuous while illness comes in episodes, the extra retirement cost (Social Security payments, if you please) might even become more costly than Medicare. Science may eventually cure enough disease to shave costs down to the first and last years of life, starting if possible with the most expensive diseases first. All fine enough, but not right now.

We must devise a better system than that, which like Health Savings Accounts, could expand from cradle to grave (and 21 years beyond death), generating a surplus by age 65, retaining unused medical surpluses for retirement, and taxable only at death. Because of compound interest, such a result is actually achievable but requires a discouraging length of time. We can buy more time with more money, but the public must agree it is worth it.

A lifetime perspective has six new features, because we begin with a deficit and end with a surplus: 1) Passive investing of reserves as a new revenue source 2) Twenty years of post-mortem Trust Funds to pay for transition 3) Redeployment of current Medicare payments to individual Health Savings Accounts without changes to its delivery system 4) Hooking the pieces together on individual Health Savings Accounts like beads on a string, to increase compounding. 5) Funding retirement with unused augmented Medicare funds, as diseases become cured by science. 6) Reaching zero balance at age 18, by grandparents half-funding the first 18 years for each of 2.1 grandchildren out of HSA surplus. These are unfamiliar concepts, consuming the rest of this essay.

Unfortunately, even if Congress devises a system to do all this, a century is a long time to leave your money in the hands of strangers. There would be one invariable consequence. Whether money is diverted to bankers' salaries or to aircraft carriers, rulers always prefer inflation to long term taxes, and sometimes prefer "imperfect agency" to other short term solutions. Even the Roman Empire eventually succumbed to this conflict. No one oversees other peoples' money as carefully as he would spend his own, so we stand warned by Milton Friedman that your own money management is the only peaceful oversight with a chance of widespread success. Even that success depends on running dual systems during the transition, one fading out and the other fading in. In the technical section which follows, ways are suggested to manage this dilemma, but above all, it seems best to prevent false starts by planning for them. Allow duplication, the ability to make mistakes, and a certain amount of waste from repairing bad choices, as the cost of doing business. Most flaws start as proposed solutions, so it will prove best if winners and losers are widely visible.

This Lifetime Health Savings Account is not a competition of ideologies; it is a series of seemingly unrelated mid-course corrections relating to changing age environments. It leans heavily on putting idle money to work at compound interest, preferably by John Bogle's total market indexing. Even Bogle's system works best with some initial lucky timing. But after a few decades, it would scarcely matter when you started, it only matters how much time you have left. Since the beneficiary is dead by the time of settlement, the ones who will really care are those who must pay off the debts. It is up to beneficiaries to fund it and to educate their descendants to begin early. A single system for everyone will probably never prove universally sensible for hundreds of millions of people. A voluntary system with age quotas seems the most painless way to smooth out an admittedly protracted transition. This is a long term plan with short term concessions.

Non-profit systems are not very good at weeding out failures, so for-profit competition is advisable, to speed things up. But anti-trust violation is a common for-profit short-cut, so modern approaches concentrate on preserving competition, not necessarily efficiency. Always remember we probably have plenty of money, never plenty of time. Young people almost never see it that way.

No other large nation has the money or the brashness to attempt so much change all at once, so there are few foreign models. We are pioneers, and costs will be higher for it. Scientists are not fools, they concentrate research on the eight or ten fatal diseases which (they are told) cause 70% of present costs. But several hundred other diseases wait in line, undermining cost prediction for the coming century. Nevertheless, there are only three stages in life with transitions to consider: childhood, working years, and retirement. Two out of these three are dependent on the remaining one at any particular time, but everybody gets a turn. The easiest way to pay for children is for grandparents to donate at death; the best way to pay for retirement is to add compound interest to what we already have saved, and all the rest depends on working people doing more saving, or less spending than they formerly did. There are lots of gimmicks, but that's the basic plan, while we pray for scientists to eliminate the most expensive disease instead of marking time, counting the number of grains of sand on every beach.

A good plan uses demonstration projects and accepts the possibility of occasionally slowing down. Research and development can be costly at first before costs eventually decline. We may be--or may not be-- as lucky as we were with heart attacks, in which the commonest cause of death was greatly diminished by a daily aspirin tablet. Or we may struggle on as we did with pernicious anemia and diabetes. Both diseases are treated with injections discovered almost a century ago. But pernicious anemia is treated at trivial cost while diabetes struggles as the most expensive chronic disease we have, prolonging life but not extinguishing cost. Only Americans would plunge ahead anyway, while a President would be foolish to try to change deep cultural attitudes too rapidly. We are warned not to see ourselves as exceptional, but we do see ourselves as exceptional, no matter what the facts.

The facts are the Medicare age group has most of the costs, younger people generate most of the savings. Third rail or not, the problem is to manage a gigantic funds transfer between generations while avoiding imperfect agents who divert money to their own purposes. In some ways, it is more a financial problem than a medical one. We watch private insurance pay its executives multimillion-dollar salaries, and we watch our government divert medical money for battleships and babysitting. It is time to stop watching and try modified individual ownership, putting our idle money back to work. Saving our own money for our own retirement if given a choice, instead of forcibly moving money among demographic groups of strangers. Choices should be voluntary and for-profit, so people will actually notice which approach works best, and then switch to it when convinced. This being political, some people will put their thumbs on the scale. But this being America, the public will not be fooled for long.

So this summarizes the idea. What follows is a general outline of vital technical details for pulling it off.

What Long Term Thinking Looks Like.

Let's apply a Due Diligence approach to the technical steps of this proposal. That is, skip past the overwhelming detail of existing data, to focus on conclusions to test. First, divide the population into three groups: dependent children, the working age group, and retirees, and start with Medicare. That's ignoring the advice that Medicare is the "third rail of politics--touch it and you're dead". The easiest place to begin is with the elderly, because they have the greatest medical cost, and anyway if we continue to "kick the can down the road", we are admitting defeat before we even start. Medicare is not only where most of the costs are, but predictably where they will migrate further. It's only half paid for by the recipients, while a major goal is to break even. Indeed, as science cures diseases, surplus should be consumed into a retirement fund, so realistic projection errors could overstate the revenue. As the old Quaker observed, the best way to have enough is to have too much.

The Composition of Medicare. With the single important exception of disabled persons, Medicare eligibility is age-related not income-related. Everyone between the ages of 65 and death (averaging now 84 years) is eligible, regardless of finances. We also contemplate funding children out of this source by transferring 5% for them. It's not much, but it is central, and it dramatizes the cost distribution. The raw data is blindingly comprehensive, sometimes to the point of obscuring important conclusions, so rather than starting with it, we should come back to data after we see what we need.

A fair working assumption is that Medicare borrows about half its costs, while Medicare totals constitute about half of total medical costs. So at least a quarter of all medical costs are already indebted. Medicare's actual sources of hard revenue are about evenly divided between payroll deductions from future beneficiaries, and premiums from existing ones, or about an eighth of total costs, each. So about twice as much is borrowed, as pre-paid in wage tax (one-quarter of total cost borrowed, versus one eighth pre-paid). Since lifetime costs are estimated by actuaries to be $350,000 in year 2000 dollars, the problem is to take $42,500 and turn it into $85,000 in 21 years in a post-mortem trust fund--seemingly at only half the rate of a reasonable rate goal of 7%. Average costs are even somewhat overstated because the 9 million disabled come from younger age groups who also contribute less than average. Furthermore, leftover revenue would probably be available for covering gaps in healthcare coverage in other age groups, as yet to be decided by Congress. You might cover these gaps by doubling the wage withholding tax, but it would be uncomfortable. Our proposal is to substitute compound interest principles, which are harder to explain, but easier to accept.

At present, the Health Savings Account is the only medical payment system which could adjust to the predicted migration from healthcare to retirement care, and it is the only component which could then fund all children with about a 4% carry-over from each grandparent to an average of 2.1 children per mother. HSA currently provides for money still left in the account at the time of achieving Medicare coverage, to flow into an IRA which can be spent on anything. If you are lucky with health problems, you can even seem to use the same money twice. That's something to brag about, but it could be made even better. Right now, for a system hoping for millions of subscribers, it is too rigid and uniform. The idea of post-mortem Trust Funds (see 1b) somewhat smooths this out as well as generating a four-fold increase in revenue. Money is left over from Medicare for retirement, and then if there is no debt left over from retirement, you do not need a Trust Fund. But flexibility would be particularly useful during the transitions; some will need it, some won't. The fact that you don't know in advance, enhances the ("Old Quaker") incentive to overfund the balances.

I see no reason for HSA/IRA migrations to be so uniform, so one-size fits all. Surely there will be subscribers who would prefer to accumulate funds for later life, rather than as soon as possible. There is no reason to demand that everyone be within a certain age group or to stop depositing at a certain age. If there is some such reason, it ought to provide for a court or agency to approve exceptions. The same court could handle the vagaries of marriage affecting grandchildren (see 2.0, below).

For example, there is even no reason to terminate accounts at the time of death. The transition will uncover numerous exceptional situations, and some people would even want to create an HSA at age 64. If they want to do it, why spend hours figuring out how someone might somehow game the system with his own money? If their parents can fund an HSA at birth, why not get started twenty years sooner and add four times as much accumulation by age 21? If there must be disincentives to accumulate money, apply them after the termination of the Trust Fund, when family responsibilities are mainly (but not invariably) coming to an end.

Growth. Money at 7% doubles in ten years, so one specific proposal is to re-direct the money already being collected during 60 years, doubling it during a gradually declining 104 years. The money must earn 7% within a Health Savings Account if it is to pay for Medicare plus a million dollars per person left over for retirement. (Bear inflation in mind, however: money at 3% gross might not grow at all.) Compounding should start early in life, remaining in one continuous storage location for as long as possible, with escrowed compartments for specific goals, like buying out or consolidating shorter-term vehicles and anticipating some marital ones. Tweaks to current Health Savings Accounts will suffice but must be at least mentioned in the legislative language, to guide the long-term regulatory one.

Only a few present limitations on HSA prevent this lifetime compounding from beginning immediately, and 7% annual returns are expected back from financial intermediaries over the longer term. Even though raw stock market returns have averaged 12% annually over the last century the financial community will probably object to 7% return for the customer from total market index funds because of its 3% inflation assumption within the middleman portion, and the intermediaries have already shown they resent the security measures. (Fear of the trial bar probably plays a role in fiduciary disputes.) But the reward for winning the lobbyist war is funding half of the shortfall deficit by placing risk on the proper shoulders. Two principles guide revenue enhancement : begin to save early, and relentlessly escrow inescapable life goals. Benefits from careful adjustment of terms with legal permission might range all the way from doubled returns, to cutting them in half.

Running through this dispute with your financial advisor is the need to use the "annual total returns" on major domestic total stock market indexes as a benchmark to be exceeded to escape penalties for ethical misbehavior. The principle in Law is well established that if there is no injury, there is no case.

1. Creating Revenue Instead of Floating Bond Issues.

The underlying problem is to fund retirements after you have funded Medicare when both of them begin at the same time. Suggested technical steps now follow, trying to co-ordinate designated approaches as beginning with as little amendment as possible, until the fate of the Affordable Care Act is decided. Beyond that, it is a possibility that, if the tax exemption of employer-based insurance is equalized, funding might become easier for the other half of the employable population . At the time of closing down the trust, there are only two eligible recipients, the Medicare Trust fund, and the IRS, so it usually makes no difference how the Government got the money during the long transition phase, and the extra administrative cost would be considerable.

1b. Post-Mortem Trust Funds. Some parts of this proposal are not obvious, and should at least be mentioned in the statute to guide the subsequent regulatory phase. For example, I see no good purpose in limiting Health Savings Accounts by age or occupation. Expenditures from these Trust Funds should only pay off Medicare-related debts. This trust fund concept alone would quadruple available revenue (and beneficiaries during a transition.) The Health Savings Account already devotes any surplus after 65 to a retirement IRA; why not make the timing optional, and hence more flexible? Underneath any regulation you will usually find a lobbyist.

The transition from our present system to a better one will be the biggest problem; why make it harder to manage? If someone is aged 64 when the program starts, why not give his estate twenty more years to invest and retire when it judges he can afford it? With a trust fund, if he is dead and has money left in the account, why write off his retirement debts immediately after he dies? The money in a trust fund will continue to grow until it becomes perpetuity -- one lifetime plus 21 years. That means his estate will have four times as much money to pay his debts--what's the matter with that? The central point is to expand the number of people able to pay back what they owe -- to the government; who cares if they are alive or not when the money is paid. Effectively, an index-fund certificate is funding an escrow account. Why not "take delivery" of the certificate by the creditor, whether or not the debtor is alive? The result would be many more funded accounts, not more bad debts.

1c. Last Four Years of Life Reinsurance. Alternately, a more complicated 50% partial buy-out of Medicare could continue present systems at half price. Eventually, the cost can be adjusted from actual payment histories, both individual and collective. The outcome might be having the transition time by pre-payment and repayment to Medicare at death, as well as replacing a liability with an asset. This is hard to explain, and post-mortem trust funds are probably politically preferable.

1d. Revenue Estimation By Exclusion. This discussion envisions lifetime coordination, but since future revenue is uncertain, adopts the temporary hypothetical that ACA is revenue-neutral. Like Frank Sinatra's song about "making it" in New York, if the idea is feasible without ACA and/or tax exemption revenue, it surely would be even more feasible with those two Laws adding revenue. Without such revenue, this proposal still addresses the majority of present medical cost but would need to be endlessly integrated with whatever emerges from ACA. One tweak is apparent: catastrophic insurance is mandatory in an HSA, but there may be long periods of employment or marital situations when a lifetime depositor has two health payment systems at once. Therefore, if a Health Savings Account has not made a health payment for a year, the premium for catastrophic coverage should be waived for the following year, substantially reducing its overall cost. The underlying assumption is that when you have two health insurances, you especially don't need two reinsurance. To pay the premium by the HSA itself would greatly ease this problem.

1e. Steadily Improved Longevity v. Steadily Greater Retirement Cost. For the first time in history, longevity has increased by 30 years in a century, followed by 3 more years in the past decade. That's a good thing, of course. But someone neglected to plan for increased retirement costs, in some ways a "bad" thing, directly caused by living longer. That is, while the present working third of the population is paying for its parents, the cost of transition will double in size, but costs of the retired third who benefit may increase tenfold. By that time, the contributors will evolve into becoming retired beneficiaries without employment, so revenue will not increase tenfold, and the situation becomes impossible to correct. The imperfect precision of these projections is irrelevant to their gloomy conclusions. Furthermore, the interests of the citizen and his government will often get into conflict, an inherently disruptive situation which interferes with solutions.

2. Grandpa Pays For Grandchild With Newly Created Funds.

A vexing parallel situation is the location of children in the scientific cost curve. Medical costs for children may sometimes seem impossibly high, particularly if obstetrical costs are lumped with them. But they are really quite small when compared with the late-in-life compounded revenues of retirees. In our plan, the money is newly created, belonging to no person, so it can be shifted with less resistance. Costs of children are disproportionately troublesome because of their timing within the context of their entire family. Politically, they insure a lot of people at not much insurance cost, so expect a lot of new children's hospitals to be built if they are insured.

2a. Shifting the Cost of Obstetrics and Pediatrics From Mother to Child, and Having Deceased Grandpa pay the Bill. The lifetime medical cost curve is J-shaped, with the lowest point at about age 17, rising steadily until death averaging age 84. The shape of the J-curve is emphasized by half of Medicare cost being experienced during the last four years of life. (This conclusion is blurred somewhat by adding 9 million younger disabled to the Medicare rolls. That adds to lifetime average Medicare cost, appearing to portray lifetime cost as even more J-shaped.) Even accounting for the distortion, financially struggling young parents have a hard time managing medical costs, made even worse for unmarried mothers. Middle-aged women often have gynecologic costs which lack a satisfactory resolution if they also have marital financial problems. Most of these distortions are artificial. Stripping them away by assigning them to the child would expose a steeper incline to the J-shaped cost curve of both sexes. From a politician's standpoint, equalizing medical costs of the two sexes would soften some political noise, by reducing employer costs, reducing female wage inequality, even affecting immigration by raising the citizen birthrate.

2b. How Is Money Transferred from Grandpa to Grandchild? The answer is simple: it is transferred from HSA to HSA at Grandpa's death, or Grandchild's birth, as a 5% transfer. The math means one transfer suffices for 2 grandchildren, at a 2.1 birth ratio.

3. The Working Age Group From 18 to 64.

Our basic position is simple: we ignore the working age group until business and government reach an agreement. Meanwhile, we treat both Obamacare and Employer-based insurance as unchanged and revenue-neutral, while fervently hoping for some surplus revenue to reduce the cost of the dependent two-thirds of the population. Employer groups have resisted being taxed for indigents since long before the Affordable Care Act, arguing that hospital cross-subsidies were already more than their fair share of charity. We hope things will evolve as two new systems, one of which is an HSA with temporary waivers of catastrophic premiums, but both employer groups and ACA have regarded their negotiations as nobody else's business. Blue Cross seems to be taking a cautious look at HSAs. We wish they would read one of John Bogle's books.

3a. Employer Donated Employee Groups and Tax Implications. Two other vexing laws stand in the road of peaceful resolution. The first is the Henry J. Kaiser tax loophole, apparently the largest tax loophole for individuals of all time. So much profit is at stake, one scarcely blames big business for trying to extend it, but it seems nevertheless un-Constitutional to permit a tax loophole of this size to persist for 70 years for half the population, while stone-walling extension of it to the other half. It is as though no one could read the "equal protection" clause. There is little doubt the fairest solution would be to abolish the health-insurance double tax exemption for everyone, but the resultant confounding of world trade prices would be daunting. The simplest solution is to have Health Savings Accounts pay the catastrophic insurance premium, thereby extending a full tax exemption to everyone. That maneuver would reduce federal revenue, which would then have to be adjusted in the coming Tax Reform legislation.

3b. Big business seemingly has no pre-existing condition problem, but in fact they avoid hiring impaired people to avoid this issue if they can, leaving it to their smaller competitors to wrestle with last hired, first fired. So a small issue became a big one; in a sense they created it.

3c. Medicaid: A Special Age Class Trying To Become An Age-Independent Income Class.

Finally, there is the Affordable Care Act, with missteps addressed. Medicaid was originally a state-sponsored program for mothers and dependent children. The Affordable Care Act tried to expand it to all poor people and met with mixed success in different states, so Medicaid expansion potentially invades the working age groups. It is uncertain whether the nation can afford expansion, and its fate probably depends on the decision, possibly on constitutional grounds. If healthcare is ever to pay for itself, extra funds must ultimately derive from the working third of the population. (Children have no means to pay for future care, while retirees are largely without working income until the very end.) In this analysis, we treat the net cost of the age group 18-64 as revenue-neutral. That means this one-third of all inhabitants must generate its own costs, plus enough surplus to cover the deficits of the other two thirds who are dependents. Reduce the dependent cost, and you will reduce the strain on the employee group. Furthermore, the J-shaped medical cost curve means most new costs will increasingly arise among retirees. Already, Medicare is 50% subsidized, and then re-borrowed with bonds. That means it is already 50% laundered and can scarcely stand more burden. It is very difficult to make long-term plans when the finances of ACA are so obscure, and its margin for error so narrow. In one form or another, we repeat this performance every time political control reverses. The private sector could not survive without a better form of "due diligence" than this. I suggest the President immediately assemble a due diligence team for his own information, mostly consisting of accountants, to give him the news, however bad, of where we stand. And then, ways must be found to extend the "surplus" from employed people to the unemployed two thirds, stretching a tiny surplus to meet a big shortfall. Without that tiny surplus, medical finance is close to a cost spiral.

4. Constitutional Issues.

For the most part, the rest of the uproar about the cost of medical care is mostly man-made, thus seemingly should be negotiable. The problem with this attitude is the man-made problems are so numerous and of such long standing, they appear more intractable than one would suppose is realistic. In the first place, the Tenth Amendment of the Constitution clearly makes the licensing and regulation of medical care reside exclusively in several states, even in spite of greatly increased nation-wide transportation. Both specifying state regulation (for instance, the McCarran-Ferguson Act) and national regulation (ERISA) are so clear and carefully worded it is hard to guess why both have not been challenged, or indeed which side would win an appeal. The Maricopa 4-3 Supreme Court decision clouds judicial resolution along anti-trust lines. Reams of legislation by State Legislatures suggesting one organizational pattern, and voluminous Congressional legislation suggesting the opposite, allow the citation of precedent to be almost anything. Certainly, no one wants another Civil War.

5. Pay As You Go. A major mistake was made in 1965 when Medicare adopted the "pay as you go" system. The program might never have started without it, so Lyndon Johnson cannot be exclusively blamed. But the first year recipients were enrolled free to the beneficiaries, and since then, revenues have been spent as fast as they are generated. No interest was generated on this enormous foregone revenue, and the recipients are now dead. Continuing revenue consists of payroll withholding of 2.9% of income during working years. It also consists of premiums amounting to a similar total. Before the books were scrambled with ACA subsidies and $30 billion for "meaningful use" of electronic medical records from the stimulus package, this revenue source would almost have paid for Medicare if it earned 7% income. At present, it will have to be amortized. I suggest we change the recipient address on the envelope of this revenue, from Washington DC to individual Health Savings Accounts, who would then employ John Bogle's system of passive investment of index funds, hoping to achieve 7%. In time, the numbers could be adjusted to be revenue precise. When the due diligence team reports the equilibrium state of affairs, further adjustments will have to be made. They won't be revenue neutral, but we are starting 70 years late.

6. Substituting Passive Investment for Pay/Go. So far, we have only explored one approach to paying for lifetime healthcare for everyone -- take the money already being spent on Medicare, deposit it into escrowed individual Health Savings Accounts instead of milking it for pay-as-you-go, when index investing could on average double it at 7% tax-free returns in ten years (sixteen-fold increase in forty years, thirty-two in fifty years, etc). Doubling its revenue should make it self-sufficient, easily surpassing almost any expected inflation after a ten-year transition. Because Medicare costs are age-stratified, not income-stratified, this heaviest of Medical costs now subsidizes no other age groups except disabled persons, so paradoxically, voluntary participation is facilitated.

7.The hardest thing to explain to non-mathematicians is the power of compound interest to increase virtual interest rates, a concept that baffled even Aristotle. Essentially, compounding explains why increasing longevity steadily increases effective interest rates, a saving grace for this whole idea for beating inflation. In fact, this saving grace increases effective interest rates after age 60 by so much, that paying for a grandchild's health cost is fairly trivial, compared with the struggle their young parents might endure. A five percent dollar transfer would hardly be noticed by grandpa's heirs at age 84, whereas it might seem an insurmountable amount to his young children, acting on behalf of his grandchildren. Simultaneously protecting grandchildren and grandparents with a single rearrangement may strike some as fraud, but it isn't. What's really strained are two things: convincing 300 million people to do the simple math quietly, and to keep the custodians from spending the boodle, whether on stockbroker income or on aircraft carriers. In fact, I have omitted much mention of "last year of life re-insurance" as unneeded, but to be held in reserve in case a chaotic transition requires shortening.

8.Why use Health Savings Accounts, when we could just use single payer? Well, that translates to, Who do you trust not to misappropriate it? Robert Morris of Philadelphia took great pains to arrange the Constitution and the First Congress to prevent the federal government from ever owning shares of a business, because of fear of "imperfect agency". That is to say, Morris foresaw the greater danger in diverting medical money to battleships, than to Credit Default Swaps. No doubt your victorious government would share some of your money with you if it won a war, but what if it lost a war? You can make your own translation of what Morris meant, but it was essentially what is very wrong with medical cost control in general: Nobody spends someone else's money, as carefully as he spends his own.

9. There are other approaches to paying for medical care, and we may need them all. In addition to earning income on idle cash balances, we could thus display the cost of care by moving most patients from the hospital to the home or retirement community, and exposing the internal cost subsidies (usually transferred through indirect overhead charges). The wrong people are doing the medical commuting; shifting the center of care to the retirement community, along with doctors' offices, laboratories and parking lots, would reduce costs by reversing the commuting. Its biggest cost savings would come from disrupting the internalized accounting, getting control of malpractice awards, rationalizing wage and executive costs, and removing middle-man costs from supplies, especially drugs. But I predict these streamlining efforts will prove to be disappointing. The public is proud of its hospitals, and will defend them.

10. The best way to reduce costs is by research. Much of the research is wasted money, and there are hundreds, perhaps thousands of diseases. But scientists are not fools, they concentrate on the expensive and devastating diseases. It is estimated that a majority, perhaps 80%, of medical cost is spent on four to ten diseases. I'm afraid that eradicating diseases like cancer and diabetes might lengthen longevity somewhat, while other diseases like Parkinsonism and Alzheimer's could take their place. After a while, of course, the disease burden will diminish, and within a century perhaps the cost effect will be to reduce health costs to the first and last years of life. In the meantime, however, the cost of research, new drug development, etc, may even raise medical costs. In the meantime, the immediate effect of research on costs could be uncertain. When a tough-minded drug czar is finally appointed and faces down public clamor, we may well discover how to identify and direct the efforts of good researchers. Generally speaking, research is a young man's game; they burn out. Because they are young, they make poor administrators. Somehow, the system needs shaking up, so unproductive researchers can be identified sooner and shifted to teaching, administration, and clinical practice, without fear of stigma or shame. That's mostly identifying research failures. Identifying scientific brilliance is an entirely different thing, because brilliance is in great demand, financially and otherwise. I'm afraid the American system is expensive but effective: we throw money at a goal until it succeeds. No other nation can afford to match that. Some time within the next century, I expect we will be down to the expensive first and last years of life, plus a horrendous retirement expense. We should arrange our systems to direct unspent medical money into more comfortable retirements, without exactly knowing when the two requirements will mesh. That's why a self-adjusting overflow surplus has great advantages.

At present, the Health Savings Account is the only medical payment system which can currently adjust to this predictable change from healthcare to retirement care. HSA currently provides for money still left in the account at the time of achieving Medicare coverage, to flow into an IRA which can be spent on anything. That's something to brag about, but it could be made better. For a system hoping for millions of subscribers, it is too rigid and uniform.

11. The final point to be made concerns Subsidies. The foregoing discussion focuses on Payment Structure. Whoever considers costs must add the cross-subsidies which shift real costs from poor patients to insured ones. At first, reimbursed systems appear cheaper than straight-forward ones, simply with prices re-named reimbursements. But be sure to include subsidy cost before deciding which structure is really cheaper. If you want to subsidize this system, go right ahead.

George Ross Fisher M.D.

203 Chews Landing Rd

Haddonfield, NJ 08033

grfisheriii@gmail.com

(Cell) 215-280-6625

(Office) 856-427-6135

(Fax) 856-427-6136

Health Savings Accounts: Synopsis

Ben Franklin felt medical care would pay for itself by putting sick people back to work. Not quite.

1. It works for some people, sometimes. That's the old system, which now needs a few tweaks.

2. To work for a whole nation, it needs more money -- a magnification system, which implies fewer options to choose between.

1. For individuals, it can be lifetime, which would be shunned by unsuitable clients.. There should be no age or other limits, so everyone can have one, at all times if he is able. If it has been unused (for medical payment) for a full year, it should still continue to generate income, but the premium for catastrophic insurance should be waived for the following year as an incentive to save it. It may accept additional deposits, however. This seems to be the administratively simplest way to keep it functioning as an investment while temporarily managing duplicate insurances (from employers or marriage difficulties, etc.)

HSA is the only health insurance where fund surplus becomes retirement income at age 65. That should remain an option until death, changing into a 21-year post-mortem trust fund which is permitted to use fund balances for medical debts and purposes, untaxed, with final surplus taxable in an estate as if an IRA). It probably should not accept additional deposits, however. (This option replaces the present mandatory exchange for an IRA upon acquiring Medicare coverage, and the mandatory Catastrophic feature should be dropped when Medicare coverage begins.)

The catastrophic system needs statements and limits about its regulation, fees, state coordination, what to do about abnormally low returns (using domestic total market indexes as a benchmark). It ought to address state vs. federal issues in a general way.

2. To serve the whole nation, rather than just the individually suitable subscriber, it needs a uniformly longer time horizon , more augmentation of income by compounding, more attention to security and long-term income, and more benefits to compensate for fewer options. In fact, it may need a consultation about passive investing of index funds. To preserve funds for long periods of time, audited escrows are absolutely required for protection against the imperfect agency. Starting small, this system could grow to enormous size. Because of longer time frames, the fund may need to allow flexibility for other investment strategies which at the moment are discouraged. I suggest the total stock market index as an audit benchmark with adequate penalties for failure to match it. The smaller investor needs rules, the bigger ones may not. If it has a good income return, it may require less attention to its format. Events will determine whether this is mostly a campaign document or a long-term strategy and whether it must be implemented in steps. Both Medicare and ACA took on too much all at once and stumbled. I suggest reforming Medicare first, children later, working people piecemeal.

The post-mortem trust fund needs to be checked out with estate lawyers. the last years of life reinsurance as an alternative. My sense is the trust fund is politically easier for the elderly to understand, but the elderly may want to plan ahead and so would prefer an insurance approach. Those who are fearful of outliving their income may have a preference. Lawyers have mixed incentives about closing estates early.

I don't see why due diligence hasn't appeared for every change of party, for all programs. Insurance salesmen may prefer to lock you into one program or another, and flexibility is not always in their interest.

Changing the legal responsibility for children's costs will be generally resisted, but the parents are young and fearful.

The elderly have most of the health costs, while working people have most of the revenue. The trick is to transfer the funds without so much resistance. There must be some sort of trade-off for employers to let go of their loophole. It took the Civil War to weaken states rights in the Constitution, and World War II to give employers their tax loophole. Making the public understand compound interest may require another 2007 crash. But as long as we have 3% inflation, it's about our only hope. Under no circumstances allow the government to own common stock. or socialists to control corporations.

I know the weaknesses of subsidized research. Somehow, subsides never get called or counted, as costs.

Is There Any Other Medical Revenue?

In our discussion of medical finances, we assume everybody's books will balance. What about people who don't do any bookkeeping, what about taxation? Well, the vendors of medical care keep books which include payments by individuals and include expenses of running their businesses. Such items are either written off as trivial, or they are attributed to non-medical expenses, and of course, there is the black market. But let's look at medical education.

Sweat Equity. In the old days, interne and resident salaries were zero, or close to it. Student nurses may even have paid some tuition to the hospital. No great effort was made to account for the value of such training, so its effect was largely ignored. Nowadays, however, the medical students often go deeply into debt, and pay back their debt out of salaries earned a few years later, paid for either by working spouses or government training grants to the hospital. Or, more likely, they are paid back out of salaries paid by the hospital but reimbursed by Medicare. The medical school indebtedness is often as much as $150,000 per graduate, accounted for by government student loans, and the pay-back is arranged by the hospital paying salaries of at least $30,000 per year out of patient revenue, either government grants or health insurance, at least half of it government-supported insurance. It's pretty hard to say which category of patient is paying for resident training, isn't it? This is the back door by which government funding enters the scene.

Nurse training follows different but similar gyrations, making it overall pretty hard to assert these trainees are milking the system. They were once egregiously underpaid, and money fell in front of them, so they picked it up. It all comes to a lot of money, but as a rule, they did nothing underhanded to get it. In fact, if you net out the loan repayment, they are still working awfully hard to make very little. The big winners are the hospitals and the health insurance companies, big losers are the taxpayers. Take a look at the administrative salaries, and you can see immediately where the money is going. The trainees can tell you they are righting a previous wrong, merely recovering their sweat equity. The administrators have a more difficult job justifying the institution's windfall.

We could go on, pointing to government self-protection leading to DRG, and consequently to moving inpatients to the outpatient area; and the shifting of nurse's training to the university campus where they seldom see a patient. But the thrust of this section is somewhat different. It is to explain how the 50% employer-based age group appears to support so much subsidy from so little surplus. Government financing is a large new source of support, making reliance on the patients for revenue considerably less necessary. It remains to be seen whether such relief is permanent, or merely a response to the present economic recession. Since employer generosity too, is appreciably funded by taxpayers, rectification could lead to a downward spiral, leaving only the elimination of the disease by research as painless relief. Even so, let me remind the reader of the expensive longevity- enhancement implied by that solution.

All in all, it looks like revenue enhancement is the best approach, and the Lifetime Health Savings Account seems the most feasible untried approach to it. Its maxims: the best way to have enough, is to have too much. And within the limits of reasonable compassion, make every ship sail on its own bottom.

Balancing the Book

In the revenue section, we proposed taking the payroll deduction away from Medicare, putting it to work in index funds. What would Medicare do for financing during the transition period? Everything else, including post-mortem Trust Funds, grandparent-grandchild transfers, and index investing, is a new revenue source. Reduction of bondholder debt is also a "new" source of funds, in the category of needing no explanation for its replacement. But if we regard the lifetime medical financing system as an inter-generational funds transfer where the books are balanced, we have effectively concentrated the shortfall into one place, the payroll deduction system for Medicare. It represents a quarter of Medicare or an eighth of total health cost. That's not a gigantic shortfall, but without a replacement, it is enough to sink the proposal.

1. Bond Reduction. When Mrs. Sibelius was running Medicare, she estimated that half of Medicare, or a quarter of total health spending, was borrowed money. One of the goals was to eliminate such debt, or at least keep it from growing. That would seem to generate twice what we need, although not immediately.

2. Post-mortem Trust Fund Expansion. This, too, is adjustable in size, suitable for responding to a continually changing transition. In its most extreme form, of paying for the hospitalization of a beneficiary who is 65 years, one month old, it might pay for all of Medicare. Or it might shrink down to a single beneficiary who is 104 years old. If 1. and 2. are added together, the Treasury Department ought to have ample room to juggle the funds around. On average by itself, it should have the capacity to absorb half of Medicare costs.

3. Voluntary Enrollment. If Necessary, with Adjustable Age Quotas. It is safe to say some people will be more affluent than others, as well as more adventuresome than others. The enthusiasm for any change at all will vary by political inclinations. If further limitations are necessary, incentives can be created to favor either speedy enrollment or delay.

4. Scientific Elimination of Disease. Here, we are at the mercy of luck. But in the long run, medical costs should gradually decline to the limit of the first and last years of life. How soon and how much is not subject to advance prediction.

Other Voices: Rethink Lifetime Health Finance

(Revised)

Medical finance is an inter-generational funds transfer. Sickness costs migrate later, workers age 18-64, get less sick. Retirement seemingly replaces sickness, but -- so far -- merely displaces it later, without added revenue. One-eighth of lifetime medical cost now transfers between generations by payroll taxes, another quarter must be borrowed. Nine million disabled-under-65 are paid revenue originally intended for the elderly. The rest is roughly balanced, or was before the Affordable Care Act raised alarm about government's indifference.

Since 1965, Medicare collects 2.9% payroll deductions, immediately spent for their parents as "pay-as-you-go ", gathering no income. Lifelong debt concentrates into Medicare debt, as healthcare migrates toward the elderly. Politicians, terrified to touch "the third rail" of Medicare, respond at the wrong end of life. Thirty years are added to longevity, while healthcare debt evolves into retirement costs. And then, the money runs out. Statistics are rough, but retirement deficits equal Medicare's laundered debts getting worse as healthcare improves. Talk about conflicted incentives.

A solution: view one eighth of revenue as accumulated over 42 years, whereas a quarter of costs could be more than recovered by compounding the same idle money over 104 years. Try it free on the Internet. This achievable result comes from 1) extending age limits of Health Savings accounts down to birth and up to a trust Fund's perpetuity, defined in common law as a lifetime plus 21 years, while using an unfunded HSA to unify unspent compounded income for his own retirement, not for demographic groups of strangers. 2) Investing the payroll tax at no less than total market index funds, assuming a 3-7% lifetime return. 3) applying grandpa's surplus $4000 to grandchild's underfunded $4000 shortfall. (Please read that twice).

The compounding period is extended upward by post-mortem Trust Funds escrowed for Medicare-related costs only, extinguished when transition debt ends. It is extended downward 21 years by grandparents transferring approximately $4000 to one grandchild or equivalent, as HSA to HSA. Trust funds finance the transition deficits. This has the advantage of terminating Health Savings Accounts around age 18 when medical costs are lowest. Add the additional possibility of transferring the mother's obstetrical costs to the child, thus reducing premium costs for the 18-45 year age group as well. Much of this magic lies in the superiority of compounded rates over inflation rates. Long-term solvency appears likely, and borrowing is ended.

George Ross Fisher MD
3 Haddon Avenue South
Haddonfield, NJ, 08033

Cell 215-280-6625
office 856-427-6135
Email: grfisheriii@gmail.com

Why is a Health Savings Account Useful to Almost Everyone?

Health Savings Accounts, HSA, have so many hidden features it's hard to imagine anyone without one. It's a Savings Account, but it is also an insurance policy. It's a high-deductible insurance policy with an attached savings account. The more you describe it, the more complicated it sounds, but it's really very simple. Instead of regarding its two components as opposites, it combines them, but it can be treated as two separate ideas if you prefer. A nice Quaker lady seemed to grasp the idea all at once, after a period of puzzlement. "Why," she exclaimed, "That's nothing but a Christmas Saving Plan for Healthcare." Yes, you could say that.

Banks and casualty insurance companies have been in competition for savings dollars for so long, that an amazing number of people have grown to thinking they were enemies, or against the law, or something. When in fact they are two different savings vehicles with separate advantages which most people will eventually find useful. It's an example of specializing in one or the other until you forget they both have their place, and for everyone. Remember, insurance has its place. A hospital bill can run into thousands of dollars. It doesn't happen often, but someone would be foolish not to have some fail-safe insurance. The higher the deductible, the saying goes, the lower the premium. If you have both features you don't lose anything, and in fact neither the local bank nor the local insurance broker need care one whit whether you have both of them at once.They are governed by different regulatory agencies, but I can't see any harm in combining them, and considerable advantage to doing so.

Let's start with health insurance. Just about anyone can see it's cumbersome to insure small health problems, because the resulting administrative costs make it too expensive to bother; any health problem which covers less than a thousand dollars of "losses" is too cumbersome to use, so long ago insurance began to have a "front end" deductible of at least a thousand dollars, and nowadays five thousand is more likely. At least half of health insurance is given to employees as a group policy by the employer for tax reasons, and the employers regard the whole thing as a distraction from their own central activity. They just do it because everyone else does it if he can, and employees would be angry if they didn't. But a few years ago someone spent an awful lot of money experimentally proving what should be obvious--front end deductibles are cheaper. Well, wouldn't you know. But it required a President to make deductibles compulsory before they became standard. Right then and there, it should have been made compulsory to link them to a savings account, but no one cared enough to do it. Besides, the employer pays the bill, savings accounts are something banks do, and health care is left to the company union and the management to work out. But let's just examine the matter for a moment.

In the first place, placing the deductible in a Health Savings Account gives it three tax exemptions. It is tax deductible when you deposit the money, it is invested without taxation while you leave it there, and there is no tax when you withdraw it. So it just has to be cheaper than paying money to the HSA company instead of the bank, regardless of whether you use it to pay for health. In fact, if you have some other money somewhere, it is foolish to withdraw this medical money for health, or for anything else when it is such a good investment without it.

Secondly, when you have deposited the amount of your health insurance deductible, you have "first dollar coverage" in effect if not in name. If the insurance company raises the deductible, you still have first dollar coverage, but the insurance premium doesn't go up. With a $3800 annual deposit limit, it takes about two years to fill it all up, but after that, you have first dollar coverage for high-deductible prices. In fact, you have another option of putting in the full limit of your annual deposit at about 20% less cost. Show me another investment which practically guarantees 20% annual investment returns. It really doesn't matter whether you are rich or poor, this is a good deal for anyone. In fact, it is such a good deal that some vendors just don't pay very much investment income at all, in spite of the fact that the stock market has gone up 12% per year for the past century, wars, depressions, elections, notwithstanding. Surely it could give the customer 7% return, after inflation and taxes have been taken into account, but many customers are so content with 20% they don't feel like fighting for 27%. If you don't feel like quibbling, you could "take delivery" of the index fund certificate and put it in your own safe deposit box for custodial purposes. Remember, money at 7% will double in value in ten years. Believe me, this is a really good deal, and we haven't even started to talk about its value in health care.

The feature which has been slipped into it, is what happens when you turn 65. Never mind quibbling about the rising age threshold for Medicare, or the lowered age limit for 9 million disabled persons. For all practical purposes, the designers of Health Savings Accounts in 1981 regarded Medicare as the end of all your health worries. We'll deal with that fallacy at another time, because as things now stand, every HSA turns into an IRA when you get Medicare. It's our belief the whole medical system could be paid for by extending the option to convert at any time up to death, but right now it's the only healthcare payment system which lets you have the surplus for retirement.

The population is rapidly aging, because longevity has increased thirty years to age 84, in the past century. Unless old folks find some remunerative occupation, most of them won't be able to afford to retire. Thirty or forty years is a long time to play golf or tennis, or to go fishing, watch TV or whittle. That isn't the central issue at the moment, but at least we can redesign our health insurance to redirect surplus healthcare money, into helping to pay for retirement. Meanwhile, there's an even simpler thing to do: run don't walk to a place which sells HSAs, and pays you a dividend around 7%. They can be found, but they aren't exactly running after you, as long as so many people will accept lower income returns.

Passive Investing by Unsophisticated Investors

Burton G. Malkiel published A Random Walk Down Wall Street in 1973, and John Bogle founded Vanguard Group in 1974. Without getting into quarrels over originality, the timing makes it hard for an outsider to judge who thought of what, first. It could diplomatically be said there are two concepts mixed together to make a more general concept called passive investing. Professor Malkiel is associated with the idea that the stock market contains all the information publicly known about corporations, so, therefore, a random selection of stocks will result in the same yield as stock analysis will, and involves less trouble and expense.

Jack Bogle is in the stock brokerage business and offers a closer, more critical, view of his competitors in the business. In his view, whatever extra profit there might be in stock-picking by experts, is eaten up by the experts themselves in the form of fees and salary. So, why bother with any small differences, when the vast multitude of ordinary investors would be better off with passive investing. There is little practical difference between the messages of the two essayists, although John Bogle's Vanguard has already achieved deposits in the trillions, growing so fast they have largely closed their retail outlets. Both men advocate the advantages of wide buy-and-hold diversification, with low brokerage fees. And because of low turnover, fewer taxes. John Bogle is more censorious about retail brokerage practices.

Ultimate Goals of Passive Investing. These two offer somewhat different reasonings, but they come to the same conclusion: The average investor will do better for himself, using random stock selection, than by picking individual stocks, even with the help of experts. John Bogle offers the simply packaged randomization of the capital-weighted Index Fund, which allows the manager of the fund to maintain the same randomization if it wanders, and he has his reasons for thinking one particular method (capital-weighted) of indexing is best. You might add other factors, like cost saving through computers in the "back room" shuffling of orders and payments or narrowing of the buy-sell margins by greatly increased transaction speed and capacity of computers. Who cares, it's now cheaper.

In any event, it was John Bogle's insight into how to take practical advantage of these stockbroker ideas, which produced index funds mirroring the whole stock market, and their close relative, ETF, or stock-traded units of index funds. Taken all together, these features make up the concept of "passive investing", which includes the advantages of buy-and-hold over more frequent trading; the considerable reduction of advisory fees; broad diversification; and taking advantage of the payments float. Substituting randomization for stock research introduces economies of scale, and shifts the profits from stock research to computer research. Unfortunately, many other methods of random selection have been offered which give the investor different returns, and they too call themselves Index funds. Someday, someone may well devise a formula for constructing an index which produces results superior to those weighted for company capitalization; keep an eye out, but be careful of fly-by-nights. Furthermore, index funds ordinarily start small, using a sampling technique; in time, they can get big enough to contain a proportionate share of all stocks listed in the index and be picked by "big data" methods. But which index? If you buy a small-stock index, some of the stocks will grow right out of that category and into the need to be replaced. A few of the components of a large-stock index will fail and be dropped. In a mid-cap index, there can be migration both up and down. The simplified method at present is to restrict the list to index funds which are 15 or more years old and pick the index which has performed best. Switching around among index funds defeats the transaction-cost saving, achieved by just buying one index and sticking to it.

That is, someday the system may improve still further, but at the moment an innovation seems just as likely to harm results, as improve on them. Nevertheless, the quest continues, because a variation of a trillion-dollar fund by a tenth of a percent, produces enormous overall savings (and bonus) for the fund manager. The manager is looking at totals, the individual investor looks at averages. Eventually, profitability may shift from computer research to tax research, or from tax research to marketing skill.

In what follows, we are suggesting trillion-dollar Index Funds, so big they might contain some of every listed stock in America, or in the whole world. As any tiny stock rises, it gets included; and as any listed stock fails, it is dropped. Even the largest stocks individually affect the average to only a slight degree. Right now, John Bogle's books and speeches emphasize the brokers' fees and commission as what the investor captures, while Burton Malkiel tends to emphasize the essential randomness of the entire stock market. Both men are surely correct to some degree, and the investor need not care why the system works. It's called "passive investing", with the central advantages of avoiding the selection of individual companies or industries, and at the extreme, emphasizing the economies of the whole world. In the case of American investors, there is the great good luck that American stocks are both the biggest and the best performing. If you think this will change in a lifetime, an argument can be made for the superiority of world-wide indexes. In the long run, all sovereign nations can change their rules and taxes. While the average investor is encouraged to buy the biggest and cheapest, it is possible to go too far. Every passive investor is urged to compare the results of his choice with a broad range of 15-year competitors, once a year, just in case. At least one fund, the Pitcairn Fund, restricts itself to family-owned businesses, and that has a certain logic to it.

It makes some difference which factor most explains the improved performance of passive investing because they reach limits of penetration at different times. Index investing is increasing by trillions of dollars a year but must flatten out eventually when the market finally segments into those who wish to vote their shares, and those who are content not to meddle. John Bogle irritates his colleagues by repeating, the financial industry takes 85% of the total return for themselves, but even if that is accurate, it must come to an end when the financial industry threatens suicide if it isn't better paid.

Further Growth of Returns. It does appear that Bogle has so far won his argument, but eventually one-off things like this always flatten out. It would be my opinion that Roger Ibbotson's book of the century-long returns on various asset classes sets final limits to the running average to be achieved by this approach. To whatever degree the index funds fall short of Ibbotson's figure, the manager of an index fund has further work to do. To be blunt: The difference between the long-term results of index funds, and the price index for the asset class, probably results from the degree to which the index fund manager or his company is himself eating up the total returns. But some of it is the difference between doing it with pencil and paper, and actually doing it. For example, small-cap index funds should closely approach 12.7 % long-term total returns. (i.e. dividends plus realized and unrealized capital gains.) Strangely, big business corporations you have likely heard of, average only 10.4%, so the executives of firms of over a billion dollars in capitalization are extracting a 2.3% premium from stockholders for something unidentified, which needs to be clarified. Long-term U.S. Treasury bonds average 5.4%, and U.S. Treasury bills average even less at 3.7%. All of these various premiums for "safety" would seem to be the market's estimation of their true value, and that premium must surely disappear if they cannot justify it. Inflation averaged 3%. The far superior results by Warren Buffett and David Swensen, the endowment manager at Yale, represent the somewhat different advantages of being a large, immortal, tax-exempt investor buying things like Canadian lumber forests, totally beyond the reach of the average small investor. When someone devises a way to capture these advantages for the small investor, their new price advantages might possibly be considered achievable by average investors, but if so that advantage should be reflected in the index, to some extent.

Buy-and-hold Index Fund Investing. Index funds will vary in their returns, and the difference between 0.25% commission and 0.06% will only become noticeable in larger accounts. But the difference between $7 retail trades (passive) and $300 trades (active) is simply absurd. If an index fund is composed of the stocks of American companies in the same proportion as the stock market, investing in an American index fund becomes the same as investing in the American economy. Investing in a total world index is comprehensive in a different sense, but there is merit to the idea we owe this success to the American economic style, so Americans ought to climb aboard the American lifeboat. If they do, there is the reason to argue they should eventually reach a limit of an effort-free 12.7% return on their money; any higher return probably entails unrecognized risk. But remember, high corporate taxes have driven many American corporations to Ireland, the Cayman Islands and other tax havens. If this trend gets out of hand, it may be necessary to turn to world index funds. But when the broker gets fancy and makes up an index of his own recommended stocks, the maneuver gets too fancy to be called passive. That's a variant of active investing, and it's not what we are talking about, or recommending.

Short and Long-term Volatility. Every business has cash overhead, endowment funds have volatility; put those two ideas together and you find periods of time when there isn't enough cash to run the business or pay the dividends. According to Ibottson, the yearly volatility of the stock market is 11%, meaning 70% of the time the market is within 11% (one standard deviation) of the mean. It would thus seem prudent for a fund manager to hold 10-15% of the portfolio in cash, recognizing that when a fund is growing there will be considered cash inflows from new deposits. For this reason, an index fund should probably be only 90% in stocks, 10% in cash. There are also long-term cycles of 28-40 years (remember 1929 and 2008), with a volatility of 50% followed by a recession of 10 or so years. For a fund to continue to pay out 8% during those cycles requires long-term reserves of about 20% in long-term fixed income securities averaging 5.5%. This is what underlies the old adage of 60/40 portfolios, although most observers see the cycles are lengthening, suggesting smaller portions of fixed income are safe enough. In all likelihood, the appropriate asset mix is a gamble on which stage of the long term cycle you are in. If you start at the very depths of a new cycle, it is probably appropriate to have no long term reserves at all, but scarcely anyone has that degree of self-confidence. In the long run, the number of needed reserves will depend on the attitudes and ages of the investors.

The Past is (usually) Prologue. All those historic events, plus several severe recessions and the invention of the computer, seemed like earth-movers at the time, but in retrospect scarcely affected the long-run relative values of various asset classes. Unfortunately, many of John Bogle's insights were not available during long stretches of this experience, so data is not available for precisely the mixtures we wish had been collected. It is also useful to keep in mind the man who drowned while crossing a river which averaged six inches deep. Nevertheless, it seems safe to conclude U.S. Treasury bills will closely follow U.S. inflation, and stocks will do better than bonds.

Traditional Endowment Lore. The endowment community contains a great many serious investors whose livelihood and reputation depend on arriving at the right combination of safety and income return on their endowments. Among such persons, it is the wide-spread belief that a long-term return of 8% is about the limit of the safe return of an endowment. The reasoning focuses on the perpetual need to return a safe maximum, in spite of unpredictable hills and valleys of investment return. In those circles, the most devastating mistake they can make is to be forced to sell good stocks at the bottom of a decline in the market. Seeking to avoid that squeeze at all costs, the 8% maximum return is the conventional answer of these professionals. Their stocks return 10%, but they are diluted by holding enough bonds or cash to reduce the effective overall return down to 8%. The exact proportion of bonds will depend on how much cash flow they can expect from new contributions during a recession, and that is variable between endowments. For this reason, we tend to use 7% in our illustrations, because the formula of -- 7% doubles the principal every ten years -- makes it rather easy to do long calculations mentally. So that's the working goal: invest your Index stock portfolio so it returns between 10% and 12.7% annually, and dilute the stocks with cash or bonds until the total portfolio reaches 8% as return on investment. If that overall running average is not maintained, questions need to be asked. Individual accounts may vary from these benchmarks because people do get sick unexpectedly, but the aggregate account of all subscribers needs to achieve this goal to be considered healthy and its index fund to be considered well-run.

What if We Start Investing Just as a Long Depression Begins? John Bogle was recently on a television program, asserting long-term passive investing will probably average 5% total return for the next decade. Since the stock market is up 20% in the past year alone, one interpretation is this is a way of saying he expects a major decline in stocks of 25% fairly soon, from which there would be a recovery of 30%, leaving a 5% gain for the whole cycle. (He might well squirm at this interpretation of his remarks, which definitely were not that specific.) At his age, with his heart problem, he probably regards 10 years as long-term, while this book is looking at an 80-year horizon of 10%. In that sense, all of us could mean the same thing. I am urging the belief that if the market closely followed 10% for the past century, it will probably return to 10% for the next century. Of course, it might turn out that it follows 5% for half a century, then follows 15% for the last half of a century; that would have mathematical truth but would be essentially worthless information for everyone who dies in the next fifty years. Those people would be like the inhabitants of Asian Angkor Wat, or the Mexican Yucatan, dreaming of past glory for a while, but eventually just forgetting it all during a parade of ancient relics. But since I am willing to concede 5% for the next century is a possibility, it is necessary to wish for some enduring wisdom to emerge from the wars of civilizations, not just within national economies, or the transient achievements of a single stock market.

Rising Above Mere Investing. Running one of these funds is not child's play, even though individual stock-picking is superseded. The only reason for investing amateurs to play with such numbers is to get a feel for what size of total return should be expected, in the light of what others are doing. The reader is invited to study Ibbotson's yearbook, and see for himself whether he agrees that a 10% total return on stocks seems safe to bank on; or whether the whole permanent staff devoted to the management of some favorite fund needs to be replaced. Best of all might be to invest in several private funds and reward the ones that do best. To go just a little further, Congress might even consider whether management which consistently produces less than the long-run return of a related index is eligible to be replaced. But that's not reasonable. To be reliant on such approaches alone is unlikely to be successful. One only needs to watch how quickly an investment committee clusters around the consultant they have hired, glowingly eager to ask him for investment tips, while ignoring the business at hand.

But that's not what this book is about, nor what is ordinarily expected of bean counters in a bureaucracy. Someone must devote himself to such issues, but there's investing and there is finance. About the best, we can hope for is to include in our planning some national agency to monitor the economic environment. That agency should feel obliged to warn Congress and the nation that we must apparently reduce our goals for the program. We might need to develop some other plan for paying off foreign debt for Medicare, for example. Or the Health Savings Accounts might only be able to pay 50% of our bills, saving the rest for unexpected contingencies. Or we might need to require a 50% larger annual deposit in the HSA accounts. Or we might need to float some bonds for the duration of some sudden national emergency. All because it becomes apparent in the future that some national or international upheaval has changed the basic terms of trade. It's important to be a good investor, but when a program gets as large as this one ought to become, its finances are pretty much the same as the national economy, and each will influence the other.

The takeaway points are that the better funds can and should produce total returns which are superior to what an ordinary citizen can produce for himself, and some way to measure it is mandatory. And also, that there is no point to getting into this unless Congress establishes -- and monitors -- policies which deliver on the promise. If you think Fannie Mae and Freddy Mac affected the economy, just consider what this one could do.

This program will fail unless we maintain a narrow margin between what the stock market is earning, and what its owners are earning.

Your money earns 11%, but that isn't necessarily what you will earn.

Expecting it and getting it, can be two different things. Because, for one thing, most expenses for a management company also come in its first few years, on their first few dollars of revenue. Wide experience with a cagey public, therefore, teachers experienced managers to get their costs back as soon as they can. Until most managers get to know their customers, in this trade, charging investment managing fees amounting to 0.4% annually is considered normal for funds of $10 million, so charging 1-2% for accounts under a thousand dollars is common practice. These things make it understandable that brokers are slow to lower their fees, or 12(1)bs, or $250 transaction fees to distribute proceeds. But our goal as customers is to negotiate fees reasonably approaching those of Vanguard or Fidelity, which have fees of about 0.07% on funds amounting to trillions of dollars. Such magic can only be worked by purchasing index funds from a broker who aggregates them to deal in large quantities, and also develops a service with minimal marketing costs to cover the debit card, help desk, hospital negotiating, and banking costs. And who, by the way, derive serious side income from managing corporate pension funds for higher fees. Corporations get a tax deduction for such fringe benefit fees, so even the US Treasury may be said to have a conflict of interest. Remember, stockbrokers are not fiduciaries; they are not required to put the customer's interest ahead of their own. One of the better-known brokerage houses advertises charges of $18 a year for HSA accounts over $10,000, but only after it reaches that size will it permit the customer to choose the index fund. If kickbacks are suspected, the incentive it creates is obviously for the client to get the account to be over $10,000, as fast as he possibly can. Under present contribution limits, even with a family account, this cannot be accomplished in less than two years.

Proposal 14: Congress should remove all upper (and lower) age limits to opening Health Savings Accounts.(2584)

Proposal 15: Congress should impose transparency rules on fees and net returns for Health Savings Accounts, including mention of the fees available from the least expensive local competitor.(2584)

There needs to be an added layer of investment in government securities, to provide liquidity to all HSAs, in the general range of 10% of the total investment. There must be some available cash in any business; there are bills to be paid. For example, in the case of Obamacare insurance, the first purchase in the deductible fund might well be $1250 in indexed Treasury Bills, reverting to total stock market index purchases, thereafter. Other liquidity needs are an individual matter, remembering cash reserves will lower the overall return of the fund and slow its growth. At the moment, interest rates are artificially low; leaving the reserve in cash is nearly as good. At this writing, we have experienced several years of essentially zero short-term interest rates, so long-term bonds are not for an amateur to buy.

The investment alternative of purchasing in-house stock-picking funds, or funds with a concealed kick-back to your broker, is probably the riskiest of all alternatives available, and to be avoided. The goal here is to get a 10% long-term return as cheaply as possible, or else as soon as possible. With an index, 50% of customers do better than the average, and 50% do worse. For health costs, just be sure to avoid the bottom 50%, and the rest becomes fairly easy. There is one other common hazard: the tendency of all investors, small and large, to buy high and sell low. Dollar-cost averaging is the simplest way to avoid it.

In recent years, health insurance has tended to avoid co-pay and therefore to raise deductibles. For people living from paycheck to paycheck, any hospitalization encounters a cash shortage, soon translated into a hospital bad debt. It is not entirely clear what plans have been made to meet this shortfall. There needs at least to be an added layer of investment in government securities, to provide liquidity to all HSAs, in the general range of 10% of the total investment. On the other hand, it is possible to be too cautious, maintaining a duplicate cash balance for an investment fund which is itself maintaining a 10% fixed-income portfolio. In the case of Obamacare insurance, the first purchase in some deductible fund might well be $1250 in indexed Treasury Bills, reverting to total stock market index purchases, thereafter. Indeed, because of the universality of high deductibles, it looks as though an HSA ought to be the first step in any health insurance with a high deductible. Always remembering not to duplicate the safeguards put in place by the fund manager. Specific investor cash needs should also be kept in mind: regardless of fund composition, just how available is your fund's cash to the customer? Excessive cash reserves will lower the overall return of the fund and slow its growth. At the moment, interest rates are so artificially low, leaving the reserve in cash is nearly as good. At this writing, we have experienced seven years of essentially zero interest rates on Treasury bills, so long-term bonds are not for an amateur to buy.

The investment alternative of purchasing volatile stock-picking funds, or low-return funds with a concealed kick-back to your broker, is probably the riskiest of all alternatives available, and to be avoided. The goal here for HSA owners is to approach a 10% long-term return as cheaply as possible, or else as soon as possible. With an index, 50% of the customers do better than average, and 50% do worse. For health costs, just be sure you aren't in the bottom 50%, and the rest becomes fairly easy; passive investing assures it. There is one other common hazard: the tendency of all investors, small and large, to buy high and sell low. Just avoid selling stock; if you plan not to keep it there for long, just put some cash in the bank.

Broad Brush

Other Voices: Rethink Lifetime Health Finance

Barron's recently invited 1000-word summaries of radical change proposals. tg.donlan@barrons.com

Health insurance financing is a gigantic wealth transfer system. Politically, it is described as a transfer from rich to poor. But it really is a transfer from one age bracket (working people) to two non-working ones, children and retirees. Add thirty years of longevity by curing the diseases of one age group faster than another, and the balance between age and wealth distributions gets bent out of shape. Socially, it's dangerous. It gets even worse to base one-year casualty insurance on employment, tempting employers to dump a system which ends when employment does patch together by tax incentives. Average employment duration is around three years, so almost every condition soon becomes a pre-existing one, whenever employees lose their insurance. Insurance companies see what's coming, and cannot be blamed for getting out before it collapses.

More revenue would help, but existing sources are almost exhausted at 18% of GDP, while a rapid change in health delivery would flirt with disaster. But one thing remains: using the idle money in pay/as/you/go to fund a transition matching a change in spending incentives, or even scientific research eventually eliminating the disease. It would work with income returns of between 3-7%. Compound interest on money already collected would pay the deficit. Extension of the age limits on Health Savings Accounts would stop the borrowing, and trust funds would extend the compounding for 21 years past the average age of death upward, to the point it would far exceed the need for retirement funding through taxation or borrowing. Transfer of $4000 of each grandparent's HSA surplus (at death plus 21) to the HSA of one grandchild would add another 21 years to compounding downward, leaving several millions of dollars per person for retirement, curing a number of social turmoils in the process. That probably wouldn't happen completely, but a Medicare surplus rather than a deficit would allow any transition to be much speedier. The present 2.9% employment tax presently collected from working people would equal or exceed what is needed if compounded. Since the new fiscal limits would be enforced by the laws of mathematics, there would be far less temptation to spend it on battleships. Further extensions of longevity would increase revenue faster than inflation could undermine it. Essentially, it would be asked to match 104 years of compounding--with what took 42 years to accumulate. There's plenty of slack if you try those simple numbers on a free compound interest calculator, found on everybody's Internet. A second chance to do what we should have done in the first place.

True, the necessary change in incentives would come from unifying three systems into one lifetime one, incentivized by noticing the remarkable savings already created by millions of Mid-Western subscribers to HSA. A few sentences of amendments to existing law should be all that Congress needs to struggle with since these are existing programs. Whereas the R's need to see a single-payer system has become a single-saver system, the D's can save face by asserting they are the same thing.

George Ross Fisher MD 3 Haddon Avenue South Haddonfield, NJ, 08033 Cell 215-280-6625 office 856-427-6135 Email: grfisheriii@gmail.com

Fraud and Abuse in Medicare and Other Government Programs

Fraud and Abuse

Fraud and Abuse is a common debater's ploy to avoid serious reform in government programs. Just eliminate that cost which everyone would deplore, and some pesky reform proposal won't be necessary, is the implication. Usually, everyone acknowledges this unanswerable way of playing on anti-government voter sentiment, because taxes are just the cost of self-government. Other governments may be crooked, but Americans can be trusted, and so forth. So it becomes useful to have some reasonably accurate estimate of just how serious this issue really is. To make short work of it, this is really a serious issue.

U.S. Government Accountability Office (GAO)

The U.S. Government Accountability Office (GAO) had been keeping data on itself for some time, and now reduces it to a simple graph. Fraud is twice as bad as it was eight years ago, and that figure was twice as bad as thirteen years ago. We seem to be talking about 100 billion dollars a year, hardly small change or a thing of the past. Medicare paid out about 600 billion dollars in 2016, and Medicaid another 360 billion; the fiscal 2017 amount will surely total over $1 trillion. Using GAO figures, 100 billion dollars were spent on government health claims "that were not delivered, were unnecessary or were otherwise erroneous". Since Medicare is only half of the total medical care billed by essentially the same approach, why would anyone assume a single payer system would save money? Remember, none of these estimates includes anything at all to run the program itself, so it is entirely reasonable to suppose a single-payer system could cost 15% of $2 trillion, or $300 billion dollars per year just to transfer the money. Expenses of that sort approach $1000 per year for every man, woman, and child, whether he gets sick or not, in order to shift $9000, mostly to other people. Such drastic proposals justify an examination of wholly different approaches.

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