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Expanded Health Savings Accounts
The following is an executive skeleton of Revised Health Savings Accounts. Expansions grew from 1980 concepts discovered by John McClaughry and me, among them that combining an IRA for Health, with Catastrophic (High deductible) Health Insurance, transforms simple interest into extended compound interest. That maneuver usually reduces administrative costs of both, particularly when the two age groups come to face retirement. After all, retirement insurance is just health insurance which doesn't specify the cause or location of death, and its risk is nearly 100%. Young people usually have small health costs, while old folks often have bigger costs; for both age groups health is a gamble they can"t control. But it's still a cost.
Since 1980 we added five new features building on the first two, depending on luck and inclination. That's seven in all.
1.-2. In 1980 we started by combining "the HSA for Health" with "catastrophic health insurance", canceling out some costs of both by unifying them. Young people don't have much health expense, so the HSA provides extra retirement income to the person who earned it, with the appropriate tax deduction. An older employee can spend the surplus on retirement, which he surely can use, plus a surprise tax deduction for the accumulation. Or he can just spend the money if he happens to prefer it. It's like magic, and it's legal. For decades insurance companies have profited from improved longevity; this system shifts some profit to the patient.
3. These two points are reasonably familiar, so let's just skip to a third point. Let's add optional new insurance features as needed, like "Beads on a string." Supplemental co-payments and co-insurance, for example. Or not, if you prefer to spend the money on something else. The easiest option is to split and combine the two costs into Last year of life coverage . As much as half of lifetime Medicare costs fall into the last year of someone's life; the money is already spent. There's no point in quibbling, so just pay off and save much of the administrative cost by reducing it to sample monitoring. By a combination of saving costs and shifting them to Social Security, the burden on Medicare premiums is immediately reduced. By making it optional, you reduce the transition costs, which are mainly Rube Goldberg attempts to adjust for the inevitable age of death variation.
4. The fourth point is seemingly unrelated. We have gone off the gold standard, found no substitute. Inflation-targeting worked for a while, then quit working. Someday, economists will explain this, but the leading contestant at the moment is destruction of investing cost by index funds and other computer innovation. That adds five or more percent to investment earnings, triggering a virtuous deflationary cycle, probably more than canceling inflation. You don"t have to understand this to take advantage of it. We had a near-death experience with inflation and escaped by luck. Yes, it will "trickle down", and yes it will hurt some people.
5. For a fifth addition add compound interest, which Aristotle called the "Eighth wonder of the world". It means interest gets bigger with time. 'Way bigger, so it's usually bigger than you expect. By adding one insurance to the end of another, you extend the duration. Since compound interest curves upward at its far end, it's much more effective than you might guess. And it's tax-free until you spend it, so it's a more powerful stimulus to spendable income. Trust funds need useful alternatives, and HSA with Congressional sanction, could provide one, by a flexible extension of the duration of perpetuities over two generations, taking advantage of compound interest rising by increasing its length.
6. Let's be patient and try that first, to see how clever lawyers discover unsuspected loopholes. The American public clearly yearns for universal free medical care of the highest quality. But even if we could afford that, which we probably can't, most of us don't trust politicians to resist public pressure to borrow, then worry about ruinous costs after it's too late to fix them. Hasty legislation always creates loopholes, as Cyprus, Greece, and England discovered in one way, and a sudden cure for cancer or Alzheimers would create in another. It surely requires testing during several Congressional revisions to get it right, long after unmanageable sums slam the exits. Ours is the only Constitution to survive two hundred years, and we still don't entirely understand why it has. Don't change it suddenly.
7. A seventh feature is a warning. A flexible savings account is not a Health Savings Account. Anyone who deliberately tries to confuse the two is potentially a fraud trying to restore lost income. Lots of people have an FSA, believing they have an HSA. Avoid such people, dis-elect anyone of any party who proposes such a substitute, and don"t return to salesmen who propose it.
There's more, but these seven points are enough.
Last Year of life insurance is life insurance, paid after the death of the subscriber. Proceeds are paid to a health insurance company, reimbursing medical expenses incurred during the final year of the subscriber's life. The ultimate effect is either to reduce the premiums of health insurance or permit an expansion of its benefits.
The overall cost of health insurance is not changed by changing the form of premium collection. Indeed another layer of administration is required. What purpose can it serve to pay part of your premium to company A rather than company B? There are five answers.
1. Non-Randomly Distributed Risks. Non-random disease like AIDS is destructive to the system of employer-based health insurance. It is obvious that HIV infection is overrepresented in the entertainment and design industries, and overrepresented in New York City, San Francisco, and urban centers generally. Serval HMOs have been destroyed by a succession of AIDs cases, and all insurance companies are considering ways to avoid adverse risk selection inherent in a certain business, to limit coverage of the condition within the benefits package, or to withdraw from business in high-risk areas. These are understandable but undesirable trends; far better to submerge AIDS among other fatal illnesses, since almost all fatal illnesses are characteristically expensive, and no one can escape having one.
2. Catastrophic Coverage. To define a form of catastrophic health insurance which largely excludes chronic and custodial costs. (Prior to 1987, it might have been considered a disadvantage to create a separation of expensive acute diseases from chronic ones. However, experience with the Bowen catastrophic health proposal showed that political pressure groups will put custodial care reimbursement ahead of acute illness if the two are combined. Experience in England is similar.)
3. Insurability. To create a reasonably inexpensive way for people to guarantee their fatal-illness insurability during the twenty or more years before stable permanent employment achieves for them the informal guarantees of employer-based health insurance.
4. Continuity of Coverage. To create inexpensive, portable, and possibly paid-up insurance against a major portion of the risk of getting severely ill during a period of temporary unemployment. And to reduce the reluctance of new employers, who are not in a position to evaluate health problems, to hire them. Further, to segregate from lesser health matters that portion of post-employment health costs which an employer might. be willing to obligate himself to cover on the grounds that the illness began during the period of employment.
5. Pre-Funding. By isolated underwriting of a fatal illness, to begin the process of converting a pay-as-you-go health insurance system into a pre-funded one. It is possible this can only be achieved step-by-step. In any event, successful implementation of an important component would advance general understanding of the value of pre-funding.
As far as the mechanism of implementation is concerned, the concept of last-year-of life insurance involves a treaty between two parties: life insurance which pays retrospectively, and the health insurance or other agency which pays at the time of service. Life insurance can be either private or employer-paid, but if employer-paid must be term insurance to constitute a business expense in the eyes of the Internal Revenue Service. The Association could usefully work for a relaxation of this requirement since it would be revenue-neutral for the government to permit a portion of health insurance premiums which are presently tax-exempted to be applied to this purpose.
Probably the easiest illustration of the principle would be for an individual who had ample life insurance to direct that a portion of benefits be set aside for the purpose, something which every subscriber has a right to do. A standard clause might evolve to the effect that all expenses which any health insurance company had incurred in the last year of the subscriber's life would be reimbursed, provided the health insurance company could demonstrate it had reduced its premiums appropriately in recognition of this forthcoming reimbursement. This example is only a preliminary version of what is needed, however. It might serve as a transitional tool, but most individuals would be uncomfortable about the unpredictable impact on their life insurance. Many people are overinsured, but few of them feel they need no insurance. Many people are overinsured, but few of them feel they need no insurance at all. Dr. Crandall's suggestion of designating a specified portion of life insurance to cover the deductible portion of very high-deductible health insurance )ie excess major medical) is superior in approach and should be urged by the Association.
For the last-year approach to be successful, it requires the additional step pf actuarially examining costs and determining both the risk and the appropriate health insurance premium reduction. Health insurance companies would have to compete with each other in offering such a service benefit, and subscribers would have to feel the proposal was an attractive one. Obviously, Medicare is the main health insurance third party, whose cooperation would make or break the idea. Since Medicare Part B pays itself 75% of its own true premium costs, Medicare ought to be very interested in anything which might reduce premiums.
For Medicare, therefore, the issue reduces itself to exploring what incentives HCFA could offer the public in return for being allowed to shift fatal-illness costs to other funding sources. By all odds, the most popular inducement would be the provision of nursing-home costs, which the debate on catastrophic health insurance clearly demonstrated was beyond the government's current means. Negotiation goes two ways: if Medicare wants to get out of fatal-illness costs, let them offer nursing-home benefits instead. Conversely, if the public wants nursing home coverage, they must begin to contribute toward it when they are young enough to have the compound interest at work for a very long time. To the five points made at the beginning of this paper, is now added a sixth, the trade-off between dying young and living too long. Both are tragedies, but nobody suffers both of them. Unless Medicare is abolished, it is the only mechanism available for combining the two risks into one funding mechanism. If the final individual choice is reserved to age 65, even prudent suspiciousness of the profligacy of sovereign of states might be mitigated somewhat.
The proposal would be that at age 65, the individual choose whether he wishes to commit his last-year life insurance to acquire a nursing-home benefit, or whether he prefers to leave it to his estate.
Most of the advantages of last-year insurance, such as permanent insurability, portability and the ability to exchange a tangible insurance asset for some other coverage, are dependent on having last-year insurance assume the form of prefunded cash value life insurance. Unfortunately, such insurance would have to be privately purchased under present federal tax laws, because life insurance may currently only be treated as a business expense if it is term insurance. (Self-employed persons, of course, already purchase health insurance with after-tax dollars, and would have no tax disincentive to substitute cash value life insurance for health insurance.)
One useful feature would nevertheless persist even using term insurance: the submerging of AIDS into a general risk class of fatal illnesses. Except in a few industries or cities, the epidemic is not yet of sufficient extent to justify radical rearrangement of insurance. The epidemic could spread significantly into the heterosexual, non-drug addicted, community. At pandemic extremes, even spread-the-risk approaches might fail to prevent a collapse of the insurance mechanism. However, assuming the disease stabilized within a manageable corridor of prevalence, it might be possible to hold the insurance mechanism intact through the principle of shifting HIV risk from individual employer groups to a far larger pool; and last-year-of-life coverage is suggested as a possible option.
IN SUMMARY, the Association is urged to study last-year life insurance, including some estimation of the difficulties and political opposition which it might encounter. It is not necessary to advocate this idea actively at the present time, but merely to make certain we could live with its ramifications as an alternative held in reserve.
The contingencies which might require its advocacy are threatened of the destruction of health insurers by AIDS, or a political approach to imposed restriction of the health system.
Dr. Donald Crandall, Chairman
Council of Medical Services
American Medical Association
Chicago, Illinois 60610
Thanks so much for the courteous reception which you and the Council gave to me on Sunday. Let me summarize my recollection of the conversation:
The last year of life concept includes almost any system of reimbursing health costs through the life insurance mechanism. As the idea takes shape in response to audience reaction, it now has three configurations. 1) The use of existing employer group term life insurance as a mechanism for community rating AIDS or similar industry-specific health conditions, which would otherwise be disruptive to health insurers. 2) The use of cash-value life insurance as a first step introducing pre-funding to health insurance, and making it portable between employers. To do this through employers might require liberalization of the tax code, a project which Metropolitan is surprisingly optimistic about achieving. 3) The trade-off insurance benefits with Medicare in return for a long-term care concession.
The six main information gaps which I can identify are:
1. What has the average terminal illness cost? Does it vary significantly by age group?
2. What proportion of deaths is over and under age 65? Over and under age 18, where they begin to relate to employer groups?
3. Is it possible that fatal-illness costs are inflating at a rate significantly different from other healthcare costs?
4. How completely do 365 days include the majority of terminal illness costs? Would some other time period be superior?
5. What are the legal impediments?
6. What are the political impediments which become predictable when you see that the proposal creates a disadvantage for some interested group? How can the proposal be restructured to minimize such resistance?
As you requested, I will work up some proposals for a simplified notification procedure between the life health carriers which includes some safeguards against double-counting and double-dealing.
George Ross Fisher, M.D.
For advice and support about the thrust of this much-revised book, I owe new debts to the many people who read the first versions and commented. The first book was written as ideas developed in my mind, and rather in a hurry. The second revision was written so later thoughts might be introduced earlier in the argument. This one was written and rewritten to rise above the twin possibilities that either, the Affordable Care Act would be completely repealed, or it would essentially survive forever. I still don't know its future, whether it is too big to fail, or too big to survive. Either way, I think it failed to reform some things which should be reformed. The best way to defend that position is to propose an alternative which is much simpler, but more radical.
In particular, I am eternally grateful to John McClaughry for his help in the basic formulation of Health Savings Accounts, to my son George for his extraordinary computer skills and his Wall Street insights, to my book designer Elaine Lanmon, to my entire family for its support even when they were initially dubious, and to my secretary Torie Affrunti, who relieved me in the endless drudgeries of producing a book. ----------------------------------------------------------------------
REFERENCE COMMITTEE A
When the idea of Last-Year insurance was presented to the AMA in December 1987, someone got to the microphone before I could. The AMA system is to publish meeting agendas in an advanced handbook. The subject had therefore been announced with a few spare sentences leading up to a proposal that the Association should look into the matter.
Whether the proposal was really unclear or whether a comedian just jumped at an opening, the subject was introduced with a mocking story. There was a little town outside Philadelphia, it seems, which used to have an ordinance about its fire hydrants. All hydrants were required to be inspected, one week before each fire. To follow that jibe with a description of insurance technicalities isn't the easiest position to in, but somehow the reference committee subsequently found the generosity to endorse the study.
Last year of life insurance is life insurance, paid after the death of the subscriber. The death benefit is paid to a health insurance company, reimbursement medical expenses incurred during the final year of the subscriber's life. The ultimate effect and the intention is to reduce the premiums of health insurance.
Since there can be no free lunch, it is clear this proposal will not reduce the cost of medicare care. The overall total cost of health insurance, therefore, is not changed by changing the form of premium collection. Indeed another layer of administration is required. What difference can it make whether you pay part of your premium to company A or company B? There are five answers.
Pre-Funding. As emphasized in the first section of this book, there is a great need to change our national system of health insurance from a pay-as-you-go system to a prefunded one. Such a radical shift in philosophy could be quite disruptive, so transitional steps are needed. each age group has a different point of view about pay-as-you-go. Young subscribers since their premiums are higher than their risks. Older subscribers feel thirty years of paying premiums creates a moral obligation for health insurance to carry them through their time of heaviest expenses. Consequently, established dominant health insurers have legitimate anxiety about new companies skimming off their healthy subscribers, leaving them with the sick ones and thus triggering an insupportable upward spiral of premiums and dropouts. The problem is to prevent this disaster for the private sector without precipitating it by changes which frighten away healthy subscribers. The problem is to fix the engine with the motor running.
Therefore, the initial reaction that last year insurance constitutes fragmentation is unfair; the segmentation is intentional, aimed at providing a gradual shift toward pre-funded health insurance in one area where it may be achievable. Ina segmented system, reducing the premium for a reduced unfunded component of health insurance means fewer remains at stake when you try to reduce the unfunded problem still further. Subscribers and insurers have more temptation but less latitude for gaming a system with fatal illness largely removed. When a greater proportion of claims represent randomized unpredictable acute illness or accidental injuries, the troublesome non-random risks are easier to see. The main difficulty is obstetrics, where family planning makes the insurance mechanism highly unstable; further ideas relating to obstetrics need to be developed and would be easier to develop if isolated underwriting of fatal illness proves a success.
Catastrophic Health Coverage. When Secretary of HHS Otis Bowen opened up the subject of catastrophic health insurance, he was probably as jolted as other physicians to watch the way this popular idea was instantly redefined. Once it became clear that catastrophic health coverage was a legislative slam-dunk, attempts were made to include domiciliary care of the aged, chronic illness of all sorts, mental retardation, and many other things which were expensive hence a catastrophe if you had to pay for them. Any hope Medicare could be restructured to pay for expensive illness first, paying for minor illness only if money was left over, went up in the smoke of special interest lobbying and revived hope among liberals of extending Medicare into a national health scheme.
This appalling example of what is out there on the other side of the gates, should at least remind serious students of health financing to use highly technical definitions when they make a proposal. There is, of course, plenty of room to argue that terminal care life insurance should cover expenses two years before death, or conversely that it should only cover two months. You can change the calendar definition of the coverage almost at will, and yet still intelligibly call it last-year insurance. The intent is clearly to cover the characteristically high costs of dying under medical supervision, as contrasted with saving lives with medical miracles, or nursing chronic invalids. if such coverage should pay for sunglasses, facelifts, or porcelain teeth, it would clearly be unintentional. Terminal care of fatal illness.
With the mechanism largely impervious to deliberate redefinition, and largely immune to manipulation for profit, isolation of the ethical issues of terminal care becomes a possibility. The cost of the problem gets held up for regular consideration, as premiums for the coverage get revised. Public attitudes about whether an extreme medical function is desirable would surely be reflected in the choices actually made between different coverage options. At different ages, one might feel a desperation to have every possible chance of survival, yet might later wish to be left to die in peace. Lawyers may argue about the legitimacy of living wills, but few would dispute that someone who spent his last-year insurance on something else, had made an important statement about his wishes. Deathbed discussions are almost invariably couched in slogans. The same relative, on the same day, may say "Let him die in peace," and then "Where there is life, there is hopes." Such expressions are usually made for the effect they have on the listeners and do not greatly illuminate underlying public attitudes about a serious subject. Observation of how much of their money they are collectively willing to spend is often a better guide to what people truly want that is the expression of opinion by their representatives. On one occasion, I happened to watch a large conf=gressional committee listening attentively to testimony on health insurance when unexpectedly the subject of euthanasia was introduced. Within two minutes, a majority of the congressmen had fled the room.
Pre-Existing Conditions. People change jobs with fair frequency, voluntarily and involuntarily. The tendency of young entrants into the job market is to take part-time or small-time employment in order to gain experience, but then if possible to work their way into permanent employment with a major employer. This progression is seen by them as moving into a better job, one "where the benefits are good."
This system has a sort of hidden equity to it since generous pay and generous benefits are definitely linked with the profitability of the firm. Unions have tended to be strong and aggressive in prosperous companies, while conversely companies in the rust belt losing out to foreign imports have found the industrial unions much more tolerant of givebacks. Fortune 500 companies definitely get a better quality of worker, because they pay up. With many exceptions, the tendency is to work for small struggling companies when you are young, and big prosperous ones when you get good at your work. This unofficial system provides health insurance directly to the working population, while the youngsters just entering the job market mostly don't have health problems. If such a young uninsured person does get suddenly sick, the larger companies may still pick up much of the cost involuntarily, courtesy of the cost-shifting mysteries within hospital accounting systems. Much against their will, the large prosperous companies do partially reinsure the system against risks being run within the pool of young people from whom their future employees will be drawn.
Obviously, such a system is unstable. One of its worst features is that those who develop extremely serious illness before they get into the employer health insurance mainstream, are probably permanently excluded from it. There is no way available to them or their parents to guarantee future insurability for health insurance. As long as health insurance remains so firmly linked to employment in a large firm, it is hard to imagine any solution except through modification of the life insurance mechanism. Even so, if large numbers of people are to be encouraged to protect their insurability for health insurance, some way must be found for them to get their investment back, once the huge majority of them eventually do acquire employer-paid health insurance. We will return to this issue in the next chapter.
If the average person lives to be 80, and that's almost true, only forty years of that time are spent in the workforce where employer-based group health insurance is the norm. Since this period of time includes the coverage of dependents children and has potential carry-over to retiree health benefits, it is critical for the individual worker and his family to lock up his health insurance protection. The most frightening aspect of sickness among active workers is the possibility they may not be able to get health insurance when they lose their jobs. To be sick and out of a job is to have a "pre-existing condition." Since the pre-existing condition is the one most likely to cause a problem, it is small consolation to be covered for everything else. To have a wife with leukemia or a child with cerebral palsy is a very strong reason not to switch jobs if there is any question of health insurance coverage. While the person who knows the condition exists may have some bargaining power or individual coverage options before he leaves the job. But to develop a serious health condition during a period of unemployment is a truly ominous situation. Insurance contracts do not include exclusions of coverage of pre-existing conditions as legal boilerplate, they really mean to exclude the risk to themselves. In fairness to them, it must be noted they cannot possibly allow people to get sick and apply for insurance. The situation needs some mechanisms for insuring against loss of health insurability, and last-year-of-life insurance might at least serve to reduce the range of potential uninsurability.
Portability. Our system of linking health insurance to the place of employment has the disastrous obverse that if you lose your job, you lose your health insurance. This particular issue periodically gets more attention when a recession in the economy leads to waves of layoffs. Employers of more than??? are required to maintain health insurance for ??? weeks after a layoff. Employees are entitled to continue their employer's group health plan at their own expense for ??? weeks more. However, such arrangements are complicated and unwelcome; it is not clear they are very popular with families who have suffered the bewilderment of losing their income. Last-year-of-life insurance would be as portable at your own expense, while funded life insurance is both portable and permanent as long as the cash values can carry the premium. Perpetual insurance is still better; the cash values have built to the point where the interest they generate is sufficient to pay the premium further contribution.
True, present income tax laws permit only term life insurance to be considered a business expense for an employer. In 1988 the Congress is undoubtedly in no mood for social legislation which increases the national budget deficit, such as by creating a tax shelter for cash-value life insurance. But laws can be changed when Congress wants to change them, and the experience with the catastrophic health insurance shows the public can sometimes whiplash congressional opinion very rapidly. A severe recession would immediately restore Keynesian ideas about budget deficits to fashion. The best present response to legislative defeatism on this subject is to examine the net effect on the deficit of replacing a portion of health insurance premiums with last-year life insurance premiums, transferring tax-deductibility from one to the other. If the two financial effects wash out, permitting last-year health premiums to be treated as business deductions should worry few practical politicians.
Experience-Rated Unfairness: The AIDS Epidemic.If a company had a policy of paying all medical bills of its employees, the cost to the company would vary with the amount of sickness there happened to be. Since self-insurance of this type represents at least half of all health insurance in America, health insurance companies must offer a comparable cost if they are to have any hope of selling insurance. Rather than establish a single premium rate for the community, the usual practice is to offer "experience rating", sometimes also called "merit rating." In an experience-rated group, the premium is adjusted up or down to reflect the cost of the claims actually submitted. From the point of view of the subscribing employer, the cost is the same as it would be to pay the claims directly, and the administrative profit of the insurance company may well be less than the cost of processing the claims in the employer's personnel department. Adjust this cost somewhat to recognize the interest earned or lost on the premiums and claims, and you pretty much have a formula for the dominant American health insurance system. The cost of fatal illnesses, the last year-of-life costs, are thus buried in a system which emphasizes the yearly costs of employers while making little analysis of the individuals who are included in the coverage.
From time to time, reformers have tried to force health insurance companies to charge a uniform community rate to all subscribers, but are immediately confronted with a rush by low-cost employers to drop out of insurance and adopt a self-insuring approach. As long as health insurance is unfunded and carries no future guarantees, it is not easy to convince lucky people they should pay more than they have to, just to lower the premiums of those who have bad luck. An earlier section of this book dealt with the pernicious effect on intergenerational risk-sharing which is exacted by the tax code in return for treating premium costs as business expenses. Many people see the wisdom of paying a higher premium when they are young and healthy so they will not be stranded when they are middle-aged and sick. A fair number of people are willing to pay more for their health insurance if remain healthy than if they happen to get sick. But almost no one wants to pay more for his health insurance when he is well while relying on the unenforceable voluntary generosity of future generations for support if he gets sick himself. Everyone distrusts the possibility that future generations might go self-insured and leave the present generation hanging out to dry.
Experience-rated health insurance, therefore, is an evil for which there are few obvious remedies. Since employment groups delimit final boundaries, experience-rating is inherent in basing health insurance on the employer. Last-year-of-life insurance contains the potential for the major cost risk of fatal illness to escape voluntarily from that employer-based partition. There is no way to know how much-hidden age, sex, race, or other discrimination there is in job recruitment, and certainly no. way to know how much the potential health costs are weighted in the equation. NOr is there any way to know how much American Business are unsuccessful with foreign competition because of these immeasurable issues is dramatically illustrated by the current epidemic of a contagious venereal virus, HIV...
AIDS is invariably fatal, its complications are expensive to manage, and it is relatively easy to surmise who is likely to catch it. This combination of features creates strong incentives for insurance companies to exclude the condition from coverage, or exclude high-risk groups from the subscriber base. Since the average cost of treating a single case is???, several HMOs have been driven out of business by having a run of cases of AIDS. From an insurance viewpoint, the most treacherous feature of AIDS is that the distribution of cases is not random throughout the population. If even a financially strong insurer is careless or altruistic about accepting high-risk groups, it's premium structure may rapidly become overpriced by comparison with competitors who somehow did not have so many cases. To be perfectly frank, homosexuals are overrepresented in the entertainment, fashion, and advertising industries, as well as the art world in general. It is almost impossible to imagine such industries maintaining an employment-based health insurance system in the future except if they somehow exclude paying for the risk of AIDS. If the epidemic spreads, and particularly if legislatures seek to prevent the exclusion of certain industries, then cities like San Francisco may simply not have any health HMOs or states like New York may not have any health insurance. Whether the exclusion is applied to people with positive blood tests, or to unmarried males, or to the entertainment industry, to cities or to whole states, insurers will find a way to protect their own solvency. If not, the whole country will be without health insurance until a cure is found.
Consider now the advantages of last-year-of-life health insurance for coping with this problem. Since AIDS is invariably fatal, it has the grisly advantage that no one is going to recover from the condition, only to contract a second expensive fatal illness later. Everybody else who doesn't get AIDS is also going to have a last year of life, and for the majority, it will be an expensive year. Medicare finds that ??% of its claims over the last 60 days of someone's life. Because the AIDS victims are young they have fewer years for compound interest to reduce premium costs, but having said that it remains true the population-wide risk of fatality at a young age is very small. Community premiums could double or triple without discouraging potential subscribers who have the cost of terminal cancer in mind. Actuarial costs of last-year insurance for the whole population can be calculated much more accurately than any individual can guess his own risk. Risk-avoidance strategies might somehow evolve, but with so little annual mortality in employer groups, yearly experience-rating could not be their mechanism.
Catherine S. Smith
Vice President, Development and Public Affairs
224 Second Street SE
Washington DC 20003
Dear Ms. Smith,
Re: The Medical Marketplace: Incentives vs. Controls
I was flattered by your recent request, thrilled with the prospect of a Cato book on the subject, and yet dismayed to discover a hostile undertone to the AMA in the outline. Perhaps I can do something to head off an unfortunate confusion in the minds of the authors as to who are their friends and who are their enemies.
Let me identify myself. I Am a member of the House of Delegates of the AMA, Chairman of the Philadelphia Delegation, and a candidate for election to the AMA Council on Medical Service. I doubt very much if anyone else at the AMA currently has more influence over the thought processes of the present-day AMA about the particular subject material of the forthcoming book. At the same time, I am a loyal subscriber, contributor, member or whatnot of the Cato Institute; I read its publications eagerly, attend its meetings when I can, and endorse its philosophy as completely as anyone could without losing his self-respect.
Furthermore, I labor under the impression that the concept of the IRA for Health was suggested by John McClaughry in anticipation of a dinner for the White House staff, was fleshed out into its present form by me after that dinner speech which Bill Niskanen attended. Quite possibly others thought of it independently or even earlier, it doesn't really matter. It is more important to understand that the AMA has embraced the concept as an official policy has spent a lot of money on actuarial work, and is trying its best to get the idea promoted in Congress. The Cato and the AMA would make a great team to put the idea over the goal line. At the same time, I know how touchy the AMA is about criticism, and I hope you can do something to prevent a collision between what ought to be two firm allies.
I am referring in particular to what I fear is behind the reference to the AMA as a quasi-monopoly, attributing to it the creation of cost-plus reimbursement. If I understand this allusion correctly, the authors are unaware of the considerable effort and expenditure of the AMA to get rid of hospital cost-reimbursement in 1983, and its violent efforts to server physician reimbursement from the hospitals' cost-plus system in the 1965 construction of the two forms of Medicare. The voluminous reports of the Health Policy Agenda, and the Cost Containment Commission both of them AMA sponsored and funded document the strenuous efforts of the AMA to substitute market mechanisms for the insurance-driven non-market reimbursement environment of the health industry. It is perfectly true that each action in this evolution of AMA policy has been opposed a debated by individual delegates with either non-market ideologies or self-serving motives. Please notice, however, that these free agents within a system of free speech and adversary debate did not win the important votes on the subject, and their views are not AMA policy.
The foregoing paragraphs were written from the viewpoint of trying to get Congress to adopt a policy which is congenial to the mainstream views of both the Cato and the AMA; let me turn to some ideas about developing a better historical analysis of some of these issues, which my position perhaps helps me suggest.
In the first place, I think it would help us understand the best limits of free trade within the medical industry to go back to the 19th Century when the AMA created the system of medical licensure, and successfully piloted it through the various legislatures. Please remember that as recently as 1900 the AMA only constituted 7% of American physicians, and was then a small group of lonesome idealists, trying thought processes went along the lines of what improved the medical profession improved the health of the citizenry, and vice versa. Notice, however, the difference between what they meant by being Good for General Motors. The AMA wanted to limit the license to those most qualified to have it, and the Flexner Report of 1914 extended the idea to medical schools. I think it would be very interesting to trace the effect of these actions on physicians income, at the same time that some sort of effort was made to quantify the improved health of the country which might be attributable to the monopoly thereby created. I have the impression that the economic benefits of the effort lagged the health benefits considerably, and in fact, I have the impression that the generation who created the license/ monopoly (citizens as well as doctors) did not live to extract ay great personal benefit from it. Perhaps some scholarly analysis could shake my conviction, but I have the impression that the creators of the system knew very well that it wouldn't do them much good they rightly thought their efforts were for posterity. Perhaps Peter Ferrara is entitled to reply that the creators of Social Security had their main effect on posterity, too, but I don't believe they saw it that way at the time, while the doctors did.
So maybe license was an idealistic idea gone wrong, but I doubt if it is fair to characterize it as a conspiracy to raise prices, no matter what Adam Smith said. But even that theory might be defended as being in the public interest look at what has happened to education as we impoverish the teachers.
The second interesting part of the medical marketplace story is a legal one, and I hope the authors have the legal background to explore the implementation of Milton Friedman's ideas about the medial monopoly by the Justice Department antitrust division, and possibly also the Federal Trade Commission, but mostly the Justice Department. I have the impression that those young idealists over at Justice have carried plausible manipulation of language to level of abstraction which is going to be unintendedly destructive of some other treasured societal values; and that the incumbents of the legislative branch are not going to have the wit to move quickly enough to keep related systems out of trouble. It troubles me that the AMA is examining this matter purely as a problem of legal reasoning, rather than asking whether the legal arguments can reasonably be followed to their limit without first building bomb shelters for the bystanders.
I think what I mean is that it seems a useful thing for doctors to reprimand a colleague who charges too much or urge their colleagues to reduce fees for poor the antitrust statutes were really not designed to prevent it. And it seems a good thing to urge that medical prices bear some relation to costs, in order to minimize distortions of the provision of care. ANd it seems a good thing to allow enough slack in the system to permit cost-shifts which provide care to the poor which they otherwise might not get. Temporarily, perhaps, and only until a better solution is found. But what I am saying is that the Justice Department appears to me to be attempting something which only Congress should be allowed to address in the Constitution, well, the hell with the constitution or the laws of the Medes and the Persians, or whatever other items of worship the lawyers may produce. It seems to me that the issue is not that the courts are writing legislation, but that the legal profession as a whole cannot restrain itself from that activity. I certainly hope the Cato will not endorse any short-cuts around achieving public permission to enhance the public interest.
Well, this letter has turned out longer than I intended it to be, and I hope my main feeling, which is one of enthusiasm for the book, has not been smothered. I would be happy to meet with the authors or comment on the manuscript, in the spirit of trying to avoid those minor errors of fact, upon which their debating antagonists are so likely to focus.
George Ross Fisher, M.D.
Gordon K. MacLeod, M.D., Chairman
Ad Hoc Committee on Long Range Strategy
Pennsylvania Medical Society
20 Erford Road
Lemoyne, PA 17043
December 15, 1984
Re: Some Proposals for PMS to Use Money as a Measure
Ludwig von Mises, the Austrian economist, won a Nobel Prize for drawing the world's attention to the information value of prices in a market economy. Since a capitalist society measures most things by money, you can learn a great deal about how society values a person, system or product by how much society is willing to pay for him or it. Herein was an academic formulation of the old Calvinist doctrine that if you were rich, it was probably a sign you were beloved by the Almighty. For von Mises, the important issue was not theological, but political, since he maintained socialist economies function badly mostly because they fix prices by a committee and thus deprive themselves of the information system of the "bottom line".
Well, non-profit corporations like the Pennsylvania Medical Society also deprive themselves of the information content of prices and profits, although I here maintain that it is undesirable to do so, that it is feasible to do otherwise, and that our committee ought to try to get the Society to use money as a measure where it can. I intend to use the AMA as an example because it is readily visible to us. The AMA can afford to spend large amounts on management consultants who suggest systems which become entrenched because they work, even though the users of the systems may well not understand them. that sort of entrenchment by effectiveness, too, ought to be one of our goals.
When organizations get to be a hundred years old, they acquire a number of functions which do not readily fit into a crisp mission statement. In the case of the Pennsylvania Medical Society, we have some activities which are typically for-profit businesses, even though the organization as a whole declares itself to be non-profit (hence, tax-exempt) corporation, dedicated to carrying out a number of public- service missions. The most obvious for-profit activity is the operation of the endowment portfolio, which differs in no major wat from the operation of a mutual fund or any other investment activity. In addition, we are in the rental real estate business, the speculation in raw land of our headquarters, the malpractice insurance business, the magazine publishing business, and probably a number of-of other actives which I have not had time to ferret out. Activities of this sort always are applauded as a way of reducing dues (speaking to the members) and of expanding the scope of our benevolent activities (when speaking to the governmental authorities who would like to tax us.) Because of the discomfort of scrutiny by the tax collector, there is always a tendency to conceal or at least blur the discussion of such activities, and out of that tendency may grow slackness of management (as in the case of Blasingame) or unwarranted domination of the organization (as in the case of Fishbein). These two potential evils will cost the Society much more than it could ever pay in taxes, and therefore I make my first proposal:
1. All profit centers of the society should be measured by their return on fair-market equity. It is sometimes described as "conservative" accounting to maintain stocks, bonds and real estate on the books at the purchase price of twenty years earlier; it is no such thing as conservative, it is deceptive.
2. To the maximum feasible degree, activities which should have a major goal of producing profit should be separated from the purely benevolent activities in a special accounting system. To the extent feasible, such activities should become for-profit corporations, the stock of which is contained in the Society's investment portfolio, and whose return on equity is evaluated in conventional terms.. No doubt the Society now maintains its books in other ways for other reasons, and it is not here proposed that the present books need be discontinued for whatever audience reads them. Rather, it is proposed that the membership and the leadership need a new reporting methodology for their purposes. The concept being urged is that our return on pure endowment investments can now be readily compared with the results of other professional investments can now be readily compared with the results of other professional investors, and therefore becomes our gold standard. To the extent that Pennsylvania Medicine, for example, falls short of the return on equity which our portfolio managers can produce with non-medical investment,Pennsylvania Medicineis being subsidized. The amount of that subsidy can be carried over to the benevolent side of the ledger as a cost to the membership dues. At the present time, I believe, only absolute losses are being carried over, and such a system, therefore, does not measure the "opportunity" cost. Because it is desirable to structure returns to take full advantage of the Society's tax-exempt status, determining the "total return" on such investments will depend on our ability to produce accurate estimates of the underlying market value of our subordinate business. Since that goal is to produce estimates of the degree of subsidy from the dues, ranges of estimates would be sufficiently serviceable for the oversight and decision-making function. For example, it should be possible to form a rough estimate of how much the Society Could realize from selling the malpractice insurance company to a commercial carrier, and from this to decide the order of magnitude of the subsidy from dues. It seems possible that the total investment return which we presently realize is much less than we could realize from selling out and investing in the Dow Jones Average. Conversely, it is equally possible that the invisible total return on a growing asset is more than we could realize from any alternative investment. The point is we do own a substantial piece of property and yet have not made such an appraisal, against which subsequently would have to be argued its merits in a non-financial sense, of course.
Turning to the non-profit, or service, side of PMS, we could do worse than to emulate the AMA system. They divide their activities into "missions" and report how much they have spent on political representation, education, member services, etc. If PMS employed the same format, we could at least compare our expense allocations with those of the AMA. Presumably, we spend a much smaller proportion of our money on publications and scientific information than the AMA does, and proportionately more on other things, but it might be illuminating to compare the "pie-chart" of our expenses with their pie-chart, utilizing the same scheme of mission definitions. Other state societies may have thought of the same idea, and we might compare ourselves with other states. Ultimately, of course, we hope to compare our expenditures on each mission with our accomplishments in each mission; the result is a cost/benefit ratio. Within each mission there are projects, and projects have cost/benefit ratios, too. Ultimately, we can put a price on small services. How much does it cost PMS to write a letter? To answer the average member request for information? To process a new member? To hold the annual meeting? To publish one issue of Pennsylvania Medicine?
It might carelessly be said that we already have a good estimate of such costs, but I believe it is not possible to know your costs unless you have constructed a matrix in which every penny you spend is included, and every benefit you produce is defined. If every cost must be allocated somewhere, you find that you have to do something with the cost of unsuccessfully lobbying to have a bill passed. Its cost may well have to be added to the visible cost of successfully lobbying a bill through the legislature, on the win-some, lose-some philosophy. Some credit must be assigned to preventing some unwelcome bill from passing, and some indirect overhead cost must be developed for the general purpose of making the legitimate like us a little more or dislike us a little less. This cost is legitimate, and it must ultimately be added to the true cost of our occasional successes since they are all part of the same process.
There is a dark side, too; since no one likes criticism. perhaps it is costing too much to answer member letters either we find a way to do it more cheaply, or we stop answering letters, or we stop complaining about the cost. Management should always have the first crack at such problems, but ultimately such cost/benefit analyses are the proper concern of the Board of Trustees. The Board must decide whether to seek efficiencies, to drop a program, or to stop complaining about its costliness. The line-item sort of budget and financial summary is probably not terribly useful to the Board, although it is useful to management, and it is essential to prepare it for tax purposes and for financial audit. But there is a question whether the Board would ever even look at a line-item budget if it had a budget by function with which it was pleased.
I guess what I am proposing come down to an elaborate computer spreadsheet program, with all expenses recorded at least three times:
1. By function, as locally defined in response to Board request.
2. By function, as defined at the AMA (for comparability).
3. Byline item, as needed for management, audit, and tax purposes.
Furthermore, I do not see how the overlapping functions, particularly of the higher levels of management, can be allocated without the use of a "lawyer's time-sheet". From my experience with other organizations, I know that employees rebel at such things, since they fear the worst motivations are at work. Therefore, the time-sheet idea (for which inexpensive computer software is readily available for use by lawyers) is only feasible if it starts at the top, and each layer of management is able to assure its juniors that they themselves "have tried it and it isn't so bad".
Let me try to summarize. Where we are engaged in remunerative activities, the profit yield should be compared with the yield on similar resources in our investment portfolio; the investment yield should be compared with the yield of professional investors.
Where we are engaged in service, we develop cost/benefit ratios, making certain that we divide 100% of our costs by 100% of our benefits. Missions, goals, projects, and activities can be defined in many different ways; such redefinitions are legitimate only if they adhere to the 100%rule.
Out of these two measurement schemes, one for bottom-line profits, and one for service functions can come to a heightened appreciation of where we are and where we are going. The Board needs to know this, management needs to know it, and ultimately, the membership needs to know it.
George Ross Fisher, M.D>
Before we get too deep into slicing average lives into average medical partitions, the reader should remember there is another way of viewing health care. Declaring we simply can't pay for everything because there are limited resources, we imply we agree on life's priorities when we really don't.
If this were a contest on TV, no two people might rank priorities the same way. But physicians would come closer. Reflecting common professional experience, most of them would give a special place to the first two years of life, and the last two. Health care costs concentrate there, and special reverence is paid to the patients. The rest of life has long quiet periods, but just about everyone is seeing or trying to see a doctor, during their first two and last two years. If we really must ration care, these are the years to be spared. These are the four years of maximum helplessness. We must keep it in mind. Special consideration is in order.
By the time of the Bretton Woods conference in 1945. even a hybrid precious metal standard had to be abandoned as too inflexible. President Nixon closed the "gold window" and Lyndon Johnson closed the "silver window". The virtual standard of inflation monitoring seemed to work for three decades, but the refinement of the Phillips Curve seems to be tottering us into a situation which may not be manageable. What now?
There was a hidden side to Bob. He had first run a jewelry shop in Kansas, where he incorporated a drug store. After a time, he went to Optometry School in Chicago, earning his way running a parking garage. He became highly dissatisfied with Optometry and went to Medical School, then took an Opthalmology residency, where he earned his tuition by testifying in court about shady practices of optometry. One of his most famous private pronouncements was that it required more skill to be a jeweler than an optometrist.
When he was elected President of the American College of Ophthalmology, seven thousand colleagues were in attendance. The former parking attendant left his considerable estate to the University of Kansas.
Last year of life insurance is life insurance, retrospectively paid after the death of the subscribers to his health insurance company. Although theoretically reimbursement could be made for actual individual expenditures, it is a more powerful idea to reimburse in the amount of the calculated average last-year costs of the community. It could loosely be said this approach constitutes 100% reinsurance of a selected peril, in order to suggest possible variations, such as 105% reinsurance (to transfer administration costs), 80% reinsurance (to encourage case management ), etc.
The last-year-of-life concept should be regarded as a tool for coping with certain problems inherent in the system of basing health insurance on employer groups. Employer-related health insurance is tax-favored, reduces marketing costs, and almost eliminates risk to the insurers; it is far easier to modify such a system than to reform it. However:
Non-random perils like AIDS may cause insurers to withdraw from ensuring particular companies or even whole industries.
Employees who retire early for reasons of health may find themselves unable to obtain health insurance after the COBRA protection period.
There is presently no method available for young people to guarantee their insurability before they enter permanent employment, or for employees of any age to guarantee their insurability in the event of company insolvency.
The risk of losing insurability is present in every change of employment; job immobility is created when fear of health insurance problems is on the employee's mind. Early retirement may be rejected for fear of exposure to loss of health coverage between the time of retirement and the onset of Medicare coverage.
Serious dilemmas for corporate funding of post-retirement health benefits have been created by a fear that voluntary pre-funding such obligations may create cash targets for corporate raiders. An employee has no legal rights to the prefunded reserve even though he may have legal claims for the eventual benefit obligations
Consequently, the most conservative present estimate of unfunded post-retirement health insurance obligation is $100 billion, and it may be four times that.
Since last-year-of-life insurance is life insurance, it might be provided as either term insurance or cash-value insurance. Although cash-value insurance has obvious advantages for the problems listed above, it would not enjoy the same tax-sheltering which term insurance would have, and consequently would require legislative relief to be fully effective. However, term insurance might well offer some relief for the AIDS problem.
Insurers are leaving the Washington DC area because of prohibitions against screening for AIDS, and Massachusetts also has a law against testing. The obvious first resort of an insurer is to withdraw from covering companies involved in the arts, design, theater, etc, and this tendency is paralleled by rapidly increasing detox and rehab costs for cocaine abuse, which have led to harsh exclusions for psychiatric care. The point is that employer-based insurance seldom includes a premium provision for risk, and if a particular peril cannot be excluded then a general class of service or a particular sort of employer is excluded as a proxy for it.
In this particular instance, it is proposed that insurers explore the willingness of their group markets to shift coverage of last-year costs from company-specific to community-rated premiums while continuing to be experience-rated for all other perils. If the various trade-offs were favorable, then insurers might be willing to discontinue offering last-year coverage except through the community-rated life insurance route. At present, the experience is probably insufficient to judge whether a market-driven voluntary approach would be effective. In the event, most companies proved willing to adopt the approach but insurers feared non-compliant competitors who saw an opportunity to steal business, then the public-interest need for legislation to protect the health insurance industry from disruption by the AIDS problem would have to be debated. For those who dislike compulsory solutions, it is exasperating to discover that the insurance industry generally prefers to be compelled by law since to move ahead in a cooperative manner is to invite anti-trust action.
In this particular instance, it is proposed that insurers explore the willingness of their group markets to shift coverage of last-year costs from company-specific to community-rated premiums while continuing to be experience-rated for all other perils. If the various trade-offs were favorable, then insurers might be willing to discontinue offering last-year coverage except through the community-rated life insurance route. At present, the experience is probably insufficient to judge whether a market-driven voluntary approach would be effective. In the event, most companies proved willing to adopt the approach but insurers feared non-compliant competitors who saw an opportunity to steal business, then the public-interest need for legislation to protect the health insurance industry from disruption by the AIDS problem would have to be debated. For those who dislike compulsory solutions, it is exasperating to discover that the insurance industry generally prefers to be compelled by law since to move ahead in a cooperative manner is to invite anti-trust action.
The preceding, or "term-insurance" approach has the advantage of gathering useful information about the last-year concept without requiring extra tax sheltering or even the formality of separate policies or insurance subsidiaries. It could be retrospectively tested on paper without much cost or any risk, and it might be held ready as a potentially useful tool for the eventuality of the AIDS epidemic provoking serious disruption of health insurance. However, much more important benefits might grow out of the cash-value life insurance or refunded, approach to last-year-of-life coss. Since last-year expenses come at the end of a 70+ year life expectancy, the opportunity for compound interest to work is at a maximum.
Under this approach, the initiative would lie with life insurers, who would be induced to include a standard beneficiary clause in their policies. That clause would assign the community-average last-year health cost reimbursement to any health insurance company which had assumed those costs and had previously provided the beneficiary with appropriate consideration for making the assignments. (At the moment, the various secondary adjustments between employer, employee, health insurer, and tax collector can be left to the marketplace to work out. If no one makes an adequate offer, the beneficiary simply has some life insurance).
The cost of such insurance might turn out to be fairly modest. Although average last year-of-life health costs might be guessed to approach $20,000 per death, the comparatively low death rate before the age of 65 means that an average life insurance policy of less than $5000 (with proceeds exhausted at 65) could conservatively be guessed to cover that need. After age 65, every person can reasonably expect Medicare to have a last-year obligation. Using a 65 investment assumption, the present value of such policy would be $250 at birth; a 3% assumption would only be $500 and would allow general inflation the economy to be ignored. (The $5000 figure would seem to allow generous room for potential innate health-care cost inflation, inasmuch as last-year coverage does not require any provision for recovery from one formerly-fatal condition only to die later of a second fatal condition, which is the main cause of "innate" health cost inflation.) Presumably, the best protection against future health cost escalation is to purchase more insurance than is thought to be needed, expecting any surplus to flow into the estate. Even taking a conservative view of the health-cost escalation problem, its possible to imagine premium costs of $100 per year during thirty years of working life.
Although the marketplace could be expected to determine how much reduction in health insurance premium would be accorded for the lifting of last-year risks, the main value of this coverage would appear in the case of someone who was uninsurable (? ie unemployable?) without it, or who would have been afraid to switch jobs without it. When individuals sustain periods of loss of income, the possession of this insurance might be regarded as a form of catastrophic health coverage, which for the temporarily unemployed might be an absolute minimum coverage. The reasoning is that this type of coverage can be switched on or off; a treaty of assignment need only be signed if the individual finds it advantageous to use it, and is later revocable at will. The policy, in short, is his not his employer's but can be made to coordinate with employer benefits.
Medicaid programs are rather dubious candidates for this approach but even they might be induced to be more generous with last-year coverage (probably under either a term-insurance or waiver-of-premium approach) than they have typically been with full health insurance, the becaused potential for abuse is eliminated.
Finally, the relationship with Medicare needs to be explored with HCFA. After all, Medicare is the main health insurers of fetal illness costs. Far from ever escaping these costs, Medicare has a major concern that it may also have to assume long-term custodial and nursing home costs. Far from ever escaping these costs, Medicare has a major concern that it may also have to assume long-term custodial and nursing home costs. In this matter, Nature provides a certain trade-off. Dying young and outliving your income are both tragedies, but few people have both of them. There is a need to consider ways of transferring costs between the two largely-exclusive problems. The aggregate community cost of fatal illness after age 65 is much heavier than it is up to age 65; possibly $20,000 average coverage would be necessary. Since compound interest would have longer to operate, however, the premiums or present-value costs would not necessarily be proportionately larger. A premium of $40 (1988 dollars) could be imagined; there is no reason why premiums could not be inflation-adjusted on a yearly basis as an alternative to making overly conservative interest-rate assumptions.
The proposal is to explore with HCFA he attractiveness to them of providing some degree of long-term care coverage in return for surrender to them at age 65 of paid-up life insurance adequate to cover fatal-illness costs.
QUESTION: If the health insurer agrees to lower his premium, and subsequently pays the last year costs for the subscriber, how can he be assured the life insurance will eventually reimburse him?
Since health insurance is mostly in employer groups, covering only expenses n the current year, the health insurer can limit his concern to the current year. The health insurance annually needs a slip of paper guaranteeing payment by a life insurer, in the event of client death. Three main methods are available, each with implications about who owns and controls the process:
One method is to follow the reinsurance model strictly; the employer pays the health insurer, who then pays a life insurer for "reinsurance". In this case, the health insurer controls the process, which is almost invisible to the employer an employee.
Where the employer already has a group life insurance benefit, he might well wish to send the check directly to the life company for a somewhat larger benefit(simultaneously reducing the payments to health insurer). While this approach gives control to the employer, it also gives him the headache of negotiating the premium adjustments.
Both of two foregoing approaches would be administratively very convenient, but neither one provides the employee with portability between employers, bridging of episodic gaps in employment, etc. For the employee to take advantage of portability, carriers other than the company carrier must be utilized. The employer's health carrier would then need yearly slips of paper from a number of life carriers, most easily obtainable as part of the yearly premium billing process for the life insurance. Such a paper would amount to a rebate coupon, issued by the life insurers, honored by the health insurer.
It is essential to keep paperwork simple for an estimated premium of about $100 a year for a term an $400 a year for cash-value life insurance (of course, only$100 of either would be transferred to the health insurer). Consequently, insurance management would want to look into bulk communication: "Dear Health Insurer, Our records show the following clients have exclusively assigned the average last-year health benefit to your company for deaths which might occur during the period between A and B. Yours Truly, Life Insuror"
Because of the problem of differing premium dates, the insurance industry might further wish to agree on a calendar or other standardized year definition for this type of coverage. The administrative issue can be stated in the plainest possible term: the extra administrative cost of this approach is the price of portability.
QUESTION: No underlying health insurance.
Although an individual with cash-value life coverage could borrow against it to pay health costs, terminal or otherwise, the issue has been raised as to how someone would employ the life insurance mechanism if he did not have any underlying health insurance, but did have term life insurance. Alternatives would be:
He could purchase health insurance with a front-end deductible equal to the face value of the life insurance. MONY sells a $25,000 deductible policy for about $200 a year family premium, with a $1,000 top limit. Such a combination would protect for more than just terminal illness, but it would not protect against more than one heavy cost. For what would presumably be a very low extra premium, he would need another reinsurance policy to cover multiple illnesses. Such reinsurance might have two parts: one part to cover the remote possibility of exceeding the deductible more than once, and another part to cover the deductible on what proved to have been a non-fatal illness. This degree of coverage goes considerably beyond the last illness concept and would naturally cost more.
The main problem with this life-insurance-to-pay-off-the-high-deductible approach is that it presumes the beneficiary would pay his bills in cash and contains no way to spread the risk. Therefore, everyone ends up either overinsured or underinsured. A smaller issue is that he would pay full charges without a way to negotiate volume discounts at hospitals. Taken together, this approach would be unnecessarily expensive.
An approach more narrowly related to the cost of terminal illness would be for the life insurer to pay last-year costs, large and small, but only reduce the net death benefit to the estate by the average community terminal illness cost rather than the actual case-by-case expense. Once the average rate had been established, it would become possible to tailor the insurance coverage, leaving a suitable margin for year-to-year inflation and other contingencies.
The degree to which carriers could pool claims data in arriving at the average cost is an anti-trust question; the definition of a covered expense is purely a question of practicality within claims administration. However, differences of opinion about the feasibility of different coverages might make data sharing less practical.
QUESTION: What if there are multiple carriers involved?
On examination, this question relates mainly to carelessness, misunderstanding or incompetence on the part of the subscriber. Even if the individual has multiple life insurance carriers, he would be foolish to execute a last-year beneficiary clause with more than one of them. Consequently, no such clause should be permitted unless it defines the primary carrier for last-year purposes as that carrier with the earliest date of execution of such a clause which is still valid at the time of death.
With regard to multiple health carriers, the life carrier would generally take the position that he is only going to pay so much, and the health carriers can work it out among themselves. The reasonable division of the award would be in proportion to the degree the health insurers had paid out the actual health costs. No doubt there would be instances of multiple health insurance coverages of someone who dropped dead with no medical costs at all. If the reimbursement were on the basis of average community costs, lawyers for the health companies would no doubt exercise their imaginations in court, but the life insurer would be serene, and the situation would soon clarify itself with case law.
It is somewhat more difficult to contend with the possibility that the life insurance clause would authorize payment of actual individual costs, only to discover that the beneficiary had over insured himself with multiple health carriers, without coordination of benefits clauses. The life carrier would thus be in a poor position to know just what the actual payments by the two contending health insurers had been, and how much overlap or legitimacy there was to them. It follows that the subscriber who requests that individual actual reimbursements rather than average community ones be made, must also be required to specify whether he wants all carriers reimbursed, or only the primary, or only the largest, payor. With the life carrier thus immunized, it becomes the responsibility of health carriers not to reduce their premiums or make other concessions to the subscriber in return for a last-year treaty unless the subscriber can satisfy them that their agreement meshes with the life clauses, or that the subscriber agrees to the coordination of benefits.
"Eighty years ago any one of the 'tycoons,' whether in the U.S, Imperial Germany, Edwardian England or in the France of the Third Republic, could and did by himself supply the entire capital needed by a major industry of its country. Today the wealth of America's one thousand richest people, taken together, would barely cover one week of one country's capital needs. The only true 'capitalists' in developed countries today are the wage earners through their pension funds and mutual funds." (Peter F. Drucker, The Wall Street Journal, September 29, 1987.)
In the passage displayed above, a noted authority on the American economy has concisely captured the new dimensions of capitalism in the Twentieth Century, even though his jump in logic can be disputed. It is too soon for the evolution from Nineteenth-Century tycoons into universal capitalism to have affected common parlance; redefinition took place without anyone's planning or prediction. People who describe themselves as workers and employees are slow to develop attitudes and skills appropriate to their new economic power. It is equally uncongenial for those who think of themselves as entrepreneurs and managers to accept "people's capitalism" as the present and growing future of free-enterprise America. Drucker's partitioning of the country into two classes may well be disputed, but he has an insight of some sort which warrants examination. Obsolete class rhetoric will doubtless persist through several more presidential election campaigns.
Two things fit together here. It takes a ton of money to finance a multi-trillion a year economy. It also takes a ton of money to pay for a whole country to retire from work at age 65 and then go on a twenty-year vacation. The new imperative of capitalism is that we somehow must save enough of our collective working income to supply the capital requirements of the economy, which must, in turn, employ such capital efficiently enough to pay for our old age including its inherently heavy medical costs. If we have wars we will have to pay for them too, but the main dividend of our economy does go into a national retirement nest-egg. That's why we work, and that's all we have when we are done working. Stop worrying about quick-rich stories like Mr. Boesky's concerning conspicuous consumption by overpaid yuppies on Wall Street. Forget about the occasional person who takes a year or two off in mid-career to wander around Nepal. Don't however forget to remember the poor, the disadvantaged and the shiftless, because they get old too, and are part of the molten mass. In my view, the national economy can be roughly summarized as a process in which we collectively attempt to have nearly everyone spend his last cent on the day he dies but not a day sooner, living as well as he can in the meantime. Within the scope of this description we thus all become capitalists as we strive to enjoy twenty years without working income after we retire. The only alternative is that we mustn't live so long.
Because broad-based or near-universal capitalism has evolved recently and is not entirely acknowledged, the present system has some large transitional defects. Health insurance, unfunded health insurance, is one of the main defects we will get to in a few pages. A more immediate structural defect is what is that we have not yet evolved an efficient system of aggregating the savings of a nation of little capitalists who are unsophisticated in the ways of Wall Street and want to stay that way. Not only does it cost excessively to hire investment advice, but the voting power of ownership control gets lost in the process.
In the bad old days, when J.P. Morgan and others would buy common voting stock, they bought the company, and the company certainly knew it had been bought. If all of the officers and managers of the bought company weren't soon changed, that was only because they made desperately clear they were ready to take orders about company policy. By contrast, when T. Boone Pickens today buys a similar share of the voting stock of a corporation, the hired hands appear before a congressional committee, or the legislature of Delaware, to get a law passed outlawing the "unfriendly takeover". In Morgan's day, money didn't just talk, it screamed. Today, well, money is in a fight for its life with one-man-one-vote power in the hands of elected representatives. People's capitalism has become a humbled passive investment process, although not necessarily a cheap one, or invariably profitable.
There may be some exceptions, but the middlemen in peoples capitalism have generally declined to grab the voting power which the small stockholder cannot usefully exercise. The people who run what is known as the "Institutions" are custodians of great gobs of other people money in a mutual fund, pension or insurance trusts, and hence hold enormous voting power in the election of corporate directors, officers, and auditors. For some reason institutional investors seldom vote against the management, generally preferring to sell the stock if they are dissatisfied with the way things are going in a portfolio company. Consequently, the entrenched management of major publicly held corporation can do just about as it pleases even following policy disasters. To say this is a flaw in our system is a massive understatement. Things which run by the law of gravity generally tend to go in only one direction. No one wants to see the Japanese pulverize our major corporate jewels, no one wants to see them repeatedly greenmail. Nobody loves a corporate raider.
And still, it is clear the little stockholder cannot and never will aspire to meaningful voting power in a corporation which has millions of shares and thousands of stockholders. (Footnote; When I get those expensively packages proxy cards for my pitiful holdings, I always vote along with management. My theory is it's a good thing to change watch dogs frequently, and my Quixotic vote might hurt somebody's feelings enough to notice the message it sends). The system of governance of very large corporations needs to be reformed by its insiders before consumer activists using one approach, or elected public officials using another, manage to fill the power vacuum to our national disadvantage. They might, for example, reexamine the New York Stock Exchange rule, prohibiting the listing of companies with more than one class of stock. Someone should be asked to evaluate the experience of companies like Ford which evaded the rule, or of those companies which escaped to other exchanges to avoid it.
The directions such reform might take are not the concern of this book; the present focus is on the difficulties which are created for pre-funded health insurance by the fact that corporate voting power materializes whenever major purchases of common stock are made for purely investment purposes. Unpredictable things happen no matter how the stock is voted. If the voting power in the hands of custodians is never exercised, corporate control automatically concentrates in the hands of those whose ownership is relatively minor, whether insiders or outsiders.
One does not have to be a rabid conservative to recognize that government ownership of voting control of a corporation is a form of is w form of nationalization. The Labor party in England nationalized the steel and airline industries, the Socialists in France and India nationalized the banks, Communist doctrines go to the extreme of requiring government ownership of the total "means of production". If we are imaging success in the effort to pre-fund a trillion dollars of health insurance, we have to contemplate the highly undesirable features of potential government control of the voting stock of IBM, American Telephone and Telegraph, Exxon, and Morgan Guaranty Bank. The aggregate worth of all he stock on the New York Exchange is xx xxx. A trillion dollar worth of all the stock implies voting control of quite a bit of corporate America, no matter how sincerely its managers try to avoid it. a resolutely passive investment stance would just make it cheaper for the Japanese to buy control or for that matter the Russians, if they wanted to do it.
This scary line of thought potentially leads to the conclusion that pre-funded health insurance should avoid the purchase of common stock. But that seems bizarre; the historical difference between a 3% return (bonds) and 8% return (stocks) means this voting control issue could condemn health insurance pre-funding to a pitiful fraction of its potential for reducing the costs of an essential social service. It seems imperative to seek ways to improve the long-term return, even if government-controlled pools have to be rejected. True, massive increases in the proportion of non-voting stock confer unwarranted power to the management of the corporations and their potential greenmailers, no matter who runs the passive investment pool. Go one long jump beyond that; they just cannot be permitted.
As a matter of fact, it is impossible to conceive of a permissible investment vehicle for a government-controlled fund, except government bonds. Unfortunately, when you look at what has happened to the Social Security trust funds which are totally invested in government bonds, you find an appalling thing. Buying government bonds isn't too satisfactory, either.
When sums approaching a trillion dollars are involved, even the finances of the United States Government must reckon with the law of supply and demand. If a lot of people want to buy government bonds, they push the price up as long as the supply is limited. Since government bonds are issued to pay for federal debt, increasing the supply of those bonds means increasing the national debt, so we ordinarily don't want to do that either. That is, we don't want the Treasury to issue more bonds just to provide a safe investment vehicle for funded health insurance. On the other hand, by restricting permissible investment to government bonds in huge amounts we cripple the cost reduction of health insurance, since the inevitable result of clamoring to buy bonds will be lower interest rates. Quite aside from the fact that a captive customer gets shabby treatment, it may not be in the national interest to lower interest rates. Since Government bonds are regarded as the safest possible investment, their rate is the floor under all interest rates in the country or even the world. So, lower interest rates are inflationary, even at times when it may be contrary to national policy to stimulate inflation.
What this focus on government bonds has stumbled onto is the mechanism by which modern government attempt to fine-tune the national economy, a process mostly devised by the British economist Maynard Keynes. Based on the premise that no one controls enough money to affect the market price of government bonds, the government sets the price by buying and selling to itself. This particular conflict of interest operates between the Treasury which issues the bonds, and the Federal reserves which buy them. To a certain extent, the Arabs and the Japanese have been rich enough to influence the price of US Bonds, but the largest "external" bond buyer has been the Social Security trust funds. The quasi-external quality of the trust funds is often minimized or exaggerated as it suits some momentary purpose. If more money flows into the funds from tax payments than flows out for pension checks, the trust funds are described as assisting the national deficit. However, if the future indebtedness of the funds is increased more than current revenues are, this debt is regarded as the trust funds' problem and not a matter of national accounts. All this is a cross-generational difference in point of view. My generation can only see it as one big sticky ball of wax. The Federal Reserve's regards it as a major obstacle to their effective use of Keynesian principles. One has to conclude that it would be very unfortunate to add a great big lump of health insurance funding to a government bond problem which will be convulsive enough without it.
In summary, what can we conclude about investing the proceeds of funded health insurance, if we could ever get around to funding it? We see that the creation of a new source of investment capital would be an enormous asset for the national economy, but reckless dumping of huge amounts of cash in any market at all could be disruptive. The purchase of common stock would be considerably more cost-effective than buying bonds, and in the long run, might even be safer. However, equity markets need to consider how to cope with the continuous concentration of voting control of major corporations by default, as a majority of votes would become further locked into passive custodial accounts by funded health insurance. And finally, control of funded health insurance by government agencies poses the same problem of stock voting power which is left to Wall Street to solve, the next chapter tries to consolidate these issues into a general prescription. Remember, Index fund investing is momentum investing. If everyone does it at once, it will pop the bubble.
This chapter can be summarized: it's expensive to pay for things on credit, less costly to pay as you go. But payment in advance is cheapest by far. Fully funded prepayment offers a way to make medical care appreciably cheaper for the consumer without reducing services, charges or fees one bit. No rationing, no corner-cutting. Buy exactly as much, get it cheaper.
To understand what the magic is all about, just review some principles of compound interest which are both agreeable to hear and easy to prove. With some possibly exaggerated examples as beacons, the reader is asked to skip through a short description of the environment of complexity which potentially smothers serious proposals to pay a major share of health costs with internal investment income. A healthy distrust of pat answers is quite appropriate; the simplicity of concept does not assure ease of execution. However, since this is not a textbook for insurance executives, the reading public really only needs to extract a slogan: pre-funded health insurance is cheaper, makes medical care cheaper to buy. Have you got that? Cheaper.
Because unfunded health insurance is so traditional we all have a habit of thinking and saying that health costs to the public and receipts by health providers are the same thing. You obviously get the same total whether you add up everything the country spends on health or total up everything the health industry receives. It would seem equally certain that premiums collected by a solvent health insurance company must always, at a minimum, total up to the company's expenses.
However, that's not quite so. If your hypothetical company receives all its premiums in a lump at the beginning of the year, the company only spends the money gradually over the course of the year to reach zero balance on December 31. Since the company only uses one-twelfth of the money each month, it would put the rest into some form of liquid investment which might pay 8%interest in 1988. The whole melting lump would, therefore, generate a 4% return for the year. Consequently, $1000 in premium would buy $1040 in medical care; or, another way to look at it, $1000 of care could be bought for $960. To jump to the end of the argument, $1000 of care might be bought for $100 if prepaid thirty years in advance. Indeed, if prepaid sixty years in advance it could be bought for $9.62. That's the simple principle in the argument that pre-funded health insurance is potentially much cheaper than pay-as-you-go insurance, leading to the rather plausible proposal that we try to find a way to adopt the pre-funded approach. Mind you, there are lots of nits to pick. The rest of this chapter threads through the forest of insurance obscurities related to this idea. However, when saving of 1% translates into five billion dollars a year in the health field, most people would be willing to accept the contention that no amount of nitpicking will defeat the suspicion that pre-funded health insurance could be lots cheaper than our current "pay-as-you-go" approach.
To brush in another argument with broad strokes, it is fortuitous but ideal that heaviest medical care costs happen to be concentrated toward the end of life. If the appreciable medical cost of being born is considered to be the baby's own expense you can a curve of life medical costs which are J-shaped, heavy at the beginning, quite moderate for the next fifty years, then steeply rising. It is more realistic of course to attribute the cost of obstetrics and pediatrics to the young parents, so the most meaning curve is more U-shaped. In fact, a useful graph only begins with the onset of the earning period at about age twenty, has a twenty-year dip in the middle, then rises again. The vital point is there is a calm period in the middle, then rises again. The vital point is there is a calm period in the middle of the storm, just about where the baby boomers find themselves in 1988. If they pre-fund their health insurance, the boomers can have health care pretty cheaply when they need a lot of it. But if savings get dissipated on ski trips and divorces, that generation will have a dickens of time affording a twenty-year vacation after they retire. Provision for retirement is what will ultimately suffer since our whole social structure is organized around the imperative that access to quality health care is a right. If maybe you disagree with Oscar Ewing's 1950 social priorities it will make little difference, because our system of healthcare insurance is currently organized to make certain the vast majority of Americans can spend a lot of money on their health. My yuppie children assure me it is impossible to persuade their contemporaries to set aside investment money in their thirties to provide for a comfortable retirement. But that seems too grim a view of human nature because during the Great Depression era economists were at wit's end trying to get my parent's generation to stop saving so much money and spend a little. The current economic distortion is not either based on some flaw in human nature, it is a fad. The madness of crowds never lasts long.
A fortuitous parallel quirk of the American health insurance system is that very few policies vary the premium with the age of the subscriber, even though average claim cost obviously follows the U-shaped curve. Particularly in direct-pay policies (i.e. no employer in the middle), premiums are usually level across age groups, and the public is universally accustomed to this averaging of costs. If the yup generation started to demand some portion of their own health costs in late middle age, it is hard to see how the presently subsidized older generation would have many complaints, since relatively few of them had been direct-pay subscribers when they were younger. If you tried to switch to a pre-funded system, some gradual transition could probably be worked out by gradually increasing the share of excess premium which goes to permanent funding instead of subsidy for older subscribers. Balancing the basically political question of moral obligation to an older generation which loses its subsidy, there is an opposite political point helping the younger generation to compromise. The yuppie age group is accustomed to relatively high premiums, and might not rebel at continued high premiums which subsidized their own elderly costs rather than the health costs of their parents' generation.
We might now begin a fly-over of the obstacle course by noting that current insurance practice mostly does not even capture short-term interest on the premium "float". Instead of following our hypothetical example of paying the premium at the beginning of the year and reducing cost by 4%, most corporation benefit offices pay their premiums in monthly installments and thus retain most of the interest for their own use. To go a step further, about half of all employer health benefit is self-insured, which is to say the company pays as claims are submitted and therefore allows no interest generation at all. Whatever interest is generated is mostly at the expense of hospitals and doctors, through intentionally slowing down the payment stream, earning interest at the expense of creditors. The fourth section of this book ("Tangles") examines how this short horizon chiseling actually increases the cost of medical care quite a bit.
Furthermore, as mentioned earlier most state insurance commissioners are hostile to the internal accumulation of reserves in the health insurance industry. To understand what is at work here, it is necessary to know about The Premium Cycle. For reasons presently relevant, all competitive insurance goes through cycles in which premiums are unjustifiably low during lean years followed by fat years in which premiums are too high, subsequently followed by more lean years bordering on bankruptcy. Success in the commercial insurance world (outside of health insurance) mostly depends on being so well capitalized that the company can ride out the bad years and make enough profit in the fat ones to average out the cycle. 1987-88 happened to be lean years for the health insurance industry when it was a weekly experience to read of bankrupt HMO's or forced mergers of Blue plan or withdrawals by insurers from the PPO market. it is therefore almost certain we will soon be shocked to read of horrifying increases in premiums which are proposed by frantic insurance companies, and these shocking increases will be opposed by our hero the Insurance commissioner, friends of the people. Well, it's just the insurance cycle, folks. Reflecting the fact that reserves were not permitted to rise to an adequate level during the preceding fat years, the health insurance industry lives on the edge of oblivion, six years out of eight. The health insurance system is recognized to be unfounded; the unadmitted fact is that it is also under-reserved.
By trumping the misleading and largely untrue idea that the money being spent on employee health benefits is money which belongs to the employers, those employers have embraced a heavy trust obligation. If the health insurance company which the employer hires to administer health claims is under-reserved, surely it is essential that the employer maintains reserves at least to protect against the premium cycle. The argument would be that if they kidnap the interest float, employers then necessarily acquire the obligation to fund the reserves. In fact, employers would not dare to do so even if they perceived the duty. Since the tax laws do not permit them to carry benefit money from one year to the next, they may not sequester such reserves in an untouchable fund. However, to maintain large cash balances in the undesignated corporate treasury is a certain way to invite a corporate raider to start a greenmail operation or an unfriendly take-over. Or, in what amounts to the same thing, it tempts corporate management to raid the company in a leveraged buyout.
Health insurance money could finance other corporate raids, too. Health insurance companies are not a particularly profitable business, and most insurance conglomerates only provide health insurance as a service to customers who buy more profitable products. In the current dip in the insurance cycle, the insurance conglomerates have started to learn the old business lesson that "maintaining a full line of products" is almost always a management blunder. On the other hand, a barely-profitable health insurance company handles huge amounts of cash. If its owner happens to be in the greenmail, or arbitrage, or merger and acquisition business, it can be very handy to own a business which can produce millions of dollars on demand for thirty days. It's better than owning a bank since banks are not allowed to supply cash to their owners.
As soon as an investment gets much past one year, it becomes important to focus on "real" interest investment income. Another jargon phrase would be "net, net", which is net after inflation, net after taxes. For example, 15% interest paid during a 12% national inflation produces only 2% real income. If the income tax of 33% is then paid, only a 2% return that you could spend is left the net, net. Indeed, you had better watch yourself, become if taxed 33% of your 15% income, you may only have a 10% net return which inflation then reduces y 12%. You lost 2% that year.
True enough, but the country begins to fall apart when negative returns are more than temporary occurrences. The historical experience for this century is one of real interest returns averaging about 3%, while conservative long-term investing in stock market equities has yielded an 8% return. No one can predict the future, but these historical real interest rates are used as future assumptions throughout this book. The example given earlier should then be recast to propose that $1000 of medical care would cost $xxxx if prefunded thirty years in advance, or $xxxxx if prefunded sixty years ahead. 8% return is only plausible if the risk of investment in equities is built into the assumption. If these comments effectively deal with concerns about unpredictable interest rates and potential inflation, there remains a concern about technological medical inflation which will be addressed in a later chapter.
Meanwhile, the insurance field with singularities of tax treatment. Health insurance provided by employers uses before-tax money. If you earn ten dollars you might ordinarily have only seven dollars left to spend after taxes, but if its put into employer health insurance, you can spend all ten dollars. If that same process were permitted to occur with pre-funded health insurance, the real interest rate would be a third higher than applies to private after-tax investing. Furthermore, ever since the present income tax was imposed in 1913 Congress has made special provision to allow internally generated investment income to compound within life insurance, untaxed.
It now seems time to stop this digression into insurance minutiae and repeat the message worth carrying away from it: if we could find a feasible way to pre-fund health insurance, we would make health care much easier to afford. There is a second message too, which is at least as important. If we could create a trillion dollar investment fund where none now exists, the invigorating effect on the national economy would be astounding. After all, if someone pays 8% to borrow money he can only keep it up so long as he makes at least 12% in. whatever business he then creates with it. Cheer up, congressmen; he will pay half of the difference back to the Treasury as income tax. And he can only function if his employees pay still more income tax as a result of something else which would be created. Jobs.
An abundance of threatening international situations might unexpectedly lead to a banking collapse, but since every bull market "climbs a wall of worry", it isn't a threat unless it happens. The introduction of a new international currency is either never going to happen, or it is going to be needed without much warning. It's needed in the developing world, but there's a long way to go before it topples banking systems in the developed world. At the moment, nation-wide index funds might make a perfectly satisfactory currency substitute, like the Spanish pieces of eight. Index funds are tested and available in huge amounts and trusted by everyone who talks about them. They are growing fast and may eventually dominate choices unless something even better comes along. If something better comes along, it is hard to see why we couldn't let the market replace them as fast as people want to buy them. In any event, we have tons of gold as an inert reserve. The question is, will they hang around in their present form long enough to be a useful tool? At the moment, bitcoins are the popular rage to make people rich, but most people feel a secret currency is a good way to make people poor.
Of course, no one can answer such a vague question about a vague future for a vague development. But index funds are essentially nothing but bundles of stock certificates which are easy to buy and sell, easy to lock in a vault, and easy to carry. They have real intrinsic value which can change with the economy and whose value can be checked in an instant. If something better comes along, it's hard to see why you couldn't buy it with index funds. It's hard to see why two or more currencies couldn't co-exist, particularly if the co-existence was temporary and brief. It's hard to see why it couldn't be limited to central banks, who support local secondary currencies with instantaneous appraisals of the mark-up premium. On the other hand, it's hard to see why it couldn't be divided into subunits and carried around in everyone's pocket, if that's what is chosen to do. Since we got along with Spanish doubloons for centuries, it can be assumed it will serve the purpose. Since ownership is registered, it's even got one certain improvement: you can lose it or have it stolen, and still have a way of getting a replacement. In a sense, that was Robert Morris' contribution to currency theory: if a wooden boatload of gold sank, it was gone. But if a boatload of gold certificates sank, the underlying gold was still safe at home.
|Charles de Gaulle|
Resistance from those it would put out of work can safely be assumed. Just scratch any regulation, and you will find a lobbyist, usually very well funded. But the hardcore opposition would be from those who see that the currency has real value if you own it legitimately. Its value as a currency is that it is a real value, a piece of the economy, which you can carry with you anywhere. It, therefore, upsets the principle of national boundaries established long ago by the Treaty of Westphalia. If you want to defend this fact, you will say you could buy the country that way, by imagining a horde of "tourists" who open their knapsacks and demand what they bought, which is your economy. Some elderly people may remember the French battleship which Charles de Gaulle sent to New York harbor to demand his gold. It wouldn't take very long for that to be disruptive, as the more recent Irish experiment with lowered tariffs also graphically demonstrated with migrant corporations. Eventually, even the United States had to make itself competitive with the 12.5% tariffs of the Irish Republic. You will find, even though it is denied, that nations with weak economies don't want to be rescued by richer countries, so they will cook their books. Portable ownership of the means of production is not merely portable socialism, it is portable ownership of a corporation which may be indefensible legally, therefore leads to war if you try to exercise the right. So unless simple prevention can be devised, sovereignty is the one thing this money won't buy, even with Brexit. It might someday seem useful to prevent economic sovereignty as well, and for that, we must look to what the European Union devises for its individual component nations since they don't want to adopt the American one. With the exception of the Civil War, we managed to buy our way out of trouble by having rich states support poor ones, since we are all Americans, right? Until we reach the point of industrial states getting along with slave states, it would be better to have national currencies, based on national economies, type unspecified.
|Treaty of Westphalia|
Until someone figures out a solution to that issue, a confederation of national currencies based on index funds is about the best we can offer as a short-term solution. You can gamble on long-term stability, but it's your risk to do so, just as it is today. Short-term is worth something substantial, however. Reducing the cost of trade would almost surely inject several percents of GDP into everybody's economy, net of the cost of doing it. It should be the basis of a bull market, for quite a while.
What we once called investing in the stock market, is now increasingly called "active investing" because of one man, John Bogle. Mr. Bogle, a main-line Philadelphian, invented index investing (now renamed "passive" investing) as a competitor to "stock-picking", now to be called "active" investing. It's made possible by high-speed computers. What hasn't been much commented upon, is that Fidelity, nominally a Boston firm which is second in size, is actually controlled through a Philadelphian named Solmssen, through a web of holding companies.
The original index investing used the Standard and Poor 500 list, providing high-quality diversification, adjusted for size. It was probably selected because it had a good record of smoothing out three common variables in a stock portfolio. Other lists had good records, too, but generally, the stock-pickers for the list were famous and therefore well-paid, hired by successful companies which took another cut for selecting such good stock-pickers and advertising their success. This arrangement selected stocks which performed well, but it added cost. When computers made it possible to construct an index of the entire stock market of a nation or even the whole world, it emerged that such inclusive lists performed as well or even better than active stock-picking, net of transaction costs. Because the index changed slowly, transaction costs were fewer, and consequently, fixed taxes were lower, because less frequent. Indices were then tested for different nations, different industries, different sizes, or any other sort of difference. While many claims have been made for particular semi-active indices, they all increase internal trading volumes, so their costs also go up, although slowly. At the moment, it is generally felt that results are very similar; it is certainly true that trillions and trillions of dollars are shifting from active investing to passive index-investing. Nation-wide, or even world-wide, indices are thought to be essentially investments in the economies of the whole geographic area. The ultimate simplicity would be to buy the certificate, put it in a bank lock-box, and forget it for a lifetime. So far, this is essentially how things have worked out.
In spite of the stampede-like character of recent trading, there is still a majority of stock in individual accounts. Most of this stock has accumulated taxable gains which would diminish in net value if sold, and simple inertia is also not to be under-estimated. If all such stock were converted to passive accounts, no one can say if the net result would raise or lower the final value of index holdings. Nor can one be sure the unsold hold-outs would be largely limited to insiders who have personal agendas rather than economic ones, eventually leading to unfortunate gyrations of the aggregate price which would lessen ties to a true value. Nor can anyone say whether the habit of buy-and-hold will become so ingrained that people will hold on when they should be selling. All that might be said is that, so far, none of this has made an appearance. And meanwhile the sands of time are running out, the train is leaving the station. At present, the most likely prediction is that overall volatility will be reduced, but true value can be assessed by the P/E ratio, the ratio of price to earnings. And a lot of brokers will have diminished income.
At the rate things are going, answers to this sort of question will seem stable in about five years. Beyond that time, waiting for more answers will probably mean waiting forever. So let's ask the simple question again. Why not use some sort of a total stock index as a replacement for gold in the return to a gold standard? Forget about going beyond national control toward individual citizen control, because that answer is already predictable: traders will like it, governments won't. But governments are sometimes nearly immortal, and people aren't.
Headlines in the Wall Street Journal announced collapse of Congressional healthcare reform. In the same edition, a small short article buried in its depths described a possibly major step toward its reform. Martin Feldstein calmly observed, a tax exemption for healthcare insurance of 2.9% really amounts to a wage increase whose elimination might go a long way toward paying for the eighty-year mess Henry J. Kaiser had created. (In fact, it was effectively taxable income of 4%.)
It was all so simple: healthcare extended longevity, created thirty years of new retirement cost. In turn, exempting the premium for healthcare became a tax-exempt increase in wages -- for the 70% of employees getting insurance as a gift. Maybe not at first, but wages adjust to expect it during eighty years. Social Security could not cope with an extra thirty years, so SSA was going broke, while health insurance was actually the main cause of increased longevity.
But notice how unused Health Savings Accounts automatically turn into retirement accounts (IRAs) for Medicare recipients. So if you are lucky and prudent with healthcare, or if you overfund an HSA, unused healthcare money makes a reappearance in retirement funds where it belongs. If you have used up the money, you have probably been sick, and maybe won't need so much for a shortened retirement. Increasingly, expensive healthcare hits the elderly hardest, so there are many years during which compound interest overcomes inflation. At the rate things are going, retirement may become four times as expensive as Medicare, so let's consider that future.
Medicare doesn't save its withholdings, it uses "pay as you go" and spends the money on other things, like battleships. Therefore, to make any use of this windfall, it is necessary to save it, invest it, and use it for retirement. Just doing that much might redirect the other 30% of the withheld tax to its intended purpose. So the economic effect would be considerable, just by stirring around in that corner of it.
Institute for Liberty and Community from John McClaughry
Dr. George Ross Fisher
829 Spruce Street
Philadelphia, PA 19107
Maybe a year ago you sent me a letter asking about some color stories from within the EOB and suggested that we meet somewhere to surround a few beers in connection with your next book. I am embarrassed, George, that I didnâ€™t reply. The reason was that I really had no idea of what kind of EOB stories you might have had in mind, and at the time I had no idea when I might next venture out to what some people laughingly call the civilized world. So I did the logical thing. I set your letter aside.
On the first point, you might want to look at Dave Stockmanâ€™s hype up the new book, which doubtless contains numerous EOB stories. Another source of internal expose is Paul Craig Roberts, THE SUPPLY SIDE REVOLUTION: ACCOUNT OF POLICY MAKING IN WASHINGTON (Harvard, 1984), which is Craigâ€™s account of economic policy battles within the Regan administration. It gives a real flavor of the chronic paranoia one must live with: identifying all real and prospective enemies and allies, manipulating the media, covering oneâ€™s ass with a paper trail, etc. Depressing stuff, really.
On the second, I rarely emerge these days. I only venture out when somebody pays. Iâ€™m on a Presidential Task Force at the moment, but thanks to seeing dimwitted drafting work by its creator, it has no money for paying memberâ€™s expensive, so to hell with it. Working for free is one thing, but paying my own way down there to work for free is beyond the pale.
I am tentatively planning to be in Philadelphia on September 20-21, and if nothing goes wrong perhaps we could meet them. Hope the book is going well despite the absence of any help from me.
Michael Smith, M.D.
P.O. Drawer 1037
Thibodaux, LA 70301
October 2, 1981
I have just finished reading The Hospital That Ate Chicago. Thank You for recommending it. I have some observations to offer:
First, you may be interested to hear the description of trying to control hospital costs by the President of the American Association of Foundations of Medical Care. He said it was like a balloon that when squeezed at the bottom made the top larger. He believes hospitals are the most serious problem facing medicine.
Second, some years ago I presented the AAP Committee on Third Party Plans with an estimate of the potential cost of paying first-dollar coverage of small fees. Making some assumption, it goes like this:
Cost of Visit $25.00
Cost of Filling out health insurance form $ 3.00
Cost of Insurance Company to process claim and Send Check $ 5.00
Cost of Health Insurance Collection and General Administration $ 2.00
Total Administrative Costs $10 for a $25 Charge = 10/25 = 40%.
Obviously this would be nonsense. Possible ways out would be:
1. Computers in office and in the insurance company which might reduce the costs to $2.00 for each and reduce general administrative costs to under 20%.
2. Packaging small fee charges into a single â€œLimited pre-payment package of service.â€ We have done this in our office and have been able to reduce overhead. However, insurance doesnâ€™t recognize the package and we ended up making out health insurance forms for each visit. On the other hand, our preprinted forms allow us to do this for a minimal cost. I believe that with or without CHIP or an IPA-HMO that this concept is worth consideration.
3. The Lifeguard IPA manages to survive and prosper in spite of complete prepayment with the exception of a $3.00 cash outpatient insurance charge and a $10.00 cash emergency room charge.
Third, I worked for two years in a complete prepayment scheme for a coal miners local union. I donâ€™t want to do that again!
Fourth, if we believe that indigents would not be able to self-insure, as Fisher seems to believe, then where do you draw the line? Large numbers of people are borderline and the young parent is more often than not in that group. For many, a $100 deductible is a catastrophe.
Fifth, as an employer I self-insure to a $500 deductible for my employees. I hear you.
The basic problem I see with CHIP or Fisherâ€™s self-insurance is that it leads to 100 percent coverage of expensive surgical and hospital charges and invokes the moral hazard where the damage can be the greatest. Fisherâ€™s contention that there is relatively little un-needed hospitalization ignores a lot of experience. It probably reflects the way he grew up learning about medical care. We all learned to practice in an era where almost all hospital bills for patients were paid by insurance. Therefore, we took full advantage of this for our patients and the average hospitalization rate has been 1200 days/1000 population. We act as the patients advocate and get the best deal possible for them, including that extra day. It has become an ingrained habit.
In our Lifeguard IPA our hospital rate is 375. We recognize that that one extra day in the hospital will pay for the babyâ€™s entire first year of medical care in the office. Our motivation is to get the best deal for our patients and make medical care affordable to them. So prepayment isnâ€™t all bad under some circumstances.
Call it what you will, insurance is a form of prepayment. I believe we should shake the insurance mentality and look at health financing without the catastrophic colored glasses. We recognize that the manner and amount in which insurance payment is made has an effect on the behavior of patients, doctors and hospital bureaucrats.
What do we need to do to maximize child health care?
1. Get every child into the medical mainstream.
2. Encourage health insurance supervision services with the preventive and anticipatory guidance services.
3. Encourage personal care and continuity of care to reduce costs and humanize medicine.
4. Encourage early illness care and early effective treatment.
5. Reduce administrative third-party costs.
6. Reduce the overutilization of emergency rooms, hospitals and reduce unrequired surgery.
7. Make hospitals costs conscious and more efficient.
8. Insure freedom of choice and practice.
9. Retain the principle of sharing the risks.
I find first-dollar coverage with deductibles and coinsurance on hospital and surgery fees faulty in items 5 and possibly 7. Yet for the poor, the near-poor and for a lot of young families with children, it is probably essential if we really want them to have care. Packaging services will help item 5.
I find CHIP most economical. It might be a problem in items 2 and 4. Actually, if properly done, it could encourage 2 and 4. Unless restructured, it would be a problem in items 6 and 7. If properly done, i.e., charging significant coinsurance on hospital, emergency room and surgery services paid for through the catastrophic policy, it should work. A total annual out-of-pocket cap should be part of the package.
Glenn Austin, M.D.
P.S. Just received the copy of Fisherâ€™s Letter. Thanks. Look forward to seeing you in New Orleans.
The Duchess of Windsor was reported to say, a woman can never be too rich or too thin. Perhaps, but with insurance you state -- in advance -- how much insurance you can buy, best not expect more. In healthcare, it's my hunch something drastic would have to change before the American public voted an assessment for more than $3300 per person, for every working year from age 26 to age 65. In fact, if it went much higher, many people would probably look for a way to escape the burden. Perhaps we could supplement 3% per year, the historical rate of inflation for the past century. That's fair because although it would reach $10,000 at age 65 instead of $3300, everything else would have readjusted to give it the same financial impact. Similarly, asking people 26-65 to pay for all ages is more palatable if it's arranged as your own childhood and retirement to be supported.
Excluded: Past debts and Custodial Care. In any event, any payments for past debts, for health or otherwise are not envisioned in the following plan. The term "fixed income" reminds our debt and equity obey different rules, and the premise is the income supplement of this calculation will be based on equity, common stock. Furthermore, we know the National Debt, but how much of it once paid for health services, is fuzzy. When I started this analysis, I really never dreamed all of the current healthcare costs might be covered by investment income from common stocks, and it's going to take some experience to be sure even that is reasonable. It allows us to take a stance: if it won't pay current costs, at least it will pay for some of them. If it more than pays for them, annual deposits should be reduced, never confiscated. To avoid circumvention by changing definitions, it might be well to state custodial care costs are not included, either, because they are treated as retirement income.
Medicare. Making it easier to explain, let's begin at the far end of the process, the day after death, looking backward. This proposal didn't initially include a Medicare proposal, but the accumulation of its unpaid debt has become so alarming, considering Medicare within Health Savings Accounts could fast become a national priority having no other solution. In addition, most factual health data come from Medicare, so the reader gets accustomed to hearing about it. So, while the Medicare situation is fraught with political obstacles, we might have to risk them. While debt overhang from earlier years continues to grow, Health Savings Accounts cannot be confidently promised to rescue Medicare by itself. But perhaps at least the Savings Account discussion could put a stop to going deeper into debt. Even a stopgap would have to get started pretty soon, but there is also a chance an improving economy might partially reduce the indebtedness.
Medicare-HSA Overlaps. At present, Catastrophic coverage is required for Health Savings Accounts, but its premiums are not tax-exempt. To extend HSA for the life expectancy, therefore, requires an additional average of 18 years of after-tax premiums. We have split lifetime HSA into two parts at age 65 and assume a single-premium ($80,000) exchange for Medicare, possibly traded for partial forgiveness of premiums and rebate of payroll taxes. It is important not to count the $80,000 twice if it assumed to be self-financed. One quarter from payroll taxes, one quarter from premiums, and a half from the $80,000 which used to be from the taxpayers. If pre-payment begins at an early age, Medicare costs might be quite modest after growth from income. Even when we show all the costs, including double payments, using an HSA at conservative rates like 4% will reduce the Medicare cost by 75%. Better performance depends heavily on approaching 12.7% by passive but hard-boiled investing. To pay down the existing debt back to 1965 is not contemplated by this proposal. At present, it grows by 50% of annual costs by addition; and an unknown amount by compounding. The amount of debt service is probably going to depend on the national ability to pay it down, regardless of its written terms. The same is likely to be true of subsidies for the poor. Ultimately, both of these decisions are political, limited by the ability to pay. Because of the long time periods, comparatively modest interest rates could convert this impending disaster into a manageable cost, but it should not be contemplated until net investment returns approach 12.7 %. The outcome of these intersections is that the terms and benefits become largely a matter of political choice. That has been true for a long time, yet no effective corrections have been made. It is perhaps unbecoming of a citizen to say so, but the political system needs some steps taken to increase its sense of urgency.
Disintermediation of Investment Returns. By this reasoning, the rescue of Medicare depends on the political choice to do it, and the avoidance of a collision with the financial industry. Without a solution to the Medicare problem, a solution to paying for healthcare at younger ages becomes quite feasible, but it would be useless. Conversely, solving Medicare would be possible if the problems of younger people were ignored, but that is equally unlikely. To solve healthcare financing for all ages depends on introducing some new feature, and the easiest solution to imagine is to raise effective net interest rates. Interest rates are unusually low at present, and the Federal Reserve probably feels it would be dangerous to raise them. However, that's the easy part, because interest rates are certain to rise, eventually. What's much harder to envision is to flow the improved rates and the transaction-cost efficiencies through the financial system without wrecking it. What's hard to imagine is not hard to seem feasible, however. It is to take investments averaging 12.7%, flowing 10% past the intermediaries to the investor; and keeping it up for a century. Disintermediation, so to speak.
Rationalizing Fragmented Payments The transition to a solvent system could be greatly eased by the present premiums and payroll deductions, which are largely age-distributed, and can, therefore, be forgiven in a graduated manner for late-comers to the program. Most redistribution of high-cost cases should be handled through the catastrophic insurance, which is well suited for invisible and tax-free redistribution. Because of hospital internal cost-shifting, inpatients are overpriced, rapidly heading toward underpricing. This distortion of prices is achieved by squeezing inpatient prices with the DRG to shift costs and overpricing to hospital outpatients. In the long run, distorting prices has the effect of raising them. This will more immediately affect the relative costs of Catastrophic and Health Savings Accounts and should be more carefully monitored, with an eye toward re-achieving equilibrium.
Dual Reimbursement Systems are Better Than One At present costs, statisticians estimate average lifetime healthcare costs at about $325,000 in the year 2000 dollars; we could discuss the weaknesses of that estimate, but it's the best that can be produced. Women experience about 10% higher lifetime health costs than men. Roughly speaking, how much the average individual somehow has to accumulate, eventually has to equal how much he spends by the time of death. At this point, we must work around one of the advantages of having separate individual accounts. On the one hand, individual accounts create an incentive to spend wisely, but it is also true that pooled insurance accounts make cost-sharing easier, almost invisible, and (for some) tax-free. Therefore, linking Health Savings Accounts with Catastrophic insurance provides a way to pool heavy outlier expenses, while the incentive for careful money management resides in the outpatient costs most commonly employed (together with a special bank debit card) to pay outpatient costs. Such expenses are much more suitable for bargain-hunting anyway because dreadfully sick people in a hospital are in no position to bargain or resist.
Internal Borrowing. Furthermore, there is a significant difference between mismatches of aggregate revenue-to-expenses of an entire age group, and outliers within the same age cohort, the latter much likelier to be due to chance. To put it another way, somebody has to pay these debts, and the plan has been designed to break even as an entirety. Surely we must have a plan about who should pay them when enough revenue is not yet present in a new account. Surely some groups are always in surplus, other groups are always in arrears; the two should be matched, at low or zero interest rates. Borrowing between sick outliers and lucky good people within the same age cohort should pay modest interest rates, and borrowing between different cohorts for things characteristic of the age (pregnancy, for example) should pay none. Unfortunately, some people may abuse such opportunities, and interest must then be charged. Until the frequency of such things can be established, this function of loan banking should be part of the function of the oversight body. When it's limits become clearer, it might be delegated to a bank, or even privatized. While it is unnecessary to predict the last dime to be spent on the last day of life, incentives should be identified by the managing organization, separating structural cash shortages from abusive ones. Much of this sort of thing is eliminated by encouraging people to over-deposit in their accounts, possibly paying some medical bills with after-tax money in order to build them up. Such incentives must be contrived if they do not appear spontaneously. User groups can be very helpful in such situations. People over 65 (that is, those on Medicare) spend at least half of that $ 325,000-lifetime cash turnover, but just what should be counted as their own debt, can be a matter of argument (see below.)
Proposal 10: Current law permits an individual to deposit $3300 per year in a Health Savings Account, starting at age 25, and ending when Medicare coverage appears. Probably that amount is more than most young people can afford, so it would help if the rules were relaxed to roll-over that entitlement to later years, spreading the entire $132,000 over the forty-year time period at the discretion of the subscriber.Bifurcated Health Savings Accounts. When Health Savings Accounts were first devised, it never seemed likely that Medicare might be supplanted. However, Medicare has grown both highly popular and severely under-funded, probably running at a large loss. The rules should be modified to permit someone who has health insurance through an employer to develop a Health Savings Account which the funds but does not spend while he is of working age. The funds would then build up, enabling him to buy out Medicare on his 65th birthday or thereabout, with a single-premium exchange at present prices, (exchanging about $100,000 funded by the forgiveness of Medicare premiums and some portion of payroll deductions from the past). He would have to purchase Catastrophic coverage at special rates. If this approach proved popular, it might supply extra funds for loaning to HSA subscribers in the outlier category. While there is no thought of phasing out Medicare against the subscribers' will, Congress would certainly be relieved to have subscribers drop out of a program which must be 50% subsidized.
Proposal 11: The present closing age for HSA enrollments at the onset of Medicare should be extended a few years older. And single-premium buy-outs of Medicare coverage, including the possible return of payroll deductions where indicated, should be permitted as an option.Single-Premium Medicare, age 65 Hypothetically, if anyone could live to his 65th birthday without spending any of the accounts, a prudent investor would have accumulated $132,000 in pure deposits on his 65th birthday. He only needs $80,000 to fund Medicare as a single-payment at age 65, however, so he can even afford to get sick a little. If he starts later than age 25, he has already paid for Medicare somewhat, with payroll taxes. That could be considered payment toward reduction of the Medicare debt.
Proposal 12: Congress should create and fund a permanent Health Savings Account Agency. It should have members representing subscribers and providers of these instruments, with the power to hold hearings and make recommendations about technical changes. It should meet jointly with the Senate Finance Committee and the Health Subcommittee of Ways and Means periodically. It should be involved with the appropriate Executive Branch department, to review current activity, detect changing trends, and recommend changes in regulations and laws related to the subject. On a temporary basis, it should oversee inter-cohort and outlier loans, leading to recommendations concerning the size and scope of this activity.
If someone makes a single deposit of $80,000 on his/her 65th birthday, there will accumulate $190,000 in the account over the next 18 years, the present life expectancy if he spends nothing for health and invests at 5%; and $190,000 is what the average person costs Medicare in a lifetime. Since the average person spends $190,000 during 18 years on Medicare, enough money will accumulate in Medicare to pay its expenses, and after some shifting-around, this should make Medicare solvent, in the sense that at least the debt isn't getting bigger because of him. Furthermore, index funds should be returning 10-12% over the long haul, so there should be some firm discussions with the intermediaries about some degree of dis-intermediation. Please don't do the arithmetic and discover that only $40,000 is needed. That seems plausible, but that's wrong because the costs remain the same , and previously the government has been borrowing half the money from foreigners. In effect, the subscribers have been paying the government in fifty-cent dollars, while claiming the program is entirely self-funded. There has been an exchange of one form of revenue for another, so the required revenue actually does demand $80,000 for a single deposit stripped of payroll deductions and perhaps premiums. An end would be put to further borrowing, but the previous debt remains to be paid. I have no way of knowing how much that amounts to, but it is lots. All government bonds are general obligations, mixed together, while access to Medicare reports back to 1965 is not easily available. What we can more confidently predict is the limit young working people can afford for the sole purpose of paying off the Medicare debts of the earlier generation. If there are other proposals for paying off this foreign debt, they have not been widely voiced. And the debt is still rapidly growing.
Escrow the Single Premium A young subscriber would have to set aside an average of $850 per year (from age 25 to 64) to achieve $247,000 on his 65th birthday, assuming a 5% compound investment income and relatively little sickness. This might seem like an adequate average, but occasional individuals with chronic illnesses would easily exceed it in health expenditures. Assuming a 10% return, he would have to contribute $550 yearly. It is not easy to estimate the size and frequency of expensive occurrences in the future, so someone must be designated to watch this balance and institute mid-course adjustments. As an example, simple heart transplants costing $200,000 are already being discussed. To some unknown extent, the cap on out-of-pocket expenses would have to be adjusted to pass these cost over-runs indirectly through the Catastrophic insurance. Insurance does greatly facilitate sharing of outlier expenses, but usually requires a time lag whenever new ones appear.
It does not require much political experience to know taxpayers greatly resent paying debts that benefitted earlier generations. They complain, but complaining does not pay off the debts of the past. To double required deposits in order to pay off past debts, as well as using forgiveness of payroll deductions and premiums, would require an additional $120,000 per year escrow, for each year's debt accumulation. At present, roughly $ 5300 per beneficiary, per year, is being borrowed, and there are roughly twice as many current beneficiaries as people in the tax-paying group, but for only 18 years, as compared with 40 years as a prospective beneficiary. So that comes to liquidating roughly $1300 a year of debt to balance the two populations or $2600 a year to gain a year. That's for whatever the debt happens to be, which surely someone can calculate. To accomplish it, one would have to project an average of ??% income return. That's definitely the outer limit of what is possible, and it probably over-reaches a little. Therefore, to be safe, one would have to assume some other sources of income, a change in the demographic patterns, or an adjustment with the creditor. Assuming inflation will increase expenses equally with inflation seems a possibility. And it also seems about as likely that medical expenses will go down, as that they go up. You would have to be pretty lucky for all these factors to fall in line over an 80-year lifetime.
Medicare: Optional, Mandatory, or Third Rail? It is this calculation, however rough, which has made me change my mind. It was my original supposition that multi-year premium investment would only apply up to age 65, and that would be followed by Medicare. In other words, it should only be implemented as a less expensive substitute for the Affordable Care Act. It seemed to me the average politician would be very reluctant to agitate retirees by proposing a plan to eliminate Medicare. They would feel threatened, the opposing party would fan the flames of their fears, and the result would be a high likelihood of undermining the whole idea for any age group, for many years. Better to take the safer route of avoiding Medicare, and confining the proposal to working people, where its economics are overwhelmingly favorable.
But when the calculations show how close this proposal under optimistic projections would come to failure, and when nothing remotely close to it has been proposed by anyone, the opportunity runs the risk of passing us by. So, I changed my mind. The moment of opportunity is too fleeting, and the consequences of missing it entirely are too close, to worry about the political disadvantages of doing the right thing. The transition to a pre-funded lifetime system will take a long time to get mature, and the political obstacle course preceding it is a daunting one. However, there is another way of saying all this, which is perhaps more persuasive that Medicare must be changed. It begins to look as though the unfunded and accumulated debts of Medicare are such a drag on our system of government, that very little can be accomplished by anyone, until this central problem is addressed. In that sense, our problem is not the uninsured or the illegal immigrants, or an expensive insurance system. Our problem has become Medicare underfunding, and our second problem is that everyone loves Medicare.The "simplified" goal is therefore for everyone to accumulate $80,000 in savings by the 65th birthday, remembering that savings get a lot harder when earned income stops and definitely remembering that people approaching retirement are not likely to part readily with $80,000. With the current law, you would have to start maximum annual depositing in an HSA of $3300 by your 52nd birthday, to reach $80,000 by age 65, and you would still need 10% internal compounding to make it. With a 5% return, you would have to start at age 48. But notice how easily $200 a year would also get you there, starting at age 25 (see below) but it immediately gets questionable to assume $700 a year deposit for a 25 yr-old receiving 5% returns. We are definitely reaching a point where the ideas proposed in this book will no longer bail us out of our Medicare debt. Because -- the most optimistic of these projections are achieved by assuming there will be no contributions at all from people aged 25-65, for their own healthcare, babies, contraceptives and whatever. Many frugal people might skin by with looser rules; But the universal goals of the past are just that, the goals of the past. If we are going to cover lifetime health costs instead of just Medicare, many more will need $80,000 to do it and have something left to share with the less fortunate. But to repeat, that still compares very favorably with the $325,000 which is often cited as a lifetime cost. Unfortunately, that just isn't enough, the Chinese will have to wait for repayment. This book was not written to propose a change in Medicare, but in writing it I do not see how we get out of our healthcare mess without addressing Medicare. If politicians can be persuaded of that, at least we will no longer need to invent reasons for urgency. Starting with the Medicare example. Notice that forty years of maximum contributions would amount to far more than the necessary $40-80,000 by age 65. We haven't forgotten that the individual is at risk for other illnesses in the meantime, so in effect what we need is an individual escrow fund for lifetime funding intended (at first) only to replace Medicare coverage. (We are examining lifetime coverage, piece by piece, trying to accommodate an extended transition period.) Depending on a lot of factors, that goal could cost as little as $100 a year deposited for forty years at high-interest rates, or as much as the full $1000 per year with low rates. It all depends on what income you receive on the deposits in the interval. In a moment, we will show that 10% return is not impossible, but it is also true that a contribution of $1000 per year would not seem tragic, compared with the present cost of health insurance (now averaging over $6000 a year). I have unrelated doubts about the current $325,000 estimate of average lifetime health costs, but that is what is commonly stated. For the moment, consider these numbers as providing a ballpark worksheet for multi-year funding, using an example familiar to everyone, but not necessarily easy to understand after one quick reading.
The Cost of Pre-funding Medicare. Rates of 10% compound income return would reduce the required contribution to $100 per year from age 25 to 65, but if the income were only 2% would require $700 contributed per year, and at 5% would require $300 per year. Remember, we are here only talking of funding Medicare, as a tangible national example, Obviously, a higher return would provide affordability to many more people than lesser returns. Let's take the issues separately, but don't take these preliminary numbers too literally. They are mainly intended to alert the reader to the enormous power of compound interest. Let's go forward with some equally amazing investment discoveries which are more recent, and vindicated less by logic than empirical results.
Charitable institutions and other non-profit organizations occasionally assemble an endowment and thus develop a need for an oversight committee to hire (and occasionally fire) an investment manager, to monitor the fund's management, and to assess the manager's fees. The meetings of the oversight committee could, therefore, be pretty brief, related to two numbers. How had the endowment portfolio performed, compared with some acknowledged benchmark? To these two numbers might be added a brief summary of the investment management fees, compared with the usual benchmarks (40 basis points, or .4%, would be a common standard). However, an agenda so mercilessly sparse seems an inadequate reason to convene a group of worthies for an hour, and quite commonly the committee will chat about investments in general, hoping to pick up some personal pointers. A good tip or two makes the whole effort seem worthwhile.
On one such occasion in 1987, the famous Quaker surgeon Jonathan Rhoads, Sr was chairman of the committee. The manager of the endowment was a handsome fellow whose picture had occupied a full page of the New York Times financial pages just a day or two before this particular meeting. The picture had been truly spectacular, the tailoring was remarkable, and he surely had perfect teeth. As this gentleman entered the room, the committee gathered around, slapping his back and congratulating him on his fame with great jollity. Little did the group know that within thirty days, the stock market would have its most severe drop in almost twenty years. Unnoticed at first by the merry-makers, Jonathan Rhoads had sat down at the head of a perfectly empty long mahogany table, and was intoning to the empty seats, "We will now begin by reading the minutes of the last meeting of this committee". Visibly shaken, the group immediately broke up and took their seats.
Rhoads went on. We were now to hear the report of our portfolio by our manager. Proudly, it was noted that in February we had bought XYZ for 20, and in July we had sold it for 44. And in March we had bought ABCs for 60, and it now stands at 100. When he had concluded, the chairman said, "That's fine. That's just fine. But what bothers me is that point of confusion." Why, what confusion, Dr. Rhoads?
"The confusion between investment genius, and just being in a bull market." Later the same month, the stock market suddenly dropped 22% in one day, thus guaranteeing that no one in the room would ever forget the episode.
|Flexible Spending Accounts|
For many years, Health Spending Accounts (now called Flexible Spending Accounts) were confused with Health Savings Accounts. In the previous section, we have just proposed the $500 annual roll-over be made permanent. Naturally, that raises the question of whether a permanent rolled-over account could be made into a supplementary retirement account, but unfortunately, the mathematics of that is not nearly so good. Let's consider the most favorable case. As stated, that would be a $500 annual contribution, starting at age 18, paying 10% income return. That would generate a retirement fund at age 65 worth $436,000. That sounds pretty attractive until you start picking it apart.
In the first place, most people can't start work at age 18 and expect to be continuously employed until 65. There will be periods of unemployment for most people. In the second place, money invested in large-cap common stock will indeed return 10% over a long period of time, but there may well be gaps and periods of catch-up. And if you are not careful, you won't get 10%, even though your money is earning it. The experience with 401(k) accounts has been the financial industry will likely reduce your returns by roughly 2% with an internal assessment called 12b(1), allegedly a reimbursement for sales promotion, but really just 2% for themselves. So, you are down to 8% before you encounter $250 charges per transaction. Some brokers only charge $5.00 for purchase, and some banks charge nothing to give you your own money back. Very likely, the $250 purchase charge will disappear before the $250 withdrawal fee does because the withdrawal fee is harder to spot on the receipts. John Bogle recently remarked on television that the financial industry takes 85% of the returns on retail investments before it gives anything back to the consumer, which seems to include rather more than an 8.5% gross margin, so there's probably more fee here than I can account for, which is about half of that. To be conservative, let's say your original return of 10% has been reduced to 5%. So, the expected retirement fund for our hypothetical wage-earner is not $436,000, but $89,000.
Even that haircut is more than our hypothetical is likely to get. With Medicare as a backup, paying for healthcare has been protected during its most expensive period. Retirement, on the other hand, is usually more costly in a retiree's sixties than his eighties. So, while $89,000 might well cover health costs in old age, it will probably fall short of covering retirement. For instance, the average Medicare recipient costs Medicare $11,000 a year. How many retirees do you know who can live on $11,000 a year? We're going to have to leave it at that. By stretching and luck, by arm-wrestling the investment community and counting on continuous employment for forty years, we might scrape together a plan that would cover healthcare as we hope it will cost when we get there. But retirement? My warning is that I don't see how it can be managed, except for one strategy. People are going to have to work longer and retire later. To make ends meet on retirement, the emphasis must shift from demanding retirement as an entitlement -- to demanding our employers themselves get to work, providing more of the jobs old folks can perform, in spite of infirmities. We've got to build houses cheaper to repair, and cars cheaper to drive. We've got to live in houses with elevators and wear clothes that moths won't eat. But squeezing it out of investment accounts? After we've wrung it dry, paying for healthcare, I doubt there will be much left.
Thank you for asking me to describe Health Savings Accounts. In five minutes, I will try to make four points.
HEALTH SAVINGS ACCOUNTS, OLD STYLE.
Thirty years ago, John McClaughry of Vermont and I devised the Health Savings Accounts you may be familiar with, and millions of people have tried them with satisfaction. It has been reported that they can reduce healthcare costs by as much as 30%.They consist of two ways to pay for Healthcare. Essentially, one is an individual investment account, rather like an IRA, or Individual Retirement Account. The subscriber usually uses a special bank credit card and receives an income tax deduction if the money is spent on healthcare. The account is individually owned, as an incentive to be frugal and shop wisely, because whatever money is left over he may keep in a regular IRA. He needs to deposit into the account, only such money as he requires for healthcare, depositing less if he has been frugal in the past. If he deposits more than he spends, he gets it back with interest. These healthcare expenditures are usually office or outpatient expenses, subject to shopping around as vigorously as he chooses.
The second form of payment comes from a high-deductible health insurance policy. This policy is ordinarily used for hospital inpatient expenses where the patient has very little ability to choose or to shop, and where payments are usually lump-sums derived from a system called DRG (Diagnosis Related Groups). This has proved to be an effective cost restraint.
Right now, if you don't have an old-style HSA, you probably can't get one. Recent regulations forbid new accounts for persons over the age of thirty, the accounts are only partly tax-deductible, and existing accounts end when Medicare begins. These are artificial, and I hope temporary, barriers which could be swept away in an afternoon of Congress.
HEALTH SAVINGS ACCOUNTS, NEW STYLE. (Lifetime Health Savings Accounts)
To these two original building blocks, I now propose to add two new ones. They both probably require legislation, and they may even need to be considered in separate committees of Congress..
One new feature to Health Savings Accounts is a lifetime, or whole-life, policies substituted for present one-year term formats. Not only would that save marketing costs, and permit permanent funding. Obviously, lifetime policies must somehow be portable between states.Lifetime health savings accounts have the surprising ability on paper at least, to pay for most of the healthcare costs by themselves. True, the McCarran Ferguson Act is in the way, and maybe even the Tenth Amendment. But major reductions of healthcare costs are too important to ignore, without first examining work-arounds.The second is passive investing , a Wall Street term for eliminating churning and stock picking by using total-market index funds. This system promises to return 12% per year to the investor, but I quote John Bogle that the financial system extracts 85% of the return before the investor gets it, just as it does in many 401(k) plans. This battle of fees needs to be fought out because, in the case of healthcare, thirty extra years of longevity have greatly increased the return available for disorders of old age, which predominate. In thirty years at only 7%, money will have three doublings, or multiply eight times. You could lose half of it in a stock market crash, and still, have 400% of what you started with.
Independence Blue Cross (of Philadelphia) has imaginatively designed a Health Savings Account product for retirement purposes, by allowing the employer to overfund an HSA with $750 annual contributions, looking ahead to the employee's retirement. They should be given credit for a good idea. Whether this supplements health insurance before retirement, is apparently left up to the employee, but of course, it supplements any other after-retirement arrangements the employee may have.
Since employers may soon face a requirement to provide health insurance, the high deductible from the government plan is used, to supply the high-deductible requirement for the HSA alone. This seems an efficient way to address present uncertainties and could provide the basis for compromise discussions between the two political parties on the whole subject of fringe benefits. High-deductible is good; adding subsidies confuses the intent. Keep them separate.
Overfunding is always a good idea for subscribers to HSA, whatever their other program features. Politicians hate overfunding, so private is better than public. The program is so new, and its time periods so distant, that unintentional gaps in coverage are always possible. If worries proved unfounded, overfunding would just lead to more money for retirement, hardly a tragedy.
Over-investment in Health Savings Accounts -- The Retirement Alternative. Because it's a new program, with financing uncertainties, we advise everyone with an HSA to consider overfunding it as a precaution. Just about everyone could readily use resulting surpluses for some of his retirement. Although the employer only donates $750 per year, the law allows a total of $3350 as a maximum, and so a $2600 personal supplement is required in the following three hypothetical but typical situations. Example One. An employee starts the program at age 21 and remains with the company until retiring at age 66, contributing $3350 per year to the HSA. It makes no difference whether the employee rises through promotions or remains at the entry level; the maximum is the same. Result: the employee receives a taxable retirement income from the HSA to IRA transfer of $16,000 per year, with an $825,000 death benefit of the residual. Example Two. Another employee enrolls at age 21 but retires to get married at age 26. At age 66, until death, there is a yearly $3000 retirement income, with a $238,000 death benefit of the residual.
Example Three. An employee joins the firm at age 61 and remains until age 66. His retirement income is $450 per year, with an $18,600 death benefit.
In the examples, the first thing which jumps out is the large disparity between what five years of work will get you, starting at age 21, compared with the almost pitiful amount a person age 61 will get for the same absolute, and maximum allowable, contribution. The difference, of course, is made up out of the income compounded internally for 40 years. And the moral is clear, a small steady investment at an early age is worth far more than the same investment at the end of working life. It costs the employer exactly the same, either way, and he may not realize it. It will depend on what value he places on maturity and experience, as compared with vigor and strength.
The second point revolves around the interest rate being paid. The investment manager, whether in-house or by way of a vendor, is able to earn and should be able to earn, 12% on an index fund of the common stock of the whole American market. Inflation at a steady rate of 3% for a century, reduces that return to 9%, net of inflation. How much is the customer entitled to? If he is paid less than 3%, he is actually losing money on the exchange. If he is paid 7.5% gross, he only receives 4% net of inflation, in spite of surrendering half of the net gain (4.5% of 9%) to the broker or manager. In this example we have arbitrarily assigned him 6.5%, which is 3.5% net of inflation, yielding well over half of the margin to the broker. I have to wonder whether the services provided are really worth more than 1% (for example, one nearby trillion dollar firm only charges a tenth as much), so it seems as though a fair return to the investor/subscriber would be 5%, net of inflation, net of fees, or 8% gross.
That means the price debate ranges between 3% (no profit to the investor at all) and 8% (substantially the wholesale price). Throughout this book, I have generally adopted 6.5% as an average, mainly to be safely conservative and avoid arguments. The marketplace will eventually settle on the "right" price, but if it's less than 3.5% net of inflation, it's less than a quarter of the wholesale price. Eventually, I expect the price to be knocked up to 8%, net of inflation, or 11% gross. The ultimate effect of this price pressure on the cost of health care would be considerable, indeed. Sustainable retirement would come into sight, and as we have mentioned, the price of healthcare is linked to it.
Now, I don't want to be accused of starting a revolution, but my calculator tells me if the passive investment could achieve 11% income return, the first of the three examples cited above would receive a retirement income of $363,572.00 per year. The youngster who worked five years and then quit could look forward to a pension of $149,160.00 per year, with an estate of $1,136,000 waiting for him when he dies. Something tells me this is too destabilizing to be allowed to happen, so I'm not going to get impaled on the barricades to achieve it. Ultimately, it probably reflects the reduction of transactional costs by electronics which has not yet worked its way through to retail consumers. So, one way or another, something is going to happen, and it's up to all of us to make sure it is benevolent.
Seven-point Summary of New HSA Contents
Combining an HSA with Catastrophic (High deductible) Health Insurance -- has the surprising effect of reducing administrative costs, especially when age groups retire and justify a different tax treatment.HSA has been legal for decades; it's hard to know whether to cheer for the millions who already have HSAs or weep for the millions who don't. This book mainly concentrates on features made possible by adding options right now, requiring a brief table of contents to find your way. Almost without exception, all subscribers are better off but differ in the time it takes to harvest the savings. It takes an act of Congress for anyone to lose money on an HSA but it also requires an Act of Congress to make improvements.
LAST YEAR OF LIFE INSURANCE II
New blog 2018-10-24 20:34:13 description
FOUR PRESCRIPTIONS: Proposals For Reform of Health Care Financing II Last-Year-of Life
II. Last-Year-of-Life Life Insurance 1. Pre-Existing Illness Exclusions 2. Portability 3. Pre-funding 4. Administrative Ease
Letter to Catherine S. Smith: The Medical Marketplace, Incentives vs. Controls
New blog 2018-10-17 18:29:17 description
Letter Gordon K. MacLeod Re: Some Proposals for PMS to Use Money as a Measure.
New blog 2018-11-09 17:14:17 description
First Two, and Last Two, Years of Life
Medically speaking, the four most eventful years of almost anybody's life.
The Phillips Curve appears to show an inverse relationship between unemployment and inflation. It was adopted as an adjuster for precious metals, whose fundamental purpose had been to avoid inflation. Skip intermediate steps and simply hold inflation to some constant level. However, the recent failure of inflation to respond to falling unemployment now suggests the two ingredients (inflation and unemployment) may sometimes operate independently. Confusion at a basic level is extreme.
REPLICATED COPY of Robert J. Reinecke 10/11/18 10:47 pm
Born in Kansas where it's windiest, so he hated wind. The answer to his query, where is the least windy part of America? was answered, Albany, New York. Eventually, he was offered the post of Professor of Ophthalmology there, and he happily took it. He bought a house on a trout stream and caught up to fifty trout a day when he wasn't doing computer research on how to correct crossed-eyes in children by lengthening the muscles on one eye while loosening the opposite eye the same amount, a feat that made him famous. He became a physician in chief at the Wills Eye Hospital, after a stint in the same position as the King's Ophthalmologist in Saudi Arabia. He represented Ophthalmology in the American Medical Association House of Delegates for many years.
Gold Standard and Index Funds
New blog 2018-10-02 02:38:12
Last Year of Life Insurance
New blog 2018-09-18 21:15:00 description
How to Cope with a Trillion Dollars of your own Money.
New blog 2018-09-13 18:00:40 description
Paying in Advance is Cheaper
New blog 2018-09-11 18:00:56 description
Passive Investing With Total-Market Index Funds
New blog 2017-01-11 03:53:57 description
Martin Feldstein Does It Again: Eliminate Tacit Tax Exemption for 70% of Workers Denied To the Rest
The Henry Kaiser tax exemption for health would pay toward Social Security, indirectly paying for retirement, which health insurance prolonged.
Replacing the Gold Standard
If you don't like the gold standard and are uneasy about no currency backing at all -- just what would you choose as a way to back the currency?
Letter from Institute for Liberty and Community John McClaughry
New blog 2017-07-06 18:33:51 description
Letter pertaining to The Hospital That Ate Chicago. from Michael Smith, M.D.
Michael Smith, M.D.
Lifetime Health Savings Accounts:How Much is Enough?
There's an old Quaker saying: The way to be certain you have enough, is to have too much.
Quaker Investment Committee
Quakers expect results from their investment managers, not just Wall Street gossip.
Spending Accounts into Savings Accounts for Retirement? Don't Count On It.
Flexible Spending Accounts, unlike Health Savings Accounts, have a use-it-or-lose-it feature. New regulations now permit FSAs to roll-over $500 per year to later years. Astounding things become possible that were previously impossible if this conversion could be extended to more than a single year.
Congressional Hearing: Health Savings Accounts
Health Savings Accounts have dual payment systems, cash, and insurance. The new style adds passive investing in a lifetime instead of an annual model.
Rollover of Unspent Flexible Spending Accounts
Flex Spending is use-it-or-lose-it. Employer-based insurance, only. So, wasteful things are bought at year-end. It made some sense when it was the employer's money. But now FSAs surplus is mostly the employees own money, the option to roll-over, as in Health Savings Accounts, seems only fair.