Philadelphia Reflections

Medical reform Subjects (1)

New topic 2019-05-24 20:49:32 description

American Medicine Before 1965

New Foreward

In the early 1980s, American hospitals adopted the remarkable concept of being repaid by Medicare and Medicaid on the basis of the patient's diagnosis, instead of itemized bills for the patient services. The system spread to other health insurance companies, and the diagnosis list was greatly simplified. The result was "Diagnosis-Related Groups" or DRG.

I happened to be in the audience at the Congressional hearing considering this proposal and was initially pleased with what seemed to produce a considerable reduction of paperwork and a potential increase in public understanding. Now proven entirely wrong on both predictions, I am in fact appalled by the changes in medical care DRG provoked. However, I must admit it was a brilliant way for the insurance industry to suppress costs of hospital inpatients. Unfortunately, that was just pushing on a balloon, with the costs bulging out elsewhere. These unexpected consequences were even more devastating because it took so long to understand what was causing them.

Whatever the original motives, the DRG paperwork simplification has proven to be primarily a cost control measure. One illustration of this core theme lies in the way the DRG list itself was simplified. Starting from abandoning the Standard Nomenclature of Diseases and Operations(SNODO, a compendium of well over a million diagnoses) and going to the International Classification of Diseases (ICD) of only several thousand, as a basis, "diagnoses" were reduced to the original DRG set of about 250. Right there, was an unrecognized sign that medical science wouldn't play much of a part in it. Presumably, it was easy to set 250 prices, hard to set a million of them. But both the hospital and the insurance company were really only interested in one thing: what was the aggregate amount of the reimbursement. If they could agree on some approximation, all that medical stuff could be skipped.

Refinements of the DRG list now amount to about three hundred different price numbers, one among which could be assigned to each patient with some sort of medical justification, like "all other". Increasingly, diagnoses were assigned to a particular diagnosis group more because of the similarity of their prices than a similarity of their medical content. Increasingly, all bills were considered automatically fair by the auditors if the grand total of hospital payments was unchanged. Just over the horizon can be seen the approach of matching each DRG to some target based on a budget rather than progress in medical care. The purpose was to hold down the prices of hospitalizations through standardizing them; if the hospital received the same amount of money, what difference did it make? The answer to that question is: we always expected future medical progress to change the cost of care, sometimes up, sometimes down. Regardless of national cost problems, we did not expect the payment system to define the direction of medical care, or for the people most concerned with costs to over-rule the judgments of those primarily concerned with the patient, without even talking to them. Mutual respect and compromise -- now, those are different things. Freezing the revenue stream means if you want something new, you have to give something up. For a hospital of all places to exclude the patient's physician from the trade-off is going to lead to something the patient won't like. Making the physician an employee may silence him, but that only makes the medical catastrophe worse when it surfaces. As shown by recent statistics, the overall profit margin on inpatient hospital patients has remained close to 2%. If that is your only measure of success, the DRG seems a success.

However, a simple example casts doubt on the finality of that decision. Payment based on diagnosis means it no longer makes any difference how long a patient remains in the hospital. Such an effect surely raises costs, but since the price is constrained, the extra cost reappears somewhere else. The same is true of laboratory tests, and bandages, and a whole lot of other costs like cleaning people and computer technicians. So now the burden of holding costs downshifts from the insurance to the hospital itself? Plausible, except that isn't what happened.

What happened was hospitals shifted their sources of revenue toward services not covered under DRG, like the Emergency Room and the outpatient area. They bought up doctor's practices and created satellite clinics. Since no one works as hard for a salary as he would work by being paid piecework, we get a doctor shortage. And consequently, the cost of new medical schools has to be added to the indictment. Since the episodic treatment does not cover an entire illness, it is not and never will be suitable for DRG. And since the hospital administration covers both types of services, it opens the business school opportunity to divert costs to the inpatient area and profits to the outpatient area, while paying big administrative costs to the umbrella organization. Getting hard boiled like that translates somewhere into even greater pain for the indigent and uninsured. Emergency services now have a profit margin of 15%, and outpatient areas now return 30%. Administrator salaries are now in seven figures.

But even that isn't so bad as the trick by which it is accomplished. It's called the Chargemaster, and it has the unfortunate byproduct of dumping the highest charges on the patients who can least afford them, the uninsured ones. When you joke about aspirin tablets which cost twenty dollars, see if you can laugh at bills of $300,000 for treating Hodgkin's Disease, the same conditions for which an insurance company pays 10% of the bill for aspirin or Hodgkins. A famous surgeon friend of mine once muttered, "Nowadays the main reason for having health insurance is to keep the hospital from fleecing you."

Tort Reform

Medical Tort Reform (1)

The U.S. House of Representatives will soon consider a medical malpractice reform (limiting awards for pain and suffering to $250.000) which it adopted seven times in the last ten years. Following almost certain House passage, the proposal will then confront the Senate,

cartoon malpractice

where it has failed seven times. The politics of the two chambers are not chief concerns of this paper, which strongly advocates passage. The paper contends that unwise incentives for patients to bring suit are important causes of present difficulty, and reducing such incentives offers a comparatively simple opportunity to bring the complex issue to quick stability. Stability is essential before more sweeping changes can be examined. The collection of data in certain areas would reduce the scope for vituperation and ideology, another important step toward a solution. Full recognition must eventually be given to the intertwined complexity of industrial product liability, the McCarran Ferguson Act, hospital and corporate governance in general, the tort system, pass-through of Medicare and Medicaid overhead reimbursement to malpractice premiums, even universal health insurance. Some small step must begin such an interlocked rearrangement, and a cap on pain and suffering has the major advantage of being successfully tested by twenty-five years of experience in California and Indiana.

This paper makes no claim of identifying all the root causes or predicting all the calamitous consequences of inaction. Advocating passage of national laws to reduce plaintiff incentive to sue, it chiefly focuses on the chief arguments historically made against the present proposal, offers some comparatively novel insights in favor, and makes suggestions for collecting data to reduce the latitude for disagreement.

Congress will again take up malpractice tort reform (MICRA) in 2005. perhaps successfully. The 2004 outcome was close. Since the Republicans subsequently made electoral gains in both House and Senate, the leadership is considered likely to re-introduce the same bill and try to hammer it through. The bill's medical essence is to limit awards for "pain and suffering" to $250,000, contrasting strongly with recent escalating awards which have sometimes reached $100 million. Newcomers to the issue may be surprised that so much emphasis gets placed on this point, but thirty years of wrangling experiences in state legislatures have produced this reform alone with proven effectiveness. In the course and semi-jocular language of politics, "nothing helps the malpractice problem unless it involves on

Malpractice: State or Federal Problem?

McCarran Ferguson Act

The 1945 McCarran Ferguson Act prohibited federal agencies from regulating the business of insurance whenever individual states had passed laws on the topic. However, Congress can always modify its own laws, so McCarran Ferguson is not a serious obstacle to a federal tort reform law. Legislative interference in the judicial branch is admittedly somewhat more sensitive, particularly if the U.S. Supreme Court resists. However, the Supreme Court would have to be feeling especially prickly to block Congressional action whose effect is to increase the authority of the federal over the state courts, particularly in circumstances where the state courts appear to be failing.

Proponents of tort reform, the American Medical Association in particular, very much prefer one federal law to fifty state reform laws. Not only does it simplify the scrambling around, but the federal Congress is likely to be more sympathetic to this particular issue. Sixty years of state politics have saturated the various state legislatures with trial lawyers, building up a formidable example of conflict of interest. After all, since 1937 the legislatures have had comparatively little to occupy their attention except insurance. At one point, the Pennsylvania legislature found itself with the speaker, vice speaker, majority leader, and chairmen of both judicial committees all trial lawyers.

Bill Frist

And then there are personal circumstances of leadership. The U.S. Senate Majority Leader in 2005 was William Frist, M.D., a distinguished cardiac surgeon. Cardiac surgery is one of the specialties with the highest risk of a lawsuit, and the highest malpractice insurance premiums. His predecessor, Robert Dole, had been openly critical of the trial lawyers as a factor in Senate politics, an attitude that seems to come with the job. For balance, the 2004 President of the AMA, Donald Palmisano, M.D. was a lawyer.

Back of this line-up is the history that a cap on pain and suffering had been passed by the U.S. House of Representatives seven times in the last ten years (only to fail in the Senate), and most of the supporters are still in office. Proponents of tort reform, and opponents too, regard the matter as a foregone conclusion in the House. It's the Senate where it will be decided, requiring 60 votes to overcome a filibuster. Meanwhile, President George Bush, a notably vigorous political partisan, has announced early support. From the Republican point of view, trouncing the trial lawyers would be a delicious thing, but both sides must be wary of public annoyance at partisan behavior.

So, what about Constitutional issues? There really can be no argument about the jurisdiction for tort cases; they are tried in state courts, and no one proposes shifting to federal court. The Ninth and Tenth Amendments, plus two centuries of tradition place tort cases within state courts. The states have seemingly made a mess of the matter, but nevertheless, we are surely going to hear a lot about states rights when this matter comes up in the Senate. Justices Rehnquist and O'Connor have historically been strong advocates of states rights.

The strongest argument for a federal solution, in Congress or in the Supreme Court, lies in the discordance between states repeatedly imposed by individual state constitutions. In this area, the trial lawyer lobby might have over-reached. It can be terribly difficult to amend a state constitution, sometimes requiring super-majorities of both legislative houses in two successive years. When one faction achieves a brief but overwhelming dominance it can sometimes pass constitutional amendments that are very difficult to overturn even when the political climate significantly changes. The consequence: it is comparatively easy to pass tort reform laws in some states, next to impossible to do so in others. Add to that the matter of interpretation of these constitutions by state supreme courts that are often strongly partisan, and you can have a highly inequitable inter-state situation that is nearly impossible to change. One of the main functions of the U.S. Supreme Court is to settle conflicts between jurisdictions. When some states have firm limitations on non-economic awards, while other states effectively prohibit legislation on the subject, it is time to look at a national solution if we are to remain a single nation.

Malpractice: Reported Medical Errors

Wall Street Journal Errors

A recent article in the Wall Street Journal reports the state of Minnesota releasing a survey of 378,544 surgeries performed in the hospitals of that state in a 15-month period. During that time, 99 serious medical errors were found, 21 of which resulted in the death of the patient. One error in about four thousand surgeries, and one death in twenty thousand. Because of an understandable reluctance to self-report mistakes, assume this incidence of negligent errors is a bare minimum level of the true incidence. But arbitrarily doubling that to a rate of one death in ten thousand, would be a safety record that calls the malpractice crisis to account. Minnesota is somewhat special, to be sure, frequently held out as demonstrating the lowest medical costs in the country. So go on, then, say the rest of the country has one death in five thousand surgeries. You might be very risk-averse to feel such an incidence warrants destroying our present medical system, imposing some new one with unknowable risk content. That's especially true if you recognize that average American life expectancy got four months longer during those fifteen months. One way to reduce the number of errors would be to perform fewer surgeries, but there are ways of measuring the harm that would do. It's not ever comfortable to defend any error, but it really is necessary to examine the full consequences of any proposal about them.

Let's extend these examples. Since there were only five fatal medication errors in 400,000 Minnesota surgeries, then fatal medication errors must be impossibly rare. An event that only occurs once in eighty thousand cases must represent very special circumstances when it does happen. If people are of the mindset to take 79,000 successful surgeries for granted while applying the most pejorative scrutiny to one case that was unusual, there is no way statistics can change a mindset that the medical system is riddled with error.

My own reaction to these bare statistics is that if there really was only one death from a medication error, there must have been five hundred near-misses. I would conjecture the persons making these mistakes probably caught them before they got serious most of the time, perhaps four hundred times. And then one or two other people caught it most of the rest of the time, leaving the last few cases to escape by pure luck, and one unlucky person making it through to the statistical report. Over a period of two centuries, the hospital has developed systems for catching errors, and most of the systems depend on redundancy. We in hospitals do almost everything three times, screening out a huge amount of human error under stress. Any efficiency expert worth his stop-watch can see repetition and overlap, redundancy, and\waste. Focused factories, as Professor Herzlinger of Harvard styles them, can easily save money by enforcing a discipline of doing it once, and doing it right the first time. That saves money, and that's not a minor issue. But if we yield too far to this pressure, some of those other five hundred medication errors are likely to prove fatal.

A modern hospital employs several thousand employees, of varying levels of skill and training, with a great deal of employee turnover. An occasional incorrigibly incompetent employee can occasionally do real damage before being identified and dismissed. In recent years professional shortages in critical areas can force some substandard employees to be tolerated longer than they should be. By encouraging longer stretches of employment, a congenial slow-paced environment can reduce the incidence of errors but then look out for those efficiency experts. And crowded, tense anthills of activity must perform all day and all night, weekends and holidays. Emergencies appear out of nowhere, the door to the ambulance entrance banging open to a cluster of shouting excited firemen. They can appear at a moment when every single employee is lashed to a heaving deck of other necessities, or wearily starting out the door at the end of a tumultuous day. Some other pious professor or earnest newspaper columnist offers the non-helpful suggestion that we would perform better if we got more rest. What suggestions might be valuable to reduce stress when the loudspeaker blares, Code Blue?

Malpractice: Insurance War Stories

ROBERTS

The 1937 Supreme Court (Owen Roberts, for the majority) allowed Franklin Roosevelt's New Deal to place the federal government in charge of all American commerce, not merely interstate commerce as the "commerce" clause of the Constitution provides. Congress, however, soon exempted the insurance industry from that federal control by passing the McCarran Ferguson Act. States were thus put back in charge of insurance, and it's about the only commerce they are in charge of. Out of this peculiar political anomaly, grows the present uncomfortably deep penetration of the local insurance industry into state politics. And over time, the unanticipated deep penetration of state politics into insurance.

In return, state governments have conferred at least one favor on insurance lobbyists unwisely. If an insurance company fails, subscribers angrily find themselves stranded. The patchwork solution arises, of assigning the obligations of a failed company to its surviving competitors. With no immediately visible cost to the taxpayers, that seems to rescue the subscribers. But it removes any point to competition, eventually raises premium prices, and overall, broadcasts moral hazard. That is, it doesn't matter how badly they behave, their competitors will have to pay for their mistakes. Moral hazard is the most insidious form of political corruption because it is so seldom punished.

Politically inclined state insurance commissioners have other favors to extend. Malpractice companies work in an environment with a peculiarly long tail. (Translation: It's at least six years before the average case is finally settled and paid.) A brand new insurance company collects premiums for six years before paying out much for claims. True, with unrealistically low premiums they are destined to go bust in six years, but there's a free ride in the meantime, including an available punt in the stock market with unspent cash. Investment income during those six years is chancy, making survival a gamble after six years. Lately, the true finances can be obscured by "finite reinsurance", which guarantees to absorb heavy losses, but often neglects to announce how briefly it will do so. It's the job of the Insurance Commissioner to decide whether premiums are realistic, the job of the auditors to assure that the complexities are transparent, the job of the competitors to complain if premiums are too low, and the moral hazard for the Insurance Commissioner arises -- from knowing in the worst case it won't matter to the subscribers, the competitors will bear the cost. Since Insurance Commissioners are usually politically appointed young lawyers, competing insurance companies are actually in political competition, not economic competition. As we say in Pennsylvania, you must Pay To Play.

These seamy realities can unexpectedly exploit premium differentials between medical specialties. There are a lot of lawsuits against obstetricians, neurosurgeons, and orthopedists; consequently, the premiums for these specialties are quite high. Pediatricians and general practitioners have low premiums reflecting infrequent lawsuits. Now, it might be supposed a company seeking long-term profitability would prefer to ensure clients who don't get sued. But here and there you can be surprised to see a new company with great eagerness for high-risk clients, people who get sued a lot. This paradox rests on the quick accumulation of big-ticket premiums from a mere handful of clients. Competitors are prompted to suspect companies with that behavior are looking to accumulate as much premium revenue as possible during a six-year free ride, even lowering premiums somewhat to generate business. But if they misjudge the stock market during those six years, all the other competing companies will likely be forced to pay for the gamble.

Once in a while, the totally unexpected happens. For example, some years ago thirteen judges in one city went to jail for accepting bribes. The Republicans wouldn't appoint Democrat judges, and the Democrats wouldn't confirm Republican appointees to fill the vacancies. During this impasse, Congress happened to pass a law leap-frogging drug offender cases ahead of everything else on court dockets; the unanticipated consequence was an eight-year period without malpractice trials. It became a sort of judicial coiled spring. Insurance companies accumulated huge reserves, the politicians squeezed down the excessive premiums as "windfall profits", money was made and lost in the stock market, and when finally the judicial logjam was broken, the cases had to be paid. Guess what. There wasn't enough money to pay the claims, and premiums took a big jump. Doctors and lawyers bellowed at each other that it was the other profession's fault. In a sense, that wasn't fair either way, although come to think of it, most judges are lawyers. As are most legislators. And Insurance Commissioners. These particular lawyers may not have participated in the problem, but only they are in a position to fix it.

Malpractice: Captain of the Ship ... New Title, One Step At A Time, but A Big One.

One important step is reducing the financial incentives for plaintiffs to sue

Dr. Fisher

In a situation as complex as the medical malpractice crisis, it's hard to know where to begin, and how far to go. We argue here for reducing the financial incentives for plaintiff's to sue. Of the various steps which would accomplish that, the one with proven effectiveness is to place an upper limit of $250,000 on awards for non-economic damages, mainly pain, and suffering. Another step which is easy to explain is to allow juries to know about (and take into consideration) the economic damages which have already been paid by another insurance, like Blue Cross or Worker's Compensation. A third world is to pay out damages for support and disability month by month instead of in a big lump sum which may never be used. These financially-oriented changes, particularly the cap on pain and suffering awards, would be sufficient to stabilize the present chaotic situation for perhaps as long as ten years. During that period of respite, more basic reforms could be examined and tested. It would definitely be better not to get into many of the fundamental issues, just now.

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-- The present tort system is said to have been invented by Charlemagne in the 8th Century, to put a stop to a private settlement of disputes by duels and revenge fights. It has evolved into a system which attempts to place a dollar value on every injury and compensate the injured party. It must be obvious that some injuries do not have any equivalent in dollars, and few injuries are much improved by being paid for. Society needs a long period of reexamination of how we can best compensate those who would benefit from financial compensation, and then what to do about problems that money will not solve. We need a new system that is less expensive to operate, gets better results quicker and has less tendency to provoke dissention. To do that well, will first require at least ten years of stability, not likely unless we do something first to stabilize.

-- Too many other issues are crowding the attention of our legislators. A related issue, product liability, has greater power to gain attention, regardless of its relative merit. Our medical leaders need to acknowledge that product liability reforms may get ahead of medical malpractice in the Congress if we dither, and therefore sweeping medical reform proposals will then require appreciable modification before they can pass.

-- Similarly, the public is presently dismayed to see the governance of major corporations needs fundamental reappraisal, along with difficult decisions about accounting methods within businesses in general. It is not sensible to respond drastically to the disruptions of hospital governance caused by malpractice-induced upheavals when there looms ahead some unknowable organizational rearrangement of corporations in general.

-- What is being proposed as a simple stop-gap -- is to make a change in the court system, in order to rescue a different profession, the insurance system. Never mind that the courts provoked this problem in the first place, courts will nonetheless prefer insurance to seek an insurance solution to its difficulties. Furthermore, it is a federal approach to what has traditionally been a state matter, both in trials of a tort, and in the business of insurance. Such an approach is not easy to accomplish and must contend with every competitive proposal made by those who would lose from it. All of the alternatives have already been examined and are truly not feasible, but they must have a hearing. Ultimately, it may require political brute force to pass this simple measure, and that has a political cost to be considered.

-- Once the public fully realizes that this problem has a lot to do with rising levels of health insurance and that universal health insurance would thoroughly confound its solution, many people will have to reconsider their deeply-held opinions. The steps taken to stabilize this situation must be simple, easily understood, and adopted soon. There is more to be said, but it's better to stick with a simple point, and adopt a solution that can demonstrate twenty-five years of success in several states.

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To summarize the present medical malpractice snarl, particularly what the 2005 Congress should do about fixing it, please tolerate first a bit of naval history from 1777. Speculative Philadelphians rowed across the Delaware River to New Jersey and as far up the Jersey creeks as they could go. Walking a mile or so East, they reached the bustling shipyards of privateer captains, at the headwaters of creeks running the other way, out to sea. The speculators bought shares in the vessels of likely-looking captains, their money bought supplies and sign-on inducements for the crew. The captains then sailed out to blue water through the coastal creeks and bays, and if they came back, paid off the shareholders. If they never came back, the shareholders lost their money, the sailors including the captain lost their lives. When ships were lost, it was presumed to be the captain's fault, but he risked his own life in the process, so utmost diligence in a chancy business was fairly confidently presumed. That's the way the "captain-of-the-ship" idea evolved when corporations, especially hospitals, emerged in the following century. And that's the origin of the belief that the responsibility of the stockholder was limited to his investment, and supervision of the captain was very limited. As business corporations evolved out of this model, the stockholders took some responsibility, and the captain-like C.E.O. took considerably less personal responsibility for mistakes of employees doing what they were told to do. Eventually, stockholders were assigned the whole cost of corporate damage awards, gaining very little true control in the process. Hospitals, possessing charitable immunity, were just about the last to go down this trail, so many principles of the captain of the ship idea persisted, both confounding the hospital-physician relationship in court, and the mutual rights and responsibilities in actual medical care delivery, when charitable immunity was suddenly withdrawn. Using every argument weak and strong, and exploiting every legal ambiguity, the trial bar then unwittingly brought this disruption of essential services to the point where something absolutely must be done about it, and soon.

Unfortunately, redesigning responsibilities in the whole corporate structure of America is too heavy a topic for this spring's debate on medical malpractice. We're certainly moving in some direction, with criminal lawsuits now in the process personally against the C.E.O.s of some of our largest corporations for transgressions that may not be medical, but nevertheless, leave undigested implications from the recent Sarbanes-Oxley Act concerning for-profit corporate governance. No one is willing to permit so unique a corporation as a hospital undoubtedly is, to establish principles of law governing the entire economy. Herein lies one of the main arguments in favor of stop-gap legislation, rather than get-to-the root-of-it legislative statesmanship about MICRA, or whatever we call medical malpractice legislation on a federal level.

The second argument for a patchwork solution lies in the vexing entanglement of the medical malpractice crisis with other inflammatory national medical questions: what should we do about employer-based third-party health insurance or even health insurance in general? The wounds are too sore from the 1993 Clinton proposal, and from the subsequent managed-care fiasco, or the more recent prescription drug tangle, for there to be any hope of keeping those echoes out of a medical malpractice debate. Employers are deeply involved in product liability questions at the same time they are heavily invested in employee health insurance. If we force them to choose between their conflicting interests in these two areas, they may decide the net balance of their Washington interests favors a course of action on medical malpractice which makes the malpractice crisis worse. Notice that malpractice awards are pretty much confined within the limits of malpractice insurance, with a major role of moral hazard making things worse. Malpractice insurance, particularly the hospital part, is almost entirely financed out of health insurance. And rising costs of malpractice awards are thus a major source of rising malpractice insurance premium rates while rising malpractice premiums put upward pressure on health insurance premiums. Round and round it goes, making it impossible to establish a new theory of one form of insurance without a new theory of managing the other one. The situation cries out for a workable stopgap, followed by a period of calm rumination.

A number of earnest proposals have been made in the last forty years, and almost none of them has had any effect. The defense bar, putting forth a succession of obscure legal doctrines to make it easier to defend cases, has not been a productive source of ideas. Since only a small proportion of very similar medical mishaps trigger a lawsuit, all those well-meant ideas for arbitration or alternative dispute resolution raise the specter of creating a staggeringly huge entitlement for a particular sort of injury. Carry that further to all injuries caused by anybody, and you can't tell where you would be going, but you know for certain it would be more expensive than even the present crazy system.

In all the wrangling and experimentation about medical malpractice which has been going on for two generations, only one general approach has been demonstrated to work quickly and surely: reduce the financial incentives of plaintiffs and their representatives. California and Indiana provide twenty-year demonstration projects on the consequences of placing a $250,000 cap on non-economic damages, generally known as awards for pain and suffering. Legislation which includes a provision that juries be told that health insurance has already paid for injury repair (repealing the Collateral Source Rule) or that a widower has since remarried and does not need supplementary child care, or similar circumstances, would probably get attached to such legislation without great debate. Structured (rather than lump-sum) payment of damages is another legal term for reform of a "money issue" which would probably pass any session of Congress willing to pass a cap on pain and suffering.

So let's get on with it. Put a reasonable cap on pain and suffering, attach a few other legal obscurities, and bring this malpractice issue to a screeching halt. And then, in the ten or twenty years of respite, it would provide, thrash out all those fundamental questions of corporate governance and responsibility, of non-adversarial dispute resolution, of party politics, and universal health insurance. There's a fair chance those questions can never be satisfactorily resolved. But even if they can be, this malpractice matter won't allow you to wait for it.

The Blue Cross Discount (6)

Blue Cross Blue Shield

Since I've alluded to the two basic problems in health financing today, perhaps I need to explain them. What's known in hospital circles as the Blue Cross discount refers to the wide disparity between what the hospital will accept from an insurance company and what they will demand in payment from someone who has no insurance. It's often double the price. It's a tragedy that forty million Americans don't have health insurance, all right, because it costs them twice as much. It's a punishment for the terrible crime of not buying insurance, to call a spade a spade.

That sounds like a pretty easy problem to fix, doesn't it? Stop overcharging them, and half of the problem of the uninsured would go away.

Furthermore, most of the people who do have health insurance are effectively able to buy it at seventy cents on the dollar, because they don't pay income tax on the money that goes for "health benefits" which is to say health insurance premiums.

Taken together, most people thus pay seventy cents for health care which will cost uninsured people two dollars. Most people would suppose that we ought to give a break to some poor devil who can't afford insurance, but in fact, we skin him alive financially. It's impossible to name any other necessity of life that's treated this way, and it's hard to think of any other problem that would be so easy to solve -- just charge everybody the same amount. If you are really bighearted, charge poor people just a little less,

Now, I refuse to get drawn into a history of the origin of these egregious situations. It has to do with price controls during World War II and the fact that investment capital for the health system was impossible to raise during the depression of the 1930s. But it doesn't matter in the slightest how this came about. What matters is how to make it go away.

Consequences of Lyndon Johnson's Healthcare Legislation

"New" Health Care Reform, 1965

Lyndon Johnson

In 1965, Lyndon Johnson caused the enactment of two amendments to the Social Security Act, Titles 18 and 19. Title 18 is now called Medicare (for the elderly), and Title 19 is called Medicaid (for poor people). These two laws were cobbled together as negotiated compromises; the history of this contraption no longer concerns us. The outcome is that Congress created a Federal program for the elderly, and a state-administered program for the poor, partly financed by the states but mostly financed by federal taxes. The states howl that Medicaid is an unfunded mandate, and the Federal bureaucracy snarls that the states are mismanaging someone else's money. The welfare patients are bitter about second-class treatment, and doctors have as little to do with this system as possible. The focus of this article, however, is on the harmful effect of Medicaid on hospitals. Of all the stakeholders affected by Medicaid, the hospitals have historically been the best treated. Nevertheless, it has brought them to the brink of ruin, most of them acknowledge it, and matters are so hopelessly snarled that it is time to call for a transfer of the medical components of Medicaid to Medicare. In plain language, that means replacing state administration with federal Medicare management.

It may seem peculiar to call for extracting the medical components from a medical program. Forty years of creeping modifications in fifty different state directions have resulted in many state Medicaid programs spending more on nursing homes, home care, and various educational programs -- than on the activities of doctors and hospitals as originally intended. After forty years, this creeping mandate shows no sign of abating. It may never abate, but certain parts of it could rather easily be transferred to federal Medicare program, leaving the innovative fringes to fight their own battles with state legislatures, arguing those merits independently of this issue.

From the hospital point of view, Medicaid pays substantially (20-40%) less than the costs it claims to cover. The chiseling is worse in some states than others, but it is hard to find a single state Medicaid program which clearly pays its costs in full. Medicare is pretty tight-fisted, too, but at least a majority of knowledgeable insiders would admit it comes pretty close to paying its audited costs. Everybody else pays more than costs, but for this discussion that is irrelevant. Government as a whole is not paying its fair share, the state-administered portion is responsible, and there was never any non-political justification for having two programs. So, combine them. Other components of Medicaid, however worthy in intent or effect, are the responsibility of the various states which created them. When the states have got non-hospital, non-doctor issues carved out and audited, the merits of federal funding can be examined.

Two other features of the Medicaid mess can be mentioned, so long as they are not allowed to befuddle the main message of program consolidation. In general, the proportion of elderly or poor clients in rural hospitals does not materially differ from the proportion of such clients in urban hospitals. There is institutional variation, of course, but the principal distinguishing feature is that small rural hospital is necessarily semi-monopolies within fifty-mile districts, whereas urban hospitals face competition more directly. State governments, therefore, are unable to impose discounts on rural hospitals with the same leverage and severity. Seeing this, urban hospitals have often applied political pressure on the legislature to extend comparable relief to them. Since local labor and living costs are lower in rural areas, an excuse is created to word regulations and state laws in a way which recognizes parity in the ratio of audited costs to charges rather than the charges or costs themselves. Quite often, hospital accountants can outwit legislatures in these obscurities, leading to rather obscenely high list prices for hospital services, to shift the ratio. Although it has the temporary advantage of further obscuring public market prices for such services, it constitutes a serious injury to uninsured patients. Other persons, who might perceive no personal need for insurance, are driven to buy it in order to protect themselves from gouging.

Medicare itself is certainly not perfect. The largest remaining issue confounding hospital charges can be traced back to weaknesses of a 1983 Medicare law, the Budget Reconciliation Act. Reimbursement legislation traditionally overpays initially, with every intention of paring prices down later. The providers, hardened to this maneuver, try to stonewall all subsequent amendments as long as they can. In this case, the overpayments have persisted so long they have become basic assumptions, triggering internal re-adjustments which make resolution still more difficult. A number of hospitals have been severely fined for violating the spirit of this law, however close they may come to obey the letter of it. On the other hand, other courts have held that a situation which has been allowed to persist so long can be deemed to be settled law. The result is a predicament which is quite unnecessary, and might be rather readily corrected.

But let's not wander too far from the basic proposal. The corresponding (doctor and hospital) portions of Medicaid should be consolidated into Medicare, with remaining issues settled independently. Consolidating two government programs may not quite be the "single payer" concept that others had in mind, but it resolves most of the legitimate problems which provoked that mysterious slogan.

National Business Coalition on Health

NCOH

In 1992 the National Business Coalition for Health was just forming at a convention in Chicago. Before I really understood what it was all about, I agreed to their flattering invitation to be the keynote speaker at the kick-off luncheon. Who suggested my name was and is a mystery to me, and I arrived in Chicago with very little idea what they wanted to hear. However, it followed the familiar pattern of inviting the speakers to stay overnight at the hotel on the evening before the meeting began and to meet for drinks at the bar with the organizing leaders. I had enough experience with public speaking to know I could learn the general slant of the thing at such an informal party and adjust the speech to the audience to whatever degree seemed needed. Among the people scattered around at tables was Harry Schwartz, who was also there to give them a speech. Harry had been on the editorial board of the New York Times for many years and was known to be generally quite favorable to physicians. We had both written books about medical care, The Hospital That Ate Chicago in my case, and The Case for American Medicine, in his. We liked each other immediately and fell into an animated cocktail conversation that would eventually be renewed every six months at the American Medical Association House of Delegates meetings, where I was a delegate and he covered the topic for various news media. As we chuckled together about one anecdote or another of medical politics, the bar gradually emptied out. It soon became clear that all the other cronies had wandered off to dinner together, so we ordered dinner on the house, neither one of us have learned just what we were there to talk about. It really didn't bother either one of us very much, since from long experience we could tell some jokes and make it up as we went along. I knew what I wanted to tell businessmen, so it was just a matter of finding a way to lead into it.

The speech seemed to go well. There were several hundred, perhaps even a thousand in attendance, quite convivial and prosperous. As executives usually do, they looked younger than you might expect from the titles on their name tags; they laughed at the appropriate points and applauded at the end. In other words, I went home from Chicago with no more idea what this organization was up to than I had before I came. At the very least, it is clear they were forming a national organization of businesses, with constituent representatives largely drawn from Departments of Human Resources. They wanted to speak for American Business with a more or less unified voice, and the topic seemed to be health care. Although fate had put me into the debate at the very earliest moment at Wills Eye Hospital, this convocation of extroverted Republicans seemed to know a lot more than I did about what was secretly afoot among the Democrats in Washington.

This Chicago tea party did one other thing for me. Many months later, when the editors of USAToday were in search of an editorial page writer who was both a physician and opposed to the Clinton Health Proposal, they called Harry Schwartz. And he suggested to me. They ultimately ended up with a Medical Editorial Advisory Board of five members, at least three of whom were far to the left of me. At the New York Times, of course, Harry Schwartz was considerably more outnumbered than I was. After it was over, Harry and I used to joke that both sides were fairly evenly matched.

Monitoring the Actions of the Business Coalitions for Health: by Harry Schwarts, PhD

Chicago, Il. Those much discussed and, in some medical circles, much-feared Business Coalitions for Health Action may be a more constructive force on the health scene than doctor pessimists have feared.

No one could have attended the first national meeting of the coalitions, sponsored by the U.S. Coalition for Health Actions at the first of June, without understanding the strength of the commitment of the coalition representatives to more economical resource use in healthcare. But this was no "hate-the-doctor" meeting nor was there any irrational or demagogic posturing such as has come so frequently from some politicians in Washington.

On the contrary, both speakers and participants agreed the United States has a superb health-care system offering patients the best available care. There is a desire to make the system operate more economically by widening the choices of both doctors and patients. But the coalition members seemed much too sophisticated to believe there was any single magic answer such as dragooning all doctors into health maintenance organizations (HMO's) or making them hired hands of the federal government.

Moreover, the stress was on slowing down the rate of future health-care cost increases. It was recognized health-care costs will increase because the country's population is aging and because future medical progress will make it possible for doctors to do more to help their patients than ever before.

Perhaps the most intriguing insight offered to the more than 100 participants came from Stephen Caulfield, of the Government Research Corporation. He suggested that later in the 1980's the greatest of health-care price increases might come from the high cost of the capital.

"There is a desire to make the system operate more economically by widening the choices of both doctors and patients."

Many of the nation's community hospitals, built 20 to 40 years ago, are becoming more decrepit and, in many cases, need rebuilding or complete replacement. Just to replace the community hospitals, with no increase in beds, he estimated, would cost $190 billion, most of which will have to be borrowed. And at the likely rates of interest visible ahead, that interest load may well prove the most inflationary force on health-care.

For physicians pinched by increasing competition and the resulting patient shortage, a possible new rival to HMO's was described in detail by Gary Brukardt, of Denver's Mountain Medical Affiliates, a preferred provider organization (PPO), organizations that may conceivably become as much a part of medical jargon as HMO's.

A PPO is a device for doctors to compete by cutting prices or giving discounts, for third-party payers. Burkhardt's pioneering PPO was organized by Denver's Presbyterian Saint Luke's Medical Center after the hospital began losing more and more of its patients to suburban hospitals and HMO's.

The hospital decided to meet the challenges by organizing itself and its specialist physicians who cared to join into a price-cutting source of tertiary care later expanded to primary care. Mountain Medical Affiliates was organized by the hospital as a complementary physicians organization, now embracing 320 doctors representing 28 specialties.

In effect, the hospital and the PPO offer third-party payers a discounting deal. The arrangement apparently appears mainly to Denver companies that self-insure for medical costs. If their employees go to the hospital, the hospital's bill to the employer is discounted by some undisclosed percentage. If the employees go to one of the 320 participating specialists, their employer is billed at a rate which is between 5 and 20 percent below the prevailing "usual and customary" rates.

For the participating physician, the arrangement has two big advantages. First, it is a source of additional patients, as well as a means of holding on to odd patients. Brukardt estimated that 45 percent of the PPO's patients are new. Second, the companies involved pay promptly, normally within seven to 10 business days on receipt of the physician's bill.

The Hospital itself has expanded its system to include a total of six hospitals including institutions in Estes Park and Vail, Colo., as well as Colby, Kan., two emergency facilities, and eight primary-care centers staffed by employed physicians. Brunkardt emphasized participating PPO physicians control their destiny, decide themselves what the relative values of different procedures shall be and are by no means completely dependent on the PPO. Some physicians g=fet 20 percent of their patients from the PPO, while others get only a few each weeks.

The luncheon speaker was George Ross Fisher, MD, a Philadelphia endocrinologist author of "The Hospital That Ate Chicago" and a veteran member of the American Medical Association's House of Delegates. Dr. Fisher emphasized two points: the need to make patients more conscious of the cost of medical care by introducing more deductibles and percentage payment arrangements into health insurance schemes; and the need to run hospitals in a more businesslike fashion.

To foster the latter objective, he suggests every non-profit hospital set up a subsidiary for -profit organization that would actually operate the hospital. All profits made by the organization running the hospital could be used by the owner, the non-profit corporation, for encouraging teaching and research and to pay for patients who cannot pay for their own care.

There are now 48 full-fledged coalitions for health care operating in the United States, a Peter Ozge, director of the U.S. Chamber of Commerce Clearinghouse on Business Health Coalitions, told the meeting participants. The 48 coalitions enroll 1,870 members 75 percent are employers, 18.5 percent are health-care providers, and the rest is labor, government, and miscellaneous groups.

Most of the coalitions are relatively small, local organizations and only 20 percent of them have more than 50 members, while 9 percent have under 25 members. Most of the coalitions are operated by volunteers or personnel assigned by member companies, but 21 coalitions have only workers employed by those organizations themselves.

About one-third of the coalitions consist exclusively of employers, while only none of the 48 have to labor organizations as members. The interest of the provider organizations in the coalition movement was indicated by the presence of numerous representatives of provider groups such as the Indiana Medical Association, Kaiser-Permanente and the Hospital Corporation of America.

The stress was on slowing down the rate of future health-care cost increases.

The business community's effort to exert pressure for restraint on medical costs is not monolithic. Entirely separate from the coalition movement is the Health Task Force of the Business Roundtable. The Roundtable consists of the chief executive officers of some 200 of the largest corporations of the country, and the latter has encouraged its members to belong to the Washington Business Group on Health, an articulate representative for business views on health issues before Congress.

But apparently relations among the different business groups are cordial. Lindon Saline, Ph.D., a General Electric executive assigned to the Business Roundtable "Health Initiative," spoke to the group. He emphasized the Roundtable is encouraging its member corporations to participate in local coalitions in all of the communities where the member coalitions have significant plants and offices. Willis Goldbeck, the chief executive of the Washington Business Group on Health, acted as moderator at one of the meeting's afternoon discussion sections.

A representative of the Department of Health and Human Services (HHS), medical economist Bruce Steinwald, Ph.D., said the Reagan administration is still interested in the competition strategy but has the regulation strategy in reserve if needed. HHS, Dr. Steinwald said, is collecting a wide variety of information on medical costs and on how costs are affected by different modes of healthcare delivery and by business efforts to restrain costs.

Gerald Gleeson, of the Philadelphia coalition, and government data collection efforts. These efforts aim to make basic data sets available that will permit equivalent comparisons between medical care given and medical costs incurred for similar conditions in different communities and different parts of the county.

However, few stressed that the collections of fully comparable and uniform data for all parts of the country will permit government and other third-party payers to press for greater uniformity throughout the country. It is known, for example, that the length of stay in a California hospital is relatively short while relatively long in the Northeast. With the passage of time, availability of better data may create the basis for pressure to make the length of stay in a hospital and other cost elements more uniform across the country.

Gleeson, other speakers, and various coalition members and staff personnel attending the meeting expressed concern that the Reagan administration may try to put more of a load on the coalitions that they are capable of bearing. "We cannot be the nation's health planners, utilization reviewers and 'what have you' as some in Washington would like us to be." one veteran coalition official said.

Nevertheless, the coalitions hope to expand their activities and help get all providers both doctors and hospitals to adopt more economical modes of health-care delivery. Doctors and their organizations are apparently welcome to cooperate as are hospitals and their organizations. But nobody at this Chicago meeting doubted there would be conflicts as well as cooperation in the months ahead.

Why Are Hospital Prices So High?

Aspirin

Cost analysts maintain it really does cost ten dollars to write a simple business letter, so maybe it's no surprise when hospitals charge ten dollars to administer an aspirin tablet.

But there's also another form of hospital overcharging. Mark-ups of prices of several hundred percents over audited costs are routine in hospital bills. These are not hidden cross-subsidies, either; they emerge on the yearly audit as multi-million dollar "losses", neatly balanced by "contractual allowances". Translated, these are discounts to insurance companies.

Why do hospitals raise prices, then turn around and discount them? Why do they overcharge, then call it a loss when they write it off?

It's an important question, because it results in confronting patients without insurance with much larger bills than the effective price to insured ones; patients who can't afford to pay are charged more than those who can.

The old-time system of hospital wards to care for people who couldn't pay have been replaced by collection departments and hospitals are very aggressive in pursuing the very people who can least afford to pay, and who are grossly overcharged in the first place.

Health savings accounts with high deductibles were conceived as a way for people to self insure but they have been thwarted by hospital overcharges. Since HSA deductibles are guaranteed, hospitals perpetuate their present largest source of loss -- unpaid deductibles. So why do hospitals continue to post abusively-high prices for patients without large-insurance-company coverage?

Until hospital officials come forward with a coherent defense of their practices, outsiders can only guess at motives. Start with the old legal approach of "Cui bono?" (Who might have a motive?) and divide the answers into those with a motive and those with the means. The line-up will then consist of hospitals, insurance companies, limited-license practitioners, and the state government. Limited licensees, acupuncturists and the like, surely must hate high-deductible health insurance because their fees mainly fall below the two or three thousand annual deductibles. Old-line health insurance companies also have plenty of motive to keep out competitors, fearing antitrust action if they get too obvious. That leaves the state government.

States have ample power over hospitals. Substantial annual payments are negotiated with hospitals for Medicaid services, charity care, and educational grants and subsidies. Tax exemptions are repeatedly challenged and re-negotiated, and overall non-profit corporations are entirely creations of the state legislature. So, unless it is a violation of federal law, the state government has the means to compel hospitals to do anything. Power, yes, but where is the incentive for states to wish for exorbitant hospital prices? Or confer monopoly status on certain insurance vendors by according them sweetheart discounts?

All current plans for "reforming" health care involve providing government-paid insurance to those without. Will the result be to permanently institutionalize the artificially-high public prices to be paid in full by the government? If so, you can well understand why hospitals support these "reforms".

So hospitals are no better than stores that mark up their prices and then loudly proclaim that they will give you a discount. 200% mark-up, 10% off; terrific.

While the City Sleeps

David Dinges

For almost a century, it's been a settled rule that it takes "half an hour" to get from home to work. In a sense, that's just a figure of speech because it rather obviously takes most people longer than that. But in another sense, the thirty-minute rule persists in fact, because that's how long it takes to travel to the outer edge of the suburbs. That time requirement has not changed in decades. As people increasingly live beyond the outer edge of the suburbs, it takes them thirty minutes to get to that point, with "exurban" travel time as an extra, often significantly extra. It would appear from common parlance that the thirty-minute distance is fixed and settled; the exurban extra time consumption is open to argument, still subject to change.

Let's restate this business. Thirty-minute commuting is what everyone must do, but travel beyond the suburban line is still considered an elective option. Other options are to read books, go to professional society meetings, fiddle with computers, or chat using a variety of new electronic instruments. One option is at least briefly considered by everyone: get less sleep. The World Health Organization has shown that finding extra time to commute by sleeping less is nearly universal. Philadelphia's Institute for Experimental Psychiatry has measured the physical cost of doing so. Essentially, you can accumulate a deficit of sleep for a week, then restore your freshness by one or two good sleep. At the very least, biological pressure of that sort is going to compete with Sunday morning church attendance. Of course, maybe it works the other way; maybe atheists feel free to move to the exurbs.

There's another residential option, to build vertically upward in what is commonly called "condos". From the church attendance point of view, it's an interesting observation that people who live in houses downtown seem to get dressed for church, followed by Sunday Strollers Brunch. Dwellers in condos, however, seem to prefer to spend the time at sidewalk tables on Rittenhouse Square, South. Quite obviously, some other considerations may be dominant. When the housing bubble finally bursts, it will be interesting to see what it will uncover in the way of convoluted social effects.

Certain facts will remain hard facts. According to Euclid, the area within a circle expands three times as fast as the square of the radius. Hence the population is first to spread thinner as it expands outwards, then silts up with more people. In our case, the census bureau reports exurban commuting time has about doubled in fifteen years, so traffic gets more crowded at that rate. People make up for it by sleeping late on Sunday, then start giving up something else. They don't want to give these things up, so they skirt the edge of chronic sleep loss. They fall asleep in movies, or in lectures -- or at the wheel of the moving car. The cities grow larger, urban sprawl spreads further out. Mixing all factors together, one would suppose there's an invisible limit to how wide each city can grow. After that point is reached, there's only increased density insight if population numbers continue to increase.

Longevity Revolution

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Current Healthcare Reform Proposals

More on Last Year of Life Re-insurance.

It's looking far ahead indeed, but at least in theory, everything about health care costs will eventually disappear as we cure disease -- except the first and last years of life. Everybody's born, and everybody dies, so the goal of all health insurance, single payer or single individual or other, is to reach the configuration of only two critical remaining years to be paid for. How long it will take, at $33 billion per year in research costs, is hard to say, probably a very long time. But at least we can be working in that direction, while we pursue shorter-term goals.

Our short-term goal is to lengthen the period of compound interest, and to get more of it deposited early. Ultimately, that should reduce the amount to be paid at the time of service. The more we reduce Medicare costs, the more these two features combined, lead to flattening out the lifetime bulges in costs at the time of service, which essentially means, from further evolution into Medicare. That, in turn, reduces the amount transferred to Medicare from working generations. As mentioned earlier, it is dangerously unbalanced to have the working population, which gets less and less sickly itself, pay for the healthcare of children and retirees, whose costs are steadily rising as the disease gets pushed into new categories of life. We must hope ultimately to achieve a reduction of the cross-subsidy, while we work to prolong the period of compound interest income, directly.

To a degree, it is a happy circumstance that young people are healthy, while old folks relentlessly concentrate a lot of sickness and death in their group. It's a moderate nuisance for cross-subsidizing employers who extract subsidy money without being able to guarantee benefits after an employee changes employers. There's not much they can do except hide when it happens. This nuisance has been regularly endured until by now it is becoming a serious problem. But it's so simple, really. All you need do is let the employees own their own policies, take them with them when they change jobs, and actually collect what they earned while they were young. A whispered appeal would be, to correct this difficulty before it causes rebellion.

If the Medicare payment system is reviewed, it can be seen we are already sequestering about a quarter of Medicare costs through the payroll withholding tax, collected from every workman's paycheck. What happens next is not so attractive. Instead of accumulating the withholdings within an interest-bearing account, they are absorbed into the general fund and can be spent on almost anything.

Accountants in the government will have to tell us the exact amounts that could accumulate, but Medicare spends about $50 billion a year. We can thus assume equilibrium at 25%, or $12.5 billion for payroll withholdings. Suppose for a moment the money could be put into total market index funds (which at 11% gross sustain inflation attrition of 3% and overhead of 1%) leading to a 7% net gain. Since money doubles every ten years at 7%, in fifty years the withholding float should produce five doublings or 3200%. Since we started with a quarter of Medicare expenditures, that's 800%, or eight years, of annual Medicare cost for each year you keep doing it. No doubt it's too drastic to remove 25% of withholdings, but we only need a fraction of the total to cover the last year of life. And we don't even have to pay that until the worker dies, which on average is going to be 21 years (two doublings) after he reaches 65. So it sounds to me as though you only have to wait sixty or so years before a set-aside of a portion of a year's Medicare cost would pay for current last-year-of-life costs. You probably wouldn't do it exactly that way, in order to shorten the time you must wait to get to the payoff. But this rough approximation illustrates that no amount of quibbling about the principle involved would reach any conclusion except that it's do-able. The issue is whether we wish to change our whole fiscal premise in order to do it. But let me suggest another consideration: if the Singapore government, for example, succeeds at doing it, can we withstand the pressure to go along? In my opinion, our rhetoric would rapidly change, because everyone knows nothing must ever happen for the first time.

And remember one more thing: if it works, it will reduce total Medicare costs by 20%, or whatever is found to be the true medical cost of the last year of life. Make it the last two years of life, and you almost wipe out the Medicare deficit. The last four years include half of Medicare cost.

We expect a more accurate assessment of the "exact" numbers from this source by people who own calculators, and it may be less, but it will still seem appreciable. In addition to payroll deductions from working people, Medicare obtains a similar amount from retirees as Medicare premiums. As you reduce the deficits, you can stop collecting premiums. Carried far enough, you can start reducing the Medicare budget -- and start sending the reduction to beef up the retirement funds, which in this case I would expect to define as the surplus within their Health and Retirement Savings Funds. There's more to this idea, starting with the first year of life, which is a wholly different matter.

Loud and Clear: Health Savings Accounts

Health Savings Accounts. Medical Savings Accounts must be distinguished from Medical Spending Accounts, which unfortunately include an annual "use it or lose it" feature. These spending accounts recently styled themselves Flexible Spending Accounts, while Medical Savings Accounts became Health Savings Accounts. In time the confusion may subside, but the distinction remains important. There has recently been an employer initiative to make the payments of Spending Accounts tax-exempt, apparently intending to equalize them with Savings Accounts, but tip-toeing around the larger issue of failing to include individually purchased health insurance in the tax exemption.That would be an unfortunate splitting of political forces.

Health Saving Accounts (HSA), or Medical Savings Accounts (same thing) supplement other IRA (Individual Retirement Accounts) or 401 (k), but address medical expenses .

Tax-deductible, Health Savings Accounts do indeed accumulate unspent balances from year to year, gathering income for a future rainy day as they go, while allowing funds to be spent immediately if the rainy day comes early. If wisely invested and left untouched, they can accumulate a surprisingly large amount of money over a lifetime. They don't quite make everybody a millionaire but that isn't completely impossible if you don't get seriously sick, and pay small routine medical expenses in cash. Just why employer groups have failed to seek ways to convert their use-it-or-lose-it plans into Health Savings Accounts -- which wouldn't lose it -- is not entirely clear. But it is highly recommended that this be explored, if for no better reason than to put a stop to wasteful spending at the end of the year, just to use the money up. This book proposes to put that money to work pre-paying medical expenses in the far future with the investment income, which is a goal you would suppose is in the employer's interest. Almost enough has already been said here about this idea, so some attention needs to be devoted to those people who have HSA plans and do get sick, and can't afford their medical costs without invading the fund. If such a person does get sick, the money to pay for it is available. This feature responds to the fact that some people have major illness early in life, while some other people stay well for decades before they have a serious illness; for most people, it is a toss-up which it will be. It isn't very common for someone to be very sick for six decades, by the way, but stop-loss insurance would even cover this contingency, and it isn't very expensive because that sort of casualty is uncommon.

Because we all get tangled in this sickness lottery, the Health Savings Account is intended to be linked to a high-deductible health insurance policy. The higher the deductible, the cheaper the insurance premium will be, so progressively more money is left over to add to the Health Savings Account, compared with buying ordinary health insurance. At the moment, the best level of deductible is at least $5000, varying with inflation. The person who buys this package is on the hook for $5000 until the Health Savings Account builds up to $5000, which usually takes about three years. Those who don't already have that much savings or reserves are taking a chance for three years. That's one of several reasons why this package is most appropriate for young, healthy people.

These two linked promises are meant to discourage unwise spending, even for health, but it's your choice. What induces you to contribute annually, and discourages early withdrawal, is the income tax deduction. That's all there is to it, and it's already quite legal. From its very beginning, an HSA was intended to be linked to a high-deductible health insurance policy bought independently. The pre-funded last year of life was an afterthought for what you would do with the money if you enjoyed good health, and the accordion is provided just in case we get a cure for cancer, or some other wonderful development.

There are problems to be tinkered with. Nowadays, it usually goes the other way; the Health Savings Account is suggested and explained to customers by salesmen for high-deductible ("Catastrophic") health insurance, who could also suggest a bank with a debit card to make claims and payments both convenient and smoothly integrated, but often don't do so because there is no commission for added features. Brokers earn commissions on the insurance part, but not on the HSA part, and that's probably a flaw. Some brokers suggest the whole package, but pressuring individual banks to waive fees for maintaining them, is just asking too much. Providing for sales commissions might improve public adoption. Technically, that's all there is to HSA. The only known opponents to high-deductible insurance are a few labor unions who fought to pass state laws mandating specific small-expense items into all insurance policies in their state. Somehow they imagine circumventing those victories (by HSAs making them unnecessary) would diminish their own stature. In any event, these small-expense state mandates ought to be repealed or pre-empted. They eat into the fund which might need money later for a more serious sickness, and they inhibit the sales of high-deductible. Hospitals are very little affected by this approach, except in the reform of the ratio of charges to costs. Therefore, most of the external supervision of the program should come from physician representatives, who will be the first to notice when changes are needed.

The real value of Health Savings Accounts is not what they provide, but what they make possible. One immediate consequence is to silence knee-jerk objections to a high deductible. By implication, deductibles discourage the co-pay approach by competing with it for the premium dollar, and we have earlier discussed why that would be desirable. On first learning about HSA the first reaction of many people is that no matter how small the deductible is, some poor patients could not afford it. A high deductible sounds even worse. However, under the Affordable Care Act, everyone must now carry some form of health insurance, so a high deductible makes it cheaper to finance and to buy. For some poor people, a subsidy is required, so Constitutional equal justice is, so far, in doubt here. Health Savings Accounts merely aspire to receive equal subsidies for poor people compared with other insurance, but meanwhile, provide a tax-exempt incentive for working people to accumulate funds internally to cover a deductible. With HSAs, money to cover the deductible is in the fund after about three years, and sooner if it is subsidized. In any event, subsidies would mostly be temporary, because those who do not get sick would see annual increases in the Savings Account, soon making further subsidy unnecessary. Anyone with tight finances might be advised to start with the catastrophic insurance, adding the HSA component when they can, and resulting cost savings would not be negligible, even during the present episode of abnormally low-interest rates, because the contributions themselves are tax-deductible. The temptation to delay or deplete the fund should be resisted, particularly by governmental payers of last resort, because the expense is so likely to reappear as a bad debt when indigent patients get sick. Temporary front-end subsidies for HSA, while initially objectionable to conservatives, are a far better solution than the present unsustainable expedient of cost-shifting. The first function of a high deductible is to make insurance cheaper, in this case, cheaper than simply enrolling through an insurance exchange. Because of current low-interest rates, a few banks currently charge a small fee for debit cards with a low balance, but many banks do not. Young people are apt to incur small medical expenses, not covered by the high deductible, but they can all look forward to higher expenses when they will be glad they had set the money aside. Starting out with buying both features should squeeze major financial health risks permanently out of consideration after two or three years of good health. Existing health insurance companies may thoughtlessly resist such a change, but the impending startup turmoil about the Affordable Care Act should soften them up considerably.

Speaking of fairness, HSA finally catches up with the Henry Kaiser World War II provision (see above) by extending healthcare tax exemptions to all working people, not merely salaried employees. It now could readily match a temporary subsidy for the poor to whatever permanent subsidy the government provides under the Affordable Care Act, whenever that gets untangled from the conflicting provisions of ERISA. Those are decisions independent of insurance design; if Congress changes either the subsidy or the tax exemption, the insurance can adjust correspondingly. A future budget search for smaller subsidy costs would not cripple Health Savings Accounts, as it might well cripple Obamacare. A few conservatives are so antagonized by Obamacare they would not mind crippling it, but their long-run interests are better served by creating a more workable system. That point may not be obvious, revolving around the difference between indemnity and service benefits. An indemnity (or the patient) states in advance what is affordable and hopes to negotiate the rest, whereas a service benefit describes what services it will pay for, regardless of cost. If you were a healthcare provider, how do you suppose you would react to that proposal? Indemnity is designed for ambulatory adults to bargain with but is largely inappropriate for sicker people in a hospital bed. In the HSA system, the distinction between ambulatory and bedridden appears at the level a Health Savings Account stops paying, and the deductible health insurance starts paying. That is, it depends on a shrewd choice of the size of the deductible. For this reason, Health Savings Accounts have always attempted to match the size of the deductible to the average cost of fairly inexpensive hospital admission. And for this reason it should not be tinkered by other considerations; if the deductible is raised above the level of the median hospital entry, it should apply to a separate stop-loss policy for hospital outliers.

In a well-designed system using debit cards, a transition between the two types of treatment venue could almost be imperceptible, but that also creates a hazard of changing it carelessly. As mentioned, it is in the interest of everyone to maintain the amount of the deductible below the great majority of hospital inpatient bills, while remaining above the average annual cost of office care. If that is unachievable, only the hospitalization cost should be matched. To forestall gaming of the insurance by cost-shifting, hospital outpatient costs should be treated as office visits, and Emergency Room costs as well, provided the patient is not subsequently admitted.

The Health Savings Account is thus tax-exempt and accumulates from year to year, together with the interest it earns; its sources are a portion of wages, or tax credits, or possibly in time government subsidies, varying between individuals. To prevent gaming, expenditures might be limited to health care, but there is no earthly reason to limit contributions to a system which is starved for revenue. In practice, the account is used primarily to pay for outpatient (office) services; assuring the ability to pay the deductible of a linked catastrophic insurance policy is very important, but much less frequent. It is not contemplated that it will have any co-pay or coinsurance (see above). It also might contribute to an optional pool (or reinsurance) for the less frequent risk of paying for the second instance of an annual deductible, providing sufficient funds have not re-accumulated in the Savings Account. Its essential point is to distinguish between small negotiable costs and large unnegotiable ones, not between paying hospitals or doctors, as Medicare and others do. The internal accumulation of compound interest income matches another unspoken reality; young people have few medical costs and can accumulate, while older people are mostly spending. This somewhat answers the common grievance of young people that they are subsidizing old people; they are in fact subsidizing themselves for when they are the old ones. The degree to which unmentioned problems fall into place is a great testimony to a system whose most attractive feature is simplicity. In practice, it does employ an essentially different insurance methodology between most office doctors, and hospitals, and between most young and old. It just doesn't specify it.

Marketplace Presumptive Costs (MPC). Payment by diagnosis rather than itemized bills (beginning in 1982) was a great improvement for patients too sick to pay much attention to finances, which generally describes hospital patients who need to be there. Since Canadian hospitals demonstrated (by eliminating them) that itemized bills were the main information system for cost-effective management, they are still produced in American hospitals. Although such posted charges are largely useless because of the 500% disconnect between prices and their underlying cost, the volume of individual services is depicted accurately, and could be used to link marketplace prices (reported by aggregated regional Health Savings Accounts), to the item volume within the Diagnosis Related Groups (DRG), as well as the particular patient's item volume (his bill). The result would be a new cost figure not previously available, which we will here call the Marketplace Presumptive Cost (MPC). If that is added the unique surcharges for administration, teaching, charity, and research and development, the evaluation of what these costs are all about could be brought into the open. Compared with that step forward, the relatively trivial costs of wasted paper in bills-no-one-can understand, can be ignored. Until some such transition can be accomplished, itemized bills must not be abolished in the name of efficiency, or any other motive. With the MPC, doctors would finally have a meaningful speedometer to guide their cost decisions. No sentient doctor now pays the slightest attention to the hospital bill, because it reflects nothing approaching the true cost of the service or the true cost of individual physician performance. The underlying cause of this disconnect is the enormous amount of cost-shifting taking place, but a certain amount of cost-shifting is nevertheless essential to running a hospital. The issue is to detect when it has become excessive, without necessarily changing it. The present reliance on direct costs and the present rhetoric about posted charges are both futile. A cost-to-charges ratio is therefore doubly useless. The need is to examine indirect costs, make comparisons among competitors, and decide what is necessary, what is excessive. It's fairly clear in advance that will demand some definition to indirect costs.

The Clash between Mandatory Coverage and Marketplace Benchmarks. Insurance was never meant to be universal, and the closest thing to it, mandatory auto insurance in no-fault states, gives a widely familiar example of what happens when insurance is overextended; the insurance adjuster rules but prices go up anyway. At least in auto repair, an extended market for metal workers, painters, electricians, and mechanics exists to create some basis for argument. By contrast, if every patient carries insurance, how can the price of almost any service be determined? How about a new operation to transplant brains, or an ingenious repair of someone who fell off a cliff? How about a badly needed distinction in compensation between doing your first operation and doing your thousandth one? Or, just sitting at the bedside, comforting the dying. Everywhere you see a disturbance of the marketplace you see a disturbance in prices, and if prices are forcibly constrained, then candy bars well known to shrink in size. Eventually, shortages appear, as they recently have with generic drugs driven off-shore, creating a monopoly for irresponsible manufacturers. The only feasible way to retain a vigorous marketplace in health care costs is to allow the market free play under a large deductible. A sufficiently large co-pay might be thought to do it, but Gresham's Law shows it is impossible to maintain two prices for two halves of a service. Since many services performed in the hospital are also performed in doctor's offices, a considerable base for determining the price of DRGs (diagnosis-related groups) is readily established, and adjusted for local and regional differences. That will be automatic if the market is allowed to adjust to costs in nearby offices, and the necessary data links are created. A blood count is a blood count, an EKG is an EKG, whether inside the hospital or inside a tent. Hospital administrators complain they have high overhead, but that's just the point, isn't it? A high deductible is the only imaginable way to preserve a marketplace within a totally insured world, and it will be a tragedy if Obamacare fails to recognize it.

The catastrophic insurance policy is thus included by the Affordable Care Act only in the sense that some kind of health insurance is mandated. Used as part of a package with Health Savings Accounts, its split usefulness in two venues relies on health costs jumping sharply as soon as a patient is sick enough to go in a hospital. We also discuss in another place, the advantage of employing internal interest build-up in the Last Year of Life proposal. At this late point in the discussion, it is only useful to mention the fortuitous advantage that indemnity plans fit together, creating a strange ability to offset outpatient health costs against terminal care costs.

In any event, politicians must note that boundaries somehow have to remain flexible enough to adjust to changes. Service benefits are so flexible they could bankrupt us, so any replacement must not go that far. In the crudest brief description, Medical Savings Accounts seek to take advantage of the cost restraints of high-deductible ("catastrophic") health insurance, while easing the necessary pain by providing some patients with the money to do it with. It probably can cover all patients only if there is some temporary subsidy for the poorest. Some may need charitable assistance, and none can expect to enjoy the benefits of compound interest until interest rates return to normal. The pooling of investments in order to have professional management seems highly desirable if investment diversification is contemplated. Experience with these plans has shown that paying the money out of a tax-exempt fund has almost as much spending restraint as paying bills fully with cash, so costs are reduced by about 30% in actual experience. There might also be a reinsurance pool to pay for the occasional patient who exceeds the money in his account repeatedly, but the medical perception is that once you start going into the hospital, you either soon get better or you don't. Either way, there are few chronic diseases left; cancer and Alzheimer's disease, and that's about it. The strategy of giving poor people the three-to-five thousand dollars was originally envisioned to level the tax playing field with employer-based insurance, which still only provides tax avoidance for salaried employees. In recent years, a number of other ways to give away money by another name (especially funded tax credits) have been devised. They are not discussed further. HSA progress has been resisted for thirty years, but one consolation is that during the interval dozens of examples have been tried out, medical costs have regularly declined for workers, and both doctors and patients are satisfied with the arrangement. These savings come disproportionately from the outpatient arena since reimbursement of hospital inpatient costs often depends on negotiations between the insurer and the hospital. The use of market-based out-patient costs (MPC) as a basis for guiding physician decisions to cost-effective diagnosis and treatment, allows indirect hospital costs to be negotiated separately with third parties without fanciful allusions to linkages to billable services. Some hospitals could withstand this type of review, others could not. But it is certainly past time to have the discussion.

The Billing Mess No reimbursement system can be entirely satisfactory until provider accounting and billing are reformed. Health Savings Accounts were once resisted by those outsiders who benefited from unique tax exempted coverage, but the current climate is now favorable to deductibles almost everywhere. At least this much has been accomplished. Progress since 1980 has been retarded, not by lack of success, but by abnormally low-interest rates at banks imposed by the Federal Reserve, and by state laws mandating coverage of specific low-cost services. It is possible that the latter is motivated by a desire to exert indirect price control, and thus provide an opportunity for negotiations. It is also unwise to mandate coverage for birth control pills, cough medicine and like because experience in nations with nationalized health systems shows a tendency to be generous with low-cost items so as to conceal appalling harshness about expensive care. Doing so also brings to the fore such contraptions as the widespread three-insurance system for paying your bills. One policy now pays about 80%, another policy pays about 20%, while a major medical policy cleans up loopholes. This costly contrivance is even used to bill for individual refills in a drug store. The resulting chaos means most medical bills are not finally settled for several months, generating mountains of paperwork beyond average comprehension. With a Health Savings Account, the patient generally pays cash and gets a receipt for it, although the use of debit cards smooths that, and adding inpatient payments to the debit card would smooth it further. Useless itemized hospital bills should be revised to substitute market-based prices for inpatient items, thus restoring their usefulness for physician and patient cost guidance. Indirect hospital costs need not be shown on the bill at all; rather, they could be subjects for negotiation with third-party payers alone. Combining direct costs and indirect ones serves no identifiable purpose, since actual payments are now DRG or diagnosis-based rather than item-based, and indirect costs have become so large and cost-shifted that the combined figure is totally misleading for the analysis of cost-effectiveness. Periodically, the item composition of DRGs does need to be re-compiled, but this can be produced on demand for monitoring purposes, and would often be more useful if aggregates were examined rather than individual cases. The "grouping" of items in the DRG with similar costs rather than medical characteristics may have convenience for the billers and payers, but the process is highly approximated, at best, for any other use. For serious analysis, the entire ICD coding system needs to be abandoned, and to revert to an updated version of the original Standard Nomenclature system, now mainly in use by pathologists (SNOMED3). Many of these small reforms may seem technical and obscure, so a sentence needs repeating: No reimbursement system can be entirely satisfactory until provider accounting and billing are intensively reformed.

Summary of Improvements useful to integrating Obamacare with Health Savings Accounts.

1. Enable commissions for salesmen of high-deductible health insurance to bundle their product with HSAs, debit cards, and reinsurance. This would not merely encourage this product, but assist the primary sales adviser in discouraging opportunistic fees and costs from banks who manage accounts..
2. Encourage state governments to eliminate small-cost coverage mandates, which conflict with the high-deductible approach.
3. Discourage co-pay coinsurance, which has shown little cost-restraining effect, but tends to encourage multiple claims costs.
4. Charge some agency with monitoring inpatient charges, for the sole purpose of suggesting needed changes in the deductible amount of insurance to match them.
5. Provide a system for subsidizing unpaid deductibles for poor people, which phases out when HSA accounts build up to the deductible amount but does not contain a disincentive to contribute to the Account.
6. Study the need and cost of a reinsurance system or pooling arrangement, for those who exhaust their HSA balance, and thus require additional subsidy. Combining this with item 5. would be ideal.
7. Establish a mechanism for using HSA (or other) information to establish the publication of national (and possibly regional) marketplace prices for medical items outside of institutional care.
8. Charge a commission with determining relative pricing for items unique to hospital inpatients, building on values relative to outpatient charges..
9. Re-cast DRG prices to conform to 7. and 8, with indirect institutional costs to be subject to unrelated audit and negotiation.
10. Recast hospital bills to reflect 7, 8, and 9. in an easily intelligible way, including amounts actually paid by third parties.
11. For DRG purposes, phase out the ICD diagnostic coding system, replacing it with SNOMED3 (formerly SNODO), or else use two codes for two dissimilar purposes.
12. Charge some Committee of Congress to determine in advance what the rules should be for unspent surpluses of HSA accounts, at the death of the owner.

Medicare: Restating Mathematics for a Social Goal.

It's hard to believe any problem could be too big to solve, just as it boggles the mind to think of a corporation too big to fail. But if we say the same thing often enough, we come to believe it. People who tell you Medicare is the third rail of politics, are mostly telling you they hope so.

Lyndon Johnson, Wilbur Cohen, and Bill Kissick did indeed bite off more than they could chew, but Medicare really isn't that complicated. It amounts to taking the employer-based health system floating on an enormous tax deduction and substituting three ways to pay for it. The first was to charge premiums to the old folks, which wasn't enough, only covering about a quarter of the cost. The second was to apply a 3% wage tax to younger working people, called a payroll withholding tax, which prepaid another quarter of it, by means of a gimmick called "Pay as you go". And the third, which amounted to half the cost, was supplied by taxes. The year 1965 was the time when the post-war balance of American payments turned from positive to negative, and there was something called the Vietnam War to be paid for.

So after a while, the national budget had to be borrowed, and after the manner of governments, it was borrowed by selling bonds. The largest purchaser of 10-year treasury bonds is China. So, in a general sort of way, half of Medicare is borrowed from the Chinese, and half is paid for by the clients. The debt service is temporarily bearable, but eventually, it must be confronted, and China may have to choose between absorbing the costs or going to war. Our own choice is between kicking the can further down the road, or having the confrontation right now. That is to say, right now there is time for a long-term peaceful solution, but if we delay much more, that option will disappear.

I don't plan to run for office, so let me make a proposal. Instead of continuing the pay as you go system, the withholding tax receipts should be deposited into the Health Savings Accounts of individual citizens who earned them. They should be invested into inexpensive total stock market index funds, redeemable on the employee's 65th birthday or whenever he joins Medicare. That is, redeemable by Medicare, with the residual redeemable at the death of the subscriber. The wage owner would scarcely feel the difference, but the growth of the funds would be substantial. With luck, it would pay for Medicare's deficit of 50%, putting a permanent end to Chinese borrowing, but probably not much more. It would not, for example, pay for existing debt, or retirement costs. Remember, retirement costs are legitimately regarded as a natural outgrowth of Medicare's prolongation of longevity.

The invisible costs of Medicare would eventually be paid for in two other ways: the J-shaped costs of Medicare in the last four years of life, and the contingency fund.

J-Shaped Curve All healthcare costs with the exception of premature birth, genetic disorders and the like, are migrating to older age groups. One of the main causes of disruption is the migration of costs from working people to people on Medicare. But within Medicare, costs are also migrating later in life. Half of Medicare costs are paid for the last four years of life. Since Medicare extends twenty years and growing, half of the total Medicare cost would disappear as a result of lifting this burden and placing it somewhere else. This is called the Last Four Years of Life Reinsurance, one component of the First and Last Years of Life reconstruction of healthcare finance. It will be discussed separately in later sections of this book, but a vital point is removing the cost of the last four years of life, which constitute half of Medicare cost. The consequence is to cut the remaining cost of Medicare in half, potentially funding half forward, half backward.

The Contingency Fund at Birth. And the half which is funded forward can be further reduced by investing at birth and earning investment income for eighty years. By adding the withholding tax receipts from age 25-65, the combined fund can probably pay for Medicare. Just to be certain, a contingency fund could be added at birth, amounting to around $100 at birth and growing to $25,600 at age 80, or other variations of the 256 to one ratio. We have alluded to this concept in other areas. Its power concentrates in the nature of interest rates as well as principal to concentrate at the end of debt. That is, they rise at the end, and prolonged longevity takes advantage of this fact, parallel to the tendency of healthcare costs to rise at the end of life.

For the purpose of the reader following this without a calculator, take the happenstance that money invested at 7% will double in ten years. In nine ten-year periods of extended longevity, the money will have nine doublings (90 years). Follow the bouncing ball: 2,4,8,16,32,64,128,256, 512. In ninety years, a dollar turns into 512 dollars. If the family of a newborn, or in the case of poverty the government, deposits a dollar at birth there is a 500-fold increase at death at 90. There is no sense in being more precise about all the variables in a century, and many people are more skillful than I in manipulating them. But if to this is added another doubling, the ratio becomes 1024 to one, achieved by not liquidating the fund until ten years after the death of the owner. (This feature is added as a safety-valve.)But after the most sophisticated manipulation, it is safe to predict this outcome: The revenue would exceed the need in the last four years of life, even if the seed money turned out to be a hundred times the dollar postulated in the example. There would almost surely be money left over at the end, which might be used to supplement Social Security, although we suggest funding children as preferable during the transition phase.

So that's how you could restore Medicare to some sort of solvency, plus something left over for other purposes.

More Work for the U.S. Supreme Court: Revisit Maricopa

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The Judicial Branch took much of its present form from Chief Justice John Marshall, several decades after the Constitutional Convention of 1787. Somehow, the fact of being the last branch to set its boundaries gives the Judicial branch the last word in certain circumstances, including the possibility that its last word may need some reconsideration. Sometimes not, of course, since if the other two branches make a mistake, the Court can overturn them; but the other two branches can regain control by seeking to change the law. That's the sort of balanced power which the founding fathers envisioned. But if the Supreme Court itself makes a mistake, it remains pretty much a mistake in residence, until the Court itself re-examines the matter. It would be indelicate for anyone else to cite a list of examples of this observation, so they are usually taken up, one at a time. The example with the greatest application to Healthcare is the 1982 decision in State of Arizona v. Maricopa County Medical Society.

Maricopa County is where Phoenix is located, and its County Medical Society was one of the pioneers in what was then called Foundations for Medical Care. These were organizations in which local physicians took the lead in organizing and managing health insurance for the local community. There is no doubt the rules and policies of the Foundations were conceived and implemented by physicians, who felt empowered by the defects of health financing which they saw in daily practice. It is also true these physicians were impatient with both the government and the health insurance companies, who seemed to resist helping the sick poor by implying it violated a per se technicality intended for business corporations. And furthermore, on the topic of business corporations, they are not exactly an enumerated Constitutional power of the federal government. At the same time, "Foundation" physicians could easily see opportunities for reducing waste in the local hospitals which would only be exploited if physicians were in charge because physicians could usually judge the cost/benefit more readily. Having recently returned from World War II, these doctors knew that medical care could be excellent even without such a thing as health insurance, and indeed even when hospitals were only a collection of tents. Perhaps a few of them were overly influenced by the TV serial, "MASH", whose central theme is that if doctors take the lead and do the right thing, much can be forgiven. That's a sort of Hollywood restatement of the latitude of ancient Courts of Equity, intended to cover a situation where obvious harm exists, but no law exactly addresses it.

The Maricopa Medical Society

Accordingly, the "better sort" of a doctor in Arizona perceived that the respectable ones would readily consent to care for the poor at lower rates, whereas the shirkers in their midst would ruin things for everybody by refusing to do their fair share of pro bono work. Like labor unions, the doctors resented the free rider phenomenon. The idea of a two-class system of medical care was also abhorrent to them, however; if there wasn't enough money to spread around, a "good" doctor would just agree to lower his fees unilaterally. This moral quarrel often conflicts American business, which characteristically takes the view that it doesn't really matter what costs or taxes or burdens are imposed by the government. What matters is that competitors mostly agree to abide by the same handicaps. When handicaps are roughly equal, the difference between success and failure is -- talent. To a considerable degree, talent rising to the top summarizes the aspirations of the anti-trust statutes, where it is both a simultaneous source of cost escalation and price suppression. Physicians are ultimately expected to find their highest duty is fiducial to the patients' best interest, particularly when the main conflict is only a financial one. In the antitrust arena, particularly the per se violations, the difference between a business corporation and medical society is sufficiently wide to justify considerable professional latitude. As it is not, in the case of insurers, and as it only partly remains, in the case of hospitals. The Maricopa Medical Society responded with perhaps excessive enthusiasm to the challenge of making local sense out of the price-fixing dilemma, but it was never given the opportunity to make its case.

At one time, local healthcare costs were held down by imposing competition on the hospitals, treating insurance administration in particular as clerks to pay the bills, rather than as big business's cup-bearer of fairness in a naughty world. Needless to say, the hospitals and health insurers had long chafed at the ability of physicians to change hospitals, and the patients to change insurers when their Attorney General seemed to suspect a return to Robin Hood notions of a special right to defy the law. What disappeared was an ancient concept of professional latitude. In certain parts of the country, big business was already reconsidering its control of hospitals and insurers as their agents in both assuring low-cost medical care, and suppressing its cost. With the defeat of physicians by the Maricopa decision, plus the approaching withdrawal of big business, the way was opened for hospitals and insurance companies to go to war for monopoly control of their own finances. Thirty years later, hospitals and insurers are now universally merging, and applying monopoly controls to admit favored physicians as their employees. The Affordable Care Act is the mechanism by which the government means to control the victors, thus making government itself into the hidden battlefield. It's a far cry from leaving medical decisions in the hands of physicians and their patients, to chose the treatments, and to agree on the price.

Sen. John Sherman

The Attorney General of Arizona, himself a colorful character, soon brought suit for an anti-trust violation, since price-fixing had been declared a per se violation, or confession of the absence of competition. These were additions made to the Sherman Anti Trust Act by earlier Supreme Courts, who found that an Act first written on the back of an envelope was difficult to administer. Further strictures were imposed by the Clayton Anti-Trust Act, but these might be remedied by subsequent Congresses. The important consequence was that the District Court of Arizona found it quite unnecessary to hold a trial or hear the evidence. The Court found against the doctors entirely on the basis of a motion for summary judgment. The matter passed through the Court of Appeals to the Supreme Court, which on the theory that price fixing is price fixing, by a vote of 4 to 3, upheld the Arizona suit. All the way from a writ of summary judgment in a district court, to the United States Supreme Court, without formal examination of the facts.

Perhaps, strictly on lawyerisms, that was safely correct. But in terms of the effect on medical care, it won the war for control of hospitals and the insurance companies. Somehow it was interpreted to mean that a hospital or an insurance company might do a great number of things which were forbidden to organizations run by physicians. The consequence is that Foundations run by physicians were under constant threat of what might happen to them if they did what HMOs were seen to be doing every day. The whole Clinton health fracas revolved around this particular case and its implications. From the physician point of view, if you had medical training, you were disqualified from running an HMO, because a change of leadership shifted the antitrust issue to a different level for two identical organizations. And that was true even if the physician had been trained for the role, while the administrator had not. What was particularly galling was to be tarred with the same brush of antitrust whereas others would describe their identical behavior as self-disciplined in the public interest. Self-imposed financial restraint was taunted and abused by aspirants for the same job with the same temptations, with multi-million dollar incomes but without adherence to the same code of ethics. The joke is that after all the Clinton Healthcare Plan's uproar, the public decided they disliked HMO's intensely, mainly because they couldn't choose their own doctor, and the doctor was being hampered in doing what seemed professionally best for the patient. None of these legal issues had arisen for physician-run HMOs. While of course, that might happen, such disputes would be settled by physicians, using medical arguments, followed by a change in management if the medical community widely disagreed with the decision. The only substantial difference was that doctors were running one, but subservient in the other, and the Courts had found that when doctors were in charge it amounted to price-fixing between competitors.

It now remains for some case to be found and carried to the Supreme Court which would allow an examination of the facts of this matter, perhaps remanding the case back to the District Court to hold a trial. That would seem a bare minimum after thirty years, and it now no longer get precisely to the issue. Somehow, another way must be found to examine which of two rather extreme theories of the Wild Wild West needs to be laughed off. Either we must re-examine whether, always and everywhere, price-fixing is such an undiluted evil that it never even needs a trial. Or whether we should continue to lynch price-fixers, and declare that medical care is too important to be left to people trained in its complexities, even when disciplined by self-interest in the exercise of its power.

Henry J. Kaiser

While on the subject of mixing business practices with professional standards, we might as well direct judicial attention to the unfair and probably unconstitutional (equal justice) tax preference for employers who purchase health insurance for their employees. An unnecessary grievance is created for millions of self-employed and unemployed people. Now seventy years old, this grievance has dubious evasions at its historical origin, has resisted multiple efforts for repeal, and benefits only one large group: big business. Henry Kaiser claimed he had difficulty attracting employees to his war industries because of wartime wage and price controls. Persuading the War Production Board to look the other way, he cloaked inducements to employees as something other than employee compensation. The fringe-benefits circumvention has since grown entirely out of control but is fiercely defended by business and union interests. As it grows, however, the inequity for the self-employed and unemployed to remain excluded from it also grows. Instead of addressing this problem directly, it might well be conjectured that recent regulatory attempts at forcing individual policies into group policy eligibility might be a way of exacting a price for cooperation, and for lobbying silence.

Summary of the Maricopa Case

From a legal standpoint, the uncomfortable feature of the case of the Maricopa Medical Society is that it went all the way to the Supreme Court without any trial of the facts or real opportunity for the defendants to present their case. That is, the whole HMO movement was effectively removed from the hands of physicians by a motion for summary judgment, on a Supreme Court decision, 4 to 3.

To hold a trial of the facts by remanding the case for trial, would seem to be the only way to introduce the defense that the doctors would have made. It is improper to suggest to their lawyers what the defense should be, but certain facts are now public knowledge. The Medicaid Act was passed in 1965, requiring state consent for a joint program. By 1972, Arizona was the only remaining state not to have agreed to Medicaid, which by then was widely recognized as the worst medical program in America. In 1982, Arizona adopted a small portion of Medicaid, and it was only in 1988 that it fully adopted the program. In 2001, Arizona's governor was offered 7.9 billion dollars over four years, as matching money for the insurance exchange feature of the Affordable Care Act. The governor recommended to the Legislature that they accept the offer because at least it was "better than Medicaid". There can be little doubt the Legislature of Arizona was adamant on the issue.

What were the doctors expected to do with the sick poor people? No doubt, there was a wide divergence of opinion, but it seemed likely only a handful of saintly volunteers would come forward, and none of them would be able to afford to pay hospitals what it cost. They felt that only by bullying a substantial majority to take the cases would it work, and the only weapon they had was to make it a condition for membership in the medical society.

Under these contentious circumstances, surely the Supreme Court could find some words to create a better outcome. Price fixing is a per se violation of the act, and there is little doubt that all HMOs fix prices. But only a physician-run HMO could be accused of fixing prices for competitive reasons, although it is arguably how strongly they would compete for indigent patients. The Supreme Court may be reluctant to overrule the price-fixing part, and the Arizona politics of this case are surely thorny. But at least the Court could find some clarifying language about physician-run HMOs. The opportunistic response of the non-physician-run HMOs was to exploit the opportunity to eliminate the competition of physician-run groups. In the meantime, HMOs run by non-physicians have become contentious in the extreme, whereas the earlier physician-run ones were tolerated by most physicians, and embraced by quite a few. The matter is one of the important threads in the Obamacare controversy, so the Supreme Court has an opportunity to improve quite a few situations by writing a clarifying paragraph or two.

Methods in the Madness

Even today, many people are uncomfortable about psychiatric illness in their family. In the Nineteenth century, this feeling was much more pronounced, so wealthy families sought out luxurious psychiatric hospitals where wealthy patients were kept out of sight. Rich families also sought out psychiatrists of their own class to be in charge; not only keeping matters out of sight, but they were also likely to be discreet in their outside discussions. Sigmund Freud wrote a whole book to the effect that getting richer brings on mental disorders.

Snake Pits. By contrast, saying institutions for indigent psychiatric patients were once substandard, is quite an understatement. Indigent cost to society must have been a considerable burden fifty years ago, with over 500,000 licensed beds nationally in 1955, even though society is a notorious pinch-penny with indigents in any era. When Thorazine made its appearance as the first really effective antipsychotic drug in 1953, it was prematurely followed in 1955 by President Kennedy announcing a plan for cutting the number of inpatient psychiatric beds by half. This goal was quickly and drastically achieved, cutting beds in "psychiatric snake-pits" to 40,000 by the year 2000. To a certain degree, however, we have simply moved mental patients from snake pits into prisons at a higher cost. In all this turmoil, upper-class institutions at first were much less affected.

Rest Cures. During the last half of the Nineteenth century, psychiatry itself had become a distinctly upper-class specialty. To what extent this class isolation was a cause of the profession's later troubles is hard to say, but it probably was a factor. In the early Twentieth century, this social situation was upset by a pell-mell rush of enthusiasm by psychiatrists to follow the teachings of the Austrian doctor, Sigmund Freud, introducing psychoanalytic methods of treatment at a significantly higher cost.

The Analysts. For a while, no academic psychiatrist could expect promotion unless he was an analyst, and this attitude spread out into the practicing profession, too. But its time was brief; psychiatric drugs starting with Thorazine swept the scene. Soon, anybody with a fountain pen and a prescription pad could be a psychiatrist; seven years of specialist training were no longer required. Hope was soon raised that psychosis would next follow the example of tuberculosis, first with effective patient treatment, and evolving later into the closing of highly expensive specialty hospitals.

Fads and Fashions. Many of these changes did result in general savings. In each step in the therapeutic process, the leadership of the specialty was thrown into disarray by radically new treatments requiring many years of re-training to master. Brash young physicians displaced the experienced older ones; the older ones never quite got it, and the younger ones never quite got over it. The ultimate outcome of this uproar was what you can now see in the center of many cities: "homeless" people living in rags on steam grates, because there are few psychiatric hospitals for chronic indigents, anymore. And basically, no good ways to define and reimburse psychiatrists.

Trust Fund Babies. The effect on upper-class "trust fund baby" patients are harder to notice, but inevitably young people of any class will outlive their parents, and often outlive the trust fund as well. What did further disrupt the vulnerable changing treatment scene, was the introduction of large numbers of addicts to recreational drugs, which tended to affect those who could afford the cost, sooner than those who could not. The system was disrupted from the top down at first, and then it became a regular feature of the youth scene for young people of any social class. The closing of upper-class inpatient facilities is particularly disruptive when the signs of addiction first make their appearance, encountering a distraught family having no familiarity with what to expect, or whatever treatment facilities are available, however abundant or scarce, good or bad.

Non-Relatedness of Psychiatric Severity to Hospitalization. There is an old saying in psychiatric circles: "People aren't hospitalized because they have psychiatric conditions. They are hospitalized because they are bothering somebody." Because psychiatry at the time was regarded as a state responsibility rather than a federal one, there were enormous disparities in treatment adequacy. It should be recognized that interstate disparities are part of the force behind the move to federalize. It's actually one of the pressures by interest groups to upgrade spending in poor states, which in time will correct the imbalances between states which James Madison envisioned as a driving force for change. Because California was particularly generous, it was punished by attracting large numbers of psychiatric patients. The response of neighboring states was quite the opposite; they closed what few state facilities survived, and the patients drifted to California. In both cases, local politicians found something to boast about, and their opponents found something to complain about.

The Rather Drastic Philadelphia Method. One place they couldn't quite boast of, was the relative absence of drug addiction in Philadelphia, for quite a long time. The local Mafia chieftain declared anyone selling drugs in his territory wouldn't even live to regret it. His methods were easy to notice, and for a number of years, Philadelphia was "clean". The proof that this was the cause was easily demonstrated by an upsurge in drug addicts soon after a neighboring Mafia tribe "bumped him off".

Cycles. One psychiatric social worker looked on the scene with disgust and offered this explanation. "These psychiatric fads come and go, and they always will. We see patients on steam grates and we say they must be hospitalized to get better treatment. After a while, we call those hospitals 'snake pits' and then say the patients should be integrated back into society." That was her view of it, and everybody else except me may be right. But I feel blame for the present mess is partly shared among many forces: To over-enthusiasm for a new treatment, partly stimulated by a desire to save a lot of public money which encourages a suspension of disbelief, and adverse decisions made by public officials, with other priorities being pressed upon them. Increasing longevity caused adverse de-selection to emerge from state governments funding nursing homes for the indigent elderly, for example. We, unfortunately, do need some bad examples to trigger improvement, but too many of them will overwhelm a government into seeing no way out except hunkering down.

John Kennedy closed the Snake Pits. Who will close the steam grates?

The End of the Dream Economy The shift in American international trade payments from positive to negative, which took place around 1966 reminded us we weren't as rich as we thought we were, while the recreational drug scene shifted attention to different clients for psychiatric care. The two movements have a certain amount in common. In other words, the nation shifted charitable priorities away from chronic psychosis. It was a result of a whole host of pressures independent of the inclinations of the psychiatric patients and psychiatric doctors. Psychiatry is an extreme case because the patients always surrender a certain amount of autonomy. But it is a warning to everyone that it is dangerous to surrender the remaining control of your fate to people who have limited incentive to look out for your interests. I have been convinced by the arguments that the closing of high-class, high-cost psychiatric hospitals for the rich, did not start this trend. But when wealthy powerful people cannot find an institution they are perfectly willing to pay for, (as is now true in the case of chronic adult psychosis), it is a remarkable development. And it raises a question how much further this trend might go.

That Dratted DRG, Again. Hospital payment by diagnosis makes a reasonable assumption that hospitalization costs are somehow related to the diagnosis, but while that's often true it is seldom precise. The less the precision of the diagnosis, the less precision it will have in determining the cost. When it reaches the extreme of two million diagnosis categories lumped into two hundred diagnosis-related groups, it is inevitable that some diagnoses are unrelated to the mean, in the services they require. Furthermore, some patients with identical diagnoses have complications involving fresh departures in treatment. Or they will be affected by unusual manifestations of illness requiring them to run up special costs. Variations are sometimes enough to bankrupt a family, sometimes they are so extreme they bankrupt a hospital. Bigger hospitals find the law of large numbers often takes care of the problem, but combined with local environmental or politician problems, sometimes even a very big hospital can be shaken by an epidemic.

Outliers. That is, "outliers" will be found, where the DRG payment is not even remotely appropriate. But the main reason DRG is adequate for most hospitals is the payer wills it to be so, and the hospital then devises some workaround which the payer chooses not to notice. In the case of psychiatry, whole disciplines of illness are occasionally found to have little association between diagnosis and cost of treatment. No matter what his diagnosis may be, a person who thinks he is Napoleon can stay in a hospital for one day, or his whole life, depending on circumstances. So the DRG law at first provided outliers should be paid the old way, by itemized services, for psychiatry and other outliers. That was once the way we paid for all hospitalizations, so why wouldn't it continue to suffice for outliers to be treated as exceptions? The flaw in this reasoning, of course, was prices of individual services were discretionary, and pretty much limited to exceptional cases, plus psychiatry. That led to two clusters of prices in the chargemaster lists, one for outliers in conventional general hospitals, and a second one for psychiatric hospitals. Either way, it seemed a good precaution to set the prices high.

Strained State Budgets. In government circles, there is a standard sort of behavior, usually tolerated as a normal part of the negotiations. To get a bill passed in Congress without delay, technical adjustments can come later. In retrospect, it is unclear whether readjustments were bungled or whether the problem was unsolvable; the payers' fuse did seem to have been rather short. In any event, when the number of psychiatric beds fell toward 40,000 from an earlier 500,000, many gave up and went out of business.

Windfall, Then Disaster. And so it came about in those days that general hospitals were chafed by low prices set for DRG, while psychiatric hospitals were effectively given blank checks, and prospered notoriously. A movement was even under discussion, to move non-psychiatric patients into psychiatric hospitals, but events headed this off. It took some time for all of this to work through the system, but eventually, three situations survived. Prices were drastically reduced for psychiatric DRGs, to the point where hospitals of this type were driven out of business. Secondly, the DRG system proved to be a highly efficient rationing system, eventually moving toward a pattern of 2% profit margins within a 2% national inflation rate. And thirdly, the Chargemaster rates remained high, discouraging hospitalization and encouraging outpatients. One by one, famous established psychiatric facilities closed their doors, to the point where indigent patients are found on steam grates, and some affluent ones, too.

The Veterans Administration. As a matter of fact, there is one place left to treat inpatient psychiatric patients -- the Veteran's Administration hospital system, if you can find an empty bed. The bed capacity is small, but at least they do not segregate by the ability to pay. Social workers desperately looking for somewhere to place psychiatric patients, quickly learned to ask the most important question first: "Have you ever been a veteran?" If so, regardless of income, but somewhat dependent on locality, it is one lucky patient. All of the inadequacies of the VA informal rationing system soon come to light, however; the long waiting lists, the remoteness of the location, the recreational drug epidemic, the demoralized staff. With thousands of patients on their outpatient waiting lists, it was just not possible to cover all this up, to say nothing of fixing it before newspaper reporters arrive. Newsmedia has generally been ardent supporters of Obamacare and government-run medical care, but even they have been chastened by the example of it encountered in the Veteran's Administration. Let me help them with their outrage. The Armed Forces themselves will have nothing to do with VA, running an independent system of military hospitals for active-duty military, and politicians they wish to court. When President Eisenhower had a heart attack, he went to Walter Reed Hospital, Franklin Roosevelt and a host of other presidents went to the Naval Hospital in Bethesda. Even Senator Joe McCarthy died in the Naval Hospital, where the first thing a VIP says is, "No one must know I am here." That's the motto of military hospitals. But if any important government official is ever cared for in a Veteran's Hospital, by contrast, it will be very big news, indeed.

Medicare Re-Arrangement

Let's see what we have to work with, in Medicare. The first step is to set the boundaries. Aside from the add-on programs for disabilities and End-stage kidney programs, the public first encounters Medicare at around age twenty, when the working population begins to have 3% of its payroll check deducted. From that point to retirement at age 60-65, Medicare is invisibly taxing payroll checks and paying as it goes, but the beneficiaries hardly know they have it. At age 65, let's say for the sake of tradition, payroll deductions trickle off and Medicare payments trickle in. The serious illness starts to play an important role in life beginning at age 55, but half of Medicare expenditures take place in the last four years of life.

Of course, people who are healthy live longer than people who get deathly ill, so although the average age at death is about 73, medical progress is pushing the average death age steadily older. Some day it will approach 84, the average age of longevity at birth, which is itself predicted to be 90 in a relatively few decades. In short, people are dying older and seemingly can be predicted to die even older in the future.

The problem, however, is whether new treatments or even new diseases will fill in the gap between retirement and the last four years of life. Or, whether increasing longevity will just push the terminal four years older, like the cap on the end of a mushroom. My own personal observation is that diseases which were once thought unworthy of attention are now getting a lot more of it. Skin cancers would be an example. When the average seventy-five-year-old got skin cancer, it was possible to surmise some other life-threatening issue would interrupt the need to worry about skin cancer. Nowadays, there is an increasing tendency to treat skin cancer in the nineties. On the other hand, if we are talking about one of those people who never see a doctor except by looking up from an ambulance stretcher, the trend will be different. In all likelihood, both trends will continue, and it will eventually be possible to say half of the somewhat greater expenses will take place in the last five years of life, even though the average age at death is then approaching 90, Both the ages and the costs will have to be adjusted as we go. These are guesses of course, which should get more accurate as time goes by. From the financial point of view, compound interest will be working in our favor, while biology is probably going to increase costs. If more pessimistic biologic predictions prevail, we will be very lucky to have explored some revenue enhancement.

We have dug ourselves quite a deep financial hole. Suppose, by some combination of revenue enhancement, good luck in the market, and compound interest, the revenue is sufficient to pay for half of Medicare. Very likely what would then happen is the deficit would disappear, foreign borrowing would stop, and Medicare would become self-sustaining (between the payroll deductions and the Medicare premiums). The citizenry would hardly see any difference; the improvement would take the form of reduced foreign borrowing, avoiding catastrophes we didn't expect in the first place. After a few years, we would be back where we started.

Now suppose we doubled our success and paid out the bonus in extra retirement money. Since our present notions of a decent retirement are five times the healthcare benefit, we could expect nothing but complaints about a retirement system which approximately doubled the present Social Security benefits. Otto Bismarck, whose National Healthcare goal was to keep people quiet so he could conquer Europe, would never stand for such a failure. And yet the first of these two approaches would require payroll deductions of 6%, and the second would require 9%, even assuming the Affordable Care Act budget would prove to be revenue-neutral. The burden could be lightened by dipping into the contingency fund, but a much better approach would be to use the strategy of the Last Years of Life -- Reinsurance.

Modifying Medicare Early, Using It Later

Medical Generation Gap

Miriam Schaefer

To understand the dynamics of the following medical anecdote, the reader should understand the thrust of Miriam's First Rule of Management. Miriam is my oldest daughter, with long experience managing many firms, large and small. Her rule is that when an employee starts misbehaving for no good reason, eliminate the position. Invariably, well almost invariably, an employee who starts acting out doesn't have enough work to do. If you are managing a large organization, you should also consider firing the supervisor of that person, on the grounds the supervisor should have noticed there was not enough work for the employee to do and was probably covering up.

My anecdote concerns a session at the 2006 annual meeting of the American College of Physicians, ostensibly devoted to the conflict between generations of doctors. It didn't take long before the meeting turned into an uproar about the new work rules which prohibit a resident physician from working more than 80 hours a week. That's supposed to protect patients against mistakes of sleepy doctors, although some suspect it is mainly an outgrowth of a gap between what they do and what they expected to do. From the time they entered high school, future doctors have been taught to expect workaholic employment conditions, and while more normal people haven't been taught that message, that's irrelevant. The situation is aggravated by the increased admission of women to the profession, who for their part have been taught to expect a breathless race between finishing their work and getting home to relieve the babysitter. Perhaps in time the newly invented specialty of "hospitalists" will get established and accepted, along with accident room work as another harrowing occupation which abruptly ends its day by the clock rather than the backlogs. At the moment the pioneers must overcome the suspicion, only partly fair, that Miriam's First Rule applies to them.

If not, that Rule clearly does apply to the youngsters who now must go home to spend quality time with their families, because they are not allowed to exceed the new work rules. At the ACP meeting, a dozen of us Civil War veterans were treated to an appalling amount of teenage mumbo jumbo apparently emanating from unsuspected warfare between Generation X and the Baby Boomers, their supervisors, mentors, and colleagues. All of us Civil War veterans held the private opinion that Baby Boomers were a little self-indulgent, but in the eyes of Gen Xers the boomers are workaholic fanatics, incapable of relaxing even for a moment in order to enjoy the life of the good, the true and the beautiful.

As we passed out of the room at the end of the session, one of the silent gentlemen with white hair came over to me. We didn't know each other, but we recognized the signs of a silently shared opinion. The old doctor leaned over to me and muttered, "They offer nothing, but they want everything." I smiled, and we parted. I guess I might have told him about Miriam's First Rule, but it would have taken too much explaining.

N-HSA, Bare Bones (2015 Version)

Explanations and arguments, later. Here's the skinny on N-HSA, the plan I believe is ready to put before Congress.

CATASTROPHIC HEALTH INSURANCE

1. Everybody is assumed to have a Classical Health Savings Account. If it isn't funded, it only exists in theory.

2. Everyone who has an HSA is now required to have high-deductible catastrophic healthcare insurance coverage. This should be changed to optional coverage, which becomes mandatory if the HSA is funded in its non-escrow partition.

3. Money deposited in the non-escrowed partition may be used to pay the premium of high-deductible catastrophic insurance, making the premium as an effective tax exempt as if an employer purchased it.

4. If employer-purchased health insurance loses its tax exemption, this feature may be re-examined.

MEDICARE BUYOUT

(1. Everybody is assumed to have a Classical Health Savings Account. If it isn't funded, it is inactive.)

5. A newborn child is funded $50/yr privately, or at public expense if indigent. Payroll deductions are then added.

6. The money is passively invested in an escrowed portion of the child's HSA as a total domestic stock market index fund, becoming available for a Medicare buy-out at age 66 (together with accumulated payroll deductions), with the alternative of conversion into an IRA after payment of taxes. Assumed gross income rate: 11%; assumed net of inflation and transaction costs: 6.5%. Average duration: 66 years.

7. Assumed Medicare buyout price: $ 48,336 plus payroll deductions, of indeterminate amount, probably $37,000. Assumed public and private net cost: zero or near-zero (readjust #5. appropriately)..

FIRST AND LAST YEAR OF LIFE REIMBURSEMENT

8. A second escrow fund within the individual's HSA is designated to generate the funds to repay the original payer of the first and last years of life cost, using the average Medicare cost basis, thereby lowering the first-payer premiums and/or buy-out costs.

9. This has a little net cost effect at first but tends to spread the cost away from poorly financed age groups without matching increase for the working age group.

10. Estimated cost: $20/yr.

INFANTS AND CHILDREN

11. Everyone is assumed to have or is assigned, one grandparent and one grandchild. Mis-matches are pooled, or reassigned on request.

12. Grandparents are expected to bequeath the left-overs in their HSA to their grandchild's HSA, up to the limit of one child's average cost for the first 21 years of that child's life. This transfer is deemed to occur at simultaneous birth and death, and appropriate inter-fund loans or transfers are made to accomplish this.

13. This bequest does not take place to the generation who have already achieved age 21. Grandparent contributions in the first generation are pro-rated as of age 50.

14. The bequest is invested in an escrowed portion of the child's HSA as a total domestic stock market index fund and transferred to his grandchild's HSA at birth for the purpose of funding. Assumed gross interest rate: 11%; assumed net of inflation and transaction costs: 6.5%. Average duration: 110 years..

INDIGENTS AND OTHER SPECIAL CASES

15. One of the great disappointments of the Obama plan is that it made health insurance mandatory, but left thirty million uninsureds. It may well be true that prison inmates and mentally retarded are so different from each other, they would be better served with specialized programs than one-size fits all.

16. Furthermore, most poor people are only poor for a portion of their lives, rising or falling with circumstances.

17. And finally treating poor people as an underclass with an attached funding source makes it impossible to have more than one program serve them. Therefore, it seems much better to have a separate agency which addresses their poverty based on their own demonstrated preferences, than to pick winners and losers among agencies to help them.

More on Integrating Medicare into HRSA

During all the uproar about the Affordable Care Act, the retiree population was very quiet. Even after the commotion about jamming the Act through Congress, the death of Senator Kennedy and loss of Senate Democratic control, the failure of the state insurance exchanges, and related Obamacare talk -- the retiree generation, characteristically so interested in political gossip, had almost nothing to say. In addressing Medicare-age groups about health insurance, I found they were largely oblivious to it. But let me tell you, when the discussion got around to the possibility that Medicare would be underfunded in order to pay for the new benefit, their voices suddenly became very loud. Apparently, all through the Affordable Care Act discussions, one concern had been uppermost in their minds. No one was going to take their Medicare away in order to pay for younger people. The politicians got a general idea quickly, too; no one of them was going to touch such a proposal.

No one else is showing the slightest sign of touching Medicare, either, no matter how deeply it goes into debt, and no matter what other expedients are resorted to. Everybody loves a fifty-cent dollar and safely presumes other people feel the same. But doctors suspected it couldn't last in its present form. Even though illness still continues to threaten the last ten years of the working age group, it seems only a matter of time before severe illness will predominantly be found only in the retiree group. Right now, for example, just about everyone who dies does so at Medicare's expense. It's impossible to believe life insurance companies have not noticed this fact and quietly made adjustments to it. The National Institutes of Health are currently spending 33 billion dollars a year on research, and Medicare itself is only spending fifty. We hear only eight diseases account for 80% of the expenditure of Medicare. It seems reasonable to suppose every few years the expenditure of 33 billion dollars would result in knocking off one of those expensive diseases. I realize that everyone has to die of something. When one of these expensive diseases disappears, it is reasonable to suppose a less expensive disease will take its place. But there remain plenty of cheap sudden ways to die, which might be replaced by expensive ones. Life expectancy will get a little longer, hospitals will need fewer beds. And so, regardless of whether Medicare spending went up or down last year, in the very long run, Medicare expenses will get smaller.

And of course, retirement costs will go higher, because an improvement in longevity leads to more time in retirement. At the moment, there is no provision made for Medicare surplus to be transferred to Social Security instead of into battleships, food stamps or agricultural subsidies. Medicare lengthens retirements. What you can save in Medicare becomes part of what you can spend in retirement, in actuality if not in overt shifts of finance. Right now there is no Medicare surplus, so right now there would be less resistance to changing the laws to mandate Medicare surplus become Social Security funding. It takes time for the public to adjust to any idea, and it helps a lot to have been the first mover. Passing a mandated surplus transfer (from Medicare surplus to Social Security) seems like one of the few painless things to be done about this financing tangle; once a surplus appears, competition for the money will also appear and the difficulty of mandating it will increase substantially. A related step that might even be taken is to deposit the cost-of-living increases of social security benefits, into the Health Savings Accounts of the elderly (without specifying how to spend it). That would open the way for later steps, even though many Social Security benefits would indeed be withdrawn and spent. But some would not, gathering compound income and requiring the Health Savings Accounts to remain open after age 65, which would be desirable for other reasons. The more preliminary steps of this sort which might be devised, the easier and more natural it would become to make large transfers, whenever some expensive disease does start to disappear. For example, Medicare recipients who spend significantly less than average on health care might be said to have "earned" an increase in their retirement funds. To extend the age of HSRAs to the time of death would permit some of these deposited surplus funds to be spent on health, get a double tax deduction, and advance funding-unification another notch toward enhanced compound income.

Must Roe Lead to Wade?

The case of Roe v. Wade is famous enough, but it actually begins twenty years before 1879, with the discovery of anesthesia in 1848. Anesthesia had made abortion simple, but it triggered thousands of deaths from puerperal sepsis during the interval before Pasteur and Lister popularized its bacterial cause and prevention. Seeing no better solution, the AMA urged its members to seek state laws to curtail the epidemic with abortion prohibitions. Connecticut in 1965 still retained an unrepealed law against contraceptives even in the bedroom, hung over (and largely unenforced) from earlier days. At that time, the AMA was horrified by the mayhem of women dying like flies from having abortions, after anesthesia but before aseptic technique. By 1911 the AMA voted to take steps to reverse things, but various church groups among members were better politically organized to paralyze nation-wide action, although many states did repeal the outmoded laws. In fact, such battles were still being fought in 1950, when I first entered the House of Delegates. The Medical Association at its subsequent national conventions was restrained by the declaration of its more religious members that they would resign if the Association now voted to reverse activities it had fervently demanded earlier. The result was an unfortunate political straddle which both weakened the Association by its loss of academic members, and gave out a misleading public image of where it stood. The law was obsolete, badly needed to be reviewed, but for internal political reasons could not obtain the medical leadership to go forward while still retaining membership among some religious groups or their opponents. That is, it was unable to choose between two groups of members, perhaps deciding wrongly which ones to pick. The resultant seizure of control of the abortion issue by nonphysicians caused many destructive effects on organized medicine's leadership of purely scientific matters. This image must now be somehow repaired because the mistakes appeared to the public as implying social indecision in the face of scientific facts. The present image, despite adding thirty years to public longevity, is now "You may ask them questions, but you needn't take their advice." Until quite recently, the expression to obey was "The doctor who treats himself, has a fool for a patient."

Lawyer doesn't come out of this looking very good, either. This is another profession where advantage can be taken, but when trust is destroyed, you suffer for it. It is not possible to say that a judge only follows the Constitution when privacy is nowhere found in the Constitution but still dictates stretching the privacy in the bedroom into general privacy, not merely for sodomy. but for any and all criminal activity. Robert Bork pointed out that this is some sort of blind alley to be avoided. But he is dead and the rest of his profession is leading us further down the path. Over and over, Bork exclaims that the Supreme Court must not take the role of a legislature and invent rights which could never pass the legislative branch. That's what Anton Scalia said, and Bork converted to the religion. The courts interpret the law as written by the Legislative Branch, and merely bite their lips until the legislature says to intervene. Bork found countless instances of Congress saying impossible things, but Congress refused to act. Congress wants to get reelected, so if they refuse there must be public resistance. Roe v. Wade is merely one example of what happens if the Supreme Court invents the Constitution and resorts to unauthorized workarounds. They may be entirely right, but they weren't elected. It will require a century to undo the adventures of the Warren Court into judicial legislation, many of which have yet to come to the surface and take dozens of small steps to correct. But Congress can reverse mistakes in a week. If they refuse to touch it, there's some reason which a workaround will merely delay.

Roe v. Wade was an example of doing the right thing for the wrong reason. Underneath it all, was Justice Douglas in 1965, legislating rights that Congress had been refusing to touch, and not stretchable from the Constitution. The real tragedy of Roe v. Wade has very little to do with abortion.

Multi-Year Catastrophic Health Insurance

Since we propose a monitoring agency for health insurance, we might as well add a few suggestions for its formative years. Insurance companies with experience in the field should, of course, be represented, and although an actuary might represent a company, actuaries as a profession should be invited to the governing and advisory committees. My own professional experience suggests the President of a large and influential institution will often nominate himself. Then, after a meeting or two, he sends his chief deputy. But scattered through the field are apt to be occasional revered experts, working for obscure institutions with little political clout. These are the ones you want on the brainstorming committees, and they are more likely to be nominated by the professional organization than by the employing ones. For example, let's imagine multi-year catastrophic insurance has been proposed for multi-year pricing.

Catastrophic health insurance is an indemnity plan, and its tradition is to be a one-year renewable one. That is, it's term insurance when we are starting to propose the whole-life model might be cheaper and have some other advantages. What are the pros and cons of multi-year Catastrophic coverage? It's probably cheaper because of lower marketing costs but lacks the flexibility of changing its premium frequently, in rapidly changing marketplaces. And it provides the opportunity to drop a troublesome customer, which is to say it shifts power somewhat in the direction of the insurer. At least in the life insurance market, most of the profit derives from customers who drop their policies, an unfortunate incentive arrangement. A particular hazard is to attract a disproportionate number of clients who have hidden information about impending health problems, leading to "adverse selection" of clients. That leads to requiring physical examinations, which raise costs.

Although some arbitrary time period, let's say five years, may be arbitrarily selected, everybody would recognize that accurate statistics might suggest a better time interval, let's say three or seven years. The management of the company would naturally prefer a shorter period in which to make mistakes, but it might be just as satisfactory (and therefore cheaper) to pick a longer period. Such decisions are often made by a board member with a booming voice, but it would be better to base them on statistics derived from pilot studies. For example, in seven years the client is seven years older at the end of it, and more likely to have serious illnesses intervene.

That may or may not be decisive. With the one-year term, the client is likely to apply for the insurance "on the way to the hospital", that is after he suspects he is sick, but before the insurer can prove it. That leads to waiting periods of variable length, again decided by the booming voice unless you can produce data that he is wrong, and often not even then. Statistics are the timid actuary's friend when he is in conflict with an aggressive executive who came up through sales. The best statistics are derived from pilot studies aimed at the particular question you are asking.

A committee might have better suggestions, but my guess is there are two curves: a slowly increasing one, with age. And a sharply decreasing one with the duration of time since application. My guess is that cheaters will decline in a year, hypochondriacs in three years, and cancer victims in five. The incidence of cancer is age-related, possibly the others are, too. There may be some other factors at work, which will surface in the first study, and have to be examined in a second one. But eventually, it should be possible to prove just what added risk appears at what age, and how much that is attenuated by adverse selection.

Knowing the added risk, it should be possible to set age-related risk adjustments, modified by different surcharges for the first year, the second, etc. And then, it should be possible to judge the best number of years to cover, since the adverse selection should only appear in the first round, not much in the renewals. And finally, it should be possible to see whether lifetime catastrophic rates might be a commercially viable possibility. Once that is established, it becomes like the fable of Columbus and the egg; everyone can do it.

Co-insurance. This seems like a good moment to introduce the subject of co-insurance. Co-insurance is the main reason for supplemental insurance to cover it, resulting in two insurance policies to pay for one illness. One presumes it was the reason Obamacare does not include it. Although it masqueraded as a utilization control, giving the customer some skin in the game, a 20% co-pay feature had very little effect on utilization. It was customary because a 20% co-pay makes the premium 20% smaller, a 30% co-pay would make the premium 30% smaller, etc. It was a handy tool for midnight labor negotiations, but otherwise, it was a burden.

But in the example we are following, it is very handy to have a fixed relationship between the surcharge and the added risk. Therefore, a demonstrated added risk of, let's say, 14.7% in the first year after initial purchase, would be adequately covered by a 14.7% surcharge on the base rate for the age and gender group. In the second year it would be less, and in subsequent years, still less. The insurance design is simple, once you can define the risk. Almost any other risk would be subject to the same rules: tell me the risk, and I'll tell you the premium.

Medicare/Health Savings Accounts Legislation

Medicare Modifications

Last Four Years of Life Contribution. Some very rough calculations suggest a 3.5% compounded interest return should turn a quarter of Medicare payments (which we already make) should equal the whole cost of Medicare in forty years (age 25-65). However, the last four years of life caper should also pay for half of Medicare cost with an investment of considerably less than a quarter of its cost, because so much of Medicare expenditure is terminal care. Thus reducing the cost of pre-paying ten years of Medicare cost by four years of revenue ought to reduce the residual cost of the other half of Medicare, presumably allowing a 1.75% compound interest rate to be sufficient, and probably more than sufficient.

Contingency Fund. Furthermore, the contingency fund of$ at birth has grown to $ at age 65, so it would take financial catastrophes of major proportions to upset the prediction that this re-arrangement of the payment stream should wipe out the Medicare deficit now covered by foreign borrowing, If unneeded, it can be used to fund the First Years of Life program, with surplus flowing into Social Security. Furthermore, the Medicare premiums now paid by beneficiaries would then be unnecessary. These might be considered contingent contributions to retirement.

Taken altogether, it still would not promise future beneficiaries a luxurious retirement, but it would considerably improve their outlook.

Miriam's Suggestion: A Communication System For Doctors, Run by their Local Society.

The credit card business got its start in the restaurant business. Easy credit is a big help for high living and big spending, but it also leads to a lot of bad debts. The restaurant customer may be from out of town, may never come back, can get along without the restaurant forever; and you can't repossess the product.

Bad debts would easily run to 7% of sales if you allowed restaurant and barflies to put it on the tab. Furthermore, there would be billing costs, in a business traditionally run on the basis of "cash on the barrelhead". Extending credit leads to impairment of cash flow; the bar owner might be forced to borrow money, just to buy more liquor to remain in business until the end of the month when the bills were eventually paid. If they were paid.

So, the credit card is a pretty good deal in the restaurant business, even though it switches a small percent from gross receipts to expenses. The "service establishment" takes a pile of slips to the local bank, which exchanges cash for them, less the discount, and so off to the liquor wholesaler for restocking. The banks make an arrangement with the credit card company, sending the charge slips to a service center for consolidating bills to the customer to one monthly bill. There may be some fraud from time to time, but the merchant is required to call for authorization if the amount exceeds $50. Customer fraud, plus bad debts, come to less than 1.5% in the credit card system, usually leaving room for a profit from the increased sales volume and slightly reduced bad debt.

While it is true this system is remarkably parallel to the health insurance payment system, there are certain unrecognized differences which shift the cost equation. In the past, a well-run middle-class medical practice experienced no more than 2% loss from bad debts and fraud. Since that is rather comparable to the attrition of the credit card system, at first it is hard for a doctor to see why he should permit his charges to be discounted an additional 2-5% by the credit card company. Cash flow is nice, but a doctor doesn't run much inventory, and his expenses are about 50% of gross receipts; he can wait for his money without pain, and so is used to surrendering a month's interest to the tradition of billing at the end of the month. For him, the image of easy credit (costing 2-5%) seems less valuable than the image of a trusted professional. If his practice is in a low-income area, he can always revert to cash at the time of service.

The exception to this similarity is found in a hospital-based physician. In the past, that mostly meant surgeons, but it now includes a wide array of specialists who hang around the hospital accident room, waiting for a patient to wander into the system. These physicians generally have even less overhead than the traditional office physician (radiologists and pathologists are the traditional hospital-based physician) and concerns about cash flow are unexpected. In the traditional case of hospital-based physicians, the patient may not even have recognized these issues, since the new billheads reflect some mysterious title like Cardiovascular Associates, PA. If the patient hadn't met them (like pathologists), didn't request their services, and doesn't understand what their function is, then their bills seem doubly excessive and rapidly turn into bad debts.

A. Telecommunicating the Remittance Advice. Commonly known as the EOB (Explanation of Benefits), the piece of paper which the insurance company sends back to the doctor is as much nuisance to him as the claim form was. In other words, each party is heedless of the trouble it causes the other and both have an interest in peaceful exchanges. Unfortunately, most doctors are unaware of the chaotic non-uniformity of the bits of advice their office assistants must use to adjust their balances, to balance bill or to write off the disallowances, to collect copayments and deductibles, or to rebill an incorrectly processed claim. More than any other area, this is the one where the Medical Society could perform the greatest service to its aggregate members.

B. A uniform format for EOBs needs to be developed, a task which is made somewhat easier by the fact that no one is now sending remittance pieces of advice by wire, so there is no local protocol which would have to be changed. A program needs to be developed for the office computer of the doctor, so that advice received by wire can be reconciled with the patients' accounts and balances. And, obviously, the insurance companies need to agree to piggy-back the reverse flow of remittance advice at the end of the forward transmission of claim forms. The trade is not entirely equal; one remittance can cover several claims.

This concept separates the remittance advice from the remittance; the check can go to the doctor's bank, not the doctor's office. The cost of preparing the check, postage, and depositing costs are eliminated by electronic funds transfer, which has some small cost of its own. From the insurance company's point of view, one cost is the loss of float; but three or four days cannot be a serious obstacle to negotiation. Close and careful analysis of the float reveals that the system only eliminates one or two days for claims transmission and two or three days for depositing. There is now more float than that, but either it is eliminated by office automation which the insurance company cannot stop, or it is unaffected by the proposals.

C. Additional Services. The organization of a communication system into doctor's offices generates an opportunity to send more than insurance claims over it. The Medical Society would undoubtedly wish to communicate with its member notices and similar medical chatter over it. Such a system could easily become a unifying force.

The most obvious needed data transmission in the medical environment is that of laboratory and x-ray reports. Once more, the opportunity is created, not merely to eliminate the step and the postman, but to incorporate electronic material directly into the physician's medical record of the patient.

Other transmissions are more fanciful; some linkage with the drug store might be developed which notified the doctor of refills which he may or may not have authorized, for example.

D. Commercials should be explored. There are no doubt drug firms willing to pay to have their material transmitted over the system; scarcely any doubt that doctors would want their computers screened to filter out what they didn't want. The combination of the two might actually make this the preferred system for conveying drug information. Since drug throw-away journals abound, there might just be some suppressed but discoverable enthusiasm to transmit scientific information through this medium. Most doctors would be very enthusiastic to have the current medical literature screened in response to their designed areas of interest. Since 80% of the drug industry is located within a hundred miles of Philadelphia, it should not be difficult to see what interest could emerge.

E.Using the Float to Pay for the System. At a number of points in this letter, I have referred to the float as if it were an inconsequential thing. That may not be entirely balanced, but I believe it is necessary to overcome some exaggerated over-emphasis from the Carter high-interest days which will probably never return. Nevertheless, the whole principle of commercial banking resets on the ability of banks to aggregate a vast number of erratic dribs and drabs of no great use to the individual depositors into a steady useable lump. By asking the members to join a large assignment account run by the Society, we accomplish the same thing. It is my belief that the members would much more willingly agree to allow us to use the aggregated float to pay for that system than they would receive an itemized bill. Similarly, it seems to me that the insurance companies would more willingly agree to permit us to have to the interest on our own money than they would to paying directly for the costs of running the electronic clearinghouse. The technicalities of running a money market fund with transfers via Fidelity USA (for example) seem to be very standard and pose no great problem. The big problem is to obtain agreement to substitute electronic remittance advice and make bulk transfers to the assignment account. After that, it is merely a matter of holding on to the money until it generates enough interest to cover the cost of running the system. Since we could garner 30 days of interest simply by paying the monthly credit card bills members, they should experience no cash flow problem.

Cash flow, by the way, seems to me to be an exaggerated concern. Relatively few doctors, radiologists, and pathologists perhaps have such high overhead proportions that cash flow is more important than interest payments. No doctor that I can think of maintains an inventory like a druggist and hence needs to have the cash flow to restock. Cash flow is nice, but for the most part, gaining interest on the money is just as good. Reduction of Society dues is another painless way to move money between doctors and the Society; I see no need to send people a bill, and I hope we can avoid it

. F.Seed capital is another matter and one which must be deferred at least until after preliminary discussions with the companies. As a general rule, the costs of a system should be borne by those who benefit from it; that's what is known as negotiating the price. It is generally true that one party in such a venture is willing to spend more money than the other, and money then "talks" in the sense that disproportionate contributions to seed capital must be reflected by some other adjustment. In this case, of course, the Federal government is a major player and may be willing to fund a pilot study or development costs if the system goes into the public domain to some degree. But generally, the system should remain in private hands.

Perpetual Fire Insurance

Many of the a older houses in Philadelphia still have Plaques to the front wall, usually between two windows on the second story. These are the symbols of colonial fire companies, signifying that this particular house had paid its dues to a particular company and was entitled to its services if it ever had a fire. There are two exceptions to this rule, one showing four hands gripping wrists (the fireman's "carry" technique), which was the symbol of Franklin's fire insurance company, otherwise known as the "Contributionship". The other shows a Green Tree, the symbol of a competitor fire insurance company which found a business opportunity in ensuring houses with a tree on the property, something the Contributionship declined to cover. These fire insurance companies are the only survivors of a type called "perpetual" fire insurance. Since the Contributionship is the oldest fire company in America, while the Green Tree company was fairly recently involved a controversy with its directors some of the most prominent people in the City they generate highly interesting histories, as organizations.

But in many ways, the more interesting feature about them is their unique business plan, which contains some important lessons for the rest of the insurance industry, particularly health insurance. Since health insurance is now one of the great unsolved problems of national life, it is perhaps worth a little trouble to understand perpetual insurance as a concept. It isn't that hard, so stick with it.

A fire insurance company has to figure out each year's risk of fires and set a premium large enough to pay for that risk, but not so large as to drive away business. If there's some unspent money left over at the end of the year, that profit belongs to the company. When Ben Franklin was starting the first fire insurance, he had no way of guessing what the risk was going to be, so he guessed far on the high side. So as to keep from scaring away his customers, the agreement was that any surplus would be applied to the following years, invested in the meantime. After a while, the investment income was enough to pay for the fires, plus enough to pay a dividend and to return the whole investment if the home-owner wanted to move to another house. Here was perpetual fire insurance. A returnable, lump-sum investment paid for the fire insurance, paid a nice dividend, and you got your money back if you wanted it. Its most extreme example was the policy taken out by thePennsylvania Hospital during colonial times, which still pays about 15,000 annual dividend, plus they have had fire insurance for two centuries from an investment which seems trivial in retrospect. Why doesn't everyone have perpetual fire insurance? Why is it now a quaint little forgotten idea that almost no one knows about?

the 1929 crash

There are conspiracy theories, of course, that greedy insurance companies prefer to sell you a more expensive product that is more profitable for them; forget that line of argument. A more plausible criticism is that the managers of perpetual insurance have to take a long-term view of risk. The perpetual companies are reluctant to insure a house that has any significant chance of having a fire, ever. Philadelphia long ago prohibited wooden structures, however, and the building codes have become progressively more strict. Another source of customer reluctance grew out of the 1929 crash, which destroyed for generations the confidence of the public, and for that matter the board of directors, in the safety of long term investments. If the investments become too timid, they will generate a reduced return, and inflation of the cost of replacing a burned-down building may slowly pull ahead of the investment income which is supposed to cover it. The tax laws will inevitably change over a period of time which describes itself as perpetual, and somehow or other the investment safety may become impaired by politics.

A more subtle risk is inherent in the nature of building materials. If you have a stone house, you expect to have your fire insurance restore you to a stone house. But houses were built of the stone when a stone was locally abundant, and cheap. Nowadays, it gets harder and more expensive to find and transport suitable stone, and much harder to find a skilled stone mason. One of the reasons you hire an architect is to direct you to the newer, more modern materials and techniques, and away from obsolete, expensive materials of the past. In summary, therefore, the managers of the company must establish a set of predictions about the perpetual risk of your house burning down, and the perpetual cost of replacing it. If they guess too low, the money you invested will eventually run out, and you will be left with a perpetual promise, but no money in the treasury to pay for it. All of this woeful, fearful whimpering, however, must be set against a two hundred year history of a simply glorious investment opportunity. You have to trust your company to be smart and, to be honest. Who trusts anyone, any more?

The Hospital That Ate Chicago (1)

George Ross Fisher M.D III

One evening in 1979 my visiting son, puzzled by health financing, asked me to explain. A decade of asking myself the same question led to the prompt reply that there seemed to be two central problems, both of them man-made. It's axiomatic in our family that man-made problems can have man-made solutions.

I believed you adequately understood health care financing if you understood the price reduction which hospitals give to subscribers of Blue Cross but not to subscribers of their competitors, and if you also understood the income tax dodge which the Federal government gives to salaried, but not to self-employed people who buy health insurance.

He asked how in the world these two subsidies were defended, and I told him. He then asked how these monopoly-inducing subsidies related to other weird quirks of health finance, and I told him that, too. He listened quietly for thirty minutes, and then exclaimed, "Wow. That's really the Hospital that Ate Chicago!"

So he went to bed, while I stayed up and wrote a short fancy for the New England Journal of Medicine, called, "The Hospital That Ate Chicago". Next morning I polished it a little and sent it off to the editor. Within a few days, it was accepted. Six weeks later it was in print.

Making the Whole Town into a CCRC

Center-city continuing care retirement communities

Probably because of cheaper land and construction costs, retirement villages are generally found in suburban or semi-rural regions. In Philadelphia for example, forty or so retirement communities dot the outermost edges of the city while the urban center contains only two or three of them. As was true during the migration of the national frontier Westward throughout American history, cheap land costs seem generally to overcome the attractiveness of urban habits and culture. Or at least that now seems a more universal theory of migration patterns than the attraction of suburban schools for the parents of teenagers. It has generally been argued in the past that the automobile made it possible for families to escape the turmoils of inner-city schools by fleeing to the suburbs. But now we see families without children continuing to flee from the center of town. Center-city continuing care retirement communities have certainly been built in the center of town, right next to libraries, museums, clubs, and department stores, but real estate salesmen know very well that it is a safer bet to locate one of them in cheap farmland, well beyond the ring of much-praised suburban school systems. When random inhabitants of such villages are asked what attracted them, most of them say it was the medical system, but that can't be precisely right since they all have Medicare. More likely, they want to locate near the suburban doctors, hospitals and pharmacies they grew accustomed to during their compulsory residence near the high school. And the circle of friends they made there; although the aging process makes that into a dwindling band.

The point here is that automobile commuting and much-praised high schools probably created suburbs, but are no longer the strongly attractive issues which induce empty-nesters to settle nearby for the rest of their lives. The CCRC is like a ship at sea, pretty much entirely self-contained because of the progressive locomotion difficulties of the residents. At first, the residents can feel free to go on living as they "always had", but habit and convenience rather quickly narrow their horizons and circle of friends. They may have been community leaders a year or two earlier, but soon after making their monastic choice, they begin to withdraw into the more limited community of their new chosen monastery. Limiting perhaps, but not confining.

That's unfortunate in one way since a theme of this book is that the young older group needs to find ways to continue productive lives. The country can't afford to have them remain unproductive, and they themselves need to have more useful things to do. An entirely recreational life simply cannot continue to get longer and longer as a sole justification for all the expensive health care we seem capable of providing for them. Therefore, one promising experiment which needs to be tried is to organize the whole suburb into a half-way house, amicably intertwined with neighboring houses full of teenagers. With people living in their own homes a few years longer than they originally planned after the kids are out of the house.

The town where I live is now surrounded by miles of other suburbs, but I think of it as on the edge of farmland because that was the way I found it sixty years ago. The borough itself has seven thousand houses, probably somewhat too few to suit urban planners, but presenting no convincing argument for us to consolidate with neighboring suburbs except the nagging of those sociology professors. The town has plenty of doctors, most of whom practice somewhere else, and plenty of dentists. No hospitals, no nursing homes, no rehabilitation centers. But several drugstores, two ambulatory x-ray units, and two specimen-collecting laboratories for nearby hospitals. We have a busy volunteer ambulance corps, run out of the firehouse, and frequently seen racing and honking its siren around the town. The composition of these independent medical facilities has varied over the decades but is not greatly different from what can be found in a dozen near-by suburbs. The one thing we don't have is a CCRC, and there seems to be enough demand for one, even enough empty land to hold it. Just about every retiring family in the town has been heard to express a wish that a retirement village could be made available, so they wouldn't have to pull up their social roots in addition to all of the other disruptions of retiring. Having spent most of their adult lives envying people with larger, more luxurious houses, they are now at the point where they are sick and tired of fussing with the big house they do have. They want less number but smaller houses, especially apartments, just don't exist in the town. So they are forced to consider moving away.

Especially after one of the two elderly marriage partners dies, there is the worry of living alone. Twice in my own experience, an elderly widow living alone in a big house has broken her hip bone with no one in the house to call the police. One of these ladies was lucky; she lay on the floor for two days without food or sanitary support, until the mailman came by and noticed the mail piling up. The other lady was not so lucky; she had bought a big dog which apparently ate her when she was helpless on the floor. Old folks living alone tend to think they can cope with anything. Until suddenly they can't.

Very likely, the mobile cell phone has reduced the number of such tragedies, just as it has apparently reduced armed robberies almost by half. The mobile phone gets progressively more clever with the invention of 500,000 applications, or apps. We can probably expect to see visual surveillance systems and the like, very soon and very inexpensively. Handbags in the bathroom and other safety devices are regularly more ingenious; there are even companies which will outfit a whole house with such improvements and suggestions for use. It's a great pity that installing a home elevator is comparatively cheap when the house is being built, and almost prohibitively expensive after the builders go away; nobody over the age of 60 should really buy a house without an elevator, except for the fact that so few houses have them. They seem expensive until you realize that moving your home once or twice is going to cost $100,000, mostly because of universal tendency to buy the biggest house you can afford rather than the biggest one you need. But even so, my little town needs one more thing before it can be said to have coped with its retirement needs.

What's missing in all this is management. Relatives who live close by will often suffice, depending on their other commitments. With a competent manager, what's needed is a part-time employment agency, to supply the nurses aides, physiotherapists, and babysitters of various skill -- and to cope with the mountain of redundant government paperwork. Regulatory paperwork can rather easily be coped with by someone who has a programmed home computer, so the right equipment and program must be located, or commissioned. Since the Obama administration was recently willing to spend $29 billion dollars to equip every doctor with a computer system, what's probably most needed is a loud angry lobbying group to get the necessary money, and to cope with the passive aggressive resistance which any competitive environment is filled with. We're talking here about reducing the number of people who need to enter a CCRC, so nursing homes and other CCRSs can be expected to express hurt feelings and discover a myriad of ways it is totally unsafe to provide a competitive alternative to their business model. Getting a sympathetic congressman will help about half the time; the other half of the time you should consider the advantages of replacing him.

There are advantages to starting one of these retirement villages without walls in a rural area, with lots of experience with volunteers pitching in and helping out. The community officials are sympathetic in such areas, and costs are generally lower. In a suburban neighborhood, the environment is more sympathetic to the approach of applying for a government grant, or if there is no available program, asking for the creation of a demonstration program. That's an egg that will generally take five years to hatch, and prove to have higher costs. The rural environment needs enthusiasm, the urban one needs tenacity, and will generally find it is an advantage to have a congressman who is chairman of a committee. But everyone who wants to see a local retirement village without walls also needs a slogan, so here it is. "Anything a retirement village can do can be done at home. Only cheaper."

The Nation's Future Health Profile

As the nation's health steadily improves, it's going to cause some problems of a social nature.

The most astoundingly good news about health is frightening, precisely because it is so astoundingly good. The average life expectancy of Americans has increased by three years during the last decade. That's right, we got thirteen years for the price of ten. Most of that improvement has come from taking daily aspirin tablets, or from taking the anti-cholesterol "statin" drugs, with a resulting decrease in the death rate from heart attacks and strokes by roughly 30%. It seems possible to hope for another three-year extension of lifespan in the next decade; when statin drugs lose their patent protection they will become a lot cheaper, and many more people will take them regularly. It seems churlish to emphasize the negatives of such a miracle, but unfortunately, it's questionable if our political and financial mechanisms can readjust to such an unprecedented commotion.

It could get much worse. The improvements in cancer treatment have lately been much slower and more expensive. If someone invented a treatment for malignancy which proved to be safe and cheap, we could get another five years, followed by still another five years as the patents run out and doctors get the hang of using it. Everybody could then reasonably expect to live to be ninety. What the Social Security and Medicare budgets would look like under those circumstances, must simply boggle the mind. If people mostly lived to be ninety, comparatively few of them would have much serious illness before they were sixty-five. The vast bulk of medical expense, for practical purposes almost all of it except obstetrics and psychiatry, would become Medicare expense. People would of course eventually die of something, and all of those terminal care costs would be Medicare costs. The government would, of course, begin to see what is happening and attempt to change the political arrangements for financing it, but that would be resisted bitterly, and it would be slow. What would not be slow would be the decision by employers that there is no sense in accepting financial responsibility for health costs which no longer have much impact on working people. Right now, health insurance amounts to forcing employees under the age of forty to subsidize the costs of other employees between the ages of forty to sixty-five. If that curve shifts to the point where everybody under sixty-five is essentially subsidizing people on Medicare, well, say goodbye to employer-based health insurance. Not later, right now. At the end of whatever calendar year, employers all wake up together and start a stampede out the door.

The first issue, of course, is not how to shift around the costs of medical care, but how to pay for staying alive. We can raise the age for beginning Social Security benefits, but that doesn't create money, it just shifts retirement cost from the government to the individual. What matters is that people must keep working longer, earning at least enough to support themselves; and that implies greater competition with younger people for available work. It may mean greater resistance to immigration, particularly illegal immigration, and a greater appreciation for frugal living. But shifts of twenty or thirty percent in the workforce within a decade probably cannot be accomplished, any more than they could be accomplished in Africa after the elimination of epidemic diarrhea and other tropical diseases. Genocide as an avocation does not seem very appealing, either. One suspects something similar happened to India with British colonial rule, better water and drains, and all that. And one has to speculate that something like that is being concealed in China, for all its vaunted growth in Gross Domestic Product. Selectively killing all girl babies at birth, and all boy babies after the first one seems more drastic than we would accept. But we must eventually do something, with the first step being a general appreciation of the problem. Overpopulation may or may not be the problem; the problem is too many healthy people past the traditional age of employment.

Somewhere in the writings of Aristotle is the maxim that all culture comes out of the wealthy classes because only the wealthy have time for it. Aristotle is obviously now out of date on that topic, because we can easily foresee a population of healthy old folks with time on their hands. Our cultural institutions seem painfully slow to recognize, not just their new customer base, but the potential creative base. Surely, Grandma Moses is not the only artistic self-promoter in her age group. And surely, adolescent love affairs are not the only topic capable of attracting a mass audience. Improved cataract extractions, better hearing aides, and outstanding dentistry will surely make it possible to foresee more grown-up tastes in music, the visual arts, and culinary skills. Once these old folks stop predicting their own impending deaths and face a twenty-five-year future on the golf course, a flowering transformation of the arts is safely predictable.

But that's not enough. Most people were not born with the talent to carry a musical tune or draw a straight line, and many of those who do have some talent feel the arts are trivial. For most people, the way to fill up a quarter of a century is to go back to work. I didn't say it was easy. There is just no feasible alternative.

Medicare Including Retirement, Pearl # 2

Invest the Withholding Tax and Pre-pay Medicare? Borrowing to pay for Medicare, except temporarily, has very little to be said for it. On the other hand, the choice between pre-paying for it and paying at the time of service is a closer argument. Pre-payment can sometimes be arranged to reduce the price out of recognition of the interest foregone, but usually, the seller gets the better of such a deal. In this section, we propose to arrange the payment stream to give the buyer the interest, but Medicare finances are so strained, it doesn't make a heavy impact. About a quarter of Medicare cost is paid from premiums from current beneficiaries. If that were collected in advance over a period of forty years like the payroll deduction, the combined interest payments would considerably reduce the eventual total cost. Unfortunately, young people are now so suspicious the money will be diverted to other purposes, it is a political question whether they would permit the withholding to be increased in amount. Furthermore, the other half of Medicare is essentially borrowed, so interest payments each way would about cancel each other without affecting the principal cost.

They would, however, probably be sufficient to keep the debt from continuing to rise at 7% a year, and that's a major advance. The withholding tax and the Medicare premiums would remain the same, the benefits would be unchanged. So what's in it for the average voter? Most accountants would say it was still a desirable change toward a more stable system, but many politicians would say it runs a risk without any political benefit at the next election. Everybody is correct; it isn't enough but it is something. It solves a definable portion of the problem, of bringing future deficit increases to a stand-still. Things are so bad I'm afraid that's all you can buy for $3.5 billion a year. We must find some way to supplement it, but it's a start. We have five other suggestions:

Devise Some Way to Escrow Long-term Funding. New revenue ordinarily arrives as cash and is invested in short-term loans until it is decided what to do with it. With thirty-day loans, or even overnight loans, you just have to wait for a little, in order to restore cash status. But money market funds show us what can potentially happen. If customers get into a sudden panic, they want their money back immediately. If it's already invested in thirty-year mortgages, the money market fund may go bankrupt unless someone "bails them out". Which is to say, loans them more money to supply some cash -- even though they have ample funds frozen in long term investments. The creditors have their own creditors to consider. If no one will help out, the creditors may shut them down and you get the beginning of a liquidity crash.

Because of this remote but very real possibility, the longer the loan, the higher its interest rate, because the liquidity risk gets extended. That's bad if you are a borrower, but please if you are a lender. Therefore, if the Medicare wage-tax receipts flowed into a frozen single-purpose investment account, creditors would be more assured money would be unrequested before the stated time, and its rate of return could rise with this new attractiveness. Just how much extra income would be provided is a little uncertain, because very few loans are currently for longer than thirty years. However, about forty-five years are potentially available between age 21 and 65, and educated guesses could be made. A one-or-two percent rise in income might change many calculations, not just this one alone.

Find Ways to Extend the Years at Compound Interest. Since retirement is conventional at age 65, a fund for retirement will immediately start to dwindle until the date of death. But many people continue to work or have other retirement funding sources. If they do not need the surplus immediately, they should be permitted to leave it in the escrow fund, to prolong its term. This could be either fixed-term extensions or demand deposits, at the election of the depositor, and its election would make these funds preferable to retain, compared with Social Security, for example.

The open-endedness of retirement is always going to be a problem. If we speak in averages, they suggest half of the population will be dead, mid-way to the average. Any unexpended surplus after their deaths will be a source of contention, and there will be a struggle for it between heirs and longer-term survivors. If the compounding of unused income could continue longer, for even five years after death, the extra revenue would be considerable.

Continue to Earn Interest after the Death of the Depositor, as in a Trust Fund Long ago, perpetuity was defined as one lifetime, plus 21 years. Adding another two decades would add two more doublings, and still not run afoul of inheritance traditions. In effect, it would increase the multiplier from 512 to one -- to 2048 to one, increasing the number of newborns who could afford $100, considerably, by making it only $25.

Because of the de minimus initial deposits, it would be a small matter to devote a small portion of the deposit to a backward-funding for childbirth costs. My Libertarian friends would be shocked to hear the proposal, but this small diversion would settle a myriad of cases before the Matrimonial courts about paternity, divorce, single parenthood, and even same-sex marriage. Indeed, the financial incentive might be so great it would affect behavior, and need to be debated on that level separately.

But all of the foregoing is small-time, based on the mistaken notion the system is basically sound. Let's look, without pretense, for seriously larger amounts of money:

Contingency Fund. Any projection a century in advance risks making gross mistakes in its planning. No matter how confident the predicting party may seem, it is only prudent to have a contingency fund, when the multiplier of compound interest is so great. For example, most people can expect to be of Medicare age when they die, but not everyone will do so. But mostly a contingency will need to cover the considerable risk of simple miscalculation, without creating a temptation to divert it. The size of the contribution is scarcely a handicap. That is, a contingency fund of $2000 can be envisioned from the gift of $1 to a newborn. Since you know with absolute certainty that every newborn will die someday, a contingency fund of a million dollars per person is possible with a grant of $500 to everyone born in poverty, so long as:

you don't spend any of it for 111 years, providing you can get an average 7% return, and providing the government doesn't devise other uses for your money in the meantime.

Incidentally, increasing public resistance to inflation is one of the hidden virtues of this proposal. Most people would laugh at such a long-term projection. For a single individual, yes, for an extended family, not so much. The trick is to get started with small amounts, which don't attract much attention until they demonstrate some power.

Instead of fanciful extrapolations, it is possible to say almost every working person could summon up $200 per child, and the government could summon up $200 for those who can't. This is what is needed to provide supplements which would accomplish reasonable goals for lifetime healthcare, plus a somewhat more modest description of a comfortable retirement supplement to Social Security. And for those who are unable to support themselves for handicap reasons, the government might summon up the cost for indigents. In the long run, that would be a bargain investment. Since every child has two parents, it leaves a 100% cushion for under-estimates when we extend this idea to children. The problem is not arithmetic, it is public acceptance of the whole idea of individual long-term contingency funds, plus a way to store such a fund for centuries at a time, protecting it from pilfering by its custodians.

First and Last Years of Life Re-Insurance By far the best proposal for refinancing Medicare, however, is to anticipate the way science is going to re-design costs. In the long, long, run, there will be very little medical cost left, except for the first and last years of life. We have no idea how long it will take, but that's the direction it is going.

So, phase in a restructuring of funding for both children and elderly first, and then add in the rest of a lifespan, step by step. The rest of the lifespan will eventually shrink as a cost center, while the beginning and end would not. Be sure to do all this in such a way that maximizes investment income at compound interest. This might be a project under construction for decades, but its first step would be to begin funding for the Last Four Years of Life, which happens to be an early step in the proposal for refinancing Medicare. Since the reader may be unprepared for the topic, it is considered in a free-standing way, in the next section.

Medicare Frugalness Incentive

Future Medicare costs are more predictable verbally than with data. Half a dozen diseases make up most of the cost of Medicare, and it can be predicted that research will eliminate some of them. Although at first the new cost of treatment will raise costs, eliminating the disease will eventually lower them. The last year of life will almost certainly remain expensive because everyone will eventually die. In that sense, it is easier to predict continuing high costs for the last year of life, than for Medicare as a whole, except for scientific progress driving disease out of lower age groups into Medicare. In fact, the enduring costs of the last year of life are about the only thing predictable about Medicare. So the old folks needn't worry; no one will seriously propose eliminating the program until the future becomes clearer.

However, diseases will surely be eliminated, longevity will increase, and the last year will be expensive. It seems rational to give Medicare recipients the same incentive to be frugal about spending which younger ones get from Health Savings Accounts: if your medical costs go down, we will transfer the savings into retirement funds which many of you badly need. In the case of Medicare beneficiaries, that probably means transferring them into current Social Security payments. Another purpose is also served, which is to make the offer while there are no surplus funds. It would serve the purpose of assuring the elderly that funds going into their medical care will be diverted to the consequences of good care, which is improved longevity. The consequences of not staking out this position in advance might be, just might be, the diversion of funds into battleships, sugar subsidies, and other worthy causes. And having been shown clean hands with this proposal, perhaps the seniors would calm down and consider other proposals about Medicare.

For example, how the books are kept. Medicare is funded by three sources, the wage tax on working people (3%) of their income, the premiums the old folks pay, and the subsidy from the general fund. However, the money is not put into a big Medicare pot but rather designated to particular parts of the program. The fiction is maintained that hospitals are almost entirely funded by the wage withholding tax, more or less guaranteeing that the hospitals will be paid, no matter what, because the wage tax has already been collected as cash in hand. The rest of it is less certain subsidies and premiums, much of it borrowed from foreign nations. You can see the hospital lobbyist in this: hospitals get paid first, no matter what. And so far, it hasn't mattered much, because everyone got paid in full. But however meaningless, it represents a give-back which the hospitals would probably be reluctant to give up.

Since it represents a reason to resist reductions in Medicare funding by the federal government, it potentially stands in the road of gradually reducing Medicare funding for other purposes. Including shifts from medical care to retirement funding, let's say. And it serves no other purpose I know of.

Medicare Buy-Out

Could Americans buy their way out of Medicare? Right now, no. In a few years, probably yes. A Medicare buy-out would have a few special complications. The transition to it might take thirty or more years, in view of the several ways it raises revenue and the varying ages of the patients involved. For example, from the time an individual starts his first job, until the age of 66, he is sustaining payroll deductions for future Medicare coverage. Also, from the age of 66 until he dies, he has Medicare premiums deducted from his Social Security payments. Each of these compartments aggregates about a quarter of the cost of the program, and the two methods keep more or less in balance over a lifetime, eventually paying half its cost.

The other half of the Medicare program cost is supplied through general tax sources, as a subsidy, and could continue to build up indefinitely. Eventually, an undeterminable portion of the subsidy is borrowed internationally, and that debt, like a credit-card balance, draws continuous interest. The Economist reports it would be more advantageous for the Chinese to buy American common stock. But using that approach, they would now own a fifth of the major corporations of America, which is politically unacceptable. Therefore, they bought American Treasury bonds. Depending on maturity, these bonds will eventually come due and must then be redeemed or refinanced. This arrangement can only continue with mutual consent of the two nations, and currently, the Chinese economy is shaky.

Moreover, it cannot be said the two funds will keep in balance. That's essentially true in bulk, but the actual revenue for each age cohort is largely based on its historical birth rate. Payroll deductions for the baby boom bulge have reached a peak and are about to decline to zero, whereas the Medicare premium bulge is just beginning, along with benefit payments. These repeated imbalances could prove troublesome to fund.

I wish I believed these receipts had been put into a bank vault, but in fact, they were likely co-mingled for general government expenses and spent long ago. Whether or not they are represented by accountants as paying for part of future Medicare expenses, or for current bridges and battleships, they are going to make a problem when the boomer bulge catches up with them. The formula will remain unchanged, but the proportion of payroll deduction will fall because the Millennial generation is fewer than the boomer generation, who are in turn more numerous than their parents as consumers of Medicare funds. The Treasury would certainly be concerned about any proposal to accelerate the payout to help a Medicare buyout. And even if an exchange of health funding is agreed to, the accounting problem of determining millions of balances of differing size is sure to be a headache. The balance in question is the net of 6.5%, less the rate on Treasury bonds, which could be either a positive balance or a negative one if the bond market and the stock market do not move in parallel. The unpredictability of markets is amply illustrated at present, when trillions of freshly printed bonds do not cause inflation, even for the mundane purpose of maintaining a stable currency. Even inflation targeting does not work as desired, currently reaching 1.5% when the Federal Reserve is trying to reach 2%.

In the longer run, Medicare buy-outs by the grandchild approach would stretch available funds over a longer time span, and augment them somewhat. Longevity is increasing, but the period of working life is not. People are retiring earlier, and they are entering the workforce later in life. Progressive taxation further reduces what working people have left over to spend, and eventually will make them less willing to support the protracted vacations of their children and their parents. So extra investment income will be needed, and shifting other savings around will probably relieve some of the pressure. Even so, it appears certain some elderly people will outlive their savings and must find a way to generate income with their leisure time. Along the same lines, we must also change the mentality of those who regard employment as a punishment to be avoided, but that is not my present topic. One small advantage of the unemployed Millennials is they are less likely to resist working long after they do get a job.

Summary of One Scheme of Medicare Buyout. Childhood health insurance, funded through health insurance for senior citizens. Owned by two people linked by redefining a birthday or some other strategy, all sounds like a peculiar idea. But let me persuade you to do a little math. At 7%, there are 9 doublings in a 90-year life. 2,4,8,16,32, 64, 128, 256, 512. That's rounding up on 6.5% and 85 years, which are closer to realistic estimates of future longevity and interest rate return, but no one can predict. Every dollar at birth (now redefined financially as the 21st birthday) is multiplied 289 times (the approximation process suggested 512). The grandparent aged 40 would have to add $450 to a sinking fund, and a grandparent aged 65 would have to contribute $27,000 to pay it in advance. Eventually, when things settle down and we have added four doublings, the contribution would be $42+ a person, so considerable juggling would be useful for a few years to smooth it out fairly.

Let's aim for $200 a year for five or ten years for everybody over age 40 or something of that nature. To pay for Medicare coverage, that's amazingly cheap. That's a rough estimate, of course. The overall effect is for the child to wear down his gift from grandpa from birth to age 21, paying $42+ at age 40 to support his own grandchild. He pays for his own care from age 21 to 66. During the transition, a late starter would pay $200 a year for several years after age 40 to make up for his late start, and others would pay the same, but starting later. There are a hundred ways to do this, and the choice would be for the most palatable appearance. We have other, possibly more acceptable, approaches, but this one links well with other goals.

Proposal 22: Congress should enable one voluntary transfer between the Health Savings Accounts of members of the same family, especially grandparents and grandchildren, or one transfer to a general pool for atypical families. Members of the grandparent generation who have no grandchildren may choose one substitute from outside the family, or leave the decision to the fund.

Proposal 23: Congress should permit voluntary buy-outs from the Medicare program, which include consideration of returning payroll deductions, and fair accounting for premiums, copayments and benefits already paid for by age groups in transition; but make little effort to encourage buyouts, until prices start to fall.

All in all, the conclusion of this analysis is that targeted programs are probably better for the thirty million people with special needs, so universal one-size-fits-all is probably not a good goal. Privatizing Medicare is a good goal, but we may not be quite ready for it. What's left is to fund the healthcare of children, by mildly overfunding the healthcare of seniors. That ought to end the discussion of this topic, except for demonstrating how you would control the money machine, exposed by the lack of gold or other standards for the currency. It's done by bringing balances to zero once in a while, and it was uncovered by working around the grandparent-grandchild transfer. By studying what's left, we reach the conclusion that fixing the children problem would do the most good for the least cost, and just about everything else has major disadvantages.

Let us then do this much without waiting to see what Obamacare is going to do. If the Federal Reserve's inflation targeting serves the purpose, this may be held in reserve, but the failure of Keynesians to reach 2% inflation when they try to inflate on purpose, should make everyone uneasy about their approach in a currency system which depends on printing money until short-term interest rates rise to 2%. As the man in the audience called out, "Haven't you been to the grocery store, lately?"

Lifetime Healthcare, Using Health Savings Accounts (1)

Can it be done? What would it cost? Since no one can predict future healthcare costs, no one knows how to pay for them. Conclusions like that over-state the difficulty. It's fairly easy to predict minimum available revenue, and fairly good cost extrapolations already exist. Payment feasibility can amount to comparing "no more than" with "no less than". With luck, we can judge the relative probability of success among payment proposals. Since that still sounds like a scam, what follows is step-by-step. We apologize to actuaries and mathematicians, who may find simplified explanations tiresome.

Medical Costs. We use someone else's estimate of present costs and the foreseeable rate of growth. Blue Cross of Michigan, confirmed by federal agencies, estimates the average lifetime cost in America today roughly approximates $350,000 for a male, and about 10% more for females, using the year 2000 dollars. An 83-year overall lifespan necessarily includes history and prediction. The gender difference rests mainly on women's somewhat longer life expectancy, as well as the statistical convention of attributing all obstetrical costs to the mother; it's likely to be a stable ratio. A million dollars for a family of three is pretty daunting. Because there have been so many changes in medical care in the past century, likely to be repeated in the next century as well, $350,000 must be considered a soft number. Most extrapolation errors will arise from it, so an analysis reduces to this question: How close could we come to cover a $350,000 cost, without distorting medical care? To simplify the explanation, the cost goal is reckoned in the year 2000 dollars, so inflation and other adjustments are taken from revenue, to make them match. Inflation has remained steady at 3% in the past century, so 3% per year is accepted for the future in this analysis. Medical inflation is somewhat different; greater than 3% in the past, recently diminished. Only revenue projections are discussed, with costs taken as a given. It isn't perfect, but it can serve as a base for mid-course corrections, providing a margin for error is adequate.

Revenue, per average person. It is easier to estimate future bulk numbers for the whole nation than to predict an individual's future cost. Therefore, our approach is to take national costs, divide them by the population, and concentrate final analysis into a hypothetical "average" person. Since the goal is to compare average costs with average revenue, it is important to avoid using revenue as a basis for costs. The temptation is great, however, because of the well-known tendency of costs to rise to the level of available funding. To the extent possible, such behavioral adjustments are reserved for "dynamic scoring."

Other Data Points. Longevity has risen by 30 years in the past century but is now relatively stable at age 83. Where practical, we have extended calculations to 93, which seems a reasonable guess for where longevity might go in the coming century. How much an average person could or would be likely to accept as a personal expenditure is hard to say, just as it is hard to say how much cost the country would be willing to pay for subsidies to the poor. There is a temptation to use present costs as a surrogate because there is so much uproar about them, but that approach has too much circularity to its logic. After all, the public is complaining. So, whenever practical, we have presented a family of curves which permit the reader to choose between alternatives. The final data point is the maximum achievable interest rate, a matter of enough complexity to require special discussion, which follows after voicing an opinion about the medical future underlying this subject.

The medical side of it. There is fair reason to believe most or all late-developing diseases might originate in the dozen or so complete genes in the mitochondria of cells. These genes are only inherited through the mother and probably originated in the plant kingdom. So the conquest of our currently most expensive diseases -- diabetes, cancer, Alzheimer's disease, Parkinson's disease, and arteriosclerosis -- during the next century -- is not a totally unreasonable prediction. Furthermore, new cure discoveries, while generally expensive at first, eventually become cheap. Mix it all together, and while the costs of the next century may at times be towering, it seems entirely conceivable healthcare payments could become self-sustaining without financial intervention, a century from now. If we generate the means to get to that point, curiously we should give some credit to financiers, like Warren Buffett and John Bogle. If that sounds confusing, read on.

What passive investment income for a Health Savings Account is generally achievable? Essentially, this proposal advocates saving in advance instead of paying after the fact (often called "Pay as you go.") That translates into being paid interest instead of being charged interest. For this, we steer the reader toward investing his savings as much as possible in an HSA (Health Savings Account), rather than an IRA (Individual Retirement Account), or a 401(k) plan, the employer-based equivalent to IRA. There's nothing the matter with these other tax shelters; they are just not as good as an HSA. The only qualified American savings plan to contain a tax shelter on both deposits and withdrawals is the HSA, and even its tax shelter on withdrawals is limited to approved medical expenditures. The Canadian savings plans do have this dual advantage, but in every other qualified American plan, it is necessary to reduce either the deposit or the withdrawal by its estimated taxes at different ages. All graphical representations of IRAs and 401(k)s likewise require a mental adjustment for taxes. In amounts, this large, taxes make a vital difference. After-tax savings vehicles are necessarily less generous, and are not discussed.

So far, so good. Probably the greatest reluctance this proposal will encounter will come from an almost absolute need to invest the HSA in common stocks, which many people sincerely feel is a form of gambling. But to reflect on history for a moment, it took over a century for Americans to overcome their resistance to banks, which are now found on practically every street corner. Pioneer families were obedient to Shakespeare's, "neither a lender nor a borrower is," which indeed remains pretty good advice in most circumstances. But banks were also the foundation of the Industrial Revolution, and their process could also be called a form of gambling. Modern index funds are a far cry from 19th Century mining and railroad stocks. Their risks, while not totally eliminated have been tamed, so the modern economy really has no savings vehicle quite as safe for those who must live in the real world. At this particular moment in time, almost no stock is as risky as bonds, and in Europe cash in the mattress can lose 50% of its value in a month, responding to central-bank changes in currency rates. True, approximately every thirty years stocks fall almost as much, but modern investment has ways of coping with the "black swan" risk, by somewhat sacrificing some of the investment return. Every company eventually comes to an end in about a century, and the only real safety comes from wide diversification of risks substituting for agility in jumping among them. The current total-market index fund model allows for investment in the whole economy at once, counting on remorseless market pressure to purge the index of failing companies, while constantly adding new ones who are succeeding. Holding several thousand successful stocks at once is the new definition of safety. Meanwhile, the new definition of success is moderate but relentless growth, from low costs and low taxes.

John C. Bogle of Philadelphia probably did not invent the notion you can't beat the index (he means the stock market averages like Dow Jones, Standard, and Poor, Russell, etc.), but he certainly evangelized the idea. Let's explain. When you finally overcome the idea of getting rich by out-performing the stock market, the idea reverses itself. The entire stock market is a proxy for the whole economy, and although some people do get rich faster than the stock market grows, hardly anybody gets appreciably richer than the index in the stock market without using leverage , and leverage is only for gamblers who can disguise the nature of their leverage.

Professor Roger Ibbotson of Yale has compiled extensive data for the previous century and demonstrates how relentlessly the American equity stock market has grown quite linearly, varying by asset class but largely disregarding stock market crashes, or numerous wars large and small. While small stocks have grown at a rate of 12.7% per year over the past century, safer Blue chip stocks have consistently grown at about 11%. With big computers, we can see investors in stocks have only received a return of 8%, which sometimes implies the financial industry is absorbing 3% for its expenses and profits. That may not be a fair comment since a considerable portion of the 11% must be invested in lower-yielding bonds to protect against periodic black swan disasters like 1929 and 2008; this point is expanded later. Vanguard, Bogle's fund, reduces overhead cost by matching his portfolio to the index and letting it run indefinitely, a process known as passive investing, which at least minimizes taxes and expenses. Perhaps, over time, ways can be found to widen the investor's lifetime return to more than 8%, but for the time being one must be satisfied with 8%, and 11% remains the ultimate goal for the far future. Warren Buffett does better than that by buying whole insurance companies and leveraging with their cash float; that's not exactly possible for other people. To rephrase the whole business, a total-market index fund offers the 8% current safe limit to passive investing, within a bumpy unsafe 11% world. Furthermore, the 8% contains steady 3% inflation, so investors better not count on more than 5% spendable return. A disappointingly low five percent, relatively safe, after-tax and after-inflation, return. What will that achieve toward paying an average lifetime cost of $350,000? Remember, this is compounded , which has a magic of its own.

Table xxx plots how $400 will grow in response to compounding, starting at birth and ending at 83 to 93 years, at 5% to 12% compound investment return. We've already described why 83, 93, and 5% were chosen, but why $400? It's a personal guess, shown at the bottom of a family of curves which go up to 12%, the current maximum. It represents the amount I guess would be privately regarded as within almost everyone's reach, and if lost wouldn't financially cripple them forever. It would admittedly have to come as a government subsidy for handicapped people who could never support themselves. And since it would be at birth, it would have to seem bearable to young parents. Also included in this family of curves, are 12% (the limit of growth in the stock market over the past century) and other 1% levels down to 5%, so the effect of taxes, overhead, inflation, and bond protection against stock crashes, can be judged. Note in particular how the curves widen around age 60, exposing the new opportunity created by the 30-year increase in longevity during the past century. The consequence of every improvement in the investment return is multiplied appreciably after you reach that bend in the curve. In my personal opinion, this growth is both staggeringly large, but disappointingly inadequate to pay for all future health care with enough margin to justify committing the whole country to risk it. It will pay for a big chunk of it, however.

Another central point of the graph, however, is that a lifetime of investing a relatively small amount -- at reasonably achievable interest rate -- has apparently come within our grasp. In my view, however, we have to do better than this. We have to tweak this basic idea enough to generate more than $400 at birth. Although prosperous people could use it to make a large reduction in their lifetime medical costs, there is not enough room for error, to permit the nation to risk so much for millions of people with only a marginal income. In the following sections, we apply a variety of other variations to convert an attractive idea into a widely useful one.

************* Compound interest always surprises people with its power, and in this example, 5% just about makes the goal. There's not much room for error or contingencies. All of the known factors are conservatively estimated, and it passes the test. What isn't covered is the unknown factor, the atom wars, a stock market collapse, an invasion from Argentina. To be on the safe side, we had better not count on this approach to pay for all of the health care. Just a big chunk, like 25%, does seem feasible. In the immediately following section, we examine the first "technical" problem. The first year of life is just as expensive as the last year of life, and you can't dip into savings.

Lifetime Healthcare, Using Health Savings Accounts (4)

At the time this book is written, newspapers report 12 million people to have Health Savings Accounts. Unfortunately, newspapers also report the Affordable Care Act ("Obamacare") is awaiting the Supreme Court decision as to its Constitutionality. Like the rest of the healthcare world, we must wait to see how the decision affects the financing. At the hearing, Justice Alito hinted the effective date of the decision might be delayed longer than the decision itself. Therefore I decided to proceed with a discussion of really radical health insurance reform, necessarily treating working-age people as a later add-on. The whole matter of paying for healthcare amounts to shifting resources from people who are able to work, to paying for people who are too sick to work. Insurance is one way to accomplish it but is the ideal way for only some of it. For one thing, insurance has proved to be remarkably expensive. It involves a major shift of funds from those who can work, to those who can't, but administrative income from the transfers somehow gets dissipated. We can do better than that, by hundreds of millions of dollars.

Furthermore, the financial strain has overwhelmed the political obstacles. To speak of Medicare as a political "third rail" is no longer tolerable. It is the job of politicians to persuade the elderly that no one wants to ruin their entitlement, shorten their lives, or ration their care. Protection from all that would be strengthened, not weakened, by making the system sustainable. And the time is long past for believing the government will protect the funds better than having the money within one's own possession. At the other age extreme, the parents of children will do a better job of protecting the kids, than treating the whole age group as if it were in a child-care center. Mind you, there must exist a fail-safe or catastrophic, health insurance against legitimately huge medical expenses, plus a system of oversight for overcharging. But the first level of price resistance must rest with the patient's family, who have an avenue of appeal if they are bullied. We need an appeal mechanism, not a system of regulators. We need catastrophic insurance, not first-dollar coverage. With these two basics in place, the next level of a decision must be restored to the patient's family. While of course, frugal shopping is useful, the main decision a family must make is whether to spend their funds now or save them for a later rainy day. A public education program might well prove useful, reinforcing but not supplanting the advice of a family physician. By improving the investment choices of the administrators of Health Savings Accounts, the investment experience of the whole country would be enhanced by educating the public in personal investment. That would be an invisible advantage of an enlightened HSA investment service; the visible part would be to set realistic goals and then achieve them. Assuming legal or legislative clearance, the total lifetime cost would be one single payment at the birth of $2200 (invested @ 6% compounded), in addition to whatever it turns out Obamacare charges for coverage from age 22 to 66.

In return for that, Medicare could stop borrowing 50% of its costs from foreigners, and each individual would cover the cost of one child per subscriber, up to age 21. (Remember, the present birthrate is 2.1 children per mother.) That is, individuals with children would get coverage for one designated child from birth up to age 21, for $220, which would be a bargain price for what is now 8% of lifetime medical costs, or $25,000. The government would get a far larger benefit of 50% of Medicare costs for one person. That would be a far more attractive part of the bargain, paying for coverage worth $82,500, for $2000. Although this would be a bargain package for many subscribers, it would only be of tangible value to those who had children. Very likely, it would be a futile selling opportunity, whose only virtue from the presentation is to illustrate how we already start with solvency instead of subsidy. Subsidy -- and advantage to working people -- comes later, when compound interest makes the other, more customer-attractive, features vastly cheaper to provide. For that, we must await the Supreme Court's decision, followed by bipartisan debate and eventually, election results.

So, that's sort of a disappointment until we begin to envision what some regulatory changes could make, in addition. Remember, unless there is a change in the law, one-quarter of Medicare's cost is supplied by payroll deductions from working people, and one quarter from the premiums paid by Medicare subscribers. Therefore, this proposal would only pay for half of the cost of Medicare, the rest being the elimination of the present deficit spending. If a system of voluntary Medicare buy-outs could be established, these costs would disappear, and both working people, as well as present Medicare subscribers, would be appreciably better off financially. At first, only the adventurous first-adopters would take the bargain, but even that slow beginning would allow a new program to get started, picking up more timid subscribers gradually. The whole population would now be offered a voluntary bargain. The next legislative step with significance would be to provide for an overfunded Medicare buy-out, which with a lump sum payment gives the customer a Medicare buy-out plus the surplus, which goes to cover the first 21 years of medical cost for a designated grandchild. Where does this extra money come from?

Taxing the Working Generation We won't know the realities of financing Obamacare for quite some time to come, but we can estimate how painful the revenue effect would be for working people, in addition to their Obamacare costs. For an extra $5 a month, from age 22 to 66, a small tax on working people would generate (with 6% compound interest) an extra pool of $xxxxx by age 66. That would seem easily adequate to supplant the $2220 pump priming at birth we postulated at the beginning of this section. Since it is paying for subsidies to the poor as well as the well-off, it probably should be discounted by a third or even a half. So, if that seems insufficient margin, it could be raised in incremental amounts of $5 per month, depending on how much saving could be effected in Obamacare costs, which at present we do not know. Nevertheless, the numbers inspire reasonable confidence that this general approach is at least worth a demonstration project. At present, the main uncertainty revolves around the consistent ability to generate a 6% return through index funds, including adequate provision for the "black swan" sort of recession every few decades.

Technicalities of Transition Once transfers from the "grandparent" HSA to the "grandchild" one are working smoothly, the working-generation contribution can be eased by up to 8% (the cost of children). Furthermore, if the option of buying-out Medicare is made legal and feasible, it should no longer be necessary to deduct Medicare withholdings from paychecks; prior payments might be open to a negotiated rebate. That should eventually reduce the price of lifetime coverage but unfortunately might make any remaining gaps less appealing for poor people until the entire life cycle gets into operation. Looking ahead, considerable premium costs would be less necessary and are therefore up for consideration in the new scheme.

Repealing Obamacare's present prohibition of Catastrophic Health Insurance after age 30 is certain to be very popular, and should be an early priority, leaving extra room for compromise after the removal of childhood costs. All Obamacare policies are high-deductible, but their premiums have been raised to cover the uninsured. Once this funding concept has proven itself, that should be less necessary. Since the HSA covers everyone who wants it and anticipates subsidies for those who cannot afford it, a compromise phase-in should be possible. How much real re-insurance would then cost is probably fairly well known to its recent insurers, although recent uproars will probably make new bidders rather protective. In this sense, public opinion is important to the price which would be demanded. As far as a subsidy to the poor is concerned, Obamacare originally anticipated hospitals would be able to lower their prices if everyone became insured and internal cost-shifting would stop; this would provide a test of that hope. Really serious planning may have to be deferred until a concerted effort is made to clarify the extent of internal hospital cost-shifting; one hopes this is already underway. If the approaching Judicial outcome produces a mixture of priorities which cannot be balanced, there will just have to be a later Congressional action to balance it. Since it can be anticipated that the piecemeal introduction of lifetime coverage will seem attractive to many, perhaps there will be several opportunities to get things more optimal. Transition into a new system must coincide with a transition out of the old one. Unfortunately, just the fear of deadlock could slow smooth advancement.

Since John McClaughry and I were the two originators of Health Savings Accounts in 1981, we obviously are pleased with the notion that so many fellow citizens see our idea as the main alternative to comprehensive government involvement. The previous few chapters outline how I think the HSA can be stretched to finance and reduce the cost of all medical care, how its segmentation would assist a stepwise transition to it, and how it would essentially leave the scientific details to scientists while leaving more decision-making to the patient. Having once been in charge of the Professional Standards Review Organization in my area, I am completely satisfied that professional self-governance can quickly control abuses if there must be an iron fist hidden somewhere inside this velvet glove. Doctors are generally no more interested in administration than Senators are, or that executives of unrelated businesses once were; but doctors are disciplined and bright, which is the main qualification. I share Senator Wallace Bennett's view that a small but adequate minority can be found to do the work, although overstaffing will seldom prove a problem.

Health Savings Accounts were originally designed to replace employer-based health insurance, but millions of subscribers would be relatively satisfied with either one. Like any one-size-fits-all solution, each will seem uncongenial to some people, who should be left free to make a choice. By leaving enrollment voluntary, institutions can gradually expand or contract to adjust to demand. I have an enduring but blurred memory of the chaos which ensued in 1966 when Lyndon Johnson on television invited old folks to start sending the government their medical bills when it was soon discovered Medicare did not even have a listed telephone number. A vacant supermarket was found in Camp Hill, Pennsylvania, to store the unopened mailbags of Medicare claims, floor to ceiling.

All the HSA needs, to integrate almost any reasonable working-person health insurance into lifetime coverage, is a reliable stream of enough money to function. Starting at age 21, this money would link the roll-over money from the "grandparent's" surplus Medicare funds after death to the newborn's new HSA. Judging from this untried analysis, the likely limiting step would appear in the organization of the proposed Medicare "buy-out" program, since infirm old folks in the last years of life would have little incentive to switch. In fact, demographic mismatches might appear between any two segments of a lifetime program. Therefore, a contingency fund to cover these anticipated shortfalls, especially for the first year of life, would probably have to be regarded as the main hindrance to smooth start-up. From my talks at public meetings, I detect that elderly people have accepted Medicare as a fact of their lives, and are surprisingly indifferent to the Obamacare commotion. They even express the unlikelihood that anyone could ever change the present entitlement, in time to make a personal difference to them. This attitude must be gradually persuaded to yield, and then secondarily reflected by their elected representatives. A surplus is welcome at any juncture; it is the shortages which will hurt. The key to a smooth transition is to devise the right incentives, well in advance of the uproar.

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The Association (5)

American Medical Association

The American Medical Association has several hundred thousand physician members, all of whom consider themselves important members of their communities, hence important members of the AMA. "The Association" maintains a large, experienced, and frequently successful lobbying staff in Washington. It would be wildly impractical to permit every individual member of the Association to walk into the Washington office and give orders to the staff. Even when individual doctors have a very good idea, and the staff members thoroughly agree with it, it's never safe to assume the professional as a whole agrees. And in fact, it is always possible to find some doctor who violently disagrees, no matter what the topic.

So, a couple of centuries of experience led to a system of funneling physician opinion up to the line to the House of Delegates, and passing it through that narrow neck of the funnel before it is released to the Washington office as "policy". Sure, a couple of knuckle-heads can sometimes block a good idea at the narrow neck of the funnel, just as an occasional Leonidas can save civilization at this Thermopylae, against a bad idea. Sometimes an idea slides all the way through on the first try, and sometimes it is necessary to build up a head of pressure behind it. The fundamental question before the House of Delegates is not entirely whether a proposition is a good idea or a bad one; an equally important question is whether it likely reflects the prevailing viewpoint of the profession.

My first salvo in the campaign to win AMA approval for Medical Savings Accounts was a letter to Jim Sammons, the Executive Vice President. He wrote back promptly that he had read the Medical Savings Account proposal three times, and still didn't understand it. Although my opinion of him was never quite the same, he did me the favor of demanding simplicity, to be more quotable. An IRA for Health. An IRA plus a catastrophic policy. What's good about that? Cheaper. What makes it cheaper? Compound interest. How does it help poor people? More people can afford to buy something that's cheaper. Sammons said, ok, I can live with that.

The letter to the EVP turned out to be a good idea because it established my claim to ownership. A few months later I arrived in Chicago with a crisp, brief zinger of an MSA proposal, only to find that somebody from Louisiana was attending the same meeting with an almost identical proposal, called CHIP. Mike Smith was president of the Louisiana Medical Society, and not only had the same idea but personally had a lot of Louisiana oil money which he freely spent on professional packaging of his presentation. Mike and I suspiciously circled each other like two wildcats for a few hours, but we had so much in common that very shortly we were the best of friends, remaining so for years until his unfortunate death. He introduced me to his Southern friends, I introduced him to my Northern ones, and the idea itself picked up some allies on its own merits. It had a fairly easy time of it in the House of Delegates. However, it was referred to a committee for polishing and deeper consideration. Six months later it had disappointingly picked up quite a lot of unforeseen opposition, probably after the hospital and insurance executives heard about it. It took another six months to fight through a wall of specious argument, but an endorsement of the Medical Savings Account did become a policy of the AMA and the eager Washington staff was thus free to run with it.

It has remained AMA policy ever since, and the main technical problem for its main sponsors became one of keeping the idea alive in a House of Delegates with constantly shifting turnover. The AMA is like the court system; it doesn't like to keep revisiting an issue that is settled policy. Too many other members have proposals requesting attention, so why should we go on reaffirming old matters? However, the proposal was stalled in Congress, and for the momentum, we needed to keep beating the drum with variations which somewhat stretched the patience of the more senior members of the House of Delegates. To them, I apologize, with gratitude for their tolerance.

But what was the matter with Congress? What was the matter with the editorial page of the New York Times? I was always uneasy about a protracted debate because reducing the cost of medical care (from the patient's point of view) was apt to translate into reduced income for doctors. I was leading a procession of self-employed entrepreneurs into a proposal to cut their own income for the benefit of the public; how long could physician enthusiasm be maintained for that? I'm proud to say the answer is at least twenty-five years.

Even in retrospect, I am a little surprised that even such sophisticated students of medical economics could remain focused for so long. They might have come to regard the sponsors of MSA as being on an ego trip, or else nutty fanatics obsessed with a lost cause. Or they might have joined the young newcomers in fearing that such determined opposition at a national level might signify the opponents were somehow right to oppose it. The arguments advanced by the opponents really seemed to have very little merit, but perhaps in private, it might be possible to sympathize with some embarrassing circumstances that explained the vigor of the resistance without crediting its excuses. Political debate after all, even in scientific organizations, quite characteristically wraps venal motives in a cloak of logic and altruism. I remained fearful for years that the House of Delegates would shrug its shoulders and let the opponents have their way. That they never, ever, did so was probably related to medical care being physician home turf; where you get used to hearing a lot of dumb arguments, but you don't have to credit them with any merit until merit is displayed. You can tell doctors a lot of fairy tales about architecture or investment banking perhaps, but if you talk medicine with them, you better have your facts.

Whenever my colleagues would privately draw me aside and ask why in the world a lot of people were so resistant to the MSA, I had to tell them I was not entirely certain. However, it was notable that three groups had important things to lose, and would probably fight to preserve them. The Medical Savings Account threatened the eighty-year-old pricing preferences between hospitals and insurance companies. Secondly, it threatened the sixty-year-old preferential healthcare pricing for members of organized labor. And finally, the politicians who were so anguished about the uninsured population might possibly be more interested in preserving the grievance than achieving its solution.

I can never remember a private conversation of this sort that didn't satisfy the doctor who asked the question. And I also never met a representative of health insurance, hospital administration or organized labor who would admit any truth to it.

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