Philadelphia Reflections

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

1 Volumes

Chapter Twenty-Seven Re-writing the Constitution

Chapter Twenty-Seven Re-writing the Constitution

Rise and Fall of Life Insurance

Hammurabi Code

While it is possible to see traces of the origin of insurance all the way back to ancient Mesopotamia, insurance of a currently recognizable form began around 1500, with maritime insurance creating risk pools for ships at sea. Eventually, insuring the life of a ship and ensuring the life of a person did not seem greatly different in principle; sooner or later everyone dies, but in those days sooner or later most ships sank. From the records of such pooling efforts, we can see that a sailor in colonial times had a 40% chance of not returning from a typical voyage. Learning this, some of the plots of Shakespeare's Merchant of Venice becomes more understandable, and the enormous wealth of successful sea captains, privateers, whalers and ship owners seems more justified by the risks they were taking. In retrospect, it seems hard to understand why anyone at all went to sea, thus why it took so long to discover America. Selling maritime insurance was a way to gamble on these risks. You might not get wet, but you were still taking big risks with your money.

Life insurance was a comparatively late arrival on the insurance scene and grew out of the experience with maritime risk pooling. The first life insurance company was the Presbyterian Ministers Fund, a Philadelphia institution if there ever was one. In essence, the church had undertaken to support the widows of ministers. Insurance tailored to the life of each minister, when pooled together, approximated the church's collective widow-support risk. Only ministers were insured by this fund, however. The Insurance Company of North America (now Cigna) seems to have been the first company to sell life insurance to all comers. That's definitely an improvement; limiting the risks to a particular occupation amounts to "adverse risk de-selection", unintentionally excluding, for example, women and blacks. On the other hand, the concept was totally new; no insurance at all would have been attempted if it had been initially impossible to limit the risk.

Insurance has since spread to many other topics, but it remains true that life insurance has one central unique feature. It is absolutely certain the customer will die, the policy will be cashed in. The uncertainty is when it will happen. After a while, it became evident that premiums would be collected until the final date, and could be invested until it happens. When the pool of customers gets large enough, there is almost perfect predictability about the average age at death, so the bigger the company the safer it should be.

There is one great potential weakness in this system, lying in the fact that the person who buys the policy and receives the assurances will not be around to complain about failures of those assurances at the time the policy is cashed in. It takes many years before public trust in such promises overcomes skepticism. The growth of life insurance was therefore slow until the Civil War suddenly demonstrated there were unpredictable risks around. Unfortunately, abuses of the system by fly-by-night companies in the last half of the Nineteenth Century led to heavy government regulation of the industry. Philadelphia's reputation for integrity rapidly expanded its dominance of insurance, but could not prevent the heavy hand of regulation from holding it down, or local taxes from driving it into other jurisdictions. State Insurance commissioners were originally charged with guarding against an insurance company going bankrupt by using unrealistic low prices to attract business. The public interest was redefined to mean low premiums, by the obscure but effective method of legally shifting the debts of a bankrupt insurer onto its surviving competitors -- neither the public nor the Legislature had to worry about it any further. In the insurance capital of the country, stockholder returns and executive salaries gradually went from too fat to too thin. Insurance companies, one by one, moved to other states or at least to other counties. It is now possible to wander through the abandoned executive suites on the top floors of the former insurance palaces and feel as though you were at Luxor, wandering through the abandoned Egyptian temples of Karnak.

To be fair about it, it is also possible to have a real estate agent take you through the former estates of life insurance entrepreneurs whose business practices amply justified some regulatory over-reaction. Plenty of old retired lawyers will be glad to tell you of the times they wrote new insurance laws for their insurance client, who just forwarded them to Harrisburg for enactment -- before the Second World War. But the destruction of this industry does no one any good, and it is surely fair to argue that excessive profits were the lesser of the two evils.

Setting the regulatory risk to one side, the life expectancy of Americans has dramatically lengthened in the past century, nearly eight years in the past fifty years. Such unpredictable reduction of risk ought to lead to increased profitability for the insurer, but it also leads the public to shift to less profitable term insurance. The young buyer can see a period of several decades of dependent children, followed by a long period of life when the death of the breadwinner is less tragic. I needed, living too long becomes a modern new concern, the outliving of accumulated savings. When the investment manager of the insurance e company is faced with a choice of more investment safety or greater investment return, he must produce a combination of both, an impossible assignment. And so, insurance business drops off as clients wander away toward more glowing promises, or at least toward promises unconstrained by the growls of a consumer-driven insurance commissioner. During the Great Depression of the 1930s, only two life insurance companies went bankrupt, so at least the old way of running these companies produced safety. The 1930s now seem a long time ago.

Philadelphia: Charles Dickens Gives an 1842 Viewpoint

Charles Dickens

In 1842, Charles Dickens wrote a short summary of Philadelphia for the readers back home in London-

My stay in Philadelphia was very short, but what I saw of its society, I greatly liked. Treating of its general characteristics, I should be disposed to say that it is more provincial than Boston or New York and that there is a float in the fair city, an assumption of taste and criticism, savoring rather of those genteel discussions upon the same themes, in connection with Shakespeare and the Musical Glasses, of which we read in the Vicar of Wakefield.

Six Ways to Fix Social Security

Health-Care Python

Baby boomers, the so-called pig in the python, are right to worry there may not be enough money to pay their promised Social Security benefits. Everybody else is a little suspicious that former Flower Children and veterans of Woodstock might somehow be responsible for their own problem. That's quite a bum rap. If you must blame someone, blame Lyndon Johnson for half of it, and the medical profession for the other half.

Although the original design of Social Security during the Roosevelt administration had the shaky arrangement of each generation paying the costs of its parents, rather outrageously dubbed "pay-as-you-go", the true weakness of assuming all generations would remain of equal size only appeared when Lyndon Johnson put it under stress. In seeking a way to portray Medicare as comfortably financed, Johnson combined Social Security savings with the general budget, a process he termed a "Unified Budget". In fact, the savings of the baby boomers were promptly spent for current expenses, including earmarks, along with more benevolent expenses. One has to marvel that a protest generation of Boomers once led by Jerry Rubin and Abby Hoffman, has been so supine about being swindled out of lifetime savings.

{Bill Clinton}
Bill Clinton

The medical profession deserves blame for the other half of the impending problem. Life expectancy at birth has increased twelve or thirteen years during the working lifetime of the boomers, probably will increase by a year or two more by the time the last of the boomers retire in 2030. If we find a cure for cancer, life expectancy will probably jump five years. Such astounding medical advances had never before happened, so it is fair to forgive a lack of foresight in the original 1933 calculations. Originally, the average age at retirement was 67 and the average age at death was 69, two years of average retirement to provide for. Unfortunately, the average age at retirement dropped to 63, and the average age at death rose to 77. You might scorn the boomers for retiring two years sooner, but the other added years of longevity are mostly nothing to weep over.

There might be other, still more clever, ways to rescue national finances from this predicament, but a careful reading of the news only identifies six proposals that anyone has told us about. They are as follows.

1. The Lockbox. Bill Clinton seems to have been saying we ought to repeal the Unified Budget and actually save the retirement savings instead of spending them. Indeed we should, but it's a little late, getting later. Republicans in Congress would probably vote for it, but not without drawing a lot of attention to the fact that Lyndon Johnson never should have proposed the Unified Budget in the first place.

George W. Bush

2. Privatize it. George Bush took the understandable position that government has demonstrated it cannot be trusted to save money, so give it to the individual to save. Some won't, of course, but at least their subsequent problems will be their own individual fault. And the victims would be individual rather than a whole generation. Perhaps an even stronger concern is that a great many financially naive people could be swindled by mutual funds with outrageous fees and poor performance. Presumably, a law could be technically crafted to minimize this risk, but it would have to survive a great deal of lobbying to be usefully intact at the end of it.

Ed Prescott

3. Borrow it. Nobel laureate Edward C. Prescott is on record saying more debt would be nothing to worry about since an ideal federal debt should be 2.0 times the Gross Domestic Product, whereas it is only 1.6 times GDP at present. If we really think it best to continue intergenerational borrowing, debt is a pretty inevitable consequence. Most of the nation is however more familiar with Polonius on the subject, that borrowing dulls the edge of husbandry, and a skeptical public would need far more convincing than by the mere use of computer modeling. For example, what if we acquired the debt and then GDP should fall in a recession. Once created, it's hard to see how to reduce the debt to maintain the 2.0 ratio. If you couldn't, you might experience the Weimar Republic again, with inflation going to destructive levels. Neither borrower nor lender be.

4. Tax the Rich This political slogan is apparently intended to support raising the income threshold (now approaching $100,000 yearly income) above which the 12.4% tax is applied. Quite aside from political class warfare that might be provoked, and a disincentive for workers to work, there is only a questionable net revenue enhancement. Raising the ceiling for contributions implies raising later benefit payouts, with lessened or no net saving on behalf of the baby boomer deficit. To achieve a net revenue gain, there would have to be a new feature: taxation without benefit.

5. Raise taxes. Presumably, the Republicans would burn at the stake rather than allow taxes to rise, now that the harm to the economy seems fairly well established. Taxes would then effectively be raised on the present working generation only because previous Congresses had been unwilling to raise taxes on earlier generations. Quite aside from the unfairness outcry, there seems little doubt we are on a point of the taxation curve where small increases in taxation would have rather prompt negative effects on the economy. Once a recession appeared, the political consequences for triggering it might be dire.

6. Increase the age of retirement. This is my favorite solution. Having retired at age 80 myself, actuaries still promise me fifteen years of an extended vacation, so people like me perceive no great hardship in future generations retiring at age 70. Even inducing people to retire at the age of 67 as they did a generation ago, would help the problem a lot. There once was a time when we advised young people not to get married until their financial ship came in. Perhaps the new advice is, don't retire until you can afford to do it.

Congressman Pence (R-Indiana) has a related piece of advice. It takes a long time for public adjustment to something so radical and important to them. The Congressman advises us to do nothing at all for two years, using the time to build a case, and create a national consensus that whatever we do is the best that can be done. That seems like rather sensible advice, Congressman.

Colleges and Religions Drift Apart

{Yale Divinity School}
Yale Divinity School

Until fairly recently, academic institutions have existed as an outgrowth of religion, sort of enlarged monasteries charged with acting in loco parentis. The Catholic Church in Europe had its medieval universities, but could probably have got along without them. It was Protestantism, especially American Protestantism, which needed a place to train ministers. Harvard, William and Mary, Yale, Princeton and the other early American colleges were established to train ministers. If there was room, they sometimes took students with no intention of entering the ministry; more often, the non-ministers had enrolled with a religious vocation but drifted away from it. In time, the professional schools of medicine and law joined theology as learned professions, and of course, the colleges needed a supply of educated teachers for themselves.

And so it evolved that colleges and universities of the Philadelphia region almost always had religious sponsors, sometimes rather remotely connected, and among Catholics, the different Orders had their own colleges. Temple had Baptist origins, Princeton was Presbyterian, Eastern University was originally Eastern Baptist Theological Seminary. There is Moravian College, and so on. Since this was once an entirely Quaker region, we have Bryn Mawr College, Haverford College, and Swarthmore, although the Quakers were slow to trust the idea of colleges, since they hoped their members would remain unmoved by clergymen. The other dominant religion of the colonies, the Anglicans, split off from the British church as Episcopalians and then got somewhat scattered by the awkwardness that many Anglicans were Tories. The non-Tory Anglicans tended to wander off into Methodism, a form of Episcopalianism formed by non-ordained leaders cut off from British influences by the Revolution. The Presbyterians, however, were the heart of the American Revolution; their Scotch-Irish ancestors had no trouble saying what they thought of the British. With the attainment of Independence, they prospered as victors. Gradually, the original idea of a college to train ministers evolved into a college to teach future lay leaders of religious groups about their faith. Hidden in this transformation of the schools was an acknowledgment that leadership was migrating away from the clergy. Even the Atlantic Seaboard Quakers, who always declared they had no truck with clergy and had no fixed doctrine to teach, grasped the central point of this and formed their three colleges so that Quaker children could acquire a Quaker education, and presumably, find other Quakers to marry. That was the slogan of the times, but the underlying realization was that the enduring values of religion are guarded and promoted by an educated elite, not an ordained clergy.

This drift toward what is called secularism had some peculiarly Philadelphia variants. The University of Pennsylvania was founded by Benjamin Franklin, a deist, and has never had a divinity school, although it has a school of religious studies. A deist is someone who believes that something called God may have created the world and established its rules. Perhaps so, but since that original and final act of creation, God has simply left the world to run along on its own. Out of this arms-length piety and the dissensions of the Revolution, grew up the tradition of wealthy Philadelphia families sending their children to Harvard and Yale if Episcopalian, and to Princeton if Presbyterian. Princeton was a natural direction to take during the 19th Century when wealthy estates occupied the banks of the Delaware River all the way up to within walking distance of Princeton, and the River was the main highway. This hurt Ivy League University of Pennsylvania by draining off sources of support, either toward other Ivy League schools or to the trio of Quaker colleges. It particularly hurt Penn's undergraduate college, since the Quaker Colleges, and Princeton, held back from forming professional and graduate schools, and looked to send their graduates to Penn after the formative undergraduate years. Dickinson, Franklin and Marshall, Ursinus, Muhlenberg, and Lafayette did the same, remaining content to provide a sound liberal education rather than training for a career. Consequently, an opportunity was created for free-standing graduate schools without an undergraduate base, like Hahnemann, Women's and Jefferson Medical Colleges, or Lehigh and Drexel for engineering,, Moore School for Art. Mergers and academic imperialism have tended to push all of these free-standing units toward fuller university status. All in all, nearly a quarter of a million students now attend colleges in the Philadelphia region, and almost a million in the broad exurban area, depending on what you call a college. But a sound liberal and practical education has long ceased to be the same as a sound religious one.

Meanwhile, religion has lost its dominance in American life. Things reached some sort of climax in 2000 when Yale University officials contemplated closing the Yale Divinity School. It was said to be an expensive distraction, out of the mainstream of University life. Momentarily forgetting that the teaching of Divinity was the main reason for founding the University, those former flower children of the sixties, now fortified with tenured rank, abruptly learned that religious feeling in America is not entirely dead. Dying, perhaps, but not so dead as to forget the legalities of restricted endowment funds.

The next step in this evolution is not so clear. In 2006, while the majority of older colleges may be concentrated in "blue" states, the majority of Americans nevertheless live in "red" states, where religion is both strong and actively displeased with ceding spiritual leadership to secular universities. The decisive outcome becomes whether this topic is deemed mainly educational (decided by professors), or mainly religious (decided by clergy). At the moment it is not decisively either one.

Finances of the Girard Estate

{Stephen Girard}
Stephen Girard

Stephen Girard died on December 26, 1831. It required 7 years for executors to settle the estate of this richest man in America, valued at $7 million, of which $5.25 million was to establish a school for poor white orphan boys. Two million dollars of that was set aside in the will for the construction of his new school. Considerable criticism was raised about the fact that the various administrators of his estate did not admit a single student for the first sixteen years, during which time extensive trustee tours of Europe were conducted to study suitable models and publish books about them. At the end of that time of preparation, the two million dollars were just about all gone. It turns out that Girard could actually afford this luxurious approach. In 1886 the estate would rise in value to $11 million, in 1914 it was worth $30 million. In 1926 it was worth $73 million. This appreciation was in spite of educating more than 10,000 boys, and also purchasing and repaving (with Belgian blocks) both Delaware Avenue and Water Street, from Vine to South Street as a public service to which more than $2 million was devoted. In 1935 Cheesman Herrick wrote a history of Girard College, in which is found the following, rather delicate, history of the long-term financial management by the Board: "The Board of Directors of City Trusts is a creation of the State of Pennsylvania. At the outset in the administration of the Girard will, the city authorities looked to the state Legislature for an empowering act to proceed with the organization of Girard College. The same authority [then] set aside the control of the City councils and put the Girard Estates and Girard College under a new Board which became a part of the machinery of the city government. Probably no more successful administration of public trusts has ever been known than that by the Board of Directors of City Trusts. Time has known the wisdom of Stephen Girard in leaving the administration of his estate as he did. "Colonel Alexander K. McClure, who knew Philadelphia well and who was relentless in his inquiry as to the discharge of trusts by public officials, paid the Board of Directors of City Trusts a deserved compliment in saying that no shadow of doubt or suspicion had ever fallen upon the doing of that body. It may be added further that probably no other government agency or private business enjoys a higher reputation for integrity and efficiency in the conduct of its affairs that does this Board. That this record is good is owing primarily to the standard set by those who have served under the Board in various business and administrative positions.

"When the record of the Board is taken into consideration, and the magnitude of the work which it has to supervise is regarded, one can readily see that service on this Board is a signal distinction. The list of the Board has been a sort of honor roll of Philadelphia's foremost citizens. That the standard in this Board has been so high and that members of the Board have served so faithfully, have been due in no small part to its members' having seen beyond the millions of Stephen Girard, and numerous other funds which they have handled, to the great good which these various trusts are accomplishing. With the interest of the beneficiaries always in mind the Board has conscientiously sought to make the Girard Estate, and the other foundations under its supervision, serve the community to the greatest possible extent. The idea of service has been the touchstone making the Board of Directors of the City of Trusts a great Board." Starting with Nicholas Biddle, the Board of the institution was certainly composed of men who had distinguished themselves in business and finance. However, a great deal of credit must be given to Stephen Girard, himself. A year before he died, he bought roughly 18,000 acres of Schuylkill County after the discovery of coal outcroppings on the property. In subsequent years over a hundred million dollars of anthracite coal were extracted by the mining agents of the Girard Estate, based in Pottsville, PA. The clean-burning properties of this form of coal were promoted with the image of "Phoebe Snow", and were the basis for much of the industrialization of the region. Coal came down the Schuylkill River on canal barges with a terminus opposite the present boathouses, hence the Lighthouse adorning Sedgwick, the most northern boathouse. Later, it was carried on the Reading Railroad, which at one time was the largest railroad in the nation. The Girard heirs felt this went far beyond Girard's contemplated income from the estate, and went to court to obtain for themselves what they considered a more appropriate share of it. Their argument boiled down to saying Girard College had so much money it didn't know what to do with it and was returning income to principal. It was their contention that if Girard could have predicted both the revenue and the expenses of the school, he would have left the school less money, and given more to his numerous heirs. The managers of the estate, who felt their own acumen was largely responsible for the windfall, made a sophisticated and ultimately successful rebuttal. Instead of relying on the contrast between the incredibly good performance of the Board of City Trusts, compared with the earlier looting of the estate by City Council, their lawyer

{Horace Binney}
Horace Binney

(Horace Binney) relied on and largely invented some important legal reasoning. Coal in the ground was a dwindling asset, and speed of its dwindling was under the control of the owners. The managers of Girard's estate had shrewdly transformed the coal into a more conventional source of income by taking proceeds at the best available price, regardless of the needs of the school. With it, they put up office buildings and department stores in the center of Philadelphia on the land around 12th and Market, first intended to be the site of the orphan school. Also, the six hundred acres of Girard's farm in South Philadelphia were converted to rental houses. In time, the income from the coal-bearing properties was transferred to center-city rentals -- all within the bounds of real estate which Girard had purchased before his death. The trustees had enhanced the value of Girard's properties by shifting assets amongst them, a result that greatly benefited the entire city and region, and rendered the entire concept of annual income -- irrelevant. The legalisms of this dispute are very clever, but in truth, the Girard's heirs probably never had a chance in court against the political and business establishment of the whole state, united in the firm belief they were doing a remarkably benevolent thing for orphans. It is breath-taking to reflect that Girard College's anthracite did become the economic pump for the entire Philadelphia industrial region from Pottsville to Trenton, for nearly a century. And equally breathtaking to reflect that, about a century later, anthracite mining just about ceased entirely. Although there was shrewd later management of the assets, the fact is the coal was discovered, purchased and bound up in irrevocable covenants by a single man in 1829, who was therefore dead during every day of this activity, except during the first year when the plan was organized. If he wanted to do this for orphans, it is scarcely possible even to suggest a reason why he shouldn't.


Girard College It's Semi Centennial of Girard College: George P. Rupp ASIN: B000TNER1G Amazon

Georgetown Returns Day


Early in November, two days after each election, Georgetown Delaware puts on a festival called Returns Day. About two hundred years ago, there was a law that all ballots had to be cast in person at the courthouse in the county seat (Lewes, at that time), and it took two days to count the votes. Everyone, candidates included, would hang around at the courthouse to learn who had won. After a few elections, except in wartime when the ceremony was temporarily skipped, the popular tradition has continued even though of course the election results are known much earlier. Although the function of revealing election results has yielded to the news media, the ceremony has assumed importance for its own sake. Unless it rains pretty hard, the parade lasts three hours, with ten or twelve marching bands, and local amateurs struggling with bagpipes. The candidates, winner, and loser, ride gamely around the square in horse-drawn carriages. You can imagine what would happen to the political future of any candidate who declined to participate in what is now a mandatory public entertainment.

U.S. Senator from Delaware

Two features of this festival are especially notable. There is a hatchet-throwing contest, trying to get the flying hatchet to catch one corner in a post. It's not an easy thing to do. And then there is hatchet-burying, which is said to date back to the Nanticoke Indians. The traditional hatchet is brought from Lewes, as is the sand. This is all said to be the origin of the folk-saying about burying the hatchet, and it's really very heart-warming to believe the election is only an election, and the competition is over. It's probably not entirely true, of course, but it symbolizes what the public wants to believe is true. And what the public is telling politicians -- had soon better become true, again.

The Future of Health Savings Accounts--Lifetime Accounts?

Mutual Fund Governance

{Mutual Funds}
Mutual Funds

Unfortunately, mutual funds' main advisory revenue often or even usually comes from selling the fund they work for to corporate pension systems. Although the money belongs to the employees, the choice of fund is usually left to the employer. The revenue of that fund, and hence the revenue of that fund's management adviser firm, is based on the volume of assets; the bigger the fund, the more they all are paid. For the most part, corporation managements can readily change the mutual funds which handle employee pension savings. Consequently, If word gets around that some fund manager often votes the proxies against corporate management in proxy fights, there's ample opportunity for retaliation. So, effective reform of both corporate governance and mutual fund performance seemingly must either exclude corporate management from the selection of employee pension advisers or else from the right to vote the proxies. However, that's too simple. The unspoken bargain is "If you don't criticize our performance (and reimbursement), we won't criticize yours."

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.

State Capitol Think Tanks

{top quote}
States rights will be neglected as long as state governments remain so second-rate. {bottom quote}

Setting aside one's political party preferences, it is hard to deny the considerable increase of new and sophisticated ideas generated by the Republican party in the past twenty years. For fifty years before the Reagan Revolution, it was quite the reverse. All of the bright new ideas -- good and bad -- seemed to bubble out of the Democratic Party, while the Republicans just sulked and muttered. Even when Eisenhower swept the Democrats out of power, he was mostly riding a crest of idea fatigue. Leave us alone for a while. Thirty years before that, Harding came into office promising a "Return to Normalcy". The country does occasionally get fed up with pesky innovation, but for nearly a century we became accustomed to ideas ("reform") coming from the left, resistance coming from the right.

Yes, the pendulum does swing back and forth spontaneously. And yes, Adolf Hitler inadvertently stirred the American intellectual pot by chasing the Austrian school of economics to our shores, primarily landing at the University of Chicago. Nevertheless, a case can be made that it was the establishment of a number of think-tanks in Washington which brought conservatism to life as a positive force. The model was already in place, at the Brookings Institution and the Institute for Advanced Study in Princeton. In each case, a very wealthy man decided to endow an institution for the promotion of ideas congenial to himself or his religion. In the case of Bamberger the department store mogul, the think tank was mainly created to house one man, Albert Einstein. While Bamberger and Brookings were liberals, their model was copied by Otis at the American Enterprise Institute, Coors at the Heritage Foundation, Koch at the Cato Institute.


It does not seem to have occurred to the existing think tanks that one of their favorite ideas might be accomplished internally, within the think tank world itself. That idea is devolvement of power from centralized Washington to the fifty various state governments. Anyone can see, on any weekend, that urban Washington DC has outgrown its blood supply. The traffic jam out on Fridays is matched by equal paralysis on Monday morning as the crowd returns to work. In spite of a splendid highway system, designed at least in part with emergency evacuation in mind, the place is both unlivable and dysfunctional as a place to work. Twice each week, the Southern half of the East Coast is cut off from the Northern half by this gigantic traffic jam, just as effectively as if Generals Lee and Grant were conducting battles there. Components of one administrative department are cut off, not only from other departments but from other components of the same department. The headquarters of the Department of Health and Human Services is eight miles away from the National Institutes of Health in Bethesda, and thirty miles from Medicare headquarters in Baltimore. The headquarters of the whole country is cut off from the rest during the working week and essentially deserted on weekends. The need to decentralize the federal government in some way is a case that can be made on physical issues alone, quite ignoring the philosophical issues of states rights, local autonomy, or shortening the chains of command.

And yet, it must be admitted. State governments are just terrible. They are almost all located in small one-industry towns, at a considerable distance from population centers, universities, business, and commerce. Almost no state capitol has a good airport or good air service. The hotels are mostly despicable. As for entertainment, there is essentially nothing for a visitor to do, there. It doesn't matter how this came to be the case, but Illinois provided us with an insight into the process when Abraham Lincoln helped some railroad and real estate interests by dropping the state capitol in Springfield, naturally enriching a large number of local landholders, thereby. The state capitals used to be in Philadelphia, New York, and Boston; now they are in Harrisburg, Albany, and Springfield. The elected representatives clearly prefer to do their work out of sight, and because it is out of sight it can be incompetent, corrupt and unaccountable to anyone. It is a hopeless task to move the capitals back into the sunlight because the legislators prefer it to remain this way. But because state government are such a hopeless mess, it is unthinkable to devolve federal functions to them.

It's probably useful to remember that our Constitutional Convention was motivated to transfer as much power as possible from state legislatures to the central government. That turned out to be just a few powers, so the framers assumed that the vast majority of government would take place in state capitals. That's how things were under the Articles of Confederation, but unfortunately included watering the currency and passing debt-forgiveness laws. Control of the currency and regulation of private contracts, at least, should remain out of the hands of the state legislatures. When state governments were instruments for both starting the Civil War and resisting Reconstruction, furthermore, the victors became even further determined to weaken state government effectiveness. But moving the Department of Agriculture to Nebraska and the Department of the Interior to Colorado or the National Archives to Philadelphia and the Department of Defense to Austin are examples of devolving functions to different areas of the country rather than to different electoral bodies, and they all sound like things which might be feasible to move, just to relieve the traffic in Maryland and Virginia.

But here's a different place to start: if state governments flee from the sunlight, let's chase them with sunlight. Who knows a likely billionaire, able and willing to start a think tank in the sticks? If it works, perhaps others will imitate it. Every state capital city ought to have at least four think tanks. Unfortunately, there are at least forty which have none at all.

Medicare/Health Savings Accounts Legislation

Health Savings Accounts

The legislation removes the hampering restrictions of the 1995 Law. What follows is a brief outline of the main features of the HSA/MSA clause in the 2003 law,

U.S. Capital

as published by the main authorizing committee, the House of Representatives, Committee on Ways and Means. From this point forward, more specifics of the program will probably be written by the Executive Branch and published in the Federal Register. The Ways and Means Committee will continue to exercise oversight authority, however, in conjunction with the Senate Finance Committee. As a consequence, statutory modifications of the program are likely to appear in future annual budget reconciliation acts, or else in any new Medicare amendments. The legislative route map becomes more understandable when it is recalled that Medicare itself is considered to be an amendment (Title XVIII) of the Social Security Act.

Committee on Ways and Means
Medicare Prescription Drugs, Improvement And Modernization Act of 2003

Health Savings Accounts (HSA's)
Lifetime savings for Health Care

Working under the age of 65 can accumulate tax-free savings for lifetime health can needs if they have qualified health plans.

A qualified health plan has a minimum deductible of $1,000 with $5,000 cap on out-of-pocket expenses for self-only policies. These amounts are doubled for family policies.

Preventive care services are not subject to the deductible.

Individuals can make pre-tax contributions of up to 100% of the health plan deductibles. The maximum annual contributions are $2,600 for individuals with self-only policies and $5,150 for families (indexed annually for inflation).

Pre-tax contributions can be made by individuals, their employers, and family members.

Individuals age 55-65 can make additional pre-tax "catch up" contributions of up to $1,000 annually (phased in).

Tax-free distributions are allowed for health care needs covered by the insurance policy. Tax-free distributions can also be made for the continuation coverage required by Federal law (i.e., COBRA), health insurance for the unemployed, and long-term care insurance.

The individual owns the account. The savings follow the individual from job to job and into retirement.

HSA savings can be drawn down to pay for retiree health care once an individuals reach Medicare eligibility age.

Catch-up contributions during peak savings years allow individuals to build a nest egg to pay for retiree health needs. Catch-up contributions allow a married couple to save an additional $2,000 annually (once fully phased in if both spouses are at least 55.

Tax-free distributions can be used to pay for retiree health insurance (with no minimum deductible requirements), Medicare expenses, prescriptions drugs, and long-term care services, among other retiree health care expenses.

Upon death, HSA ownership may be transferred to the spouse on a tax-free basis.

Contain rising medical costs- HSA's will encourage individuals to buy health plans that better suit their needs so that insurance kicks in only when it is truly needed. Moreover, individuals will make cost-conscious decisions if they are spending their own money rather than someone else's.

Tax-free asset accumulation- Contributions are pre-tax, earnings are tax-free, and distributions are tax-free if used to pay for qualified, medical expenses.

Portability- Assets belong to the individual; they can be carried from job to job and into retirement.

Benefits for Medicare beneficiaries- HSA's can be used during retirement to pay for retiree health care, Medicare expenses, and prescription drugs. HSA's will provide the most benefits to seniors who are unlikely to have employer-provided health care during retirement. During their peak saving years, individuals can make pre-tax catch-up contributions.

Chairman Bill Thomas Committee on Ways and Means 11/19/2003 12:56 PM

New Health Insurance Reform Proposals

{top quote}


a) reduced small-claims insurance costs
b) reduced "moral hazard" overutilization costs
c) compounded internal investment of reserves
d) utilization of the now-wasted labor potential of young retirees

It does not aim directly at the goal of reducing the number of uninsured, except on the principle that if something becomes cheaper, more people can afford it. {bottom quote}
Dr. Fisher

1. HIGH DEDUCTIBLE. The annual deductible of health insurance should be high, in the range of $ 3000 per year. The main reason for a high deductible is to make health insurance premiums cheaper, especially for currently uninsured people. But high deductibles serve other important purposes. 80% of costs concentrate in the most expensive 20% of illness episodes, but these "big ticket" expenses generate far less than 80% of administrative costs. The cost of healthcare to society can be markedly reduced (at least 30%) by eliminating small-claims administrative costs, as well as the disproportionate "moral hazard" costs of minor illnesses. "Moral hazard" includes wasteful utilization of services and insensitivity to price, both deriving from interposing insurance "third parties" rather than paying the providers directly. Note: the advantages of deductibles are not present in "co-pay" features, which in fact increase administrative costs, particularly when a second, or coinsurance, a policy is employed to cover them.

2. COVER DEDUCTIBLE PORTION WITH MEDICAL SAVINGS ACCOUNT. Because high-deductible insurance may give poor people a financial barrier to access, the 2003 Law encourages linking high-deductible policies to a tax-sheltered Medical Savings Account, renamed Health Savings Accounts. Thus, although medical bills (up to the deductible threshold) require cash, reimbursement reserves are supplied by the individual's Account.

These reserves also create new and unexpected value, including portability between jobs, a more level playing field for tax preferences, a longer horizon for health coverage than traditional one-year policies, and neutrality of employers to individual employee health preferences. Although conventional health insurance could be paid for by credit or debit cards, it has somehow never been conventional to use them. Medical Savings Accounts, by contrast, commonly use credit cards, because they simplify record-keeping for the deductible.

What is the source of the money in Medical Savings Accounts? High-deductible premiums are roughly a third of conventional health insurance, depending on the individual's age. The remaining two-thirds go into the tax-deductible savings account. Current law permits additional contributions (out of pocket, but tax-exempt), scaled to the individual's age. If the account is mostly untouched by a healthy person for two years, it becomes increasingly difficult to exhaust it later because of a) its internal income generation, and b) the top limit on expenditures created by the insurance policy. For low-income individuals, funding might be publicly supported.

3. NOTICE THE TWO DIFFERING PROVIDER PAYMENT-METHODOLOGIES. The level of $3000 annual deductible was chosen as within the current band of outpatient-inpatient price separation and requires an inflation adjustment clause to keep it there. One of the chief advantages is to permit two different reimbursement approaches to co-exist, one for outpatients and one for inpatients, without mandating either one.

A high deductible is intended to save cost, preserve individual choices, and to restore consumer negotiating power: consumers gain control to negotiate prices for better service. They can readily observe what is happening, and can readily move to another provider.

However, for incapacitated patients within an inpatient complex, such advantages become unrealistic. Their bundled services (psychiatry may be an exception) should be priced by diagnosis. Although the present DRG (Diagnosis Related Group) system badly needs revision, its introduction by Medicare in 1983 proved so superior to item reimbursement and cost reimbursement, that almost all health insurers employ it.

Moral hazard, which is much lessened for services within the deductible, reappears when the deductible is satisfied, especially when the decision is made to enter the hospital. A financial incentive exists for patients to prefer more expensive but fully insured inpatient care. 1) Accordingly, it would be wise to allow the deductible threshold to rise when excess funds appear in the Medical Savings Account; since that would lower the insurance premium further, the individual has some incentive to agree to it. 2) The patients who select more economical care should share the savings they create. Therefore, policymakers (and providers) should reconsider their instinct to limit the benefits of health insurance strictly to health expenditures. 3) To this end, Medical Savings Accounts should be unified with some or all federal, and federal qualified, tax-preference funds, including possibly Social Security itself. 4) In order to sharpen the focus of most concern to the matters where moral hazard is greatest, a series of insurance carve-outs should be added. These carve-outs would focus on issues where other concerns are greater than the moral hazard feature, for example, obstetrics and terminal care, or where the moral hazard is significantly different, as in-home care and durable medical equipment.

In all efforts to structure incentives away from moral hazard concerns, it should be remembered that draconian countermeasures have already been tested and failed. If individuals desire care-managers to work on their behalf, they should be charged for that unbundled service out of their Medical Savings Accounts, shifting the risk it will lower their medical costs, and the profit if it does, to themselves. Rationing has been firmly rejected by the public, as well as deliberate limitation of medical facilities in order to ration by shortages. All of these approaches are bad politics. Finally, it should be noted that the preference for insured inpatient services has historically been addressed by expanding the limits of insurance to include outpatient care and home care. This might be good politics, but it is not good arithmetic since it has been one of the main sources of healthcare inflation in recent years.

4. LIFETIME COSTS RATHER THAN ANNUAL COSTS. BEGIN WITH TERMINAL CARE. Medical costs are rapidly concentrating in two places: the first year of life and the last year of life. Because of the technology cost to achieve that transition, it makes take several decades for it to become obvious. Meanwhile, the design of health insurance should begin the process, incrementally, of moving to lifetime health insurance instead of annual insurance. Eventually, it can be expected that the cost of living too long will be equal to the cost of dying too soon, but cost predictions are presently difficult. We could rather easily begin the process -- by carving out the cost of terminal care, insuring it separately from the rest of Medicare, and demonstrating to the public the remarkable power of COMPOUND INTEREST ON INTERNAL INSURANCE RESERVES. For example, it has been loosely stated that two thousand dollars invested at birth, compounded tax-free, would roughly pay for an average lifetime's medical expenses.

Carving out terminal care could be accomplished without the public much noticing it, by the following means. Medical care would continue to be paid for by conventional methods, but all costs which fall in the last year of life would be designated "terminal care" and retrospectively reimbursed to the insurance entity which paid them. Since substantial proportions of Medicare funds are now being paid out during the last year of someone's life, the reduction of Medicare's pay-as-you-go "premium" would be considerable. Accordingly, a comparable amount could be set aside from Social Security payroll taxes, invested at compound interest, and eventually made available to pay the individual's terminal care. Transition costs, future cost projections, interest rate risks, and methodology of investment are set aside in this discussion since this project would have to develop some actual experience before a final design is possible.

5. CARVE-OUTS. By limiting health insurance premiums to the current year, the uncertainty of future medical cost inflation is addressed. However, this insurance advantage is confounded by treating all medical costs as if they were random events, including any costs which can be deferred into a different premium year, and other costs (like birth and death) which lack the individual potential for occurring randomly in multiple years. To the degree that such medical costs can be teased out of their mixture with more random risks, opportunities for patients, providers, and insurers to game the system are reduced.

A carve-out system for terminal care has been mentioned, as well as a carve-out of managed care management costs. The latter might be paid for outside of the Medical Savings Account, just as investment advice is often paid for outside an IRA, in order to preserve tax-exempt funds. (The same may be true for preventive care costs). If managed-care management advice actually saved money, fee-based advice might be a prudent option to adopt. It seems very likely that prescription drug costs will be handled as a carve-out. Psychiatry has long proved unsuitable for payment by diagnosis; failure to confess to this has almost destroyed inpatient psychiatry, and there is some urgency to carve out and significantly revise psychiatric care reimbursement. The same applies to home care, durable medical equipment, and probably other areas of healthcare. No reimbursement system can be carried to the present extreme of "one size fits all, let's extend it to other things."

A carve-out of the COST OF OBSTETRICS AND POSTNATAL CARE sounds radical but could be mostly transparent, as well. It is more likely to provoke political resistance, however, since it represents a reversal of parents paying for children, to individuals paying their own birth costs. One birth cost per person paid for by health insurance in the usual way and repaid to that health insurance like a mortgage or a tax on the Medical Savings Account. Just as is true of a mortgage prepayment, the individual would have various options for early, average, or late repayments, reflecting the accumulated funds in his account.

PREVENTIVE, OPTIONAL, COSMETIC AND OTHER ELECTIVE MEDICAL COSTS should also be carved out, for the reason that present rules excluding them from coverage are unworkable. (Preventive care has already been carved out of Health Savings Accounts by excluding them from the deductible; it might be wise to demand proof of effectiveness before making this sweepingly inclusive). It would be equally unworkable to insure them all. It seems better to create carve-out insurance for these costs, provided with funding that does not affect traditional healthcare premiums. Such a system would provide a funding mechanism which must be paid for, rather than the present system of futilely insisting that these costs are illegitimate when in fact they are not. The main argument against using insurance to pay for preventive care is that there is no risk, everyone ought to have it. So the insurance just adds unnecessary costs. When Medical Savings Accounts become more widely adopted, this issue may disappear.

6. CCRC Retirement communities should be encouraged to become the center of health care delivery in their regions, by removing regulatory or tax obstacles, particularly the IRS opposition to accumulating healthcare volunteer activity credits against later healthcare needs of their own. Tax and regulatory obstacles to the use of vacant infirmary and outpatient facilities, community physician and laboratory/x-ray facilities, and pharmacy/durable equipment providers should be removed. Since this trend conflicts with locally established providers, mechanisms should at least be developed to match these transitions to the migrations of elderly populations in any particular region. * * *

IN SUMMARY, this whole scheme can be described as "SUPPLY SIDE" HEALTH INSURANCE REFORM. It generates new funds for healthcare by a) reduced small-claims insurance costs b) reduced "moral hazard" overutilization costs c) compounded internal investment of reserves and d) utilization of the now-wasted labor potential of young retirees. It does not aim directly at the goal of reducing the number of uninsured, except on the principle that if something becomes cheaper, more people can afford it.

Our Federal Reserve (1)

{Colonial Coins}
Colonial Coins

The most enduring, and bitter, controversy in American politics concerns the control of the currency. That's not unusual, since as far back as 1000 B.C. the person or group who controls any government of any country has met resistance in raising taxes, and so was tempted to coin more money. Unless you personally received a big chunk of that new coinage, you were opposed to the system, because of the inflation it invariably created. Prices go up.

So people get upset with watered currency, and once refused to consider something to be real money unless it was made of gold. Gold doesn't rust, there's only a limited amount on the planet, and everybody agrees it's pretty. Silver was maybe all right, too. Gold dust was weighed in the marketplace, but if you trusted the dust you took a risk it had been diluted with something. So coins evolved, with a picture of the king stamped on them, and the edge of the coin serrated, so cheaters would be unable to shave the coin and use the shavings. It didn't matter who stamped the coin, and throughout Colonial times in America, the Spanish piece o'weight was good as gold. But the use of gold and silver coins was cumbersome, and occasionally there were local shortages. One of the important causes of resentment leading to the American Revolution was local discontent with the way the British allowed disruptive shortages of coinage to interfere with commerce in the colonies, at the same time the British prohibited paper currency as too easy to counterfeit. Without a common medium of exchange, commerce is driven to resort to the inefficiencies of barter.

Industrial Revolution

So, barbarous relic or not, gold was quite effective in restraining governments from their irresistible tendency to promote inflation. The downside began to appear when the Industrial Revolution caused a great increase in a trade because a fixed amount of money in circulation will force all prices lower in a rapidly growing economy. Nobody will buy anything if everything is certain to be worthless if you wait. If people are reluctant to buy, prosperity soon comes to an end. Merchants don't like lower prices, and debtors don't like to repay their debts with money that's scarcer. People are just as unhappy as they were during inflation. Eventually, everybody came to see the best thing was price stability, neither rising nor falling. To accomplish that, the amount of money in circulation has to match the growth of the economy, technically a very difficult balancing act for the government. With the British treasury separated from the colonies by 3000 miles of ocean, and sailboats were used to communicate the distance, the whole thing became impossible.

French Revolution Guillotine

It's sort of true that an unstable currency puts rich people and poor people into contention. But the more fundamental fact is that it puts creditors and debtors in conflict, thereby paralyzing commerce and injuring everybody else. For three centuries, our political rhetoric has enlisted the support of "workers" against the "the rich", but that's only acceptable shorthand if the balance of currency has gone too far in one direction or the other, and needs to be corrected. If you really let those slogans polarize society, you won't get fairness, you will get another French Revolution and the guillotine. What's needed is to fine-tune temporary imbalances, so the amount of currency in circulation grows gradually in parallel with the economy. During nearly three centuries of struggling with this mysterious issue, we have frequently lost our way with attempts to have "free silver", with honoring or dishonoring the Continental currency, with issuing Greenbacks during the Civil War, War Bonds during various wars, deliberate national deficits during recessions, going off the gold standard, and a host of other expedients and desperate political gestures. The first person to devise a workable system of matching the money in circulation with the size of the economy, was Nicholas Biddle, of 715 Spruce Street.


Please Let Us Know What You Think


(HTML tags provide better formatting)

14 Blogs

Rise and Fall of Life Insurance
Like many things, insurance started here. It's now mostly all gone.

Philadelphia: Charles Dickens Gives an 1842 Viewpoint
Dickens liked Philadelphia a lot, but he was still a little patronizing.

Six Ways to Fix Social Security
Baby boomers have dutifully paid 12.4% of income for retirement benefits, all their working lives. Politicians spent it. What can we do now?

Colleges and Religions Drift Apart
American colleges and universities were originally founded to teach ministers..

Finances of the Girard Estate
When he died in 1830. Stephen Girard was the richest man in America. A quick review of the outcome of his life work suggests he was maybe the smartest man in America, too.

Georgetown Returns Day
Glimpse what American democracy was supposed to be in the little Delaware village of Georgetown, even after nearly three centuries have gone by. Two days after the election, the victorious and the defeated candidates still appear for announced election results, ride around the courthouse in a carriage together, and actually bury a hatchet.

The Future of Health Savings Accounts--Lifetime Accounts?

Mutual Fund Governance
Their main income depends on selling their mutual funds to corporation-controlled pension funds, that's why.

The Blue Cross Discount (6)
Hospitals customarily inflate many charges so far beyond their costs that you must buy insurance to protect yourself. Whatever the dominant health insurers may be doing to encourage that practice, they are the main ones to benefit from it.

State Capitol Think Tanks
States rights will be neglected as long as state governments remain so second-rate.

Medicare/Health Savings Accounts Legislation
What Every Voter Needs to Know

Health Savings Accounts
In late 2003, Congress passed and the President signed, legislation enabling tax exemptions for contributions to Medical Savings Accounts. This monumental reform was included in a law which created a number of Medicare prescription drugs benefits which received more attention in the press. Such accounts were renamed Health Savings Accounts, which was the original terminology in 1980 when John McClaughry of Vermont and George Ross Fisher of Pennsylvania, shortly joined by Michael Smith of Louisiana, first introduced the concept.

New Health Insurance Reform Proposals
A Complex Reform Reduced to Brief Essentials:

Our Federal Reserve (1)
All governments find it easier to print (or coin) money than to raise taxes.