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Philadelphia Reflections

The musings of a Philadelphia Physician who has served the community for six decades

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Introduction: Health and Retirement Savings Accounts. As Is, Right Now.
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Terse Verse: Thomas C. Howes (10)
Poetry is a form of literature that uses imaginative and creative words in a compressed form to express idea.

Right Angle Club: 2016
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Interest rates as signs of the future.

Terse Verse: Thomas C. Howes (9)
Poetry is a form of literature that uses imaginative and creative words in a compressed form to express idea.

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No Tree Grows to the Sky

It would appear both healthcare and compound interest follow J-shaped curves of slightly different shapes over time, sufficient to encourage the idea that a little manipulation could make achievable passive investment pay for healthcare. For example, a single fairy-godmother deposit at birth would rather easily cover the costs of first-year and last-year of life insurance, if interest rates return to a normal 6.5%. That could also be accomplished by saving $5-10 dollars per paycheck from Medicare withholding tax from age 25 to 65, provided the savings were subsequently invested at 6.5%. Some might argue such investment return is too high an estimate, and others might question whether future generations would be sufficiently frugal to continue the process. But most people would say the amounts estimated are small enough to adjust to such questions. Paying for retirement costs, however, is another order of magnitude.

Just as a lot of people warm to the idea of giving newborns an equal financial start, there is a lingering hope that at retirement, everyone might enjoy a more-or-less similar life of leisure. However, a little calculation shows it would be far more difficult to achieve. If we can agree on a hypothetical number, perhaps it would be debatable whether $20,000 a year might satisfy most ideas of an adequate pension, particularly when reminded this would amount to $40,000 a year for a retired couple. But just look at what it would cost.

To achieve this goal, savings of $250,000 would be required at age 65. And to achieve that, several of our favorite strategies look a little marginal. We could transfer Medicare withholding tax of $150 a month for forty years and invest it at 6.5%, at the conclusion of which we would have about $250,000. But the newspapers seem certain that fifty percent of the population aged 50, have no liquid savings at all. These may well be rough estimates, but they do not augur well for asking new hires at age 25 to put away $150 a month, and keep it up for forty years. Nor does the fairy godmother approach sound like an easy approach. If we imagine an inheritance or a federal subsidy, it would require a lump-sum deposit of $3500 per person at birth to achieve an individual goal of $250,000 at age 65. Or a deposit of $18,000 at age 25, coming from similarly undefined sources. We might look for ways to stretch out the investment period, since it would look as though compound interest has a chance of growing faster than the cost of living. If that approach is tapped, it would require a transfer of $700 to a newborn, assuming a 90-year investment time could be manipulated out of thin air. Or $300 for 104 years, the present definition of a perpetuity (one lifetime of 84, plus 21 years). Or $150 for 111 years, hoping life expectancy to increase to 90 years looking one lifespan ahead. The trouble with such projections is not so much the dollar amount, which some would say could be inflated away, but the extended time period. All such extensions exceed the human lifetime, depend on someone-else to keep them up for someone, who has been dead for decades. It is possible to predict great advances in medicine, in computers, and in transportation. But I would not be willing to predict such advances in human nature.

So I would urge everyone to be satisfied with these suggestions for healthcare, looking elsewhere for help with luxury retirement.

To Sum Up: Health and Retirement Savings Accounts: Immediately, and A Peek at Future Advances

As an earlier section has outlined, Health Savings Accounts were developed by John McClaughry and me in 1981, as a bare-bones health insurance scheme for financially struggling people. The package consisted of the cheapest insurance we could imagine (a high-deductible Catastrophic indemnity plan with no co-pay features), linked to what others have described as a tax-sheltered Christmas Savings Fund. What was the linkage supposed to accomplish? The Account linkage was originally intended for folks who must struggle to assemble the deductible portion of the insurance; so the package could then become the cheapest healthcare package we knew how to devise. As deposits in the account built up, the effective deductible fell to zero, but the premium of the insurance did not rise. At that point, you might describe it as "first-dollar coverage at a rock-bottom premium." It certainly compares well with so-called "Cadillac" plans, where the underlying motivation was to include as many benefits as possible, money no object, with someone else paying for it. If the government wanted to subsidize our plan to make it even cheaper, money for the bare-bones plan could be subsidized for seriously poor people, just as the Affordable Care Act does. HSA is itself absolutely the cheapest, but it isn't free, and additional features like charity must be accompanied by additional revenue from somewhere.

First-dollar coverage by any mechanism generates the danger of spending health money unwisely. That undesirable feature was neutralized by letting you keep what is left over at age 65, thereby generating retirement income. Retirement income is generally in short supply, and there may exist a future danger well-meaning attempts to supply generous retirements would destroy this incentive to be frugal, but right now it isn't a worry.

Other Incentives. One thing we didn't immediately verbalize was, making it a bargain additionally entices people to save, even when they are sort of inclined to consume. We didn't think to include regular paycheck withdrawals, but that's another common savings incentive with proven effectiveness. Having loose cash does seem to create a vague itch to spend. But the HSA specifies an invitation to save for health care, using any surplus for retirement, a much more tangible appeal. With that addition, it becomes a more attractive program, while possibly appealing to a larger segment of the population without reducing its appeal to the original ones. Our reaction was that everyone was complaining about high health costs, so the more people HRSA appealed to, the better.

The real game-changer was this: When a subscriber acquires Medicare coverage, anything left in the fund is automatically turned into a tax-exempt retirement fund, an IRA. As enrollments in HSAs began to boom, it was realized this provision created an unmatchable retirement fund whenever someone put extra money into the account. I wish I knew whose idea that was. So you might as well say the basic package has three parts: a high-deductible health insurance, a spill-over retirement fund, and a Christmas savings fund to multiply it with compound interest. It is a savings vehicle for two sequential stages of life, with the tax advantages of the first stage getting it on its feet. The separation of the account from its re-insurance, also separated the incentive to save from the desire to share the risk. Adding compound interest adds particular attractiveness for the later stages of life, because compounding takes a long time before it means much. It connects the two benefits end-to-end, lengthening the time for compound interest to become meaningful, as it might not if it waited for retirement to begin. We eventually realized the deductible-funding and retirement-funding Christmas savings account package was the most attractive investment vehicle most ordinary folks could find; beating it as a retirement fund was therefore nearly impossible.

Hence the overall strong incentive to save, sadly missing from every other form of health insurance. Experience shows this unique set of incentives to buy it were effective, so a 30% reduction in premiums for total health insurance began to be demonstrated among pioneer clients, not merely claimed in theory. The recognition of all these advantages led millions of frugal people to sign up without an expensive marketing effort. Everything seemed to fall in place, making us quite satisfied with the result. Even though mandated extension might have speeded up acceptance, slower adoption avoided the early catastrophes of taking on more than could be handled.

So that's where HSA stands today -- the best little health insurance idea available anywhere, unless someone monkeys with it. Even the remote possibility of getting very sick, very often, was covered by adding the feature of a top-limit to out-of-pocket costs, paid for by dipping into a small portion of savings generated by other features. Anyone who thinks of a better health insurance plan than this one, is welcome to offer it. Let's whisper a reminder: the policy is owned by the individual rather than his employer, so it doesn't suddenly stop when you change employers. To a different audience we could whisper, it could bring another feature closer to an end, the business of paying for Medicare with debts which have to be borrowed from foreigners. The Account gathers interest, instead of costing interest charges. The best part is: it induces the subscriber to hold back from using the account, saving it for more distant requirements, which otherwise come without warning. Paying for your old age is wonderful, but starting to save while young is vital, and more likely to work. Most plans now maintain an upper limit to the subscriber's out-of-pocket costs, protecting against a second illness with its second deductible. When we say, "That's all there is to it," we really mean that's all the advantages which have so far emerged. It's ready to be renamed HRSA, the Health (and Retirement) Savings Account.

Technical Amendments, Needed at Present.

Now, let's pick the nits, noticing how hard it gets to improve on it. If Congress could pass a few amendments, the following flaws could be more or less immediately repaired:

1. Full Tax-Deductibility. Attractive as it is, HSA still isn't fully tax-deductible like the health insurance many employed people are given at work. The savings and retirement portions are indeed tax-sheltered, but unlike some of its competitors, the high-deductible health insurance itself stands outside the funds (as what insurance experts might call re-insurance) and isn't covered. Employers get around this difficulty for their employees by buying it themselves and "giving" it to the employees. Without monkeying around with this rather dubious maneuver, we propose the premiums for the Catastrophic health portion of the HRSA might instantly become tax-exempt if the Savings Account paid the premium. That would appear cheaper to the Treasury, than proposing to make the whole package deductible. But the other parts are already tax-exempted.

To permit something like that would require a one-line amendment to the HSA enabling act, but would restore fairness to the system, and bring out how much cheaper the Health Savings Account really is. Making it cheaper means more people could afford to buy it, thus relieving the Treasury of the need to include those people under the Affordable Care Act. That compensates for some of the loss of revenue to the IRS of making the Catastrophic Health Insurance tax-exempt. Regardless of how the CBO scores this complexity, it should be remembered that poverty is not a lifelong condition for most poor people; after a temporary period of poverty, many if not most of them rise toward becoming full tax-payers. Equal treatment under the law is itself worth something; it could alternatively be provided by lowering the corporate income tax. But that's not self-evident, and politically hard to explain. If the Congressional Budget Office would extend its dynamic scoring to include retirement taxation on the HSA's eventual compound interest (instead of limiting its horizon to ten years), it would prove to be better to chose the alternative of letting the Accounts buy the re-insurance.

2. A better Cost of Living Adjustment for HSA deposit limits. There is presently an annual limit of $3350 for deposits in Health Savings Accounts, whose limits have seldom been raised. This new COLA should be formalized into a continuing cost-of-living adjustment which is somehow related to the current rate of inflation in the economy, and perhaps takes account of the transition to HRSA by people over age 60. These late arrivals simply cannot catch up within the present deposit limits, even if they possess the savings to do so.

3. Age Limits for HSAs It is a quirk of compound interest (originally noticed by Aristotle) that effective interest rates increase with the duration of investment. Consequently, much or most of the revenue appears after forty years, and consequently the HSA gets progressively more valuable with advancing age. To put it another way, young people contribute more time for interest to grow, old people must contribute more money. At present, the HSA age limits are set to match employment, but the HSA will inevitably focus increasingly on funding retirement. Removing all age limits might go a little too far, but would substantially increase the amount of investment income generated, at almost no extra cost to the government. It might also supplement the platform for funding childhood health costs, a problem which stubbornly resists improvement. It might greatly enhance revenue for older subscribers, the surplus from which could be used at their death for grandchildren.

Extending the age limits would potentially also serve as a platform for re-adjusting dangerous imbalances in the healthcare financing system. We are fast approaching a demography of thirty years of childhood and education, followed by thirty years of working life, followed by thirty years of retirement. But substantially all of the revenue comes from the middle third, while the remaining two thirds of the population contain most of the health costs. To some extent, this is unavoidable, but the whole health financing system becomes a dangerously unbalanced transfer system for well people to subsidize sick ones. It is possible to foresee the beginnings of class warfare, based on age alone. Consequently, society would be well served to create the more stable system of subsidy between yourself as the donor and yourself as the beneficiary. The alternative is to continue the process of having one demographic group collectively subsidize two other groups of strangers who generate most of the cost. Eventually this might lead to the well people dumping the burdensome sick people. I hope I am unduly concerned, but to extend the age limits for individual self-financing seems a very cheap way to begin stepping out of that particular mud puddle.

As an aside, it's true the subscriber to a Health Savings Account is not fully covered in his first few years, until the account builds up to the deductible. At first, that was a concern, but it has proved largely unnecessary to provide for it among young healthy subscribers. Apparently, by the age hospital-level illness becomes common, ability to meet the deductible has mostly been achieved. Nor has it proved necessary to resort to sliding-scale deductibles hidden in the slogan, "the higher the deductible, the lower the premium" -- probably because conversely, lower premiums lead to more money to save. These features might be reviewed when self-selected frugal applicants taper off, since HSA enrollment has favored younger enrollees, so far. For the moment, sales incentives seem adequate; everything else may be indirectly changed by HSAs, but very little is directly changed.

Future Expansions.

How far these three short amendments would extend retirement solvency, is hard to predict into the future, but it would be considerable. Aside from any improvement never seeming like enough, it is almost impossible to guess the future timing of health costs, even if you can see them coming. But while the amendments might assure a comfortable future for Health and Retirement Savings Accounts, they do seem unlikely to address the full costs of retirement, which are usually undefined and often overly ambitious. So the problem for many, many afternoons' deliberation, would be to expand the potential of HSAs until they become objectionable for competing concerns. For that, I have four additional proposals which might work, but inevitably collide with professions who would be quick to suggest narrower limits. Let's describe them, while waiting to assess objections from those they would discomfit:

1. A re-insurance scheme (insurance company to insurance company), called First and Last Year-of-Life Re-Insurance.In the far distant future, health insurance will surely concentrate into the these two years, so we get our directions approximately right if we start there. It's superimposed on but untangles many cross-subsidies, and extends the duration of compounding within the present system. A ninety-year transition period for lifetime HSAs is too long and must be shortened somehow before whole-life can be feasible. In retrospect, it is difficult to understand how the insurance industry managed to establish whole-life insurance; certainly, it could not have been based on actual experience. The present proposal is a reinsurance system, invisibly supplementing present procedure-based payment systems but extending their duration of compound interest. In summary, a small escrowed sum at birth--possibly three hundred dollars-- grows undisturbed to astonishing size in eighty to a hundred years. At death, the fund would easily reimburse Medicare for its demonstrated expenses during the terminal year of life, essentially providing a quarter of Medicare at a total cost of three hundred dollars. A somewhat larger deposit, perhaps another hundred dollars, might also produce enough surplus after reimbursing Medicare, to take care of the first year of life of one grandchild or equivalent, although there appears to be so much surplus from last-year, that the two approaches could proceed from both ends at the same time, to shorten the transition. Available figures for obstetrical costs are not available, but the approach might be improved by considering obstetrics as a cost to the baby. The main problem with this transition issue is not its cost, but its extended duration.


By placing these funds in escrowed individual Health Accounts, a suspicion is addressed that the money might be spent on battleships or otherwise diverted during its long period out of sight. About a quarter of health costs would be replaced, and essentially removed; although the accordion principle might adjust it larger or smaller. Birth and death years are the two most expensive in human life. Almost no one pays his own costs for them. And they address 100% of the population. The Health Insurance Industry, now precariously balanced on questionable cost-shifting between demographic groups, would never be the same. Particularly since private industry would be expected to finance the reinsurance out of reduced revenue.

2. Medicare should be modularized but without basic change, so recipients can buy pieces they do not need, using the proceeds for retirement. Sometime during the next fifty years it can be predicted at least one of the five most expensive diseases (Alzheimers, diabetes, cancer, psychosis, and Parkinsons) will be inexpensively cured, once the initial cost increase is absorbed. We need a way to fine-tune the transfer of such medical savings into retirement income, understanding many competitors will hope to divert the windfall. Redirecting the Medicare withholding tax makes an excellent way to channel the funding, as would reductions of Medicare premiums. Scientifically, Medicare is eventually destined to shrink as we find cures, but funding the resulting longevity must have first call on the savings.

3, The investment component of Health Savings Accounts should be dis-intermediated.The stock market has produced--for a century--10%-11% long-term returns on large-cap stocks, 3% inflation, and less steadily 4-5% on bonds. The volatility is much less than most people imagine. Index funds of these entities should perform about the same, at far less cost, perhaps 0.1-0.3%. The days fast fade, when the public will surrender the present level of transfer costs, which now sometimes erode investor return to as low as 1%. The simpler system is "passive" investing with index funds, and its goal should be an average return to the retail customer of at least 6.5% after inflation and costs. The retail finance industry must re-examine who is at risk and who is rewarded for taking that risk.

4. The center of medical care should migrate from medical centers to shopping centers attached to retirement villages. Architects report it will always be cheaper to build horizontally than vertically. Since we seem destined to spend thirty years in retirement, and the principal occupation of retired people is taking care of their own medical needs -- the wrong people are doing the medical commuting. Teaching hospitals were located close to the poor, in order to use them for teaching material. But now "meds and eds" are fast becoming the principal occupations of high-rise cities. If there is ever a good time to place medical care closer to the patients, this is it.

And if ever there is a way to put the doctor back in charge of medical care, decentralization is the way to do it smoothly. We will always need tertiary care, but we don't need indirect overhead, skyscraper construction, or layers of administration. Even continuing education is becoming a revenue center. No one can claim the present centralization made things cheaper, and the disadvantages of medical silos certainly call the quality issue into question. The Supreme Court failed us in the Maricopa Decision; so let's see what Congress can do with reconciling the Sherman Act with the Hippocratic Oath.

Preventing Perpetuities

In the usual funding and billing operation, the main concern is finding enough money to pay the balances. In this circular system, however, if a balance keeps going around and around for generations, it will eventually reach infinity. Anticipating this loophole, with the absolute certainty that someone will try to take advantage of it somehow, the laws of perpetuity provide that inheritances may only last a single lifetime, plus 21 years.

In this case, what we have available are sixty years (age 25-85), or 85 years if we start the clock at birth (0-85), and maybe 90 years if longevity inches up during the 90 years of a coming lifetime. Compounded quarterly, these age ranges create a multiplier of the $400 we plan to donate, of 64x, 364x, and 515x, leading to funds at death of $25,000, $145,000, or $206,000, respectively. Those are multipliers which surprise most people. Keeping the compound interest within present Medicare ranges just isn't enough, but $145,000 might scrape by, and $206,000 is quite comfortable for the purpose. The specified goal is to bequeath, donate or tax $18,000 to the designated grandchild, and $100,000 to Medicare as a last-year-of-life reinsurance transfer, all of which grew out of the original $400. We compound 7% because it's easy to double every ten years in your head, but it relates well to a century of large-cap common stock returns at 11% (re Ibbotson), less 3% inflation, less 1% more for overhead. And it correlates well with the mode for the last 50 years of the S&P, which comes to 6.6% (see my son's calculations in the special index.) That's in the ballpark of what we seem to need, with some to spare. And remember, the heaviest and most permanent two expenses of life (birth and death) have been removed from the cost burdens of society, by doing this. For reasons we won't go into, reducing the volatility of investments will lower their cost somewhat, and decrease their apparent riskiness, quite a lot.

Obviously, someone must be designated to watch this drama unfold, with latitude to make small mid-course corrections re-aiming it toward its goal. Eventually, Congress must reserve to itself the right to change the ground rules if serious miscalculations begin to appear. It may begin to fall short, which results in raising the initial donations. Or someone may figure out a way to game the system by overfunding it, turning it into a perpetual money machine.

For that rather vague goal, I advise adjusting the choke point at age 25. That's when childhood subsidy runs out and the adult funding for death begins; in a sense, it's the beginning of financial life. It fits the existing laws about perpetuity. Every dollar you change it, up or down, can have a leverage of $300 at the time of the subscriber's death. Of course, there's such a thing as outright fraud, where you ultimately have to send someone to jail rather than allow him to topple the financial system.

Essentially what you would have done, is identify the final package of the second half of(first and last year of life insurance), with an approximate cost ($400), toward which we work as scientific advances slowly carve away the rest. Any other surpluses go into the retirement fund for seniors, as surpluses appear. How long it will take to get there is uncertain, but at least it's a plan. Leftovers from the first year of life gift from grandparent to grandchild will slowly grow from age 25, gradually supplementing it, but right now we assume everyone alive has somehow paid for being born.

Insurance for the First Year of Life, Childbirth, and Childhood in General.

First, Define the Unit. Before we can describe a coherent plan for the entire life cycle, healthcare for children is the final link in the chain, as well as its beginning. In some ways, it is the hardest link, because self-funding for newborns is hard to imagine. Some other age group must supply the money, and traditionally it has been the family as a unit. But although it is understandable that employer-based insurance should use the family-unit approach, the unit itself is now under strain, and often ends in dissolution. Two-earner families mixed with one-earner families strain notions of equality in the employer-unit approach. When one-earner families have children, or two one-earner families share children in common, or two two-earner families do, it's hard to follow any coherent rules. So we adopted two notions: a single life begins on the day of delivery, and childhood dependence upon outside financing ends on the 25th birthday. That allows a large and definable portion of obstetrical costs to be shifted to the child, ultimately to be recycled from the child's life later in the individual-unit. Although this re-arrangement disturbs tradition, its simplification of many issues argues in its favor. No one argues this unit should be used in any situation except health insurance, which has a nation-unit quality to it for share-the-risk purposes. The HRSA has a dual structure, an individual financial fund attached to a nation-unit insurance; maybe that justifies it. When a premature baby can incur costs of a million dollars, new notice must be taken of old problems, previously dumped on the extended family. Our culture would surely rebel at making childhood costs a responsibility of government, but perhaps it could stomach government as custodian of a funding cycle, run by parents for the first 25 years of life, and by the individual thereafter. Let's at least see how far we could go with that idea. The first problem it eases is to make age 25 (ordinarily the cheapest moment for healthcare) the starting point for self-financing, instead of the day of birth, the second most expensive one.

It might be objected we make no direct connections between Health and Retirement Savings Accounts, or the Affordable Care Act, for the working years between 25 and 65. But medical financing issues for working-age people have become so scrambled, there remains little choice but to skip past such judgments until politics settle down. Whether covered by Health Savings Accounts or something else, non-HSA approaches are here assumed to be revenue neutral. That's improbable, of course, but the assumption allows consideration of how to finance the other two thirds of life, later adjusted to the working age outcome when we know what it is. Half has already been considered, in the form of allowing a gradual -- voluntary -- substitution of retirement financing for Medicare's withholding tax , using investment income to make up the overall shortfall. The history of the Standard & Poor averages suggests there would be enough surplus left over to pay for the healthcare of children, as well. So the last remaining issue is to devise some way to transfer such funds-flow from grandparents to grandchildren.

Parents or great-grandparents might also be considered. An argument might be raised that parents need such extra leverage to control adolescent behavior. Conversely, the adolescents, at least, believe parents already have too much control, causing generational conflict; great-grandparents would have even less emotional motive to control behavior. However, in practice grandparents are now dying slightly after their own children are recovering from expenditures for grandchildren college, and their own retirements. There is still time (for some of them) for more doublings of compound interest between the time of greatest family need, until the time when savings have no further use for grandparents. Further extension of life expectancy might alter this balance, but right now it is the grandparent whose death releases most money at the time it is needed, with least inconvenience for its legal owner. The choice of heirs is a closely treasured asset for the older age group, of course, so they have to be motivated to give up a little of it, in return for a more assured retirement. That's why first-year and last-year of life are combined in one package. Since on average, compound interest turns upward after four doublings, it helps to extend the whole process upward to the age of all grandparents' death, and downward to the child's twenty-fifth birthday. The revenue issue is then vastly simpler for the grandparent than for any other generation, although there will always be exceptional cases.

Obstetrical cost and Other Contrivances. Furthermore, it also simplifies discussion to consider the life of the child as beginning at the onset of labor, since doing so permits us to ignore family size as a variable. (Nothing more is intended, no hidden social agenda.) All childbirths can then be considered as costing roughly the same, unless there is a complication or disease. Vaginal deliveries and caesarians cost the same by being merged and averaged; whatever justified the Caesarian section is responsible for adding its extra cost. In recent decades, hospitals and obstetricians have taken to charging equally for the two, to prevent cost from influencing the decision. You might do that; I found it to be an unnecessary contrivance for a proposal at this stage.

The Grandparent Transfer.To justify including the child's first two doublings, probably requires including their benefits as well. Estimating the total cost of delivery by any means to be $10,000, the total intergenerational transfer would be about $25,000 -- at the death of one grandparent and the birth of one grandchild, with the government financing timing mismatches. Redistributionists will like the idea of an equal start for everybody from government funds, conservatives will like the idea that its success or failure depends on successful individual management of the equal start. This compromise probably contains enough verifiable facts to survive the temptation to divert it to unintended purposes, like battleships.

Shortfalls and PerpetuitiesEvery individual fund theoretically arrives at a zero balance at age 25, and by thus defining the amount of required subsidy at the time of least medical risk, allows shortfalls to be corrected at least cost, and surplus from becoming a perpetuity. Perpetuity has long been defined as one life, plus twenty-one years, and this stays within that traditional definition. With an added contingency cushion of $400 at the child's birth rising to about $60,000 at age 65, there is probably room for yearly mid-course adjustments, up or down, at age 25, with surplus beyond that need, applied to extra retirement funding, in competition with serving to pay off international debts for previous deficit spending. Since births are distributed over the entire year, this would be a continuous process. The contingency funding (mentioned earlier) operates along the same principles, except for its re-adjustment point at birth. Eventually that leads to a diplomatic summit between the two creditor funds, negotiating with the two debtor funds (Medicare and, probably, the Affordable Care Act.) Meanwhile, the two approaches can operate independently, until finally events expose the cards in their hands, and force a showdown merger.

The Purpose of Final Merger. There are two main ones: a consolidated system ends debate about poaching boundaries to capture higher investment income. And a consolidated system makes whole-life insurance possible. Allowing a major insurance company to manage all of the complexities internally would certainly improve the quality of management, but the offsetting cost is the need to make a profit. At the moment, it is hard to see a responsible company taking on a 90-year risk and actually paying off at the end.

Essentially, we propose overfunding Medicare escrows by an amount of money sufficient to pay one-day obstetrical and the first 25 years of childhood costs (23% of total lifetime costs) after 90 years of compounded interest, surely a hundred dollars at most. The transaction would be voluntary and hence gradual, leaving existing systems in place. Since everybody alive has somehow already paid for being born in some way, the funding could be much less for a considerable early period of transition to this system. (This might be considered some sort of payback for the free ride of the 1965 generation.) Eventually, the escrow funds would be adjusted to generating $100 in 2016 currency for people in all subsequent years.

Meanwhile the transition costs would be supported from the Medicare phase-out option, which is in turn supported by diverting a portion of the wage withholding tax. (Earlier details of the last-year-of-life system have already been outlined.) Very roughly speaking, this would overall amount to a total escrow of $400 at birth, including funding for the last year of life. Remember, this is the funding which eventually catches up with the transition costs we offered earlier by different approaches, and eases the question of how much to sacrifice for a precisely workable transition. But it ought to ease the political pain to know there is an end in sight, for both redistributionists and merit-advocates.

Our earlier calculations show at least this total amount would be generated by compounding interest at 7% on the Medicare withholding taxes presently collected on working people. So the premiums on actual Medicare retirees would serve as another initial fall-back cushion, just in case we make a gross miscalculation. Meanwhile, taking out these two main cost factors (birth and terminal care) should reduce residual lifetime costs by half, so everybody benefits considerably. Parenthetically, subsidizing half of the system by the present gigantic transfer system is politically a very dangerous thing to continue. That's particularly true when you realize that people 25-60 years of age, are not very sick, and remember that even the Affordable Care Act had to exclude 30 million special cases. In the background is science, which could both temporarily worsen, and permanently improve, health costs. We must gamble on their success, but simultaneously rely on compound interest, for longer or shorter way out of our problems.

Excluding inflation, the cost comes down to $300 for the people already alive, pro-rated downward for the people who have already lived part of their working career, but mainly pro-rated upward because their seed money has less time to grow. The basic idea is to fund the public system in compounded income from working people alone, eventually forgiving gradually more Medicare premiums once the system is established, but maintaining the payroll withholdings. That effectively completes the funds transfer from the age group which is working and well, to the age groups who cannot work and have lots of illness -- and gather interest on it, rather than borrowing it.

If that ideal cannot be reached, only a certain proportion of premiums would have to be waived. It once seemed to me almost anything would suffice as an incentive for old folks to give up Medicare and have major premium forgiveness as compensation for extending Health Savings and Retirement Accounts in their place. But they mostly don't see it that way, because their time horizon shortens. When the final feelings of the public about this have been determined, more precise numbers can be offered, but the conservative inclination of old folks will probably persist. When it finally became clear that Medicare could not be totally eliminated, a partial advance became clearly preferable. What's proposed here is not exactly a plan, it is an insurance design, which must first be debated -- and readjusted. If the plan could be fleshed out and decided by the 2020 elections, it could be said to have been ratified. By the way, the present government subsidy of Medicare would diminish, too. The Chinese would just have to buy bonds from someone else.

In case it hasn't been noticed, the childhood portion is the last piece needed to complete a circular "single payer" system. It is a far cry from just extending unsupportable Medicare to everyone at public expense, and the number of intermediary payers would probably be in the hundreds. But that's compromise for you; nobody gets everything he asked for.

Here emerges yet another plan for the intermediate transition step. As a gesture toward the legality of gifts and estates, the two ends of life are consolidated into a single "First and Last Year of Life Escrow Account", created at birth in the child's name. It is funded with about $400 and allowed to grow, undisturbed, to something approaching $100,000 at age 90. At that point, it repays the last-year-of-life costs to Medicare, and distributes about half of that to the HRSA of a single previously-designated grandchild for his obstetrical and pediatric care until age 25. Meanwhile, a new escrow is established at birth with $400 from the grandparent's funds, to re-establish the cycle. Healthcare finance for the child-grown-into worker is not included in this plan, because the politics are still too unsettled. However, we recommend the HRSA, which I guess would sort of make it into a single-payer system.

Re-shuffling Some Old Ideas

Dear reader, please bear with the next three paragraphs. There's nothing entirely new. All of these ideas have been around for a long time, but are reshuffled into a somewhat surprising recombination. We assume the reader has accepted our brief excursions into compound interest, escrow accounts, the J-shaped lifetime health expenses, and the complexities of pre-paying the cost of newborns. Our whole economy is built on debt and its extension, called credit. However, everyone guiltily knows is it better to be paid interest than to pay it. Everyone knows life expectancy has lengthened, but not everyone realizes the cost implications. And even Aristotle despaired of the way we ignore the way compound interest sharply increases at the far end; it's J-shaped, too. Let's start by re-emphasizing what everyone supposedly knows already.


The Cushion. The first hypothetical graph illustrates a tax-free escrow account, into which only $400 is deposited at birth, and terminates at death 90 years later, accumulating wealth until age 65 but then spending it down for retirement. The numbers are arbitrary. That is, it begins with a manageable sum but eventually produces a modest retirement, just by sitting still. This is the "accordion" we employ to substitute for our obvious inability to project costs and revenue for a century ahead. It assumes an average income of 6.5%, which is justified by the history of the past fifty years, which show a high of 8.6% and low of 4.5% in successive thirty-year slices. Actually, as my son shows in the appendix, it is the more conservative modal value rather than the average, to satisfy actuaries who will be asked about it. We have only partial data for fifty years before then, and even sketchier data for a century before that. But the data seem to justify the same conclusion for a long time, in spite of countless wars and recessions. This isn't the plan, it is the cushion which would support the plan if it failed, intended to show our proposals remain within the limit of what is conceivable. No one, of course, can claim to predict the future with precision.

Measurement Inaccuracies. According to accountants, revenue always equals costs, accountants then stretch things a bit to make it happen. But in projecting the future we sometimes substitute one for the other because data is more available. When you dig into how these numbers are produced, you see their premises, hence their inaccuracies, are sometimes quite different. That's a fact which misleads the reader when the two curves are superimposed, allegedly displaying profits and deficits as the difference between cost and revenue. Sometimes it also misleads executives, who have to scramble to keep the company (or the nation) afloat in a mismatch. Without going into boring details, this explains much of the empiricism of the planning process. Sometimes, just sometimes, the Board of Directors acting on logic, knows better than the CEO, acting on data. In healthcare, the central actor is the dismaying alacrity with which costs react to reimbursement.

A Harpoon for Leviathan. And having long experience with the conflict between the welfare of the individual patient and the welfare of the organization, doctors instinctively resist the efficiencies which allegedly result from placing centralized control more and more remotely. Remote, that is, from the patient, who then suffers from the choices being made. Therefore, the "disintermediation" which is implied by individual health accounts immediately appeals to physicians, and should appeal to patients, even though it is easily shown that running a tight ship is best for the organization. Therefore, while using Abraham Flexner's ideas as a model ultimately added thirty years to life expectancy, it could not stop its own momentum to adjust to the retirement consequences of improved longevity. People instinctively sense some control must be restored to the patient. Even if they were not so much cheaper, giving patients individual control of their own Health Account balances is the least disruptive place to give patients a harpoon for Leviathan. Prices have wandered too far from costs, and that's a fact.

The Plan in Outline. We assume many things will remain unchanged. Health costs will remain J-shaped, low at the beginning, high at the end. We assume life will continue in three stages: dependent children for thirty years, working and earning for thirty years, and retirement for thirty years, all more or less. We assume some transfer system must exist, so the one-third in the middle can support the two-thirds at the ends. And we assume that research efforts (now $33 billion yearly) will continue until there are essentially only two costs left: the first year of life and the last year of life. Diseases will first concentrate into Medicare, and then gradually fade away. There will be many ups and downs before it takes place, but eventually that will be the final configuration. Since there are many programs for health, broken up and overlapping, eventually most of the existing structures will change, merge, or disappear. We started with health costs paramount, but will end with retirement costs dominant, birth and death continuing as appreciable costs. Finally, most of the next century will be spent in transition from what we have now, to birth, education, retirement and death, with education perhaps going its own way.

The Plan. Technically, the plan revolves around birth and death re-insurance, possibly renamed First and Last-year of Life Re-insurance. Assuming this is the final configuration toward which we are working, our new plan should deliberately aim for it, meanwhile coping with the individual changes science forces on us. One lucky thing is that everybody alive has already been born, so it is not so urgent to cope with that transition quite so urgently. That's good, because the transition to last year-of-life will be complicated enough. Re-imbursing Medicare for terminal care costs should reduce the Medicare withholding tax for working people, allowing that amount to be directly transferred to escrowed partitions of individual HRSAs, instead of indirectly through intermediaries. Growth of this money in the escrow would be the new money for the system, so the individual must negotiate an income rate with his HSA vendor, at least matching the Medicare inflation rate, before he would be able to accept the system of transfers. However, the amount needed is astonishingly small, since it multiples many times in the process. The transfer, or whatever it is eventually called, of $100 from the withholding tax to the escrow fund at age 25, would generate (at 6.5%) $100,000 at the person's death at age 84. The cost of the last year of life, currently, is said to be $25,000. Paying for the rest of Medicare at current prices might require $300 more. Paying for all of Medicare plus a retirement income from 65 to 84 would depend on what you think is a moderate retirement. But paying an additional retirement of $20,000 a year (amounting to $40,000 per couple) would cost an additional $4000. That's a lot of money, but remember the present total contribution to the withholding tax is $227 billion, or roughly $6800 per worker per year. There's no need for precision in such numbers, but beneficiaries and benefits get added so quickly it is silly to be more precise. The conclusion is obvious that there is plenty of money in this approach. The potential difficulty lies in the transition.

Don't turn your head to spit. Please remember that the secret of this approach is to use two funds gathering income simultaneously from opposite directions. Since 7% income doubles the fund in approximately ten years, using two funds in opposite directions results in doubling the doublings. The success of the venture thus lies in maintaining a reasonable income in competition with your own intermediaries throughout, either through excessive fees or confiscation by the sovereign. Whether the danger is called default, inflation, or outright confiscation, the expression for this is "imperfect agency", and it has endured as long as governments. The only nation with a Constitution to last 200 years can be the only nation to resist imperfect agency, as well. But it won't happen without vigilance. Since some of the religious divines in my own family tarnished their record, the advice they give in Texas is, "Don't turn your head to spit."

There's a deficit in this system, occasioned in 1965 when generations of new Medicare recipients (like my own mother) were given Medicare without contributing to its costs. Congress will have to decide how to cope with this, possibly by absorbing it, possibly by taxing heirs of the beneficiary (like me), who will probably protest about ex post facto. If that approach is blocked, the new investment money will have to be taxed for it, somewhat delaying its benefits. However, transition costs are nothing new to Congress, and a variety of methods have historically been applied. This proposal eventually envisions enlargement to include the second-to-last year of life, etc, while the first year of life might even start from birth to age 25. Working from both ends, the transitions should eventually be complete, and Medicare should gradually shrink. So long as the excesses in the system eventually go to support retirement income, it should be possible to grow our way out of the Entitlement squeeze. Its long term hope probably rests on research discovering cures for expensive diseases, diminishing the costs of Medicare, but longevity will also increase, so increased retirement costs must be considered as well. This proposal must be considered a long-term transition plan of uncertain length. Present beneficiaries of Medicare can rest assured that dual systems are practically inevitable for quite some time.

It is the present intent to regard the Affordable Care Act as revenue-neutral, since it is not possible to predict what it will actually be. So the problem of the first-year-of-life may not need to be addressed immediately, but ultimately the plan is to over-fund the last-year costs by about $400 (sound familiar?) and distribute $100 to funding newborns by inheritance at the death of what would be their grandparent, reserving the remaining $300 for the last-year of their parents. To make all of this come out right, the present 2.1 births per mother would translate into $200 per child generation and $400 per grandchild generation. But there are four grandparents, so it remains $100 apiece per grandchild.

Let's now turn to health insurance for newborns, which pose new difficulties.

A most interesting website, thank you. I really hope to visit Philadelphia one day, and I shall definitely consult your website. I came across this website after doing a search on Johannes Kelp / Kelpius. I had just listened to a song written about him called, 'Sighisoara' at ukuleleroadtrips.com. Sighisoara is the place J Kelpius left for Philadelphia with 40 followers. Best Regards
Posted by: Pamela   |   Aug 20, 2015 11:04 AM
I'm overwhelmed. I'm thinking of a one-line poem by William Blake: "Enough or too much" " stragglers who live from 85 to 91." Sorry to be a burden, but soon to be 91 I can still go a couple of rounds without huffing and puffing. You remind me of Dr. Melvin Konner.... professor.... anthropologist..... physician.
Posted by: Martin   |   Sep 27, 2014 5:16 AM
I want to thank you for this wonderful resource. I find it fascinating. May I offer one correction? In the section "Rittenhouse Square Area" there is reference to the Van Rensselaer home at 18th and Walnut Streets and its having a brief fling as a club. I believe in 1942 to about 1974/5 the Penn Athletic Club was located in the mansion. The Penn AC was a good club, a good neighbor and a very good steward of the building - especially the interior. It's my understanding that very unfortunately later occupants gutted much of the very well-preserved original, or close to original, interiors. I suppose by today's standards the Van Rensselaer-Penn Athletic Club relationship could be described as a fairly long marriage. The City of Philadelphia played a large role in my life and that of my family, and your splendid website brings back many happy memories. For me and many others, however, there is also deep sadness concerning the decline of so much of the once great city and the loss of most of its once innumerable commercial institutions. Please keep-up your fine work. Your's is a first-class work.
Posted by: John D. Mealmaker   |   Aug 14, 2014 2:24 AM
Dr. Fisher, The name Philadelphia University was adopted in 1999, as you write, but the institution dates to 1884 and has been on School House Lane since the 1940s. It acquired the former properties of the Lankenau School and Ravenhill Academy, but it did not "merge" with either of them. I hope this helps when you update your site.
Posted by: David Breiner   |   Jun 11, 2014 10:05 PM
Hello Dr. Fisher, I was looking for an e-mail address and this is what I could find. I must tell you my Mother who you treated for years passed away last May. She was so ill with so many problems. I am sure you remember Peggy Marchesani. We often spoke of you and how much we missed you as our Dr. You also treated my daughter Michele who will be 40. I am living in the Doylestown area and have been seeing the Dr's there.. I just had my thyroid removed do to cancer. I have my fingers crossed they get the medicine right. I am not happy with my Endochronologist she refuses to give me Amour. I spoke with my Family Dr who said he will take care of it. I also discovered I have Hemachromatosisand two genetic components. I have a good Hematologist who is monitoring me closely. I must say you would find all of this challenging. Take care and I just wanted to convey this to you . You were way ahead of your time. Thank you, Joyce Gross
Posted by: Joyce Gross   |   Apr 4, 2014 2:06 AM
I come upon these articles from time to time and I always love them. Is the author still alive and available to talk with high school students? Larry Lawrence F. Filippone History Dept. The Lawrenceville School
Posted by: Lawrence Filippone   |   Mar 18, 2014 6:33 PM
Thank you for your articles, with a utilitarian interest, honestly, in your writing on the Wagner Free Institute of Science [partly at "...blog/1588.htm" - with being happy to post that url but the software here not allowing for the full address:)!] I am researching the Institute, partly for an upcoming (and non-paid) presentation and wanted to ask if I might use your article's reproduction for the Thomas Sully portrait of William Wagner, with full credit. Thanks very much for any assistance you can offer here. Josh Silver Philadelphia
Posted by: Josh Silver   |   Jun 2, 2013 1:39 PM
Thank you for your articles, with a utilitarian interest, honestly, in your writing on the Wagner Free Institute of Science [partly at "...blog/1588.htm" - with being happy to post that url but the software here not allowing for the full address:)!] I am researching the Institute, partly for an upcoming (and non-paid) presentation and wanted to ask if I might use your article's reproduction for the Thomas Sully portrait of William Wagner, with full credit. Thanks very much for any assistance you can offer here. Josh Silver Philadelphia
Posted by: Josh Silver   |   Jun 2, 2013 1:39 PM
George, Mary Laney passed away last November. I was one of her pall bearers. She had a bad last year. However, I am glad that you remembered her and her great work. I will post your report at St Christopher's and pass this along to her husband Earl. Best wishes Peter Hunt
Posted by: Peter Hunt   |   Mar 28, 2013 7:12 PM
Hello, my name is Martin. I came across [http://www.philadelphia-reflections.com/blog/1705.htm] and noticed a ton of great resources. I recently had the honor of becoming a part of a new non promotional project on AlcoholicCirrhosis.com. We decided to put together a brief guide about cirrhosis, and the dangers of drinking. We have received a lot of positive feedback and I wanted to suggest that we get listed on the above mentioned page under The National Institutes of Health. Let me know what you think and if you have any further requirements or suggestions.
Posted by: Martin   |   Jan 1, 2013 8:51 AM
Posted by: SUSAN WILSON   |   Aug 12, 2012 12:49 AM

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