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American Healthcare
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Although Congress is offering several thousand pages of proposals for healthcare "reform", none of them even mentions the three main difficulties, to say nothing of fixing them. Let's be terse about this:
1. Health insurance is fine, but if you make it universal, there is no impartial way to determine fair prices. Somebody must haggle with the vendor in order to introduce the issue of what is the service worth? The customer doesn't care what it costs to make, or whether the vendors are being paid fairly. If everyone is insured, no one cares what it costs. Not only do all costs rise, but they rise without coordination, without a sense of what each component is worth, relative to alternatives.
2. Employer-based insurance is fine, but it ends when employment ends. You just can't stretch employment-based insurance because you can't stretch employment.
3. State Medicaid programs are fine, but just about all fifty states are going broke trying to pay for it. Extending it to more people by raising the income limits just makes things worse. Items 2. and 3. are related. Trying to do both -- expand Medicaid as employment shrinks -- during a recession is incomprehensible. Item 1. (price confusion) gets drawn into this because the States try to pay less than it costs, hoping to shift the deficiency through hospital cost-shifting, utterly confounding the information which prices provide. The doctors have no way to tell which is the cheapest approach to a problem, so they don't try. Without control over prices, we can only control volume.
That's really all there is to this mess. Not one word of the current legislation even mentions these problems, so of course the legislation blunders. Even a child can see that compulsory expansion of benefits to universal coverage will fail if you can't pay for what you already have. No one will make sacrifices for a new system if the sacrifices seem futile. They are futile, so leave me alone.
The current administration has been compared with bank robbers who see they are trapped and decide to shoot their way out. Let's see them try to shoot their way past the first Tuesday after the first Monday in November.
Warning: Crowd-Out. When Health insurance was still a novelty, sickness and health seemed like a lottery. With time, it became apparent that about half of healthcare costs were routine, particularly if you view the cost of being born and the cost of that dreadful last year of life as 100% certain for everybody. In this book, we gradually evolved a system which is about half insurance, half pre-payment. Bear with a little repetition: medical costs are crowded near the end of life, concentrated in people who are no longer working. That is an advantage when you imagine a method of saving in advance because a considerable cost reduction will result from investment and compound interest coming early, while heavier expenses come late. By instituting a "pay as you go" system at the beginning of a huge scientific reduction in disease, "pay as you go" managed to survive for fifty years. Meanwhile, the pre-paid system we have conjectured would have done much better, because increased longevity compounds investments for a longer period of time. Health pre-funding seems to be the better approach, no matter what happens to the science of medicine. That may not be true if non-medical forces dominate the next century of the environment of health care, but at least this point seems settled.
That's one way of looking at health costs, but it is also possible to see them as part of a huge transfer system between generations, which will endure under any set of circumstances. The really sick people are often unable to pay for themselves out of current earnings; that's the old retired generation. Working people in a younger generation are better able to pay, but they mostly aren't sick. Since there is essentially no one else left, working people must simply face up to paying for sick people, under any system it is possible to devise. To acknowledge those facts isn't a sign of being compassionate, it's a sign of common sense.
And there is one more fact of the matter: most people simply don't trust an implicit promise of repayment "when their turn comes", fifty or more years later. Governments develop more urgent priorities, like national defense, which for thousands of years repeatedly diverted loose cash to new projects. Regardless of motives or promises, experience teaches that governments are unreliable custodians of private wealth. Experience, therefore, suggests it might be best to exclude routine medical costs from a government-run system, thereby enhancing public protectiveness for what is left. If circumstances force routine costs to be included, the long-run strategy should endure: try to transfer such costs back to the private sector, and if possible back to individual responsibility whenever that does become feasible. Don't let government get off cheap when you must ask for its help.
The Medicare Annual Deficit. The present predicament of Medicare offers a particularly vivid example. Medicare is popular with everyone, so popular indeed that many wish to convert the whole medical system to "single payer", which is to say: put everyone on Medicare. Unfortunately, the reason it is so popular is exactly the reason we can't continue it; it's at least fifty percent subsidized, and the government is running out of borrowing power to cover it. In 2011, Medicare spent $550 billion, but its total revenue was $530 billion. That leaves the impression that Medicare debt only increased by $19 billion. Unfortunately, $223 billion of its "revenues" were "transfers from general revenue", which is to say: deficits ten times bigger were made up from general tax revenue. The government borrowed this money, incidentally depleting the so-called trust funds of $19 billion, for a total program deficit of $242 billion. Distributed over the 48 million Medicare beneficiaries, that's an average yearly deficit of over $5000 apiece. The average Medicare subscriber meanwhile shares in Medicare expenditures amounting to about $10,000 a year apiece. (Medicare expenses $10,000 a year per subscriber, program revenue only $5000.) No wonder it is popular. Indeed, since the Department of HHS reports that hospitals across the country routinely surcharge their audited costs by 400% in their claims charges (and patient bills), the public is easily under the illusion that it gets $50,000 of services at a cost to themselves of only $5,000. But the ratio of charges to costs is another matter entirely, taken up later. The point here is that there is a $5,000 subsidy, per Medicare subscriber per year, and there are about 50 million subscribers. These are 2011 statistics; the subsidy is constantly growing, is now the largest domestic contributor to the national deficit, and Obamacare may or may not make it worse.
In 1965 it was possible to look at these matters with more tolerance. In the first place, America had enjoyed a favorable balance of trade with the rest of the world for twenty years since World War II, and could not be expected to realize this balance was about to turn negative, apparently forever. Medicare was then new and untested, and the employer-based insurance community argued strongly and effectively that it had done its fair share without government subsidy. So, it seemed fair for the government to act as payor of last resort for the unpredictable costs of starting the system with a large cohort of elderly -- who immediately had Medicare costs but no prior opportunity to pay any Medicare payroll withholding taxes, the main source of new funds for the program. There had to be a way to pay for the indigent elderly, and the startup costs; and to get it through Congress. Presumably, it was planned to make adjustments and creep up on the deficit, but it never happened. So the designation of "transfers from general revenue" as a revenue source instead of a liability was not an accounting accident or illegal; it was just the complicated new system making optimistic guesses about the future, and guessing wrong. From the beginning, a well-intentioned design generated unsustainable deficits, and no one had the heart to say so. Now that we begin to see we must give up something else to be able to afford to continue on this path, we hear other things are being crowded out. The alternative to facing facts will lead to an unsustainable debt burden, adding force to a recession's artificially suppressed interest rates, potentially leading to a weakened international dollar, eventually raising the unthinkable specter of the dollar losing its status as a reserve currency. It is not necessary to understand monetary policy to understand that an implacable limit to the nation's borrowing -- is beginning to arrive.
When creditors sense they may not be repaid, they raise interest rates, so it gets even harder to "service" the debt. Other valuable parts of the economy cannot pay higher interest rates, so they get "crowded out" of the debt market, or else something they must buy gets crowded out. That's the first sign of serious trouble, and should be taken seriously, because people getting crowded out lose their willingness to help others.
There's another quirk in the law, which may or may not endure. You don't need a linked high-deductible insurance policy to withdraw money from an HSA, but you do need it, to deposit more money. If you take advantage of that, watch out for the rule that you can't have two government plans at once, including Obamacare, Medicare, Medicaid, and Veterans Health Benefits. So it's best to take out the HSA first, then the other insurance. This is such a complicated process, it might very well change, so be sure to ask before taking any action.
In any event, the suggestion seems valid at the moment, that the worst to happen to you is to acquire a tax-deductible account which you aren't entirely free to liquidate until you retire. And it has a health insurance feature which is also tax-deductible to the extent it has been funded, but which can be used to empty the account if you are strapped for money. If you have other sources of funds, it probably would be best to spend the first, since doubly-deductible health insurance is hard to find.
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John Micklethwait
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The London Economist has a new editor, and a new owner. Mickelthwait, the old editor, is now working for Blumberg, and ownership has passed from one corporation to another. The two synchronous events may or may not have anything to do with each other, but the name of Rothschild has more or less vanished. No doubt the new management will change the cover page and format a little, but we must wait for a little to see whether their editorial viewpoint has changed very much. A few token viewpoints will probably continue to be sacred, like support for American foreign policy, and admiration for the British socialized health system. But there is a sign, one change may be significant.
Twice in the last few weeks, there has been a serious discussion in the magazine for serious economists, of the same newly-discovered fact. Whenever the private sector generates strong profits, the Economist sees strong evidence the majority of profits soon appear as increased credit in the real estate sector. Industrial profits transform into real estate investments, in other words. No explanation for this strange observation is offered, and perhaps it is just an observation, without a current explanation agreed by everyone. But after skipping that gap, the observation certainly has the potential to explain much of the cyclicity of markets, offering an explanation of why market upturns are so often followed by real estate crashes. And, if we are lucky, followed by some reasonable proposal for preventing such crashes?
If no one else is going to step forward with an explanation, let me offer one. For the small investor, real estate has long been the only available way to get into speculation on interest rates. A thirty-year mortgage starts with small equity and a large debt, and gradually the borrower becomes a lender. Business schools teach that real estate is "where the rubber meets the road". But seeing a real estate boom, the rest of the market heads for the exits.
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The Economist
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If that's the one-liner we are looking for, it probably neglects the last step. When wealth gets created, by a stock market boom or any other method, most small investors have discovered only one safe and comfortable way to participate. So, having temporarily exhausted that approach, they hesitate. During that period of hesitation, they build up an invisible form of wealth, called credit, which enables them to borrow were before that, they had no credit. The American discoverer of this puzzling concept was Robert Morris, the banker of the American Revolutionary War. And come to think of it, didn't Morris himself encounter bankruptcy and debtor's prison -- from real estate speculation on credit?
So what's new? What's new is that longevity has increased to the point where it is sensible to liquidate the real estate and spend the proceeds on retirement. Having achieved lender status, they then aim to spend their last dime, on the last day of their lives. That seems just perfect, but where have all the credit gone?
This book will appear in print around the time of the November 2016 presidential election, and therefore have little effect on its outcome. I expect the election to polarize both political parties still further on the Affordable Care Act, sucking all the oxygen out of the room, as the expression goes. It is likely to create a sort of lame-duck situation during November and December, no matter who wins. Therefore, I decided to present a book which superficially seems to have little to say about the Affordable Care Act, in order to grasp the microphone first, about health issues which got ignored by the Affordable Care uproar. Even when discussion seems to focus on the A.C.A., trade-offs are blithely apt to ignore "germane-ness". And thus get to issues which have been debated very little, and pass very quickly. This book primarily attempts to do two things to re-focus attention:
1. To draw attention to the Health Savings Account legislation as a fall-back from almost any deadlock. HSA is already enacted, tested, and distributed. If Congress reaches a deadlock, the HSA is existing law, and anybody in a jam can simply go down the street and buy one. It's simple and cheap to get started, is approximately as inexpensive as any other health insurance, and you can discard it whenever you like. (Naturally, I hope people will keep it.)
It does have a few flaws, which I hope Congress might correct. It unnecessarily limits buyers to people who are employed. That seems purposeless to me, while it prevents minor children from being enrolled, limits the deposit of funds to a fixed amount of their own money, and forces people out of the HSA at age 65. Forcing people to drop it as they acquire Medicare, impairs one of its most important virtues, the incentive to apply unspent money to retirement living, just at the time they are likely to retire. Some people will have other retirement sources and time-tables, and wish to defer use of some or all of them. Getting back to children, permitting deposits at birth would add at least twenty years to the compound interest period available preceding retirement, allowing the retirement fund to grow four times as large. Dropping the age and employment limits would not require more than a few sentences of an amendment, and provide maximum flexibility.
2. We also portray universal Health Savings (and Retirement) funds as potentially "a string holding together a necklace of pearls". To do that requires major legislation, going far beyond emergency stop-gaps for deadlocks. It's potentially a program for health, phased in over a century, and including the possibility of even including ACA. Since one Congress cannot bind a successor, it provides a road map through ten or more changes of political control in Washington, adding or subtracting individual programs which sometimes have little relation with each other. As a matter of fact, if an attachment is voluntary, you can have other parallel programs without attaching them, if you prefer.
By happenstance, reform could start with one "pearl" already in place. By the legislation's automatic transfer to an Individual Retirement Account at the onset of Medicare coverage, every subscriber in effect would immediately possess one of the essential ingredients of a lifetime health and retirement funding system. That even generates coherence, symbolizing prolonged longevity as a result of earlier health care. On the other hand, it implies the present configuration of Medicare is perpetual when it already has a number of features which should be changed. Therefore, it is essential to state at the outset that the string, the HRSA, intends to be kept as simple as possible so that amendment complexity is concentrated into the "pearls" themselves. After doing so, the HSA can remain versatile enough to suffice for newborns, mentally handicapped and billionaires, alike. It might provide healthcare for prisoners in custody as well as the marooned Medicare copayment supplements. Some things wouldn't work and can be dropped without upsetting the whole system. The expression is KISS -- which they tell me means keep it simple, stupid.
The basic structure is to divide health finance into two parts, one for everyday routine expenditures, and the other for bare-bones, cheap, insurance -- for people who are too sick in bed to be bothered with haggling over finances. If there is anything left over at age 65, it can be spent for retirement and serves as a life-long incentive to be frugal about health expenses. It's for everybody, not just some demographic group. If the government chooses to subsidize certain groups, then that becomes an independent topic, sharing a common framework, hanging separately from the necklace as it were. At the moment, it's one serious technical flaw is to imply total control over investment policy lies in the hands of any corporation which manages it, leading eventually to suboptimal investment performance for customers. Also, limiting management to visible fees rather than invisible profit-competition should allow plenty of room for shopping between managers.
Having established the basic framework and pointed out its present main -- but correctable -- flaws (management control of investment, and mandatory management participation in profits), we added two potential pearls to the necklace. One is the two parts (80/20) of Medicare with its finances unified, and the other is to provide health coverage for children up to the age of 25. These are both sensitive topics and may take the protracted debate to get the mechanics right. When these two programs have finally got their books balanced by deciding who pays for what, they are ready for voluntary acceptance into HSAs, and they remain eligible to be tossed out if unexpected problems surface, once we get over any notion of infallibility. Balancing the books may include subsidies, but the subsidies for poor or the handicapped must reasonably result in balanced books. It is intended to be an insurance design, not a subsidy originator. A design, not a budget; the government may subsidize as it pleases without changing the design. The government has a right, even a duty, to provide for those who cannot provide for themselves. But deficit financing is not wise: if you are going to subsidize, subsidize the pearls, not the string. This wouldn't eliminate politics, it merely shifts politics to a less dangerous level.
At that point, we now stop detailed planning and merely list seven more "pearls" which might be added on the same terms. They would be special programs for difficult situations, like prisoners in custody, physically or mentally handicapped to the point of not being self-sufficient, and aliens within our borders. We are told the aggregate of these three groups alone is thirty million people.
When it comes time to negotiate the Affordable Care Act, between twenty and forty million more are eligible to become self-financed "pearls" after the ACA finds a way to balance its books. It is not intended to subsidize other subsidies linked to programs. That's the government's job. Unfortunately, the government has tended to raise prices for people struggling to pay their bills by subsidizing other people who cannot. The consequence is even more people cannot afford their own care, threatening to sink the lifeboat for everybody. If we are to subsidize the health care of some part of the population, let the money come from defense, or agriculture, or infrastructure, not from the quality of healthcare of some other person.
To continue the list, additional pearls for the future are the accumulated debts of fifty years of deficits, and the tax deduction-supported gifts of health insurance from employers to employees. I'd like to see some resolution of the mess left behind by Maricopa Medical Society v. Arizona decision of the Supreme Court. As these problems get worked out to be self-sufficient, they become eligible to become "pearls" as long as it remains clear this proposal is not a cross-subsidy vehicle. At the moment, the ACA shows no signs of adding anything to the HRSAs except more deficits, making solutions more difficult to find. Just because we see no end to problems, shouldn't keep us from getting started. In particular, when the ACA is addressed, out goes the oxygen from the room, diverting attention from anything except expedients. That should not be necessary. All of these problems can be worked on simultaneously.
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It is now time to identify the financial maneuvers which promise partial success. It isn't true there is only one principle involved, but there is certainly one main one. Almost all of the magic of money creation in this proposal is provided by stretching out the time for income earning. A longer earning period takes advantage of the rock-solid principle of compound interest rising at the end of its investment period. To return to our oft-repeated formula, money earning 7% will double in 10 years, so 2,4, 8, 16 reaches 512x magnification in 90 years. From age 80 to 90 the money grows 128-fold., so an original investment of $100 grows from $25,600 to $51,200 between the ages of 80 and 90 or $2,560 per year for a $100 investment. That is, it's not growing at 7%; during those last 10 years, it's growing at 256%. And it's not magic, it's just math. Furthermore, it's not new. The ancient Greek Aristotle complained about the unfairness of it because he was seeing it as a debtor. So that suggests a related strategy: wherever possible, position citizens as creditors, not as debtors.
What's new about this whole thing is the extension of longevity. In Aristotle's day, it was considered remarkable to live to be forty years old. In our era, life expectancy at birth is moving from 80 toward 90. So today it's not a pipe dream, it's a realistic strategy. But stretching it out automatically comes with problems, too. There's a greater risk, fifty years of extra opportunity for someone to chisel it from you. History is replete with examples of kings who shaved gold coins, financiers who took more profit for themselves than for their investors, central banks who give you back a penny when you invested a dollar a century earlier. If you win a war, you might emerge better off; but if you lose a war you may be more like the seventy million people who died from wars in the past century, an experience which strongly favors having no wars, but otherwise doesn't seem to change things much. This risk/reward ratio strongly suggests we have neglected the necessary precautions required. So the proposals of earlier pages to balance the Medicare budget, etc., carry the risk that something or someone will come along and divert the money to other purposes. And without planning to forestall that, you have not got a workable plan.
That's the thinking underneath the dispersion of control to individual Health Savings Accounts, just as it is the reasoning behind resistance to consolidated systems of control, such as "single payer" systems as presently described by their proponents. They all just make it easier for your trusted agent to steal bigger amounts of money at one time. William Penn, the richest private landholder in recorded Western history, spent his days in debtor's prison because his steward falsely accused him of stealing the money from him. Robert Morris, the financial savior of our nation, likewise went to debtor's prison while the Governor of his state nearly sprained his hand signing over property deeds to himself. When the Federal Reserve was created in 1913, a dollar was a dollar; now it is a penny. Nobody needs to explain what "pay to play" means. So, although we need much more ingenuity in devising safeguards for savers, we need to grit our teeth and allow some people to fail to take their opportunities. Countless teenagers who might have had a comfortable retirement will instead have the opportunity to smash up their red convertible on the way home from college. We absolutely must not deprive them of this risk, out of sympathy for its consequences. There will be plenty of Huns, Goths and Vandals watching what Rome does with its advantages.
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Suffice it to say a billion dollars will turn anyone's head; Health Savings Accounts are already many times that size in aggregate. Although ownership is dispersed widely, it is only a matter of time before some stockholders organization is formed, ostensibly to protect the interests of HSA owners. There will be an eternal need to suggest tweaks in the law to adjust to new circumstances. There will be a need to monitor the performance of managers, and even to counter the power of regulators. Sneaky little laws will get thrown in the hopper, requiring alarms in the night. Someone who lost money will sue to recover it; someone will have to decide whether to settle or resist in court, ever mindful of precedents being set. Executives will demand extraordinary life-styles; someone will have to decide if their production warrants the rewards. Someone else will have to be fired for incompetence or venality, but he will find many friends to defend him. The methods of selection of the board of directors are vital issues, now and forever in the future. As much as anything, continuous publication of results ("sunlight") is vital to oversight. The directors of the oversight body should have a deep suspicion of the directors of the "pearls" and only limited pathways for promotion between the two. Every time, every single time a dereliction is discovered, the results should be published and morals are drawn. Mr. Giuliani made a name for himself by policing broken windows, and it's still a very sound principle.
There is a financial success, and then there is product quality, which is different. Organizations will undoubtedly be formed to monitor quality, and these will produce measurable monitoring results. An effort should be made to make a meaningful match between these two report cards, with comparable groups having access to each other's data. There should be observers from each discipline on the other's board, and possibly a few voting overlaps. Disparities between rankings in the two evaluations should be explored and evaluated, and at least one annual meeting should be composed of both kinds of boards, devoted to the interaction of cost and quality. This may prove particularly fruitful at moments when scientific advances cause major changes in underlying premises. On another level, dialog should be frequent between research groups like the NIH, to see if research parallels needs..
A particularly interesting comparison might result from contrasting the regions with their 20% copayment partner's performance. They should be very similar, but may not prove to be.
Originally the "lower counties" of Pennsylvania, and thus one of three Quaker colonies founded by William Penn, Delaware has developed its own set of traditions and history.
Start in Philadelphia, take two days to tour around Delaware Bay. Down the New Jersey side to Cape May, ferry over to Lewes, tour up to Dover and New Castle, visit Winterthur, Longwood Gardens, Brandywine Battlefield and art museum, then back to Philadelphia. Try it!
Millions of eye patients have been asked to read the passage from Franklin's autobiography, "I walked up Market Street, etc." which is commonly printed on eye-test cards. Here's your chance to do it.
In 1751, the Pennsylvania Hospital at 8th and Spruce was 'way out in the country. Now it is in the center of a city, but the area still remains dominated by medical institutions.
Grievances provoking the American Revolutionary War left many Philadelphians unprovoked. Loyalists often fled to Canada, especially Kingston, Ontario. Decades later the flow of dissidents reversed, Canadian anti-royalists taking refuge south of the border.