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Richard Arkwright
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The Industrial Revolution had a lot to do with manufacturing cotton cloth by religious dissenters in the neighborhood of Manchester, England in the Eighteenth Century. What needs more emphasis is the remarkable fact that Quakerism and the Industrial Revolution both originated about the same time, in about the same place. True, the industrializing transformation can be seen in England as early as 1650 and as late as 1880. The Industrial Revolution thus extended before Quakerism was even founded, as well as long after most Quakers had migrated to America. No Quaker names are much mentioned except perhaps for Barclay and Lloyd in banking and insurance, and Cadbury in candy. As far as local history in England's industrial midlands is concerned, the name mentioned most is Richard Arkwright, whose behavior, demeanor and beliefs were anything but Quaker.
He seems to have invented nothing, stealing the patents and ideas of others freely, while disgustingly boasting about his rise from rags to riches. Some would say his skill was in the organization, others would say he imposed an industrial dictatorship on a reluctant agricultural community. He grew rich by coercing orphans, convicts and others he obviously disdained into long, unpleasant, boring and unwelcome labor that largely benefited him, not them. In the course of his strivings, he probably forced Communism to be invented. It is no accident that Karl Marx wrote the Communist Manifesto while in Manchester visiting his friend Friedrich Engels, representing reasonably well the probable attitudes of Arkwright's employees. What Arkwright recognized and focused on was that enormous profits could flow from bringing piecework weaving into factories where machines could do most of the work. Until his time, clothing was mostly made by piecework at home, with middlemen bringing it all together. The trick was to make clothing cheaper by making a lot of it, and making a bigger profit from a lot of small profits. Since the main problem was that peasants intensely disliked indoor confinement around dangerous machines, the industrial revolution in the eyes of Arkwright and his ilk translated into devising ways to tame such semi-wild animals into submission. For their own good.
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Charles Babbage
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Distinctive among the numerous religious dissenters in the region, the Quakers taught that it was an enjoyable experience to sit indoors in quiet contemplation. Their children were taught to submit to it at an early age, and their elders frequently exclaimed that it was a blessing when everyone remained quiet, enjoying the silence. Out of the multitude of religious dissenters in the first half of the Seventeenth century, three main groups eventually emerged, the Quakers, the Presbyterians, and the Baptists. Only the Quakers taught that silence was productive and enjoyable; the Calvinist sects leaned toward the idea that sitting on hard English oak was good for the soul, training, and discipline was what kept 'em in line.
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The Quaker idea of fun through daydreaming was peculiarly suitable for the other important feature of the Industrial Revolution that Arkwright and his type were too money-centered to perceive. If workers in a factory were accustomed to sit for hours, thinking about their situation, someone among them was bound to imagine some small improvement to make life more bearable. If such a person was encouraged by example to stand up and announce his insight, eventually the better insights would be adopted for the benefit of all. Two centuries later, the Japanese would call this process one of continuous quality improvement from within the Virtuous Circle. In other cultures, academics now win professional esteem by discovering "win-win behavior", which displaces the zero-sum or win/lose route to success. The novel insight here was that it has become demonstrably possible to prosper without diminishing the prosperity of others. In addition, it was particularly fortunate that many Quaker inhabitants of the Manchester region happened to be watchmakers, or artisans of similar trades that easily evolved into the central facilitators of the new revolution -- becoming inventors, machine makers and engineers.
The power of this whole process was relentless, far from limited to cotton weaving. When Charles Babbage
sufficiently contemplated the punched-cards carrying the simple instructions of the knitting machines, he made an intellectual leap to the underlying concept of the tabulating machine. Using what was later called IBM cards, he had the forerunner of the stored-program computer. There were plenty of Arkwrights getting rich in the meantime, and plenty of Marxists stirring up rebellion with the slogan that behind every great fortune is a great crime. But the quiet folk were steadily pushing ahead, relentlessly refining the industrial process through a belief in welcoming the suggestions of everyone.
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Benjamin Franklin
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CODICIL: I, Benjamin Franklin, in the foregoing or annexed last will and testament named, having further considered the same, do think proper to make and publish the following codicil or addition thereto.
It has long been a fixed political opinion of mine, that in a democratical state there ought to be no offices of profit, for the reasons I had given in an article of my drawing in our constitution, it was my intention when I accepted the office of President, to devote the appointed salary to some public uses. Accordingly, I had already, before I made my will in July last, given large sums of it to colleges, schools, the building of churches, etc.; and in that will I bequeathed two thousand pounds more to the State for the purpose of making the Schuylkill navigable. But understanding since that such a work, and that the project is not likely to be undertaken for many years to come, and having entertained another idea, that I hope may be more extensively useful, I do hereby revoke and annul that bequest, and direct that the certificates I have for what remains due to me of that salary be sold, towards raising the sum of two thousand pounds sterling, to be disposed of as I am now about to order.
It has been an opinion, that he who receives an estate from his ancestors is under some kind of obligation to transmit the same to their posterity. This obligation does not lie on me, who never inherited a shilling from an ancestor or relation. I shall, however, if it is not diminished by some accident before my death, leave a considerable estate among my descendants and relations. The above observation is made as merely as some apology to my family for making bequests that do not appear to have any immediate relation to their advantage.
I was born in Boston, New England, and owe my first instructions in literature to the free grammar schools established there. I have, therefore, already considered these schools in my will. But I am also under obligations to the State of Massachusetts for having, unasked, appointed me formerly their agent in England, with a handsome salary, which continued some years; and although I accidentally lost in their service, by transmitting Governor Hutchinson's letters, much more than the amount of what they gave me, I do not think that ought in the least to diminish my gratitude.
I have considered that, among artisans, good apprentices are most likely to make good citizens, and, having myself been bred to a manual art, printing, in my native town, and afterward assisted to set up my business in Philadelphia by kind loans of money from two friends there, which was the foundation of my fortune, and all the utility in life that may be ascribed to me, I wish to be useful even after my death, if possible, in forming and advancing other young men, that may be serviceable to their country in both these towns. To this end, I devote two thousand pounds sterling, of which I give one thousand thereof to the inhabitants of the town of Boston, in Massachusetts, and the other thousand to the inhabitants of the city of Philadelphia, in trust, to and for the uses, intents, and purposes hereinafter mentioned and declared.
The said sum of one thousand pounds sterling, if accepted by the inhabitants of the town of Boston, shall be managed under the direction of the selectmen, united with the ministers of the oldest Episcopalians, Congregational, and Presbyterian churches in that town, who are to let out the sum upon interest, at five per cent, per annum, to such young married artificers, under the age of twenty-five years, as have served an apprenticeship in the said town, and faithfully fulfilled the duties required in their indentures, so as to obtain a good moral character from at least two respectable citizens, who are willing to become their sureties, in a bond with the applicants, for the repayment of the moneys so lent, with interest, according to the terms hereinafter prescribed; all which bonds are to be taken for Spanish milled dollars, or the value thereof in current gold coin; and the managers shall keep a bound book or books, wherein shall be entered the names of those who shall apply for and receive the benefits of this institution, and of their sureties, together with the sums lent, the dates, and other necessary and proper records respecting the business and concerns of this institution. And as these loans are intended to assist young married artificers in setting up their business, they are to be proportioned by the discretion of the managers, so as not to exceed sixty pounds sterling to one person, nor to be less than fifteen pounds; and if the number of appliers so entitled should be so large as that the sum will not suffice to afford to each as much as might otherwise not be improper, the proportion to each shall be diminished so as to afford to everyone some assistance. These aids may, therefore, be small at first, but, as the capital increases by the accumulated interest, they will be ampler. And in order to serve as many as possible in their turn, as well as to make the repayment of the principal borrowed easier, each borrower shall be obliged to pay, with the yearly interest, one-tenth part of the principal and interest, so paid in, shall be again let out to fresh borrowers.
And, as it is presumed that there will always be found in Boston virtuous and benevolent citizens, willing to bestow a part of their time in doing good to the rising generation, by superintending and managing this institution gratis, it is hoped that no part of the money will at any time be dead, or be diverted to other purposes, but be continually augmenting by the interest; in which case there may, in time, be more than the occasions in Boston shall require, and then some may be spared to the neighboring or other towns in the said State of Massachusetts, who may desire to have it; such towns engaging to pay punctually the interest and the portions of the principal, annually, to the inhabitants of the town of Boston.
If this plan is executed, and succeeds as projected without interruption for one hundred years, the sum will then be one hundred and thirty-one thousand pounds; of which I would have the managers of the donation to the town of Boston then lay out, at their discretion, one hundred thousand pounds in public works, which may be judged of most general utility to the inhabitants, such as fortifications, bridges, aqueducts, public buildings, baths, pavements, or whatever may make living in the town more convenient to its people, and render it more agreeable to strangers resorting thither for health or a temporary residence. The remaining thirty-one thousand pounds I would have continued to be let out on interest, in the manner above directed, for another hundred years, as I hope it will have been found that the institution has had a good effect on the conduct of youth, and been of service to many worthy characters and useful citizens. At the end of this second term, if no unfortunate accident has prevented the operation, the sum will be four million and sixty-one thousand pounds sterling, of which I leave one million sixty-one thousand pounds to the disposition of the inhabitants of the town of Boston, and three millions to the disposition of the government of the state, not presuming to carry my views farther.
All the directions herein given, respecting the disposition and management of the donation to the inhabitants of Boston, I would have observed respecting that to the inhabitants of Philadelphia, only, as Philadelphia is incorporated, I request the corporation of that city to undertake the management agreeably to the said directions; and I do hereby vest them with full and ample powers for that purpose. And, having considered that the covering a ground plot with buildings and pavements, which carry off most of the rain and prevent its soaking into the Earth and renewing and purifying the Springs, whence the water of wells must gradually grow worse, and in time be unfit for use, as I find has happened in all old cities, I recommend that at the end of the first hundred years, if not done before, the corporation of the city Employ a part of the hundred thousand pounds in bringing, by pipes, the water of Wissahickon Creek into the town, so as to supply the inhabitants, which I apprehend may be done without great difficulty, the level of the creek is much above that of the city, and may be made higher by a dam. I also recommend making the Schuylkill completely navigable. At the end of the second hundred years, I would have the disposition of the four million and sixty-one thousand pounds divided between the inhabitants of the city of Philadelphia and the government of Pennsylvania, in the same manner as herein directed with respect to that of the inhabitants of Boston and the government of Massachusetts.
It is my desire that this institution should take place and begin to operate within one year after my decease, for which purpose due notice should be publicly given previous to the expiration of that year, that those for whose benefit this establishment is intended may make their respective applications. And I hereby direct my executors, the survivors or survivor of them, within six months after my decease, to pay over the sum of two thousand pounds sterling to such persons as shall be duly appointed by the Selectmen of Boston and the corporation of Philadelphia, to receive and take charge of their respective sums, of one thousand pounds each, for the purposes aforesaid.
Considering the accidents to which all human affairs and projects are subject in such a length of time, I have, perhaps, too much flattered myself with a vain fancy that these dispositions, if carried into execution, will be continued without interruption and have the effects proposed. I hope, however, that if the inhabitants of the two cities should not think fit to undertake the execution, they will, at least, accept the offer of these donations as a mark of my good will, a token of my gratitude, and a testimony of my earnest desire to be useful to them after my departure.
I wish, indeed, that they may both undertake to endeavor the execution of the project, because I think that, though unforeseen difficulties may arise, expedients will be found to remove them, and the scheme be found practicable. If one of them accepts the money, with the conditions, and the other refuses, my will then is, that both Sums be given to the inhabitants of the city accepting the whole, to be applied to the same purposes, and under the same regulations directed for the separate parts; and, if both refuse, the money, of course, remains in the mass of my Estate, and is to be disposed of therewith according to my will made the Seventeenth day of July, 1788.
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And lastly, it is my desire that this, my present codicil, be annexed to, and considered as part of, my last will and testament to all intents and purposes.
In witness whereof, I have hereunto set my hand and Seal this twenty-third day of June, Anno Domini one thousand Seven hundred and eighty-nine.
B. Franklin.
Sad Aftermath
Extracted from a printed Report of the Committee of Legacies and Trusts, made in the Common Council of Philadelphia April 27th, 1837, by Mr. John Thomason, chairman of the Committee.
"From official returns, it appears, that up to the 1st of January, 1837, the fund has been borrowed by one hundred and ninety-three individuals, in sums mostly of $ 260 each. At that date, the fund was in the hands of one hundred and twelve beneficiaries, of whom nineteen have paid neither principal nor interest, although the accounts of some of them have been open for a period of thirty-four years. Ninety other persons stand indebted in sums from $ 21 to $ 292; and three, having borrowed within the year, were not, at the last-mentioned date, liable to any demand by the trustees. Of these one hundred and nine cases of non-compliance with the terms of the will, fifty-eight bonds may be subject to a plea of the statute of limitation, and the rest is still valid. In this condition of the fund, it becomes difficult to estimate its present value. Should all the debts be recovered, the amount of the fund would be $ 23,627.09; but, from the length of time elapsed since the date of many of those bonds, such a result is hopeless; and even this latter sum, large as it is, is below the amount it would have attained at this time had the intentions of the testator been fully carried out. The original bequest of $4,444.44, at compound interest for forty-five years, would be $ 39,833.29 ; and, although the immediate conversion of interest into principal, as the former becomes due, is not always practical, yet it is believed, that, with careful management, the fund would, at this time, have lacked but little of that amount. How far the fund falls short, may be partly judged from the actual receipts on account of this legacy for the last ten years. During that time the sum of $ 16,191.92 has been paid in. As this period included the term for lending out, and receiving back with interest, the whole fund, the receipts within that term may be taken as a safe approximation to its real value; to which must be added the sum to be obtained through the enforcing of payment, by legal process, from such securities as may be good at this late day. Had the fund been placed at simple interest, it would have amounted to the last-mentioned sum by this time.
"Had the requirements of the will been, in former years, fully complied with, the operation of the fund, at this day, would be sensibly felt by the mechanics of Philadelphia. Passing from one borrower to another, and increasing in a compound ratio, its effect would be to stimulate useful industry, which, without such capital, would have remained unproductive. It would have increased the number of those who do business on their own stock. It would be a standing lesson on the immutable connexion between capital and productive industry, thus constantly inciting to economy and prudence. It would have become the reward of every faithful apprentice, who could look forward to a participation in its benefit. It is deeply to be regretted, that this state of things, which had so captivated the imagination of Franklin that he devoted a portion of his hard-earned wealth to realize it for the mechanics of Philadelphia, should, in the emphatic language of his will, prove 'a vain fancy. ' "
By this statement it would seem, that there had been at some time a remarkable want of fidelity in administering the trust, especially in allowing so large a number of bonds to become worthless by the statute of limitation, and neglecting to make reasonable- demands upon the sureties.
Appended to the same report is a letter from Mr. William Minot, treasurer of the Franklin Fund in Boston, dated December 23d, 1836, which contains the following state, of the fund in that city.
"The whole number of loans from this Fund," Mr. Minot says, " from May 1791 to the present time, has been 255, in sums varying from 70 to $ 266 up to the year 1800, since which time they have usually been 200.
"From July, 1811, to the present time, the number of loans has been 91, of which 50, at least have been repaid (in whole or in part) by sureties, and on four of these are balances which cannot be collected, both principals and sureties being insolvent.
" Dr. Franklin's donation was Pound 1,000 sterling. The present value of the Fund is as follows;
"Estimate of 13 bonds, considered good, 1,428.68
"Amount deposited, on interest, in the office of the Massachusetts Hospital Life Insurance Company, 22,739.00
Cash in the hands of the Treasurer 158.15
$24,325.83
"It is apparent, from these facts, that the benevolent intentions of the donor have not been realized, and that, in the present condition of our country, it is not advantageous to married mechanics, under the age of twenty-four years, to borrow money to be repaid in easy installments, at a low rate of interest; and the improvidence of early marriages, among that class of men, may fairly be inferred.
"The great number of instances, in which sureties have been obliged to pay the loans, has rendered it not so easy, as formerly, for applicants to obtain the required security. This is proved by the small number of loans from the fund, averaging for the last five years, not more than one a year.
"Until within the last twenty years, no great care was taken in accumulating the fund. It is now carefully attended to; and money not required for actual use is placed in the Life Insurance Company, where it increases at the rate of about five and one-third percent a year.
"The loans are made at the rate of five percent, but, on installments past due, six percent is charged, from the time they were payable, and the bonds of delinquents are put in a suit after reasonable notice. Two sureties, at least, are required on each bond."
According to the treasurer's return on a lot of January 1840, the amount of the fund in Boston was at that time as follows.
Deposited in the Life Insurance office, 26,595.64
Bonds for Loans 1,846.35
$28,441.99
At present, the Classical variety of Health Savings Accounts is reported to have 15-17 million subscribers and 25 billion dollars deposited. It seems to be growing at the rate of a million new subscribers a year. Let me confide it is very satisfying to discover millions of people are intrigued enough to commit money to an idea John McClaughry and I put together thirty years ago. It happened without any money of our own devoted to promoting it, and from which John and I have derived no personal gain. I even have an eventual goal, which requires some legislative help to get going. It's called the Lifetime Health Savings Account. It builds on the original idea of the year- to- year Classical HSA, but follows the whole-life insurance plan, so familiar to purchasers of life insurance. It is, to lifetime health care, what whole-life life insurance is to term insurance. A single lifetime marketing effort, internal professional investing of its float, early overfunding followed by later distribution of surpluses.
However, you can't buy lifetime health insurance right now, and won't be able to, until certain laws are modified. Furthermore, the various steps will take decades to come together into a unified lifetime demonstration. Therefore, two strategies were tried out. The first was to omit some steps and work around The Affordable Care Act as if it didn't exist. That's easier on paper, called the New Health Savings Account (N-HSA), but takes just as many decades to prove itself, and is forced to surrender much of the financing cushion which gives it a safety factor. Therefore, it is only included in the book to display some of the hidden technical features which tend to make it workable. These details are then extracted like pearls from oysters and strung into a necklace of ideas. The eventual outcome is the last chapter of the book, which is able to refer to these pearls as if the reader is familiar with them. Which he will be if he reads the book sequentially, and which he can be if he refers back to the sources in other chapters in other guises. The result is a description which is quite simple, but each feature of which has explanations which are not entirely self-evident.
If I started over and re-wrote the whole book, it would be much smoother. However, I made a conscious decision to sacrifice smoothness, in order to get the book into the national debate in time to make an impact. Even now it seems a little late, while many fast-breaking events just have to be ignored because there is no time to include them. It's the primary difficulty, for which I apologize, is the math of the examples keeps changing.
Meanwhile, I decided two things: to go ahead with the book with its final goal largely sacrificed to immediate needs. And, to prepare an interim, or new, Health Savings Account proposal. The new proposal would go ahead with a few advances toward Lifetime Health Savings Accounts which might be acceptable enough to political combatants to pass Congress, but which could advance the concepts of Lifetime HSA through some experimental stages. Even that proved too ambitious because It would require decades to prove the concepts by example. So it was stripped down some more, creating the last chapter of this book. Instead of taking a few ideas and struggling with them for a lifetime, I finally came to the view that a lifetime was a series of events, some of which worked out, and some didn't. Like a string of beads, I finally strung them together, recognizing that some would have to be replaced. Essentially a pilot study of proofs-of-concept, it prepares the way for more grandiose plans after most demonstrated flaws had been cleaned up. I called it New Health Savings Accounts (N-HSA) and thought it would work to include all of the healthcare except for age 21-66. Although that would cover 58% of health costs, it would not conflict with the Affordable Care Act, and might eventually seek greater compatibility as the ACA evolved. If the ACA got thrown out, it would be a concept prepared to take its place, without tumbling us into healthcare chaos. But until some upcoming elections clarified where the public stood, the two ideas could essentially stay out of each other's way.
A description of N-HSA follows in this section. Because the calculations of the Lifetime goal-model showed L-HSA could generate considerably more money than required, I was misled into thinking abbreviated N-HSA would generate ample funds. That turns out to be only narrowly true, and it has such a thin margin of safety that a major war or a major recession would probably sink it before it had enough public support as a pilot study. That didn't stop Lyndon Johnson from going ahead with a program which was only 50% funded, together with a Social Security program which has a similarly bleak balance sheet, and a Medicaid program which is a notorious failure to do a good job or to come close to paying for itself. But those were different times. In 1965 the international balance of payments of the United States had been positive for 17 years in 1965 but has been steadily negative for fifty years subsequent to that time. It shows no sign of improving. The Vietnam semi-revolution destroyed Lyndon Johnson's political career in the Sixties. His entitlement programs lingered on as unsupportable public generosities for fifty more years, but they simply must change if we are to survive as a nation.
The Health Savings Account is based on a different set of fundamentals. We have saved enormous sums by stamping out thirty diseases but at a different sort of cost which has increased as we extend our generosity to essentially everybody, even non-citizens. We have created a tidal wave of rising expectations which even the most optimistic surely cannot imagine can continue indefinitely. And a rising rebellion of envious foreigners with nuclear capability, and an unstable monetary system without any definable standard; which puts us at the mercy of ambitious foreign rulers. And yet, we continue to throw huge amounts of money at research, in a typically American mixture of hope and calculation. We have narrowed most medical costs to about five chronic diseases: cancer, Alzheimer's, diabetes, Parkinsonism and self-inflicted conditions, and we aren't going to stop until those five conditions are cured. Nobody told us to do such a thing, but everybody secretly hopes it will work. If we eliminate diseases, well, everybody can then afford not to pay for them. Unfortunately, it created a bigger, unanticipated, problem.
We bifurcated medical payments into three compartments: working people age 21-66 who earn almost all new wealth, but most don't get very expensively sick. Secondly, the elderly from 66-100 who don't earn much money, but increasingly have all the expensive diseases. And third, the children from birth to age 21, who only consume 8% of the health care costs, but who have no opportunity, either to pre-fund their costs or to earn enough to pay for them. This third group, as I found out, unexpectedly upset almost all plans for comprehensive care, cradle to grave. Rich and poor folks, about whom we have heard so much, are distributed within these three groups. What we have mindlessly created is the need for an enormous transfer of wealth from the people who earn it, to the rest of the nation, who have most of the disease and little of the earning power. This wealth transfer is just more than the generosity of the country can comfortably support, and it's been growing steadily from President Teddy Roosevelt to President Barack Obama.
My concept, right from 1980 onward, has been to find a way for individuals to store up their own wealth while they are working so they can support their own costs when they grow older. Doing it by demographic classes is too much altruism to tolerate -- just listen to what young people are saying about their lucky elders, and to what the baby boomers are saying about the millennials. The nick-names will change, but that's the way all interest groups talk about each other. I had assumed medical science had already reduced the disease burden to the point where self-funding your own old age -- in advance -- would cover a majority of the population. But I now have to admit we are only part-way. Enough volunteers would probably support N-HSA to make the experiment a success in normal times, but it doesn't have enough cushion to be completely confident it could survive a war or a depression. Every time we make a scientific advance, the day of feasibility comes a little sooner. So, it boils down to whether you are willing to take the risk now, or not. I'd like to see a pilot study of volunteers iron out the kinks, first. But a great many impatient people are boiling to take the risk right now, and if we are lucky on the international and economic level, it might work. Every bull market "climbs a wall of worry." If we approach it more gradually, it is more certain to work. Judge for yourself.
The book before you is not a list of dooms and glooms, it turns into a proposal. A proposal to preserve a functioning society by regarding child, parent, and grandparent as different stages of the same person's life, with united interest in the same goal. The same goal, even for a newborn, is a comfortable retirement. While it speaks exclusively to paying for healthcare, the same principles apply to any useful but expensive commodity. That is, as much as possible, individuals subsidizing themselves at different ages rather than members of three different classes of strangers. We build upon the idea of a Health Savings Account, one account per person throughout one lifetime, as a financial way to emphasize the underlying social point. If you spend too much too early, you won't have much left for later. That sounds far less obvious when it appears within separate compartments, with separate sources of funding. Separate sources have their own budgets coming first in their minds. They compete with each other for the same money, if they can.
This unification proposal -- Pearls on a String -- is voluntary, you don't have to do it, or even part of it, but in some ways, that's another advantage. True, there is no escaping the use of insurance for unexpected catastrophes, but really, only an insurance salesman would argue for unlimited insurance for everyone, all the time. Only someone who knows very little about insurance would believe insurance is a way of printing money for the customer. Compulsory also means uniform, government-issue. Voluntary, by contrast, isn't a one-size-fits-all commitment and doesn't dump 340 million subscribers onto inadequately tested systems, all at once.
Whether voluntary or mandatory, however, some facts are just part of life. Almost completely, the working generation must subsidize its older and younger generations, but it would do it better with a focus on the same individual at different ages, instead of by whole categories of strangers. For a final twist, we unexpectedly propose to empower solutions by leveraging a new problem we scarcely noticed we had (prolonged longevity and retirement). It isn't a trick; in retrospect, everything looks as though it might have been predicted.
Three New Potentials. Curiously, the Health Savings Account had to be tested before it could be fully understood even by its originators. A bit of history may help explain the delay. The basic concept of Health Savings Accounts was developed in 1981 by John McClaughry and me, while John was Senior Policy Advisor in the Reagan White House. Derived from the IRA concept developed by Senator Bill Roth of Delaware, it started as a Christmas Savings Account, to save up for the approaching deductible of (high-deductible) Catastrophic health insurance -- which was to be linked to it. So from its beginning, there were two linked features: (1) high-deductible health insurance, and (2) a medical variant of an Individual Retirement Account (IRA). For those unfamiliar with insurance jargon, a high "front-end" deductible policy connotes the insurance company only ensures that part of a medical bill which is greater than the stated deductible amount.
Since this automatically means the higher the deductible, the lower the annual insurance premium; high deductible policies are the cheapest you can buy. When the Affordable Care Act was passed, all health insurance was required to have a "high" deductible, so the HSA idea then seemed moot. But a high deductible by itself isn't enough. Without the savings account attached to it, the client can't easily separate risk protection from pre-payment, or for that matter inpatient costs from outpatient ones. Ideally, the level of the chosen deductible is the result of tension between a high level to please the insurance company, and a low level to attract the customer. Call it luck or call it planning, a high deductible separates inpatient from outpatient, market prices versus fixed ones, optional costs from unavoidable ones, prevention from treatment, and risk protection from pre-payment. Out of these segregations, remarkable things can be achieved. The one danger is that the deductible might fail to change with circumstances. The divisions are set by the market balance between customer and provider and are rough ones. If either side succeeds in freezing the deductible, its underlying significance could disappear.
The higher the deductible, the lower the yearly insurance premium.
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After experience in action, a totally new realization dawned that -- once the two parts became semi-independent -- the real deductible just becomes the unpaid portion of it. The unpaid portion of the deductible is now situated in the account, ultimately becoming zero -- but now the insurance premium no longer rises as the remaining deductible declines. Not at first but eventually, the HSA emerges looking like "first-dollar coverage" for the same low price as high-deductible insurance. The truth is, you have two insurance policies, one owned by the insurance company, and the deductible, which is self-insured, owned by yourself.
You can be as frivolous or as frugal as you please, within the self-insured deductible. The insurance could care less which it is. A great many people have no medical expenses for a whole year, so they get to keep all of it. Someone else could spend it all. Another way of saying this is, saving for the deductible has shifted into the customer's own hands without shifting any extra burden onto an insurance company. A mandatory expense now transforms into part of his disposable income. Frivolous (ie small) expenses are self-insured; necessary ones (ie expensive ones) are insurance-insured. It wasn't exactly the deductible that saved money, it was the new-found ability to exclude non-essential expenses if you chose to.
A second realization emerges from the tendency of non-insurance HSA managers to use debit cards for medical reimbursement, instead of insurance claims forms. (This freedom may well be a consequence of concentrating frivolous expenses into the deductible.) Although in the absence of strict scrutiny there might well be more temptation to cheat, a debit-card system depends on the client to howl if he suspects his money is being mis-spent. Otherwise, it will be lost. (When you spend a third party's money, there's less concern than in spending your own.) A decline of policing cost might even be said to expose a lack of overall effectiveness of the third-party approach to policing of claims. Since it is obviously more costly to police than not to police, that particular hidden cost of using third parties only emerges after it gets eliminated. (This same reasoning applies to a diagnosis-based payment for helpless hospital inpatients, a related issue which is now segregated into the insurance compartment of HSAs, but crippled by the crudeness of its DRG coding system.)
The foregoing describes two potentials, broader coverage, and less administrative cost, but an even more gratifying development might be a decline in elective claims, despite the reduced cost-containment effort. This is harder to prove, but highly likely. At first, this likely saving seemed attributable to the ("adverse") selection of unusually frugal applicants. But over time, a more likely incentive emerged: added provisions of the HSA act permitted any surplus remaining at age 65 to be turned into an Individual Retirement Account. That is, an incentive was created to save health money for retirement, by substituting personal responsibility for insurance company vigilance. All in all, it would not be a bad outcome. So far as I know, it is the only form of health insurance which has this feature, which every one of them ought to use, by means of attaching their "bead" to the "string". All other health insurance returns a surplus to lowering the costs for others; that only works if you never change companies, and even then, the temptation of management to skim it is undeniable.
The second implication of this third zinger in the system took even longer to sink in because nobody wanted to believe it. It suggested our path might never lead us out of the financial hole we were in. Not eventually, but never. The situation was this: As improved health care spread among the elderly, the elderly lived longer. Gradually and grudgingly, it was acknowledged
extended longevity was a hidden cost of Medicare, unanticipated perhaps, but universal. Its pain first started to hurt beyond the insurance boundary, accounting for the delay in recognition of the link. There was Social Security, of course, left in the dust of thirty years of longevity added since 1900. Increased longevity was first discovered as destroying the attractiveness of defined-benefit retirements. But as it became acknowledged that good health and longer longevity were two manifestations of the same effort, the doubled cost began to be seen as insupportable. What's worse, the future cost of retirement is even harder to specify that the future cost of health care, because everyone has his own definition of a "decent" retirement. Underfunded retirement is an even stronger incentive to watch your pennies than a specified one because there is absolutely no one, not even that demonized one percent of rich folks, who can be certain there will be enough money left at the end, to last out his lifetime. Wasn't that combined incentive enough to get everybody's attention?
HSAs are the only health insurance with the incentive to save for retirement whatever you don't spend for healthcare.
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The Driving Force. For the purposes of this book, the power of that unfunded retirement incentive was the HSA's most important new insight. Almost anybody could tell at a glance the high cost of Medicare was what stopped "single payer" in its tracks, what paralyzed Congress on healthcare, and defied solutions from any other direction. Medicare was the "third rail" of politics -- touch it and you're dead. But with a retirement entitlement looming behind it almost making Medicare costs seem laughable, it was a new ball game. Once retirement begins, retirement savings get steadily depleted, whereas serious health costs are usually episodic. Both begin at the same time.
Six conclusions emerge:
1. The Health Savings Account, as is, is quite adequate (if funded, of course) to cover healthcare costs in replacement of existing health insurance. It's surely cheaper, although possibly not as much as the 30% reported in early trials. There are several reasons why that should always remain the case, although it does require more management by the customer. It is entirely suitable for intermittent use as employers and government programs change.
2. The HSA already contains the mechanism of the customer funding up to its present $3400 yearly limit, with annual cost of living adjustments but excluding the cost of the attached health insurance, gathering investment income for decades, and turning it over at age 65 as an IRA retirement fund. In honor of this feature, it is proposed to rename HSA to HRSA (Health, and Retirement, Savings Account.) As such, it would supplement any other retirement source but could stand alone. Its main flaw is easily corrected; the law limits coverage to employed people. No children, no supplements after age 65, but that would be simple to fix. There is a political risk in allowing the annual deposit limits to be at the mercy of changing political administrations.
3. New means of investment, such as passive investment of total market index funds, seem as safe as most investments now offered. Cheaper ways to increase effective returns should be explored, particularly in dividing returns between HSA management and their customers. I suggest published "fee-only" arrangements would give the public a chance to shop around. Later on, ways might be explored to balance voting power in health companies against the medical prices reflected in the price of their stock. Demonstration projects might be in order. Present owners of HSAs will probably be shocked to hear the total market has averaged 11% returns during the Obama eight years; how many HSAs paid customers more than 3%?
4. With minor legal adjustments, the HSA could serve as the investment conduit for: surplus generated by Medicare, a proposed Childhood Transfer System, an end of life reinsurance system (to be described), and any other health program which changes its proposals to transfer surpluses to retirement, as an incentive to become a frugal shopper. For the time being, however, it is intended to remain entirely independent of the Affordable Care Act until politics clarify.
5. The ultimate goal is to construct a lifetime framework for HSAa, to serve as a financial vehicle for connecting all health plans around a common investment and retirement framework. It might easily include such things as bounties for below-average health expenditures and rewards for superior performance of other sorts.
6. The longer-term goal is to re-arrange pieces of this network to increase investment returns, starting with Medicare (see below), Last Four Years of Life Reinsurance and First Twenty-five Years Gift Transfers, with the rest of life added, accordion-style. These terms should become clearer after later discussion.
In the existing environment, third-party reimbursement of healthcare now stands in the road of everybody's retirement, by being disjointed. That's not to suggest unifying whole programs, an overwhelming task, but merely to unify their transfers and their retirement termination, as well as the age and employment limitations of individual pieces. So long as left-overs ultimately belong to the individual, and the separate pieces are all available for compound interest along the way, the affiliations can be quite loose. On the other hand, if further program integration seems cost-effective, nothing stands in its way.
Medicare's financing problems might even become a symbol the problem was not just a lobbying benefit to be defended blindly by its current beneficiaries. Increased retirement cost was, in short, an overlooked cost of health care all along, and anyone who stood in the way of coordinating things has misjudged the ultimate necessities. Standing closest to retirement, Medicare is in fact the very first program you must change. But you better do it very carefully. And by the way, you better do it pretty soon.
Fortney P. Stark Chairman
Subcommittee on Health
Committee on Ways and Means
United States House of Representatives
Re: H.R. 4951: Mandatory Health Insurance and /or Risk Pooling
This testimony is offered in response to your invitation for public views on mandatory employer health insurance benefits and contributions to a health insurance risk pool. Testimony at the August 9 hearing covered many essential issues in this problem and described most economic interests likely to be provoked. However, I am moved to further testimony through observation that three important issues were unmentioned, and by the reflection that the provider community is likelier to encounter some aspects of health problems of the uninsured population than are employers, unions, and insurers. Consequently, Congress might possibly act on this matter without recognizing that risk pools are a far better idea than mandatory employers benefits, should be separated from that issue, and enacted uncontroversially the handicap of linkage.
The Uninsured Residual Portion of the Population Have Disproportionately High Health Costs. There has been a tendency to assume the cost of extending health insurance can be anticipated by merely counting the affected residual population, and multiplying by the existing average cost. Congress should definitely spend money and take time to measure the unique needs of the uninsured group. However, it can safely be assumed this group contains a disproportionate number of chronic illnesses, of pre-existing illnesses, of deferred or neglected health costs, and a disproportionate number of persons lacking in the background and experience to take advantage of health services available to them regardless of cost. It is also clear that marketing costs are greater for small groups than large ones, and that administrative costs are higher for employees who change jobs or address frequently. Employers with marginal profits will default on premiums more frequently, change benefits packages more often, and shop around for bargain insurers more frequently than do large prosperous employers. Insurance companies prefer to avoid small group business because, although their costs are definitely higher, they generate heavy pressure to be charged standard rates.
In national legislation mandating employer coverage, the same issue is certain to arise. Large employers are certain to experience pressure to absorb excess costs of the new small groups; it is probably fair that they should do so, and most of them would probably be willing to pay a reasonable surcharge. such a surcharge could probably be regarded as a tax for the privilege of skimming off the healthy component of the workforce, leaving hardship cases to the small entrepreneurs. However, if the surcharge proved to be extremely heavy, large employers would rebel and expect a portion of the cost to be absorbed through general tax revenues, and that is also fair. They would make the point that being a large employer is not necessarily the same as being a profitable one.
It thus becomes critical to know the degree of adjusted extra cost per person of the uninsured population. There are indications that it may be extremely large, and the 1966 experience with Medicaid and Medicare casts grave doubt on anyone's ability to analyze it I advance. If indeed the aggregate cost proves to be very large, there will need to be a nationwide debate about the equity of who should pay for it.
Health Care is Partly an Economic Investment, Partly a Basic Need, and Partly a Consumption Item. The very large costs we are contemplating can be seen to some degree as increasing the productivity of the workforce, and consensus would probably be readily forthcoming for public tax support for that purpose. However, perceptions would surely be widely variable about how to separate essential medicine from luxury medicine. At the margin, many patients would disagree about preferences between achieving health and consuming health services. There is not the slightest doubt that elected representatives would prefer to have any negative decisions be made by physicians, as is true to a large extent in Great Britain.
Robin Hood No Longer Has a Hostage. It is unlikely that many people outside the provider community are aware that tertiary care was associated with teaching hospitals, and those teaching hospitals and that teaching hospitals were once firmly linked to charity care. This three-way linkage made cost-shifting feasible since the prosperous members of a community could not escape going to charity hospitals if they wanted tertiary care. Forces in the last thirty years, mostly Congressional in origin, disrupted this linkage of tertiary care to charity costs to shift. Therefore even those few teaching hospitals which wish to continue a charity mission are caught in an unbearable price squeeze by their competition. The time is at hand when Congress must take steps to prevent major disruptions in the health care delivery process. The necessary steps should involve some mechanism for spreading charity costs over a wider geographical area than just the urban ghettos, extending costs to hospitals which are not themselves delivering charity, and to employers who are not themselves disposed to it.
Risk Pooling is the Way to Begin to Sort Out These Issues. At the August 9 hearings, there was the discussion of the desirability of addressing unmet health care needs which have not reached the surface. Unfortunately, it is disquieting to achieve this goal by issuing blank checks, since the monthly bank statement may prove to be shocking. Society should first see if it can afford, and if it can effectively administer, a program aimed at the known costs and the least debatable needs. Risk pooling builds on the decisions currently being made by patients, hospitals and physicians. It pays for necessary health care without requiring health insurance for those, like illegal immigrants, who cannot reasonably obtain it. If patients are willing to ask for charity, and providers are willing to give it, the traditions of our culture are such that the absolute minimum benefits package has been effectively described. Both patients and providers will immediately expand their demands if the minimum is satisfied, and it is surely true this is not enough. If the country is willing to afford more, let the benefits package be expanded later, but surely it is inhumane to withhold this much while waiting for perfection.
Risk pooling is possible in a number of different ways. The provisions of this bill utilize the method of taxing employers. This has the great advantage of relieving willing state legislatures of the obstacle created by ERISA that placing taxes on state-regulated health insurer creates an incentive for employers to escape to self-insurance. However, a[plying the surcharge for the pool to hospital bills would work as well and would have the advantage of driving some services out of the inpatient area when the outpatient area would be a cheaper alternative. A hybrid tax might achieve both subsidiary goals.
Unlike the untested concept of mandatory employer health insurance, risk pooling of health insurance has been in existence in a number of states for a number of years. Indeed, it would probably now be widely employed if the ERISA had not been enacted; there is no doubt the insurance industry immediately lost its taste for processing state legislatures for risk pooling. Risk pools can take a number of forms, and it is desirable that a wide variety of pools should be tried in the "laboratories of the state". Congress should adopt a minimalist approach: the main need is to stop preventing the states from forming risk pool's.
Respectfully submitted,
George Ross Fisher, M.D.
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.