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Chief Justice John Marshall
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Chief Justice John Marshall first took his seat at the opening of the new term, in Washington the new capital, on Wednesday, February 4, 1801. It was also at the end of Philadelphia's twenty-five-year reign as the center of the country, and twelve-year Federalist domination of national power, except for the Supreme Court. The Presidency, both houses of Congress, and the federal bureaucracy were in the hands of Jefferson's party. Only the dwindling life tenure of federal judges permitted some power to remain in the hands of Federalists for several more decades. John Adams the defeated Federalist President realized this very well and hastened to fill any remaining vacancies before he left the office. The Jeffersonian Republicans understood what was happening, resented it, and referred bitterly to the "Midnight Judges". We discuss the Marshall Court in some detail because it leads to the Andrew Jackson escapade in high finance, which ultimately merges with evolving financial history back in Philadelphia at the crashing termination of "Biddle's Bank".
Marshall was himself a Midnight Judge in the sense he was the retiring (Federalist) Secretary of State, immediately appointed by Adams to the duties of Chief Justice. He was himself the office of the Adams Administration who neglected to deliver the certificate of appointment of Justice of the Peace to Marbury, who promptly sued James Madison the incoming Secretary of State, to give him his signed and ratified certificate. Jefferson the incoming President of the United States, ordered Madison not to give it to Marbury. The behavior of all these high officials was unbecomingly petty since it was within the power of several of them to end the tangle in simple ways. To make matters still more infuriating, Jefferson delivered a beautiful, heart-warming First Inaugural Speech, full of forgiveness and invitation to compromise ("We are all Republicans, we are all Federalists"), which his own intransigence before, during and afterward transformed into a Federalist by-word for hypocrisy exceeding anything in Shakespeare. It's hard to say whether it makes these performances more or less bearable to learn that Marshall and Jefferson were first cousins. In any event, Marbury v. Madison was the first example of a Supreme Court ruling that a law was unconstitutional. The legal point on which this titanic Constitutional point rested, however, seems mostly a minor procedural error, leaving poor Marbury's problem as a footnote, Marshall's negligence uncriticised, Jefferson's interference unimpeached, and the whole nation's opinion of its governance sadly disappointed. On vivid display was the dominance of petty private grievances of our most venerated Founding Fathers, in an era when a public policy seemed most in need of getting the highest priority. In 1800, the confluence of names alone suggested crisis: Aaron Burr, Robespierre, Bonaparte, Hamilton. It was certainly a dramatic way for John Marshall to make an entrance on the public stage, but compared with the tie-vote election of 1800, and the Trial of Aaron Burr the Vice President for treason, it scarcely seemed worth public notice.
Within legal circles, professional achievements of Judges are ranked by a different standard which seems obscure to both the public and historians. Oliver Ellsworth, Marshall's immediate predecessor, nowadays seems most highly esteemed in the legal profession for revising the nature of judicial opinions. Prior to Ellsworth, the seven justices gave their opinions individually and serially. Ellsworth simplified this to majority and minority opinions of the entire court, with individual concurring opinions if insisted upon. The Chief Justice selects who will write the majority opinion, and generally writes it himself if he is in that majority. Effectively this makes the Chief Justice the voice of the court in important cases. Ellsworth retired for reasons of health before he got many advantages from this change, so the full force of Chief Justice power began to appear with the voice of Marshall. John Marshall then added his own twist, which was the obiter dictum .
Judges often make little speeches from the bench, which sometimes are on the public record. If they are directly related to the decision or opinion, they have some force as precedents to lower or later courts. In other circumstances obiter dicta have little consequence, but Marshall recognized there was a very big difference when an obiter issued from the pen of the Chief Justice of the United States, speaking for a majority of the Supreme Court. All Judges of every Federal Court and the Judges of State Courts in many situations are then on notice that the obiter is the opinion of that court to which all appeals could ultimately be made. It would be a brave judge who ignored this warning, and only a foolish lawyer would bring a case which flouted it. John Marshall had found a way to legislate what was effectively the Law of the Land, one without the possibility of a veto while he was still on the bench. He had not been made an Emperor, because the power of his dicta would depend on how combative he and fellow justices chose to be about it. But, looking ahead, Andrew Jackson would have been showing a profound lack of subtlety about the way things really are, had he issued his famous jibe that "John Marshall has made his decision. Now let him enforce it." Jackson's most distinguished biographer Robert Remini maintains Jackson never said it, and prudently so.
Marshall was also prudent when he had to be, and acting as a Moses was careful to confine his Commandments to his mandate, which was the American law. Some of his obiter dicta might have been ignored as coming from the most powerful Federalist of his day, a former chief of the Virginia Federalist party, but with the passage of time several of these opinions have passed from statements of early Nineteenth century judicial policy into becoming the accepted American view of things. It is reasonably safe to say the following three dicta anticipate the coming of the Civil War, define its issues, and survived that war, reconfirmed:
The Federalist View of the Constitution. The Constitution is an ordinance of the people of the United States, and not a compact of States.
Enumerated powers. While the government which the Constitution established is one of the enumerated powers, as to those powers it is a sovereign government, both in its choice of the means by which to exercise its powers and in its supremacy over all colliding and antagonistic powers.
States Rights. The National Government and its instrumentalities are present within the States, not by the tolerance of the States, but by the supreme authority of the people of the United States.
Article 1, section 10, clause 1
No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.
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The Contract Clause
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The Sanctity of Contracts. In a famous dialogue between James Madison and Roger Sherman of Connecticut, Madison identified the erratic and high-handed behavior of state legislatures as one of the main reasons to convene the Constitutional Convention. He was describing a long list of behaviors which included reclaiming sales which had been regarded as permanent, reversing statutes, interfering with executions or other verdicts of courts, intervening in private controversies, calling for new hearings, introducing new rules of evidence after a trial had begun, and so forth. To a considerable degree, these abuses grew out of a collision between the undeniable right of a later legislature to change the rules which had been established by an earlier legislature, balanced against the disruptive effect of making any changes in rules, no matter how beneficial. For their part, the courts were in need of restraining themselves with doctrines like stare decisis , while reserving the right to make desirable changes in the law after serious consideration. They were also in need of establishing best practices and insisting they be followed, eventually evolving into the concept of due process , which eventually became Constitutional doctrine by the XIV Amendment. The legislative equivalent of these judicial principles was seen in laws passed after the crime had been committed ( ex post facto ), special legislation for one case an exception to general rules, and a wide variety of other unfair practices which had grown up. Accordingly, Article 1, section 10, clause 1 of the Constitution was written but often evaded in practice by sly legal tricks with Latin names. Examples of the broad principles might be stated in the constitution, but it required an experienced Judge to recognize the many evasions for what they were and organize a set of rules to implement the Constitutional principle. Marshall appointed himself in that role and systematically integrated his judicial counter-attack into a coherent code of moral conduct, bit by bit in obiter dicta.
We should let the French traveling correspondent, Alexis de Tocqueville, pass the final judgment on Marshall's effort:
"Scarcely any political question arises in the United States which is not resolved sooner, or later, into a judicial question. Hence all parties are obliged to borrow in their daily controversies the ideas, and even the language peculiar to judicial proceedings. . . The language of the law thus becomes, in some measure, a vulgar tongue; the spirit of law, which is produced in the schools and courts of justice, gradually penetrates beyond their walls into the bosom of society, where it descends to the lowest classes, so that at last the whole people contract the habits and the tastes of the judicial magistrate."
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Flexible Spending Accounts
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For many years, Health Spending Accounts (now called Flexible Spending Accounts) were confused with Health Savings Accounts. In the previous section, we have just proposed the $500 annual roll-over be made permanent. Naturally, that raises the question of whether a permanent rolled-over account could be made into a supplementary retirement account, but unfortunately, the mathematics of that is not nearly so good. Let's consider the most favorable case. As stated, that would be a $500 annual contribution, starting at age 18, paying 10% income return. That would generate a retirement fund at age 65 worth $436,000. That sounds pretty attractive until you start picking it apart.
In the first place, most people can't start work at age 18 and expect to be continuously employed until 65. There will be periods of unemployment for most people. In the second place, money invested in large-cap common stock will indeed return 10% over a long period of time, but there may well be gaps and periods of catch-up. And if you are not careful, you won't get 10%, even though your money is earning it. The experience with 401(k) accounts has been the financial industry will likely reduce your returns by roughly 2% with an internal assessment called 12b(1), allegedly a reimbursement for sales promotion, but really just 2% for themselves. So, you are down to 8% before you encounter $250 charges per transaction. Some brokers only charge $5.00 for purchase, and some banks charge nothing to give you your own money back. Very likely, the $250 purchase charge will disappear before the $250 withdrawal fee does because the withdrawal fee is harder to spot on the receipts. John Bogle recently remarked on television that the financial industry takes 85% of the returns on retail investments before it gives anything back to the consumer, which seems to include rather more than an 8.5% gross margin, so there's probably more fee here than I can account for, which is about half of that. To be conservative, let's say your original return of 10% has been reduced to 5%. So, the expected retirement fund for our hypothetical wage-earner is not $436,000, but $89,000.
Even that haircut is more than our hypothetical is likely to get. With Medicare as a backup, paying for healthcare has been protected during its most expensive period. Retirement, on the other hand, is usually more costly in a retiree's sixties than his eighties. So, while $89,000 might well cover health costs in old age, it will probably fall short of covering retirement. For instance, the average Medicare recipient costs Medicare $11,000 a year. How many retirees do you know who can live on $11,000 a year? We're going to have to leave it at that. By stretching and luck, by arm-wrestling the investment community and counting on continuous employment for forty years, we might scrape together a plan that would cover healthcare as we hope it will cost when we get there. But retirement? My warning is that I don't see how it can be managed, except for one strategy. People are going to have to work longer and retire later. To make ends meet on retirement, the emphasis must shift from demanding retirement as an entitlement -- to demanding our employers themselves get to work, providing more of the jobs old folks can perform, in spite of infirmities. We've got to build houses cheaper to repair, and cars cheaper to drive. We've got to live in houses with elevators and wear clothes that moths won't eat. But squeezing it out of investment accounts? After we've wrung it dry, paying for healthcare, I doubt there will be much left.
Health Savings Accounts are a big improvement over traditional health insurance, and this book stands behind them -- as is, without major adjustments. Go ahead and get one right now, regardless of what other coverage you have. Let me repeat: Their secret "economy" lies in keeping everyone spending insurance money as carefully as he would spend his own -- but not being too dictatorial about it. No one washes a rental car, as the saying goes, so you can't act as if someone has committed a crime, just because he doesn't do everything for you. But just you let the individual keep what he saves, and millions of HSA owners will find ways by themselves to save up to 30% of traditional healthcare costs. HSAs provide an incentive for the medical consumer to shop more carefully, and consumers seem to respond. The difficulty is, some people are too sick to worry about rules. So, substitute a catastrophic high deductible for your present coverage if the law lets you do it (which is presently uncertain) but go ahead with a Health Savings Account and add to it when you can.
Looking ahead to what might follow HSA, is one of the main reasons for doing it.
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In practice, the Savings Accounts (and their debit cards) are almost entirely used for out-patients, where an effective shopper can arrange a reduction in costs. For hospital bed patients there is no choice but to allow the hospital to set its own prices, except those prices must more fairly correspond to direct costs. Fair prices are mostly an accounting effort, concentrating on reducing indirect overhead cost attributions, with a few legal rules to ensure uniformity. But everyone must wait for that to resemble true costs more precisely after indirect costs have been evaluated. Having repeated it all as a preamble, we now look ahead to how we might extend it to lifetime coverage, instead of the year-at- a-time variety. Looking ahead to what might follow it, is one of the hidden complexities of doing it.
One further simple idea: costs not prices. We have all assumed that catastrophic coverage is basic. If everybody ought to have something, he ought to have a very high deductible for a bare-bones indemnity policy. But just consider an addition: insurance for the health costs of the first year of life, plus the last year of life. That's technically simple to do retrospectively, although it takes most people a few moments to get it. And 100% of the population would receive both benefits, at a restrained cost by remaining uncertain just what the last year of life is until it is too late to run up its cost. Indeed, transition costs would be minimized by eliminating the historical part of costs for the transitioning population and phasing in the ongoing expense. Ask your friendly actuary; he'll get it, immediately.
Revised DRG coding and Methodology. Either way, if you guarantee to provide something for everyone, you better have a plan for controlling its boundaries. Inpatient costs affect patients too sick to argue about price, so hospital bed patients might as well be presented with some different options. They are more or less suitable for the DRG approach, but we have gone to some length to show what's wrong with the DRG coding methodology. The coding, among other things, must be fundamentally modified. As informed doctors will tell you, ICDA-11 isn't it.
DRGs ("Diagnosis Related Groups") is something Medicare started, which with more precise coding could be made ideal for the catastrophic insurance part of Health Savings Accounts. Medicare now contributes half of average hospital revenue, so its rules effectively dictate most other methods of hospital reimbursement. There are many problems with Medicare, but paradoxically, escalating inpatient cost is not one of them. Inpatient billing has been so muddled, most people do not realize that DRG has been a somewhat overly-effective rationing device. Like all rationing schemes, it causes shortages, as inpatient care is shifted toward the outpatient area. Office and hospital outpatient costs are quite another matter, so the whole hospital accounting system has been turned on its ear. In particular, components of inpatient costs must be re-linked to identical outpatient charges, in the instances where they are really market-based. Then, a system of relative values needs to be applied to that base. For that, we will need a Google-like search engine for translating the doctor's exact words into more precise code.
Single payer is not a solution, it is pouring gasoline on the flames.
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The Single-Payer Delusion. If the eyes glaze over at this endless complexity, take a moment to unveil this thing called single payer, which sounds as though it ought to be a great simplification. It's just Medicare for all ages, what could be better? Entirely too many people now spend their money on luxuries which they really can't afford. In a sense, the whole country plays make-believe that serious sickness is for old folks, who will be generously cared for, by Medicare. The facts are that Medicare is already running unsupportable budget deficits, and depends on foreigners to lend the money to pay for it. Extending that process to a lifetime of single payer is not a solution, it is pouring gasoline on the flames.
Furthermore, both catastrophic insurance and last year of life insurance are more similar than they sound. What most people don't appreciate is the risk of a catastrophic health cost is rather remote in any given year. But in a whole lifetime, it is almost certain to happen at least once, which is often the last year of life. When you consider an entire lifetime, you cannot delude yourself it won't happen. Someone must plan for it, and the books must roughly balance.
Add Many Years to Lifetime Compound Income. Mathematically, it is fairly easy to show that healthcare costs will go down at the end of life; it's cheaper at 95 than at age 85. But that's probably a trick. We don't know what diseases will terminate life a century from now, so we can't count them. They are not cheaper, they are just unknown, and so we record the cost of the survivors of the race of life, not the average runner who will take time to catch up. If we are looking for lifetime healthcare revenue, recognize that practically all revenue is now generated by members of the working-age 21-66. A lifetime system needs to extend its revenue even further to other lifetime age groups. It seems only right that everyone's longevity should be included, but laws may currently block the way.
It would help a lot to include the first 21 years, adding several doubling-time periods. It would also be useful to let HSAs run for a full lifetime instead of mandatory rolling-over to IRAs at 66. Obviously, the idea behind terminating at age 66, was that Medicare would take care of everyone's medical needs. But with time, Medicare has consistently run big deficits, to the point where it is 50% subsidized by competition with other federal funds, or by international borrowing. Adding forty years would multiply extra investment returns by four doublings at 6%, and at little cost to the government. This would be particularly useful during the transition, when many people start their Accounts at zero balance, but at a more advanced age. It would be a significant improvement to all these programs to end them with at least one optional alternative; terminating a health program at a fixed age is something to avoid.
Proposal 13: Health Savings accounts should include the option to be individual rather than family-oriented, and therefore should include an option to extend from the cradle to the grave, rather than age 21-66, as at present, and consider options for Medicare buy-out and transfers within families between accounts.
Permit Tax-free Inheritances of Funds Sufficient to Fund One Child's Healthcare to Age 21. In other words, we should make some sort of beginning to the knotty difficulty of making The State responsible for what used to be the family's responsibility. A second adjustment would recognize that essentially all children are dependent on their parents for healthcare support until they themselves start to work. Children's health costs are relatively modest, except for costs associated with the first year of life, and the bulge would be even greater if insurance shared obstetrical costs better between mother and infant. Even as we now calculate it, the baby's health costs, from birth to age 21, are 8% of lifetime costs. A cost of 3% for the first year of life alone, makes lifetime investment revenue essentially impossible for many young families to support lifetime costs because any balance would start from such a depleted level. So, the idea occurs that a considerable surplus appears when many people become older if grandpa could effectively roll over enough of his surplus to one grandchild or designee. The average American woman has 2.1 children, so it comes close to a 1:1 ratio of children to grandparents. Young parents often have a big problem financing children, whereas in a funded system, the transfer from grandparents could be supported by a fraction of it, by application of compound interest.
With two statutory adjustments along these lines, financing of lifetime healthcare by its investment revenue becomes considerably easier.
Whole-life Health Savings Accounts. (WL-HSA) It has developed in my mind that Lifetime Health Insurance would become even better for cost savings, with the addition of one more feature, copied from life insurance, and combined with the needed DRG revision. It is, broadly, the difference between one-year term life insurance, and whole-life insurance, which offers lifetime coverage as a variant of multi-year coverage. Life insurance agents frequently argue that whole-life is much cheaper in the long run than term life insurance. What they may not tell you is that most of the apparent profitability of term insurance derives from so many people dropping their policies without collecting any benefits at all. Comparing apples with apples, whole-life insurance is not just cheaper, but vastly cheaper.
For those who don't understand, one-year term insurance covers illnesses for a single year and then is open for renegotiation. By contrast, a whole life policy covers a lifetime of risk, overcharging young people for it in a certain sense, meanwhile investing the unused part for later years when health risks are greater. Does that start to sound familiar? The client is seemingly overcharged at first, but in the long run, his life insurance cost is far cheaper. Not just a little cheaper, but just a fraction of what a chain of yearly prices would cost.
It doesn't mean you must enroll at birth and remain insured until death; it means any multi-year insurance becomes cheaper, depending on the age you begin and the age you cash out -- often at death but not necessarily. What makes the saving so astonishing is the way life expectancy has lengthened. We have been so uneasy about rising medical costs we didn't much notice that people were living thirty years longer than in 1900. As a rule of thumb money earning 7% will double in ten years; in thirty years, it becomes eight times as big. If you lose half of it in a stock market crash, you still end up with four times as much. This is what would be new about lifetime accounts, and it can be easily shown that overall savings for everyone would be more than anyone is likely to guess.
Let me interject an answer before the question is asked. Why can't the government do the same thing? And the answer is, maybe they could, except two hundred years of history have shown the American public is extremely averse to letting anyone be both a player and an umpire. For more than a century at first, there was a strong political suspicion of the government running a bank, or even borrowing money with bond issues. Yes, the government could invest in businesses, but we would then be guaranteed a century of rebellion if we tried to have the government do, what any citizen is free to do on his own. Indeed, a review of Latin American history shows what disaster we have avoided by retaining this negative instinct to allowing the camel's nose under the tent. The separation of church and state is a similar example of how our success as a nation has been based on gut feelings. The separation of business and state is at least as fundamental as separating church and state. And for the same reason: we instinctively avoid having the umpire play on one of the teams.
Proposal 14: Congress should authorize a new, lifetime, version of Health Savings Accounts, which includes annual rollover of accounts from any age, from cradle to grave, and conversion to an IRA at optional termination. Investments in this account are subject to special rules, designed to produce a maximum safe passive total return, and limiting administrative overhead to a reasonable, competitive, amount. The account should be linked to a high-deductible catastrophic health insurance policy, with permanently guaranteed renewal, transferable at the client's annual option. The option should also be considered of linking the HSA to a policy for retrospective coverage of the first year of life and last year of life, combined. These two years are disproportionately expensive, and they affect 100% of the population. Subtracting their costs from catastrophic coverage should greatly reduce catastrophic premiums.
Lifetime Health Savings Accounts (L-HSA) would differ from ordinary C-HSA in two major ways, and the first is obvious from the name. In addition to meeting each medical cost as it comes along, or at most managing each year's health costs, the lifetime Health Savings Account would try to project whole lifetimes of medical costs and make much greater use of compound income on long-term invested reserves. The concept seeks new ways to finance the whole bundle more efficiently, and one of them is health expenses are increasingly crowded toward the end of life, preceded by many years of good health, which build up individually unused reserves and earn income on them. Since the expanded proposal requires major legislation to make it work, it must be presented here in concept form only, for Congress to think about and possibly modify extensively. This proposal does not claim to be ready for immediate implementation. It is presented here to promote the necessary legal (and attitudinal) changes first needed to implement its value. And frankly, a change this large in 18% of GDP is better phased in gradually, starting with those who are adventurous. By the time the timidest among us have joined up, the transition will have become routine. As a first step, let's add another proposal for the present Congress to consider:
Proposal 15. Tax-exempt Hospitals Should be Required to Accept the DRG method of payment for inpatients from any Insurer, although the age-adjusted rates should be negotiable based on a percentage surcharge to Medicare rates. The DRG should be gradually restructured, using a reduced SNOMED code instead of enlarged ICDA code, and intended to be used as a search engine on hospital computers rather than printed look-up books, except for very common hospital diagnoses. Also to be considered for those who are too sick for arms-length negotiation of hospital costs, are uniform reimbursements among insurance carriers and individuals, and between inpatients and outpatients, including emergency rooms, as well as a major expansion of specificity in DRGs.
Overfunding and Pooling. Lifetime Health Savings Accounts, besides being multi-year rather than annual, are unique in a second way : they overfund their goal at first,
counting on mid-course correctionsto whittle down toward the somewhat secondary goal of precision -- amounting to, "spending your last dime, on the last day of your life". To avoid surprising people with a funding shortfall after they retire,
we encourage deliberate over-estimates, to be cut down later and any surplus eventually added to retirement income . For the same reason, it is important to have attractive ways for subscribers to spend surpluses, to blunt suspicions the surpluses might be confiscated if allowed to grow. An acknowledged goal of ending with more money than you need runs somewhat against public instincts and is only feasible if surpluses can be converted to pleasing alternatives.
Saving for yourself within individual accounts is more tolerable than saving for impersonal groups within pooled insurance categories, but probably must constantly defend itself against the administrative urge to pool. Pooling should only be permitted as a patient option, which creates an incentive to pay higher dividends for it. The menace of rising health cost at the end of life induces more tolerance of pooling in older people, whereas small early contributions compound more visibly if pooling is delayed. Young people must learn it gets cheaper if you don't spend it too soon. The overall design of Lifetime HSAs is to save more than seems needed, but provide generous alternative spending options, particularly the advantage of pooling later in life. Because it may be difficult to distinguish whether underfunded accounts were caused by bad luck or improvidence, the ability to "buy in" to a series of single-premium steps should both create penalties for tardy payment, as well as create incentive rewards for pooling them. This point should become clear after a few examples.
Proposal 16: Where two groups (by age or other distinguishing features) can be identified as consistently in deficit or surplus -- internal borrowing at reduced rates may be permitted between such groups. Borrowing for other purposes (such as transition costs) shall be by issuing special purpose bonds. These bonds may also be used to make multi-year intra-family gifts, such as grandparents for grandchildren, or children for elderly parents.
Smoothing Out the Curve.There is a considerable difference between individual bad luck with health costs and systematic mismatches between average costs of different age groups. Let's explain. An individual can have a bad auto accident and run up big bills; as much as possible, his age group should smooth out health costs by
pooling within the age cohort to pay the bill. On the other hand, compound investment income sometimes favors one age group, while illnesses predominate in a different experience for another. It isn't bad luck which concentrates obstetrical and child care costs in a certain age range, it is biology. No amount of pooling within the age cohort can smooth out such a
systemic cost bulge, so the reproductive age group will have to borrow money (collectively) from the non-reproductive ones. With a little thought, it can be seen that subsidies between age groups are actually more nearly fair, than subsidies based on marital status or gender preference, or even employers, who tend to hire different age groups in different industries. On the other hand, if interest-free borrowing between age cohorts is permitted, there must be some agency or special court to safeguard that particular feature from being gamed. All of these complexities are vexing because they introduce bureaucracy where none existed; it is simply a consequence of using individual ownership of accounts to attract deposits which nevertheless must occasionally be pooled later. Because these borrowings are mainly intended to smooth out awkward features of the plan, every effort should be made to avoid charging interest on these loans. However, if gaming of the system is part of the result, interest may have to be charged.
Proposal 17: A reasonably small number of escrowed accounts within a funded account may be established for such purposes as may be necessary, particularly for transition and catastrophe funding. Where escrowed accounts are established, both parties to an agreement must sign, for the designation to be enforceable. (2606)
Escrowed Subaccounts. Both Obamacare and Health Savings Accounts are presently expected to terminate when Medicare begins, at roughly age 65. Nevertheless, we are talking about lifetime coverage, where we have a rough calculation of the cost ($325,000) and the Medicare data is the most accurate set, against which to make validity comparisons. We want to start with $325,000 at the expected date of death, spend some of it in roughly 20 installments, and see how much is left for the earlier years of an average life. Then, we repeat the process in layers down to age 25 and hope the remainder comes out close to zero. There are several things missing from this, most notably how to get the money out of the fund, but let's start with this much, in isolation for the Medicare age bracket, age 65-85. We are going to assume a single-premium payment at age 65, which both life expectancy and inflation in the future will increase in a predictable manner, and changes in health and health care eventually reduce healthcare costs, not increase them. Not everyone would agree to the last assumption, but this is not the place to argue the point.
We know:
(a) The average cost of Medicare per year ($10,900)
(b) How many years the beneficiaries on average are in the age group (18).
(c) Therefore, we know how much of the $325,000 to set aside for Medicare ($196,200),
(d) And know how much a single premium at age 65 would have to be, in order to cover it. ($196,000 apiece)
(e) We thus know how much all the working-age groups (combined as age 25 to 65, 60% of the population) must set aside, in advance for their own health care costs, when they reach Medicare age ($196,000 apiece).
(f) And by subtraction therefore how much is left for personal healthcare within age 25 to 65 ($128,800).
(g)We can be pretty certain average Medicare costs will exceed those of anyone younger, setting a maximum cost for any age.
(h) All of this calculation ignores the payroll deductions for Medicare and premiums. Since this is nearly half of the cost, it changes the conclusions considerably, depending on how you treat these points. During the transition phase, several approaches may be necessary. Furthermore, the size of accumulated debt service is unknown, or what the alternative plans are, for it.
Shifts in the age composition of the population produce large changes in total national costs, but should by themselves not change average individual costs. What they will do is increase the proportion of the population on Medicare, thereby paradoxically making both Obamacare and Health Savings Accounts relatively less expensive. Obamacare can calculate its future costs with the information provided so far. But the Health Savings Account must still adjust its future costs downward for whatever income is produced by investments. We don't yet know how much each working person must contribute each year, because we haven't, up to this point, yet offered an assumption about the interest rate they must produce. We should construct a table of the outcome of what seem like reasonably possible income results. There are four relevant outcomes to consider at each level: the high, the low, and the average. Plus, a comparison with what Obamacare would cost. But there are two Medicare cost compartments: the cost from age 25 to 64, and the cost from 65-85 advancing slowly toward a future life expectancy of 91-93. These two calculations are necessary for displaying the relative costs of Medicare and also Obamacare.
Children's Healthcare. Someone is sure to notice the apportionment for children is based on income rather than expenses. The formula can be adjusted to make that true for any age bracket, and a political decision must be made about where to apply an assessment if income is inadequate; we made it, here. We have repeatedly emphasized that if investment income does not match the revenue requirement, at least it supplies more money that would be there without it. Somewhat to our surprise, it comes pretty close, and we have exhausted our ability to supply more. Any further shortfalls must be addressed by more conventional methods of cost-cutting, borrowing, or increased saving. In particular, attention is directed to the yearly deposit of $3300 from age 25-65, which is what the framers of the HSA enabling act set as a limit, somewhat arbitrarily.
Privatize Medicare? And finally but reluctantly, the figures include provision for phasing out Medicare, which everyone treats as a political third rail, untouchable. But gradually as I worked through this analysis, I came to the conclusion that uproar about medical costs would not likely come to an end until the Medicare deficit was somehow addressed. I believe we cannot keep increasing the proportion of the population on Medicare, paying for it with fifty-cent dollars, and pretending the problem does not exist. So it certainly is possible to balance these books by continuing our present approach to Medicare. But it would be a sad opportunity, lost.
In summary, we have concocted a guess of the outer limit of what the American public is willing to afford for lifetime health coverage ($3300 per person per year, from age 26 to 65), and added an estimate of compound income of 8% from passive investing, to derive an estimate of how much we can afford. From that, we subtract the cost of privatizing Medicare if our politicians have the courage for that ($98,000 -196,000) and thus derive an estimate of how much is available for health care of the rest of the population ($128,000). Because of the longer time spans available for compound income, at 8% it would cost more out-of-pocket to finance the $128,000 than the $196,000; it would actually be financially better to include it. The non-investment cost, on average, would only be $ 148,000 per lifetime, for an expense which otherwise almost insurmountably crowds out everything else in the national budget. It might be $98,000 less because of Medicare payments, or it might prove to be more, depending on interest rates and scientific progress. Believe it or not, that could be a wide improvement over the present trajectory.
That's how it seems at first when you approach the topic of multi-year health insurance. But there are several exciting additions when you really get into it. It plods along, and then it explodes.
It's looking far ahead indeed, but at least in theory, everything about health care costs will eventually disappear as we cure disease -- except the first and last years of life. Everybody's born, and everybody dies, so the goal of all health insurance, single payer or single individual or other, is to reach the configuration of only two critical remaining years to be paid for. How long it will take, at $33 billion per year in research costs, is hard to say, probably a very long time. But at least we can be working in that direction, while we pursue shorter-term goals.
Our short-term goal is to lengthen the period of compound interest, and to get more of it deposited early. Ultimately, that should reduce the amount to be paid at the time of service. The more we reduce Medicare costs, the more these two features combined, lead to flattening out the lifetime bulges in costs at the time of service, which essentially means, from further evolution into Medicare. That, in turn, reduces the amount transferred to Medicare from working generations. As mentioned earlier, it is dangerously unbalanced to have the working population, which gets less and less sickly itself, pay for the healthcare of children and retirees, whose costs are steadily rising as the disease gets pushed into new categories of life. We must hope ultimately to achieve a reduction of the cross-subsidy, while we work to prolong the period of compound interest income, directly.
To a degree, it is a happy circumstance that young people are healthy, while old folks relentlessly concentrate a lot of sickness and death in their group. It's a moderate nuisance for cross-subsidizing employers who extract subsidy money without being able to guarantee benefits after an employee changes employers. There's not much they can do except hide when it happens. This nuisance has been regularly endured until by now it is becoming a serious problem. But it's so simple, really. All you need do is let the employees own their own policies, take them with them when they change jobs, and actually collect what they earned while they were young. A whispered appeal would be, to correct this difficulty before it causes rebellion.
If the Medicare payment system is reviewed, it can be seen we are already sequestering about a quarter of Medicare costs through the payroll withholding tax, collected from every workman's paycheck. What happens next is not so attractive. Instead of accumulating the withholdings within an interest-bearing account, they are absorbed into the general fund and can be spent on almost anything.
Accountants in the government will have to tell us the exact amounts that could accumulate, but Medicare spends about $50 billion a year. We can thus assume equilibrium at 25%, or $12.5 billion for payroll withholdings. Suppose for a moment the money could be put into total market index funds (which at 11% gross sustain inflation attrition of 3% and overhead of 1%) leading to a 7% net gain. Since money doubles every ten years at 7%, in fifty years the withholding float should produce five doublings or 3200%. Since we started with a quarter of Medicare expenditures, that's 800%, or eight years, of annual Medicare cost for each year you keep doing it. No doubt it's too drastic to remove 25% of withholdings, but we only need a fraction of the total to cover the last year of life. And we don't even have to pay that until the worker dies, which on average is going to be 21 years (two doublings) after he reaches 65. So it sounds to me as though you only have to wait sixty or so years before a set-aside of a portion of a year's Medicare cost would pay for current last-year-of-life costs. You probably wouldn't do it exactly that way, in order to shorten the time you must wait to get to the payoff. But this rough approximation illustrates that no amount of quibbling about the principle involved would reach any conclusion except that it's do-able. The issue is whether we wish to change our whole fiscal premise in order to do it. But let me suggest another consideration: if the Singapore government, for example, succeeds at doing it, can we withstand the pressure to go along? In my opinion, our rhetoric would rapidly change, because everyone knows nothing must ever happen for the first time.
And remember one more thing: if it works, it will reduce total Medicare costs by 20%, or whatever is found to be the true medical cost of the last year of life. Make it the last two years of life, and you almost wipe out the Medicare deficit. The last four years include half of Medicare cost.
We expect a more accurate assessment of the "exact" numbers from this source by people who own calculators, and it may be less, but it will still seem appreciable. In addition to payroll deductions from working people, Medicare obtains a similar amount from retirees as Medicare premiums. As you reduce the deficits, you can stop collecting premiums. Carried far enough, you can start reducing the Medicare budget -- and start sending the reduction to beef up the retirement funds, which in this case I would expect to define as the surplus within their Health and Retirement Savings Funds. There's more to this idea, starting with the first year of life, which is a wholly different matter.
It's hard to believe any problem could be too big to solve, just as it boggles the mind to think of a corporation too big to fail. But if we say the same thing often enough, we come to believe it. People who tell you Medicare is the third rail of politics, are mostly telling you they hope so.
Lyndon Johnson, Wilbur Cohen, and Bill Kissick did indeed bite off more than they could chew, but Medicare really isn't that complicated. It amounts to taking the employer-based health system floating on an enormous tax deduction and substituting three ways to pay for it. The first was to charge premiums to the old folks, which wasn't enough, only covering about a quarter of the cost. The second was to apply a 3% wage tax to younger working people, called a payroll withholding tax, which prepaid another quarter of it, by means of a gimmick called "Pay as you go". And the third, which amounted to half the cost, was supplied by taxes. The year 1965 was the time when the post-war balance of American payments turned from positive to negative, and there was something called the Vietnam War to be paid for.
So after a while, the national budget had to be borrowed, and after the manner of governments, it was borrowed by selling bonds. The largest purchaser of 10-year treasury bonds is China. So, in a general sort of way, half of Medicare is borrowed from the Chinese, and half is paid for by the clients. The debt service is temporarily bearable, but eventually, it must be confronted, and China may have to choose between absorbing the costs or going to war. Our own choice is between kicking the can further down the road, or having the confrontation right now. That is to say, right now there is time for a long-term peaceful solution, but if we delay much more, that option will disappear.
I don't plan to run for office, so let me make a proposal. Instead of continuing the pay as you go system, the withholding tax receipts should be deposited into the Health Savings Accounts of individual citizens who earned them. They should be invested into inexpensive total stock market index funds, redeemable on the employee's 65th birthday or whenever he joins Medicare. That is, redeemable by Medicare, with the residual redeemable at the death of the subscriber. The wage owner would scarcely feel the difference, but the growth of the funds would be substantial. With luck, it would pay for Medicare's deficit of 50%, putting a permanent end to Chinese borrowing, but probably not much more. It would not, for example, pay for existing debt, or retirement costs. Remember, retirement costs are legitimately regarded as a natural outgrowth of Medicare's prolongation of longevity.
The invisible costs of Medicare would eventually be paid for in two other ways: the J-shaped costs of Medicare in the last four years of life, and the contingency fund.
J-Shaped Curve All healthcare costs with the exception of premature birth, genetic disorders and the like, are migrating to older age groups. One of the main causes of disruption is the migration of costs from working people to people on Medicare. But within Medicare, costs are also migrating later in life. Half of Medicare costs are paid for the last four years of life. Since Medicare extends twenty years and growing, half of the total Medicare cost would disappear as a result of lifting this burden and placing it somewhere else. This is called the Last Four Years of Life Reinsurance, one component of the First and Last Years of Life reconstruction of healthcare finance. It will be discussed separately in later sections of this book, but a vital point is removing the cost of the last four years of life, which constitute half of Medicare cost. The consequence is to cut the remaining cost of Medicare in half, potentially funding half forward, half backward.
The Contingency Fund at Birth. And the half which is funded forward can be further reduced by investing at birth and earning investment income for eighty years. By adding the withholding tax receipts from age 25-65, the combined fund can probably pay for Medicare. Just to be certain, a contingency fund could be added at birth, amounting to around $100 at birth and growing to $25,600 at age 80, or other variations of the 256 to one ratio. We have alluded to this concept in other areas. Its power concentrates in the nature of interest rates as well as principal to concentrate at the end of debt. That is, they rise at the end, and prolonged longevity takes advantage of this fact, parallel to the tendency of healthcare costs to rise at the end of life.
For the purpose of the reader following this without a calculator, take the happenstance that money invested at 7% will double in ten years. In nine ten-year periods of extended longevity, the money will have nine doublings (90 years). Follow the bouncing ball: 2,4,8,16,32,64,128,256, 512. In ninety years, a dollar turns into 512 dollars. If the family of a newborn, or in the case of poverty the government, deposits a dollar at birth there is a 500-fold increase at death at 90. There is no sense in being more precise about all the variables in a century, and many people are more skillful than I in manipulating them. But if to this is added another doubling, the ratio becomes 1024 to one, achieved by not liquidating the fund until ten years after the death of the owner. (This feature is added as a safety-valve.)But after the most sophisticated manipulation, it is safe to predict this outcome: The revenue would exceed the need in the last four years of life, even if the seed money turned out to be a hundred times the dollar postulated in the example. There would almost surely be money left over at the end, which might be used to supplement Social Security, although we suggest funding children as preferable during the transition phase.
So that's how you could restore Medicare to some sort of solvency, plus something left over for other purposes.
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.