The present state of healthcare legislation is, to put it delicately, immature. Both Health Savings Accounts and the Affordable Care Act are the law of the land, but the Obama Administration defiantly slipped in some regulations, and quietly slipped in others, which have no precise authorization in the law. Everything may claim to be mandatory, but until enforcement begins, neither enforcement nor appeal to the Supreme Court about constitutionality seems completely feasible. When no one has been injured, no one has "standing" in the eyes of the courts.
Funding the Deductible. For example, every one of the governmental "metal" plans has at least a $1250 front-end deductible, going up to $6300 for full coverage. Meanwhile, non-government health insurance is rapidly replacing copay with high deductibles, too. (Co-pay is the main cause of supplemental insurance, a doubling of administrative burden.) Unless a person is eligible for the subsidy, this mandatory large deductible makes the insurance hard to use unless the individual has saved up some cash for his deductible, somewhere else. So why not provide a tax incentive to have the deductible in escrow? At the moment, Health Savings Accounts are the only feasible approach to this goal, but that does not exactly mean they have been authorized to do so since double coverage is more or less frowned upon. The deductible means nothing until you get sick, so Obamacare gave itself a few years to figure this out, but the public is apparently in jeopardy if it tries to invent a workaround. It begins to look as though the voters may not give the originators of this plan enough time in office to see this as a problem they must address. So, if this is going to be everybody's problem, why not see if the Health Savings Account can offer to do it. By doing so, the individual apparently must drop his existing insurance, so go figure.
By accident or by design,
All Obamacare policy choices have high deductibles.
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The Bronze Plan is Cheapest
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People who have no illnesses, naturally have little present concern with ambiguities in health insurance. But health insurance will matter as soon as illness appears. Therefore, the present state of limbo will increasingly be of concern to more people. Seemingly, there is a race between the three branches of government to start an action. Either a compromise must be reached between the Executive and Legislative branches, or else the Courts will be forced to intervene by some injured person. Curiously, the only Justice to express displeasure with the present Constitution is Ruth Ginsburg, whose two cancers make her likely to be the next Justice to retire.
A piggy-bank for Millennials. Whatever someone may think of Obamacare, the front-end deductibles provide a pretty substantial incentive to maintain at least $1250 per person cash reserve somewhere, and an HSA would be just a wonderful place to keep it. If that is somehow blocked, an IRA would be almost as satisfactory. If Congress addresses the matter, an IRA could later add a feature to roll over the deductible from such IRAs to HSAs. If the individual avoids spending what is in the HSA, it eventually will revert to an IRA on attaining Medicare eligibility, anyway. Calculating a 10% investment return, age 25, and assuming no medical expenses, it might then have grown to $51,000 taxable, or somewhat less if lower interest rates are assumed. For someone who stays healthy, its minimum distribution as an IRA at age 65 would start paying a taxable retirement income of over $775 a year. That's pretty good for an investment of $1250. Obviously, everybody older than 25 gets less, but in no case does anyone get less than the $1250 he/she put in, just to cover a possible deductible. The issue of the high investment return is taken up in Section Four. As will then be seen, there are two issues: whether such a return can be safe and consistent; and whether hidden fees will undermine the return.
It's true you can't spend the same money twice. If the fund is depleted by spending for a deductible, it must be promptly and fully replaced to keep the fund growing. However, Aetna studied and GAO confirmed, that only 50% of enrollees in employer-sponsored HRAs withdrew any of their funds (which might have been used for outpatient as well as high-deductible purposes). Apparently, these clients were more anxious to preserve the tax shelter, than to protect their health, which is a slant I hadn't considered. This was true, even though the employers' efforts to enhance the compound income were not particularly strenuous. In a sense, it is a flattering sidelight on the frugality of many Americans. But the power of compound interest lies in re-investing the profits, so reasonably prompt restoration of the enhanced principal would not materially reduce the final outcome, just so long as internal profits remained untouched. It would be fairly simple to impose this requirement, creating a distinction between "balance" and "available balance", but doing things for people's own good, is always a questionable adventure.
We mentioned earlier, Roger G. Ibbotson, Professor of Finance at Yale School of Management has published a book with Rex A. Sinquefield called Stocks, Bonds, Bills and Inflation. It's a book of data, displaying the return of each major investment class since 1926, the first year enough data was available. A diversified portfolio of small stocks would have returned 12.5% from 1926 to 2014, about ninety years. A portfolio of large American companies would have returned 10.2% through a period including two major stock market crashes, a dozen small crashes, one or two World Wars hot and cold, and half a dozen smaller wars involving the USA. And even including one nuclear war, except it wasn't dropped on us. The total combined American stock market experience, large, medium and small, is not displayed by Ibbotson but can be estimated as roughly yielding about 11% total return. Past experience is not a guarantee of future performance, but it's the best predictor anyone can use. The supply of small-cap stocks is probably a limiting factor. As we will see, your money earns 11%, but that isn't necessarily how much its owner will earn. But inflation throughout the period remained close to 3%. In this sense, the income net of inflation was never higher than 9%, so we have to presume 9% sets a theoretical limit to what can be achieved by passive investment, even after heroic efforts to reduce middle-man costs. Most of our estimates are based on 6.5%, and most investment managers produce less than that. Nevertheless, very substantial program gains are possible in every tenth of a percentage point which can be further squeezed out. The next candidate for streamlining cost is the Catastrophic insurance premium.
Catastrophic insurance has not been popular for many decades, so presumably, there is room for competition to reduce premiums, marketing costs, profit margins, and other conventional competitive tools. The reimbursement to hospitals has suffered from favoritism directed toward some of its client corporation groups, who indirectly force Catastrophic to absorb some of their costs. And finally, there is likely to be overlapping provision for the same costs in a year-to-year system, which might be wrung out by five-year, ten-year or even lifetime policies. One can see potential economies on every side, but they will not come easily. In the long run, a perfect system might generate the revenue equivalent of 10.5% as a top limit instead of 9%. As everybody came up to speed, the potential is there for easily managing what might now be borderline achievable results. In fifteen years, that is. In the meantime, we will have to be satisfied with less ambitious projections for our present approach of term insurance.
So, in the meantime, we take things in a different direction, based on the whole-life insurance model. But one point may not be so clear: the Savings Account part of HSA is already lifetime, in the sense of rolling over and accumulating after-tax income for the rest of life. So for that matter, Catastrophic high-deductible insurance would be an easy next step, requiring only some adjustment of the present unfortunate tendency to assume an equivalence between "mandatory" and "exclusively mandatory". Money is money, and the courts will have to decide what sort of entirely fungible money is satisfactory for meeting minimum, maximum or any other coverage requirements. Since the "metals" plans all have high deductibles, but also have unduly high premiums, it seems likely the idea was to force insurance premiums to cover the subsidies for the uninsured. Such confusions of language and intent are ordinarily corrected by technical amendments. At age 66, right as it now is, every HSA turns into an IRA for retirement purposes. But up until age 65, it can be used for medical expenses, getting a second tax deduction. We are close enough so that changes to enable a whole-life approach are imaginable, but not yet feasible.
On June 26, 2015, the United States Supreme Court handed down its opinion on King v. Burwell , essentially leaving the Affordable Care Act unchanged. Much will be written about this controversial opinion, but little of it would have to do with Health Savings Accounts.
If anyone is interested in my opinion about the contested language in the law, it is derived from reading Jacob S. Hacker's book about the passage of the Clinton Health Plan, called The Road to Nowhere . The plan as described by Hacker, was to plant deliberately conflicting proposals in the House and Senate bills, so the real proposal could remain concealed until the House-Senate conference committee meeting, where the versions meant to survive could be identified. The final result could thus be released when the press was absent, preferably on the eve of a holiday.
It didn't happen in the case of Hillary Clinton's plan (which was never fully released), while in the case of President Obama's Plan, it was suspended in mid-operation by the death of Senator Kennedy. But the Senate version had been passed by a friendly Senate, so the House was forced to vote on an identical bill, to avoid returning to a conference committee convened by a newly hostile Senate. This version of the story fits the known facts pretty well and is reinforced by Hacker's subsequent membership on the Obama election team. Unfortunately, the Supreme Court's later decision constitutes an endorsement of a parliamentary maneuver which ought to be forbidden. Let's now break off this conjecture, and return to Health Savings Accounts.
My original intent in 2014 was to offer Lifetime Health Savings Accounts (L-HSA) in such a way the two programs (ACA and HSA) could be negotiated into a compromise that both could live with. In time, they would eventually evolve into hybrids that both would be proud of, or else lead the voters to state a clear preference for either one to be exclusive after they had a taste of both. Offhand, I could see no value for either one to be declared mandatory if that would still leave 30 or so million people uninsured. "Mandatory" did not seem like a helpful word to use, and often it seemed harmful to someone. In applying a computer search engine to the Affordable Care Act, I was unable to find a single use of the word "mandatory". Looking back on it, its premise was flawed but its intent was felt to be benign, so perhaps face-saving boilerplate was called for.
The central feature of the Savings Account has always revolved around the fact that youthful health care is usually cheap, while health care for the elderly is expensive. Many decades of tax-free compound interest at 6.5% would thus have been allowed to build up in some sort of escrow under both plans, until the age when healthcare really gets expensive. At that point, it would not matter which program it was assisting, and both sides would stop looking for a victory. By that time, I wouldn't be surprised if the deficits of the Medicare program had become so fearsome, and the debts of the program become so threatening, that both sides would be willing to consider modifications of Medicare. If not, subscribers to a buy-out had built up a six-figure retirement fund.
Medicare is already more than 50% subsidized by taxes and foreign borrowing, but the public scarcely knows it. I believe it is just a matter of time before the public realizes where it is going, but right now they see Medicare as getting a dollar's worth of healthcare for 50 cents if they think about it at all. I suspect it would take a full year or more of intense Congressional work to fill in the action details of a lifetime or lifecycle system, and maybe longer than that to re-direct public opinion. The proposal is voluntary, no politician dares to force it down anyone's throat. And the proposed incremental steps would also be voluntary. The investments would be in personal accounts, so no one could divert them for aircraft carriers. And the accounts would be lucrative, so no one needs to be afraid of their solvency.
Because compound interest on savings from the working years tends to rise after about age 45, a long period of Health Savings Accounts generates much more money than from a string of disconnected single years. Like the difference between term insurance and whole life insurance, you can't judge the improved investment of L-HSA by multiplying one C-HSA time your life expectancy, so it is a subtlety that two continuous programs would generate more funds than two separated ones.
Meanwhile, we have Classical Health Savings Accounts (C-HSA) which already have more than 15 million satisfied subscribers, steadily growing in number. Most of the Obamacare subscribers wouldn't want HSAs, and most of the HSA subscribers wouldn't consider the ACA plan, so total insured would increase. HSAs are described in the first chapter of this book, and in 35 years only about four or five improvements have come along, awaiting Congressional approval, but the bipartisan passage of them would calm the waters considerably. They need a tax deduction for the Catastrophic health insurance premiums, to make their owners just like everyone else. The easiest way to accomplish this is to extend permission for the Accounts themselves (which are tax-exempt) to purchase the catastrophic insurance which is required. Catastrophic health insurance is itself tangled in Obamacare regulations, which need to be revised, to deserve Presidential signature from any President. The annual deposit limits now need to be liberalized, and restated as total lifetime limits to account for the varying ages of new subscribers.
And new regulations need to accommodate the new phenomenon of passive investing, which is deservedly sweeping the nation, providing much lower transaction costs and higher average returns, which might be made still higher. Although HSAs are mostly self-administered, new investment managers are a little afraid of them, and well-established firms do not yet seem to recognize their enormous long-term potential. For these reasons, many early investors have been "savvy financial people", an image I am very anxious to see the change to "ordinary folks", without resulting in "high fees for rubes".
To return to the Supreme Court's King decision, the only version of HSA which is ready to go is the Classical one, which would still be improved by a few amendments, if the President is of a mind to cooperate. His own plan seems more or less in suspense, waiting for Big Business to emerge from its policy huddle, after two years of delay. Many tradeoffs and compromises can be envisioned for that coordination, of by far the biggest eligible group of subscribers. It is my commentary that employers' gift of health insurance in 1945 has long since been compensated for, by a corresponding drop in wages. So nothing but a tax exemption is left. The amount of money involved is so huge, it requires other issues to be brought into the discussion to avoid a stock market panic. It particularly needs to be emphasized that a loophole based on the corporate income tax rate is not at all -- not at all -- the same as an increase or decrease of corporate income at that rate. Getting a free lollipop at a 60% discount does not affect your company's income by 60%.
Nevertheless, the existence of fringe benefit tax dodges does create pressure to retain the high corporate taxes, and those taxes need to be reduced to keep our corporations from fleeing to tax havens abroad. My suggestion is to lower the corporate income tax in parallel with a comparable reduction of the employer tax dodge, a maneuver so delicate it ought to be overseen by the Federal Reserve, acting under a Congressional time limit. Such a proposal is so newsworthy it might well suck the air out of the room for Health Savings Accounts, and Obamacare, too. Everyone involved has an incentive to be cautious and reasonable, a difficult thing to be, during an election year. However, with prudence, breaking the logjam on the migration of American corporations to foreign locations could be the thing which suddenly gets everyone's attention.
New Health Savings Accounts (N-HSA)
Because it increasingly seems so unlikely a notoriously stubborn President would ditch his health plan at this late date, I turned my attention to seeing what could be done with using Health Savings Accounts for what's left. Obamacare is likely to be subject to twists and turns until after the November 2016 elections, and this administration has a history of preferring to operate out of sight. Therefore, my revised plan was to avoid the subject as much as possible, except for one thing. The savings in a portion of the Account would continue to accumulate as a tax-exempt investment account, available for extra medical expenses until age 66 when it turns into a retirement account. That is, an N-HSA account could exist untouched for as many as 45 years (21-66) without catastrophic backup insurance, or else if agreeable, with a catastrophic policy coordinated with an Obamacare policy. The purpose of this part of the structure was to provide a haven for a long-term buildup of funds, with as few financial drains on it as possible, while it stays out of the way. On the other hand, money seems no good if you can't spend it, so it needs some contingency exists.
It is possible to summarize a great deal of thinking by stating that it mostly can't be done. The evolution in healthcare has not reached the point where people aged 21 to 66 could save enough to support the rest of the population while taking care of their own health. In fifteen years that might become possible, but not yet. Even then, an additional thirty million people who are unemployable (prisoners in custody, disabled people, and illegal immigrants) would probably topple the system without some major reductions in the cost of chronic diseases (diabetes, Alzheimers, arthritis, emphysema, kidney failure) which might well take another fifty years. So we temporarily set this attractive idea aside.
Except for one thing, paying for children under 21. The system devised was to overfund Medicare slightly, gather investment income for a combined 104 years, and transfer the result to a grandchild or pool of grandchildren to pay for 21 years of healthcare. The grandparent transfers the money at the death after 83 years of compounding, but the child receives a lump sum at birth and erodes it to near zero by the 21st birthday. This is how 104 years are available to the next generation to grow a contribution of $42 to $27,000 while staying within the limits of the Law of Perpetuities. To do this requires passive investing of a total-stock index averaging 6.5% net of 3% inflation. According to records by students of the subject, the total stock market has averaged 11% returns for a century, in spite of wars and depressions. Right now, the main obstacle to achieving this is the community of middle-men in the financial world. It the problem continues to be a stubborn one, I advise taking delivery on the stock index security, putting it in a safe deposit box, and opening it decades later.
One issue comes up, that this system could produce unlimited amounts of inflated money by escalating the initial single payment. But it cannot do so if the account balance starts from, or must go to, zero. If loopholes are discovered, additional points of zero balance could be imposed.
Medicare Backup Insurance. In the original planning of Health Savings Accounts, it never seemed likely we would lack places to spend money earmarked for healthcare. However, 45 years really is a long time to have your money locked out of reach. The other side of this coin is the spectacular result of long-term passive investing. Just to throw in a couple of examples, the investment of $1000 at age 21 would result in a fund of $16,000 at age 66, and an investment of $1000 a year, every year from 21-66, would accumulate a fund of $246,375 at age 66, quite a nice retirement fund. And if you were lucky enough to live frugally, from 66 to 83 the $16,000 would grow to $ 43,800, and the $246,000 would grow to $680,165. If you grow uneasy about Medicare solvency, these sums would be nice to have in the bank. In effect, they could serve the function of catastrophic self-insurance, without the insurance.
As a matter of fact, it would be nice to include a provision that the Health Savings Account could dispense with the expense of catastrophic insurance when it grows to a point equalling it. It would dramatize the subtle transformation, from an account for drugstore expenses, into a serious investment tool. That won't happen soon, and it won't happen to everyone, but it is a realistic goal.
Healthcare for Children. Now, that leads into an entirely different direction. One of the perpetual headaches of designing health care finance is the fact that newborn babies are expensive. Part of that is due to inordinate malpractice costs for obstetrics, partly it is due to expensive care being devoted to premature babies and Caesarian sections. But mainly it is due to the parents being young people without much savings. It's pretty hard to design a pre-funded health care plan for an individual who starts the second year of life with a $10,000 debt.
His parents barely climb out of a financial hole before the child himself is ready to have children. As we have seen in earlier paragraphs, some frugal grandparents end up with more healthcare money than they can spend on their own health. American mothers average 2.1 babies apiece, and with a little fumbling it can be seen, that figure averages one grandchild per grandparent. If aggregate health care for children 0-21 averages $29,000, Grandpa could give a child a very nice start on life by rolling over his surplus at age 83 to a grandchild at birth -- if the laws permit such a thing, particularly if no family connection exists. (We'll have to leave unorthodox family sexual preferences to the matrimonial lawyers to sort out. )
With ingenuity, an additional 21 years can be added to the period of compound interest, and we've already shown what a difference that can make in an 83 (or maybe 93) year lifespan. In case you missed the point, when Grandpa relieves the cost of healthcare for a grandchild, the benefit is indirectly felt by the child's parents, although that isn't invariably true. Right now, the cost of a child's healthcare is the responsibility of the parent, so it's relatively fair.
Payroll Deductions and Premiums for Medicare. With 300 million citizens, a lot of exceptional cases can arise, and the foregoing probably doesn't contain enough incentives to start a stampede for N-HSA. Accordingly, let's consider forgiving the Medicare payroll deduction, in whole or in part, as a legitimate spending outlet. And if that isn't enough, consider waiving Medicare premiums. Both of these are legitimate health costs, so no one is violating the purpose of a tax deduction for Health Savings Accounts. Each one of them covers about a quarter of Medicare costs, so the funds are ample. (The present average costs of Medicare are about $180,000 per lifetime).
And finally, there's your Social Security contribution. SS isn't a medical cost, but it's a retirement cost, and that's what N-HSA could turn into. Reducing any or all of these expenses will free up a comparable amount of spendable income. If all else fails, consider abating your income tax. Income tax isn't a health expense, but it is often the largest item in a retiree budget. Reducing income tax could displace other funds designated for health costs, and hence indirectly could sometimes be considered a health cost, itself. There are plenty of ways to create savings with the government, and all you probably really need is their permission to do it.
To repeat, the purpose of all this is to find a way to subsidize the health expenses of children, which in my view is the unsuspected stumbling block for all self-funded lifetime proposals. Even the tax-evasive employer-based system gets into a tangle over it.
Subsidies for the Poor. We must conclude by mentioning poor people. It's, of course, true you have to start with some money to earn income from it. What are you going to offer poor folks, when the country is already deeply in debt? Well, it's practically impossible to say what Obamacare is going to do for them, although it will surely do what it can. The possibility of double-subsidies is still present when the situation is as unstable as it is, and the economy is as fragile as it is. So this proposal prefers to delay the subsidy discussion until Obamacare is also on the table.
To facilitate that discussion, this plan has been forced to organize the subsidy money for poor folks to come out of the age group 21-66, who are effectively the only real creators of wealth in the whole system. That coincides with Obamacare, and cannot be effectively discussed without including it. However, once it is coordinated, the subsidy to poor people could be quite substantial as a result of being placed at the far end of the compound interest curve and given enough years to work in an escrow account. If came to a showdown, the subscriber could take delivery on an index fund certificate and put it in a bank lockbox until it was needed. I propose separating subsidies from all healthcare and funding them independently. Independent of the intermediaries of their grants, that is.
To summarize, we start with a regular Health Savings Account with obstructions removed. In return for allowing the HSA to remain in the background, gathering interest, the HSA effectively assists Medicare. Assisting Medicare could mean helping in a Medicare buy-out, or it could be used to help Social Security. Or it could recirculate through Grandpa, to help the coming generation. An option for Grandpa to make the choice would simplify administration, but possibly unbalance something else.
Outline:
Summary of Two Beads on a String:
Health (and Retirement) Savings Accounts as a Political Entity: A Lobby for Balanced Budgets
No government should favor one class over another.
Health (and Retirement) Savings Accounts as a Political Entity: A Lobby For An Improved Share of the Private Economy
The present system cannot possibly support adequate pensions for all, at least for decades to come. Since this is more or less permanent, it should be put to use, balancing proposed subsidies. On a small scale, the German and Swiss systems follow this principle, but they have been unpopular without historical disasters to preserve them.
20% copayment absorbtion
Apparently, some regions are self-suporting, some are in constant deficit.
Accumulated debts of the past.
The system cannot possibly afford to carry these debts, and must fight to avoid adding new ones.
Outliers which do not fit the model
This varies by region, which could lead to politicall partisanship.
Adjusting the Existing Pearls to Scientific Advances
A legitimate portion should be established.
The Ultimate Tension: Subsidies vs. Balanced Budgets
Employer-based Gifts
The system of increasing corporate taxes, then expunging them with loopholes, must be stopped, but probably gradually. Since corporations must compete internationally, effective rules are crippling. Therefore, it is possible the only solution is to eliminate corporate taxes (and shift the revenue burden to individuals.)
Balancing Ownership(stockholder) control vs. Corporate Profits
Some way must be devised to keep price gouging under control with taxes for the absence of competition. The patent system is a useful model, but its weakness has been the time limits.
Conclusion: exploiting the curve of compound interest must be protected by 1) special safeguards against imperfect agency 2) special safeguards against rare catastrophes 3) limiting the rules to American residents 4) the substitution of competition for monopoly .
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Let's apply a Due Diligence approach to the technical steps of this proposal. That is, skip past the overwhelming detail of existing data, to focus on conclusions to test. First, divide the population into three groups: dependent children, the working age group, and retirees, and start with Medicare. That's ignoring the advice that Medicare is the "third rail of politics--touch it and you're dead". The easiest place to begin is with the elderly, because they have the greatest medical cost, and anyway if we continue to "kick the can down the road", we are admitting defeat before we even start. Medicare is not only where most of the costs are, but predictably where they will migrate further. It's only half paid for by the recipients, while a major goal is to break even. Indeed, as science cures diseases, surplus should be consumed into a retirement fund, so realistic projection errors could overstate the revenue. As the old Quaker observed, the best way to have enough is to have too much.
The Composition of Medicare. With the single important exception of disabled persons, Medicare eligibility is age-related not income-related. Everyone between the ages of 65 and death (averaging now 84 years) is eligible, regardless of finances. We also contemplate funding children out of this source by transferring 5% for them. It's not much, but it is central, and it dramatizes the cost distribution. The raw data is blindingly comprehensive, sometimes to the point of obscuring important conclusions, so rather than starting with it, we should come back to data after we see what we need.
A fair working assumption is that Medicare borrows about half its costs, while Medicare totals constitute about half of total medical costs. So at least a quarter of all medical costs are already indebted. Medicare's actual sources of hard revenue are about evenly divided between payroll deductions from future beneficiaries, and premiums from existing ones, or about an eighth of total costs, each. So about twice as much is borrowed, as pre-paid in wage tax (one-quarter of total cost borrowed, versus one eighth pre-paid). Since lifetime costs are estimated by actuaries to be $350,000 in year 2000 dollars, the problem is to take $42,500 and turn it into $85,000 in 21 years in a post-mortem trust fund--seemingly at only half the rate of a reasonable rate goal of 7%. Average costs are even somewhat overstated because the 9 million disabled come from younger age groups who also contribute less than average. Furthermore, leftover revenue would probably be available for covering gaps in healthcare coverage in other age groups, as yet to be decided by Congress. You might cover these gaps by doubling the wage withholding tax, but it would be uncomfortable. Our proposal is to substitute compound interest principles, which are harder to explain, but easier to accept.
At present, the Health Savings Account is the only medical payment system which could adjust to the predicted migration from healthcare to retirement care, and it is the only component which could then fund all children with about a 4% carry-over from each grandparent to an average of 2.1 children per mother. HSA currently provides for money still left in the account at the time of achieving Medicare coverage, to flow into an IRA which can be spent on anything. If you are lucky with health problems, you can even seem to use the same money twice. That's something to brag about, but it could be made even better. Right now, for a system hoping for millions of subscribers, it is too rigid and uniform. The idea of post-mortem Trust Funds (see 1b) somewhat smooths this out as well as generating a four-fold increase in revenue. Money is left over from Medicare for retirement, and then if there is no debt left over from retirement, you do not need a Trust Fund. But flexibility would be particularly useful during the transitions; some will need it, some won't. The fact that you don't know in advance, enhances the ("Old Quaker") incentive to overfund the balances.
I see no reason for HSA/IRA migrations to be so uniform, so one-size fits all. Surely there will be subscribers who would prefer to accumulate funds for later life, rather than as soon as possible. There is no reason to demand that everyone be within a certain age group or to stop depositing at a certain age. If there is some such reason, it ought to provide for a court or agency to approve exceptions. The same court could handle the vagaries of marriage affecting grandchildren (see 2.0, below).
For example, there is even no reason to terminate accounts at the time of death. The transition will uncover numerous exceptional situations, and some people would even want to create an HSA at age 64. If they want to do it, why spend hours figuring out how someone might somehow game the system with his own money? If their parents can fund an HSA at birth, why not get started twenty years sooner and add four times as much accumulation by age 21? If there must be disincentives to accumulate money, apply them after the termination of the Trust Fund, when family responsibilities are mainly (but not invariably) coming to an end.
Growth. Money at 7% doubles in ten years, so one specific proposal is to re-direct the money already being collected during 60 years, doubling it during a gradually declining 104 years. The money must earn 7% within a Health Savings Account if it is to pay for Medicare plus a million dollars per person left over for retirement. (Bear inflation in mind, however: money at 3% gross might not grow at all.) Compounding should start early in life, remaining in one continuous storage location for as long as possible, with escrowed compartments for specific goals, like buying out or consolidating shorter-term vehicles and anticipating some marital ones. Tweaks to current Health Savings Accounts will suffice but must be at least mentioned in the legislative language, to guide the long-term regulatory one.
Only a few present limitations on HSA prevent this lifetime compounding from beginning immediately, and 7% annual returns are expected back from financial intermediaries over the longer term. Even though raw stock market returns have averaged 12% annually over the last century the financial community will probably object to 7% return for the customer from total market index funds because of its 3% inflation assumption within the middleman portion, and the intermediaries have already shown they resent the security measures. (Fear of the trial bar probably plays a role in fiduciary disputes.) But the reward for winning the lobbyist war is funding half of the shortfall deficit by placing risk on the proper shoulders. Two principles guide revenue enhancement : begin to save early, and relentlessly escrow inescapable life goals. Benefits from careful adjustment of terms with legal permission might range all the way from doubled returns, to cutting them in half.
Running through this dispute with your financial advisor is the need to use the "annual total returns" on major domestic total stock market indexes as a benchmark to be exceeded to escape penalties for ethical misbehavior. The principle in Law is well established that if there is no injury, there is no case.
1. Creating Revenue Instead of Floating Bond Issues.
The underlying problem is to fund retirements after you have funded Medicare when both of them begin at the same time. Suggested technical steps now follow, trying to co-ordinate designated approaches as beginning with as little amendment as possible, until the fate of the Affordable Care Act is decided. Beyond that, it is a possibility that, if the tax exemption of employer-based insurance is equalized, funding might become easier for the other half of the employable population . At the time of closing down the trust, there are only two eligible recipients, the Medicare Trust fund, and the IRS, so it usually makes no difference how the Government got the money during the long transition phase, and the extra administrative cost would be considerable.
1b. Post-Mortem Trust Funds. Some parts of this proposal are not obvious, and should at least be mentioned in the statute to guide the subsequent regulatory phase. For example, I see no good purpose in limiting Health Savings Accounts by age or occupation. Expenditures from these Trust Funds should only pay off Medicare-related debts. This trust fund concept alone would quadruple available revenue (and beneficiaries during a transition.) The Health Savings Account already devotes any surplus after 65 to a retirement IRA; why not make the timing optional, and hence more flexible? Underneath any regulation you will usually find a lobbyist.
The transition from our present system to a better one will be the biggest problem; why make it harder to manage? If someone is aged 64 when the program starts, why not give his estate twenty more years to invest and retire when it judges he can afford it? With a trust fund, if he is dead and has money left in the account, why write off his retirement debts immediately after he dies? The money in a trust fund will continue to grow until it becomes perpetuity -- one lifetime plus 21 years. That means his estate will have four times as much money to pay his debts--what's the matter with that? The central point is to expand the number of people able to pay back what they owe -- to the government; who cares if they are alive or not when the money is paid. Effectively, an index-fund certificate is funding an escrow account. Why not "take delivery" of the certificate by the creditor, whether or not the debtor is alive? The result would be many more funded accounts, not more bad debts.
1c. Last Four Years of Life Reinsurance. Alternately, a more complicated 50% partial buy-out of Medicare could continue present systems at half price. Eventually, the cost can be adjusted from actual payment histories, both individual and collective. The outcome might be having the transition time by pre-payment and repayment to Medicare at death, as well as replacing a liability with an asset. This is hard to explain, and post-mortem trust funds are probably politically preferable.
1d. Revenue Estimation By Exclusion. This discussion envisions lifetime coordination, but since future revenue is uncertain, adopts the temporary hypothetical that ACA is revenue-neutral. Like Frank Sinatra's song about "making it" in New York, if the idea is feasible without ACA and/or tax exemption revenue, it surely would be even more feasible with those two Laws adding revenue. Without such revenue, this proposal still addresses the majority of present medical cost but would need to be endlessly integrated with whatever emerges from ACA. One tweak is apparent: catastrophic insurance is mandatory in an HSA, but there may be long periods of employment or marital situations when a lifetime depositor has two health payment systems at once. Therefore, if a Health Savings Account has not made a health payment for a year, the premium for catastrophic coverage should be waived for the following year, substantially reducing its overall cost. The underlying assumption is that when you have two health insurances, you especially don't need two reinsurance. To pay the premium by the HSA itself would greatly ease this problem.
1e. Steadily Improved Longevity v. Steadily Greater Retirement Cost. For the first time in history, longevity has increased by 30 years in a century, followed by 3 more years in the past decade. That's a good thing, of course. But someone neglected to plan for increased retirement costs, in some ways a "bad" thing, directly caused by living longer. That is, while the present working third of the population is paying for its parents, the cost of transition will double in size, but costs of the retired third who benefit may increase tenfold. By that time, the contributors will evolve into becoming retired beneficiaries without employment, so revenue will not increase tenfold, and the situation becomes impossible to correct. The imperfect precision of these projections is irrelevant to their gloomy conclusions. Furthermore, the interests of the citizen and his government will often get into conflict, an inherently disruptive situation which interferes with solutions.
2. Grandpa Pays For Grandchild With Newly Created Funds.
A vexing parallel situation is the location of children in the scientific cost curve. Medical costs for children may sometimes seem impossibly high, particularly if obstetrical costs are lumped with them. But they are really quite small when compared with the late-in-life compounded revenues of retirees. In our plan, the money is newly created, belonging to no person, so it can be shifted with less resistance. Costs of children are disproportionately troublesome because of their timing within the context of their entire family. Politically, they insure a lot of people at not much insurance cost, so expect a lot of new children's hospitals to be built if they are insured.
2a. Shifting the Cost of Obstetrics and Pediatrics From Mother to Child, and Having Deceased Grandpa pay the Bill. The lifetime medical cost curve is J-shaped, with the lowest point at about age 17, rising steadily until death averaging age 84. The shape of the J-curve is emphasized by half of Medicare cost being experienced during the last four years of life. (This conclusion is blurred somewhat by adding 9 million younger disabled to the Medicare rolls. That adds to lifetime average Medicare cost, appearing to portray lifetime cost as even more J-shaped.) Even accounting for the distortion, financially struggling young parents have a hard time managing medical costs, made even worse for unmarried mothers. Middle-aged women often have gynecologic costs which lack a satisfactory resolution if they also have marital financial problems. Most of these distortions are artificial. Stripping them away by assigning them to the child would expose a steeper incline to the J-shaped cost curve of both sexes. From a politician's standpoint, equalizing medical costs of the two sexes would soften some political noise, by reducing employer costs, reducing female wage inequality, even affecting immigration by raising the citizen birthrate.
2b. How Is Money Transferred from Grandpa to Grandchild? The answer is simple: it is transferred from HSA to HSA at Grandpa's death, or Grandchild's birth, as a 5% transfer. The math means one transfer suffices for 2 grandchildren, at a 2.1 birth ratio.
3. The Working Age Group From 18 to 64.
Our basic position is simple: we ignore the working age group until business and government reach an agreement. Meanwhile, we treat both Obamacare and Employer-based insurance as unchanged and revenue-neutral, while fervently hoping for some surplus revenue to reduce the cost of the dependent two-thirds of the population. Employer groups have resisted being taxed for indigents since long before the Affordable Care Act, arguing that hospital cross-subsidies were already more than their fair share of charity. We hope things will evolve as two new systems, one of which is an HSA with temporary waivers of catastrophic premiums, but both employer groups and ACA have regarded their negotiations as nobody else's business. Blue Cross seems to be taking a cautious look at HSAs. We wish they would read one of John Bogle's books.
3a. Employer Donated Employee Groups and Tax Implications. Two other vexing laws stand in the road of peaceful resolution. The first is the Henry J. Kaiser tax loophole, apparently the largest tax loophole for individuals of all time. So much profit is at stake, one scarcely blames big business for trying to extend it, but it seems nevertheless un-Constitutional to permit a tax loophole of this size to persist for 70 years for half the population, while stone-walling extension of it to the other half. It is as though no one could read the "equal protection" clause. There is little doubt the fairest solution would be to abolish the health-insurance double tax exemption for everyone, but the resultant confounding of world trade prices would be daunting. The simplest solution is to have Health Savings Accounts pay the catastrophic insurance premium, thereby extending a full tax exemption to everyone. That maneuver would reduce federal revenue, which would then have to be adjusted in the coming Tax Reform legislation.
3b. Big business seemingly has no pre-existing condition problem, but in fact they avoid hiring impaired people to avoid this issue if they can, leaving it to their smaller competitors to wrestle with last hired, first fired. So a small issue became a big one; in a sense they created it.
3c. Medicaid: A Special Age Class Trying To Become An Age-Independent Income Class.
Finally, there is the Affordable Care Act, with missteps addressed. Medicaid was originally a state-sponsored program for mothers and dependent children. The Affordable Care Act tried to expand it to all poor people and met with mixed success in different states, so Medicaid expansion potentially invades the working age groups. It is uncertain whether the nation can afford expansion, and its fate probably depends on the decision, possibly on constitutional grounds. If healthcare is ever to pay for itself, extra funds must ultimately derive from the working third of the population. (Children have no means to pay for future care, while retirees are largely without working income until the very end.) In this analysis, we treat the net cost of the age group 18-64 as revenue-neutral. That means this one-third of all inhabitants must generate its own costs, plus enough surplus to cover the deficits of the other two thirds who are dependents. Reduce the dependent cost, and you will reduce the strain on the employee group. Furthermore, the J-shaped medical cost curve means most new costs will increasingly arise among retirees. Already, Medicare is 50% subsidized, and then re-borrowed with bonds. That means it is already 50% laundered and can scarcely stand more burden. It is very difficult to make long-term plans when the finances of ACA are so obscure, and its margin for error so narrow. In one form or another, we repeat this performance every time political control reverses. The private sector could not survive without a better form of "due diligence" than this. I suggest the President immediately assemble a due diligence team for his own information, mostly consisting of accountants, to give him the news, however bad, of where we stand. And then, ways must be found to extend the "surplus" from employed people to the unemployed two thirds, stretching a tiny surplus to meet a big shortfall. Without that tiny surplus, medical finance is close to a cost spiral.
4. Constitutional Issues.
For the most part, the rest of the uproar about the cost of medical care is mostly man-made, thus seemingly should be negotiable. The problem with this attitude is the man-made problems are so numerous and of such long standing, they appear more intractable than one would suppose is realistic. In the first place, the Tenth Amendment of the Constitution clearly makes the licensing and regulation of medical care reside exclusively in several states, even in spite of greatly increased nation-wide transportation. Both specifying state regulation (for instance, the McCarran-Ferguson Act) and national regulation (ERISA) are so clear and carefully worded it is hard to guess why both have not been challenged, or indeed which side would win an appeal. The Maricopa 4-3 Supreme Court decision clouds judicial resolution along anti-trust lines. Reams of legislation by State Legislatures suggesting one organizational pattern, and voluminous Congressional legislation suggesting the opposite, allow the citation of precedent to be almost anything. Certainly, no one wants another Civil War.
5. Pay As You Go. A major mistake was made in 1965 when Medicare adopted the "pay as you go" system. The program might never have started without it, so Lyndon Johnson cannot be exclusively blamed. But the first year recipients were enrolled free to the beneficiaries, and since then, revenues have been spent as fast as they are generated. No interest was generated on this enormous foregone revenue, and the recipients are now dead. Continuing revenue consists of payroll withholding of 2.9% of income during working years. It also consists of premiums amounting to a similar total. Before the books were scrambled with ACA subsidies and $30 billion for "meaningful use" of electronic medical records from the stimulus package, this revenue source would almost have paid for Medicare if it earned 7% income. At present, it will have to be amortized. I suggest we change the recipient address on the envelope of this revenue, from Washington DC to individual Health Savings Accounts, who would then employ John Bogle's system of passive investment of index funds, hoping to achieve 7%. In time, the numbers could be adjusted to be revenue precise. When the due diligence team reports the equilibrium state of affairs, further adjustments will have to be made. They won't be revenue neutral, but we are starting 70 years late.
6. Substituting Passive Investment for Pay/Go. So far, we have only explored one approach to paying for lifetime healthcare for everyone -- take the money already being spent on Medicare, deposit it into escrowed individual Health Savings Accounts instead of milking it for pay-as-you-go, when index investing could on average double it at 7% tax-free returns in ten years (sixteen-fold increase in forty years, thirty-two in fifty years, etc). Doubling its revenue should make it self-sufficient, easily surpassing almost any expected inflation after a ten-year transition. Because Medicare costs are age-stratified, not income-stratified, this heaviest of Medical costs now subsidizes no other age groups except disabled persons, so paradoxically, voluntary participation is facilitated.
7.The hardest thing to explain to non-mathematicians is the power of compound interest to increase virtual interest rates, a concept that baffled even Aristotle. Essentially, compounding explains why increasing longevity steadily increases effective interest rates, a saving grace for this whole idea for beating inflation. In fact, this saving grace increases effective interest rates after age 60 by so much, that paying for a grandchild's health cost is fairly trivial, compared with the struggle their young parents might endure. A five percent dollar transfer would hardly be noticed by grandpa's heirs at age 84, whereas it might seem an insurmountable amount to his young children, acting on behalf of his grandchildren. Simultaneously protecting grandchildren and grandparents with a single rearrangement may strike some as fraud, but it isn't. What's really strained are two things: convincing 300 million people to do the simple math quietly, and to keep the custodians from spending the boodle, whether on stockbroker income or on aircraft carriers. In fact, I have omitted much mention of "last year of life re-insurance" as unneeded, but to be held in reserve in case a chaotic transition requires shortening.
8.Why use Health Savings Accounts, when we could just use single payer? Well, that translates to, Who do you trust not to misappropriate it? Robert Morris of Philadelphia took great pains to arrange the Constitution and the First Congress to prevent the federal government from ever owning shares of a business, because of fear of "imperfect agency". That is to say, Morris foresaw the greater danger in diverting medical money to battleships, than to Credit Default Swaps. No doubt your victorious government would share some of your money with you if it won a war, but what if it lost a war? You can make your own translation of what Morris meant, but it was essentially what is very wrong with medical cost control in general: Nobody spends someone else's money, as carefully as he spends his own.
9. There are other approaches to paying for medical care, and we may need them all. In addition to earning income on idle cash balances, we could thus display the cost of care by moving most patients from the hospital to the home or retirement community, and exposing the internal cost subsidies (usually transferred through indirect overhead charges). The wrong people are doing the medical commuting; shifting the center of care to the retirement community, along with doctors' offices, laboratories and parking lots, would reduce costs by reversing the commuting. Its biggest cost savings would come from disrupting the internalized accounting, getting control of malpractice awards, rationalizing wage and executive costs, and removing middle-man costs from supplies, especially drugs. But I predict these streamlining efforts will prove to be disappointing. The public is proud of its hospitals, and will defend them.
10. The best way to reduce costs is by research. Much of the research is wasted money, and there are hundreds, perhaps thousands of diseases. But scientists are not fools, they concentrate on the expensive and devastating diseases. It is estimated that a majority, perhaps 80%, of medical cost is spent on four to ten diseases. I'm afraid that eradicating diseases like cancer and diabetes might lengthen longevity somewhat, while other diseases like Parkinsonism and Alzheimer's could take their place. After a while, of course, the disease burden will diminish, and within a century perhaps the cost effect will be to reduce health costs to the first and last years of life. In the meantime, however, the cost of research, new drug development, etc, may even raise medical costs. In the meantime, the immediate effect of research on costs could be uncertain. When a tough-minded drug czar is finally appointed and faces down public clamor, we may well discover how to identify and direct the efforts of good researchers. Generally speaking, research is a young man's game; they burn out. Because they are young, they make poor administrators. Somehow, the system needs shaking up, so unproductive researchers can be identified sooner and shifted to teaching, administration, and clinical practice, without fear of stigma or shame. That's mostly identifying research failures. Identifying scientific brilliance is an entirely different thing, because brilliance is in great demand, financially and otherwise. I'm afraid the American system is expensive but effective: we throw money at a goal until it succeeds. No other nation can afford to match that. Some time within the next century, I expect we will be down to the expensive first and last years of life, plus a horrendous retirement expense. We should arrange our systems to direct unspent medical money into more comfortable retirements, without exactly knowing when the two requirements will mesh. That's why a self-adjusting overflow surplus has great advantages.
At present, the Health Savings Account is the only medical payment system which can currently adjust to this predictable change from healthcare to retirement care. HSA currently provides for money still left in the account at the time of achieving Medicare coverage, to flow into an IRA which can be spent on anything. That's something to brag about, but it could be made better. For a system hoping for millions of subscribers, it is too rigid and uniform.
11. The final point to be made concerns Subsidies. The foregoing discussion focuses on Payment Structure. Whoever considers costs must add the cross-subsidies which shift real costs from poor patients to insured ones. At first, reimbursed systems appear cheaper than straight-forward ones, simply with prices re-named reimbursements. But be sure to include subsidy cost before deciding which structure is really cheaper. If you want to subsidize this system, go right ahead.
George Ross Fisher M.D.
203 Chews Landing Rd
Haddonfield, NJ 08033
grfisheriii@gmail.com
(Cell) 215-280-6625
(Office) 856-427-6135
(Fax) 856-427-6136
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.