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Rittenhouse Sq.
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The Rittenhouse Square "area" has far outgrown the square itself, and the term when used by locals usually refers to the whole area of central Philadelphia West of Broad Street to the Schuylkill, bounded roughly by Chestnut Street on the North, and Pine Street on the South. Rittenhouse Square Park is in the center of this primarily residential area and is now mostly ringed by apartment buildings. Rittenhouse Park was once enclosed by a high cast-iron fence with sharp-pointed palings and gates that could be locked at night, just like so many London Squares. The fence disappeared around 1900. Around 1840 the first house was built on the square, and then a fifty-year building boom (reflecting the burgeoning prosperity of the city) filled the fashionable area out to the limits defined by the Schuylkill bridges at South Street and Walnut or Chestnut Streets. Because of the advent of central heating and inexpensive window glass manufacture, the low ceilings and small windows to the East of Broad Street (promoted by the need for fireplace heat, plus laws taxing both windows and white paint) were replaced by tall ceilings and big windows without mullions. These townhouses were big, often with twenty or more rooms, and the occasional narrow streets filled with small houses were for servants, however, gentrified they may have recently become. The center of fashion shifted over the years, and right now probably Delancey Street is the pinnacle, although it is patchy and arguable. After the 1929 crash (of the stock market), many fashionable Families had to abandon the unmaintainable big house and move into the little servant house in the neighboring alley in order to remain in the fashionable area. The Big houses with its big taxes then became several apartments or a storefront with apartments above. Or it just deteriorated and then was torn down, unless some economic up swelling happened to rescue it again. The fact is that the number of big houses in the area exceeds the number of wealthy people who want to live in them, and the fashionable area has thus had to contract, but it has not disappeared, either.
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Spruce Street
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Rather than swamp this blog with a tedious recital of the previous occupants of so many show houses, let it suffices to say that the families which once had the most Notable Houses around and near Rittenhouse Square were Roberts, Weightman, Frazier, Gibbs, Harrison, Stotesbury, Cassatt, Jayne, Harding, Janney, Gazzam, Scott, Dobbins, Bullitt, Baugh -- and, of course, many others too.
Within this district, churches abound at the Northwest corner. Clubs are strung along the Eastern border, between the residences and the financial district along Broad Street. And the Southern border is where the doctors used to be. I had an office once at 19th and the Square, but the main concentration of doctors was on Spruce Street. If you have seen Harley Street in London, you will recognize the pattern. Originally, the doctor had his office on the ground floor and lived upstairs. The zoning regulations in both London and Philadelphia permitted professional use of the first floor only if the professional lived in the house. So, when the advent of automobiles induced most doctors to live in the suburbs, the office continued on the first floor of these houses, and the doctor's nurse lived upstairs, to satisfy the requirement of the zoning law. But that was just a transient phase; the advent of health insurance during World War II induced a more hospital-centered medical practice, and Spruce Street soon lost its medical flavor as doctors concentrated their offices around hospitals and their ample parking lots.
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Resselaer
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As traffic heading for the South Street bridge or the Walnut-Chestnut-Market bridges defines the limits of the district, the Rittenhouse Area has more or less contracted to the four blocks of East-West streets which terminate at the river, creating a more quiet and peaceful cul-de-sac.
Some idea of the former grandeur of the area can be gained by looking at the former Van Rensselaer home at 18th and Walnut, which had a brief fling as a private club before it became a gift shop. Or the Wetherill Mansion further South on 18th Street which now houses the art alliance. Or the grey stone house a couple of doors to the West of it which was where Governor Earle lived and was the last single-family house on the square. One of the houses on DeLancey Street was featured in the movie "Trading Places" as Hollywood's idea of real opulence, and a great many other houses tell a famous story. The Rosenbach Museum is at Spruce Street, very well worth a visit, particularly on Bloomsday. And the Thaw House at 1710 Spruce tells a particularly lurid tale of the Gilded Age.
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Michael Millken
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It is not fanciful to link the credit crunch of 2007 with the savings and loan problems two decades earlier. Both bubbles were related to home mortgage financing, and the first bubble turned destructive by seeking money to keep itself going. If dammed-up surpluses of the Middle East and China could be made available to American mortgage lenders, there seemed to be ample demand for them. Furthermore, while Michael Millken is mostly known for his prison sentence, he had nevertheless made an important observation. Risky mortgages were generally overpriced. That is, the aggregate extra cost of subprime defaults was appreciably less than the aggregate extra interest being charged for them. If some way could be found to make the risk premium more appropriate to the actual risk, home mortgages would get permanently cheaper, and mortgaging profits would likely be gratifying. Mortgages needed a better system for establishing appropriate interest rates, and they needed more of that underemployed wealth of the Orient. Derivatives suggested themselves as a solution for both issues.
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Chairman Alan Greenspan
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The unaccustomed wealth of Asia and the Persian Gulf was put under heavy pressure to migrate to America by lack of local investment opportunities but was bottled up by rudimentary banking systems in the developing world. As ways were found to get around obstacles for exporting this money, the danger increased of "asset bubbles" inflating whatever they touched, for example, the dot.com stocks in 2001. The pressure indeed needed to be deflated, but carefully. Furthermore, certain accords reached in Basle around 1982 made it even easier for banks to issue loans, while the favored tax treatment of interest from residential real estate loans directed lending to home mortgages. Indeed, the calculated cost comparison between buying a home or renting it had once remained identical for fifty years but began to diverge in 1982. By 2007, it was significantly more expensive to buy than to rent, even though many analyses suggested a housing surplus existed, particularly in California and the Southwest. While the interest-rate premise was correct, the earlier campaign against "redlining" probably did encourage loans to people who could not afford the house, and there was momentum to this idea. But the most obvious stimulus to continued high-priced home purchasing, in the face of a growing over-supply, was the momentum of abundant cheap money. To mop up a growing housing surplus, initially low "teaser" interest rates were offered for ARMs, or adjustable rate mortgages which could abruptly adjust upward after a few years. A growing problem was being set up to go over a cliff. Chairman Alan Greenspan fretted at his seat on the Federal Reserve Board that it was difficult -- a conundrum -- why market interest rates for long term borrowing did not rise enough to put a stop to this. In retrospect, it seems likely the risk premium had long been too high and was now reaching for more appropriate levels. Derivatives were the main instrument for bringing rates down, and they did it with breathtaking speed, perhaps overshooting in the process. As is often the case with innovation, the risk of failure was overemphasized, while the dangers of success received little attention.
Credit derivatives can also be viewed as a form of insurance, protecting the lender if the borrower defaults. That doesn't sound like a bad thing. True, all insurance creates a "moral hazard" that encourages risky behavior by reducing its pain. No one, it is said, washes a rental car. But in a housing surplus, the insurance protection allows banks to take more chances in marginal situations, using up the surplus. Young folk is allowed to get started in life; the poor are allowed to enjoy the American dream. Unfortunately, some will abuse the privilege by buying speculative houses in a rising market, and "flip" them. Many will buy bigger houses than their income can support. Some, who should more wisely rent because their employment prospects are not secure, will be tempted to buy. All of these considerations are wrapped up in the interest rate the lender charges, so eventually, interest rates will rise to a level that anticipates -- discounts -- them. Interest rates did not rise. The old levels of risk "premium" did not reappear.
It seems now that increased demand stimulated by derivatives was not resisted by a shrinking supply of money, with a balance maintained by the adjustment in interest prices. Indeed, a good even brilliant idea was crippled by a series of responses to the puzzling environment. Banks learned to sell pretty much any mortgage as quickly as it was created; after that, the extra risks were none of their concern. It has been suggested that banks be required to retain a portion of any loan they originate but to do so would exhaust the bank's lending capacity during a bonanza of business. Standards for a bank's lending capacity are set by the Federal Reserve, as a multiple of their retained profits or reserves. Those capacity limits had been relaxed by the Basle accords, but only on condition, the banks restricted themselves to AAA-rated loans. This will turn out to be a critical point because it put unwarranted reliance on the opinion of the rating agencies, and in any event, led to "tranches".
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Federal Reserve Building
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Here's how things roughly went. Investment banks learned to buy up and combine great bunches of these mortgages into a bundle. The bundle was then sliced into tranches of lesser bundles, attempting to sort out the bundles by their credit rating. Elegant mathematical formulas were brought forward which did a fairly good job of sifting the potentially weak loans away from another bundle that was largely risk-free. Those better sub-bundles, thought to warrant a AAA rating, were then sold to institutions who were restricted to them by the Basle accords but paid a lower interest return than the mortgage pool they came from. That was already an uncomfortably low rate by historical standards, now made lower. However, in view of its superior quality with default risk removed, it could be bought with borrowed money, eventually creating an adequate but leveraged return after costs. The debt was thus piled on debt, and the process repeated with exaggeration on the next lower quality tranche, the AA paper. And so on down to the lowest grade, which was thought to contain all or almost all of the default risk in the whole mortgage pool. People who bought the lowest tranche were real risk takers, experts who knew what they were doing, receiving a premium interest return to do it. Because this process was thought to create a sophisticated assessment of the true risk in the bundle, it was thought it would justify lower rates for everybody, squeezing out the unnecessary cushion of comfort. It was a plausible idea, and if it worked, it would be a brilliant one. But it had a big unrecognized flaw. It assumed that essentially all of the defaults would occur at the bottom of the pile, or possibly at the next higher level. There would be no defaults in the AAA level until all of the lower tranches had been wiped out -- an almost inconceivable economic calamity.
Ingenuity was then carried to yet another level. Credit derivatives are a form of insurance against default, but there was a more traditional form already in existence. Several so-called monoline companies offer insurance against default, backed by the enormous strength of pooled resources of a number of the largest strongest financial institutions in the world. The rating agencies assess their strength as AAA, the highest quality. Now, it was reasoned, if a tranche of mortgages rated AA by the agencies were insured by an insurance company, itself rated AAA, then the effective risk to the investor was really only AAA, or negligible. Alchemy. The lead was turned into gold. Unfortunately, when the panic finally hit, monoline insurance stock which was considered rock-solid at $80 a share, was soon selling for $15. The flaw in all this was that the rating of the bond was based on the credit rating of the borrowers. No one had supposed that people who were quite able to pay their debts would walk away from them. When home prices fell only ten or so percent, many of them fell below the cost of the borrowed-up mortgage. Instead of feeling horror at defiling their credit reputation, many of these prosperous borrowers regarded foreclosure as simply a business decision. The protection of monoline default insurance was trivialized when one of the smartest investors in the world, Warren Buffett, announced he proposed to form a company to ensure municipal bonds, and only municipal bonds, against default. Since that might strip away what had become the only profitable portion of the monoline portfolio, the prospect of such crippled companies paying housing claims would be bleak. Pseudo AAA tranches were now clearly back to being AA, and even real AAA tranches were under a cloud. All of this was not anticipated.
There remain two other questionable developments in this colorful adventure: the role of the rating agencies, and off-the-books behavior by the regulated mortgage originators.
It is misleading to make precise predictions, about almost anything, eighty or ninety years in advance. However, predicting the average of millions of people is more accurate than predicting any individual future, whereas mathematical principles like compound interest are precise, forever. But let it be clear; what follows is rounded off, estimated, and largely based on projecting past experience into future performance. You must do so, if you want to talk about it, at all.
Investments are more predictable than health costs. At 10% they will double in seven years; at 7%, doubling investments takes ten years. Ten in seven; seven in ten. From birth to age 91, there will be time for thirteen doublings of investments. At seven percent, only nine doublings. With a focus on health economics, Americans divide into four groups: children from birth to 26, working people from 26 to 65, retirees over 65, and poor people of any age. We assume only people from 26-65 are able to deposit money in Health Savings Accounts; children and poor people are dependent on working people to help them, while retirees must live on money they earned while they were 26-65. Businesses and governments are pass-throughs which sign checks, but in our way of thinking, only individuals make and spend money in the national accounting of it. These are the assumptions, please read them twice.
1. Investment predictions are based on Ibbottson's compilation of actual market performance since 1926 of all investments in all classes. It's safe to assume index funds, now available in the trillions of dollars, will follow Ibbottson's patterns for the next hundred years, only because they were remarkably steady during the last century. Two major depressions and a dozen minor ones, one World War and a dozen smaller ones, were unable to shake the long-term trends for more than a blip in the lines.No such prediction can be guaranteed, of course. Highly diversified, Index funds have management fees of about a tenth of a percent, making them steady passive investments for people who have little investment experience, and probably equalling performances of most people who do. Using Ibbottson's raw data, half the population will do better and half will do worse--by managing their own money, even with professional advice. But if everybody buys the index fund without advice, everybody will perform the same. Collectively, the average common stocks of "small" American corporations (but nevertheless greater than one billion dollars of market value each) achieved a ninety-year performance of 12.2%, which we here discount to 10% by using diversified ETF (index funds) of really big stocks with familiar names.
2. At present, the only realistic source of deposits into a Health Savings Account is by individual investors within the age group 26-65, except for investment income. Contributions made on behalf of children derive from money earned by working parents or by -- somebody else aged 26-65. Retirees invest, but the core of what they invest was earned earlier, again 26-65. We ignore exceptional cases. The population 26-65 supports their own costs and those of everybody else. Nevertheless, it is impossible to make precise predictions about the time and amount of shortfalls in individual Accounts when sudden withdrawals must be anticipated. For the most part, transfers are made from accounts in surplus to accounts in deficit, but particularly during the phase-in period, supplements may be necessary. However, everybody's Health Savings Account is a separate piece of property and not a pool. This difficulty is managed by slightly overfunding everything to keep transfers to a minimum, and pooling these surplus amounts by agreement to reimburse them at some later time for some specific purpose. Furthermore, the principle is announced in advance that if shortfalls are unavoidable, the accounts to be billed for it are to be limited to the working-age group from 26 to 65. The ultimate fallback is the full faith and credit of the taxing power of the U.S. Government; but we hope to avoid using it except in dire emergencies like a national nuclear attack or something else of this order of severity, eventually establishing a reputation of a self-funding program. Within that program, the real fallback is to the 26-65 generation who are earning a living. They are expected to care for their children, and aging parents, but by individual agreement. Since the plan is to stop collecting 6.5% payroll deductions from this age group, and anticipated deficits are of the nature of 0.5% of income, assessments should be comfortably met, although it is too much to expect them to be cheerfully met. A whole chapter is later devoted to this sensitive topic.
2.5 Transfers are necessary, however. Because of the security risk, it is probably wise to introduce the extra step of transfer into and out of an insurance or insurance-like pool, so that transfers between Health Savings Accounts can be performed by a tightly controlled security organization which maintains permanent transaction records as its main or only function. Pooling would actually ease the accounting burden of linking every account in surplus with every account which runs a temporary deficit when actually it is only necessary to account for the balances between individual accounts and the pool. If newborns have individual accounts, they will have to be linked to their parents or guardians, and perhaps transferred from their parents' accounts at age 26. Although making health insurance a personal rather than a community activity is a step forward, there will be much occasion for reducing individual volatility while the accounts are still too small to provide their own liquidity reserves. This is also the place to put subsidies for the poor, and payroll tax assessments on the 26-65 age group, replacing the 6.5% payroll tax for Medicare pre-payment, which has been eliminated out of consideration for dropping later Medicare coverage. After the transition phase is complete, the pool will be less necessary, but it may take decades before money spent on obstetrics comfortably matches up with money pre-funded for cancers and strokes.
3. Medical costs essentially do not matter for lifetime plan design, since this is "found money". Rising costs are of course the main concern, and of course, we should pay all of them, but not necessarily by investment income, entirely. We strive to generate as much new revenue as possible and are confident it will raise appreciably more than the present system. If more is needed, additional sources must be sought. It might, if all went as planned, generate half of the cost of healthcare in the far future. But it will never seem like that much, because we are already outspending our revenue, and borrowing the shortfall. Only after our books balance on a current basis, will the public notice any difference. Congress will notice it sooner and be tempted to spend it. If it generates more than we need for healthcare, then if we are wise we really should spend the surplus on retirement costs for an aging population.
However, the outlines of what is possible can be made out. Likely, future medical costs for younger individuals under the age of 65 should remain constant, or even decline in the future. However, medical costs of the elderly are assumed to rise in the future, as people live longer and get more expensive chronic diseases. CMS says 5% of the elderly generate 50% of costs for their age group. Conditions related to obesity are a new source of such costs, while Managed Care has had no effect. Exceptions will appear but predicted cost curves seem likely to assume the shape of a dumbbell, bulging at the ends, but shrinking in the middle. Since working cash for inter-person transfers and unexpected illness are laid on the working age group, it is a lucky happenstance that future predictions almost always show a dumbbell or wasp-waist shape to the cost curve, making it possible to design budget shortfall levies to concentrate on this level. The biggest threat to future healthcare financing may well lie in the likelihood that people who now die at the age of 60 will live to be 85, and be afflicted with the same high expenses as we now see in people aged 85. If present trends continue, the rising costs after age 85 contain a mixture of falling sickness costs, hidden within rising domiciliary costs, or nursing home costs, which possibly belong in a different budget. This outcome seems more likely that the present rate of longevity extension, which is more likely to level off. However, the original point is the strongest on: it is a mistake to pretend to predict a future which cannot be predicted.
4. We assume average health costs for a lifetime to be $300,000, based on a Blue Cross of Michigan study, confirmed by AHRQ and CMS to be of that general magnitude. It is a critical number since it is the burden workers age 26-65 must carry for the whole medical system at every age--averaging $7800 per year apiece for the working person. It is important to know how it is calculated, to understand what it means -- and what it doesn't.
Calculated as described, the $7800 pays for one working person, plus averaged contributions for dependents and charity obligations. Because of cost-shifting, the proportion of redistribution is unclear. But, remember, these are lifetime costs, using current prices. If costs remain otherwise identical, a 3% inflation rate means the answer, calculated the same way next year, will be $309,000. This point is made to convince the reader, that even if we do not know the precise costs, we can be fairly sure that costs will soon outrun our ability to cope with them.
In order to include present costs and present practices, a hypothetical person is constructed from current costs at each level, reassembled in order to reflect current costs for current treatments, as if they all occurred in the year of death. It, therefore, includes 3% inflation over the time span from birth to each particular age. The modest costs of childhood are thus inflated the most, while the expensive last year of life is not inflated at all. Since it will be adjusted in the next paragraph, it is probably not a serious error.
Predicted Future Healthcare Costs. If the $300,000 we spent on each person's health in the last 90 years should merely increase at 3% inflation, lifetime costs will become $4.5 million, 91 years from now. That's sobering enough. But if medical costs increase as much as they actually did in the past century, lifetime costs will come to an unthinkable $1.5 billion dollars a person. Therefore, we accept the present hypothetical lifetime cost, including inflation, to have been $300,000, and assuming no change other than 3% inflation, will be $4.5 million, 91 years from now.
Nevertheless, we know in retrospect that a solitary deposit of $55 in 1926 at the 10% rates which actually prevailed last century, would have kept even with it without later additions. Today, to keep up with the costs of a newborn great-grandchild could apparently be accomplished with a deposit of $796, over twelve times as much. It's still an achievable goal, but it's drawing away from us. Remember, $800 will only pay for present prices, plus 3% inflation. Unlike the last century, the next century cannot add thirty years to life expectancy, or eliminate thirty diseases. In fact, only five remaining diseases account for half the cost, and life expectancy has no room left to increase by another thirty-year extension. The medical profession has the scientific tools to make it work, provided the financial and political professions create the right environment. The present prospects are for science to deflate disease costs in every age group except the oldest, but to quantify is impossible. Since 1913 when the Federal Reserve was founded, a dollar then is worth a penny, now. The medical profession can't help with inflation. Perhaps no one can, but at least a monitor exists to make mid-course corrections of the currency.
More than that, notice the difference between $300,000 and $796. The difference, although roughly estimated, suggests the savings possible by switching to lifetime costs, and investing the difference between "whole life" and "pay as you go" annual payments. It is unnecessary to come even close to actual costs to see the savings from financing the medical system longitudinally, outstripping anything imaginable in extra administrative costs, or price escalation from moral hazard. Cut it in half, or take only a tenth, the savings are so appreciable you begin to wonder if they might upset the stock market. There are even safeguards from miscalculation, remaining inherent in other approaches to cutting the cost of medical care.
For example, we fervently hope, but make no assumption in the example, for an extension of working life, both down and up, to 24-75. That is, we favor a reduction of the two great vacation periods in American life, by a parallel extension of the lifetime of significant work. We recognize most Americans do not agree, and in a democracy that's how decisions are made. But this safety valve remains available to those with bad luck or bad timing; it's how you recover your finances if they have slipped along the way.
Let's cut wasteful practices, particularly the habit our government has of making hospitals into welfare programs, or our insurance administrators have for making them into banana republics, and the habit the public has of wanting everything for free. Let's structure costs in such a way that if an individual doesn't overspend for healthcare, the money saved gets applied to better retirement. It gives the individual some skin in the game, which is the essence of bringing costs down by competition.
Right now, however, it is necessary to examine how we might extract the savings from Health Savings Accounts, gradually transitioning from one-year term to whole life with investment, without upsetting the system. And examining what useful things might be done with a cash windfall before too many extra noses push into the trough. After all, you cannot spend the money after you are dead.
Let's start backward from an assumed guess of $300,000 average lifetime expense, from the viewpoint of someone aged 90, which is also only guessed-at future longevity, to the day of death. To have $300,000 at age 90, you must have $30-40,000 set aside at age 65 in index funds. Remember, in the elderly, we are talking about the period of greatest health costs by present projections, in an age group where few people are working and thus must entirely depend on investments and pensions. It can be done but it's a stretch. In many ways, the greatest obstacle would be the mindset of elderly people themselves. We are talking about buying common stock for elderly people, who must overcome the main reason they buy high and sell low. Left to themselves, they will lean toward the safety of low-yielding bonds.
We have repeatedly alluded to The Monitoring System, which will take time and experience to design. Whether the monitor resides within the Treasury, the Department of Health or some independent agency is a political question that others probably feel they have a better right to decide. Such an agency might have many functions, but since it must have the power to make myriads of mid-course adjustments, it probably requires a self-balancing oversight board like that designed for the Federal Reserve, and we favor that approach. At least once a year, that monitoring body will have to recalculate the estimates of the emerging trend of the balances between costs and revenues, and the distribution of the balances among each yearly cohort from birth to age 91.
Those yearly recalculations would set the price of entry into the system for latecomers, calculating what it would cost to make up for failing to pay for it all at birth. And if the system makes a revision for new information about trends in motion, everybody will in a sense be a newcomer, subject to a late deposit levy. And since the working adults 26-65 will be picking up the extra costs for birth to 26, plus charity cases at all ages, there will have to be secondary and tertiary adjustments in the levy. Furthermore, there may be a recalculation of the cost of a particular age cohort for current medical expenses, and that will have to be set as an additional deposit required for that age cohort. Meanwhile, the investment managers will report on how close they came to their target, and further adjustments made. The Federal Reserve will make a report on current inflation rates, leading to more adjustments. The ultimate goal is to set a price for late entry at each year, so that continuing future income distributions will be equal, for current entrants, as for those who made a lump-sum investment at birth. This monitoring system will also be responsible for smoothing out short-term volatility, as in an influenza epidemic, and possibly long-term readjustments of internal lending and borrowing which were not anticipated at the outset of the program.
The Elderly Investor. Although the Libertarian view is that people ought to be able to do what they please with their own money, this is one case where it probably would be advisable to mandate the pooling of investments, in spite of the obvious introduction of political risk. The argument runs: it might be possible for most people to save $30-40,000 by any number of ways before the age of 65. But after 65 it becomes a little unwise for a growth fund to place trust in the investment judgment of a class of people who rightly prize security overgrowth. They will predictably have a very hard time shaking the perceptions of their age group. On the other hand, if there is ever a chance people will accumulate $45,000 in savings, it would be at the time they stop working. Let's hurry on; our present purpose is to illustrate the principle we are driving at.
Working people 26-65. Between the time they get their first job and the time they retire, working people have children, send them to college, buy a house, and try to come up in life a little. They get dozens of claims for their support, so in our example, to have perhaps $35,000 to surrender at age 65, using our system they might alternatively have to have $500 available at age 27, from Santa Claus. And then let it grow, untouched, to the next goal of $35,000 when they reach 65. That sounds easy, but it often has its problems. If somebody, say their parents, gives them the $500 as a present, it's all pretty easy. But if they have to work for it, then somebody has to give them $35 at birth, because the daisy chain is connected from start to finish. That's right, $35 turns all the way into $300,000 at age 90 if each step is coordinated. It pays for an entire lifetime of health costs. But it doesn't need to. If just about everything goes wrong, a quarter of that would still amount to a big chunk of money. Are you going to tell me no one could afford to give $7 to a newborn? There's no rule against making a partial contribution to your own care. There are practical problems to be addressed, but the power of compound interest isn't one of them. In fact, you might easily find that no investment house would accept a $7 deposit for a 90-year forward account.
Children. After the elderly, the second subsidized group is composed of children, including obstetrics and pregnancy. There is overlap here between child and two parents, and for conceptual purposes, there is nothing to do but be arbitrary. The addition of 26 years of compounding is too tempting to quibble about ambiguities, which might be solved by giving it to any of them, or to all three. That heightens the unfairness to those who do not have children, but it also creates an incentive for the mother to have her first child younger. Medically, that would be a desirable thing. Our society, perhaps even our biology, has created a tradition that the parents subsidize the health costs of children. The Health Savings Account system formalizes that tradition or at least does not conflict with it. For the surprisingly small amount of one single payment of $150 at birth, the child would have $40,000 at age 65, assuming a 10% investment return. Investment advisors might rebel at their costs for accepting amounts that small, but a single-payment zero-coupon bond or credit might be created. That would ease the mechanics, as well as reduce the outcry against federal subsidy to people who might be indigent when the child is born, but are far from it later in life. The disadvantage is a bond makes no provision for the health care of children even though it pays for it, so some patchwork is still needed. A birth deposit of $150 would be worth about $2000 at age 26, and average childhood medical costs might be somewhat greater, so a transfer of ownership could imply a net liability.
The Poor. The third and last category of subsidized people consists of those who are both poor and sick at the same time. Unfortunately, we have tried and rejected two methods of dealing with their problem. The first was defined by the original Good Samaritan: "Take care of him, and I will repay thee." And the second method was almshouses, now a relic of the past. The disadvantages of both approaches are now obvious. The third method was to eliminate poverty, which has worked pretty well. Fifty years ago, sixty percent of the hospital beds in Philadelphia were "ward" beds. Nowadays, there are few enough of them to scatter among paying patients. But the disadvantage soon appeared that the public became determined to prevent the inevitable rationing from spilling over to more fortunate components of society, in an era when hospitals are fearful of discrimination. Mindful of the long history of charity for the sick poor, and the spotty history of using government to cover the costs, we propose that governmental charity be paid out of the pool for inter-account transfers. That preserves an independent audit of just how much is paid by whom, and it is linked to an assessment process on people who must pay the bill. That will not prevent government from discounting its contribution, as it does not prevent Medicaid from discounting hospital bills. But it widens the audience who are instantly aware of it, all of whom will be heard from in the November elections. Individuals are compassionate, governments only pretend to be. You would almost have to say it is the one remaining good feature of having a King -- to symbolize the nation's simultaneous aspirations, of opulence and compassion.
Since America has rejected the obvious approaches to caring for the sick poor (almshouses and blank checks), our institutions are in some disarray. We even seem to be rejecting a mixture of the two, which was the hospital reaction to the 1965 entitlements. Until we identify and concentrate the sick poor in some way, we cannot even measure the size of the problem. But at least concentrating the rest of the population's sickness on paper allows us to measure their cost and (by subtraction) estimate a health budget for the sick poor. It will inevitably cost more than average, and result in worse outcomes. But only after we measure it, can we even decide how much we can afford.
What you have, including the three demographic subsidies, is what it seems to cost working people in today's environment to care for themselves and their obligations. It's distributed over forty years of working, but not everybody works that whole period of time. If you wish, you can contribute $100 a year from age 25-65, a surprisingly small amount which after compounding at 10% should pay the lifetime costs of one person (yourself). Calling it $150 to be safe, it is no more than a tenth of what most people suppose they pay for annual health insurance. Therefore, it is safe to suppose a family of four could afford to pay for ten poor people (in addition to themselves) at the cost they are already spending. Remember please, our goal is not to pay for all health care to the last penny. Our goal is to devise ways to pay for as big a chunk of it as we can.
And by the way, devising some method to get the latent money out of these accounts for medical care, since $300,000 does no good in a frozen account of somebody aged ninety. Please read on.
Well, it's all called the Health Savings Account, Classical Version. John McClaughry and I invented it as the Medical Savings Account in 1981, and we both consider it to be on the short list of things we want to be remembered for. The central feature of these accounts is they pay your medical bills with a special debit card, and they get every tax deduction we could find, except one.
Proposal 79: The law says they must be linked to catastrophic health insurance but are forbidden to pay the premium. This omission should be repaired, by changing the law or regulation; with this change, they would become superior to the discriminatory employer-based tax abatement discussed below, because that could extend the income tax relief equally to everyone, regardless of employer.
Since almost everyone would agree, why not adopt it and get on to other business? The essence of the whole remaining debate is how to pay for comparatively low-cost care, especially for people with low incomes, neither impoverished nor affluent. Some people will have to be subsidized, and the rest are mostly able to save enough to pay their medical bills. We can ease things for borderline cases with tax deductions, and the rest is mostly a routine drawing of lines. The concept is discussed in greater detail in later sections of this book. Right now, all it immediately needs is a revision of those two regulations of the Affordable Care Act.
An HSA should be overfunded. Any surplus can be used as a retirement fund.
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That's all there ought to be to this fuss, and we already have most of it enacted into law. Whether called the Health Savings Account or the Medical Savings Account, it is a combination of two things: catastrophic health insurance and tax-deductible savings account for smaller health costs, and it could just as easily be regarded as a Savings Account with re-insurance backup, as Catastrophic health insurance with an account for the deductible. In practical use, one part customarily pays for hospital inpatient care, the other largely pays the deductible and miscellaneous outpatient services. When you get right down to it, it seems amazing so many people resisted the idea of full coverage, with imaginary objections. Since this simple issue has a history of being twisted for partisan purposes, it illustrates how unwise it is to call opponents names, when a little persuasion might convert them to becoming friends of the concept. But if you read between the lines of the next section of this book, it should be no problem to surmise who has opposed this perfectly legal alternative.
Instead of confronting, let's out-bid them, with a Lifecycle Health Savings Account (L-HSA). The dreams of the future usually include legalizing a few radical advancements which become normal parts of the landscape in time. By adding passive investing and the power of compound interest, the HSA becomes a Lifecycle (multi-year) Health Savings Account, providing the balance can be legally carried forward for a lifetime or even longer. The out-bidding already takes the form of adding a new revenue source, not by reducing the benefits.
Proposal 80:At this point, it probably would be wise to add some legislation clarifying the ground rules since several professions would have to cooperate in allowing a new line of business for whole-life insurance.
In effect, it could become a do-it-yourself whole-life insurance company, which pays for health insurance instead of funerals. I'd love to see the whole-life insurance companies adopt the idea, which comes close to imitating their business model. There's no reason why stockbrokers and/or investment managers couldn't do much the same thing in competition--it all depends on what the enabling statutes happen to enable. Whole-life insurers could manage the money professionally and would create much-needed competition for old-style health insurance companies, now operating on the "use it or lose it" principle. The large amounts of money the savings account approach would generate, seemingly almost discredit the idea as exaggerated; we'll, therefore, let the reader do some of the math. Perhaps you do need to dangle astonishing incentives to get people away from the something-for-nothing term-insurance approach which is now threatening to shoot itself in the foot. The full transition is a fifty-year project, but long-term progress usually doesn't seem so long looking back on it, and it gives everybody a chance to claim some credit. Remember, it's only long-term lack of progress you really need to fear.
Let's not quibble. It might even be legally or financially possible to adopt one approach, year by year, or the other, spread over a life cycle; and hurry it all up by making it into a mandatory monopoly. But it is inconceivable for half of a whole unwilling country to tolerate a mandatory health system they widely resent. However, it seems possible to implement parts of both approaches voluntarily right now, without major disadvantages except extra cost. You can do that, or you can read the Lifecycle-HSA as just an alternative proposal to consider. The main dream offered here prefers to cut average lifetime health costs in half ($175,000) but might be expanded to full lifetime coverage of $350,000. Or reduced by individual vendors to some more affordable fraction, such as by a reduction of average costs by only a quarter ($85,000) or a tenth ($35,000). To do this requires some legislation, but $35,000 times 300 million population is scarcely trivial. Even Bill Gates isn't worth half of that.
Over-investment in Health Savings Accounts -- The Retirement Alternative. Because it's a new program, with financing uncertainties, we advise everyone with an HSA to consider overfunding it as a precaution. If you could use resulting surpluses for something else, it should reduce the hesitation to overfund. One alternative is to use Medicare exclusively after age 66 and transfer the surplus to your IRA retirement fund. That's legal and essentially cost-free. Consider all the foregoing to be a short introductory look at the theory of Health Savings Accounts; we next display an actual example, using actual numbers which just came across our desk from a large and local insurer. To keep it simple, we assume the client had no serious illnesses at all and paid for minor illnesses out of pocket. That will rarely be the actual case, but its use here is to illustrate the safety of over-investing in the product in order to fund a healthy retirement with the overflow. Although it will provoke extensive discussion later, we assume the deposits into the HSA will earn 6% compound interest.
Example One. Assume an average employee aged 21 receives $750 yearly from the employer and deposits $3300 into the HSA account, adding the personal supplement permitted of $2600 extra, until age 66. Deposits earn 6% compounded. After age 66, income tax is paid and the remainder rolled over into an IRA. Subsequent to retirement, the minimum retirement is paid annually, while the balance continues to earn 6% after tax.
Example Two. Assume an average employee aged 21 receives $750 yearly from the employer and deposits $3300 into the HSA account, adding the full supplement permitted of $2600 extra, until age 26 when he/she retires to get married. Deposits earn 6% compounded. After age 66, income tax is paid and the remainder rolled over into an IRA. Subsequent to retirement, the minimum retirement is paid annually, while the balance continues to earn 6% after tax.
Example Three. Assume an average employee aged 61 receives $750 yearly from the employer and deposits $3300 in the HSA account, adding the full supplement permitted of $2600 extra, until age 66. Deposits earn 6% compounded. After age 66, income tax is paid and the remainder rolled over into an IRA. Subsequent to retirement, the minimum retirement is paid annually, while the balance continues to earn 6% after tax.
You pay income taxes when you make the transfer to the IRA and on IRA withdrawals. Most of the investment return is tax-sheltered, however. Assuming 6% tax-free earnings and a 15% blended income tax rate, your investment of $132,000 would be worth $698,000 pre-tax, and $482,000 after income tax, at age 66. At that point, suppose you pay your HSA tax and re-invest the proceeds in an IRA. Assuming a life expectancy of 88 years at that point, you would leave $1,638,000 when you die, or $1,493,300 after income tax. That's assuming you actually spend nothing out of the account, but since it's a surplus, it also represents how much you could have spent without affecting the retirement. Be careful of this point, however, because the age at which you spend it will markedly affect the outcome. That's unlikely to be sure, but if you consume it all you have paid for all your lifetime healthcare, as best we can estimate it. The point of this calculation is not to make everyone rich, but to demonstrate the financial power of the approach. With a little management, it easily covers the actuarily projected lifetime cost of health care of $350,000 per person and leaves enough slack to be comfortable about it. In case anyone questions the ability of a poor person to save $3300 per year, lifetime savings would amount to $440, per dollar invested at the beginning. That's too attractive to brush aside on the grounds you might never be able to do it, even for brief periods. It's quite honest and legal, starting today, but an additional reason to show it here is to demonstrate how little anyone has to lose by investigating it today. In fact, over 12 million people have already started such arrangements. If the rudiments of the plan are that attractive, just imagine what a few legal clarifications could accomplish.
What's the secret? Instead of paying 10-15% to service your bills, you earn 5-6% interest by pre-paying them. The swing between those two is the difference between comfort and worry. There are other swings, but that's the main one.
Read on, to see how the passage of a few relatively harmless laws, might offer poor people a way to get a rich man's health care. Getting rich in this sense amounts to funding your medical bills in a radically new way, but it does not imply any change in the kind of care you receive. Otherwise, it certainly will cost somebody $350,000 per average lifetime, as calculated by Michigan Blue Cross, verified by Medicare.
But it doesn't imply that no one will be worse off. There are 1,500,000 employees of health insurance companies, but there are only 800,000 licensed physicians. Doesn't it seem excessive that for every doctor you see, there are two insurance employees handling the bills? It's probably conservative to guess that every doctor hires another insurance employee, and every pharmacy hires several. Every hospital probably hires a hundred, and every laboratory or x-ray laboratory hires more; it just seems to go on, and on. Five or six clerical insurance employees per doctor don't seem like a wild guess since a lot of doctors aren't actually practicing. Those who want to continue with this sort of thing can pay for it. Surely, the rest of us deserve some other choice.
Because this book is written during a confusing period where both Health Savings Accounts and Obamacare have been enacted, but the position of the Supreme Court has not been clarified, nor the regulations coordinated, -- what an individual should do is highly specialized to his age and situation. We cannot predict what upsets the November 2016 elections will bring, or what the result of their reconciliation will be.
Essentially, this particular health plan offers its groups the choice between an Obamacare with, and Obamacare without, a Health Savings Account. Into the HSA version, the employer effectively contributes $750 but gets a lower premium from raising the deductible. Never mind the economic argument that the cost ultimately comes from the paycheck; most people will say it feels like a gift. The compound interest in the future dictates that every young person should enroll in an HSA at the earliest possible moment, and supplement the employer contribution to the limit of his ability. A young lady, for example, should go to work immediately after graduation from school, even though she plans to drop out of employment when she gets married. An older employee, on the other hand, is far less expensive to the employer than he appears to be if the retirement benefits are considered. If a person reaches age 61 without provision for retirement, there is little to be done about it.
Commentary. The high deductible portion of Obamacare serves as the catastrophic link required by the HSA enabling act. The employee is annually allowed to contribute up to $2600 to the savings account additionally. (There's a family plan, with different contribution rates.) There's no way to know how long an employee will remain with the same employer, or whether a new employer would continue the same coverage; but at least an individual's HSA has been established, provided you go ahead and do it. If an employee starts this plan at age 21 and continues it to age 66, the outside potential is to transfer $159,550 to a regular IRA at age 66, assuming 6% interest, but no personal supplement, and only out-of-pocket health withdrawals. Never mind theoretical economists; it's a very good deal, and it almost feels free.
But don't get carried away; you can't spend the money twice. The example shows the financial benefit of being lucky with your health; it could also be said to reflect the cost of being unlucky or careless if your health is bad. Its success depends on young healthy people saving their money and generating extra income before they become older people getting sick and having to spend their savings. Meanwhile, scientific progress will exaggerate both the savings and the attained age before the spending begins. In the past century, that added thirty years of longevity, and hence thirty years of compound interest. If some scientific miracle should add more cost than longevity, a mid-course correction might have to be applied. Some future generation might have to answer the question, "Didn't you want to live an extra ten or twenty years?" I would have to say the medical profession has been pretty good with this juggling act in the past when we were in control of it; one of the ponderable dangers of upsetting the system is the danger of upsetting this balance in the future if control of the payment system falls into other hands.
The foregoing should suffice as a summary of this book's proposal. The next section describes some of the other serious problems with healthcare and how they got that way in the past century. Sometimes more funding will help these problems, sometimes it won't. The section following that will describe some of the nuts and bolts of Health Savings Accounts, and sketch in some more elaborate variations which might be possible. By far the most important new concept to be thoroughly absorbed is the approaching wrestling match between the health industry and its finance partner. Recall that we have estimated the Health Savings Accounts would earn 6% compound interest income during the long lifecycle between healthy youth and sickly elderly. Actually, that is likely to be an under-estimate.
Stock Market Issues.For the past century, the foremost student of the matter, Roger Ibottson, has shown the equity stock market has averaged about an 11-12.7% total return. Investors in index funds of the same stock have received about 5%. Three percent of this attrition is ascribed to inflation, leaving another three percent unaccounted for. Money managers use the residual 3% for expenses and to buy bonds as a safety measure. While the law of large numbers will ordinarily account for the ordinary jiggles of the stock market, there is some other cycle at work causing a severe crash every 25-30 years. It is thought wise to set aside 25-40% of the portfolio in bonds to ride out such "black swan" storms. This, in essence, is the central issue of the third section. The final section describes other variations of the Health Savings Account concept, particularly as it involves transitions from other funding mechanisms.
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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.
