Philadelphia Reflections

The musings of a physician who has served the community for over six decades

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Obamacare: Examination and Response
An appraisal of the Affordable Care Act and-- with some guesswork-- its tricky politics. Then, a way to capture major new revenue, even paying down existing Medicare debt, without raising premiums or harming quality care. Then, an offering of reforms even more basic, but more incremental. Finally, the briefest of statements about the basic premise.

Health Savings Accounts, Regular, and Lifetime
We explain the distinction between Health Savings Accounts, Flexible Spending Accounts, and Lifetime Health Savings Accounts. Sometimes abbreviated as HSA, FSA, and L-HSA. Congress should make it easier to switch between them. All three are superior to "pay as you go", health insurance now in common use, only slightly modified by Obamacare. It's like term life insurance compared to whole-life. (

Average Lifetime Medicare Balance Sheet

Lifetime Medicare revenues are about $55,000 in premiums from Medicare recipients, about $87,000 from payroll taxes paid by working people, and about $140,000 in general revenue, mostly from income taxes. These are soft numbers, approaching one quarter from the Medicare recipients themselves, one quarter from working people, and one half from income taxpayers. The best we can calculate is our proposal would generate about three-quarters of that. It's not enough, but what do you want for nothing?

The following average revenues of Medicare come from the CMS website, and must exactly balance Medicare expenditures:

Thirty-five years of Medicare Part B and D premiums $55,300. Plus, thirty-five years of 6.2% payroll deductions. $87,000. Plus, a 50% subsidy from income taxpayers, or debt owed to foreigners, as you might please to call it: $142, 360. Total lifetime expenditure (probably an underestimate): $285,000, per person.

A Three-Compartment HSA. At present, we pay for this expenditure year by year, as it comes due, in a process called "pay as you go". We are about to propose that we gradually stop that, and pay off the accumulated debt, thereby reducing the expenditures, and effecting some savings by consolidating programs from birth to death. We propose to pay off the rest of it in yearly installments from birth to death, collecting investment revenue on escrowed payments, and gradually reducing duplicate payments for the same expenses. It will be wise to collect more savings than are calculated to be necessary, just in case expenses or net revenue prove more unfavorable than we hope for. And because of the poor, a certain amount of subsidy for them is required. The government is the payer of last resort, but the program is intended to be self-supporting with interest on loans calculated in the final assessments. An independent agency is probably needed to manage unforeseen developments and make mid-course corrections. To minimize the adjustments, it is envisioned that revenue for lifetime coverage be escrowed , with a reserve fund , so the higher interest rates for long-term can be kept separate from the lower rates for short-term cash needs. Separate from both of these would be a regular Health Savings Account for yearly health costs and the averaging of yearly volatility between the funds. The lifetime escrowed fund would not be permitted to fall below current estimates of lifetime needs at that age, with interest-bearing borrowing used when it is in deficit, but no borrowing to return the debts when it is in surplus. It is envisioned that millions of accounts be reported annually, but invested collectively. It is envisioned that, after startup adjustments, the escrow fund and the reserve fund would be entirely in large-cap, domestic, total market, index funds with a maximum administrative fee no higher than that of the largest such fund on the market. The regular HSA would be entirely in short-term U.S. Treasury certificates, with an age-specific proportion kept in the reserve fund. Formulas should be devised to maintain transfers from regular to reserve, at a level maintaining only necessary liquidity for the pooled universe, but ultimately reaching for maximum achievable returns in the long-term funds. After satisfying itself with the performance of these formulas, the committee should turn its attention to the minimum deposit flow into these funds needed from subscribers to idealize returns, and then recalculate the formulas from experience. To the extent this is possible, permanent formulas for the whole structure with safety corridors should be devised and exposed to public comment, with the goal of public satisfaction that some average income experience would reflect the best possible money management. At that point, the committee should turn its attention to the developing perception of what long-term trends, combined with demographic data, are being projected for the growth of the escrowed fund to a point where the phase-down of Medicare is possible, and at what rates. The opinion of Congress should be sought as to whether these projections need to be changed, disregarding any other suggested use for the funds. Preparatory to any changes, the opinions of the professional advisory groups should be sought and forwarded to Congress. The Secretariats need not follow Congressional advice, but any deviations from it should be addressed in a public white paper and resubmitted to Congress for a white paper response sixty days before the next election.

A working example of our proposal is the average person contributing $250 per year to the escrowed compartment of a Health Savings Account, from age 28 to age 65, which reduces the after-tax, out of pocket, contribution to about $200 a year, or $4 a week. Other non-escrowed contributions to the HSA would pay for current expenses during a transition, but a certainly guaranteed revenue stream through thick and thin is absolutely necessary for the success of this idea. The source of this contribution is less critical, and if Obamacare may subsidize, this plan may also subsidize the poor to the same extent. It is estimated in our example to generate 10% tax-free income, based on the work of Ibbotson, but the expenses of the system have yet to be determined. It is intended that a private fund manager may be chosen if preferred by the subscriber, and performance records are periodically reviewed. Generally speaking, private advisors are reluctant to deal with amounts less than $10,000, so that transfer provisions should expose the fund to competition at that point, and the implications of trends should be taken seriously. The fund would continue to generate income until the end of life expectancy, here stated to be age 90, at which time it is transferred to a regular IRA. If these are close to average numbers, the individual would have at least $35,000 in the account at the time of death, and according to Ibbotson, it might be $120,000, plus another $100,00 if 26 extra years could be recovered by including childhood.

Please adjust these numbers any way you please, using the calculator provided in:

(In particular, try out your own numbers.)

Matching $35,000, the result of 3% income return, with $285,000, is about a quarter of it. Tripling the hypothetical interest rate to 9% would mean that investment income could pay well more than half the average lifetime costs of healthcare, and following Ibbotson's charts, 10% is not at all impossible over the span of a century. At the worst, however, you could surely match income and revenue by quadrupling the contributions to the HSA (to $800 yearly), which is still considerably cheaper than present term insurance costs. But finally note this well: we are planning to take actual healthcare expenditures out of the same revenue pool, so all of this calculation assumes $200-$800 in addition to current expenses for checkups and illnesses. Although the transition can muddle up appearances, a good person, or even a prosperous sick one, could set aside this much money by paying health expenses out of after-tax income (in order to preserve the tax-advantaged fund for compounding). And indeed this would happen automatically if the population continues its present pattern of sustaining its heaviest medical expenses when it is older, allowing it to compound among people while they remain young and healthy. This idea underlies Obamacare also, although the assumption that uninsured people are mostly healthy is a little dubious. It seems much safer to place the necessary money in a special-purpose escrow fund, where it could be spent away only in approved emergencies. When approved emergencies do occur, the escrow should remain unspent, and the expenses get paid by borrowing from a special reserve fund set up for this sole purpose, administered by some independent agency. Ultimately the U.S. Treasury remains the payer of last resort, so there must be Government oversight. One would hope that bad experience with Fannie May and Freddie Mac has taught us how to design such oversight.

-------- When all of the kinks and special pleading have been worked out, you only have solved Medicare. There's the healthcare for the rest of your life which has to be figured into the equation, so double it, for the purposes of discussion. It's my guess we could do it with this approach alone, but being Americans, we would try everything else first. And there is one big thing to try. We could try to lower costs. Everyone would agree there are waste and inefficiency in the system, but everyone would also agree there are lots of truly sick people to tend, and lots of important research to do, before we can assess that healthcare costs are as reasonable as we can make them.

--------- In this regard, it would seem reasonable to raise the retirement age in steps to age 70. I retired at the age of 83 and didn't feel it hurt me a bit. Ending life with a thirty-year vacation is about twenty years too much, no matter how badly your back aches.

The experience with Health Savings Accounts surprises even me. The actuaries report that the nine million people who now have HSA are running costs 30% lower than average. Whether it will scale, that is whether it will be true of ninety million subscribers, is unknowable. But moral hazards, the savings from not spending someone else's money, are not a fairy tale, by any means.

The savings to be achieved from getting tort reform are probably equally surprising. But the psychological effect on health care providers from tort reform is worth it, even if we didn't save a penny. The natural leaders of the Law Profession have always really been a decent sort. Just how the unnatural leaders of that profession gained control of the Bar Associations and Trial Lawyers Association, is open to debate. But it is high time the natural leaders of the Law profession reasserted control of it, perhaps led by the Chief Justice, the corporate law firms, the law schools, and the Judicial Conference.

In case that isn't enough, there are some suggestions to be made for healthcare cost reductions, some of which concern features of health finance which date back many decades.

Originally published: Tuesday, February 04, 2014; most-recently modified: Monday, May 13, 2019