Philadelphia Reflections

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

Related Topics

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. (

Pay As You Go

The traditional architecture of health insurance is called "Pay as you go", which like many political titles, means the opposite of what it says. When Lyndon Johnson started Medicare in 1965, he was faced with two simultaneous decisions: medical bills were coming in to be paid, and payroll deductions rolled in, intended to pay out for someone else's medical bills in the future. It seemed a simple thing to use the money on hand to pay the bills. Money was money, and it didn't care what it was for. For a while, more money came in than went out, so there was a surplus Medicare fund, but that is now gone. Almost entirely, today's' bills are paid with money intended to be spent years from now. To be brief, cash flow is used to pay current expenses, disregarding future obligations. That's very close to a Ponzi scheme, with the difference that the federal government can print reserve currency and, therefore, can borrow almost unlimited amounts from foreign countries. We quickly passed the point where we could invest the surplus money and got into the habit of borrowing it.

{top quote}
Pay As You Go is unable to generate income from premium reserves. {bottom quote}
Why Not Pay/Go?
To restate: In addition to not earning income, we make interest payments, for a double cost. If we could find a way to get out of this blunder, we could greatly reduce overall Medicare costs. Meanwhile, most people are unaware that Medicare costs are 50% subsidized by taxes and borrowing during this process, and think it must be very well run, indeed. However, the rules of accounting were conveniently changed, so that when one arm of the government loans money to another department, it isn't called a liability, it's called an asset. After all, if you are on both sides of the transaction, it is both things, and it is also neither thing. You can find it in the CMS Medicare annual report on your home computer, listed as "Transfers from the general fund", and sure enough, it's 50% of the total cost. While we are on the subject, let us digress for a moment and say that payroll deductions from working people are 25% of the cost, and the Medicare beneficiaries themselves contribute only 25%, as premiums. Since everybody likes to get a dollar for 25 cents, the public is so approving of the balance sheet that there is a major movement to extend it to everybody, flying the flag of "single payer".

{top quote}
Medicare is 50% subsidized, so by implication, a Single-Payer system expects 50% subsidy, too. {bottom quote}
Why Not Single Payer?
However, for present purposes this little lesson in accounting is offered to explain a much more significant feature: it might be possible to increase the revenue of Medicare by re-directing the funds' flow. The insider joke is that by adding income, the accounting system would then display a loss, and the opposition party could make a big fuss about it.

Originally published: Tuesday, February 18, 2014; most-recently modified: Friday, May 31, 2019