Philadelphia Reflections

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

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Disadvantages of Lifetime Health Care

So, right off, what are the disadvantages of lifetime coverage? They would seem to be:

1. At the moment, persons receiving Medicare are excluded from starting Health Savings Accounts. During the debate about Obamacare, seniors were therefore remarkably uninterested in two topics which didn't affect them: Obamacare and Health Savings Accounts. Very few seem to realize that Medicare is 50% subsidized by the federal taxpayer, and therefore few realize they are quite right to be uneasy Medicare might be "robbed" to pay for Obamacare. No politician is comfortable discussing this issue, for fear his party will be blamed for injuring a perfectly blissful status quo. Naturally, everybody likes buying a dollar for fifty cents, and everybody likes to imagine payroll deductions and premiums create an impregnable entitlement. The sad truth is the 50% subsidy, paid for by borrowing from foreigners, practically guarantees Medicare will be eyed as a victim, using the "fairness" argument. Seniors on Medicare, of which I am one, should be immediately in favor of a proposal which forestalls such pressure. Unfortunately, right now every one of them is looking toward the sunset, gambling on outliving a threat they hope will go away.

2. The computer revolution, which makes lifetime health insurance even imaginable, has severely impacted the investment community. It is still difficult to foresee which branch of the existing financial community would be natural allies, or natural enemies, of Health Savings Accounts. A remarkably large segment of the investment community already has HSAs for their personal affairs, and the banking community sees a chance that Bank Debit Cards could displace the huge industry of insurance claims processing. Meanwhile, insurers remain uncertain whether HSAs are a new revenue source or a threat to existing lines of business. The Dodd-Frank legislation is so large and complex it confuses everyone about net winners and losers. Investment advisors have been hit hard by the recession, and are forced to charge $250 per trade when their competitors charge $7.50 for the same service. Just about everybody in the HSA business is uncertain whether HSAs are insurance policies with an attached savings account, or whether they are investment vehicles with stop-loss insurance attached. Things are tough when lobbyists don't even know which committee to lobby. It takes time for HSAs to achieve profitable size, so industry leadership hangs back to see what they look like when bigger.

3. There are lots of small advantages, but one big disadvantage. The transition from one system to another takes a long time, perhaps a lifetime for some.

How can we navigate a transition that might take a century to complete?

Transition Strategy. The general answer to the long transition period lies in providing more than one method to close the transition gaps. Start from both ends, and then find one or more methods to break into the middle. If life insurance saves money, use some of it to overfund parts of the system as an incentive. When you find people are gaming the system, drop the feature which permits it. If some goal is accepted to speed up the transition, calculate what it is worth to accomplish it, and limit the feature as the transition speeds up. The method proposed in the ****previous**** chapter will certainly work out, but a newborn baby will be a Medicare recipient before children's insurance is complete for everyone. The rest of us have already lost some years for compounding, while some of us are already on Medicare and are, as they say, entitled. Therefore, we propose two additional ways of getting to the goal. Reducing the cost of healthcare is one, to be taken up in Chapter ****. That one works for everyone's finances at any age.

The other method, which suits people of working age, is the present topic. It has two possible solutions, the issuance of special revenue bonds, and offering inducements for dropping Medicare. In the present environment, just using Medicare as a transfer vehicle is unthinkably unwise, politically. Reducing Medicare can only be brought up as a voluntary exchange, long into the future when the financial attractiveness of the HSA approach is so well established it has no political downside. It can be used to pay for non-medical retirement costs after HSAs demonstrate they can comfortably cover medical ones. At that point, it would no longer have the stigma of "robbing" Medicare but might be politically acceptable as making some use of unspendable double coverage.

Special Bond Sales. The safer approach is, therefore, to issue bonds to smooth out bumps in what is in some respects an equity investment. To match present cultural patterns, it should be recognized that working parents now fully assume the medical costs for their children, but have only a moral liability for the medical costs of their retired parents. Therefore, our culture might accept bond indentures with similar structure, but in one of the cases resist an identical bond issuance which differs significantly from accepted local patterns. In fact, it is difficult to imagine enacting any proposal which does not generally respect societal patterns. An important feature would be to start HSAs at an early age, adding as much as 26 years to the duration available for compounding. At 10%, that would be almost four doublings of the investment, and a fairly good start toward the initial goal of $80,000 in the account by age 65, while still starting with relatively small investments in childhood. True, a bond issue would have the interest to pay, but since the interest payment stays within a family it might be designed to seem less burdensome than taxes. It is a curiosity that U.S. Treasury bonds are entirely general obligations, unlike state bonds. There may be a good reason why federal bonds for specific projects are agency bonds, but someone else will have to explain it. The two purposes for which special bond issues might be considered are: respect for society's wishes with regard to parent/child discipline, divorce and illegitimacy issues; and to smooth out gaps in coverage necessitated by nonlinear relationships between revenue and expenses at different ages.

Proposal 16 :Congress should authorize special limited-use bond issues (or Federal agency bond issues) for two Health Savings Account purposes: to fund accounts of late age at enrollment within the transitional stage who have difficulty attaining self-sustaining status; and to create a permanent bridge between age groups which are in chronic deficit and age groups which are in permanent surplus, to the extent that such particular age disparities remain in balance. In both of these cases, it is calculated the accounts will eventually come into permanent balance after a full transition has taken place within current demographic trends.

Comment: With the passage of time, it should be possible to identify age groups (for example, the first five years of enrollment) which will eventually come into balance with other age groups which permanently generate a surplus. Knowing aggregate lifetime coverage will itself bring these two groups into permanent balance, it is sensible to borrow from one and loan to the other during early transitions, at minimal interest rates. Having provided for eventual coverage of these secular risks, it becomes more reasonable to extend favorable rates to them during early transition. When the slots are fully loaded, so to speak, there will always be secular fund imbalance between age groups, where market rates are always needed to cover the overall plan design. The intent of these two interest rate levels is to distinguish between a transitional phase which is temporary, leading to an equilibrium loan imbalance which is a natural part of the design.

As a practical demonstration of the superiority of equity investing over zero-sum fixed income, an invisible psychological value cannot be overstated. If our nation expects for longer longevities to rely increasingly on investments rather than salaries, it must broaden its experience with sensible risks. Whether we like the idea or not, we are collectively taking long strides toward a rentier culture, where our main hope of advancement lies in greater willingness to understand and buffer the reasons for market volatility. One of the features of even this attenuated risk-taking is to recognize that a few people will start their investing at the bottom of a dip, while most will start at the top of a peak. The long-term result will smooth it out, but some people are destined by the luck of their birthday to make more profit in an equity market, than others. And some people are destined by the timing of their illnesses to end up with less money in the account than others, too. It may not seem fair, but tampering with investment cycles will not improve it. By establishing a system of buy-ins, both as a transition step and also for late-comers, the opportunity of market-timing is created. Almost nothing is more discredited as an investment strategy than market-timing by amateurs, but it probably cannot be completely avoided here, and will probably exaggerate the differences in account size achieved by members of the same age cohort. Somehow, the attitude must be made general, that nobody can make anything at all in the accounts if we return to annual premiums; all extra money in these accounts is "found" money. The books will not balance completely at all stages, so it becomes a political question whether to forgive the difference (as Lyndon Johnson did in 1965) or to define it as a subsidy (as Barack Obama seems to be planning for his start-up insurance system.) Perhaps in accounting for residual medical costs at the end of life, a way can be found to equalize outcomes, but it seems unwise to tamper directly with such large amounts which are mainly responding to the world's inherent volatility.

There are several other serious matters. They will be briefly noted, and then an omnibus solution presented, the IIOO. Let's answer one inevitable jibe immediately: How can poor folks afford this? Answer: They have to be subsidized, that's all, just as they are in every other proposal including Obamacare. It's important to face this because neglecting it is the route by which every deficit has been incurred, every budget unbalanced. People who spend other people's money on healthcare characteristically have higher than average health costs themselves. But the novel discovery is Health Savings Accounts have generally proved to reduce costs by 30%. When both approaches operate at the same time, results are not reliably predicted but can be monitored. Miscalculations usually result in debts, dropped options and dropped amenities. A politically appointed board would be wise to refuse an assignment to address this, unless contingency instructions are clear, and remain out of their hands. When Congress eventually discovers how to put a ceiling on the national debt, effective answers to this related issue may become more apparent.

Transition from Term Most transition problems (shifting from one-year coverage to lifetime coverage) have to do with whether you are a child, whether your children are gone and forgotten, or whether you are supporting everybody else in your family. As the saying goes, how you stand will depend on where you sit. The unique borrowing problem here, is complete transition takes so long, groups will differ significantly on whether to unify forward (child to grandparent) or backward (grandparent to child), until it can be worked out how to borrow as a child and borrow for a time as a grandparent, depending on particular situations. What's to be avoided is intergenerational borrowing as groups; we've tried that. The benefits of invested premiums are obvious to all groups, but the arrangements must be debated thoroughly in order to avoid just kicking the can down the road. Almost any arrangement would suffice for a brief transition, but this transition would take so long it would amount to a Constitutional Convention when it was over. The eventual goal is to place the cost burden largely on working people age 26-75 since that is the only age group in direct contact with the national economy. The tricky part is to utilize other age groups during the transition -- and then slowly work out of it. Don't forget a third generation will intervene -- their own children, as well as their parents and grandchildren. The whole construction is a job for actuaries, but the modern use of index funds put on the table the potential of a diversified investment, absolutely without stock-picking, at favorable rates of interest, allowing room for cyclicity of the economy. America seems to need increased fertility, and the compound income might make it possible, but if it is not carefully examined, it might act as an inducement for women to delay their first child even longer than they presently do. As long as you don't get overwhelmed by too many transition issues at once, almost any intergenerational problem would be eased by generating more revenue. At ten percent, money compounds to double itself every seven years, and the resulting sums can boggle the mind. But if they are not planned for, the extra money will either vanish or induce people to act like a deer frozen in the headlights.

Making ten or twelve percent on safe investments may seem impossible to those who have recently lost thirty percent on the stock market, and of course, it is not guaranteed. That is why lifetime health insurance based on fixed income securities cannot be presented as guaranteeing payments for future services; only equity securities (stocks) can do that, and even they, mostly don't succeed in real terms, or net of inflation. Lifetime health insurance should only promise to supply a substantial portion of future health costs, and has little hope of doing so except for two possibilities. If the taxpayers would stand for it, you might deliberately overfund the accounts; since they won't, it is necessary to induce some to do it voluntarily and shrug your shoulders at those who don't. That probably won't work, either, so we are left dependent on our scientists to reduce or eliminate medical costs. They are willing enough to try, but of course, they can's guarantee. You can gamble on its happening, or you can wait until it is a sure thing. We are decades into fiat currency without the semblance of backing by monetary metals and must feel our way. However, the bright side of our present financial system is that transaction costs are steadily declining for reasonably safe passive investing. Professor Ibbotson has demonstrated that total market averages have been remarkably steady for asset classes over the past eighty years, and probably will safely remain so for another century, but that's another assumption which might go wrong. When you get down to it, you either go ahead or you don't. That's all. Investing in the total domestic stock market of America, the investment is guaranteed by the full faith and credit of America, just as surely as if invested in U.S. Treasury Bonds, and it pays a little better in return for its increased volatility.

Still another question comes from people who rightly believe there is no free lunch: Where does the extra money come from? A fast answer is that it comes from correcting a blunder of long standing, called the "pay as you go" system. To some extent, this problem began with the original Blue Cross plans of the 1920s, but it was elevated to its present stature by the Medicare and Medicaid proposals of 1965. By the pay/go approach, this year's premium money is spent for this year's sick people, not the people who paid the premiums. That ruse helped get the program started, but it means current unspent premium money is quickly gone, and thus it means no compound interest or investment income is generated by rather huge revenue collections in the future. Since health expenses rise with advancing age, a great deal of floating premium money might be invested for many decades, if only it had not already been spent. Actual projections are surprisingly large, but I would prefer that others announce their calculations, employing the motto of "Underpromise, but over-perform."

Other substantial sources of reserves exist, nevertheless. Health Savings Accounts now in operation are reporting 30% savings; since it is unlikely this record can be maintained with inpatients, who are generally older, overall savings may well turn out to be closer to 15%. Inflation helped a lot to pay off the original startup costs of 1965, but at least nominally it is true the debt has been paid. We are now free to invest that ancient transition cost, so to speak, as long as we don't try to spend the same money twice. But there is considerable squeamishness about the public sector acquiring equity in the private sector, so Treasury bonds are about the only public sector investment the public will easily allow. Investment experts are however almost unanimous in feeling that equities provide greater long-term income (see graphs by Ibbottson) and security against inflation. On the other hand, if private individuals invest in common equity with index funds, less resistance is encountered. Any way you look at it, some investment income is better than no income, and for long-term investment, equity is better than debt. For political purposes, it would seem best to restrict investments to U.S. companies, and index funds are less controversial (i.e. "gambling with my money") for most small investors than actively managed funds, because the savings mostly come from reduced investment expenses. John Bogle is telling the world that 85% of most total return is diverted back to the financial industry, and this is one way to rebalance that. Fifty percent of investors would do better than average, fifty percent would do worse because of broad diversification, but not much worse, because total index diversification is fast approaching a maximum. Meanwhile, compound interest would be at work, and most people would be astonished to learn how large the long-term appreciation would grow. Tax-free, diversified, and long-term.

Finally, the question arises: how can you tell whether income from this source would equal the terminal care costs of fifty years from now? You can't, of course, you can't. But this transfer and invest scheme would generate a whole lot of money that presently isn't being generated. If it isn't enough, we will have to do something in addition. The monitor and mid-course correction system are expected to detect when more money is required to balance the books, and therefore more money will have to be invested in the Health Savings Accounts. If savings are insufficient, either subsidies or borrowing will have to be resorted to. Experts sometimes will be wrong, so revenue should be raised somewhat higher than the experts think we need. And if it all goes wrong, if we have an atomic war or an expensive cure for cancer, there is always the national debt. Which is where we began, isn't it.

Independent and Impartial Oversight Organization. (IIOO)After reviewing the complexities, it seems best to create an oversight body with more time and expertise that can be expected of representatives who are subject to periodic election. However, Congress must make it clear that it retains ultimate authority to break from the normal routine, occasionally concentrating its attention on conflicts between expert opinion and public opinion.

Working backward, a mixed public/private system needs an official backer of last resort, a function which cannot be delegated, and an experienced crisis management team in place with the authority to act within defined limits, most of the time. The last resort has to be the full credit of the United States, just as unfortunately it now is with Medicare. What's mainly needed is a sort of Federal Reserve in the very narrow sense of an independent management team, under the direct governance of a Board whose composition is half public, half private. To be useful, it needs a monitoring authority provided by a mandate from Congress, a comparatively limited amount of regulatory authority of its own, intentionally limited by adequate board representation from all stakeholders. The Board needs to be constantly told what is going on, and it needs general authority and trust to act in an emergency. Many proposals require a system of mid-course corrections particularly in the first decade of operation, at the same time the Board must not usurp Congressional authority.

Congress, on the other hand, must have the restraint of private oversight by technical experts who can appeal to the public, to make very certain it does not feel it has a new piggy bank. Corruption is one thing; misjudgments are quite another. Once in a while, we manage to construct such an agency.

Originally published: Wednesday, October 15, 2014; most-recently modified: Sunday, July 21, 2019