Philadelphia Reflections

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

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Blue Sky Flying for Congress: What to Do With Money Which Health Savings Accounts Drop in Your Lap

Let's be clear about our role. It is to suggest four or five main ways to rearrange health financing, so enormous sums are available to reduce health costs. Once the money is available, only Congress can decide what to do with it. In fact, my prediction is anything else would be brushed aside as an amateur suggestion. Nevertheless, I have given the matter some thought, and offer my ideas. They begin with leaving the practice of medicine alone, on the grounds that the public will not support any major intrusion into what they consider their private affairs. And my suggestions end with the opinion a change such as I propose can only be done once in a century. So please get it right if you do it.

Starting Young, and Playing With Numbers. The power of compounding is brought out by starting really young, possibly even at birth with a gift from parents. At 10%, money doubles in seven years; at 7%, it doubles in ten. In 65 years there are eight doublings at 10%, six doublings at 7%. The real power of compounding comes at the end of the series. The last three doublings were added in the past century. It makes them eight times as valuable to us as to our grandparents. So, something slow, gradual and unnoticed, creeps up on us before opening an entirely new set of possibilities.

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Eight times as valuable to us as to our grandparents. {bottom quote}
Three doublings added.

We divide the roughly 85 years of life into three compartments: (1) Children from birth to age 25, whose health expenses are a debt they owe their parents. (2) Working people, from age 25 to 65, who essentially generate all the wealth of society. (3) And over 65, when working income ceases, and living costs are paid from savings generated earlier in life. There are forty years to earn, preceded by 25 years of being supported, and followed by 20 years of living on savings. That's why so much of this book pivots around ages 25, 65, and 85. If you learn it from your parents, you get a head start. If you must learn it for yourself, mostly it's all gone before you react.

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Learn from your elders, get a Head Start. {bottom quote}
If You Learn for Yourself, mostly it's gone.

Working backward from $80,000 at age 65, you need to start with only $200 at birth with 10% working for you or $1,000 at birth with 7%. What's the significance? If you make a lump-sum payment of $80,000 on your 65th birthday, the lump sum generates what we now assume is the lifetime average cost of Medicare. Translating $200 at birth into $80,000 in 65 years is definitely possible. Figuring out how to translate the money earned into what the average person will spend 65 years later, is too complicated to be precise, but we have learned you always underestimate the change in such a long period. We always underestimate the change, but the cost of it cannot exceed the money we will have. Paradoxically, that may be a little easier. Remember, the stock market averaged 12.7% during the past century, but here we only project a 10% return to an investor, therefore few would dispute results of this financial magnitude are a reasonable goal. I'm not entirely sure what we are predicting, but perhaps it is an invisible limit to the rate of inflation a viable economy can withstand. No gold or silver standard, but perhaps the velocity of money standard. Maintaining a future goal of 3% inflation during the next century, for example, seems entirely within the power of one person, the Chairman of the Federal Reserve. He may fail, and the world economy flies apart, but if it holds together, something like this velocity will have to continue, even if we all are commuting to Jupiter for lunch. The final conclusion would be unchanged: a comparatively minor investment at birth could be fairly comfortably projected to pay for average Medicare costs, half a century from now. You might even get all of Medicare for a single $200 payment; now that's really a bargain. Even $1100 (at 7%) is still a trivial price for retirement with unlimited health care. But remember, we are not promising to pay for it all, just some big chunk that presently isn't paid for. During major inflations such as Germany, Russia and China had, the individual nation disintegrates but eventually catches back up with the rest of the world. Our whole financial system seems to have been stabilized by some such notion for the past four or five centuries.

The Debts of Our Parents. We started by showing it would likely be feasible to assemble $80,000 by the 65th birthday, and that much money on average, would likely pay for Medicare because the relative values will not change unrecognizably in thirty years. Remember, Medicare is spending $11,000 a year on the average Medicare recipient, for roughly 20 years, or roughly $200,000 during a 20-year lifetime after 65. If you start with a nest egg, sickness will slowly wear it down. At the same time, you do make a certain return on your nest egg. The goal is to build the egg up when you are working, so you have something to spare between the interest you make on your nest egg, and the annual cost of the illness. Eventually, the sicknesses win the race, but your task was to stretch things out as long as you can. Eventually, a few people will have to resort to dipping into the last-year-of-life fund (see below), and if things go badly wrong maybe we can only pay fifty cents on the dollar. There is this contingency provision, but it will not be infinite.

Let's examine the concern, which isn't entirely fanciful. Since earning power starts to disappear around age 65, there will inevitably be some people who throw themselves on the mercy of Society with no hope of paying their substantial medical costs. My suggestion is we anticipate this contingency by initially excluding payment for healthcare in the last year of life, which as I have said many times, comes to everyone. Because nearly everyone who dies, is on Medicare, we have pretty good data about the cost of the last year of life. Setting aside the funds to pay for it would allow us to add the cost to our estate or insurance. For those who have somehow escaped pre-payment however, this remains the last final debt and a fairly substantial one. Segregating this debt as the last unpaid one, allows for the people who fall through the cracks, to fall through this one, last. Whether we make this deficit into an unfunded debt of society, or a pre-funded responsibility of a benign society's natural obligations to its citizens, or a debt of society to its medical institutions -- makes only a rhetorical difference. The problem has been concentrated in a single focus, where it can be dealt with as generously (or as tight-fisted), as we choose to appear in the eyes of the world. As envisioned, all other debts are paid before this one, so to some people, it will seem like a contribution to the Community Chest, while others will treat it like highway robbery by welshers and ne'er do wells. But at least we have provided for what we all acknowledge is inevitable.

We estimate compounding will add more revenue, roughly matching the costs of robust stragglers who live from 85 to 91. That is, the growing costs of the elderly are like a longer neck on a giraffe -- rather than a bigger belly on a hippopotamus. Average costs actually go down a little after 85. We assume a fair number of them will be healthy during most of the extra longevity, with heavy terminal care costs merely shifted to 91 instead of 85. We started at age 65, with 65 years of health costs already paid; we paid down the estimated costs of twenty years, and the interest on the remainder pays five more. We get there with money left over, we haven't diverted the premiums from Medicare, and we still have to pay for that last year of life. Except we let Medicare calculate the average cost from the people who decline this gamble, and the fund reimburses the hospital or whatever, for average terminal care costs -- during what is only then recognized to have been the last year of life. If the money from fund surplus isn't enough, the agency can look at raiding the Medicare payroll deduction pool. And there can always be recourse to liberalizing or restricting enrollments, to age groups which experience shows will either enhance or restrict the growth of the fund, as predictions come closer to actual costs. And finally, the last recourse is to have the patient pay for some of his own costs, himself, by re-instituting Medicare premiums. Those who feel, paying for all of the healthcare with investment income was always a pipe-dream, will feel vindicated. But all this book ever claimed was it would reduce these costs by an unknowable amount, which is nevertheless a worthwhile amount.

Whoops, Medicare is Subsidized. A major explanation for the astounding bargain in Medicare funding can be traced to a 50% subsidy of Medicare by the Federal government, which is then borrowed from foreigners with no serious provision forever paying it back. Medicare is:
about half paid for by recipients,
about a quarter paid for by payroll deductions from younger working people, and
about a quarter paid for by premium payments from Medicare beneficiaries, collected by reducing their Social Security checks.

A quarter paid in advance, a quarter paid at the time of service, and half of it a subsidy from the taxpayers at large. No wonder Medicare is popular; everybody likes to get a dollar for fifty cents. But the Chinese might be astonished to hear Medicare described as self-funded, sort of ignoring the repayment of their loan.

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America's Big Benevolent Gamble. {bottom quote}
Billions for Research
So I'm sorry but if you want to pay your bills, it might cost more than $80,000 on your 65th birthday, based on the assumption that you do want to notice the nation's huge debts run up by your ancestors. And to go further, it will take at least $200 a year, starting on the average person's 25th birthday, even making what some people would say was an optimistic estimate of 10% return. So you might as well call it $500, just to be safe from other rounding errors, and to allow enough time for hesitation lag about doing such a radical thing. No one says you have to do it my way, but this is how you reach a rough approximation of what it will cost, to do what I think has to be done, including paying off our debts.

That's indeed how much it will cost if you do it all by raising revenue. You can also do some of it by cutting costs, where fortunately we are well along on a uniquely American way to do things. No one else has the money to do it our way, so everyone else tries to cut costs by turning out the light bulbs. But without saying a word, notice how we have united in what the rest of the world thinks is madness.

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Americans Unite, Others Think It's Madness. {bottom quote}
Eliminate Costs by Eliminating Disease
Starting about fifty years ago, we began pouring outlandish amounts of money into medical research. In fifty years, we extended life expectancy thirty years, through eliminating dozens of diseases, along with the cost of caring for them. Just think of the money saved in treating tuberculosis alone, tearing down those TB hospitals seen in every city during my student days. Infectious diseases, particularly typhoid and syphilis, consumed the time of a medical student, and much of the budget of every municipality. One of my professors said we had two challenges left: cancer and arteriosclerosis. He was an optimist because we still have cancer. And the three main mental disorders, schizophrenia, Alzheimer's and manic-depressive disorder. But add five more to that list, and cure them in twenty years. After that, our main problem would no longer be dying too soon. It would be, outliving our incomes. Financially, these are features of the same thing, except one pays for Social Security and the other pays for Medicare.

Consider a moment, how difficult it is to say how much medical care will cost. Remember, a dollar in 1913 is now called a penny, and today's dollar is very likely to be called only a penny in 2114. We long ago went off the gold standard, and money is only a computer notation. Looking back, it is remarkable how smoothly we glided along, deliberately inflating the currency 3% a year, and listening to assurances this was the optimum way to handle monetary aggregates. Even more remarkable still is to hear the Chairman of the Federal Reserve ruminating we don't have enough inflation. It took a thousand years to get used to metal coins, several centuries to get used to paper money, and almost a century to get used to being off the gold standard. The political task of convincing the whole world that inflation is a good thing sounds very close to starting a world-wide civil war.

But we now have more than a million people over the age of 100. They got cough drops as a baby for a penny, and now hardly blink when a bottle of cough medicine costs several dollars. But instead of that, they are likely to get an antibiotic which was not even invented in 1913, retail cost perhaps forty dollars when it was invented, and now can be bought for less than a dollar. If they got pneumonia in 1935, they probably died of it, no matter how much was spent for the 1935 medicine, so how do you figure that? Or someone who got tuberculosis and spent five years in a sanatorium, who today would be given fifty dollars worth of antibiotics. The problems a statistician is faced with are impossibly daunting.

The current practice, which reaches the calculation of $325,000 for lifetime medical costs, is to take today's health costs and today's health predictions, and adjust the average health care experience for it, both backward and forwards. Every step of this process can be defended in detail. But the fact is, average lifetime health cost of someone born today is only the wildest of guesses, no matter what kind of insurance is in force, or who happens to be President of the United States. The cost of drugs and equipment go through a cycle of high at first, then cheaper, then they vanish as useless. But adjusting the overall cost of materials and services when only a faint guess can be made about healthcare and disease content, can be utterly hopeless, or it can be quite precise. Unfortunately, even its probable degree of future precision is a wild guess. It's a wonderful century to be living in unless you are a healthcare analyst. The only safe way to make a prediction is to make a guess that is too high and count on public gratitude that it actually wasn't much higher than you predicted. But to guarantee a particular average outcome, which an insurance actuary is asked to do, will be impossible for quite a few decades.

So, here is a plan for paying for healthcare, which is nothing if not flexible. If we start running out of money too early, we just don't pay our foreign debt, that's all. Doing it overtly is probably to propose a change in our entire culture so it would be done by inflation, a dime on a dollar.

If that isn't enough, we inflate some more until we can stop running up foreign debt.

If that isn't enough, we cut costs, inflate some more, and reduce the quality of health care.

And if that isn't adequate, we put a stop to funding biological research, by letting foreigners try their luck at it. Americans would be particularly loathed to do that because it represents a confession we were wrong about our boast to put an end to the disease.

This four-step process is absolutely mind-boggling to me, absolutely unspeakable, although the Chairman of the Federal Reserve is able to hint around about it. To me, it is so repellant that absolutely no circumstances would allow me to endorse it, and my hope is that just the mention of it will be enough to stir up the newspapers and the Congress. Stir them up, that is, to take some of the harsher measures which are necessary to withstand such suggestions. Meanwhile, we have the satisfaction of generating some compound income on the premiums, which will make the direst eventuality, to be not quite as bad as otherwise.

To keep track of how we are doing, the alternative I propose is to create a semi-permanent agency with adequate resources to oversee the transition and release honest white papers about how it is going, judge how it must be modified. After that, no doubt, a blue-ribbon oversight board must be appointed with power to suggest to Congress what needs to be modified. The blue-ribbon approach is to designate a couple of dozen private institutions to send one representative, and to rotate the appointees among a smaller board than the number of institutions which nominate one. Let's say, twenty positions among thirty institutions, rotating on a three-year cycle, to minimize overlap with Congressional elections. No doubt, that would produce an annual flood of half a dozen books a year by board members, agitating a process which is ultimately decided by elected Congressional representatives.

Originally published: Monday, November 10, 2014; most-recently modified: Wednesday, May 15, 2019