Philadelphia Reflections

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

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First Example, single payment of relatively small deductible. The smallest deductible in the Obamacare Insurance Exchanges is $1250. If a deposit in the HSA is made at age 26 to cover this contingency but never used, it should rise to $10,000 if invested in U.S. Treasuries at 3.7% -- by age 85. That won't get you where you want to go, but it may be the least that can be afforded.

Second Example, single payment of $6300.The the largest deductible in the Obamacare Exchanges is $6300. A single deposit of this size at age 26 will reach $10,000 at age 40. At that point, we can hope that 10% is generally available in the marketplace, and thus would reach $24,000 at age 65. An IRA of $24,000 will start paying pensions at the minimum distribution rate of $960 a year. In a sense, that's not a bad investment of $6300, but everything has to go smoothly (in health as well as finances) for 39 years to achieve it. The point of these first two examples is to demonstrate that HSA is probably not able to overcome current abnormally low short-term interest rates enough to be used solely as a place to park small deductible reserves. At $10,000, it becomes feasible, and when interest rates return to normal levels, it may again be feasible for small savers.

Third Example, single payment of $10,000 (deductible reserve of $6300, plus $3700 cash), at birth. This cash contribution at birth will not only match the $10,000 minimum demanded by brokers for unrestricted investment (i.e. for eligibility for 10% long-term investment return), with an added bonus of reducing premiums for paying a higher deductible. Now, this one is far less accessible, but it illustrates some important points.

At one time, a $25,000 deductible health insurance policy was available for an annual premium of $100; but while times have changed, it still remains true, the higher the deductible, the lower the premium may be. Secondly, the lower the premium, the more is left for investment. This deposit, if placed in an IRA at age 26 at a 10% income rate, would generate a fund of $411,000 at age 65, making possible an annual pension of $15,000. Quite a contrast! The third feature is that starting the compounded income at birth instead of 26 adds nearly four doublings to its investment horizon. The ultimate consequence would be a comfortable retirement fund of $60,000 a year. What's mainly standing in the road of this windfall, is all the current dissension about the place of the family in American life. If it is the parent's duty to supply healthcare for their children from the moment of conception, then the cost is an obligation and should confer ownership of the benefits. If the child didn't ask to be born, his costs are his own and, while the parents may make a gift or a loan, the benefits are the child. And if there is a divorce or illegitimacy, the support costs are probably the determining factor. Quite obviously, we are at quite a distance from a basis for settling this issue. If you throw in the costs of an abortion subtracted from the cost of being born, you go off on another tangent, one you probably never return from.

Should we treat Obstetrics and Pediatrics as a loan from parents to a child?After all, the insurance location of Maternal/Childhood Coverage Could Add 26 Years of Compounding and solve several problems which are now beyond the scope of this book. It seems like a problem which could be reserved for a later time since lifetime coverage can be addressed without it, no matter if it would be simpler to include it. This is a book about healthcare finance, with every incentive to avoid thorny society problems. However, a collision occurs when we attempt to include the rather considerable costs of obstetrics and/or abortion, and the comparatively minor medical costs of children under the age of 26. The goal is not so much to protect against these costs, as to add 26 years of compounded investment income to the calculations, and the problem is that our society has not completely decided whose financial responsibility such costs belong to. Judges make expedient decisions in divorces and illegitimacy; but issues like this, for them to stick, must really be made by society in general. For purposes of long-term prediction, we will, therefore, assume that a child is responsible for his own birth and subsequent medical costs and that someone else in the family is responsible for reimbursing the child. Treating costs as the infant's responsibility is something of a fiction, like pretending each child has a trust fund to pay everybody back at age 26, but it will have to serve.

At the moment, everybody does have some mechanism for paying Obstetrical costs, even while that mechanism is only to rely on charity. The costs have already been assigned to someone. For the most part, Obstetrics is now part of the parents' health insurance policy. It must be admitted that the true costs are not readily available since the whole matter is tangled in internal cost-shifting by hospitals and insurance policies. However, they are determinable by someone, and eight thousand dollars seems adequate. Two hundred dollars a year seems right for average childhood costs from birth to age 26 but obviously, better data would improve the precision. We take a guess at $8200 for obstetrics and pediatrics combined or $5200 for pediatrics alone. At 10% investment income, the fund would overtake the pediatrics in 26 years, and possibly allow the fund to break even on the Obstetrical costs over the 26 years. For a while at least, policies like this should allow the managers to gain experience; if the investment pays the medical costs, then enough of the obstetrics will be double-paid by existing sources to make the whole experiment escape insolvency A pilot study of four or five years, in four or five states, might clarify the issues. After that, it should be possible to establish profitable levels for the package. Somewhere mixed up in this are the inordinately concentrated malpractice costs of obstetricians. We look longingly toward the Chief Justice and the Judicial Council to rationalize this wasteful situation, and then for the ensuing savings at 10% for 26 years to get most Health Savings Accounts off to a profitable level by age 26. This complicated sentence structure may seem a round-about way to streamline transaction costs for HSA brokers, but something like that will have to be done to reduce transaction costs, which are probably roughly equitable in the first and second examples. But nevertheless, costs must be reduced because of the tremendous jump in gains in the third example is too attractive to be ignored. In summary, in this discussion, we regard the initial high obstetrical costs and the low pediatric costs which follow, as a wash. We can come back later and tinker with details. But the important point at the moment is to stress that we can garner 26 years at 10% compounded investment income, by simply declaring them to be manageable break-even costs.

Fifth Example: Deductible Reserve, Generous Returns, for Twenty-Six Additional Years. All of this begins to merge with the idea of lifetime health insurance, which is the subject of the next Chapter. So we need to add at least one new idea, which is whole-life health insurance. We end this term-insurance line of thought with the stockbroker's hard-nosed assessment that he can't make a profit with this idea unless he starts with a $10,000 nest egg, or else charges hidden fees. The first $6300 gets provided by Obamacare's discovery they can't make health insurance work without a $6300 deductible. Matching that is my own assertion that no one should risk using $6300 deductibles unless he can see some source for the money, whether it is a government subsidy or his own personal savings, of enough ready cash to cover one year's deductible. Even so, we have to find another $3700 to get to the safe harbor of ten percent. If such a thing as $10,000 deductible became available, it would close this gap without borrowing, because higher deductibles make lower premiums possible, and eventually you break even. But right now, the individual has to borrow $3700 to make this work. Because the new father and mother are young, they are going to have to pay a higher interest rate, and we might as well assume a loan-rate of 10%. But it's 10% on $3700 of it, which makes the whole fund eligible for a 10% return. In round numbers, that's $1000 minus $370, or a net gain of $630 a year; reducing the loan balance to $3100 the second year, $2500 the next, etc., You would have to be working with real Obstetrical costs to know how much it would cost, but this is the general idea behind calling the initial cost a wash.. Now, where does that leave us, with essentially $10,000 to prime the pump, and starting with a growing income of $1000?

Well, it leaves us with $80,000 at age 26, and literally millions at age 65. The numbers are so generous we see no need for precision. We can now see a clear path from a cash contribution you must make, to quite enough money to pay all average lifetime medical costs by the age of 65. All medical costs, so no 6% payroll deduction, no premiums, become a possibility. And with enough extra cash emerging from the calculation to make it unnecessary to use a calculator to be reassuring. Only by getting another 26 years of income does it become possible, but it does make it unnecessary to have quite so many assets when you start being a capitalist at birth.

As a footnote, we find it unnecessary to tell bankers how to smooth out repayment of $10,000 from people who are pretty much guaranteed to have millions before they die; it's what bankers do for a living and they are good at it. But there is one other risk inherent in this discussion: the risk that any particular individual could get very sick several times. In some circles, the solution to that contingency would be called "reinsurance", and in other circles, it implies "subsidy". But, otherwise, this system has only one remaining difficulty. It would take 80 years to prove itself. That might seem like a great handicap, until it gets compared with the risk of taking on too many complex tasks, too rapidly. One of the great advantages of taking this approach is that its several steps force major readjustments to be gradual.

Originally published: Wednesday, December 03, 2014; most-recently modified: Thursday, May 16, 2019