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The main purpose of fitting a small picture of health financing reform, into a big picture of health financing, or even into a bigger picture of national financing -- is to help judge whether the proposed reform is even remotely feasible. In constructing this assessment, our first task is to see whether healthcare as we project it can be self-sustaining. If not, we would have to look around for something else to subsidize it, because healthcare is not going to go away. We would have to shrink its ambitions, or else shrink the ambitions of something else, like abolishing the rich in order to subsidize the poor. Therefore, balancing the books in this context means showing how the health system can become self-sustaining.
Revenue Let's start with available revenue, which must ultimately come from people of working age. That is to ask, how much can people from age 26 to 65 afford to devote to healthcare? Their children are too young to contribute, and after they retire, the retirees are living on what they accumulated while they were working. Everybody hopes to save a little more than that, but what they have is probably best put in the category of retirement costs. Other derivative savings categories, like corporate income and government subsidies, either come directly from working people as taxes, or indirectly from organized charities, inheritances, and savings. Since 1965, aggregate foreign transfers have all been negative.
Painless Augmentation of Revenue. All budgets seem to start this way. Everybody's appetite seems bigger than his wallet. But few budget discussions begin with the proposal that we perpetually find new sources of revenue for two-thirds of projected expenses. That is, most organizations assume you have to borrow in order to meet your goals. Eventually, you find new sources of revenue, or else the debt service grows to a point it destroys the vision thing.
Substitute Investment for Debt. We presently regard the diverging curves of revenue and expense as a tragedy, when they could be turned around as good luck. The pay as you go system allowed employer-based health insurance to forget about the early costs of people who had not pre-paid them. In a sense, pay-go borrowed its capital costs and never expects to repay them. It may have assumed later generations would pay off the debts, but the later generations just continued the minute, and let it grow. Like all insurance companies, it rejoiced in the gift of protracted payment periods, growing out of unexpectedly extended longevity.
There's a tipping point in such developments: if the interest you earn on savings is greater than the interest paid to your creditors, your debt burden shrinks; if it's the reverse, you probably go broke. In the favorable case, the more longevity keeps extending, the cheaper it becomes to extend the debt. The health industry has permitted the insurance and finance industries to enjoy this windfall. It's time for the Health Industry to take possession of what it created, but you need not expect the insurance and finance industries to cooperate gracefully. As John Bogle so annoyingly pointed out, the finance industry has absorbed 85% of the income from investments. The insurance industry is allowed to charge 10% to collect healthcare bills. And big business finances the transfers by paying half of its inflated tax liability in taxes, while denying the same advantage to its foreign and small-business competitors. No one expects these three giant industries to roll over on command, but the government can be pressured to stay out of the road while the healthcare industry switches from being a debtor to being a creditor, hence avoiding bankruptcy in order to be rewarded for extending everyone's lifespan by thirty years. In short, by switching from pay/go to Health Savings Accounts. From debt-pay to pre-pay.
Substitute Independent Multi-year for Employer-based One-year Term Insurance. Since both the Clinton and the Obama health reform teams had extensive contact with business interests, there is little doubt they were well aware of two flaws in the employer system. It is not portable, leading to the campaign agitation about "job-lock"(Clinton), and it does not roll over from year to year, resulting in a furor about pre-existing conditions(Obama). These are both manifestations of employer control, inherently consequences of employment mobility. It is unclear what combination of pressures impelled both administrations and their political associates to avoid the ERISA solution of shifting employer control to an independent insurance company, funded by employers. Perhaps it was fear of union domination of ERISA plans, perhaps it reflected resistance from non-profit insurance, perhaps something else. In any event, this resistance stands in the road of the many advantages of multi-year coverage, perhaps forcing attention to inferior solutions less directly distasteful to employers.
In any event, the lifetime cost of whole-life insurance is roughly a quarter of the cost for equivalent coverage in year to year term insurance. Furthermore, the term product is generally less attractive as a revocable product, hence even more expensive than it seems. It is certainly troubling to hear that term insurance would be unprofitable if fewer people dropped their policies. We would defer to insurance experts on the relative merits of different ways to extract cash from them for medical requirements. Using the cash balances is one way, reducing the terminal benefit is another. Nevertheless, the HRA experience is only half of the accounts have any yearly withdrawals at all, so perhaps the whole-life approach contributes only half as much as its final balance to paying for healthcare. If it eliminated the need to prohibit pre-existing conditions, it might save even more. Perhaps whole-life and term would have appeal to different age groups, so the ability to transfer should be protected. The need to create an information and research center for healthcare is evident in questions like this.
Where Should the Retail Outlets be Located? Health Savings Accounts can be regarded as insurance plans with a banking front end, or else regarded as Savings accounts with fail-safe insurance attached. Instead of a fight to the finish, it is exciting to envision one plan as part of existing insurance offices, and the other as part of brokerage houses. The resulting competition might quickly surface important advantages to different customer needs. It might also adjust more easily to shifts from inpatient care to outpatient, or different state regulatory postures. Some thought might also be given to facilitating foreign medical tourism.
Zero-sum (Painful) Augmentation of Revenue. For health insurance to cross the tipping point between a debtor and net creditor, it must receive a greater return on its investments. The investment community is struggling with a recession and a hostile regulatory climate and will resist a loss of margin unless it is accompanied by a considerable increase in sales volume. They are entitled to make their case but are not entitled to make their own facts. The government needs to assure that prices are more widely transparent, and cost-free transferability is easy. Fees for deposits, withdrawals and transfers should be both low and immune to kick-back arrangements. Fiduciary status should be encouraged if not mandatory. Competition in the sunshine should be the goal, so long as investment income is comfortably above the tipping point. Health Savings Accounts already report $22 billion in deposits, while potential volume is a hundred times that much. There is room here for all participants to prosper, and for optimum rules to emerge. Somebody without narrow boundaries should be empowered to watch, to prevent, and to enforce. With some imagination, the Constitutional quarrel between Federal and State regulation could be turned to advantage, not to obstruction.
Balancing the Books. In this summing-up exercise, balanced books imply health industry self-sufficiency. Even if it is decided to unbalance them by, let's say, subsidies to the poor, the size of the subsidy should be measured against the size of the budget, and the size of the populations involved. Somebody or some agency must be charged with doing so, because health financing is very fluid.
As a first step, health savings Accounts at their most optimistic, fall $50-$80 thousand short of stretching $132 thousand into $350 thousand. That's a whole lot better than falling $200 thousand short, which is the present plan. Almost by definition, we don't believe it can be done by raising cash contributions, but it is sure one big step toward it. As data accumulates and the economy clears, we hope the figures will seem more favorable. As medical research progresses, we hope the overall costs will go down, but an expensive cure for cancer could blow that hope away.
We might expand the international trade of healthcare, both by sending Americans abroad where labor costs are lower and by importing foreign nationals for expensive forms of care, at a fee. For a long time, there was a weekly flight between the Netherlands and heart surgery in Texas, to the financial benefit of both countries. We have not made much effort in that direction, since that time. And finally, there has been very little progress in converting the infirmaries of retirement villages into low-intensity hospitals, an advance with considerable promise if helicopter transfers were facilitated and telemedicine advanced. Because of hospital zero-sum resistance, this trend would best begin in remote regions, and might even require some pilot studies. Finally, it would help a great deal if the retirement age spontaneously moved several years older. Perhaps to age 75. Beyond that, we are going to have to resort to subsidies and cost-cutting to balance the books. That's not the best solution, but it's all this approach can provide. By the way, that's not exactly peanuts. Try multiplying $100,000 times 340 million to see what an advance we have made on solving an apparently unsolvable problem.
If anyone is still listening, we seem to be forced to start experimenting with lifetime Health Savings Accounts. They have more promise, but less experience to back them up. Very likely, they might produce an additional lifetime $100,000 revenue, but they have one immediately important obstacle. We might very well find they cannot do what we want unless the nation is willing to surrender Medicare. No one needs to tell me the politicians regard that as political suicide, because almost no one is willing to face the fact we cannot pay for it, to the degree it is itself probably a bigger problem than the rest of the population's healthcare, and almost no one will face it. I won't repeat the mathematics here, but Medicare is 50% government subsidized. Think it over. Even I am forced by public opinion to soft-pedal the facts, hoping other people who have nothing to lose, will start to speak up.
Originally published: Saturday, December 20, 2014; most-recently modified: Thursday, June 06, 2019