Philadelphia Reflections

Financial Overview

A More Uniform Healthcare Accounting. Here is how to pay for lifetime healthcare. Consider it's a flat tax, in the sense of everyone of the same age paying the same amount. But it's also progressive, in the sense that average amounts vary at different ages. You might say it's a flat tax, more realistically adjusted for age. At least, in theory, children borrow from parents, paying back when older. Old folks, by contrast, use up savings they themselves had accumulated while middle-aged. The existing healthcare payment system is not greatly different, except for how Medicare is sourced out.

Thus, the average child and young person, in theory, ought to borrow from, and repay, his parents. But ordinarily, there isn't enough money in his account to allow it. If there isn't enough aggregate money within the whole healthcare system, it must be supplied from tax subsidies. There are no social classes of permanently rich and poor; just people of different ages, so income tax subsidies are add-ons, considered separately. Income tax is not a flat tax, so subsidies derived from it represent richer people paying for poorer ones. To summarize: all new wealth can be traced back to people of working age. They pay for their children, and they save for themselves, for later. Their children may never pay them back, and their savings may not cover the needs of old age. Nevertheless, for practical purposes, all wealth is generated between ages 26 and 65, often in differing amounts.

The Medicare Exception. It reduces complexity to view it uniformly, and it immediately unravels Medicare as an outsider. There's a great contrast in Medicare, where we only pay for one-quarter of Medicare with payroll deductions in the normal way of saving to pre-pay a coming expense. A second quarter of the cost is paid by elderly subscribers themselves as premiums. But the real problem is generated by paying the remaining half of the cost, in appearance by taxing the working class, but actually by immediately borrowing it from foreigners. If it's ever going to be paid in the future, it adds additional hidden interest cost, so more than half really isn't in full circulation, yet. No wonder it's popular; the public thinks it's getting a dollar's worth of health care for fifty cents.

Tell me what you can spend, and I will predict the costs.

Getting back to our bookkeeping, we accept the figure in common use, that average lifetime healthcare costs are roughly $350,000 in current dollars. Somewhat more than half of the amount is Medicare, so somewhat more than a quarter is not fully funded. While we accept the approximation that inflation will affect costs about as much as inflation affects revenue, that equilibrium does not apply to fixed-income debts. Major upheavals, like wars and cures for cancer, just have to be dealt with as they arise. The basic premise of estimating future costs is this: we are going to spend as much as we possibly can on healthcare, and we are going to contribute as much as we possibly can, to pay for it. We adopt the cynical premise that politicians and doctors may force us to spend up to every bit we can, but no one can force us to spend more than we possess. So we can predict costs if we can predict revenue.

For example, if you think a 26-year-old can invest more than $3300 a year in his lifetime healthcare, go right ahead and some more revenue is available for politicians to spend. I happen to think this is at, or beyond the ability of a 26-year-old, so anything more than $3300 must come from some other age group, which will naturally resist. Anything borrowed from foreigners makes the whole thing -- non-self sustaining. You will have to elect magicians to make it come true for very long. From age 26 to 65, the system thus acquires $132,000 aggregate per person but spends $350,000. If that isn't good enough, just spend less, die younger, or rely on the black magic called outside debt. Where does the difference come from? From 8% compound investment return, passively invested in nation-wide index funds. And it won't come easily; you will have to scratch and claw for every penny of it.

Total revenue is $350,000, composed of $132,000 in direct contributions by working-age people, plus $218,000 in that compound investment income. To accomplish it, you must be dealing with agents who will leave you 8% after their administrative overhead and periodic episodes of bad stock markets. Therefore, you must get over any prejudices against investing in common stock, and any dreams of getting rich by plunging in them. By passive investing in index funds of the entire American (or perhaps entire World) economy, you should really expect at least 12.5% return, fairly steadily. As can be seen throughout this summary, we have consistently under-estimated future revenue and overestimated future costs. Making 8% net out of 12.5% gross is not easy.

$132,000 in contributions, plus $218,000 at 8% compounded.

Lifetime Revenue

If you get and accept the option to consolidate multi-year management (whole life insurance model) out of more conventional term-insurance models, revenue could be enhanced by internal efficiencies, perhaps to 11 % net, instead of 8%. We'll surely hear from insurance actuaries about it, but this feels like a conservative number, which has room to generate compound income in millions per person. This giant step introduces many new complications, but eventually the enhanced revenue projection would make privatization of Medicare seem almost mandatory, but on the other hand, would generate many controversies. My guess is we would adopt parts of it, step by step. The long transition time creates the main concern, however. Stretching so long over several presidential election cycles, consistent planning for a transition from term insurance to a whole-life model might prove very difficult until the idea has proved itself. That's revenue. Total expenditures are equally difficult to predict, except by the cynical assumption we will spend every cent we get. Therefore, it is vital the public have the ability to capture excess medical funds for retirement costs, at least creating a tension between two contenders for the money -- health, and retirement. This issue repeatedly arises and makes some reformulation of Medicare a very desirable feature for planners. For instance, working out the calculations for Medicare is now fairly easy, because so many of the figures are actual data. But politicians say Medicare is the third rail of politics; touch it and you're dead. Politicians ought to know. We're not going to touch it, but we must discuss it. Medicare is itself the source of many difficulties because it costs crowd out competitive costs. That's also why it is political dynamite.

Expenditures: $200,000 Deposited:$8,400

Medicare, Longevity 83

Carving Out Medicare, into Escrow. For the sake of discussion, we must be arbitrary about both Medicare's beginning and ending ages. Arguably, Medicare begins at 65, probably soon will progress to 70, probably ought to begin at 75. On the other hand, many people retire in their fifties, creating resistance to raising the year at all. We're going to call it 65, following our principle of being conservative. Medicare's ending is death, with longevity moving from 83 to 85 relatively soon, and probably leveling out at 93 in ten or so years. Sometimes the conservative guess would be 83, sometimes 93. We're just going to be inconsistent, giving a range between the two projections of longevity. There might be a profit in having longevity increase to 93 and then level off. A cure for cancer, Alzheimer's Disease, or diabetes might turn out to be terribly expensive; but patents do expire, so the long-term cost of drugs is headed downward. In summary, one assumption is that Medicare will cover costs from age 65 to 93, averaging $11,000 per year, or $308,000. A lower assumption begins at age 65 to 83, reaching $198,000. Medicare, by the way, is responsible for 50% of all hospital costs, so that's where the crowding-out is coming from.

Expenditures: $308,000 Deposited:$6,000

Medicare, Longevity 93

Spending What's Left, on Working Folks. If a person makes one lump-sum deposit of between $198,000 and $308,000 at age 65, a pre-existing escrow deposit would have pre-paid it with only $150 to $325 yearly contributions from age 26 to 65. That may seem hard to believe, but that's the math. Going back to the original budget of $3300 (see Chapter One), his HSA between ages 26-65 would then be reduced to deposits of between $3150 and $2975 annually, left over to spend on his current health expenses between 26 and 65. (That's the same $3300, split into a Medicare escrow fund of $150 to $325, plus $3150 to $2975 for current costs.) Looking ahead to age 65 in the escrow fund, much of Medicare's cost would be paid by new income generated from funds transferred to Medicare and remaining unspent at the time of transfer. In spite of the fuzziness of some of these estimates, it is remarkable they come within $11,000 of the old saying of "Spending your last dime on the last day of your life." This is largely due to the hefty size of the 8% return and the bulk of the money being transferred at age 65. That's before serious expenses become the norm, but after the deposited principle has ceased to be the main source of income. As such, they may be somewhat fortuitous, but most of the trends seem favorable. Rounding errors and unpredictable future events can be brushed aside as inevitable consequences of any attempt to predict the future. The real and enduring weakness will lie in depending on average college students to save money, and average stockbrokers to give it up. Both the early savings and the continuing high returns of this general proposal will have to be struggled for, no matter how precise the predictions in a book.

Financing Health in Middle Age. So, having between $187,000 and $297,000 to spend, what are the expected health costs for a middle-aged person? They will be quite moderate between age 26 and 55, starting to rise considerably in the last ten years, from 55 to 65. During all of this period, the individual will have to save $3300 per year, and in addition, will have to pay for obstetrics and pediatrics out of that. If children had any money, these costs would rightfully be theirs to pay. But children do have one asset to contribute: 26 years of additional compound income. In a theoretical sense, the children need to borrow their own medical costs from their parents. It might be said they should pay this back to their parents directly, but it is the grandparents who will be experiencing the rising medical costs of their fifties. By legally merging children and parents until the children are 26, a choice can be made between encouraging fertility and helping the kids with college costs or helping the grandparents with unexpected health costs. Ideally, it would be preferable to let the family unit decide such choices, but matrimonial courts are full of examples of family dissension, and quarrels between headstrong adolescents and their neurotic parents. It's only a suggestion, but it seems best to me to let the parents decide until the child is 21, and let the child decide after that. Invisibly, the quirks might have to be adjusted in the parents' wills and estates.

Financing System Shortfalls. There's one final question to answer. What if, for whatever reason, there isn't enough money in the system to pay all the legitimate bills? We can fumble around with eliminating fraud and abuse, but that won't make much difference. The government can be the banker, but someone might well have to be individually responsible. There is no escaping it, the extra money will have to come from additional deposit contributions by people with an income. Probably, extra deposits will have to be levied on people 50 to 65, who will be at the top of their lifetime earning capacity and beginning to experience a greater share of the costs. At that point, it may seem easier to repay the grandchildren costs by repaying the health loans of children to grandparents instead of parents. It could be done quietly by assessing extra deposits on 50-65 while shifting childhood repayments to grandparent accounts. Immediately, a much smaller amount could be deposited in the children accounts, where compound interest for 26 years would multiply it back to where it started.

Let's Do It All, Backwards. Children's healthcare is paid by the parents. In order to capture 26 years of compound interest, we try to unify the legal family until the child is 26. The child owes a debt, to be repaid to parents or grandparents, later. At age 26, the individual starts depositing $3300 yearly into a tax-exempt Health Savings Account, paying back at least 8% on passive investing in American or Worldwide index funds of common stock, essentially capturing a diversified share of the entire market. This HSA can pay health expenses, but those who can afford it would be wise to pay their medical bills out of other accounts and save the tax-free feature for bigger sums, later. A high-deductible health insurance policy pays big bills, the HSA can (but need not) pay the high deductible. This is how things go until the individual is 65, except between $150 and $325 is placed into an escrow, which will be used on the 65th birthday to buy out of Medicare. It's possible for the individual to deposit less, perhaps $3075 to $2975, but the alternative is to buy out of Medicare, a much better deal.

That's how it goes until the 65th birthday when Medicare appears. The working person has already paid for a quarter of Medicare's costs by payroll taxes. He now faces an equal amount as Medicare insurance premiums, as well as double that premium cost in federal subsidies, plus accumulated foreign debts for earlier subsidies. Right now, only the foreigners are worried about repayment of the debt, but somehow or other it has to be paid. The alternative was to have deposited $150 to $325 yearly, but now it will cost you $187,000 to $297,000, so for most people, it is too late. Meanwhile, the government has collected a quarter of Medicare's cost in payroll deductions, so it should owe you something for that, too.

Oh, yes. If you happen to have been unusually healthy, you didn't spend much money on health. All of that accumulated money is available to pay for your long, long, retirement.

Originally published: Tuesday, December 23, 2014; most-recently modified: Friday, May 17, 2019