Philadelphia Reflections

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

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Some Underlying Principles

Casualty insurance formerly contained a clause making it noncancellable and guaranteed renewable. Except for disability insurance, most insurance no longer has those contractual promises, but the better ones will still "stand by their product". Prices were too unstable to permit a continuation at the same price as a legally enforceable right. In 1945, the Henry Kaiser caper changed the whole nature of the relationship, at the end of which the employees walked away with no individual renewal right at all, but got really great benefits while they had them. That was not a good bargain. Without a right of renewal, there is no good way to make internal transfers from young healthy employees to aging sick ones. Apparently, labor and management felt it was more important to get something out of the situation than to come away empty-handed. Most of these negotiations were private, and there may have been unrevealed considerations.

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No individual renewal right, but really great benefits while they lasted. {bottom quote}
Bad Bargain.

But the one sure outcome of this turmoil was a young employee had no assurance of health insurance if he changed jobs, and no sure way of transferring surplus benefits to his later years, even after remaining within the same employer group for decades. Older employees were plainly getting more value for their health benefit, but young ones could not be sure they would stay around long enough to enjoy it. In retrospect, this may have been a driving force in the enactment of Medicare in 1965. Employees experienced "job lock", which definitely meant they could not take stored-up benefits to a new employer, or into retirement. Furthermore, casualty health insurance was gradually changed by employers donating the policy to the purchaser, so ownership of the policy migrated into the employer's hands. The employer had to change insurance companies for the whole employee group, or not at all, so slavery begat more slavery. The negotiated group rates naturally reflected this change. The business plan of health insurance does not differ greatly from automobile insurance: Premiums are paid to an insurer at the beginning of the year; and at some time during that or subsequent years, the insurer uses the pooled money to pay the claims. In practice, there does exist one important difference between the two types of casualty insurance. Many auto insurance companies imply they hope to renew a policy if the premiums remain paid, but hardly any health insurance is "guaranteed renewable" in any sense. You can pay individual health insurance premiums for many years to the same insurer, but the insurer still reserves the right to drop you.

This largely unanticipated disadvantage grows out of the sponsorship of health insurance by employers since applicant employees are in no position to put strings on a gift. Its hidden unpleasantness was emphasized when millions of people were recently dropped from long-standing policies which did not conform to the Affordable Care Act's regulations. Original motives and understandings became unprovable after the passage of time. One could, however, easily imagine employers felt they might acquire new duties by law, and were reluctant to stand behind unmeasurable ones. One could imagine the insurers were uncomfortable with the risk an employee might move to a new state, and because of the Tenth Amendment to the Constitution, be facing insurers with no duty to continue coverage. This ACA dilemma came about in an environment with so little competition, neither the employers nor the health insurer felt compelled to wander into unforeseeable conjectures.

In this single subsequent event during the Obamacare confusion, a serious disadvantage of employer-based insurance discarded its tradition as harmless boiler-plate, revealing the enforceable facts of the matter. A health insurance company can unexpectedly walk away from an employer-based contract, even when it is needed most. The patient gets it as a gift and doesn't own it. This dispute over fairness and the original intent was surely involved in the government's decision to delay implementation of Obamacare for large employer groups.

By contrast, we must point out the Health Savings Account leaves unspent money with the individual as permanently as he can restrain himself from spending it. For this, he loses the ability to pool with others and must buy high-deductible insurance to provide the pooling feature for large costs. Interest gathered on his idle money remains his alone. By retaining ownership in the hands of the employee, HSA gains protections against much broader health-finance risks, than the Affordable Care Act's pre-existing condition-exclusion does, for its population segment.

In fact, this sweeping violation of a gentleman's agreement may make such arrangements unacceptable in the future. If the employer community finds it impossible to live with guaranteed renewability, they may feel forced to drop the fringe benefit. Not everyone wants to exchange the freedom of choice for freedom from the expense of it, but some do. Consequently, opening this can of worms could lead to the dissolution of the present system, which depends heavily on the tax-deductibility of the gift for employers. There is essentially no difference between an individual income tax, and a corporate income tax, except the corporate tax, is higher. The world's highest corporate tax necessarily creates the world's highest tax deductions for employers. Reduce their wage costs, and you will reduce their income tax. But reduce your own tax, and you reduce what it has been paying for. That's the bargain, and no stalling will change it.

We must, however, introduce an observation which applies to all defined-contribution plans. The advantage has switched from the older "new hire" rather markedly toward the younger "new hire", because of the addition of investment income for the younger one. This is an advantage for one, not a disadvantage for the other, but negotiators seldom recognize such arguments. The terms of the agreement should probably be adjusted for this new development, which is illustrated in the first section of this book. But since the change is due to the mathematics rather than the judgment of the donor, experts will have to see what they can do about it, before it becomes a punching bag, desired by no one, but forced on everyone.

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Some rude things it would not hurt to know. {bottom quote}
Employer-based health insurance was once a well-intentioned gift, with a regrettable lack of guaranteed renewability. Until the First World War, most corporations were controlled by founding families, and more employees enjoyed lifetime job security. The switch to stockholder controlled to fewer benign gifts to lower-level employees. After a century of modification, the employee still is forced to bear the risk of losing his paid-for health insurance when he loses his job. The implicit good-faith guarantee of guaranteed renewability is however likely to vanish. Its implicit risk was transferred to the employee, but money to pay for it was not until the Health Savings Account came along. With that, surprising discoveries emerged. Thirty years had been added to longevity, now making compounded interest money a truly substantial issue. Furthermore, many diseases had disappeared, generating overall a protracted interval of smaller expenses during working life.

As long as the (term insurance) risk of losing the premium flow remained, it was not prudent to invest the money in higher-paying assets, so the insurance intermediary was in no position to maximize float. Curiously, the famous Warren Buffett became one of the richest men on earth by buying entire auto insurance companies to transform the one-year "premium float" into a virtually permanent source of cash flow. Substituting health insurance for auto policies, essentially the same strategy is proposed by this book, for employees to consider. Except for Jimmy Hoffa, few unions have considered such a role, and in view of colorful union history, perhaps employers resist it.

Is there enough money in this approach? Some of the limitations to be encountered in paying for healthcare are specific and final; longevity would be one of them. At present, the average longevity at birth is 83. It would take some dramatic research discovery to extend it much beyond 93, but it is reasonably safe to project it will slowly rise from 83 to 93 during the next century. The medical costs of achieving such a goal are almost impossible to know in advance, but attempts are regularly made, and the best available estimate is $350,000 on average per lifetime, using the year 2000 dollars. Women cost about 10% more than men, partly because of increased longevity, partly because of the statistical convention of attributing all obstetrical costs to the mother. There is a reason to believe all late-developing diseases originate in the dozen genes residual in the mitochondria of the mother's cells, so the conquest of diabetes, cancer, Alzheimer's disease, Parkinson's disease, and arteriosclerosis -- during the next century -- is a reasonable prediction. Furthermore, new cures while generally expensive at first, eventually become cheap. Mix it all together, and while the costs of the next century may at times be towering, it seems entirely conceivable healthcare costs will become comfortably sustainable, a century from now. If we can generate the means to get to that point, give some of the credit to Warren Buffett, and John Bogle.

John Bogle may not have invented the idea you can't beat the index, but he certainly evangelized the news that 80% of mutual funds managed by experts, somehow don't beat the index. Let's explain. When you finally get over the idea of getting rich by out-performing the stock market, the idea reverses itself. The whole stock market is a proxy for the economy, and so although some people do get rich faster than the stock market grows, hardly anybody gets richer in the stock market without using some form of leverage, a genuinely risky approach. Professor Roger Ibbotson of Yale has compiled extensive data for the previous century, and convincingly demonstrated how relentlessly the American equity stock market has grown quite linearly, depending on the asset class, but largely disregarding stock market crashes, and numerous wars, large or small. While small stocks have grown at a rate of 12.7%, blue-chip stocks have consistently grown at about 11%. With big cheap computers, we can see investors in stocks have received a return of 8%, paying a penalty for the small investor's inability to ride out really long-term volatility in any way but buy and hold. Perhaps, over time, we can find ways to narrow the overhead and return more than 8%. But for the time being one must be satisfied with 8% net, although 11% might become some ultimate goal. To go on, the 8% we get is made up of 3% inflation, so we better not count on more than 5% actual return. What will that achieve toward paying an average lifetime cost of $350,000?

The table plots how $400 will grow, starting at birth and ending at 83 and 93 years, with 5% compound interest. We've already described why 83, 93, and 5% were chosen, but why $400? It's a personal guess. It represents the amount I think would be achievable as a subsidy to "prime the pump". It might someday be a government subsidy for handicapped people who could never support themselves. And since it would be at birth, it would have to seem bearable to young parents. Many readers would react that $400 is too stingy, but politics is politics, and what people can afford is not the same as what they will vote to afford. In any event, we here are testing the math as a preliminary to announcing we can save a bundle of money by changing the system we are used to. Choose your own number, remembering we are attempting to reduce what is now reliably estimated as 18% of the Gross Domestic Product, and competing with a presidential proposal to give it to everyone. Further, the only thing you need to know about dynamic scoring is that making it free will assuredly escalate its eventual true cost.

Compound interest always surprises people with its power, and in this example, 5% just about makes the goal. There's not much room for error or contingencies. All of the known factors are conservatively estimated, and it passes the test. What isn't covered is the unknown factor, atom wars, a stock market collapse, an invasion from Mars. To be on the safe side, we had better not count on this approach to pay for all of the health care. Just a big chunk, like 25%, seems entirely feasible. In the immediately following section, we examine the first "technical" problem. The first year of life is effective as unaffordable as the last year of life, and newborns generally can't dip into savings.

Originally published: Tuesday, March 03, 2015; most-recently modified: Sunday, July 21, 2019