Philadelphia Reflections

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

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Some ruminations about health financing, written while we wait for the Supreme Court to announce its decision on King v.Burwell.

Using Escrows to Estimate Cost Risks(1)

The general thesis of this proposal is we can make better guesses about the future than we think we can, just as long as we remain aware they are guesses. In the past, that approach has made some blunders, like the sun revolving around the earth, or Columbus badly underestimating the width of the oceans. And so the world divides itself into "failure-avoiders" and "success-seekers", each contemptuous of the other. Those divisions are not likely to change much.

The proposed approach is to estimate how much we must save to achieve a distant goal, subtract it from the amount we can stretch ourselves to save, and see if what's left, is a realistic number. If you envision atom bomb attacks and climate catastrophes, the answer is No. But if you confine yourself to the question at hand, the answer might well be Yes. So as long as we confine ourselves to a voluntary approach, the nation will hold itself together if someone is wrong.

Let us repeat the basic assumption, that for practical purposes, all money is derived from the working age group, 21-66, and everything else is essentially borrowed. That is, the health costs of children under age 21 are supported by their parents, and those over 66, by savings. In addition to this basic division, about 10% of the population are unable to support themselves because of disabilities, prison and related matters--and must be subsidized. All of these side issues are slowly improving, but in this analysis we must ignore them, or at least treat them as a general category. We are now about to consolidate children and elderly people into one group.

That is made possible by the happenstance that our birthrate is 2.1 children per mother, which comes out to be one grandparent per grandchild. There are all manner of exceptions, like trans-gender people, divorces, polygamy and what have you. Our purpose is not to be comprehensively respectful, but to estimate quantities. And one grandchild per grandparent suffices for that. If each grandparent is financially linked to one grandchild, the others are a matter of pooling more with less. All newborn health costs are the responsibility of someone else, usually the father, increasingly the mother. This proposal suggests that we make health costs the responsibility of the grandparent generation, since Medicare has already made the grandparents the responsibility of government. We do this because Medicare is increasingly becoming a burden we cannot sustain. The public does not seem willing to listen to this, and so politicians are unwilling to bring it up. But Medicare is unsustainable in its present form, and therefore is absolutely destined to change. When we eventually face facts, I believe it will seem rational to combine the health costs of the two groups, so I propose we start the ball rolling by taking advantage of it sooner rather than too late. We can come back to this later, but let me briefly step up to the soap box:

We are launched on a demonstration model to the effect that compound interest income can greatly reduce the effective cost of healthcare. It is the nature of compound interest curve to turn upward the longer they extend. Therefore, we would greatly enjoy substituting lifetime compounding for annual premiums, and the greater the longevity the better. However, lifetime healthcare funding is greatly hampered by the rather high costs of the first year of life. People would almost have to live to be two hundred years old to make up for that high cost at the beginning of life, would have to inherit several thousand dollars, and would have to have rich parents instead of nearly insolvent ones. It is almost impossible to overstate the hampering effect of the high costs of the first year of life. So, we propose that grandpa transfer some of his excess Medicare funds to a grandchild, overfund Medicare a little to make room for the cost, and use Health Savings Account transfers as the vehicle for it. That adds at least 21 years to the compounding of 21 to 66, and it could potentially add the years 66 to 83, our present life expectancy. If we can somehow transform 44 years of compounding to a full 83 years, the financial consequence would be astounding. We are talking about lifetime health care, supported by a third of a lifetime of savings, if that much. No wonder the actuaries are wringing their hands.

Originally published: Wednesday, June 24, 2015; most-recently modified: Monday, June 29, 2015