FRONT STUFF: Health Savings Accounts: Planning for Prosperity; SECTION ONE: HSA and its Competitor, in Brief
Editorial material for book construction.
Introduction: Surviving Health Costs to Retire: Health (and Retirement) Savings Accounts
New topic 2016-03-08 22:42:53 description
At present, average American lifetime costs of health care are thought to be roughly three hundred thousand dollars in the year 2000 currency, per individual. Females cost more than males, mostly because they live longer. Much of the original data was produced by Blue Cross of Michigan and confirmed by two Federal agencies. Our goal is to see if it is reasonable to hope: that a "small" subsidy at birth, invested in total stock market index funds over a reasonably projected life expectancy, might (in addition to lifetime healthcare) pay whatever retirement income it is reasonable to expect over anticipated longevity. The tricky part is that good health leads to less health cost, but it also leads to higher (longer) retirement costs. This last age differential seems to be most pronounced toward the end of life. The age differential is almost enough to count on, but not quite.
Our Answer: It turns out in theory, confirmed by historical experience from the stock market, that a total subsidy of $400 at birth will just barely scrape by at 6.5%. But the transition would be such a close thing, Congress might have to increase contribution limits to impart more safety. We assume the law as presently written, using a "term insurance" approach with technical amendment. The transition would no longer be a serious issue, using a "whole life" approach, but its duration becomes so extended it might be politically unfeasible. We end up recommending: an extension of the contribution limits, then starting with the safer "term insurance" approach first. A few years to study emerging outcomes of the term approach should lead to a safer whole-life projection since assumptions would become less fuzzy. No one seriously questions "pay as you go" is more expensive. What's difficult to arrange is a transition from the more expensive to the cheaper system.
Specifically, the politically tolerable subsidy was selected to be $400, the average future life expectancy was projected to be 90, and the modal retirement age was chosen as 65. Since both theoretical projections and backward analysis of a century of Standard and Poor 500 data do confirm it is practical to expect success with this approach, a practical way to achieve it could then be offered in the present Health Savings Account, using American total stock market index funds as an investment. The biggest problem encountered would be the transition from present healthcare finance to the proposed one. A crisis might precipitate action, while a cure for cancer might make it unnecessary. The fallback position is if HSA proves not to cover all of healthcare and retirement for everyone, at least it would provide a large part of it. In that sense, it appears superior to present systems.
That is, we recognize the superiority of a "whole-life" approach, rather than the present proposal, which is based on "one-year term" coverage. However, the time periods are so long it seems unwise to commit such huge sums to untested theories for nearly a century. We feel a purely political decision would come to the same general conclusion, even though the application of many minds could undoubtedly improve on this approach. Nevertheless, we explore whole-life approaches in the hope of adding them piece-meal to a term approach, which is less comprehensive but safer to try.
Anyway, healthcare is expensive, has a fair amount of waste, and certainly costs more than it used to. No one would write a check based on such a summary, but the goal of the question is more modest. Whole-life insurance is acknowledged to be appreciably cheaper than term life insurance. So, after a few chapters on other details, we examine how much cheaper lifetime health coverage might be than year-by-year ("term") funding. Admittedly, it would introduce intermediary costs. To roll all the complexities into one monthly premium for life would indeed introduce great efficiency. It must be remembered the savings account approach captures the largest component of growth, the flexibility to begin saving at any age, and the accommodation of any variations to the duration at the other end where income is more certain.
If it's vital to recognize how much difference small differences in interest rates matter it's also important for public opinion to be in favor of price stability, remembering 1980. (That's when the Federal Reserve found it was necessary to incite a recession deliberately, in order to stop rampant inflation.) A third subtle variable of investor growth is the frequency of compounding (see below), which should match the quarterly distribution of dividends, but may not if the investor is unwary.
Will We At Least Cure the Expensive Diseases? Several thousand diseases are currently recognized, and more can be expected to turn up. But the National Institutes of Health, largest research-funder in the world, calculates eight or ten diseases currently account for 80% of current costs. Remembering NIH also distributes 33 billion dollars a year, it seems possible for one or two of the expensive ones to be picked off by lucky research in the next decade or two. Perhaps it is possible for all ten expensive diseases to be cured in three decades. There are at least two main disappointments lurking in such projections, however.
And then, who knows? Somebody with a bomb may blow us all to cinders, taking our premises with it. Predicting future revenue might prove easier than predicting future costs, and force us to cut our suit to fit our cloth. That probably leads to rationing, so it's a last resort. But it ignores the central fact that "costs" respond quickly to available reimbursement.
The first is the heaviest contributor to cost has long been the need to admit the patient to an institution. When Thorazine came along, President John Kennedy jumped the gun a little and effectively closed five hundred thousand chronic psychiatric beds. In retrospect, it might have been wiser to restrain that impulse by a quarter or a half, so we might now find fewer psychotic souls lying on sidewalk steam grates in the winter. Nevertheless, the general idea was understandable that diseases requiring institutionalization consume more resources than other conditions which might be judged more dire by a different standard than governmental cost. In a sense, institutional costs are a variable, independent of the cost of treatment. These are "low-hanging fruit", as the saying goes, and could be used up fairly quickly, except that shortening the length of stay may simply increase daily costs -- and so end up at about the same place, by adding a lot of administrative overhead. Some time ago, I wrote a little paper on the diseases afflicting the patients in bed at the Pennsylvania Hospital on July 4, 1776, the very first Independence Day. There was considerable similarity with the present, because of the tendency of leg conditions and brain conditions to require help with daily living, not because the treatment hadn't changed a lot. What with air conditioning, high-speed elevators and private rooms, daily living costs have also risen faster than the cost of living.
Diseases requiring institutionalization consume more resources than other conditions.
Quarantining contagious diseases is another costly treatment approach, similarly mixing treatment cost with the cost of daily living. An independent, less satisfactory, factor contributing to institutional cost is cultural; providers and manufacturers failing to exercise self-restraint in black-mailing helpless patients to achieve unwarranted profits. You do see some of that, particularly near vacation areas where patients are generally strangers. Perhaps we should re-classify these as vacation costs. Our culture has discovered a deeper artificial cost issue: rationing always provokes shortages, which are ultimately self-defeating in a free society. When you threaten this balance in matters of life and death, you find you get still higher costs. Perhaps someone should try reclassifying rationing costs as independent variables.
Unfortunately for prediction purposes, five or six thousand uncured conditions have a way of expanding to fill vacancies created by the diseases we cure, since everybody has to have something to die of. Generally, this transfer cost makes its appearance as a cost of lengthened longevity.
Meanwhile, improved housing does make it possible for more people to die at home, or at peace with their fate in some other location. Some houses even have elevators, and almost all apartments do. The spread of higher education makes it more expensive to provide kindly, basic care, and our instinct to use automation to replace caregivers, somewhat coarsens the substitution. Architects report it is always more expensive to build vertically than horizontally; therefore calling into question whether we have fully considered the high-rise incremental cost, or the alternate cost of moving institutions to the suburbs. In a nearby high-rise office building, I noticed the elevator shafts took up fully half of the floor space on upper floors. Someone has to commute; whose time is cheapest? Putting patients in hospices and calling it scientific care has not improved costs much, at least so far. Whatever else you might think of HIV, its swift eradication is a marvel of science, so the degree of patient clamor has to be a consideration. Copyrights and patents do run out, competition does work if unobstructed by regulation, so the prospect is for future health care to proceed through spurts of astonishment, but on balance for healthcare to get slowly cheaper, per year of added life. Much of the cost problem will nevertheless be buried in a mountain of double-talk, simply renaming retirement issues, and possibly employing some sugar-coated euthanasia.
Will Support-Environments Become Friendlier to Medical Cost-saving? In my opinion, improvements in the supporting environment hold at least as much promise as medical research itself, for making medical care cheaper. Improved support systems could also make medical care more expensive. Medical research is somewhat force-fed at the moment, in the hope of breakthroughs which may emerge from expanding chromosome and protein chemistry. Changes in architecture, infrastructure, clothing technology, and similar drab subjects are probably due for a major upheaval from advances in electronics, which have so far neglected such prosaic matters. My own insight into such matters was advanced by seeing how greatly medical efficiency has been enhanced by widely-denounced advances in finance and banking. How much a one percent change in interest rates can affect medical costs, barely scratches the surface of what can potentially happen. If people can commute to work in half the time, or must commute in twice the time, makes all the difference in the hidden costs of healthcare. When the millennial generation gets back on its feet, they will be more surprised than we will be, at how much they can accomplish with comparatively prosaic advances.
Frequency of Compounding and Depositing. A feature of compounding is, the more frequently you compound and the more frequently you deposit, the faster it grows. That is, if you pay $365 at a dollar a day, it will grow considerably faster than if you deposited $365 on December 31, but less than if you had deposited it all on January 2 of the same year. If you compound the money in a similar manner, it gets another boost. Most stock dividends are issued quarterly but on dates of the company's choosing. Once the money is invested in an index fund, the bulk of it compounds nearly continuously, but the dividends compound a little less than quarterly. Overall, an index fund indexes a little oftener than quarterly, but quarterly is easier to show on a graph. That's an appreciably better return than annual compounding, which is often how the results are shown in publications. Just who profits from these subtleties is not commonly revealed but is something to keep in mind. With a single deposit of $400 at birth, the compounding frequency, often left unclear, is generally assumed to be quarterly. In actual practice, fresh deposits extend from age 20-65, somewhat at the whim of the depositor's trips to the bank. The expenses of doing it are a negative factor, so at least you should inquire about these two features when comparison shopping. Of course, the bank may change its frequencies over long periods of time.
We next show the single-deposit for escrow accounts, which guarantee long-term rates to a fund which guarantees not to withdraw until the end, modified by the frequency of compounding. The following graph shows what is possible from the multiple-deposit, which reaches its extreme with depositing the annual limit of $3350, modified by starting at different ages. More probable actual results lie somewhere between these two examples.
What emerges is that small variations in the frequency of compounding, plus small variations in investment income, plus small variations in longevity -- combined -- are somewhat within our control, and collectively make an enormous difference. But fundamentally it was the increase in longevity which put this new vision before us. It will be up to financiers and politicians to make this vision come within our grasp, or oppose it, fighting it every inch of the way. But it was fundamentally the medical profession, responding to the tub-thumping of that Rainmaker, Abe Flexner, who made it even seem possible in our lifetimes.
Originally published: Wednesday, March 02, 2016; most-recently modified: Friday, June 07, 2019