Philadelphia Reflections

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

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(3) Obamacare: Speeches
New topic 2015-09-25 21:48:47 description

REPLICATED COPY of Introduction to the Components of the Problem 07/13/16 11:44 pm

The book before you is not a list of dooms and glooms. It is a proposal to protect a functioning society by regarding child, parent, and grandparent as different stages of the same person's life, with a united interest in the same goal. Specifically, we build upon the idea of a Health Savings Account, one account per person throughout one lifetime, as a financial way to emphasize an underlying social point. If you spend too much too early, you won't have much left for later.

This unification proposal is voluntary, you don't have to do it, or even part of it, but in some ways, that's another advantage. Without the ability to refuse, the only remaining protection is the sympathy of more fortunate people. Sympathy lasts longer if everyone appears to have done his level best--for himself, and with plenty of warning if that wasn't sufficient. There is no escaping the use of insurance for unexpected catastrophes, but insurance is formalized dependence on strangers. Only an insurance salesman would argue for unlimited insurance for everyone, all the time. Only someone who knows very little about insurance would believe insurance is a way of printing money. Voluntary, by contrast, isn't a one-size-fits-all commitment and doesn't dump 340 million subscribers on untested systems, all at once. Voluntary respects your right to say No.

Either voluntary or mandatory, however, some things are just part of life. The working generation must always subsidize the dependent generations, but it could be the same individual at different ages instead of by classes of strangers. For a final twist, we unexpectedly propose to empower solution by adding a second problem we didn't even realize we had, until recently. It isn't a trick; everything looks in retrospect as though it might have been predicted.

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The cost of third-party systems can be found by subtracting the difference between the costs of two approaches, first-dollar, and high-deductible. {bottom quote}
Three Surprises. Curiously, the Health Savings Account had to be tested before it could be fully understood even by its originators. A bit of history may help explain it. The basic concept of Health Savings Accounts was developed in 1981 by John McClaury and me, while John was Senior Policy Advisor in the Reagan White House. Derived from the IRA concept developed by Senator Bill Roth of Delaware, it started as a Christmas Savings Account, to save up for the deductible of a (high-deductible) Catastrophic health insurance. So there were two linked features: high-deductible health insurance, and a medical version of an IRA. After testing, the realization dawned that the real deductible became the unpaid portion in the account, eventually becoming zero -- because now the (linked but separate) insurance premium no longer rose as the real deductible declined. Eventually, the HSA emerged looking like first-dollar coverage for the same price as insurance with a high-deductible. Saving the deductible was placed within your own hands without shifting the burden onto an insurance company. The undue cost of first-dollar coverage was reduced, again, by shifting its point of impact.

A different enlargement of that point emerged from the tendency of non-insurance HSA managers to use debit cards for medical payments, instead of claims forms. Although there may well be more temptation to chisel in the absence of strict scrutiny, the debit-card system essentially depends on the client to howl if he suspects his own money is being mis-spent. Otherwise, it will be lost. When you spend a third party's money, there's far less concern than when you spend your own. The relative disappearance of chiseling cost was tangibly high-lighting the true cost (and lack of effectiveness), of third-party policing. Since it was more costly to police than not to police, it exposed a second hidden cost of using third parties -- at all.

That was the first surprise, but a more gratifying development was an appreciable decline in medical costs, in spite of reducing cost-reduction efforts. At first, this saving was attributed to the ("adverse") selection of unusually frugal clients. In time, the real incentive emerged: the provisions of the HSA act permitted any surplus at age 65 to be turned into an IRA. That is, an incentive had been created to save health money for retirement, substituting personal responsibility for insurance company vigilance. And the hidden cost of using a third-party system was similarly approximated by the resulting difference between the two costs.

But a third zinger in the system took longer to emerge. What was mainly motivating subscribers to be stingy and vigilant was the provision in the enabling law that when the owner reached Medicare age, the Health Savings Account turned into an IRA, Bill Roth's Individual Retirement Account. The name itself suggested motivation. As improved health care spread among the elderly, they lived longer. Gradually and grudgingly, it was recognized that extended longevity was a hidden cost of Medicare. There was Social Security, of course, left in the dust of thirty extra years of longevity since 1900. It destroyed defined-benefit insurance. It might have satisfied Bismarck, but it was essentially negligible in the face of longevity -- which eventually proved to be five times as expensive as the rest of health care. What's worse, its cost is even harder to approximate than the future cost of health care, because everyone has his own definition of a "decent" retirement. Underfunded retirement is a stronger incentive to watch your pennies than a specified one because there is no one, not even that demonized one percent, who can be certain there will be enough left to last his lifetime. Wasn't that enough incentive to get anybody's attention?

For the purposes of this book, the strength of that last incentive was its most important feature. Almost anybody could tell at a glance that the cost of Medicare was what stopped "single payer" in its tracks, what paralyzed Congress on healthcare, and what defied solutions from any direction. Medicare was the "third rail" of politics -- touch it and you are dead. But with a new retirement entitlement looming which almost made Medicare costs laughable, it was a new ball game. In the new environment, third-party reimbursement was itself standing in the road of lowering everybody's costs through rearranging the payment stream. Medicare became a symbol of what the problem was, not just a lobbying benefit. Increased retirement cost was, in short, a central cost of health care, and anyone who stood in the way of fixing it was misguided. Because it is closest to retirement, Medicare is in fact the first thing you must change, but you better do it very carefully. And by the way, you better do it pretty soon.

------------------------------ This study of Health Savings (and Retirement) Accounts was begun thirty years ago, with intensity in the past five years. During most of that time, it was paying for health costs which were the central concern. Paying a big chunk of health costs would be an achievement, paying for it all would be an impossible dream. Therefore, paying for the whole healthcare system was the earlier goal of my proposals. If it fell short, well, it paid for a big part of it. Either way, we could afford to leave Medicare alone. But once Medicare came into focus as the main impediment to solving an even bigger problem for exactly the same age group, "saving" it becomes a relatively small issue. New revenue must be found, the quality of care must not be injured, and -- most of all -- public opinion must be re-directed. This is a specialist's game, but the public is now the real player.

Resource Assessment. Adding up all the other economies of Health (and Retirement) Savings Accounts, but now also including the retirement costs, the conclusion is left that HRSAs might pay for health costs, and some but not all retirement costs. Much of the shortfall comes from difficulty stating a "decent" retirement payment which would satisfy most people. That's enough for a Trappist monk is not enough for a movie star, and what will be called decent in 60 years is pretty hard to say. So the most we should promise is healthcare plus some retirement; supplement more generous retirement as you are able. Even promising that much is a stretch, but is certainly superior to healthcare plans without the discipline of individual ownership. Unfortunately, it forces the individual to some choices he must make for himself, versus allowing some big anonymous corporation to do it all for him at a hefty markup. Let's specify the two big dangers he must navigate:

Imperfect Agents Theoretically, the best result anyone could provide would be to give a newborn baby a couple of hundred dollars at birth, let a big corporation do the investing, and pay a million dollars worth of bills over the next ninety years on his behalf, at no charge. The long investing period would provide some astonishing returns, and it would be entirely carefree for the customer.

Unfortunately, experience over thousands of years has demonstrated agents will eventually extract much of the profit for themselves. Countless kings have been known to shave the edges of gold coins, even more, have been found to have employed inflation of the currency to pay their own bills. Investment managers are almost invariably well compensated, usually for mediocre returns. William Penn, the largest private landholder in history, was put in debtors prison by his wayward agent, as was Robert Morris, the financier of the American Revolution. Whole-life insurance companies are the closest approximation of an agent for a Health Savings Account who might propose to get paid a level premium for decades before paying out a benefit for a dead client. They seem to survive by promising a single defined fixed-dollar benefit and counting on inflation to work for them as it does for dictators, overseen by an insurance commissioner. Unfortunately, they have the moral hazard of falling back on other surviving firms to bail out bankruptcy, and the political hazard of trying to force premiums downward for the taxpayer without any reliable benchmark. Just how much they have been rescued by lengthened longevity is something only an actuary knows. Long ago, the situation was summarized by the question, "And where are the customers' yachts?"

Inexperienced Solo Management. If Warren Buffett had an HSA, he would have no problem managing it, and neither would a great many other savvy folks. The problem is to make the management so simple and standard that expenses can be kept low without injuring investment returns, for the average citizen. This consideration almost drives the conclusion the lifetime would be best divided into at least three component parts, with benchmarks and averages published regularly, since the medical and beneficiary problems divide into the same three (childhood, working age, and retirement) components. It begins to look as though a new profession of fee-for-service advisors needs to become educated and distribute themselves widely, perhaps in local bank branches. As will be described in later sections, the need is for the income stream to be kept in balance with the probable expenditures, adjusted for inflation or deflation. It is not to achieve the maximum possible revenue return, regardless of risk. That is to say, the purpose of the HRSA is not to make as much money as possible, but to be sure as much medical need as possible can be satisfied by the revenue available. Let's put it all in a nutshell: There's a big difference between designing a system to cover a public need inexpensively -- and designing a business model to make a profit. But that's not nearly as big a problem, as doing both at the same time.

After Assessing Obstacles Comes Strategy. Most HSAs make payments with a debit card suitable for passive investing (utilizing total market index funds) for inexperienced investors and for otherwise undesignated accounts. However, there's a technical problem: the earning period is not the first stage of life; it's the second, following nearly a third of life in childhood and educational dependency or debt. Health expenses in the childhood third of lifespan may be comparatively small, but the earning capacity is essentially zero. This unconquerable fact leads to splitting investment considerations into three stages, the first and last thirds subsidized by the middle one. The result is, two systems feeding off the middle third in opposite ways, requiring opposite approaches. Somehow, it must all come out in balance at the end. And remember, it starts with a deficit in the obstetrical delivery room unless we re-arrange something else.

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If you spend too much too early, you won't have anything left for later. {bottom quote}
New blog 2016-07-13 17:16:09 contents -------------------------------------------------------------------------------------------- The initial reaction was to treat workers and retirees as two different classes of people, relying on one to tax the other, ignoring any restlessness about the cost of paying for someone else. But retirees now move to different communities, even different states, almost sorting into two different nations. Furthermore, the gap gets wider, with good health leading to longer retirements. Government is forced to be the paymaster for an expanding free lunch for strangers.

become entitled to tax their parents for health and education, for longer stretches of increasing alienation. Give things a little time, however, and it's possible to anticipate this additional third of the population feels entitled to tax the working third, deploying the enforcement powers of the government intermediary. Between them, the non-working two thirds will constitute a majority, so even politics may not forestall the problem. To earn more requires more education. To work more should entitle a peaceful retirement. Somewhere, we got on this wrong path for the right reasons.

If the present system could be disentangled without destroying it, the potential exists to earn money before the funds are needed and spend them later. The PThe initial reaction was to treat workers and retirees as two different classes of people, relying on one to tax the other, ignoring any restlessness about the cost of paying for someone else. But retirees now move to different communities, even different states, almost sorting into two different nations. Furthermore, the gap gets wider, with good health leading to longer retirements. Government is forced to be the paymaster for an expanding free lunch for strangers.


Originally published: Wednesday, July 13, 2016; most-recently modified: Monday, June 03, 2019