Philadelphia Reflections

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

Related Topics

Some Pages for a Book on HSA

The New Plan

Let's begin with the HSA Contingency Fund. It's simple and answers a lot of premature objections to changing Medicare, even ever so little. Because IRAs have been around for over forty years, let's call the cushion an IRA, and modify the IRA rules slightly to make it possible. The problem, take my word for it, is not one of financing a new Medicare system. It is the treacherous stepping-stones you have to negotiate in the transition from one system to another. So we start by saying you need a cushion for unexpected pratfalls on the way to any new system. You can't be comfortable about any proposal, including this one unless you have set aside a contingency fund. If you were absolutely confident about the unexpected, you wouldn't need a contingency fund, but who can predict his health for decades in advance?

First, Establish a Safety Net. You could call it a tax-exempt Christmas Savings Fund if you prefer. The idea is to provide a vehicle for saving small amounts in advance of the birth of a baby, for the purpose of later conversion into the baby's Health Savings (and Retirement) Fund. Without even knowing the sex of the coming baby, and therefore not even knowing its name. The new fund belongs to the parents until they give it to the baby, or the baby reaches age 25, whichever is sooner. And it's just an IRA with limitations. It can only be used for later conversion to some unborn child's contingency fund, unless it remains unused for thirty years, in which case it reverts back to an ordinary IRA. It's just an answer to the repeated question of, "Where does the money come from, to pay for the child's contingency fund?"

It also illustrates the principle underlying the magic of an expanded HSA. You start with a modest amount and let compound interest grow for years, just in case something goes wrong with the HSA that wasn't anticipated. If the money is invested in common stock index funds, on a buy and hold basis, it should grow at 7%. doubling every ten years. Since it would be hard to find a bank which would bother with a dollar deposit or even twenty dollars, it wouldn't be surprising if the bank required the assurance of sticking with them for, say, ten years, even after the conversion to a plain old Health Savings Account. That is, they would want some long-term profit to compensate for the short-term loss.

The long-term gain is surprisingly large. A fund which doubles every ten years will be doubled eight times in an eighty-year lifetime, or 2,4,8,16, 32,64,128, 256 times. That is, a tax-free dollar becomes 256 dollars, and a hundred dollar deposit grows to be $25,600 if you don't spend any of it. That's an important lesson for a child to learn, right there. And it's the foundation of the whole proposal for privatizing Medicare.

Everybody is now expected to pay $56.000 into Medicare -- $700 a year for forty years (25-65), followed by $1400 a year for twenty years more. But instead of having $534,000, we use a "pay as you go" system, spending current deposits for current expenses. Not only do we end our days with no money left over, the government pays almost equal that amount to borrow money for the shortfall. So the American people, one way or another, pay almost a million dollars per lifetime, for what a better system would pay $56,000. That's about twenty times what Medicare would cost if President Lyndon Johnson hadn't been in such a hurry. You can pick nits in the arithmetic. But cut it in half, or a quarter or a third -- and you reach the same conclusion about the two approaches.

In fact, the calculation has considerable conservative under-estimation. The transfer is about as simple as changing the postal address of your deposits, from sending the check to the U.S. Treasury, to sending it to your Health Savings Account manager. And you get a double tax exemption; it's tax deductible when you deposit the money, it is not taxable if you withdraw it to pay for healthcare. That is, $56.000 would require earning an average of 18% more income tax before you make the deposit, and the resulting $66,000 would grow to, not 534,000, but to $10,680,000 in healthcare. That ought to pay for every organ transplant you could imagine if you have the transplants toward the end of your life. If you have the transplant one day after your 65th birthday, it might stretch you a bit, but that's the sort of thing the contingency fund was designed to cover.

There are a number of other details to cover, but let's settle an important one as early as possible. The figure of $56,000 was obtained from the 2015 Medicare report on the Internet, and it was divided by the number of Medicare recipients without regard to their income. That is to say, the $700 yearly for 40 years, followed by $1400 per year for 20 years is not what the average subscriber pays for himself alone, it includes all those indigent and disabled people who cannot pay for themselves. In the case of Medicare, we are not speaking of subscribers, we are speaking of everybody over a certain age ("beneficiaries"). It absolutely is not true that Medicare is a rich man's entitlement, it's everybody's entitlement. It is certainly true that our silly way of managing "pay as you go" will bankrupt the nation, and rather soon. But the Health Savings and Retirement Account would accomplish as much without bankrupting the nation, and without one word mentioned about tightening the belt or radicalizing the delivery system. I'll help my critics a little. The serious problem is not starving the poor or all sorts of politically motivated objections smothered in a cloud of misinformation. The problem, the real problem in doing what I suggest, lies in devising a safe transition from a silly system to a better one. That's really what the contingency fund is for. Right now, we are saying you will have all the money you ever need, on your hundredth birthday. The hidden problem comes before you reach that promised land. So, when we speak of privatizing Medicare, we are speaking of managing the transition before we get there.

Originally published: Tuesday, October 25, 2016; most-recently modified: Friday, June 07, 2019