Philadelphia Reflections

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

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Personal Reminiscences
One of the features of aging past ninety is accumulating many stories to tell. Perhaps fewer are left alive to challenge insignificant details.


Since everybody would benefit if the country found a way to pre-fund health insurance, what options are available or doing so? Or put another way, what obstacles, objections, and vested interests obstruct each possible way of doing it; how difficult would it be to overcome them?

Three general approaches might work reincarnation of Individual Retirement Accounts (IRAs) .for this special purpose, the legal encouragement of health insurance companies to sell permanent insurance or the creation of a national trust fund. Each of these approaches will now be changed to make them possible. All of them must somehow overcome the main problem inherent in payment in advance, which is that people must find spare money somewhere. while of course the disposable income could be found by reducing expenditures for non-essential luxuries, this discussion limits itself to examining how seed money might be squeezed out of inefficient practices in the existing health financing system.

Health Banking The first approach to be examined has been known by several names. When Michael J. Smith of Louisiana proposed it, he called it the CHIP proposal (Consumer's Health Investment Plan). When John McClaughry and I independently proposed something similar, it was called the Health Protection Account, Peter J. Ferrara of the Cato Institute, who likewise got the idea independently, had the genius to call it the IRA for Health. The IRA for Health has the great beauty that the title itself does most of the explaining; most people know what an IRA is, or was. An IRA for Health is obviously an IRA whose use is limited to health care costs. Unfortunately, congressman, whose cooperation is vital to the success of the idea, have gone through the experience of repealing the tax exemption of IRA's trying to reduce the national budget deficit. Congressmen have the mindset that IRAs will worsen the deficit, or at least that their constituents might think so. It isn't a correct perception, but the catchy H-IRA title has become a hindrance and must be replaced. Health Banking is here offered as a substitute title for Health Iras because it suggests an interest group who might assist the process of public persuasion because they would benefit from it. The definition of what constitutes a bank is in the process of change; perhaps there is room for health banking in some future compromise revision of the Glass-Steagall Act. For example, the mutual fund industry could become interested in health banking as part of their vision of non-bank banking. Perhaps the moribund savings banks could be entrusted with a trillion-dollar consolation for their regulation-induced troubles.

Whatever institution might aggregate and invest the funds, the main idea is that the tax-sheltered money which employers now spend on health benefits would be deposited in individually named accounts, and invested according to some rule of prudence. Withdrawals from the accounts would only be permitted for specified health purposes. It is absolutely central to understand that nothing is here proposed to be tax sheltered which is not already tax sheltered. For better or worse, employer contributions for health benefits are already tax-sheltered, and will almost surely remain so. Even recent deficit-desperate congresses have not dared to threaten that $50 billion annual revenue cost to the Treasury. Indeed, when Congress does develop the courage to curtail the tax exemption of health benefits (for employed people), perhaps then health banking could be described as costly. Until such time, however, it remains fair to generalize that reestablishment of IRAs, limited to health expenditures, has no Federal cost.

In the next chapter, we will discuss the investment issues which are raised. For the present, we should assume that the institution which becomes custodian or health banker will generate a safe and adequate stream of revenue; what rules must govern the way it is spent? Ideally, a health investor would want to accomplish the following goals:

-He would want to pay for essential health care.

-If he lives a long time and has money to spare, he would want to provide for custodial care in his old age.

If he dies and has money left over, he would want it to go to his estate.

But these are decreasing priorities. The first rule is survival. If he cannot pay for his old age, he must plan to throw himself on the mercy of family, friends, and community. If he has nothing left for his heirs that is no worse than a pity when he has no dependents, but tragic if he does.

To the foregoing self-evident principle should be added two more which are less adequately appreciated. The first is that the federal government has long addressed the problem of aid for dependent children, and ordinary Social Security benefits are quite generous for survivors. No doubt these programs for widows and orphans could be more generous, but they are as generous as twenty congresses have decided to be; it is unrealistic to include provision for dependent survivors in a new program proposal.

The second mitigating principle is nature's trade-off. Nothing is more clear to a doctor than the experience that ten percent of his practice develop ninety percent of the illness. If you get very sick very often, you need not worry greatly about the prospective costs of living for years in a retirement home. Dying young is a tragedy, and outliving your income in a shabby old age are both tragedies, but relatively few people experience both of them. To the extent that some people are needlessly insured against both disasters, it should be possible to create insurance efficiencies by combining both risks in one funding mechanism.

By reflecting on the general principles of prudent provision for the future, we arrive at the following proposed rules for releasing money out of healthy banks (aka IRAs for Health). Vouchers may be issued, or disbursements made directly, to pay health insurance premiums, front-end deductibles, nursing home insurance, entrance fees for life-cares communities, specially designated trade-offs with Medicare, and payment of any residual balance to the individual's estate. Investment income would not be taxed, but the estate tax would apply after age sixty-five. Since this statement of benefits is technical and terse, the following explanatory footnotes are necessary:

Payment of front-end deductibles. If the health bank only paid the present premiums of health insurance there would be nothing left over to invest. It is anticipated that premiums would initially be lowered y purchasing health insurance with at least $500 yearly deductible, and the amount of the "front-end" deductible would later gradually rise as funds accumulate in the account. This process would, in turn, cause a progressive lowering of the premium of the health insurance, accelerating the savings. When expensive illness occurs, the fund would reimburse the subscriber the full amount of the deductible, upon presentation of evidence that his health insurer had paid out amounts in excess of it.

Special trade-offs with Medicare, Nursing home care, Life-care communities. It will be necessary for the reader to be patient for these proposals to coordinate health banking with the entitlements under Medicare and federal catastrophic health insurance. The subject is dealt with in the section of the book devoted to Prescription II: Last Year of Life Insurance.

Payment of Residuals to Estates.No doubt there would be an instinct to examine whether the program could be made less expensive if residuals were forced to revert to the federal treasury. To permit an estate to retain these funds would seem to enrich the heirs out of funds which were largely made possible by federal income tax exemption. True enough, but long experience in my medical practice with life tenants of trust funds has been that they will relentlessly seek ways to spend money on pseudo medical care if there is no other way to get their hands on what they regard as their rightful money. Some incentive must be created to prevent "health insurance companies" from creating benefits like suntan oil and health spas in warm climates, whose only real purpose is to collude with beneficiaries. To attempt to prevent this sort of behavior with regulations is laughable.

That's not all you could do with health banking, however. If individuals should die young or use up all of their funds with repeated expensive illnesses, they might seem to be about where they are now without health banking, minus the extra layer of administrative overhead. But they have achieved portability. They can become unemployed, change employers, or retire early without the same concern that they have lost their health insurance. If they have developed a chronic problem, it has not become a "pre-existing condition" in the eyes of some new insurance carrier. They can quit their jobs without fear that a new employer with company self-insurance would regard them as potentially expensive employees. They need not fear that post-retirement health benefits will be blown away by a corporate raider, or that the company where they worked for years will subsequently go bankrupt and leave them with empty promises instead of health insurance. Portability.

For the vast majority of participants, however, another whole new concept becomes possible after a few years. We are now back to Benjamin Franklin and perpetual insurance. The health bank was just a transitional stage to reach it. The ingredients of perpetual health insurance are:

The fund has grown so large that its investment income is big enough to pay the premium on a high-deductible health insurance policy without any further contribution

And the fund is big enough to pay all of the deductible portions of a major illness

And there is still enough investment income to pay the premium of a reinsurance policy which covers the unusual instance of sustaining two or more major illness.

As a guess, such a fund would be in the neighborhood of thirty thousand dollars. As a further guess, most people would continue to work past the time the fund went perpetual, and further contributions would accumulate. Individuals who reached this happy state of affairs would almost by definition be fairly healthy, and in all likelihood would look forward to a long and dreadful sojourn in a nursing home. For a quick overview of the situation, the next time you go to a high school reunion, take a stroll over to the area where the fifty-year class is meeting. About half of the class will be in attendance, some in wheelchairs, but the other half of the class will be in memoriam. Fifty-fifty at the fiftieth.

What has been briefly described is a mechanism for designating a considerable amount of funds for long term care that are not now available. It was achieved without financial or other barriers to healthcare access except possibly some self-denial since full reimbursement for healthcare is available to every participant. If someone wants to put up with his hemorrhoids in order to have more money for later nursing home care, or if he wants to hold off entering a nursing home in order leave more money in his estate, well, those are his options. If he holds off getting treated for his cancer "for those same reasons", in my medical experience those wouldn't have been the true reasons", in my medical experience those wouldn't have been the true reasons at all and he would have held off no matter what his insurance arrangement might be. So, what's the magic? Where did this money come from?

From the operation of compound interest of between 3% and 8%, depending on the amount of equity risk assumed.

From self-denial of borderline necessary or even frivolous medical expenditures in response to the development of an incentive to save.

From the downward pressure on medical prices created by a more cost-involved public.

From the out-of-pocket contribution of health care expenses which fail to exceed the yearly deductible amount.

From reduced administrative costs of processing small claims through first-dollar coverage rather than paying them out-of-pocket. The reader is invited to consider this issue in more detail in Prescription IV: Insurance Tangles.

Will all this be enough to carry the project? Hard to know. What isn't hard to know is that savings of just 1% of a $500 million annual medical cost, amount to $5 billion per one percent saved.

Health Insurance Companies Unchained.Observers of the economic scene, especially the Washington political-economic scene, will be well aware that health banking is a proposal from the conservative side of politics. It had origins in the Reagan administration and the libertarian Cato Institute. A staunch Virginia conservative, Representative French Slaughter, introduced a bill (HR 536) along these lines, and he has been supported by the Republican Study Group under the chairman of Representative David Dreier of California. Just exactly because the proposal has this sort of appeal, it has a strong weakness. The idea is strongly rooted in the idea that individuals should make their own choices, even to the point of being allowed to make wrong choices. Individual citizens should be allowed to have their own way with their own money, even if their betters think their choices are not in the best interest of society or even best for the particular individual.

Well, that's just fine, but unfortunately in this instance, it comes up against a pretty big problem. Even when the IRA was available, only 14% of the eligible public availed themselves of it, there were vast numbers of people who had never heard of it. I spent endless hours fruitlessly attempting to persuade several of my secretaries to create an IRA, and even some of my children had to be prodded pretty hard. An executive of one of the largest corporations in the country told me of the dispiriting experience at his company with a 401 (k) plan, which is essentially an IRA. The company offered to match contributions dollar for dollar and conducted a large and continuous education program. This man made the estimate that in the whole corporation no more than a dozen unmarried women availed themselves of the opportunity, and the workforce included plenty of women lawyers and accountants. With an experience of only 14% enrollment in the IRA, it certainly isn't fair to point to just single women as having an anti-saving mentality, although I suppose there is something to it if he says so. In doing my little bit to encourage the world to establish IRAs, I noticed that one of the most effective inducements among those who did it was the wicked pleasure of beating the government out of some taxes.

So, we enthusiasts must make a grudging concession that if health banking is to succeed on a major scale any time soon, it must do more than just make itself available and then wait for everybody to get smart enough to buy it. It isn't necessary to share the rhetoric one union president unleashed on me, "You've got to find a way to keep the working man from spending his wages on drink". The paternalism of that degree is too much for me, but I will concede that something must be done to prod people a little. And that missing ingredient just might be a vast army of glib commission-motivated insurance salesmen.

It must not be assumed that health insurance companies are straining at the leash, impatiently lobbying for legislative release from their inability to sell funded health insurance. In fact, most of them do not have much sales force since health insurance is typically marketed in bulk to employer benefits departments. Most of them do not have much investment portfolio management department, especially outside the area of the short-term paper. There is minimal research on the subject of lifetime health costs. Incentives are weak; health insurance is typically regarded as a loser by full-line companies, Blue plans which dominate what is left are non-profit concerns. Insurance companies are fiduciaries, custodians in trust of other people's money. If careless paying obligations they get sued, if they can't pay their obligations they go bankrupt. If they make big profits they get bad press or ruinous competition, it doesn't matter which.

However nothing important is easy, and we want them to peddle our product. What's their problem? Their central problem turns out to be the fact that funded health insurance asks the company to assume the risk, and no one knows how to price the risk. Using the health banking approach, the individual subscriber assumes the twin risks that future health costs will inflate at a predictable rate and that investment results will equal the historical record. Who knows if we will have inflation like a banana republic, a depression like the one in 1933, or the development of medical miracles no one can afford? That's a risk, which the individual holder of a tax-sheltered medical account might assume willingly on the argument that any outcome could be no worse than unfunded health insurance. Put an insurance company's guarantee into the hands of that person, however, and you had better pay your promise if you want to stay out of court. Life insurance companies are just beginning to experiment with best-efforts investing, using the name of variable annuity life coverage, and that sort of approach would surely be necessary for funded health insurance. Predicting the average life expectancy of a large group of healthy people is however a minor mathematical exercise compared with estimating the aggregate average health care costs for the next thirty-five years. The actuary doesn't even know for certain how many people will have any health cost at all; at least the life actuary knows that everyone is going to die. The advent of a new and fatal epidemic like AIDS shows you what these predictions can be worth. The price Dr. Starzl's hospital charges to transplant your liver startled even me when I heard it last year.

Quick reflection on the issues brings the firm conclusion that health insurance companies could only be expected to offer best-efforts investing, without any insurance guarantee at all. They would surely market the product skillfully, as we desire they should, but the cost increment would be quite appreciable. The sales cost for life insurance is typically equal to the entire first year's premium, while an additional profit must be offered the company to induce it to handle the product. Investment experts will have to be paid to manage the money, and they characteristically value their own services highly. It's too bad to have to say it, but if you are too dumb to manage your own money you are going to pay through the nose to have someone else do it.

Perhaps this is an appropriate time to mention the idea that some large unions have toyed with, of becoming self-insured for the health benefits of their members. All that means is they would expect the employer to give them the money, and they would pay it out. In order words, they propose to become insurance companies. Most everything which has been said about other health insurance, therefore, applies to them, too. In addition, it might not hurt to mention Ricardo's principle of relative advantage, which roughly states that people with professional experience in a field often do the best job at it.

Publicly Managed Trust Funds. The third general method for achieving pre-funded health insurance is one which the American Medical Association as a method for basic restructuring of the Medicare program. In a widely discussed report of the AMA proposed the creation of an independent federal agency to receive the health insurance payroll taxes which now flow into the Medicare trust funds, invest them, and issue vouchers to the elderly which would permit them to purchase private health insurance. The agency would also fill the badly needed role of a group of experts charged with overseeing the course of national health inflation, demographic and health practice changes, and the national investment climate.

The AMA employed expert advice in the preparation of this plan, and it is likely their financial estimates are sound when they project that Medicare could become totally pre-funded by 2016, using tax rates achievable close to present taxation. This plan would include provision for working off the present unfunded liability for existing beneficiaries, honoring commitments previously made to the elderly. It is a great testimonial to the flexibility of the AMA in recent years. as well as to the tremendous power of compound interest, that such a monumental problem could be effectively addressed. After all, the AMA in 1965 quite correctly warned the country that the Medicare program would quickly pile up mountains of unfunded obligations if it adopted a "pay as you go" financing method. Not everyone who has been vilified for being right will subsequently adopt a constructive problem-solving approach to repair the accurately predicted damage.

The creation of an independent board of expert overseers supplies a need which health banking through the IRA doesn't, and creations of a government agency create a guarantor of last resort, even though it might be stoutly denied. Lots of Americans trust their government to keep its promises. However unsophisticated that attitude may be m, it helps get national support for the idea of pre-funded insurance in a way no television spot commercials could do, and no insurance salesman could do over the kitchen table. Every government since the Lydians invented coinage might have remorselessly devalued its currency, and it would not matter. A very large proportion of Americans trust government bonds as they trust nothing else in society.

However, a sizeable group of people simply will not have this approach, and a number of them are in Washington. The AMA made a small tactical error in describing the proposed independent agency as roughly comparable to the Federal Reserve Board in its independence and suggested a similar method of appointment. Apparently, the AMA had no idea of the violence with which the Federal Reserve Board is hated by certain influential members of both legislative and executive branches, or of the decades of bitterness between mid-western bankers and the New York banks which control the open market committee of the Fed. In a sense, the Federal Reserve is actually owned by the banks it regulates and tends to defend their interests. The whole investment community is at war (nice polite war, of course) with banks, struggling for turf in some pending revision of that Treaty of Versailles, the Glass-Steagall Act. Every election year, the Federal Reserve gets embroiled in bitter controversy as to whether its policies are slanted to cover up for congressmen who want the Fed to do their dirty work and have it within their power to abolish the whole agency if it does not comply. Independent as the Fed. Foo.

Let a Hundred Flowers Bloom. No doubt this inflammation can be soothed with diplomacy, but there are more serious worries about the investment difficulties which are unique to a trillion dollar fund run y the Federal Government to be addressed in the next chapter. In the meantime, the three funding mechanisms can be summarized as having certain flaws and certain strengths which are peculiar to each. It seems unlikely that the country could agree to permit only one of them to be designated to the exclusion of the other two. To a serious proponent of the general approach, it seems imperative that we authorize all three approaches while forcing them to remain in competition with each other. After all, we are talking about a system which addresses the needs of everyone no matter how different the circumstances. People who take wild chances should be restrained from becoming public charges, ignorant people should be protected against those who would fleece them. As Adlai Stevenson said, "It used to be said, a fool and his money are soon parted. But nowadays, it can happen to anyone."

There is, however, no certain way to know the future even if you go to Princeton to learn it. Let the banks and mutual funds exploit their lower marketing costs, let the insurance companies sell rings around them. Let the private sector shame the mediocre performance of the public trust fund, while the trust fund stands as a tower of strength among self-serving investment pitchmen. So long as the public is allowed to switch around, things should work out, in an investment version of the system of checks and balances.

Originally published: Monday, September 24, 2018; most-recently modified: Thursday, June 06, 2019