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August 16, 2014

OT Thread-Fixing healthcare (Long, Wonky) [WeirdDave]

So this past week Avik Roy came out with a "conservative" alternative to Obamacare. If you haven't read it, it's the same old RINO garbage: "Hey, we can tweek Obamacre here, here, and here, and then when we run it it'll really work!" Such nonsense. Just for shits and giggles I decided to demonstrate what true conservative reform of the current system would look like, and for the hell of it I saved Medicare from financial collapse too, along with Social Security. This is long, but worth a read if you are interested in this stuff. There are a few questions I don't have the answer to at 9PM on a Friday, I've bolded them in the text below.

First of all, it is important to recognize that the health care is not provided in a uniform manner across the population. Approximately 60% of the population gets their health insurance from their employer, about 30% are covered by government programs of one kind or another (Medicare and Medicaid) and the remaining 10% self insure. Each of these three groups is very different from the other. Here we will focus on the 60% who rely on their employer for their coverage.

Having one's employer provide their health insurance is a singularly inefficient vehicle to meet that need. It has it's roots in the unintended consequences of governmental over-regulation, specifically wage limitations imposed upon private businesses during WWII. Ideally, decoupling insurance from employer would probably be the best way to go, but such a solution is unlikely to be found attractive to the vast majority of the people comfortable with the existing system. What I propose, then, is to modify the system so that employers still provide coverage, but the type of coverage that they provide puts control of health choices into the hands of the individual employees. Fortunately, there is an existing form of health insurance that does this perfectly, and even better, it's a zero sum game for employers. I am talking about HSAs (An HSA is a very simple type of health insurance. Typically, a family will have an insurance plan with a shared high deductible, usually $5000. They pay family medical costs out of pocket until they have spent $5000, then insurance pays 100% of all their medical costs for the rest of the year. Along with the insurance, a savings account is established where one can set aside money to cover those out of pocket costs). Let's look at some numbers. Currently, the average family plan costs an employer about $15,000/year. Employer provided HSA plans with a $5000 family deductible cost about 30% less. The astonishing thing about these numbers is that 30% of $15,000 is $5000. What this means is that for the same cost (and affording them the same tax break, which is why employers do this in the first place), employers could ditch the current dogs breakfast of HMO, POS, PPO, co-insurance, co-pay, etc.. plans that they now offer, replace them with simple HSAs AND fully fund each employee's savings account to cover their pre-deductible expenses. Under this system, broadly speaking, each employee and his family would see their out of pocket medical expenses drop to $0/year, no matter what medical conditions they need treated. This is a proposed change to the system that, if explained properly, would be enthusiastically greeted by almost everyone. (The numbers for single people don't match up quite as neatly. Average cost here is $5000, and an HSA with a correspondingly reduced deductible for the individual would need to be calculated, and actually brings us to the first question for the actuaries: At what policy cost/deductible for individuals do the numbers come closest to zeroing out? ) What’s even more important is realizing that by adopting this system, we would be setting in place a long term solution that will drive down health care costs ("bend the cost curve down" is the current preferred phrase in DC, and consumer driven plans do that brilliantly) while at the same time providing a foundation to alleviate the coming financial crush in several of our biggest entitlement programs. How? The answer is simple, and it depends on understanding the "S" part of an HSA plan. The S stands for "savings", and as with most things financial, savings is the key to long term stability.


Here's how it works. HSAs were designed to give people who self insure a vehicle allowing them to use pre tax dollars to fund routine medical costs while maintaining a catastrophic insurance plan to pay for major medical expenses. This is done by establishing a special savings account just for medical expenses. Money deposited into this account has several distinct properties, all of which are necessary in order to understand how I propose to introduce a paradigm shift into the way employer provided health coverage works.

#1. Money deposited into the account is tax deductible. Employer contributions to an employees account are currently tax deductible, and this must be maintained in order to keep the overall financial picture of the employer relatively unchanged.

#2. Money deposited into the account belongs to the employee. This is an absolute must. I propose fully funding the savings account each year for each employee, but employees must understand that while this money is available for all medical expenses, ultimately it is their money. This is the key provision that will drive the medical cost curve down. People will spend someone else’s money without thought, but tend to be very parsimonious with their own. When people use their own money to pay for medical expenses, what develops naturally is competition on price and service. A perfect example is LASIC eye surgery. When it was introduced, it was very expensive, and no insurance covered the procedure. Because of that, the market drove the price down so that now LASIC is generally affordable. Some insurance plans have even started to cover some or all of the cost. People using their own money for medical services (rather than having an unseen third party pay an unknown amount) will naturally gravitate towards the best price and service, forcing all providers to match that or go out of business. Really, this is Econ 101 stuff, I trust everyone understands.

#3 Money in the account accrues year to year, it is absolutely not a “use it or lose it” proposition. This is another key component of my plan to ease entitlement costs going forward. Each year, employers would deposit (under the model we’re discussing now) another $5000 into the employee’s account. Most of them won’t use all of it, so the unused portion will stay in the account, to be joined each year by another $5000, and so on and so forth. They lynchpin upon which my reform proposal rests is this accumulation of funds. In an employee’s working lifetime, the majority of the population will accumulate tens if not hundreds (we’ll come back to this) of thousands of dollars in these accounts. (Which brings us to actuary question number 2: How much does the average individual spend on non-catastrophic medical expenses each year? Catastrophic expenses are the exception, they would zero out accumulation of funds the year in which they occur, but not any of the previous years or necessarily any subsequent ones) Once we know that, we can start to get a pretty good idea as to how much the average worker would accumulate in his or her savings account in their working lifetime. THAT is the golden number here, because once millions of people reach retirement age with tens of thousands of dollars in these accounts, we can start using that money to reform Medicare into the same type of HSA plan.).

We all know Medicare is underfunded to the tune of trillions of dollars. Frankly, very few people in government are willing to admit exactly how shaky this house of cards is, but we all know it’s going to go spectacularly broke before too many more years/decades pass. What conversations I have seen about this center around what cuts need to be made to the program, means testing, etc..., and some of that may be necessary, but what I am proposing is looking at an alternative method of funding and an adjust of the cost basis for the program. Here’s what I mean, and what needs to be known to make this proposal concrete:

If we switch to this model for employer based health insurance, we are going to start having people reach retirement age with cash left in their HSA. For the first decade or so, that can be a nice little retirement bonus for seniors (I’d tell you to buy stock in Carnival Cruise Lines except that would be insider trading ). However, after ten years or so, there are going to be enough people retiring with enough money in those accounts that it will become feasible to start to convert Medicare itself to a catastrophic insurance plan for those people, allowing them to continue to pay for routine expenses from their savings accounts, while insuring them for catastrophic expenses in excess of $5000/year through Medicare. Assuming that catastrophic insurance plans cost about 30% less then traditional health plans...Medicare is already paying out less than private plans, so cut that to 25%...be conservative and figure that only 50% of all people going on Medicare any given year will have accumulated enough funds in their accounts to make an HSA model feasible(this percentage will rise over time, naturally)...given those assumptions, ten years down the road half the people coming on to Medicare would cost 25% less to insure. That’s a significant savings.

However, as I see it, we need to know the answer to a couple of more questions before we can confidently place our wager on this particular horse. Question number 3: How much money would a person need in their medical savings account at retirement to be reasonably sure that it would cover their non-catastrophic medical costs for the rest of their life? That right there is the $64,000 question, because it determines how soon, best case scenario, we could begin phasing people into the reformed Medicare. Is it $15K? $20K? $40K? That’s the real crucial number here, and one that I have no idea of. Everything else keys off of that. The answer doesn’t change what I’m proposing, it just determines how soon it’s feasible to move to this model.

The best thing about this proposal is that it puts Medicare onto a sustainable path, rather than an unsustainable one. Right now a graph of Medicare liabilities looks like the side of a mountain-the further out we go, the higher the liability. My proposal would turn it into a...probably not a true bell curve, but at some point the line would trend downwards, when enough new members brought their savings into the program with them. What I’ve proposed so far would “save” Medicare long term, but there’s one thing in there I said was a key point that hasn’t been recognized, do you remember? Expounding on that and putting this whole proposal on steroids will be the focus of part II.

Part II

If you understand the basics of what I just proposed, it should be easy enough to understand the gist of part II. When I finished with part I, I concluded that what I had was a simple solution to not only provide better employer based health care, but one that could be expanded to help address an additional entitlement problem: Medicare. Medicare is small potatoes next to the coming financial crash of OSADI program. Fortunately, we can solve that one too, and give real meaning to the idea that the money in an individual’s HSA account was their money. After all, if all they can use it for is medical care, well, that’s great but it’s probably not anybody’s first priority for “their” money. That’s why I propose to take the entire concept outlined in part I and double the amounts. I want employers to provide high deductible catastrophic insurance with $10,000 deductibles, and fund the savings accounts at $10,000 per year. If we could do this we would have people hitting retirement age with some real money saved up. Unfortunately, this is not a straightforward reallocation of resources, in other words, using the $15,000 cost for an employee’s health plan worked in part one because the reduced cost of the catastrophic plan off set the money being deposited into the HSA account almost exactly. This wouldn’t be the case with $10,000 deductible plans. The first question we need answered here is How much would an employer sponsored catastrophic health plan with a $10,000 deductible cost? (I don’t know, AFAICT, there aren’t any out there) Once we establish that, we would then need to create a mechanism to offset for the employer the difference between what he had been paying for insurance and his new cost. (Example, using made up numbers: If a $10K cat plan cost $7K per year, then an employer who contributed $10K to the savings account would be spending $17K per employee on health insurance, he would need to have some mechanism to compensate him for the extra $2K he spent over the 15%K he's spending now). A flat tax credit would work for big employers, but might be a burden on small businesses, perhaps a reduction in his payroll tax commensurate with the extra expense would be more palatable. Once we establish the best mechanism for doing this, well, then we’d really have something. Here’s what I propose:

As an employee reaches retirement age, the money in his savings account would be evaluated. Whatever is the figure reached in answering question #3 from part I would be reserved in the account to meet his non-catastrophic medical costs during retirement. The rest would be converted into a lifetime fixed annuity, and these payments would be used to supplement or even replace his guaranteed OASDI benefits.

Here’s how it would work. Suppose employee A retires at age 65 with $90K in his account. (He’s one of the first people to be covered in this manner, over the last 10 years he’s had $10k in out of pocket medical costs while his employer has contributed $10K/year to his account.) Also, suppose for this illustration that the answer to question 3 above is “$40K”, and he is owed the current average OASDI payout of $1200/month based upon his work history. $40K would be reserved for his future medical needs, and $50K would be converted to an annuity. A lifetime fixed annuity at age 65 pays $300/month for every $50K invested in it. He would receive his monthly $1200, as usual, (and this number MUST be guaranteed by the full faith and credit of the US government, etc.. What I propose is not to change OASDI payout by one dime. That’s a promise made that must be kept. My proposal only changes the method of funding that payment), only now $300 would come from the annuity, and only $900 from the SSA. We’ve just cut this individuals lifetime OASDI cost to the government by 25%!

The real beauty of this proposal is that the further out time wise we extend it, the less and less the government is responsible for paying. Talk about bending the cost curve down, I’m going to put that sucker in a vice and repeatedly whack it with a sledgehammer! The longer this program lasts, the more money people are going to bring to their retirement, and the smaller and smaller the government’s portion is going to be. Eventually, people are going to be wholly financing their guaranteed benefit from their annuity, some will even exceed it (which they must be allowed to do, or the whole concept of “this is their money” is invalidated). 30-40 years down the road, when people start funding annuities with $3-400K, they’ll be doing far better than they would under the current system which would have imploded by then. Further, it will give young people just starting their working lives something that they don’t have now: confidence that there will be an OASDI benefit for them when they retire.

I do foresee several problems with my proposal.

#1. It only covers employer/employee health insurance. Fair enough, I have a different proposal for the 10% of the population that self insures.

#2. Some people are plagued by health problems. They are going to get to retirement age with little or nothing in their savings account. A more traditional Medicare model must be preserved for these people and for people who have the bad luck to be plagued by chronic high cost health issues that exhaust the money held in reserve from their HSAs. Traditional OASDI benefits must be preserved for those who don't make it to retirement with enough HSA money for any kind of meaningful annuity as well..

#3, It must be made clear that this isn’t really a “privatization” of OASDI. All benefits are guaranteed, as earned, by the Federal Government, just as they are now. What this is, is a method of ensuring that funds are available to support these guaranteed payments.

#4, It doesn’t address the issue of dependent benefits. Wives, current and ex, children and dependents, all of these are eligible for OASDI benefits. However, my hope is that this proposal, if enacted, will financially strengthen the entire system so that it can cover dependent costs.

I can’t think of a single party that isn’t benefited by this proposal (except Federal bureaucracies). The only thing left to solve is Medicaid, which is easy, block grant the money to the states, and those self insuring. Honestly, the self insurance market pre-Obamacre worked fine except for those people who were uninsurable due to pre-existing conditions. Don’t believe the “47 million uninsured” number that was thrown about. Yes, it’s a real number, but if you read the methodology of the Census report that it’s based upon, that number includes illegal aliens, people who chose not to buy insurance and people eligible for Medicaid who don’t bother to sign up. The real number is between 4-6 million. These people could be covered by state run high risk pools, which is essentially what Obamacare tries to be. We had one in Maryland that worked quite well. Obamacare killed it.

Now, how hard was that? So called “experts”, always trying to reinvent the wheel with 37 axles and square sides. Sheesh. Besides, one of Ace's movie reviews just sent me an email saying “Dude, enough!”

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posted by Open Blogger at 09:14 AM

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