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The Lifecycle Theory of Saving For Healthcare Needs

Republicans are bickering over whether to repeal the more costly provisions of Obamacare and allow greater flexibility into the health insurance marketplace. Republican lawmakers were shocked… SHOCKED, to discover net beneficiaries of the Affordable Care Act (ACA) like receiving open-ended subsidies worth thousands of dollars – paid for by other people. Lost in the shuffle are the self-employed, small business owners and individuals whose premiums have skyrocketed – and are no longer affordable – so that others can get a sweet deal.

The status quo cannot go on, of course. Premiums are skyrocketing and insurers are pulling out of the market. HealthCare.gov plans are a bad deal for all except for those receiving subsidies and those with significant health problems. Only about 15 percent of exchange enrollees are those paying the entirety of their own premiums, suggesting consumers don’t consider plans a good value. 

In an ideal world, young people would save for retirement, have an emergency fund and save for future health care needs. A mandatory payroll tax dedicated to individuals’ own health care would be the ideal way to fund their future medical needs. Singapore has such a system, called MediSave accounts. Liberals consider personal accounts to be antisocial, since money in one account cannot be diverted to someone else’s medical bills. However, a dose of antisocial behavior would benefit our health care system.

Under an individualized lifecycle theory of saving for future health care needs, individuals should begin saving while young, giving funds time to accumulate for use later in life. This is similar to the idea behind an individual retirement account. A 10 percent payroll tax may be sufficient to fund most health care over the course of a lifetime until Medicare eligibility. Most young peoples’ premium dollars could accrue in a personal health account, such as a health savings account (HSA). A smaller portion of the premiums for a young person would go for catastrophic insurance. Over time HSA balances would grow and the ratio of HSA deposits to insurance premiums would decline as one’s health risk increases with age. Most people are healthy when young, spending little year after year. The distribution of medical spending by age doesn’t register huge jumps until most people enter their 50s. For instance, health care spending per capita on the elderly is about five times that of children.

In health care there is what’s known as the 80/20 rule. That is: 80 percent of patients consume only about 20 percent of health care dollars. Thus, the 80 percent of patients (whose medical bills are low) could pay for routine medical care out of pocket from an HSA. The remaining 20 percent – those who represent the highest medical claims – would be the only ones whose medical care was paid by insurance.

Health insurance makes it easier to finance costly medical interventions – including those of little value. Having a reliable funding source also stimulates the development of medical technology. As technology increased, so did the cost of care. As care increased so did premiums. The average employer-sponsored health plan now costs $6,435 per individual and $18,142 for a family plan. Cost-sharing has also increased over the past few years as a means to slow the growth in premiums. From 2006 until 2015, average deductibles for employee coverage increased from $303 to $1,088. Ten years ago, only about 4 percent of those with employer coverage had high-deductible health plans; that figure is nearing one-third today (29 percent). Deductibles of $3,000, $4,000, $5,000 or higher are not uncommon in the individual market.

What this means is that Americans are increasingly forced to enroll in costly health plans that reimburse none of their medical bills. It also means many families are spending the equivalent of $18,000 in annual premiums when their annual health care needs are less than 10 percent of that sum. Currently society relies on redistribution of most of your premiums to care for people whose health is more precarious than yours. Care for the sickest 1 percent consumes nearly one-quarter of health care resources. The sickest 5 percent of patients consume half of all health care dollars, while care for the sickest 10 percent consumes two-thirds of medical expenditures. Should some of that be redirected to prevention or personal health accounts? Absolutely!

What if you were in control of your a lifetime HSA (i.e. like a Medical IRA) and you were only required to pay your actuarial risk on a multi-year individual medical health plan? What if instead of cross-subsidizing others who are older and sicker than you, you only cross-subsidized yourself when you are older and sicker?  In this regard you would set aside funds while young that you could draw on when older and sicker and needing the cross-subsidy from your (formerly) younger self. You would probably work closer with doctor and insurer to decide on your treatments – since you may have a lifetime limit on benefits. You could make trade-offs with your money and health; including those others may find objectionable. Suffice it to say our health care system would be in a lot better shape if individuals took more control and were rewarded for their efforts.

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1) Do you really want Singapore and all of the government controls it also has? I doubt it. Why not Taiwan’s system?

2) How are people going to fund those HSAs? The world is not really ideal. How would the young couple with premie twins pay for their care?