Why Are Republicans Afraid of Free Market Healthcare?


The United States has fantastic healthcare.  We have all of the latest machines and gadgets.  You can get in and see a doctor often the same day, but certainly within a couple of days if needed.  There are also starting to be walk-in clinics at drug stores and other places where you can go without an appointment for simple things like ear infections and poison ivy rashes.  There are readily available hospitals and emergency rooms for more serious events.  Finally, there are all sorts of new drugs coming out all of the time that treat virtually everything that makes ailments that were once considered just part of growing older a thing of the past.  Certainly the care available is among the best in the world.

The issue is not healthcare, but the way in which payment has been made for healthcare for the last 40 years or so that has made the sticker price very high and the amount that people are paying increase faster than inflation.  The issue is that prepaid healthcare, in the form of cover-all health insurance plans, has become a standard benefit at work. It has also become a common benefit provided by the government for those who don’t work or who have jobs that don’t provide health insurance.

Insurance is a good thing to buy and part of a free-enterprise market.  Most people don’t have an extra $50,000 in the bank to pay for their and someone else’s car and injuries should they get into a car accident, so they buy car insurance that covers the costs should it happen.  People also don’t have an extra $200,000 to replace their home should a tornado wipe it out, so they have home insurance.  In both cases people don’t pay the full price of a car accident or a home each year when they buy the insurance – they pay a small fraction of the price based on the amount that the insurance would pay should an event occur and the likelihood that it would occur in any given year.  Insurance works well for events that are unlikely to happen, but that would be financially devastating should they occur.  This keeps the cost affordable but makes sure the money is available for the few people who use it each year.

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What is called health insurance in the US includes an element of insurance that covers things like liver transplants and hospital stays that are unusual, but it also covers doctor’s visits, prescriptions, and labs that will happen for most people each year.  This means you are paying the full cost of these procedures, plus a bit extra to cover administrative fees and profit for the insurance company.  Plus, since people are paying for everything regardless, and it will cost the same whether you go to the doctor fifty times or three times, and whether you get the name brand drugs that see for $500 per month or the generics that sell for $15 per month, people tend to use healthcare more and not take cost into consideration in their choices.  This then causes the cost of insurance to rise.

Another factor is that health insurance makes pricing very opaque.  The sticker price for a doctor’s visit might be $150, but the doctor might have an arrangement with the insurance company that they’ll take $40.  An x-ray might have a sticker price of $500, but the insurance pays $75.  If you ask the doctor, you might get similar prices, or pay just a little more or a little less, if you’re paying cash.   If you’re dealing with a hospital it is more difficult to negotiate since they’re trying to get as much as they can to of each patient, so their willingness to cut a deal will be based in part on their expectations of whether you’d be able to pay the full amount.     Because a lot of people pay nothing at the hospital, or the hospital gets less than the cost of care from the government Medicaid or Medicare programs, they charge others more to make up the difference.  They then claim that the ones who don’t pay are getting “charity care” from the hospital, when really the patients who pay out-of-pocket or use insurance are paying the their bills, and they don’t even get to deduct the gifts from their taxes.

                 

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Free-markets, where there are many consumers and many providers trading with each other, would work with health care just as it works with everything else.  If everyone just paid out-of-pocket and didn’t use insurance except for major events, the costs would immediately drop to be in line with what the insurance companies pay or even less since the doctor’s would no longer need to spend time and money sending in insurance claims.  If everyone were paying for themselves, costs would decline since you wouldn’t be paying the costs that others didn’t pay, just as it would be a lot more expensive to go out to eat if you were paying for the tables around you rather than just the cost of your food.  Prices would also start to be more transparent,  as medical centers started to advertise their prices and specials to attract customers.  Those that didn’t provide their real pricing would lose customers since people wouldn’t put up with not knowing the price before they bought things and being surprised at the end just as they wouldn’t shop in stores that had no prices until they got to the register.  Prices would drop as providers looked for ways to be more efficient and cut their costs to avoid being undercut by other providers.  Manufacturers of medical devices and drugs would also look for ways to cut costs if they were competing for consumer dollars rather being able to bill insurance companies since they would not be able to sell drugs that cost $100 per pill.


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Despite the vast evidence that free-enterprise makes markets more efficient, lowers prices, and improves customer satisfaction, Republicans are scared to go to a free-market system.  Rather than simply repealing Obamacare and shifting to a market system over a reasonable transition period as they’ve said they wanted to do for the last six years, they want to go to some sort of Obamacare 2.0 that still has all of the collective payment for care but without the things that sort of make Obamacare work like the requirement that everyone get insurance.  We could be on the road to a great system where anyone who works a regular job would worry about getting healthcare no more than they worry about getting food.  Why the fear?

The answer is simple:

  1. Eliminate the tax break for providing insurance through work to encourage employers to simply pay their employees money and separate healthcare from work.
  2. Require everyone to put away money into a health savings account so that they have the money needed for healthcare so that others don’t get stuck with their bill.
  3. Make the health insurance market free, allowing insurers to sell anywhere they wish rather than being confined to certain states.

Do these things and watch healthcare costs drop as the free-enterprise system does its magic.  There is no reason to fear.

So what do you think?   Please join the conversation and leave a comment.  Contact me at VTSIoriginal@yahoo.com.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

The ACA was Terrible; the AHCP Even Worse


Those who are regular readers to this blog will know that I am not a fan of the Affordable Care Act (ACA), a.k.a.Obamacare.  Amazingly, the Republicans have created a replacement plan that is even worse called the American Health Care Act (AHCA).  In what appears to be an effort to avoid making anyone mad, they have basically taken out the parts of Obamacare that sort of made it work, but that people didn’t like because it cost them money, and left the things in that made it financially unstable, but which everyone loved because they were “free.”  Having a lot of people getting free stuff, with no way to pay for that free stuff, is a sure-fired way to bankrupt an industry.  The ACA nearly destroyed the heath insurance industry – the AHCA will surely finish it off if it passes as it is.

The things people loved in Obamacare:

Subsidies (paid for by taxpayers and people paying full freight on the unaffordable, Affordable Care Act insurance)

Keeping young adults on parents’ health insurance until 26 (really, this provision has no effect since young adults rarely get sick, so their health insurance would be really cheap if they ever left their childhood bedroom)

Coverage of preexisting conditions (the most unaffordable provision, since this allows people to buy insurance on the way to the hospital)

No lifetime or yearly maximums (should be included, but raises rates)

Things people didn’t like:

Penalties for not buying health insurance (the only way to make premiums affordable)

Collection of healthcare data by the Feds (creepy)

Forcing religious businesses and entities to buy insurance that included abortant drugs (so much for the 1st Amendment)

So the AHCA tries to keep the things people liked, but get rid of the biggest thing that people didn’t like:  being forced to buy insurance, particularly really expensive insurance for those who are young because they are covering all of the high costs of those who are old.  With the ACA, many young people wisely decided that they were better off paying the penalty, so they didn’t buy the insurance, which pushed the price higher for everyone else, until the ACA entered the death spiral.  The AHCA does nothing to fix this issue, and even makes things worse, since now those who don’t buy insurance until they are sick don’t even pay a penalty.

         

The secret to reducing the price of healthcare, and making getting it a non-issue for virtually everyone just as buying food is a non-issue for anyone with a job, is to get most people to actually pay for their healthcare.  This can only be accomplished if you make sure that they put enough money aside so that they have the money when needed, rather than spending every dime and then not being able to pay their medical bills.  Not even requiring people to buy health insurance is a sure recipe for having lots of people with no money to pay the bills when they have an emergency.  This means the costs for those who actually do pay will get even higher.

A good health care plan has people saving up money when they are well to pay the inevitable times where they will need healthcare.  It also means having them mainly pay for the services they receive, as opposed to having insurance that covers everything regardless of cost, to give them an incentive to use less health care or choose lower cost options when it really isn’t important.  Basic, routine care like physicals and ear infections should be paid for by individuals with money they have saved for medical expenses.  The large, unexpected expenses that rarely happen to an individual like the long hospital stay due to needing to replace a kidney should be covered by major medical insurance.  Insurance only works if most people never use it, since then it is cheap for everyone and since you want to make sure that the few people who incur the big expenses are covered.  The solution is therefore the following:

                            

1.  Require that everyone sets up a Health Savings Account (HSA) and contributes a required portion of their income to the account, up to a certain dollar value of income.  The contribution percentage would decline after a certain amount is saved in the HSA, meaning that those who used little healthcare would have a higher take-home pay, providing an incentive to maintain high account balances and not spend money unless needed.  Those who cannot contribute enough to cover reasonable costs would have their contributions subsidized.  Any money left at death would be passed to heirs.

2.  Require that everyone also buy major medical insurance – insurance that pays for costs above a certain, large threshold, like $20,000.  Ensure that there are enough insurance companies competing that the price of this coverage is as low as possible and the service is as good as possible.   These policies must be clear on what is covered and government should fine any company that does not immediately pay for a covered service (no denying payments for sick people, hoping they won’t dispute the mistake and just pay the cost themselves).  The threshold could also be raised as an individual increased the amount in his HSA, thereby lowering the premiums.  For example, an individual with $40,000 in an HSA could have a major medical plan with a $40,000 deductible, which would cost less than one with a $20,000 deductible.

3.  Develop a high risk pool, subsidized by taxes, that covers those with really bad medical luck (like a major disease at 18 years old before starting a job and getting major medical insurance).  These individuals are rare so most people would be able to cover themselves with everyone saving up a portion of their income in an HSA, so spreading the risk out over the whole population won’t cost much.

4.  Require that all medical providers post costs and stick to those costs (no preference for one patient over another).  This would allow individuals to shop around for the best deal and eliminate price disparities as currently exist.

What would things be like after this plan is implemented?   Most people would just pay for their medical treatments out of their HSA when needed because they would have the cash saved up.  There would be no need for the doctor’s office to file insurance, reducing costs.  In addition, because most people were paying their bills and you wouldn’t need to pay for other people, costs would drop dramatically.  Imagine $20 office visits, $15 X-Rays, etc….  Hospital stays would be maybe $150 a day instead of the thousands they now cost per day.

There would also be incentive to save money, and therefore people would pick the cheaper option when it really didn’t matter and not use healthcare when not really needed.  This would cause less demand, and therefore lower prices.  Doctors could also provide a discount for procedures that really reduce costs like certain exams.  Prices would decline to the point where getting healthcare is no big deal for most people.  With most everyone paying for their own healthcare, the cost to cover those who could not would be easily obtained through charity or taxes.  Now that’s health insurance reform.

Contact me at vtsioriginal@yahoo.com, or leave a comment.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Good HSA Investing Can Let You Retire Early


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If you are fortunate enough to have a Health Savings Account, or HSA, you might be able to retire earlier than a lot of your peers.  Many people have the money to retire by their late fifties, but they hold out a few more years because they’re worried about losing their health insurance before they become eligible for Medicare.  If you invest properly in an HSA starting when you’re young, you might have the cash needed to carry you through to the time you’re eligible for Medicare and beyond, allowing you to retire on your timetable.

This is even assuming Medicare will still be there when you’re ready to retire.  The actuaries for Medicare have been warning for years that the system is running out of money and will either need an infusion from Congress/taxpayers or it will need to start cutting benefits.  This makes even the more reason to beef up your HSA.

So let’s look at the basics of an HSA and then talk about how to contribute and invest in an HSA to have the money you’ll need for medical expenses later in life.

What is an HSA?

A Health Savings Account, or HSA, is a private account that you can use for medical expenses, including paying the doctor, paying for labs and x-rays, and paying for prescription drugs.  You can also use an HSA to pay for COBRA continuation of insurance if you lose a job.  This means that if you are laid off or see your hours drastically cut, you can continue to get the same healthcare insurance for a period of time (currently 18 months, but always check this since it can change) so long as you are willing to pay both your part and the portion your employer was paying before.  So, having a well-funded HSA can help protect you from an unexpected job loss even years before you retire by providing the money needed to pay for COBRA coverage.  Unfortunately, it cannot (at this time) be used to pay for private insurance.

When you use your HSA to pay for qualified medical expenses (things like those listed above), you don’t need to pay taxes on the withdrawals from the HSA.  If you buy other things, you may need to pay some taxes.

Who can start an HSA?

Basically you can start an HSA if you have an employer who provides one, which means that your employer offers a high-deductible health insurance plan option.  The idea is to encourage employees to choose a plan with a high deductible by also having an account from which they can pay for expenses before meeting their deductible.

How does an HSA get funded?

Many employers fund part of the HSA for you as further incentive to choose the option.   In addition, you are able to contribute some of your own money from your paycheck to fund the HSA.  There are limits on how much you can contribute, so check the laws before proceeding.

Why would you want to contribute to an HSA?

If you pay for medical expenses out-of-pocket, you’ll be spending money on which you will have already paid taxes.  You can deduct medical expenses from your taxes, but only above a really high threshold that most people do not meet.  If you instead put the money into an HSA, then pay for medical expenses out of the HSA, you will not pay taxes on the money deposited from the first dollar.  So, if you are in the 15% tax bracket, this is like the government paying for 15% of your medical bills.  In fact, you don’t have to spend the money on medical bills during the year in which you make the contributions to see the savings.  As soon as you put the money into your HSA, you can deduct the contribution from your taxes, while letting the money stay in the HSA until you need it.

Why would you want to invest in an HSA?

In addition not paying taxes on the money you put in, money from interest or capital gains earned inside of the HSA will be tax-free if used on qualified medical expenses.  This means that you can put $2,000 in an HSA today, invest it in stock mutual funds for 20 years, and maybe then have $16,000 or so that you can spend on medical expenses, all tax-free.  Put in $10,000 today and you might have $80,000 later, and so on.  That $10,000 invested in your early twenties for 40 years might provide around $650,000 in your early sixties, which is enough to pay for some significant medical events even without insurance.  Double the amount you contribute and you’ll have over a million dollars available.

And that’s the part that might help you retire early.  If you have enough saved up in an account to self-insure for the unlikely event that you’ll have a major medical event during the three or four years between retirement and Medicare, you may be able to take the risk.  If before you retire the requirement in the Affordable Care Act is repealed that prevents the sale of catastrophic, major medical insurance , that would be even better since then you could buy inexpensive insurance to pay for the unlikely event that a major surgery will be needed and just self-insure for the more minor events.   The nice part about investing money for medical expenses in an HSA instead of just putting money into an IRA for retirement is that you can spend it tax-free on medical expenses before retirement age.  This provides protection and options for you that an IRA will not.

How should you invest the money inside an HSA?

In investing, you need to look at how soon you’ll need the money.  Money you’ll need (or have a reasonable chance of needing) within the next three years or so should be kept in cash.  Money that may be needed in 3-10 years you should be invested in a mix of stocks and bonds.  The higher the percentage of bonds (up to 80%), the more stable your account balance will be but the lower your return.  Money you don’t need for ten, fifteen, or twenty years or more should probably be invested almost entirely in stocks since they’ll offer the best return and protect your money from inflation.

Cash:  So first look at your deductible and multiply by three to estimate how much money you may need to pay out-of-pocket for medical expenses in the next three years.  Then look at your income and free cash flow and decide how much of those expenses you could cover from your paychecks if needed.  Plan to keep the amount beyond what you could cover from your income in cash so that you’ll be ready for near-term medical needs.  For example, if you have a $5,000 deductible and plan to cover $2500 per year from your salary, you’d need to keep 3 x $2500 = $7500 in cash inside the HSA.  For the first couple of years after you open the HSA, you’ll probably just be building up cash.  Investing comes a little later.

Bonds/fixed income assets: Figure out next what your deductible will be for seven years.  When doing this, assume that your deductible will increase by 10% each year for each of those seven years.  For example, if you have a $5,000 deductible now, use that value for the first year, then multiply by 1.1 for each year afterwards to get $5,500, $6050, $6655, $7320, $8052, and $8858, for a total of about $47,500 over the seven-year period.   Plan to keep about half this amount in bonds and the other half in stocks.  This will result in that portion of your portfolio being fairly stable in value while enjoying modest growth.  In years when the market really falls like 2008, this portion of your account may fall about 15% while the stock market as a whole falls 40%.  In years like 2009 when stocks go up 30%, this portion of your portfolio might gain 15-20%.  This will nearly ensure that you’ll be able to generate the cash you’ll need to meet your deductible in the period 3-10 years from now.

For the first ten years or so after you start an HSA,  you’ll probably not have this much to invest.  Just start by building up the amount of cash you’ll need from the section above,  Once you’ve got enough cash, start buying half bonds and income funds/half stocks and growth funds as you contribute more money.  As far as selecting particular funds goes, you’ll want to just buy an income fund that buys the whole market –  all types of bonds and some dividend paying stocks if possible.  For the stock portion, split between funds that invest in large and small caps 50/50 or just buy a whole market stock fund.  When choosing funds, get the ones with the lowest fees you can find.  If you can find passive funds – those that invest based on a strategy rather than hiring managers to choose investments – that is normally the lowest-cost option.

Stocks/growth assets:  Once you’ve invested enough to cover yourself for ten years out, you’re ready to invest any additional funds for long-term growth.  Here you’ll want to buy a mixture of large cap and small cap stocks, while skewing slightly towards small caps.  For example, you could put 40% in a large growth stock fund and 60% in a small growth stock fund.  If you have the option to buy into an REIT fund, which invests in real estate, you could add this to the mix with maybe a 20% REIT, 50% small cap, 30% large cap allocation.

As with everything, this will start slow with only a small amount invested in your HSA.  After sticking to the plan for many years, however, suddenly the value will explode.  You’ll be surprised at how much money your investments are generating and how easy it is to cover your deductible and medical expenses each year.  Before you know it, you’ll have plenty of money to cover medical expenses.  You’ll then have a lot more freedom and a lot more options.

Got an investing question? Please send it to vtsioriginal@yahoo.com or leave in a comment.

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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.