A Quarter Million Dollar Bill

I opened up a piece of snail mail yesterday.  To say I was a little bit shocked is an understatement.  This was the first bill I’ve received after a fairly intense medical procedure five weeks ago.  I’m fine now, things could not have gone better.  But the bill was, let’s say, a little on the high side of my expectations. 

At the very top it had one eye catching line labeled “Total Charges”.  Great, no wading through pages to get to the crux of the matter.  So how much were the total charges?  That three hour surgery and the eight hours I was a guest in their stage one post-op ward resulted in total charges of $249,320.50.  I didn’t mistype that, it was just a few dollars short of two hundred fifty thousand US dollars.  Or stated another way that’s nearly twenty-three thousand dollars per hour!  Man, I’m glad I did not stay overnight.  

That’s a lot of money.  And while I feel its a heck of a bargain in exchange for keeping me alive and kicking, that’s still very nearly a quarter of a million dollars.  And I’m not even sure there won’t be more bills trickling in over time (although I think this is the grand total).  

This is also my first real test of how Medicare and my Medi-Pak supplemental insurance work when facing a major medical expense.  I haven’t had many health scares in my life and the times I did run up a sizable bill I was under my company medical insurance plan.  Obviously I won’t be facing the entire $250K out of my pocket.  But just how much of that is going to have to come out of my retirement nest egg?

The answer was just as surprising as opening the bill, but in a much happier way.  Total out of pocket expense for yours truly was zero.  Zero, nada, zilch.  Not even a single penny.  How wild is that?  No co-pay, no deductible? Not a single penny for this extremely expensive medical care?  The other five pages of the invoice offered an “explanation”.  At this point I was feeling like there had to be a catch and I was afraid I might be facing an unpleasant surprise hidden somewhere in the fine print, so I kept reading.

The bulk of the “Total Charges” showed up on page 3. That was the portion  that was from the hospital surgical center and post-op ward.  Those added up to over $225K.  And of that Medicare applied a “Member Discount” of $215K.  In other words Medicare told the hospital, “Sorry, doesn’t matter what you think it cost, we are only paying you ten thousand.  You can eat the rest, the other two hundred thousand plus dollars.  And by the way, you cannot go after Steveark for any of that, he’s golden.”  Of that $10K that was paid to the hospital, that was split 80-20 between Medicare and the supplemental policy I purchased.  It could not have worked out better for me if Don Corleone had handled the “negotiations” with my provider and made them an offer they couldn’t refuse.

As far as the rest of the costs which included anesthesia, oxygen, robots and my rocket scientist surgeon, they were not as bizarre.  Medicare only disallowed a small part of their fees and they and my supplemental policy paid that with zero out of pocket from me.  

What a great deal for me, I got a little health issue fixed forever and paid nothing.   I know everyone says our system is totally broken compared to the rest of the world, and maybe they are right. But I got first class care where I wanted, when I wanted and with no cost to me.  That doesn’t feel broken.  

I said no cost to me, but that is not entirely correct.  Medicare charges me and my wife premiums, our supplemental policies do also and so does the prescription plan we use.  Those six premiums total up to about $8,000 a year for the two of us.  That isn’t free but it is affordable and only about half of what I paid for private insurance before we hit age 65. 

But something is broken.  I don’t think my procedure cost anywhere near a quarter million dollars.  Pretty sure the hospital made that number up, that it is pure fiction.  But it certainly cost a lot more than Medicare agreed to pay.  So I got a pretty big free ride.  Except, there are no free rides in life.  And that medical center is a for profit business, it is not a charity.  So they have to make a profit or they will shut down, right?  If I didn’t pay for my surgery, who did?  

That’s the question  that points to the where the brokenness lies.  It is you, kind reader, you who are on private insurance, employer provided insurance or health share plans.  They do not have the power of the federal government and while they certainly would have negotiated the total charges down to maybe half of what the hospital asked for, it still would have been a six figure surgery instead of the small fraction they got from Medicare for fixing me.  

I have one additional data point that gives me confidence that I’m right about how this works. I was on a hospital board for a locally owned hospital back in the day.  I remember the CEO explaining how the thing that determined if the hospital made money or lost money was the patient mix.  He used this example.  He said a standard heart surgery at our hospital actually cost about $20,000, that was the amount the hospital needed to recover to break even.  He said if a patient had insurance through their employer or any other kind of private insurance they would get paid $40,000 for the procedure and net a $20,000 profit.  However the same surgery for a Medicare or Medicaid patient would only result in a $10,000 payment resulting in a loss of $10,000 for the hospital.  Therefore you needed one private insurance patient for every two Medicare patients just to break even.  That’s a broken system and that’s a big reason private and employer provided insurance is so expensive.  You are paying a big share of Medicare and Medicaid patient costs.

It is broken on many levels.  But a main one is it sends a perverse signal to the provider.  If they know they are losing money on me as a patient, they have a huge incentive to underserve me, to rush me in and out, to provide the least post operative care possible.  I’m not a opportunity for them to make money, I’m a drag on their profitability.  I’m more like a tax than an income stream.  That’s a terrible business model in a capitalistic economy.  Plus how can the government tell you to operate your business at a loss, how is that moral?  It is like telling a car dealership that they have to give away one third of their new cars for free each month.  What does that do to the price of the cars they don’t give away?  Exactly.  

What is the answer, socialized medicine like our neighbors to the north?  Or just keep things like they are?  I mean it worked great for me, I can’t complain.  I got an incredible bargain even though I could have paid the full quarter million and not seriously impacted my net worth.  I do think any kind of “Medicare for all” is asking for disaster the way things are now because  hospitals generally  cannot make a profit just with Medicare reimbursements. They have to be able to overcharge private insurance companies to offset the low Medicare payments.  At the same time giving wealthy boomers free medical care paid for by the insurance premiums of Gen X, Y and millennial patients feels unsustainable and unfair.  I have no suggestions at all.  How about you?

OK, maybe you stayed at a Holiday Inn Express last night, how would you fix this mess? 

Have you experienced something bizarre in terms of medical bills and insurance?   

Why I Don’t Have an Annuity

Annuities are a polarizing topic.  The FIRE community generally has zero use for them.  But financial advisors, even fee based fiduciary financial advisors, quite often recommend them.  In fact,  a retirement planning expert  I highly admire and respect even included one in the detailed financial plan he did for me and my wife years ago. He doesn’t sell them or get any kind of commission, he just honestly thinks they make since for someone like me, maybe for most people planning retirement.

So what is the truth regarding annuities?  I will lay out the common arguments I am familiar with, pro and con, and let you decide.  First, the case for annuities.  One of the biggest problems with determining if you are truly financially able to stop working is the fact that none of us know how long we will live.  If we knew that it would be fairly straight forward to come up with the amount of investments, savings and/or passive income we would need to quit work and retire. The standard consensus figure that is most commonly thrown around is you need twenty-five times your annual expenses invested to have enough money.  There are a lot of assumptions built into coming up with that.  Its also known as the four percent rule, because if the assumptions hold true in the future, you can safely draw four percent of your investment portfolio out the first year of retirement and then draw that same amount of money, adjusted for inflation, every year after that.  But what about those assumptions?  

And there is the rub.  Those assumptions include that you have a significant exposure to stocks (50% or higher), that’s simple enough.  They also include assuming that all future stock and bond performance will be the same as it was in at least one of the past thirty year historic sequences.  In other words the future will not be different from the past.  Now that is quite an assumption when we have record national debt, new things like crypto currencies and a stock market that is setting records for price to earnings.  It also assumes you are invested in low fee index funds and never panic sell and always faithfully rebalance your allocations. But the biggest assumption of all is that you only need to fund thirty years of retirement.  Now for a guy like me who retired, mostly, at sixty that’s probably about right.  But for many of you, planning to retire well before that age, you will still be pretty young after thirty years has transpired.  What financial planners call that risk, that you’ll outlive your money, is longevity risk.  And it is a real thing.  

And what do we do to control risk?  We buy insurance.  We insure our car because we might hit someone and hurt them and get sued.  We insure our house because the Fed Ex woman might trip on our front step and, yeah, sue us. Or it might catch fire and burn up along with all our stuff.  We even insure our death with a product nonsensically called life insurance, because when we die our income dies with us and we may have people who were depending on us.  So how can you insure against living too long?  That is what an annuity is, it is insurance against out living your money.  The concept makes sense for the same reason those other insurance policies do.  Car insurance is cheap compared to the cost of getting sued for crashing into another car.  Home insurance is pretty cheap compared to rebuilding your house if it burns down.  The reason insurance isn’t super expensive is because most of those bad things you insure against do not happen very often.  So if one person in a thousand has their house burn down the other nine hundred ninety-nine people who never have a claim help pay for rebuilding the house through their insurance premiums.   

An annuity is much the same.  First let me clarify I’m only talking about the type of annuity that pays you a fixed amount of money each month after it starts,  and it never stops paying that fixed amount until you die.  If a vampire bites you and you live to be five hundred years old the insurance company will still be paying you that same monthly check.  And that is how it insures against living too long.  As long as you are still ticking the checks will keep coming, it is the ultimate mailbox money.  Financial planners that favor annuities usually do not try to provide for your entire retirement expenses with an annuity but generally separate out what you need to live a “no frills” dignified life and buy a big enough annuity to cover those costs.  They will usually recommend putting the rest of your investments in conventional things like index funds and bonds and cash and to use that money for emergencies and “frills”.  

It makes sense and should take less money to fund than it would to invest enough of your money in stocks and bonds to provide the same income. Let’s do the one thousand people thing again.  Say one thousand people buy annuities that start paying at the age of 60.  The average life expectancy of those thousand is, let’s say, eighty-eight years.  The fact is some of them will die in their sixties and seventies.  And when they die the insurance company stops writing them checks. So maybe they paid $500,000 to get an annuity that would pay them $2,125 per month( real numbers from TIAA’s annuity calculator).  Well if someone dies at age 61 the insurance company just made a $474,500 profit off that person because they only got back twelve months worth of checks for the half million they spent.  And that money is available to write checks to all the geezers (being a geezer, I’m allowed to say that) that live past their life expectancy.  So the geezers get a wealth transfer from those that die too soon to get their money back.  And that is why a lot of financial advisors like annuities.  They also make a big deal about the fact that annuities are a guaranteed contract, no matter what the stock market does the insurance company has to make those payments to you as long as you live.  That is versus a four percent withdrawal rate that might stop working if the US some day becomes the next Japan with a market going down or sideways for decades.  

What about those who hate annuities, why do they hate them?  Lots of reasons.  First you can usually earn a lot more by investing the money yourself than the insurance company will pay you.  I mean, they have to make a profit and that profit is coming out of the monthly checks they write to you.  And in many cases the fees charged by insurance companies for annuities in the past have been egregious.  I think that competition has greatly improved that but it happened enough that many people permanently wrote all annuities off as over priced.  Next, there is the risk you might die too soon to get your money back. And even if you don’t you still have nothing to hand down to kids or charity because that half a million you spent is gone, its being paid to the old timers who outlived you. 

And that’s generally where the debate ends.  Annuities are a good deal if you outlive all expectations and are pretty terrible if you die too early.  But I think there are a couple more arguments against them that are not made very often, and they are why I have no plans to purchase one.  

First, how good is that guarantee, really?  When you buy index funds you are buying into hundreds, maybe thousands of companies.  As long as they keep making a profit their stock will have some value.  You are diversified, and there is safety in that.  When you buy an annuity you are buying into exactly one company, just one, the insurance company you bought the annuity from.  If they go under, like AIG almost did in September of 2008, they do not have to honor that contract.  And the half a million you gave them, it might have vaporized. Annuity proponents will say, that can’t happen.  That has never happened.  But that does not reassure me much.  Annuities are supposed to be the cure for the fact that the assumptions behind the four percent rule might be flawed.  It is supposed to take care of the risk that past performance may not predict what will happen in the future.  Well you can’t have it both ways.  You cannot say the past is not reliable when it comes to estimating  a safe withdrawal rate and also say the past is completely reliable when it comes to proving annuities are safe. As for me I’ll trust a huge index of domestic and global companies rather than one insurance company. 

The second risk is inflation. Its an much bigger risk in my opinion.   Annuity companies do not sell inflation protected annuities because inflation terrifies them.  That first check they write, in my example at age sixty, stays the same amount even when you are hundred years old.  Again, in my example the insurance company pays you $2,125 each month and you bought that annuity because that was what your minimum expenses were at age sixty.  But using the inflation history I’ve lived through, across a forty year period, that $2,125 check is going to be nearly worthless. After forty years your expenses will have risen to $8,184 because that’s what inflation does.  So how is that good longevity insurance?  You will only have a fourth of what you need to live and you’ll be eating cat food, and not even premium cat food at that.  

So for those reasons, and because my actual withdrawal rate is very low, far below 4%, I do not see annuities as being a fit for me. I am self insuring for longevity risk by having plenty of invested assets.   I have a difficult time seeing them as a good fit for anyone but I’m no financial expert and they might be fine in some situations.  And there are many other types of annuities.  Some pay higher yields when the market goes up while protecting you from market crashes.  Some have life insurance or long term care benefits mixed in.  I’m not talking about those, though I am never buying them either. 

So what say you?  Do any of you have annuities or think you might consider one someday?  

Do you think I’ve treated them fairly in this post or just did a hatchet job on an actually good product?

As always, should the comment box be hiding somewhere you can’t find it, just click on the title of the post. 

Comments Rant!

It’s Rant Time! I love comments.  I love getting them and I love making them on the blogs I write and the ones I read.  But what I don’t love is the fact that some of my favorite blogs don’t let me comment at all!  Take Humble Dollar, that is a pretty entertaining site but you have to “log in” to comment.  And every attempt I’ve ever made either wants me to log in with credentials that reveal my identity or just fails only providing me some obscure coding reference.  I see others making comments on those sites and feel left out because I can’t figure out how to join in on the fun.  And yes I know when I comment I do provide my email to the site, but it doesn’t attach that to my comment. So I’m only exposed to the person owning the site, and that’s OK with me.

Other sites, lots of them, try to identify me with my WordPress sign in.  And I’m not sure what would happen if I let that go through, but I think it might specifically identify me in the comment.  So I just pass on that when it happens, even if I’ve spent ten minutes making what (to me) was the most insightful comment in modern times.  Also I can’t seem to log in to WordPress directly, I always just log into my Bluehost account and it logs me into WordPress when I access my blog site.   But logging straight into WordPress doesn’t work for me.

Then there are all the sites that don’t allow any comments.  What is with that?  I know some people have restricted comments because they were being trolled by jerks and idiots, like Sherry of Save. Spend. Splurge.  I get that, and I’m not ranting at them, I’d never rant at Sherry.  But there are lots of other sites that just don’t want my opinion.  And I take that personally. I’d insert the meme but I’ve always been afraid of Michael Jordan.

Worst of all there are a handful of sites that tease me into thinking I’m good to go with dispensing my indispensable knowledge in their comments section.  I can fill their little box with my wit and wisdom and put in my email and “name” and website address. But when I hit the “Post Comment” button I don’t get the satisfying sight of my wonderful words  added to their post.  Instead I get a message telling me the site is not accepting comments.  Really?  Now you tell me? 

So what about you other frequent commenters.  Do you experience the frustration of commentus interruptus in your daily life? 

Or am I such an irrelevant Ok, Boomer that I’m simply missing the easy way around the comment barricades.  I’m simply  being culled from the commenters herd by Darwinian selection.  

And because I never want anyone to find it difficult to comment on my posts, if you don’t see a comment box then try clicking on the title of the post up top. That should make it appear.