Health Insurance Reform Should Be About Better Insurance, Not Entitlements

Hedge fund manager Cliff Asness writes in a Bloomberg article that true health insurance reform should focus on restoring the true purpose of insurance:  "True insurance comprises two things. The first one is a goal: to protect against very large losses. The second one is a method: the proper assessment and pricing of risk."

He argues health care costs are too high partly because "All incentive for the consumer to control costs is abandoned."  Why?  Most health care costs, "including routine and minor care," are paid for by someone else, and the most common someone else (your employer) has a tax incentive to provide more health care benefits.

In pursuit of social "equality", politicians are moving toward arguing "the same premium must be charged for a well-protected, unscathed house as for one that is already on fire."  "The business of insurance is about determining risk and charging accordingly. It’s why insurance companies exist. If we eliminate that, medical insurers are just form-processing companies for the government."

Instead of heavily regulating insurance for everyone due to the few that have extremely high health costs and poor (or no) insurance, Asness claims "direct state subsidy is far more efficient."  Not an easy thing for a libertarian like Asness to say.

Problems with Obama's Criticisms of Insurance Rates

The New York Times reports that the President "will propose on Monday giving the federal government new power to block excessive rate increases by health insurance companies." The policy is intended "to frame his debate with Republicans over health policy at a televised meeting on Thursday" by "seizing on outrage over recent premium increases of up to 39 percent announced by Anthem Blue Cross of California."

I have at least 4 problems with all of this: one about the uncritical media coverage, one about the political games being played, one about unintended consequences, and the last about the role of government.

1) news story after news story is reporting Anthem's rate hikes as "up to 39 percent". I have yet to find one news story that digs into this number. Out of the 700,000 affected customers, how many will see 39% increases? One? All of them? What's the average increase? Is anyone seeing a rate decrease? With all the coverage this is getting, you think someone would look into this instead of just repeating the number, which has the effect of supporting Obama.  This statistic is becoming the new "47 million Americans are uninsured."

2) The article says "the legislation unveiled on Monday will actually be the first comprehensive proposal put forward by the White House." The President keeps criticizing the Republicans for not having good ideas, but he comes out with new proposals, immediately before a televised meeting with them? I hope voters see that "seizing on outrage" = "pandering"; it does not equal good policy based on a long-term strategy. Senate Republican leader, Mitch McConnell said “If they are going to lay out the plan they want to pass four days in advance, what are we discussing on Thursday?”

3) The House and Senate health insurance proposals will require insurers to cover more high-risk patients, and will regulate how much more insurers can charge high-risk patients, compared with low-risk ones. To comply, insurers will have to raise rates overall, and particularly to low-risk patients because the new regulations are an explicit subsidy from the healthy to the sick. Part of these rate hikes are certainly due to the bad economy, but how much is a result of the oncoming Obamacare train? Is Obama criticizing something here that is actually the direct result of what he is proposing?  This WSJ editorial thinks so.

4) Who decides what is an "excessive rate increase"? If customers are not getting value for their money, they should be able to choose a different insurance plan. The government should take steps to increase competition so that consumers can make these choices, instead of waiting for a government panel to decide what is appropriate.

Why AIG Was Saved

An article on the WSJ's opinion page says the AIG hearings in Washington "showed that the story of why AIG could not be allowed to fail continues to change, which inspires little confidence that Washington can be trusted with new powers to identify and address systemic risk."

The best illustration I've seen of why AIG had to be saved is this chart from the IMF. The arrows show the % change in default risk of an institution, if the institution the arrow is pointing at defaulted. For example, if AIG defaulted, Bank of America was 4.56 times as likely to default. If AIG had gone under, the US government may have ended up in the position of backing up consumer deposits at Bank of America, Wells, Fargo, Wachovia, Citigroup, etc. The FDIC doesn't have nearly enough reserves to take care of that. By bailing out "Wall Street" (many of these institutions are not part of Wall Street, but politicians refer to them as such), the US government essentially bailed out Main Street. However, demonizing "Wall Street" is a message that gets more votes.

Most Under-reported Story of the Recession?

CNBC reports "Many Firms Reluctant to Hire Because of New Taxes, Rules".

According to this article:

The prospect of increased federal and state regulation and taxes has been particularly disruptive to the hiring plans of small- and medium-sized businesses, which have historically generated about two-thirds of the nation’s jobs...

In a recent interview with CNBC.com, the [American Chamber of Commerce]’s chief economist, Martin Regalia, described a paralyzing uncertainty over policy issues, saying that many members “had adopted an attitude of survival” and "few talked about net new hiring.”

Businesses don't like to hire in an uncertain environment, and while Congress has spent much of 2009 and early 2010 debating health care "reform", employers have little guidance on taxes, energy policy, financial sector reform, and other areas Obama promises to address. Meanwhile, the administration claims they're doing everything they can to create jobs.

If only the government would take advice from the medical profession: "first, do no harm." Instead, they seem to be complicit in keeping this crisis alive longer than necessary to make sure they don't "waste" it.

NPR on Homebuyer Tax Credit Fraud

According to this NPR story, "Thousands of people have gotten first-time homebuyer tax credits they don't deserve ... Some of these suspicious claims come from people who are writing off interest payments on another house." The IRS "highlighted nearly $500 million in homebuyer tax credits claimed by people who don't appear to qualify."

The Wall Street Journal reports:

Among those claiming bogus credits, at least some of them were definitely first-timers. The credit has already been claimed by 500 people under the age of 18, including a four-year-old. This pre-K housing whiz likely bought because mom and dad make too much to qualify for the full credit, which starts to phase out at $150,000 of income for couples, $75,000 for singles.

The NPR article points out that "the IRS doesn't require people applying for the credit to prove they've purchased a house." Frank Keith, a spokesman for the IRS, says "the IRS doesn't have the authority to reject a claim for the tax credit without doing a full audit first." So, "the IRS is reportedly trying to audit almost everyone who claims it this year."

Someday, the government should consider opening offices where you can show up, choose from a menu of government handouts, present ID, and walk out with your check. At least that would be efficient. Oh wait, I forgot about my last trip to the DMV.