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.

Daily Read - 2/24/10

Keith Hennessey has a good summary of President Bush's record of passing major bipartisan legislation. Interestingly, it includes items used in recent rhetoric to paint Bush as an extreme partisan and ideologue, and also includes things Obama is expanding or extending, without giving Bush any credit.  I'm not a big George Bush fan, but much of the criticism of him is based on fiction and partisanship, and takes little account of the truly difficult times he faced while in office.

The average number of years Americans spend in retirement has roughly doubled since 1970, according to this handy chart in the Economist. "Official retirement ages have failed to keep pace with rising life expectancy, making pensions increasingly unaffordable." The age Americans can qualify for Social Security needs to raised, which means governments and employers need to find ways to keep people working longer and being productive.

Blogger Jay Cost makes an interesting point about those who argue the Senate should not use reconciliation to pass health care because the procedure does not honor the majority rule principle of a Democracy: "the Senate is not a majoritarian institution!" Every state gets 2 Senators, regardless of population.

The FDIC reports: "Lending by the banking industry fell by $587 billion, or 7.5 percent, in 2009, the largest annual decline since the 1940s."  (Washington Post)  FDIC Chairman Sheila C. Bair says much of the decline is the "result of cutbacks by the nation's largest banks, which have tightened qualification standards for borrowers and increased the proportion of money that they hold in reserve against unexpected losses."  I'm sure that speeches vilifying bankers are being loaded into the president's teleprompter as I type this.  However, I doubt he will go much further in explaning the lack of lending that saying bankers are evil.  As Bair says, banks are still being burned by loans made over the last few years as creditors ability to repay keeps getting worse.  Bair says banks are holding extra reserves "against unexpected losses", but banks are also waiting (still) for financial reform measures out of Washington that will almost certainly raise their reserve requirements.  If they lent money that the government will later say they should have in reserve, they would be vilified for that too.  Washington needs to give up on scoring political points and finish whatever financial reform they decide on -- all they are accomplishing by delaying and demonizing is scaring the private sector from making investments.

The National Federation of Independent Business (here) says: "Washington still does not get it. It pays lip service to the fact that small business generates half of private sector GDP and creates over two-thirds of private sector net new jobs, but when it comes time to provide help, small business gets $30 billion IF banks decide to accept the TARP funds to support loans and IF the owners can subsequently get a loan from a bank. But for most firms, this dinky amount is of little help. More so, this new aid misses the main problem since only five percent of small business owners cite “financing” as their top business problem but 31 percent cite “poor sales.”"  The NFIB argues that Washington continues to press on with their high-spending, high-regulation agenda, which is the "death knell for private sector vitality."  "If the administration wants to count “jobs created and saved” it should also be accountable for “jobs destroyed or prevented.”"  (h/t Cato)

Obama the Financial Procrastinator

Banks continue to fail at an alarming rate. The chart below summarizes bank failure data from the FDIC by quarter. Q1 2010 looks like an improvement until you realize the data are only through early February.

More than a year after the collapse of Lehman Brothers, the government has no exit strategy for Fannie and Freddie, former Treasury Secretary Hank Paulson says we've made no progress on improving the regulations for dealing with failed financial institutions, and the number of institutions on the FDIC's "Problem List continues to soar - from 552 in September to 702 in December, noting that "that indicators of asset quality continued to deteriorate during the fourth quarter."

In the meantime, Obama and Democrats in Congress are simultaneously claiming victory over the job-creating power of the stimulus package, while claiming jobs are "top priority" for 2010.  So far, this has resulted in a $15 billion job bill proposed by Harry Reid.  They're using up countless hours blaming Republicans for the failure of a health care bill that couldn't get enough Democratic support, and has Democrats retiring from public office over the partisanship created.  While the FDIC reports bank profits are "still well below historical norms for quarterly profits," and that profit improvement indicates progress for the economy, the President rails against excesses in the financial sector to score political points without taking any meaningful steps toward addressing the real problems.

Financial reform should be top priority, and the longer Obama puts this off, the less likely he will be able to cry "I inherited this mess" when it blows up in his face.

Daily Read - 2/23/10

Obama released health-care reform proposal yesterday, the first plan that can realistically be called "Obamacare", in advance of Thursday's meeting with Republicans.  Does anyone else think it's odd that Obama isn't taking his proposal to the Democrats first? What if they don't support it? ABC News reports "Congressional Democrats cautiously embraced President Barack Obama's new health care plan as their last hope for enacting a comprehensive overhaul." They feel the need to pass something, even if they don't like it, because "the chance won't come around again anytime soon."  "Cautiously embraced" does not sound like a ringing endorsement.

The Washington Post reports that his "proposal's most notable feature, he scales back the Senate bill's main revenue source, a tax on high-cost insurance that he has strongly supported. Instead, he would impose a new tax on the unearned income of the wealthy."  Economist Greg Mankiw thinks this is a mistake - higher taxes on expensive health plans would be an incentive to use less health care (and therefore reduce costs), while but the "unearned income" tax reduces the incentives for saving and investment.  In Mankiw's words, "the new proposal would do less to bend the curve of rising healthcare costs and more to impede long-run economic growth."

The Post also notes: "White House officials touted as the proposal's signature addition a new nationwide authority to review insurance rate increases," but that the "proposed authority is slightly less than meets the eye."  The authority basically amounts to price controls for health care, and Mankiw reminds us of the less-than-impressive history of price controls, citing this article.  The Cato Institute also weighs in against "Clintonesque" price controls, and even quotes Obama’s top economic advisor Larry Summers as saying "price and exchange controls inevitably create harmful economic distortions. Both the distortions and the economic damage get worse with time."

While claiming repeatedly that Republicans had no ideas and no plan for health care, the White House web site now says: "Throughout the debate on health insurance reform, Republican concepts and proposals have been included in legislation."  It will be interesting to see how Obama uses this in Thursday's televised meeting with Republicans.  In Cato's podcast on the price controls, Michael Cannon claims Obama hand-picked the Republican proposals that would get the least support from independents and libertarians and will use them to make Republicans look as "big-government" as possible.

Obama's plan also closes the so-called "doughnut hole" in Medicare's prescription drug coverage, making a Bush-era program that the President and Democrats repeatedly include among their "inherited" problems even more expensive.  Also, does Obama include this among his Republican ideas he is including?
The WSJ's editorial "ObamaCare at Ramming Speed" also says the proposal "purports to fix the special-interest favors in the Senate bill not by eliminating them—but by expanding them to everyone."  For example, "the White House claims to eliminate the 'Cornhusker Kickback,' the Medicaid bribe that bought Nebraska Senator Ben Nelson's vote, political appearances are deceiving.  As with the union payoff, what the White House really does is broaden the same to all states, with all new Medicaid spending through 2017 and 90% after 2020 transferred to the federal balance sheet. Governors will love this ruse, but national taxpayers will pay more."

In summary, the President's new health care plan contains little more than a mash-up of the existing House and Senate plans, plus a feature that makes them worse, and other feature that is politcally popular, but likely to do more harm than good. Or, as the Wall Street Journal puts it: "It manages to take the worst of both the House and Senate bills and combine them into something more destructive"
Keith Hennessey ponders  whether the President's proposal is a set-up for his exit strategy from healthcare reform.  "The President proposes a “compromise” and blames Republicans for being unreasonable and unconstructive. Legislative failure is the Republicans’ fault, not the President’s."  If this is true, it might explain why the President is so set on the event being televised.

In spite of all the opposition, Eugene Robinson of the Washington Post says Democrats should "Find your spines and pass health reform," then spends most of the article blaming Obama and the Republicans for the failure to not pass something already - contradicting the headline, which implicitly blames the Democratic super-majority that failed to pass anything.  He argues the last year of negotiating could have been a lot easier if Obama had been more clear about what he wanted (Side note to Robinson: Obama is not the boss of Congress).  Then Robinson says Obama's proposal is very similar to the Senate bill, and he is doing Republicans a favor by providing it as a "starting point" for discussions.  If Republicans refuse to back this bill, which only passed the Senate due to massive kickbacks to the health care industry, and huge bribes for the last few Senate votes, Robinson says "observers will be able to draw conclusions about who is being constructive and who isn't."  On the other hand, Robinson could have argued that it is very unlikely Republicans would support something that Democrats only barely support, but that would not have suited his political purposes.

Daily Read - 2/22/10

A Swiss court accused a fisherman of torturing a fish because it took 10 minutes to reel it in, and activists are lobbying that animals should have lawyers.  (AP story here; h/t Overlawyered.com)

Maryland Gov. Martin O’Malley, the vice chair of the Democratic Governors Association, said at a press conference that Congress should pass a jobs bill that includes “whatever they think is appropriate, as long as they do it quickly...the people of our country need to see us fighting...for jobs."  He also argued Democrats should "force Republicans to take uncomfortable votes against measures they've supported in the past. He thinks that would help Democratic candidates on the ballot this year, including him."  (Politico)  I thought the jobs bill was supposed to be about jobs, not about passing partisan bills quickly for the sake of public appearances and elections?  Proposing something just because you think the other party will vote against it is childish and a big part of the reason Americans are getting fed up with their government.  Voters don't want to see their politicians fighting any more - they want results.

"For a year, critics of the Democratic health care plans have been applying the label "ObamaCare" to whatever the current draft was," says Marc Ambinder at the Atlantic.  The President has now unveiled a comprehensive bill as a prelude to Thursday's meeting with Republicans, and Ambinder summarizes the highlights of Obamacare here.

Ambinder says Obama's "new insurance rate increase mitigation authority" will be hard to oppose politically (and will be used to make Republicans look bad), but that the policy probably won't work - citing this National Review column.  I take issue with Obama's grandstanding over "excessive rate increases" by health insurers here.

In the upcoming issue of Vogue, Treasury Secretary Tim Geithner says “You can’t do these jobs worrying about perceptions...You have to focus on improving real things that matter. To consider what is popular will lead you astray and you will have no integrity to do the important things that will make the country stronger.” (Jake Tapper, ABC News)

Five former Treasury secretaries wrote a letter to the WSJ in support of the "Volcker Rule," which would restrict FDIC-backed institutions from trading too much for their own profit, and restrict them from investing in hedge funds and private equity.  While this idea is great in theory, I'm still not sure where I stand on this one practically.  The letter was in response to a column by Alan Blinder on Feb 15, where he wonders if "the Volcker "idea" can be translated into a workable Volcker rule. It is devilishly difficult to draw bright lines between proprietary trading and trading, hedging, and market-making on behalf of clients."  It was the likely impact on FDIC-insured institutions that led to the bailout of AIG, so it makes sense for the government to be more strict about who does, and does not, qualify for FDIC insurance.  But, Fannie, Freddie, AIG and Lehman Brothers were not banks -- it wasn't proprietary trading and other investments by banks that caused the crisis, and what the "Volcker Plan" looks to regulate are not a significant part of their businesses.

The Economist weighs in on the challenges facing Obama's deficit commission.  Most importantly, the commission has no authority, unlike the commission voted down in the Seante that could "make recommendations which Congress would be forced to vote on (without amendment)."  Also, "It is scheduled to report by December 1st this year, shortly after the mid-term congressional elections," which postpones the issue until after the election.  The Tea Party movement may be loud and influential now, but the more time passes, the more likely their cries for serious fiscal reform will fade away.  If this commission and the next Congress fails to produce something soon, will it be too late?  On the positive side, the structure of the commission ensures some amount of bipartisan support for whatever it recommends.

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.

Weekend Read - 2/20-21/10

"After reaching the top of the podium at the 2006 Turin Olympics, [Hannah] Teter embarked on a charitable mission through her website Hannah's Gold (www.hannahsgold.com) to help an impoverished town in Kenya to acquire basic necessities...After finishing second in a grand prix event in Utah last month, Teter donated her $10,000 winnings to the earthquake victims in Haiti."  (Fox News)

Keith Hennessey has six economic ideas that he agrees with Obama on (some with caveats).

"When Yitta Schwartz died last month at 93, she left behind 15 children, more than 200 grandchildren and so many great- and great-great-grandchildren that, by her family’s count, she could claim perhaps 2,000 living descendants." (NY Times)

"In an attempt at transparency, Obama has decided to make public the list of all visitors after a 90-day lag to preserve security."  "More than 5.5 million people requested tours of the White House last year."  (Washington Post) Do casual tourists really need their names posted to a government website?

Daily Read - 2/19/10

Elton John thinks "Jesus was a compassionate, super-intelligent gay man who understood human problems." In case you're not sure who Jesus was, the NY Daily News can help. According to the story, He was "one of the central figures of Christianity." Who knew?

Philanthropy.com reports that Feeding America, the national network of food banks, raised 51% more money in 2009 than in 2008.  Kudos to the generous Americans and American organizations that continue to donate during this rough economy.  (http://feedingamerica.org/)  "Leaders of the anti-hunger group say the increase is in large part because donors recognize the extreme rise in demand for basic services like food and shelter as the economic crisis has taken its toll."

The Economist says don't blame the political system in the US - blame the President.  "America’s political structure was designed to make legislation at the federal level difficult, not easy."  Instead of understanding that the system is designed to stall legislation that isn't broadly supported "Mr Obama has done a lousy job of winning over Republicans and independents to the causes he favours."  "Rather than regretting how the Republicans in Congress have behaved, Mr Obama should look harder at his own use of his presidential power."

Charles Krauthammer agrees, and gives examples for Obama to follow: Reagan worked with Democratic House speaker Tip O'Neill on Social Security, Reagan worked with Democrat Bill Bradley on tax code reform, and Bill Clinton worked with Newt Gingrich on welfare reform.  America is only ungovernable if its leader fails to see that he is not always right.

Paul Volcker, former Fed Chairman and current advisor to President Obama, thinks "Reforming Social Security is “doable,” he said, in part by “jacking up the retirement age” and changing the benefit calculation so that it won’t rise as fast for higher-income Americans as it does under existing law."  He prefers reforming Social Security and preserving it as a "bedrock" retirement plan to the proposals in Obama's 2011 budget.

Americans can also do a better job of saving and depending on themselves for retirement.  Personal savings rates in the US have been very low, even negative, but are improving recently.  (Source: Bureau of Economic Analysis, via NY Times)

Daily Read - 2/18/10

This one from Mitt Romney: "in case you didn’t hear the late-breaking news, the gold medal in the downhill was taken away from American Lindsey Vonn. It was determined that President Obama is going downhill faster than she is." (h/t National Review)

Anthem Blue Cross recently announced health insurance rate increases of up to 39% for some customers in California.  This Wall Street Journal column explains the increases "are the direct result of the Golden State's insurance regulations—the kind that Democrats want to impose on all 50 states."  The "cost" of health care reform that the President, Congress, and the CBO measure is only the costs that would be the responsibility of the government. The entire cost to all Americans hasn't been estimated by anyone as far as I know, but it will be much, much larger than the government piece alone.

Cato's daily podcast discusses taxation of multinational corporations.  Obama has discussed stricter taxation of US-based companies that produce revenue in foreign countries.  The podcast argues this is a bad idea for 2 reasons: 1) US corporate tax rates are already the 2nd-highest in the developed world, and raising them would just cause more businesses to move out of the US, and 2) if a US-based business has to close an office in some other country, a business from another country will move in to take advantage of the local tax advantage.  The US can only control our policy, not the policies and actions of other countries.

Bruce Campbell, editor of "The Collected Works of F. A. Hayek," says the economic stimulus stimulated sales of Hayek's "The Road to Serfdom," a dense book from 1944 describing the dangers of social planning and big government.  How ironic.

Venture capitalist Bill Frezza's thoughts on "Why Washington Can't Reform Healthcare" -- "The healthcare industry runs on fake prices."  "Imagine the world's smartest food expert with access to the best culinary research trying to decide what the right price is for a ham sandwich. Once the price is set, that's it - selling a ham sandwich for more or less is against the law. Oh, and homeless people get free ham sandwiches. Refuse to serve them and you lose your deli license."  What happens if the price of pork spikes?

Some good stuff from Yahoo Finance today:

This article has the "Wackiest Tax Deductions for 2010," including someone who produced a diary written all in one color ink, and copyrighted after the relevant year, as documentation to an IRS auditor.

This one says that almost anyone would want to double their income, but there are reasons why many can't or won't that are usually about what you have to give up to earn the extra income.  Money can't buy happiness, after all.

Daily Read - 2/17/2010

In the Atlantic, Megan McArdle wonders why, among all the many government actions, the Obama administration is claiming the stimulus is the one that prevented a depression.  Only $287 billion of the $787 billion stimulus has even been spent, according to recovery.gov, and by McArdle's estimation, this can't possibly have added more than about 1% to GDP.  Not insignificant, but certainly not more important than all the other government actions put together, which is what they're claiming.

However, Joe Biden was on CBS's "The Early Show" today saying taxpayers have "gotten their money's worth" from the stimulus because 2 million jobs might have been saved. (AP via Yahoo)  Doing a little math, that works out to $143,500 per job.  That doesn't seem like a good deal to me, but perhaps "one of the least wealthy members of the Senate" thinks that's value for the money.  On the other hand, how many jobs have been destroyed because of fear of government regulation and the future taxes that will be needed to pay for growing government?

President Obama is expected to announce that he will create the "National Commission on Fiscal Responsibility and Reform" by executive order today to "to help bring down the federal budget deficit to 3% of gross domestic product by 2015, compared with nearly 10% today, and to propose ways to hold down the surging costs of government programs such as Medicare, Medicaid and Social Security." (WSJ)  Unlike the commission proposed by by Sens. Kent Conrad, D-North Dakota, and Judd Gregg R-New Hampshire recently, this commission "will not have the power to force Congress to cast politically unpopular votes. So the commission's report could wind up being another blue ribbon panel report that sits on a shelf somewhere, unless there is public pressure for Congress to act on the proposals." (CNN)  The President's logic seems to be that, because voters aren't pressuring Congress enough to spend taxpayer money more wisely, he should create a Commission that has no power, except that derived from voter pressure.  This makes no sense.  Unless, his logic is: I can take credit for being bipartisan and confronting big problems by ordering a commission to discuss the issue until after the next election!  On the positive side, Obama is expected to name Alan K. Simpson, a former Senate Republican leader, and Erskine B. Bowles, a top official in the Clinton White House as chairs of the commission (Washington Post)

Apparently Obama considers nuclear power plants too big to fail.  He announced $8B in Federal loan guarantees for the building of a nuclear power plant, although "Reports by Congressional Budget Office and Government Accountability Office have estimated that the risk of default for new nuclear reactors could be as high as 50 percent."  (Atlanta Journal-Constitution)

Surprise!  "Audit finds Census preparations wasted millions" (USA Today)