One size fits all?

Filed Under (Environmental Policy, U.S. Fiscal Policy) by Don Fullerton on May 27, 2011

Lately, mandates seem to be an increasingly popular choice of policy by the Federal government.  Just the last few years have seen health care mandates, automobile fuel efficiency mandates, and now – coming January 1st, 2012 – light bulbs.  That’s right, those pear-shaped incandescent bulbs have lit American homes for the last 130 years, but they begin phasing out of stores in favor of Light Emitting Diodes (LED) and Compact Fluorescent Light (CFL) bulbs, thanks to a 2007 bi-partisan mandate signed into law by then-President George W. Bush.  As an economist, I cringe when I think of mandates, as they remove incentives for innovation, take choices away from consumers, and put the decision-making into the less-informed hands of the policy makers in Washington. 

The end-goal of the light bulb policy is to reduce polluting emissions.  News stories such as USA Today provide information regarding the extra efficiency of CFL and LED bulbs in comparison to incandescent bulbs.  When the law takes full effect in 2015, the U.S. Department of Energy estimates that “Families nationwide will save nearly $6 billion a year and will help eliminate 30 million metric tons of carbon dioxide emissions annually — the equivalent of taking about 8 million cars off the road each year.”  Other nations already have policies in effect that are more stringent than those here in the United States, including Canada, Russia, Australia, and the European Union.

Limiting families to purchase only these new light bulbs means paying a higher price up-front in order to cut emissions.  But the enacted “ban” applies to everybody, no matter whether the use of the old style bulb might be very important to some individuals.   To ban all incandescent light bulbs is not efficient, if certain individuals could use them with benefits that exceed the social cost.  The alternative is a price incentive, such as a price on greenhouse gas emissions in a cap-and-trade type system.  Then firms and individuals get to decide for themselves whether and how to reduce electricity use and cut emissions most cheaply and effectively.  When government policymakers issue a mandate, they are effectively saying they know what is best for us.  And with heterogeneity among firms and individuals, those policymakers can’t possibly know what single set of abatement methods is best for all different people simultaneously.

South Carolina has seen significant innovation on the part of policy makers in figuring out a way around this new light bulb law that could have ramifications for federal mandates of all sorts.  The Commerce Clause gives the Federal government the authority to regulate commerce between the states.  As Martin Hutchinson from Money Morning writes, “According to the Supreme Court’s 1935 decision in the case of Schechter Poultry vs. United States, the federal government does not have the power to regulate commerce that is entirely conducted within a state.”  In other words, if the state of South Carolina has a manufacturer that produces light bulbs in the state and for sale within the state, they could theoretically escape this mandate. 

The 2007 law doesn’t make incandescent bulbs illegal but instead sets requirements on their efficiency; these standards are proving to be quite difficult for the industry meet.  It is similar to the Corporate Average Fuel Efficiency (CAFE) standards established for the automobile industry, where producers are told to increase the miles per gallon (MPG) of cars produced, but the government does not attempt to dictate how this must be done.

In the long-run, this policy may save families money on their electric bill and reduce emissions.  But any one such law is not a comprehensive co-ordinated policy that chooses the cheapest forms of pollution abatement.  I’d rather see government address the problem in a comprehensive cost-effective way.

Don’t be fooled . . .

Filed Under (Finance, U.S. Fiscal Policy) by Don Fullerton on Apr 15, 2011

 . . .  by proposals to cut taxes.  Fiscally, such proposals are dangerously irresponsible.  The U.S. debt is huge, and the annual deficit is adding to it daily.  Increasing proportions of our debt are owned by China and other countries.  We need to reduce the annual deficit, just to reduce the huge current interest payments on the debt, which crowd out other beneficial forms of government spending. 

As much as the taxpayers might wish for tax cuts, those tax cuts would only add to the nation’s future fiscal woes.  The claim that a tax cut might raise revenue is counterintuitive, pandering, and certainly not supported by any recent economic history.  President Reagan enacted the biggest tax cut in history at the time, and the deficit ballooned.  He also had to backtrack several times with tax increases to fix the problem.  President Clinton raised taxes, which was followed by one of the strongest sustained recoveries in our nation’s history (and years of U.S. budget surplus).  President Bush cut taxes again, which was followed by deficits that exceeded those of the Reagan Administration.   It’s only logical, face it, that tax cuts lead to deficits!

Given the current huge U.S. deficit, the only responsible course is some combination of spending cuts, continued borrowing during a period of deficit reduction, and selected tax increases.  We have choices to face, about who should suffer from those spending cuts and who should face the  tax increases, but none of THAT debate can deny the fundamental reality that somebody has to suffer from spending cuts, and somebody has to face tax increases.

How Much Should Congress Leave to the Regulators?

Filed Under (Environmental Policy, U.S. Fiscal Policy) by Don Fullerton on Feb 11, 2011

The very existence of the Environmental Protection Agency (EPA) has long been a point of contention between the two political parties.  What is, and what ought to be the role of the EPA with regard to policy making?  Congress cannot possibly enact laws that contain every detail about subsequent implementation, monitoring, and enforcement.  And they should not put everything in the law anyway, in order to allow enough flexibility to deal with future contingencies.  Besides, those in Congress don’t have the science background necessary to decide all of the details of some technological aspects of pollution prevention.

The law does not say that every electric power plant must reduce emissions of each pollutant to no more than some number, like 37 micrograms per cubic meter.  Instead, the law from Congress just says that EPA should protect human health to an adequate margin of safety.

Yet some would prefer that the EPA disappear, along with every agency having any regulatory power.  This agency, which was conceived in 1970 under Richard Nixon, has analyzed and supported some of the most important pieces of legislation of the last forty years, ranging from the Endangered Species Act to – more recently – the new emissions standards going into effect this year. 

In 2007, the United States Supreme Court ruled in a 5-4 decision called “Massachusetts vs. EPA”, that the EPA could in fact regulate greenhouse gases under the Clean Air Act, on the grounds that such emissions do affect human health.  When combined with the new Republican-dominated Congress, we have set the stage for yet another ideological battle. 

Throughout the past decade, much of the discussion about controlling carbon dioxide emissions has largely centered around the idea of Cap and Trade.  That system would effectively put a price on each unit of pollution emissions.  It would create a market where the need for emissions and the cost of emissions are balanced in a way that can achieve economic efficiency.  However, the most viable attempt at this in recent years, the Waxman-Markey bill of 2009 (H.R.5454), passed the House and not the Senate.  It would not even get past the House in this term.  

The question then becomes, what exactly are the cards that the EPA retains in their deck? 

A recent article is titled “Greenhouse Gas Regulation Under the Clean Air Act” by researchers at Resources for the Future (RFF, by Burtraw, Fraas, and Richardson).  It seeks to explore the options available to the EPA, in-depth.  What they find is that the EPA can implement measures that will reduce greenhouse gas emissions significantly in a measured and cost-effective manner.  For this to happen, however, they argue that the EPA must become bold and decisive in their actions. 

Bold action may be taken as an example of government overreach, and so the EPA must be careful.

Republicans are currently in discussion to introduce the Energy Tax Prevention Act of 2011 .  They recognize that the EPA holds some powerful cards after the Supreme Court ruling in 2007, and they want to take that power away.  This Act would shift the EPA’s ability to regulate from the Agency to the legislative branch.  Yet such an action could take any decision-making ability from the scientists and put it in the hands of the politicians.  As EPA leader Lisa Jackson said, “Politicians overruling scientists on a scientific question – that would become part of this committee’s legacy.’”  Herein lies a problem with democracy.  The people in charge of making the decisions that affect us all, often have little knowledge of the actual issues at hand.  After all, Republicans from oil-rich states like Oklahoma still claim global warming is nothing but a hoax.

Misleading Accounting and Illinois’ Pension Perils

Filed Under (Retirement Policy, Uncategorized) by Jeffrey Brown on May 3, 2010

My good friend Douglas Elliott, who is now a Fellow at the Brookings Institution, just issued a new paper “The Financial Crisis’ Effects on the Alternatives for Public Pensions. The paper is yet one more in a growing chorus of voices pointing out the significant fiscal woes facing our state and local pensions in the U.S.  And, as I have pointed out before, Illinois is the poster-child for everything that is wrong with the funding status of our public pensions.  

After reviewing the net losses on pension assets, Doug makes the following simple but astute observation:

“The situation is even worse than those figures show on the surface, because pension funds are essentially walking on a treadmill. They need to earn an expected return each year in order to stay standing in place, since the value in today’s dollars of the pensions they have promised to pay goes up each year as those payouts come closer in time. The situation is analogous to inflation. The public pension funds may have lost 15% over two years on a “nominal” basis, but, if their target return was 8% a year , they lost 31% compared to their targeted level of investment value, excluding the effects of contributions and pension payments.”

I have previously noted in this blog that the Government Accounting Standards Board (GASB) allows public pensions to discount future liabilities using the expected return on plan assets.  This approach has no basis whatsoever in financial market theory – indeed, I have yet to meet anyone with a PhD in economics or finance who believes such an approach is correct or sensible.  Actuaries and plan administrators often defend it, but when you dig below the surface, their defense is often rooted in the political or P.R. ramifications of reporting the true nature of the liabilities, rather than in any good economic reasoning.

Let’s bring this home to Illinois.  Specifically, let’s bring this home to the State Universities Retirement System, or SURS.

According to the SURS Investment Update (see page 3 here), the average annual return on the SURS Total Fund over the 10 years ending February 2010 was dismal 3.4%.  But SURS, in accordance with GASB, uses an expected return on assets that is more than double this amount.  Even worse, SURS credits participants in the old Money Purchase option with an investment return that is far greater than this.  Doing so amounts to an implicit transfer from Illinois taxpayers to Illinois pensioners that is above-and-beyond the standard pension formula. 

As we discuss pension reform in Illinois and other states, here are three related points that are worth considering:

  1. We should start with truth in accounting.  Stop hiding behind high discount rates and let’s at least define the size of the problem honestly.  A starting point would be disclosing the size of the public pension liabilities discounted using something more akin to a risk-free rate.  (See here for discussion).
  2. Let’s stop pretending that we can achieve higher returns without taking on higher risk.
  3. Let’s stop making irrevocable transfers from taxpayers to pension participants on the basis of “average” or “expected” returns.  In SURS, that means bringing the Effective Rate of Interest way, way down from historical levels.   

Pension Reform in Illinois: Why is everyone cheering?

Filed Under (Retirement Policy) by Fred Giertz on Apr 14, 2010

 

What passes for pension reform in Illinois came with lightening speed in late March. The bill (SB 1946) appeared suddenly and was approved by substantial bi-partisan majorities in barely two days and enthusiastically signed by Gov. Pat Quinn. After some preliminary actions on March 23, the Illinois House and Senate took 71 separate actions on March 24, leading to the final approval of the bill.                  

The bill was widely hailed in the editorial pages of newspapers in the state as well as the Wall Street Journal and by politicians as an important step toward addressing the state’s massive budget shortfall by dealing with the pension piece of the problem – the one that has come to symbolize the cause of and solution to the state’s fiscal woes.

Unfortunately, the pension reform process was seriously flawed on procedural grounds. In addition, the new legislation falls far short of effectively dealing with pension funding problems, not to mention the larger state budget issue. 

In a recent News-Gazette commentary, State Sen. Mike Frerichs, D-Champaign, heralded a new day of openness and transparency in the General Assembly. His Taxpayer Transparency Act (SB 3622), approved by the Senate, would “put an end to the practice of last-minute, secret budgets in Illinois.”   Further, it will mandate “that general revenue spending proposals must be available for public review for four days prior to the General Assembly taking a vote.” 

Overcome by this spirit of openness, the Senate passed pension legislation that few members, not to mention citizens, understood. By comparison, the recent national health care debate was a model of openness and propriety. In fact, two weeks after the legislation was approved, no one in Springfield could give a definitive answer to a number of key features of the bill. There were no significant hearings on the legislation, no real input from the state’s pension systems, and no competent actuarial study before the bill was approved. 

It is surprising how the editorial writers and commentators bought into the reform idea. In a Chicago Tribune commentary, Abner Mikva, an icon of Illinois politics, stated: “Gov. Quinn and the legislature deserve a lot of credit for a pension reform that is a substantial piece of any meaningful fiscal restraint program. More than a faint praise, they deserve a loud hurrah.” It is disappointing that the former distinguished judge, noted for his advocacy of proper and open procedures in politics, would be cheering what transpired in Springfield. 

The faulty process might be forgiven if the results effectively addressed the pension problem.  Instead, the new bill can be viewed as business as usual similar to the so-called reforms of 2003 and 2005, where purported savings to be realized far in the future became the excuse for reduced current funding efforts. 

The pension bill imposes a new dramatically lower second tier by severely limiting pension coverage and pension benefits for new employees. This will differentially impact public school teachers and public higher education employees who are not covered by social security. New retirement benefits will only be partially indexed for inflation, and these adjustments will not be compounded. The result is that a retiree would lose around 28 percent in purchasing power during a 20-year retirement with 3 percent inflation and 50 percent with 6 percent inflation. 

To save state funds, pension benefits for new employees will be based on a fraction of the social security earnings ceiling – currently $106,800 per year regardless of the actual employee’s salary. This too will only be partially adjusted for inflation, which will cause the earnings ceiling for a new employee working 30 years to fall to 64 percent of the social security ceiling with 3 percent inflation and to 42 percent with 6 percent inflation. 

These are only two of several punitive measures that will reduce future pension benefits. The fallacy of this approach is that it assumes that there will be no adjustment necessary in the hiring costs for new employees who are offered drastically reduced benefits compared to current employees. Can new, highly skilled employees be hired with such meager benefits? This can only be done by paying higher salaries to compensate for the lower benefits or through the establishment of supplementary retirement systems to make up for the deficiency. What the state saves in lower pension costs will be partially offset by higher wages and new supplementary benefit costs. 

Rather than using the new pension savings as a means of setting the state on a path to solvency, the new pension bill is used as an excuse for the state to continue its reckless ways by reducing scheduled pensions contributions. What is overlooked in this discussion is that the budget problems facing the state are really the result of excess spending over several decades where deficits have been partially funded by shorting the state’s pension systems. For example, had the state made timely payments (based on actuarial costs of slightly more than 10 percent of payrolls) to the State Universities Retirement System, SURS would be fully funded with assets of around 106 percent of liabilities rather than its actual level of around 50 percent. 

No reasonable observer can deny that pension reform as well as a careful evaluation of non-pension post-retirement benefits such as health insurance needs to be part of a general solution to the state fiscal mess. However, these changes must be accompanied by greater fiscal discipline as evidenced by spending austerity and enhanced revenues. Unfortunately, the General Assembly appears to view its version of pension reform as a substitute for such discipline.

 Giertz is professor of economics at the University of Illinois and an elected member of the State Universities Retirement System Board of Trustees. The views expressed here are his and not necessarily those of these institutions.

  

Adverse Selection — California Style

Filed Under (Health Care) by Nolan Miller on Feb 9, 2010

News from the West Coast today that Anthem Blue Cross, one of the largest private insurers in California, is raising the prices for the 800,000 or so people it sells individual health insurance policies by up to 39%.  The Obama administration is not happy, to say the least.  HHS Secretary Kathleen Sebelius fired off an angry letter to Anthem and its parent company, WellPoint, demanding an explanation.  Of course, this also comes at a time when the Obama administration is struggling to make the case that health insurance reform is urgently needed, so this also provides a perfect example for them.  The letter is kind of cool, since I have never seen an angry letter from a Cabinet Secretary before.  The text is here.

What I find more interesting as an economist, however, is WellPoint’s response.  They haven’t replied formally to the letter yet, but in a statement WellPoint’s spokesman said the following:

“As medical costs increase across our member population, premium increases to the entire membership pool result. Unfortunately, in the weak economy many people who do not have health conditions are foregoing buying insurance. This leaves fewer people, often with significantly greater medical needs, in the insured pool. We regret the impact this has on our members.”

So, where’s the economics lesson here?  In a competitive market, health insurance prices are driven by the cost of caring for the average person in the insurance pool.  That means that healthy people usually pay more than their actual cost of care and sick people pay less.  Although healthy people pay more than their average health expenditures in any year, they’re still willing to buy insurance because it provides them with, well, insurance.  In the event that they have a car accident or other unexpected, large expenditure on health care, they’re protected against the financial consequences.  This works fine as long as the premium (driven by the average cost of care) doesn’t get too high above what the healthy people are willing to pay for insurance against relatively rare events.

Now, enter the recession.  People are losing their jobs, wages for the employed are stagnating, and people are losing money on housing and financial investments.  In light of these challenges, some healthy people are looking at their health insurance premiums, their income, and the likely cost of going without insurance, and deciding not to buy health insurance.

This is a perfectly rational response to increasing premiums and decreasing incomes.  However, it results in the remaining people in the insurance people being, on average, sicker.  This means that the average cost of caring for the insurance pool will be higher, which will necessitate higher premiums.

Unfortunately (and interestingly if you study this stuff), this leads to the potential for what is known as an “adverse selection death spiral.”  The idea is that once premiums rise, the healthiest people who are still buying insurance may decide to drop out of the pool.  Since the remaining pool is even less healthy on average, premiums will once again need to rise to cover their higher medical needs.  And then the cycle starts over again.  In extreme cases, the premium just keeps going up until nobody is willing to buy insurance.

So, what next?  Well, the adverse selection story holds in competitive markets.  But, you can already see Secretary Sebelius telegraphing the administration’s punches.  They will argue that the price increases are not due to competitive pressure and an increasingly unhealthy insurance pool but rather a greedy, for-profit insurer trying to take advantage of people when they’re down.  For their part, WellPoint/Anthem will argue that this just shows why health reform is needed, but health reform of a fundamentally different sort than Obama has proposed.

My prediction is that we’re headed for a highly charged series of Congressional hearings that boil down to an attempt to drive home to voters that something needs to be done.  Really went out on a limb, there, didn’t I?

Time for Health Care Credit Cards?

Filed Under (Health Care) by Jeffrey Brown on Feb 8, 2010

Yes, I know that credit cards have gotten a bad name given the fact that so many families have gotten themselves deep into personal debt by not managing them effectively.  But a couple of interesting ideas have come across my desk recently that have me thinking that a “health care credit card” is an idea worth considering as part of an intelligent health care reform.

As background, my colleague Nolan Miller made a post last week about “The Health Reform House of Cards” in which he highlighted the difficulties in tackling reform.  He walks through the steps that one could take in order to put together a reform that actually works, highlighting how one reform element must be accompanied by other reform elements if it is all going to work.

As luck would have it, I recently received a proposal from a good friend of the College of Business, Jerry Carson.  In his proposal, which is much more detailed than what I will provide here, he outlines a system that appears to have many of the elements that Nolan calls for – and his approach has a role for health care credit cards.  I probably will not do Jerry’s proposal justice, but here are a few of the highlights …

First, require that everyone purchase a catastrophic loss health insurance policy.  In Jerry’s proposal, anyone could sell this insurance, including private insurers or the government.  Premiums would be based on the risk pool of the entire nation, which, in Jerry’s words is “the only true economical form of insurance – the broadest possible base with high deductibles.”  Policy terms would be the same without consideration of pre-existing conditions, and premiums would be tax deductible.  if insurers want to provide policies that wrap-around this catastrophic coverage by providing benefits that are more generous, they may do so, but such policies would not be tax deductible.  This would help limit the “Cadillac plan” problem that leads to inefficient over-utilization of health care services.  It also limits the tax burden arising from the “tax subsidy” of these plans.

Second, Jerry suggests allowing individuals to use a “health care credit card” that can be used at point-of-service.  These cards are with full recourse to the individual.  Private lenders can issue the cards, and again, if someone cannot get one then the government can issue one.  In the case that the government issues one, all services would be reviewed by a federal agency, and unpaid costs would be deducted from federal/state benefits.  As Jerry puts it, it would be “socialized health care without the free lunch.”  

Jerry is certainly not alone in trying to come up with creative ways to solve our health care dilemma by providing incentives for individuals to care about the cost of care (a focus on incentives and individual responsibility) while still protecting them from catastrophic losses (a focus on social insurance).  A few months ago, the esteemed economist Martin Feldstein (former President of the NBER and former CEA Chair for President Reagan) wrote an op-ed in the Washington Post that called for us to replace the current tax subsidy approach with a health care voucher system.  Interestingly, he also calls for “the government to issue a health-care credit card to every family along with the insurance voucher.”  

Health care reform is an enormously complex topic, and as Nolan’s blog and Feldstein’s op-ed both suggest, the solution requires a number of inter-locking pieces to work.  Both Jerry Carson’s and Marty Feldstein’s creative ideas may be the kind of innovation we need to get out of the current health care reform quagmire.

The Health Reform House of Cards

Filed Under (Health Care) by Nolan Miller on Feb 4, 2010

[Note:  I originally wrote this last week and scheduled it to post today.  Yesterday I read Uwe Reinhardt's post on the NYTimes Economix blog that expresses much the same sentiment with more real-world input and fewer of the blow-by-blow details.  If I hadn't written my post already, I might have just linked to his.  But, since the work is already done, I'll leave mine here.  If you are at all interested in health, I highly recommend reading everything Uwe writes at Economix.  Even when you don't agree on the conclusions, he's right on the facts and identifying the key issues.]

 

In the wake of President Obama’s falling approval ratings and last month’s stunning upset in the Massachusetts Senate race, I hear a lot of people saying that this is the inevitable result of Democratic hubris, and in particular of Obama and the Democrats trying to do too much on health care too quickly, especially when the country has not yet bounced back from the current, severe recession, is (still) fighting wars in Iraq and Afghanistan, and faces an ongoing a real terrorist threat.

I’m willing to concede the points in the last paragraph.  Maybe this wasn’t the time to try health care.  Arguably, though, given the Senate’s anti-filibuster rules, the chance may not come again for a long time.  I’m also not a huge fan of the bill because I don’t think it went far enough to contain cost growth, which I (and others) have said is the real threat to the system in the long run.  But, I think that those who argue that Obama and the Dems should have taken a more incremental approach to expanding access to health insurance also miss the mark.  Here’s why.

Suppose that you want to extend access to the health care system to the roughly 46 million uninsured people in the U.S. (or just the 80 percent of them who are U.S. citizens).  The least obtrusive way to do this in the context of the existing U.S. health care system would be to either expand Medicaid to cover wealthier people or to bolster the dysfunctional individual (non-employment-based) insurance market.  Now, Medicaid does a good job of providing basic care to poor people, especially children and their families, but because of its low reimbursement rates is probably not a great way to extend care more broadly.  And, any broad expansion of this government-run program would surely meet with strong opposition.  So, this leaves us with bolstering the individual market.

The individual market is the insurance market for people who don’t get insurance through their employers.  To put it bluntly, this market doesn’t work very well.  Only about 5% of the U.S. non-elderly population gets its health insurance through this market.  There are several reasons for this.  First, coverage is expensive because those buying insurance through the individual market do not have access to the economies of scale and bargaining power of employment-based coverage.  Second, those who seek to buy insurance on this market tend to be sicker than the population as a whole.  Insurers respond to this by charging higher prices based on medical history (“risk rating”), excluding pre-existing conditions, charging higher rates for coverage, putting annual or lifetime limits on benefits, or simply refusing to cover the sick.  And, in many states they can cancel an existing policy with little or no justification.

All this translates into private, individual coverage being very expensive at the same time those who might buy such policies are relatively poor.  This leaves us in a situation where the sick can’t get insurance and the well do not want insurance because it is too expensive.  As a result, there are few people for whom buying insurance on the individual market is an attractive option.

So, how do you fix it?  The first step would be to prevent insurers from engaging in the types of practices mentioned in the previous paragraph.  So, let’s require that insurers charge everyone the same price for insurance and must enroll anyone who is willing to buy insurance.  Let’s also prevent excluding pre-existing conditions and lifetime limits on benefits.  In other words, we outlaw “abusive insurance practices.”

Fine.  Now anyone who wants to buy insurance can buy it at any time.  How does a reasonable person react to this?  Well, if you are currently sick, you buy insurance.  But, suppose you aren’t sick.  A reasonable calculation would be to not buy insurance while you are well and take advantage of the prohibition on denying coverage in order to buy insurance only if you become sick.  The result of this will be that only sick people will have insurance and that, without healthy people in the risk pool to balance them out, premiums will have to be high.  So, even though everyone will be able to buy insurance, it will still be expensive to buy, and many insurers will find that it is simply not worth the trouble of insuring an exclusively sick population.

So, how do you bring down the cost of insurance?  The way to do this is to bring the healthy people into the risk pool.  After all, even though they don’t buy insurance while well, they are already benefiting from the system which guarantees them access to health care if they get sick.  In exchange for this guarantee, let’s force them to buy insurance early.  So, we mandate that individuals buy insurance.

The mandate puts healthy people into the risk pool, so now we have a mix of sick and healthy buying insurance from the individual market.  This should bring average prices down.  How might insurers react?  Well, all else equal, the insurer does better if it attracts a relatively healthy pool to its policies.  While the regulations above prevent insurers from explicitly excluding sick people, they can try to design policies that are implicitly more attractive to the healthy than the sick.  For example, they may exclude mental health benefits, refuse to cover weight-loss surgery, put their offices on the third floor of no-elevator buildings, etc.  But, these “dumping” practices are wasteful.  So, let’s prevent insurance companies from engaging in these practices by standardizing benefits.  This will have the additional benefit of making it easier for consumers to shop for plans since it will be easier to compare apples to apples.  And, if consumers become more sensitive to quality and price differences between plans, this will encourage plans to improve quality and lower price, which is an added bonus.

In fact, let’s push that idea further.  In order to encourage insurers to compete more vigorously, let’s set up insurance markets, or “exchanges,” where people can easily shop for plans.  This will also help people choose a health plan, an extremely complicated decision.

Finally, we need to face up to the fact that the uninsured are primarily poor.  This means that many of them will not be able to afford coverage no matter how well the individual insurance market works.  If we want to them to have access to private insurance, we’re going to have to help them pay for it.  So, let’s subsidize poor people to buy insurance through the private market.  We can do this in two ways.  We can either directly subsidize purchases of individual insurance policies or force employers to expand their insurance offerings by requiring employers to offer insurance or pay a penalty if they don’t.  But, if we’re going to subsidize individual insurance purchases, the money is going to have to come from somewhere.  So, we’ll have to increase taxes in one way or another.  (Aside: Clearly, the best way to do this is through a tax on tanning salons, as proposed in the Senate Bill.  The only question I have is why we didn’t come up with such a brilliant idea sooner.)

And there you have it.  If you want to expand coverage and you want to use the private market to do it, you quickly find yourself with a very big piece of legislation.  It’s a house of cards, and without any of the pieces it will quickly fall apart.  (Another aside: many people feel the penalties paid by individuals and employers who choose not to buy/offer insurance are insufficient in the current legislation, so the house of cards may be destined to tumble, anyway.  See this op-ed by Martin Feldstein.)

While going all the way may be too far, it is unclear whether there would have been a way to ease into reform.  Unfortunately, the one part of the bill that can be chopped out without jeopardizing the short-run goal of covering more people is the one that we really need to address to ensure the long-run viability of the system — the cost reduction part.  Even if we expand coverage in the short run, without addressing cost and especially the rate of cost growth, we’ll be right back in the position of insurance coverage being unaffordable for an ever-increasing segment of the population in a matter of years.

The Public Option and Stock Prices

Filed Under (Health Care) by Nolan Miller on Dec 24, 2009

I assume that everyone has better things to do than read this blog over the holidays.  But, cyber-space is forever, so I thought I’d post anyway.  Here’s an interesting piece from the Huffington Post (sent to me by Dan Karney — thanks, Dan!) that traces the stock prices of health insurers since Joe Lieberman laid siege to the Senate bill on October 27, threatening to support a filibuster unless the public option were removed.

As a health economist, I’m pretty unsure about what the public option will do.  But, the market seems pretty clear in its expectations.  Basically, the stock of major health insurers such as Coventry, CIGNA, Aetna, WellPoint, UnitedHealth and Humana went up anywhere from 13 to 31 percent between October 27 and December 18, relative to a 2.3 percent increase in the DJIA.  Now, this isn’t all due to the Lieberman threat and the possible removal of the public option.  Some of this may be due to increased skepticism about the likely passage of any bill at all or other changes in the legislation that were introduced during this time.  But, it certainly appears that developments over the last month and a half have been interpreted as good for insurance companies.

Here’s the link.

http://www.huffingtonpost.com/2009/12/21/seeing-public-subsidy-not_n_399733.html

Happy holidays to all.

Atul Gawande on How the Senate Bill Would Contain the Cost of Health Care

Filed Under (Health Care) by Nolan Miller on Dec 17, 2009

Atul Gawande just wrote (yet another) great piece on health care reform for the New Yorker.  Rather than spout off about it, I’m just going to copy a particularly interesting paragraph and give you the link.  Enjoy.

“There are, in human affairs, two kinds of problems: those which are amenable to a technical solution and those which are not. Universal health-care coverage belongs to the first category: you can pick one of several possible solutions, pass a bill, and (allowing for some tinkering around the edges) it will happen. Problems of the second kind, by contrast, are never solved, exactly; they are managed. Reforming the agricultural system so that it serves the country’s needs has been a process, involving millions of farmers pursuing their individual interests. This could not happen by fiat. There was no one-time fix. The same goes for reforming the health-care system so that it serves the country’s needs. No nation has escaped the cost problem: the expenditure curves have outpaced inflation around the world. Nobody has found a master switch that you can flip to make the problem go away. If we want to start solving it, we first need to recognize that there is no technical solution.”

Read more:  http://www.newyorker.com/reporting/2009/12/14/091214fa_fact_gawande