Fear of the elites

Another great quote from Arnold Kling over at Econlog:

I have a fear of the masses that would rival David Brooks'. But I have a fear of the elites that is even stronger. Among elites there is an even larger discrepancy between knowledge and power. The political elite has too much power relative to the dispersed knowledge in society.

Read his entire post here.

"Essential benefits package" provision is the real government takeover

One of the primary elements of both the House and Senate plan is this concept of the "essential benefits package". In order for an insurance plan to qualify to be sold on the newly created health insurance exchange, the government will require that the insurance plan provide certain minimum benefits. A "benefits committee", known as the Health Benefits Advisory Council will be headed by the Surgeon General and made up "experts" appointed by the President from both inside and outside the government. The committee will make recommendations on the services that must be covered and included in the essential benefits package.

The first and most obvious comment is that if someone has a plan that does not currently include all of the benefits that the government deems essential, then the insurance provider will be forced to change the plan to provide them. This clearly violates the President's promise that no one will be required to change their existing plan.

Second of all, how in the world are costs supposed to go down if the government is requiring insurance companies to offer even more benefits? The best path toward lowering costs is to reduce the role of insurance in the health care industry and promote (or at least put on equal footing) insurance plans that have fewer benefits, but this plan does the exact opposite.

And most importantly, this element of the plan, along with guaranteed issue and community rating, is just as problematic if not more so than the "public option". The government doesn't need its own insurance company in order to control the entire industry. The "essential benefits package" mandates will represent the real government takeover.

Maybe one of the strategies all along was to put the public option out there, divert attention away from the real government takeover, and at the last minute take out the public option to get the bill passed. Then what will happen? The new mandates, along with guaranteed issue and community rating requirements, will cause premiums to skyrocket. The President will then come back to the public and say, "We gave the insurance companies a chance, but it's now clear the only way to keep them honest is with a public option". Perhaps they are not that clever, but it could end up working out that way.

[Update]

Here is an interesting white paper from the Center on Budget and Policy Priorities on the need to design minimum benefit standards. The paper recommends "limits" on both the "degree of variation in different benefit designs" and on the "number of different plan choices". Doesn't sound very competitive, does it. It also states that:

Although minimum coverage standards are critical, it is neither necessary nor desirable to try to write the particulars of those standards into legislation. The legislation need only establish the broad parameters of the benefit standards and charge the exchange or some other federal standard-setting entity with developing the specifics. This will simplify the passage of legislation and allow the benefit standards to be updated or modified over time in accordance with advances in medical research and practice.

So, don't be specific about the "essential benefits", just give the government the power to control what must be covered so that the bill can more easily pass. Scary stuff.

Another letter to my Congressman

Here is another email I wrote to my Congressman over the weekend. Not the best piece of writing ever, but I tried to touch on some ideas about what the health insurance and health care in general might look like if the health insurance market worked the way other insurance markets work.

Dear Congressman,

You consistently argue that it is unreasonable for insurance companies to deny coverage for pre-existing conditions. How is that unreasonable? That is like saying it’s unreasonable for MetLife to deny life insurance to someone who is already terminally ill, or that it is unreasonable for State Farm to deny homeowners insurance to someone whose house is already on fire.

That is not how insurance works.

An insurance policy should be a private contract between an individual and the insurance company, where the insurance company agrees to provide certain coverage in the event of an unexpected and catastrophic event. Our market for health care and health insurance, however, is based on an employer provided system where coverage is guaranteed as long as you have a job, and the insurance offered is usually a low deductible, first dollar type health “insurance” plan. It’s actually not insurance, it’s a prepaid medical/tax arbitrage plan.

As a result, people have no incentive to lock into an individual plan early in life the same way people have an incentive to get life or disability insurance when they are young and before they have a medical problems. Plus, people don’t care what their health care costs because in most cases a third party is paying the bill. As a result, costs skyrocket. Think about what would happen to food prices if we had “food insurance” or the cost of an oil change if our auto policy covered routine maintenance.

Everything proposed by the House and Senate makes all of these problems WORSE. It’s not really reform, it is a takeover. And by takeover, I am not referring only to the public option. I am talking about the “essential benefits package” provisions and other mandates that give complete control of the entire industry to the government. Supporters constantly talk about the need for more competition and choice, but these provisions are explicitly designed to limit the number of plan choices and variations in plan designs.

Real reform means tax reform including income and payroll tax deductions/credits for individually purchased health care, expanded access to HSA accounts, allowing for the purchase of health care across state lines, tort reform, and a general reduction in insurance mandates and other expensive regulations. If we do these things, and we will see markets for health care and health insurance begin to finally function properly.

What would that look like? It's tough to say, but there are few things likely to happen. First of all, health insurance companies will get back in the business of providing non-cancelable catastrophic insurance rather than this prepaid medical care where they operate as an expensive middleman. Insurance companies will focus on individual customers rather than groups, and as a result, insurance companies will have an incentive to maintain their reputation in the marketplace and not arbitrarily deny claims. Allstate can’t get away with arbitrarily denying legitimate auto claims. If they did, word would get out and customers would flock to State Farm and Nationwide. That’s the way health insurance could and should work as well.

Then, the patient will replace the insurance company as the health care provider’s primary customer. As a result, health care providers will become more responsive to the patient and worry less about things like reimbursement rates and insurance company billing paperwork.

Meanwhile, consumers will have a new incentive to get coverage and lock it in. And the coverage they will tend to get would be high deductible, catastrophic type coverage. This will provide consumers with an incentive to be aware of how much they are spending on health care, putting downward pressure on costs.

Plus, these reforms have the added bonus of costing the government nothing, something that is very important considering the fact that we are currently running $200-$300 billion monthly budget deficits.


Thank you for considering my recommendations.

"Core functions"

When discussing his financial oversight reform proposal on MSNBC, Chris Dodd stated that "the Fed must return to its core functions". Well, yes, I agree. But maybe Congress and the President should do the same.

More on that Implicit Tax Rate

Clifford Thies has put together two remarkable graphs depicting the implicit marginal tax rate for the working poor when you take into account "the loss of means-tested benefits (e.g., cash assistance, food stamps, housing subsidies, and health insurance), and the taxes that people pay on earned income". Once you take those factors into account, "the return to working is essentially zero for those in the lower two quintiles of the income distribution."

See the graphs and read the article here.

So our approach to solving unemployment is to make it increasingly expensive to hire AND increasingly expensive to work. Not sure this is a winning formula.

Andrew Ross Sorkin's "Too Big to Fail"

This post from Arnold Kling over at Econlog prompted me to pick up the book "Too Big to Fail" by NY Times journalist Andrew Ross Sorkin. The book is a riveting, hour-by-hour account of last Fall's financial crisis.

I am about 80% of the way through the book, and so far have the following takeaways:

1) The Fed and Treasury organized bailout of Bear Stearns (where JP Morgan purchased Bear Stearns at $2/share while the Fed guaranteed up to $30 billion in potentially bad debt) caused all kinds of confusion and false expectations about the role the government would play as other banks got into trouble. For example, once it was obvious Lehman was in trouble, many potential buyers seemed to take a wait and see approach, in part because they wanted to see if the government was going to arrange yet another "sweetheart" deal. Sorkin tells one story where a potential Lehman buyer gets off the phone with Hank Paulson and says to himself “I want the Jamie Dimon (the JP Morgan/Bear Stearns) deal”.

Then it got to the point where the Lehman buyers were not even negotiating with Lehman, but instead were negotiating directly with Treasury and the Fed. In one incredible scene, the CEO of Barclays calls Tim Geithner to express interest in buying Lehman, and to his credit, Geithner says, “Why are you calling me?” The Barclays CEO insisted that he wanted to negotiate with the government and not with Lehman.

2) Hank Paulson, Secretary of the Treasury, is incredibly smart and well intentioned, but he seemed to be way too involved in every aspect of the crisis. Arnold Kling aptly describes him as a control freak. Plus, he had this rather striking and unwavering belief that the future of the country was at stake when it came to the survival of these investment banks. Not good.

3) The book portrays Chris Cox, the SEC chairman, as clueless and incompetent, but I found his hands off approach refreshing. There is a scene where Paulson wants Cox to call the Lehman board to tell them to file bankruptcy, but Cox is reluctant to do so because he thinks that it would be completely inappropriate for a government regulator to force a company into bankruptcy. Some of us might find his position completely reasonable, but Paulson was furious and other bankers mocked him as being stupid.

I think a little more Chris Cox and lot less Hank Paulson might have been a good thing for the entire situation. Who knows, had Chris Cox been in charge, maybe his cluelessness would have left the other Wall Street firms no choice but to take action, devise a plan to save themselves, and leave the taxpayers out of it.

Stimulus!

And the top tax rate that would be required to close the 2010 deficit is...95%. Of course, that estimate includes the completely unrealistic assumption that everyone would continue to work at the same rate they do now despite the higher rates.

Read about it here.

Is it a wonder why any rational business person might think twice about taking on new payroll in this environment? Maybe the more intelligent business decision is to build up cash reserves to pay for future tax hikes.

But it's okay, because that person desperately looking for a job might be better of without one anyway, seeing how a job would make him or her ineligible for all kinds of government subsidies, and potentially face an implicit marginal tax rate of 131%!