Wednesday, September 30, 2009

No Public Option for Healthcare Insurance!!

It's been fun watching the healthcare reform circus as the months have rolled by. It's also been disappointing. I view the notion that the government can "compete" with private companies in any market as preposterous. Ridiculous. Nonsense.

Government "competition" with private industry is not within the definition of a free market, and therefore a free-market optimum result or equilibrium cannot be attained. However the public-option proponents imagine things will play out, I can guarantee it won't happen that way. That's because they are basically hoping for an outcome that contradicts human nature, and the fundamental mathematics of markets and incentives systems. To me it looks as ridiculous as expecting water to run uphill.

We can refer to my earlier post about market regulation and the ice rink analogy. As applied here, medical insurance companies are the skaters and the government is the rink owner. The goverment can define the playing surface in a proper, free market, but it can't "compete", by definition. That's because if the rink owner plays, it will always win. It controls the game.

Or imagine a football game where one team includes the referees and the stadium owner, and millions of dollars are at stake. Oh, and the refs can change the rules anytime during the game. Who will win? I'll bet on the team with the refs. Do you want to take the other side of the bet?

In the medical insurance market, the government specifies the market parameters, has infinite resources, is subject to massive political incentives from the electorate (who are also insurance customers) and has the power to tax all of the other insurance companies. Again I ask "who will win?"

At the very best, as an outlier case one could imagine the federal government running its public option as a wise, benevolent despot. That is, it would undermine the private insurance options just enough to squeeze profits a little and force increases in efficiencies, and then stop. In this scenario it would be self-limiting, and forbear on many actions it could take. This won't happen. Please take an honest and critical look at any other program the government has undertaken. The contitutional limits on government exist for reasons based in experience and wisdom.

Monday, August 10, 2009

What might a market-oriented prescription for health care reform look like?


If the supposedly best legislative minds elected to the greatest deliberative body in the greatest country in the world can’t produce anything better than the rotten sausage in parts of HR3200, then I say “Long Live King Deadlock!”

I’ll use that entree to make a short speech about forbearance and governance. The Founding Fathers of this country are lauded as tall men in part because of what they gave up, what they did not do, and what they did not take. Of these, George Washington may be the greatest example. Today, legislators seem to grovel before their special interests. But I hope they will strive to increase in stature as they work through the rest of the health care reform initiative, whether or not any new law is created. The effects of this effort will be with us long past the legislative careers of all of the participants.

This post grew into a small paper as I wrote it. The Objectives section attempts to show that there is quite a bit in common among the high-level objectives for reform across the political spectrum. The rub is, of course, in how to implement them. The Necessary Features section shows what I think must be addressed to implement an effective reform. Desirable Features shows the nice-to-have features, and those that I think would be extremely difficult to implement effectively in the present political environment. (I'm sure the necessary features will be difficult enough!) Discussion expands on some of the Features and points to papers that I found helpful in exploring the subject, and recommended reading. That's followed by References, which is self-explanatory.

Objectives of Health Care Reform

These are the broad goals for health care reform we see now on the political stage. If you observe that some of these seem to be at cross purposes you’re not alone. That’s what makes consideration of American health care such a profound and interesting problem.
  • Coverage for more people
  • Reduced healthcare costs, whether to individual buyers, companies, the government, or as a percentage of GNP. The current popular phrase for this is “Bends health care cost curve down”
  • Increased quality and efficacy of care, or at least not a reduction in care quality and not a decrease of choices
  • Avoiding increased wait times for services
  • Avoiding the rationing of care. Rationing, remember, is a way of saying that some care is simply not available to some people who need it some percentage of the time.
Here are my additional goals, for the purposes of this writing:
  • A decrease in market distortions, where possible
  • Increases in efficiency in the delivery of healthcare
  • An increase in competition in markets where oligopoly or monopoly are found
  • Reductions of the government’s role in health care delivery to the extent possible
This next set was copied from a web page. Sorry, I lost the reference, but it could be one of the President’s official pages. I got a chuckle from “eight specific” protections, which include six. Well, how inflammatory are the other two? I don’t have any huge disagreements with these six as they are, so I find myself agreeing with the Obamas twice here, as you’ll see.

“The White House said Obama would outline eight specific consumer protections he thinks are needed. They include:
  • no discrimination for preexisting conditions
  • only reasonable out-of-pocket expenses
  • no dropping of coverage for serious illness
  • no gender discrimination
  • no annual or lifetime caps
  • extended coverage for young adults” (this one puzzled me on first reading. It means that young people can be covered under parent’s or guardian’s plan until age 26 or so, up from the current age 18 or 22 or so.)
Objectives from the Senate’s Healthy Americans Act
  • Bends health care cost curve down
  • New system could pay for itself
  • Creates competitive market for health insurance
  • Individual consumers can choose the best values
  • Cuts administrative costs
  • Spreads risk across large pools of consumers
And lastly here are a couple more of mine, tailored for small businesses and individual purchasers:
  • Equalize the tax treatment for small business or individual purchasers of health insurance versus large business plans.
  • Reduce the mandates and restrictions on plans that insurance companies can offer the “small group” market. (These reductions are exclusive of the Minimum Health Insurance Coverage Definition, discussed below). The reductions should be combined with allowing more multiple state pooling and competition for insurance business across state lines. This will achieve reasonable actuarial risks and reasonable rates and coverage for the insured.
Necessary features in a reform initiative

Competition in the Health Insurance Market
The consolidation in the health insurance industry over the last 20 years must be reviewed. Consolidation in the market to less than 7 carriers in a state, combined with state insurance coverage regulation results in oligopolistic market behavior. This must be addressed as the keystone in containing costs.

Minimum Health Insurance Coverage Definition
Rules for minimum health insurance coverage can be defined and not harm competition in the market. It simply constrains the boundaries of the market battleground away from what are essentially partial coverage plans.
  • Rescissions in coverage must be ended. It is simply changing the terms of a contract after it is entered.
  • No pre-existing condition exclusions
  • No dropping coverage for expensive illnesses after coverage is started.
  • No exclusions for specific illnesses or genetic test results
  • No ceilings on coverage. This will make the insurance companies deal with one of the key reasons health care insurance exists in the first place – to insure against catastrophic loss on the part of the insured. Insurance companies may need insurance for themselves. In other types of insurance products, this is known as reinsurance.
  • Standard information, metadata and field definitions must be decided upon, and then enforced for the insurance industry. This is to support electronic documentation interchange.
  • Long Term Care should be considered in the minimum definition
No Maximum Health Insurance Coverage Definition
Avoid defining maximum coverage or contract terms for health insurance. Let the market decide that.

No Public Health Insurance Option
This should not be included in any legislation. I discuss this below.

Reinsurance provides a means to further pool risk, beyond the bounds of a single company. A good, meaning undistorted, reinsurance market enforces better standards on insurance companies as they seek reinsurance.

I am not aware of a reinsurance market for health care insurance companies. Maybe there is one. If there is, it should be more visible. What companies provide it? How profitable are they? Is there a competitive market for it? What regulations and laws apply? Do they help or hinder the market? If this information was more visible to the casual observer, greater appreciation for the insurance industry would probably be one result. Also, this information would provide an indicator on the financial efficacy of the healthcare market over time.

Tax Treatment
Tax health care benefits at large companies, or level the tax advantage for all who purchase care. The essential result is a level playing field for individual, small group, and large purchasers on a per-insured person basis.

Information Availability – Health Insurance Exchange
The Health Insurance Exchange idea is in HR3200 and on its face seems to be a good one. It addresses one facet of asymmetrical information between parties, as I mention later.

Information Availability – Electronic Medical Documents and Electronic Interchange
The initial motivation for electronic records interchange is efficiency and cost reduction. It also could be designed to address the asymmetric information problem insurance companies, doctors, and patients. However, proper infrastructure of security, privacy and anonymity rules must be in place first. Once medical records are digitized, the security and privacy challenges get much more difficult. If the rules don’t exist, or are not enforced with criminal prosecutions, we would risk descending into a hellish Orwellian world with consequences of the most personal kind.

Going electronic in a nationally (or internationally) standardized way is still worth it. Filling out endless variations of paper forms is a terrible way to run security. Paper is a great way to remain catastrophically inefficient.

Medical malpractice non-economic awards and Tort reform
Tort reform and the reduction of defensive tests must be a key goal of reform. Watch the tort lawyers and other special interests howl. It doesn’t matter. This ridiculous party must be shut down. The jury system itself is not necessarily the problem; it is the guidelines and limits of awards they get, as well as the amount of medical expertise available to the jury, or included in the jury.

The present jury structure was conceived before Lister and Pasteur were born! Some review and change of the fundamentals is needed to keep outcomes just and fair, and also economically viable for the doctors, companies, medical care industry and society as a whole.

Having said that, award maximums should be indexed to the rate of inflation. The mistake of omitting this is made repeatedly in drafting law. Not indexing creates unintended market, incentive, and legal distortions in the future. The debate over the Alternative Minimum Tax illustrates this repeatedly.

Medicines and Advertizing
At minimum the present rules regarding medical advertising must be reviewed. How does advertizing affect research budgets and pharmaceutical company profits? How does it affect our quality of life? Does drug advertizing have any suggestive affect in making people sicker, not just aware of maladies they already have? If the advertizing is successful (from the companies’ perspective, how does increasing patients’ demand for patented drugs affect overall health care costs?

Patents and the cost of medicine
Patents law in America serves a very useful purpose, to enable inventors and entrepreneurs to recoup their investment costs. It should be easy to show this increases innovation. When twenty-year-old patents are fought over to maintain multi-billion-dollar businesses, the essential point has been lost. If the development of a single drug requires a large revenue stream for twenty years to recoup expenses, it’s an outlier, and probably other solutions should be found. Possible ways to expedite FDA reviews and approvals should be explored.

Modify the EMTALA law so that hospitals and clinics have incentives to treat patients in a rational, economically reasonable way. See the note about Chicago’s success with this in the Discussion section. I believe if average voters knew how much the present implementation of this law is costing them and is distorting the system, they would favor modifying the law.

If EMTALA continues to exist in anything like its present form, then all citizens must have minimum health care insurance coverage. It’s the only way to spread or pool the risk realistically, in my opinion.

Desirable features in a reform initiative

Paying for Healthy Outcomes
It would probably prove valuable to look at compensating some classes of health care providers for healthy patient outcomes instead of the performance of disease treatments. I’m not going to suggest that this should be the case for all providers because I can’t imagine how such a system would actually work, built on the present system. But within a new minimum definition of health care coverage, such a system might work at the General Practitioner level. If the market can find ways to more richly compensate GP doctors, the supply of them should increase.

A “pay for healthy outcomes” provision may be optional or mandatory in the Minimum Health Insurance Coverage Definition, depending on how the definition is implemented. A differentiator may turn out to be the health of patient at the time coverage is initiated. The prime anticipated benefits of such a plan are healthier, better informed patients and lower costs.

Allocation of innovative, expensive treatments to patient pool
The question of how to allocate new, often astronomically expensive, and scarce treatments to the pool of waiting patients should be addressed. The prime function of a free market is to allocate resources. But in this case a free market, in which only the richest or best-insured can afford them early in the treatment’s “product cycle” or possibly at any time, won’t be acceptable by society.

This can be addressed partially by the specification of the Minimum Health Insurance Coverage. And most of these treatments would probably not be covered. Perhaps a special rider on a health insurance policy would give a patient access to such a treatment. This would result in a kind of lottery, where if a patient had purchased the rider and if they got a disease treatable with a new technology, they would get it. What if everyone in the country had to pay mandatory surcharge on top of their mandatory insurance premium? Would $3 a year be enough? $3 multiplied by 300million-plus people equals about $1Billion. But some of these individual machines for new, exotic treatments cost $300million each to build.

Universal Access – Geographic Coverage
By saying Universal Access I do not necessarily mean coverage for all citizens. I mean reasonable geographic access. Charitable efforts are undertaken to provide health care in some extremely rural areas of the US. I cite a video below that’s rather shocking, showing rural people coming to a temporary clinic for health care who seem unable to afford care the rest of the year, and barely able to transport themselves to distant cities if the care was paid for.

Universal Access, then, is similar to that in telecommunications – It’s most expensive to provide in some of the places that can least afford it. A lot has been written and regulated over on the telecommunications side. Universal Access was deemed a worthy societal goal and is supported by a tax regime. The issue of whether rural clinics should be supported at all could be reviewed.

However, all the little pile-on fees, as is done in telecom, should be avoided. In telecom’s case they drive customers away from regulated land lines and toward cellular phones. But anyone’s recent cellular phone bill shows clearly that the regulatory apparatus has caught up and added many taxes and fees to the cellular service cost.

Information Availability – Health Insurance Exchange Extensions
Additional, government sanctioned (but not government provided) Internet resources could include this information for patients and potential patients:
  • documentation of the basic health coverage plan
  • reviews of insurance extended features
  • Physician and hospital patient experience ratings
  • treatment success records
  • costs reviews
  • billing accuracy records
  • Discussions of treatment alternatives and the treatment innovations
  • Reviews of medical tourism destinations, including costs and risks
WebMD and similar sites has already changed the equation of asymmetry of information between patients, doctors, and insurance companies. It is a valuable service. One can imagine reviews of medical subjects. To some extent they already exist.

The Cleveland Clinic, for example, helps provide a website that concentrates information on FMD, a little-known disease. If you or a family member are diagnosed with this disease, this website and the volunteers backing up the site help in understanding the disease, the treatments available for it, the treatment “state of the art”, and even an informed shoulder to cry on, among other information.


In the United States health care costs are 2-3 times higher than other industrialized countries as a percentage of GDP. Yet our health statistics such as infant mortalities are not among the leaders. This cost differential has several components, of which these are a few of the largest:
  • humongous administrative overhead due to the regulatory and legal environment
  • defensive tests and treatments to mitigate malpractice liability risk
  • oligopoly profits for health insurance providers
  • innovative and expensive new drugs, treatments, and medical devices
  • Transfers of wealth, intentionally or otherwise, to those who cannot or will not purchase health care insurance
Economics, Free Markets, and the Limited Role of Government
When one studies the economics of healthcare one meets the work of Kenneth Arrow. He’s a Nobel-prize winning economist who wrote a seminal piece in the 1963. This work has been used as key input for much writing and research. I’ll quote from Duke University’s Research in Profile piece on the Journal of Health Politics Policy and Law, special issue of October 2001, dedicated to Kenneth Arrow. These areas are applicable today.

“Arrow targets several areas that are closely examined by the issue’s authors:
  • The proper role of market competition in delivering health care services
  • The implications of moral hazard—the notion that the widespread availability of health insurance increases the demand for health care services
  • The uncertainty inherent in health care, from diagnosis to treatment efficacy
  • The role of non-market social institutions (such as norms, ethics, and professionalism) or nonprofit institutions, as a response to overcoming uncertainty and market failure
  • The existence of extreme information asymmetry; that is, inequalities of information between the insurer on one hand and the physician and patient on the other, as well as between the doctor and patient
  • The importance of trust in the doctor-patient relationship, given the existence of Information Asymmetry”
Other than the fundamental importance of free markets and competition wherever it is possible, Kenneth Arrow’s work illuminates an important triangle in health care:
  • Inequality and asymmetry of information [insurance companies versus doctors and patients; and doctors versus patients]
  • Moral Hazard – more availability leads to more demand, resulting in inefficiencies in health care markets
  • Trust between the parties
Highly imperfect information flows between the parties has reduced trust. Each party has armed itself with more administration, insurance, lawyers and other safeguards. Patients are often dissatisfied with the results, to the point where health care reform has become a national priority. Moral hazard causes more services to be demanded inappropriately and further erodes trust.

EMTALA is the acronym for the Emergency Medical Transfer and Active Labor Act – This is the law under which Emergency Room services must be provided to a patient without inquiring first his or her ability to pay for it. I agree with many commentators that it is a large unfunded mandate. And as EMTALA has been modified and interpreted in court cases, and its implementation has evolved in hospitals, the distortions resulting from its unfunded mandate have increased.

See , and note the comments on California cost shifting.

Free Emergency Room services for some patients has caused a market disaster. The effects of this disaster have rippled through hospitals’ billing regimes, insurance rates, doctor and resident’s experience of ER work and therefore the perception of the medical profession, and ultimately has effected the overall cost of health care.

Addressing this problem set should be part of any solution. EMTALA was enacted as an emotional reaction to a very emotionally loaded situation. I sincerely doubt whether anyone present at its beginning realized or intended all of its consequences.

The current proposed bill from Congress is HR 3200. It’s over 1,000 pages. As of the last visible discussion in the press, the key congress members had not read it. The President proved under press questioning to be uninformed about at least one of key features. Emails have circulated listing what look like terrible features with associated page numbers. I have yet to work my way through all of these, although I have obtained a copy of the bill and am looking around in it.

The Senate has had a health care bill on the table for some time. A blurb about it is at:

Senators Wyden and Bennett were instrumental in creating the Healthy Americans Act. Their article in support of it is at:

State Regulation and the Federal Role
Jeremy Siegel Ph.D., in his opinion piece at asks:

“Moreover, why do we have state-run system where each state spends billions of dollars replicating each other's regulations? Why can't we introduce competition into the private insurance system by offering nationwide plans that satisfy a nationally determined set of criteria? It won't be easy, but it would be gutsy if Obama could move against these costly entrenched state bureaucracies.”

Therein lies a fundamental opportunity to reduce costs and increase quality and availability of care.

In a way similar to different states’ formulas for gasoline changing at different times seasonally lead to higher gas prices for everyone, different states’ insurance rules lead to patchwork coverage availability for health insurance and higher coverage. One might assume that there are national standards for health insurance coverage and national availability, but the non-obvious truth is that a lot of coverage options stop at state lines. I have two instances of this in my own personal experience which I won’t detail here.

To be sure, many health insurance companies are multistate, national or international. But they must also get approval for each insurance product in each state. Each state has an insurance commission or regulator, and within that, a section dedicated to health care insurance. With a little thought you can imagine the bureaucratic fun that follows from that. State insurance regulators are fine for now, but labyrinth regulations and product availability maps are not.

The Health Insurance Market
Being a monopolist is great work if you can get it. Being part of an oligopoly isn’t bad either. In both cases profits are higher than in free market competition. But an oligopoly aren’t quite as obvious as a monopoly. This is especially so in the case I’m about to discuss.

It’s clear to everyone that the cost of health insurance coverage is increasing. Large companies also bemoan this fact. But at fist glance, wouldn’t one think that with their formidable negotiating power, they could get good prices for coverage. In a competitive market, the answer is yes. Leemore Dafny, in his 2008 paper Are Health Insurance Markets Competitive? at Northwestern University, has shown that the market is not as competitive as we would expect.

He shows that these factors combine to raise costs for coverage
  • Market consolidation: In a twenty year trend, health care insurance companies have merged and bought each other to the point where in some markets there are as few four carriers.
  • Employers are somewhat captive customers, because of all of the administrative connections between the employer and the carrier, the employee’s familiarity with the existing plans features, employees preference for their present doctors and other providers, and other “momentum” factors
  • Health insurance coverage contracts are customized for each major employer, and are for the most part kept private. In a sense the price is not discoverable by other market participants because the contract terms are not discoverable. Only in a few studies and databases are such data available.
  • As employer profits rise, they get “stuck” with higher premiums by the carriers. Their profitability is public knowledge. While times are good for a company, management has a difficult challenge selling a carrier switch. In lean times it can be justified as a cost-saving measure.
  • Downwardly sticky rates – During lean times for a company, or a recession, coverage rates do not go down to the same degree they have risen. Therefore rates for the same coverage tend to ratchet upward.
  • State boundaries for coverage regulation. In a multinational company I worked for, as an example, California was always a special case for coverage.
Dafny shows that when there are 8 or fewer major carriers in a state market, health insurance rates and costs increase faster than the rate of inflation, consistent with an oligopoly market.

Therefore, enforcing antitrust law in the health insurer market and ensuring that there are at least 9 carriers per state market, rationalizing regulations, and facilitating employers’ ability to switch plans will increase competition, and reduce cost increases.

The Public Option for Health Insurance
The public health insurance option would, I believe, have even greater negative consequences than are widely debated now. Programs of this sort are always more expensive than initially presented. They spawn large bureaucracies that are self-perpetuating. If markets, through the incentives bearing on health insurance companies, do not allocate treatments, than rationing will. Decreed, instead of market-based prices for services and drugs will have unintended effects on American innovation, with consequences worldwide.

The question as to whether the public option is a Trojan horse, with the *intent* of undoing the private insurance industry is not the most important question. The important question is whether market forces and cultural forces in the U.S. will result in a slide down the slope to a single payer system, regardless of the bill’s authors’ intent. I believe it will, because of the public perceptions and current market for health care insurance, combined with current public’s willingness go keep its hand in the public cookie jar, so to speak, combined with the American adversarial environment. This might not be true in certain other countries that have had a public/private coverage blend for some time. If the experiment is done here and the health care insurance industry is destroyed, the experiment cannot easily be undone.

Health Care Providers
It is good to remember that the prime customers of hospitals are actually *doctors*, not *patients*. That is, it is most often the doctor that selects the hospital for a procedure, not the patient, when geographical happenstance doesn’t determine the hospital. A doctor knows the other professionals in the hospital, its procedures, and its equipment, so the relationship is a natural one.

This fact should be reflected in ratings systems and other reviews available to patients on the Internet. This additional information would probably result in an improved hospital experience for patients as hospitals compete.

Doctors, not patients, should be the prime customers of the drug companies. If this is true, drug companies’ large expenditures on marketing to patients is not needed. How much would the elimination of these marketing budgets reduce the costs of the medicines and therefore the overall system? If some companies do market to patients and potential patients, they all must have an incentive to do it. None should do it.

That’s before we get to the idea that a constant message stream about these diseases may increase the suggestibility of the patient population for having diseases they otherwise wouldn’t know about. Are there any analyses of this idea?

Drug company’s marketing to doctors is another area for concern. It has been an issue for several years. The concern is that large amounts of expensive SWAG and fancy trips and other perks for doctors bias what they prescribe at the expense of the patient’s health and the insurer or other payer. There was also concern about an arms race in advertizing and marketing budgets, resulting in meaningful expenses to the pharmaceutical companies and possibly less drug innovation than otherwise.

I would favor a “boring” exchange where the drugs’ technical, efficacy, side effect, interaction and other information is available in a standardized format. The International Organization for Standardization (ISO) has a standard 11.120.10 for Pharmaceutics/Medicaments but not necessarily a standard for information sharing about the medicaments.

Microsoft Corporation has had a medical information interchange initiative going for several years, but I’m not aware now of how well it is received in the health care industry. I believe it was initially it was centered around an XML definition. These have proven fairly difficult to get standardized and adopted. But once they reach a critical mass of adopters the network benefits become clear.

EMTALA and Chicago
At the University of Chicago Medical Center an initiative was undertaken to reduce the costs and burdens associated with EMTALA while still providing the mandated care. It’s now known as Urban Health Initiative, V2. It’s website is .

Michelle Obama helped to create this program. An initial feature was Emergency Room referrals to accepting clinics. The site indicates that the brief of the program has expanded. Critics of the program have noted on the tax benefits coming to UCMC as a hospital may exceed the value of the payments to the accepting clinics patients. I would submit that that is the idea: to lower expenses. Critics have also decried the program as “patient dumping” but I don’t think it fits the definition. Patients are not dumped, as in escorted out the back door with no chance of treatment at that hospital. They are referred to an approved clinic within a defined network, where they receive appropriate care resulting in a more efficient use of scarce and expensive ER resources.

Rural Medical Care
Turning from urban to rural medical care, I found this video disturbing:
The video is a story about medical volunteers providing a range of medical services once a year to Virginians. Under mandated minimum medical insurance, these patients would be covered, and probably also receive assistance for the premiums. Then they could get ongoing medical services in a more economically sustainable fashion. Judging by some anecdotes in the video, patient outcomes would be better, as well.

New Medical Technologies and Procedures
Brilliant and innovative people are always working on the next new medical procedure for important illnesses. Most of these new treatments share some common traits:
  • They’re almost always more expensive than existing treatments
  • They sometimes have uncertain efficacy – that is, how often they have their intended effect is not as well known as that for an established treatment
  • An exotically expensive new treatment with promising results creates headaches over which patients should receive it.
An example of this is proton therapy, which is often used to treat prostate cancer patients. It has the three above traits. And one complexity is a still newer treatment on the scene. Beyond the question of allocating the treatment to patients in the existing proton treatment centers, how many hospitals or clinics should build new ones? If it’s often not a pure business-case decision to build one, how are these decisions made? Are the results of these decisions the most optimal allocation of resources for our economy?

I personally think that drug advertising over the heads of doctors and directly to patients is harmful. I remember fondly the old days before it was legal. I believe it does have a suggestive effect and makes people sicker. I think it successfully increases demand for more expensive drugs. I think it degrades the quality of life in America, especially at dinnertime. If you watch television programs that are financed with advertising, you know what I mean.


Kenneth Arrow – Health markets economist who wrote a seminal article on the subject in 1963.

Leemore Dafny, Are Health Insurance Markets Competitive?, Northwestern University, 2008

Milton Friedman – Economist and author of several books. An exponent of free markets, the flat tax and the Negative Income Tax.

A good friend and neighbor of mine is well-connected and influential in the health care industry. He provided many insights for this paper. I’ll maintain his anonymity here, but he may identify himself with a comment if he wishes.

Amid all the noise surrounding American health care, this is a good article to read. In it Uwe E. Reinhardt of Princeton University sets out the 3 basic reform objectives that most parties in the debate agree on. And author’s “three-legged stool” comment on health insurance for individuals or small groups is spot on. See

Robert Nozick – author of Anarchy, State, and Utopia. I’ve read just enough of this book to know what the central argument is. I don’t refer to it directly, but the philosophical bent of the book is baked into the entire paper. Another view is that the entire discussion of government concern with health care is erroneous, illegal on constitutional grounds and wrong on philosophical grounds. But I’ll take that risk because of where we are in the discussion already.

Tuesday, July 21, 2009

Kill the Health Care Reform bill

Yes, just kill it. Don't renegotiate, water it down, try to fix it, or try to work in a new philosophy.

I remember the Hillarycare initiative, and I was jumping for joy when it died. This bill is about the same, and I'll be just has happy when it's dead.

The worst and fundamental flaw Congress' approach in the bill is that it ignores free market principles. There is not some special properties box around health care that causes market principles not to apply. Markets exist, and incentives and free will apply, in this area as much as any other.

These markets are substantially distorted now, and have been for a very long time, numbered in decades. But to argue that the fix is having a government behemoth "competing" with private insurance companies, surrounded by other new bureaucracies, is heinously wrong.

I personally am not happy with the health care system as it is. I have many complaints. But this direction is not the correct one.

Wednesday, July 15, 2009

What do they do with all the money?

Forgive me for not posting for awhile. I've been alternately busy and having a slight sinus infection. I have written my representative politicians on a couple of issues in the meantime. There's been so much to follow that it makes my head spin, and it's been yanked to the left a lot lately. I'm not pleased.

On hearing that the federal deficit for June was $94.32Billion, I couldn't resist doing a little arithmetic. That equates to $3.144Billion a day, or $2.18Million a minute, or $36,388 a second. It takes real chutzpah to overspend (not just spend) $36,388 a second, every second of a month, wouldn't you say?

And yet most of our stimulus 1.0 money (forget about the Bush stimulus 0.0) sits around in coffee cans somewhere. I favor pulling the money out of the coffee cans and using it for an immediate payroll tax cut, if they can't dispense it any faster than that. Meanwhile President Obama flogs the Congress to pass a gargantuan medical spending bill.

Oh, and the promise of government largess already has distorted the renewable energy market. It seems negotiations on new projects and plants have stopped or slowed, because providers of private capital need to wait to see who gets the government funds, and how much, and under what terms.

This all is definitely change, but not that which I can believe in.

I noticed that the overall movement after the credit debacle started to unfold was called deleveraging. That means that in general entities are moving out of debt. Yet massive government debt dominates the news. Maybe just the owners of the debt have changed. And there are solid signs a commercial real estate debacle lurks in the not-too-distant future. It seems to me the government would be wise to cool it a little so it has some ammo left for that one.

Wednesday, May 27, 2009

What's the latest in the world of taxes?

California wanted to cover it's deficit in part with the 1A-1E propositions. The Obama administration wants to cover its universal healthcare project in part with the Cap and Tax (Cap and Trade; sorry!) legislation. And some in Congress are looking at paying for everything else in part with a new national sales tax.

Well, Rahm and Barack didn't waste their crisis, of that we can be sure. Please bear with me while I write only a semi-serious post because I don't have time now for a serious one. All of the scary ideas shown above are for real though. I've seen and heard them from multiple sources in the news.

Now, recall Amy Winehouse' song "Rehab" and its "No, No, No!" refrain. Or if you'd rather, Aflac's commercial in which the goat is eating the paper and saying "Naw, Naw, Naw!". Take your pick of those, but either way, that's what we TEA partiers and the rest of us in the electorate should be saying to new taxes.

Imagine a curve on a graph that rises and then falls somewhat like a bell curve. The X axis shows the amount of taxing and spending, and the Y axis is the number of votes for the pols in question. If this much taxing and spending hasn't bought all the votes they're gonna get, then no additional amount will do it. It's hit a point of diminishing returns. The TEA parties are a first loud manifestation of this. Eventually it will get loud enough that even the dumbest, deafest pol will hear it.

The key test is whether this will occur before or after permanent damage has been done to the American economy, civic environment and way of life.

Oh, and a VAT (Valua Added Tax) such as used in Europe is a somewhat slicker and slier alternative to a new national sales tax. In fact, many economic theorists I've respected over the years have preferred a VAT to both a sales or an income tax. But the question was asked on aTV news show today, "So, could either of the those replace the income tax"? The answer was a resounding "No, it would of course be in *addition* to the our income tax"!

Thursday, May 21, 2009

California Election - What Happened?

California had its election Tuesday May 19th and we've all had a couple of days to digest the results. 1A through 1E failed by hefty margins and 1F passed. 1F is the pay cap for pols in deficit years. My interpretation is that the electorate is angry and just said "No!" to everything in sight but the pay caps. That's a good start. We, the California electorate, should have gotten angry and stayed angrier a long time ago.

Remember Arnold Schwarzennegger's mandate when he won the recall election? It was intended to be a turn toward fiscal responsibility and to cure the ills amplified by the previous governor, Grey Davis. It didn't quite work out that way.

The tax-and-spend liberal machine that owns Sacramento has fought Arnold to a draw and stalemate, at least. Or possibly the machine has won and is rumbling its way over the financial cliff. It's possible that history will show that California was "GM'ed" by the public worker's unions starting a long time ago. I read somewhere that there was a union voting disaster facilitated by Jerry Brown while he was governor. That's going back a long way indeed. But its effects are ongoing. And we should remember that Jerry Brown still lurks in Sacramento as Attorney General, possibly positioning himself for larger office and opportunity.

Lastly I want to call attention to Proposition 1A. It seemed to be an effort to reduce the "pro-cyclicality" of California's spending. That sounded good, until I got to the massive tax hike part. If we in California thought on a more Chinese-style long-term timeframe, 1A might have been written differently.

Tuesday, May 19, 2009

Calornia Propositions A-F election today, cont.

As a first follow-up, here's some quick arithmetic. The result is that Proposition 1A wants everyone in California to pay an additional $422 a year, on average.

Here's the breakdown. Proposition 1A's summary/analysis says that state tax revenues would rise by about $16billion a year through the 2012-13 year. So let's look at that number as 16,000,000,000. says that California's population was 36.46 million in 2006, and increases by about 1.267% a year. So we'll take 36,460,000 and multiply by 1.01267 three times to compound to 2009. We get 37.86million, with a little rounding. Or we can write it 37,860,000. We'll cancel out three zeros from each number and divide. 16,000,000 / 37,860 = 422.61.

I think I know how I want to vote. That kind of marginal tax increase is very contractionary, as in the opposite of stimulative. And in California it's about wealth creation and getting the economy going again. Or rather, it should be.

Calornia Propositions A-F election today

Well, today is our election in California. The date got here fast and I haven't done my research into these propositions. The usual newsprint pamphlet containing the legislative analyses is missing from our house. Either we've misplaced it or we never got it.

I noticed a huge lack of URLs for information about the propositions. The single paragraph blurbs on the ballot don't mean anything. The basically explain nothing about the proposition, except the subject from the 60,000-foot level. And especially in this election, I don't believe what I've heard and seen in the political print ads and on TV. The ads are so slanted that they don't really make sense to me. The marketing program for these propositions basically "stink to high heaven"!

If you want to research these, here are some links.
Gotta love the one for 1D. I don't know how much stock I should put in an analysis when they can't spell the word.
For other info and .htm presentations of the information, go to and search with "proposition 1x legislative analysis", where x is the prop of your choice.

Over the course of the last month, I've noticed that any economic analyst I've considered intelligent has recommended "no" votes on all of these propositions. I'll probably vote "no" myself.

Having said that, are California's political process and budget processes broken? Certainly. They are also wildly pro-cyclical, where spending goes up during good economic times, followed by budget crunches during bad times. This was true since before the defense-related recession in California in the late 80's, the Silicon Valley / dot-com boom-and-bust of the 90's and early 2000's, and so on. So the processes certainly need to be changed. As an aside, the "rainy-day fund", known in the analyses as the "BSF" seems designed to smooth the cyclicality to the upside, with more taxes, instead of forbearance of possible spending during good times!

One glaring, flashing omission from these proposals is discussion spending cuts. There's a lot of rearranging of deck chairs and debt, shall we say, and some sizable tax increases. There is discussion around protecting certain "sacred cow" spending areas. But the whole thing seems built around the idea of "Don't look at the spending behind the curtain!"

Talk with you soon. I'm off to study and Vote!

Wednesday, April 15, 2009

T.E.A. Party Day

Hooray for the Tea party organizers. I'm going to my local Tea party today to see what happens.

The stimulus bills and associated pork may have been the catalysts for the Tea party movement. However the larger and longer term issue is the growth of government spending as a percentage of GDP. That is bad, on top of all the other reasons, because a dollar cycled through the government has a lower multiplier than a dollar kept circulating in the private sector. That subject is explored in detail in any good first- or second-year economics course.

For those that don't care about wealth, or want to lower it, the lower multiplier is not a problem. For the rest of us it's a key issue, even if it's not usually argued in those terms.

So I'm off to my local Tea party. Here's an article that surveys the Tea party phenomenon.

Thursday, April 2, 2009

What To Do About the Cap and Trade Idea?

What really should be done from a normal free-markets and American perspective? Forget it; it’s nothing but a big market distortion. People willingly buy goods and services that return utility to them – not the right to cause dis-utility to another unidentified and nebulous group. Only a small part of the population would pay into such a fund voluntarily. If they feel better contributing, great. If a Cap and Trade tax program is implemented as the Obama administration has proposed, the only logical place for the revenue is to fund forests and other plants that efficiently convert carbon dioxide back into oxygen. Imagine paying Brazilian rain-forest owners and farmers a fee to recycle carbon dioxide! But that’s not what our environmentalists or the Executive Branch are thinking. They want to use the funds to create further market distortions subsidizing their chosen energy technologies and groups.

Monday, March 23, 2009

What Should be Done About AIG Bonuses?

Absolutely nothing should be done about the bonuses paid to AIG employees, at least not legislatively. To understand why, please take out a calculator now and do this simple division. Enter 165, to represent the $165 million in bonus compensation. Divide that by 170,000 to represent the $170 billion in bailout money that AIG has received. Look at the result. Adjust your calculator's display to show 5 digits to the right of the decimal point if your calculator doesn't already show them. The number you'll see is 0.00097. What does this mean? It means that the bonus money is less than one one-thousandth of the bailout money going to AIG.

This money, on a percentage basis, is less then the rounding error in many calculations. While $165 million is a huge amount of money to most of us, it's just not meaningful in the scope of AIG's problems or it's bailout, or the problems in the banking system, the government or the economy.

So I watch with sadness and amuzement while the House rants and then passes a bill that is reckless on several levels. It's reckless on constitutional grounds. If the Senate and President pass and sign anything like it, it may get struck down on those grounds in the courts. It's reckless on business grounds because of the perceptions of recklessness, fickleness and inconsistancy it will create for businesspeople. Who'd want Congress as a business partner? And it's reckless on political grounds, if there is a backlash against things going further wrong due to this bill.

This week we seem to be moving past the AIG furor, and focusing on the Geithner plan. That's great. We should forget about the AIG bonus issue and hope the legislation lapses into irrelevancy.

Monday, March 2, 2009

Is getting the bad assets out of the banks the way to go?

Today Federal Reserve Bank of Boston President Eric Rosengren said about getting the bad assets off the banks' books that it is "desirable to move quickly". I believe even more strongly than that, that it is essential. And that the people and institutions responsible for helping the economy recover are making a strategic mistake if they don't move quickly on it. They may be working on this in the background, and may even be finding problems and making progress. If so, the mistake is then one of communication.

Rosengren's study of the Japanese banks experience points to getting the bad assets out as cucial.

Rosengren points out from almost an organizational studies point of view that while the bad assets are on a bank's books, management stays fixated on the losses and mistakes at the cost of not moving forward into new, good loans. And as a trader, I know that sitting around looking at losses is not helpful in finding and making the next profitable trade. Instead, one should analyze the bad trade, learn what can be learned, and forget about the pain of the loss and move forward.

Getting the bad assets out of the institutions is of course easier said than done. That doesn't affect at all whether doing so is crucial to recovery. As we see with the Citibank bailout effors to date, the sick assets essentially sicken the whole institution. I've listened to many commentators about this, especially over the last three months. And it seems to me that the smart ones are essentially in agreement that paths always lead back to the bad assets in the institutions and their value. Washington and others may want that fact to go away, but it won't.

Neither is the fact that the root cause of the creation of those bad assets was the government's driving the banks to make lousy loans they would not otherwise have made. But I've covered that particular point already in this blog.

Here's a list of issues I've seen regarding the bad assets. Specifically these assets are the CDO's containing subprime loans, and derivatives based on these and other troubled assets, including CDS's.

1) There are losses on derivatives created out of thin air. That is, not just derivatives based on CDO's that actually exist. For the best explanation I've seen of this, see the article "The End" in Portfolio magazine, Dec08/Jan09.

2) The question is how to value assets, and after determining what are they worth. Of course the simple answer is that they *should* be valued by price discovery in an open, regulated, undistorted market. Since that option is not available, some form of modeling must be used.

3) The "taxpayer" has an interest in this. Politicians of any skill at all learned quickly months ago to recite phrases like "protect the taxpayer", "make the investment back" for them, "protect their interest" and the like. Nice to consider, but our situation is so bad that there will just be costs. This situation seems to be worse than the savings and loan debacle, and its relatively successful bailouts. The models for valuing the assets become mechanisms for allocating the losses. Not pretty.

4) The FASB changed an accounting rule earlier in the crisis, known as "mark-to-market" and also "Fair Value Accounting". I feel I understand FASB's basic motivation to make the rule change. A huge theme in accounting is knowing the present value of everything, even things that won't be realized as a financial entry until the distant future. However, this rule change, accompanied by a lack of guidance at the time, did serious but quiet harm to banks and other institutions. This harm is not yet fully discovered. Over-the-counter, unregulated markets and the end of markets and price discovery at all combined with the rule to force banks losses. The get close to declaring the losses; they need the bailouts.

5) The "bad-bank" discussions are about creating containers for the toxic assets outside the instituions. If we had liquid markets for the assets, we wouldn't need the containers. Every few days there's a story about a firm that wants to buy some toxic assets, but learn that they can't. In a sense it's too dangerous to establish a price by selling assets to them. Go figure.

6) In the end, leaving the toxic assets in a fully public "bad bank" wouldn't be as bad as the government nationalizing banks, or almost so. Why? The government can boss the assets around all it wants to, and then sell them later. This will cause less long-term damage to markets and American free enterprise then the government bossing around banks, and creating long-term, heinous market distortions.

Thursday, February 5, 2009

President Clinton and Banks' Market Cap

I'm still amazed that President Clinton has taken not a single shot (that I'm aware of) for his part in the sub-prime mortgage debacle and subsequent credit meltdown. Wasn't Reagan the Teflon president, or was it Clinton? I think they both have that property. I tag Clinton with a lot of the blame for the sub-prime situation. He pushed aggressively for the Carter-era CRA to be strengthened and extended. This is noted elsewhere, including my first entry on this blog.

Also, the cosy, corrupt (IMO), and ultimately very damaging relationship between congressional democrats and Fannie Mae and Freddie Mac was extended and deepened through the Clinton years. And this component of the debacle ultimately makes sense. If a lot lousy mortgages are being created, then some party needs to buy 'em so still more can be created. Only after all this was in motion, did Wall Street firms create the derivatives, swaps, and other instruments that spread the bad-mortgage disease around the world. If President Clinton didn't want the relationship and doings at the GSEs to continue, they wouldn't have.

President Bush knew about it and tried to stop it on a few occasions in his first term. But instead he's tagged with blame in the mortgage problem, to my complete bewilderment. Republicans can be blamed for feeble and ineffective communication - of that I'm sure.

A net result of all this was discussed today on CNBC. What's really the market cap of the big banks affected by this? Some say it's essentially zero. It's certainly only a fraction of what it was. Where did it go and who owns the spoils? To the degree that the bad loans created a non-wealth bubble, this "bad air" was sucked into the banks and canceled out value. Thanks for the market distortion, President Clinton. Now we public (taxpayers) own a sizable chunk of the banks' remaining market cap.

The entire issue is a cause of serious concern for anyone who cares about undistorted, free markets. I'm angry. Remember Earl Pitts? "Why I'm so angry, I could......"

Friday, January 30, 2009

Obama Starts Down the Dreaded Path

Here a some beefs I have with President Obama's and the Democratic majority's recent actions and positions.

1) The so-called stimulus bill is full of pork. I'm hearing about more items all the time that sound more like ornaments on a Christmas tree of pork than elements of a well-thought-out and effective stimulus bill.

2) The stimulus bill is too light on tax cuts and too heavy on spending. I'll detail why tax cuts are more effective in a later post.

3) The Columbian Free Trade Agreement isn't passed yet. Remember this? It still matters. The U.S. so far has failed to lock in free trade and economic recovery advantages and the drug war advantages of passing the FTA. Stratfor and other sources have warned about Mexico's dire straits. We need to watch our southern border closely.

4) There's a "buy American" clause in the stimulus bill. It's nonsense to codify that in a bill. If a private party wants to pursue a buy America ad campaign that's fine. But massive sellers of treasury notes and the beacon of democracy and free markets, not to mention chief advocate of free trade, can ill afford to do this. It's stupid and economically wrong.

5) The Obama administration naively stated the obvious about China's handling of its currency relative to the dollar. Of course they manipulate it. It's officially pegged, after all. It doesn't even pretend to float in a free market relative to the dollar. But it was a stupid thing to say so. To do so within a week of the passage of a giant spending bill to be financed by government borrowing was a whopper. The Chinese have good reason to fear sanctions and legal consequences if what they are doing is called what it is. And of course a backlash to those actions would hit us. Hard. Please guys, try to act sophisticated even if you aren't. The U.S. and China are in a dance together and it will take at least another generation to unwind things enough to be free-market rational.

6) The "Card Check" pro-union bill lurks in the halls of congress. The election mechanism is un-American and I would think it would be unconstitutional. I'd have to look. The bill will also advance the government's role from referree to dictator of terms after a set time period of negotiations between a company and a union. That's bad on several levels. More on this later. For some detail see today's editorial page in Investor's Business Daily.

7) Obama signed the "Lilly Ledbetter" bill. That's a bill that sounds appealing to people who think with their hearts instead of their brains. But it sets up some incentives and legal mechanisms which will be abused, to the short-term detriment of businesses and the long term detriment of employees.

8) Closing Gitmo? Dumb. Castro's already making hay, and that's before we've let anybody out! We close Gitmo and celebrate only after we're out of Iraq and Afghanistan, UBL is proven dead, al Queada is discredited and dismantled, Iran has been shorn of nukes, the Isreal-Palestinian question has been resolved to the degree that Palestinians move forward economically instead of work to dismantle the present situation, and Hamas and Hesbollah in their present forms are nothing but bitter memories.

My relief at the perceived quality of Obama's cabinet picks is giving way to the forlorn environment I feared before Obama was elected.

Wednesday, January 28, 2009

A Skating Rink Guides Regulatory Reform

The issue of market regulation reform lurks behind the automaker bailouts and the stimulus packages. Social engineering is to regulation reform as pork spending is to stimulus packages. Both social engineering and pork should be avoided.

Contemplating an ice skating rink may help guide the philosophy shaping regulatory reform, especially of financial markets. An ice rink is flat, as a level regulatory playing field or market should be. The rink has walls, which define the limits of the playing surface. The rink doesn't limit how fast skaters can skate. Instead they must suffer any negative consequences of their own risk-taking. No one is preselecting winners or losers in the competition.

To stretch the analogy a large step further, unless someone provides the skating rink, the skaters would be skating out on a parking lot. The irregular surface with no boundaries is not conducive to efficient skating. The lack of boundaries and level playing surface enables skaters to pull dirty tricks on each other with impunity.

This philosophy applied to financial markets regulation suggests tranparency, good reporting, open price discovery, and regulated exchanges for all large markets. Credit Default Swaps and Collateralized Debt Obligations should be regulated this way. That's especially true if the Financial Accounting Standards Board holds to its mark-to-market accounting rule. The mark-to-market accounting rule applied to private, over-the-counter CDS market proved to be a dangerous combination when the markets began to seize up. In fact, some who know more about this than I do posit this as a key cause of the seize-up.