First it was the AMA supporting health reform, now Pharma. Pharma has spent 4 million on Harry and Louise ads in support, and are considering spending 120 million during the August recess in support.
If both Pharma and the American Medical Association are for something, well, let’s just say that any liberal with sense should be thinking not just twice, but thrice.
Robert Reich noted a while back what Pharma will probably get in exchange for their support:
- Not allowing drug reimportation from Canada
- Not allowing the government to negotiate drug prices
Add to that forced enrollment of Americans into a insurance plans, and I’d lay long odds that Pharma has calculated that they’re going to make a bundle off of the new medical system, much more than the 80 billion they’ve promised to give up (a promise that isn’t worth much in the first place.)
At this point in time the strategy to get through a reform bill appears to be to bribe every powerful interest opposed to one enough to get rid of their objections. If the goal of this is to significantly reduce costs, every major participant deciding that they’ll make more money under the new legislation rather than less is not a good sign.
The method is simple enough.
Use the Senate conservatives and blue dogs. Obama may have the ability to move much of this under reconciliation, but it’s clear than neither he nor Reid want to do so. The Senate HELP bill is weaker than the House bill, and the “bipartisan compromise” coming out of the Justice bill is going to be even weaker (it most likely won’t even have a public option, but instead co-ops, which are too weak to work).
Blue dogs, in my opinion, are the lesser threat. I believe Pelosi when she says she can move a bill through the House. I could be wrong on that, but so far Pelosi has proved very good at winning crunch votes.
The only way a good public option will happen is if progressive in the House are willing to buck Pelosi, Rahm and Obama and spike a bill. There are more progressives than Blue Dogs in the House, more than enough to kill the bill.
The reason conservatives get a much larger voice in legislation is because they are willing to vote it down. Rahm and Obama whip progressives far harder than they whip Blue Dogs. If progressive representatives actually want a good public option enough to fight for it, they need to make Rahm and the White House whip the Blue Dogs. If Democrats are unpopular in 2010 because of a failed legislative agenda, it’s not progressives who are going to lose their seats, it’s conservatives in swing districts. And White House threats to turn off money, staff and volunteers are much more effective against people who run in swing districts.
I know the idea of actually whipping conservative democrats the way progressives are whipped is crazy-talk in modern Washington and to Obama and Rahm, but maybe it’s just crazy enough to work.
Or maybe we’ll just get a lousy health care “reform” bill with no public option or one that’s completely crippled.
The China Syndrome: what the current talks with China tell us about America’s situation
Chinese and American flags flying together
The US/China talks are actually, in many respects more important than the healthcare debate. What China is willing to pay for may well be what the US can do, and what is being negotiated right now is what they’ll pay for.
Let’s take a look at the issues.
The exchange rate and Treasury purchases
At stake is continued demand by China, the largest foreign investor in U.S. Treasuries, for the unprecedented issuance of American government debt.
Sounds good. But then we have this:
The value of China’s currency, the yuan, is also on the agenda. The U.S. regards China’s currency policy as a distortion and wants China to let the value of the yuan appreciate.
Here’s the problem. Those two things are in opposition. The more treasuries China buys the more downward pressure there is on the Yuan and the more upward pressure on the dollar. Buying treasuries (or any other dollar denominated assets) does not lead to the Yuan appreciating, unless China buys less of them. But if China buys less of them, well, the US won’t have enough purchasers (actually the US already won’t have enough purchasers and the Fed will have buy treasuries, but how much is in question.)
US Savings Rates, the Death of the American Consumer and the everlasting great recession
What’s interesting about all this is how honest Geithner is being about the US economic situation with the Chinese. Take for example, this:
In the talks today and tomorrow in Washington, U.S. officials said they plan to tell the Chinese the American rebound from a recession won’t be led as much by consumers as past recoveries.
Why is this? Because employment is not going to recover before the next recession, and because the savings rate for the US has to stay relatively high so that Americans can de-leverage, as has also been admitted:
“We are committed to taking measures to maintaining greater personal saving and to reducing the federal deficit to a sustainable level by 2013,
What this means is that the consumer spending is not going to lead the recovery this time around. Consumers are not going to dig the US out of this, because China is not willing to lend US consumers that much money anymore.
But the statement is contradictory on its face. If deficits have to be brought under control, and savings rates have to be kept relatively high, who’s going to create the demand required by the economy to get out of the great recession? Not government, because of the deficit issue. Not consumers, because they are going to have a higher savings rate and their assets (read houses) aren’t going to look good to be borrowed from.
Which leads us to another point. Both America and China did a stimulus. China’s stimulus is already working. It had 7.1% GDP growth. The US is still mired in recession.
Why? Two main reasons.
- China did its stimulus right. It wasn’t 40% bullshit tax cuts with almost no stimulative effect.
- China, as a creditor rather than debtor nation with huge savings, can credibly be expected to continue its stimulus, while the US can’t. When businesses make decisions about spending they need to know the money will be there next year, they don’t know that with the US.
Americans also want the Chinese to move to greater domestic demand,, to open up the Chinese market to US investment (because American companies desperately want to be able to invest in a country with real growth prospects, rather than the US) and to start buying more US goods. This requires letting the Chinese currency appreciate against the US dollars and is needed long run for American health. But in the shorter term it leads to a fiscal crisis. If America doesn’t want to increase taxes to pay for its own spending, how can China buy less treasuries and US assets and thus allow the Yuan to appreciate? And why should they, when right now in exchange for money the Chinese can afford to lose and crappy consumer goods, the US is exporting its industrial base to China? An industrial base is worth any price. Americans, with their unwillingness to tax themselves, aren’t willing to pay for the American industrial base. The Chinese are.
Why can’t we get a good healthcare bill?
Because the US is a debtor nation, and China isn’t willing to pay for Americans to have healthcare. That’s why it has been declared that the health reform bill must be deficit neutral (or close). On the other hand, since bailing out the financial system meant bailing out the value of a lot of Chinese assets, the Chinese were (grudgingly) willing to go along with that, since they benefited. They do not benefit from Americans getting health care.
Can you say co-dependent?
I sure hope so, because that’s the Chinese/US relationship. But one side of the relationship is getting a lot more out of it than the other one and every year the Chinese need America less, and America needs China more.
Why High Frequency Trading needs to be ended and how to do it
Over the weekend the high frequency trading (HFT) story exploded. HFT is when large traders place their own trading computers in exchanges. Doing this gives them a very sligh (microseconds) speed advantage over anyone who doesn’t have their computers co-located. Not only do they have a slight speed edge, in exchange for a fee they see orders slightly (a few microseconds) before other traders. They use this speed advantage to front run slower investors. In addition, they issue and then cancel orders to see what prices other traders are willing to pay. Using their speed advantage they can then, if they, for example, see you want to buy X stock at $5 or less, and it’s trading for $4.80, buy it before you and sell it to you at $5, capturing the profit in between.
About 50% of market volume is now high frequence trading. Large firms front running smaller traders, engaging in strategies normal traders can’t engage in, to make sure that they make small profits on as much of the business going on as possible, all the while creating the illusion of real stock market activity when there is half the fundamental demand that there appears to be.
Fleecing sheep and manipulating the market seems to be the mild way to put it.
The solutions to this are simple enough. First getting information before other market participants do should be illegal. It is fundamentally anti-market. Ban that.
Second, add a micro fee or tax on every order, whether filled or not. Say one cent per. That will make much of this unprofitable, since it relies on micro-profits per transaction.
Third, capital gains tax at a very high rate (say 50%) any profits on securities held for less than a minute. Even most day traders don’t hold securities for less than a minute. Society wants secondary markets largely so that money can be raised on primary markets, this is not making raising money on primary markets more attractive.
There is no socially beneficial reason to allow high frequency trading, especially when it includes front-running. HFT defenders say it increases liquidity, but this mistakes churn, which is doing many small trades to get tiny profits per, with liquidity which is making sure those who actually want to own the stock can. Any minor liquidity benefits are minor compared to the cost, which is that HFT is capturing profits which would have gone to other market participants by having unfair advantages that smaller traders can’t match.
There’s a lot of suspicion that the US market is being manipulated in various ways. Ordinary investors are leary of getting back in. And scams like HFT are one of the reasons why: the market seems designed to work for large inside players and to fleece everyone else. The only reason you’d want in on that is if you know when to get off the train before the next train wreck. But that’s not a trading policy any sane society should allow.
A heated argument is going on about the right health insurance model between those those who believe in a public option and those who believe in single payer.
Or perhaps I should say between those who are willing to take what they can get: public option; vs. those who want to hold out for what they consider the best option: single payer.
By way of reconciling what differences can be reconciled, let me ask a question of each side.
A Question for Public Option Advocates
Do you want to eventually have a single payer or a comprehensive system like the French have? If not, why not?
A Question for Single Payer Advocates
Are you willing to fight for a public option which could eventually lead to single payer or a comprehensive system like the French one? If not, why not?
At this point what I’m seeing is both sides retreating into moralistic screaming.
The public option folks are saying: “It is better to save some lives than none, and if you single payer purists don’t support a public option which will save even a few lives, you’re responsible for those deaths.”
The single payer people are saying: “The public option is so watered down that all it will do is discredit real public reform, aka single payer. You public option folks are settling for so little that the few lives you might save are outweighed by all the lives you won’t save and the damage to the chance at real comprehensive health care reform.”
Both sides are assuming the other side is operating in bad faith. The public option folks assume the single payer folks just want to be pure rather than saving lives, the single payer that the public option folks are just sell-outs shilling for a bad bill.
But what I’m seeing, as someone with a foot in each camp, is that both sides are (mostly) sincere.
Now there is one group that can’t be reconciled. People who want a public option so weak it either won’t survive, or can’t be used as the basis for a comprehensive system. The usual suspects like Insurance company executives, for example. But also some people in the Obama administration, such as Health Secretary Katherine Sibelius, the health secretary, who said that the plan would be drafted specifically so that it could never become single payer.
But for everyone else, for those acting in good faith, there should be some common ground from which we can work together. Let’s start by recognizing that the battle over public option vs single payer is a distraction away from what we could accomplish if we worked together.
United we stand a chance. Divided, we will lose our chance at health care reform.
On Saturday I wrote about a piece by Kip Sullivan which attacked the Public Option on its own merits. Kip’s most devastating, and I think, accurate, criticism was that the public option as envisioned by the current House proposal (let alone likely Senate modifications) is so weak it might not even survive.
Why?
- Because it has no built in customer base, which increases its upfront expenses for advertising and a sales-force significantly. People who have company healthcare plans can’t join.
- Doctors, hospitals and so on are not required to accept it, and providers will not accept it if it provides below market rates unless it also provides large numbers of patients, which it can do because it isn’t pre-populated and isn’t a good buy for insureds unless it can provide a low premium, which requires it to pay low rates.
- It must make a profit in order to return the money up-fronted to it, and it has only 10 years to do that, but it has to start from scratch, as noted above.
Looked at through this lens, the idea that the Public Option will survive 10 years is ridiculous. With these burdens, it can’t obtain the necessary number of insureds to allow it to negotiate provider agreements that are low enough to make it attractive enough to enough people to have enough people to negotiatite provider agreements which are low enough to… (well, I’m sure you see where this is going.)
This is a public option designed not just to never turn into either single payer (what Canada has) or comprehensive health care (what France has), it is a public option so crippled it may not even be able to get off the ground. New companies have significant startup costs, there are massive barriers to entry in the health insurance field, and the term over which the public plan has to return its costs is too short.
So what does the Public Option need to work?
First: it needs to be populated with enough people to be viable. Here are some possibilities of how to do that without a lot of auto-enrollment. You don’t need to do all of these, you do need to do some of them or something similar.
- On the income tax form, have an opt in box for anyone who wants to enroll, so that every American sees the option, without needing to see advertising
- If there is an individual mandate requiring people to buy insurance, if they don’t have it after the first year—if they haven’t bought, auto-enroll them at tax time into the public option.
- auto enroll everyone on disability into the plan, as top-off insurance. Whatever the gap between what they get from their disability and public option is covered by the public option
- Veterans auto-enroll into the public option as well, in exactly the same way, as top-off insurance. They still get all their veterans care, but anything that isn’t covered by Veterans, that is covered by the public option, they now also get
- everyone must be free to choose the public option, including people who are enrolled in corporate healthcare plans (this is baseline, this must be in the plan to give it the ability to drive down costs.)
- State rollovers. If a state has a plan that doesn’t cover everything the public option does, then everyone on the State plan is automatically enrolled, and the cost of those health care services is taken out of Federal Medicare funds.
Institute enough of these policies, and the public plan can have a large enough enrollment base to matter, and because it is easy to enroll in can put price pressure on private firms. But even with all of these, the public option will still start out not all that large and have trouble negotiating contracts. So, what else do you need?
Second: it needs to work with Medicare and Medicaid.
- Negotiation must take place between the all three plans as one, and providers. This will drive down prices the fastest. It will not just help the public option, it will also drive down Medicaid and Medicare rates.
- If a provider accepts Medicaid or Medicare they must also be required to accept the public option. No picking and choosing.
- The rate does not have to be the same as the Medicare rate, but it must be based off the Medicare rate. The House plan is Medicare + 5%. That’s fine.
- All limits on the ability of Medicare/Medicaid and the public option to negotiate prices with providers (for example, not allowing negotiations with pharmaceutical companies) must be removed. Failure to do so will mean not only that costs won’t be contained, but that the government plans will be at a disadvantage compared to private plans which an do this.
The above are the minimum requirements to create a viable public option. Public option advocates who are not willing to draw a line on the above are advocating for a plan which will, most likely, not survive—a plan that is not viable. The cry of public option advocates has been “saving even a few lives is worth compromising!” But if you compromise to the point where the plan is not viable, you’ve compromised to the point where there’s no point.
There are other requirements for a good public option, such as guaranteed issue, the whole population being enrolled in some insurance (mandates in the current debate), the plan being national in scope so it has scale, private plans being required to cover the same things as the public plan, and high enough subsidies so that everyone can actually be enrolled (if you insist on mandates). Those requirements, however, seem to be better understood by public option proponents. What is required for viability, however, does not seem to be.
The current House Plan is not viable as written and other options are worse. There is no practical difference between no public option, and a non-viable public option and at that point the argument of “don’t let the perfect (single payer) be the enemy of the good (a public option which will save some lives)” becomes non operational.
I will be happy to support a viable public option. So far we don’t have one. I urge public option advocates, and even single payer advocates, to push for one.
The most devastating critique I’ve read of the current public option comes from Kip Sullivan. What makes it devastating is that although he’s a single payer advocate, instead of attacking it from the point of view of single payer, he takes it on on its own terms—comparing the House bill’s version of the public option to the one originally proposed by Hacker:
• The PO had to be pre-populated with tens of millions of people, that is, it had to begin like Medicare did representing a large pool of people the day it commenced operations (Hacker proposed shifting all or most uninsured people as well as Medicaid and SCHIP enrollees into his public program);
• Subsidies to individuals to buy insurance would be substantial, and only PO enrollees could get subsidies (people who chose to buy insurance from insurance companies could not get subsidies);
• The PO and its subsidies had to be available to all nonelderly Americans (not just the uninsured and employees of small employers);
• The PO had to be given authority to use Medicare’s provider reimbursement rates; and
• The insurance industry had to be required to offer the same minimum level of benefits the PO had to offer.
What would this mean in effect? 123 million people enrolled, the ability to set premiums substantially below those of private insurers and the ability pay hospitals and doctors less than private insurers, leading to massive cost savings.
But of the five conditions, only one is met in the new plan: requiring the insurance industry to offer the same plan. Not a single other requirement of the original public option plan is met. Not one. As Sullivan points out, the public plan starts without a single enrollee and has to hire sales staff, negotiate contracts and so on, all while being required to pay back its start up costs within 10 years.
What advantage do you have over the private insurers that means you will be able to out compete them? The only one I can think of is that you don’t have to make a profit, but that’s only half true, because of the requirement to pay back within 10 years, you effectively do have to turn a profit.
Go read the entire thing. Sullivans’ argument is, in my opinion, strong enough as to be devastating. I’ll be discussing this more next week, as promised, but Sullivan has said most of what I wanted to say and said it better than I would have. His argument about why the CBO scoring of only 9 million enrollees is either correct, or even overstates the case is of particular interest.
and Democrats don’t.
As someone who lives in a parliamentary democracy (Canada) that’s what I’ve noticed.
The fundamental rule of parliamentary democratic politics if you are the opposition party is this:
Whatever the ruling party does is wrong
Why? Because if the ruling parties policies work and make people happy, healthy and wealthier, then they will be re-elected. If they are a complete disaster, the opposition will win. If some don’t work, you need to be able to run against them, and it’s difficult to do that when you supported them.
The archetypal US example of this is John Kerry in 2004. The Iraq war is already unpopular, but Kerry can’t credibly run against it because he voted for it.
This calculus is something that Republicans understand, and that Democrats don’t.
Never give an enemy an even break…
As Dave observed today, many Democrats still think they are living in the past, when gentlemen and ladies could reach across the aisle, find agreement, and do what is right for the country.
The Republicans don’t live in that world, and from an electoral politics point of view it’s not clear they aren’t right not to. Incumbent parties defeat themselves by failing to rule adequately. If you don’t believe that you weren’t paying attention to the last 8 years. The Democrats didn’t defeat the Republicans, they defeated themselves by their complete inability to put through effective policy or to govern effectively day to day (an inability revealed starkly in both Katrina and Iraq). Democrats walked into the void.
You can walk in faster if you opposed the failed policies (again, see Kerry, 2004) but eventually screwing up governance will tank a party.
Now in parliamentary systems a majority government just does what it likes, and the opposition reflexively opposes but can’t stop anything. In a minority government, the opposition can’t just stop everything because if it defeats the government on the wrong vote it’ll cause an election and you don’t want one of those till you’re sure you’ll win and the governing party won’t get a majority. So the government can still get through a fair bit of its agenda, even if it doesn’t have a parliamentary majority.
In the US there’s no threat of a snap election, and the opposition can often hold up significant legislation, especially in a case like the current one where the governing party has unreliable members (something that’s very rare in most parliamentary systems).
So the Republicans have taken parliamentary opposition one step further. Instead of just opposing everything but letting it pass, then running against it, they figure why not oppose everything in the hopes of weakening policy to the point where it doesn’t work? The stimulus bill was compromised to the point where it didn’t do the necessary job. The global warming bill likewise, and the health care bill appears headed for the same fate.
Lousy policy leads to lousy outcomes. Lousy outcomes make the population unhappy, and less likely to vote the incumbents back in.
What the Republicans are doing makes perfect sense from an electoral point of view. Voters are not going to primarily blame Republicans for Democrats failing to govern effectively.
This is something that many Democrats, especially older ones who came from a more genteel era, or those who some sort of strange genetic disposition to compromise (Obama) don’t seem to get. But Republicans get it in their limbic system. They believe that your enemy is your enemy and that you never give your enemy an inch. When you’re on top, you give them the boot, when you’re down, you knaw at their ankles till they bleed out and fall.
Comity and compromise only work with people who believe in them. Contrary to the moronic statement “it takes two to fight”, it actually takes two to make peace. When one person wants to fight, and one won’t fight, what happens may not be fighting, but it certainly isn’t peace.
How insurance works and why private insurance costs more than universal government insurance
Today I’m going to talk about how insurance works. I used to work in the industry (on the life side, but in the American industry) and I studied it in detail at the time.
Insurance is making book
One of my friends was an underwriter, and she used to say “I feel like a bookie. I figure out the odds on people’s lives.” I used to joke “when a life insurer writes you a letter saying they’re sorry about your relative dying, you can be sure they mean it from the bottom of their cold shriveled hearts”.
Which is to say, what insurance companies do is look at how risky a person or a group of people are, assign odds to them taking a loss and figure out how much the average loss will be. That’s the basic cost of the insurance. To vastly oversimplify and pull numbers out of the air, say you get insurance for getting your hand cut off, then replaced. The odds per year are 1 in 1,000 (you work in a machine shop) and the cost of reattaching your hand is 100,000 dollars. To break even they will have to charge each person $100.
Variability: God plays dice
Well, they would if there were no variability. Those may be the odds, but what if one year there number of machinists getting their hands chopped up is higher than normal? The fewer machinists the company is insuring the more variable this will be. Insure one machinist and you either pay out nothing or $100,000. Sure the odds of paying out are low, but if you do, your loss is 99,900. Ouch!
The more machinists the company insures, the less the variability. So they will want to insure as many machinists as possible. The larger the population they insure, the closer actual claim experience will match with theoretical claim experience. And if they insure every machinist in the country, well the experience should be very close to exactly what they originally calculated.
So the larger the population an insurer serves, the closer its experience matches what would be expected. The smaller, the less it does: the more the variability increases. This has a cost, the smaller the population you insure, the more money you have to put aside to cover variability. (1)
When you divide up an insurance market you increase variability, and therefore you increase the cost of insurance. It is impossible to avoid.
So at this point, the price of insurance is the cost of covering average losses plus the cost of covering variations from normal claims.
Underwriting. Or some people don’t have average experience.
So, since you don’t have a monopoly, and you aren’t the government, you don’t have the entire market. That mean your experience could vary for reasons other than just luck. Say you happen to insure machinists in a shop which has bad safety procedures and where machinists gets their hands chopped off at twice the normal rate? If you were to give them standard rates, and assume standard deviations from the norm, you’d take a huge loss.
That’s not a risk you can take. So you hire people to get all the records on the shop, someone to inspect it and someone to make book on the shop. How likely is it that this shop will have more (or less) than the normal experience? How much more, or less, should you charge them based on their safety precautions or lack thereof?
And if individual machinists are applying it gets even worse. Not only do you have to look at where they’re working, you have to make sure the applicant isn’t accident prone. How’s his eyesight? What’s his personal safety record? Does he have drug or alcohol problem? Any medical problems which might make him more likely to slip up? How old is he and what is the relationship between age and accidents? Etc…
All of this underwriting costs money. You’ve got the people getting the records, doing the medical tests, visiting the sites and so on.
So the price of insurance is now the cost of average losses modified by your specific population’s characteristics + variability + underwriting costs.
Anti-Selection: or, people who need insurance are bad bets (2)
One of the biggest problems in insurance is that an applicant knows more about his situation than you do. When everyone isn’t automatically enrolled, studies find that those people who do insure themselves are more likely to have adverse events. Think about it. If you have reason to believe you won’t get sick, you’re more likely not to get health insurance. If you live in a geologically stable area with no woods nearby in a stout well built house you’re far less likely to apply for catastrophe insurance, and so on.
People who want insurance are bad bets. So you have to underwrite them and investigate them. What it is that they know that you don’t know, that you need to know? (This is why insurance companies see recissions as moral: they figure that people held out on them, and holding out on them is effectively cheating them.)
But even after you underwrite, the people you underwrite will still have more incidents than they should have. So you have to put in some extra money to pay for that. If you insured the entire population you wouldn’t have to do that, but you don’t.
This, by the way, is one reason why insurers prefer to insure groups, like companies. A company hires employees for a purpose other than buying insurance. There shouldn’t be any anti-selection. If anything, a corporation’s employee’s experience should be slightly better than the general population, because people who are really ill (or likely to die) are less likely to be employed. Sick people don’t make hiring managers day.
So, the price of insurance is now up the cost of average losses modified by your specific population’s characteristics + variability + underwriting costs + anti-selection costs.
Insurance Companies Aren’t Non-Profits
Well, most of them aren’t. Companies that are mutual companies (fewer and fewer are) are sort of non-profits. But the rest of them need to make a profit. Traditionally 5% was considered a reasonable profit in the insurance industry—it was a widows and orphans sort of industry which invested in the dullest of dull, safest of safe securities. But, alas, when you’re a stock company, and Wall Street is demanding 15%, well, you’ve got to make that amount of profit, because if you don’t the stock price won’t go up and the executives options and bonuses won’t be as high as they could be. And we all understand that would be an unacceptable disaster.
So, the price of insurance is now up the cost of average losses modified by your specific population’s characteristics + variability + underwriting costs + anti-selection costs + profits.
Investing for the future
Health insurance costs can be roughly divided into two parts. There are ongoing health care costs which are about even over the life of your insured, and there are catastrophic end of life expenditures. About half of the cost of health care for Americans comes in the last year of their life (the problem being guessing which year is the last year. My father has been through his last year twice.) Insurance companies take the premiums they gain and the invest them in various securities. Roughly half of them go into short and medium term duration investments, the other half go into long term bonds.
This may not seem like a cost, but the point is that they have to take in more money than they are spending any given year, so they can invest that money for the future. That is an expense. It is an expense which a national insurance system which simply pays out of pocket each year does not have.
So, price of insurance is now the cost of average losses modified by your specific population’s characteristics + variability + underwriting costs + profits + investment costs.
Private Insurance Costs More
Why? Because it is the cost of average losses modified by your specific population’s characteristics + variability + underwriting costs + profits + investment costs.
Public insurance is either the cost of average losses + (very small) variability
or, if you do invest rather than paying year to year
Public insurance is the cost of average losses + (very small) variability + investment costs
There’s more to it than this, of course. But those are the basics embedded in the way that insurance itself works.
Let’s talk about some other issues.
A Sure Thing Isn’t Insurance
If you aren’t insuring the entire population another issue crops up. What about individuals who you know are going to take a loss? In medical insurance, what about someone who’s an asthmatic, or a diabetic, or has Parkinson’s, or whatever? The odds of that loss aren’t (population X incidence rate), they are already known. Insurance is about odds, about making book. When someone is already a claimant before they even sign up that’s not insurance. It’s just a known cost and you can’t provide it for less than the cost of providing it. You can’t make a profit on someone who’s already sick, unless you charge them more than the cost of their healthcare. At which point, why bother? If instead, you were to average their costs over the population of people who haven’t suffered a loss, well, that increases the cost to everyone. And it isn’t insurance. Insurance is about losses which haven’t yet occurred
This is why insurance companies won’t take people with pre-existing conditions. Either such people are a straight loss, or they increase cost and price for everyone else, and that damages the insurance companies competitive position. Either way it damages profits.
The Gatekeeper problem, aka: doctors and hospitals and drug companies want more money
Or to put it another way, between the insurer and the insured are gatekeepers who decide (or try to) how much care those people get. The more care the person receives, whether they need it or not, the more the gatekeeper gets. The insured isn’t in a position to deny care in most cases. If your doctor tells you you need a test, how often do you argue. So as an insurance company you have two choices. You can just accept the bills, and pay them or you can try and manage the care the insureds receive. Even if this is totally good faith (you actually do want people to get care they need, just not care they don’t need), well, denying care costs money in terms of staff and so on. And once an insurer realizes that staff saves you money, well perhaps you should deny even more care and turn into a profit center.
Of course, somehow costs do keep rising fast, and part of it is that some actors don’t get negotiated with very hard, for example drug and medical appliance companies. The question of bargaining comes down to difficulty: it’s easy to screw over a sick individual. He or she doesn’t have the power, money, time or health to fight back effectively. A big pharma company does. So the small actors get squeezed, and the larger actors make outsize profits (for most of the 00’s the only sector making more profit than the pharmaceutical companies were the financial companies.)
Lessons for health reform and the public option
Look again at the formula:
cost of average losses modified by your specific population’s characteristics + variability + underwriting costs + profits + investment costs
The public option, should eliminate profit costs, at least for it.
Removing the ability to deny applicants + not allowing different premiums due to history eliminates underwriting costs.
Anti-selection costs are reduced but not eliminated if one of the plans is seen as better than the others when it comes to actually delivering care (i.e. if insurance companies continue to make it hard to make claims and the public option doesn’t, the public option will suffer from anti-selection
Variability costs due to population size are not eliminated
Investment costs are not eliminated
The gatekeeper issue does not go away. Especially if the public option is specifically forbidden to negotiate with pharmaceutical companies.
The sure thing problem goes away, but could lead to an increase in prices depending on whether gains from reducing uncovered catastrophic care are enough to offset sure costs for actually treating people
Concluding Remarks
This is a fairly simplified look at how insurance works. But it does suggest a number of things.
- Insure the entire population’s so you eliminate variability, anti-selection and the need for underwriting
- Remove the need for profits
- move to pay-go rather than pay-in and invest
- Allow negotiation with large actors
- Move away from fee-for-service(4)
Next week I’ll talk more specifically about what is required for a public option to work to reduce the number of uninsured people, under-insured people and to reduce health care costs at the same time. While single payor automatically eliminates all of these problems except for fee-for service, public option needs to be done very carefully to actually work.
Notes
1) Note that in health insurance terms a population could be “all 66 year olds”. Medicare has an entire population, everyone above a certain age. There are still disadvantages to this because if you don’t have the population through its lifespan you can’t institute preventative care and other insurers can try and dump costs on you, but you do get the variability taken out to as large a degree as possible.
2) Also known as adverse selection. Same thing.
3) Mutual companis had consistently lower costs for insurance than stock companies. They are better for people who are insured, the data is dead clear on this. One model of reform is forcing all stock companies in the insurance business to go back to the mutual model.
4) There are some arguments against moving away from fee for service. It seems to work well enough in various other countries and inside some parts of the US health care system. When economics fails it tends to fall back on bad sociology, but the fact is that a health culture amongst health care providers doesn’t take advantage of fee for service to do necessary procedures and tests. Unfortunately, so much of US medical culture is sick that messing with incentives (the last refuge of bad management) may be necessary.
Of course, it’s dangerous to speak for other bloggers, but I think the calculus which many are operating under is that if you get a bill with some sort of public option, and some sort of subsidies, some lives will be saved. Something, in other words, is better than nothing. I also think that people need to believe. Many bloggers worked really really hard to elect Obama, to get a House and Senate majority, and the that it can’t deliver on something so fundamentally important as making sure every American has the health care they need is something they just don’t want to believe.
Also most other bloggers are not fundamentally econobloggers and econobloggers who don’t buy the “TARP saved the universe” disillusionment started much earlier than for most other bloggers. For me it started at TARP time when Obama pushed through Paulson’s highway robbery act Then Obama hired Geithner and Summers as his key economic people. So I started down the path of “no hope” a lot earlier than most bloggers.
I use the stimulus bill as my model for looking at healthcare. As with the stimulus bill I think that the House draft bill is the high point. I think this is the best bill we are going to see. I think the Senate bill will be worse (Daniel reported last night, as I was writing, that the Senate bill probably won’t have a public option) and that it may well be worse than nothing even if a weak public option is in the bill. In particularly Medicare and Medicaid are being hit to pay for this, people will have deductibles on “non preventative” care (and maybe preventative by the time it gets through) and so on. The Massachussets experience, which is the closest parallel, has not been good.
There is a counterargument, I made part of it the first day I wrote at OpenLeft. The public option could drive out private insurance or at least drive costs lower. Getting people into the system turns them into real patients and suddenly there are doctors and so on who don’t want to lose them, and that gives them a constituency, and above all, you do save some lives and help some people and isn’t that better than nothing?
I’m not a single payor purist, though I think the fact single payer isn’t even on the table is a terrible indictment of the system—however, I’ll settle for a good public option, or even a non-sucky one. But I’m becoming convinced that any public option will either be too compromised, or non existent, and at that point, all that happens is you have slashes to Medicare and Medicaid, forced purchase of bad insurance, and through those purchases more money being pumped into the system.
Is forcing people to buy insurance the real goal? The best way to make money, bar none, is to have government force people to buy your product. It’s a wet dream for any industry, so if it’s going to be done, it has to be done right—it has to be very highly regulated and controlled with rates of return set like utilities.
Will it be?
(Addendum: Before I ride off into the sunset next thursday, I’ll see if I can pull together a post on what is required for a good public option. One of the reasons I favor single payor is that it has many fewer moving parts. It’s easier to do single payor right than it is to do a public option right. Not least because there are many different working models of single payer and variations. Getting the public option right is very complicated.)
Seriously, can’t Obama even pretend he intends to meaningfully reform corporate governance? If not, why does he insult our intelligence? (h/t Americablog)
The president specifically mentioned regulatory changes that would require shareholders to have nonbinding votes on executive compensation packages (emphasis added)
This is similar to the plan to create create standardized credit default swaps (CDSs) which can trade on open markets, but not require firms to actually use them, and still allow custom CDSs.
I’d say that Obama and his financial advisors still think that if they just ask banks and brokers nicely, they’ll do the right thing, but that would insult the administration’s intelligence as well as mine and yours.
