US vs. Health Insurers: Why It's Tough To Analyze Sectors/Companies Now

Wisconsin Republican House member Paul Ryan co-wrote an editorial in the Wall Street Journal yesterday contending,


"Every day, more see that the road to serfdom in America does not involve a knock in the night or a jack-booted thug. It starts with smooth-talking politicians offering seemingly innocuous compromises....."

Yet, on the opposite page that morning, in the lead staff editorial, entitled Sebelius Has a List, the Journal's own countered Ryan's contention.

Moreover, that lead staff editorial offers yet another example to explain, again, why my own posts of the past few years have become less strategy-focused, and much more politically- and macroeconomically-focused.

The editorial suggested,

"Witness Kathleen Sebelius's Thursday letter to America's Health Insurance Plans, the industry trade group- a thuggish message even by her standards. The Health and Human Services secretary wrote that some insurers have been attributing part of their 2011 premium increases to ObamaCare and warned that "there will be zero tolerance for this type of misinformation and unjustified rate increases."

Zero tolerance for expressing an opinion, or offering an explanation to policyholders? They're more subtle than this in Caracas."

And that, dear readers, provides the example. Look at how much qualified judgment is evident in Sebelius' letter? She and her minions deny that ObamaCare is putting pressure on insurers' costs, despite prior admissions of same by the president. Further, she finds, a priori, that any attempt by insurers to communicate these truths to customers or investors will be judged as "misinformation," the accompanying rate increases "unjustified."

As I wrote here recently in my companion political blog, Massachusetts' own insurance commissioner was against similar moves by that state's governor. It seems that many senior bureaucrats forget that when they move to cap and/or control insurers' rates and revenues, they unwittingly threaten the solvency of same, and their ability to actually pay legitimate claims.

Oooops!

But you can see how Paul Ryan may be a bit myopic, or simply optimistic.

It seems that the jack-booted state is alive and well at HHS. And this type of capricious regulatory punishment of private sector firms is why strategy matters so much less today than it used to, while perceived political correctness, singing the party line, and generally avoiding political persecution and prosecution is the new order of the day for American business.

Hospital Ships Anyone?

In the aftermath of the recently-enacted healthcare legislation, I've been considering what sorts of unintended consequences will occur.

Of course, everyone with a brain has already identified the phenomenon of corporations dumping their employees onto the federal government, rather than continue to pay for anything but bare-bones health care. So much for that 'keep the plan you like' lie from Congress and the administration.

And it's becoming clear that many older doctors won't wait around to see their incomes slashed as they become de facto federal employees. Thus, just as millions are added, at below-cost premiums, to health insurance rolls, the capacity of the medical field to treat them will shrink drastically.

But I think there will be another, more surprising development in the provision of healthcare. It occurred to me while watching a History channel program concerning 1920s rum runners. The fast small boats ferried loads of illegal alcohol from mother ships hovering just outside the limits of US jurisdiction at sea.

My prediction is that someone will organize a business providing full-service medical and hospital care on ships sailing just beyond the reach of US law. Probably domiciled in a small country where permissions may be cheaply obtained, the services will offer or arrange for insurance policies, the claims on which will be fulfilled on board the medical ships.

Being out of US jurisdiction, but near to the country's shores, retired US doctors and nurses of all ages will staff the floating care centers. Look for regular helicopter services from major US cities to the ships, carrying both employees on rotations of at least a week, as well as patients.

It seems logical that, if the world's ultimate premier medical destination, the US, outlaws private medicine, then the US medical sector will relocate to the nearest unregulated location. And that, I predict, will be the high seas just outside the legal and physical reach of Obamacare.

Massachusetts' Command Healthcare Economy

Friday's Wall Street Journal editorial concerning Massachusetts' demands that health insurers sell policies at a loss ought to give investors a lot of pause about risk in this economy.

It may seem like ancient history now to recall the federal takeovers of Citigroup, AIG and GM. Or the bailouts of Morgan Stanley and Goldman Sachs, as the two investment banks ran for cover to register as commercial banks in order to take Fed injections of funds.

But it is a fact that the federal and state governments are intruding into the private sector to a greater extent than any time except for Nixon's wage and price controls and FDR's massive attempts at socialization of the economy.

Having been refused premium increases to cover losses, three non-profit health insurers in Massachusetts- Blue Cross Blue Shield, Tufts and Fallon Community Health- stopped selling new policies.

In retaliation, the state has demanded that these companies never the less sell loss-making policies in the state.

With actions like this, doesn't it make you just reflexively avoid the health care insurance sector for equity investment? This perfectly illustrates how meddling with private sector companies can so easily chill investor interest in a sector, or businesses in a particular state.

Confidence in capital markets and their operation free of excessive, arbitrary interference from government, is a fragile thing.

The Grand Inquisitors

I think we've finally reached the point of total hilarity and Kafkaesque intrusion of government into the private sector.

Democratic Representatives Henry Waxman and Bart Stupak are shocked....SHOCKED!!!!!....that some companies have publicized higher expense recognitions they are making in the wake of the recent passage of a universal health care law.

The Congressmen, angered at being embarrassed by the reaction of some in the business community to the new realities of health care insurance expenses, are demanding the appearance of the presumed-guilty executives before a Congressional Committee.

Of course, this is perhaps extra embarrassing for Stupak, because he pretended to agonize over the pro-life consequences of the bill, before caving in for a meaningless executive order. Now, his faux pro-life cover blown, he also looks stupid for having voted for a bill that will, contrary to his colleagues' and his own affirmations, raise the costs of doing business.

Caterpillar, John Deere, Verizon and a few other companies, in compliance with the Congressionally-mandated Sarbanes-Oxley law, adjusted their expenses for the effects of the new health care law only days after its passage.

Now, they are being called to task for obeying that law.

You see, many in the business community warned over the past year that passage of this ill-advised legislation would result in higher costs to businesses. But Democrats ignored this, as they ignored any suggestions for health care reform which would not result in a totally socialized health insurance and care system.

Now that the law has been passed, by the thinnest of party-line majorities, Democrats in the House are outraged that their claims are being disputed by some executives at large US companies.

It should be quite the show. After all, Sarbanes-Oxley makes it a crime for executives to sign off on corporate filings which they know to be false. So we know this week's disclosures of the higher expenses are real, and true. Otherwise, the affected executives could be charged and convicted of perjury and violations of Sarbanes-Oxley.

Of course, it's ironic that the CEOs being summoned to Washington would, if they used the same approach to accounting that Congress used in the bill, and which the CBO blessed, they'd be in jail. The assumptions and tax/benefit mismatches, intentionally gamed by Democrats and the president to force a misleading, nonexistent 'savings' in the federal budget, wouldn't pass GAAP muster.

The inconvenient truth, to use a popular leftist phrase, is that economic realities are hitting the idealistic, misleading Democratic claims for the health care sector reorganization within a week of the bill becoming law.

Think of how much more bad news will be coming from the private sector as a result of this bad law in the coming months, prior to the November mid-term elections.

Tyler Mathisen Must Go- Part 2

Only a month after I wrote this post, Ole' Ty, a/k/a Tyler Mathisen of CNBC, has provided still more evidence that somebody at CNBC needs to give the old campaigner the hook.

This afternoon, while discussing Aetna's decision to change its planned communications with investors, in light of the attacks from Washington Democrats, Ty managed to totally misunderstand the nature of the evolving risks in the health insurance sector.

While Michelle Caruso-Cabrera sensibly noted the assault on all health insurers, and their reasonable profits, by Congress and the administration, Ole' Ty weighed in with the hopeful thought that Aetna and its ilk will receive many more customers from ObamaCare.

Ty rambled on about how, whether those customers are subsidized, or not, they still represent new revenues.

If only Ty had a full brain, he'd remember that profits are revenues MINUS costs! And that the longer term aim of Washington's bureaucrats is to, first, direct subsidized new customers to insurers like Aetna. Then they will observe how much federal money Aetna receives, and squelch premium increases, while expanding mandated coverage.

It won't take very long for insurers like Aetna to begin losing money, as their premiums are capped and their payouts are increased.

Ole' Ty doesn't get this. So, in addition to being irascible, churlish, curmudgeonly and cranky, you may now add....stupid.

It's clear that CNBC's on-air cupboard has become barren, what with the loss over the past year of Bill Griffeth, Charlie Gasparino, Becky Jarvis, Dylan Ratigan (no great loss), and another female anchor whose name escapes me who left to join the Fox Business News startup at its inception.

But, surely, CNBC's management can do better than dragging Ole' Ty out of his dotage and propping him up in front of a camera each afternoon?

The CBO, Deficits & Transfer Payment Programs

"Social Security and Medicare were popular from the start and passed with bipartisan support."

That statement, buried in Fred Barnes' editorial in this morning's Wall Street Journal, jarred me.

Why, I mused, were these gargantuan transfer payment programs so popular at their inception, in contrast to the current abomination, Obama's health care proposal? Especially as crafted by the Senate, and filled with bribes to selected states whose Democratic Senators required those payoffs to vote for the bill?

A little research reminds us that Social Security became law in 1935, while Medicare was enacted in 1966. Both of those years were in eras distinctly different from our own.

Social Security was passed in the midst of the Great Depression. People were worried, extrapolating then-current experience, about providing for their aged years. The country had what is now viewed as essentially no external debt. Additionally, not a trivial point, the program was only meant as a safety net, not a universal entitlement. Ostensibly, FDR and his ilk foolishly believed that that average American would continue saving as if nothing had changed, with Social Security only intended to pay those who, through bad luck, ill health or stupidity, failed to save enough for their later years.

So much for good intentions. And a first taste of the sting of unanticipated consequences.

Medicare passed during what I view as the height of America's post-WWII salad days. I learned from people like my late father how unimpeded US business was abroad. With Germany and, for that matter, most of Europe still recovering from the war, and Japan exporting copycat transistor radios and silly little Toyota Corollas, American business reigned supreme, and American labor demanded and received extravagant promises of future pension and health care benefits.

So, ironically, our two largest social welfare transfer payment programs were passed with widespread support in two distinctly different, but each uniquely accommodating eras.

Thus, Fred Barnes' quote, so simple in its candor, expresses, really, the profound naivete of the American people and Congress in 1935 and 1966.

In the former, nobody thought it appropriate to be against such a simple, small old age pension scheme thought to only be needed for a few extreme cases. Nobody noticed that the very first Social Security check ever cut was for more than that first beneficiary had paid into the system in her lifetime. The pattern was set from the very start.

In the latter, a lucky nation mistook that luck for its lasting position as a supreme economic power spewing out uncountable wealth, and simply promised a sizable share of that presumed future wealth to oldsters for their medical care.

Everyone in business who is at all effective knows that implementation matters. It's not just superior concepts that profit, but well-implemented ones.

How often do we hear an aphorism such as, "better lucky than smart?"

Or, "Better to have a bad strategy implemented well, than a good strategy implemented badly?"

In the case of both Social Security and Medicare, stupid Congressmen designed and implemented a 'communal pot' scheme. That is, rather than providing individualized accounts for each program's transfer payments, so that individuals had a cap on benefits, and owned them, Congress just tossed all the payments into a pot, then dipped into the pot for payouts, too.

No caps nor any notion of limitations on individual claims were considered. Worse, because Social Security wasn't yet broke by the time the geniuses in Washington dreamt up Medicare, they did the same thing with that, as well.

Since then, both programs have vastly outrun their initial spending projections, and are deeply in deficit. Because they are not accounted on the federal government's balance sheet, their deeply-unfunded liabilities are not shoved in the faces of taxpayers and voters. But, like the unsightly children (Ignorance and Want) beneath the cloak of the Ghost of Christmas Passed in Dickens' A Christmas Carol,

"The live....oh they live."

And grow, as well. The deficits grow because, as Barnes noted, the programs are so popular. Yes, transfer payment programs sure do engender behavior that swells their usage far beyond the limited spending projections naive Congressmen used to pass them, don't they?

Now health care is becoming the third in a series of disastrous, ultimately economy-wrecking social transfer payment programs.

It's bad enough that Congress is still full of members who, in their majority, are too stupid to realize the necessity of individual, benefit-capped accounts.

But now they've added a new disastrous wrinkle. They lie about the program's structure, then rely on the Congressional Budget Office to certify the lies as fiscally responsible.

Yesterday morning, on CNBC, a former CBO official served as guest host. He confirmed that the CBO has two unyielding dicta: it can't question assumptions of Congressional schemes given to it to estimate costs, and; it can't make a 'good/bad' judgment.

Thus, the widespread knowledge that the current Senate health care bill is unsustainably expensive is not reflected in this morning's new CBO 'scoring' of the bill.

Rather than highlight the front-end loaded new taxes and Medicare cuts, combined with only 6 years of benefits, and explain that this results in a fraudulent 'savings' of $100B, the CBO can only state the alleged savings.

Further, the CBO is not allowed to inject the effects of realistic human behavior on the scheme. That is, seeing how Americans behaved with respect to other free-ride transfer payment schemes, i.e., Social Security and Medicare, it's reasonable to expect that Americans will overuse and overspend estimated usage of this new proposed program.

Which brings me, again, back to Fred Barnes' statement.

When government alleges it can give you something for apparently nothing, who doesn't like that? In the 1930s, nobody really grasped the long run costs of Social Security. The envisioned usage of the program just didn't seem to be very much to spend in order to keep a few oldsters off the streets in their waning years.

Instead, as long ago as 1975, when I was a freshman in college, I had a classmate who was paying for his tuition with Social Security benefits from his father's death.

Huh?

I seriously doubt that's what the Congress of 1935 ever envisioned for Social Security.

Of course there was widespread popular approval for Medicare. The US seemed economically invincible, so Congress enacted another 'bread and circuses' program to appease voters and promise to remove the burdens of health care costs in old age.

Once again, linkages between behavior and consequence, and the notion of individual responsibility affecting risky behavior, vanished.

And you wonder why we have an obesity crisis today?

Now we combine the elements of the perfect economic/transfer payment scheme storm. A misleading CBO report of alleged 'savings' for a new, vast health care and insurance transfer payment program which will destroy the private health insurance business, heap the resulting risks onto the taxpayers, promise open-ended benefits for all forever. And presume to borrow from investors in the rest of the world to fund it.

Barnes is right when he asserts that, unlike Social Security and Medicare, this new entitlement program will spark annual funding fights and crisis from the moment it passes, if it passes.

And its repeal will become the Republican party's major, focusing objective for the next three years.

As I said to my business partner at lunch yesterday, it's just possible that this bill must pass, in order for health care entitlement to finally be vanquished when it is repealed in three more years.

Otherwise, the dimwitted, gullible American public won't understand the horrifying loss of liberty and imposition of huge taxes to fund this mistake. Not to mention the fiscal emasculation of our country and downgrading of its debt, as the world wisely declines to fund our misguided entitlement programs.

The Unrealized Value of The Indvidual Pre-Tax Health Insurance Benefit

Recently, a friend who is a retired industrial senior executive wrote me regarding the ongoing debates on government health care legislation,


"Have you ever done a blog on the rationale for a tax on employer-provided health care? I realize that this is a third rail in Congress, but you could make the point that people are economic animals and until an individual has his own interest in the outcome there will be no change in behavior. The government has always encouraged the provision of uneconomic fringes with its tax policy - and this has lead to the demise of the airlines, the autos and the steels."


His point is correct. Government-subsidized health insurance, by way of the tax code and so-called "fringe benefits," have led to third-party payers insulating health care consumers from the costs of their own behaviors. And they are insulated in two ways. First, by the tax-free nature of the implied compensation of health insurance. Second, by being given that benefit as a defined obligation, rather than a defined level of value.


In prior posts, I've mentioned the origin of this sorry state of affairs, i.e., Senator Harry Truman's Senate Committee freezing wages during WWII. The result was non-price competition in the form of then-novel "fringe benefits." These included paid health insurance and pensions.


Thanks to this bone-headed war-era move by Congress, businesses foolishly turned what was a controlled expense, wages, into an open-ended obligation, health insurance and pension promises.

I'm not inclined to excuse the corporate CEOs of the era for this mistake. There were other methods of enabling individuals to receive these benefits, if only by making them defined contribution, rather than defined benefit in nature.

That's really the key point. Most of the private sector has moved non-union employees from the latter to the former when it comes to pensions. It's time to do so for health insurance, as well. It's true that defined-benefit approaches to health insurance and pensions did much to sink the US auto, airline and steel sectors.

One could, as my friend does, argue for removing the tax-preferenced nature of health insurance premiums from businesses, so that they are on an equal footing with individuals who buy their own health insurance with after-tax dollars. I'm fine with doing this, too, if only, as he points out, to force individuals to pay for the implied compensation.

But I think, by far, the more important element in reforming US health care is to move corporate compensation in the form of health insurance obligation, to a cash payment as a wage component. This removes the open-ended obligation from the corporation's balance sheet and income statement, replacing it with a simpler, more easily-valued and controlled cash payment. The obligation's value then becomes the choice of individual employees.

As I wrote in yesterday's related post,

"For example, in direct contrast to several Wall Street Journal editorialists with deeper backgrounds on the subject than Buffett, he blithely declared increased spending as essentially wasteful and a crushing burden on American competitiveness.

What Buffett ignored, but others have noted, is that greater discretionary spending on health care is a hallmark of wealthier society.

Here's one way to see Buffett's error.

Americans spend more time and money on leisure activities now than they did fifty years ago. And, given the relatively lower costs, in percentage terms, of various other household expenses, almost certainly more in percentage terms, as well.

Oh my God!

We have a leisure spending crisis! Fifty years ago, nobody spent money downloading music to iPods! Now, they do.

What will we do? American businesses must be shouldering the burden of all that digital entertainment expense, mustn't they?

Buffett confuses changes in discretionary spending with escalating costs for a controlled level of consumption.

Oil prices are higher now than they were fifty years ago, too. Isn't that another crisis? Shouldn't that be tackled by Congress?

The key flaw in Buffett's argument, much as Boone Pickens' over energy costs, is to pick one input to our economy, note the rise in its cost, and declare an emergency, while failing to observe the rise as at least partially attributable to consumer discretionary spending and business use to create even higher-value outputs."

What my friend astutely notes, whether tax-preferenced, or not, is that by shielding workers from the true costs of their behaviors, they over-consume health care. It's one thing for an employee to use his cash wages to buy gasoline, food, health insurance, and save for his own retirement. When all these claims on a household budget are explicit, real lifestyle choices result.

You never hear anyone in Congress complain that gasoline or food prices are hurting US business competitiveness, do you? Why should it continue to be so with health care?

It's almost moot whether one chooses to continue the pre-tax treatment of health insurance premiums and HSA accounts for individuals, or not. The really important change is to make end users pay those amounts out of their own pockets, from a defined cash compensation amount, so that consequences of their behaviors and choices are truly owned.

It's not hard to foresee Americans eating and behaving in healthier ways, once the cost of health insurance is seen as depending, in part, on the buyers' health status.

But, most importantly, by putting the choice of how much health care end users wish to buy and consume in the hands of those consumers, and not leaving it as an open-ended corporate obligation, those consumers will experience the true and full consequences of their behaviors. Thus, as my friend noted, almost certainly changing their behaviors, bringing down the care-level-adjusted cost of US health care.

It will also simplify and separate the US health care problem as distinct from costs of doing business for US businesses.

Warren Buffett's Muddled Understanding of Healthcare Costs

The Berkshire Hathaway annual meeting must be nearly upon us, as Warren Buffett spent three hours on CNBC this morning. Thanks to his close relationship with co-anchor Becky Quick, the Omaha-based asset manager spends a distressingly large amount of time on CNBC's programs nowadays.


If you are wondering what the term "halo effect" means, just tune into Buffett for 20 minutes or so. He is peppered with questions far outside the range of his asset management skills. And, looking at the nearby price chart of Berkshire and the S&P500 for the past 2 years, those skills are seen to have waned recently.

So we come to the CNBC co-anchors beseeching Buffett to share his vast font of health care knowledge with them, and their viewers.

Now, one thing you need to realize is that Buffett is not a stupid man. He knows he is a potential target of government, should he ever be seen as voicing outright disdain for or opposition to it.

Therefore, Buffett, I believe upon being advised Obama would win the 2008 presidential election, allied himself with the Democrat. Now, despite a year's worth of horrendous mismanagement as president, when asked how he views Obama's performance, Buffett is of course laudatory.

After all, he knows the value being out of the rifle scopes of a sitting administration and a Congress controlled by the same party.

Thus, Buffett then went on to declare his support for the current mess of a health care proposal, rather than have 'the status quo.'

But here's the problem. Buffett isn't viewing the current US health care situation correctly.

In a theme I'll continue in tomorrow's post, Buffett confuses choices about spending one's income, and quality of care, with total cost.

For example, Buffett made some incorrect statements about the quality of US healthcare, relative to other countries, then contrasted health care costs of decades past with those of today.

Unbelievably, Buffett never bothered to even make a glancing reference to the immensely superior level of medical care in the US today, versus the 1960s, nor the enormous increase in years of lives now made possible by more advanced, knowledgeable medical treatment.

At several points in the discussion, Buffett claimed to have no real knowledge of the sector, but then plunged ahead, again, tossing off wrong diagnoses and crying "crisis."

For example, in direct contrast to several Wall Street Journal editorialists with deeper backgrounds on the subject than Buffett, he blithely declared increased spending as essentially wasteful and a crushing burden on American competitiveness.

What Buffett ignored, but others have noted, is that greater discretionary spending on health care is a hallmark of wealthier society.

Here's one way to see Buffett's error.

Americans spend more time and money on leisure activities now than they did fifty years ago. And, given the relatively lower costs, in percentage terms, of various other household expenses, almost certainly more in percentage terms, as well.

Oh my God!

We have a leisure spending crisis! Fifty years ago, nobody spent money downloading music to iPods! Now, they do.

What will we do? American businesses must be shouldering the burden of all that digital entertainment expense, mustn't they?

Buffett confuses changes in discretionary spending with escalating costs for a controlled level of consumption.

Oil prices are higher now than they were fifty years ago, too. Isn't that another crisis? Shouldn't that be tackled by Congress?

The key flaw in Buffett's argument, much as Boone Pickens' over energy costs, is to pick one input to our economy, note the rise in its cost, and declare an emergency, while failing to observe the rise as at least partially attributable to consumer discretionary spending and business use to create even higher-value outputs.

Buffett is right in one respect, though. He doesn't understand the health care sector. And, thus, should probably just remain silent when questioned about it. In fact, that's probably a pretty good idea for him on anything outside a rather narrowly-defined scope of asset management questions.

Pfizer's Bad Example: CEO Jeff Kindler

It was with great interest that I read Kim Strassel's piece in Friday's Wall Street Journal concerning Pfizer's CEO, Jeff Kindler's bargain with the devil over health care legislation last year.

I've written in earlier posts concerning the auto company bailouts that both government and corporate executives have unwisely failed to observe a separation that ought to remain.

Specifically, corporations ought not seek government aid, and government ought not give it.

Yet, from reading Strassel's editorial, it appears that Kindler did exactly that by pandering to the administration's and Congress' coercive threats, to be embodied in last year's failed health care bill.

Strassel details how Kindler, upon arriving at Pfizer, suddenly oversaw the retirement of free-market oriented governmenat affairs personnel, and magically hired people with ties to various Democratic powers, current and out of office.

In a variant of requesting aid for his firm, Kindler caved in to Congress on opposing the socialization of medicine, in exchange for protection from threats like drug reimportation, guarantees of purchase of branded drugs by the government, and no price controls.

Then, as Strassel carefully notes, Congress reversed itself as the going got tough. Now, reimportation is back on the table, as are Medicare drug price controls and new limits on certain pharma patents.

This just goes to show how dangerous it is for the private sector to succumb to Congressional coercion and, worse, try to jump into bed with that branch in order to trade favors.

It's always far better for industry to aggressively defend and express its own views contrary to government's. The risk to business is that, having given in on some key aspects of a business model, the impression is that the firm was either lying in the past about its business processes, or didn't really need some practice it vociferously defended.

Now, thanks largely to Kindler, Big Pharma is left looking like they agreed with Congress on many issues which are, in fact, key to their current business models.

Perhaps Pfizer's board should have been more careful in choosing its new CEO and so radically changing its pro-free market orientation.

Vaccines: The New Pharma Strategy

Tuesday's Wall Street Journal featured an article that confirms that creativity is still alive in the pharmaceutical sector.

Faced with an impending US government takeover of health care, drug makers are focusing on vaccines.

It's a very logical move. If you're going to research, produce and market drugs, why settle for those, the value of which can be debated, because they contribute to easing disease.

Vaccines are a much more binary sort of thing. It's an all or none proposition, and, for certain at-risk groups, there's no alternative.

If the drugs are marketed from outside the US, there's a much better chance these companies can maintain profit margins and price levels on vaccines than on conventional drug products.

Even with government action threatening most of the workings of the pharmaceutical sector, it's good to see that they are still thinking ahead and targeting the most profitable areas of their markets. Those with the highest price inelasticities.

If they didn't, you can forget even seeing vaccines like these appearing to aid consumers who will be at risk.

Martin Feldstein On Rationing Health Care

Martin Feldstein wrote a scathing piece in last Wednesday's Wall Street Journal concerning "ObamaCare."

I found Dr. Feldstein's piece particularly illuminating because he noted an important fact which I had heretofore not realized,

"Although administration officials are eager to deny it, rationing health care is central to President Barack Obama's health plan.

One reason the Obama administration is prepared to use rationing to limit health care is to rein in the government's exploding health-care budge. Government now pays for nearly half of all health care in the U.S., primarily through the Medicare and Medicaid programs. The White House predicts that the aging of the population and the current trend in health-care spending per beneficiary would cause government outlays for Medicare and Medicaid to rise to 15% of GDP by 2040 from 6% now. Paying those bills without raising taxes would require cutting other existing social spending programs and shelving the administration's plans for new government transfers and spending programs."

Thus, a flawed approach to government-sponsored medical care from the 1960s haunts us today.

Thank you, LBJ and the Democratic Congress of that era. Logically, Feldstein observes that this wouldn't be a problem, were government to reduce its role in health care funding,

"The rising cost of medical treatments would not be such a large burden on future budgets if the government reduced its share in the financing of health services. Raising the existing Medicare and Medicaid deductibles and coinsurance would slow the growth of these programs without resorting to rationing. Physicians and their patients would continue to decide which tests and other services they believe are worth the cost.

There is, of course, no reason why limiting outlays on Medicare and Medicaid requires cutting health services for the rest of the population. The idea that they must be cut in parallel is just an example of misplaced medical egalitarianism."

Again, Feldstein's logic is sharp and unerring. Why do all of us who pay for our own health insurance and medical care have to suffer just because government is bungling the management of health care for the poor and/or elderly?

Next, Dr. Feldstein attacks the tax-preferenced nature of privately-funded health care,

"While an extra $100 paid to someone who earns $45,000 a year will provide only about $60 of after-tax spendable cash, the employer could instead use that $100 to pay $100 of health-insurance premiums for that same individual. It is therefore not surprising that employers and employees have opted for very generous health insurance with very low copayment rates.
Since a typical 20% copayment rate means that an extra dollar of health services costs the patient only 20 cents at the time of care, patients and their doctors opt for excessive tests and other inappropriately expensive forms of care. The evidence on health-care demand implies that the current tax rules raise private health-care spending by as much as 35%.

The best solution to this problem of private overconsumption of health services would be to eliminate the tax rule that is causing the excessive insurance and the resulting rise in health spending. Alternatively, Congress could strengthen the incentives in the existing law for health savings accounts with high insurance copayments. Either way, the result would be more cost-conscious behavior that would lower health-care spending.

But unlike reductions in care achieved by government rationing, individuals with different preferences about health and about risk could buy the care that best suits their preferences. While we all want better health, the different choices that people make about such things as smoking, weight and exercise show that there are substantial differences in the priority that different people attach to health.

Rationing is bad policy. It forces individuals with different preferences to accept the same care. It also imposes an arbitrary cap on the future growth of spending instead of letting it evolve in response to changes in technology, tastes and income. In my judgment, rationing would be much worse than excessive care."

Thus, Feldstein provides a coherent, sensible, exhaustive economic basis for rejecting the proposed universal, single-payer health care system, and, instead, fixing the current mess by correcting tax-based biases, allowing those who can afford to buy their own health care to do so without suffering due to government funding problems for the poor.

Finally, he reminds us, as the good economist that he is, of the target which we should not fail to keep in sight,

"Those who worry about too much health care cite the Congressional Budget Office's prediction that health-care spending could rise to 30% of GDP in 2035 from 16% now. But during that 25-year period, GDP will rise to about $24 trillion from $14 trillion, implying that the GDP not spent on health will rise to $17 billion in 2035 from $12 billion now. So even if nothing else comes along to slow the growth of health spending during the next 25 years, there would still be a nearly 50% rise in income to spend on other things."

The national economy, if left to grow as it has in the past, will provide income to allow people to afford more health care, should they choose that as a spending option.

A key part of the solution, though, is to quite making government the ultimate payer for all health care, thus requiring rationing of public spending on private health matters, and allowing each person to choose their own health care options using their own money, or that which the public has decided to allot to them.

Bad Economics Disguised As Healthcare Reform

Several times in the past year or so, I've written critically of Boone Pickens and his ilk crying that Americans spend "too much" on imported oil.

How, may we ask, can Boone know what "too much" is? Price is the economic allocator of scarce resources. Ostensibly, those Americans who have bought petroleum products refined from imported oil did so because they had uses for the oil more valuable than its price.

It's the same with health care.

A recent Wall Street Journal editorial, Craig Karpel claimed we are spending too little on health care, not too much. Why? First, he notes some very sensible economic facts,

"Mr. Obama has said that "the cost of health care has weighed down our economy." No one thinks the 20% of our GDP that's attributable to manufacturing is weighing down the economy, because it's intuitively clear that one person's expenditure on widgets is another person's income. But the same is true of the health-care industry. The $2.4 trillion Americans spend each year for health care doesn't go up in smoke. It's paid to other Americans.

The basic material needs of human beings are food, clothing and shelter. The desire for food and clothing drove hunter-gatherer economies and, subsequently, agricultural economies, for millennia. The Industrial Revolution was driven by the desire for clothing. Thus Richard Arkwright's water frame, James Hargreaves's spinning jenny, Samuel Crompton's spinning mule, Eli Whitney's cotton gin and Elias Howe's sewing machine.

Though it hasn't been widely realized, the desire for shelter was a major driver of the U.S. economy during the second half of the 20th century and the first several years of the 21st. About one-third of the new jobs created during the latter period were directly or indirectly related to housing, as the stupendous ripple effect of the bursting housing bubble should make painfully obvious.

Once these material needs are substantially met, desire for health care—without which there can be no enjoyment of food, clothing or shelter—becomes a significant, perhaps a principal, driver of the economy."

These are important and reasonable statements. It's simply ludicrous for anyone, especially an economically illiterate, newly-elected, politically-immature president to state that any one sector has "too much" spent on it, when that spending is the result of consumer choice.

Then, for the first time in my memory, I actually read a cite of some economic research on the topic. Karpel continues,

"In a 2007 study, Stanford University economists Robert E. Hall (who will take office next year as president of the American Economic Association) and Charles I. Jones reported that modeling they've conducted has found that mid-21st century U.S. health-care expenditures would optimally amount to 30% of GDP or more. They wrote:

"We examine the allocation of resources that maximizes social welfare in our model. We abstract from the complicated institutions that shape spending in the United States and ask a more basic question: from a social welfare standpoint, how much should the nation spend on health care, and what is the time path of optimal health spending? . . .

"Viewed from every angle, our results support the proposition that both historical and future increases in the health spending share are desirable. . . . [W]e believe it likely that maximizing social welfare in the United States will require the development of institutions that are consistent with spending 30 percent or more of GDP on health by the middle of the century." "

As our life expectancy increases, is it not reasonable to expect that we, as a nation, will spend more of our increasing disposable income on health care? More people are more active at older ages than in decades past. Joint replacements are more common.

Why should our government unilaterally decide how much is "too much" health care for Americans to buy?

When Biased Reporting Goes Too Far And Misinforms

Over the past few weeks, I've noticed something in CNBC's coverage of the health care legislation that constitutes not just sloppy reporting, but genuine misinformation.

Carl Q, the hispanic co-anchor of the network's morning Squawkbox program, now exhibits a rather strange behavior for a news program anchor. Either he is really stupid, and I don't mean that lightly nor euphemistically, or he's been given orders to ignore certain realities.

Here are just two examples, out of several I've seen this month, of what I mean.

A few weeks ago, Carl Q interviewed Virginia Republican Representative Eric Cantor on health care. After Cantor laboriously catalogued several Republican ideas, presented for inclusion in a health care bill, Carlos asked Cantor,

'So, if you defeat this bill, do you declare victory Congressman?'

Anyone watching the interview just saw Cantor say that Republicans know that things must improve in the health care sector, and that he had just ticked off a number of ideas for introducing substantially more competition without government involvement as a provider.

Carl the Q simply ignored these, and, instead, attempted to paint Cantor and his colleagues as purely negative and only wishing to halt any health care reform.

You have to wonder, if Carl were not given instructions to do this, how he can be allowed to remain in his job when he's so obviously mentally impaired. He cannot process statements by his interview subject and respond to them contextually.

Then, just this week, South Carolina Republican Senator Jim DeMint was interviewed by the very same Carl the Q. Once again, the Senator rattled off several ideas which Republicans had offered for health care reform. Once again, Carl the Q responded by totally ignoring DeMint's remarks, saying, to paraphrase,

'So, Senator, is there any possibility Republicans will compromise on cooperatives instead of a single-payer model in the health care bill?'

It's apparently a reflexive response that Carl can't hear his Republican Congressional interview subjects' answers about solutions to health care costs, etc.

A wide range of Republicans now routinely offer a coherent, sensible set of solutions, including:

-medical tort law reform
-interstate insurance competition, ending state-bound regulation and marketing, to increase competition
-relaxing/removing mandates so that consumers may purchase exactly what they choose
-tax-based credits or other treatment to place all consumers on a level field in terms of before- or after-tax basis for health insurance expenses
-a government-funded credit for pre-existing conditions insurance, distinct from that offered by for-profit entities

Why CNBC can't manage to acknowledge these truths is beyond me. Unless, of course, you assume the network, as a matter of policy, simple chooses to tilt the news this dramatically.

Otherwise, one is left to conclude Carl Q is totally unable to do his job, and should be fired for incompetence.

After all, if a news anchor can't reliably and correctly report news and interview newsmakers, of what use is he?

CNBC's Resident Idiot Strikes Again

Earlier this week, CNBC resident idiot and economic-pretender Steve Liesman demonstrated why he loses so many debates, especially with Rick Santelli.

On the morning in question, Squawkbox had Wisconsin Republican House member Paul Ryan as guest-host.

Ryan, in response to a typical charge that conservatives/Republicans in Congress were simply 'against healthcare reform' and had no ideas of their own, quickly rattled off several bills proposed by Senate or House Republicans, but ignored by Democrats. His own proposal, he noted, covers the poor uninsured by providing a (roughly) $5,000 amount as a credit or rebate to use for health insurance.

When Liesman contended that this would cost Treasury, Ryan corrected him, explaining current treatment, taxes typically paid by these filers, i.e., not much, and the alternative of redesigning our entire healthcare finance system just to cover several million people.

Liesman then stared blankly at Ryan, mouth open, eyes dull, uttering something like,

'I'm sorry, I'm just not getting it, Congressman.'

Even I had understood Ryan's explanation, and I'm sure most viewers did, too.

Ryan smiled and patiently replied that he'd take Liesman back through the numbers- again- after the commercial break.

It was a priceless moment. CNBC's clueless economic reporter didn't have a clue about Ryan's rather straightforward manner of providing healthcare insurance for the poor, and the entire program had to stop until the staff dunce 'got it.'

As if it mattered. Or Liesman would be able to retain the explanation for more than a few minutes.

Robert Reich's Flawed Analysis of Public Healthcare

Robert Reich, former Clinton labor secretary and liberal economics professor, now at UC Berkeley, wrote an extensive defensive of a governmental healthcare option in yesterday's Wall Street Journal entitled "Why We Need a Public Health-Care Plan."

My overall reaction to Reich's poorly-reasoned argument is that, if this is an example of his thinking, I can't understand how he managed to receive an academic appointment, let alone a PhD in his field. His logic is flawed and his reasoning is sloppy.

Essentially, the error Reich commits is to assess the impact of a public health option in the future as if vibrant, profitable private healthcare options were still available, which therefore would be carrying much of the burden of the true cost of healthcare not paid by that same public option.

For example, Reich wrote,

"But before we even get to this point, it's important to recognize that those terrifying CBO cost projections significantly overstate the costs. They did not include potential cost savings from the lynchpin of health-care cost containment: a so-called public option that would give people who don't get health care from their employer the choice of a public insurance plan. Why? For the simple reason that the Senate committees hadn't yet agreed on a public option. Yet without a public option, the other parties that comprise America's non-system of health care -- private insurers, doctors, hospitals, drug companies, and medical suppliers -- have little or no incentive to supply high-quality care at a lower cost than they do now."

Reich's final statement in this passage is simply untrue, and displays his ignorance of how business, as opposed to economics, actually works. Implicit in Reich's statement is an accusation of illegal oligopolistic behavior by private healthcare providers. Even without a public option, each healthcare insurer/provider has a motivation to supply lower-cost care in order to secure a larger market share and, thus, enjoy economies of scale and higher profits for shareholders. With each provider attempting to do this, they all have to keep up with each other in competing for healthcare dollars.

Of course, allowing cross-state-line competition would make this motivation even stronger.

Reich later wrote,

"Critics say the public option is really a Trojan horse for a government takeover of all of health insurance. But nothing could be further from the truth. It's an option. No one has to choose it. Individuals and families will merely be invited to compare costs and outcomes. Presumably they will choose the public plan only if it offers them and their families the best deal -- more and better health care for less."

This is highly disingenuous of Reich. He ignores, or fails to understand, that practitioners of medicine, and drug manufacturers, can only give special discounts to the federal government's "public option" so long as they can make up the profits on the private healthcare plans.

In effect, Reich fails completely to realize that subsidization will occur, in part, as a result of government's coercive behavior with providers of medicine and medical care.

Ask yourself this question. If the government did not, itself, provide a 'public option,' but, instead, issued limited-purpose, government back debt specifically to fund a standalone, independent provider of the 'public option,' licensed to do so by the government, but without coercive legislation or other actions, how many pharmaceutical companies, doctors and hospitals would cut special deals with this firm?

Wouldn't that new 'public option' firm's attraction for healthcare deliverers be its potential market share? Why would it have any competitive advantage over existing private firms, other than government coercion?

Reich continues his misleading and wrong-headed reasoning in the following passages,

"But, say the critics, the public plan starts off with an unfair advantage because it's likely to have lower administrative costs. That may be true -- Medicare's administrative costs per enrollee are a small fraction of typical private insurance costs -- but here again, why exactly is this unfair? Isn't one of the goals of health-care cost containment to lower administrative costs? If the public option pushes private plans to trim their bureaucracies and become more efficient, that's fine.

Critics complain that a public plan has an inherent advantage over private plans because the public won't have to show profits. But plenty of private plans are already not-for-profit. And if nonprofit plans can offer high-quality health care more cheaply than for-profit plans, why should for-profit plans be coddled? The public plan would merely force profit-making private plans to take whatever steps were necessary to become more competitive. Once again, that's a plus.

Critics charge that the public plan will be subsidized by the government. Here they have their facts wrong. Under every plan that's being discussed on Capitol Hill, subsidies go to individuals and families who need them in order to afford health care, not to a public plan. Individuals and families use the subsidies to shop for the best care they can find. They're free to choose the public plan, but that's only one option. They could take their subsidy and buy a private plan just as easily. Legislation should also make crystal clear that the public plan, for its part, may not dip into general revenues to cover its costs. It must pay for itself. And any government entity that oversees the health-insurance pool or acts as referee in setting ground rules for all plans must not favor the public plan."

This last paragraph is Reich's most egregious error of logic. He points to a sort of portable voucher which he hypothesizes being given to each consumer, with which to purchase healthcare. But he simply omits, and denies the potential for the 'public option' program to additionally run at a loss, charging below-market prices in order to gain share. Were it a standalone firm, the 'public option' purveyor would be charged with anti-competitive pricing behavior. In anti-trust law, it's called "predatory pricing."

The legislation to which Reich refers is hypothetical, and, in the event, will never have real force. The phrase "it must pay for itself" is laughable, and simply reveals Reich, even with his Washington experience, to be hopelessly naive about how the healthcare plan which he champions will really work.

Honestly, if the terms on which Reich insists a public option were actually used, and enforced, there wouldn't be a problem, because the effort would fail miserably. However, you can be sure that none of Reich's provisos will be included in Congressional legislation or, if included, will not be enforced.

Just consider what a mess Congress made of the mortgage markets by failing to oversee Fannie and Freddie. Thanks to Congress, both parties, by the way, private mortgage conduits were elbowed out of business by GSEs which ran amok and ruined a big chunk of our financial system.

Do you want the same type of results in the healthcare sector?

Reich makes another statement near the end of his editorial,

"As a practical matter, the choice people make between private plans and a public one is likely to function as a check on both. Such competition will encourage private plans to do better -- offering more value at less cost. At the same time, it will encourage the public plan to be as flexible as possible. In this way, private and public plans will offer one another benchmarks of what's possible and desirable."

Again, he's off in academic economic dreamland. This is not what will occur.

Instead, a heavily and stealthily-subsidized federal 'public option' will drive private healthcare insurers out of business by underpricing care and risk. When employers realize that they can more cheaply fund their healthcare benefits by buying the public option, private plans will disappear.

Reich simply ignores that almost all US consumers are covered by third-party payer plans, and, thus, don't even make their own decision about who provides their healthcare insurance.

Why did the Journal even print this naive blather? Perhaps to embarrass and reveal Reich for the misinformed, lazy analyst that he obviously is?

Do Healthcare Costs Make US Business Uncompetitive?

What sort of analysis would make you conclude that a sector of the US economy accounting for 17% of GDP requires radical, forcible restructuring?

If someone told you that the sector's costs, as inputs to other parts of the US economy, were inhibiting US competitiveness on a global basis, what evidence would you require to believe that contention?

Friday's Wall Street Journal featured an article by Betsy McCaughey, the now-legendary figure who is credited with having derailed HillaryCare in the 1990s. She was a lieutenant governor of New York who switched parties, left the field of political offices and now runs a health-related concern to reduce deaths from infection.

Responding to the current administration's claim that US healthcare costs are an economic burden on American business which must be forcibly restructured, Ms. McCaughey offered rebuttals to five claims by the administration.

First, Ms. McCaughey correctly dissects the administration's claim that because Medicare is in financial trouble, all Americans must be put on a federally-mandated healthcare 'diet.' It's a non-sequitor.

If anything, Medicare's and Medicaid's problems suggest they should be fixed prior to giving the federal government any further role in healthcare.

Next, Ms. McCaughey notes that the rate of increase in healthcare spending has actually fallen in the past five years, to a 6-7% range, from 13% in 1980. She notes an apple-to-oranges comparison by the current administration alleging that premiums have risen, writing,

"The real cause is the declineing share of care paid for out of pocket (down to 15% today from 33% in 1975). Auto-insurance premiums would also skyrocket if coverage suddenly included oil changes and tune-ups."

Regarding the alleged added 'burden' of healthcare spending today by families, the author notes that, since 1960, four budget items have accounted for a little over half of American family spending- food, energy, housing and healthcare. These made up 53% of the 1960 average household budget, and 55% today. She goes on to contend that Americans spend more for healthcare in part because they can afford it, and they "get more for it" than do Europeans using state healthcare systems.

Ms. McCaughey revisits, again, the tired old argument that Euopean state-run healthcare is cheaper than that in America. She cites statistics on medical innovation in America, and the rising rates of surviving various health problems, such as breast cancer or heart disease. As she notes,

"If you had a heart attack in the 1980s and made it to the hospital you had only a 60% chance of living a year. Now your chance is over 90%. No one wants 1980s medicine at 1980s prices. And in 10 years, no one will want 2009 care."

Finally, she tackles the economic argument that we need to cut healthcare spending in order to save American jobs. She writes,

"At a time when the economy is ailing and the president is bailing out industries to protect jobs, his advisers recommend shrinking the health-care industry. It currently provides 1.4 million jobs- 10 times the U.S. work force of General Motors and Chrysler."

Ms. McCaughey provides some persuasive arguments not to attempt to pass an omnibus healthcare bill this summer, as the Democrats are so eager to do.

But, beyond her excellent refutations of the White House's report on the healthcare situation, there remains a fundamental lack of a convincing, compelling business case to sustain the contention that American medical costs currently cost American business growth, profits, or jobs.

We have no trend information demonstrating the contention. Nothing about comparative medical expense levels and corresponding health indicia across the globe. Nothing relating healthcare spending, health, and business growth, profitability or job growth.

Nothing has been presented which clearly demonstrates a significant decline in American economic performance traceable to, and only to, rising healthcare costs.

Without this type of evidence, who would be foolish enough to radically, but vaguely, restructure our healthcare sector?

Ironically, this drive by the Democrats to federalize healthcare may, and probably will, only succeed in putting larger costs and clumsier procedures into practice, while resulting in a less-healthy American population.

This is progress? Or change you would want?

The Latest Government Canard: Our Healthcare Costs Hold Us Back

I heard some excerpts from the current administration's tired, repetitive arguments that the US healthcare system, and its costs, are now a significant anti-competitive burden for US businesses. That only by federalizing the system can its costs be contained, and, thus, the primary goal of being globally competitive can be attained.

Really?

You know, if that were truly a business proposition, it would be tested. There would be evidence of the current loss of competitive value or strength. A case would be made for how a new system would work, how its costs would be lower, at the same or better care levels, than the current one. How this would translate, dollar by dollar, into allegedly lower costs for the same business output in US companies.

Instead, all we hear is empty claims. Scary talk. And statements that pose as fact, without any evidence whatsoever as to the veracity of the claims.

This troubles me greatly.

Sure, I have reservations about federal health insurance "competing," with taxpayer-financed subsidies, with private sector providers. Everything critics allege will almost certainly be true, because no private firm can compete with a rival that has: access to government funding, and; represents the law-making authority in the nation. You'd have to be crazy to compete on those terms.

You'd know that, should your government rival somehow not attain sufficient market share, they could literally change whatever laws were required to eventually put you out of business.

But prior to getting into those details, the very emptiness and falsity of the top-line argument of the current administration, and many in Congress, is disturbing.

When did these guys suddenly begin to care about business' healthcare burden? If they are so concerned about US competitiveness in a global market, how about cutting US tax rates for business and simplifying regulation? And halting the idiotic card check drive?

No, this isn't about helping business. This is about lulling business into believing they will receive something positive from the gutting of the private healthcare insurance and delivery sector of our economy.

This is a mistake we will come to regret. And soon.