Coyote Blog

The Senate health care bill relies for much of its funding on a tax on so-called "Cadillac" health care plans.  But what happens when employees and employers inevitably change their behavior in the face of different incentives?

History teaches us that tax policy has a huge effect on behavior.  Witness the fact in health care the non-nonsensical fact so many people rely on their employer for health care.  As we see today, this is a really bad idea, but it was hatched because tax law provided incentives for paying compensation in the form of health insurance premiums, since these are not subject to either income or payroll taxes.

Already, employers are offering employees what are effectively buy-outs of health care -- higher pay in return for reduced health care benefits.  For employers, the upside risk on health care costs now outweigh the tax advantages of health insurance as a compensation tool.  Given this trend, what do you think will happen when employees suddenly have the same incentive, to roll back health care coverage to get under whatever bar is set for an insurance package Congress thinks is too rich (hint:  wherever the bar is set, it will be below the health insurance Congress provides itself).  Employers and employees are now going to have a shared incentive to back off on health care benefits in exchange for more cash.  Think of the sharp minds on both sides of a UAW contract negotiation - does anyone really think that these guys won't figure out a win-win to avoid paying the surtax?

Three to five years from now, even before the system goes bankrupt from inevitably expanding costs  (you didn't really buy that stuff about the operator of Amtrak and the Post Office improving the industry's efficiency, did you?), we are going to be talking about the gross shortfall in tax revenues to support these programs, all because people change their behavior in the face of changing incentives.

In 2003, my company was in some serious financial problems.  Post 9/11 commercial insurance premiums had just risen substantially, so much so that my premiums went up more than my total annual profits.  At the same time I found out that a number of operations I had just acquired were profitable only because they were not in compliance with labor law, and my crash program to bring them into compliance was going to put me deeply in the red for that year.

I did a whole bunch of things to right the ship, but the two most important were 1)  I eliminated a whole layer of management, slashing 5 vice-presidents and having all the front line managers report directly to me; and 2)  I eliminated the smallest and worst performing business units.

Now, contrast this to what governments do in the same situation.  Their first response, of course, is to do something I could not do - compel more revenue for themselves by increasing taxes.  Those of us who make our living by the free decision making of others don't have this dictatorial option.

The second thing that governments do is cut their MOST important, MOST valuable operations.  In Seattle, it was always fire and ambulance services that would be cut.  Because the whole game was to find the cuts that would most upset the public to try to avoid the necessity of having to make cuts at all.  Its an incredibly disingenuous process.  Any staffer of a private company that made cost savings prioritization decisions like government officials would be fired in about 2 minutes.

The third thing that governments do if forced to actually, really cut costs (meaning that every other stalling tactic, taxation method, and accounting trick has been exhausted) is to cut field staff who actually do the work rather than high-paid, bloated administrative staffs.  This means teachers get cut but not vice-principals.  And it means that preventative maintenance gets cut and not transit staffers:

Having removed a mere 25 employees so far, and having just suffered its deadliest year ever, Metro officials now want to raid $10 million from the agency's preventive maintenance fund in order to cover operating expenses, including salaries and benefits. Metro managers would rather skimp on passenger safety and reliability than clear out the system's deadwood and force serious concessions by the transit union.

Moreover, even as it asks riders to sacrifice, Metro is fattening itself up, hiring two new "senior planners," one to a newly created position. According to Metro's official job description, they will be "responsible for participation in the development of an annual business plan ... identifying opportunities for future growth and development" and "defining future strategies."

I am sure there are more landmines hidden in the Senate Bill, but the Heritage Foundation has parsed an implementation schedule from the most recent bill:

2010: Physician Medicare payments decrease 21% effective March 1, 2010

2011: "Annual Fee" tax on health insurance, allocated according to share of total premiums. Begins at $2 billion in 2011, then increases to $4 billion in 2012, $7 billion in 2013, $9 billion in the years 2014, 2015, and 2016, and eventually $10 billion for 2017 and every year thereafter. Two insurers in Nebraska and one in Michigan are exempt from this tax.

2012: Medicare payment penalties for hospitals with the highest readmission rates for selected conditions.

2013: Medicare tax increased from 2.9% to 3.8% for incomes over $250,000 (joint filers) or $200,000 (all others). (This is stated as an increase of 0.9 percentage points, to only the employee's share of the FICA tax.)

2014: Individual mandate begins: Tax penalties for not having insurance begin at $95 or 0.5% of income, whichever is higher, rising to $495 or 1% of income in 2015 and $750 or 2% of income thereafter (indexed for inflation after 2016). These penalties are per adult, half that amount per child, to a maximum of three times the per-adult amount per family. The penalty is capped at the national average premium for the "bronze" plan.

2015: Establishment of Independent Medicare Advisory Board (IMAB) to recommend cuts in Medicare benefits; these cuts will go into effect automatically unless Congress passes, and the President signs, an override bill.

2016: Individual mandate penalty rises to $750 per adult ($375 per child), maximum $2,250 per family, or 2% of family income, whichever is higher (capped at the national average premium for the "bronze" plan). After 2016, the penalty will be increased each year to adjust for inflation.

There is a link in the original to a more detailed timeline.  There is a lot more that is left out of this brief timeline, see it here.

There are very few problems that can't be traced to information and incentives.  I thought of this when Tyler Cowen discusses an attempt to improve health care costs with better information:

The health care reform bill before the U.S. Senate would require hospitals to publicize their standard charges for services, but New Hampshire and Maine have gone much further in trying to make health care costs more transparent to consumers.

New Hampshire and Maine are the only states with Web sites that let consumers compare costs based on insurance claims paid there.

In New Hampshire, the price variation across providers hasn't lessened since the Web site went live in 2007.

The problem is that this is all useless if individuals have not particular incentive to shop.  If I were on Unemployment, would I bother to check a web site to see which unemployment offices had the lowest operating costs and go there to get my check?  No way, what incentive would I have to do so?  I am going to the closest one, or the one with the fewest lines.  Ditto with most people and health care:

Of course, the new health care bill will only make this worse.   Those of us who actually have an incentive to shop, either with high deductible policies and/or HSA's will see our policies banned.   The new health care bill has done nothing but attempt to drive this line all the way to zero.

Update: IBD publishes on the exact same topic (I beat them by 12 hours).

Patients have little direct connection in paying for their care. Their role has fallen significantly. Meanwhile, the government's involvement has grown, as has that of the insurance industry.Because so many Americans rely on an insurance policy or a government program to pay their health care bills, the internal governors that temper the rest of their purchases are turned off. When a visit to the doctor's office or a diagnostic test costs them a mere $10 or $20 co-payment out of pocket "” or there is no charge at all "” cost has little impact on their decision to see a doctor.

"By not knowing the full costs associated with health care, consumers demand more and 'overuse' it," Kenneth E. Thorpe explained a few years back in Health Affairs.

Americans would be more judicious in seeking health care "” they would self-ration "” if the right incentives were in place. An effective way to cut overuse and bring down costs would be to encourage through public policy the use of health savings accounts. If consumers used HSAs to pay the full amount for medical care at the point of service rather than letting employer-funded insurance or a government program pay the bills, the demand would fall.

The Democrats' health care legislation, however, puts more distance between Americans and the payment process and promotes dependence on government. That will only drive down consumers' out-of-pocket expenses even further and force overall health care spending upward. Under such a regime, the system will be worse off than it is now.

The bad news:  The Democrats are going to pass a half-baked mess of health care insurance changes.   Several opponents of the bill are saying there is a silver lining -- that this will allow Republicans, who did such a bang-up job when they last controlled Congress and the Presidency, to get back in power.  Color me less than excited.

Good editorial today in the WSJ on the myth of government health care cost control:

A field as dynamic and innovative as U.S. medicine, in which costs are largely driven by new technologies and better ways of caring for patients, is rife with complexities and uncertainties. But no one bothered to strike that note of caution when Washington was hopped up on a cost-control gambit that was too painless to be true. The new cost-control apologists concede that there isn't any actual plan for controlling costs: Throw enough speculative policies against the wall, they say, and some breakthrough will stick. Yet Mr. Orszag's no-less-confident predecessors spent decades trying to pull down Medicare spending with little to no success. Technocracy rarely if ever works as intended. Mr. Gawande points to the case study of U.S. farm policy, and if politically sacrosanct agriculture subsidies and rural price-supports are the best to hope for, then what's the worst?

More relevant examples include Medicare's "relative value" payment scale, which was designed in 1985 by the Harvard economist William Hsiao to encourage more primary care. That's this year's rallying cry too. "Diagnosis-related groups" were introduced into Medicare in 1983 to alleviate hospital cost growth, and what a monumental success that turned out to be. With only brief periods of relatively slower growth, nominal Medicare spending has risen on average at an annual rate of 9.6% since 1980. Over the same period total Medicare spending has grown 13-fold, climbing from 1.2% of the economy to 3.2% today.

Congress lacks the stomach for serious cost control in any case. One policy Mr. Orszag favors"”Medicare penalties for hospitals that re-admit certain patients"”is limited to only three conditions in the Senate bill, and the penalties are trivial.

Another"”a putatively independent commission that is supposed to enforce cost cutting"”is barred from going after costs incurred by doctors and hospitals, which leaves out more than half of Medicare spending. Earlier this year Mr. Orszag got into a heated debate with Henry Waxman over such a commission at a dinner party hosted by Connecticut Rep. Rosa DeLauro, precisely because the House baron enjoys the political power that flows from controlling health spending.

Paging Friedrich von Hayek.  The administration constantly whines that none of his critics ever offer an alternative (a patently false statement that seems to play well in the sympathetic press, very parallel to the global warming alarmist charge that skeptics haven't offered an alternative explanation of past warming).

Hmmm. One liberal sage noted in a 2007 paper that "four decades of empirical research" have shown that insulating people through third-party insurance coverage "from the full cost of health care has been responsible for anywhere from 10% to 50% of the large increase in health expenditures." Ultimately, he concluded, increasing cost-sharing would give individuals a direct stake in more prudent purchasing, as opposed to today's invisible health dollars that vanish as more expensive premiums, foregone wages and higher taxes.

Those are the words of Jason Furman, now the White House deputy economic director who seems to have been put into witness protection. Every serious health economist in the country recommends reforming the tax exclusion for employer-sponsored insurance, perhaps by converting it to a deduction or credit. Cost control will never stick unless it is extricated from politics and transferred to individuals to make their own trade-offs.

Such reforms were ruled out by union opposition, so the Senate gestures at them with a 40% excise tax on high-cost insurance plans, on the theory that two wrongs will make a right. But this untargeted tax will simply raise the cost of coverage for all workers in a given pool"”it's too clever by 40%"”while doing nothing to stem the distortions from first-dollar, third-party insurance.

This was simply amazing to me.  For years, I and others have said that putting more health care spending under insurance plans was going exactly the wrong direction, both from an individual choice as well as a system cost perspective.  By eliminating the need or incentive to shop by the consumer of services, prices almost inevitably rise.

Here is a fabulous smoking gun example from my windshield repair today.  I happen to have free windshield replacement in my insurance policy.   I called the insurance company and said I had an auto glass claim.  I was transferred to Safelite Auto Glass, who apparently (very intelligently) have a contract to process claims for my insurance company.  They said I could use any provider, but would I like them to call out someone for me -- if I used their choice, the insurance company would guarantee the work.

Well, what did I care -- I wasn't paying for it -- so I had them make an appointment for me.  Unsurprisingly, it was with Safelite Auto Glass.

I must add here that Safelite did an exceptional job, the guy who showed up at my workplace was friendly and competent.  No complaints at all about the service or workmanship.

Anyway, I got a bill for which I owed zero dollars, which I suppose is heading right this minute for the insurance company.  Before I show it to you, I was curious what I would have paid for this service if it hadn't been insured and I shopped around.  I got just one quote - from the Safelite Auto Glass web site.   This is a bit unrealistic because for a purchase this large, I would have gotten several quotes.  But this was the only quote I needed.  The charge to me if I bought the new glass service with my own money without insurance was$321.05  (click to enlarge).

And this was the bill I signed for the insurance company:

For a total of $710.40.  Same service.  Same car.  Same customer.  Same part.  Probably the same repair guy.  2.2x higher price.

Now, I suppose I might be willing to believe there is some invoice pricing game here and the insurance company may get a discount over invoice, similar to car sales, though I am not sure what their incentive would be for this game -- it should be the opposite.  In fact, we can be nearly positive they are marking up the price to insurance companies given a) the web quote says right up front it is not good for insurance work and b) I have already shown how glass companies give enormous consumer kickbacks for insurance work.

If I had cared, I would have eschewed the offer on the call to have them set up the appointment and shopped around for the best kickback.  All a cross subsidy from those who don't use the insurance to those who do use the insurance.  Talk about a terrible incentive.

I think the conclusion is pretty strong.  Anything we shift to insurance from having individuals pay out of pocket gets substantially more expensive.  And this doesn't even address my changing willingness to live with a small windshield crack and avoid this purchase altogether when I am paying the bills vs. when I am not.

This is an amazing contortion:

According to Phil Klein of the American Spectator, Christina Romer, head of President Obama's Council of Economic Advisers, had this to say today about the Senate's proposed excise tax on high-end health insurance policies:

"Part of the idea of how that is going to work is precisely because it does empower consumers. It empowers each of us to have an employer-sponsored plan to call our HR office and say, "˜Would you negotiate harder? Would you think about (whether this) is the most efficient plan out there, because I don't want my plan paying an excise tax.' So I think that's something that is very much empowering consumers."

On any number of occasions from October through February, I predicted that this recession would top out at perhaps 9% unemployment at the most, and would probably not be as bad as the recession of the early 1980's.  My logic was that we had a mortgage-driven banking crisis, but that the crisis was perhaps not as bad as that of the late 1980's and that many fundamentals (e.g. interest rates) were looking way better in this recession than in the early 1980's.  I honestly thought that Bush and Obama Treasury and Fed officials were declaring the sky was falling more from the danger to their beloved former employers on Wall Street than due to any economic fundamentals.

Well, obviously I was wrong.  Unemployment has topped 10% and could be headed higher.

So the question is, do I accept that others saw something I did not, or do I crack open the self-serving excuses.  Well, at the danger that this will fall into the latter category (I will leave that to readers to decide) I do think some things have changed since late last year that have contributed to worsening the economy.

Businesses are reluctant to invest when the returns on their investment are wildly unpredictable, particularly when future income changes are more driven by changing acts of Congress rather than fluctuations in the market.   Over the last year the Congress and Administration have:

• Printed trillions of dollars of new money, raising the risk of future inflation
• Borrowed trillions of dollars, sucking capital out of private lending markets
• Run up deficits that pretty much guarantee future tax increases
• Toyed with health care bills that will substantially increase the cost of labor
• Toyed with climate bills that will substantially increase the cost of fuel and electricity
• Demagogued industries with average to below-average profitability for making obscene profits that must be reduced (e.g. health insurance companies who make 3-4% of sales)
• Taken over whole industries (autos, banks) and run them to the benefit of favored political constituencies, even when it violates the law (e.g. trashing for secured creditors of auto companies in favor of the UAW).
• Demonstrated a disdain for money-making by imposing populist compensation limits on executives of out-of-favor companies and industries.
• Spent money in the stimulus mainly to add government jobs, every one of which is generally focused on making my life running a business harder.  If you do not understand or believe this, you have not run a business that employs people.
• Shown a general philosophic hostility towards markets and capitalism

I am sure this is just a subset (Louis Woodhill has more in this vein here), but these all have negative effects on investment.  My company for one has backed out of several planned expansions this winter for four reasons:

1. Half of my costs are labor, and I don't know how much Congress is going to increase my labor costs.  Current health care bills will increase it at least 8% -- given that my typical margin in 5-8% of sales, a government action that increases half my costs by 8% is worrisome.  Worse, my smaller competitors will not bear this expense under certain versions of the legislation.
2. My second highest expense is fuel and electricity.  I have no idea right now how much Congress may raise these expenses.
3. Capital for small businesses is gone.  I can get secured equipment financing, but that is it.
4. Assuming I make any money from these investments, I have no idea how much I will be able to keep.  I would not be surprised at all if Obama pushes my marginal rates over 50% -- and investments in my business are just too much work and risk to keep less than half if I make any money.

I used to work as for several years in St. Louis as VP of Planning for Emerson Electric.  I worked for a guy named Chuck Knight, who could be a real pain in the *ss to work for, but was a) brilliant and b) always willing to speak his mind without the typical filters a lot of other executives apply.  It appears that his successor Dave Farr, who I also knew at Emerson, is following in this tradition:

Emerson Electric Co. Chief Executive Officer David Farr said the U.S. government is hurting manufacturers with regulation and taxes and his company will continue to focus on growth overseas."Washington is doing everything in their manpower, capability, to destroy U.S. manufacturing," Farr said today in Chicago at a Baird Industrial Outlook conference. "Cap and trade, medical reform, labor rules."...

Companies will create jobs in India and China, "places where people want the products and where the governments welcome you to actually do something," Farr said.

The unemployment rate in the U.S. jumped to 10.2 percent in October, the highest level since 1983. Emerson, which Farr said employs about 125,000 people worldwide, has eliminated more than 20,000 jobs since the end of 2008 to lower expenses.

"What do you think I am going to do?" Farr asked. "I'm not going to hire anybody in the United States. I'm moving. They are doing everything possible to destroy jobs."

Politicians in both parties are generally clueless about this kind of thing, because very few of them have ever run a business or even even been in a real business position other than as lawyer or lobbyist.  Just look at how George McGovern feels now that he has run a business.

But the Obama administration is almost scary clueless.  In defending their promotion of a good business environment, they cite the most hostile item on their agenda:

"This administration has made a significant commitment to U.S. manufacturing, including reforming the country's health insurance system to bring down costs and make American companies more competitive globally," Griffis said.

Not. One. Single. Clue.

Actually, I think the Obama administration may believe this, which just accentuates their preference for a corporate state wherein "business friendly" means support for the top 20-30 corporations in the country.   In the context of a few old-line corporations with politically powerful unions, health care reform is helpful in that it dumps a bunch of the corporation's commitments to present and past workers onto the taxpayers.  But these are not the companies that grow the economy -- they are just the ones with out-sized power in political elections.

Obama continues to deny that the health insurance mandate which is backed with a penalty to be collected by the IRS is a "tax."  He says "For us to say that you've got to take a responsibility to get health insurance is absolutely not a tax increase."  Three responses:

1. Asking people to take individual responsibility for their health care expenses is not a tax.  Asking them to do so via a particular method, in this case the purchase of an insurance policy rather than, say, just paying expenses as they go, is a tax.
2. Obama might argue that since people are getting value for the policy they have to buy, there is not net tax but just a (forced) exchange of value.  But this is the classic technocratic fault, to assume that the central planner's definition of value is the same as every individuals.  But its not.  Many folks don't get value from a policy, which is why they don't buy one today
3. Even if Obama were right in #2, he would still be wrong given the rules embedded in this bill.  Young, healthy people will be forced to subsidize the old and those with pre-existing conditions by the rules imposed on insurance companies.  These rules effectively make it impossible to charge full cost to the old and sick, so that the young and the healthy will have to pay more.  Because the young and the healthy will not see values in policies at the prices they will be paying (given these transfers), they won't value the policy with is EXACTLY why the law has to force them to buy it.  Which is why it is a tax.

John Stoessel via Carpe Diem

Competition is a "discovery procedure," Nobel-prize-winning economist F. A. Hayek taught. Through the competitive market process, we producers and consumers constantly learn things that force us to adjust our behavior if we are to succeed. Central planners fail for two reasons:

First, knowledge about supply, demand, individual preferences and resource availability is scattered -- much of it never articulated -- throughout society. It is not concentrated in a database where a group of planners can access it.

Second, this "data" is dynamic: It changes without notice. No matter how honorable the central planners' intentions, they will fail because they cannot know the needs and wishes of 300 million different people. And if they somehow did know their needs, they wouldn't know them tomorrow.

Frequent readers know I almost never call statements "a lie."  I try to take the position that reasonable people can disagree without either lying.  I hate all the "Lying liars and the lies they tell their lying supporters" type books.

But I simply can find no other way to explain this statement:

"There isn't anything we could do to satisfy them in this health care bill. Nothing," Senate Majority Leader Harry Reid (D-Nev.) said. "They are so anti-competitive. Why? Because they make more money than any other business in America today. . . .What a sweet deal they have."

I have written about this any number of times, but Carpe Diem also has the numbers at the link - health care insurers are well below average both in profit margin and return on capital, the two most common measures of profitability.  For the last couple of years, most large health care companies have made less than 5% return on sales.

The only other explanation is the neither the House Majority Leader, his staff, President Obama, or Nancy Pelosi and her staff (all of whom have echoed this same meme) have never once spent the 12 seconds going to Google finance or the Wall Street Journal to look the number up.

Nancy Pelosi once said:

I'm very pleased that our Chair of our Democratic Congressional Campaign Committee and member of the leadership will be talking too about the immoral profits being made by the insurance industry and how those profits have increased in the Bush years. We all believe in the profit motive; we all want to reward success.  But having that success come at the expense of America's working families "” have that success come by withholding care, when a person becomes ill, is just not right and we're going to take this issue in a new direction.

Liberal pundit Kevin Drum, who really should know enough to look it up, once said:

It means the health insurance industry is scared that we might actually do something in 2009 and they want to be seen as something other than completely obstructionist. That means only one thing: they've shown fear, and now it's time to bore in for the kill and gut them like trouts. Let's get to it.

It takes eleven pages just to summarize the new 1990-page House government health care bill.  Here is the summary.

The implications for my business is staggering.  I have already mentioned in the previous post that it imposes an 8% tax on wages on my business -- a business where 50% of revenues go to wages and margins are in the 6-7% range.  You do the math.

Worse for us is that nearly all our competitors are ma and pa companies with less than $500,000 in wages a year, meaning that our competitors will be exempt from these taxes, giving them an automatic 4% cost advantage over our company.  Great.

Twelve seconds after this thing passes, I will be on my phone to my attorney to figure out if it is possible to break my company into multiple corporations that all fall under the 500,000 wage limit.  The paperwork and administration for this would be a huge hassle, but it can't be as high as 4% of sales.

Beyond this, I have not seen the detail yet, but the old House bill imposed enormous record-keeping obligations on businesses.  Basically, I would have to know at all times exactly what kind of medical insurance policy every one of my employees has.  Barf.

One of the reasons for substantial variation in the cost of health insurance between the states is the variations in state "must-cover" health insurance mandates.  New York and Massachusetts, both known to have among the most extensive requirements, not coincidentally have the highest average premium costs.

I found this study the other day - it was put together by a health insurance group and is certainly self-serving;  but since it is just a summary of existing law, I don't see any reason why it wouldn't be mostly accurate.

Here is one example table from the report -- it is the type of specialist care that must be covered in each state.  They also have much longer tables on the individual procedures that must be covered:

Gotta make sure that "naturopaths" are covered, don't we?  You can picture the process of specialists marching into state capitals and making their pitch that their profession needs to be covered.

You can get a feeling for what goes on with one example.  One procedure, "Port Wine Stain Elimination," caught my eye.  I assumed this was removal of some type of birthmark, but I was curious and looked it up.  I got this study near the top of the Google search, and in this link you can see the political process of mandates in a nutshell.  Here is the abstract (emphasis added)

background. Port-wine stains are congenital vascular malformations that can be disfiguring and may lead to psychosocial as well as medical complications. The 585-nm pulsed dye laser is very effective in treating port-wine stains. Laser treatment is often viewed by insurance companies as a "cosmetic procedure" and not "medically necessary." Consequently many patients are denied coverage for treatment of their disfiguring birthmarks.

objective. To determine variability of insurance coverage for laser treatment of port-wine stains from state to state. Natural history, progression, and potential complications of port-wine stains arc reviewed and rationale for consistent insurance coverage for laser treatment of port-wine stains is given.

methods. A questionnaire was mailed to 40 dermatologic surgeons in 22 states and the District of Columbia. We reviewed the literature regarding port-wine stains and their potential complications, and health care policy guidelines regarding "medical necessity" and "cosmetic procedures."

results. Insurance coverage for laser treatment of port-wine stains varies from state to state.

conclusion. Based on current health care policy guidelines, laser treatment of port-wine stains should be regarded, and covered, as a medical necessity by all insurance providers.

In other words, the study surveyed a bunch of cosmetic surgeons.  They were asked "should an expensive procedure you provide be covered by insurance."  They all answered "Hell YES!"  Anyone want to bet whether the funding for the study came from the company that makes the laser equipment?

But today, they now have to run to 50 state houses (well, 48 since they have been successful in 2).  In the future, they will just run to Congress.  And we know how good Congress is at saying no to special interests.

Postscript: I would normally assume this is obvious, but after years of blogging I know that I must add that I have nothing against those with port wine stains, I am thrilled that a technology exists today to remove them, but I don't want to pay for it in my policy.

Postscript #2: I am willing to bet that the Venn diagram of the 4 states offering "naturopath" coverage and the 3 states offering "Pastoral Counselors" don't overlap.

Postscript #3: What does a naturopath (whose tools include homeopathy) charge an insurance company for a remedy consisting of at most one molecule of active ingredient in a glass of pure but well shaken water?  Speaking of homeopathy, this is classically funny.

From the AZ Republic, on the yet-again-revived public option:

Health-care legislation heading for the Senate floor will give millions of Americans the option of purchasing government-run insurance coverage, Majority Leader Harry Reid announced Monday, although he stopped short of claiming the 60 votes needed to pass a plan steeped in controversy.  Reid, D-Nev., said individual states would have the choice of opting out of the program. Details of how it would work were still sketchy, but states would get a year after the 2013 phase-in of the new health-care plan to decide whether to participate.

And federal taxes for citizens of opt-out states will be reduced, right?  No way.  This opt-out is a joke.  Its a bit like saying that every individual has the right to opt out of public education in favor of a private school.  Sure they do -- they don't have to attend the public school, but they have to pay for it anyway in their taxes.

Update: Sorry, the AZ Republic has made it almost freaking impossible to excerpt from their online articles without bringing over a load of cr*p code.

Since the New York Times has pretty much become the official media outlet of this administration, I presume that this article represents a new trial balloon in selling government health care.  The pitch this time -- its good for small businesses!  (via Maggies Farm)

President Obama, in his Saturday radio address, said the Democrats' health insurance overhaul would help small businesses and stimulate the economy by providing relief from "the crushing costs of health care "” costs that have forced too many small businesses to cut benefits, shed jobs, or shut their doors for good."....

The House speaker, Nancy Pelosi of California, said the sharp rise in premiums for small businesses offered the latest evidence that Congress must act swiftly on health care legislation.

"This underlines the urgent need for health insurance reform, including a public option," she said in an interview. "We need to have competition for the insurance companies to keep premiums down."

I am only now getting through the 1500 pages of this bill (putting me ahead of Ms. Pelosi in reading it, I am sure), but the last House bill would have been a disaster for my company, increasing taxes on wages by up to 8% and imposing a record-keeping burden that was just horrific.

The NYT and the Democrats are apparently trying to set up a mini-class war within bussinesses, snidely saying these companies have more negotiating leverage.  Sure.  But what they have even more of is the leverage to shape federal legislation to their benefit.  However worse a deal my company may get in free insurance markets due to being small is nothing compared to how much worse of a deal we will get from Congress by being small.

If they really wanted to cut costs for small businesses, they would strip out all the national and state coverage mandates for things like aromatherapy that raise costs so much and let me shop for insurance across state lines.  That would be real competition.  Unfortunately, all Pelosi means by competition is throwing Amtrak into the mix to compete with the airlines.  Yeah, that will do the trick.

I am not sure anyone has actually said this, but that has certainly been the implication, right?  Obama & Pelosi spends a lot of time accusing insurance companies of having profits that are too high, so I have to believe his intention is to reap cost savings by cutting into them.

I have blogged about this before, but Carpe Diem also picks up this thread, observing that health insurance companies are #86 on the list of US industries in terms of profit margins, with a ROS of  3.3%.  As Mark Perry points out, this gives them a profit of about $100 per individual policy.  Not really a very promising source of savings, is it?  But it is very scary for any industry that makes more than 3.3% profits, knowing that the Administration thinks they are making too much money and has shown a willingness to slice into profits it thinks to be excessive.

Kevin Drum thinks John Shaddeg (who is actually my representative) is crazy because he equates the current health care proposals, which Drum says are just to make sure that everyone has decent health care, to "Soviet gulag health care."  Further, Drum concludes that Democrats in Congress are sane and would never ever engage in such over-the-top loony rhetoric as Mr. Shaddeg

But it's a good example of what I mean when I suggest that today's right-wing lunacy is different from left-wing lunacy of the Bush years.  Sure, there were lefty bloggers who went over the top about Amerika and how the NSA was bringing 1984 to life and so forth, but for the most part you didn't have members of Congress taking to the House floor and joining in.  They largely managed to keep a slightly more even keel.

Wow, that will be blood in the water for Conservative bloggers - I can think of a number of Democratic loonies in Congress but I don't want to do the Republican's job for them.  Instead I wrote:

I have no doubt that you have the best of intentions, and that you only want healthy people and two unicorns in every garage. But you are, no matter how well intentioned, achieving your ends through compulsion. You compel person A to pay for person B's health care. You compel doctors and medical suppliers to provide services at costs or at quality levels they would not have provided otherwise. You compel everyone to get insurance -- and not just insurance, but exactly the insurance with the coverage you want, not what they want.

To folks who cherish individual liberties (and who don't look to the Republican party for much leadership on this or any topic) it is all soviet-style compulsion, no matter how pure your motives.

PS- as a libertarian without a horse in the wars between the Coke and Pepsi party, I find this kind of post hilarious. Team Elephant thinks you guys are insane and they are normal, and you think the opposite. You think that calling their president Hitler is fine while they are wrong to do it to yours, and vice-versa. I will give you a big hint. You guys all sound exactly the same. You all use the same tactics. You both have thoughtful members and loonies, both on the sidelines and in positions of power. You both have honest people and corrupt ones. It's like watching Apple vs. PC ads, except those two actually have some differences.

Update:  This from a later Drum piece is exactly what I was referring to.  I am positive the Republicans think the exact same way about Democrats, in fact I hear them all the time saying "We need to get down and dirty like the Democrats and stop being the ones always following the rules."  Apparently Democrats think the same way:

Is it really true that the Democratic leadership acts like a high school social club while the Republican leadership acts more like the mafia?  Step out of line in GOP-land and they'll make you pay dearly: money, committee assignments, and more will be savagely withdrawn if you vote the wrong way.

Self-awareness seems to be in short supply in Washington.

I wondered aloud last week at the fact that I when I raised my annual health care deductible to $2500, my annual premium savings were over $3000.   Which meant that from an economic standpoint, it was crazy to do anything but have a high-deductible health plan (even without considering the knock-on effects to the overall system of my now wanting to actually price shop for services).

TJIC offers one explanation that seems reasonable to me:

What kind of person is unwilling to pay the first $2,500 out of pocket? A person that intends to make lots of claims.

They know that they're going to use much of that first $2.5k.

Question: between one person who has no intention of going to the doctor for every little thing, and another person who does, let's assume that both get broken legs, which push them each to $5k in expenses "¦ which one is going to demand more follow up visits, cancel and reschedule more often, demand an extension on their course of painkillers, etc. ?

The one who was intending to use lots of service down at the low end, I'd wager my middle nut.

Three other possible explanations:

• As alluded to above, it is in the insurance company's interest to get their customers to start actively price-shopping for some medical services, so they encourage high deductible policies.
• Claims in the deductible range tend to be small and carry a disproportionately high overhead / processing cost as a percentage of the claim amount
• It is an economic IQ test, with results somehow correlated to attractiveness as a customer

This latter theory results from my experience at McKinsey & Co, a management consultant.  When I joined, they offered a $5,000 one-year interest-free loan to cover relocation costs.  As I became more senior and was responsible for hiring new consultants, some of them would come to me and say "that's OK, I don't need the money."  I would look at them and respond, "we aim to hire the best young business minds in the country.  If you turn down an interest-free loan, we may have to rethink our hiring decision.  Go sock it in a 12-month CD like I did."  My personal theory was the offer was really an IQ test, not a benefit.

I have a high deductible health plan, which makes a ton of sense to me.  For reasons I don't understand, by increasing my deductible from $100 to $2500 I save over $3,000 a year in premiums.  So even if I max my deductible every year, which I don't, I still don't pay as much in a year as my old BC/BS gold-plated policy.  And as an extra, added benefit, we have actually started price-shopping health care services, and that has been a real eye-opener as well.  Bottom line - one can get things like tests and X-rays a lot cheaper if one has the incentive to shop around.

So I worry about exactly this with the new federal health care bill:

Wendy Williams and her husband liked their health insurance plan.  The premium and annual deductibles made sense for them, and a more "gold-plated" plan was not worth the money.  Yet Massachusetts' health care regulators disagreed, and forced the Williams to pay a $1,000 fine if they wished to keep their insurance plan "” a plan they prefer to a comparable state-approved alternative....

If the federal government adopts an individual mandate, Ms. Williams fears her experience could soon replay itself nationwide.  She's right to fear.  Once there is an individual mandate, interest groups will flock to Washington seeking to have their preferred treatment or service incorporated into the requirements for acceptable health care plans.  Over time, the requirements will grow, and the cost of health care plans for many Americans will increase as a result.  Consequently, many individuals who have health care plans that fully meet their needs will suddenly find themselves "underinsured" "” and taxed fined as a result.

Evan Bayh pretty much gives away the game.  We rob from the unpopular and give to the popular.

You can sort of see this coming. The savings from the pharmaceutical companies and the insurance industry, you can kind of count on that because they're not very popular.

The hospitals are a different story.  People, you know, like their hospitals; they tend to trust their hospitals. The hospitals have pledged big savings. I can easily forecast at some point in the not-too-distant future the hospitals coming in and saying, "You know what, this isn't working exactly the way we expected. Please spare us from this," and them getting a good hearing in [Congress].

The Baucus Health Care bill follows in the tradition of many other pieces of recent legislation in raising taxes in ways such that Congress can claim that it didn't actually raise taxes.  Here are four such taxes in the Baucus Bill  (note that no one that I know of has read any actual legislative language, so this is based on the press releases by the bill's authors.  Actual bill language can only be worse).

Employer Penalty is a Tax: In a step right out of Goldilocks, the Baucus bill will impose "penalties" on employers with no employee health care plan as well as on employers who have plans that are "too rich."  Never mind the insanity of the government micromanaging how an employer chooses to structure his compensation package to employees.  These "penalties" are structured as percentages of wages -- the one for having no health care plan was 8% of wages in the last bill.  This is a direct tax on employment, making hiring people more expensive (effectively the same magnitude as doubling the Social Security tax).  So how does this effect the average person?  Think of it this way, for the same wage, you job will be more expensive to a company that it was before the bill, making it less likely you will get hired at that wage.

Insurance Mandate as a Tax: The mandate that everyone must have insurance is a tax on the young and the healthy, as I explained previously:

People focus too much on the penalty itself being a new tax.  But the new tax is actually the requirement that individuals buy a product (in this case a health insurance policy) that they feel has no value (or else they would purchase it of their own free will today).  The government stopped pretending long ago that these younger middle class families will get much value from such a policy.  In fact, if they did get value commensurate with the premiums they will be paying, the mandate would not be achieving its purpose.  The whole point is that healthy people pay more into the insurnace system than they get back to support sick people.  If that payment is mandatory, then it is a tax, even if it is called an "insurance mandate" instead.

In fact, this is made all the more clear when politicians also suggest that cheaper high deductible health insurance plans be banned, as they were in Massachusetts.  Again, the whole point is to get young healthy people to overpay for insurance, and allowing them to buy sensible, cheaper, high deductible insurance defeats the whole purpose.

In fact, the bill's supporters have explicitly discussed requirements that insurance companies raise the price of insurance to the young and healthy to help reduce premiums for the old and, er, politically more active.  This is a redistributive tax, hidden within an insurance rate structure that will be heavily regulated by Congress.  Though don't expect Congress to admit this when young folks start to complain, they will say "blame the insurance companies."  Which is the whole beauty of such a hidden tax.

Corporate Taxes as Consumer Taxes: The plan would place new excise taxes on insurance companies, drug companies, and medical device providers.  But these taxes, particularly in the low margin insurance businesses (Yeah, I know if you only listened to Obama, you would never realize they were low margin but they are) just get passed onto consumers in the form of higher prices.  Congress knows this, but pretends it doesn't happen, so it can tell the economically ignorant that it hasn't raised taxes on consumers, and that rising prices are all the fault of the evil insurance companies blah blah, you know the drill.

Price Controls as a Tax: A large part of the Baucus Medicare savings is instituting price controls on doctors and other medical suppliers --  basically cutting their reimbursement rates.  This, by the way, just confirms what we all have known, that Obama and the Democrats don't have some mysterious win-win way to cut medical costs.  The only levers they have are 1. Price Controls and 2. Denying care.

There is absolutely no difference to a doctor between price controls and a tax.  A cut in the reimbursement rate from $50 to $40 is the same as having a 20% tax put on his $50 reimbursement.  Again, price controls in this context are just a way of hiding a tax.

And this might be the most dangerous tax of all, as such price controls always, by the immutable laws of economics accepted by monetarists and Keynsians alike, reduce available supply.  Doctors, for example, are going to be less willing to stay in the medical profession.  The result is inevitably shortages and long waits, something that should surprise absolutely no one as shortages and queuing are endemic in every government health care system in the world, starting with liberal darling Canada, whose citizens get medical treatment quickly only by crossing the border into the US.

This year has been a frustrating year for my business.  As many of you know, I am in the business of privatizing public recreation.  We take over the management of public recreation facilities, and are generally able to run them to the same or better standards as the government for less money.  Whereas before we take over, the government typically loses money on a park, we often can run it at a profit AND pay the government rent for the concession rights.

This year, numerous state parks have been threatened with closure in states all across the country.  In many of these states, I have communicated with everyone I could think of, from the governor to state parks leaders, trying to say that companies like ours could probably keep many of these parks open. I told them I wasn't looking for a sweetheart deal - we weren't afraid to bid against other companies, but it was crazy to close parks that could easily remain open.   We have been told any number of times by numerous state leaders that they would prefer to close the park rather than put it under private concession management.

To some extent, this is due to the pressure of public employees unions, who have every incentive to play brinkmanship and force closure of parks rather than set the precedent of having them managed by a non-union private company.  This is unsurprising.

I also understand that there is a fear of private management of public recreation facilities.  I swear the first think I hear almost every time I present on what we do  is that they fear we would put a billboard or a McDonalds in front of Old Faithful.  I kid you not, this charge is as regular as clockwork.  Fortunately, we manage about 175 public recreation facilities to a pretty high standard, and not one billboard or McDonalds can be found at any of them.  A large part of the bid process for any facility management contract is not just the rate or the rent but also the detailed operating standards to which it will be managed.  So this is a normal, but surmountable hurdle.

But even taking into account these usual sources of resistance, I am always just amazed at how vociferous the opposition is to even experimenting with private management.  States like California are simply hell-bent on closing parks a company like ours could easily keep open for the public (to be fair, Ruth Coleman, head of California State Parks, is very open to new models but she gets absolutely no support either within her organization or in the legislature for such new ideas).

But I think I understand this phenomenon better now after reading Kevin Drum today. This is what Drum wrote in response to the DNC ad, which clearly stretched the truth, claiming that Republicans voted to end Medicare:

Why not just tell the truth: Republicans essentially voted in favor of turning Medicare over to private industry.  With only a few words of explanation, this could easily be more effective than the ad that actually ran.  Like so:

Republicans voted to turn Medicare over to private insurance companies!  You heard right: they want to hand Medicare over to the same companies that [insert two or three insurance company outrages here, maybe a Wall Street reference, something about profits over people, etc.].  Democrats will never do that.  Blah blah blah.

Would that really be any less scary than the ad that actually ran?

So for Drum, and I presume for much of the Left, the suggestion that a government service be managed privately is just as bad as the suggestion that the service be ended. In essence, Drum is saying he would almost rather have no Medicare than Medicare provided privately.

It certainly explains a lot, and puts the phenomenon I see in public recreation into a larger context.

Update: A couple of the comments hpothesize the problem is that many in government and on the left just hate profits and the profit motive in general.  One related story -- I was in a meeting with a large state parks organization where a senior person raised the idea of private park management.  Well, everyone hated the idea, but when it looked as if the leadership might still seriously consider the private option, one person in the room said "well could we at least mandate that they can't make a profit."  There was a lot of head nodding at this.

I didn't go off on this and kept a smile on my face.  But I did lose it in an earlier meeting with the head of some government parks we actually did run.  We were discussing park fee increases for the next year (the state had just raised minimum wages about 30% and we were scrambling to make ends meet).  He said he was uncomfortable with the level of profits we made.  I asked him, "Jim (not his real name) does this state pay you more than $25,000 a year to run this park?"  He nodded.  I said, "then you make more profit in this park than I do, and what is more, you didn't have to invest $100,000 in equipment to get your job, nor do you have to rebid for your job every 5 years, nor does you salary go down if for some reason park visitation decreases."

Sometimes I wish I had stood up in that state meeting and said something similar, as in "Why is the money I make in a park somehow tainted because it is the difference between my revenues and expenses and the result of substantial investments and subject to extraordinary risks, while the virtually guaranteed-for-life salary you make, paid for by the same visitors, is somehow pristine?"

The leftish political strategy for over 100 years has been

1. Regulate something
2. Blame the free market for inevitable disruptions caused by the regulation
3. Use the above to justify more regulation
4. Repeat

Obama's speech has a classic example of this:

So let me set the record straight. My guiding principle is, and always has been, that consumers do better when there is choice and competition. Unfortunately, in 34 states, 75% of the insurance market is controlled by five or fewer companies. In Alabama, almost 90% is controlled by just one company. Without competition, the price of insurance goes up and the quality goes down. And it makes it easier for insurance companies to treat their customers badly "“ by cherry-picking the healthiest individuals and trying to drop the sickest; by overcharging small businesses who have no leverage; and by jacking up rates.

This is ENTIRELY a situation manufactured by government and specifically state regulations.  States prevent out of state insurance companies from competing in the health insurance market.  Think you have the same Blue Cross/ Blue Shield I have (or used to have)?  Wrong.  I have Blue Cross/Blue Shield of Arizona.  You have Blue Cross/Blue Shield of whatever state you are in.  If Amazon.com had to create 50 separate state entities all with wildly different regulatory structures, you can bet they would focus on just a few states and there would therefore be a lot less competition.  Obama HAS to know this is true, so this is just a cynical argument aimed at the ignorant and uninformed.

By the way, what evidence is there that having 75% of the market in 5 companies is too concentrated?  I have been in a lot of industrial markets that were far more concentrated than that which were brutally competitive.

Two excerpts from Obama's speech:

That's why under my plan, individuals will be required to carry basic health insurance "“ just as most states require you to carry auto insurance.

Oh, jeez, I sure wish that were true.  Auto insurance covers only catastrophic damages, such as totaling your car or incurring serious liability by hurting someone.   It does not cover regular repairs, preventative maintenance, etc.  Also, state-mandated auto insurance has a range of coverage caps -- if you want a higher cap, you can pay for it.  No one expects their company to pay their auto insurance, and if a company were to provide it it would be considered a taxable benefit.  Compared to our current health insurance system, auto insurance-like health insurance would be a brilliant improvement.  Despite his making this analogy, this is absolutely NOT what he is suggesting.  Also from his speech:

Under this plan, it will be against the law for insurance companies to deny you coverage because of a pre-existing condition. As soon as I sign this bill, it will be against the law for insurance companies to drop your coverage when you get sick or water it down when you need it most. They will no longer be able to place some arbitrary cap on the amount of coverage you can receive in a given year or a lifetime. We will place a limit on how much you can be charged for out-of-pocket expenses, because in the United States of America, no one should go broke because they get sick. And insurance companies will be required to cover, with no extra charge, routine checkups and preventive care, like mammograms and colonoscopies

Update: OK, here is another good pairing, from the same source -- first, he says that a public option will not be subsidized:

They argue that these private companies can't fairly compete with the government. And they'd be right if taxpayers were subsidizing this public insurance option. But they won't be. I have insisted that like any private insurance company, the public insurance option would have to be self-sufficient and rely on the premiums it collects.

But then he makes this comparison:

It would also keep pressure on private insurers to keep their policies affordable and treat their customers better, the same way public colleges and universities provide additional choice and competition to students without in any way inhibiting a vibrant system of private colleges and universities.

See?  The public option will not be subsidized and will work just like public universities which are highly subsidized.

By the way, it is almost impossible for government NOT to subsidize such an entity, in part because of the way government accounting differs from private accounting.  Government accounting is on a cash basis, so large up front investments show as a first year loss with no future expense implications.  In operation, it means capital spending is pretty much free.  And numerous charges that private firms take on, such as liability insurance, are not charged for on government books.   I compete with the government a lot, and have investigated this dynamic in depth.  Even why my costs are lower, the government, because of the way it accounts for things, often thinks its costs are much lower than mine and they under-price us.