Friday, December 18, 2009

The Socialized Medicine Scheme: Bending the Cost Curve






Diagram of Marginal Cost










Proponents of the socialized medicine scheme offer a talking point entitled Bending the Cost Curve. Sounds impressive does it not? However, is the talking point put forth of bending the cost curve merely price controls in disguise?



Definition of Cost Curves:


(1) Short run and long run average cost curves are U shaped,

(2) Short run cost curves are U shaped because of diminishing returns,

(3) Long run cost curves take on a U shape because economies and diseconomies of scale. (1)


Shape of the Cost Curve?

Bending the Cost Curve, that "U" shaped curve in the diagram above, can surely be a different shaped "U". However, the shape will always be "U". Which means marginal cost rises. (2) (3)


Its not about Cost Curves

The concept of a cost curve is being hijacked by politicos when they use the phase "Bending the Cost Curve". That is, there is a complete disregard for the economics of the cost curve itself and merely a catch phrase has been developed that sounds as if sound economics are being applied.

The vast majority of those using the talking point Bending the Cost Curve have no earthly idea what a cost curve is nor the economic theory surrounding the cost curve. In other words, in the current heath-care debate, bending the cost curve is not economics nor political-economy. Its pure politics. Its political speak.

Serious Discussions of Changing the Cost Curve of Health-Care

There are serious discussions on how to lower costs within the realm of health-care. Sound strategies exist that pertain to cost factors such as more efficient organization, physician supply, institutional factors, comparative effectiveness of research, reform medical liability, etc., etc.. In other words, strategies that directly effect a cost curve. (4), (5), (6).

There is a sea of research on how to effectively reduce health-care costs. Ideas and procedures that really do address the concept of a cost curve.

Enter the Politicos

With the political speak talking point of Bending the Cost Curve firmly in hand, politicos merely take the path to price controls. In other words, when politicos say bending the cost curve they really are talking about price controls.

Politicos want votes not real results. Rather than addressing the true problem associated with cost, its more politically expedient to merely apply price controls. Politicos end up with a price argument even though they began with a cost argument. Remember, we are going to bend that mean old cost curve. Forget that, attack price.

The political argument for price controls is articulated with sub-talking points such as the percentage of Gross Domestic Product the USA spends on health-care in comparison to other economies (argued that total price is too high), affordability (argued as price being too high), that the uninsured are uninsured do to price, etc., etc. The point being the politicos make a price argument not an argument for strategies regarding cost factors i.e. bending the cost curve gets thrown out the window in favor of a price argument.

The economic disconnect is that final price is made up of a series of costs. That if you concentrate on cost factors, and truly bend the cost curve then you will have materially changed final price.

However, if you attack final price, and make price a political issue, then somehow artificially reducing price will affect cost? That's the cart before the horse.

Price Control Strategy

You are going to be very hard pressed to find one case in economic history where price controls have ever worked. (7) (8) Then why use price controls? Because really bad economic ideas never die they merely get recycled and sold to the gullible.

What the politicos want you to think is that they have a concern with cost (don't forget that bending the cost curve mantra) but in fact their argument is price and the solution is price controls.

What do Price Controls Produce?

Price controls always end with the same result: depressed supply of the item. Supply falls and rationing of the item occurs.

Sure seems like the rationing argument crops up over and over again within the health care debate. Odd huh?

Price Controls with Increased Price?

As mentioned above, really bad economic ideas such as price controls never die. However, really bad economic ideas can be made even worse. Really? Sure! Why not increase the price first, add some taxes to further increase the price, take the increased revenue produced by the increased price and redistribute to millions of uninsured and make them insured hence creating a demand shock, then slap on price controls and have a real mess. Sounds like a plan!

No Price Control Scheme is Complete without Big Government

When you discuss price controls you are talking bureaucracy. If you are going to control price, you will need plenty of rules and regulations. No rules and regulation manual is complete without an army of government bureaucrats. The current health-care legislation creates upwards of 110 new government departments. Now that's bending the cost curve!

Summary

Politicos are using a the slogan "Bending the Cost Curve" with no real understanding of the economic theory of cost curves. (9) That politicos want you to feel they are concerned with cost when in fact their strategy boils down to price control.




(1) http://www.economicshelp.org/blog/economics/diagrams-of-cost-curves/

(2) http://www.economicshelp.org/microessays/costs/diminishing-returns.html

(3) http://csob.berry.edu/faculty/economics/CostCurves/CostCurves.htm

(4)http://content.healthaffairs.org/cgi/content/abstract/28/5/1260

(5) http://www.kaiserhealthnews.org/Daily-Reports/2009/July/17/CBO.aspx

(6)http://www.brookings.edu/reports/2009/0901_btc.aspx

(7) http://freedomkeys.com/pricecontrols5.htm

(8) http://austrianeconomics.wikia.com/wiki/Price_controls


(9) http://www.politico.com/livepulse/1009/CBO_Bend_the_cost_curve_what_does_that_even_mean.html

Monday, December 7, 2009

Socialized Medicine Scheme: Universal Coverage does not equal Universal Access


The socialized medicine scheme is based in part on the premise that universal coverage creates universal access. What would be the true costs of universal coverage if it truly created universal access?





Defining Terms

(1) Universal Coverage: health insurance coverage for all persons in a state or country, rather than for some subset of the population. It may extend to the unemployed as well as to the employed; to aliens as well as to citizens; for pre-existing conditions as well as for current illness; for mental as well as for physical conditions. (1)


(2) Universal Access: universal access can be defined as access for all to quality health services if need be, with social health protection. Universal access is not, by itself, sufficient to ensure health for all and health equity. The roots of health inequities lie in social conditions outside the health system’s direct control, to be tackled through intersectoral collaboration. Universal access however is the necessary foundation within the health sector on the road to health for all and health equity. (2) (3)


Universal Coverage and Universal Access

From the definition above one can see that universal coverage is on the demand side of the equation. Demand for health-care products and services would certainly increase with universal coverage.

From the definition above, Universal Access is related to supply. Supply of health-care products and services would need to adjust to the increased demand caused by universal coverage.

The Missing Determinant

The missing determinant of universal coverage in relation to universal access, is price. That is, to achieve universal coverage a price (cost) must be paid for those currently uninsured. To achieve universal access an incentive price must exist for supply to accommodate demand.

Price/Cost
To achieve universal coverage a price/cost must be paid. To fully insure the entire population, income and/or wealth must be redistributed. The political class attempts to make the moral argument that redistribution of income/wealth must occur from the producer class to the recipient class as the recipient class is uninsured in large part due to price/cost. That is, the uninsured are in large part uninsured due to affordability of health insurance.

However, the price of health insurance is directly related to the cost of producing/providing health-care. In other words, in the free market, the demand for health-care intersects the supply of health-care, at point price. The price point of health care is known and hence the "price" becomes the cost of health insurance. That is, the risk of facing the price of health-care is then a major component of determining the cost of health insurance.


Price Controls

In the scheme of socialized medicine the argument routinely put forth is that the price to provide health-care is too high. That is, even though demand and supply produce price, the price point is too high. In other words, the natural or true price created by demand and supply becomes a socio-economic argument. As the argument goes, the price is too high because only a certain percentage of Gross Domestic Product (GDP) should be allocated to health-care. That somehow and some way, if the percentage of GDP allocated to health-care was lower, then the subsection of consumers uninsured would find coverage affordable. The argument goes on to compare costs in one country to costs in another country and/or percentage of GDP spent on health-care in one country to another country (one economy compared to another economy). Note that it is a price argument.

Welcome to artificial pricing. In a command and control economy "price" is set artificially regardless of demand and supply. Price can be set artificially too high or too low in a command and control economy. In the socialized medicine scheme argument, "price" is artificially set below the price produced by the previous free market for health-care.

Arguments for artificial pricing are artificial by nature. If consumers value an item then they demand the item. For example, if the Chinese economy demands rice, and rice makes up 20% of GDP, why is 20% wrong and 12% right? Price controls always backfire. (4)

Artificially Set Prices in the Socialized Medicine Scheme

As previous pointed out, in a free market, demand and supply intersect at price. The price point can be afforded by most consumers but a subsection of consumers can not afford price due to their particular command of resources (income). For example, the demand and supply of 42 inch flat screen TV's produce price (p). Price (p) attracts certain consumers while other consumers do not have the resources to allocate to a 42 inch flat screen TV.

In the realm of socialized medicine the political class argument is put forth that in order for the subsection of consumers to afford price, income and wealth (resources) needs transferred to to this subsection of consumers (redistribution of income and wealth). However, the producer class resists the redistribution to the recipient class. Further, the redistribution causes the producer class to have less disposable income to pay for health-care. In other words, the price point of health-care then becomes unaffordable for some producer class members due to the redistribution of income. That is, some of the producer class now slips into the recipient class due to redistribution of income and wealth.

Enter political-economy. If price is artificially set below the free market price, then the redistribution of income and wealth from the producer class can be set low enough to cut resistance and to stop the slippage mentioned above of producer class members falling into the recipient class.

The Effects Producing Universal Coverage through Artificial Pricing and Redistribution

When universal coverage is achieved through artificially pricing and redistribution of income the proponents of socialized medicine then promote that they have given the masses universal access. That universal coverage is the avenue to universal access.

However, access is supply driven. If Price is distorted (artificially set below the market) the supply, which is the summation of suppliers, now faces a disincentive in the form of an artificially low price.

Existing suppliers now have to decide to stay in the health-care field or allocate their resources to other ventures. If price is too low, some suppliers leave the market place. Further, with price set artificially low, many other potential future suppliers e.g. future doctors, nurses, medical device makers, pharmaceutical research companies, etc. shift their resources to other more profitable fields where price is set by the free market. However, other supplier will enter the health-care field but enter on "cost". That is to say, the cost sensitive supplier offers cut rate services, service quality below service quality that was available at Price (p) set by a free market. (5)

Hence artificially low prices set by command and control then causes supply to dry up and/or become of lower quality. The ability to access health-care is then diminished for the entire group of universal coverage participants as demand engulfs supply. Price (p) can not function as the rationing agent as it has been set artificially. Therefore, among an array of rationing agents, time (t) becomes a component of rationing. For example, at artificial price (aP) the supply of hip replacements is 1000 per day. However, universal coverage has created a demand for hip replacements of 5000 per day. Time must pass before the hip replacement can occur for the majority of demanders due to restricted supply.

Summary

Universal Coverage through redistribution of income and artificial pricing leads to a universal access that is rationed through time and the Universal Access is generally of lower quality. That the only way to create un-rationed universal access is to allow the free market to determine price through demand and supply.

However, if price is allowed to be the determinant, price set by the natural forces of demand and supply in a free market, then un-rationed universal access would have a price tag of redistribution of income and wealth that would break the back of the producer class. (6)

Hence universal coverage, with price set artificially low, as proposed by proponents of the socialized medicine scheme, actually leads to rationed universal access for the entire group of participants.



(1)http://www.mondofacto.com/facts/dictionary?universal+coverage

(2) http://www.becausehealth.be/becausehealth/PDF/seminar2009/becausehealth_140509_concept_bc_ws.pdf

(3) Advancing and sustaining universal coverage. In: Primary health care: now more than ever. The World Health Report 2008. Geneva, World Health Organization, 2008. http://www.who.int/whr/2008/whr08_en.pdf

(4)http://www.ncpa.org/sub/dpd/index.php?Article_ID=8146
(5) http://www.dailymail.co.uk/news/article-1234276/Britain-sick-man-Europe-Heart-cancer-survival-rates-worst-developed-world.html

(6) http://www.dailymail.co.uk/news/article-1234660/Pre-Budget-report-Clobbering-middle-earners-national-Insurance-raid-mean-40-000-find.html

Thursday, November 26, 2009

The Socialized Medicine Scheme: Distortions in Risk Management and Pure Risk Transfer

Does The socialized medicine scheme, through mandated one-size-fits-all health care coverage, distort the individuals ability to deploy risk management and consequently distort the pure risk transfer mechanism ? In this article we explore the following questions:

(1) are the individuals decisions regarding risk avoidance, risk reduction, risk mitigation and risk retention being distorted by mandated coverage and the distortions leads to the immediate pure risk transfer aka purchase of insurance?

(2) does the socialized medicine scheme of mandate coverage reverse the proven process of insurance theory and practice and require the immediate transfer of risk (purchase of insurance) with risk management deployed after the fact via through tax disincentives ?

(2a) does the reversal of the proven process of insurance theory and practice lead to risk management becoming a cost item rather than a cost reduction item?

Defining Terms
(1) What is pure risk? A category of risk in which loss is the only possible outcome; there is no beneficial result. Pure risk is related to events that are beyond the risk-taker's control and, therefore, a person cannot consciously take on pure risk. (1)

(2) What is risk management? Risk management is the application of tools and procedures to contain risk within acceptable limits. (2)

(3) What is insurance? A promise of compensation for specific potential future losses in exchange for a periodic payment. (3)


Risk Management
Its well established within insurance theory and practice that one needs to review and employ risk management concepts and techniques before the consideration of the transfer of pure risk (insurance).

Risk management techniques reduce the need to transfer portions of pure risk. The less pure risk transferred means the lower the consideration paid (premium) for the transfer of risk. Hence risk management lowers costs.

Risk Avoidance

The first risk management technique one needs to explore is risk avoidance. This is simply avoiding the risk all together. For example, if you never want to sustain a football injury, then do not play football. However, risk avoidance has it limitations as not all risks can be avoided.

Risk Reduction
If the risk can't be avoided or you want to benefit from an endeavor that involves pure risk, then you need to go to the next step of risk reduction. That is, can one reduce the chances that pure risk might occur.

For example, risk reduction of operating and/or owning a motor vehicle includes taking drivers education, taking an advanced defensive driving course, reducing/combining trips to reduce miles driven, owning snow tires,etc.. Hence the pure risk of an auto accident can be reduced through safety.

Risk Mitigation

Risk mitigation is an exercise in risk management. Since the pure risk exists, and if the pure risk occurs, we need to mitigate the loss. Fire does occur. Owning a fire extinguisher, being trained in the proper use of a fire extinguisher, and placing the extinguisher in fire prone areas can mitigate the scope of the loss if fire occurs.

Risk Retention

Risk retention is the concept that if pure risk exists, and given the other risk management techniques have been deployed, then how much of the ensuing potential financial loss of the pure risk can you reasonably absorbed? This differs per individual. If the maximum potential loss is $100,000,000 can you retain $1000, $5000, or $10,000 of the risk? That is, given an individuals financial situation, what portion of a loss can be financially absorbed before it becomes financially disabling?

Therefore, before one ever explores the transfer of a risk (aka the purchase of Insurance), one must go through the risk management process to access risk avoidance, risk reduction, risk mitigation, and risk Retention.

The Transfer of Risk

Only after you exercise the steps of risk management can you intelligently determine that a particular pure risk exists and how to financially treat the risk. That you can or can't avoid the risk, that you have determined how much you can reduce the risk, that you have determined how much you can mitigate the risk, and a determination has been made on the amount of pure risk that can be financially retained.

Once you have passed through the risk management steps, and determination has been made that X amount of pure risk needs transferred then at this point one must attempt to find a ready market to transfer the portion of the risk that one can not retain i.e. purchase insurance.


The Dynamics of Risk Management and The Transfer of Risk Regarding the Individual
Applying risk management and determining the need to transfer pure risk is going to yield many and varying results among differing individuals with differing circumstances. For example, John Q. Buffet can likely retain the majority of pure risks whereas on the other end of the pure risk curve Jane Q. Public needs to transfer the majority of pure risk. Between John's situation on one end of the spectrum and Jane's situation on the other end of the spectrum are an endless series or risk management and pure risk transfer scenarios.

Enter the Socialized Medicine Scheme
The socialized medicine scheme proposed in the US House of Representatives and Senate imposes a one size fits all risk management and transfer of pure risk scenario which minimizes the incentive for risk management. The known dynamics that exist within risk management and pure risk transfer among differing and varying individuals are disregarded through the use of one-size-fits-all pure risk mandated coverage. The mandated coverage requires a relatively low set deductible and relatively low set out-of-pocket cost. The proposed plan also includes ancillary coverages such as relatively low doctor office co-pays and relatively low prescription card co-pays. The predetermined coverage with relatively low deductibles and co-pays causes little room for risk management. The predetermined mandated coverage design pigeon holes all risk management although its well known that individual risk management needs vary widely.

Consequently, the theory of risk management and pure risk transfer is violated by predetermined mandated coverage. The process of risk management immediately leading up to determination of the transfer of pure risk is minimized .

What are the Consequences of Minimizing the Risk Management step?
Inefficient Allocation of Resources

One very important consequence of minimizing the risk management step is the inefficient allocation of resources for individuals. For instance, why would John Q. Buffet want to allocate $10,000 per year for the transfer of pure risk when in fact he would rather retain the risk? The $10,000 is now transferred from other activities John Q. Buffet values to an activity John does not value. This becomes an inefficient allocation of resources for John Q. Buffet. The same inefficient transfer of resources cascades across the entire spectrum as the vast majority of individuals would have chosen deductible and plans different than the mandated plan and deductibles.


Incentives created to Minimize Risk Management Techniques

Another aspect of a one-size-fits-all approach which consequently minimizes the risk management step immediately prior the determination of pure risk transfer, is the effect on risk management techniques. When risk management becomes a minimized procedure so do the risk management techniques become minimized. Assume for a moment that John Q. Buffet wanted to retain the entire risk while Jim P. Public wanted a very high deductible major medical plan and retain a relatively large portion of the risk. John and Jim are now required to outlay resources they had allocated elsewhere in the past. This is an additional cost to John and Jim. John and Jim are now incentizised to minimize rather than maximize risk management techniques they otherwise would have employed in the past.



The risk management techniques, that would have been paramount when retaining an entire pure risk or retaining a major portion of a pure risk, are now minimized by the relatively low deductible mandated coverage. John and Jim now have an incentive, through low deductible insurance, to minimize risk management techniques. That is, John and Jim don't deploy risk management techniques as they have in the past.

John and Jim rigorously deployed risk management in the past when they were retaining all or large amounts of pure risk. The retained risk is so low under mandated coverage that John and Jim have no incentive to rigorously deploy risk management. Lets say John always wanted to sky dive. However, as a risk management techniques John avoided sky diving. Why not sky dive now as the risk of injury is covered by insurance on a relatively low out of pocket dollar basis. It boils down to the following sarcastic comment you have surely heard in the past when a person is questioned about a risky endeavor: "...why not, I have insurance"!

Incentives Introduced to Recover Cost (to over utilize)

Another item creeps into the realm of pure risk when insurance is mandated and risk management is minimized: return on the dollar invest in insurance. The theory of insurance clearly points toward buying insurance for the catastrophe. When insurance is purchased for everyday items, consumers of insurance then have an incentive to maximize what they perceive as cost/benefit. In other words, if a consumer is forced to buy insurance with a low deductible, with plenty of benefits, but at a perceived high cost, then the consumer will attempt to recover cost through utilization of benefit.

Attempts to Deploy Risk Management After the Fact via Tax Disincentives

In the socialized medicine scheme an attempt is made to deploy risk management after the fact. As discussed above, the mandated coverage of the socialized medicine scheme creates an incentive to minimize risk management techniques. From the consumers point of view, all the risk management in the world will not reduce the cost of the relatively low out of pocket cost under mandated coverage.



Proponents of socialized medicine attempt to deploy risk management through a cost increase to mandated Insurance consumer. Rather than risk management being used as a cost reduction technique for the consumer of health-care, they use risk management as a cost increase item for consumers of health-care.


The proposed Soda Tax is an excellent example. Proponents of socialized medicine believe the consumption of soda leads to health problems. Hence to reduce consumption of soda they propose a tax. Hence risk management suddenly becomes a monetary increase in cost to the consumer rather than a monetary reduction in cost to the consumer.


Many proponents of socialized medicine also support taxes on fast food. That fast food leads to weight gain and hence is unhealthy. Enter the tax as a risk management technique to reduce fast food consumption. Once again we have a back door, after the fact, risk management method that increases cost to the consumer rather than decreasing costs through traditional risk management.

Summary

Risk management has been distorted and minimized as a proven step in the determination of pure risk transfer through mandated coverage. Hence the method of deploying risk management after the fact becomes a cost increase rather than a cost decrease method.



(1) http://www.investopedia.com/terms/p/purerisk.asp


(2) http://msdn.microsoft.com/en-us/library/cc500392.aspx


(3) http://www.investorwords.com/2510/insurance.html

Thursday, November 19, 2009

The Administrative Cost Argument of the Socialized Medicine Scheme


Proponents of the socialized medicine scheme (aka single payer, public option) make an argument that "administrative costs" would be lower under a socialized medicine scheme vs. private insurance. Is this a valid argument or are terms and conditions skewed? Are the mathematics/statistics of the argument presented incorrectly? Are monopolistic pricing powers being confused/included within the term "administrative costs"? What about the item dislocated labor markets?


Administrative Costs Defined

First of all what are "administrative costs" within the field of insurance? One needs to know the terminology.

The "load" is the term that refers to administration cost in the field of insurance. "Loading" is the addition of the administration cost to the pure cost of insurance. Here are two widely used definitions:

(a) addition to the pure cost of insurance that reflects premium taxes, administrative costs associated with putting business on the books, and contingencies,

(b) the amount included in the premium to meet liabilities beyond anticipated claims payments to provide administrative costs and contributions to reserve funds and to cover contingencies such as unexpected losses or adverse fluctuations. (1)

Socialized Medicine Administrative Cost Argument

One of the arguments put forth by proponents of socialized medicine is: the "administrative costs" will be lower with socialized medicine vs. private insurance. The problem is that proponents of a socialized medicine scheme have shaped their arguments around differing definitions of "administrative costs" none of which match insurance theory or practice.


Administrative costs arguments put forth by socialists:

(1) in argument number one Administrative Cost are the traditional costs of the broad concept of general paper work administration,

(2) in argument number two administrative costs are more comprehensive including advertisement and claim administrative costs, screening of applicants, general paperwork, billing,

(3) in argument number three, which appears to be their most common argument, they define administrative costs the same way as in one and two above, then leave the realm of administrative costs, and include within the argument, the monopolistic pricing power of a socialized medicine scheme. In other words, they add in an exogenous variable monopolistic pricing power related to the pure product which has nothing to do with administrative costs,

(4) none of the arguments add in contingency costs,

(5) all arguments rely on a statistic from medicare pointing to the low cost administration of Medicare,

(6) all arguments exclude service level/service value and the consumer's ultimate satisfaction with "administration".




Reverse of the Original AT&T Break Up?


Looking at the subject of administrative costs from a historical perspective, and given history is always a good teacher as well as a good story, let us discuss monopolist powers.

Atlantic Telephone and Telegraph was the only "provider" of telephone services 30 years ago. For those of you under 45 years of age, imagine a time when there was only one Internet Service Provider (ISP).

The consumer received one and only one menu of choices and the one and only one customer service from exactly one provider known as Atlantic Telephone and Telegraph.

Bonus: you received one and only one price.

Say for instance you thought there should be more choices or better customer service. Sorry. one choice and this is how it is.

The consumer got fed up with one choice and authoritarian customer service. In the 1970's everyone complained about "the phone company". If you are under 45 years old, everyone hated the one and only ISP.

Along the way, the one and only provider, Atlantic Telephone and Telegraph, became administrative fat. Oh yes! Pork and Union diet only. Why not! There was no competition!

When the AT&T break up occurred, the new competitors ate AT&T's lunch. The biggest lunch plate item? Oh yes, AT&T's administrative costs.

Welcome to the telephone competition of today. You have an endless menu of options from multiple providers. Providers that offer good customer service (or you have the choice to change providers). Providers who run very lean operations and administrative costs in comparison to AT&T before the break up.

In other words, from an economics perspective, after the break up of Atlantic Telephone and Telegraph you received choice at a lower cost vs. monopolistic powers.



Monopolistic Administrative Costs Argument of Socialized Medicine

The argument for monopolistic administrative costs of socialized medicine is articulated by Erza Klien in his June 8th article in the Washington Post. (2) He summarizes as follows: "Moreover, public insurance is simply more efficient. Medicare holds costs down better than private insurance".

Senator Bernie Sanders argues for monopolistic administrative costs of socialized medicine by stating "...you have to deal with the enormous amount of waste that is currently within the private health insurance industry. The estimate is about $400 billion a year in administrative costs, billing, in profits, CEO compensation, in advertising--all of these things which have nothing to do with the provision of health care..." Senator Sanders goes on to say "In California, my understanding is that 1 out of every 3 dollars of premium goes to administration". (3)

What about the Medicare administrative cost argument? Is it true or false? False. Medicare administrative costs are higher, not lower, than for private insurance. (4) (5)

What about the 33% administrative costs as asserted by Senator Sanders? False. California Private Insurers average 12.7% administrative costs .(6)


Monopolistic Pricing Power of the Pure Product

One must note that the argument put forth that socialized medicine would have lower administrative costs purposely becomes entangled with monopolistic pricing. That is, the argument leaves the realm of administrative costs and attempts to include in the argument the exogenous concept of pricing the pure product.(7) The argument is invalid as administrative costs are items you add to the pure cost of the product.

In Klein's article he states "...act as a public insurer. To use market share to bargain down the prices of services much as Medicare does". Monopolies do not bargain. Monopolies set the price suppliers will be paid. Take it or leave it. In other words, Medicare is basically a monopoly and sets the price it will pay for services. Either accept medicare patients at price "X" or don't accept Medicare patients.

What in the world does the exercising of monopolistic pricing power to suppliers of the components of the pure product have to do with administrative expenses? Nothing. The argument is a separate argument unrelated to administrative costs.


Impact on the Labor Market of Monopolistic Administrative Costs

Exactly what is the labor demographics of the private sector health insurance administrative mechanism? (8) By and large the administrative labor force is female. Would this largely female work force be dislocated by a monopolistic administration within socialized medicine? Yes, large labor dislocations at an enormous cost. (9)

Hence we dislocate hundreds of thousands of predominantly female non-union workers at an enormous cost, and replace these workers with a unionized government labor force. Does that sound like administrative cost savings? What about the start up costs for the new government unionized administration? (10) What about the ensuing chaos of untrained administration workers, with a new procedural manual, in a newly formed bureaucracy, that now needs to provide service to millions and millions of people. Chaos is an understatement.

Also, many of the private sector female administrators are telecommuters. That’s right, they are mom's that work from home. Its a cost saving tool for private insurers and the workers like the idea. What about the indirect cost to the family of dislocating these workers? Do government workers telecommute? Largely no. Only 6% telecommute. (11) Why does the government not use this cost saving and labor satisfying technique?


Summary

The argument that a socialized medicine scheme would have lower cost is incorrect. That monopolistic pricing of the pure product is out of place in the administrative cost argument. That the socialized medicine scheme would create a monopoly in administration with unintended consequences for consumers. Finally, the socialized medicine scheme argument for monopolistic administration would dislocate hundreds of thousands of workers at an enormous cost and replace a largely female non-union work force with a high cost unionized government work force.

(1) http://www.answers.com/topic/loading

(2) http://voices.washingtonpost.com/ezra-klein/2009/06/health_care_reform_for_beginne_3.html

(3) http://www.thenation.com/blogs/edcut/440938/a_seat_at_the_table_for_single_payer">

(4)http://www.heritage.org/research/healthcare/wm2505.cfm

(5) http://www.wellsphere.com/healthcare-industry-policy-article/rhoads-what-administrative-savings/598029

(6) http://www.lao.ca.gov/2008/hlth/sb840/SB840_analysis.pdf

(7) see (1) above

(8) http://www.dllr.md.gov/lmi/industryclusters/financedemographics.pdf

(9) and (10). see (6) above

(11)http://www.wharton.universia.net/index.cfm?fa=viewArticle&id=918&language=english

Thursday, November 12, 2009

Hyper-Debt and Unemployment as a Lagging Indicator

Unemployment is a lagging indicator when Economic Recovery begins. That is conventional wisdom. (1) (2) (3)

(A) Unemployment as a lagging indicator is true in a normal Business Cycle.

(B) Unemployment is a lagging indicator in a normal debt level situation of households, businesses, and government.

(C) Unemployment is a lagging indicator when leverage begins to become readily available as recovery begins in the business cycle.

Conventional Wisdom gets upset from time to time. (4)(5) As the business cycle tries to move into a recovery stage, what if Unemployment is not a lagging indicator? Hmmm.

Is this a normal Business Cycle Recovery?

Consider these items:

(a) businesses and households are deleveraging,

(b) fixed overhead-capital values having fallen in value by Trillions of dollars,

(c) other wealth items having fallen by Trillions of dollars,

(d) sprinkle in some major open market operations aka Quantitative Easing,

(e) add in a falling dollar and the specter of rising taxes.

(f) plummeting Government Tax Revenues and Expanding Expenditures creating unmanageable deficits.

(g) State, Local, and the Federal Governments having over spent for decades while simultaneously creating unfunded entitlements creating an unmanageable accumulated debt level.

(h) looming inflationary pressures.


What is a Published Unemployment Rate of 10.2% and a Real Unemployment Rate north of 16% really indicating?

Given a Real Unemployment rate north of 16%, what about the sharp increases in Underemployment, Part Time Employment, Structural Unemployment? What about discouraged workers increasing at an increasing rate? What is being "indicated"? What about the remaining employed having an average work week of 33.2 hours? What does this all "indicate"?

Unemployment is not acting as a lagging indicator this time around? This time around Unemployment as a Lagging Indicator is a statistical outlier?

Hyper-Debt

Of the items mentioned above affecting this particular Business Cycle, the summation of accumulated debt, that is the past use of debt to accelerate future consumption into the present, may in effect be a major influence on unemployment.

We certainly know that "debt" is a drag on any economy. What if the summation of accumulated debt becomes so large its referred to as Hyper-Debt? From Social Security through the Great Society Programs, through the transition to a "service economy", through decades of Keynesian Deficit Government Stimulus Plans , through decades of Politicians buying votes via Pork Barrel Spending, to the decades of the Financial Sector, Consumers, and Businesses over leveraging......that surely the accumulation of too much debt sends up an "indicator" at some point in time.


If borrowing is viewed as accelerating future consumption into the present, that consumer goods, business goods, and government goods can be enjoyed in the present by borrowing from the future. Then at some point future consumption is affected by past borrowing.


However, if you mismanage debt, that you mismanage to the point of reaching a Hyper-Debt state, there are consequences. One consequence of hyper-borrowing, hyper accelerating future consumption into the present, is that you find yourself in the future (time marches on) with no funds to support past consumption patterns. If you over borrow, that is, over consume in the present at the expense of future consumption, and do it on a regular basis, then future consumption must suffer at some point.


Debt is a drag on an economy. Then Hyper-Debt is a Hyper-Drag on an economy.

We may very well have reached that point, upon the time line of Hyper-Debt, that the past borrowing, of accelerating future consumption into the present, has caused present consumption to look completely different than past consumption. That past consumption patterns now effect current consumption patterns.

Consumption of goods and services, the Demand for goods and services, directly effects the amount of human capital employed. If you accelerate too much future consumption into the present then the level of employment of human capital mirrors this over acceleration of future consumption into the present facilitated by Hyper-Debt. When the Hyper-Debt becomes unsustainable, that the cost to service the Hyper-Debt and the need to retire Hyper Debt trumps any further leveraging, then deleveraging becomes vogue.

However, if past employment levels were strongly associated with over accelerating future consumption into the present, and the accelerating of future consumption into the present via leveraging abruptly ends, then employment must fall.



Further, its one thing to deleverage from debt and yet another thing to deleverage from Hyper-Debt. The cost to deleverage from Hyper-Debt is extreme. Hence the new consumption pattern is devoid of acceleration and actually decelerates as the high cost of Hyper-Debt deleveraging demands a greater share of current and additional income, income that otherwise would have, in large part, been used for consumption.



Moreover, its not deleveraging from Debt, its deleveraging from Hyper-Debt. This deleverageing causes a demand for goods and services that is unlike past demand patterns. That deleveraging from Debt takes time, that deleveraging from Hyper-Debt takes a long time. Therefore the new level of demand requires less employment of human resources. That the old level of demand was false due to Hyper-Debt over accelerating future consumption into the present causing an employment level that was accelerated.



Rather than Unemployment being a lagging indicator, Unemployment will remain high and persistent and comparisons of current unemployment to past unemployment figure are apples and oranges as past employment was based on Hyper-Debt over accelerating consumption into the present and causing employment levels to over accelerate.

If in fact Hyper-Debt, over time, is deleveraged and debt levels return to manageable debt levels, then income once used for deleveraging Hyper Debt by Businesses and Households will become available for consumption. The question becomes how long will it take to deleverage from Hyper-Debt to Manageable Debt?



(1)http://www.dmiblog.com/archives/2009/09/leading_with_lagging_indicator_1.html

(2)http://seekingalpha.com/article/114201-unemployment-numbers-losses-were-awful-but-jobs-are-a-lagging-indicator

(3) http://www.ncsu.edu/project/calscommblogs/economic/archives/2009/08/unemployment_as.html

(4) http://latimesblogs.latimes.com/money_co/2009/07/wall-street-opens-this-week-less-confident-that-a-turning-point-for-the-economy-is-on-the-near-horizon-after-last-thursdays.html

(5)http://seekingalpha.com/article/141937-unemployment-as-a-lagging-indicator-not-this-time

Socialized Medicine Scheme and Central Planning: Purple Marbles.

The socialized medicine scheme that recently passed the US House of Representatives is an attempt at central planning. That is, socialized medicine is centralized planning. Central planning is an attempt to allocate resources by "scheme" rather than allowing the free market to allocate. The 1994 pages of the socialized medicine scheme should have been paired down to "1984" pages so one could more easily identify it with "misery".


All one needs to do is study the former Soviet Union’s central planning, decades and decades of central planning, and one will find the best intentions, elaborate schemes, “planning”, etc. failed miserably.

What does a central planning scheme look like?


















If you didn't spend much time studying the former Soviet Union, central planning may be a foreign concept to you. The diagram above is a short version of a central planning scheme. Schemes inevitably gain a life of their own as the scheme can't allocate resources correctly. The final centralized planning chart will be much larger and much more complicated? Of course. Further, there will never be a "final chart". Schemes can not account for all the dynamics of free market allocation. Hence the chart will be amended over and over again yet never solving the problem of efficient resource allocation to competing ends.

Central planning always fails as regardless of the intricacy, elaborate modeling, planning, etc.: central planning always fails to allocate scarce resources to competing ends.

Regardless of the economic frame work, the ends are always competing. In the former Soviet Union, in the beginning of the fourth quarter of an annual cycle, the managers of different industries would on their own, outside the central planning frame work, begin to barter for scarce resources among themselves.

Why did they begin to barter for resources in the centrally planned system?

Every year, without fail, the central planners would mis-allocate resources. Some industries would have stock piles of unused items while other industries would have to halt production as they had no more inputs. Bartering would begin among the managers of the varied industries in an attempt to reallocate scarce resources. Of course bartering is a highly inefficient system. Hence some resources would be reallocated but most resources sat idle. The result was inevitably too many purple marbles and not enough eye glasses.

The allocation of scarce resources to competing ends is most efficiently done in a free market. Maybe the framers of the central planning document known as socialized medicine should read some philosophy from a fellow named Milton Friedman. They might find that economics is the study of incentives as well as the study of the allocation of scarce resources to competing ends.

However, when Economics is supplanted with politics, ideology, and agenda, when resources are not efficiently allocated.....well maybe the Picture Chart below explains the concept/result:




Wednesday, November 11, 2009

Schemes: Unintended Consequences

The Socialized Medicine Scheme as proposed and passed by the US House of Representatives is full of unintended consequences. That is, when you create a Scheme (1990 pages of Scheme) to replace a Free Market you immediately face the phenomena of unintended consequences and cascading unintended consequences.

This article merely looks at one immediately known unintended consequence regarding fines for not purchasing Health Insurance.

Take a look at the article below regarding "uninsured motorists" in regards to auto insurance. There is little new information in the article for the exception of Web Based Tracking Pilot Programs. There has been a zillion articles written on the topic of uninsured motorists. However, please keep in mind the gist of this article is enforcement and fines regarding the uninsured motorist.


http://articles.moneycentral.msn.com/Insurance/InsureYourCar/wanted-auto-insurance-outlaws.aspx


Also keep in mind that when arguing for the Socialized Medicine Scheme, proponents like to compare Compulsory Auto Insurance to Socialized Medicine. That argument is invalid. The non-validity of the argument is explained here:



http://thelastembassy.blogspot.com/2009/10/socialized-medicine-scheme-compulsory.html


Martin Feldstein of Harvard University recently wrote an article stating that the Socialized Medicine Scheme, as proposed and passed in the US House of Representatives, creates an incentive for paying the fine and skipping the purchase of Health Insurance. Please see that article below:

http://www.nber.org/feldstein/washingtonpost_110909.html


Now, think about Martin Feldstein's recent article regarding people being incentivized to pay the fine and avoid buying health insurance under the Socialized Medicine Scheme. You pay the fine then buy coverage when you are sick as the Preexisting Conditions clause is invalidated.


Feldstein's article makes the assumption that HomoEconomicus makes the rational decision to pay the fine as outlined in his article.

What if Feldstein's assumption of paying the fine is replaced by the decision not to pay for anything at all. In other words, just like the phenomena of "uninsured motorists" you have the "uninsured and non-fine paying" health insurance non buyer.

Will the "uninsured and non-fine paying" phenomena occur in the Socialized Medicine Scheme? Absolutely. Hence that takes you back to the discussion in the uninsured motorist article (above) regarding "enforcement and fines".

"Enforcement" costs money. Who pays? Lets look around. Yes, you pay! If one is going to enforce the payment of fines, one must create a mechanism to collect the fines. More Bureaucracy? Of course!

Lets say we develop an Enforcement Bureaucracy and they track down and fine a non-insured and non-fine paying person. What then? Suspend their privilege to have health insurance? They, by definition, have no health insurance. If you suspend their privilege then they are part of the uninsured which supposedly is the reason for the Socialized Medicine Scheme (cover everyone). Gets murky does it not?


OK, we collect back fines as the enforcement. We further fine the back fines (a fine on a fine). However, the vast majority of Uninsured Motorists are uninsured as they can't afford insurance. It would be the same phenomena in non-insured and non-fine paying in the Socialized Medicine Scheme i.e. non-insured and non-fine paying people can't afford the fine or the insurance in the first place. What are the chances of collecting a fine on accumulated non paid arrears fines from a person that can't afford the fine or the insurance in the first place? Gets more murky does it not?


Can't pay the fine on the fine and the back fines? We throw the person in jail. Ops! The jails are already full! Ah, the evil of it all!


It should become clear that replacing a Free Market with a "Scheme" is absolutely full of unintended consequences. The phenomena mentioned above is merely one of hundreds and perhaps thousands of unintended consequences of the Scheme known as Socialized Medicine. Any good unintended consequence worth its salt will interact with other unintended consequences causing Cascading Unintended Consequences. Schemes generally end up a messy proposition.

Saturday, October 31, 2009

Exit Zero

The Real Unemployment Rate in the US Economy currently sits at 16% according the Federal Reserve of Atlanta. (1) Further, no relief is in site for idle Human Capital. (2) Persistent high unemployment appears to be the norm with no current favorable factors contributing to the reduction in the number of unemployed.


Are Government Policies contributing to high persistent unemployment?


Government Policies

Stimulus Plan

An $800 Billion Stimulus plan was rammed through Congress in early 2009. The unread and un-debated Bill had a marquee of urgency. The urgency of passing the Stimulus Bill was to head off Unemployment. That the Unemployment Rate would not exceed 8% if the Stimulus Bill was immediately passed by legislatures and signed by President Obama.

Although the Stimulus Bill was unread and un-debated within Government, many outside the Government in the Private Sector did debate the Bill. Warning signs went up that the Stimulus Bill was Social Engineering, Financed Wealth and Income Transfers, and in the Macro Economic sense, not an engine to create Employment. That the Stimulus Plan was full of pork, ear marks, and based on a Political-Political design rather than a Political-Economy design.

One merely needs to look at the results to see the warning signs were correct.


Reasons for the Failure of the Stimulus Plan


Why is the American Recovery Act such a Spruce Goose? Why is the American Recovery and Reinvestment Act the Spruce Goose of all stimulus plans ever concocted? Surely $800 Billion of borrowed money will create jobs?

First of all, Keynesian Government Deficit Spending (Fiscal Stimulus) is suspect at best with very mixed results/track record. However, if one is to deploy Keynesian Government Deficit Spending the best results of past stimulus plans of this label are based on Infrastructure Spending. Building and repairing Social Overhead Capital does in fact create temporary employment and a public asset is either created or repaired.

However, only a small portion of the Stimulus Plan was based on Social Overhead Capital ($80 Billion of the $800 Billion). Why? It has to do with the designers of the Stimulus Plan. Who designed the Stimulus Plan? Very good question. Many parts of the design were concocted by the Tides Foundation in association with The Center for American Progress.(3) You mean to say Congress in association with Public and Private Sector Economists didn't design the entire plan? Correct.

The Warning Flags were real.

The Tides Foundation and The Center for American Progress influenced the Stimulus Plan? Who are they? These two organizations label themselves as liberals or "progressives". Others label them as Socialists as many of the members of these two groups are Socialists. (4) Many past members of the Tides Foundation and The Center for American Progress now hold positions in the White House.

Socialists have a grand track record in Social Engineering aka wealth and income transfers. Socialists on the other hand have no track record regarding income, wealth, and job creation. Beginning to ring a bell?


Hence we have transfers of borrowed Stimulus Funds arriving at the Public Sector that produces virtually nothing. Those transfers go to pet projects (pork barrel spending) that are dubious job creators. More transfers go to Social Welfare Programs. Meanwhile, on the Federal Level employment is expanding based on borrowed Stimulus Funds. Expanding a sector that produces little.



Liberal Economists believe that transfers of funds to Private Welfare Programs create a situation where the transferred funds will immediately be spent (a component of Social Engineering). The theory is based on the notion that low income or no income recipients will spend 100% of their funds and save zero. That 100% of the transferred funds will be spent hence creating a multiplier effect thus stimulating the economy. However the theory has a major flaw: low income recipients generally spend their funds on "staples". Low income earners do not buy new vehicles, contract for a home to be built, invest in new business ventures, and other dynamic economic activities that truly have multiplier effects.



The tax cuts associated with the Stimulus Plan are doomed to fail. Why? Any positive economic effect associated with Tax Reductions is closely associated with "expectations". That is, temporary tax cuts have basically no effect as consumers and businesses realize the short term duration on any additional disposable income and hence make short term type purchases that match the short duration of additional disposable income. Whereas long term tax cuts (e.g. reducing Marginal Income Tax rates for the next 10 years) causes consumers and businesses to make long term purchases such as home, vehicles, and capital investment in business as the consumer or business matches long term purchases to the long term increase in disposable income.



Meanwhile, tax revenues at all levels of government are plummeting at historical rates. The answer to plummeting tax revenue? Taxes are increasing on the State and Local levels to support the bloated size and scope of these governments. The increased taxes then reduce disposable income of consumers and businesses which consequently reduces Private Sector Demand for goods and services.



On the Federal Level tax revenues are plummeting as well. However, the Federal Government continues to spend at unprecedented levels (spending increasing at an increasing rate). Spending and tax revenues are on a course of complete divergence. The result is a swollen deficit.



Enter the non-renewal of the Bush Administration across the board tax cuts. Soon all tax payers will face an across the board tax increase. This creates the expectation of long term higher taxes and consequently changes consumer and business consumption behavior (the opposite behavior of long term tax cuts mentioned above).



However, the specter of even more tax increases are affecting consumer and business behavior. The spending increases by the Federal Government, the constant need to borrow funds by the federal government for financed spending such as the Stimulus Plan and general revenue needs, the specter of higher energy taxes through Cap and Trade legislation, talk of a Value Added Tax as an additional tax, and finally the increased tax burden of Socialized Medicine are causing consumer and business long term spending behavior to be paired back.



Oddly the Consequences are Known



The consequences of the above mentioned Government Behavior is well known. Huh? The lessons of the Great Depression have been enumerated by economists through empirical study. Thousands of empirical studies have concluded the errors of the Great Depression:

(1) Keynesian Government Deficit Spending (fiscal stimulus) creates temporary jobs creating temporary stimulus. When the deficit spending ends, the temporary jobs end as well as the temporary stimulus,

(2) rising taxes, rising regulation, and increased government debt reduces Private Capital Formation which is directly related to Private Sector Job Creation,

(3) rising taxes reduce Private Sector consumption,

(4) repeating 1-3 above, over and over again, as was done in the Great Depression, yields the same result: continued recession.


Milton Friedman's Fourth Category of Spending


Milton Friedman basically said when you spend someone else's money, you have no rational interest in either value or quality. (5) (6) In other words, when the government taxes you, brings in the revenue, when the time comes to spend that tax revenue, value and quality are Job 57. Hence Keynesian Government Deficit Spending (Stimulus) has inherent value and quality problems.



Enter "Jobs Saved"

In the field of Manpower Economics and Labor Economics you are either employed or unemployed. Yes, you either have a job or you don't have a job. Sure, you can be underemployed, structurally unemployed, part-time employed and a multitude of sub-categories of employment and unemployment. However, at the end of the day, you either are employed or unemployed.


Heard the phrase "Jobs Saved"? (7) Guess what? No such term or statistic or measurement exists within the field of Economics. Huh?

When the Spruce Goose of all stimulus plan fell on its fat little porker , income transfer, wealth transfer face, the Obama Administration, through the Council of Economic Advisers, created the ultimate Political Speak Phrase "Jobs Saved".

Jobs Saved is a non-statistic statistic. Its unmeasurable, un-comparable, and basically fantasy. Why did they create "Jobs Saved"? One must remember that the $800 Billion stimulus plan, if passed immediately, would then cause unemployment to top-off at 8%. When the 8% target was unmanageable, enter "Jobs Saved". (8)

Jobs Claim

The employment picture created by the stimulus plan is so bleak that the Obama Administration has begun to grab at straws. "30,000 jobs created" was the reported headline and the Obama Administration lauded the report (9). Unfortunately 30,000 is an anemic number of jobs and better yet the report was refuted, called "way off the mark" a week later. (10)



Subsequently the White House announces the Stimulus Plan saved 650,000 jobs (jobs saved non-statistic statistic yet again). (11) Somehow borrowed money, sent to the States on a temporary basis, has saved jobs? Or has borrowed money been used by State Governments to subsidize budgets that were already out of control?



Please remember, no jobs were saved. You are either employed or unemployed. However, take a closer look at the report and what jobs are referred to within the report? Public Sector jobs. (11) Hence Government Workers remained employed based on unsustainable State Budgets temporarily funded by borrowed money. One might also point to Government Workers, unionized in many states, are predominantly supports of the Obama Administration.

Meanwhile Back in the Unemployment Line

Creating the phase "Jobs Saved" and lauding a phony job report or pointing to borrowed money propping up unsustainable State budgets funding Government Jobs doesn't really help the unemployed.

What is the Jobs outlook for the Unemployed? Not too bright. (2) (8) (12)

With the average work week at 33.2 hours the average employer has plenty of room to expand the utilization of current employees before any expansion of total employment. (8)

If demand does expand, and employers do increase the average work weeks to 40 hours, an employer will opt for over time for the current work force rather than expand the number of workers. Why? The employer wants to be certain that any increase in demand is sustainable and not a false signal. (13)

An employer also realizes that the laid off workers were the most marginal workers. In other words, employment was reduced at the margin, leaving the most productive workers retained. It can be argued some workers laid off were in marginally profitable lines of business while other workers were laid off from core profit business. The marginally profitable line of business would have to show even more robust sustainable growth before human capital is added back in comparison to employment in a core profit business.


Gross Domestic Product (GDP) can Rise and High Unemployment can Persist?

GDP can grow, however, if human capital is under utilized (current 33.2 hour average work week) a slack or lag occurs in labor markets and persistent high unemployment can exist. The slack or lag is elongated by the determination of employers, as mentioned above, regarding GDP growth and the ability of GDP growth to be robust and sustained. Hence GDP can show positive results while unemployment can remain persistently high.

What if Demand grows in an anemic fashion? That is referred to as a Jobless Recovery.

Exit Zero

If you are currently unemployed, you have reached Exit Zero on the unemployment highway. Exit Zero is the last exit before unemployment Armageddon.


Discouraged workers are increasing at an increasing rate (those giving up on finding a job). The average length of time unemployed workers have been drawing unemployment benefits is at an all time high (week after week after week these workers can not locate a job).

The Stimulus Plan is a bust accompanied by made up statistics and made up economic criteria. Private Capital Formation leading to private sector job creation is anemic. Rising taxes are depressing consumption dynamics.

The average work week at 33.2 hours means employer will utilize current workers before hiring new workers.

Welcome to mile marker Zero. The zero job creation mile marker on the employment highway. Welcome to Exit Zero.














(1) http://www.breitbart.com/article.php?id=CNG.4452bed82adf3124e5884678e236d7fb.361&show_article=1


(2) http://www.politico.com/politico44/perm/1009/leveling_off_b1e35f37-54bc-4c12-91df-0c9e48cf6403.html


(3) http://www.foxnews.com/story/0,2933,535284,00.html

(4) http://www.foxnews.com/story/0,2933,554680,00.html

http://seekingalpha.com/article/169983-the-lagging-indicator-how-unemployment-and-gdp-can-rise-simultaneously?source=commenter

(5)http://bartsblogg.blogspot.com/2008/10/milton-friedman-4-ways-money-is-spent.html

(6)http://www.reddit.com/r/Economics/comments/9lldr/milton_friedmans_classic_4_ways_to_spend_money/

(7) http://online.wsj.com/article/SB124451592762396883.html

(8) http://www.ft.com/cms/s/0/b3565084-bc02-11de-9426-00144feab49a.html?catid=171&SID=google

(9)http://www.usatoday.com/money/economy/2009-10-15-stimulus-jobs_N.htm

(10) http://today.msnbc.msn.com/id/33522856/ns/business-stocks_and_economy/

(11) http://www.msnbc.msn.com/id/33548535/ns/business-stocks_and_economy/

(12) http://scottgrannis.blogspot.com/2009/10/state-of-union-is-bleak-but-there-is.html


(13) http://seekingalpha.com/article/169983-the-lagging-indicator-how-unemployment-and-gdp-can-rise-simultaneously?source=commenter

Friday, October 23, 2009

Fun and Games with Preexisting Conditions

Preexisting conditions and buying insurance after-the-fact are two health insurance subjects that have received plenty of press coverage recently. These two subjects need examination.


Commonly Used Definition of Preexisting Conditions


Before you examine "preexisting conditions" within health insurance, you need to look at a generally used definition of preexisting conditions:


Preexisting conditions means an injury or illness:


(a) for which a covered person received medical advice of treatment with in X amount of months immediately preceding the effective date the covered person became insured under the policy; or


(b) which in the opinion of a qualified doctor:


(1) probably began prior to the application effective date the covered person became insured under the policy,


(2) manifested symptoms which would cause an ordinary prudent person to seek diagnosis or treatment within the 12 months immediately preceding the applicable effective date the covered person became insured under the policy.


Why would such a definition exist within a health insurance policy? How come the subject of preexisting conditions occurs within health insurance?



Private Insurance Formation (Private Welfare Plan)

Before we go further into the subject of preexisting conditions, we must examine the reason we organize a private welfare plan and the member characteristics making up the private welfare plan.


One must remember that private insurance can be defined as a private welfare plan. That is, a group of private individuals create a pool of resources to benefit those members (welfare of the group) suffering an insured loss. Hence when you see the logo for XYZ Insurance Company and their trademark slogan and even little commercial jingle, these sometimes very large corporations, at the end of the day, are merely private welfare plans.


The welfare of the group is the reason the private insurance was organized. The pooling of resources among the members allows the group to pay losses that any single member likely can not pay with their own individual resources. Simplistically, 5000 individual members contributing $1,000 each creates a pool of resources of $5,000,000. The pool of resources ($5 million) is used to pay covered losses of members (welfare of the private group). A single member with a loss of $50,000 likely can not easily pay the loss himself/herself, but the pooled resources can easily pay the loss.


Enter Insurance Theory. The risk of the group of members, creating the private welfare plan, needs to be made up of homogeneous risk exposure units spread over a wide geographic area. What does that mean? Homogeneous risk exposure units are categories of like kind items such as: residential homes, commercial buildings, private passenger vehicles, etc.. The risk exposure needs to have similar characteristics and similar measurable risk attributes. Spread over a wide geographic area? This concept means you do not want all the risk grouped into a small contiguous area that can suffer a dramatic loss from one single event e.g. a tornado hits one town and every home in the town, is in fact, a member of the same private welfare plan. The welfare plan's resources are then wiped out in one single loss.


Please remember the reason the group was formed was for the welfare of the group. If additional members are added to the group, the group must have some sort of membership criteria aka underwriting. Do we add only members with well maintained risks and few losses in the last five years? Or do we add new members with poorly maintained risks and immanent losses?


You can go to the extreme and ask: do we add a homeowner member, in a home insurance private welfare plan, with the home currently on fire? Of course not, as it adversely impacts the welfare of the group's resource pool. The mere idea is an attempt not to measure risk. If you added homes currently on fire, the resource pool would be adversely affected and membership fees (premium) to the particular private welfare plan would certainly rise.


Classic Example of Poor Member Selection Criteria


When National Flood Insurance was proposed and eventually passed, the insurance industry was invited to participate. The insurance industry, after a period of time of participation in framing the Flood Insurance Plan, pulled out as their ideas were ignored.

One of the selection criteria problems was that you could apply for a policy, with little or no waiting period, then cancel the policy and receive a refund for the unearned premium.

Interesting happenings followed:

(1) Spring comes and the head waters of the Mississippi River begin to fill up with the water from thawing snow,

(2) if the thaw is too quick, the Mississippi begins to flood,

(3) the flood waters move down the Mississippi,

(4) people in St. Louis and other river communities watch the weather forecast/flood forecast,

(5) if the flood water appear to threaten them, they buy coverage,

(6) if the flood waters pass by, they cancel and collect the remaining premium as a refund,

(6a) if damage occurs, they collect the coverage then cancel the policy to receive the remaining premium as a refund.


Adverse Selection in regards to Membership Criteria

Suppose for a moment you have a private welfare plan and each member's dues/premium is $1,000 per year. However, the membership criteria is suddenly changed to very lax standards.


The risk characteristics of the original group of members are soon changed to a much different set of risk characteristics. This new set of risk characteristics leads to more claims. The increase in claims cause the claims-resource-pool to fall. In order to replenish the resource pool (that pays claims) premiums must rise to $1,000 plus X.

Many of the members do not like the new premium of $1,000 + X. These members seek out another private welfare plan with a lower premium. The alternate private welfare plan with lower premiums has stricter membership criteria. Those who can qualify move their risk to the new plan. Meanwhile, the old plan now has falling membership, the characteristics of the remaining members of the original plan deteriorates as the low risk members, who can qualify elsewhere, flee the plan. Hence we have a lower membership number with higher risk characteristics causing more losses to be paid causing the premium to increase to $1,000 + X +Y.

You can quickly see that without some sort of intervention, the escalating premium due to the increase of risk leading to increased claims causes the less risky members to leave. You eventually have a small group of very risky members with an unaffordable premium.


Back to the beginning: Preexisting Conditions and Buying Insurance After-the-Fact


In the currently proposed socialized medicine scheme your have surely heard how that bad old insurance company uses preexisting conditions. Ah, the evil of it all!

Or, just maybe, preexisting conditions and other underwriting criteria are used to protect the risk integrity of a private welfare plan. In other words, underwriting is used to protect the members (you) against adverse selection and escalating premium costs.

Really? Sure!

Lets say Sam down the street is always buying a new car. Little-do-you-know, but Sam's ability to buy those new cars on a regular basis is because Sam doesn't pay $600 a month for health insurance. Sam's new car is a shiny BMW. Sam loves the car so much, he drives it night and day. Sam drives so much he ends up cross-eyed. Well, that will not do as driving a BMW while cross-eyed really lowers the enjoyability of the driving experience.

Sam learns that the government has dumped the preexisting clause regarding health insurance. Sam signs up for health insurance and gets that cross-eyed problem fixed for $50,000.

Once the problem is solved, Sam realizes that having the BMW and health insurance is cramping his style. Sam learns that his $600 a month premium cost will only equate to the newly government imposed $100 per month fine for not owning health insurance. Hence he dumps the health insurance. Why not Sam thinks! Next time I'm sick I'll merely sign up for health insurance again! Plus the $100 fine is surely cheaper than $600 health insurance premium!

Ah, yes, the evil of it all.

Saturday, October 17, 2009

The $800 Billion Spruce Goose

Have you seen this logo (below) as you travel down the highways and byways?
























The logo represents, none other than, the American Recovery and Reinvestment Act of 2009 aka Stimulus Plan. This logo represent "stimulus" as well as $800 Billion of debt.

Apparently the logo has meaning. The meaning is translated to you via the "artist's impression".

After surveying logo impressions from the general public, here are some of the most interesting responses:

....the blue area includes eight stars. This represents the eight jobs created,

....The blue area part two: recovery.gov is an oxymoron,

.... the green area represents that money, does in fact, grow on trees,

....the red area is the cogs, inter workings, of the Debt Clock.


This may have been a better logo:










































Thursday, October 8, 2009

Socialized Medicine: You've Been "Baucus-ed"

The Max Baucus (D-MT) Socialized Medicine proposal will be voted upon this week in the US Senate. The plan paves the way for the following wonderful attributes:

(a) price distortions, demand shock, and over utilization, leading to long waits for services

(b) two to one pricing scheme with the younger insureds subsiding older insureds,

(c) government making decisions on cost effective procedures,

(d) rationing and cascading rationing due to price distortions,

(e) low out of pocket costs leading to cascading over utilization,

(f) increased costs,

(g) higher taxes passed onto consumers,

(h) reduces benefits to the elderly,

(i) vast expansion of the welfare-state via Medicaid with State Governments picking up the tab,

(j) another un-read, not available to the public, rammed through Bill.


Feeling warm and Fuzzy? Feeling like you will pay more for less?


The half-baked Baucus Bill, scored by the Congressional Budget Office (CBO), based on "conceptional legislative language"is going to save money? The plan supposedly costs $829 Billion dollars over 10 years, yet reduces the deficit by $81 billion over 10 years? Hmmm. Unfortunately, the major increase in taxes are left out of the headline. Increased taxes are a cost savings? George Orwell would be proud: savings equals increased cost which increases taxes, consumers ultimately pay the increased tax, which means you saved money (1) (2) (10). Pure genius it is!

Why is the Baucus Bill half-baked? First of all the Bill will never see the light of day (1). Secondly, the CBO scoring was based on "conceptional legislative language". That means the CBO scored the bill on highly dynamic assumptions that can change at the drop of a hat. Its more like the CBO scored a moving target, the moving target changing in size and scope, with the moving target changing speed as it crosses the horizon. The only scoring approach you can use on a target like that is the old shotgun scoring approach. That is to say, the CBO numbers are basically real, real, real fuzzy math.

Regardless of the validity of the CBO scoring, lets talk new taxes and new fees. That's right, the half-baked Baucus Bill has plenty of new taxes and fees. (1) (2) (10) Like all Politicos, the headline numbers are lauded but the new taxes and fees are buried. Plus national polling shows the majority of Americans will only support health care/insurance reform if no new taxes are involved. (3) Polling also shows that the majority of Americans do not support monetary penalties (tax) for not buying health insurance. (4) (7)

Besides the new taxes and fees, what about those Medicare cuts? They are going to cut Medicare payments, cut corruption in Medicare, yet not reform Medicare? Huh? (5) Those reduced Medicare payments have no effect on the elderly? (6) That the reduced Medicare payments are not an indirect tax on the elderly?

The public has decided that ramming through un-read legislation is ridiculous. After the Spruce Goose of all stimulus plans was voted upon and passed without Legislators reading the bill and the consequential 16% real unemployment rate. Then Cap and Trade rammed through the House of Representatives with out being read by Legislators. The result was the eruption of a major public battle cry: for Legislators to make Bills public, read the Bill, and debate the Bill before voting.

When the House of Representatives made their Health-Care/Insurance Reform public, the blow back from the public was amazing. Matter-of-fact, some one million people marched on Washington D.C. in July with many carrying signs reading "Read the Bill".

Guess what? The Public and Legislators will not get to read the Baucus Bill! (8) Why? Because that would take time, public input, and of course that nasty idea of "debate". These are all considered "time wasters" by Progressives/Socialists who want the Health-Care/Insurance reform Bill passed by Thanksgiving. (9) In other words, more rammed through Legislation. Recognize the song just a different beat?

Saved the best for last. The Baucus Bill adds $37 Billion to State Budgets as it vastly expands Medicaid. That's really good news to State Governments that are already bankrupt. You may find you are a citizen of one of the 50 States. If so, fasten your seat belt. Also enjoy your ride as you will also be subsiding Nevada, Michigan, Oregon, and Rhode Island as they are exempt from participating in the the $37 Billion price tag for five years. Huh? Thank Mr. Harry Reid (D-NV)for that little amendment. (11)

Saved the best-of-the-best for the very last. One of the increased tax revenue items in the Baucus Bill is a tax on "Cadillac Health Plans". Who has these Cadillac Plans? Most Unions negotiate for Cadillac Plans for their members. Oh no! Unions are upset about this tax! Enter the Top Socialist of them all: Charles Schumer (D-NY). The arbitrary dollar figure assigned to Cadillac Plans ($21,000 per year) has been increased to a threshold of $25,000 in Massachusetts and other highly unionized states. (11)

One can only wonder why our Legislators have such a abysmal approval rating and the Public doesn't trust the Government. Go figure.


(1) http://www.foxnews.com/politics/2009/10/07/cbo-release-cost-report-sweeping-senate-health-care-reform/?loomia_ow=t0:s0:a16:g2:r5:c0.103757:b28154894:z0

(2) http://www.americanthinker.com/blog/2009/10/health_care_reform_some_states.html

(3)http://www.rasmussenreports.com/public_content/politics/current_events/healthcare/october_2009/55_oppose_penalty_for_not_buying_health_insurance
(4) http://www.rasmussenreports.com/public_content/politics/current_events/healthcare/october_2009/to_pay_for_health_care_plan_59_say_no_new_taxes_on_those_earning_under_250_000
(5) http://www.heritage.org/Research/HealthCare/wm2641.cfm

(6) http://www.newsmax.com/headlines/armey_healthcare_obama/2009/10/06/269197.html
(7) http://blog.heritage.org/2009/10/07/healthcare-at-what-price/#

(8) http://www.washingtonexaminer.com/opinion/No_-you-can_t-see-the-health-care-bill-8352156-63636167.html#

(9) http://online.wsj.com/article/SB10001424052748703298004574457171293975390.html

(10) http://www.foxnews.com/politics/2009/10/06/b-taxes-senate-health/

(11) http://www.americanthinker.com/2009/10/the_baucus_masterpiece.html#