Tuesday, April 30, 2013

Thomas Sowell on The Art of the Impossible

"Someone called politics "the art of the possible." But, in the era of the modern welfare state, politics is largely the art of the impossible.

Those people morbid enough to keep track of politicians' promises may remember how Barack Obama said that ObamaCare would lower medical costs -- and lots of people bought it.

But if you stop and think, however old-fashioned that may seem these days, do you seriously believe that millions more people can be given medical care and vast new bureaucracies created to administer payment for it, with no additional costs?

Just as there is no free lunch, there is no free red tape. Bureaucrats have to eat, just like everyone else, and they need a place to live and some other amenities. How do you suppose the price of medical care can go down when the costs of new government bureaucracies are added to the costs of the medical treatment itself?

By the way, where are the extra doctors going to come from, to treat the millions of additional patients? Training more people to become doctors is not free. Politicians may ignore costs but ignoring those costs will not make them go away.

With bureaucratically controlled medical care, you are going to need more doctors, just to treat a given number of patients, because time that is spent filling out government forms is time that is not spent treating patients. And doctors have the same 24 hours in the day as everybody else.

When you add more patients to more paperwork per patient, you are talking about still more costs. How can that lower medical costs? But although that may be impossible, politics is the art of the impossible. All it takes is rhetoric and a public that does not think beyond the rhetoric they hear.

You can just call "medical care for all" a "right" and you are home free with a major part of the public. Those who are more skeptical can be dismissed as people who just are not as compassionate. That puts you on the side of the angels against the forces of evil -- and that is a proven winning strategy in politics.” - Thomas Sowell


“So it’s no surprise that governments with vast powers routinely behave stupidly: they are attempting to do the impossible while being overseen by the ill-informed.” - Don Boudreaux

Link to the entire article by Thomas Sowell appears below:



Saturday, April 27, 2013

Social Security Disability Insurance (SSDI) Goes Insolvent in 2016?

“The nation's disability rolls continued to climb sharply, as 76,983 workers enrolled in the Social Security Disability Insurance program in April, according to new data from the Social Security Administration.

More than 300,000 have joined the program so far this year. The number of workers on permanent disability is now a record 8,865,586, a net increase of one million in just three years.

Today, 6.5 workers are on disability for every 100 who have a job. That's double the ratio from two decades ago. The number of people on disability has climbed almost sixfold since 1970.

That influx has caused SSDI costs to climb faster than its dedicated payroll tax revenues. The program has been running a deficit since 2009, and will be insolvent by 2016, according to the program's administrators.” - Investors Business Daily, 04/25/2013

The entire article appears in the link below:


Friday, April 26, 2013

Government failure: housing bubbles and subprime lending

Down Payment Rules Are at Heart of Mortgage Debate - NYT

"And the subprime debacle has only distorted the debate, say some analysts. “The problem with this conversation is that it’s like discussing the future of shipbuilding from the deck of the Titanic,” said Roberto G. Quercia, director of the Center for Community Capital at the University of North Carolina at Chapel Hill. “There’s a lack of perspective.”

To underscore his point, Mr. Quercia studied mortgages in a special program for low-income borrowers, typically those with minimal down payments. From 1998 through the end of last year, 5.5 percent of the mortgages ended up in foreclosure, he found. Subprime mortgages made during the last housing boom, regardless of down payment size, had far higher foreclosure rates, roughly 25 percent."




Let’s not repeat the same mistakes that led to the housing bubble -AEI

"I‘ll call those 2,500 borrowers and raise 3.1 million families. Since 1975, one in eight of the 25 million families getting an FHA insured loan suffered a foreclosure from their 30-year, fixed-rate mortgages with a small down payment. The dashed American dreams of these families trumps the 2,500 in the UNC study. America’s homeowners have already experienced the horrific impact of the government’s successful effort to loosen underwriting standards that drove the boom that went bust. Let’s not repeat the same mistake."


Oops! Capex is Cratering

“New orders for manufactured durable goods in March decreased $13.1 billion or 5.7 percent to $216.3 billion, the U.S. Census Bureau announced today. This decrease, down two of the last three months, followed a 4.3 percent February increase. Excluding transportation, new orders decreased 1.4 percent. Excluding defense, new orders decreased 4.7 percent.” - Advance Report on Durable Goods Manufacturers’ Shipments, Inventories and Orders March 2013, US Department of Commerce, released 04/24/2013

The entire report can be found at the link below:


Sunday, April 21, 2013

Obamacare, Department of Health and Human Service, Weber Shandwick and the $3.1 million advertising contract

'Weber Shandwick won a $3.1 million contract to help the Department of Health and Human Service roll out a campaign to convince skeptical -- or simply confused -- Americans the Affordable Care Act is good for them and convince them to enroll in a health plan.

Weber Shandwick's contract is limited to work on the rollout of Obamacare and it's not likely the agency will be involved in defending the administration in the latest dustup over Obamacare.

It seems businesses who want to purchase insurance coverage in state exchanges may only be able to offer their workers one plan next year because some states may not have exchanges for businesses fully set up by next year's deadline.

Rather, Weber Shandwick, which didn't return requests for comment, will be tasked with implementing roll-out communications based on old-fashioned marketing principles.”

One tactic involves the use of marketing -- and the help of Experian and other companies that target audiences -- to understand the psychology of the uninsured.

The department is getting a handle on "what worked best when we launched other large-scale health programs like [the Medicare prescription drug program' … and building from those experiences in order to be ready to execute effective tactics," said a spokesman for the Centers for Medicare & Medicaid Service, the HHS agency in charge of the campaign.

CMS said it will tailor its message to different sectors of a consumer group that is 48 million strong but not monolithic.

CMS broke down the uninsured by geographic location and income levels. It also divided the uninsured into six basic groups based on attitudes.

Three of them won't be targeted. They are the "Informed, Healthy and Educated," the "Mature and Secure" and the "Vulnerable and Unengaged."

Instead, CMS will home in on three other groups that make up about 90% of the uninsured. They are the "Sick, Active and Worried," "Healthy and Young" and "Passive and Unengaged."

The Sick, Active and Worried people are Baby Boomers and Generation Xers who are savvy about health insurance but worried about cost and may have pre-existing conditions or a chronic illness that puts insurance out of their reach financially.

The Healthy and Young group are those in good health and think healthcare is unimportant. The Passive and Unengaged group is older but healthy and its members don't understand much about health insurance or care because they "live for the day." ‘ - Ana Radelat, Advertising Age, 04/05/2013

The entire article appears in the link below:


Saturday, April 13, 2013

Obamacare: Smoke’n Up-rates and No Subsidy

"Smokers, beware: tobacco penalties under President Obama’s Affordable Care Act could subject millions of smokers to fees costing thousands of dollars, making healthcare more expensive for them than Americans with other unhealthy habits.

The Affordable Care Act, which critics have also called “Obamacare”, could subject smokers to premiums that are 50 percent higher than usual, starting next Jan 1. Health insurers will be allowed to charge smokers penalties that overweight Americans or those with other health conditions would not be subjected to.

A 60-year-old smoker could pay penalties as high as $5,100, in addition to the premiums, the Associated Press reports. A 55-year-old smoker’s penalty could reach $4,250. The older a smoker is, the higher the penalty will be.

Nearly one in every five U.S. adults smokes, with a higher number of low-income people addicted to the unhealthy habit. Even though smokers are more likely to develop heart disease, cancer and lung problems and would therefore require more health care, the penalties might devastate those who need help the most – including retirees, older Americans, and low-income individuals.” (1)

The law, known as the Patient Protection and Affordable Care Act, was — as its name implies — ostensibly designed to make health insurance affordable to Americans. It prohibits insurers from turning down or charging more to individuals with pre-existing conditions and even certain conditions (such as obesity) that increase the risk of health problems.

However, the one condition that the law does not protect from high insurance rates is nicotine addiction — despite the fact that smoking is associated with a number of serious health problems including heart disease and lung cancer. In fact, it specifically permits insurers to charge higher rates to older smokers than to nonsmokers or even younger smokers. Under the law, older adults in general may be charged up to triple what younger ones are charged (which could end up
harming the young by hiking their rates). Smokers may, in addition, be charged up to 50 percent more than nonsmokers for their coverage, but younger smokers may be hit with a lesser penalty than older ones. Plus, the subsidies the government provides to offset the cost of insurance purchased on the individual market cannot be applied to the smoking penalty.” (2)

"Take a hypothetical 60-year-old smoker making $35,000 a year. Estimated premiums for coverage in the new private health insurance markets under Obama's law would total $10,172. That person would be eligible for a tax credit that brings the cost down to $3,325.

But the smoking penalty could add $5,086 to the cost. And since federal tax credits can't be used to offset the penalty, the smoker's total cost for health insurance would be $8,411, or 24 percent of income. That's considered unaffordable under the federal law. The numbers were estimated using the online Kaiser Health Reform Subsidy Calculator.

The effect of the smoking (penalty) allowed under the law would be that lower-income smokers could not afford health insurance," said Richard Curtis, president of the Institute for Health Policy Solutions, a nonpartisan research group that called attention to the issue with a study about the potential impact in California.

In today's world, insurers can simply turn down a smoker. Under Obama's overhaul, would they actually charge the full 50 percent? After all, workplace anti-smoking programs that use penalties usually charge far less, maybe $75 or $100 a month.

Robert Laszewski, a consultant who previously worked in the insurance industry, says there's a good reason to charge the maximum.

"If you don't charge the 50 percent, your competitor is going to do it, and you are going to get a disproportionate share of the less-healthy older smokers," said Laszewski. "They are going to have to play defense."

Upon further review, the ACA forbids discriminatory pricing except for those conditions ACA wants to discriminate against. Hmmm. Non-discriminatory discriminatory pricing. Very nice indeed! Load up on those Twinkies but stay away from those smokes.

Wait a minute! ACA is supposedly an attempt to insure the uninsured and predominately aimed at lower income individuals. You know, “affordable care act”. Affordable care [insurance] for those that supposedly can’t afford insurance. However, as with all intention oriented do-gooder schemes, the negative cascading unintended consequences become the results. Hence uninsured lower income James Goodsmoker suffers a 50% up-rate that will not qualify for an Obamacare subsidy. James Goodsmoker finds coverage as unaffordable under the “affordable care act” as he did prior to ACA. Go figure. (4)

A question to ponder: since sixteen million of the uninsured will be herded into Medicaid, will the federal government charge itself a 50% up-rate for the subsection of the sixteen million that smoke?






(1) 'Obamacare' to hit smokers with huge penalties, rt.com


(2) Under ObamaCare, It’s Quit Smoking or Pay the Price — Literally, thenewamerican.com


(3) Obamacare to Hit Smokers with Huge Penalties, newsmax


(4) Socioeconomic status and smoking, oxford journals.org








Sunday, April 7, 2013

Obamacare: actuaries, insurance policies, maintenance policies and Kathleen Sebelius

“In a report that could prove a big political headache for the administration, the Society of Actuaries estimated Tuesday that insurers will have to pay out an average of 32 percent more for claims on individual health policies under the Affordable Care Act, a cost likely to be passed on to consumers.”

“Kristi Bohn, an actuary who worked on the study, acknowledged it did not attempt to estimate the effect of subsidies, insurer competition and other factors that could mitigate cost increases. She said the goal was to look at the underlying cost of medical care.

"Claims cost is the most important driver of health care premiums," she said.” (1)

Enter Kathleen Sebelius:

“At a White House briefing Tuesday, Health and Human Services Secretary Kathleen Sebelius said some of what passes for health insurance today is so skimpy it can't be compared to the comprehensive coverage available under the law. "Some of these folks have very high catastrophic plans that don't pay for anything unless you get hit by a bus," she said. "They're really mortgage protection, not health insurance."

She said this in response to a report from the American Society of Actuaries arguing that premiums are going to rise by 32% when Obamacare kicks in, as coverage gets more generous and more sick people join the insurance market. Sebelius's response is apparently that catastrophic insurance isn't really insurance at all--which is exactly backwards. Catastrophic coverage is "true insurance". Coverage of routine, predictable services is not insurance at all; it's a spectacularly inefficient prepayment plan.” (2)(3)(4)

What Sebelius is saying is that maintenance policies are insurance. This would mean the risk management matrix, insurance theory and actuaries are fallacious as maintenance policies are true insurance.

At this point many pundits show the absurdity of Sebelius's claim by pointing out the oft quoted case of “grocery insurance” or “gasoline insurance“. That is, if you “insured” the maintenance of grocery purchases or gasoline purchases your price for such coverage would be exactly the cost of your groceries or gasoline, plus an administration charge to handle the transactions. (5) (6)

The problems mentioned above regarding claim costs and hence rising premium price and the problem with maintenance policies can be summed up very easily: in the risk management matrix the most efficient use of insurance is for low frequency and high severity risks. All other deployments of insurance in the risk management matrix are inefficient allocations of insurance. (7) (8)


Given insurance theory and in particular the risk management matrix and knowing the most efficient deployment of insurance is for low frequency and high severity risks, then why does Sebelius advocate high cost maintenance insurance designs which drive up claim cost and hence premium? Sebelius’s argument finds its implicit assumption in categorical risk management. However, before one can discuss categorical risk management one must examine incremental risk management. All firms and all individuals deploy incremental risk management. That is, risk management is viewed in a cost/benefit fashion with certain risks retained as the cost outweighs the benefit. For example, the vast majority of households do not install sprinkler systems in their homes as the cost/benefit is ineffective given constraints but many households do find smoke/fire detectors cost/benefit effective.

Then who advocates categorical risk management such as Sebelius? Categorical risk management advocates take the position of unlimited benefit regardless of cost. Who in the world can disregard cost? Ah, enter Milton Friedman’s fourth category of spending. Those that advocate categorical risk management do so with other people’s money. (9) (10)

Hence we end this examination with the Health and Human Services Secretary, Kathleen Sebelius dismissing the Society of Actuaries by advocating the deployment of insurance in an inefficient fashion via categorical risk management with other people’s money. Political nitwitery is best served with dupery.



(1) Study estimates Obamacare could raise individual claim costs 32 percent, Washington Guardian, 03/27/2013 [update 03/28/2013].


(2) ibid

(3) Health and Human Services Secretary Doesn't Understand What Insurance Is, Megan McArdle, 03/27/2013, The Daily Beast.


(4) What is the purpose of insurance? Greg Mankiw’s blog, 03/28/2013.


(5) ibid

(6) Health and Human Services Secretary Doesn't Understand What Insurance Is, Megan McArdle, 03/27/2013, The Daily Beast.


(7) The Socialized Medicine Scheme: reverse risk management.


(8) ObamaCare: more on categorical risk management


(9) Milton Friedman’s Four Categories of Spending.



(10) Applied Economics, Thomas Sowell, pages 144 - 145