Tuesday, April 27, 2010

ObamaCare: HHS chief actuary report

Two new reports were released regarding ObamaCare that need your attention if you are concerned about health insurance costs.

Health and Human Resources Department Report

Richard S. Foster, Medicare's chief actuary, reported Thursday 04/22/2010 that ObamaCare will increase insurance costs. Foster said "During 2010-2019, however, these effects would be outweighed by the increased costs associated with the expansions of health insurance coverage. Also, the longer-term viability of the Medicare...reductions is doubtful". (1)

What else did the Health and Human Services Department report state?

(a) Medicare cuts may be unrealistic and unsustainable,

(b) will drive about 15% of hospitals into the red,

(c) possibly jeopardizing access to care for seniors.

(d) 14 million will lose employer sponsored coverage,

(e) millions will be placed in Medicaid which is already a very strained program. (2) (3)

Congressional Budget Office Analysis

Also on Thursday 04/22/2010 the Congressional Budget Office (CBO) released a separate analysis estimating 4 million households would face tax penalties for not acquiring health insurance. What else did the CBO analysis report?

(a) the health-care overhaul will increase health care spending by some $311 billion between 2010 and 2019,

(b) Medicare cuts to hospitals, nursing homes and other providers are unsustainable,

(c) a mass exodus from Medicare Advantage to the tune of 50% leaving the plan causing seniors to rely on traditional Medicare causing senior to face higher out-of-pocket costs,

(d) the new voluntary long term care plan included in ObamaCare facing a high risk of insolvency. (3)

Timing of the Health and Human Resources Report?

The HHS report was released Thursday 04/22/2010? It was released to the public 04/22/2010. However "... health care report generated by actuaries at the Health and Human Services (HHS) Department was given to HHS Secretary Kathleen Sebelius more than a week before the health care vote. She hid the report from the public until a month after democrats rammed their nationalized health care bill through Congress" according to The American Spectator. (4)

Further, according to The American Spectator the HHS report was not publicly release until a month after the health-care vote: “The reason we were given was that they did not want to influence the vote,” says an HHS source. “Which is actually the point of having a review like this, you would think.” (5)

More Unintended Consequences?

Remember those 2000+ unread pages of Obama-Care? Remember Nancy Pelosi's statement that "We Have to pass the bill so that you can find out what is in it."? Apparently section 9006 of ObamaCare requires "any corporation" to report every expense over $600. "Any corporation" includes Limited Liability Companies. Currently businesses are required to issue a 1099 for wages paid over $600 but merchandise purchases over $600 do not require a 1099. Businesses make millions and millions of purchases each year over $600. Businesses will now have to track such purchases and issue 1099's for such purchases. This will be a red tape nightmare for business and require the IRS to hire more personnel to account for the 1099's issued and sent to the IRS. (6)

More and More Unintended Consequences

According to The Heritage Foundation:

"Millions of Americans Dumped into Medicaid

In order to cover low-income uninsured citizens, Obamacare expands eligibility for Medicaid to include all Americans that fall under 133 percent of the federal poverty level. However, Medicaid is a low-performing, low-quality federal program that fails to meet the needs of its beneficiaries. For example, Medicaid’s failure to cover the cost to providers of seeing Medicaid patients has greatly reduced the number of doctors who will see Medicaid patients.

As a result, Medicaid beneficiaries have become even more reliant on emergency care than the uninsured. According to the Centers for Disease Control’s National Center for Health Statistics, Medicaid patients comprised 25.5 percent of all emergency room visits in 2006, while the uninsured made up only 17.4 percent. What is more, the emergency room visit rate among Medicaid patients was higher than that of the uninsured: Medicaid’s emergency room visit rate was 82 per 100 Medicaid patients, while that of the uninsured was 48 per 100 uninsured patients." (7)

Hence emergency room visits soar causing increased cost pressures and compound hospitals trying to stay out of the red due to meager Medicaid reimbursements (hospital emergency room visits increasing at an increasing rate with revenue decreasing at an increasing rate).

More and more and more unintended consequences: gaming the system.

ObamaCare requires guaranteed issue policies but low fines for not purchasing insurance. Hence would someone only buy insurance when they need the coverage to pay a large medical expense then drop the coverage once the health-care issue is solved and merely pay the much lower fine in comparison to the health insurance premium? Surely not! Try again.

According to Kay Lazar of Boston.com:

"Thousands of consumers are gaming Massachusetts’ 2006 health insurance law by buying insurance when they need to cover pricey medical care, such as fertility treatments and knee surgery, and then swiftly dropping coverage, a practice that insurance executives say is driving up costs for other people and small businesses."(8)

The Massachusetts 2006 health insurance law was the blue print for ObamaCare.


As reported here and by many, many other sources, within 30 days of passing the unread and un-debated ObamaCare legislation, the unintended consequences and price increases are piling up at an exponential rate. This is a true mess for the currently insured as well as the uninsured who really would like access to reasonably priced insurance. The uninsured who care not to have insurance face mandated fines. Most of all the American tax payer better brace for another bail out.

(1) (2) http://www.msnbc.msn.com/id/36726295/

(3) (4) (5) http://biggovernment.com/jhoft/2010/04/27/breaking-dems-hid-damning-health-care-report-from-public-until-a-month-after-vote/


(7) http://www.heritage.org/Research/Reports/2010/04/Obamacare-Impact-on-the-Uninsured

(8) http://www.boston.com/news/health/articles/2010/04/04/short_term_customers_boosting_health_costs/

Friday, April 16, 2010

ObamaCare: Congress passes a law they don't understand

It has become increasing apparent that the U.S. Congress has passed a law known as ObamaCare and they have no earthly idea what the language of the law actually means.

Yes, Congress has passed a law that they themselves do not understand. Is that the definition of good government? You make the call.

Every day a new possible consequence of the law makes headlines with absolutely no one in congress or the federal government able to fathom what the possible consequence really means as they don't understand the language of the ObamaCare law recently passed. No firm explanation is forth coming when questions are posed.

Newest ObamaCare questions with no answers. Newest consequences based on limited understanding of the law. Try these:

(a) State run high risk health insurance pools have been granted, by the ObamaCare
bill, $5 billion to create or expand high risk pool programs, but no one can explain how these risk pools will work.(1)

(b) without any rules written within the legislation the entire health care system and health insurance system has been placed in limbo, (2)

(c) Yum Brands (Pizza Hut and KFC) attempted to estimate the cost impact of ObamaCare regarding their operations in 2014 and ended with a gray area figure of between $20 and $30 million, (3)

(d) six more states have joined the initial lawsuit challenging federal health care reform (bringing the total to 13 states), (4)

Shall we go on? Oh why not!

(e) the insurance commissioner of the state of Georgia refuses to participate in ObamaCare, (5)

(f) members of congress have found that ObamaCare will affect their own personal coverage. They have inadvertently written a law removing their own health-care insurance coverage as it exists currently, (6)

(g) ObamaCare will create a shortage of doctors, (7)

(h) ObamaCare creating hospital monopolies in smaller communities, (8)

For even more consequences check these two links:



Why so many unknown consequences and no point of reference?

The consequences cropping up daily are directly related to passing unread and un-debated legislation. Congressional members who rely on staffers to write legislation then do not bother to read and debate the legislation have created an environment of health-care participants moving in a variety of directions given limited understanding of the law. When clarification of the law is sought, no answer is forth coming. No answer is forth coming as the authors of the law don't themselves understand the law. Absolutely brilliant!

Insurance Contracts and "easy read format"

Beyond unread and un-debated legislation, ObamaCare is basically setting mandated guidelines for insurance contracts albeit "unknown" guidelines. Insurance contracts, for the direct benefit of consumers, were re-written many years ago into "easy read format". In the past insurance contracts were written by lawyers for lawyers. The average consumer could not understand insurance contracts.

Enter the "easy read format" insurance contract. Years ago the National Association of Insurance Commissioners promoted the "easy read format". Insurance contracts were re-written so the average consumer could understand. Today many insurance contracts appear in easy read format and consumer understanding of scope of coverage has increased significantly. (9) (10) (11)

Since insurance contracts are written in easy read format to increase consumer understanding, congressional legislation regarding "insurance" should adopt the easy read format so the same legislators who pass bills into law can understand the law they have in fact passed. The easy read format would also allow the electorate better understanding.

But wait a minute. "168 Representatives and 57 Senators have a law degree". (12) Hence we have 225 congressional legislators that are in fact attorneys. Attorneys that can't answer questions about legislation they passed a mere three weeks ago. There is something extremely wrong with this picture.

Hence our congressional representatives have passed a law that no one including themselves understand. This is apparently good government by Washington beltway standards.

(1) http://www.nytimes.com/2010/04/17/health/policy/17health.html

(2) http://www.dallasnews.com/sharedcontent/dws/bus/stories/DN-HealthBill_17bus.ART.State.Edition1.3db4784.html

(3) http://www.qsrweb.com/article.php?id=17984&na=1&s=2







(10) http://www.ftc.gov/os/comments/modelprivacyform/528621-00012.pdf



Wednesday, April 14, 2010

ObamaCare: more unintended consequences

As mentioned here and in other articles ObamaCare, the unread, un-debated , and poorly crafted legislation has immediately yielded consequences.

The final 2000+ page bill went unread, un-analyzed, and un-debated. That is to say, if common sense had been applied, the amended Senate bill which became the ObamaCare bill, required weeks if not months to be read and analyzed. Then the results of the analysis needed debated to be sure wording and intent was correct. However, the bill was rushed through unread and un-debated.

It boils down to this statement by Nancy Pelosi: "But we have to pass the bill so that you can find out what is in it, away from the fog of the controversy". (1)


Senators, representatives, and staffers to be removed from current coverage?

Although the electorate demanded that if Congressional Democrats thought that ObamaCare was so grand, that Congress should participate in ObamaCare as well. However, Congress supposedly wrote the bill in such a way to exempt themselves from ObamaCare. Or did they?

Apparently passing the ObamaCare bill, unread and un-debated, has left senators, representatives and their staffers not able to retain their current coverage. Ironic?

Please see the following excerpts from the New York Times article entitled 'Lawmakers Baffled by Obama-care':

**"It is often said that the new health care law will affect almost every American in some way. And, perhaps fittingly if unintentionally, no one may be more affected than members of Congress themselves.

In a new report, the Congressional Research Service says the law may have significant unintended consequences for the “personal health insurance coverage” of senators, representatives and their staff members."

**"For example, it says, the law may “remove members of Congress and Congressional staff” from their current coverage, in the Federal Employees Health Benefits Program, before any alternatives are available.

The confusion raises the inevitable question: If they did not know exactly what they were doing to themselves, did lawmakers who wrote and passed the bill fully grasp the details of how it would influence the lives of other Americans?

The law promises that people can keep coverage they like, largely unchanged. For members of Congress and their aides, the federal employees health program offers much to like. But, the report says, the men and women who wrote the law may find that the guarantee of stability does not apply to them.

“It is unclear whether members of Congress and Congressional staff who are currently participating in F.E.H.B.P. may be able to retain this coverage,” the research service said in an 8,100-word memorandum.

And even if current members of Congress can stay in the popular program for federal employees, that option will probably not be available to newly elected lawmakers, the report says."

ObamaCare to control insurance prices?

Leading up to the vote on ObamaCare, vilification of the insurance industry along with health insurance price controls was the mantra of Mr. Obama. Of course its economic axiomatic that price controls merely cause non-price rationing of one sort or another e.g. time/quality and reduces supply.

Please see these excerpts from the LA Times.com article entitled 'Healthcare overhaul won't stop premium increases':

**Public outrage over double-digit rate hikes for health insurance may have helped push President Obama's healthcare overhaul across the finish line, but the new law does not give regulators the power to block similar increases in the future. "

**"The irony here is that it was the Anthem rate increase that breathed new life into the healthcare bill," said Jerry Flanagan, medical policy director of Consumer Watchdog, a longtime supporter of tougher premium regulation. "But there is nothing in this bill to guarantee that it doesn't happen again."

The lack of muscle is stoking concerns that more rate jumps -- and an angry backlash from ratepayers -- could undermine support for implementing the healthcare overhaul.

Insurance industry officials say that talk of more regulation is misguided and have urged federal officials to focus instead on containing rising medical costs, which help drive up premiums.

"Politicians are much more comfortable looking at healthcare premiums," said Karen Ignagni, president of America's Health Insurance Plans, the industry's Washington-based lobbying arm.

Ignagni, as well as some independent healthcare experts, said policymakers should look at ways to control what hospitals and other providers charge, although few elected officials have shown much appetite for doing so."

Apparently, the unread and un-debated ObamaCare bill lacked any wording leading to any mechanism to apply price controls. Hence ObamaCare has not ability to apply price controls.

Go figure!

These consequences seem very ironic. Or is it really better summed up by: "But we have to pass the bill so that you can find out what is in it, away from the fog of the controversy".




Monday, April 12, 2010

ObamaCare: Centralized Control

Two major objections to the construct of ObamaCare are:

(1) the elimination of pre-existing conditions and the unintended consequences that will occur,

(2) price controls that merely lead to non-price rationing.

An article appeared in the Wall Street Journal on Friday April 9th, 2010 entitled The Massachusetts Insurance Blackout, Insurers go on strike after Deval Patrick imposes price controls.

Please see excepts from the article below:

"This week it became impossible in Massachusetts for small businesses and individuals to buy health-care coverage after Governor Deval Patrick imposed price controls on premiums. Read on, because under ObamaCare this kind of political showdown will soon be coming to an insurance market near you."

"Yet all of the major Massachusetts insurers are nonprofits. Three of largest four—Blue Cross Blue Shield, Tufts Health Plan and Fallon Community Health—posted operating losses in 2009. In an emergency suit heard in Boston superior court yesterday, they argued that the arbitrary rate cap will result in another $100 million in collective losses this year and make it impossible to pay the anticipated cost of claims. It may even threaten the near-term solvency of some companies. So until the matter is resolved, the insurers have simply stopped selling new policies."

"One irony is that Mr. Patrick's own Attorney General and his insurance regulators have concluded—to their apparent surprise—that the reason Massachusetts premiums are the highest in the nation is the underlying cost of health care, not the supposed industry abuses that Mr. Patrick and his political mentor President Obama like to cite. "

"On top of that, like ObamaCare, integral to the Massachusetts overhaul are mandates that require insurers to cover anyone who applies regardless of health status or pre-existing conditions and to charge everyone about the same rates. This allows people to wait until they're about to incur major medical expenses before buying insurance and transfer the costs to everyone else. This week Blue Cross Blue Shield reported a big uptick in short-term customers who ran up costs more than four times the average, only to drop the coverage within three months."

"Last July, Charlie Baker detailed similar gaming at Harvard Pilgrim, the health plan he used to run. Between April 2008 and March 2009, about 40% of its new enrollees stayed with it for fewer than five months and on average incurred costs about 600% higher than the company would have otherwise expected. "(1)

The Massachusetts plan was the blueprint for ObamaCare. Opps! Price controls have never worked, never-ever worked, in all of recorded economic history. Its an economic axiom that price controls merely cause non-price rationing of one sort or another (time/quality) and consequently supply shrinks. (2)

Pre-existing conditions is an underwriting criteria that controls cost in a private welfare system (private insurance). Removing underwriting criteria merely leads to cost acceleration for the group of insureds making up a private welfare system. Removing underwriting criteria also can threaten the solvency of a private welfare system. (3)

The gathering back lash and the prior protests regarding socialized medicine comes down to placement of control. The root objection is placement of control.

Thomas Sowell’s example of the mighty forest best describes the basis of attitudes regarding "control" within economics. The forest is a very efficient system. However, this efficient system is generated by random items such as which acorn grows or rots, where a leaf will fall upon the forest floor, which blade of grass will grow etc., etc.. Hence we have random items with the end product being a very efficient forest. (4)

It’s the natural eco-system of the virgin forest. That this natural eco-system was produced through random events that produced an end result of a highly efficient forest eco-system.

A certain sub-section of ideologues think that “control” is necessary as randomness scares them. The inherent freedom of randomness scares them and hence the answer is to control by removing the freedom of randomness.

The freely occurring randomness of a free market produces efficient results just like the randomness of the forest eco-system. The free market is made up of millions upon millions of economic decision makers who as a group are making zillions of economic decisions per day. Yet each decision maker on the whole makes rational decisions in their best self interest. They also make those decisions on the basis of the simplest least expensive path that actually solves their particular problem. Hence the random nature of a free market is really the rational, simplest, and most cost effective economic organization that actually solves economic problems.

Conversely, a planned economy such as the former Soviet Union was an attempt by few to plan the zillion decisions made daily. The most glaring example of the control experiment by the Soviet Union was to set a hundred thousand prices every year. The price setters only had mundane knowledge to set a very few prices with the remaining prices set as a pure guess. Once they set prices then the random nature of economic decisions were constrained by price fixing and shortages occurred over and over while surpluses occurred in other sectors. Hence the control produces a very, very inefficient system of allocation of scarce resources to competing ends. (5)

Remember, all economies (capitalistic, socialistic, monarchy, fascist, communist, etc.) function under the axiom of the allocation of scarce resources to competing ends.

“Control” in the free market is the individual making rational economic decisions in their own self interest leading to the least expensive and simplest solutions that actually solve for an economic problem. When you remove the control from the individual and allow the state to control, the result is irrational decisions leading to the most expensive and complicated solution that does not in fact solve the problem.

It’s the placement of “control” that divides ideology of free markets vs. other planned authoritative schemes.

(1) http://online.wsj.com/article/SB10001424052702304198004575171782805022028.html?mg=com-wsj

(2) http://thelastembassy.blogspot.com/2009/12/socialized-medicine-scheme-bending-cost.html

(3) http://thelastembassy.blogspot.com/2009/10/fun-and-games-with-preexisting.html

(4) Intellectuals and Society, Thomas Sowell

(5) http://thelastembassy.blogspot.com/2009/11/socialized-medicine-scheme-and-central.html

Wednesday, April 7, 2010

ObamaCare: consequences, unintended consequences and hidden consequences

ObamaCare, the unread, un-debated , and poorly crafted legislation has immediately yielded consequences.

We need to examine the immediate consequences, immediate unintended consequences, and the continuation of consequences and unintended consequences. Once we examine the self evident consequences we can then seek hidden consequences.

What kind of consequences and unintended consequences have already occurred and what hidden consequences can one expect as time passes?

News stories will surely rage on as the consequences and unintended consequences continue to mount. Over time the unintended consequences will begin interacting with one another creating yet a new set of unintended consequences. Then all the unintended consequences will begin to cascade and create a seemingly insurmountable economic mess.

However, hidden consequences need examined as well.

Why are there going to be Unintended Economic Consequences?

The ObamaCare legislation fails a series of important economic axioms and fails a series of important insurance axioms. The major axioms violated by ObamaCare is that the plan is the world's most expensive and complicated solution that does not solve the problem. ObamaCare is a scheme to allocate scarce resources to competing ends through price fixing which merely causes non-price rationing (time/quality). (1) (2) Also, the risk management matrix of insurance being applied to low frequency/high severity risk is totally mismanaged. (3)

The correct solution would have yielded the simplest and least expensive solution that actually solves the problem. The correct solution would have allocated scarce resources to competing ends through a free market based on price as the only logical rationing agent. The correct solution would have applied insurance to its most efficient area which is low frequency and high severity risks.

It should be clear to all that violating economic and insurance axioms sets a stage for a train wreck. The violations listed above are a mere sampling of axioms broken. The list of economic and insurance errors within the legislation creates a laundry list. Violating sound economic and insurance principles yields unpleasant unintended consequences.

Put aside economic and insurance axioms for a moment and purely look at ObamaCare from a consumer purchase perspective: (a) the consumer has been warned for years to "read their insurance policy" before purchasing the policy, (b) understand your insurance before you purchase the insurance, (c) ask questions before you purchase insurance, (d) fit the insurance to your particular need for insurance. ObamaCare violates every basic consumer purchasing guideline.

What are the immediate Consequences and Unintended Consequences?

Mr. Obama hadn't put his pen down after signing the poorly crafted legislation into law when the consequences and unintended consequences began. Here is a short sampling:

(a) not all components of the plan where scored by the Congressional Budget Office (CBO) and hence any deficit savings referred to were immediately lost when additional components were added and a $260 billion dollar deficit increase appeared over the next 10 years. Hence an already widening deficit ending as national debt puts the U.S. in a more precarious financial situation, (4) (5) (6)

(b) the medicare physician fee schedule change aka "Doc Fix" was not added into the CBO calculation by design. Hence add another $371 billion to the deficit over the next 10 years. More debt to an already out of control deficit and consequently national debt, (7)

(c) authorizes the hiring of 16,000 additional IRS agents to enforce the rules yet no enforcement mechanism was written into the legislation. We then have 16,000 more public employees with no mechanism for enforcement, (8) (9) (10)

(d) AT&T, 3M, Deere & Co., Caterpillar Inc., AK Steel, Valero Energy and Verizon by law had to immediately restate earnings to reflect the present value of their long term health liabilities as well as the higher taxes. The total amount is estimated at $14 billion once all companies write down earnings. Companies had been incentivized through the tax code to provide benefits to retired employees. That tax incentive has been removed. Retired employees with health-care benefits and drug benefits provided by their x-employers will likely be cut loose by smaller employers and hence forced to purchase such coverage themselves. (11) (12) (13)

(e) your freedom to choose different health care plans has been extremely curtailed and mandated coverage elements must be included in your plan regardless of your needs. The most ridiculous being that single men and women who can't have children must still have pediatric services included in their plan and pay the premium to fund the benefit. Further, the reduction in available deductibles, the mandated inclusion of preventative benefits and the many mandated coverages will force insurance cost to rise significantly, (14)

(f) an additional 2.3% tax is imposed on medical device makers and an annual tax of 2.3 billion will be applied to drug makers. When you increase the tax on something you get less of that item. Medical devices that could save your life or a drug that could save your life will now be curtailed,
(15) (16)

(g) the mandate of requiring everyone to buy health insurance was immediately challenged by a series of state attorney generals as unconstitutional. (17) The U.S. Constitution has no clause requiring a citizen to buy any particular product. Will you be required to by a vehicle from GMC next?

Will there be more Unintended Consequences?

ObamaCare's 3000 pages are basically an outline. The legislation authorizes over 100 new government departments that will then write the rules and regulations. That is to say, ObamaCare is an attempt to centrally plan a once free market through rules and regulations. Planned economies always fail as they attempt to plan what were once millions of daily individual decisions made in each individuals self interest. Each individual made decisions based on the least expensive simplest solution that actually solved their individual problem.

The mountain of rules and regulations that are about to appear will attempt to duplicate the workings of a free market. The "control" of the individual and his/her individual decisions that existed with in a free market is now replaced with "control" being mandated and assumed by a central authority aka government. The attempted central planning is no different than the former Soviet Unions attempts to centrally plan. That somehow the central government has "special knowledge" that you and other individuals do not possess and hence this special knowledge replaces the individuals self interest based decisions. Centrally planned economies result in vast shortages in many areas while creating mass surpluses in other areas.

Hidden Consequences

Hidden consequences are those economic undercurrents, those economic trends and economic phenomena acting in the background.

There lurks plenty of hidden economic consequences. However for this discussion think of these three factors acting in the economic shadows:

(1) over 100 new federal government departments created to handle a command and control market for health-care and health insurance,

(2) 16,000 new IRS agents to enforce government mandates,

(3) the unionization of the personnel in (1) and (2) above.

Consider this economic phenomena: the tax increases added to medical device manufacturers and drug makes will be passed onto consumers. Its an economic fact that input costs, and tax is an input cost, is always reflected in the final price of the producer. Hence the consumer of a product or service ultimately pays any tax placed on the producer.

Now consider this economic phenomena as described by William Graham Sumner is his 1883 essay The Forgotten Man:

"Sometimes people go on to notice the effects of trades-unionism on the employers, but although employers are constantly vexed by it, it is seen that they soon count it into the risks of their business and settle down to it philosophically. Sometimes people go further then and see that, if the employer adds the trades union and strike risk to the other risks, he submits to it because he has passed it along upon the public and that the public wealth is diminished by trades-unionism, which is undoubtedly the case. " (18)

What Sumner is explaining is an economic phenomena in the private sector. Unionization of the public sector had not occurred in 1883. However, just like taxes being assessed to a producer and ultimately transferred to the consumer, the cost of unionized labor is transferred from the producer to the consumer.

Now think about the difference between the private sector producer negotiating with unionized labor and the public sector negotiating with unionized labor. What incentive exists for the private sector producer to negotiate with unions vs. the incentive that exists for the public sector to negotiate with unions? That is, do the incentives differ between private and public entities when negotiating with unions?

William Graham Sumner and Milton Friedman

If we take Sumner's theory that the cost of unions to the producer is consequently a cost passed onto the consumer, then the cost of unions in the public sector is passed onto the tax payer. Then is there a difference in the magnitude of the "transfer of cost" of union labor in the private and public sectors?

The magnitude of the transfer of cost of union labor in the private and public sectors is related to Milton Friedman's four categories of spending. In other words, incentive exists in the private sector to negotiate for the best price for union labor. In the public sector there is less incentive to negotiate for the best price therefore causing a greater transfer of cost. The less the incentive to negotiate with union demands surely affects the magnitude of the transfer cost of union labor. Why is there less incentive in the public sector?

The incentive level between private and public sector negotiations with union labor costs lies within Milton Friedman's four ways that money is spent:

The first and most common way in the private sector is people spending their own money on themselves. In this case, the buyer is interested in both quality (the best product or service that he can afford) and value (getting it at the best price) because he is both the producer of the wealth being spent and the consumer of the good or service being procured.

The second way is when people spend their own money on others (such as gifts). Here they are still concerned about value (it's their money), but less concerned about service quality as they are not the consumer.

The third way is spending other people's money on yourself. Think of the rich man's girlfriend who buys herself the nicest dresses in the store on his credit card without even looking at the tag. She wants quality, but value is irrelevant since she sacrifices nothing.

The fourth way is when people spend other people's money on other people. In this case, the buyer has no rational interest in either value or quality. Government always and necessarily spends money in this fourth way. This guarantees inefficient public spending because the spenders have no vested interest in efficiently allocating those funds.

Public sector money falls in the fourth way of spending. Bureaucrats spend your tax money when negotiating with federal workers that are almost all unionized. In other words, other people are spending other people's money on other people. Since no rational interest exists in either value or quality, we find that the union employees within government have negotiated large salary, benefit, and pension packages.

Hence Sumner and Friedman are correct. Much of their correctness lies in the fact that today public sector employees total compensation far exceeds that of private sector employees. (20)That is, over time the fourth category of spending has benefited public sector unions and the enormous cost has been passed onto the consumer which is the tax payer.

Therefore we have a hidden economic phenomena at work within ObamaCare. Those public sector employees charged with overseeing the centrally planned program known as ObamaCare will create a dynamic, continuous, shadow cost driver. The unions representing these public sector employees will push as hard as ever for compensation enhancements. The compensation enhancements will be approved just as they have in the past due in part to Friedman's fourth category of spending. And as Sumner explained those compensation enhancements will be passed onto the consumer (taxpayer).





(5) http://www.investors.com/NewsAndAnalysis/Article.aspx?id=527363


(7) http://www.gop.com/index.php/comms/comments/obamacare_quick_facts/

(8) http://thehill.com/blogs/on-the-money/domestic-taxes/87697-republicans-assail-irs-provision-in-health-care-bill-



(11) http://online.wsj.com/article/SB10001424052748704100604575146002445136066.html


(13) http://online.wsj.com/article/SB10001424052748704100604575145981713658608.html

(14) http://www.investors.com/NewsAndAnalysis/Article.aspx?id=528137

(15) http://www.smartmoney.com/investing/economy/healthcare-change-will-leave-you-with-less-change/



(18) http://oll.libertyfund.org/index.php?option=com_staticxt&staticfile=show.php%3Ftitle=1654&layout=html#chapter_108194