28 March 2012
Last January in Ica to Lima I quoted a famous line from Anatole France:
“The law, in its majestic equality, forbids the rich as well as the poor to sleep under bridges, to beg in the streets, and to steal bread.”
And last September on Twitter I wrote:
We shouldn’t say that anything is “banned,” only that it has been “denied to the poor.” The rich can always satisfy their wants and needs.
I don’t think that there has been a sufficient appreciation of the intimate relationship between law and poverty.
Our legislators like to pretend that they are making laws that are universally applicable to everyone within a given nation-state, and the mass media is complicit in this illusion by reporting on an egalitarian society that simply does not exist. Of course, our legislators have plenty of practice in this art, because every two or four years they must go out on the campaign stump and pretend as though they are “just plain folks” when they are not.
There is an old saying that, money can’t but you happiness, but it does allow you to choose your own kind of misery. So it is that the wealthy have choices denied to the rest of us, and among these choices are opportunities to avoid any law felt to be onerous or an inconvenience. The rich live in a libertarian anarchy in which all things are possible.
This I take to be F. Scott Fitzgerald’s point at the end of The Great Gatsby when the narrator says:
“Tom and Daisy — they smashed up things and creatures and then retreated back into their money or their vast carelessness, or whatever it was that kept them together, and let other people clean up the mess they had made…”
The same essential idea was expressed with less poetry and more viciousness when Leona Helmsley, the “Queen of Mean,” was quoted as saying, “We don’t pay taxes. Only the little people pay taxes.”
Despite the persistent idea of equality before the law in democratic societies, we all have known, even if we don’t much talk about, the fact that the rich are not subject to the same laws as everyone else. Back before abortion was legal in the US, if a girl from a privileged family got in “trouble,” she went to Sweden for a safe and legal abortion, or she was sent to have her child in Europe where such things carried less social stigma. Today, abortion is legal in the US, but the political climate in large swathes of the US means that an abortion is almost impossible to obtain in some states, but for those for whom travel out of state presents no difficulties it is not a problem, though it is a problem for the poor.
The middle classes don’t have the scope of free action that the wealthy possess, but they do posses some scope of action that the poor do not. For example, the middle classes have just enough money that, if they prioritize some particular interest or activity, they can choose one or two or maybe three areas where they will exercise their freedom — whether these areas might include private schools, exotic vacations, or boutique health care.
And to mention medical care brings us back to the topic of yesterday’s Three Alternatives to PPACA. It is important to understand that the debate over health care is really a debate over what health care the poor will have, and then this debate is really a debate over how the poor will be regulated (in ways that do not regulate other segments of society).
Regardless of what measures are imposed on the US population as a consequence of PPACA, the wealthy will continue to enjoy the best medical care that money can buy. They can afford to pay into whatever system they need to pay into, and then still buy themselves whatever they want outside the system (or above and beyond minimum requirements). It is those without options who will be stuck with the system and whose lives will be most profoundly affected by it. And, as I noted yesterday, most of those who have no health care or no health insurance at present do not have it because they cannot afford it. They will be the ones forced to face either unaffordable premiums or fines.
Neither the wealthy nor the middle class will have to make painful decisions about cutting back on food or cutting back on electricity or cutting back on heating in order to meet health insurance premiums (and thereby ensure that the insurance industry continues livin’ large), but these are issues as real to the poor as the monthly worry of making rent and having enough to eat.
Thus we can say in precise analogy with the earlier quote from Anatole France:
“The health care law, in its majestic equality, obligates the rich as well as the poor to purchase health insurance, to choose between paying bills and paying premiums, and to face fines if they cannot afford the premiums.”
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27 March 2012
Voltaire famously said of the Holy Roman Empire that it was neither holy, nor Roman, nor an empire. In a similar spirit we might say of the “Patient Protection and Affordable Care Act” (apparently named by the shade of Kafka) that it will not protect patients, that it will not make health care more affordable, that it is not about care, and it is not even an act — rather, it is an excuse for legislative inaction. It is as though someone proposed “solving” the problem of homelessness by passing a law that every homeless person must either buy a house or rent an apartment or face a fine. Great. Problem solved.
With the US Supreme Court hearing arguments on the constitutionality of the provisions of PPACA, political rhetoric is heating up and the news stories are flying thick and fast. I don’t have much confidence that the Supreme Court will decide the case on the constitutional merits — this is, after all, a political process, so the judgment will be a political judgment. That is unavoidable. But apart from the legal constitutional issues posed by PPACA, there are the larger questions of whether or not it is any good as legislation. After all, a law can be lousy and still pass constitutional muster.
One thing for sure that PPACA isn’t going to save anyone any money. It is not about affordability. If you really believe that funneling vast new sources of money into insurance companies is going to make the health care industry more frugal and more efficient, then if we met we probably wouldn’t have anything to say to each other because our perspectives are essentially incommensurable. And please be clear about the fact that this legislation is not about providing health care, it is about purchasing insurance, and, as anyone who has purchased health insurance knows, having health insurance is not the same thing as receiving health care.
Health care premiums will continue to ratchet upward, steadily and relentlessly, and the new pool of forced contributors to the system will mean that even more money will be dumped into the ever-hungry maw of the medical-industrial complex, as more and more of US GDP disappears into a rat hole without a shred of accountability. Everyone knows the dismal statistics: the US spends a greater part of its GDP on health care than almost any other country (and since the US has the largest economy in the world, this means that not only are the rates the worst, but the absolute numbers are the highest also), and the US population is far from being the healthiest for all the money that is spent on health care. The US population has been very poorly served by the health care industry. What are we going to do about it? We are going to reward the industry by giving it even more money and forcing everyone to participate in a deeply troubled industry.
PPACA is not an act, because it takes no action — it does not confront the vested interests of the health care industry (whether hospitals or doctors or labs or the manufacturers or medical technology), it does not confront the vested interests of the insurance industry, it does not confront the vested interests of the pharmaceutical manufacturers, it does not confront the vested interests of the US government itself, and it does nothing to change the way health care is managed or delivered. Rather than taking on the powerful, the PPACA targets the most vulnerable and least powerful elements of our society — people who do not already have health insurance and probably cannot afford it.
It will be obvious from the above that I have nothing good to say about PPACA, but there are three simple things that could be done that would cause me to drop my objections:
1. a universal single-payer system
2. an “opt out” clause
3. bring all employees of the government, from the president on down to the lowest bureaucrat, into the PPACA as individuals forced to purchase insurance under the individual mandate
Unfortunately, all three of my alternatives are politically “radioactive” to the point that they are not even on the agenda. We do not talk about the ways in which real reform could be brought to health care in the US; instead we take action against those least able to resist the intervention of the government into their lives. This reveals the rapacity of the welfare state in its most ugly aspect.
I would have no objection whatsoever to a universal single-payer health care system in the US. In fact, I think it would be a good idea. When it is mentioned how every other industrialized nation-state has universal health care, so we therefore need to have government-mandated health care in the US also, it curiously goes unmentioned that the vast majority of these universal health plans are single payer systems that eliminate private insurance in favor of a truly universal system. In the US we don’t discuss this — not because the older universal single payer systems in Europe are running into chronic problems not unlike over-promised legacy pension systems (which is true) — but rather because the insurance industry in the US is very big, very profitable, and employs a lot of very wealthy and influential people. A tough-minded administration would be willing to take on vested interests like the insurance industry, but nothing whatsoever is being done by the PPACA to reign in insurance companies, who stand to be flooded with a tsunami of new money unless the individual mandate is struck down by the Supreme Court.
An “opt out” clause would be equally fine with me. Since PPACA incorporates an individual mandate, which particularly targets individuals, why not give the individual a chance to opt out of the system? And I do mean opt out entirely. I would be perfectly willing to carry a card in my wallet, like an organ donor card, or even to wear a tag around my neck, explicitly stating that I have opted out of PPACA and that I am not to be taken to a hospital or an emergency room unless I have the money available to pay cash on the barrel head for my treatment. I can imagine the people who thought this through would think I am crazy, and if my opinion mattered it would be denounced as barbaric and inhuman. So be it. I have no problem with it. If I die as a result of injuries sustained from a car crash because no ambulance was called, I accept that risk. (As I have attempted to explain in Risk Management: A Personal View, I believe the management of risk to be illusory, and in fact a moral hazard.) If I came down with a chronic problem requiring medical care, I would seek medical help in a country where the prices of the health care industry have not been so distorted by non-market incentives. So I am perfectly willing (if not enthusiastic) to do without the entire US health care system.
Similarly, I would have no objection to the PPACA if I knew that those making the law had to live according to its dictates (or alternatively, if they provided the benefits that they receive under their plan to the American people generally — but then that truly is politically unthinkable, is it not?). As with the unspeakable alternative of a universal single payer health care system, which would take on the vested interests of the health care industry, the insurance industry, and the pharmaceutical industry, government employee inclusion in PPACA provisions would not only take on the vested interests of the US government, but would also ensure that something actually gets done. As I wrote above, the legislation in its present form does nothing except to target the disadvantaged and the powerless — not something that you would call courageous legislation. If the people who wrote this law had to live according to its provisions, they might actually do something and make some changes. At present, they have no incentive whatsoever to do anything.
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17 January 2011
How to Make a Killing
in the Insurance Industry
Without Really Trying
Suppose you ran a business and you could get the government to force people to buy your product or service under threat of penalty. That would be really sweet, wouldn’t it? Well, health insurance companies in the US are now in this enviable position. One could say that anyone who doesn’t go right out and set up shop in the insurance industry is a fool, except that there are significant barriers to entry to the industry. It takes a lot of money to be in the insurance industry. You have to sit on a mountain of cash, and you have to have a lot of cash flow to make it work.
Sometimes people in the business world say, “cash flow is king.” Even a business that isn’t doing so well can leverage its cash flow for its benefit, if it has a cash flow to leverage. Small businesses routinely do this in minor ways by, for example, charging their business purchases on credit cards that give them benefits. So if you have a lot of cash flow but not much profit, you can still get something out of the cash flow. It’s sort of like juggling money.
Big businesses leverage their cash flow in big ways. Indeed, some industries make their money not from sales of goods and services, but from the management of their cash flow. The insurance industry is one of these industries. It is not usual for an insurance company to pay out $1.06 in claims for every dollar it takes in from premiums. How do they stay in business? They sit on so much cash, that they invest the cash they sit on and they make some money from capital gains. An ADP representative once told me that this is how they make their money too.
The pending individual mandate to force the uninsured to purchase health insurance is a promise of even greater cash flow to the insurance industry. During the run up to the passage of health care legislation in the US, the insurance industry lobbied hard for the mandate and for penalties that would really bite: “AHIP objected to the version of the penalties in the original Senate leadership proposal as insufficiently strict to induce many people to become insured.” The insurance industry was never fooled about this, though the popular press persisted and still persists in characterizing this legislation as “reigning in” the healthcare insurance industry and calling them to account. This behavior has been encouraged by the Kafkaesque title of the legislation: Patient Protection and Affordable Care Act (ACA).
“Three important goals of reform are to increase health insurance coverage, to eliminate discrimination by health status in the sale and maintenance of health insurance, and to increase the affordability of coverage. Without an individual mandate, these would all be affected by the natural tendency for people to want to pay for health insurance only when they believe they will need health care services. Since those currently without insurance have significantly lower costs on average than those paying for insurance, the mandate will bring lower-cost people into the insurance risk pools. This would lower the average cost per person covered and thus lower premiums.”
When you read the insurance industry treatments of the problem you find formulations like “a diverse risk pool of enrollees.” This sounds very nice, but what does it mean? In the context of health insurance, it means health diversity. In other words, some people are weak and sickly, and some people are strong and healthy, and the insurance industry, as well as a lot of politicians, want the strong and the healthy to subsidize the weak and the sick. Failure to do so they call “adverse selection.” You know what adverse selection is in evolutionary theory? It is extinction. This is a debate about extinction. Go figure. I can say things like this bluntly and honestly because I don’t have to care what other people think of me, but politicians and politically visible persons (like CEOs of major companies) can’t be honest. They cannot afford to be honest.
How much cash flow are we talking about as a result of the individual mandate? I did some very rough calculations — literally on the back of an old envelope — and if we take the frequently cited figure of 47 million Americans without health insurance, and divide this by average household size of 2.59, we get more than 18 million uninsured households. I found figures cited between $46,000 and $50,000 as the median US household income in 2010. I took the lower number of $46,000, and found estimates between 7.5 and 12.8 percent of household income to be spent on healthcare (the Urban Institute’s report cited above gives a rate of 2.5 percent, but this is not to be taken seriously). If we pick a number between the two percentages cited, between the high and the low figure, we get about $4,650.00 annually for health insurance per household. This is an unrealistically low number, but I’m doing a conservative calculation. With these conservative numbers, we find that the individual mandate would funnel another 83.7 billion dollars into the coffers of the insurance industry annually. This is cash flow that they can leverage even if they have to pay out a little more than 83 billion in claims.
Now, if I were an insurance executive, even if I had to operate under government regulations (what industry does not have to deal with regulators?), I would be very pleased indeed to hear that the government was going to force people to spend another 83 billion dollars in my industry. Even if I didn’t get all of it, I could count on getting a portion of it. And we all know that an expanding industry is an industry in which the established players don’t have to fight over scraps. A bigger pie means a bigger slice for everyone invited to the table.
But the business model of profiting off investments has weaknesses. Sometimes no profits are to be had from investments. Sometimes investments lose value. This can create a crisis. During the last stock market plunge prior to the 2008-2009 debacle, insurance companies were hit quite hard. Policy prices spiked as the industry sought to make up their losses. My business policy increased significantly. Nothing could be done about it. You pay the bill, you accept the fact that you may have lost your profit for the year, and you hope that next year will be better. C’est la vie.
What happens when everyone is forced to buy insurance, the insurance companies have their money invested, and the stock market tanks, threatening the industry as a whole? After all, we do live in a capitalist economy (more or less, granting exceptions like the nationalization of the airport security industry following 11 September 2001), and no one has figured out how to have a free market without a business cycle. The business cycle is a fact of life in a market economy. It will happen again, like it or not. We can do our best to smooth out the business cycle, but we won’t eliminate it.
When this eventuality comes to pass, and premiums must spike sharply across the board, for everyone, the politicians and the insurance company executives will say that there is nothing they can do about it. And they will be right. Honestly, under these circumstances, there is nothing that can be done except to raise everyone’s premiums, or to let a few companies go bankrupt, or a combination of the two. But it is one thing to understand this, and another thing entirely to explain it to more than 300 million people with an attention span shortened by the cleverest spin doctors in the business. Maybe there will be congressional hearings. Maybe heads will roll. But the one thing that is sure is that the money has to come from somewhere. The politicians could turn to the expedient of printing money, thus creating inflation, but that has been made more difficult by the same measures that have been introduced in the attempt to minimize the business cycle.
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22 March 2010
The Insurance Industry Attains to a State of Grace
If grace is an unmerited gift, then certainly today the insurance industry must have attained to a state of grace, for it has received an unmerited gift of truly stupendous proportions. Health care legislation has been passed that will require individuals to purchase health insurance and will require businesses to offer health insurance to employees. In other words, an enormous amount of money is about to flood into the medical-industrial complex, to which the insurance industry is central, and which will be the primary recipient of this government-mandated largess.
What must the insurance industry do in order to earn this gift? Nothing. Nothing whatsoever. That is what makes this government directive the purest form of grace. An industry that has been profiteering off the misery of mass man is now, by legislative fiat, to be enriched beyond anything that the market free of coercion would provide.
The Loyalties of the Democrats
Shrill and unthoughtful commentators sometimes say that Democrats tend to side against the business community in their political dealings, but more thoughtful commentators have observed that the Democrats’ primarily loyalty is to big business while Republican loyalties tend to go with small business and entrepreneurs. Thus in the past Democratic policies have favored enormous big businesses of the sort that appear in the Dow Jones index, companies like 3M and GM. The UAW has always been a stalwart supporter of Democratic candidates. But the big businesses of the past are no longer the big businesses of the present. GM, once a force to reckon with in the economy, is bankrupt.
Not only has industry changed, but workers have changed too. The constituency of the Democratic party tends to be better educated and better paid, and that means that they tend to have pencil-pushing desk jobs, the sort of jobs one might find, for example, in the insurance industry. Thus a gift of magnanimous proportions to the insurance industry from a Democratically controlled federal government ought not to be a surprise.
The only way to truly provide improved health care in the US at a lower cost would be to create a universal single payer system that would put the health insurance companies out of business. I would have no problem with this, but the Democrats are not going to take on the insurance industry because that is their constituency.
A single payer system could be made to work. But the American people, like peoples in democratic societies, are about to get exactly what they deserve. As they say, be careful what you wish for because you just might get it. And one ought also to be careful what one wishes not to have, because one may well not get it. Because of the hysterical antipathy to a universal single payer health care system that would be relatively simple and straight-forward, we will instead get a Rube Goldberg health care system that will cost a lot of money and not make people any healthier than they are now.
The Moral Hazards of Health Care Legislation
When an economic policy encourages irresponsible behavior, such as insulating people from the consequences of risk-taking, economists call this moral hazard, and we find that there is substantial moral hazard in the newly passed health care legislation. The provisions of the legislation, while well-intended, like all good intentions will have unintended consequences.
Individuals will be forced, under penalty of law, to purchase health insurance, and businesses will be forced, under penalty of law, to offer health insurance to their employees. What this means in actual fact is that young people and healthy people who have, to date, opted out of the medical-industrial complex, will be forced to put themselves at the mercy of that system. And what this means is that they will have to pay for a service that they neither want nor need.
A Tax upon the Healthy
Everything that your mother told you is true: you should eat well, exercise, and get plenty of rest. Simple as it sounds, that is the foundation of a healthy life. Forcing individuals to buy health care, however, will mean that the healthy will subsidize the unhealthy. Those who eat small portions of healthy food, exercise regularly, and get enough sleep will subsidize those who eat large portions of unhealthy food, live sedentary lives, and fail to get the rest that they need.
In other economic calculations we could say that this creates an incentive to eat unhealthy foods, to overeat, to become a couch potato, and to deprive oneself of sleep. However, when it comes to how individuals live their lives, this calculation no longer applies. People who live active and healthy lives enjoy the intrinsic benefits of their health and are not likely to begin neglecting themselves and their health because they have an economic incentive to do so. So the healthy will continue to live healthy lives, the unhealthy will continue to live unhealthy lives, and the the former will be forced, under penalty of law, to subsidize the unhealthy lives of the latter.
Since the healthy will not be able to opt out, and since they won’t take advantage of the medical-industrial complex in order to enjoy the dubious benefits of an unhealthy life, the new health care legislation constitutes a de facto tax upon the healthy. In other words, the incomes of the healthy will be redistributed to the unhealthy. It is difficult to imagine a worse social policy than this.
The Apotheosis of the Medical-Industrial Complex
The medical-industrial complex in the United States, which to date had been something that a law-abiding citizen could avoid, is now set to become an-embracing, all-pervasive reality in the lives of all US citizens. If you fail to make your contribution to the enrichment of the insurance industry, you will be fined according to the level of your income. Such a penalty will require an enforcement regime that has access to both the medical records and the financial records of every US citizen. Perhaps one will have to present one’s papers to the authorities to prove that one has paid one’s premiums. A whole new class of insurance industry commissars, apparatchiks, and nomenklatura will be created.
In his classic Principles of Political Economy (Volume 2, Book V, Chapter II, section 5), John Stuart Mill wrote these words in criticism of landlords:
The ordinary progress of a society which increases in wealth is at all times tending to augment the incomes of landlords; to give them both a greater amount and a greater proportion of the wealth of the community, independently of any trouble or outlay incurred by themselves. They grow richer, as it were, in their sleep, without working, risking, or economizing. What claim have they, on the general principle of social justice, to this accession of riches?
Landlords, while still powerful, are no longer the bête noire of the economy, but I would suggest that the insurance industry neatly fills their ample shoes. What Mill wrote of landlords can now be reformulated, mutatis mutandis, for the insurance industry:
The ordinary progress of a society which increases in wealth is at all times tending to augment the incomes of insurance companies; to give them both a greater amount and a greater proportion of the wealth of the community, independently of any trouble or outlay incurred by themselves. They grow richer, as it were, in their sleep, without working, risking, or economizing. What claim have they, on the general principle of social justice, to this accession of riches?
John Stuart Mill could not have imagined, in the very different climate of nineteenth century England, how timely his appeal to “social justice” would sound today, but I find that the advocates to today’s conception of social justice seem to have little say in the matter of enriching the insurance industry. It seems now that the insurance executives, aided and abetted by professed supporters of social justice, can now gently recline for a nap and can expect to grow fat while they sleep.
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