health care

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Health Care, Taxes, and Debt

As we move more into the legislative agenda of the Obama administration, rather than the triage period of economic recovery, several inter-related issues become very prominent. Obama wants to shift the emphasis of health care towards universal coverage, but has to accomplish this against a very strong headwind: the Reagan/Bush legacy of national debt.

The problem is simple: any attempt to provide universal health care coverage, in other words the move from regarding health care as a ‘benefit’ or a ‘consumable product’ towards a basic ‘service’ akin to a utility will cost serious money. Most estimates put the price tag in the range of $150 billion a year. In the context of the Federal Budget this is a very significant addition to the deficit, although it is trivial when set against the cost of bailing out the banks.

The original Obama budget used a variety of methods for financing this cost: mainly the termination of the Bush tax cuts at the high end of incomes, and the implementation of much needed cost reductions in the health care industry.

The problem of cost reduction is of paramount importance. The US system is extremely expensive to run. It absorbs about twice of our national annual income, as measured by its percentage of GDP, than any other health care system in the world. The next most expensive is the French system, which delivers excellent service at half the price. Indeed the French system is arguably superior since it provides more effective basic service to the entire French population, unlike the American system which fails to cover about 45 million people here.

The problem with the US system is is that its fragmentation amongst a vast number of carriers, insurers and other providers dissipates buying power so costs of things like drugs are not forced down. Yet at the same time it is replete with duplicated costs: all those insurance companies carry large administrative overheads and at the front line of care the lack of automation in doctor offices is extraordinary. By any objective standard the system is horribly inefficient.

To those who advocate a totally private system this must be a source of frustration: market forces are supposed to drive out costs because doctors and hospitals should be competing on price as well as service. In fact price should dominate the provision of the basic services since most doctors, within their specialties, have little opportunity to differentiate sufficiently to maintain a higher price service. There will always be niches for very high end services, but those are commonplace the world over even in nationalized systems. The problem here is that the typical market forces that should eliminate waste simply don’t work. Consumers do not look at health care as a ‘consumable item’ except for fringe services like cosmetic plastic surgery. And sick people have very little incentive to search for a ow cost provider: they simply go to their regular doctor or head to the emergency room.

In the American system the true locus of efficiency inducing market forces should be in the cost of purchasing insurance. This is where consumer choice should enter into the equation. But, again, consumers are effectively shielded from the true cost of their choices by the employer provided nature of the service. Because employers provide health care coverage as a ‘benefit’ they find it acceptable to absorb some of the cost. So consumers who get their insurance through the workplace, and that is a large percentage of Americans, do not face the real cost. Thus they have no incentive to demand cost reductions from doctors or insurance companies.

Couple this lack of effective market force with the unique effects of the American litigious process which adds to overhead costs and the end result is a system that is neither market efficient nor universal. It has none of the benefits of being truly ‘privatized’ and none of the benefits of being truly ‘nationalized’. So it exists as a wildly inefficient hybrid absorbing an increasing amount of our wealth while not producing an equivalent level of excellence: the US ranks very low in most of the basic services that the United Nations uses to measure the effectiveness of health care around the world. This is a scandal given the amount of money we collectively spend on it.

So a fix is urgently required before we are swamped by the system’s cost and it squeezes out other more productive and wealth generating activities from the economy.

Hence the need to look at debt loads and taxes.

I have mentioned here many times that the massive expenditure to save the economy was unavoidable. Deficit spending, while distasteful to those of us who are fiscally conservative, is a necessary evil. It is the only method we have for keeping ourselves from plunging full bore into another Depression. And it seems to be working, although there is growing feeling amongst economists of all political stripes that the stimulus may need another round of spending before we are assured of success. Even Martin Feldstein, hardly a left winger, gets in on the act of advocating more spending. Only the hard core ‘New Classicists’ remain berating the Keynesian drift of economic policy, mainly because the current crisis is an indictment of their theory.

But, given the mess that three decades of Reagan/Bush profligacy have created, notwithstanding the entirely accidental Clinton surpluses, we are facing almost historic debt levels as a result of the current ‘triage’ approach. And already that is causing nerves to crack in the bond market. The prices of US treasury bonds are dropping at the moment for a variety of reasons:

  • faster economic growth will engender inflation. Bonds will fall in anticipation of inflation: interest rates will climb to compensate for inflation. Higher interest rates means fixed rate US treasury bonds are worth less, hence the decline in price of bonds.
  • the enormous amount, some would say ‘glut’, of bonds being flooded onto the market by the US as it tries to bail itself out needs to be maintained in the market. This is a simple matter of supply and demand. Greater supply of bonds will reduce their price. The result: lower bond prices and higher interest rates.
  • now add in the expectation of funding needed for the Obama agenda, and the supply of bonds seems to grow even more. The result: lower bond prices and higher interest rates.
  • lastly, foreign investors will start to unwind their holding of US bonds, as their respective domestic markets recover and offer higher yielding opportunities for investment. The result: lower bond prices, and higher interest rates in the US in order to maintain foreign investor involvement in the market.

There seems to be a theme here.

Even with the Federal Reserve Board’s efforts to reduce the supply of bonds through purchases most estimates put the Treasury’s bond issuance requirements at around $2 trillion this year alone – it has already issued about $900 billion this year.

In other words fiscal policy is a mess and we need to start to plan to tighten it back up in order to prevent a massive bond market revolt against the US. The jitters last week when Standard and Poor’s threatened to downgrade the UK debt from its AAA status was a strong shot across the bows here as well.

So what to do?

Raise taxes.

There seems to be little appetite for expenditure cutting in Washington. And in truth there is little that can be done in any case. The largest chunks of the budget are each sacrosanct: I doubt, for instance, that defense spending will be reduced substantially any time soon even though it is egregiously high when compared to other nations. The US spends as much on defense [or more properly ‘offense’] than the next ten countries in the world combined, and it is wedded to defense systems that have no place in the post-Cold war era. Yet cutting defense spending seems politically infeasible. Likewise reducing or eliminating entitlement spending: even the supposedly anti-government ideologues like Reagan and Bush balked at that. In fact they added to the spending. The American middle class likes its perks, but doesn’t want to pay for them.

So in the absence of cost cutting we will have to raise revenues. This means taxes. I have already alluded to the elimination of the upper end Bush tax cuts, but that alone won’t be enough. US corporate taxes are already among the highest in the industrial world and probably need cutting rather than raising – but only if the loopholes are also done away with. This leaves other taxes such as excise and sales taxes. I would wager that the US will end up with a European style Value Added Tax [‘VAT’] in the not too distant future. Given our need to shift our priorities more towards savings, a larger emphasis on consumption taxes surely has to be in the offing.

But. Lingering in the background of the health care debate is a massive tax opportunity. One that Obama has now begun to turn to, even though he hammered McCain during the election for raising it. Resolving the employer tax exclusion could free up more than enough money to pay for the entire edifice of universal health care – some estimates put the extra revenue that abolishing this loophole would provide at $300 billion a year. Serious money . Huh? I can hear you all asking. What is that? It seems that way back during World War II the government put a lid on wages in order to control costs and it simultaneously introduced a ferocious tax on ‘excess profits’. After the war businesses that started to make good money again were faced with rising profits and no ability to raise wages. So they turned to giving away health benefits in lieu of wages. Why? Because the wartime legislation also excluded the cost of employer health care coverage from taxes. So providing health care was subsidized by the tax exclusion. And, as usual, the continuance of a tax subsidy distorts the market: decades later we have a mangled health care system because businesses can reduce their tax bill by offering health care as a ‘benefit’.

So there you have it: our fiscal constraints will dictate in large part the next phase of the Obama agenda. The costs of unwinding the Reagan/Bush binge are enormous and threaten to undermine any attempt to rationalize our health care system. With some imagination and a little political courage we can accomplish both at the same time. Indeed I see them as firmly intertwined. We spend too much on health care, and we ned that money to get our house back in order.

Welcome to the era of change: cost cutting and fiscal responsibility. That’s very conservative. And it’s a huge change from the past three decades of waste and illusion.

Change we can believe in? Or simply change we need?

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Social Security and Medicare: Silly Season

One of the victims of this recession apparently is the media’s incapacity for sorting out what are longer term and therefore structural problems from those that are simply temporary and whose existence is co-terminus with the downturn itself. Yesterday’s New York Times provides us with a classic example. It contained a breathless article about the ‘fragility’ of the Social Security and Medicare programs. The conclusion of the author: that the ‘draining’ of the trust funds for these two programs presents an ‘immense difficulty’ as we try to ‘shore them up while also extending health care to millions of Americans’. The article also contains a couple of fancy charts, neither of which has any particular relevance. But they look nice.

Here we go again with the hand wringing and angst. The sky is falling in on our socialized safety net. Oh my. We had better just give in and let the market solve all our problems. Because we clearly can no longer afford Social Security or Medicare.

And the news is?

I apologize for my snark, but this is getting so old. If we are going to discuss the retirement and health care ‘crises’ we should focus on the longer term.

Let me try to explain:

  • I suppose it would be too obvious to remark that the recession has drained quite a few things of resources. Like the entire planet. The IMF has calculated the banking system will lose about $4 trillion as a consequence of the downturn. American households have seen trillions cut off from their home equity and retirement funds. And yes we have seen lots of articles about this horrendous ‘drainage’. So what’s special about either Social Security or Medicare? Nothing. The funds flowing into the two programs has been severely reduced because we pay for them from employment taxes. If unemployment goes up then those taxes go down. And, boy, has unemployment gone up. But does this represent a fatal blow to the social programs? Not at all. The current negative shift in funding is cyclical. When employment recovers so will the funding. So, perhaps, we can look forward to a follow-up article in late 2010 or early 2011 that talks in equally breathless language about the sudden surge of cash flowing into the system. Presumably then there will be no difficulties with either system.
  • Not. Both systems do indeed have long term issues. But those issues have absolutely nothing to do with the temporary shortfall in income due to this recession. There is no news in the cyclical problem, but there is plenty to chew on with respect to the longer term problems. And the two programs have very different problems. Social Security was designed as a pay-as-you-go system. The surge in the trust fund is a result of the demographic bulge caused by the baby boom. That population ‘cohort’ is so large that its payments more than cover the expense needed to pay for today’s current retirees. So a surplus has accumulated. But we knew all along that this surplus was an illusion. It would start to be eliminated as the baby boomers all retired. Eventually it will disappear altogether, and the program will return to its pay-as-you-go roots. The original intent of the program was that it would have a fund invested in assets just like a normal retirement fund. But New Deal politics killed that idea. Notably the Republicans back then wanted to prevent the government accumulating a substantial investment portfolio – they feared it would be so large that it would dominate the stock market – so they forced the current cash based funding onto FDR. The real issue with Social Security is that we all live longer but the program’s retirement age is still fairly low by comparison. So in the long term, about thirty years from now, the program will be threadbare. This can be fixed fairly easily by changing the rules for funding, an example would be eliminating the cap on contributions, or moving the retirement age out to a more realistic seventy years old.
  • Medicare’s problems are far more serious. They have more to do with the antiquated and fragmented nature of our overall health care system. The cost of health care, and especially end of life health care, has risen dramatically. Costs are raging way above the general inflation rate, and the industry is incapable of bringing those costs under control: the market system breaks down for services like health care where incentives and costs are decoupled. We have a quasi free market for health care: consumers are shielded from the full cost of health insurance because most employers subsidize them – health insurance is regarded as a ‘benefit’ in business – with the result that the usual market disciplines are removed from the system. Since no one bears the true cost of the service no one has the incentive to control costs. Doctors can continue to dabble in high cost tests and ‘cures’ without any push back from consumers as to the true value those things represent. Insurance companies niggle about everything, but their incentive is to avoid making any payments at all so as to boost profits. So they annoy both consumers and doctors while adding enormous costs to the system without adding any benefit. Medicare exists as a social program within a dysfunctional world and cannot be sustained or fixed without fixing the wider health care system. We could abandon Medicare as being too expensive, but that would not reduce the amount of GDP we expend on health care by much. Besides any such reduction would simply be due to people not getting any health care and so would represent a significant reduction in our standard of living. This is why radical surgery on the health care system is now long overdue. At the current rate of cost inflation in health care we will be spending over one fifth of our entire wealth on it, to the exclusion of investing or saving for the future. That burden is untenable. The private parts of the system: doctors, insurers, drug companies, and so on have failed to deal with inflation and remain mired in old fashioned technology – think of all the times you have filled the same form out, doctors seem unable to share simple data. And the social parts have ben hobbled by partisan politics: the deliberate prohibition against using mass purchasing power to lower drug costs is an example.

So why do we get a breathless article now?

Shoddy analysis. The downturn in money going into our big social programs should come as no surprise. It is hardly worth noting because it is so obvious.

In a way the social programs help support the economy: we don’t cut spending when the money coming in is reduced. This automatic shift to a deficit acts as a ‘stabilizing’ force during a downturn. Indeed, some European countries have argued, rightly, that they should not use as much fiscal stimulus as we need to here precisely because their social programs provide this automatic stabilization.

“Medicare is caught in the middle of this mess. We need to extricate it quickly.”

Our problems are far more structural than cyclical. An interesting discussion is about to take place as the administration starts to get to grips with the disfunctionality of the currents system. Driving costs out of health care means less cash to go around. That should spark plenty of debate. I would have preferred the article to have focused on that. Maybe the author thought he was laying out some background for that debate. If so, he failed.

So allow me to end by highlighting what I see as a major problem we all have when we get into a health care debate. Eventually the nub of the problem is our decision as to how to allocate resources. How do we ration using a government system? Or do we ration using the market system? The outcome depends upon your faith in markets. Those of us who are pure free market believers will want to eliminate company subsidies for health care benefits to make consumers responsive to cost. They think that this will force consumers to haggle better for prices and avoid the use of unnecessary tests. As a result, such folks argue, costs will come down. The outcome of a market process, they say, will reveal to us what we collectively wanted by way of health care consumption. Those who want health care will have it, and those who don’t want it will not have it.

Those of us who have less faith in markets – chastened as we are by the banking system debacle – think the government should be more heavily involved. The consequence will be a more limited, but ‘fairer’ system that has application to a wider population.

The current hybrid system, it is neither pure market nor purely government run, is failing us and has been proven as the worst of both worlds. It is the most expensive system in the world with much of that cost absorbed by administration not the provision of care. As a consequence we do not reap the benefits of the resources we allocate to it.

Medicare is caught in the middle of this mess. We need to extricate it quickly.

How we do that iswhat I hope we will be reading about in future articles.

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Walmart and Health Care

My reaction to Walmart has been like a lot of you: disgust. They have a corporate policy that deliberately squeezes their workers so that profits are kept high. But why do we presume that companies have an obligation to pay for health care? Why not the government? After all the government is the cheapest health care provider in America because it spreads its costs over such a large base, and has no expensive bureaucracy trying to weed out high risk patients. Health care in this country is so expensive precisely because it is privatized and consequently fragmented and focused on organizing and reducing risks to insurance companies.?

Walmart is doing us a huge favor by pointing out that society at large is a better provider than they are. Plus, if we de-couple the health care debate from Walmart we can focus instead on living wage issues by encouraging people to shop elsewhere.

Also, it’s a little ironic that this holiday season Walmart is doing well because low wage earners are flocking to it to save money and thus pay for their higher heating bills! We are all going to lose the working person vote if we keep shooting at the store they feel is the best deal in town for prices. It is an easy tactic for a populist right winger to criticize leftist elitists who don’t even have to shop at Walmart. Compare that with the relative complexity of building the left wing argument that, somehow, those low prices are a bad thing — even for people who don’t work at Walmart.

That’s why while I dislike the bare bones, and what I think is unethical, nature of Walmart’s strategy I use them as an example of why business should not be responsible for health care [rather than waste time trying to make them, responsible]. There must be an increasing number of business executives who would agree with the need for a debate about publicly, rather than privately, funded health care. They are drowning in benefit costs [think GM], and would love nothing more than to see the country as a whole step up and take on the job they are failing at.

By the way: in a perverse way the accounting profession, hardly a bastion of liberal thinking, is going to help us: upcoming accounting standard changes will force companies to recognize on the underfunding of benefits their balance sheets. The red ink will scare even more executives our way if we are sensible about the way we cooperate with them.

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Health Care Watch

The American Health Care [non-]system is in decline. The number of Americans covered by employer health care plans actually fell by about 5 million during the past four years, even though the number of people eligible rose by about 10 million. That’s an additional 15 million average Americans for whom the health care system is a distant mirage. Plus for those lucky enough to have coverage the cost is rising rapidly. American industry is in a pickle: how does it contain cost without antagonizing it’s employee base? A national crisis is looming, but before it can be resolved Americans need to face the truth about their system.

It is time Americans stopped thinking that they have ‘the best health care in the world’ and recognize that they are, in fact, way behind most every other industrialized nation. The facts are stark when you face up to them: America spends twice as much on health care as its industrial partners, yet ranks below them in terms of basic results. For all that vaunted money and technology, Americans have shorter life spans and higher infant death rates than anyone else in the industrialized world. That’s a rotten return on investment. Very rotten. Not only this, but Americans are much less likely to see a doctor — they say they are afraid of the cost, or to take the medicines that they are prescribed — they cost too much. Clearly, at least to an objective observer, Americans are getting a bad deal from their market driven system.

Why? Because the system is knee deep in bureaucrats all of whom cost money, and all of whom are fighting to cut or eliminate expenditure rather than to provide care: they do not add to care but they take up a lot of dollars. It is a system designed for accountants not those in need of care. This is truly ironic given that a major criticism leveled at Government run systems is that they are typically bureaucratic, but in this case the reverse is true: a Government system would have less, not more, bureaucracy. Another aspect of this is that the system is fragmented, there are too many players none of whom have the clout that the Government would in the market place. For instance, Americans pay far more for their drugs than anyone else because no one in their system has sufficient power to drive a hard bargain with the drug makers. The Government could do that, but such is the lobbying power of the drug industry that the George Bush’s pet Medicare bill explicitly forbids the Government from using its market power. So the sick and the taxpayers get the shaft while drug company profits are inflated.

America has a system where the rationing of service is by price rather than government allocation. It is market driven. In other words you can get whatever you want if you can afford it; if you can’t then you get nothing. For instance, it is correct to observe that people in Britain and elsewhere wait longer for elective surgery [what’s wrong with waiting for something that is elective?]; but wait times mask a grim reality here in the U.S.: for many people the system simply doesn’t exist because they cannot afford it. So those short wait times are irrelevant, the service isn’t there to wait for. It is a scandal that the world’s richest nation has approximately 15%, and rising, of its population uncovered for health care, and it is delusional nonsense to keep lauding the system as if it’s good. It isn’t.

The fix is obvious: America needs some form of national health care system. It’s time to press for the correct answer. Then maybe the system will deserve the credit Americans currently give it.

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Non-Health Care

I have arrived at the conclusion that the only way to get people to discuss the utter dysfunctionality of American health care is to avoid calling it a system. It isn’t. It is a shambles. In case you missed it, health care is now the hottest topic in corporate board rooms. American companies are being crippled by rising health care costs and are having to cut programs and benefits as a result. The cuts are presented as ‘choice’, as in ‘we are giving our employees more choice’. The point is that staying healthy is not a choice, but an imperative. The decision to hire a doctor or visit the hospital is often made under pressure and with limited opportunity to exercise considered choice. The notion that health care is a product that people can comparison shop for is fatuous nonsense. The people who peddle choice in health care are the free market types who cannot abide the idea that government has a role to play in anything: I have the image of economist professors deciding whether to get a broken leg fixed or to spend that same money on something else. After all they argue that health care is a choice like all other economic decisions. Rubbish. Still, those of us who advocate a role for government now have an important ally in big buiness. Savvy business types are now realizing that government should get involved because corporations cannot be both businesses and health care providers. It’s not what they are supposed to do, and they can no longer afford it. As business squeezes it employees [can we all say Wal Mart?], political pressure will build. Then after we have fixed it we can dignify the mess we have by calling it a system. Just don’t call it that now.

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