Health Insurance Limitations

Someone remarked the other day that if not for the war in Iraq, health care would be topic number one in the presidential race. That might well be true.

How will we devise a system to stop insurance from creating unlimited demand for health care services, creating a non-ending escalation of costs? Somehow we will have to give consumers incentive to limit their demand for services. This is tough, because when you are sick, or a loved one is sick, it is really tough to say that you cannot get treated.

Yet this has been the norm in all other important areas, such as housing, education, transportation, and food. Prices in these cases serve their normal role of inducing people to make choices to go without certain services, or at least to choose lower cost services. Many people routinely choose cheaper schools for their children, less expensive and less safe cars for themselves, and take jobs that are riskier to life and limb but pay more (e.g., fire fighters). Also, throughout history, unlimited health care has not been the norm.

Other countries are to a great extent using some kind of nonprice rationing such as waiting for service. In the US today, we have some rationing due to geography: living close to a major medical center will get you more, and more expensive, health care.

I have always felt that a part of the answer will lie in medical insurance being differentiated by degree of coverage. Some plans will not cover certain services, such as expensive transplants, or will at least have high co-pays for certain services, such as mental health.

The new Massachusetts regime requiring everyone to have medical insurance is moving in this direction. The Blue Cross Blue Shield website for the state lists several different plans at different prices and with different coverages.

What I was not able to find in the online descriptions of the plans is a key feature: lifetime maximum benefit. I think this will be critical. There should be some plans that are cheaper but have lower lifetime maximums, or in some way put a limit on what will be covered in certain situations (heart transplant, long term hospital stays, hip transplants past a certain age, etc). It is interesting that the lifetime maximum is not prominent in the plan descriptions -- indeed it is hidden. I am pretty sure there are lifetime maximums, and that they differ across plans. What will BS BS do with patients who hit that max and still want more coverage? Will our dear friend M. Moore have yet more fodder for another movie?

Taxing Private Equity

Not too long ago, I asked an accounting colleague about the tax treatment of someone selling things on an auction site like Ebay. Suppose you are making your living buying and selling collectibles on Ebay. How does the income you make get treated for tax purposes -- is it normal income, or is it capital gains? The difference, of course, is very large, as capital gains are taxed at 15% and normal income at higher rates. Similar analogies came to mind: how about a used car dealer? If I buy and sell cars, is the money I make a capital gain or normal income? It seemed like one of those issues where tax law would draw a somewhat arbritrary line. I can see an argument that if you are essentially a dealer, i.e., making a market in a collectible, then your income could be considered normal, rather than a capital gain, as you are essentially being rewarded for the service of providing a market. But it is going to be a tough call, and in some sense, illustrates the arbitrariness of treating income differentially to begin with.

Now comes the tax issue with the partners of private equity funds. Is the money that private equity fund managers make better considered to be normal income or a capital gain? This is a great topic for discussion. The current law may well make it legal for the managers to use capital gains rate; I suspect if they are doing it, they have had great lawyers look into the legality. So the question is what the right legal tax treatment should be.

But along comes the New York Times yesterday, with a front page story on "Tax Loopholes Sweeten a Deal for Blackstone." The intent of the story is clear -- to raise all kinds of shady questions about the tax fairness of aspects of the Blackstone IPO. The tactics are the usual combination of insinuation, vague claims, and muckraking language. Here are some examples:

"“These guys have figured out how to turn paying taxes into an annuity,” Ms. Sheppard said. “What people don’t realize is
that the private equity managers, the investment bankers, all the financial intermediaries, are in control of their own
taxation."

"The Blackstone partners sold the good will from their left pocket to their right."

"The ability to provide answers to such questions is why tax lawyers can typically charge $700 an hour or more. Just as
fashion designers blend textures, colors and shapes, tax experts mix and match elements of partnerships and
corporations, and bits and pieces of the tax code, securities laws, accounting rules and economics principles."

There are some interesting issues in the Blackstone deal. But this NYT story leaves me clueless as to what actually is going on, and whether it is at all questionable. Some more facts and clear language on what is being done would go SO much further than the kind of language pointed out above. The "annuity" that is referred to seems to be nothing more than the fact that if the goodwill can be written off against income in future years, then of course it creates a tax saving (assuming there is positive income). And to say that private equity managers are in control of their own taxation is really a stretch.

Well, I guess I am in control of my taxation too. If I earn less money, I will pay less tax.

Scooter Libby Gets Clemency

Scooter Libby won't go to jail. He still has a felony on his record, and he still pays a fine and has probation. But no jail time, which must be a relief to him and his family. Bush could still pardon him, which would wipe the felony off the record.

This is fine with me, the punishment did not seem to fit the crime, and it was all a bunch of politics anyway.

Naturally NPR this morning led off the story with Joe Wilson complaining about the pardon and saying that there should be an investigation of Bush. For granting clemency? Give me a break. Go look up the list of pardons that Clinton gave.

The nice thing about Bush is that he did this one in broad daylight. You have to hand it to Bush on that front; he is not afraid to do what he thinks is right. Disagree all you want, but give the man his due for following through on some things.