Thursday, December 29, 2011

Various European Central Bank Topics

Interesting things in Europe, where threats of various economic crises seem to have abated but not disappeared.

While Mario Draghi, the relatively new head of the European Central Bank, has been strident in saying that the ECB cannot be the lender of last resort to European governments, it seems that his actions are different from his words. Last week, the ECB opened up low interest (1%) three year loans to European banks in a "liquidity-providing operation" and banks promptly borrowed €489 billion. And this week, it was reported that the ECB's balance sheet had grown to €2.73 trillion, €553 billion higher than three months ago.

And as background, we have French President Sarkozy encouraging banks to run a "Sarkozy carry trade," that is, borrow from the ECB at 1% and invest it in sovereign government bonds that yield close to 7% (Italy). In fact, the ECB will even take those bonds as collateral on the loans! Not a bad deal if you can get it!

The expansion of the ECB balance sheet is of course from its lending program, among other things, and it represents an injection of high powered reserves into the European banking system. It seems to me to be quantitative easing, the new terminology for what we used to just call expansion of the money supply through open market operations.

By itself, this is not a bad thing, and in times of a liquidity crunch, such expansion is called for. However, there are some worries in the European situation. Are the loans to the European banks to help them with liquidity problems, or are the loans to the banks just a back-door way for the ECB to buy European government bonds? There certainly seems to have been an impact, as yields on Italian and Spanish bonds have fallen.

John Cochrane has a great editorial on many of these matters. Cochrane emphasizes how European banks have huge risks, as they have loaded up on sovereign bonds, and now they have even more incentive and ability to do so. And all this sovereign debt gets a zero weighting in the regulatory bank capital schema, meaning that it is considered risk-free!

To the extent that European banks run the Sarkozy carry trade, there is an interesting divergence between the US central bank policy and what the ECB is effectively doing. During the US credit crisis (post-Lehman) the Fed pumped up its balance sheet, partly through a policy of buying mortgage bonds issued by FannieMae and FreddieMac. This sounds similar to the ECB buying up bonds of Italy, Portugal and Spain. However, with the Fed and in the US, the bad practices that got us into the mess had ended -- the subprime market was shut, and even Freddie and Fannie tightened significantly their lending practices (so much so that it is too hard now for people to get a mortgage). In Europe, it is not yet clear that the government policies that got them into trouble have really been fixed. And the bonds sold by those governments are now on the balance sheet of the ECB.

Sunday, December 18, 2011

Of Competition in Health Care, and Law Schools Too

Yesterday I wrote that not much had been said about the new Wyden/Ryan “defined contribution” plan for Medicare. I guess I had not searched enough, for later I came across this piece by Krugman, Ron Wyden, Useful Idiot and in it he references a posting by Ezra Klein, Competition Hasn't Worked in Health Care.

Krugman's title is certainly choice, but besides that, we have these additional tidbits:
... Sen. Ron Wyden did indeed do a bad, bad thing in his joint proposal with Paul Ryan...So why would anyone who isn’t a right-wing ideologue propose that kind of degradation?
Also, Krugman states that
Looking both within the United States and across countries, if you ask which systems are best at cost control, the ranking looks like this:

Government provision as well as financing (socialized medicine) > single payer > market competition
The problem here is that Krugman is very careful to do his ranking only in regard to cost. The problem of Medicare is not just one of cost, although the public debate is focused on that. Everyone knows that there are consequences of holding down costs in the wrong way, for example, if the "doc fix" did not go into effect and doctors' reimbursements were to fall by 30%, there would be quality/access consequences. Even I have said that in the UK, with health care providers being employees of the government and all prices set by the government, you should be able to keep prices low. The problem of Medicare is one of providing high quality care at a cost that is politically acceptable. By framing the debate only around cost, Krugman simplifies things too much.

Krugman also states as his first reason for why competition can't work in health care: "Patients by and large don’t have the information to evaluate medical treatments... and he attributes this, rightly, to Kenneth Arrow some time ago. I will return to this "lack of information" idea below.

Ezra Klein is a little less vitriolic, but his thesis is that competition has never worked in health care and he asks for examples. Klein suffers from the same limitation of Krugman, which is that he focuses on the role of competition in helping to hold costs down, rather than the more relevant question of whether competition helps produce a (cost, quality) package that is more preferred. Klein crosses the border sometimes, however, and is less careful than Krugman to say that he is only talking about the ability of competition to hold cost down.

But let me take a shot at some that have worked even just on the cost side: Any self-insured employer with any sense puts its third party administrator contract up for bid occasionally, and lets health plans compete on price and quality. Health plans actually worry a lot about trying to control cost and improve care. Take a look at some of the cost control plans by BC/BS in Massachusetts. Or look at the number of instances in the past several years where a health plan has cut a hospital out of its network because that hospital's costs were too high. In my neighborhood, a company spun out of work from researchers at The Dartmouth Institute, Health Dialog, was sold to Bupa, a private for-profit British company with health insurance interests, for $775 million. One of the goals of Health Dialog is to help patients make more-informed decisions, which will result in better quality of care and often in lower cost. Folks might not look at something like Health Dialog as part of competition, but it is: It was a for-profit startup, funded by venture capital, and sold in a competitive marketplace to a larger company. The number of for-profit health care startups in our economy is large, and many of them are focused on cost control as well as better quality. In Hanover, we just had Iora Health, a for-profit startup, announce that it will be opening a new kind of primary care facility. I know that the intent here is to not only improve the coordination of care, but also to reduce cost. This is competition! In a government-financed and government-provided system, would we get such innovation?

Klein tries to negate the idea that the competitive bidding process for Medicare Part D is not responsible for its good performance, but there is no way he is going to succeed at that...just as I cannot succeed at saying the bidding process is mostly responsible for the good performance. However, there is a competitive bidding process, it works in establishing prices and giving choice, and I do know that companies think very seriously about how to bid in these auctions (this from talking to people who have advised companies in the bidding process). Note that I am NOT saying there are not issues with Medicare Part D, especially in regard to its complexity and some specific faults of its bidding process.

Consumer choice and competition "works" not just in Medicare Part D but also in the Federal employees health plan (competing plans with consumer choice) and in many countries, particularly Switzerland, where citizens (under an individual mandate) choose privately offered health insurance plans. Does "works" necessarily mean lower costs? No, of course not -- in what marketplace or for what product or service do we care only about cost (some, sure, but none with the complexity and importance of health).

Other areas where competition has worked in health care, to produce lower costs and/or higher quality? Production and marketing of generic drugs? Drug competition it really from the good will of the pharma companies that we get less costly ways to produce drugs? How about even much of the competition between hospitals? Yes, there are stories about how competition between hospitals results in an arms race for advanced medical equipment, but even in my local area there is some competition (smaller hospitals) for certain services in the hospital market, and it gives local consumers a cheaper and different alternative to the big medical complex known as Dartmouth Hitchcock. Local private practice doctors also provide a competitive -- yes, competitive -- alternative to doctors employed by DH. In the Boston market, it is at least legitimate to raise the question of whether the merger of major hospitals into the Partners group caused a significant decline in competition and increased medical prices -- see here, for reference to the MA Attorney General report on prices in Boston.

I could actually go on for some time showing where competition works in health care. Even given the unfair tilt towards focusing only on cost reductions, it is easier to answer than I thought it might be.

The better question is what things would look like if we did not have competition at all, say with a single government financed, government provided health care system.

At the heart of Krugman's dislke for a defined contribution Medicare plan (and Klein's too, I think) is this idea that consumers are just not informed and rational enough to make good decisions.

Instead of arguing about that one directly, let me note this other story from the NYT this morning, on how the American Bar Association puts all kinds of accreditation standards onto law schools. The thrust of the article's thesis is that the ABA makes all law schools meet very high quality standards (such as the number of full time vs. parttime faculty) so that there are no cheap law school alternatives.

Ah, but what would happen if we loosed different kinds of lawyers onto the ill-informed, irrational citizens that inhabit Krugman's and Klein's world? Obviously, the public needs to be protected from competition:
Members of the A.B.A. Section say the point of the standards is not to raise the cost of law school, or to limit competition. The point is to ensure that lawyers are well trained and that the public gets quality legal services.

”It’s pretty basic, and more or less the accreditation function that you’ll see for any profession,” says John O’Brien, chairman of the Section and dean of the New England School of Law. “You want to make certain that a school that is nationally approved is providing students with what they have a right to receive in terms of education. And at the other end you want to protect the public and make certain that graduates who offer themselves as qualified lawyers know what they’re doing.”

Saturday, December 17, 2011

The Wyden/Ryan Medicare Plan

Sen. Ron Wyden and Rep. Paul Ryan have a new plan for Medicare. It has gotten a surprisingly low amount of attention -- maybe the Republican primary is taking media precedence.

The proposal can be read here.

The main components of the plan are, in my order of interest/importance:

1. Seniors would choose their health coverage from competing plans on an exchange (the Medicare Exchange), similar to the way Medicare Part D works now. (Medicare Part D is prescription drug coverage. Companies wanting to offer drug coverage under the plan bid in regional markets and enrollees select their coverage from the offers made.) Plans would have to be approved, meaning that they would have to meet certain minimum standards of coverage.

2. The amount to be given to each enrollee as a subsidy for buying insurance would be determined by the auction. This subsidy would be either the second-lowest bid in the auction or the standard Medicare fee for service plan. See point 3 next.

3. One of the options would remain the standard Medicare fee for service option. This is not clear to me, but I guess the meaning is that the Federal government would have to put in a bid just like a private company. I am not sure what would prevent the government from always winning the auction, since they play with OPM (other people's money).

4. Exchanges would be on a regional basis, as for Medicare Part D.

5. If costs rose faster than 1% above nominal GDP growth, unspecified cost controls would kick in.

The idea deserves serious consideration. Moving Medicare toward a voucher/defined contribution plan makes a lot of sense to me. Such a change would get the government out of specifying how much providers are paid, leaving that to private insurers as is currently done (private insurers negotiate with hospitals and doctors to determine contract prices). Using a competitive bidding process to both select plans and to determine the subsidy amount seems to work well for Medicare Part D, so let's extend the model.

One of the interesting things will be if the subsidy is determined regionally or nationally. If done nationally, there will be some pain as enrollees in the high cost regions (see the Dartmouth Atlas) discover that their subsidy is not enough to buy any plan in that region. That would probably put more effective pressure on the high cost regions than anything the Center for Medicare and Medicaid seems able to do.

Wednesday, December 14, 2011

Al Gore's Manifesto for Sustainable Capitalism

Al Gore and David Blood wrote an editorial in the WSJ titled a "Manifesto for Sustainable Capitalism."

A fair amount of this is actually fine -- essentially an argument for including what are now externalities into the economic calculus of firms and consumers. That is sound economics and policy. Of course, what the level of the externality is, in dollar terms, for any specific environmental problem is always a key question. I like to ask what I view as a telling question: What do you think the carbon tax should be, on the basis of a barrel of oil or gallon of gas?

But of course I could not read an article by Al Gore without having some arguments. This quote:
Before the crisis and since, we and others have called for a more responsible form of capitalism, what we call sustainable capitalism: a framework that seeks to maximize long-term economic value by reforming markets to address real needs while integrating environmental, social and governance (ESG) metrics throughout the decision-making process.
does worry me. Two things: first, what exactly is a "real" need? Who determines that? Is my desire for a fast car a real need? How about my desire for imported Scottish salmon?

The other thing that is a bit odd is the focus on long term value (I do like the metric of economic value, though). Yes, I do agree that there is at times too much focus on the short term. Examples abound. But to have one of the major actions proposed being an end to quarterly earnings reporting? That seems a stretch. Have they really thought out the unintended consequences of letting managers report only once or twice a year? I suppose my students might want grades to be issued only at the end of each year, yet I continue to push for grading at the end of each course.

So Laws do Work!

Amazing. The new health care act requires employers who offer health insurance to employees to cover children up to the age of matter whether those "children" live at home, work elsewhere, are in college or not...

And with this mandate in place for almost a year, the Administration reports that almost 2.5 million additional young adults have received coverage.

We should not be surprised that this part of the health care law works.

I am a little ambivalent about it. Hopefully nobody thinks it comes for free, as any employer who falls under this mandate will experience additional costs. Those costs are generally going to be borne by employees, through higher health care premia, lower wages, and fewer jobs. Any self-insured employer could have offered such coverage on their own in the past; the fact that they did not might reveal that employees were not willing to bear the cost.

I also don't really like the principle and economics of making an employer responsible for the health care of a 25 year old who has nothing to do with that employer other than being the child of an employee. There is really nothing the employer is going to be able to do to influence the health of that individual (for actual employees, the employer might be able to do some things in the workplace to improve health). The law also really makes parents continue supporting their children well past the usual age where the youngsters are pushed out of the nest. Heck, why don't we mandate college tuition to be covered too?

The nice aspect of the law is that it does get young adults into the health insurance market during a time when they might choose to go without coverage. It seems to me that this law coupled with a "continuous coverage" provision would go a long way to making an individual mandate less necessary. So kids get covered through 26 with employer coverage; if they want health insurance at any other point in their life, let insurers put in a continuous coverage clause: an insurer must issue coverage so long as the individual has had continuous coverage. If someone has not had continuous coverage, have a high risk pool available, but make there be a cost to not maintaining continuous coverage.