Friday, December 28, 2012

Number of laws passed as a measure of Congress' productivity?

From the WSJ today:

Following the tea-party wave in the 2010 election, the 112th Congress looks set to be the least productive in recent history. By the end of November, the House had passed 146 bills over the previous two years, by far the smallest number for any Congress since 1948. The Senate passed fewer bills in 2012 than in any year since at least 1992.

 Damn, only 146 bills.

And the fat lady hasn't begun to sing quite yet.  We might yet get a tax increase without any spending cuts.  Imagine, the automatic spending cuts set to kick in are $110 billion...on a GDP of $15 trillion.  I will save you the math...that is less than 1%.

Note added:  The cuts of $110 billion are only 1% of GDP, which is relevant when thinking about the (possible!) impact on spending and hence GDP.  The cuts are a bit more than 4% of the total Federal budget, and of course more than 4% of discretionary spending.  Still, to refer to the cuts as "draconian" as is customary, seems a bit of an exaggeration...especially when the Federal government is clearly living beyond its mean.

Wednesday, December 26, 2012

The optimal safety net depends on the heterogeneity of the population?

Comparisons between heterogeneous countries like the US versus Sweden or Finland have always bothered me.  It seems intuitive that all kinds of public policy should optimally depend on the degree of heterogeneity in the underlying population.  A more homogeneous population should be able to provide a better safety net, for example, because there will be less of an incentive problem in providing a minimum level of welfare.   Here is an attempt to formalize that intuition.  I suppose this has been done before.  I don't have the math worked out entirely but it seems right...

Let individuals in the population be defined by a parameter a, which we will think of the individual's ability to create wealth in the market economy. (I do not presume a negative connotation here. This is a very narrow definition of ability -- the ability to create wealth in the market economy.  Great artists might not have much ability by this definition!)  More precisely, each individual has a function

     W = W(E | a)

where W is wealth, a is an individual-specific parameter, and E is effort.

We will assume that dW/dE = a

and let a be normally distributed.

Every individual will have an increasing disutility of effort, but this is the same for everyone.

Each individual will in the market economy choose her optimal level of effort and therefore her optimal level of wealth.  The optimum occurs where the marginal disutility of effort equals the marginal effect of effort on wealth, which is given by a.  With marginal disutility of effort increasing, it will be the case that individuals with higher a choose higher levels of wealth.  This makes sense.  If an individual has the capability to create more wealth, they will choose to do so.  This is the essential heterogeneity I am dealing with.

Now bring in public policy in the sense of a minimum safety net level of wealth, S, or a subsidy that would be available to anyone who has less wealth than S.

If there is no disutility associated with receiving the safety net subsidy, then a rational individual should compare the wealth less disutility they would achieve in the market economy to S and choose whatever is greater.  Since individuals with higher a choose higher wealth, there will be some critical level of the ability parameter, let's denote it a*, below which it will be optimal to elect the subsidy and above which it will be optimal to engage in the market economy.

The final step is to think about how public policy sets S.  There must be some value associated with equity, letting the less able achieve a minimum level of net wealth.  The cost of achieving equity, however, is the loss of effort from individuals who choose the subsidy.  As the base subsidy S increases, several marginal effects occur:  One, the marginal value of increased equity falls, because individuals getting the subsidy are increasingly well off.  Two, the marginal wealth loss increases as more-able individuals drop out of the market economy.  Wealth loss has to be a negative.  And third, as S increases, we move along the normal curve and experience an increasing slope of that density.  This last point is critical, as it addresses the issue of heterogeneity.  I assume that S is further than one standard deviation less than the mean of a.  Since the inflection point of the normal is at one SD away from the mean, that means we are in the range of increasing slope.  So as S increases in that range, more individuals are caught up, and more wealth is lost even if marginal ability were not increasing.

The optimal S, S*, has to balance the marginal benefits of greater equity against the marginal cost of wealth loss.  Remember that with S* there is also an implied a*.  Individuals with ability below a* take the subsidy; individuals above  a* participate in the market economy.

Here is a picture of two normals.  The tighter one represents a more homogeneous society to begin with (Finland, Sweden).  The less tight one we can think of the US.

Now remember we are far to the left on these densities, where the slope is increasing in a (which is on the horizontal axis).

Here is where it starts getting a little tricky, and I will have to check the math by getting the derivative of the normal density as a function of the standard deviation.

But suppose that S* for the tighter distribution, the more homogeneous population, implies an  a* right about where the density curve in the picture above ends.  Then go up to the density for the less homogeneous population, the wider normal curve.  Note that the slope of that curve will be greater than for the other curve -- essentially we are closer to the inflection point, where the slope reaches a maximum.

If the slope of the density for the more heterogeneous population is greater, that means that the marginal cost of increasing S is also greater, for we are picking up more of the population.

All the other marginal effects are the same, for we are at the same level of a.

A higher marginal cost of S means that the more heterogeneous population would optimally choose an S*, and an  a*, less than that of the more homogeneous population.

The optimal safety net depends on the heterogeneity of the population?

Tuesday, December 25, 2012

Medicare Advantage auctions: Asking too much?

When I teach about auctions, I like to ask students:  What does an auction accomplish, or put differently, what social roles does an auction play?

I point to two major roles:  An auction determines an allocation -- who gets the good being sold, or who is chosen to produce -- and it also determines a price.  Two very important things:  allocation and price.

In Medicare -- a confused and confusing policy area if there ever was one!-- auctions are used in both Medicare Part D (prescription drug coverage) and Medicare Advantage (private Medicare plans).

I am concerned that some policy proposals for Medicare Advantage (MA) are asking too much from an auction, for they add a third role:  determining the subsidy level for subscibers.  This is a complicated issue, requiring auction theory that is at the frontier.  But I think the intuition is pretty clear.  Also, while I will focus on MA here, similar issues arise with Part D plans, albeit somewhat less so because of the way those rules are set.

In a nutshell, here is the way MA plans work now.  Private insurers submit bids to provide health coverage for those over 65, with bids submitted on a county basis.  Folks who qualify for Medicare can either take the standard government-issue Medicare or opt into one of the private MA plans. The private plans are paid by the government a subsidy amount equal to the average per person cost of that county's standard Medicare plan.  If the plan bids more than that, the enrollees in that plan pay the difference between the subsidy and the bid.  If a plan bids less than the subsidy, then enrollees don't pay anything but the plan has to rebate the difference to enrollees as either cash or extra benefits (I do need to verify the specifics of this, but for now I don't think it is crucial).  Importantly, enrollees select which MA plan they want, so choice is a key part of the process.

So this is fine.  The auctions do two things, as above.  They determine which of the private plans provide service (allocation) and they determine a price (the price paid by enrollees).

Note that the subsidy is determined exogenously from the auction -- the average per person cost of standard Medicare.  Granted, there might be some endogeneity here, as the cost of the local Medicare plan depends on who opts into MA plans...but that seems of second order importance.

However, some policy proposals (see Alice Rivlin, for example) will add a third role to MA auctions, that of determining the subsidy.  The typical idea is to set the subsidy at the second-lowest bid of the private insurers.

The first order logic of this is great.  Set the subsidy at that level, and you can be sure that at least two plans will be willing to offer coverage at that subsidy amount.  Even more important, instead of having the MA subsidy set through a political process, it is set in a market mechanism.  What could sound better than that?

Here is my concern, arising from the effect that setting the subsidy in the auction will have on strategic bidding behavior. (Let's be clear that strategic bidding behavior should be expected, that is, insurers will not just put bids in that equal their expected cost, even if that is what the government asks for.  Insurers will put in bids that maximize their expected profit.)

The issue is that by putting in a higher bid, an insurer has a reasonable expectation that it will increase the subsidy (if the bidder happens to be the second lowest bid).  This will increase the subsidy to enrollees and make it less likely that the insurer's bid will result in a net payment by the enrollees.  Also, as the subsidy increases, more people will opt into the MA plan arena.  Seems pretty clear to me that this will result in higher bids.

Amplification of this problem arises because is in MA plans, there is not a standard package of benefits.  By adding benefits, and putting in a higher bid reflecting the higher cost of that expanded package, an insurer minimizes any competitive effect of being a high bidder in the auction while still having a reasonable expectation that the subsidy will be increased.

As all bidders do this, the entire distribution of bids shifts higher.  Studies that have been done on the cost savings from basing the subsidy on the second lowest bid are obviously wrong, as that second lowest bid is going to be higher.

The idea is not that different from shifting from a second-price sealed bid auction to a first-price selaed bid auction (standard auction where something is being SOLD to bidders).  It would seem that taking the highest bid as the price in an auction would clearly be better than taking the second highest.  But as the rules change from second-highest to highest, we have to expect that bidders will lower their bids.  I always ask students:  What do you think is greater -- the second highest out of a distribution, or the first highest out of a lower distribution?

Friday, December 21, 2012

Just for the record: Federal spending

Sorry for the small font on this -- the table is from here if you want to see original.  I added the last line, percent growth year on year.

Three main points to note:  First, the 18% increase in total federal outlays from 2008 to 2009, on top of a 9% increase 2007 to 2008, both of which were stimulus to a great extent.  Second, since then, there is only one year when nominal spending went down, by 2% from 2009 to 2010.  And third, overall between 2007 and 2012, nominal Federal outlays are up 39%.

In previous posts, I noted my fear that stimulus spending would become permanent.  Here is a quick graph of the outlays from 2007-12.

House Republicans Deal a Bad Hand to Democrats?

Speaker Boehner pulled his "Plan B" bill from the House Thursday evening, saying there were not enough votes to pass it.  This bill would have preserved the current tax rates for those under $1 million in income, allowing tax rates to rise on those above.

Pundits are crying the end of the world, which coincidentally coincides with the predictions of the ancient Mayans.

The end of the world as we know it is not nigh.  I actually give the advantage now to the forces in favor of smaller government, as in less spending and lower taxes.

Look at it this way.  Any deal has to win approval of a majority in the House.  My working assumption  is that the Republicans will hold together (but see the * endnote below).  Thus, any deal needs approval of almost all Republicans.  Think of the Republicans as being lined up on a continuum, from very conservative (lower taxes, lower spending) to more moderate (willing to accept higher taxes, higher spending).  Boehner's failure defines the conservative side of the spectrum in regard to the minimum deal it is willing to accept and the risks it is willing to endure.  With this clarity, the center of gravity in the Republican continuum has shifted to the conservative side.

Suppose I was negotiating with two people, one very demanding and one less so. The more demanding person just committed himself to blowing his head off if he doesn't get his way.  I would say that the center of gravity shifted to the very demanding side of the spectrum.

The conservative Republicans are willing to risk going over the cliff, and I think they are correct in accepting that risk.  My belief is that "the cliff" is not anything like truly going over a cliff.  There will be some unfortunate consequences, especially in regard to the Alternative Minimum Tax and Medicare rates for doctors (the media are not focusing on the Medicare implications, but the so-called Doc Fix needs to be voted this year or Medicare payments to docs will fall).  Taxes will go up, which to be honest I don't see as a disaster either.

If I am right in that the cliff is not a disaster, the Democrats lose much of their negotiating power in the new year.  That power right now is fueled by media-supported claims of economic apocalypse.  If Jan. 1 comes with no deal, and life goes on, how does the Democrat position look?  There will be some cries of pain, yes, but blame will be equally spread -- and if there is any justice, most folks will blame the leader, ie., President Obama, for failing to negotiate a deal.  Thus, in the new year, the balance of power shifts to the conservative side, with a better prospect of getting more spending cuts and a better mix on the revenue side.

*Endnote.  It is possible that the Republicans will not hold together in the House.  If Obama and Reid craft a deal in the Senate, could that attract all the Democrats in the House and just enough Republicans to pass?  Possible, but unlikely...unless the deal is attractive enough on the "less spending and taxes" dimension.

Sunday, November 18, 2012

More Competition for Hospitals

Here is a great development that shines a bright light on the issue of competition in health care:  The Surgery Center of Oklahoma.  An article by Jim Epstein in Reason alerted me to this.

In a nutshell, the (for-profit) Surgery Center was started by a group of surgeons to provide an alternative to surgery within hospitals.  They have a focus on transparent, all-inclusive prices for various surgeries, from knee repair to hernias and even bunion removal.  You can see their prices right on the website -- an adenoidectomy for instance costs $2695, all-in.

The Center appeals to a variety of patients, in particular those with high deductible plans and to self-insuring employers, who can direct their employees to the Center and thereby save money.

Oklahoma, it turns out, did away with their Certificate of Need law, making it easy for such a business to enter the market (funny that the common abbreviation for Certificate of Need is CON).

So, here are a few questions to ponder:

Are businesses like the Surgery Center cost-increasing or decreasing?  Is this just more surgeons looking for business, so that by the phenomenon of supplier-induced demand we will just end up with even more surgeries (that don't really need to be done)?

Isn't this just adding more costs to our health care system --look at the nice building they have, and think of all the equipment inside?

Aren't centers like this just cherry picking the paying patients, leaving the uninsured to be treated at hospitals?

Won't this mean that existing hospitals in Oklahoma will have to raise their prices, since they have to continue to exist and they still have to cover the uninsured?

How far can the "unbundling" of hospitals go?  How strong are the economies of scope for hospitals?

Do CON laws prevent competition from raising costs of health care or do they stifle cost-reducing innovations?

Wednesday, October 31, 2012

Competition in Health Care: Medicare Part D

As part of my ongoing project to chronicle the working of competition in health care, I note this latest article in the American Economic Review.

Medicare Part D is the prescription drug coverage program for senior citizens in the US.  Those eligible choose a plan from competing (yes, competing!) insurers.

Here is the abstract of the article and a paragraph from the conclusion.  I will emphasize this one sentence in particular:  "Our results add to the accumulating evidence that Part D represents a successful implementation of a market-based approach to deliver a large-scale entitlement program..."

Selection in GM's Pension Buyout?

General Motors has offered about 42,000 of its white collar employees a lump sum buyout from their pension plans.  The employees were offered either to keep the monthly pension payment they were entitled to or a lump sum, with the lump sum being set at an actuarially fair level:  present value of the stream of benefits, using a unisex life expectancy.  The latter is required by law.

Just this week, GM reported that about 1/3 of the eligible folks opted for the lump sum.  See this Chicago Tribune article for details.

Now, wouldn't it be neat to see the gender breakdown of those taking the lumpsum as compared to the gender mix in the eligible pool?  Since women live longer than men on average, and the lumpsum had to be set using average life expectancy across men and women, women should take the pension stream and men should take the lump sum (ceteris paribus, of course).

Saturday, September 22, 2012

Interesting Experiments in Health Plans

One of my colleagues proposed some time ago that health insurance should be more like true indemnity insurance, wherein you just get a lump sum of cash if you have a health care need.  The idea is that the patient would then shop around for the best care -- best defined by the patient's weighting of cost and quality.  Broken leg -- that might yield $5,000.  Of course, there are myriad issues here: a new kind of moral hazard; monitoring the quality of care providers chosen by patients;  the difficulty in determining a reasonable payment for complex cases; contingency payments for unexpected complications, etc.

Now it turns out that such experiments are going on.  The most recent issue of Health Affairs includes this article, "Payers Test Reference Pricing and Centers of Excellence to Steer Patients to Low-Price and High-Quality Providers," by Robinson and Macpherson.  Calpers, the California public employees system, pays $30,000 to insureds for a knee or hip replacement, with any excess over that the responsibility of the patient.  Safeway, the grocery company, pays $1500 for a colonoscopy, after they observed almost 10-fold variation in colonoscopy prices.

Many pharmaceutical plans already use this reference pricing concept for drugs, giving a patient only the amount that a "reference"drug would cost.

The potential for savings here is quite large.  As I pointed out in a class the other day, there are static and dynamic effects.  The static effect is the one-time cost savings by having patients choose a lower cost provider.  The dynamic effect arises when the entity losing business realizes that and lowers price, or when a supplier sees that their demand is now more elastic, and by offering lower prices they can attract business from new patients.

But note the free-rider problem inherent in this:  Safeway's innovation will create lower prices for all buyers, to the extent that the dynamic effect of competition kicks in.  Safeway pays all the cost of the innovation but accrues only part of the benefit.

Saturday, August 18, 2012

Setting Voucher Levels or Setting Supplier Reimbursement Rates?

One issue in the Medicare debate that I have not seen anyone address concerns the political economy of setting voucher levels versus setting supplier reimbursement rates.

The Ryan plan would set a level of "premium support"-- think of it as a voucher -- which seniors would use to buy their health plan.  While the Ryan plan might have in mind a path for the voucher amount each year in the future, the actual level is of course going to be up to the Congress at the time.

Current Medicare sets thousands of individual prices at which hospitals and docs are reimbursed -- the notorious fee-for-service regime.  Each year, at least ostensibly, the Federal government, through the Centers for Medicaid and Medicare Services, determines all these prices.  Under ACA, it is true, there is some incentive to move away from fee for service to bundled payments -- payment for treating a disease condition over a period of time -- or even to capitation, whereby an entity such as an Accountable Care Organization will be paid for maintaining the health of a whole population.  Even in these cases, there will still be a lot of individual prices being determined.  Fee for service is not going to entirely disappear.

In order to say which regime will be less generous to Medicare beneficiaries, it is necessary to address the political economy of setting the different prices.  Will the political process really be able to hold the voucher level below the average cost of a senior buying a reasonable health plan on the open market? How does the political process deal with the setting of individual doctors' reimbursement rates?

I won't pretend to have done a full analysis of this.  But I think the visibility of the voucher and its sufficiency will be a key issue, and those who say that the voucher will be set at too-low levels need to think twice.  Seniors are a powerful political lobby.  Meanwhile on the other side, there is the invisibility of all the individual suppliers' prices, and the power of the American Medical Association.  The so-called "doc fix" where a previous cut in doctors' reimbursement rates has been put off year after year suggests the nature of the problems in setting individual payment rates.

The issue reminds me of  Stigler's paper "The Theory of Oligopoly."  Is it more conducive to collusion to having many small buyers or a few large buyers?  Stigler argued many small buyers is more conducive to collusion, as a seller will not risk defecting from a collusive agreement for just a small increase in sales:  "It follows that oligopolistic collusion will often be effective against small buyers even when it is ineffective against large buyers."

Some Honesty in the Medicare Debate, Finally

In the Washington Post, Ezra Klein has an interview of Rep. Chris van Hollen, who sits with Rep. Paul Ryan on the House Budget Committee.  The interview is here.  Klein does an admirable job of keeping the discussion on an even rational basis.

As one example, many opponents of the Ryan "premium support plan" claim that it cuts Medicare benefits, while the Affordable Care Act did not cut benefits.  See for instance Eugene Robinson in the WaPo who says this:

"The Affordable Care Act, otherwise known as Obamacare, slows the rate of growth of payments to Medicare service providers by more than $700 billion over a decade. But no impact is felt by seniors themselves, whose benefits and costs remain the same."

Sarah Kliff, in an otherwise very informative post, makes a statement that is very similar:  

"It’s worth noting that there’s one area these cuts don’t touch: Medicare benefits. The Affordable Care Act rolls back payment rates for hospitals and insurers. It does not, however, change the basket of benefits that patients have access to."

Now current Medicare does not pay anything directly to beneficiaries; the beneficiaries visit hospitals and doctors, who are paid directly by Medicare.  ACA does cut payments to doctors, hospitals, and some private insurers, and Kliff's otherwise fine post details quite well what those cuts are (they are very complex).  To say that ACA's cuts to doctors, hospitals, and private insurance companies (who provide supplemental Medicare insurance) are not cuts to benefits is really semantics.   Taken to an extreme, ACA could have cut doctors' reimbursement rates to Medicaid rates (extremely low, that is) and the ACA sympathizers would still be saying "but we didn't cut any benefits."  

Getting back to the Klein interview of Rep. van Hollen, there is this exchange.   I like Klein's question more than van Hollen's answer, which doesn't really address the question  (though he does have a valid point on what ACA attempts to do).

EK: Until now, I think that insofar as folks knew anything about the Medicare debate, they probably thought that Republicans had a plan to cut Medicare spending, but it was a bit cruel, and Democrats were completely unwilling to touch Medicare spending at all. I think we’re starting to get closer to the truth here, which is that both parties have very different visions for how to cut Medicare spending. But one thing the Democrats like to say is that they’re just cutting providers, not beneficiaries. But providers often pass their costs along to beneficiaries, either by making them pay more or giving them worse service. So how real is that distinction?

CVH: Obviously, if you were just to do across-the-board, arbitrary cuts, that would be the case, but the whole idea behind Obamacare is to change the incentive structure behind Medicare so the payments to providers focus on the value of care rather than the volume of care.
So, for example, before the Affordable Care Act was passed, hospitals would get reimbursed every time a patient was readmitted to a hospital even if they were readmitted continuously for the same underlying condition. Hospitals had no financial incentive to coordinate the care of the condition once the beneficiary left the hospital. We’re now changing the model so hospitals don’t get reimbursed every time the patient gets readmitted. Now they’ll get readmitted for managing that underlying condition. There’s also a major initiative underway to better coordinate care for dual-eligibles, people both on Medicare and Medicaid, who are a small portion of the population but a very high percentage of the costs. There are lots of misaligned incentives between the Medicare and the Medicaid program, and we’re working on them.

Sunday, August 12, 2012

Employment Effects of Medicaid Expansion

In thinking about the effects of ACA on employment, I have neglected the effect of the Medicaid expansion.

Overall there are a multitude of effects of ACA on the supply and demand for labor (that framework of course being my model of choice for the analysis).  On the demand side, we should expect that the employer mandate in the ACA -- provide acceptable insurance or pay a fee -- should decrease the demand for labor.  Offsetting this negative effect on demand is an increase in the supply of labor, reflecting the value that employees get from the mandated coverage.  As a first approximation, these two effects would perfectly cancel out, causing the money wage to fall and employment overall stay constant, but that is only a first approximation.  It should be expected that the value of the insurance to the employee is less than the cost to the employer, as many employers are observed to not offer insurance.  Also, there is the small problem that with very low wage employees, the money wage cannot fall so with demand being the binding constraint employment will fall.

A confounding effect here is caused by the subsidies offered to employees who buy insurance on state exchanges -- in some cases, the subsidy will be worth more to the employee than the fine that the employer will have to pay if their employees avail themselves of a subsidy (there are tax effects here too that I will ignore for now).

These are the effects that most analysts seem to take into account when looking at the effects of ACA on employer-sponsored insurance, see for  this Urban Institute article or this article by Holz-Eakin and Smith. 

But for the effect of ACA on employment, one more variable is important, and that is the expansion of Medicaid coverage.  Right now, of course, Medicaid coverage in many states is quite meager, with able-bodied adults often if not typically ineligible.  With the new Medicaid coverage, adults will be covered by Medicaid if income is below 133% of the Federal poverty level.  In comparing the decision to be unemployed pre-ACA, the cost of health insurance (or the cost of not having it) would have loomed large.  Post-ACA, the difference between the cost of insurance if unemployed is zero (Medicaid coverage) as it is if employed (subsidized or employer sponsored).  This seems like it would be a rather large impact on the supply of labor -- reducing it, as one of the major costs of being unemployed has fallen dramatically.

Friday, June 29, 2012

More on Taxes vs. Penalties in ACA

  I do have to say that my post below was pretty much on target, although I really did not think that the decision would be made on the basis of whether the mandate can be interpreted as a tax.

  On the whole, I am not disappointed with the Supreme Court decision. I think that Roberts and his majority colleagues did what I would want them to do and what they should do: Not look for way to find that the ACA is unconstitutional, but look to see if there is a way to rule it constitutional. Innocent until proven guilty. Roberts says this in a different way, when he discusses the point that if a law can be read in more than one way, the Court needs to read it in the most constitutionally favorable way.  The Commerce Clause limitations were even strengthened, and the idea that laws like this have to be recognized as taxes will make the political process more transparent.

  The ACA is also not a terrible base from which to build, if certain things were to be modified. I would really like to see us sever health insurance from employment, and while the ACA does provide a platform for that to happen -- the exchanges, and the beginning of taxation of health benefits -- it does not go nearly far enough. 

  But there is one more ethical question, related to my Apr. 4 post below. Roberts actually created a third option in addition to the two that I had: Scheme C: A mandate to buy insurance, with a tax penalty to be paid if the mandate is not followed. However, "...the mandate is not a legal command...(p.32, Opinion) and "...if someone chooses to pay rather than obtain health insurance, they have fully complied with the law...(p.37) Is there an ethical difference between Scheme C and Scheme A, the mandate and penalty? Seems pretty clear to me that there is. According to Roberts, I can skip insurance  simply pay the fine, and feel no qualms about doing so. I don't have "..all the attendant consequences of being branded a criminal..."

   I do worry that we are creating a precedent here, by creating a law with the word "shall" in it, and then saying that you can break that law and simply pay the penalty and be off the hook, including according to Roberts avoiding any "social stigma." So when the government says I shall do other things, such as parking in no parking zones, can I just pay the fine and be off the hook, legally and socially?

Wednesday, April 04, 2012

Ethics of "Mandate+Penalty" vs. "Tax+Credit"

In regard to the debate on the individual mandate, some people have mentioned that the mandate+penalty scheme is equivalent to a scheme of levying a "health care responsibility tax" on everyone, and giving a tax credit for those who buy an acceptable insurance plan. See, for eg., Ezra Klein, Ed Kilgore and Justice Sotomayor:

"JUSTICE SOTOMAYOR: Could we have an exemption? Could the government say, everybody pays a shared health care responsibility payment to offset all the money that we are forced to spend on health care, we the government; but, anybody who has an insurance policy is exempt from that tax? Could the government do that?"

So here is my question. Is there an ethical difference between these two economically equivalent options:

Scheme A: A legal requirement for everyone to buy an insurance policy, with a penalty of $1000 for failure to do so.
Scheme B: A health care responsibility tax on everyone of $1000, with a tax credit of $1000 for anyone buying an insurance policy.

Saturday, March 31, 2012

A Taxing Question on HSAs

Health Savings Accounts, or HSAs, are tax-advantaged savings accounts that are paired with a high deductible health plan (HDHP).

The idea is to take on a HDHP and put enough money into a MSA, so as to have money to pay for both expected and unexpected health care expenses.

Contributions to HSAs can be done via pretax earnings, thereby saving or at worst delaying the tax that otherwise would be paid (if withdrawn for nonmedical use after age 65, the non-earnings part of the distribution would be taxable). Earnings on contributions accumulate taxfree, even if withdrawn for nonmedical use after age 65.

So here is the question. Suppose someone is in an HDHP and puts the maximum amount, $3100, into their account. At the end of the year, they see that they have incurred $1000 of health care expenses, and begin to prepare a withdrawal from the HSA to repay themselves.

But...those funds in the HSA are earning taxfree returns. Suppose the individual has maxed out on all other tax-advantaged investment opportunities, such as their IRA.

Then why take any funds out of the HSA? The person should really just eat the health care expenses out of regular savings or income. Leave that HSA alone and let it accumulate taxfree!

The question then is: One might have thought ex ante that, with the HSA, the marginal cost of health care expenses would be lower by the marginal tax rate, that is, if the marginal tax rate is 30%, then the real cost of health care expenses will only be 70 cents per dollar incurred. But if one is behaving optimally, it seems that one should just put the maximum contribution into the HSA and leave it there for retirement...or for general living expenses, health care included, if any kind of cash flow situation develops.

So the cost of health care seems to be dollar for dollar, at the margin, just like for any other consumption. The fact that the HSA is funded with pretax dollars is just a gift from the government in general; it is not a means for lowering the marginal cost of health care.

This is different from Medical Reimbursement Accounts, which are funded with pretax dollars but cannot roll from year to year and do not earn returns. With MRAs, the money has to be spent on health care, and they do lower the marginal cost to the consumer of health care only.

Is this right? Will consumers see this pricing difference and behave differently with HSAs than MRAs -- purchasing less health care? My bet is yes: Come the end of the year, and people start thinking about withdrawing from their HSA to pay for health care, some of them will realize they are better just leaving the money there. Others will have used their HSA on a pay-as-you-go basis, since they come with a debit card sometimes. These people will be foregoing a very nice way to save tax free for retirement. Of course, many people are not currently maximizing their opportunities to save taxfree for a variety of reasons.

Tuesday, March 13, 2012

Is this the market working?

Here is a very interesting WSJ article involving customer claims to their money from the failure of MFGlobal.

Recall the basic situation: customers who held funds in accounts at MFGlobal have not been fully paid, and the money as of yet has not been located. It appears that in the flurry of MFGlobal's plunge into bankruptcy, those sacrosanct customer funds were mis-appropriated...but nothing has been proved yet.

Now comes a couple banks, Barclay's and Royal Bank of Scotland, offering to pay US customers of MFGlobal 91 cents on the dollar in return for the customer's claim against MF. Not too bad...those customers as of now have received 72 cents on the dollar from the bankruptcy process.

Why would the banks do this? Well, they or the investors on the other side think that 91 cents is a good price for the claim.

I wonder if there is a chance that the owner of the claim could get more than 100% -- maybe due to penalties.

My colleague Randall Thomas and I once wrote a paper where we discussed the sale of claims arising from class action lawsuits to the highest bidder. The advantage here, as with the MFGlobal situation, is that you will get a concentration of economic incentives to litigate the case efficiently.

Fascinating how markets work.

Saturday, March 10, 2012

Is this insider trading?

A while back, my colleague John R. Lott Jr. and I wrote two papers around the same general topic, on the effect that one firm has on another firm through competitive actions and the implications for stock market prices.

For instance, we discussed what might happen if Firm A were to announce a decision to entry into Firm B's market. Without perfectly competitive markets, it should be expected that Firm A's decision would cause Firm B's market value to fall.

Knowing this, would it be profitable/feasible/legal for Firm A to trade in the securities of Firm B before making their announcement?

We looked into the legal aspects of this and concluded that it did not appear illegal, so long as the announcement were not fraudulent. Legality at least on insider trading grounds hinges on the managers of Firm A not having a fiduciary responsibility to Firm B. Of course, Firm A might restrict its employees from such trading (not sure why they would, but they could). But Firm A could instruct its pension fund, for instance, to short Firm B before the entry announcement.

We had trouble finding current examples of such behavior. Too bad, or the article would have gotten into an even better journal.

But now we have this Reuters article about Starbucks and Green Mountain Coffee. Quoting from the article:
A heavy burst of bearish option action in Green Mountain Coffee Roasters Inc in the hours before Starbucks announced plans to launch a single-cup coffee and espresso brewer has raised eyebrows among some option market participants.

"The level of aggressiveness that traders early on Thursday came for Green Mountain March downside puts was very suspicious," said Alan Thompson, options market maker at Timber Hill, a division of Interactive Brokers Group. "It raised our eyebrows."

"We expect that the regulators will take a deeper look at both Starbucks and Green Mountain ahead of (Thursday) night's announcement," Najarian said.

The U.S. Securities and Exchange Commission, which looks into unusual stock and options activity, declined to comment.

Post on Certificates of Need in Hospital Industry

I wrote a post last week for US News & World Report on the issue of certificates of need for new hospitals. It is available here.

In New Hampshire, a new specialty hospital, Cancer Treatment Centers of America, wants to bypass the usual Certificate of Need process. That has raised interesting questions on the role of competition in health care.

If anyone wants to read an academic paper on the topic, a very recent one is

Cutler, David M., Robert S. Huckman, and Jonathan T. Kolstad. 2010. "Input Constraints and the Efficiency of Entry: Lessons from Cardiac Surgery." American Economic Journal: Economic Policy, 2(1): 51–76.

Saturday, February 11, 2012

The Cost of Contraception: Make the Insurers Pay!

Faced with some serious outcry from the proposed regulation to make all employers offer free contraceptive services to employees, the Obama administration has come up with a clever answer: Actually, the employers don't have to provide the services, we will just make the employers' insurers cover the services, and of course with no cost to the employee.


Wait, it gets even better. According to the Administration, this won't cost anyone anything! See this from the LA Times:
Under the new plan, administration officials believe insurers will comply at no charge because the coverage may not actually cost them anything. Evidence suggests that providing birth control coverage reduces overall costs for health plans because birth control is much cheaper than pregnancy, according to administration officials and some health industry analysts.

So I guess the insurers (and employers) must just be stupid for not already giving contraceptive services for free, since they reduce health costs by more than their price. This certainly starts warning bells buzzing in my head.

There are lots of subtleties here, but let me try this angle. Suppose we have an employer who is not self-insured and pays an insurance company to cover its employees. Suppose that like most plans, contraceptive services like the pill are covered, but employees must pay a copay. Suppose also that the administration is correct in that reduced health costs from using contraception (no births) offset exactly the cost of the contraception itself.

Beginning now, this insurer must cover contraceptive services for all employees, for FREE. But probably a huge number of the potential employees who might use contraceptives are already using them and paying for them. For these employees, what we call the inframarginal ones, the insurance company simply loses revenue. Any benefit in the form of reduced health cost is already being captured. For the truly marginal employees, the ones who were not using contraceptives before but will if they are free, the administration's logic is right and the insurance company would break even.

I suspect that the first group, the inframarginal employees who already use and pay for contraceptives, is much larger than the second group, so the insurance company will on net lose a lot of revenue. This will have to be made up somehow, through larger premiums.

The insurance companies have been largely silent through all this, which does not surprise me too much given how much political pressure they are already under. But see this Reuters story:

"We are concerned about the precedent this proposed rule would set," said Robert Zirkelbach, spokesman for America's Health Insurance Plans, the industry's trade group. "As we learn more about how this rule would be operationalized, we will provide comments through the regulatory process."

Zirkelbach said insurers "have long offered contraceptive coverage to employers as part of comprehensive, preventive benefits that aim to improve patient health and reduce health care cost growth."

Employers who have signed on for such health plans in the past paid part of the cost of birth control prescriptions, while their employees also bore some of the expense through co-payments.

That Reuters article ends with this mention of the free lunch theory:
When asked about the insurer concerns, the White House cited a report from the U.S. Health and Human Services Department that estimates the costs of providing free birth control can be offset by reducing expenses associated with unintended pregnancies.

There are probably many medications that reduce health costs in excess of their own price. I would imagine that insulin, blood pressure medications and blood thinners are three great examples. Does this mean that they should all be offered in any insurance plan for free? Are employers and insurers just stupid for making us pay for these free lunches? No, of course not, for many reasons. An employer or insurer needs to somehow cover the overall cost of the plan by charging employees. Typically an efficient plan is going to recover costs through a variety of charges on different services, balancing things like elasticity of demand for those services against costs. There is also the important effect that if something is offered for free to consumers, producers face a very inelastic demand and are more likely to raise prices.

Tuesday, February 07, 2012

Tuition Increases and Expansion of Top Universities

Following on an argument I have been making for years, I wrote a post for US News and World Report arguing for expansion of class sizes at top universities. Top universities are the gates to much of the upper economic class in our society and I think they should be open wider.

The USNWR piece can be read here.

Adverse Selection at the Supreme Court

The brief for the private respondents in the individual mandate case can be read here.

It's a good day for the concept of adverse selection on one hand-- I count twenty mentions, and they are not incidental.

On the other hand, the brief discounts the difficulty in countering adverse selection via relatively simple restrictions, such as limited enrollment periods and coverage-waiting periods.

I tend to agree that it should be possible, if one is willing to use penalties of meaningful impact, to have both must-issue clauses for insurance (so sick people cannot be refused coverage) and prices that are not "overly" based on risk. But there would have to be a cost to waiting until sick to get coverage -- worse coverage, higher prices.