Wednesday, November 27, 2013

Another Obamacare Delay Announced -- Day Before Thanksgiving!

I do feel angry when the government or companies announce important things either on Fridays or before a major holiday.  Where's the honesty in that?

Here's the latest example of such shenanigans.  The SHOP exchanges, one of the potentially better parts of Obamacare, will now be delayed for an entire year.  And when is this announced?  When most people are either traveling, shopping, or just daydreaming about eating turkey.

SHOP, in case you aren't aware, stands for Small Business Health Options Exchange.  The idea is to give employees of small business employers and employees a more efficient way to provide and shop for health care coverage.  This is the second setback for SHOP already.

I suspect that all available government resources are devoted to the consumer-facing health exchanges, as they are getting most of the bad publicity.  SHOP and the back-office programming for risk mitigation and insurer payments are no doubt on the back burner.  Too bad, as small business insurance was one of the problem areas of the old system.

Tuesday, November 19, 2013

More on Risk Mitigation in Obamacare

Senator Marco Rubio of Florida has an editorial in the WSJ noting some of the issues with risk mitigation.  As I said in my post below, stay tuned for action on this front.  Should be interesting.

A short quote from the article, which might be behind the WSJ paywall:

"Buried deep in the Department of Health and Human Services' press release that accompanied the president's Nov. 14 speech was this sentence: "Though this transitional policy was not anticipated by health insurance issuers when setting rates for 2014, the risk corridor program should help ameliorate unanticipated changes in premium revenue. We intend to explore ways to modify the risk corridor program final rules to provide additional assistance."
Risk corridors are generally used to mitigate an insurer's pricing risk. Under ObamaCare, risk corridors were established for the law's first three years as a safety-net for insurers who experience financial losses. While risk corridors can protect taxpayers when they are budget-neutral, ObamaCare's risk corridors are designed in such an open-ended manner that the president's action now exposes taxpayers to a bailout of the health-insurance industry if and when the law fails."

Monday, November 18, 2013

Risk Mitigation for Insurers on the Exchange

I have posted once before on the three risk mitigation mechanisms built into the ACA Health Exchanges:  Reinsurance (to compensate insurers who have high cost individuals); Risk Corridors (to compensate or penalize insurers who perform financially worse or better than they expected); and Risk Adjustment (to minimize adverse selection by paying or charging insurers who get less or more healthy consumers than the average.   See this presentation for a description.

I expect that there is a fair amount of consternation over these risk mitigation schemes right now, from insurers and from the folks in the US government.  We won't hear as much though because these things are not consumer-based.  But they could be even more important.

First, the risk mitigation schemes are going to take a fair amount of manpower and computing power to implement.  Is the system up for this?  Given what we have seen to date, I would be surprised it it were.  And if the risk mitigation systems aren't already ready to roll, I doubt there is sufficient spare capacity in HHS and CMS to help at this point -- everyone is working on the consumer-facing exchanges.   If the enrollment numbers continue on the low side, with mostly high cost individuals enrolling, there are going to be a ton of claims from insurers for risk adjustment payments -- from all three risk mitigation programs.  If I were an insurer, I wouldn't be expecting my accounts payable from CMS to be paid anytime soon.

Second, as Megan McArdle points out today, the government is already making noises about increasing the risk mitigation payments.  She doubts the law permits that to happen, but let's not think that mere rules will stand in the way!  The government is increasingly having to rely on those terrible insurers (remember all the rhetoric to get Obamacare passed) to make the whole damn thing work in any kind of way at all, so they might try real hard to create the necessary incentives.  I would not be surprised at all to hear of changes in the risk mitigation to compensate insurers for losses incurred from low and adverse enrollments.

Sunday, November 17, 2013

Senseless Health Care Pricing or Efficiency?

This is an old subject, see Steve Brill's Steve Brill's Time article.

But having just received a bill from a physician's group practice and thought about it, I have come to think there might be more going on than meets the eye.

Take a look at this bill.  The "amount billed" is $986.06.  These are just lab tests ordered by the doctor and done at that facility, and these are the list prices.  Cigna, my employer's health care administrator (not insurer!) has negotiated with this facility for a discount from those list prices.  In this case the discount is a whopping $713.55, or 72%!!

My first reaction was that this is either stupid or greedy.  It would seem stupid if nobody actually pays those list prices, in which case they are meaningless and a waste of ink.  Come on, let's stop the charade and admit that real prices bear no resemblance to what is listed.

It would seem greedy if someone is actually paying those prices, because my first thought is that the only people paying the list prices would be the uninsured, and as Brill and others have pointed out, it is really sad to be making the uninsured pay the highest prices.

Stupidity and greed are still two good candidates to explain these billing practices but I think there is a third.

It is not only the uninsured who pay the list prices.  Suppose I am a Cigna customer and suppose this physician's group I went to see was not in Cigna's network.  I will still give them my Cigna card and they will bill Cigna first.  Cigna will get the bill and tell me that they will consider those services to be worth only $272.51.  In my case, since I had not yet met my yearly deductible, they would credit that amount toward my deductible.  But I would be responsible for paying this provider the full list price!

My point is that as cruel as this seems, it serves a purpose, which of course is to keep me within the Cigna network.  The higher those list prices, the more control Cigna has over its network.  That can be very efficient, letting Cigna work with a smaller set of providers to improve quality and value of care given to its customers.  Under this view, Cigna actually cares not only about the price they pay -- the discounted price -- but also the list price that they never will pay!

So maybe the high list prices are not stupid and not based on greed but are really to let the insurers use networks efficiently.

Thursday, October 17, 2013

Health Insurance Premia, Competition, and Endogeneity

An interesting article ran in our local paper today; the original was from Vermont Digger which provides news for Vermont.

The article looks at health insurance premia in Vermont versus the rest of the country; Vermont turns out to have the 5th highest rates out of 48 states.  These rates are for 2014 plans, offered on the exchanges, and are pre-subsidy.

The article mentions the lack of competition as one reason for high rates in Vermont, and it correctly notes that competition is relevant at two levels:  that at the supplier (hospital) level and that at the insurer level.

Vermont turns out to have little competition at both levels.  There are only two insurers offering policies on the Vermont exchange, and there is only one large hospital system in the state, Fletcher Allen.  Dartmouth Hitchcock, based in NH, would be the second largest supplier, with many Green Mountain folks driving across the Connecticut River for their care.

The only problem with the article's analysis is the problem of endogeneity.  Why does Vermont have only two insurers offering policies?  No doubt it is to a great extent because of Vermont's low population.  States with large populations tend to have more insurers, states with small populations tend to have fewer insurers.  Larger populations allow for economies of scale in insurance operations, and by itself will lead to lower rates.  So is it just the low population of Vermont that drives up rates, or is there an independent effect of little competition?  I suspect it is both.

The same is true on the health care supplier side. Why only one (relatively small) hospital system in Vermont?  There is just not enough market for more than one supplier of even close-to-efficient size. Again, economies of scale are limited by the extent of the market.  This alone will drive up health costs and hence insurance rates.  But it also limits competition, and that has an independent effect on rates.

Is small really so beautiful?  If nothing else, it comes at a price.

Monday, October 14, 2013

Delaying the Individual Mandate is Difficult

There is still talk about delaying the individual mandate, and there are some reasonable arguments in favor of that position -- not the least of which are the ongoing difficulties with the Federal health exchanges.

But, the fact is that health insurers have already posted health insurance policies with prices, available to buy.  The prices (premia) of those policies reflect expectations about who will sign up (premia have to cover expected health costs of the enrollees).  Importantly, who signs up depends on whether or not the individual mandate is in force or not.

The tax for not signing up is $95 or 1% of income, whichever is greatest (with a cap equal to the average cost of  a bronze plan).  This is not insignificant.  Dropping the mandate/tax will definitely induce some individuals to go without insurance, and there will certainly be adverse selection in that choice -- the healthiest individuals will tend to not buy insurance, the least healthy will tend the other way.  This will distort the pool of insured people from what the insurers would have expected when they posted their premia for the 2014 year.

I do recognize per my earlier post that there is risk-sharing on the exchanges.

That said, delaying the individual mandate seems quite unfair and dare I say in violation of principles that libertarian-oriented folks would generally respect.  How can the government induce businesses to offer contracts at binding prices and then significantly change the rules so as to increase the cost of fulfilling the contracts?

I have not seen anyone offer the insurers the chance to re-price their policies if the individual mandate were delayed. 

Thursday, October 10, 2013

Why insurance premia on the new exchanges are not comparable to existing policies

Are prices for health insurance on the new insurance exchanges lower than what was available before? A number of articles have suggested that prices are at least lower than expected -- see for example here and here.

What I have not seen noted anywhere is that the Affordable Care Act creates extensive loss-protection subsidies for insurers on the exchanges.  Because of these loss-protection measures, it is extremely difficult if not impossible to compare prices on the exchanges to prices that existed before.  

Indeed, if prices were not lower, it would be very surprising.   

There are three loss-protection measures for insurers offering policies on the exchanges; two are temporary (two years) and one is permanent.

The one that I think is most significant in regard to pricing is known as Risk Corridors.  Insurers compare their premium income less administrative cost to their actual claims payments.  If that difference is negative (claims exceed premiums less admin costs) the government (aka you and me) bears up to 80% of the loss.  Symmetry prevails, so the government will also tax any "excess" profits.

With problems of adverse selection and with expected stickiness of consumer choices, this policy has to induce lowball pricing for the two years that it will be in force.  Why not price low and lock in consumers?

The second major risk reduction policy for the exchanges is known as Reinsurance.  Insurers that have high-claim individuals will be eligible for reimbursement of losses.  Who pays for this?  Self-funded plans (again, aka you and me) pay a tax to fund this reinsurance scheme.  This policy also obviously encourages low prices for insurance policies while the reinsurance scheme is in effect.

The third risk reduction scheme is permanent and is known as Risk Adjustment.  Insurers compare the risk of their insured populations; insurers with higher risk individuals receive payments from insurers with lower risk individuals.  The technical details of this are very important and I expect some good careers for previous bankers who can figure out how to game the risk-adjustment formulae.  I agree that in principle risk adjustment is good, as it reduces the problem of adverse selection on the exchanges.  Also, this policy does not have any net inflow of government funds, so if the policy reduces prices on average there can be little argument that the policy is efficient.

Where else has anyone read about the risk reduction policies built into ACA and how those policies invalidate the debate over whether prices are lower on the exchanges relative to prior individual health insurance policies?

Wednesday, September 18, 2013

The complex math of iPhone security

Heard on CNBC this morning, only slightly paraphrased, after a remark about the security of the new fingerprint feature on Apple's iPhone:

"Supposedly the chances of someone cracking the password on the current iPhone is 1 in 10,000"

It's a four digit password.


Monday, September 16, 2013

Understanding of Affordable Care Act is Overstated

According to a new WSJ/NBC poll,
Overall, nearly 70% of poll respondents said they didn't understand the health-care overhaul passed by Democrats in March 2010 or only understood a part of it.
That is incredible.  Over 30% understand most or all of ACA?!  I have studied the ACA quite thoroughly and am not sure I would say that I understand all or even most of it.  How about the taxes on employer based insurance?  Where exactly do the hundreds of billions of savings from Medicare come from?  How will Medicare Advantage plans be affected?  What are the SHOP exchanges?  Can I buy insurance anytime during the year or only during enrollment periods?  What kind of high deductible plans will be allowed? How will premia be affected for the young and healthy vs. the older?

When will the Independent Payment Advisory Board be appointed and what will it do?

And that leaves out all the quality improvement and reimbursement experiments.

The survey also had findings relating to the likelihood of people signing up for new subsidized insurance:
Only 32% of the uninsured thought they were "fairly" or "very" likely to use the exchanges. 
If I were a hospital with any reasonable population of uninsured patients, I would set up a desk to help patients sign up for insurance when they show up in a hospital.  Think of the return on investment to that.

Saturday, September 07, 2013

Confidence Levels in the IPCC Climate Change Reports

Has anyone ever looked closely at the way the IPCC (Intergovernmental Panel on Climate Change) comes up with its confidence levels in its findings?

For example, just what do these kind of statements mean:
In terrestrial ecosystems, earlier timing of spring events and poleward and upward shifts in plant and animal ranges are with very high confidence linked to recent warming. In some marine and freshwater systems, shifts in ranges and changes in algal, plankton and fish abundance are with high confidence associated with rising water temperatures, as well as related changes in ice cover, salinity, oxygen levels and circulation. {1.2}
Human influences have: {2.4}
  • very likely contributed to sea level rise during the latter half of the 20th century
  • likely contributed to changes in wind patterns, affecting extra-tropical storm tracks and temperature patterns
  • likely increased temperatures of extreme hot nights, cold nights and cold days
  • more likely than not increased risk of heat waves, area affected by drought since the 1970s and frequency of heavy precipitation events.
(Source:  AR4 Synthesis Report Summary for Policymakers)

What exactly do these phrases very high confidence and high confidence, and very likely, likely, more likely than not mean exactly?

We all know what a classical confidence interval statement means.  These are definitely not classical confidence intervals; there is no explicit null hypothesis and no statistical distribution of a test statistic under the null.

These must be some kind of Bayesian statements of probability.  When I took Bayesian econometrics with Ed Leamer at UCLA he characterized Bayesian probabilities as what a bookmaker would use to set terms for bets.  But with Bayesian statistics, we still use quantitative distributions, for instance expressing our beliefs over a parameter with something like the lognormal distribution with a specific mean and variance.

Very likely?  Likely?  More likely than not?  Highly confident?

How much do you believe that the Federal Reserve's policies from 2008 to 2012 prevented the world from entering a depression?  Very likely?  More likely than not?  Not at all likely?

Of course, investment banks do issue "highly confident" letters.  Those probably don't have an explicit statistical meaning either.  I doubt that the IPCC considers their statements to be equivalent in quality to the banks'! (Hmmm...How confident are we that the IPCC statements are more likely to be correct than the banks'?)

Even more problematic, the statements coming out of the IPCC are not for an individual but for a group.

The IPCC does produce a document that describes how the writers should come up with these kind of probability statements.  Here are two screen shots of key tables:

I guess my main question would be if the IPCC has invented this kind of group likelihood assessment or if is a well-recognized science.  The list of references has only a few non-IPCC or non-climate items; I will see what they are about.

Friday, September 06, 2013

Health Insurance Plans on the Exchanges

With the advent of the new health care insurance exchanges, there will be lots of interesting developments over the next few months.  How many plans get offered, what do they look like in terms of coverage and networks, how are they priced, how many uninsured pick up a plan?

In my state of New Hampshire, Anthem just announced some aspects of the statewide health plan they will offer on the NH exchange (run by the Feds since NH declined to develop its own).

See this story for some of the details; I apologize if the Valley News requires you to sign up first but I think you might get one free look at an article.  If not, here is the gist of it:  Anthem is offering a health plan that excludes certain hospitals across the state, with what seems to be a focus on excluding the smaller hospitals in certain area.  Alice Peck Day hospital in Lebanon is excluded in my local area while the much-larger Dartmouth Hitchcock is included.  Anthem is the only insurer offering a plan on the exchange for this year.

I have said all along that I expected exchange-based plans to embrace tight, closed networks.  I think this is a good way to both control costs and possibly improve care.

Cost control occurs in at least two ways.  One, high price suppliers can be excluded.  Second, by directing more volume to a smaller number of suppliers, those favored in-network suppliers might offer the plan better prices.  Care can improve if the limited suppliers can keep patients within one set of suppliers who agree on care protocols and avoid patients bouncing around from doctor to doctor.

Of course, these savings and improvements come at the cost of limiting patient choice (ex post choice, that is, after they have chosen the plan!)

I am curious on which of the two factors are the main reason for excluding some of the small hospitals in NH.  Are the small places really the high cost suppliers?  I might have thought that they would be able to offer lower prices.  If so, then I am left relying on the second reason, that the other hospitals want to direct the patient volume to them.

At any rate, there could be dynamic effects of this kind of policy that should be considered.  If losing access to these patients causes any of these hospitals to disappear, that will be a loss of competition.

Saturday, June 15, 2013

Interesting Competition in Health Care

Southwestern Pennsylvania, the Pittsburgh region, is experiencing some interesting competition in health care -- see here for one of many articles..  University of Pittsburg Medical Center, UPMC, is the dominant hospital system in the area.  The dominant health insurer is Highmark, doing business as Highmark Blue Cross Blue Shield.  Highmark recently acquired several hospitals in the region to form its own supplier system, known as Allegheny Health Network.

Highmark seems to have plans to switch some of its insured population from UPMC to its own integrated network.  I suspect what will happen here is that UPMC will all of a sudden be "out of network" for many of the Highmark customers.  Maybe there will be tiers of insurance offered by Highmark, with only some tiers (lower priced ones) closing out UPMC.  That would seem to make sense.

At any rate, UPMC is somewhat miffed at losing possibly tens of thousands of customers.

So the two entities are locked in a contract battle over what UPMC will receive from Highmark for the Highmark covered patients who go to UPMC -- presumably UPMC will still be in-network for some, and the question is what UPMC will get for those patients.  UPMC has upped the ante by refusing to renew the contract at all.

These are not unusual contract disputes between hospitals and insurers.  What is different here is that the insurer had an alternative -- and even more unusual that the alternative was the insurer's own vertically integrated supplier network.

Fascinating developments.  Competition in health care is showing some signs of life.

Saturday, May 25, 2013

Update on Federal Spending

Back in December of 2012, I wrote this post on Federal outlays, expressing my fear that the stimulus spending of 2008-09 had become permanent.

Below is a chart with the data updated to 2013 (projected); data from the White House site (outlays are in nominal dollars). Without getting too fancy with statistics, I would propose that it is now looking as if a good part of the stimulus was temporary.  There have been two years when nominal spending has now declined -- in Dec. 2012, it was not yet clear that actual spending for fiscal 2012 would decline.  It did.  Particularly as a percent of GDP, outlays have declined and while they are not back to pre-2009 levels, it appears to me that they are not far off now from what they would be following a trend line beginning in 2000.

The CAGR for nominal outlays from 1996-2007 is 5.48% and from 2008-2013 is 4.32%.  So there too, there has been a slowing of the growth rate even including the stimulus spending (which really hit in 2009).

Not sure who can take credit (update:  or blame, if you believe more spending is good) for this.

Friday, April 26, 2013

Poetic Justice

Ah, you have to love this.  So the only health plans the Federal Government can make available to members of Congress and its staff are plans offered through an Exchange.

But for Members, their income will place them outside the range where subsidies are available.  Even for lower paid staff, the subsidy is unlikely to be as generous as the subsidy currently implicit in their health care coverage.

Even more ironic are the attempts to say that this is a "drafting error"  -- as Ezra Klein says:
This isn’t, in other words, an effort to flee Obamacare. It’s an effort to fix a drafting error that prevents the federal government from paying into insurance exchanges on behalf of congressional staffers who got caught up in a political controversy.
Well, there are a lot of businesses and individuals in the individual insurance market who when they see the cost of their coverage under Obamacare are going to hope that they are only suffering from a drafting error too.

My guess is that the Office of Personnel Management will make a ruling that lets the members and their staffs avoid any pain.  How nice.

Tuesday, March 26, 2013

Confusion in Europe over Failed Banks

Yesterday, there was much consternation over the comments of Jeroen Dijsselbloem, Dutch finance minister and the chairman of the Eurogroup.  What did Mr. Dijsselbloem say?
"If there is a risk in a bank, our first question should be 'Okay, what are you in the bank going to do about that? What can you do to recapitalise yourself?'," he said.
"If the bank can't do it, then we'll talk to the shareholders and the bondholders, we'll ask them to contribute in recapitalising the bank, and if necessary the uninsured deposit holders."
See this Telegraph article for more details.

Here is the Federal Deposit Insurance Corporation's (FDIC) statement of how it resolves an insolvent bank in the US:
VIII.  Priority of Claims
In accordance with Federal law, allowed claims will be paid, after administrative expenses, in the following order of priority:

  1. Depositors
  2. General Unsecured Creditors
  3. Subordinated Debt
  4. Stockholders
Mr. Dijsselbloem's comments seem to be a pretty straightforward statement of the FDIC policy.  How can anyone object to that?  Well, I guess if the understanding had been that general creditors and stockholders had a higher priority in the capital structure than the general taxpayer then Mr. Dijsselbloem's statement is a change of policy.  Why anyone with economic efficiency in mind would want bondholders and stockholders of banks, or even uninsured depositors, to have a higher priority than the general taxpayer is beyond me.  Seems like a recipe for moral hazard.

Saturday, March 23, 2013

The Senate Budget Does Not Cut Spending

I heard on the radio this morning about how the (Democratic) Senate budget (first one passed in 4 years, and by a 50-49 margin) "cuts spending."

Let's be very careful here -- see this from The Hill:

The Murray budget contains $975 billion in spending cuts, including $275 billion in new cuts to Medicare and Medicaid spending. But it also turns off $1.2 trillion in automatic cuts scheduled over nine years. Factoring that in, the budget does not constitute a net spending cut.

The Arkansas Compromise: New life for Medicaid Expansion

No, that is not a mistake in the title, although if you google Arkansas Compromise many of the results have to do with the Missouri Compromise.

The Arkansas compromise on the Medicaid expansion under Obamacare (happy 3rd birthday by the way) is discussed here.  What a neat idea -- my hat off to Gov. Mike Beebe of Arkansas.  Most state Medicaid programs are run by the state, and you can imagine how efficient and consumer-friendly that is.  Even more important, most state Medicaid programs pay suppliers much lower than private insurers and Medicare.  The Arkansas compromise will allow the state to expand its Medicaid program by simply pushing low income people onto the Arkansas health exchanges and subsidizing their purchase of insurance.  This is precisely how non-Medicaid individuals will buy health insurance once the exchanges get going in all states.  What could be easier?

The winners from this compromise are several --if it were to expand to other states.  The insurance companies gain, as they have more customers for their exchange-based products.  This might be offset a bit by the loss of business from states who were subcontracting their Medicaid business directly to one insurer.  Hospitals and other health care suppliers are huge beneficiaries, as the insurers' reimbursement for exchange-based insurance will generally be much higher than states' Medicaid reimbursement rates. For hospitals this is very important.  Medicaid beneficiaries most likely gain, as exchange-based insurance is almost certain to be better than Medicaid, with perhaps the exception that there could be some copays and deductibles with exchange insurance (unless Federal rules will prohibit that).  And more providers will be willing to accept Medicaid patients under this compromise.

So who loses?

The general taxpayer, of course.  The higher reimbursements to providers will definitely increase the cost of expanding Medicaid.  If this takes off, the Congressional Budget Office will have to redo its budget forecasts...

Wednesday, March 20, 2013

A Tale of Two Trends

I find it interesting to see how scientists and pundits are playing two different trends, one of global temperature and the other of US health spending.

The trend in each of these is important.  For global temperature, there are of course models that would indicate global temperature should be increasing with atmospheric CO2 concentrations; with health spending, the underlying theory is less developed, but the implications of changes in health care costs for US government spending and deficits are immense.

For each issue -- global temperature and health spending -- the most recent data observations give rise to speculation on changes in the underlying trend.  For instance, here is a headline on health spending, from this Bloomberg story:

And here is a chart from the Altarum Institute showing the data:

Meanwhile on the global temperature issue, we have all kinds of headlines on whether global warming has "stopped" in the last 15 or so years.  Here is one example of a headline, from the Guardian in the UK:

And here is just one diagram with some relevant global temperature data.  The source for this is the Real Climate blog:  Note the colored lines are different measures of actual temperature, while the black line is a forecast from a certain set of models.

Of course, the key point in all of this is that we have to consider the background variation in the time series in question before we can conclude anything meaningful about a statistically significant change.  The Real Climate chart makes some headway on that front, with confidence intervals around their model forecast.  I won't agree immediately that that method clears up the issue completely, but at least it recognizes the important fact of variability.  As to health care spending, there is also a lot of background variation, and I have seen very little on any statistical inference about changes.

However, I will go out on some ice and make an observation:  The liberal media has been all over the "marked slowdown" in health care costs as if it is for-sure a real change, while they are all over the "slowdown in global climate change" as either an artifact of starting point or as statistically insignificant.

I think the truth on both is closer to "it's too early to tell."

Tuesday, March 19, 2013

Why are Cyprus Banks in Trouble?

In all the talk about the Cyprus situation, very little is mentioned about why the banks are in such trouble.  Sure, they have a huge amount of deposits relative to GDP...but where were those deposits invested?  There must have been (recent) losses to cause the insolvency of the country's banking system.

What is the source of the losses?

Hmmm....who wants to bet the losses are based on the haircuts that non-government owners of Greek bonds had to take back in 2012 as part of the second Greek rescue package.

So we are still seeing the follow-on effects of the Greek crisis.  Question is if the knock-on effects are weakening or strengthening.

Sunday, March 17, 2013

How to Create Runs on Banks

Saturday morning, the EU finance ministers decided that the island country of Cyprus would have to appropriate a significant portion of savers' deposits in return for 10 billion euro of bailout money.  The appropriation will occur via a 9.9% tax on deposits in excess of 100,000 euro and 6.7% on smaller accounts.  The levy will have to be affirmed by Cyprus' parliament, which will begin debate Monday.  This has all happened over the weekend; see here for more.

Naturally ATM machines were hit hard over the weekend, although it seems that this behavior is too late -- the tax will already be withheld from withdrawals.  Many people of course ran to the banks a bit earlier and got all their funds out.  It will be interesting to see how far back the government will reach -- will there be a deadline of, say, March 1 so that anyone who took funds out before then is left whole?

You can see how arbitrary this is going to become.  That is the nature of a bank run -- those who get their money out first stay whole; those who delay lose.

The incentives will be clear, no matter how much the EU says this will not create a precedent.  The sanctity of bank deposits will clearly be in question if this policy is ratified.

I wonder what the capital structure of Cyprus banks looks like?  There must be public debt and there certainly is (or was) equity.  As a matter of good principle, I would want to wipe out equity and public bondholders before I touch deposits.  The whole idea of deposits is that they are among the least risky financial assets (and usually pay rates of interest in accordance with their low risk!).

Friday, March 15, 2013

Climate Change Education in Business Schools

I was at a workshop at the National Academy of Science this week, with the topic being how business schools address climate change in their curricula.

Website is here; there should be video of the sessions up at some point.

It's an interesting question and there were many good people on the panels and in the audience.

I tried to make two points during my remarks:  One, must keep in mind all the other issues that we want to educate our students about, i.e., there is an opportunity cost to spending time on climate change; and two, in order to broach climate change in an appropriately rigorous fashion, we need to first cover many basics of economics and public policy.

The issue of opportunity cost is very real, and in my position I see those costs all the time.  First consider the core (required) curriculum.  Should climate change occupy a (more) significant role there? (Note that at Tuck, there is one full session on externality in the Managerial Economics course, with climate change serving as the application; and the ManEc profs then join in the Global Economics course later in the year for a session on the global trade implications of cap and trade or a carbon tax.  But right now, many schools are debating having a yet stronger role for global topics in the core.  This will take up time, faculty, and financial resources, especially if an in-country experiential route is chosen.  Other topics also are prime candidates for core positioning:  ethics, entrepreneurship, leadership.  Meanwhile many subjects that have typically been in the core have either been cut back or taken out entirely -- statistics, managerial accounting, decision analysis...

Opportunity cost also arises in the elective (typically second-year) curriculum.  I just got done teaching a new energy economics course, at the request of students.  What is more important, an energy econ course or a course in climate change?  There is also demand/need for elective courses in health care, education, entrepreneurship, technology...

My second point was the need to have fundamentals covered well if we are going to talk seriously about climate change in courses.  The basic economics of externality, optimal amount of emissions, and alternative control policies is not easy; one session on this means "drinking from the fire hose" treatment.  Then layer on top of this the fact that climate change costs and benefits accrue over time, so that discounting and intergenerational equity issues have to play a role.

Meanwhile, if topics such as climate change enter the core, some fundamentals get squeezed out.  What we could be left with is superficial coverage of everything.

One other point about the NAS workshop, very much related to the above comments:  Most of the people there believed very strongly that climate change is not only serious from an environmental impact standpoint, but they also believed that it is quite obvious that we need to do a lot about it -- in the  public and private sectors.  But when you get a bunch of folks with the same mindset, there isn't much consideration of other issues and opportunity costs -- all the attention is on climate change.  There isn't much clearer example of a "silo," something which most people are eager to criticize.  I think the goal of business schools should be to turn out leaders who are adept at leading the organizations of the future, keeping in mind all the possible problems and issues that those organizations might face.  Climate change is but one.

Saturday, March 02, 2013

Kind of funny

This has been hanging on a bulletin board for some time now.

The Coming New "Doc Fix" in Medicaid

As we know, the Affordable Care Act standardizes Medicaid across the states, with a great expansion of coverage for most states.  The Federal government has promised to cover all the additional cost of this expansion for the first three years (2014-2016) and then phase down to 90% by 2020.

Many questions exist around this expansion.  My current one involves the payments that individual states will make under their Medicaid plans to doctors and hospitals ("providers").

Currently, each state sets its own Medicaid reimbursement schedule.  This is generally pretty complicated, but is similar in form to Federal Medicare practices -- but not similar in level of reimbursement.  For NH, if you want to read about the system, go here.  I believe it is safe to say that most states Medicaid systems reimburse providers at less than Medicare rates on average...and definitely less than most private insurers would pay for the same services.  But there has been significant variation in provider reimbursements across states.

So here is the specific question.  If ACA mandates expansion of Medicaid coverage, does it continue the practice of states setting their own provider reimbursement rates?

Generally the answer is yes, but with one pretty large exception -- reimbursement for primary care services.  ACA requires states accepting the Medicaid expansion to reimburse primary care services at Medicare rates, with any additional cost being picked up by the Federal governement.  For a brief description of this part of ACA, see this.  Much more detail can be found.  I have seen one estimate of the cost at the Federal level to be around $6 billion annually.

Ah, but here is the kicker and relation to the title of my post:  this requirement and in particular that the Federal government will pay for the higher rates only applies for two years!

The phrase "doc fix" refers to a law about ten years ago that was supposed to cut Medicare reimbursement rates to providers by a certain amount each year that the rate of increase in total Medicare expenses was too high.  Starting immediately, Congress overrode the mandated increase.  By now, there is around a 30% cumulative cut that is due, and each year Congress has to pass a law (the "doc fix") that keeps that cut from going into force.

Anyone besides me worry that we are going to get into a "Medicaid doc fix" situation?

Look forward:  For two years, any Medicaid service that can be legally lumped into the "primary care" category is going to be paid at the relatively lucrative Medicare rates.  But in two years, states like NH are going to go back to the old rate schedule.  Really?