tag:blogger.com,1999:blog-302139052024-03-14T07:07:55.605-05:00Robert Hansen's BlogA blog on economics, both theory and current events, and world political affairs.Robert G. Hansenhttp://www.blogger.com/profile/08922339441309144396noreply@blogger.comBlogger374125tag:blogger.com,1999:blog-30213905.post-67343624738141030042015-09-21T15:26:00.001-05:002015-09-21T15:27:26.340-05:00Drug Pricing and ExternalitiesI bet a few companies are not too happy about what Turing Pharmaceuticals just did.<br />
<br />
Turing acquired rights to the drug Daraprim and pretty much right away increased its price from $13.50 a tablet to $750. The NYT has the <a href="http://www.nytimes.com/2015/09/21/business/a-huge-overnight-increase-in-a-drugs-price-raises-protests.html?_r=0">story.</a><br />
<br />
Well, that created quite an uproar. Hillary Clinton tweeted, "<span style="background-color: white; color: #1c2022; font-family: Helvetica, Roboto, 'Segoe UI', Calibri, sans-serif; font-size: 16px; line-height: 22px; white-space: pre-wrap;">Price gouging like this in the specialty drug market is outrageous. Tomorrow I'll lay out a plan to take it on. -H"</span><br />
<span style="background-color: white; color: #1c2022; font-family: Helvetica, Roboto, 'Segoe UI', Calibri, sans-serif; font-size: 16px; line-height: 22px; white-space: pre-wrap;"><br /></span>
Today the biotech sector had a bad day on Wall Street. <br />
<br />
Hmmm......<br />
<br />
Now what was Turing up to? Maybe the previous owner, Impax Laboratories, was simply mispricing it? Maybe there is a difference in opinion as to the price elasticity of demand?<br />
<br />
Or maybe there is a difference in time horizon/discount rate between the old owner and the new owner, with the new owner caring more about cash in the present than a lower but longer annuity?Robert G. Hansenhttp://www.blogger.com/profile/08922339441309144396noreply@blogger.com3tag:blogger.com,1999:blog-30213905.post-32951320031886924042015-09-19T11:25:00.001-05:002015-09-19T11:35:20.956-05:00Competition for Vermont's Hospitals?I am always intrigued by how some people think they can calculate exactly how many doctors, beds, hospitals, or procedures a population "needs." And the implicit or explicit conclusion is that it would be wasteful to have more supply than what is the calculated need.<br />
<br />
The latest comes from a proposal by an investor group that wants to open an independent (from hospitals) surgery center in Vermont -- <a href="http://m.sevendaysvt.com/vermont/hospitals-oppose-proposal-for-an-independent-surgical-center/Content?oid=2884529">see this article for more.</a><br />
<br />
Cases like this are great for seeing the tension between alternative views of efficiency and performance of the health care market. <br />
<br />
The proposed center would do outpatient surgeries and procedures only -- colonoscopies, endoscopies, hernia repairs, steroid injections. <br />
<br />
It is of course running into opposition by the incumbents. <br />
<br />
Amazingly, for Medicare patients, the proposed center would receive only 56% of the payment that a hospital would receive for the same service. For an umbilical hernia repair, for example, the facility charge for the new center would be $1,417 while a hospital would receive $2,531. And the proposed center would be profitable at those rates, according to their plan!<br />
<br />
Do we think that maybe the Medicare fees are a bit off?<br />
<br />
As for the opposition,<br />
<blockquote class="tr_bq">
<span style="font-family: 'sentinel a', 'sentinel b', Georgia, 'times new roman', times, serif; font-size: 18px; line-height: 25px;">"But the project has opponents. They argue that a freestanding for-profit surgical center would threaten the financial health of hospitals and add to the cost of health care in Vermont by duplicating facilities and services. The Vermont Association of Hospitals and Health Systems, which represents all 16 nonprofit hospitals in the state, and Northwestern Medical Center in St. Albans both have been granted interested-party status in the case."</span></blockquote>
And a VP at Northwestern Medical Center in St. Albans refers to the opening of a similar independent eye surgery center in 2008, saying, "...and we still think the eye center wasn't needed..."From our perspective, it isn't meeting a need."<br />
<br />
The President and CEO of the VT Hospitals Association says, "They (such surgery centers) syphon off services that help hospitals maintain a bottom line."<br />
<br />
Both the hospital association and the NW Medical Center have "interested party" standing in the decision on the new center.<br />
<br />
Here are some questions I would pose:<br />
<br />
<blockquote class="tr_bq">
Is there any place for the process of creative destruction in health care? </blockquote>
<blockquote class="tr_bq">
If we aren't prepared to see some duplication of facilities, how do we expect to get any of the benefits of competition? </blockquote>
<blockquote class="tr_bq">
Are we prepared at all to see some organizations and facilities become "stranded assets" just like coal plants are becoming in the energy sector? </blockquote>
<blockquote class="tr_bq">
Think what would happen if anytime a new auto maker wanted to build a new plant, we did a calculation on whether existing capacity was sufficient -- with the incumbents doing the calculation? </blockquote>
<blockquote class="tr_bq">
Or if we had a commission that determined how many seat-miles we needed as capacity in the airline industry? </blockquote>
<blockquote class="tr_bq">
How about we let existing universities decide if we need any online competitors? (And this is my own industry!) </blockquote>
<blockquote class="tr_bq">
Or if the Federal Reserve determined how many financial planners we need? </blockquote>
<blockquote class="tr_bq">
How will anyone assess relative quality of alternative providers if there are no alternatives?</blockquote>
<br />
I know the responses I am going to get: Health care is different. Hospitals provide care to the indigent and uninsured, and therefore we need to let them make money in any areas to cover those losses. This center is just cherry-picking the most profitable Medicare DRGs. These independent surgery centers have low quality.<br />
<br />
While there is certainly plenty of room for debate on these issues, here are some of my thoughts.<br />
<br />
As to the indigent and uninsured, that is what we have the ACA for. Medicaid and subsidized insurance are available in VT. That issue is now off the table -- that's the beauty of the ACA.<br />
<br />
As for cherry picking, if an entrant can get prices at 56% of what a hospital receives and make money, then we have a bigger problem. It is time to think critically about the "bundling" implicit in Medicare and Medicaid prices. But the inability of Medicare (or Medicaid) to set reasonable prices should not be a license to stop competition. <br />
<br />
As for quality of such centers, look at this: http://www.prnewswire.com/news-releases/hospitals-with-physician-ownership-once-again-lead-the-way-in-new-cms-quality-ratings-300068415.html<br />
<br />
(As a last note, since some of the investors are doctors, the new center could not be an inpatient facility with overnight beds -- the Affordable Care Act bans new physician-owned hospitals and expansion of existing ones. See <a href="http://www.modernhealthcare.com/article/20150331/NEWS/150339970">here</a>. How much sense does that make?)<br />
<br />
<br />Robert G. Hansenhttp://www.blogger.com/profile/08922339441309144396noreply@blogger.com0tag:blogger.com,1999:blog-30213905.post-41237455581621553872015-03-03T13:40:00.000-05:002015-03-03T13:40:08.059-05:00Boomers Beware: Pay More for Your Dating Service!In a classic case of price discrimination, the dating service Tinder will charge those under the age of thirty $9.99 per month and those over the hill of thirty will pay $19.99.<br />
<br />
Is marginal cost higher for those over 30? Or is it that demand is more inelastic for the old-timers? Tinder hints at what they think: <br />
<br />
<blockquote class="tr_bq">
<span style="background-color: white; color: #3c3c3c; font-family: TiemposTextWeb-Regular, Georgia, serif; font-size: 18px; line-height: 29.124000549316406px;">Tinder says it spent several months researching different price points around the world before it introduced the service. "Lots of products offer differentiated price tiers by age, like Spotify does for students, for example," Rosette Pambakian, a spokeswoman for Tinder, wrote in an e-mail. "Tinder is no different; during our testing we’ve learned, not surprisingly, that younger users are just as excited about Tinder Plus, but are more budget constrained, and need a lower price to pull the trigger."</span></blockquote>
Source: http://www.bloomberg.com/news/articles/2015-03-03/how-tinder-gets-away-with-charging-people-over-30-twice-as-much<br />
<br />
Excellent. Next time I teach price discrimination I have a new example.Robert G. Hansenhttp://www.blogger.com/profile/08922339441309144396noreply@blogger.com0tag:blogger.com,1999:blog-30213905.post-21160467196723684072015-03-03T10:26:00.001-05:002015-03-03T10:26:31.946-05:00King v. Burwell Tomorrow!Tomorrow the Supreme Court will hear the King v. Burwell case. Plaintiffs in this case argue that the Affordable Care Act's language authorizes Federal subsidies for the purchase of health insurance only on State-established health insurance exchanges, not on Federal exchanges established in states that declined to establish their own exchange. The issue turns on how language in a statute is to be interpreted.<br />
<br />
Prof. Laurence Tribe has an editorial on the matter in today's <a href="http://www.bostonglobe.com/opinion/2015/03/02/supreme-court-chance-right-thing-obamacare/pERffrpzV6NWpS7vhKNvNN/story.html">Boston Globe</a>. Interestingly, he cites a Supreme Court decision from last week, wherein the Court ruled that a fish is not a "tangible object" as that phrase is used in <span style="font-family: CenturySchoolbook; font-size: 9pt;">18 U. S. C. §1519</span>, which is actually part of the Sarbanes-Oxley Act, put in place after the Enron case to help restore trust in financial markets.<br />
<br />
In this <a href="http://www.supremecourt.gov/opinions/14pdf/13-7451_m64o.pdf">case</a>, a fisherman was caught for throwing undersized fish overboard ostensibly to destroy evidence of a crime (shameful, for sure!). The Section of the law in question states more fully,<br />
<blockquote class="tr_bq">
<div class="page" title="Page 4">
<div class="layoutArea">
<div class="column">
<span style="font-family: 'CenturySchoolbook'; font-size: 11.000000pt;">“Whoever knowingly alters, destroys, mutilates,
conceals, covers up, falsifies, or makes a false entry in
any record, document, or tangible object with the intent to impede, obstruct, or influence the investigation
or proper administration of any matter..."</span></div>
</div>
</div>
</blockquote>
Prof. Tribe notes that the majority, with the opinion written by Ruth Bader Ginsburg, declined to interpret a fish as a tangible object -- thereby showing how the language of a statute must be interpreted in the overall context of the statute and the language around the phrase or word in question. <br />
<br />
True enough. But I think Prof. Tribe fails to completely note that Justice Kagan delivered a strong dissent, in which she pretty much argued that the language of the statute is real clear and a fish is clearly a tangible object: <br />
<br />
<blockquote class="tr_bq">
<div class="page" title="Page 28">
<div class="layoutArea">
<div class="column">
<span style="font-family: 'CenturySchoolbook'; font-size: 11.000000pt;">"In my view,
conventional tools of statutory construction all lead to a </span><span style="font-family: CenturySchoolbook; font-size: 11pt;">more conventional result: A “tangible object” is an object
that’s tangible. I would apply the statute that Congress
enacted and affirm the judgment below."</span></div>
</div>
</div>
</blockquote>
<br />
"Apply the statute that Congress enacted.." Hmmmm..... and Scalia, Kennedy and Thomas joined with the dissent, making the opposition four.<br />
<br />
And while Alito joined the majority, he begins his concurring opinion with,<br />
<blockquote class="tr_bq">
<div class="page" title="Page 24">
<div class="layoutArea">
<div class="column">
<span style="font-family: 'CenturySchoolbook'; font-size: 11.000000pt;">This case can and should be resolved on narrow
grounds. And though the question is close, traditional
tools of statutory construction confirm that John Yates has
the better of the argument. Three features of 18 U. S. C.
§1519 stand out to me: the statute’s list of nouns, its list of
verbs, and its title. Although perhaps none of these features by itself would tip the case in favor of Yates, the
three combined do so.</span></div>
</div>
</div>
</blockquote>
<br />
Note the phrase, "...the question is close." Four plus one makes a majority.<br />
<br />
In my humble opinion, the same applies to King v. Burwell. The question is indeed close.<br />
<br />
<br />
<blockquote class="tr_bq">
<div class="page" title="Page 24">
<div class="layoutArea">
<div class="column">
<br />
</div>
</div>
</div>
</blockquote>
<blockquote class="tr_bq">
<div class="page" title="Page 4">
<div class="layoutArea">
<div class="column">
<br /></div>
</div>
</div>
</blockquote>
<span style="font-family: CenturySchoolbook; font-size: 9pt;"> </span><span style="font-family: CenturySchoolbook;"><span style="font-size: 12px;"> </span></span>Robert G. Hansenhttp://www.blogger.com/profile/08922339441309144396noreply@blogger.com0tag:blogger.com,1999:blog-30213905.post-61290944085621352612015-02-08T18:16:00.000-05:002015-02-08T18:16:51.532-05:00ACA Subsidies Threatened?: Thoughts on King v. BurwellThis March, the Supreme Court will hold a hearing on the King v. Burwell case. The tone of that hearing and how different justices behave will cause a million words to be written, but we won't know for sure how the Court will rule until later this summer.<br />
<br />
Here are a couple thoughts on the case.<br />
<br />
Recall that the basic claim of the plaintiffs (King et al.) is that the Affordable Care Act specifies that subsidies for purchase of health insurance are only available for policies bought on exchanges created by a State -- with a State being defined as one of the fifty states plus the District of Columbia.<br />
<br />
The respondents -- Sylvia Burwell et al. -- reply that this is much too narrow a reading of the Act and that there can be no doubt that the overall intent of the Act was to give subsidies to anyone who met the income eligibility requirements, no matter whether the policy was bought on an exchange established by a State or on an exchange established by the Federal government, in the cases where States did not establish their own exchanges.<br />
<br />
I think there is a good chance that the Supreme Court will side with King, but that is my opinion. Also let me say that I have always held the concept of subsidies for health insurance for low income persons one of the best parts of the ACA (although the subsidies could be implemented much better!).<br />
<br />
For now, let me point out just two arguments that I find interesting.<br />
<br />
1. There is this idea out there that the part of the ACA where it says that subsidies are only for State exchanges is a minor out-of-the-way clause -- in fact, <span style="font-family: CenturySchoolbook; font-size: 12pt;">§36B(c)(2)(A)(i), which is defining what a "coverage month" is. Here is the actual text, courtesy of <a href="http://www.law.cornell.edu/uscode/text/26/36B">Cornell's legal site</a>:</span><br />
<blockquote class="tr_bq">
<span class="enumbell" style="box-sizing: border-box; color: #333333; font-family: Verdana, 'Helvetica Neue', Helvetica, Arial, sans-serif; font-size: 14px; font-weight: bold; line-height: 21px;">(2)</span><span style="background-color: white; color: #333333; font-family: Verdana, 'Helvetica Neue', Helvetica, Arial, sans-serif; font-size: 14px; line-height: 21px;"> </span><b class="labelleader" style="box-sizing: border-box; color: #333333; font-family: Verdana, 'Helvetica Neue', Helvetica, Arial, sans-serif; font-size: 14px; line-height: 21px;">Coverage month </b><span style="background-color: white; color: #333333; font-family: Verdana, 'Helvetica Neue', Helvetica, Arial, sans-serif; font-size: 14px; line-height: 21px;"></span><div class="ptext-12" style="box-sizing: border-box; color: #333333; font-family: Verdana, 'Helvetica Neue', Helvetica, Arial, sans-serif; font-size: 14px; line-height: 21px; padding: 5px 0px;">
For purposes of this subsection—</div>
<div class="psection-3" style="box-sizing: border-box; color: #333333; font-family: Verdana, 'Helvetica Neue', Helvetica, Arial, sans-serif; font-size: 14px; line-height: 21px; margin-left: 10px; padding: 5px 0px;">
<a href="" name="c_2_A" style="background-position: 0px 0px; background-repeat: initial initial; box-sizing: border-box; color: #005c72; text-decoration: underline;"></a><span class="enumbell" style="box-sizing: border-box; font-weight: bold;">(A)</span> <b class="labelleader" style="box-sizing: border-box;">In general </b><div class="ptext-13" style="box-sizing: border-box; padding: 5px 0px;">
The term “coverage month” means, with respect to an applicable taxpayer, any month if—</div>
<div class="psection-4" style="box-sizing: border-box; margin-left: 10px; padding: 5px 0px;">
<a href="" name="c_2_A_i" style="background-position: 0px 0px; background-repeat: initial initial; box-sizing: border-box; color: #005c72; text-decoration: underline;"></a><span class="enumbell" style="box-sizing: border-box; font-weight: bold;">(i)</span> <span class="ptext-" style="box-sizing: border-box; padding: 5px 0px;">as of the first day of such month the taxpayer, the taxpayer’s spouse, or any dependent of the taxpayer is covered by a qualified health plan described in subsection (b)(2)(A) that was enrolled in through an Exchange established by the State under section 1311 of the Patient Protection and Affordable Care Act, and</span></div>
<div class="psection-4" style="box-sizing: border-box; margin-left: 10px; padding: 5px 0px;">
<a href="" name="c_2_A_ii" style="background-position: 0px 0px; background-repeat: initial initial; box-sizing: border-box; color: #005c72; text-decoration: underline;"></a><span class="enumbell" style="box-sizing: border-box; font-weight: bold;">(ii)</span> <span class="ptext-" style="box-sizing: border-box; padding: 5px 0px;">the premium for coverage under such plan for such month is paid by the taxpayer (or through advance payment of the credit under subsection (a) under section 1412 of the Patient Protection and Affordable Care Act).</span></div>
</div>
</blockquote>
<div class="page" title="Page 18">
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<div class="column">
<span style="font-family: CenturySchoolbook; font-size: small;">But as the Brief for the plaintiffs argues (see page 29 of plaintiffs' brief), this is also the place where </span><span style="font-family: CenturySchoolbook;">the</span><span style="font-family: CenturySchoolbook; font-size: small;"> Act tells us that health plans bought through insurers or brokers will NOT be eligible for subsidies (through the language at issue, saying that only plans bought on State exchanges qualify). Now that is an extremely important part of ACA (one I don't understand though), that plans bought directly from insurers do not qualify for subsidy. But there it is, buried in an obscure clause of the law. Welcome to Federal law -- read it carefully, including the footnotes! We all know the footnotes are the most important parts of any good paper!</span><br />
<span style="font-family: CenturySchoolbook; font-size: small;"><br /></span>
<span style="font-family: CenturySchoolbook; font-size: small;">2. There is this claim by the respondents that the text must be read to include Federal exchanges as qualifying for subsidies, because otherwise the whole Act would fall down. How could they have written a law with such a self-destructing clause inherent?</span><br />
<span style="font-family: CenturySchoolbook; font-size: small;"><br /></span>
<span style="font-family: CenturySchoolbook; font-size: small;">Well, this is not really accurate either. The restriction of subsidies to State exchanges does not <i>by itself</i> imply the house of cards must fall down. It is <i>also necessary</i> that some States -- many States -- do not establish their own exchanges. The Congress could easily have thought that States would establish exchanges, and therefore this clause would never be important. It only became important when State failed to act in the way that Congress thought they would. The clause is not, therefor, </span><span style="font-family: CenturySchoolbook;">directly destructive of the intent of the overall Act. The intent could well have been achieved with that clause in it, if only States had not been so damn stubborn, or if it had not proved so difficult to create working exchanges (<i>see Vermont).</i></span><br />
</div>
</div>
</div>
Robert G. Hansenhttp://www.blogger.com/profile/08922339441309144396noreply@blogger.com0tag:blogger.com,1999:blog-30213905.post-19634130920921938382015-01-16T19:44:00.000-05:002015-01-16T21:11:10.960-05:00Invest all at once or gradually: Risk, random walks and "dollar cost averaging"I have been thinking a bit about my last post on whether if one has a bundle of cash and wants to put it into the stock market, you should invest all at once or more gradually. For instance, suppose you have $1 million in cash; you could put it into an equity index fund all at once, or do 1/12 each month for the next year. Bottom line for me is leaning very strongly towards all at once. <br />
<br />
As to be expected, I was not the first one in history to pose this question and there is a fair amount written about it. The phrase "dollar cost averaging" or DCA is sometimes used to refer to the idea of investing a lump sum gradually, although DCA is also used for other investment policies (such as just investing a fixed amount each month).<br />
<br />
Wikipedia has an entry, dollar cost averaging, which starts out good but doesn't really solve the problem. The references however are pretty good, including a 1979 paper by George Constantinides, "A Note on the Suboptimality of Dollar Cost Averaging as an Investment Policy." <br />
<br />
The company Wealthfront, an online financial advisory service, has an <a href="https://www.wealthfront.com/faq">entry</a> in their FAQ section that addresses the question and gives a link to a paper published by Vanguard. This is the same paper referenced by a commenter on my earlier post -- see <a href="https://pressroom.vanguard.com/content/nonindexed/7.23.2012_Dollar-cost_Averaging.pdf">here</a>.<br />
<br />
Both Wealthfront and Vanguard give pretty good reasons for investing all at once. Vanguard even does a study using historical data to test DCA against all-at-once.<br />
<br />
I liked the Constantinides paper because it is the most analytical and because it provides a reference to an even more analytical paper, a 1971 piece in Management Science by Gordon Pye, "Minimax Policies for Selling an Asset and Dollar Averaging."<br />
<br />
The answer that many give to my question is along these lines: If you have decided your optimal asset allocation, 80/20 stocks/bonds or whatever, you should just get to it right away. If you like the risk/return profile of that asset allocation, then why would you not get to it right away? If that is your optimal allocation in 12 months, why isn't it your optimal allocation right now?<br />
<br />
That is pretty well said and convincing, if I do say so myself.<br />
<br />
However, I had the following idea that caused me to consider seriously the gradual policy. By investing gradually over a year, you end up investing at the average price during the year -- 1/12 each month at the price of that month is the same as putting all the money in at the average of the 12 months' prices. <br />
<br />
Putting a statistical hat on, I then thought that the variance of that average price would be lower than the variance of any individual price, and therefore that going in gradually would get me to my optimal allocation in a less risky fashion.<br />
<br />
Or put it this way. Suppose I am going to put my money into the stock market tomorrow. You give me a choice: I can put in my order and take whatever the market price of the index is at that time, or you will let me buy in at the average index level during the day. Again, I thought that I should prefer the average price by the compelling (seemingly) logic that the variance of an average is less than the variance of a single draw from a distribution.<br />
<br />
There is a serious flaw in this line of reasoning, though, and it is the Constantinides paper that made me see it -- actually the reference to the Pye article because Pye deals with this problem. <br />
<br />
My reasoning about the variance of the average being lower is true if the prices are independent random draws from a distribution. That was the model of stock prices I implicitly had in my mind.<br />
<br />
But probably a better model of stock prices is that they are a random walk. That means, roughly, that the next price is the current price plus a random shock:<br />
<br />
p(t) = p(t-1) + e<br />
<br />
where e is a random variable with mean zero and some variance.<br />
<br />
In this case, if you do a little math, you find out that the variance of prices increases over time, and the variance of the average price over a period is not less than the variance of any one price. Just to do a little math, suppose we have 5 periods. Then we have<br />
<br />
p1 = e1<br />
p2 = p1 + e2<br />
p3 = p2 + e3<br />
p4 = p3 + e4<br />
p5 = p4 + e5<br />
<br />
Then doing some substitutions, you can write<br />
<br />
p5 = e1+e2+e3+e4+e5<br />
<br />
So you can see what is going on -- the end of period price is the sum of all the random shocks to that point. Its variance is going to be higher than the variance of any of the previous prices -- the random walk is causing variance to increase with time. That is one of the key ideas of a random walk -- the meandering in the future can be pretty far off course!<br />
<br />
And in this case, the variance of the average of the five prices is not lower than the variance of just p1. I will spare the math here, but it is pretty straightforward: write out the formula for the average price given the five equations above, and calculate its variance.<br />
<br />
So my early intuition was based on one model of stock prices -- that prices are fluctuating randomly around a mean -- rather than what is a better model, that of a random walk.<br />
<br />
Now there are some reasons why you might still reasonably want a gradual policy. One pretty good reason is based on a different kind of utility function, one that has a "regret" characteristic. You can read the Constantinides paper and see also that he comes up with some reasonable situations where a gradual investment policy does make sense. If you really think that the market is over-valued now, well then you should wait, but that is market timing which in practice is very difficult to do. My intuition on why gradualism might be good was not based on market timing, just on the idea that maybe I could reduce the volatility of my wealth (at an acceptable price of lower return).<br />
<br />
But in most cases, all at once will be the rational, utility maximizing policy. Just be ready to face the prospect that you will see prices decline after you go all-in. Such is the world.<br />
<br />
<br />
<br />Robert G. Hansenhttp://www.blogger.com/profile/08922339441309144396noreply@blogger.com1tag:blogger.com,1999:blog-30213905.post-77128298037136403072015-01-10T14:40:00.001-05:002015-01-10T14:40:56.009-05:00Buy stock all at once or over time?Questions involving finance and financial markets can be tough. Often one's intuition is misleading, and all kinds of priors and biases can get tangled up in decision-making.<br />
<br />
With defined contribution pension plans, college tuition plans, annuities, health savings accounts, etc. it is all the more important for everyone to be able to make good financial decisions.<br />
<br />
Here is a very practical issue, with a question that I am pondering. I have intuition on it, but some lingering concerns as well. I will put it out there for others to think about.<br />
<br />
So suppose you all of a sudden come upon $1 million. You would like to invest this in the stock market, using just one low cost index fund. Your time horizon is long, say 15 years at least.<br />
<br />
Should you put all the $1 million in at once, or should you do something like spread it out over 12 months, putting an equal amount in each month?<br />
<br />
<br />Robert G. Hansenhttp://www.blogger.com/profile/08922339441309144396noreply@blogger.com1tag:blogger.com,1999:blog-30213905.post-7027542480178931342015-01-08T21:23:00.001-05:002015-01-08T21:23:35.326-05:00Climate HypocrisyIt was -14 F this morning in Hanover, -26 C.<br />
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Why is it me, rather skeptical of much of climate policy, who has to go around Tuck getting storm windows to be shut for winter? The heat is just pouring out of the windows while the steam plant burns #2 fuel oil to compensate.<br />
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Or why is it me who in the little burb of Hanover immediately goes to the block-away parking lot where a spot is 99% probability rather than drive around and around waiting for someone to leave? A town of liberal climate-change believers and you would not believe how everyone wastes fuel looking for the closest spot.<br />
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Ah, the hypocrisy in this world will kill you if you let it.Robert G. Hansenhttp://www.blogger.com/profile/08922339441309144396noreply@blogger.com2tag:blogger.com,1999:blog-30213905.post-68277276855963665042015-01-07T19:35:00.002-05:002015-01-07T19:41:06.615-05:00Je Suis Charlie!These words express my opinion quite well.<br />
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What a travesty. Let's see what develops over the next few days...there are a lot of things to investigate here. <br />
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My thoughts are with all the French people tonight, especially the family members of those who died. Robert G. Hansenhttp://www.blogger.com/profile/08922339441309144396noreply@blogger.com0tag:blogger.com,1999:blog-30213905.post-1231322044702177762015-01-02T13:04:00.000-05:002015-01-02T13:04:36.801-05:00No Free Health Care in Germany!One thing that really drives me nuts is when someone gets hurt or sick in some other country, they go to the doctor or hospital...and don't get a bill! "It was so nice" they typically say..."all my care was free!"<br />
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Geez, that is what I want for the new year, free health care. <br />
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But now a colleague of mine reports that he had a health care problem in Germany...and he is getting medical bills sent to him! Achtung! In German! What efficiency...they are sending them to his US address!<br />
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I asked to see them, just to compare them to the bills that we get in this country ("your charges were $10,000 but your health insurer cut out all the nonsense and got them down to just $1,000, saving you $9,000.") Developing...<br />
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My colleague also reports that<br />
<blockquote class="tr_bq">
<span style="font-family: Helvetica; font-size: 16px;">By the way, the food in the hospital was awful.</span><br style="font-family: Helvetica; font-size: 16px;" /><span style="font-family: Helvetica; font-size: 16px;">Breakfast…one roll & tea OR coffee. Lunch..soup & a small yogurt + tea OR coffee. Dinner 2 pieces of cold cut, one pice of cheese, two slices of bread + tea OR coffee. Not only that, I shared a room with 2 other guys, this was OK, but no curtains between beds.</span></blockquote>
Germany by the way spends about 11% of its GDP on health care, much less than the US...and they don't have a single payer system.Robert G. Hansenhttp://www.blogger.com/profile/08922339441309144396noreply@blogger.com0tag:blogger.com,1999:blog-30213905.post-42583084318826949212015-01-02T10:14:00.001-05:002015-01-02T10:16:57.003-05:00Medicaid Reimbursement Rates RevisitedOne of the lesser-known rules in the Affordable Care Act is that it requires states to reimburse providers at Medicare rates, not at prevailing state-level Medicaid rates. This is just for "primary care" but that is a pretty large category of care. <br />
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I wrote about this back in March 2013 -- see <a href="http://robertghansen.blogspot.com/2013/03/the-coming-new-doc-fix-in-medicaid.html">here</a> -- and made this prediction:<br />
<br />
<blockquote class="tr_bq">
<span style="background-color: #fff9ee; color: #222222; font-family: Georgia, Utopia, 'Palatino Linotype', Palatino, serif; font-size: 15px; line-height: 21px;">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 </span><i style="color: #222222; font-family: Georgia, Utopia, 'Palatino Linotype', Palatino, serif; font-size: 15px; font-weight: bold; line-height: 21px;">only applies for two years!</i><br />
<br style="color: #222222; font-family: Georgia, Utopia, 'Palatino Linotype', Palatino, serif; font-size: 15px; line-height: 21px;" />
<span style="background-color: #fff9ee; color: #222222; font-family: Georgia, Utopia, 'Palatino Linotype', Palatino, serif; font-size: 15px; line-height: 21px;">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.</span><br />
<br style="color: #222222; font-family: Georgia, Utopia, 'Palatino Linotype', Palatino, serif; font-size: 15px; line-height: 21px;" />
<span style="background-color: #fff9ee; color: #222222; font-family: Georgia, Utopia, 'Palatino Linotype', Palatino, serif; font-size: 15px; line-height: 21px;">Anyone besides me worry that we are going to get into a "Medicaid doc fix" situation? </span><br />
<br style="color: #222222; font-family: Georgia, Utopia, 'Palatino Linotype', Palatino, serif; font-size: 15px; line-height: 21px;" />
<span style="background-color: #fff9ee; color: #222222; font-family: Georgia, Utopia, 'Palatino Linotype', Palatino, serif; font-size: 15px; line-height: 21px;">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?</span></blockquote>
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So the time has come for those higher rates to expire, and just like clockwork, here come the calls for extending them. This <a href="http://www.nytimes.com/2014/12/28/us/obamacare-medicaid-fee-increases-expiring.html?_r=0">NYT article</a> titled "As Medicaid Rolls Swell, Cuts in Payments to Doctors Threaten Access to Care" is pretty good*; it definitely notes that the higher rates were meant to be temporary. Given the results of the election this fall, it now appears that the higher rates will indeed expire (that should have happened yesterday!) As the article notes, President Obama did propose an extension of the higher rates, but it was not accepted by Congress.<br />
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So my prediction was wrong, but I can live with that! It should have been a conditional forecast: IF the 2014 election does not bring a Republican-ruled Congress, then there will be a successful push to extend the Medicaid reimbursement rates.<br />
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*My caveat here is that I do think the article was slanted in favor of extending the higher rates. Start with the title! And it focuses too much -- exclusively? -- on the negative aspects of ending the program. Are there no positive aspects to leaving determination of Medicaid rates in the hands of the states? <br />
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<br />Robert G. Hansenhttp://www.blogger.com/profile/08922339441309144396noreply@blogger.com0tag:blogger.com,1999:blog-30213905.post-45931104843057502252014-12-11T16:53:00.001-05:002014-12-11T16:53:26.594-05:00Salmon in the Great LakesA family member sent me this link to a three-part series in the Milwaukee Journal Sentinel about the history of the salmon fishery in the Great Lakes: <a href="http://www.jsonline.com/news/wisconsin/The-man-with-the-salmon-plan-b99397807z1-284550491.html">http://www.jsonline.com/news/wisconsin/The-man-with-the-salmon-plan-b99397807z1-284550491.html</a><br />
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It is truly an amazing story about the decline of native fish populations (mostly the lake trout) because of invasive species -- the sea lamprey and alewife -- but also about an incredible salmon stocking program that led to decades of excellent sport fishing on the upper Great Lakes. And not least of all, it is also a story of how that artificial fishery also finally collapsed (or is in a state of collapsing) and is being replaced by...an older native population of fish.<br />
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The story is very well done; I commend Dan Egan the author. Really a fine job.<br />
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This is all very personal and close to home for me. My father, Martin J. Hansen, worked as a fisheries biologist in Marquette, MI, working on eradication of the sea lamprey. I have some of the articles he wrote, such as "Cadmium Sulfide and Mercuric Sulfide for Marking Sea Lamprey Larvae" (April 15, 1963, joint with Thomas M. Stauffer). I also remember fishing in the spring of 1967 in Lake Superior, trolling with my dad in our little boat off the mouths of Sand River, the Laughing Whitefish River, and Carp River. We were catching these silvery fish about 20 or 22 inches long, a few pounds each. Normally we would be catching steelhead -- rainbow trout -- but these weren't rainbows. My dad had left biology at that time, so maybe he wasn't up on the salmon stocking program. We took a couple of the fish into the bar where we always stopped after fishing and some folks inside verified that the fish were coho salmon. They had probably been planted just one year ago and we were catching the first ones.<br />
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I will be back in the UP over Christmas, maybe I will get a chance to do some ice fishing for walleye on Little Bay de Noc in Lake Michigan.<br />
<br />Robert G. Hansenhttp://www.blogger.com/profile/08922339441309144396noreply@blogger.com0tag:blogger.com,1999:blog-30213905.post-67993448018998362662014-11-21T12:54:00.001-05:002014-11-21T12:54:03.688-05:00Electricity Rates and "Green" PowerIn New Hampshire, we are looking at some hefty increases in our electricity prices -- see <a href="http://www.concordmonitor.com/news/work/business/14332097-95/psnh-president-nh-electricity-rates-on-seasonal-roller-coaster">here</a> for a typical story. My electricity rates will go up by about 50%. (Be aware though that this is only the energy part of the bill -- many other charges are on the typical electric bill including distribution and a flat customer charge. The energy part of my bill is only about 40% of the total bill.)<br />
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Before we start blaming the utility, let's be clear that the increase is because of increases in wholesale electricity prices, and those are set about as purely on the basis of supply and demand as one could hope. Demand is up, and supply is down...because NE has been shutting coal fired plants. And supply of wholesale power from cheaper, cleaner natural gas-fired electric plants is not filling the void because of a shortage of pipeline capacity coming into New England.<br />
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Meanwhile my neighbors have been heating up our neighborhood discussion board with questions on switching electricity suppliers. One competitor is offering "renewable" source power, at higher prices than normal power. One person is choosing a particular plan because it is sourced from hydro plants -- "the most green option."<br />
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Really? Dams don't cause any environmental problems? So is there another reason why we don't have any more salmon runs up the CT river? Ever think about what slowing down water does to its temperature and clarity and how it affects silt buildup? And is any of that 100% green power coming from new dams up in Quebec -- do we know what the impact those dams will have on wildlife and even native populations?<br />
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This is why incentivizing consumers to weigh environmental costs is so inefficient and, to be honest, economically dangerous. My neighbors are wonderful folks and very smart, but to think that each one of them should be weighing all the environmental pluses and minuses of their electricity supply...when the average bill is probably only $75 per month!<br />
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There is a much better way to incorporate environmental costs into decision-making -- build them into the price we face. Then we just have to compare prices, like in any other marketplace transaction.<br />
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Here is a picture of 100% green hydro. Bet the fishing is good right there.<br />
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Source: http://www.sakacon.com/2011_08_01_archive.html<br />
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<br />Robert G. Hansenhttp://www.blogger.com/profile/08922339441309144396noreply@blogger.com1tag:blogger.com,1999:blog-30213905.post-56003396211027585732014-10-24T10:31:00.002-05:002014-10-24T10:32:19.054-05:00Lest we forget: The fall of East Germany, 1989I was in Leipzig, Germany this last week. Twenty five years ago, in September and October 1989, Leipzig was the center of demonstrations that were pivotal in tearing down the Berlin Wall and to the downfall of the East German state, the DDR -- Deutsche Demokratische Republik.<br />
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In the last two months, in Leipzig and throughout Germany, there have been many events commemorating those events of 25 years ago. How momentous those events were! I was in East Germany in 1984 when it was still communist. It was just amazing to me to see firsthand the lack of freedoms, both political and economic. I was shocked by actually seeing police with dogs looking under the train with mirrors -- as we were leaving the East. In 1990 I visited the Berlin Wall -- what was left of it -- and saw the beginning of freedom for the East. <br />
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Leipzig today is a tremendous city, beautiful and well on its way to rebuilding its reputation as a marketplace for Germany and indeed for all of Europe.<br />
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And look how quickly we forget. I read the news pretty thoroughly, and I don't remember seeing a single story in the US press in the last two months about those events 25 years ago.<br />
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Here is a nice film clip from Die Deutsche Welle about the demonstrations in Leipzig in October, 1989 and the brave men who filmed the events from a church and then smuggled the tapes out to the West. Remember...no internet back then, so the East Germans had effectively shut down any news about large scale demonstrations.<br />
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<a href="http://www.dw.de/secret-heroes-on-the-rooftops-of-leipzig/av-17969031">http://www.dw.de/secret-heroes-on-the-rooftops-of-leipzig/av-17969031</a>Robert G. Hansenhttp://www.blogger.com/profile/08922339441309144396noreply@blogger.com0tag:blogger.com,1999:blog-30213905.post-3626755484201827572014-10-05T15:20:00.002-05:002014-10-05T15:20:14.814-05:00Why should "preventive care" in health care and cars be free?The Affordable Care Act mandates that certain preventive care -- well visits, annual checkups, certain bloodtests and screenings -- be made free to anyone covered by insurance. <br />
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As an economist, I usually cringe at such policies, as a basic principle of economics is that insurance is meant to cover large and infrequent events. My usual response to covering things like annual checkups is, "Do we have insurance for oil changes on our cars?" Incurring the transaction costs of insurance in paying for routine care just seems senseless. <br />
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But then I started noticing that some auto manufacturers in fact provide for free maintenance care for new cars -- see <a href="http://www.bmwusa.com/ultimateservice">here for BMW's plan</a> for example. <br />
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Why would new cars come with free maintenance? What might be the reasons for this, and might we learn something about free preventive health care in thinking this through for cars? <br />
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A few things come to my mind as to why BMW and other car manufacturers might offer free maintenance. I put analogous explanations for free preventive care in italics alongside.<br />
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1. Consumers don't bear the full cost of not maintaining vehicles. There is some truth to this, certainly a lot of truth for leased vehicles. Even for owned vehicles, the used car market classically suffers from adverse selection, making well-maintained vehicles sell for low prices that reflect the average quality of all cars. The manufacturers have an interest in maintaining the value of used cars, so they optimally lower the price of maintenance. This explanation should have less weight to the extent that the maintenance being considered is easily documented. <i>In health care, the analogy would be that people will have insurance for large ticket illnesses, so the incentive to pay even a little for preventive care is lessened. Also Medicare in later life means that we have less incentive to take care of ourselves now.</i><br />
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2. Consumers face monopoly prices from dealerships for maintenance, so the manufacturers negotiate on behalf of new-car buyers. I like this explanation, as I always feel that the car dealers exploit both their local monopoly power and any power they have from giving "authorized warranty" coverage. <i>The analogy to health care is self evident, with monopoly pricing (price exceeding marginal cost) by providers being common. Insurers have incentive to bargain with providers to give preventive care at the lowest possible price when the insurers bear the cost.</i><br />
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3. It is all a marketing ploy, with consumers overestimating the value of free maintenance care. I think there might be some truth to this one too. Car manufacturers know how little maintenance a new car really needs; consumers overestimate that and therefore over-respond to offers of free maintenance. <i>The analogy in health care is that we should have seen insurers offering free preventive care without being forced to (and I think we did). </i><br />
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4. A last one, not my favorite, which is that consumers are irrational and skip maintenance even when the value of the maintenance exceeds its cost. As always, we have to look on both sides of the coin: I agree that consumers make mistakes, but why do we think they will under-maintain rather than over-maintain? I know lots of people who change their oil way too frequently. <i>In health care, my guess is that most analysts would say that consumers will irrationally take too little health care if they have to pay for routine care.</i><br />
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5. This is a good one: free maintenance is a way to get consumers into the dealerships so they can be sold additional services ("we changed your oil but what you really need are new shocks"). This depends on consumers not figuring out the game entirely, although again information asymmetries make it possible. <i>I especially like the analogy to health care here: come in for your free check-up and let's see what else you need. Blood tests, scans, ....?</i><br />
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Bottom line? I think that in health care we give away too much preventive care. Point 5 above is an especially good one. Not addressed by any of the points above is another big concern of mine, which is that free care perpetuates a belief that all health care "should" be free to all. Robert G. Hansenhttp://www.blogger.com/profile/08922339441309144396noreply@blogger.com0tag:blogger.com,1999:blog-30213905.post-53188839685451578562014-08-02T17:03:00.000-05:002014-08-02T17:03:19.371-05:00Transition from ICD9 to ICD10 Codes: Strategic effect on reimbursements?This fall, the US government requires pretty much all health care providers to transition from the old set of codes for medical diagnoses, known as ICD9, to a new larger set of codes, ICD10. According to the Center for Medicare and Medicaid Services, ICD10 allows for 7 digits while ICD9 allowed only for 5.<br />
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So under the new system, we could have up to 9,999,999 different codes while under the old there was only the possibility for 99,999 -- and as the ICD10 is alphanumeric, this is an understatement. I guess however they never maxed out on usage of the total possibilities, as the article referenced below says ICD9 had only 13,000 distinct codes while ICD10 will have only 68,000. Quite a difference to be sure, and still room to grow. CMS provides a <a href="https://www.cms.gov/Medicare/Coding/ICD10/Downloads/ICD10FAQs2013.pdf">fact sheet</a> if you want to learn a bit more.<br />
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The key thing is that these diagnostic codes are used for billing purposes. Submit a code to Medicare, and you get the payment associated with that code.<br />
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Naturally the pundits are having a grand time with this one. Here are the <a href="http://www.healthcaredive.com/news/the-16-most-absurd-icd-10-codes/285737/">"16 most absurd ICD10 codes."</a> Here are just a couple:<br />
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<h4 style="margin-bottom: 10px; margin-left: 0px; margin-right: 0px; margin-top: 20px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">
<ul style="color: #333333; font-family: Roboto, sans-serif; font-size: 14px; font-weight: 700; line-height: 1.5;">
<li>W55.41XA: Bitten by pig, initial encounter.</li>
<li>W220.2XD: Walked into lamppost, subsequent encounter. </li>
<li>Y93.D: V91.07XD: Burn due to water-skis on fire, subsequent encounter.</li>
<li>W61.12XA: Struck by macaw, initial encounter. </li>
</ul>
<span class="Apple-style-span" style="color: #333333; font-family: Roboto, sans-serif;"><span class="Apple-style-span" style="font-size: 14px; font-weight: normal; line-height: 21px;">These actually seem too bizarre to be true, but who knows.</span></span></h4>
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<span class="Apple-style-span" style="color: #333333; font-family: Roboto, sans-serif;"><span class="Apple-style-span" style="font-size: 14px; font-weight: normal; line-height: 21px;">Anyway, I have a serious question: How will the move to a more-granular coding system affect billings?</span></span></div>
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<span class="Apple-style-span" style="color: #333333; font-family: Roboto, sans-serif;"><span class="Apple-style-span" style="font-size: 14px; line-height: 21px;"><br /></span></span></div>
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<span class="Apple-style-span" style="color: #333333; font-family: Roboto, sans-serif;"><span class="Apple-style-span" style="font-size: 14px; line-height: 21px;">What I have in mind here is thinking about the hospitals as trying to maximize their revenues given the procedures they did to a patient -- strategic coding of procedures to maximize revenue. (I am actually on some email list that sends me announcements for seminars to teach me how to code "properly," so strategic coding is certainly not a crazy idea.)</span></span></div>
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<span class="Apple-style-span" style="color: #333333; font-family: Roboto, sans-serif;"><span class="Apple-style-span" style="font-size: 14px; line-height: 21px;"><br /></span></span></div>
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<span class="Apple-style-span" style="color: #333333; font-family: Roboto, sans-serif;"><span class="Apple-style-span" style="font-size: 14px; line-height: 21px;">I expect that many first answers would be that a more accurate (more granular) coding system would reduce billings. Why -- I don't really know. More precision avoids mis-classification. Sure, but what is the effect on revenue?</span></span></div>
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<span class="Apple-style-span" style="color: #333333; font-family: Roboto, sans-serif;"><span class="Apple-style-span" style="font-size: 14px; line-height: 21px;"><br /></span></span></div>
<div>
<span class="Apple-style-span" style="color: #333333; font-family: Roboto, sans-serif;"><span class="Apple-style-span" style="font-size: 14px; line-height: 21px;">My knee-jerk reaction is that billings will likely increase. Why? Well, suppose there was an old ICD9 code that had some average reimbursement attached to it, say $1000. Now there are two subcodes for that old diagnosis, and the reimbursement for one code is $500 while the other is $1500. These payments were set on the thinking that half of the old diagnoses were of one new type while the other half were of the other new type. Assuming there is some wiggle room in the new codes (coding systems, like contracts generally, cannot delineate every possible outcome) the hospitals will shift whatever procedures they can into the higher rate category. So while there was an even split of sub-diagnoses in the population, there will be some strategic over-billing that happens.</span></span></div>
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<span class="Apple-style-span" style="color: #333333; font-family: Roboto, sans-serif;"><span class="Apple-style-span" style="font-size: 14px; line-height: 21px;"><br /></span></span></div>
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<span class="Apple-style-span" style="color: #333333; font-family: Roboto, sans-serif;"><span class="Apple-style-span" style="font-size: 14px; line-height: 21px;">This is admittedly incomplete, for we have to think of the whole coding system, and we have to specify a bit more about who knows what and what the constraints are.</span></span></div>
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<span class="Apple-style-span" style="color: #333333; font-family: Roboto, sans-serif;"><span class="Apple-style-span" style="font-size: 14px; line-height: 21px;"><br /></span></span></div>
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<span class="Apple-style-span" style="color: #333333; font-family: Roboto, sans-serif;"><span class="Apple-style-span" style="font-size: 14px; line-height: 21px;">Another way to think about it is to go in reverse: Suppose we <i>reduce </i>the number of codes, and take an extreme case of going down to just one code (capitation, sort of!). Then if there was any strategic overbilling going on previously, going to one code has to reduce the total reimbursements, it would seem. A single code is actually more accurate, as we get the true average rather than an average biased by strategic coding.</span></span></div>
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<span class="Apple-style-span" style="color: #333333; font-family: Roboto, sans-serif;"><span class="Apple-style-span" style="font-size: 14px; line-height: 21px;"><br /></span></span></div>
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<span class="Apple-style-span" style="color: #333333; font-family: Roboto, sans-serif;"><span class="Apple-style-span" style="font-size: 14px; line-height: 21px;">This might be an interesting project to work on. There was a <a href="http://www.rand.org/content/dam/rand/pubs/technical_reports/2004/RAND_TR132.pdf">Rand study in 2004</a> that looked at the transition to ICD10 but it doesn't really take this perspective. </span></span></div>
Robert G. Hansenhttp://www.blogger.com/profile/08922339441309144396noreply@blogger.com0tag:blogger.com,1999:blog-30213905.post-8096154744659378532014-07-23T16:09:00.002-05:002014-07-23T16:09:29.493-05:00And yet another ACA decision...Two appeals courts looked at the issue of subsidies on Federal exchanges under ACA and both issued decisions yesterday. The DC circuit decision is covered in my post below, the Virginia circuit ruled in favor of the government: See this <a href="http://www.latimes.com/nation/nationnow/la-na-nn-court-obamacare-subsidies-20140711-story.html">story in the LA Times</a>.<br />
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The Administration has announced its intent to ask the DC circuit to rehear the case, with the full set of judges rather than just a three-judge panel. That would seem a reasonable thing to do, and could well remove the split between two appeals courts that would call for the Supreme Court to step in. But as <a href="http://www.washingtonpost.com/news/volokh-conspiracy/wp/2014/07/22/fourth-circuit-upholds-irs-tax-credit-rule/">Jonathan Adler points out</a> at the Volokh Conspiracy, the full rehearing is not a sure thing and there are other pending cases in other circuits. The Supremes might get another shot at ACA yet.Robert G. Hansenhttp://www.blogger.com/profile/08922339441309144396noreply@blogger.com0tag:blogger.com,1999:blog-30213905.post-82167966786417879982014-07-22T10:39:00.001-05:002014-07-22T10:39:20.648-05:00And another ACA decision...The United States Court of Appeals, DC circuit, this morning issued a decision that cuts to the heart of the Affordable Care Act...deciding that subsidies for insurance purchase are only valid for state-run exchanges. More than 30 states have let the Federal government set up and run their insurance exchanges; these are the states that will be affected if the decision is held up.<br />
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This will be challenged in many ways, and personally I find it hard to believe it will stand, but who knows. Recall that many thought the initial case against ACA, on the basis of it being an unconstitutional regulation of commerce, was scoffed at by many.<br />
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I will have to read the decision carefully to see what the judges said. In the meantime, I attach <a href="http://online.wsj.com/public/resources/documents/ACAruling07222014.pdf">here</a> a link to the opinion (WSJ), and also a link to a <a href="http://www.washingtonpost.com/news/volokh-conspiracy/wp/2014/07/22/breaking-d-c-circuit-strikes-down-tax-credits-in-federal-exchanges/">post by Jonathan Adler</a> at The Volokh Conspiracy.<br />
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<br />Robert G. Hansenhttp://www.blogger.com/profile/08922339441309144396noreply@blogger.com0tag:blogger.com,1999:blog-30213905.post-44247656843378027532014-07-01T15:38:00.000-05:002014-07-01T15:38:18.115-05:00Another ACA Supreme Decision: Burwell v. Hobby LobbyThe latest Affordable Care Act Supreme Court decision makes people line up pretty clearly on one side or another. Here are a few observations on the <a href="http://www.supremecourt.gov/opinions/13pdf/13-354_olp1.pdf">case</a>, with the first two points being on some good economic issues that were addressed.<br />
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<li> Supporters (<i>amici) </i>of the Health and Human Services position made the argument that Hobby Lobby could just drop insurance coverage for its employees if it objected to providing the required birth control coverage. Since the penalty of $2,000 per person is less than the cost of providing insurance, this would be an easy way for Hobby Lobby to avoid the problem, supposedly. The majority put this one to bed quite elegantly by pointing out (page 34 of the opinion) that benefits such as health care are part of employees' overall compensation, so that dropping such a benefit will have implications for either employment or the level of cash wages. The majority even make the subtle points that health insurance is likely to be of greater value than cash because it is done on a pretax basis and because the individual coverage market is not very efficient. These are great points, which get to the heart of a bigger question: Should and will employers drop health care coverage, and what will the employer mandate do for the level of employment?</li>
<li>Another interesting point is the alternative that the majority says is probably feasible for Hobby Lobby and that has been actually set up by HHS to let religious nonprofits get out from under the birth control coverage requirement (see the opinion, pages 9-10, for discussion). HHS permits insurers of employers who want an exemption from the birth control coverage requirement to pull such coverage out of the main health plan but then to offer it separately and to not charge the employees anything for the coverage. Interesting, the claim is that the insurers will be happy to do this, rather than not offer the coverage at all, as the cost of the coverage will be less than the savings in health care expenses as fewer women go through pregnancy. But what about self-insured employers -- there, putting the burden of coverage onto a third party administrator (TPA) is simply a cost to them; any savings from less childbirth goes to the employer. Ah, HHS has a solution to that, which is to reduce the fee that such TPAs pay under <i>another</i> part of the ACA. Boy, this is getting complicated!</li>
<li>It was fun to see Dartmouth College mentioned in Ruth Bader Ginsburg's dissent! I will let the curious reader find that.</li>
<li>In arguing that for-profit corporations should not be excluded from having rights under the Religious Freedom Restoration Act (RFRA, the statute at the heart of the dispute here), the majority points out how many for-profit corporations now pursue objectives other than pure value-maximization for shareholders (opinion, page 23). <i>Touche!</i> Their point here is that for-profit companies can pursue many objectives, such as reducing carbon emissions or giving to charity, even when these cost the company and its owners profits. "If for-profit corporations may pursue such worthy objectives, there is no apparent reason why they may not further religious objectives as well." So all that work by some activists to allow corporations to escape from the evil trap of pure profit maximization has come back to haunt them. Ah, poetic justice.</li>
<li>My position overall? I am swayed by the logical consistency in thinking that the word <i>person</i> in the RFRA includes natural persons as well as nonprofit and for-profit corporations. There is no logical way to say that it excludes some kinds of corporations or business organizations but not others. The owners of Hobby Lobby are a family, it is an extremely closely-held business, and if Congress passes a law giving people the right to express religion free from undue regulatory interference (RFRA) then it applies to the family's corporation. Plus, there are other ways to deal with what may well be a sound public policy issue -- the desire to give all women access to many forms of birth control. Put that out in the open, through some general mechanism, rather than forcing it onto the employers.</li>
<li>I do find Justice Ginsburg's dissent informative. This quote by her really defines, I think, the difference between her and the majority: "In the Court's view, RFRA demands accommodation of a for-profit corporations religious beliefs no matter the impact that accommodation may have on third parties who do not share the corporation owners' religious faith -- in these cases thousands of women employed by Hobby Lobby and Conestoga or dependents of persons those corporations employ." That gets to the heart of it. Justice Ginsburg would interpret all the language and issues in favor of the women employees; the majority sides with the owners of the business. </li>
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Robert G. Hansenhttp://www.blogger.com/profile/08922339441309144396noreply@blogger.com0tag:blogger.com,1999:blog-30213905.post-27885805148310489552013-11-27T14:49:00.001-05:002013-11-27T14:49:13.021-05:00Another 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? <br />
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Here's the latest <a href="http://www.politico.com/story/2013/11/online-shop-enrollment-delayed-by-one-year-100438.html">example</a> 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.<br />
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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. <br />
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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.Robert G. Hansenhttp://www.blogger.com/profile/08922339441309144396noreply@blogger.com0tag:blogger.com,1999:blog-30213905.post-85234618228678397532013-11-19T09:53:00.002-05:002013-11-19T09:53:24.458-05:00More on Risk Mitigation in ObamacareSenator Marco Rubio of Florida has an <a href="http://online.wsj.com/news/articles/SB10001424052702303985504579205743008770218?mod=WSJ_Opinion_LEADTop">editorial</a> 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. <br />
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A short quote from the article, which might be behind the WSJ paywall:<br />
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"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."</div>
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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."</div>
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<br />Robert G. Hansenhttp://www.blogger.com/profile/08922339441309144396noreply@blogger.com0tag:blogger.com,1999:blog-30213905.post-14002531775534156272013-11-18T17:41:00.003-05:002013-11-18T17:41:35.798-05:00Risk Mitigation for Insurers on the ExchangeI 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 <a href="http://www.cms.gov/cciio/resources/files/downloads/3rs-final-rule.pdf">this presentation</a> for a description.<br />
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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. <br />
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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.<br />
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Second, as Megan McArdle <a href="http://www.bloomberg.com/news/2013-11-15/obamacare-s-creative-or-illegal-rule-making.html">points out</a> 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.Robert G. Hansenhttp://www.blogger.com/profile/08922339441309144396noreply@blogger.com0tag:blogger.com,1999:blog-30213905.post-73492698990369017542013-11-17T14:21:00.003-05:002013-11-17T14:21:31.295-05:00Senseless Health Care Pricing or Efficiency?This is an old subject, see Steve Brill's <a href="http://content.time.com/time/magazine/article/0,9171,2136864,00.html">Steve Brill's Time article</a>.<br />
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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. <br />
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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%!!<br />
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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.<br />
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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. <br />
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Stupidity and greed are still two good candidates to explain these billing practices but I think there is a third.<br />
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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!<br />
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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!<br />
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So maybe the high list prices are not stupid and not based on greed but are really to let the insurers use networks efficiently.<br />
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<br />Robert G. Hansenhttp://www.blogger.com/profile/08922339441309144396noreply@blogger.com0tag:blogger.com,1999:blog-30213905.post-23547613039449449862013-10-17T17:58:00.001-05:002013-10-17T17:58:51.364-05:00Health Insurance Premia, Competition, and EndogeneityAn interesting article ran in our local paper today; the original was from <a href="http://vtdigger.org/">Vermont Digger</a> which provides news for Vermont.<br />
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The <a href="http://vtdigger.org/2013/10/15/vermonts-pre-subsidy-health-care-exchange-premiums-fifth-highest-u-s/">article</a> 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.<br />
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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.<br />
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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.<br />
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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.<br />
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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.<br />
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Is small really so beautiful? If nothing else, it comes at a price.Robert G. Hansenhttp://www.blogger.com/profile/08922339441309144396noreply@blogger.com1tag:blogger.com,1999:blog-30213905.post-34185074532700772092013-10-14T12:11:00.000-05:002013-10-14T12:11:02.541-05:00Delaying the Individual Mandate is DifficultThere 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.<div>
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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.</div>
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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.</div>
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I do recognize per my earlier post that there is risk-sharing on the exchanges.</div>
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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?</div>
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I have not seen anyone offer the insurers the chance to re-price their policies if the individual mandate were delayed. </div>
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Robert G. Hansenhttp://www.blogger.com/profile/08922339441309144396noreply@blogger.com0