Health Care Reform and Costs and Savings

There are several proposals in congress in the area of health care reform which would raise costs to the insurers including the Schumer plan which would add $10b in fees per year to insurers and requiring insurers not to charge more for policy holders with pre-existing conditions. Any reform which raises costs to insurers without capping premium prices or reducing costs will just result in the insurers passing on the increased costs to policy holders and increasing the cost of medical coverage. I see only two ways to make sure that premiums do not rise to offset the additional costs which are:
1 - A public plan similar to medicare. Competition with the public plan would prevent insurers from continuing the double digit annual premium price increases.
2 - Price controls. Capping the premium charges at there current level and only permitting annual premium increases in an amount equal to the annual increase cost of health care as measured by the Bureau of Labor Statistics (BLS). The BLS currently collects health care pricing by region and metro area for a range of health care services. Per the BLS, health care costs have been rising by about 8% per year by premium charges have been increasing at double digit rates.

As far as how to pay for health care reform, following are some options with the annual potential savings.

1. $10.0 b - Negotiate Medicare Part D pricing. The US House Oversight committee estimates the 10 year savings at $156b.
2. $0.5 b - VA pension decrease resulting from universal coverage. The VA provides pensions to certain groups of veterans or surviving spouses based on income and health care premiums are subtracted from income so a reduction in premium costs would reduce the pension amount paid.
3. $7.1 b - Per the IRS, in 2006, federal tax revenues were reduced by $14.3 b due to deductions from income for medical expenses. Keep in mind that only those medical expenses that exceed 7.5% of adjusted gross income are deductible. If everyone had insurance then medical deductions would decline significantly. I also think that some thought should be given to removing the deductibility for elective procedures such as plastic surgery.
4. $17.0 b - Per the American Hospital Association, uncompensated costs in 2007 for US hospitals was $34 b. These costs for services rendered but not paid for, typically for services provided to the uninsured, are shifted to paying patients. If everyone had insurance then uncompensated costs should decline dramatically. I expect that other health care providers such as labs and doctors also have significant uncompensated costs which are also passed on to paying patients.
5. $30.0 b - Tax 20% of the value of employer provided health care benefits. Per the Heritage Foundation, $150b per year is lost in federal tax revenues by not taxing health insurance benefits. All other employer provided benefits such as day care credits or 401K contributions have an annual limit of the amount that is deductible. Also, in terms of fairness, it doesn't seem fair that 100% of health care premiums paid by an employer are tax deductible while, for someone who pays for their own health care premiums in an individual plan, only the costs which exceed 7.5% of adjusted gross income are deductible. Employees, especially unions, too frequently are against this because they think that they will lose benefits. What they don't understand is that higher health care costs incurred by their employers causes the employer to cut other benefits and reduce wages and to use more part-time and contract employees for whom the employer typically does not provide benefits.
   
6. $2.2 b - Require a $2 co-pay for prescriptions covered by Medicare Part D. I found it amazing that each year there are 1.1 billion prescriptions filled by medicare recipients. I think it only fair that everyone share in cost of health care reform that will benefit everyone.
7. $20 b - More actively fight medicare and medicaid fraud. US Attorney General Eric Holder estimates that the annual cost of Medicare and Medicaid fraud to the taxpayer is at least $60b.
8. $10.9 b - More actively fight Social Security Disability fraud. Keep in mind that most people who are awarded Social Security Disability are also able to use Medicare. Social Security Disability payments are $109b per year and rising fast. At a minimum, the Feds should more frequently review medical conditions of recipients to ensure that disability awards are still warranted. To get an idea of how much waste and fraud there is in the system, see the NY Times article or an article on Medicare fraud in Miami.
9. $ ? - When a chemically identical generic is available, require Medicare & Medicaid recipients to use the generic. Most private insurers such as Blue Cross will only pay for generics in this case so why not the government? As an example, a 30 day supply of the brand name drug Zocor for cholesterol is about $150 while a 30 day supply of the chemically identical simvastatin is about $6. Also, Medicare and Medicaid could reduce costs by not paying for prescriptions which are available over the counter such as high dose Tylenol.
10. $ ? - In 18 states, personal injury protection (PIP) coverage on auto insurance policies is mandatory. PIP pays for up to $10K for medical expenses for people involved in auto accidents who do not have private medical insurance. If everyone had medical insurance, I don't see why PIP would continue to be included on auto insurance policies. In Florida, I pay about $250 per year in auto insurance for PIP even though I have medical insurance because I might be in an accident with someone who doesn't have medical insurance. In Florida, there are about $1b per year in claims on PIP coverage so I woud assume that the auto insurers are collecting in excess of $1b per year in PIP premium charges.

The savings identified above amount to about $100b per year and I'm sure that an expert in the field could identify other savings.

Health Care Reform - Round 2

It appears that the main features of a reformed health care system are firming up and will include the following:

1 - Mandatory health care insurance for everyone although there will be an opt-out for those who claim financial hardship.
2 - No exclusions or additional premium for pre-existing conditions from private insurers.
3 - Annual premium increases from private insurers will be 1.5% less than what the increase would otherwise be.
4 - No public insurance option other than possibly cooperative insurance at least for the 1st 5 years following reform.
5 - Government subsidies for low and middle income families for premiums paid.

The net-net of the above is that private insurance premiums for everyone will probably increase and the private insurance companies realize significantly higher revenues and profits.

In the case of no exclusions for pre-existing conditions and no additional premium for medical issues that exist at the time that the policy is taken out, the insurers will just raise the premiums for everyone else in the age group to cover the higher costs associated with this new group. When I took out private health insurance from Blue Cross several years ago, my premium was increased 25% due to high cholesterol. I doubt that health care reform will require these existing surcharges to be removed but the insurers will not be able to levy these surcharges on new policies and will spread the surcharge over all policy holders.

In the case of mandatory insurance, the health insurers will add a large number of young, healthy policyholders which can only translate to higher profits.

Government subsidies will increase the number of policy holders above what it would otherwise be which will also increase insurers' profits. With the annual cost of health insurance increasing at double digit rates, the insurance industry must have realized that they were in danger of pricing themselves out of business. The subsidy will enable the insurers to keep increasing premiums at double digit rates without pricing themselves out of the market - at least for a few more years.

As far as increasing annual premiums by 1.5% less than what the premium increase would otherwise be, it will be almost impossible to determine whether the insurance industry is keeping to this promise. The premiums on my personal policy from Blue Cross has been increasing by 14% per year so even the lower annual increase of 12.5% which, if this is typical, will still eventually bankrupt the consumer.

An effective and significant health care reform would need to include the following characteristics:

1. Single payer
2. Mandatory coverage
3. Negotiated prices with all providers
4. Emphasis on preventing fraud
5. Higher co-pays for everyone including Medicare recipients. A $120 per year calendar year deductible is too low.
6. Generic drugs required if available
7. Electronic, centralized health and treatment records
   

Silent Casualty of the Financial Crisis

Investors, pension funds and over extended home owners have frequently been discussed as victims of the housing bubble meltdown and ensuing financial crisis but there is another group of casualties that is almost never mentioned. This other group is the savers who by and large played by the rules and invested their money safely and conservatively in CD's and deposit accounts. Following the financial turmoil, the Federal Reserve aggressively reduced interest rates in an effort to recapitalize the banks and to stimulate the economy to offset the economic slowdown that was an additional consequence of the financial turmoil. The lower Fed rate widened the rate spread (difference between what the banks pay for deposits versus the rate that they can lend at) enabling banks to make billions in additional profits. According to the IRS, in 2006 (most recent year for which data is available) individuals reported $222.26b in interest income on their tax returns and paid about $33.57 billion in tax on this income. Interest rates available on 1 year CD's have declined about 70% in the last year. A very general calculation would indicate that savers have lost about $155 billion per year in interest income and the Federal Government has lost about $23 billion per year in tax revenues due to these lower interest rates required to save the banks.

Response to Michael Jackson’s Passing

I think that the reason that music is so important in all human cultures is the ability of music to recall an emotional memory. Music can evoke the feelings of a previous love, a significant life event or a momentous decision in our lives and cause us to relive the event and perhaps to better understand our response to the event. However, especially with the music of pop stars, some fans make the mistake of assuming that the creator of the music has some keen insight and really understands the person, emotions and thoughts of the fan. Some fans transfer the sentiment, especially the sentiment of love, that the music evokes to the person who created the music rather than the person who created the emotional experience. I suppose that this is what explains the emotional outpouring following the passing of Michael Jackson. Michael Jackson was a stupendously successful musician whose style and skills influenced the music of those who followed and enriched the musical landscape. However, it seems to me that the fans are making him into something much more than he was. Although a skilled musician, he was a narcissistic, troubled, self absorbed individual who does not seem to me to be worthy of the adulation that he has garnered. I also find it troubling that so many people spend so much more time and effort staying current on the trivia of Michael Jackson’s life than on more important issues such as education, careers, public policy, etc. If only half of Michael Jackson’s fans spent as much time and effort understanding and speaking out on significant issues such as climate policy, the invasion of Iraq or health care reform then perhaps they could have made a more meaningful contribution to the quality of human existence.

I also believe that many people are exaggerating Michael Jackson’s contributions. As an example, I have heard it reported that Michael Jackson broke the race barrier that enabled subsequent black entertainers to appear on MTV when in fact Michael Jackson had nothing to do with MTV showcasing black entertainers. The Jackson Five were under contract to CBS Records in 1982 soon after MTV began broadcasting. CBS approached MTV requesting that MTV broadcast a Jackson Five music video for the song "Billie Jean". MTV refused stating that they had a policy of not broadcasting black entertainers. Walter Yetnikoff , then Chairman of CBS Records, threatened to pull other CBS artists from appearing on MTV and go public alleging that MTV was racist. Consequently, MTV changed their policy and broadcast the "Billie Jean” music video. It was Walter Yetnikoff, not Michael Jackson, who should be credited with breaking the race barrier.

Let’s keep things in perspective. Michael Jackson was a highly compensated singer. He didn’t cure cancer or make any significant contribution to the well being of humanity.

You Lost Your Job Due to a CDSs

Thousands of people have lost their jobs due to Credit Default Swaps (CDSs) and they don’t even know what a CDS is. A CDS is insurance that a borrower will repay a loan to the lender. Here is how the CDS leads to a job loss using as an example a fictitious company that I will call Acme, Inc. that makes pencils.

Business is good so Acme borrows $100 from Jones Investments to buy a machine to make more pencils. Acme agrees to pay the loan off over 12 months. Energy prices then increase so Acme is making less money on each pencil that it sells and is unable to pay off the loan as agreed upon. Due to the liquidity crisis, Acme can not find a bank to refinance the loan which would enable Acme to stretch out the loan repayment over a longer period of time, say 2 years, by which time Acme expects the market for pencils to improve.

Before CDSs, Acme would probably be able to modify the loan payment terms with Jones Investments because if Jones did not modify the payment terms the alternative would be that Jones Investments would end up with a used pencil machine which would be worth say $50 or Acme would be forced into bankruptcy in which case Acme’s assets would be sold off or the loan restructured in which case Jones would get back only part of the money owed to them, say $50.

However, Jones Investments, when they made the $100 loan to Acme, then bought 5 CDSs for $100 each from AIG on the $100 loan to Acme. If Acme can not pay back the loan per the loan terms, AIG will pay Jones $100 on each of the 5 contracts for a total of $500. Consequently, Jones wants Acme to default on the loan and wants to force Jones into bankruptcy. If Jones refinanced the loan for a longer term then Jones might only get $110 back on the $100 loan versus the $500 Jones will get if Acme goes bankrupt.

The way this scenario plays out is that Acme if forced into bankruptcy, all of Acme’s assets (tools, machines, vehicles, etc.) are sold for pennies on the dollar, Acme’s employees are now unemployed and Jones Investments makes a 500% profit.

The above example is not idle speculation. The above scenario is believed to have contributed to the refusal of GM bondholders and, more recently, to the debt holders of Six Flags Amusement Parks to refuse to a restructuring plan because they could make more money from their CDS contracts if the companies went bankrupt.

CDSs are not centrally cleared so it is almost impossible to determine who holds what CDS contracts. There is even the possibility that some lenders have actively worked to force companies into bankruptcy on which they hold CDS contracts by shorting the equity to force the stock prices down of borrowing companies.

There is the argument that the availability of CDSs lowers the borrowing costs for some companies so CDSs are good for the economy. However, since CDSs are not regulated and no reporting is required, it is impossible to know if this is true and almost impossible to determine if CDS holders are manipulating the market to force defaults.

Financial Crisis – January 2011 Headline

Based on developments in the financial markets and the lack of significant regulatory reform, following is a potential headline news story from the future.

AIG and several major investment banks are on the verge of collapse and have returned to the Fed requesting assistance to prevent a collapse of the US financial system. In late 2008 and 2009, the world financial system almost failed due to failed investments in the housing market. The Fed at that time pumped trillions of dollars of liquidity into the system which resulted in the Fed owning a large part of the major investment banks and AIG and the Fed also lowered interest rates to almost zero to assist the banks in re-capitalizing. Because of the low rates of returns available at that time on CD’s and government bonds, and the low interest rates charged on loans, investors borrowed hundreds of billions of dollars which were invested in corporate bond funds and purchased Credit Default Swaps (CDS) on 80% of bond purchases. With corporate bankruptcies having increased by 20% in 2010, a large percentage of the underlying bonds have defaulted and the investors are demanding that AIG and the investment banks honor their CDS obligations. AIG and the investment banks under-priced the insurance sold but the sale of the insurance significantly increased their 2009 and 2010 earnings. Although only $600 billion in bonds have defaulted, over $2 trillion in CDS insurance was purchased on the defaulted bonds. The 5 largest investment banks and AIG are requesting $1.5 trillion of capital which is required to cover the CDS obligations.

Health Care Reform - Round 1

In the area of the Obama Administration's effort to reform health care, the only change made to date is an agreement with the pharmaceutical manufacturers who will pay up to half of the drug charges for Medicare Part D recipients who are in the donut hole. In Medicare Part D, the government pays for the 1st $2,700 in prescription drug expenditures each year, the recipient then pays 100% of costs until the recipient has spent $4,300 after which Medicare pays for the rest of the expenditures. The recipient's annual expenditures between $2,700 and $4,300 is referred to as the donut hole and the pharamaceutical industry has agreed to pay for half of the prescription cost for brand name drugs only (not generics) for income eligible recipients purchased by the Medicare recipient while in the donut hole.

First, I find it unfortunate that the 1st agreement extends benefits for seniors (I'm a senior myself) who are the best served group in terms of medical care in the US and who have benefited to such a large extent from health care reform over the last few years such as the addition of Medicare Part D prescription drug coverage.

Second, I question what the Obama Administration has given the drug manufacturers in return for this change. I am concerned that the Obama administration has agreed to continue the current policy of not allowing Medicare to negotiate drug prices.

There is a group of people who are "dual eligible beneficiaries" in that they qualify for both Medicaid (health care for the poor) and Medicare (health care for seniors and the disabled). Prescription drug coverage for these dual eligibles was paid by Medicaid until 2006 after which the costs were paid by Medicare. For the top 100 drugs, Medicare paid $3.7 billion more than what Medicaid would have paid. Medicare Part D drug costs are about 30% higher than what is paid by Medicaid. For all drugs, if Medicare Part D paid the same price as Medicaid for all drug purchases, the total savings to the taxpayer over the next ten years could be as much as $156 billion.

Perhaps I'm too cynical but I'd bet that negotiated drug prices by Medicare has been taken off the table so I'll give round 1 to the health care providers.

Along these same lines, I'd also question why Medicare even pays for brand name drugs when there is a chemically identical generic. As an example, the statin drug for high cholesterol Zocor costs about $150 per month while the chemically identical generic Simvastatin costs about $6.00 per month. Medicare pays for Zocor while my Blue Cross plan only covers Simvastatin.