Consumer Power Report #171

Published March 27, 2009

I don’t know about where you live, but our tulips and daffodils are coming up, the cherry blossoms are about to bloom, the sun is shining today, and the world is looking like it survived another winter. It’s all quite a contrast from the ugliness of official Washington and what is in the news. It’s worth keeping it all in perspective.

I’m also reading Churchill’s History of the English Speaking Peoples. The strutting and posturing of self-important potentates has been with us for a very long time. And so has this compulsion some people have to tell everybody else what they should be doing. The damage they can cause is frightful. I think I’ll adopt “live and let live” as a motto this spring.



The current core issue in the Obama health reform plans is whether a “public option” should be one of the choices made available in a “health insurance exchange” (interesting that whether there should be a health insurance exchange at all seems to be already settled). Former governor Howard Dean is circulating a petition that calls it “non-negotiable,” while the normally compliant Sen. Charles Grassley (R-IA) sees it as a “deal breaker,” according to Bloomberg.

Most of the advocates of the public option compare it to Medicare. UC Berkley professor Jacob Hacker is quoted in The New York Times as saying, “The Medicare program is a real success story,” and Karen Davis of the Commonwealth Fund says, “It would transform the market for private insurance.” She claims a public plan would cost only $9,000 per year for a family, while a private plan costs $11,000.

It’s hard to know how she figures that since there is absolutely no information available about how such a plan would be structured. But that’s okay. Howard Dean says in a video that private coverage charges 30 percent to 50 percent of premium for administrative costs. These are all just made-up numbers, based on nothing at all.

But here are some real numbers: Medicare currently has $34 trillion in unfunded liabilities, but the average beneficiary pays 14.1 percent of her income on out-of-pocket health care costs, compared to 4.3 percent for a non-Medicare household. Is that really a program we want to replicate for most Americans?

Most of the Times article focuses on unfair competition — i.e., the public plan would use price controls and regulations to under-price private competitors. That is certainly true, but it sounds a little whiney and it leaves open the suggestion that price controls and regulations work pretty well and should be extended to regular folks, so they can save money. It also opens the door to advocates saying, “What’s a matter? Ya ‘fraid of a little competition?” Unfortunately, we’ve all been pretending for decades now that Medicare is a good program, but it isn’t. It is lousy insurance coverage that is popular only because beneficiaries pay only a fraction of its costs.

Maybe a better strategy would be to accept the challenge. If the Obama Administration thinks public/private competition is such a good idea, let’s take it all the way. Let’s have public schools compete with private ones, and the post office compete with private mail service, and ditto with the DMV, and highways, and prisons, and fire departments, and welfare programs. Let’s open up the whole damned thing. Make the money available to citizens and let’s all buy the services we prefer, be they public or private. What’s a matter? Ya ‘fraid of a little competition?

SOURCE: Howard Dean’s petition; New York Times; Bloomberg


For the past several years I have had discussions with friends who are free-market stalwarts, but who tell me that maybe mandatory coverage wouldn’t be such a bad idea if the mandate was confined to a $20,000 deductible as Milton Friedman once proposed.

In economic theory, sure, everyone having a $20,000 deductible would make sense and then they could find various ways to finance the spending below $20,000 — insurance, bank financing, etc. But in reality a mandate involves government, and government means politics. In making such an argument politically, you have conceded the point of mandatory coverage, leaving only the amount to be mandated in dispute. The other side will take your concession and insist that a $20,000 deductible would disadvantage most people so must be lowered to (fill in the blank, maybe zero).

Similarly with a Health Insurance Exchange. The Heritage Foundation has long supported the idea of modeling the health insurance market after the federal FEHBP program. I have always disagreed with them that FEHBP is a particularly attractive model. It uses strict community rating, so it doesn’t even adjust premiums for geographical cost differences. It adds another layer of regulation on top of the existing regulatory regimes of the states. It applies subsidies that advantage more-expensive plans and disadvantage less-expensive ones. And it is free to add expensive new mandatory coverages at the whim of bureaucrats without even legislative oversight. Bush’s Office of Personnel Management (OPM) added in coverage of hearing aids, for Pete’s sake.

But more important than all that, is that the idea concedes a fundamental principle and injects politics where there shouldn’t be any. Once you have accepted the idea that a federal bureaucracy should be responsible for structuring the entire market for health insurance, all bets are off. You have given the politicians a new toy to play with. Like kids in the sandbox, they will move the pieces around to suit their mood at the moment.

The consequences are already becoming clear. The Heritage blog currently is arguing with the Center for American Progress (CAP) about whether a “public option” would enhance or destroy “a competitive health insurance market.” It starts out by quoting CAP — “Promoting choice among health insurance plans to reform a dysfunctional health insurance market is an idea that has been around for decades. The Heritage Foundation has long advocated health reform modeled on the choices in the Federal Employees Health Benefit Program, which provides health insurance to federal employees.”

CAP then argues that having a public option “offers an opportunity to create both competition and a new competitor in the health insurance marketplace.”

The rest of the blog is Heritage’s response, which amounts to whining about the Feds tilting regulations in favor of its own plan. Well, duh!

But by supporting an FEHBP model, Heritage has already lost the argument. It has given the Feds the power to tilt in favor of whatever it prefers at the moment — maybe HMOs this year, PPOs the next, and CD Health the third, all dependent on who is in the White House and who is appointed to run OPM.

SOURCE: Heritage Blog


Heritage made the same mistake in Massachusetts. The think tank was essential to getting that law passed and gave the Democratic legislature cover. They could claim, “This idea is even supported by the conservative Heritage Foundation.” And so it was. Heritage even supported mandatory coverage in the hope of getting an opt-out provision for those who would put up a $10,000 bond to prove they could pay for future health care costs. The state took the mandate and omitted the opt-out. Thanks for nothing.

Now, Massachusetts is the model for what President Barack Obama and the Senate Democrats would like to do for the whole nation, never mind that even the supporters of the plan said quite clearly that it should not be seen as a model for the nation, or even for other states. Once again, politics has a way of blowing away such subtleties and nuances.

The Wall Street Journal now headlines an editorial, “The Massachusetts debacle, coming soon to your neighborhood.” Debacle? Indeed. One thing leads to another. Massachusetts’s costs are through the roof, so it is looking for ways to reduce those costs. The paper says, “Like gamblers doubling down on their losses, Democrats have already hiked the fines for people who don’t obtain insurance under the ‘individual mandate,’ already increased business penalties, taxed insurers and hospitals, raised premiums, and pumped up the state tobacco levy. That’s still not enough money.”

What to do? Gov. Deval Patrick has set up a panel to look at the options, the article says.”The Patrick panel is considering one option to ‘exclude coverage of services of low priority/low value.’ Another would ‘limit coverage to services that produce the highest value when considering both clinical effectiveness and cost.’ (Guess who would determine what is high or low value? Not patients or doctors.) Yet another is ‘a limitation on the total amount of money available for health care services,’ i.e., an overall spending cap.”

The paper quotes an article from The New York Times that explains the cynicism of the proponents — “Those who led the 2006 effort said it would not have been feasible to enact universal coverage if the legislation had required heavy cost controls. The very stakeholders who were coaxed into the tent — doctors, hospitals, insurers, and consumer groups — would probably have been driven into opposition by efforts to reduce their revenues and constrain their medical practices, they said.”

And the Journal adds, “What really whipped along RomneyCare were claims that health care would be less expensive if everyone were covered. But reducing costs while increasing access are irreconcilable issues.” It concludes, “The real lesson of Massachusetts is that reform proponents won’t tell Americans the truth about what ‘universal’ coverage really means: Runaway costs followed by price controls and bureaucratic rationing.” Double duh!

SOURCE: Wall Street Journal


Public Opinion on Health Reform

The Pew Research Center reports that popular support for big health reforms is not nearly what it was in 1993, the last time it reared its head.

Back then, in April 1993, 56 percent of the population agreed that American health care needed to be “completely rebuilt,” This year, March 2009, only 40 percent agree. Interestingly, women felt more strongly about it 15 years ago with 59 percent saying it should be completely rebuilt versus 52 percent of men. This year men are slightly more likely to agree — 41 percent of men versus 38 percent of women. Although Democrats are more supportive, the level of support among Democrats has fallen by 21 percentage points since 1993, versus 16 percent for both Republicans and Independents.

SOURCE: Pew Research Center

Who didn’t see that coming? Part Deux

A company called Strategic Health Care is one of the first to cash in on the many opportunities presented by Obama’s stimulus plan. It is holding workshops on how to “Maximize your Federal Stimulus Opportunities.” The company’s press release says, “Strategic Health Care has a team of 25 experienced grant writers, researchers, and editors ready to help you make comprehensive application for these funds.”

For a mere $1,000 you can participate in a one-hour conference call, or for $3,000 the company will tell you if your company is likely to be eligible for money, or for a tad more money it will help you develop an application. But, it says, “If you wait to call us until grant and other program announcements are made, it may be too late. We need to assess your organization’s capabilities to determine your readiness to seek grants, loans, and other forms of government funding.”

Yep. The gravy train is leaving the station. Jump on before it’s too late!

SOURCE: Strategic Health Care

NFIB’s New Study

The National Federation of Independent Business (NFIB) has released a very ambitious study modeling various health reform options and their impact on employers and employees. Nobel economist Vernon Smith writes in a forward, “This is a path-breaking, sophisticated study of health care reform proposals in a controlled setting.” He adds, “Of particular interest to me were the findings that no scenario of treatments makes all stakeholders better off, while some plans come precariously close to making all stakeholders worse off.”

The principal authors, Stephen Rassenti, Ph.D. and Carl Johnston, Ph.D., developed an experimental model that tested nine different reform proposals in simulated real-world conditions. The nine scenarios tested were:

  • No mandate
  • Employer mandate
  • Individual mandate
  • Mixed employer and individual mandate
  • And variations on these models, including a required 50 percent employer contribution, restricted rating on premiums, and a wider or narrower choice of individual options.

The authors found that large employers with high profits react very differently than do small employers or large employers with marginal profits. The more-prosperous firms are better able to use all the scenarios to their advantage. They also found that employees and employers are inversely advantaged by several scenarios — the situations that are best for employees are not so good for the companies they work for and vice versa.

Not at all surprisingly, the authors also found, “When it comes to selecting health plans, individuals seem to be better at picking efficient plans for themselves than they are at selecting plans for other people. This is an important factor to keep in mind when considering proposals to require employers to offer insurance to their employees.”



Not that anyone in Washington is paying attention, but Consumer-Driven Health Care continues to rack up the positives. Investment News reports on a new study by Canopy Financial that finds HSA balances continued to grow during the fourth quarter of 2008, despite the woes in the rest of the financial sector. Individual HSA balances grew 33 percent and family balances grew 12 percent in 2008, according to the article. Most of this is from individual, not employer, contributions.

SOURCE: Investment News

The Tri-Lakes Tribune in Branson, Missouri reports that St. John’s Human Resources, with 20,000 employees, has installed an HRA option for all its employees after two years of discussions. The company liked the idea that prevention was covered 100 percent and the HRA helped fund a higher deductible. About 15 percent of the workforce made the switch from the existing HMO coverage.

SOURCE: Tri-Lakes Tribune

The Wall Street Journal points out that HSAs are much better for people about to be laid off than FSAs are. FSAs’ use-it-or-lose-it provision means that workers can forfeit the money they have put in. On the other hand, an FSA’s pre-funding rule means that people who are laid-off early in the year can use 100 percent of their FSA funds, even if they have contributed only a fraction of the amount. In either case, the HSA portability aspect is very attractive, as is the fact that balances may be used to pay for premiums.

SOURCE: Wall Street Journal