Category Archives: markets

Health Insurance vs Health Welfare

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The question of universal health coverage is one well worth discussing at the national level; the goal of universal coverage is to make health care services ubiquitously available, for rich and poor alike.  It’s a laudable goal.  However, in order to have a coherent discussion, it’s necessary to review the terms of the subject.

Too often, though, the discussion assumes that health care and health insurance are so much a part of each other that they cannot be had separately.  This is wrong.  Health care is what you get from your doctor or hospital.  You’re getting treatment for a medical condition, advice about how to treat a medical condition, advice about how to avoid getting a medical condition.  In return for these health care services, someone pays the doctor or hospital money.

Many people pay for these services with cash out of their own pocket, and many more would prefer to do so, were they given the choice.

Others—the vast majority of Americans (I’m eliding the free riders in the market)—pay for these services by buying something we call insurance: they pay a periodic premium to a health insurance provider for a policy that obligates the insurance provider to pay (most of) the costs of a medical condition should that condition actually arise at some time in the future.  The insurance company makes its money by selling lots of such policies on the bet that few enough people actually will incur the covered condition within a given time frame that the aggregated premiums over that time frame will more than cover the actually required medical payouts.  That’s what insurance is, including health insurance: it’s one person transferring part, or all, of a risk of something untoward happening to him to another—an insurance company, for instance—in return for an agreed upon fee.  For that fee, the entity accepting the risk, or the agreed part of it, agrees to cover the cost of that untoward event should it actually occur, with the aggregated fees over lots of such agreements, being enough to cover the required cost payouts.

Health care and health insurance, thus, are entirely separate industries: one is the actual provision of services, and the other is simply a means of paying for those services.

But for the risk transfer, or insurance, industry to work, though, two things must occur: the first is that the fees charged for the risk assumptions must be voluntarily agreed to between the two parties to the risk transfer.  If the fees are dictated to one or the other side, without any market flexibility, they run a very strong risk of being too high for the one party to afford, or too low for the other party to be able to cover the agreed costs.

The other thing that must occur is that the fees must be consistent with the risk assumed.  To take an over-simplified example, if a man has a risk of a medical condition that costs $1,000 to treat, and the likelihood of his incurring that condition within the next year is very high, and he wishes to transfer 80% of that risk to an insurance company (i.e., get the company to pay $800 should the condition arise), then the insurance company must be able to charge a premium that, over the course of a year, sums to $800 in order to break even.  Of course, if the insurance company were to sell that same policy to lots of folks subject to that medical condition, actuarially it’s highly unlikely that all of them—even with the same risk—will incur that condition in the same year.  This would allow the insurer to sell the policy for a lower premium than it could if the customer population were limited to that original single person.

With lots of companies in the market selling policies for a given coverage, competition ensures that a single company does not abuse single-company monopoly power and overcharge.  Nation-wide marketability of that policy both enhances the competition and expands the customer base with the insured-against condition, thus increasing downward pressure on the policy’s premium—the risk transfer fee.  This downward pressure makes insurance more accessible to more people.

The actual situation facing us, though, is a market structure of government limits on the policies offered, government limits on the premiums allowed to be charged, and two critical government mandates: every individual must buy health insurance—must buy those government-limited policies—and every insurer must accept all customers.  There is little to no market flexibility—or pressure—to structure coverages to match the risks being transferred, nor is there much flexibility to match the fees charged to the risks being transferred.  This combination of government limits and mandates is a health welfare program of universal coverage.

My own view is that universal coverage is unnecessary, never minding its laudability, and that health welfare (or welfare generally) is actively suboptimal when it’s the first resort, rather than the last resort after market forces have taken their effect on prices and availability.

Because the welfare program’s risks and fees do not match, and because competition among health insurance purveyors is limited, inefficiencies will rapidly develop in the form of coverage payouts being too great for the premium income in some areas and too little for the premium income in others, with a strong bias toward too little premium income.  While companies’ desires to charge more, including “too much,” would be heavily constrained by competitive pressure, the government’s bias is to hold down costs to its voters, without regard in the short term to the market consequences, and the bias is unchecked.

This drives the welfare program to one or more of three outcomes: the insurance companies must prevail on the regulatory authorities to raise premiums, they must get tax dollar help from the government to make up the shortfall, or they must stop providing that insurance coverage.  All of these represent stark cost increases to the insurees: either they pay higher premiums today (even for conditions for which they do not want coverage or whose risks are very low, because those conditions are included in the required coverage allowed to be sold), their taxes go up tomorrow, or next week they lose their insurance coverage altogether until they move to another company—if one is left in business.  Indeed, this is the rationale for the Individual Mandate requiring everyone to buy insurance: all those extra premiums, hopefully from young, healthy Americans who aren’t likely to need a payout (and who also aren’t likely to want to buy the coverage) are intended to provide those extra monies and so avoid any of the three outcomes.

Stocks and the Economy

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It’s good to see that American stock analysts/prognosticators aren’t the only ones who are no good at the task.  This is no knock on the Spiegel Online journalist, because no one is.  Nevertheless, it’s instructive to see his remarks.

In the last 10 days, the DAX, Germany’s blue-chip stock index, has fallen by 16 percent.  On Monday it fell below the 6,000 point benchmark for the first time since January and has continued its plunge on Tuesday.  Has the crisis, which for so long seemed to leave Germany untouched, finally reached Europe’s largest economy?

…last summer, when the DAX lost 30 percent within just a few weeks, sparking a wave of politicking. The widespread belief in Germany was that only the financial markets were acting up.

That is probably the biggest problem the Germans have in the now two-year-old euro crisis.  In a sea of misery, Germany was an island of bliss.

But now, though, even its most stubborn adherents have begun realizing that this concept cannot work.

Here’s a chart similar to what this writer is looking at for the DAX, courtesy of Yahoo!Finance.  It looks at the DAX over the five days ending 5 Jun 12 (not the ten that the writer describes; however, if you follow the link, select the one month view, and look back those ten days, you’ll see the preceding five days are generally flat, so little is lost to the point).

Pretty damning, isn’t it?  Nobody likes the German government’s euro, euro zone, or EU moves, and they’re trashing the German stock market over them.  Chancellor Merkel and Finance Minister Schaeuble must change their policies.

But here’s that same chart put into some sort of perspective, also courtesy of Yahoo!Finance.  This one looks at the DAX over the last five years.

That five day period is the tiny, little down-tick on the far right end, where you almost can’t see it against the five-year backdrop.  Indeed, the whole period from the Aug-Sep 2011 period to the end is little different from the period from October-ish 2010 and that Aug-Sep 2011 other than speed of occurrence.  And both periods are trivial compared to the period surrounding the onset of the Unpleasantness of late 1999-early 2000, which had a wholly different set of “causes.”

This time it’s different, though.  Yeah.  Sure it is.

The Economy

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Two purchasing managers indexes for China fell in May, and Indonesia had its first trade deficit in nearly two years, while the Republic of Korea’s exports fell for a third straight month.  Nomura Securities’ chief Asia economist, Rob Subbaraman, attributed this in part to “The crisis in Europe.”  The debt crisis is having two effects in Asia: European banks are husbanding their resources for domestic and European commitment, and so they are only able to extend less credit  in Asia—including for trade finance.  Moreover, the crisis is reducing European demand for Asian goods and services directly.

Within Europe, the debt crisis is becoming a self-fulfilling prophecy.  Heineken NV, for instance, worried about its euro holdings in a Greece that might leave the euro zone (and convert those euros to drachmas of sometime value), is taking its cash out of Greece and the euro zone altogether, which creates liquidity problems for Greece and the euro zone.  Of course, Heineken isn’t that big, but their move is typical of a whole lot of businesses that, in their aggregate, approach being big enough.  Additionally, Greek companies are starting to max out their existing credit lines and then expatriating the cash.  Other businesses, in both the non-financial and the financial arenas, are making similar moves in anticipation of a Greek departure.  This caution by everyone is part of the pathway through which the debt crisis is contributing to a slowing European economy—and to a reduced demand for Chinese and US exports.  That slowing European economy is evidenced by sustained unemployment of 11% and a falling purchasing managers index (to 45.1—a level that means actual shrinking) in May.

Coincident with Europe’s reduced demand, our own economy, whose cyclic business recovery is being held back, has suppressed our business’ health and thereby reduced American demand for Asian exports.  The poor US economy, not helped by our reduced exports, is indicated by the recent job creation number—69,000—for May that is the third straight month of falling job creation rate, and by an unemployment rate holding above 8%—8.2% in May.

Our economy is at the core of the global economy, and so much of the rest of world depends on an economically healthy US for their own prosperity.  Yet our health depends on their economic health, too.  It’s not quite a chicken and egg thing, though; we really are the engine, and so we really do need to right ourselves rather than wait on Europe, for instance, to right itself.  The foregoing just shows the integration of the global economy; it is not an excuse for our own government’s policy failures.  The buck stops—and starts—with this administration.

Our path is amazingly simple, too, except that politicians are artificially complexifying things.  Our government needs to get out of our business’ way.  It needs to stop spending—and borrowing—at its current profligate rate.  It needs to reduce spending and tax rates in real terms, not just with accounting gimmicks and a promise to pay us Tuesday for that hamburger today (which, if Mayor Bloomberg were to have his way, won’t be for sale soon, anyway [/snark]).

Déjà Vu All Over Again Cont’d

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In this post I continue a discussion of the advice to Reagan memo that The Wall Street Journal excerpted a few days ago.

On the matter of budgeting, the memo advised, in the context of fighting then-high inflation

Many question whether you are serious about a sizeable cut in budget outlays.  Credible FY 1981 and 1982 budgets which do that clearly and unambiguously would evoke an extraordinary response in the financial markets, and set the stage for a successful assault on inflation and a decline in mortgage and other interest rates.

This is sound advice for the next President, also.  Credible FY2013 (since the Progressives in the Senate and White House have variously refused to offer a serious budget or any budget at all for the last three years, a 2013 budget for the fiscal year then in progress will remain a necessity), FY2014, and FY2015 budgets will be as critical in demonstrating resolve in cutting irresponsible spending as it was in fighting inflation.  And it will be critical in reducing the impact of the inflation time bomb the Fed is creating, should that go off before it can be defused.

Those advisors continued in their section on the Budget:

Off-budget financing and government guarantees mount and expand programs through the use of the government’s borrowing capacity, draining the nation’s resources without being adequately recorded in the formal spending totals.

Pop quiz time: what off-budget financing and government guarantees are present today?  Bonus question: what does the continued existence of off-budget financing and government guarantees of any sort say about the sense of responsibility felt by incumbents of a Big Government?

The Reagan advisors also warn of this:

In addition, the mandating of private expenditures for government purposes has gained momentum as the spotlight has [i]lluminated direct spending. These mandates are also a clear call by government on the nation’s resources.

Boy, has it ever gained momentum.

Closely related to budgeting is tax policy.

Tax policy is properly the province of your Secretary of the Treasury.

Indeed.  And the inability of the present Treasury Secretary to pay his own taxes says far more about the unnecessary scope and complexity of current tax law than it does about his intelligence or sense of responsibility.  If we assume Geithner isn’t a tax scofflaw—and I believe he is a fundamentally honest man—his mistake should be a clarion call for simplification.  That it is not speaks poorly of the incumbents on both sides of the aisle.

Reagan’s advisors continue:

We consider that the key ingredients should be your proposals for the Kemp-Roth cut in personal income tax rates, simplification and liberalization of business depreciation and a cut in effective taxes on capital gains….  Consistent with your proposals earlier this year, the effective date for these reductions should be January 1, 1981.

Other key proposals are…reductions in…inheritance taxes and the taxation of Americans living abroad….

Again, these are remarkably prescient.  The Obama tax increase is set to take effect on January 1, 2013.  That increase, aside from raising income taxes on ordinary Americans smack in the middle of the present recession, will include jumps to usurious rates on what those same ordinary Americans would otherwise leave to their own children and other heirs of their choice—not of government’s choice.  Moreover, most sub-Federal jurisdictions only tax income earned within their jurisdiction.  Why should the Federal government be any different?

The Obama tax increase also includes major increases in business-related taxes: investment taxes on capital gains and increasing the double taxation present on dividend payouts.  These will serve only to reduce investment in American businesses, to the detriment of our already suffering economy.

I’ll have more in the coming days.

Déjà Vu All Over Again

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This post is taken from “Economic Strategy for the Reagan Administration,” a memo summarizing studies commissioned by candidate Ronald Reagan and delivered to President-elect Reagan on mid-November 1980, as summarized in The Wall Street Journal.  The memo began

Sharp change in present economic policy is an absolute necessity.  The problems of inflation and slow growth, of falling standards of living and declining productivity, of high government spending but an inadequate flow of funds for defense, of an almost endless litany of economic ills, large and small, are severe, they are not intractable.  Having been produced by government policy, they can be redressed by a change in policy.

Aside from the high inflation of 1980, that could have been written today.  Besides, the actual inflation then is a threatened inflation today, with the Fed’s policy of deliberately depressed interest rates and rapid printing of money coupled with the administration’s prolific spending.

You have identified in the campaign the key issues and lines of policy necessary to restore hope and confidence in a better economic future:

  • Reestablish stability in the purchasing power of the dollar.
  • Achieve a widely-shared prosperity through real growth in jobs, investment, and productivity.
  • Devote the resources needed for a strong defense, and accomplish the goal of releasing the creative forces of entrepreneurship, management, and labor by:
  • Restraining government spending.
  • Reducing the burden of taxation and regulation.
  • Conducting monetary policy in a steady manner, directed toward eliminating inflation.

This amounts to emphasis on fundamentals for the full four years, as the key to a flourishing economy.

Sound like what’s needed today?

The need for a long-term point of view is essential to allow for the time, the coherence, and the predictability so necessary for success. This long-term view is as important for day-to-day problem solving as for the making of large policy decisions.

This was true then, 50 years after the start of the New Deal, a 50-year period of spendthrift policies and high taxes, and it’s even truer today, 30 years farther down that road, with this administration’s effort to raise taxes on top of its already explosive spending and debt accumulation.  It’ll take a long time, and a long-term strategy is critical, to repair the damage.

The memo went on with sound advice concerning budgeting, tax policy, regulation, energy, and monetary policy—it could have been written for delivery to President-elect Mitt Romney in mid-November 2012.  And we can certainly hope both for President-elect Mitt Romney, and that he takes this advice to heart.  The incumbent certainly has already eschewed it.

I’ll more on the Reagan memo in the coming days.