Are Insurance Exchanges The Answer For Health Care Reform?

A much less hyped idea for health care reform that may have a good shot of passing is that of health insurance exchanges. Individuals could join a pool to purchase insurance as a group to get competitive rates and avoid individual scrutiny for pre-existing conditions. The larger the pool, the greater the potential for economies of scale. For more on this, see the following post from Economist's View that discusses insurance exchanges in detail.

Most of the health care reform proposals being considered by congress include some form of health insurance exchanges. What are they and why are they needed?

...The idea of an insurance exchange is relatively straightforward. If you work for a big company or, say, the federal government, every year you choose from among a set of insurance plans--all of them conforming to some minimal standard, all of them available to you regardless of pre-existing medical condition. They've been chosen by your human resources or benefit department, who--ideally--have some clue about what they're doing, more at least than you do.

If, by contrast, you work on your own or in a small company, then you may have just one choice--or no choice at all. Affordable coverage probably won't be available to you if you have existing medical problems; even if you're healthy, the coverage you get could have major gaps or be otherwise unreliable. It'd be good to know which policies work and which ones don't. But unless you happen to be an actuary or insurance broker yourself, chances are you're clueless when it comes to navigating this complex world.

It's you, the individual or small businessperson trying to buy insurance, for whom the exchanges are being created. They're basically regulated marketplaces, where you get to choose from among insurance plans more or less the same way folks in large companies do. Your premiums should be more affordable, since now you're part of a large bargaining group. You should be able to get coverage regardless of preexisting conditions, since insurers can't pick and choose which exchange customers to cover. And you should have the peace of mind that the coverage is good, since you know it's been screened by the exchange.

Do we have any experience with exchanges?

The concept has been around for a while... And ... one state, Massachusetts, managed to create such an institution three years ago, when--as part of a more comprehensive health reform plan--it started a pair of insurance pools for small businesses and individuals who couldn't get coverage through employers.

The results, so far, are encouraging. People once unable to penetrate the private insurance market because of income or medical condition can now go online and select from a menu of insurance options--all of them covering essential services and providing solid financial protection, for rates not previously available. And although overall medical costs in Massachusetts have continued to rise,... premiums for ... the insurance option that the exchange manages most closely ... have risen at a far slower rate.

There are both weak and strong forms of exchanges:

The strong version is national, or at least regional. It's open to everyone: The unemployed, the self-employed and any business, no matter the size, that wants to buy in. There's risk adjustment to reduce the incentive for cherry-picking. The huge pool of users gives the exchange tremendous advantages in scale, simplicity and standardization (experts say that you need at least 20 million to fully achieve these benefits -- easy in a national exchange but harder in a regional or state-based one). With so many potential customers, insurers are eager to participate, and they will bid aggressively to ensure they're included in the market and compete aggressively to make sure they're successful within it. Over time, the combination of increased efficiencies and greater competition drive down costs, which will lead more employers to use the exchange, which will in turn give it more scale and bargaining power. You could easily see this exchange slowly emerge as the de facto American health-care system. And not through government fiat. Through consumer choice.

The weak version is state-based. It's open to only the unemployed, the self-employed and small businesses. Risk adjustment, if it exists at all, is crude. With such a limited pool of applicants, insurers aren't driven to compete, and the efficiencies of scale and competition are minimal. It never really grows, and instead exists as a marginal policy to mop up those who aren't covered by employers. Sort of an outlet shopping model for health-care, accessible only to the few able to get there.

Which version are we likely to get?

The bills moving through Congress all set up exchanges modeled more or less on what Massachusetts has done. But there are a few critical differences ... in how the exchanges would select which plans to offer...

In the bills that passed three House committees and the Senate Health, Education, Labor, and Pensions (HELP) Committee, the exchange would be a "prudent purchaser." In other words, it would have a staff that bargained with insurers to bring down premiums--and that made sure all plans lived up to strict guidelines for coverage and customer service. In effect, any insurer that wants to offer coverage through the exchanges has to get the equivalent of a "Good Housekeeping Seal of Approval" from the administrators. This is precisely how it works in Massachusetts.

By contrast, the Senate Finance bill envisions much weaker exchanges. Instead of choosing which plans to make available, the exchange administrators would, by law, have to accept any plan that meets a relatively minimal set of standards.

Jon Kingsdale, who runs the Massachusetts exchange, calls that a recipe for "policy disaster," as consumers faced a dizzying array of more expensive, less regulated choices. "It would be like telling your grocery store they have to offer every single kind of bread baked by every single bakery. ... The exchanges would be nothing more than an automated Yellow Pages." ...

Massachusetts senator, Kerry,... proposed to fix it by giving the exchanges the same powers envisioned in the House and HELP bills. But when Kerry introduced his plan last week, he couldn't get the votes to pass it. The reason, several sources on Capitol Hill say, was opposition from Olympia Snowe, the Maine Republican... Snowe seems to be concerned that a more aggressive exchange would amount to more government--which, in fact, it would be. But, as Massachusetts has shown, sometimes more government is exactly what health care needs.

Here's a bit more:

...Congress must also decide whether the exchanges would have any authority to decide which plans are offered and at what price, said Paul Fronstin, a policy analyst with the Employee Benefit Research Institute... “The exchange can have a more active role if it negotiate rates,” he said, “but it is not clear what is going to happen.”

In Massachusetts, for example, the state’s exchange, called the Connector, negotiates directly with the state’s private insurance companies in offering a small number of state-subsidized plans — similar to what an employer does when it screens the policies offered to its work force. ...

Jon Kingsdale, the executive director of the Commonwealth Health Insurance Connector Authority ... said the agency’s ability to negotiate on behalf of 180,000 customers who required state subsidies was a reason it achieved a 6 percent reduction in the cost of premiums this year.

But the Connector would be less effective if it had no say over which plans were offered on the exchange, said Mr. Kingsdale, who criticized the Senate Finance committee’s proposal, for example, as potentially creating little more than “an automated yellow pages.”

Because formulating an effective exchange is so difficult, some policy analysts are still arguing that only a new government-run competitor could create a powerful enough force in many parts of the country to offset the home-court advantage many insurers already wield. ...

And finally:

Chances are reasonably good that Kerry's vision of reform will prevail... But it's not a sure thing, which is why this seemingly narrow question deserves a lot more attention. Exchange design doesn't get the attention of controversies like the public option, abortion, or supposed death panels. In the long run, though, it could be far more decisive in whether reform works.

What is the bottom line to all of this? If exchanges are the way we are going to go, then how they are designed is essential. If we let lobbyists and misguided fears about government intervention stop us from giving the exchanges the breadth and authority they need, then they won't be effective.

This post has been republished from Mark Thoma's blog, Economist's View.

Public Sector Versus Private Sector: Why We Need Both

The ongoing debates regarding private versus public service often references the presumed edge of the private sector regarding cost and innovation. This completely ignores times and ways the public sector can force the private sector to deliver innovation at minimal cost: a consideration integral to questions of health care in the US. Mark Thoma from the Economist's View discusses this very timely issue.

The public option for health care appears to be dead, so this is a bit late, but I keep hearing that there are no examples of public-private competition, let alone successful ones. But there are examples of this, and they have been successful.

We are used to the argument that the private sector can discipline and usually beat the government in terms of providing services at minimum cost (though I should note that is not always true). What is harder to find is anything written on how the government can do the same to the private sector, force them to provide innovative services at minimum cost (the point of the public plan in health care), partly because nobody ever seems to ask that question. Thus, an important part of this description of public-private competition to provide garbage collection services in Phoenix to note is that the discipline runs both ways, government forces the private sector to lower costs and be innovative, and the private sector forces the government to do the same (e.g. see the part at the end where the private firm loses the contract to the government and vows to win the next contract with its experimental truck).

This article was written in 1984, so it is untainted by the current debate, but this was also a time period when there was a lot of enthusiasm and interest in privatization. Hence, many of the articles written around this time are slanted toward examining how the private sector can discipline the government, not the other way around. Still, the story below makes clear that the city did force the private sector to continue to innovate and improve. Another interesting point is that the private sector contractor claims that the bidding process is much improved when the city is forced to participate (e.g. in specifying specs, see the full article for more on this point), a benefit of public-private competition that is often overlooked (I couldn't find much written on the Phoenix experiment more recently, so I don't know for sure how well the program has performed since the 1980s and 1990s when most of the articles on the Phoenix experiment appeared, but it does appear that currently the city won contracts in two of the three regions where private sector competition is present):

Entrepreneurs Can Do Everything Government Can Do, Only Better, by Eugene Linden, Inc., Dec. 1, 1984: Chuck Walbridge and Ron Jensen both see themselves as solid businessmen. There is a certain irony in this perception: Although both may be solid, Jensen is not a businessman at all, but a government bureaucrat.

That hasn't kept him from competing with Walbridge, however. Last year, for example, the two bid on the same contract, with Walbridge coming up the winner. Jensen has vowed that it won't happen again."We will be analyzing every cost to see where we might have gone wrong," he says. Walbridge, for his part, admits that Jensen is a tough competitor...

Jensen is director of the Public Works Department of Phoenix -- a city that regularly invites private companies to bid against its own agencies on various contracts. It was such a contract, the one for garbage collection, that was awarded in the summer of 1983 to Walbridge's company...

The ... concept behind privatization is not as new as it may seem. U.S. government administrations have long vacillated between providing services themselves and contracting them out. During the early 1800s, for example, privately operated bridges, tollroads, fire departments, and street lights were commonplace. Subsequently, gross abuses by both private contractors and public officials led to an outcry that caused governments to start providing the services themselves. Now the wheel has turned full circle, and privatization is seen as a solution to the problem of governmental bloat -- a way for governments to provide improved public services and reduce expenditures at the same time. ...

Walbridge's company, National Serv-All, is a 27-year-old, family-owned garbage-collection and -disposal business... It was Chuck Walbridge's father, Glen, who launched the family in the garbage business ... in Anderson, Ind...

Chuck Walbridge, who took over in 1979, concentrated on learning the business: how to deliver the service and how to keep the customers satisfied. ... Small as the company was, Walbridge was keenly interested in efficiency and innovation, and he constantly searched for ways to lower costs and improve service. Toward that end, he struck up a relationship with International Harvester Co.'s engineering division, which was located in Fort Wayne, and began testing Harvester's new trucks, making suggestions about improvements. He also began designing his own vehicles, trying out different bodies and control systems. In his quest to keep up-to-date with the latest advances in garbage collection, he made his first trip to Phoenix in 1975.

At the time, Phoenix had not yet begun to contract out its garbage collection, but it did use an innovative collection system designed to minimize labor costs and beat the desert heat. The system was built around a fleet of one-person trucks with mechanical arms that could pick up large, standardized containers. (Today, such containers are so big that transients occasionally take up residence in them, and Walbridge instructs his men to shake the containers before dumping them.) Walbridge was fascinated by the idea and inquired where it had come from. He was told that Phoenix was working with a system developed by a small Arizona company with the unlikely name of Government Innovators Inc.

Government Innovators is a story in its own right. Founded in 1971, it had grown out of the lunchtime bull sessions of a group of entrepreneurially minded bureaucrats in nearby Scottsdale, Ariz. For entertainment, they had often brainstormed about how they would improve their departments if they could keep the money they saved. Among the ideas they came up with was one for automated garbage trucks. The idea seemed like a natural -- so much so that they even designed the equipment and went looking for a company to produce the system. When they found no solid offers, they decided to do it themselves, building the nation's first automated garbage-collection system within the Scottsdale Public Works Department. Subsequently, some of them left public service and formed Government Innovators.

Curious about the possibilities of such a system, Walbridge purchased one of Government Innovators' trucks and took it back to Fort Wayne. Over the next few years, he experimented with various modifications, which he discussed with people at the company. They were duly appreciative. ... Walbridge's knowledge of equipment and systems stood him in good stead in 1983, when National Serv-All suddenly found itself competing nationwide against the giants of the garbage-collection industry. ...

Walbridge was ... impressed with the situation he encountered when he returned to Phoenix in 1982. There had been changes since his first visit seven years earlier. For one thing, the city had begun inviting bids for city contracts, largely in response to the budgetary constraints arising from the tax revolt of the late 1970s. That was a situation faced by government officials all over the country...

The center of privatization activity in Phoenix has been Ron Jensen's Public Works Department, which began inviting bids on garbage-collection contracts in 1978. From the beginning, the city stipulated that the Phoenix Sanitation Division would hold onto 50% of the business, to ensure that garbage collection would continue in the event that a private vendor proved unable to deliver service for one reason or another. The other 50% was put out for bidding, with the sanitation division competing against private vendors for two of the four available five-year contracts.

To keep the department's bids honest, Phoenix arranged to have them prepared by the city auditor, who made sure that they represented costs fairly on a basis comparable to those used by the private contractors. This task was easier in Phoenix than elsewhere because the city uses cost accounting. Thus, for example, the city's equipment fleet is centralized in one division of the Public Works Department and then "rented out" to various departments at a per-mile or per-hour rate calculated to reflect overhead. Management overhead is likewise apportioned among the department, right down to a fraction of the city manager's salary.

All of these systems were in place in 1982 when Walbridge returned to Phoenix... Walbridge believed National Serv-All would be in a strong position vis-a-vis other competitors, thanks to his own knowledge of the city's equipment and collection system. "I had helped to design the [Harvester] trucks Phoenix was using," he says."We knew more about them than anyone else. While Waste Management and the others buy their equipment, we custom design our own. . . . One of the reasons we beat [both the giants and the city] was that we planned to take their bodies off and put our [more efficient] bodies on." Although the city did have an advantage in knowing the actual costs of maintaining the equipment, says Walbridge, "I felt we had about a 15% advantage in productivity. Our system would load barrels faster, and our compactors gave our bodies more capacity."

In the end, that proved to be the difference. Walbridge's winning bid for contained garbage was a mere penny lower than the city's (on a unit-per-household-per-month basis). Waste Management came in third, SCA Services fourth, and Browning-Ferris Industries fifth. The thinness of the margin notwithstanding, the city conceded defeat and awarded the contract to National Serv-All. ...

National Serv-All might lose the Phoenix contract when it comes up for bid again in four years. Not that Walbridge expects to lose. "Phoenix is exceptional as far as cities go," he says. "They have a better understanding of business, and they are fair." But, in a fair contest, he believes he can usually underbid a government agency. "A city is hobbled by a low-bid requirement in the purchase of equipment, which sometimes forces them to take equipment that may not be the best. I can buy what I want." That means, for example, that a city might be unable to purchase Government Innovators truck bodies, which cost 10% more than other models, but reduce overall costs by about 20%. Adds Kevin Walbridge, "We're motivated, while cities are still cities. They will always be bureaucratic."

Marvin Andrews and Ron Jensen don't agree. They believe that government workers can be motivated to keep costs down, if only because they want to hold on to their jobs. "Quite frankly, we learn from the experience of going through the contracting process," says Jensen. "When we lose a bid, it's up to us to figure out why we lost it. Where were our costs too high? Was it equipment costs? Labor costs? And this whole feeling of competition gets to the unions, too."

This past August, Jensen's department demonstrated just how serious it was about the process, turning in the low bid on a major contract for both contained and uncontained refuse. The city's bid, moreover, was low by a substantial margin, thanks in part to its planned purchase of a fleet of new trucks. National Serv-All -- which came in fourth in the bidding -- was taken by surprise. "What they did," says Walbridge, "was to tighten up their specs on their trucks. It was smart on their part -- the new truck is a first-class piece of machinery." Walbridge says he is now working on an experimental truck that will allow National Serv-All to do better the next time around.

While stimulated by the competition, Walbridge is still not thrilled by the Phoenix approach to privatization. Granted, it works in Phoenix, but elsewhere -- he says -- it is subject to abuse. After all, many governments are less scrupulous than Phoenix's, and Walbridge would prefer not to spend $30,000 preparing a bid only to find that the competition is rigged, or that the process is so murky that he cannot figure out what is going on."I understand a private bid, but it is very difficult to know how a city formulates its bids."

Walbridge's cautions notwithstanding, it is precisely the competitive discipline imposed by Phoenix's system that makes the city an attractive place for National Serv-All to do business. Only by applying private-sector standards to its employees and departments -- and by subjecting them to competitive pressures -- is the city government able to keep track of its real costs, and thereby to come up with detailed job specifications. Without competition, privatization in Phoenix would be subject to all the problems and pitfalls that Walbridge encountered in other cities.

From that perspective, the Phoenix system -- a system of sound management leavened with a touch of entrepreneurism -- may well hold the key to the future of privatization in America. If it does, Chuck Walbridge is liable to find himself competing with government bureaucrats like Ron Jensen for years to come.

Update: I meant to include this 2003 article as an example of government's ability to innovate:

Ron Jensen, Phoenix's public works director, was the driving force behind the development of the first automated collection truck system “He actually is the one who started the privatization effort here as well,” Franklin says.

Tinkering with Equipment

Obviously, automation relies on equipment, which Franklin remembers vividly as the biggest hurdle. “I started as a mechanic in 1979 and worked on the stuff that the city was running. Most of the equipment was farm machinery hydraulics and stuff built in the basement,” he says. “We had a hydraulics shop that had eight or nine people working internally, building a lot of components. We built our own lifts and did those things to support ourselves because the industry wasn't mature enough.”

This article has been republished from Mark Thoma's blog, Economist's View.

Why National Health Care Insurance And Cap-And-Trade Are Terrible For The Economy

Is this the right time for the government to pursue ambitious and potentially expensive new reform to healthcare and the environment? Peter D. Schiff argues that such action are not only detrimental to the economy, but have little chance of achieving success. See the following post from Money Morning.

Misguided government policies have already dealt vicious body blows to our economy, but that hasn’t stopped politicians last week from launching two new kicks to the recovery - a national health insurance plan and a carbon emissions regulation system called “cap-and-trade.”

Even if these plans could achieve their desired ends, which is highly unlikely, I would have hoped Washington would refrain from throwing more monkey wrenches into the economy until it shows some signs of resurgence. The last thing we need right now is to further encumber our economy with higher taxes and additional regulations.

The meteoric rise in healthcare costs, which has become an unending nightmare for U.S. businesses and consumers, is not an accident. This painful condition arose from excess government involvement in the system, tax provisions that encourage the over-utilization of health insurance, and government support of an out-of-control malpractice industry. Rather than allowing more bad policy to drive healthcare costs further upward, we should be looking at ways to allow market forces to reign them back in.

If left alone, the free market drives quality up and costs down. Government programs produce the opposite result. Despite the president’s claim that a federal plan will bring costs down, there is no historical precedent for such faith.

Simply providing more widespread health insurance, as the Obama administration plan offers, is not a solution. In fact, it will aggravate the problem. Since consumers no longer pay for routine medical expenses out of pocket, comprehensive health insurance creates a moral hazard for both patients and doctors. To maximize the value of the health insurance “benefit,” most workers opt for low deductibles and co-pays. Therefore, doctors learn that their patients are not concerned with the cost of care, and so they are free to bill insurance companies at the maximum allowable rates.

Given our current tax code, the simplest way to bring down medical costs would be to fully tax healthcare benefits as wages and simultaneously increase the personal deduction by an amount significant enough to neutralize the effect of the tax increase.

This would do two things: First, the uninsured would get a huge pay increase, enabling them to buy reasonably priced catastrophic policies. Second, those currently insured could opt out of expensive employer-provided plans, trading premiums for extra wages, then buy a more economical plan. The savings would go right into their pockets.

The bottom line is that aggregate medical costs won’t come down unless services are rationed more wisely. Rather than being used as a pre-payment plan for routine care, insurance should only cover unpredictable, catastrophic costs.

As a comparison, homeowners often carry fire insurance, but seldom maintenance insurance. You buy fire insurance to guard against a catastrophic loss, which is a low probability but high cost event. As a result, fire insurance is relatively affordable, since premiums paid by all those homeowners whose houses do not burn down more than pay for the losses on those few whose houses do.

On the other hand, no one carries home maintenance insurance to pay for a clogged drain or broken garage door. If insurance paid for the plumber visit every time a toilet overflowed, we would now have a plumbing crisis, and Congress would be looking to reign in runaway plumbing bills with “national plumbing insurance.”

In his press conference, U.S. President Barack Obama claimed that government insurance would not drive private providers out of business. This is absurd. As the government provider will not have to produce a profit or accurately account for its contingent liabilities, it will provide insurance on an actuarially unsound basis.

With taxpayer subsidies, the government provider can run losses indefinitely. If private insurers did this, they would either be shut down or go bankrupt. Therefore, the cost of government provided health insurance will not be confined to the premiums paid, but will include the taxpayers’ bill to continually bail out the government provider.

When Medicare was first proposed back in 1966, it cost $3 billion per year, and the projection was for inflation-adjusted annual costs to rise to $12 billion by 1990. The actual cost in 1990 was $107 billion, and the 2009 estimate is a staggering $408 billion! So much for government estimates on health care.

As if this were not bad enough, the House of Representatives voted to pass the American Clean Energy and Security Act, otherwise known as the “cap and trade” bill. Disguised as an environmental bill, this proposal is merely another gigantic tax.

The lion’s share of the new revenue is already committed to politically connected special interests that will reap windfalls at everyone else’s expense. To make matters worse, the bill before Congress amounts to a blank slate, with the Environmental Protection Agency (EPA) empowered to draft the details in any manner they see fit. If Congress is going to shoot the economy in the knee, they should at least be required to pull the trigger themselves.

“Cap and trade” will do nothing to reduce pollution, yet it will drive up production costs throughout the economy - rendering us even less globally competitive than we are today. In addition to the huge cost of paying the tax, its enforcement involves the creation of an entire new bureaucracy, the costs of which will be borne by American consumers in the form of higher prices.

Years of reckless borrowing and spending have left us in a gigantic hole. Getting out of it requires that we make the most effective use of all available resources. We need labor and capital to operate as efficiently as possible so we can save and produce our way back to prosperity.

Unfortunately, national health insurance and “cap and trade” are two steps in the wrong direction. Rather than getting us out of this hole, they will merely cave in the walls around us.

This post was republished from Money Morning. You can also view this post at Money Morning, an investment news website.

Healthcare Reform Could Push The US Over The Edge

Kenneth Rogoff, Harvard professor and former chief economist of the International Monetary Fund, warns that expensive healthcare reform could lead to a financial crisis worse than we are currently experiencing. However, University of Oregon economics professor Mark Thoma disagrees with the assumption that reform would necessarily increase costs. See the following for a summary of Rogoff's commentary and Thoma's response in the following post from The Economist's View.

Kenneth "The Hawk" Rogoff:

America should also look to its fiscal health, by Kenneth Rogoff, Commentary, Financial Times:
America desperately needs a better framework for providing healthcare and Barack Obama’s administration is right to press on for change... Yet given the explosion of the federal debt, it is extremely important to craft a plan that will not excessively risk the government’s own fiscal health. The risks cannot easily be overstated.

The US government is already entering a prolonged period where it is extremely vulnerable to a loss in investor confidence from the Chinese and other main holders of its Treasury securities. Foreign investors are rightly concerned about the deeply ingrained reluctance of Americans to tax themselves. The last thing the US needs is to be viewed as one giant California, rich but unwilling to pay enough taxes to fund the services its citizens demand. A sharp rise in taxes to pay for healthcare initiatives could potentially weaken the credibility of the government’s promise to raise taxes as needed to pay off debtors. ...

[I]n principle, fixing the imbalances in the Social Security and, especially, the Medicare programmes could provide a powerful offset to the huge increase in debt burdens visited by the financial crisis.

Unfortunately, the idea that healthcare reform will alleviate debt problems rather than exacerbate them is far-fetched..., many proposed healthcare reforms are more likely to worsen the government’s budgetary health than to improve it. This should hardly be surprising, given that a main purpose of reform is to help provide better care for Americans who cannot afford insurance.

Higher taxes to pay for healthcare are also likely to reduce US growth, making it far more difficult to escape the debt trap. This comes at a time when other policy initiatives, such as tackling environmental degradation and income inequality, are also likely to imply higher tax burdens... In addition, the continuing weakness of the financial sector weighs on growth, and it is by no means clear yet when and how some semblance of normality will be restored. ...

All of these considerations appear to underscore the importance of finding ways to keep the new health plan from being overly burdensome, and to avoid unduly optimistic projections on efficiency savings. Healthcare reform is no substitute for finding a credible path to fiscal sustainability. ...

Make no mistake, the US and much of the developed world is in a frighteningly precarious fiscal state. ... It is a disgrace that the world’s richest country cannot provide reliable basic care for its poorest citizens. But if the politics of reform produces too extravagant a plan when the nation’s fiscal health is already so weak, the US may experience a form of financial crisis even more virulent than the one it is recovering from. Any healthcare plan would then be dead on arrival.

Setting the fear mongering about the future aside - and there's no evidence in long-term interest rates that financial market participants are worried about these issues - here are a few things to keep in mind when thinking about health care reform First, it is not a demographic problem. This graph is from a CBO presentation on this point, and is fairly self-explanatory:



Second, rising health care costs is not just an issue for Medicare and Medicaid, the same rise in costs is also projected to hit private sector health care. Again, from the CBO:



Projected Spending on Health Care Under an Assumption That Excess Cost Growth Continues at Historical Averages (Percentage of GDP)

Going back to the question of the effect of health care reform on the long-run budget, though expanding coverage will expand increase the total amount of medical care that is provided, and hence increase costs, there seems to be some confusion between expanding overall coverage and simply moving the dividing line between the public and private sectors upward so that the public sector expands and the private sector contracts by the same amount. Changing the dividing line, all else equal, simply changes how the bills are paid, it has no effect at all on the overall health care burden that people face (it moves the dividing line in a graph like the one above showing the public and private sectors explcitly without changing the total area). So it's hard to see why higher taxes driven by this type of a change would have the negative economic effects Rogoff is worried about.

But he is more worried that expanding the size of the public sector both by moving the dividing line up and by including more people - the latter in particular - will increase increases health care costs and add to the debt burden, which in turn would require higher taxes. Is that true? It would if the only effect of the expansion of the public sector was to increase the number of people receiving care, and his claim that costs won't fall, or at least not by much, presumes this is how it will work. But when we look at other countries that have substantially expanded the public sector we see lower costs - on the order of 50% lower - and no reduction in the quality of the care that people receive. That's a huge reduction in costs, a reduction large enough to allow a significant expansion of coverage without increasing costs at all. I don't think we'll reduce costs by that magnitude, 50% seems like a lot to hope for, but it does imply that it's possible to reform the system without compromising quality or experiencing the dire consequences Rogoff fears.

This article has been reposted from the Economist's View. The full post can also be viewed on the Economist's View.

Taking A Bite Out Of Obesity: Alabama’s New Fat Fee For State Workers

In a move that already has some getting their mu-mus in a twist, Alabama state has instituted a new annual fee for obese state-workers to offset lost productivity and high insurance costs. The fee is only $25 dollars for the year, which is half of what some smokers pay per month at companies and in state offices around the country because of their habit. Still, some are calling the new policy oppressive, even “Big Brotherish,” which I think we all can agree is hyperbolic and malapropos, not to mention ironic: By name alone, Big Brother would seem a kindred spirit to the “Big Boned” lot.

To other state workers, however, this sort of kick in the rump is long overdue; Alabama is at critical mass, with over 30 percent of the adult population now obese, second only to Mississippi and eking just ahead of Tennessee in third place. If weight is not curbed soon, this generation and those that follow will be facing astronomically higher incidences of obesity-induced diseases, bringing higher health-care costs to companies and the state, higher mortality rates and less productivity. In areas where the economy is already sagging like an unsightly mudflap, the situation is dire.

The issue at hand only becomes more complex, larger and jigglier as one considers it, for the bathroom scale only tells a portion of how obese individuals’ eating habits impact their lives. Most overweight people are not packing on the pounds by eating leafy greens and fresh fruit, but rather high-fat, low-quality foods. One must remember that this is often not by choice; poorer communities have the least access to fresh, healthy foods and frequently subsist on fast food and pre-packaged snacks which per serving have 1 percent of one’s daily required nutrients, 100 percent of one’s daily fat allowance, and 1000 percent of the trans-fats, pesticides, rat hair and roach droppings that one would ever wish to consume. In other words, obese individuals may ultimately be accountable for their own weight, but the infrastructure and culture that surrounds them makes it all too easy to pack on those costly pounds.

There is a lot of sensitivity surrounding the issue as well, and those who will be affected are already lowing at the gates about the unfairness of the situation. The main complaint among the policy’s detractors is that obesity is caused by health problems and heredity over which obese individuals have no control; therefore, these individuals should not be hit with a sort of “fat tax”, unlike smokers, who choose their unhealthy habit.

This argument is particularly weak, but I can see both sides of the issue. For kicks and giggles, let’s look at a point-counterpoint breakdown of some of the controversy surrounding obesity.

POINT	COUNTERPOINT
Obesity is and always will be voluntary. Generations before were thinner because they ate better and exercised more. It isn’t genetic, it isn’t magic, and there is no disease that makes one gain weight spontaneously, so says the first law of thermodynamics.	Certain individuals are genetically pre-disposed to store that consumed energy which makes them more prone to weight-gain. This, combined with the lethargy inspired by contemporary culture, leads to eventual obesity. To penalize individuals for this is discrimination.
This isn’t penalization; it's recouping losses that, though they may not be entirely in your control, still cost the system a great deal of money—much more than $25 per year, in fact.	To suggest that we pay more into the system also suggests that we are doing something wrong or that we are parasites on that system.
Yea. Pretty much. The truth hurts, huh fatso?	You know, it is derogatory remarks like that which cause a lot of overweight people to become depressed and seek solace in food, thereby exacerbating the problem.
‘Exacerbating the problem’ being code for ‘adding a cup size.’	I’m a man!
Indeed you are, a man whose very presence calls into question the words of John Donne: "No man is an island unto himself."	Screw this. Where are my Ding Dongs?

In the end, the fee is so minimal that no one’s wallet will be hurting for it, though a few feelings may be hurt. As the fee is also only annual, it will soon be forgotten and thus provide little motivation to people to lose weight. Furthermore, the fee is discretionary, and if an individual is putting forth a genuine effort, it can be waived.

The one last worrying aspect of this is that it creates one more precedent of what one might call a lifestyle tax. Though I personally would like to see fees levied against people who overuse the word “synergy” or sound effects in Power Point presentations (the mental anguish caused by these infractions does indeed cause lost productivity), I wouldn’t legislate these things for fear that I might one day be nickel-and-dimed by my own foibles and lifestyle choices. After all, if I want to drink a little paint when I kick back and play Russian Roulette at the local leper colony, I may be putting my health at risk, but that’s my business, thank you very much.

I’d love to hear from huskier readers what they think. Is this sort of policy motivational or degrading? Leave a comment and we’ll chew the fat.