Who Wants To Be ‘Too-Big-To-Fail’?
I’ve argued that the Dodd-Frank financial reform bill does not end “too-big-to-fail”, that is the belief that certain companies are implicitly backed by the government because policy-makers are unlikely to let said institutions actually fail. By naming some companies as ”systemically important” — as required by Dodd-Frank — the government is actually sending a signal as to who is likely to be bailed out.
As evidenced by regulators’ behavior during the financial crisis, the prime beneficiaries would be the creditors of these companies, as even when shareholders and management suffered, creditors generally did not. This should allow such firms to borrow at a cost lower than firms not deemed systemically important.
Given this funding advantage, it would seem natural that firms would want to be included as systemically important. Sure they might be examined by bank regulators more often, but that’s hardly a large cost compared to the funding advantage.
Congressman Frank has attempted to refute that there are any benefits from being deemed “systemically important” by the fact that ”so many financial institutions have lobbied against being designated in this way.” What his argument misses, or chooses to ignore, is that these benefits are not the same for all institutions. It is companies that rely heavily on debt market financing, such as banks, that have the most to gain. And under Dodd-Frank, the largest banks are automatically included. They have no opportunity to lobby to be in or out. The firms that are not automatically in, the most important of which are insurance companies, do not fund themselves primarily via the debt markets. Insurance companies get most of their funding from the premiums paid by their policyholders. And those premiums must be sufficient to cover expected losses, which have little to do with funding costs in the debt markets. Other non-bank financial companies, such as hedge funds and private equity, do not gain to the same extent that banks do because they have traditionally been a lot less leveraged than banks.
So the answer to Mr. Frank’s point is that those who have the most to gain from being ”systemically important” are already included, those with the least the gain are the very ones lobbying against being included. The real perversity is that once they are included, they will have a strong incentive to shift their business models toward more debt funding, making them riskier and more likely to fail (debt markets are far more fickle than insurance policy-holders). We are left relying solely on the judgment of the regulators to avoid this outcome, the same regulators who were asleep at the wheel as the housing bubble expanded.
Republicans Getting Rich off ObamaCare
Here we have the spectacle of a former Republican Health and Human Services secretary getting rich by helping states implement ObamaCare. Leavitt Partners (among other consultants) is helping states create the law’s health insurance “Exchanges.” Or the non-ObamaCare-compliant health insurance Exchanges that will by law become ObamaCare-compliant Exchanges. Via Politico:
More than $300 million in exchange grants has already flowed into the states since the Affordable Care Act passed. That number will grow exponentially in the coming months, as states move from the initial steps of passing exchange legislation to the more lucrative task of setting them up.
For health consultants and information technology vendors, it’s already shaping up to be a gold mine…
The opportunity is, seemingly, everywhere. Even in states that have used executive orders and heated rhetoric to push back against implementation of the reform law, vendors still see possible contracts.
“There is a group that feels as though they don’t want to be associated with the Affordable Care Act,” said Leavitt Partners CEO Michael Leavitt, who was Health and Human Services secretary under President George W. Bush. “Privately, though, it’s clear that several of those are planning behind the scenes, because they don’t want to have a federal exchange.”
These Exchanges—there is no such thing as a state-run Exchange—are the government bureaucracies that will make health insurance more expensive, induce employers to drop coverage, entrench ObamaCare, and dole out hundreds billions of debt-financed government subsidies to insurance companies.
Filed under: Cato Publications; General; Government and Politics; Health Care
Obama’s Populism a Hoax: ObamaCare Is a Sop to Big PhRMA
From the invaluable Tim Carney:
The Obama team regularly dismisses opponents as industry lackeys. The Democratic National Committee blasted out e-mails this week warning that “for every member of Congress, there are eight anti-reform lobbyists swarming Capitol Hill” and “Congress is under attack from insurance lobbyists.”
But drug industry lobbyists, according to Politico, spent the weekend “huddled with Democratic staffers” who needed the drug lobby to “sign off” on proposals before moving ahead. Meanwhile, we learn that the drug lobby is buying millions of dollars of ads in 43 districts where a Democratic candidate stands to suffer for supporting the bill. The doctors’ lobby and the hospitals’ lobby are also on board with the Senate bill.
So the battle at this point is not reformers versus industry, as Obama would have you believe. Rather, it is a battle between most of the health care industry and the insurance companies.
(And the insurers are not opposed to the whole package. On the bill’s central planks — limits on price discrimination, outlawing exclusions for pre-existing conditions, a mandate that employers insure their workers and a mandate that everyone hold insurance — insurers are on board. They object mostly that the penalty is too small for violating the individual mandate.)
A Government Man
This afternoon Politico Arena asks:
Will the president’s health care remarks today sway enough votes to pass ObamaCare through “reconciliation”?
My response:
Who knows? What they show beyond all doubt, however, is the mind-set of the president and the bill’s proponents. Consider just a few of his opening words: “Everything there is to say about health care has been said and just about everyone has said it. So now is the time to make a decision about how to finally reform health care so that it works, not just for the insurance companies, but for America’s families and businesses.”
Notice first the insinuation that health care works today for the insurance companies, but not for the rest of us. Obama has to have his foil, this man with no experience in the private sector and little understanding of how that sector works. But notice, more importantly, that we need “to finally reform health care so that it works” — the implication being that this is a collective undertaking, the only question being how to do it. “We’re all in this together.” In the private sector, if we can’t reach an agreement about some proposed undertaking, we walk away. That seems inconceivable to Obama. He’s a government man: conceiving public solutions to private problems is what his life is all about.
I suppose you could say that government is so enmeshed in health care today that there are only public solutions to the problems government is largely responsible for having created — starting with the favorable tax treatment employer-provided health care affords. But the direction of reform needn’t be toward even greater government. It might be toward less government, as with health savings accounts. But that approach has been rejected from the start by Obama and his Democratic supporters. They move in only one direction.
Reid Won’t Even Tell His Base What He’s Asking Them to Swallow
Here’s my answer to today’s “Big Question” on The Hill‘s Congress Blog:
Now that the “public option” is dead, both the Left and the Right should be able to agree: the Senate bill is nothing but a $450 billion bailout of the private insurance companies.
In fact, the bailout may be several multiples of that figure.
That $450 billion just represents checks that the Treasury would write to private insurance companies. The Reid bill would also force nearly every U.S. citizen to fork over cash to the private insurance companies — no matter how lousy a deal they offer. A recent CBO memo reveals that Reid has been meticulously working behind closed doors to conceal the full cost of his private-insurer bailout.
The Left and the Right should insist that Reid produce a complete CBO score that reveals the full cost of his bill’s private-insurer bailout — in particular, the cost of the individual and employer mandates.
Left-wing Democrats will follow their own consciences when deciding how to vote. But they should force Reid to be honest about what he’s asking them to swallow.
FEHBP Plan Is No ‘Moderate Compromise’
Senate Majority Leader Harry Reid (D-NV) has announced that he has reached a super secret compromise on how to deal with the so-called public option for health reform. While Reid said the agreement was too important to actually tell anyone what is in it, most of the details have been leaked to the press.
Rather than set-up a completely government-run insurance plan to compete with private insurance, Congress would establish a program similar to the Federal Employees Health Benefit Program (FEHBP), which currently covers government workers, including Members of Congress. The FEHBP offers a variety of private insurance plans under a program managed by the US Office of Personnel Management (OPM). Each year OPM uses the Federal procurement process to solicit bids from insurance companies to be one of the plans offered. Premiums can vary, but participating plans operate under stringent rules. As a model, the FEHBP is apparently acceptable to moderate Democrats because the insurance plans are private rather than government entities, while liberals like it because it is government regulated and managed.
In addition, the compromise plan would expand Medicare, allowing workers ages 55 to 65 to “buy in” to the program, and may also expand Medicaid.
A few reasons to believe this is yet another truly bad idea:
- In choosing the FEHBP for a model, Democrats have actually chosen an insurance plan whose costs are rising faster than average. FEHBP premiums are expected to rise 7.9 percent this year and 8.8 percent in 2010. By comparison, the Congressional Budget Office predicts that on average, premiums will increase by 5.5 to 6.2 percent annually over the next few years. In fact, FEHBP premiums are rising so fast that nearly 100,000 federal employees have opted out of the program.
- FEHBP members are also finding their choices cut back. Next year, 32 insurance plans will either drop out of the program or reduce their participation. Some 61,000 workers will lose their current coverage.
- But former OPM director Linda Springer doubts that the agency has the “capacity, the staff, or the mission,” to be able to manage the new program. Taking on management of the new program could overburden OPM. “Ultimate, it would break the system.”
- Medicare is currently $50-100 trillion in debt, depending on which accounting measure you use. Allowing younger workers to join the program is the equivalent of crowding a few more passengers onto the Titanic.
- At the same time, Medicare under reimburses physicians, especially in rural areas. Expanding Medicare enrollment will both threaten the continued viability of rural hospitals and other providers, and also result in increased cost-shifting, driving up premiums for private insurance.
- Medicaid is equally a budget-buster. The program now costs more than $330 billion per year, a cost that grew at a rate of roughly 10.7 percent annually. The program spends money by the bushel, yet under-reimburses providers even worse than Medicare.
- Ultimately this so-called compromise would expand government health care programs and further squeeze private insurance, resulting in increased costs and higher insurance premiums, and provide a lower-quality of care.
No wonder Senator Reid wants to keep it a secret.
House Democrats Choose Dishonesty
I’m not a fan of the House Democrats’ proposed takeover of the health care sector. (If there’s one thing that legislation is not, it’s “reform.”) But at least House Democrats were honest enough to include the cost of the $245 billion bump in Medicare physician payments in their legislation, unlike some committee chairmen I could mention.
Unfortunately, House Democrats have since decided that dishonesty is the better strategy. They, like Senate Democrats, now plan to strip that additional Medicare spending out of health “reform” and enact it separately. (Democrats are already trying to exempt that spending from pay-as-you-go rules, making it easier for them to expand our record federal deficits.) Why enact it separately? Because excising that spending from the “reform” legislation reduces the cost of health “reform”!
But why stop there? Heck, enact all the new spending separately, and the cost of “reform” would plummet! Enact the new Medicaid spending separately, and the cost of “reform” would fall by $438 billion! Do it with the subsidies to private health insurance companies, and the cost of “reform” would plunge by $773 billion! All that would be left of “reform” would be tax increases and Medicare payment cuts. Health “reform” would dramatically reduce federal deficits! Huzzah!
Except it wouldn’t, because at the end of the day Congress would be spending the same amount of money.
The only good news may be this. If this dishonest budget gimmick succeeds, then Congress will have “fixed” Medicare’s physician payments. Absent that “must pass” legislation, the Democrats health care takeover would lose momentum, and would have to stand on its own merit. That would be good for the Republic, though not for the legislation.
(Cross-posted at Politico’s Health Care Arena.)
Taking Over Everything
“My critics say that I’m taking over every sector of the economy,” President Obama sighed to George Stephanopoulos during his Sunday media blitz.
Not every sector. Just
- health care
- energy
- local schools
- banks
- insurance companies
- automobile companies
- compensation at financial firms
- newspapers
- the internet
This president and his Ivy League advisers believe that they know how an economy should develop better than hundreds of millions of market participants spending their own money every day. That is what F. A. Hayek called the “fatal conceit,” the idea that smart people can design a real economy on the basis of their abstract ideas.
This is not quite socialism. In most of these cases, President Obama doesn’t propose to actually nationalize the means of production. (In the case of the automobile companies, he clearly did.) He just wants to use government money and government regulations to extend political control over all these sectors of the economy. And the more political control achieves, the more we can expect political favoritism, corruption, uneconomic decisions, and slower economic growth.
Obama’s Health Care Speech in Plain English
Hell of a speech last night, eh? Here are a few of my favorite gems.
Under this plan, it will be against the law for insurance companies to deny you coverage because of a pre-existing condition.
Translation: I, Barack Obama, ignoring thousands of years of failed price-control schemes, will impose price controls on health insurance. I will force insurers to sell a $50k policies for $10k. What could go wrong?
We were losing an average of 700,000 jobs per month.
True. And your employer mandate would kill hundreds of thousands of low-wage jobs that would never come back.
They will no longer be able to place some arbitrary cap on the amount of coverage you can receive in a given year or a lifetime. We will place a limit on how much you can be charged for out-of-pocket expenses…. And insurance companies will be required to cover, with no extra charge, routine checkups and preventive care.
Translation: Boy! Are we going to force you to buy a lot of coverage!
I will make sure that no government bureaucrat or insurance company bureaucrat gets between you and the care that you need.
…except for the bureaucrats I proposed to put between you and your doctor.
Some… supported a budget that would have essentially turned Medicare into a privatized voucher program. That will never happen on my watch. I will protect Medicare.
Translation: I will never let seniors control their own health care dollars. I will never give up Washington’s control over your health care decisions. Mmmmuuuuhahahahahaha!
…there are too many Americans counting on us to succeed.
Translation: There are too many lobbyists counting on me to succeed: drug-industry lobbyists, health-insurance lobbyists, physician-cartel lobbyists, large-employer lobbyists, hospital lobbyists….
It’s a plan that asks everyone to take responsibility for meeting this challenge – not just government and insurance companies, but employers and individuals.
Translation: I’m going to tax the hell out of you, but I don’t want you to notice how much I’m going to tax you. So I’m going to tax employers and insurance companies, and they’re going to pass the taxes on to you. Most of the taxes won’t even show up in the government’s budget. It’s all very clever. No, seriously – just ask my economic advisor Larry Summers.
It’s a plan that incorporates ideas from Senators and Congressmen; from Democrats and Republicans – and yes, from some of my opponents in both the primary and general election.
Translation: I may have savaged your ideas in the past, called them irresponsible…risky…dangerous…whatever. But that wasn’t about principle; I just wanted to become president. Now that I’m president, I need a win. So you’ll help me, won’t you? Hey, where’s Hillary?
Congress Abolishes Health Care Scarcity?
Reading the New York Times‘s coverage of a Senate committee’s recent vote on health care legislation, I was struck by the following statement from Sen. Dodd:
If you don’t have health insurance, this bill is for you,” said Senator Christopher J. Dodd, Democrat of Connecticut, who presided over more than three weeks of grueling committee sessions. “It stops insurance companies from denying coverage based on pre-existing conditions. It guarantees that you’ll be able to find an insurance plan that works for you, including a public health insurance option if you want it.”
The bill would also help people who have insurance, Mr. Dodd said, because “it eliminates annual and lifetime caps on coverage and ensures that your out-of-pocket costs will never exceed your ability to pay.”
A basic understanding of economics should tell you this can’t be right. The federal government and the insurance industry have limited resources; the demand for health care is potentially unlimited. Therefore, no conceivable legislation can ensure that the demand for health care will never exceed the resources available to pay for it. All legislation can do is to shift who controls the allocation of scarce health care dollars—in this case away from patients and insurance companies and toward the federal government. Reasonable people can disagree about whether that’s an improvement, but it’s disingenuous to pretend that any legislation could “eliminate” caps on coverage or “ensure” that health care wants will never outstrip our ability to pay for them.
Health Care Priorities
As Washington debates a big increase in federal health care spending, I came across these two articles on what a splendid job the government is doing managing its current health programs.
Harvard professor Malcolm Sparrow recently testified that roughly $100 billion or more of Medicare and Medicaid dollars go down the drain each year due to fraud. It’s easy to rip these programs off because of their vast size and electronic claims processing. Medicare processes more than 1 billion of claims each year.
This Washington Post article last year described one particular example of the fraud. A high-school drop-out managed to bilk Medicare out of $105 million by submitting a 140,000 false claims from her laptop computer.
So we’ve got $100 billion or so of taxpayer’s hard-earned money being stolen each year from our current public health care plans. You would think that with today’s giant budget deficit that the highest priority of policymakers would be to reform these programs to reduce the unbelievable and disgusting amounts of graft. But no, many in Congress and President Obama have decided that current government health care works so well that they want to expand it.
President Obama wants to create a new “public health option” to “keep insurance companies honest.” Hey Mr. President, you should do something about the $100 billion of dishonesty in current public health plans, instead of hitting up taxpayers to fund an even more bloated health care budget.
The Co-op Cop-out
Faced with rising opposition to a so-called “public option” in health care reform, some Democrats are floating the idea of establishing health insurance “co-operatives” as an alternative. Opponents of a government takeover of the health care system should not be fooled.
A “co-op” can be defined as a business owned and controlled by its workers and the people who use its services, in this case presumably the people whom it insures. In that sense, government provision of some sort of legal framework or seed money to help establish health insurance co-ops seems relatively harmless but also relatively pointless. The U.S. already has some 1,300 insurance companies. Adding a few more would accomplish…what?
It is suggested that the “co-ops” would be nonprofits, and therefore would offer better service and lower costs. But many insurance companies, including “mutual” insurers and many “Blues,” are already nonprofit companies. Furthermore, states already have the power to charter co-ops, including health insurance co-ops. In fact, health care co-ops already exist. Health Partners, Inc. in Minneapolis has 660,000 members and provides health care, health insurance, and HMO coverage. The Group Health Cooperative in Seattle provides health coverage for 10 percent of Washington State residents.
If the new co-ops operate under the same rules as other nonprofit insurers, why bother?
And there’s the rub. Supporters of government-run health care have no intention of letting the co-ops be independent enterprises. In fact, Sen. Charles Schumer (D-NY) makes it clear, for example, that the co-op’s officers and directors would be appointed by the president and Congress. He insists that there be a single national co-op. And Congress would set the rules under which it operates. As Sen. Max Baucus (D-MT) says, “It’s got to be written in a way that accomplishes the objectives of a public option.”
If a “co-op” is run by the federal government under rules imposed by the federal government with funding provided by the federal government, that is government-run health insurance by another name.
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