Relevant and even prescient commentary on news, politics and the economy.

Geithner’s Baa Humbug to Jobs and Labor

Geithner’s Baa Humbug to Job’s and Labor
(h/t Run75441)

“Ebenezer: Since you ask me what I wish sir, that is my answer. I help to support the establishments I have named; those who are badly off must go there.”

Daniel Gross at Slate interviews Tim Geithner here: “We Will Be Judged on How We Dealt with the Things that were Broken”  Some rather revealing statements by Tim Geithner to Daniel Gross’s questions:

GROSS: There’s a perception that you regard your portfolio narrowly, as primarily focused on the health of Wall Street, with Main Street a distant second.
GEITHNER: “My first and essential responsibility was to fix and reform the financial system. That was necessarily going to be the principal part of what people saw. About half my time from the beginning has been spent on the design of the broader economic strategy. The idea that we did not do much for the broader challenges facing the country is completely unjustified. The Recovery Act itself was not just a sweeping, essential force for growth but included a bunch of targeted investments in education, energy, environment, health care that will have huge long-term benefits.”
(Run here: Geithner misses the point or makes the point that finance is the number one concern over Main Street, even though Main Street is financing the rescue of W$. The constituency doesn’t want charity in targeted investments in education, energy, education, and environment when it can pay for those investments itself if they are working. Main Street wants jobs? Main street is still waiting for that tsunami of job creation which is one of the broader challenges of any administration and no administration has put into play any package to stimuli it or companies to do more. Jobs are left to free market influences which is content with investing profits elsewhere other than job creating infrastructure.)

GROSS: So you don’t think the bailouts were too friendly to Wall Street?
GEITHNER: “The idea that the strategy was unfair and has principally benefited a small number of institutions in New York is a mischaracterization of the design and result of the strategy. I thought people would have understood this after the failure of Lehman Bros. But when you do too little and you leave the system with real fear that everything is going to fall apart, like any financial crisis, it hurts the poorest most. A just and fair strategy, even if it is politically hardest to explain and justify, is to use well-designed but massive force to stabilize the system.“

(Run here: Over at Naked Capitalism, they are debating whether Goldman Sachs drove the collapse of AIG by calling for the mark down of CDO by companies holding too many of them thereby forcing AIG to raise collateral after it was downgraded and eventually paying off on CDO that never were expected to payoff. While AIG is at fault for seeing too many pie in the sky dollars in risk and having too little collateral to cover it, one has to wonder why Goldman Sachs should have received 100% on the dollar on its CDS for its risk with AIG and not knowing how over leveraged AIG was at the time. Goldman Sachs certainly benefited by Geithner’s negotiated settlement of AIG’s liabilities at 100% on the dollar.)

GROSS: The biggest downside surprise?

GEITHNER: “The [high] level of unemployment relative to what was happening in the economy as a whole. I’m not an economist, but almost all forecasters missed that. And that’s hugely consequential, because it’s the prism through which most people view basic economic health.”

(Run here:He is kidding right? During every economic downturn, it has consistently been Main Street that has been shown the street from their jobs or homes.)

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Medical Loss Ratio Revisited: Cost and Coverage Controls that Work.

Back on July 28th I posted on what I considered to be the most important provision of the original House Tri-Committee Health Care Bill in Sec 116: Golden Bullet or Smoking Gun Smoking Gun referred to the belief by Republicans that this bill was designed to ultimately transition to Single Payer, and Golden Bullet to my belief that they were right, that if you forced private insurance to give up its predatory business model that ultimately they would abandon less profitable markets just as they did in the heyday of managed care.

What Sec 116 did was to establish minimum Medical Loss Ratios for all plans participating in the proposed Exchanges. Medical Loss Ratio is the industry term for percentage of premium dollar actually spent on provider payments with the remainder retained by the company to pay for marketing, administration, executive compensation, and profit. Under the House Bill the actual mandated MLR for each area would be set by an auction process and in that model you pretty much needed a Public Option to establish a baseline.

Over the course of the summer and fall the language of Sec 116 was displaced and minimized in a way that restricted it only to policies issued before the establishment of the Exchanges and so make it almost useless in the bigger picture. But then a near miracle happened at the last minute, the Team of Ten inserted Section 2718 “BRINGING DOWN THE COST OF HEALTH CARE
COVERAGE”. MLR Regulation was back, and better the ever. Text from the Manager’s Amendment and commentary below.

‘‘(A) REQUIREMENT.—Beginning not later than January 1, 2011, a health insurance issuer offering group or individual health insurance coverage (including a grandfathered health plan) shall, with respect to each plan year, provide an annual rebate to each enrollee under such coverage, on a pro rata basis, if the ratio of the amount of premium revenue expended by the issuer on costs described in paragraphs (1) and (2) of subsection (a) to the total amount of premium revenue (excluding Federal and State taxes and licensing or regulatory fees and after accounting for payments or receipts for risk adjustment, risk corridors, and reinsurance under sections 1341, 1342, and 1343 of the Patient Protection and Affordable Care Act) for the plan year (except as provided in subparagraph (B)(ii)), is less than—
‘‘(i) with respect to a health insurance issuer offering coverage in the large group market, 85 percent, or such higher percentage as a State may by regulation determine; or
‘‘(ii) with respect to a health insurance issuer offering coverage in the small group market or in the individual market, 80 percent, or such higher percentage as a State may by regulation determine, except that the Secretary may adjust such percentage with respect to a State if the Secretary determines that the application of such 80 percent may destabilize the individual market in such State.

The language is convulted but the result is simple, insurance companies can no longer make money by ensuring people who don’t make claims.

Under the current business model of private insurers the goal is to recruit insurees who in all likelhood won’t make claims, while denying those who are certain to either because of pre-existing conditions or simply by falling sick. The bill directly outlaws those practices but under 2718 they wouldn’t have the desired effect anyway. Take the hypothetical case where your entire risk pool is made up of healthy young adults whose claims are mostly limited to broken bones from skiing or biking accidents. Under 2718 unless those claims across the risk pool don’t add up to 80% or 85% depending the insurer has to rebate the extra premium. At the extreme the company would have to rebate the entire premium and so go out of business having no revenue to even pay employees. Under the new model the only ways to increase profits are one, to compete on the basis of volume, or two to reduce administrative costs, which is a 180 from the current model of hastling claimants into dropping coverage or simply finding excuses to rescind coverage.

Similarly 2718 limits or eliminates the utility of simply raising premiums because it would require a parallel increase of provider payments on an 85 to 15 ratio, otherwise the rebate provision would trigger. And while collusion between provider and insurer can’t be excluded the benefits would flow more than 5 to 1 to the provider while the price differential with other plans falls entirely on the insurer. The same effect occurs by eliminating a category of coverage, even if you didn’t fall afoul of the Acceptable Benefits Package requirements once again you risk triggering the rebate provision.

The words are not used in the bill but the result is nearly automatic cost controls. And enforcement is relatively easy, most of the information needed to calculate MLR is readily available in SEC filings and IRS returns, you don’t need HHS auditors rummaging around in the records, the SEC, the FBI and the IRS are already on the job.

On some other blogs I called this “The Most Important Health Care Provision You Never Heard Of”, something that is no longer true. It was reported the other day that the Health Care insurers were ecstatic at the passage of the bill, all those new customers delivered by the individual mandate! And Wall Street responded. But then some lobbyist realized what the real import of 2718 was and sent a follow up memo saying “not so fast”.

This language is not in the House Bill, at least not with the same effect, and we can expect that insurance companies will start working on the usual suspects to kill the bill on final. Which in my mind is reason to just get this bill signed to nail 2718 into law. Because on its own it has many of the same benefits on the overall system that the Public Option was supposed to deliver.

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That suit fits him perfectly!

I received a copy of the book Plato and a Platypus Walk into a Bar… by Thomas Cathcart and Daniel Klein today as a gift. I haven’t read through the book in awhile. I found the ‘Tale of the tailor’ to be instructive as well as amusing given the topics we have been discussing concerning the issue of economics. Sometimes it feels discussions go this way:

A man tries on a made-to-order suit and says to the tailor, “I need this sleeve taken in! It’s two inches too long!”
The tailor says, “No, just bend your elbow like this. See, it pulls up the sleeve.”
The man says, “Well, okay, but now look at the collar! When I bend my elbow, the collar goes halfway up the back of my head.”
The tailor says, “So? Raise your head up and back. Perfect.”
The man says, “But now the left shoulder is three inches lower than the right one!”
The tailor says, “No problem. Bend at the waist way over to the left and it evens out.”
The man leaves the store wearing the suit, his right elbow cooked and sticking out, his head up and back, all the while leaning down to the left. The only way he can walk is with a herky-jerky spastic gait.

Just then two passersby notice him.
Says the first, “Look at that poor crippled guy. My heart goes out to him.”
Says the second, “Yeah, but his tailor must be a genius! That suit fits him perfectly!”

If we were wiser think of the things we could accomplish! Merry Christmas and Happy Holidays to all.

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What a Group to be In

Per the Health at a Glance Chart Set, Powerpoint, available here:

All OECD countries have achieved universal or near-universal health care coverage, except Turkey, Mexico and the United States

And it’s even more impressive when you go to Slide 36 (whose header is quoted above) and realise that the Public Coverage in those three states is:

    Mexico: 82.5
    Turkey: 67.2
    United States: 27.4

Any room to bend the curve? Certainly looks as if there might be:

Well, at least Turkey and Mexico can feel good about themselves. Happy Xmas!

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Even our taxes?

by Linda Beale
(cross posted from ataxingmatter)

Economic Theory–how much is it worth
[hat tip–Yves Smith at Naked Capitalism]

Michael Hudson, an economist at the University of Missouri-Kansas City, asks how the economic discipline became so “trivialized from its classical flowering””taking for granted the social structures and dynamics that should be the substance and focal point of the analysis.” See Michael Hudson Responds to Paul Krugman, Dec. 19, 2009. He answers the question by discussing “the ‘intellectual engineering’ that has turned the economics discipline into a pulibc relations exercise for the rentier classes criticized by the classical economists: landlords, bankers and monopolists. It was largely to counter criticisms of their unearned income and wealth, after all, that the post-classical reaction aimed to limit the conceptual ‘toolbox’ of economists…. It has ended up as an intellectual ploy to distract attention away from the financial and property dynamics that are polarizing our world between debtors and creditors, property owners and renters, while steering politicas from democracy to oligarchy.” Economists, Hudson complains, developed consistent theories that won them Nobel prizes, even while pointout that there was no need to be “committeed unduly as to the relation between reality and these [abstract economic] assumptions” (quoting Nobelist Paul Samuelson)–in fact, “the results are implicit in the assumptions made” (quoting Nobelist William Vickery). Yet these theories were nonetheless used to arrive at policy conclusions that impact individuals in the real world.

Something very similar–and perhaps even more perverse–happened to tax analysis. It was coopted by this consistent economic theory and the importance of equitable considerations were shunted aside. At the Congressional level, economic models showing economic growth from tax cuts were relied on in the face of evidence to the contrary to justify one tax cut after another. The predominance of shoddy economic analysis on behalf of the vested interests and their property and “rent” rights made it possible. In academe, economic theories of efficiency were given precedence over discussion of equity–it is still somewhat hazardous to an academic tax professor’s career to write about tax without at least giving nominal homage to efficiency theories. The Volcker panel, appointed by the Obama White House to think about tax policies, is dominated by economists and, in fact, doesn’t include a single tax professor. See this March 25, 2009 story on Volcker’s appointment and the long list of former government officials with economics backgrounds that were appointed to the panel. It is bad enough that the panel was hobbled with instructions not to consider raising taxes on anyone making less than $250,000 but the makeup of the panel suggests that issues that should be on the table will be shunted aside.

In a way, the spread and misuse of theoretical economics to answer questions across a range of policy issues relates to the spread of “law and economics” in law schools. Funded by millions from the Olin Foundation and driven by people like the George Mason Dean who sought to inculcate economic approaches in the entire law school faculty (economics and tenure went together like love and marriage), law school faculties hired more and more law and economics professors (law degrees not always necessary) and those professors brought in even more faculty who wrote in some aspect of law and econ. As a result, schools across the country host a wide variety of scholars who do some aspect of “economics” research, including tax professors, corporate finance, and policy theorists.

So an interesting question to ask is how the utter failure of the economic model to foresee and deal with the financial crisis should impact the credibility of economics as the theoretical starting point for so many different analyses. In my view, it should cause us to step back and examine the premises on which so much of modern economic research is based–the use of math to hide the shallowness of conclusions that arrive exactly where they must given the starting points, even when the starting points have little to do with the real world. But there are many careers invested in arguing from the Milt Friedman perspective of free markets. It won’t be so easy to dethrone that approach.

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