We’re screwed. More to come…

Since I can’t feed content from Facebook directly into the blog, I decided to post the contents of a spirited debate that was started when I posted the following:

Jay Beeber:   Thomas Jefferson and the rest of our founding fathers must be spinning in their graves.

Kathy Ann Wittes
We’re going to fight back.

Kathy Ann Wittes
If you want, come to the Hollywood Republicans dinner 1st Wed in April at the

Steve Humphreys
Oh and they weren’t when we illegally invaded another country and waterboarded suspected terrorists?

Cristina Nenadov
I am with Steve!

Tom Quinn
Selective memory is so convenient, don’t you think?

Jay Beeber
@Steve are you advocating the “two wrongs make a right” theory of government?

Steve Humphreys
Jay: I’m not advocating “two wrongs make a right”. Please explain to me what is so horribly wrong with a health care policy that will help people we both know? (ie: all of our friends who have no insurance) It’s not perfect but at least after trying to do something since the deperession, it’s a start.

Louisa Cilento
I’m one of those people who’s job doesn’t provide health insurance but that didn’t stop me from getting it on my own. I’ve have my individual plan my whole life. I hate when people think not being able to afford it and don’t want to afford it are the same thing! People who don’t want to pay now are still not going to want to pay anything…and won’t. How is that right?

Tom Quinn
Well said, Louisa!

Stephanie Witherspoon
Tell that to my friend who’s stuck in a horrible job because her pre-existing conditions have meant she wouldn’t be able to change insurance carriers because the premiums would be too high, if they’d take her at all. Is it perfect? No, of course not. But it’s a step in the right direction, and the first step that’s been taken in 100 YEARS. It’s easy for people who HAVE insurance to bemoan the healthcare bill. Try talking to some people that NEEDED this change.

Robyn Castellano Rubin
Any company’s group policy would have accepted her. But not to worry, we’ll pay for everyone now so why get any job at all?

Rafferty Fartengaten
You mean you thought you weren’t paying for everyone already?! Wow, how naive. I guess if you knew you wouldn’t have agreed to that. Why do you think costs are so high? Well apart from the fact that insurance, pharmaceutical & medical supply companies can charge whatever they want. Who is going to say no. If you want no regulation like good Capitalists then accept this- in the short to medium term at least the companies have no need to have a moral responsibility, only an economic drive. So accepting that, anyone who can’t afford it should either stay sick… or “fall by the supply/demand wayside” … & by that I mean die. If you can accept that as legitimate collateral damage then bring forth complete open markets. Too many goddamn people anyway

Rafferty Fartengaten
Answer me this riddlers. I just got a prescription filled for generic Augmenten. How much without insurance is it? And how much in Australia or the UK? The basic multifunction effective antibiotic- it’s $103 here. It’s about $25 in Australia. Explain that price variation & why can’t we then just get our meds from oneseas legally if we have ‘open markets’ now. I wonder why the pharmaceutical companies would lobby the GOVT not to have that happen?

Jay Beeber
We don’t have open markets now. Health care, insurance, etc. are some of the most highly regulated industries in the US. Due to government interference, the market is not free, open or competitive. And yes, we can’t buy from overseas because the pharmaceutical industry co-opted the power of government to forbid us from doing something we should have every right to do. I don’t know the Australian system all that well, but I suspect that the drug is cheaper over there either because it is somehow subsidized by the taxpayers and/or the cost of developing the drug, getting approved, and bringing it to market is less than it is here. Another possibility is that the AU gov’t has put in place price controls and people in other countries that don’t have such controls are paying the difference.

Julien Batelaan Humphreys
Right, if she could find a job with a company providing employee health coverage, which many don’t nowadays.
And, besides, we are paying for those that don’t have it now. We pay for them to wait in long lines at USC Medical Center and get treated like subhumans (like my friend, who definitely can’t afford own her policy, and had nowhere else to go recently when she badly cut her finger).
Jay, I doubt Jefferson is spinning in his grave. He was too busy doing his female slaves to care about the many people suffering in many different ways at the time. (And, no, I’m not a Jefferson hater. Admittedly, just making a snarky point.) Brings to mind all the politicans who have been so vehemently against something that is meant to help the quality of life of their fellow Americans. Hypocrites and purveyors of death and destruction (read: our current war). Spent too much money on that to support something altruistic and for the greater good.

Jay Beeber
@Julien If it really would help the quality of life overall, I might be inclined to support it, but I believe it will make health care more expensive overall and the taxpayers will have to keep shouldering more and more of the burden down the road. To understand why I believe that, you have to read the posts on my blog, there is not enough room to put all that here. Post over there if you disagree with the facts I list and my conclusions.

But the main point of my original post is that there is supposed to be limits on what the Federal Gov’t can and can’t do. I object to people being forced to buy a product from a private company (especially companies that have a track record like the health insurance industry). Never before has the Federal Gov’t extended itself this far and I think it’s a terrible precedent to set, no matter how well intentioned. And I’ll be posting about that in detail on my blog as well if I can steal a free moment away from answering comments on FB.

Related posts:

1. Health Care Reform – Introduction
2. Why is Health Care So Expensive?
3. The Problem with Health Insurance

To a large extent, the special election to fill Ted Kennedy’s Senate seat was a referendum on the Democrats’ legislative ambitions in general and the current health care reform bill in particular. There are lessons to be learned from Scott Brown’s defeat of Martha Coakley to become the 41st Republican in the Senate, and one hopes the President and Congress are a quick study.

Contrary to what some liberals (oops, I mean “progressives”) like Michael Moore would wish to believe, the Democratic base did not desert those in power because they weren’t liberal enough. On the contrary, Brown won because independents and many moderate Democrats are unhappy with what appears to be this administration’s preference for big government solutions and the resulting increases in taxes and debt.

The health care bill is a good case in point. The President and the Democratically controlled Congress are attempting to foist upon the American people a trillion dollar health care plan, bought and paid for with backroom deals, and loaded with giveaways to the health care and health insurance industries. The President campaigned on “change”. But if this health care bill doesn’t prove that it’s still business as usual in Washington, nothing does.

So what should the President do? First, he should abandon the health care reform bill in its current form. Make no mistake, neither the House nor Senate bills address the real reasons for out of control heath care costs and would do little more than force everyone to purchase the health insurance industry’s flawed product; most likely at a higher cost. Pushing this catastrophically flawed bill through Congress, especially if the effort appears to involve any appearance of political gamesmanship, would be political suicide for the Democrats. Instead, the President and Congress should concentrate on only those reforms upon which most everyone can agree. It’s likely that with a scaled back, targeted approach to health care reform a few Republicans could be brought on board. (I’ll provide details in another post.) Not only would this be a huge win for the American people, but politically it would show that Obama is not only interested in bringing about change, he’s capable of change himself.

Second, the President should recognize that you can’t win elections without the backing of moderate and independent voters, and in Massachusetts they voted for a course correction. In his first year in office, Obama made the same mistake Bill Clinton made in 1992. Clinton beat Bush by appealing to independents and the so called “Reagan democrats”. But once in office, he pushed a classically liberal democratic agenda, the centerpiece of which was a big government health care reform bill. His approval ratings tanked and in the 1994 mid-term elections the Democrats lost control of both Houses of Congress. But Clinton learned his lesson, and for the rest of that term he chose to govern from the center, rather than the liberal left. He handily won re-election and by all accounts left office a popular and successful president. (Except, perhaps, for that impeachment thing.)

President Obama is actually lucky in that he’s had some early warning signs of the impending political disaster headed his way. If last November’s Republican gubernatorial wins in Virginia and New Jersey didn’t wake him up, certainly what happened in Massachusetts should do the trick. If he’s smart, he’ll make it clear that he’s heard the will of the people. He’ll become more fiscally conservative and dial back on his ambitious agenda. He’ll try to truly usher in an era of bipartisanship by repudiating ideas that would lead to bigger government intrusion in our lives and he’ll take a more market oriented approach to the reforms he wants to implement. He’ll steer clear of job killing legislation like Cap and Trade and he’ll consider options for reducing the deficit, not increasing it.

Hopefully, President Obama has gotten the message sent by the voters of Massachusetts. If not, in the 2010 midterm elections, it will be, as Yogi Berra used to say, deja vu all over again.

Related posts:

1. Health Care Reform – Introduction
2. Why is Health Care So Expensive?
3. The Problem with Health Insurance

In part one of this series, we looked at the underlying reasons why healthcare is so expensive. We now focus on health insurance and the role it plays in causing our health care system to be more dysfunctional than it need be. We’ll see that the health insurance system which has evolved here in the United States both contributes to the high cost of medical care and creates additional impediments to providing health care to the population as a whole.

An Historical Perspective

In order to understand health insurance in the United States, it’s necessary to know a little about how the system evolved into what we have today. An excellent history can be found here and I encourage you to read it.

To summarize, the modern health insurance system has its roots in the 1920’s. Around this time, costs for medical care began to rise due to advances in technology and a subsequent increase in demand. In addition, increased requirements for physician licensure, education and the accreditation of medical schools restricted physician supply, putting upward pressure on the costs of physicians’ services. As the demand for hospital care increased in the 1920s, a group of Dallas teachers contracted with Baylor University Hospital to provide 21 days of hospitalization for a fixed pre-paid amount. Ostensibly, the plan developed as a way to ensure that people paid their bills, and over the course of the Great Depression other pre-paid hospital service plans sprung up. These plans were mutually advantageous to both subscribers and hospitals at a time when both groups suffered from falling incomes. While the pre-paid plans allowed consumers to affordably pay for hospital care, they also benefited hospitals by providing them with a way to earn income during a time of falling hospital revenue. The plans eventually combined under the name Blue Cross. This consolidation was encouraged and facilitated by the American Hospital Association in order to limit competition among the plans. Physicians subsequently created a similar pre-paid plan for their services which became known as Blue Shield. The success of the Blues persuaded commercial insurers, who initially considered medicine an unpromising market, to enter the field.

During World War II, the government instituted wage controls which made it difficult for employers to compete for a limited labor supply. To get around this government intervention, employers began to offer health insurance as a way to attract prospective workers. After the war, the government further encouraged this practice by making these employee benefits tax exempt for both employer and employee. In response, private insurers accelerated their efforts to sell policies to groups of employees through employer sponsored plans.

How Insurance is Suppose to Work

As a result, we now have a health insurance system which is not actually insurance in the traditional sense. Normally, we purchase insurance to protect ourselves against the risk that we will experience some unexpected loss event. We don’t anticipate that the event will actually occur and we hope that it doesn’t, but we buy insurance just in case it does and we suffer a huge loss. A good example of this is homeowners’ insurance which protects us against catastrophic losses such as fires, floods, burglary, etc. Insurance companies provide this kind of insurance by spreading the risk of loss among a large pool of insured customers. In this way, they protect us against a loss that would be substantially greater than we could bear on our own. Everyone pays into the pool, but only an unlucky few ever have to file a claim and be paid. Even in areas where the overall risk is higher than average, such as earthquake zones or places prone to increased fire danger, the risk is still spread out among all customers while only a fraction actually incur a loss. Though customers who are at a higher risk for payout, either due to factors that make them more prone to a loss or because their replacement costs are higher than average, are necessarily charged a higher premium, the insurance model to protect us against catastrophic losses generally works well.

In contrast, we don’t purchase insurance for routine home maintenance or minor losses because these are events that we should be able to anticipate and can pay for on our own. Buying such insurance would make little economic sense because everyone in the risk pool would be filing claims on a regular basis. A part of the premiums paid into the risk pool would quickly be consumed by administrative costs and profits for the insurer and less would be available to pay for claims. We’d pay more in and get less out. As explained in part one of this series, another factor that makes purchasing insurance for minor expenses inefficient is the effect of moral hazard. If insurance companies insulated us from the direct cost of home maintenance, the costs for those services would quickly rise. Homeowners would purchase more services to “get their money’s worth” while at the same time having less incentive to shop around for the best price. Premiums would spiral upwards and those who could not afford to purchase a plan would find that they also could not afford the increased costs to repair their homes and property values would drop substantially. Overall, it would be a disaster. Clearly, the insurance model should be used only in cases where the potential loss would be significantly greater than we could bear on our own. In all other cases we are much better off paying for non-catastrophic expenses directly, rather than using insurance as a pre-payment plan to insulate us from these costs.

Today’s System is Not Really Insurance

Now compare this to what we call health insurance. Unlike homeowners’ insurance, health “insurance” covers routine medical care as well as catastrophic medical expenses. In addition, most Americans don’t actually purchase their own insurance; they receive it as an employment benefit, often in lieu of additional salary. As a result, they wish to get the most out of this benefit as possible. Rather than hoping they never have a claim, they feel that if they don’t use their insurance, they have lost out on something owed to them. Regardless of whether it is purchased directly or provided as an employee benefit, health insurance is viewed, not as a hedge against risk, but rather as prepayment for future services. So while a relatively small percentage of homeowners’ insurance customers ever require payment on a claim, virtually all health insurance customers receive some reimbursement for routine care, and the few who become very sick require very large payouts. It should be clear now why this mix of pre-paid medical care and insurance against catastrophic expenses makes it almost impossible to offer medical insurance for a reasonable price, especially at a time when the cost of medical care is rising due to the reasons discussed in part one.

How Health Insurance Companies Contain Costs

Insurers, in response to these economic realities, employ various means to reduce their expenses. In the early years of the industry, insurers primarily kept costs in line by negotiating a reduced rate from the doctors and hospitals who agreed to accept their “insurance”. In return, medical providers had access to a larger pool of patients who had an increased demand for their services since they were partially insulated from the direct cost. Furthermore, at that time, medicine offered fewer options for routine care or for those that became seriously ill, so even when claims were made, the payout was not exorbitant.

With the explosion of premium medicine and an aging population leading to higher and higher medical bills, insurers began to explore additional ways to lower costs. Insurance premiums, co-payment amounts, and deductibles all were increased, while remuneration to healthcare providers for various services decreased (resulting in cost shifting to the non-insured). In addition, insurers instituted lifetime caps on benefits and began to routinely deny claims for “unapproved” services or those they deemed “experimental”.

Another important way insurers seek to limit their claims liability is to deny coverage to applicants who have pre-existing conditions or are at greater risk for medical problems. Contrary to popular belief, this is not some nefarious scheme to prevent those that truly need insurance from obtaining it. Insurers have always been concerned with the phenomenon called “adverse selection”. This is the tendency for older or less healthy people (those who have pre-existing conditions or anticipate large medical bills) to be more likely to purchase health insurance, while younger, healthier people (who see medical insurance as an unnecessary expense) avoid purchasing it. As a result, the insurance pool becomes more heavily comprised of people who pose a large financial burden on the benefit pool. This causes an increase in premiums, which in turn drives away the more desirable younger, healthier clients, who see even less value in an expensive product they are unlikely to use. The risk pool is then further skewed towards more expensive clients, further driving up costs. From an economic standpoint then, it makes perfect sense for insurers to seek out healthier clients and avoid those with pre-existing conditions.

This problem is further complicated when applicants either willfully or inadvertently fail to disclose these pre-existing conditions on their applications. The insurance industry’s response has been to retroactively cancel policies when these oversights become known. Unfortunately, it is often difficult to determine whether an applicant has intentionally hidden or unknowingly omitted their pre-existing conditions and the insurance industry often makes no attempt to distinguish between the two groups. In fact, some insurance companies have gone so far as to cancel policies when they discover unimportant and minor mistakes on a customer’s application. Clearly, there is no reasonable justification for such actions and the resulting hardship imposed on patients that have been caught up in these actions is unconscionable.

How Government Intervention Has Made Things Worse

Individuals Are Tied To Their Employers
Previously, we discussed how government tax and wage policies encouraged the explosive rise in employer sponsored health insurance plans. (Union demands for more benefits also played a part, but that discussion is beyond the scope of this article.) This has lead to the vast majority of insured Americans being covered under one of these plans. While government intentions may have been laudable, the result has been that those covered under employer health plans are tied to their employers if they wish to continue to be insured. If they want to change jobs or relocate, they must find an employer that offers health insurance benefits, especially if they have any health problems that might cause insurers to exclude them from individual coverage due to pre-existing conditions and then wait some period of time (usually 12 months) for those conditions to be covered. The problem is much worse for those who lose their jobs and become unemployed. Even if they could afford a more expensive individual plan, they are often denied coverage because of a pre-existing condition, a situation which is more likely if they are middle aged or older. For those who are unlucky enough to become unemployed due to illness, their circumstances often becomes dire. First, their income is reduced or eliminated. Second, they lose their health insurance because they are no longer eligible to be covered under their employer’s plan. And third, they are uninsurable due to their pre-existing health condition. Add to this their mounting medical bills, and it’s no wonder that medical expenses are cited as a factor in a majority of personal bankruptcies.

None of these problems occur when coverage is purchased through an individual plan because subscribers can retain their health insurance as long as they continue to pay their premiums. It would seem logical then to allow workers to keep the insurance obtained under their employer’s group plan even if they leave their company’s employ. Yet state and federal laws prohibit this practice. True, under COBRA, workers may often hold onto health coverage obtained through a previous employer’s health plan, but only for up to 18 months (36 months in some cases). After that, though, they’re on their own.

Insurance Is Made More Expensive
Health insurance is also heavily regulated by state governments, which almost universally require insurance companies to cover specific diseases, pay for the services of certain types of providers, and/or cover certain types of patients. Other regulations may restrict insurers’ ability to contract selectively with a provider, require insurers to limit premium differences between high risk and low risk individuals, and/or require insurers to sell insurance to all potential customers regardless of health or pre-existing conditions. These laws make insurance more expensive and reduce competition.

If an insurer wishes to sell insurance in a particular market, they must include the types of coverage and benefits mandated by that state’s lawmakers. As these mandates become more burdensome, insurers flee the state, leaving the public with fewer insurers to choose from. Fewer insurers means less competition and less competition means higher prices. In addition, state governments prohibit consumers from purchasing insurance from companies located outside their own state, virtually ensuring that the public will have few options in their choice of insurers. In fact, the average number of insurers per state is 5.6 while some states have as few as two or three health insurance companies vying for customers.

For those companies that do sell insurance in a particular state, the cost of providing that insurance increases with each new mandate. In a 1999 study, Gail Jensen and Michael Morrisey found that “mandates cost money. In Virginia, mandates accounted for 21 percent of health insurance claims; in Maryland, they accounted for 11 to 22 percent of claims; and in Massachusetts, 13 percent of claims”. Likewise, a recent study by the Council for Affordable Health Insurance (CAHI) found that while some mandates increased insurance premiums by less than 1%, others, such as requiring benefits for mental health treatment or in vitro fertilization, increased premiums by as much as 5% to 10%. Considering that states, on average, impose approximately 41 mandates on insurers and some states levy as many as 70, it’s not difficult to imagine the cumulative impact that government regulation has on the cost of health insurance premiums. In fact, the CAHI study estimated that “mandated benefits currently increase the cost of basic health coverage from a little less than 20% to more than 50%, depending on the state and its mandates”. While there’s little evidence that all these regulations and mandates provide much overall benefit (states with numerous mandates don’t have populations that are demonstratively healthier than states with fewer mandates) it’s clear that mandates do contribute to the high cost of insurance and increasing number of Americans without health insurance.

Why So Many Mandates?
The saga of state health insurance mandates is a good lesson as to how things can go wrong when government is given the power to interfere in the free market. The decision as to whether or not to impose a new mandate is rarely, if ever, based on medical necessity. As is often the case, special interests have their way when it comes to making these laws. All health care service providers want their particular service covered under insurance so they can personally benefit. And if they can’t achieve this goal in the free marketplace, they get their legislators to do their bidding for them. Likewise, elected officials find it easy to impose additional mandates in an attempt to court voters that desire enhanced care for their particular needs. As a result, states now mandate that health insurance must cover the services of an ever increasing group of providers including chiropractors, podiatrists, social workers and even massage therapists, as well as benefits for such services as mammograms, well-child care, drug and alcohol abuse treatment, family therapy, acupuncture, and hair prostheses. And the list of mandates continues to grow. In 1989, the Health Insurance Association of America (HIAA) published a study which found that states had passed more than 700 mandates. By 1999 that number had risen to well over 1,000. And for 2009, the CAHI has identified 2,133 mandated benefits and providers. In fact, state and federal mandates are so prevalent that it is virtually impossible anywhere in the country to purchase an inexpensive, bare-bones health insurance policy which covers only catastrophic events. Of course, this is by no means an exhaustive list of the negative consequences brought about by government intervention, but I think you get the picture.

Health Insurance Company Profits and CEO Pay

It should be clear by now that while I’m not a big fan of health insurance companies and the product they sell, I don’t see them as the evil villains they’ve been made out to be. I readily concede that some companies in certain instances have engaged in improper, if not illegal, conduct in retroactively canceling policies or denying coverage without due cause. I would also submit that this is the exception rather than the rule. I would further argue that much of the problems we have regarding insurance coverage in the United States is the result of misguided government policies and not the fault of the insurance industry. I’ve already shown how the huge increase in national health care spending is primarily the result of the rise in “premium medicine” and how government intervention has caused insurance to be more expensive and less available. Yet there are likely readers out there who still believe that many of our health care problems could be solved if the health insurance industry took fewer profits and reduced the pay of their CEOs.

Typical of this type of thinking is the following comment found on a blog post which listed health insurance company CEO total compensation in 2008. From the Health Reform Watch website:

CEO compensation in the health care insurance industry is outrageous. Can anyone explain to me, or to the public at large, how such large compensation packages improve health care access for the ordinary citizen. How may people could get insurance if the CEO’s would limit their compensation to 40 times the lowest paid employer in their companies?

First of all, this is kind of a silly argument to begin with. One could also ask, “How may people could get insurance if George Clooney wasn’t paid $20,000,000 for Ocean’s 11?” But let’s do some math and see if we can figure out what might happen if CEOs limited their compensation. The highest paid CEO on the list is, by far, Aetna’s Ronald A. Williams at $24,300,112. (All of a sudden I’m seriously beginning to rethink my choice of careers.) Now, ignoring the fact that much of his compensation likely comes in the form of stock options and that he’s not actually paid this amount of money in a paycheck, let’s see how some of Aetna’s policy holders might have benefited if Mr. Williams decided to work for free and got no compensation at all. According to Aetna’s website, the company has a little over 19 million medical members. There are, of course, other sources of income for the company such as ancillary businesses and subscribers of other insurance products, but let’s say that Mr. Williams’ total compensation was used instead to reduce the premiums paid by these 19 million medical customers. If we divide his compensation by the number of medical members, we find that reducing Mr. Williams’ compensation to zero would net each medical member a whopping $1.26. If I’m not mistaken, that’s about 1/3 the cost of a 12 ounce Starbuck’s latte. As we can see, eliminating the annual compensation of even the highest paid health insurance company CEO would have little impact on policy holders, let alone the millions of Americans who can’t afford health insurance or health care.

Lest you think I’m being biased and ridiculous, let’s see what Factcheck.org has to say about the matter. In an article posted in June 2009, Factcheck explained why even if we eliminated all health insurance company profits and all CEO compensation it would make little difference in solving our nation’s health care problems. As an example, in 2007, the CEOs of the top ten publicly traded health insurance companies earned about $119 million in total compensation. While this seems like a huge number, it actually represents only about 0.005% of the nation’s total health care spending of $2.2 trillion. The profit of those ten companies was $13 billion, only 0.6% of yearly spending. Furthermore, a 2008 study by PricewaterhouseCoopers determined that these profits represent only about 3% of the total cost of heath insurance. The vast majority of health insurance costs were due to benefits paid out (87%) and other administrative costs (10%) such as claims processing, consumer services, provider support, marketing, and government compliance. As we’ve seen, there are a number of reasons why health care in general, and health insurance premiums in particular, are fast becoming unaffordable. But as these numbers show, insurance company profits and CEO compensation have little to do with it.

Other Complaints about Health Insurance Companies

Two other criticisms are often leveled at health insurance companies. The first is that insurers don’t actually make anyone well; that they are simply unnecessary middlemen who add to the price of health care. From the discussion above, it should be of no surprise that I partly agree with this statement. For routine health care services, insurers are superfluous and unnecessary. The “insurance” they provide is really a pre-paid medical care program which drives up the cost of health care and interferes in the transaction between service provider and consumer. We must recognize though, that this system was created and fostered by government policies. Furthermore, a majority of consumers enjoy being insulated from the real cost of their annual health care expenses. We’ll talk about this further in part four, but for now I’ll simply state that it’s somewhat disingenuous to criticize insurers for being unnecessary middlemen while at the same time reaping the benefits of their interference. Where the above statement about “unnecessary middlemen” is untrue, is when health insurance protects us against catastrophic injury or illness. As I’ve described, insurance generally works well for the purposes for which it was intended. No one complains that companies that provide home or auto insurance are “unnecessary middlemen” because we instinctually recognize that in these instances insurers serve a critical function by administering the risk pool so we may be shielded against losses that we could not bear on our own. So, too, it is true for the “real insurance”, the catastrophic insurance, which is provided by health insurance companies.

Second, health insurance companies are criticized because supposedly their business model gives them an incentive to deny claims in order to increase profits and they take advantage of this every chance they get. On the surface, this might seem a valid complaint, and there are certainly instances where this has been shown to be true. But the reality is that these types of incidents are the exception rather than the rule. As the PricewaterhouseCoopers study shows, profits only account for about 3% of the cost of insurance and fully 87% of what health insurance companies collect in fees, they pay out in benefits. And as the study further details, this profit percentage has remained fairly constant over many years. If denying claims played a significant role in insurance company profits, we’d see that reflected in the statistics. Unfortunately for those that would like to believe that this practice is widespread, the numbers do not support that conclusion. Furthermore, a similar criticism could be leveled at any insurance company, not just health insurers, because the same incentives exist in their business models as well. Yet we rarely hear of public outrage against most other types of insurers as a whole, although isolated cases of claims denial abuse certainly exist. Insurance is simply a contract, like any other, that requires both parties to perform based on some pre-agreed upon terms. When one party fails to live up to their end of the bargain, then the full weight of our civil and criminal justice system should be brought to bear. But the fact that some players might be tempted to game the system does not mean that there is an inherent flaw in the business model, or that an entire industry is corrupt, or that the free market doesn’t work when it comes to health care.

46 Million People in the U.S. are Uninsured

Finally, no discussion of health insurance would be complete without mentioning the roughly 46 million people in the U.S. who are uninsured. This number represents about 15% of the US population and has been used as a rallying cry by those calling for health care reform. At a town hall meeting in New Hampshire on August 11th, President Obama repeated this number, saying,

“Now, health insurance reform is one of those pillars that we need to build up that new foundation. I don’t have to explain to you that nearly 46 million Americans don’t have health insurance coverage today. In the wealthiest nation on Earth, 46 million of our fellow citizens have no coverage. They are just vulnerable. If something happens, they go bankrupt, or they don’t get the care they need.”

If I was there, I might have been tempted to call out, “You lie!” or perhaps just politely point out that using this figure in this way is misleading and disingenuous.  Here’s why. First, the number of 46 million does not represent only “Americans”, it includes people living in the United States who not yet American citizens and some who are here illegally. Second, the figure represents everyone who has been uninsured at any time over the previous year, meaning that even if someone is uninsured for as little as one day, they get counted as part of the 46 million who are uninsured. That certainly doesn’t mean that, “If something happens, they go bankrupt, or they don’t get the care they need.” Finally, it’s not clear that the number is even 46 million. That figure comes from the U.S. Census Bureau, which makes an estimate based on an annual random survey. However, according to Politifact, the U.S. Department of Health and Human Services also estimates the number of uninsured, but they use surveys of people conducted every few months to see if they have insurance or not. This method, which may be more accurate, found the uninsured population to be 40 million, not 46 million.

In order to determine whether we need to reform our heath care system and what those reforms might be, the question we should be asking is, how many Americans and legal immigrants who wish to buy insurance can’t afford it or are excluded due to pre-existing conditions. Let’s see if we can come up with a good estimation.

First, the Pew Hispanic Center, a nonpartisan research organization, estimates that there are about 6.8 million illegal immigrants in the U.S. that do not have health insurance. Since no health care reform plan would cover any of these people, in making the case for reform, they can’t be counted in the total number of uninsured.

Another 14 million of the 46 (or 40) million uninsured are already eligible for existing government programs such as Medicaid and State sponsored health care programs. They are not aware that they qualify for aid or simply wait until they need it before they sign up. Again, no health care reforms are needed to assist these people; they’re already covered.

Next, according to the Census Bureau, nearly 10 million uninsured Americans have household incomes of at least $75,000. Most can probably afford health insurance but choose instead to pay out of pocket when they need medical care. It’s possible, however, that some in this group would buy health insurance, but can’t, due to some pre-existing condition. Let’s say that about a third of this group would buy insurance but are prevented from doing so. That leaves about 6.7 million people who make over $75,000 and are voluntarily choosing not to buy health insurance.

Another group to consider is younger adults who, perhaps misguidedly, feel they’re healthy enough to go without insurance and that the potential benefits do not justify the expense. Based on census data, 13.7 million people aged 19 to 29 had no health insurance in 2006. Again, not all of them are choosing not to buy it. Some can’t afford it and some have pre-existing conditions. Again, let’s say 1/3 of this group falls into that category, so we’re left with about 9 million 19 to 29 year olds who are voluntarily opting out of purchasing health insurance. To be fair, some in this group also make over $75,000 and we’ve already counted them, so let’s reduce the number further to 6 million.

Now taking the Census Bureau’s higher number of 46 million uninsured, and subtracting off the 6.8 million illegal immigrants, the 14 million who qualify for coverage under existing programs, the 6.7 million who make over $75,000, and the 6 million 19 to 29 year olds who voluntarily opt out, we’re left with about 12.5 million people who need health insurance and can’t get it due to price, pre-existing conditions, or some other reason. That’s 4% of the population.

Again, for those of you who think I’m fudging the numbers, a Kaiser/ABC News/USA Today survey that looked at the issue from a slightly different perspective found that only 8.4 million uninsured Americans are either dissatisfied or very dissatisfied with their health care.

The point of this exercise is not to calculate the exact number of those who would truly benefit from health care reform, but rather to show that the inflated figure of 46 million uninsured is really just a scare tactic. The number of US citizens and legal immigrants who want health insurance and can’t get it is far fewer than the rhetoric suggests. That’s not to say that there aren’t some sensible, targeted reforms which could be implemented to alleviate many of the problems in our health care system and we’ll take a look at these in part four.

But first, a short discussion of the Pharmaceutical Industry in part three of health care reform.

Related posts:

1. Health Care Reform – Introduction
2. Why is Health Care So Expensive?
3. The Problem with Health Insurance

This is a multipart series on health care reform. You may find it easier follow the discussion from the beginning. If you haven’t already read the introduction, you can find it here.

First, we need to define what we mean when we say that health care is too expensive. Do we mean that it costs too much to visit the doctor for a checkup, or an x-ray, or a flu vaccine? Do we mean that the average person can’t afford any type of health insurance? Do we mean that if you get cancer or some other major disease or need major surgery you can’t possibly afford to pay for all the medical bills you will incur? Or are we talking about the fact that the percentage of the nation’s Gross Domestic Product (GDP) spent on heath care continues to increase every year and is much greater than what is spent in other Western countries?

When we break it down this way, we can see that in some cases, heath care is not “too expensive” for the average American. Most people, even those without health insurance, can afford to visit the doctor for minor or routine medical care. Sure, it might cost more than we’d like, but then again it cost me more than I’d have liked to replace the clutch in my Toyota, but I accept that as the normal cost of owning a car. If you take on the responsibility for anything, be it a car, or a house, a child, or your body, eventually you will have maintenance costs and you just have to plan for such things. Although the price of a doctor’s visit is actually more expensive in real dollars today by about a factor of two than it was in the early sixties (later we’ll discuss the reasons for that and the fact that it’s not an apples to apples comparison) the cost is still not out of reach for the average person. Likewise, while the cost of what we call health insurance (I’ll explain later why it isn’t really “insurance”) continues to increase, almost 85% of the U.S. population is able to obtain health insurance either on their own or through their employer. True, there are huge problems with health insurance that need to be addressed, but generally health insurance is still somewhat affordable for most people. Of course there is a small percentage of the population, the very poor, who can’t afford any health care or health insurance, though many of them can obtain some basic health care through existing Federal and State programs.

Here’s some other important facts you might not be aware of. Health care costs and health insurance premiums, while continuing to rise, are actually rising more slowly than in the past. In 2001, heath care costs were rising at about 9 percent annually. By 2008, that annual rise was about 5 percent. In addition, according to a McKinsey Global Institute report “between 1960 and 2006 the share of personal health expenditures paid by patients directly out of pocket fell from 47 percent to 13 percent”.

However, when we look at the cost of major surgery or treatment of serious diseases, we see that these items are indeed too expensive for those without insurance and in many cases even those who have it. Likewise, our nation as a whole spends a higher percentage of our GDP on health care costs than at any other time in our history, and that percentage increases yearly. So, why is this so?

If you ask most people this question, you’ll probably hear some combination of the following:

1. Health Insurance companies are greedy and are motivated only by profits.
2. Pharmaceutical companies are greedy and are motivated only by profits.
3. Doctors are greedy and are motivated only by profits.
4. Those who don’t have health insurance go to emergency rooms for treatment. That costs much more and we all have to pay for it as the costs are shifted to those who can pay.
5. Because of frivolous lawsuits, doctors’ malpractice insurance is very expensive and they have to pass the costs to their patients.
6. Because of frivolous lawsuits, doctors have to practice defensive medicine and therefore order more tests and recommend more treatments, etc. to guard against being sued.

If you believe that any or all of these are major factors in the huge increase in health care spending we have seen over the last three decades, you’d be in the majority – and you’d be wrong. While some of these may play a role in increased health care spending (especially 5 & 6) they are not the major (or even a large) factor. I realize that previous statement may seem counter-intuitive, and certainly not what we are being lead to believe by the various special interests and spinmeisters who daily show up on the airwaves. But it is true.

The real reason we spend so much more on health care now than we did three decades ago is what Arnold Kling (who received his PhD in Economics from MIT) in his excellent book, Crisis of Abundance: Rethinking How We Pay for Health Care, refers to as “Premium Medicine”.   Simply put, Kling argues that health care is more expensive today because we can do much more now in the areas of diagnosis and treatment than we ever could. Medicine now offers MRIs, colonoscopies, CAT scans, chemotherapy, hip replacements, micro-surgery, angioplasty, heart transplants, liver transplants and even face transplants. These medical miracles were unheard of only a few short years ago. In addition, much of our health care is administered by highly trained medical specialists rather than general practitioners. Have a skin rash? You’ll be referred to a dermatologist. Digestion problems? You’ll see a gastroenterologist. High blood pressure and/or heart disease? You’ll be visiting your friendly cardiologist who after a battery of tests will likely prescribe numerous medications which you’ll have to take for the rest of your life. As Kling explains, “The medical industry now employs much higher levels of both physical capital (such as diagnostic equipment) and human capital (as represented by skilled specialists)”. Wondered why your insurance premiums keep going up year after year? Wondering why it’s so expensive if you contract a major disease? There’s your answer. The medical industry can now offer you more tests, treatments and pharmaceuticals to deal with your health needs, whether routine or critical, and all this Premium Medicine costs money. And that money has to come from somewhere.

Of course, one could reasonably ask whether all this premium medicine is making us increasingly healthier in direct proportion to the increase in costs. The answer is, probably not. Certainly, advances in medical care have increased our longevity. Survival rates for many illnesses keep increasing year after year. New medical breakthroughs are now the norm rather than the exception. While many medical advances are clearly beneficial, there is no doubt that at least some of this increase in diagnosis and care isn’t worth the extra cost. Arnold Kling describes this as the ‘gray area’ of medicine which includes services that are neither entirely necessary nor entirely unwarranted. Some services are beneficial, but these benefits are so small that our limited resources might be better spent elsewhere. Additionally, a range of medical protocols is often possible and one may be more cost effective than another. The further problem is that a clear cost-benefit analysis is often difficult when it comes to health care. The relative benefit of a service is based on the probability of success and the amount of benefit received. Furthermore, the results cannot be known in advance.

Let’s take this example from Crisis of Abundance –

Suppose you have a heart problem for which it is recommended that you regularly see a cardiologist and each visit costs $200. The annual benefits of seeing a cardiologist once a year might well be in excess of $200. So that’s $200 well spent. But should you see a cardiologist once a day? Not unless the benefits from doing so are at least $75,000 a year, which is highly unlikely. Perhaps you should see the cardiologist once a week, once a month, or once a quarter. The decision as to whether you should see the cardiologist more often than once a year should be based on how much additional benefit you are getting from each visit and whether those benefits are worth the extra $200 for each visit. But this is often difficult to determine. Additional visits to your cardiologist fall into the ‘gray area’.

For most people, however, these questions are not really much of a consideration. The test or treatment is available, and if there’s any chance it will help, they want it. And who can blame them. Life is precious, and in most likelihood, they’re not paying for it out of their own pocket anyway.

Which brings me to the other major reason health care is more expensive than it used to be – health insurance (including “public” health insurance such as Medicare and Medicaid). We’ll talk about health insurance coverage as a whole a bit later, but for now we’ll concentrate on the effect the third-party payer system has on prices. Third-party payer means that a patient with health insurance (or government paid-for care) does not directly pay the fee for his medical care out of his pocket at the time that service is provided. Rather, the doctor bills a “third party”, the insurance company or government, for the costs sometime later. Compare this to fee-for-service where the patient pays the cost for his health care directly to the doctor out of his own pocket at the time of service.

So why does the third-party payer system drive up the cost of heath care? The answer is something that economists call “moral hazard”. This is a phenomenon where the parties involved in making a decision are not held responsible for bearing the full costs arising from that decision – and they act differently than they would if they did bear the costs. In the case of health care, patients with health insurance are much less price conscious and less likely to shop around for a less expensive provider. Likewise, they are more likely to opt for additional tests or treatments regardless of whether those additional services will truly provide additional benefits (services in the ‘gray area’). As we’ve discussed, patients often don’t have perfect information as to whether these additional services are needed, they rely on their doctors. But doctors don’t have perfect information either. Plus, they’re prone to the pressures of making a profit and practicing defensive medicine. So when doctors know that insurance will pay the bill, they have little incentive to be conservative in recommending services or implement cost saving measures. The moral hazard of health insurance affects the behavior of doctors as well as patients. Additionally, patients with health insurance are more likely to seek medical treatment for minor ailments that don’t necessarily need medical intervention and, as this study suggests, some might even be more likely to engage in risky lifestyle choices like smoking and overeating, knowing that should they get sick, their health insurance will be there to pay for their treatments.

There is case to be made that moral hazard does not play a significant role in situations of a catastrophic illness or accident. As John A. Nyman argues in Is ‘Moral Hazard’ Inefficient?, “conventional (moral hazard) theory makes sense for health care such as cosmetic surgery or drugs to improve sexual functioning or designer-style prescription sunglasses, but not for serious treatments such as coronary bypass operations or organ transplants”. To an extent, Nyman is correct. When health insurance pays for treatment in the case of serious illness or accidents, moral hazard may not have as significant an effect since patients in these cases are not opting for services that they could or would otherwise decline. But as we have seen in the examples above, there still may be some moral hazard at work even in these situations. While basic lifesaving treatment may not be optional, other treatment efforts may indeed fall into the ‘gray area’ and be subject to a cost-benefit analysis and that analysis is certainly colored by a consideration of who will be paying the bill. If the health insurance company is on the hook, it is much more likely that doctors will recommend, and patients will accept, treatments which may or may not provide proven and significant benefit. Also, as discussed above, when someone has health insurance and knows that they will be covered if they fall ill or have a serious accident, they may be more likely to make lifestyle choices that increase their risk. More simply put, while you might not have much of a choice once you do get sick, you certainly can make good or bad choices that increase or decrease your chances of falling ill, and knowing you have health insurance can affect those choices.

So as we can see, the third party payer system, through the phenomenon of moral hazard, reduces the incentive to shop for the most cost effective care and causes an increase in demand for medical services – and an increase in demand causes an increase in prices. This is a very important point to keep in mind as we discuss the various options for heath care reform since any proposal that increases insurance coverage for anything other than catastrophic illnesses will most certainly cause an increase in the cost of health care.

I’d be remiss if I didn’t mention another factor contributing to the increase in health care costs – our aging population and increasing life span. Older people have more heath problems and require more medical services. As the baby boomer generation ages and people live longer, the average age of our population increases. With more older people, our nation will consume more health care resources and consequently our overall health care spending will increase.

In summary, the major factors fueling the huge increase in health care spending over the last few decades are our aging population, the rise of Premium Medicine, and our reliance on a third-party payer system which tends to drive up costs by disassociating those making health care decisions from the financial consequences of their choices.

Up till now, we’ve only been discussing the cost of health care. In my next post, we’ll take a look at the problems with the health insurance industry.

Related posts:

1. Health Care Reform – Introduction
2. Why is Health Care So Expensive?
3. The Problem with Health Insurance

I considered avoiding this topic since there’s so many others writing and talking about it, but with all the misinformation on all sides of this issue, I feel I need to bring some sanity to the conversation. Health care reform is a complicated issue and there’s no way I can cover everything that needs to be said about it here at the Freedom Minute. Countless books, research papers, college courses and articles provide volumes of information for anyone who wants to look for it. Yet most people don’t look for it. They continue with their pre-conceived ideas, certain in the correctness of their “facts”. I’ll attempt to distill down the vast amount of information available and present it in a clear and concise manner, free as much as possible from ideology and rhetoric.

I’m going to divide this up into a bunch of different posts, partly because I don’t want to have to write it all at once and partly because dividing it up will make it easier to follow. Much of what follows is not simply my opinion, but rather the result of countless hours of research and investigation. I use mostly verifiable, independent, peer-reviewed sources and if I make an assertion, I’ll attempt to cite those sources so you can check them out yourself. Mostly I’ll be paraphrasing the relevant data, but when I quote another source directly, I’ll use italics so you know when that’s happening.

Another important thing to note is that I believe that we need to reform our health care system. I’ll state that again so there’s no misunderstanding, I believe that we need to reform our health care system. However, as I’m sure will be no surprise to regular readers of this blog, I don’t believe that the various proposals making their way through congress are the best way to go about it. Of course, we really don’t yet know what the final bill will look like, so we’ll just have to take an educated guess based on what is most likely to be in the final version and I’ll do that based on what President Obama has stated are his goals.

First, however, we need to take a look at what the problems are and what has/is causing them. Just like a competent doctor, we need to diagnose first before we can suggest the proper treatment. I think you may be surprised by this part because it could very well challenge some of your deeply held beliefs. When I first started my research, I thought I knew, but then those pesky little facts kept getting in the way.

I invite and encourage you to post your thoughts and reactions. I love a vigorous debate but there are a few ground rules. First, rudeness will not be tolerated, neither will demagoguery. No insults, name calling, or flame wars. We’ll leave that to the politicians. Second, it’s ok to state your opinion, but try to recognize that an opinion doesn’t qualify as fact. If you make an assertion, you should be prepared to back it up with some verifiable source and “Sicko” doesn’t count. Neither does Fox News, or MSNBC, or ABC for that matter. These are all biased sources, some more than others. In addition, most reporters really don’t have the depth of understanding about economics needed to analyze this issue. For example, one of my favorite ABC reporters is Dr. Timothy Johnson. He always provides knowledgeable and well researched information – when he’s talking about medicine. When he branches out into commenting on the economic impact of the various health care reform proposals – not so much. To quote a beloved Star Trek character, “he’s a doctor, not an economist.” He should stick to matters of medicine, not public policy. Likewise, most other reporters don’t have the knowledge and training to understand the underlying economics of the subjects they are reporting on either. As a result, we mostly get superficial reporting or a regurgitation of the prevailing wisdom. Don’t let them be your only source of information. Google is your friend.

Ok, on to part one – Why is Health Care So Expensive?

Related posts:

1. Health Care Reform – Introduction
2. Why is Health Care So Expensive?
3. The Problem with Health Insurance

As the “cash for clunkers” program came to a close this past week, government officials fell all over themselves declaring what a huge success the program has been. “This is one of the best economic news stories we’ve seen, and I’m proud we were able to give consumers a helping hand,” gushed Transportation Secretary Ray LaHood. The positive spin is certainly not surprising considering the federal government just spent $3 billion of your tax dollars (or more correctly, added $3 billion to the national debt which will have to be paid back, with interest, from future tax revenues). And when they pony up that kind of coin, we’re certainly not going to hear anything coming from Washington other than the sound of our elected officials patting themselves on the back. True, if you’re one of the roughly 700,000 who were able to take advantage of the government’s largess, it’s likely you consider the program a success as well. And who’s to blame you. It’s not often you can get the government to reallocate $4500 of someone else’s money to you so you can buy a new car.

But those of us who understand that there is no free lunch realize that when the government engages in this kind of economic sleight of hand, there is always something on the other side of the equation, hidden from view, which balances out all the “benefits”. Plus, we’ll have to deal with all those pesky unintended consequences which always occur. So let’s take a look at the entirety of the cash for clunkers program and see whether or not it really was a good deal for America.

On the plus side, we’ve got:

1. About 700,000 new cars sold which helped boost the automakers’ bottom line, at least temporarily.

2. The new vehicles purchased through the program had an average fuel efficiency increase of 58% over the average mileage of the vehicles which were traded in. On the surface, it might seem as though this will help reduce our dependence on foreign oil and be good for the environment.

Not so fast. Let’s look at the other side of the equation.

1. The increase in auto sales was only temporary and will do nothing to help the automakers in the long run. Indeed, recent data shows that there will certainly be a huge drop off in sales now that “clunkers” has ended. Auto research firm Edmunds.com describes the coming decline in sales as “a painful hangover” likely to affect dealers in the coming weeks. According to Edmunds Senior Analyst David Tompkins, PhD., “Current purchase intent is down 50 percent from the Cash for Clunkers peak, and down 11 percent from the June average. Day by day, intent is slipping: Sunday activity was down 21% from Saturday, then Tuesday activity was down 16 percent from Monday.” So all the government ended up doing was creating a temporary artificial demand that will soon correct itself. No one really gained anything. In fact, as I explain below, we’re actually worse off now.

2. Of consumers who participated in the program, a much larger than normal percentage are experiencing “buyer’s remorse” about their purchase. As the L.A. Times reported Friday, “CNW Marketing Research Inc., which tracks consumer buying habits, said a survey of 1,000 cash-for-clunkers participants found that 17% had doubts about their purchase of a new car, primarily because of the $275-to-$350 monthly payment they’re now facing.“ So Washington may now be responsible for a large number of Americans having over extended themselves once again. Did our politicians learn nothing from their ill fated attempts to entice everyone to buy a home, even those that couldn’t afford it? Apparently not. And as we saw with the housing market, the creation of an artificial demand for new cars caused the prices of those vehicles to increase. As CNNMoney.com reports, “During the weeks the Clunkers program was in effect, buyers of the Toyota Corolla paid 29% closer to the full sticker price than before the program started. Ford Escape prices were 13% closer to full sticker, and Ford Focus prices were 12% closer.” So those participating in the program may not have gotten as good a deal as they thought, and those that didn’t qualify but purchased a new car anyway definitely did a lot worse. And this price imbalance will continue for the next few months until inventory levels readjust to where they should be based on actual consumer demand.

3. As I suggested above, the $3 billion to pay for this program has to come from somewhere. That somewhere is tax dollars. And as anyone who understands basic economics will tell you, every dollar that is taken away from consumers in taxes, is one dollar less that is available to be spent or invested in other areas of the economy. That’s a dollar less to be spend on clothes, or food, or entertainment, or any of the countless other things that individuals might choose to spend their money on and grow our economy. But, of course, we’re not talking about one dollar, we’re talking about three billion dollars. Now if you’re tempted to think that this was an even trade-off, you’d be wrong. The reason is that there is a cost to collecting those tax dollars and administering the programs. Furthermore, we don’t currently have these tax dollars, we have to borrow them and pay interest on them. Think about the interest on $3 billion. But that’s not the worst of it. The worst part is that the government decided how best to spend this $3 billion. That might not have been the most efficient use of that money. In fact, it’s almost a guarantee that it wasn’t. No government bureaucrat, no matter how smart or well intentioned, can do a better job of deciding how to spend that money than the individuals from whom the money was taken from. Those thousands or tens of thousands of individual purchasing decisions would have, in the long run, produced a better economic outcome and we would all have been better off. Simply put, if those billions of dollars were best spent on buying cars, then that’s how individuals, making their own personal choices, would have spent them.

4. While the new cars on the road might use less fuel and produce less harmful emissions, consider the environmental impact of having to dispose of all the “clunkers” that were traded in. Whatever environmental benefits we may gain from better fuel mileage, we undoubtedly will lose in additional energy usage or environmental damage in disposing of the old vehicles. As any good environmentalist will tell you, in the mantra “reduce, reuse, recycle”, the most “green” of the three is reuse. Also, since many of these vehicles had some useful life left in them, disposing of them prematurely constitutes waste, and waste translates into a reduction of wealth. So, in addition to the economic costs described above, thanks to the waste created by this government program, our society as a whole is less wealthy now.

So was “cash for clunkers” a success? I hope you now know the answer to that question. And I hope you remember it as our politicians concoct their next scheme that purports to give us something for nothing. New refrigerator anyone?

Related posts:

1. Health Care Reform – Introduction
2. Why is Health Care So Expensive?
3. The Problem with Health Insurance

Just got word from the White House that The Freedom Minute will be attending the Obama townhall meeting in Los Angeles on Thursday. I’m hoping to get a chance to ask a question, but either way, you can be sure I’ll be posting about my experiences and candid impressions. Stay tuned…

Related posts:

1. Health Care Reform – Introduction
2. Why is Health Care So Expensive?
3. The Problem with Health Insurance

In a recent opinion piece on the Sacramento Bee’s web site, Dan Walters criticizes those who oppose the recent budget deal as panderers, suggesting that they’re somehow dishonest in their opposition. Read the piece here:

California budget’s foes pander on the numbers

I’m reposting my response here because comments on the Bee’s website only allows 1000 characters and I had to cut it up into five different posts:

Dan,

If you’re going to write an opinion piece on the state budget, it might be helpful for you to provide at least one fact or piece of evidence to support your claims. Basically you are claiming that the budget couldn’t be balanced unless taxes were raised. Then you go on to criticize two potential gubernatorial candidates for not giving specifics as to how they would have balanced the budget. But what’s sauce for the goose, is sauce for the gander. It’s intellectually dishonest for you to make the claims you do without backing them up. You simply proclaim that the governor is right but then offer no proof or at least a counter argument to those who claim the tax increase wasn’t necessary.

So let me provide a few examples of how to back up an assertion:

You claim that Steve Poizner is pandering when he called the budget “a financial fiasco”. It isn’t pandering to say that raising taxes in a recession would be extremely harmful to the economy when virtually every economist would agree that it’s the likely outcome. Furthermore, we have historical evidence that this budget will worsen our financial problems. In 1994, Republican Governor Pete Wilson went along with the Democratic Legislature’s attempt to eliminate the (at that time) historic $14 billion deficit with $7 billion in tax hikes and $7 billion in spending cuts. This resulted in a deeper and more sustained recession and the deficit quickly re-appeared because revenues shrank further due to the tax increases. Prosperity only returned when the tax increases expired. There’s certainly every reason to believe that the basic laws of economics will apply this time as well. And we’ll likely have “a financial fiasco” on our hands as we did before.

You further take Poizner to task for saying, “When politicians who were elected to oppose more taxes end up supporting them, this is not a hard choice – it’s a broken promise.” Well, every Republican in the State legislature signed a pledge not to raise taxes and then six of them voted for a budget that included over $12 billion in tax increases. The Governor unequivocally made that same pledge verbally numerous times as well and then approved the largest single tax increase by any State in U.S. history. I’m not sure what you’d call it, but in my book that’s pretty much the definition of breaking your promise.

Now let’s turn to your claim that the budget couldn’t be balanced without tax increases. This is false and I’ll give you and our esteemed Governor a much needed math lesson. The final budget raised taxes by about $12.5 billion. Here’s how you find that much without the taxes:

As reported in the SacBee on Dec. 15th, the Republicans proposed the following:

Redirect Proposition 10 unspent funds – $2.1 billion
Redirect Proposition 63 unspent funds – $3.9 billion
Transfer from trial court improvement fund – $61 million
Fund transfers from Department of Parks and Recreation – $27 million
Delay loan repayment to Integrated Waste Management Board – $21 million
Delay loan repayment to Public Utilities Commission – $5 million
Motor Vehicle Account Fund Transfer – $170 million
Redirect tribal gaming payments for transportation loans – $200 million

This comes to about $7 billion. Now add Senator Chuck DeVore’s plan to permit oil slant drilling which would allow us to borrow up to $5 billion against future revenues. That’s $12 billion right there. Now that’s not the only way to get the needed funds. Preferably, the legislature could just cut $12 billion of the $40 billion increase in state spending that occurred over the last 5 years. Or cut some of the 175,000 new state workers who were added to the state payroll over the last decade. (I’ll do the math for you – That’s 48 jobs added per day.)

My point is that it’s disingenuous to say the budget couldn’t be balanced without raising taxes. The truth is that it would have been politically difficult, not mathematically impossible. Of course, maybe in Gov. Schwarzenegger’s Math 101 class they only teach you how to balance the budget by raising taxes. Keeping your word and making politically difficult decisions must be taught in one of the advanced courses.

Related posts:

1. Health Care Reform – Introduction
2. Why is Health Care So Expensive?
3. The Problem with Health Insurance

In case you haven’t heard, another AIG subsidiary, International Lease Finance Corp., threw a lavish party at the Smithsonian just 4 days after US taxpayers bailed out parent AIG to the tune of $85 billion.

Read the story here.

This is in addition to the now infamous $443,344 spa retreat at the exclusive St. Regis Monarch Beach Resort for executives of AIG subsidiary, AIG American General, which prompted Barack Obama to suggest during Tuesday’s debate that the Treasury should demand the money back and fire the executives.

And this week the feds agreed to loan AIG another $37.8 billion. If you want to make your voice heard on how your tax dollars are being wasted, go to this link to look up the contact information for your congressional representatives.

Make a phone call if you can. It’s much more effective than an email.

Related posts:

1. Health Care Reform – Introduction
2. Why is Health Care So Expensive?
3. The Problem with Health Insurance

I guess if you live long enough, you see everything. This week, John McCain proffered a multi-billion dollar plan to have the federal government buy up all the home mortgages in the country that have fallen into default and then revalue them to current home values. A plan that would put us billions more into debt and reward the lenders who made bad loans and the homeowners that got themselves into mortgages they knew they couldn’t afford.

Did I mention that the plan was put forward by John McCain, the REPUBLICAN candidate for president? And guess who’s opposed to the government intervening in this way. Yeah, “that one”, the Democratic contender. If I’m not mistaken, aren’t the Republicans supposed to be in favor of smaller government and less intervention in the free market? And isn’t it the Democrats who have traditionally been accused of being the “tax and spend” party? And isn’t this the same John McCain who pretty much made his career on being a fiscal conservative, the watchdog for your tax dollars?

Apparently not. Apparently we’re living in some kind of election year Bizzaro World in which up is down, left is right, and Republicans are Democrats. Except, of course, when it comes to keeping the government out of your bedroom and other personal business. Then they’re still Republicans.

Related posts:

1. Health Care Reform – Introduction
2. Why is Health Care So Expensive?
3. The Problem with Health Insurance