Ron Amundson’s Political Blog

In Dr Laffer’s paper, he explains of the health care wedge, where patients often dont have a financial interest in their care because its hidden from them. A situation this weekend came to light that presents another yet wedge. Its probably not an isolated deal either, as I sort of predicted it would occur due to issues with Medicare Part D legislation, and its yet another uncomfortable discussion that no one wants to talk about.

The insurance/taxpayer wedge… informed insurance buyers evaluate different policies during open enrollment. With medicare part D, most will take a very close look at the published formulary to make sure the drugs they are taking are covered. In most cases, there are a range of pharmaceuticals, as one size doesnt fit all. Ie, out of 10 heart meds, one may work well, another somewhat, and eight probably cause more problems than they are designed to help.

What medicare part D legislation provides for, is insurance companies to publish a formulary during open enrollment, and then change it, after enrollment closes. On the surface, this is a bait and switch type of thing, and a insurance companies dream. Ie state you will provide for ABCD, lock in your customer base, and then dont do so… and you get to reap the rewards of premiums without having to pay out until the next open enrollment. A less cynical view would suggest the approach is to provide for mid term change. Ie if a new  less costly drug comes on the market, formulary changes mid term would provide for less costly coverage, or even the approval of new life saving meds could necessitate a change.

The issue of course, is that as long as removing one drug, and replacing it with another works… Or that one drug is found not to be as effective, and another better one already on the formulary replaces it. There in lies the problem. Such changes may not work for all people. Granted, there are provisions such that one can jump hoops and potentially get an exception, but how many seniors are going to be able to do so, and even more how long it could take to accomplish. Far too many seniors accept they got hosed, and either A try to buy meds on their own if they can afford it, or B end up not taking their meds, at least until they see their doctor, or C until something goes massively wrong, either while waiting for the doctor, or just being resigned to be hosed over.

And C is going to happen. Some meds cannot be stopped arbitrarily, in other cases, a specific medicine may be keeping someone alive, even if they dont know it. I heard a story this weekend, where a man got hosed over. He could not afford to buy his meds being they were recently removed from the formulary. Without the meds, he ended up in the hospital.  Being a Medicare patient, this shifts the cost to the taxpayer… and the insurance company wins again, subject to what they may pay out on part B, which is tiny compared to the savings achieved by removing drugs from the formulary.

This is yet another wedge. The insurance company is isolated from the costs of their decisions. It leaves the taxpayer to pick up the tab for the expenses, and even if causality could be determined at a reasonable cost, there is no provision to recover damages from the insurance company.

By the same token, not to allow formulary changes may prevent new and lower cost methods from coming on the market, or worse, it might prevent life saving treatments from being available until the next contract period. To only allow expansion of the formulary while the contract is in force is another option, but its a more expensive solution, which obviously the insurance companies will lobby against… but I think its a must, from the point of view of contracts, morality, conservation of medical resources, and a savings to the taxpayer.

Another solution, is to provide consumers freedom and choice at any time a formulary or coverage change is made. Ie, if insurance company A drops coverage, you are now free to change carriers. Of course such could be pretty intensive from a overhead point of view, and it could also serve to prevent innovation, but over time, the market would self correct, short of every carrier changing their formulary at once.

No matter what, the status quo is not an option. Sooner or later, if it hasnt occurred already patients will die, medical resources will be over used to the point of invailability, and the taxpayer will have a bird over the exponentially rising costs… The insurance industry must be reigned in one way or another. Their free ride at hidden taxpayer expense cannot continue.

I’ve been perusing Laffer’s paper as of the last few days. His views often lean quite conservative, and while I have often disagreed with any number of positions he chooses, he is well spoken, articulate, and appears to disdain rhetoric as much as I do. He presents a number of well researched issues, and follows up with some potential solutions. I think its a must read for folks on both sides of the debate.

The first thing he brings up, is that the health care system as we currently have is broken, and is not sustainable. I think thats something that everyone can agree with, despite many folks being happy with their current plan or method of care. They realize costs are out of control, and the status quo, no matter how much they personally like it cannot be maintained.

He then attributes much of the problem due to government intervention distorting the market place, with the biggest factor being patients being isolated from the cost. While I disagree that government is the biggest problem, he is correct about the isolation aspect. It sort of parallels my post on a lack of skin in the game, albeit at this point, he is only looking at the patient aspect, rather than a total system approach.

He next brings up a couple of key points. First, ill advised reform could be worse than no reform, and secondly that the 85% of folks happy with their healthcare arrangement should not be put in a worse position than they are. Well, I agree with the first premise, as it could cause the current declining spiral to increase rather than to reverse. The second one… its pretty much impossible, as someone has to pay, and if one follows his paper through to the end, his conclusions will make it much worse for many of the 85% who are happy with the status quo. They will either pay much more, or have much less care, there are no free lunches… Which is sort of surprising, being so much of his paper is focused on reducing free lunches. My guess is, he is looking at specific demographics to make his point, where as I am looking at other ones. In addition, he is viewing free market effects to happen over a short period of time, where as I see them taking many many years.

Overall, he tends to think that reducing the isolation between patients expenditures, and the care received is the solution. I too think its part of the solution, and its one of the issues that is sadly missing in the proposed legislation. The difference, is I see the isolation aspect as one small part, because unlike many other factors, many of the largest users of healthcare resources are those who are financially constrained.

For example, those in their last years of life, and those who suffer with serious chronic or life threatening illness, are those for the most part who have minimal if any resources available to pay for their care, or even buy insurance which would provide coverage for such. By the same token… being aware of treatment costs and the probability of a successful outcome does make sense. For example, few folks would think spending $50,000 on pharma in order to gain 2.5 weeks of life makes sense. Some, for any number of reasons may still wish to do so would go ahead, but the vast majority of folks if faced with such a decision would choose not to go down that path, even if it did not come directly from their pocketbook. At least that my thinking, albeit I’m often accused of being too much of an idealist.

He then goes on to discuss the issue of sharing comparitive effectiveness studies, and presents the case that government regs create more of a barrier, than does competition, albeit under the narrow PGP model. His argument does seem to hold up… but the narrowness of the model, whether it be due to government confinement, or competition is problematic. If, one were to remove the patient/care wedge though, he is likely correct, in that patients would demand it… but imho, 1000:1 it would be hidden away in so much corp speak, it would have little value, and it would also take years for such a market correction. No business willingly gives away key data which might help a competitor, it will be obscured, no matter the market demand.

He then brings up a parallel with auto insurance, ie it pays for catastrophic damage, not routine maintenance, where as health insurance does take care of the routine… and the associated divergence. I think such a analysis is in error, as unlike a car which has a short lifespan by design, and the failure of routine maintenance for many does not play a major role in how long they keep a car, health is a different matter. Ie, in the past most folks changed vehicles every 3.5 years. Even forgoing most maintenance (excluding oil changes, etc) for that period is unlikely to have a great impact, as the car is no longer theirs in 3.5 years. Health issues otoh, if left unchecked tend to multiply and accumulate, and the resulting costs later on, often dwarf the costs of routine care upfront. The exception being, drastic changes in life expectancy. Ie, if folks kicked the bucket at retirement, the total costs of lifetime health care would be less, than if they lived to 110, but I know of no-one who would suggest such a draconian model.

He then goes into a detailed analysis of the wedge (isolation between patient costs, and healthcare costs). There are some significant points made, and a fair amount of data to present his argument. Again, I agree, but only to a point, being the highest consumers of care, are those who are the ones unable to pay. He presents an interesting analogy of health care costs being driven by counterproductive regulations, as contrasted with eye glasses, which typically are not so heavily regulated… and it makes a profound point. Otoh, technology advances have served to keep costs low, plus getting a bad set of glasses is not life threatening, just an aggravation, so while its interesting to note, I dont buy into the analogy.

He then presents some data, which is why I disagree with his premise.

Five percent of the population accounts for almost half (49 percent) of total health care expenses.

The 15 most expensive health conditions account for 44 percent of total health care expenses.

Patients with multiple chronic conditions cost up to seven times as much as patients with only one chronic condition.

and then presents the following summary of the data.

Controlling spending, therefore, requires controlling the spending by the 5 percent of the population spending one-half of all health care expenditures.

To me, this is where the rubber hits the road, and is the source of disagreement. To limit the care of the 65-85 set & those with chronic diseases to what they can pay is morally wrong. Granted, spending $50K for 3 weeks of life is pretty far out there, otoh to reduce care to those least able to afford it is just wrong in so many ways. Life is more than just financial contribution to society. Even the most die hard conservative is not going to tell the hospital to pull the plug on an old grandma because they dont want to pay… yet, when they suggest she pay, and if she or her family can’t, well she is out of luck, thats not very helpful either.

This is not to say that controlling costs isnt important, it is, and I think it can be done without throwing grandma out in the cold. He thinks it can be done too, albeit that his thinking is that insurance companies will do so because of competition, ie market demand. Grandma will force the issue by being unable to afford insurance, and thus the insurance company will reduce rates via further cost controls, such that grandma can afford it. And that said cost controls will also affect the healthcare providers, such that they wont offer a $50,000 treatment to extend grandma’s life by 4 weeks… but what if grandma needed that time, and what if, over time that $50K treatment became $5K, or even $500, or instead of 4 weeks, its 4 years? There are lots of what ifs involved here, that are well beyond the scope of the insurance company bureaucrats.

There is a lot more to read, and its pretty informative, and many of his arguments do make a significant amount of sense. His conclusions and proposed solutions on the other hand seem problematic in a number of ways, or need some tweeks.

Individual ownership of insurance policies

I think this makes some sense, it gets rid of the lack of portability aspect. He sees that it should be an individual tax deduction, rather than a business one. Whether its deductible or not is up for debate, but the individual aspect does make sense. By the same token… limits on pre-existing conditions, recision, excessive premiums on risk, and exclusion of high risk individuals would have to go away… otherwise, even more would end up under/uninsured. We’d end up with 5 massive insurance companies insuring the masses of folks who spend 3% of the health care dollars… and no one willing to cover those who need massive amouns of care, being said policies would exclude said care, or be beyond the scope of folks ability to buy coverage.

Leverage HSA’s

I agree with this as well, bearing in mind they need deregulation. Ie, insurance companies lobbyists should not dictate what is customary through IRS regs. Ie, if someone chooses concierge care, off shore care, telemedicne, or alt medicine, and wishes to use an HSA, they should be able to make the call, not the lobbyists. I’m 100% for a free market approach in this area, not the careful fostering of a monopoly and good old boys market grab for the insurance industry.

Allow interstate purchasing of insurance

I think this too has potential, bearing in mind, it doesnt become a way of selecting low risk pools for the insurance business, such as in the first proposed solution.

Reduce the number of mandated benefits

One way to save would be to exclude coverage for cancer, and it would save billions… but I dont think its wise. Same with mental health. Societal costs would skyrocket. A federal set of minimum mandated benefits otoh might be the solution, and let the free market run from that as a baseline. There is also the aspect, of sales guys selling folks bogus insurance, especially to those who are uninformed. Ie, you now have insurance for a song… but it really covers nothing, but because the coverage limits are hidden in jargon and fine print, you wont know until its too late.

Reallocate Medicaid spending to vouchers for folks to buy their own insurance.

Most assuredly it would reduce administration costs, and a ton of headaches. By the same token, having the elderly and those with chronic illness, some of which may not have their full facalties to make such calls, just seems a disaster waiting to happen. Otoh, the status quo, where each state makes a mess of such is not good either.

Eliminate unneccesary scope of practice laws

Roger this, its a great idea… I cant think of how many times an old nurse has saved a young residents bacon. An experienced PA, FNP, or even RN is far less costly than a MD, and in many cases will provide much better care than a fresh MD. Granted, newbie MD’s need to get their feet wet, as do others in all professions… but pay for quality of care over quantity and credentials could be a huge deal… but not if it bankrupts young docs due to the inability to cover excessive loan payments. I’d go so far to to also include interstate practice, and off shore telemedicine as well. A system wide approach would be needed to do this, as there exists tons of entrenchment.

Liability reform

This is often a scape goat, by the same token, it can take a very high toll. Being the DOT sets the value of human life at $5.8 million, does it make sense that malpractice awards should be higher? In some cases, absolutely, as a lifetime of care may dwarf $5.8 million… yet if death occurs, it seems crazy that awards can be multiple times that amount, even for high earners, being thats what they have life insurance for, etc.

Ulimately, Laffers overt focus on deregulated insurance companies saving healthcare, and that government regulation is the big problem is imho far too idealistic. In many ways, as far too idealistic those who portray a total government plan is the ultimate solution. Neither is really the solution, all parties need to get their skin in the game for a really effective solution… and that is the problem, as each wants their own to the exception of the other.

To some extent, many dont want healthcare reform for any number of reasons, ranging from personal financial interest, to ideology, to the status quo being ideal for them and their family. All are reasonable and understandable objections. Of course, the problem is, whether now, or later by market force, its going to happen. Whats a bit scary though are some of the tactics used… Sure, maybe some of it is ideologically / sound bite driven, but when statements are so far off the mark, it does make me wonder what planet folks are on.

I came across the following:

Putting dollar amounts on human lives is unacceptable to us in America!

???? It is common practice, and widely accepted in America. However its the elephant in the room that no one wants to talk about. Granted, there may be some folks who are unaware… either by ignorance, or perhaps its horrific enough, they just dont want to think about it.

Human life does have a dollar figure whether in ones family, ones employer, products we consume, or ones government. Decision matrices do include the dollar costs of human life, whether it be how much life insurance one can afford, workmans comp limits, design calls based upon projected loss of life/litigation, and regulation. There are only so many resources, and tough calls do have to be made…

Some examples:

Mattress Safety

The CSPC propose a new standard for mattresses. It would cost $343 million, in order to save 270 people a year. The value of human life is thus calculated to be $1.2 million, just a tad more than most health insurance companies current set as their life time payout. It was implemented.

School Bus Safety

The National Resource Safety Council did a study as far as school bus safety was concerned. It was determined students lives could be saved by changes in the standards, but at a cost of $40/million per students life. This was deemed too high, and as such was not implemented.

The DOT

The NTSB makes recommendations left and right per their charter. Ie to protect the public. Other agencies balance such recommendations with the economic costs to private business. Changes which are low cost are put out as NPRM with ease, and usually there are few if any comments. Recommendations which are expensive, often times dont even make it that far, and if they do, private industry and lobbyists post comments with a vengence. Sure, on the individual level, where one has control/responsibility it makes sense. Ie, if there is the potential for a landing gear trunion failure in my single seater, and I dont fly much, and its spendy… I dont want this to become a spendy airworthiness directive, I can intelligently accept the risk after weighing all the factors.. Otoh, if a common carrier is involved, where most folks may be unaware of a safety issue, such as 777 thrust roll back, even if it is spendy, the public must be protected, even if the costs mean the end of the $99 airfare.

The Value of Life/Year

Another factor commonly used is the value of life/year. Ie, what is the value of extending a person’s life for 1 year. In the UK, NICE uses a figure of ~$49,000, which has caused no small amount of upset over rationing. In the US, ~$50,000 is a commonly used figure… except when it comes to the uninsured. Stats based upon a Wisconsin study bear the figure out to be around $5,500 for those who do not have insurance. Yet… there is no moral outrage, even if the reason for such is well beyond the control of the individual.

These stats are the elephant in the room no one wants to talk about…

Background info from http://www.nytimes.com/2009/07/19/magazine/19healthcare-t.html?pagewanted=2&_r=2&sq=peter%20singer&st=cse&scp=2

Healthcare reform is needed due to fear, morality, and costs, but there are so many opinions out there, things get buried. In fact, it seems the fear of change is perhaps the biggest fear of all. By the same token, for some, they really do percieve no need to change, at least at the current time. Ultimately though, change will happen, if not by planning, it will occur by market forces, well beyond the control of any specific group. The current model is not long term sustainable.

Reform needed due to fear

Folks fear loosing their job, or their employer or insurance company going bankrupt, if they have any medical issues, and even those who dont… if they find out they cant cover the costs of Cobra, and then have a medical problem, there are hosed.

In the back of their mind, many know their insurance is a facade, that if they really need it, it wont be there. Ie if they get cancer, they know their fellow worker who did, ended up having to declare bankruptcy. Of the fellow workers having fund raiser after fundraiser to provide support for their ill child.

Each year, coverage amounts and procedures are reduced, and/or co pays are increased by their employer. This will be an even bigger deal come the end of the year when insurance contracts are up for negotiation.

Riches to rags stories are coming to light, and more and more folks are seeing it can happen to them. It doesnt take much, and even $1 million in savings, if paid at the uninsured rates wont last very long in the case of serious injury or illness. The fellow with a net worth of only $200K is even more at risk.

Domestic abuse stories are coming to light, where in economics and the lost of medical coverage keep far too many in the horrors of an abusive relationship.

Reform needed due to morality sort of

Most people of faith, and many of those who do not ascribe to any particular faith hold that human life should be valued, as should the quality of said life. The concept of accelerating death, euthanasia, and/or leaving an injured person to die are anathama… at least in most states. Ie, many but not all have good Samaritan laws, and also fund Hospice care via medicaid, such that folks are not simply thrown outside to die.

By the same token, morality is tempered by self interest. Ie, its fine to uphold life as of great value, until it will personally cost me, especially if I dont know the person. We had this discussion in aviation some time back, as concerns regulations and cost, and the stats bore out this elephant in the room pretty clearly. Its the same in most state govt transit departments, and in business, where in costs are assigned to human life, and the costs of resulting litigation as a method of managing resources.

• The proverbial X number of deaths/serious injuries are needed to foster design changes in manufacturing or traffic lights are needed at an intersection in road design.
• Health insurance premiums would be too high, if risk pools were to include the chronically ill, lifetime payouts were removed, out patient therapy was based upon patient need, the patients needs put first etc.
• In state governement, political fiefdoms and key programs would be shafted, if the needs of the disabled and chronically ill came first. Case in point MN and CA budget cuts. Those folks dont have lobbyists and are small in number, and its easier to cut them, than other areas.

Reform needed due to cost:

Reform is needed as costs are increasing at a greater rate than wages, even more so since we are starting to enter the era of wage deflation in some areas, and sectors.

Medicare Reimbursement is a joke. A fellow posted on Minn post a few days ago, he had a colonoscopy, and was billed for $1560. The physicians medicare reimbursement for such a procedure is far under $500, some sources suggest as low as $340.

Those in the industry, are well aware of the insane markups..  Ie, if something is sold to the medical market, the sales price is 5-10X what it would be if sold into another market. QA, regulatory, and liability do play a role in this of course, but charging what the market will bare is the primary factor… and the reason for that, 1. the end user is unaware of prices, until its too late to do anything about it, and 2.  its easy to shift said costs to them.

Malpractice liability insurance is insane… I remember working with pacers folks years ago. The professional liability premiums, if they were available, often times were multiples of gross sales. Thus, most independent professionals either go bare or shelter assets. Most manufacturers have to vertically integrate low volume processes, and the use of readily available low cost commercial off the shelf technology is prohibited, thus further increasing costs.

Hospitals, even well run ones are finding unless they put the needs of their infrastructure above the needs of their patient, they can’t keep their doors open. Even Mayo, with its super cool patients first model admits its not long term sustainable practice without reform.

Its not needed for all…

Some folks are blessed with Cadillac plans at reasonable costs. I know, I was one of those folks years ago. The thing is, as time passes, the Cadillac is morphing more and more toward a Geo in most but not all sectors. Ie, congress is excluded, as are some government employees, and a few in the public sector. In other cases, the morphing is pretty well hidden. Ie, John’s kid had cancer years ago, and the insurance was wonderful, but since then, system costs are pretty nominal, and as such, no one really knows how good, or not good the company plan is. Ultimately, if the company is prospering, they can keep up a good plan for quite some time, if not… it might be shrinking over the years, but few are aware of it.

Change is inevitable

If the current model continues to run unchecked, healthcare will grow, until a vast number of people can no longer afford insurance, housing, or food, and then difficult, and potentially damaging changes will be forced upon them. The proverbial medicine or food scenario will become more and more real to many. At that point, change must occur, and most likely it wont be pleasant, ie major care rationing, lack of resources, overworked med staff, and the patient looses big time in contrast with even today. The question is, whether there is enough will to make a change, or if we all go down as captains of our own ships.

I was looking at the Blue Cross Blue Shield of MN 2008 Financial statement.  Their total revenue was $8.8 billion and paid out claims were $8 billion putting their administrative percentage a tad under 10%. In many ways, thats pretty impressive. Membership is roughly $2.2 million, putting a rough cost per member at $4000/year, which again, is pretty impressive.

However…. dollar figures dont tell the whole story.

• If someone has a pre-existing condition, it likely wont be covered.
• If someone was seriously injured, and doesnt recover, they will hit yearly, and likely lifetime limits of coverage, where upon their coverage becomes of little value, if its renewed at all.
• If someone is old, and with some heatlh issues, they will pay many times, what a young healthy person pays, if they are offered coverage at all.
• Maximum annual out of pocket spending is based upon only covered procedures, and only what they consider reasonable and customary. A significant illness or injury will likely result in annual out of pocket spending far beyond what is stated.
• It is highly likely, one will have to fight every step of the way for coverage in the event of major illness or injury, significantly less so for more routine matters. One’s doctor is really not the one in charge of care, when many options have to be reviewed/denied/appealed.

All of the above serve to keep premiums low, and also lean towards keeping a specific membership demographic that keeps premiums low as well. Removing / modifying many of the above would be the morally correct thing to do, and changes are called out in the reform bill… however, such is going to require premiums to increase multifold. Where is the greed aspect? Is it us, who dont want to pay, or is it them, in wanting to keep prices down to maintain volume and thus profitability?

I have a feeling its more us, than them. No one ever thinks they will get sick or be injured, few even bother to read their policy, until they really need it, and then find out… they need to have fund raisers and such to help with their childrens health issues, or that bankruptcy may be a high probability, although for chronic cases… what then, it doesnt change financial circumstances, the high costs are still there. Or what about the anti-government person, who believes a great deal in affordable private insurance… only to find out, they exhaust it, or its cancelled and end up on medicare/medicaid programs anyhow.

I agree that the intent of this makes sense. “To get our economy back on track and to create jobs now, we must fundamentally shift power from politicians to small business, from lobbyists to entrepreneurs, and from bureaucrats to investors.” However, tax policy, while it plays a role, is not the root issue, demand is the problem, its collapsed, and as such, there exists huge overcapacity. Here are four ideas from American Solutions, they make for good politics talk and soundbites, but do little as far as the demand side, and some are counter productive. What worked in the 80’s was based upon the history leading up to it. Considering where we are on the Laffer Curve today, such policies just dont seem to add up.

1. Reducing payroll taxes… Fostering greater consumer liquidity through tax policy can help… but more likely, the first proposal would be used by the average Joe for paying bills, and safe investing for the wealthy class rather than fostering an increase in demand. The end result, government debt increases multifold, and the citizens receive very little bang for the buck. Shrinking govt to absorb the costs is not a option, as there are too many hands in the cookie jar.
2. Eliminating Capital gains… well it makes for a good soundbite, but a good accountant and tax lawyer already have this covered. If anything, it would serve to shift the largest tax burden even more to the middle class than it already is. The flat tax would serve as a much greater leveling agent.
3. Reducing the corporate tax rate....The corporate tax rate again is subject to having a good tax lawyer, and accountant. It makes for a good sound bite, but does little in the demand arena. Its a good thing in the finance world, but does little for production of tangible goods and services in the current economic situation. I think the finance sector has been bailed out enough.
4. Eliminating the death tax… The death tax needs reform, but not removal. Removing it, being inheritance serves to keep money from being productive, at least as shown by history, would be counterproductive. The paperwork burden needs to be addressed, as do the limits.

Realistically, only a black swan will make any difference. Short of such, a long term L shaped recovery with little change in employment is the likely outcome. Thus, the questions should be asked, what can govt change to increase the probability of black swans, and what can government do to foster employment in the short term.

Encourage, rather than discourage competition, and new market creation

Vast sums of policy and regulations are in place to protect the status quo from competition, and to limit new market creation. This has to end, keeping in mind, the citizen needs protection, not the status quo. Anti-trust legislation needs to be enforced with a much larger stick.

Encourage, rather than discourage hiring for small business and startups, defined as those with under 50 employees.

Having been down the hiring path a few times, soundbite folks would be astounded to realize the costs of hiring an employee. The total cost to an employer is at a minimum 1.5 X take home pay, and 2.5 multipliers are not unrealistic in some sectors. The paperwork burden can be substantial, and the pitfalls of mistakes are huge. Shifting workmans comp, and UI somewhat to the employee side would also work wonders, even if our net costs remain the same, being such would be visible. Addressing the healthcare issue, with the proposed 8% employer contribution limit, and access to insurance will do wonders in this regard.

Encourage, rather than discourage local hiring, do not encourage outsourcing.

Tax policy encourages outsourcing for the most part, rather than local hires. This has to end… but its an impossible sale. The flat tax model would level the playing field, but being it takes the ability to influence social policy via taxation away from govt, it would never fly.

Encourage, rather than discourage early stage investing, for all people.

Currently, SEC regulations limit early stage investing to qualified investors. Only those with a high net worth can play, subject to some minor exceptions. The idea was to protect the little guy, however, as history shows, the little guy was not protected from Wall Street greed… Also, the massive overhead involved in early stage fund raising, serves as a significant barrier to entry for many. Obviously balance is needed.

Encourage the creation of startups and small business, defined as those with under 20 employees.

SBIR overhead burdens are substantial, add in small business being defined as those firms with under 500 employees, proposed institutional investors, and venture capital allowances, and a small startup firm with an idea, and limited money is out in the cold. If the intent is to encourage small business innovation and competition, the SBIR can be pretty counterproductive with such policies.

The problem with healthcare solutions, is that they dont address the problem at its most basic level, and that is the skin is in the wrong place. Ie, skin = whos finances are at stake. Insurance companies dictate to Dr’s, and balk at paying, or covering specific items as doing so makes them more money. Patients have no clue if there insurance is fake, poor, or great, as very few use it beyond the trivial things, and many really use it for trivial matters, as they dont directly pay. Many Doctors have no clue what procedures actually cost, and some practice proactive malpractice, which may protect them, but run roughshod over the patients financials. Hospitals and clinics force Dr’s to work on volume, and proactively find ways to maximize revenue, and when they get revenue, they expand, such that they can always whine for more. Malpractice carriers  advice physicians to focus on procedures which may not be the best for the patients finances, but minimize their, and their clients financial risks. Govt gets yanked around by lobbyists, at the whims of who can pay the most for revenue enhancement. Med schools charge outrageous sums, knowing that med students can get loans, irrespective of whether they really can pay them back or not. Each sector wants the best for itself, and let the others hang out to dry… and usually, that means the patient, as they have the smallest voice, and no lobbyist. And lastly, no one wants to admit there is an elephant in the room, who has been there nearly forever, known as health care rationing.

Is the free market a solution?

Some say, the freemarket is the solution… but lets think a bit. The public expects a certain level of care. Would it be cool, for an insurance company, to pull a credit card trick, and say just when you needed surgery, they decided it was only covered at 50% instead of 80%? Or to use contracts of adhesion and slight of hand to change coverage limits under the table? Sure, the free market would correct, but it might take a few quarters, all the while windfall profits could be made. Or what about far out concepts, like coverage up to $5000 would be local, and liberal. For anything more than that, it goes out for bids, anywhere in the world. Perhaps the best deal can be found in startup hospital powered by generators in a tent half way around the world. Again, the free market will correct, but how many folks are affected in the mean time. Or what about docs, and hospitals like those in McAllen TX, where profit motivation results in some of the highest care costs and use of tests/procedures in the world. Left unchecked, McAllen would probably become the richest area of the country…. but at what cost to the rest of the nation?

Is Government a solution?

Is the government the solution…. do you want to argue with a beancounter over some form, while your appendix is freaking out, and your doc is sitting worried to death it could blow at any moment? Or, what if the govt decides the one and only drug for your condition is not medically warranted. A generic is all you need, besides the FDA says there are identical… and of course, the binding agents and alternative processes that are used react, rendering it ineffective for you, and perhaps 50 others, but 1000000 folks do fine with it. Remember lobbyists are in the game, and whoever has the greatest pull gets the best deal… and that means the patient will loose. Look at Medicare part D for example, of how to win huge in the insurance business, yet the patient, doc, hospital pharmacy, and govt get hung out to dry. Of course, the exception is congress…. lobbyists dont have much pull when it comes to the governments own.

Is the current system a solution?

Is the current system a solution…. well, for many, who have rarely used it, or find it works well for trivial matters, its a perfect thing. For others, on plans similar to what congress has, it works very well, whether for trivial, or major things. On the other hand, for those in a major car crash, or with a serious diseases, far too often, they find out the hard way, their “great” insurance turned out to be only great for a few months, and then its a disaster. For others, they hit the limit, ie healthcare is rationed typically to 1-2 million dollars, after that, you are cancelled, and left to fend for yourself. And for others, say those in a early stage startup who can’t provide insurance… well their employees have to buy it out right, with after tax money. Why should such employees, many of whom put in 100 hour weeks have to subsidize all those in the F1000, who get it tax free. Otoh, mear mention of taxing health benefits, and folks scream… yet, they are the ones living off the work of others already. Go figure.

Nope… none of the above in and of themselves are solutions, they dont address the root cause(s), which lead to lack of coverage, overuse, high costs, and low value. I’ve read partly through 1015 pages of the proposed legislation… it doesnt address the root causes either, albeit it does dance around them a bit.

The blogosphere has been awash with folks crying in their beer… Egads, investors will never invest again, banks wont lend, the end of economic civilization as we know it is near… Well short of the last one, which imho is needed, the another two are pretty blatantly in error.

Investors want to make money… and along with that, guess what, the more potential gain, the greater the risk. Less than 2% of all patents make enough money to generate the costs of filing, far fewer even cover their development costs, and even less end up making a profit. Even less than that make a substantial return….  despite, the high risk, new tech is often the domain of IPO’s which attract substantial investment. However, even then, the chance of 100% loss of investment is very real. Just ask any holders of stock options from the dotcom era who failed…

Will changes in risk management in the investment world, especially as concerns government involvement, change the game… Yep, it probably will. However to state investors will not step up to the plate is significatly in error. If there is money to be made, or even a chance, by far investors will step in, albeit it is likely a different demographic will be in the game as contrasted with history.

Sec 363 of the bankruptcy code as concerns secure creditors has shifted things around for years… Secured creditor status does not grant safety, nor mulligans. It can be safer, but not always. This is not new, nor rocket science, and case law and history most certainly have justified twiddling with priorities. Either way, a fool is often parted with their money. Someone was either A too greedy, or B asleep at the wheel when investing in GM and Chrysler bonds. They had to know what was on the horizon, I certainly did, even going back as far as 2003, albeit I didnt know when things would unravel. As time passed, it appeared things would take a header sooner and sooner. Thus, to step in and buy bonds as many investors did late in the game was a calculated risk… and it didnt turn out too well. The beer has been spilled… and yes, some folks retirement was lost, and that is sad, especially if they were at the whims of an inept fund manager. If anything, the one change that needs to be made, is not to Sec 363, but to provide more diversity and options for folks retirement funds to prevent that lockin, plus additional education.

As far as contracts and loans go…. a bank makes money on loans and on bank fees. If, and I do hope it comes to pass, further restrictions come into play on fees, then banks have to return to their core, and that is the loan business. Interest rates are determined by market and by risk. Getting a loan when one has an equal or greater amount of cash in a bank’s CD’s is easy, and provides very low interest rates. In more than a few cases, large customers pretty much dictate what the rate will be, as the bank is backed into a corner. Otoh, getting an unsecured loan, unless one has a high income, a low debt to income ratio, and very stable employment is likely to result in a much higher interest rate, because the risk is higher. Certainly, those with low credit scores, low income, and high debt to income ratio can be charged the highest rates, as the risks of default are exceedingly high. The bank knows this, the investors know this, its not rocket science. And if default happens on an unsecured loan…. well, the bank gets a few cents on the dollar for selling it off for someone else to collect on, or if the customer declares chapter 7 bankruptcy, they get zero. On the other hand, if default doesn’t happen, the bank makes a small fortune. Its pretty simple, and its basic risk management 101, even going so far that a number of high interest loans are predicted to default, but that the aggregate will return huge gains.

The problem is, when the risk management model is upended… if one was being too greedy, or purposely chose to ignore specific factors, the default losses will exceed the gains, and before too long, they should cease to exist. Of course, there is the aspect of the culpability of the third party ratings agencies… if they are in error, the bank could still theoretically do everything right, and still loose their shirt, alas there is also an element of caveat emptor. Just because a bond rating or credit score is exemplary, its really only a tiny portion of the real risk at hand. Certainly a loan to an employee of a firm in bankruptcy with a 800 credit score is more risky than a loan to a person with a 700 working at a long term company showing positive trends and on a hiring spree.

Thus, when a bank or other firm gets hit with defaults, its their problem, they took on the risk, now they have to pay the piper. If anyone was foolish enough to have more than the FDIC limits tied up in such…. well, I would hope they are getting greater returns than the masses, as the risk is substantial. Granted, there are reasonable concerns for commercial entities.

And that’s what it comes down too… what is a reasonable risk, and how much return do I want. I have no right to cry in others beer, when I took a risk, and it fell apart, barring in mind, I took said risk with knowledge or a perception of what I was up against. Banks must loan money and investors must invest to exist, failing to do so, will ensure they will fail… thus changes in government policy, changes in risk models etc will not result in lack of loans, or investments. It will hopefully result in greater upfront awareness and understanding, and from a reactionary pov, fewer loans and investments in the short term, but they will come back… perhaps with more strings, or less favorable returns, but they will be back.

And lastly, the end of economic civilization as we know it, must come to an end. Liar loans must end, risky investments sold as no risk investments must end, and the whole ecoclimate needs to change. That is a good thing, and will poise us for future growth in a huge way based upon a real economy, with real and sold underlying fundamentals, not selective models based upon ignoring very real key factors, or bogus bookeeping.

Ben Bernanke brought this analogy up yet again as concerns bailing out AIG. However, it doesn’t hold water at all anymore, let me expand on it.

The situation:
The neighbors apartment complex is still burning after an extensive effort to put it out. So far, only minor fire damage has been occurred to the neighborhood. However, the reservoir is nearly empty, and the stress on the water table has resulted in homes in the city shifting, and drywall is cracking.

Only a few are noting the following:

1. The neighbor’s apartment complex if it was legit, would have either burned out, or water would have put it out long ago.

2. The council is concerned about the reservoir, but they think they can get neighboring towns to transport water, should it run dry. None have experienced in trucking, albeit there is some experience in firefighting, and significant experience in real estate.

3. The drywall cracks in town are getting worse, the council see’s this a bit, but takes a blind eye. Better to have cracks and a home, rather than none at all, not realizing if major sinkholes develop, the town will be worse off than had it been burned off the planet. A few on the council see this, but they are over powered.

4. Some think the neighbor had phosphorous and hazmat stored in his apartment complex. He was going to get rich in the fireworks business.

5. Why is the fire not out, something fishy is going on. Is the neighbor seeing the reservoir going empty, and diverting / stockpiling water for the future where they will make a killing selling it back to the town, even if his apartment complex finally ends up burning to the ground.

6. The neighbor sent a confidential message to the council, as he noted he was loosing support. Basically he said, keep up the water effort, or the town is gone, the residents will be hurt, the neighbors will be hurt. Your reputation will be ruined. Pretty much said, do this or else. The memo was leaked, and few if any were outraged.

7. While the neighbor knows he should move the contents of some apartments, and even put up a few barriers, just as good operating practice, he wont spend any money. Say’s its too hard to find good workers he can hire in this market for a song, and he would loose money. He did move a couple things, but its a slow process he says.

Some thoughts of an even smaller number of people early on:

1. We are sure their was hazmat in the apartment complex.

2. If we let if burn down, and loose half the town, we could rebuild pretty fast.

3. If we deplete the reservoir, trucking in water is not going to work. We may loose the town, and rebuilding after sink holes appear everywhere is a huge problem, it will take years to fill those in.

4. It would be a good idea to build barriers around the neighbors apartment complex, but to do so, we would need to dedicate much of the fire staff to barrier building, rather than water and hose work. Perhaps we would loose 50% of the complex, so we need to provide new housing for some of the residents. The towns residents will complain, why did those residents get help, their not getting any, plus we’d ask the neighbor to pay for the relocation. He is a good old boy, we owe too many favors too, we really can’t ask him.

5. It may be possible to bring in movers, and relocate the unburned parts of the neighbors apartment complex, as well as the adjoining neighborhood. Of course, that will require major council intervention in the apartment complex operations, as well as the adjoining neighborhood. The business community would have a bird, who gives the city the right to upend a business, irrespective of whether storing hazmat was ok or not. The city just doesn’t have the resources or skill to move houses, they best not touch this. Also if they outsource to the experts, the movers will make a fortune and it will cost the neighbor plenty both in cash and PR. We can’t do that to him.

6. Some guys on the council thought maybe they should put a watchman in place to make sure water is not diverted. Most of the council thought, no, if we do that, it will slow down our efforts to put out the fire, and to even suggest it could damage the neighbors reputation. Remember we owe him a lot already. Also, his friends will talk of this all over the county.

What should we do now? The neighbors house on fire analogy doesn’t hold water anymore…

To establish the Food Safety Administration within the Department of Health and Human Services to endanger the public health by encouraging food-borne illness, decreasing the safety of food, improving research on contaminants leading to food-borne illness, and decreasing the security of food from intentional contamination, and for other purposes.

1. It encourages food borne illness through consolidation of operations, through preferable treatment to large agribusiness.

Its interesting to note the major food borne illness outbreaks are the result of large consolidated ag practices, which are encouraged under this bill. Diversity of production is a national security concern. Imagine the consequences of Monsanto, or ADM screw up in a huge way, its not a matter of if, its a matter of when, biology can be messy that way. In part, this is why small producers are subsidized to encourage some level of diversity. Just as we found in banking, the too large to fail mantra, and the monopolistic practices granted to some firms are counter productive. Thousands of small banks did ok. The 18 or so super banks are in serious trouble.

2. It decreases the safety of food, by a massive influx of new and inexperienced inspectors, and focuses more on the administrative side than physical inspection and testing.

The FDA is tragically undefunded as it is. Adding a new overhead layer of govt, re-arranging all the chairs, increasing the paper work burden, and the inspection scope, will require a massive increase in human resources and training. As a result, experienced people are likely to be diverted to greater administrative functions, rather than being in the field. The end result, greater administrative functions, and a focus on paperwork inspections, combined with less actual testing, planning, and review by those skilled in the art.

3. It decreases the security of food from intentional contamination.

This comes back to the diversity issue once again. Ie, one person could now jeopardize security of food for millions of people, rather than just a local area. It would no longer be necessary to utilize massive terrorist cells for a ampaign, as the vulnerabilities are so concentrated. The lone errant individual would be a much greater concern as well. Introducing pathogens in the food supply chain is not rocket science, doing it over a large scale as existed 30 years ago would be impossible. Today, its possible but difficult. After passage of this bill, it would be rather simple.

In many ways large agribusiness using transgenic crops is in effect a bio lab on a large scale, and its open for business pretty much anytime day or night, with exceedingly limited security. Such crops pose a serious enough problem in the south that over 50% of biotech cotton land must be used as refuge acres, and even here in the north, the EPA requires 20%. The idea is to prevent transgenic crops from loosing their specific traits as concerns insect resistance. Its a similiar situation with volunteer corn having different gene expressions than off the shelf corn. In other words, if left unchecked its a disaster waitng to happen. Case in point, BT volunteer corn.