Enjoying the Financial Crisis So Far?

September 23rd, 2008 by DrRich

For a while last week, apparently, the American financial system bordered on a complete collapse, one that threatened not only to bankrupt the remaining major investment banks, but that also threatened to freeze all lending and borrowing across the entire American economy. According to some, we were within a day or two of seeing major brand-name non-financial corporations being unable to operate, and all American commerce essentially coming to a grinding halt. Apparently we were about to go, in very short order, from a global economy that functions at Internet speed, to one that works instead on the principle of bartering, if not hunting and gathering.  (At last Mr. McCain’s choice of a running mate becomes clearer.)

And so, on Wednesday evening, stunned congressional leaders listened to Mr. Paulson and Mr. Bernacke tell them that, unless they rapidly passed a massive federal bailout for all the bad loans, then “Heaven help us all.”

The subsequent announcement of the proposed government bailout package has stabilized things for the time being, and has injected sufficient confidence into the financial markets to allow normal commerce (of a sort) to continue. But however this whole mess turns out, whether it leads to another Great Depression, or whether it turns out to be just a really bad quarter, when it’s all over the American taxpayer is going to be saddled with a new debt burden of at least $700 billion, and that some say may reach $2 trillion.  That’s a sizable increase to our total national debt, which today is “only” about $9.7 trillion.  Once they’re old enough to figure out what we’ve just done to them, our children and grandchildren will be pissed.

Even before we reach any kind of resolution of this current fiscal crisis, the blame game has commenced.  It’s too much de-regulation by Republicans vs. too much social engineering by Democrats.  This blame game is potentially a good thing, because unless we objectively assess how this financial crisis happened, we will (as is our habit) devise “solutions” that will just make the next financial meltdown even worse. Unfortunately, the likelihood that we can be objective about assigning blame, especially in an election year, seems slight.

DrRich’s take is that there is plenty of blame to go around. As he sees it, the root of the problem is fourfold:

1)    Our government decided that for purposes of fairness and diversity, mortgage firms should be “encouraged” (and to the government, this means “forced”) to make loans to individuals who, by any reasonable risk standards, simply did not qualify for loans.
2)    The federal reserve made money very cheap, and borrowing relatively easy.
3)    Fannie Mae and Freddie Mac, companies created by government and not subject to normal market forces, bought up the risky mortgages in huge amounts, then repackaged them in complex instruments which it sold to investors all over the world.  Investors (such as the big-name brokerage houses, huge conglomerates like AIG, and the Chinese) bought up the risk-laden instruments, and from them they assembled even more convoluted high-risk investment instruments, which they traded back and forth until nobody knew who owned what, or how much worthless debt everybody had on their books.  This, of course, is where the “free market” went wild, magnifying a very bad problem into an astoundingly dangerous one. The unrestrained wildness was at least partly encouraged by the assumption that, since Freddie and Fannie were quasi-government entities, ultimately the whole mess would be backed up by the U.S. government. (Turns out they were right.)
4)    Mortgage firms, fully realizing that the government really wanted them to lend to unqualified individuals and was happy to buy up all the bad loans they wrote in the process of doing so, nearly killed themselves inventing new and creative ways to entice anybody who could sign a name (and in recent years, not necessarily even their real name, what with the introduction of Alt-A loans - the so-called “liars’ loans”) to take on exotic new mortgages.

So there’s plenty of blame to go around, from the well-meaning but naïve government policymakers who apparently will never “get” the law of unintended consequences; to the Congresspersons of both parties who fought against tighter oversight of Fannie and Freddie (in exchange for major contributions and other perks given to them by F & F) and insisted against all evidence to the contrary that these agencies were fiscally solid; to the arrogant Wall Street magnates who dived head-first into the great feeding trough (whether they were lipsticked-up or not) and allowed their firms to become highly leveraged with disturbingly questionable instruments; to avaricious local mortgage companies who ended up giving houses away and sending the bill to Freddie and Fanny; to the delusional individuals themselves who inexplicably took on hundreds of thousands of mortgages they had absolutely no chance of paying off. All these players should have understood that you can repeal laws of man but you cannot repeal laws of economics, that sooner or later the tipping point would be reached, that the bubble would burst, and that all the players who thought they were winners would suddenly be revealed as major losers.

That tipping point, it appears, came last week.  And so, the American taxpayers, many of whom take great pains to live within their means and don’t borrow money they cannot pay back, are the only ones left to rescue the greedy and the stupid and the craven.

Assuming our economy does not actually collapse over the next few months, and thus does not wipe out our entire social contract (to the extent that we will have to start all over, and thus render moot any concerns over any future fiscal crises our current social contract promises to bring us), DrRich would like to point out that, compared to what is coming, the economic crisis we are now experiencing is merely a trifle.

The current crisis, DrRich repeats, was brought about by well-meaning government policies that attempted to repeal laws of economics in order to achieve a social good, backed up by government programs that strongly encouraged private companies to behave as if economic laws did not apply.  And now, with the inevitable dénouement, the private companies are being variably liquidated or absorbed or socialized, top executives are being variably rewarded or (one can only hope) jailed, and the taxpayer is being invariably screwed.

Regular readers will recognize in the previous paragraph a description of our current healthcare system - and a description of where it is headed.  Our government has striven to devise policies that will provide unlimited healthcare to all Americans whenever they need it, a policy that requires the repeal of basic economic laws, and one that has resulted in a convoluted system of partly governmental and partly private healthcare that rations healthcare covertly (since the unavoidable limits on healthcare cannot be acknowledged), that eschews transparency, that systematically multiplies waste and inefficiency - and that is inevitably building to a dénouement.

There is one big difference, however. Whereas the newly-burst mortgage bubble has left us with an unfunded liability of merely (we think) something less than $2 trillion, our unfunded liability for Medicare alone, over the next several decades, is estimated to be between $25 trillion and $55 trillion.  Considering the fatal damage our current, relatively trivial financial crisis apparently came within a few hours of triggering, this sounds like a lot of money.

When this massive bubble bursts, not even the stolid American taxpayer will be able to backstop the crash. Unfortunately, heading off this coming healthcare tsunami will require us to acknowledge that healthcare rationing is unavoidable, and to come up with an equitable and efficient way to do it. Since our leaders were unable to make themselves publicly recognize, and take steps to deflate, the equally obvious and much more tractable housing bubble when they had the chance to do so, it is difficult to be optimistic.

So try to enjoy our current fiscal crisis, because some day we’ll look back at it with as much nostalgia as we now do the so-called “crash” of 1987.

Posted in General Rationing Issues, Healthcare economics | 8 Comments »

Ethicist-Assisted Suicide

September 8th, 2008 by DrRich

In a previous post, DrRich attempted to satirize the lame attempts of certain healthcare payers to “inform” certain of their covered lives that, among all the wonderful options available to them under their truly comprehensive health plans, the medical service of physician-assisted suicide would be compassionately offered and cheerfully paid for. (Note to the policy experts who direct politically-acceptable healthcare terminology:  Is the term “covered lives” even appropriate any more when we’re finally dabbling in the realm of covered deaths?)  DrRich even offered, thoughtfully as usual, some free though invaluable advice to payers on how they ought to go about marketing assisted suicide as a cost-saving strategy, and to do so in a far more sensitive and less ham-fisted way than they have managed so far.*

If the mark of good satire is that at least some readers will have difficulty discerning whether the satirist is serious or not, then DrRich is feeling genuinely Jonathan Swiftian today.  For, while David Hamilton of BNET seems to get the concept of satire, some of his readers (”I can’t believe what I just read. This is sick.”) do not.  This is not the first time DrRich has made unfortunate impressions upon readers through his (possibly inept) use of irony.  It will certainly not be the last.

But assisted suicide being such an important and ethically charged topic, DrRich feels obligated to clear things up once and for all. So what follows is DrRich’s honest assessment of the advisability of physician-assisted suicide, in which he will attempt to forgo entirely any satire or irony (though he admits to having great trouble in controlling his sarcasm).

DrRich believes that physician-assisted suicide is a very, very bad idea.  He has two major reasons for this belief.  On a purely practical realm, embracing and systematizing physician-assisted suicide under any healthcare system that is actively engaged in rationing (whether overtly or covertly) will necessarily lead to horrific abuses of the practice.  DrRich attempted to touch upon some of these entirely predictable outcomes of such a policy in his previous post.  For other negative outcomes that are likely or at least possible, you can either use your imagination, or read the history of Europe in the 20th century.

His second objection to physician-assisted suicide is based on ethics. DrRich admits to being on shaky ground here because: a) he is not formally trained in ethics, and b) it appears for all the world that formally trained ethicists have universally concluded that physician-assisted suicide is perfectly OK in every way.

Debating with modern medical ethicists, at least if you are merely such a one as DrRich, is a losing proposition.  This is not because ethicists are intellectually (or even ethically) superior, but rather because they are adept in couching their arguments in arcane twists of logic and webs of jargon that make their arguments difficult if not impossible for the uninitiated to follow.  This technique, of course, places laypeople like DrRich in the position of having to accept the ethical bottom line without really understanding how the bottom line was reached. It reduces medical ethicists to a priesthood, and medical ethics to received knowledge.

But DrRich maintains that advancing unintelligible ethical arguments is, well, unethical.

So DrRich will now present his understanding of the chain of logic by which modern ethicists justify physician-assisted suicide - and its close cousin, euthanasia.  (If any of you actual ethicists out there object to this analysis, and can explain where DrRich is wrong in clear language, DrRich will be all ears. Otherwise, you can pound salt.)

Point 1: Our society has already decided that the autonomy of the individual patient is the overriding ethical consideration in making end-of-life decisions. We made this determination when we decided that a patient has a right to refuse medical treatment even if that treatment is very likely to save their life.  Therefore, we have already firmly decided that passive euthanasia - letting nature take its course - is ethical.

Point 2: There is no ethical distinction between passive euthanasia and active euthanasia.  Whether we let death occur by withholding effective medical care, or by actually doing something to help death along a bit, we’re taking an action that hastens death either way. Ethically, both of these actions are equivalent. So, once we decide that individual autonomy is the overriding concern, we must also allow for active euthanasia when a patient wishes it.

Point 3: Once active euthanasia is deemed ethical, there can be no further ethical objection to the lesser act of physician-assisted suicide.  If it is ethical for a doctor him/herself to bring on the death of a patient who requests it, there can be no objection to doctors preparing the suicide machine and handing the patient the switch.

The striking thing here (to DrRich, at least) is that in establishing the ethical case for physician-assisted suicide, we necessarily also establish the ethical case for physician-provided euthanasia. Whether the patient says, “Help me to take my own life,” or “Take my life for me,” modern medical ethics supports the physician who replies, “Roll up your sleeve.”

For those who still don’t see a problem, DrRich refers you to the Dutch system, where the rules permit both physician-assisted suicide and active euthanasia for patients who request it, in full accordance with modern medical ethics. Reports on the results of the Dutch system (reports which both sides have used to bolster their respective opinions on either the glories or the travesties of such a system) do point out one striking finding - hundreds of times each year, acts of involuntary euthanasia are occurring. That is, patients are being killed under the Dutch healthcare system at the hands of their doctors, without their explicit permission. All these patients, it is claimed, are being euthanized for entirely humane reasons.

What do our friends the medical ethicists have to say about involuntary euthanasia? Well, it turns out that it’s OK with many if not most of them. Ethicists don’t like to tell us that their chain of logic doesn’t end with Point 3.  But once we make the principle of individual autonomy the overriding consideration in determining end-of-life ethical issues, the same chain of logic takes us directly to Point 4.

Point 4: Since honoring the autonomy of the individual makes voluntary euthanasia available for patients with intractable suffering, it would be unethical to withhold the same benefit from suffering patients who are too incapacitated to give their permission. Their incapacity should not restrict them from a good that is available to capable patients.  To fulfill this right, the boon of euthanasia can and must be performed, without the patient’s explicit permission, in incapacitated patients whom “reasonable people” would agree are suffering too much - that is, involuntary euthanasia is also ethical.

This conclusion, of course, leaves us in a place where others (i.e., “reasonable people” like doctors) can decide for an individual what constitutes intractable suffering, and further, can decide when such an individual is simply too incompetent to know that euthanasia is the only thing to do. Some of you, of course (hello, ethicists!) think this is just a fine idea.  Most apologists for the Dutch system apparently do, for instance.

DrRich maintains that under a system of covert healthcare rationing, where doctors are under extreme pressure to do the bidding of the third party payers (insurers and the government) who determine their professional viability, and where the payers are under extreme pressure to reduce cost, and have already displayed in numerous ways their willingness to permit suffering and death among their subscribers in order to do so, then opening the door for physician-assisted suicide (let alone physician-administered euthanasia, whether the patient requests it or not), would lead to horrible abuses, and would ultimately serve to undermine our civil society.  DrRich is too politically correct to use the “other” N-word, but he will take this opportunity to remind his readers that such a thing has already happened, in what had been perhaps the world’s most cultured and educated society, during the last 100 years.

DrRich believes that the principle of individual autonomy is vitally important, and indeed it is the foundation of American culture. However, no single ethical principle, no matter how important, can be allowed to overrule all other ethical principles in all other circumstances.  Ethical principles are often in conflict, creating what is called an ethical dilemma. And (DrRich humbly submits) it is supposed to be the job of ethicists to help us work through those ethical dilemmas, to find the right balance between competing principles, and not simply to declare that no dilemma actually exists, because ethical principle X is the only one we need to pay attention to.

Individual autonomy is critically important, but in no other aspect of our culture do we let it absolutely rule. The autonomy of individuals needs to be checked, and we indeed limit it.  The reason we have laws (supposedly) is to make sure that the behavior of individuals who have accrued power  (for instance, by accumulating great wealth, by acquiring large weapons, or by becoming heads of state) does not abrogate the rights of other individuals, and to make sure that individuals acting in their own interests do not create too high a cost for our society as a whole.  Indeed, most of the political fights we have - between Democrats and Republicans, liberals and conservatives - are to determine where best to place those limits, on individuals and on the collective, to best encourage a robust society that honors individual autonomy but that also encourages reasonably equal opportunity.  The main purpose of our public discourse, then, is to find the right balance between the rights and needs of individuals and the rights and needs of society as a whole.

So for ethicists to say, “Individual autonomy is all there is to it, and we have no choice but to follow that principle to wherever it may lead us,” is not only completely irresponsible and dangerous, it also flies in the face of our culture’s history and our everyday experience.  The cost to society not only should but must be taken into account as we consider institutionalizing physician-assisted suicide (let alone voluntary or involuntary euthanasia).  In DrRich’s opinion, ethicists who argue that we need not consider the cost to society in making end-of-life policy have declared themselves unworthy of the title and they ought to be completely ignored.

The cost to our society of institutionalizing and systematizing physician-assisted suicide, especially while we are still covertly rationing healthcare, would be severe and potentially lethal.  We simply should not do it, and we should fight efforts to make it so.

If people want to commit suicide and if medical ethicists insist that assisted suicide is OK, then let the ethicists do the assisting. DrRich has relatively little to say against ethicist-assisted suicide. But, at least as long as covert rationing is the chief operating paradigm of the American healthcare system, for the love of God keep the doctors out of it.

*Despite the clear value of this advice, DrRich still awaits his first “thank you” from Aetna or United HealthGroup or even the Oregon Health Plan.  This shows us once again that, unless they’ve paid expensive consultants a few hundred thousand dollars for it, big companies and big bureaucracies are utterly incapable of recognizing even obvious truths, truths that any of their middle managers could usually give them for free.

Posted in Medical ethics | 6 Comments »

Throwing It To The Dogs

July 15th, 2008 by DrRich

Robert Pear reported this week in the New York Times that, in narrowly averting the scheduled 10.6% pay cut for doctors (and in the process taking the popular Medicare Advantage program away from seniors), congresspersons of both parties have come to recognize that “the formula for paying doctors is broken.” For their insight in reaching this conclusion, we all should be proud of the cleverness of those whom we persist in electing.

Doctors now have an 18-month reprieve before the next round of pay cuts are scheduled to kick in. And members of Congress, who were unable to stomach the blowback that would have occurred if they had allowed the relatively “small” pay cut this year, fully realize that they’re not going to get away with the next one either, which is scheduled to come in at 20%. This gives them 18 months to find a solution to the physician reimbursement mechanism which, DrRich reminds you, they all agree is broken.

That reimbursement mechanism, of course, is so fundamentally ridiculous that it can only be understood by recognizing that it is a fairly typical bureaucratic attempt to covertly ration healthcare. Covert rationing requires systems that maximize complexity and inefficiency. So, while regulators might have achieved the desired cost cutting by the simple expediency of declaring an arbitrary series of pay cuts for doctors, they instead saw fit to conjure up a truly Byzantine system of rules, formulas, regulations and calculations, whose machinations are somehow linked to projected changes in GDP, which themselves are the product of arcane and mystical divinations made by such prevaricators as econometricians. This sort of “system” serves covert rationing well. It allows Congress to represent the physician pay cuts as being the result of a scientifically derived and economically justified process, which is so finely calibrated as to make it nearly a crime for Congress (or anyone else) to “adjust” it .

We aren’t supposed to notice that the physician reimbursement mechanism fails to recognize even the most basic principles of economics. And if doctors point out that neither the number of sick people nor the overhead of medical practices track in any way with the projected GDP, they reveal themselves as being either unsophisticated or greedy. Either way, they can be safely ignored.

At least, that’s how the process is supposed to work. With this latest round of scheduled pay cuts, however, while Congress did its best to take the issue to the wall, in the end our elected representatives were forced to admit that the physician reimbursement system simply doesn’t work. By this admission we can only conclude that the reimbursement system at last has become politically infeasible. .

Infeasible though it might be, Congress is far from prepared to come up with a substitute. As Mr. Pear reports, “Democrats and Republicans agree that. . . fixing it would be phenomenally expensive.” For instance, if Congress were to do what at first blush seems to be the most logical thing, that is, to simply repeal the current mechanism and allow payments to doctors to grow at the rate of medical inflation, the Congressional Budget Office estimates it would cost Medicare $65 billion in the first five years and nearly $200 billion in the next five years. You go tell the voters that doctors are worth that kind of money.

The bottom line: Paying doctors in some reasonable manner is simply not an option.

The solution Congress is turning to, according to Mr. Pear, is to assign the job of figuring out physician reimbursement to the doctors themselves: “Lawmakers are pleading with physicians’ groups to come forward with a comprehensive proposal.”

We have seen, of course, the sort of thing that happens when you turn over to “physician’s groups” the honor of figuring out how the limited physician reimbursement pie is going to be divvied up. The RUC is the result of such an effort, and there, as one would expect, the powerful specialists have completely overwhelmed the voice of the relatively weak primary care physicians, much to the detriment of not only the PCPs, but also of patients, the healthcare system, and the healthcare budget itself. (While some may consider it ironic that a process initiated in an effort to covertly ration healthcare ends up increasing costs, this is actually the most common outcome of the programmed inefficiencies that invariably accompany covert rationing efforts.) In any case, Congress now proposes more of the same - that is, let the doctors figure it out.

DrRich has pointed out many times that doctors really do want to do what’s best for their patients, and that indeed, wanting to do what’s best for their patients is as high as number three on doctors’ priority list. Priority number one is maintaining their individual viability as practitioners (a priority that requires them to keep the payers happy above all else). And priority number two is protecting the integrity their professional turf, that is, maintaining the prerogatives of their specific medical specialty. (Cynics should recognize that no doctor who ignores priorities one and two will very long be in a position to exercise priority three.)

Congress is now proposing to remake the physician reimbursement system by turning it into a turf battle among physician groups. The battle will be bloody.

Congress is faced with a kennel full of starving dogs, of many various breeds, and has decided it will feed them with a single lamb shank. Rather than figuring out how to distribute the lamb shank so that smaller (yet valuable) dogs will not be torn apart in the struggle, they have elected instead to just go ahead and toss the shank over the fence, and let the dogs figure out how to divide it up. The result will not be pretty, nor will it be hard to predict.

DrRich would rather not watch. He merely (as a courtesy, no more), shouts this new warning to PCPs (the smallest dogs in the kennel). He will then hide his eyes from the carnage.

Posted in Healthcare economics, Primary Care in America | 8 Comments »

Why Big Health Insurance Supports the Democrats

May 30th, 2008 by DrRich

As difficult as it undoubtedly will be for most readers to believe, DrRich still hears from skeptics who ridicule his theory that a Democratic victory this fall will be the best thing that could happen to the health insurance industry. For example, consider this from Anonymous in Montana:

Democrats hate ALL corporations and want to eliminate profit as a concept. Democrats believe that the most evil companies in all the evil corporate world are the murderous health insurance outfits, because they make their filthy profits withholding healthcare from the sick. If the Democrats win this fall the health insurance industry is toast. For you to suggest that the health insurance industry will be better off with a Democratic victory is nonsense. And suggesting that the insurance industry will support the Democratic candidate is dumber than suggesting that Smith & Wesson will be a big Obama booster. You twit.

DrRich has not given much thought to which candidate the armaments industry will be supporting this year. He expects it will be Mr. McCain, who once operated some pretty impressive firepower himself. On the other hand, one could easily predict a huge boost in gun sales if Mr. Obama wins, triggered by concern (among those Bible-thumping, gun-toting non-supporters) over the possible repeal of the 2nd amendment. So, Smith & Wesson’s support could go either way. DrRich will have to consider the matter further.

But, my dear Anonymous, in regard to which candidates the health insurance industry will be supporting this year, the verdict is already in.

The Wall Street Journal Health Blog reported this week that the health industry has suddenly shifted from a preference for Republicans to a preference for Democrats. Specifically, political contributions from the health sector are showing a 55% to 45% split in favor of Democrats. This is a reversal of the traditional split that for at least 20 years has strongly favored Republicans.

Furthermore, a visit to the website of the Center for Responsive Politics, which tracks these sorts of data, will show that political contributions from HMOs (i.e., the big insurers) has trended even more strongly in favor of Democrats: 69% for Democratic candidates, and only 31% for Republicans. This is a Hillary-in-West-Virginia-magnitude rout.

Non-readers of this blog (and, of course, Anonymous) will be surprised by these statistics. After all, both Mr. Obama and Ms. Clinton propose to phase-out private health insurers (though they won’t come right out and say so) by attrition, by forcing them to compete for subscribers with a new government-sponsored, taxpayer-subsidized “Medicare for Everyone” health plan. Mr. McCain, on the other hand, proposes to maintain private health insurance as the backbone of the American healthcare system, relying nearly entirely on this industry as the engine for healthcare reform. So why would HMOs be giving financial aid to Obama/Clinton and not to McCain?

DrRich’s theory, first formulated six months ago, provides the answer. In the evolution of their managed care products, health insurers finally have reached the point where they need to demonstrate their ability to grow their profits by actually managing the medical care of sick people. The notion that they can do so is, of course, absurd. Furthermore, the notion that the Republicans would be relying on the insurers not only to make a profit, but also to reduce the cost of American healthcare at the same time, literally scares the bejeebers out of insurance executives. The very last thing Wellpoint and UnitedHealth Group want is for McCain to win the presidency, then turn to them and say, “OK boys, do your cost-reducing stuff!” A Republican victory would suddenly reveal the insurers to be entirely bankrupt of useful ideas, and would expose them to a sudden, ugly, stock-tanking demise.

Democrats, of course, will also bring about the demise of the private health insurance industry, just as Anonymous asserts. But at least they will have the grace to do it gradually and predictably - and with one last profit-inducing, stock-soaring windfall thrown in as a sweetener.

It was for these reasons that DrRich predicted last fall that the big insurers would have no choice but to root for and support the Democrats in 2008. (DrRich actually specified at that time that the insurers would support Ms. Clinton. He did not realize that she was then in the process of blowing the nomination by - among other things - forgetting to organize in the caucus states.)

Since DrRich initially posed his theory we have seen Warren Buffet (a major booster of Democratic candidates) placing a huge bet on the big health insurers - which undoubtedly means a) he strongly believes a Democrat will win the White House this fall, b) he understands what this victory will mean to the industry, and c) he reads this blog, which is the only place you can get political and economic theory like this.

We have also seen the major health insurers completely capitulate on their chief mission of providing affordable health insurance to the masses, thus announcing to the world that they no longer have the means, the will, or the intention of seriously trying to reduce the cost of healthcare. A clearer plea by the insurers to “Vote Democrat - Please!” could hardly be imagined (except, of course, for the fact that they are giving their financial support overwhelmingly, and for the very first time, to the Democrats).

DrRich admits that his theory originally was laced with a certain amount of sarcasm and irony, and was based at least partially on speculation, intuition, and confabulation. Nonetheless, developments since that time have provided us with hard facts that, while seemingly impossible to explain with more conventional thinking, are readily explained and even predicted by his theory.

Indeed, DrRich’s theory (and Warren Buffet’s investment strategy that is so obviously based upon it), look more infallible each and every day.

Posted in Healthcare economics, Investment "advice" | 2 Comments »

Proof That Warren Buffet Reads This Blog

May 17th, 2008 by DrRich

Yesterday, Jacob Goldstein of the Wall Street Journal Health Blog reported that Warren Buffet greatly increased his stake in big health insurers during the first quarter of 2008. Specifically, he added 300,000 shares of WellPoint and 400,000 shares of UnitedHealth to the holdings of Berkshire Hathaway. Notably, the stock prices of both of these insurers have been tanking for months. So why would Mr. Buffet be buying them?

Mr. Buffet has a simple answer: “If we’re going to be buying things, we want to buy them on sale.”

To which the WSJ replies: “Of course, if it was simply a matter of increasing holdings that are falling, we’d all be billionaires. There must be more to it than that.”

Indeed, there is more to it than that, and careful readers of this blog (as Mr. Buffet must surely be) realize what that is.

The case against buying health insurance stock, it goes without saying, is plain for anyone to see. As DrRich has pointed out more than once, the mega-insurance companies have traditionally had three major pathways for increasing shareholder value:

1) Acquiring and privatizing community assets - generally non-profit hospitals and non-profit insurers - for a tiny fraction of their true value (through the collusion and/or ignorance of boards of trustees, state attorneys general, and state insurance commissioners), then letting the market assign the actual value of those formerly public assets to the company’s stock price.

2) Mergers and acquisitions of smaller insurers, i.e., through the consolidation of the industry.

3) Taking advantage of certain opportunities for “efficiency” that big insurance companies’ quasi-monopolies have bought them, such as cherrypicking patients, handcuffing doctors, retrospectively denying coverage to insured individuals, and the manifold other activities we can safely bundle under the rubric, “covert rationing.”

Obviously, all three of these pathways are closing off. There are few community-owned assets left to acquire, and consolidation has already left the U.S. with just a handful of important health insurance carriers. As for the “efficiencies,” opportunities here are drying up as well. For instance, this past December, shareholders of UnitedHealth Group (concerned because subscribers to the company’s insurance products had decreased by 315,000 in 2007) demanded a promise from company executives that the insurer would become “nicer” to its subscribers. Their own shareholders are wrecking their business model!

Insurance companies are left with the impossible task of trying to make a profit (and worse, to demonstrate continued growth) by actually managing the healthcare of sick people. This has never been accomplished in the modern era, and in all likelihood is not within the realm of possibility.

This explains why the stock prices of the big health insurers have been heading south for some time now. But what explains Warren Buffet’s enthusiasm for these failing businesses?

Two things. First, he recognizes the growing prospect of a Democratic victory this fall, in both houses of Congress and the Presidency. Second, he has clearly read and digested DrRich’s posting of six months ago that describes what will happen to the insurance industry with a Democratic victory.

Republican-style healthcare reform, even with a Republican such as John McCain, would bring the rapid and painful death of the health insurance industry. This, simply, is because the Republican strategy for healthcare reform relies on “competition and efficiency” in the private insurance market to save the healthcare system. Republicans, apparently, have not noticed that the insurance companies have been desperately trying their brand of “efficiency” for more than a decade now, and it’s been a disaster. The insurers have shot their efficiency wad; they’re entirely bereft of ideas; they haven’t a clue. Indeed, one can only imagine how the notion of a Republican victory, and the unbearable expectations such a victory will place upon them, must shake insurance executives to their core.

On the surface, Democrats will also put the insurance industry in an untenable position, as it is clearly their aim to drive insurers out of business (though they won’t actually tell us so). But Democrats actually have no performance expectations whatsoever for the insurance industry. Their only expectation is that the insurance companies should fail in due time. This prospect - as long as it’s preceded by one last, massive windfall - is quite acceptable to an insurance industry itself, which, realistically, can only be looking for a graceful exit strategy at this point.

As it happens, that one last windfall for the insurance industry is an integral part of the Democrat’s promise. For, before they drive private insurers into oblivion, the Democrats will present them with the gift of government-paid insurance premiums for many (Obama) or all (Clinton) of the 47 million uninsured Americans. These new premiums will amount to as much as $150 billion per annum. So, for at least a while, the Democrats will guarantee that health insurance profits will rise, executives bonuses will increase, and - more to the point - their stock prices will soar.

Which brings us back to what Warren Buffet is up to. DrRich is a great admirer of Mr. Buffet, and is sincerely happy to have been of assistance in furthering his understanding of the complex interplay between politics and the fiscal status of the big health insurers. So far, Mr. Buffet is playing the game perfectly.

DrRich does respectfully remind him, however, to carefully monitor this blog for the “sell” signal.

__________

Addendum. DrRich has just noticed that his deeply admired fellow blogger, DB, has challenged him this morning to a discussion of honor over the topic of malpractice reform, where DrRich has taken a very contrarian and highly unpopular position. Indeed, even DrRich hates himself for making such an argument. Nonetheless, DrRich is compelled, reluctantly, to answer in the affirmative (this being a matter of honor), and will post a reply within a day or two.

Posted in General Rationing Issues | 6 Comments »

Healthcare Economics, Explained At Last

March 17th, 2008 by DrRich

Dr. Gaulte of Retired Doc’s Thoughts recently suggested that DrRich might want to weigh in on the Fuchs-Emanuel “Universal Health Care Voucher” proposal for financing American healthcare. Specifically, Dr.Gaulte allowed that he has trouble implementing his normally reliable “follow-the-money” rule to figure out whether this voucher system makes sense, or why neither the Republicans (who like vouchers) nor the Democrats (who like universal healthcare) have ever addressed - much less supported - the Fuchs-Emanuel proposal.

DrRich is humbled that anyone (much less the perceptive Dr. Gaulte) would seek out his opinion on a matter of such a complex fiscal nature. However, having had the audacity to entitle his recent book “Fixing American Healthcare,” and the even greater audacity to advance a Grand Unification Theory of Healthcare, DrRich (try as he might) cannot reasonably shrink from Dr. Gault’s comparatively “simple” request.

So.

Distilled to its essence, the Fuchs-Emanuel proposal postulates a certain unfortunate truth about healthcare economics, and then offers a new way of financing healthcare aimed at rectifying that underlying problem. Accordingly, DrRich will offer his commentary on the Fuchs-Emanuel voucher proposal in two separate posts. In the present post we will consider their analysis of present healthcare economics. In a later post we will consider the voucher proposal itself.

The Fuchs-Emanuel view of healthcare economics

Fuchs and Emanuel argue that the widely discussed ideal of “shared responsibility” - wherein individuals, the government, and employers all will contribute their fair share in bearing the financial burden for healthcare - is inherently a “myth.” To support their contention that shared responsibility does not and cannot exist, they focus their analysis mainly on American businesses. (Their argument extends to government-funded healthcare, but their focus on business is reasonable since at least until recently, most Americans got their health insurance through employee benefits.)

Fuchs and Emanuel make a convincing case, supported by plenty of data, that there is a direct trade-off between wages and healthcare costs. Simply put, businesses treat employee health insurance premiums as a straightforward employee expense, that is, they put those expenses into the same bucket as wages. Since limiting the size of the overall employee expenses “bucket” is critical to any business, changes in wages tend to become the inverse of changes in health insurance premiums. Their data show that that, for decades, wage changes have moved in the opposite direction of changes in insurance premiums. The result is that companies aren’t really paying their employees’ insurance premiums; the employees themselves are paying, directly out of their own pockets, in the form of lost wages. Indeed, because of the soaring cost of healthcare, inflation-adjusted wages have actually fallen over the past 30 years.

But employees believe they are getting healthcare for (nearly) nothing - so why should they tax themselves, or agree to any other changes in healthcare policy, to get what they’re already receiving for free? The “myth” of shared responsibility distorts the public’s view of how healthcare is paid for, and places a roadblock in the way of any meaningful reform. Somehow, Fuchs and Emanuel say, we must make the public understand that the entire cost of healthcare is already being taken from their own pockets. Otherwise we are all stymied.

DrRich comments:

The Fuchs/Emanuel synthesis of healthcare economics is unquestionably accurate. In fact, DrRich believes that their synthesis, to a large degree, is essentially trivial. It ought to be completely obvious (and would be if not for our dysfunctional educational system and for the lies that political leaders of both parties pass off as truth) that neither businesses nor the government have access to funds that don’t ultimately come out of the pocket of individuals. The government gets its money from taxes. Companies get their money from selling stuff. Any expenses incurred (healthcare or otherwise) must be provided by individuals, either through an increase in taxes or the price of goods (or, in the case of the employees themselves, in reduced wages). That’s just basic economics.

Certainly, the failure of individuals to realize they’re actually the ones paying for their (and everyone’s) healthcare is a major root of the problem. The notion that healthcare expenses are “shared” with business and the government makes healthcare feel “free,”and any time something feels free it’s nearly impossible to set limits. It is our now-institutionalized inability to set limits on healthcare spending that promises ruination. (Our “no limits” paradigm is fundamentally what requires us to engage in covert rationing, rather than open rationing, of healthcare.)

As DrRich sees it, however, the actual reasons we are unable to set limits on healthcare spending go deeper than the synthesis described by Fuchs and Emanuel. If we’re going to consider their proposed voucher solution to healthcare financing, we ought to first take a closer look on why such limits have become impossible.

On limits, and why we can’t have them
A fundamental principle in economics is that when we are buying consumable products that we are consuming ourselves - like Caribbean cruises, sports cars, ice cream, or healthcare - we should spend no more on those products than we are able to pay ourselves.

Now, before you click away in anger, be assured that DrRich is not trying to make a political statement here, just an economic one. It is certainly true that some societies have decided to purchase some of these consumable products (healthcare, for instance) collectively. And the collective purchase of consumables constitutes a somewhat different situation that we will address in a moment.

But for consumable products that everyone agrees ought to be paid for by the individual (let’s just take Caribbean cruises as a relatively non-controversial example), the individual must arrange to cover the cost. The reason for this principle is obvious. If individuals could arbitrarily decide to go on a cruise, but leave the cost to others who have no say in whether the cruise happens, the economic system would soon collapse.

Three quick asides on this basic principle:

1) The fact that our economic system is in severe turmoil at the moment - and, according to some, is indeed at risk of total collapse - is precisely because we encouraged too many people to borrow too much money that they have no means of repaying.

2) This principle permits occasional exceptions among small groups. Certain privileged factions, such as politicians, have awarded themselves the ability to take Caribbean cruises on somebody else’s tab whenever they choose. Such a practice will not cause a widespread economic catastrophe as long as the size of the privileged group is carefully circumscribed.

3) However, when those same politicians “forget” that the rules under which they are personally privileged to operate cannot be generalized, and then, say, pass laws that encourage lending institutions to extend those same privileges to the masses, economic turmoil is inevitable. See item 1.

But what about those societies which have decided to collectively purchase certain products and services (like healthcare) that are consumed by individuals? It turns out that these societies must operate under a very similar economic principle: A society should spend no more on such consumable products than it can pay without incurring long-term, multi-generational debt.

In the U.S., we have decided to pay for healthcare collectively. A large chunk of healthcare is provided directly through big government programs like Medicare and Medicaid. But even the “private” healthcare that Americans get through their employers is collectively supported through the tax deductible insurance premiums enjoyed by businesses. So whether your healthcare is provided directly through government payments or through tax-deductible insurance premiums, to a great extent society is collectively footing the bill.

This would not be a problem, economically, if we were doing it on a pay-as-you-go basis. But we’re not. We’re running a huge national debt today, and largely because of healthcare obligations that debt will reach stupendous proportions in the foreseeable future.

Reasonable people can argue over whether having a large national debt is good or bad, but the answer lies at least partially in what it is that the debt has been incurred to pay for.

The ability to borrow money, and carry debt, is important to a vibrant economy. Individuals can borrow even large amounts of money as long as they promise to pay it back and their credit rating is high enough. But if a person fails to pay back what they owe according to a predetermined schedule, society takes steps to stop further borrowing and to force them to repay. If they get in too deep, society ushers them into bankruptcy, and allows them to slowly make themselves whole again. But society does NOT allow them to simply keep borrowing indefinitely.

This is because individuals die. If we were to allow individuals to simply accumulate as much debt as they want until they die, leaving it to somebody else to pay it back, the economic system would soon disintegrate. So before people can borrow money, they need to demonstrate their ability to repay it, or to have their estates repay it upon their death. In this way there is a natural limit to how much individuals can spend on consumable products in their lifetime.

Societies, like individuals, must borrow no more than they can eventually pay back. The difference is that, unlike individuals, society lives “forever.” That is, the accumulation of debt that cannot be paid off in a single generation is not necessarily alarming, because society will “always” be there to pay it off.

As it turns out, the ability to accumulate even huge amounts of debt is vital for complex societies like ours, as it permits us to maintain a buffer for economic stability, to smooth out boom-bust cycles, and to maintain reasonable predictability, stability, and steady growth. The ability to carry multi-generational debt enables the government to borrow the money it needs to make multi-generational investments, things like building up the nation’s infrastructure, providing for national defense, advancing medical research, and engaging in other forms of non-commodity spending that will allow society to progress, to grow stronger, and to steadily improve the lives of successive generations of its citizens.

The “right” kind of long-term national debt, then, is a chief enabler of economic growth and prosperity, an investment in the nation’s future. It is appropriate to ask future generations of Americans to share the financial burden of that debt, since they will reap the benefits of the investment.

Things go very wrong, however, when we burden society with the “wrong” kind of debt, the kind that represents an open-ended promise to purchase products and services that are consumed by individuals, such as healthcare. There are two problems with this kind of debt.

First, this kind of debt is not an investment in the future, whose fruits will be realized by our children and grandchildren, and whose returns will more than cover the overall debt obligation. Instead, it benefits only the individuals currently alive who are the direct recipients of the consumable services, leaving no direct benefits but only an ever-increasing debt burden to those who will be left paying the bills decades later.

Second, while there is a natural limit on how much an individual can spend for products and services they consume during their lifetime, once the responsibility for paying for those consumables shifts to society, there is no longer such a natural limit (since societies live forever). The debt can now be borne by multiple generations. Because there is no longer an inherent limit to what an individual can consume, and because it is to the advantage of present and would-be officeholders to eliminate any remaining arbitrary limits, individuals are eventually encouraged to consume as much as humanly possible. And without these limits (whether natural or imposed by rules) the provision of such services to individuals rapidly becomes an entitlement, whereupon the natural checks and balances that apply to other parts of the federal budget are no longer available.

When society faces an accelerating debt burden that is completely open-ended and is not subject to normal checks and balances, that society is dealing with a disproportionate economic variable (DEV) - that is, an economic obligation that grows without limit and completely out of proportion to the growth of the overall economy. Healthcare spending, which unrelentingly consumes an ever-increasing proportion of the GDP, already has become a DEV.

DEV’s are inherently destructive to a society, and for that reason are rare. Indeed, in viable societies the only commonly encountered DEV is wartime spending, a form of spending that is temporarily required for survival. Indeed, the disproportionate spending in wartime is tolerable only because war is temporary. It should be noted, however, that one reason war is temporary is that in a prolonged war, a runaway DEV can cause a country to spend itself into oblivion. (See: the multi-decade Cold War and the demise of the Soviet Union.)

Our government has made apparently irrevocable but unsustainable promises to its citizens regarding future spending for their healthcare. As DrRich pointed out in an earlier post, the GAO now tells us that Medicare alone has created an unfunded obligation that, over the next several decades, will reach an unimaginable 34 TRILLION dollars. The reason this massive debt burden exists is the same reason similar debt burdens exist for companies such as General Motors, i.e., because of open-ended promises for whatever healthcare their future retirees may need, without limits. The threatened result - oblivion - is also the same.

Americans need to admit that there’s a limit to what we can spend on healthcare, even if that limit is liberally defined as “something less than would eventually cause the disintegration of our society.” Our current political discourse disallows us from setting even that modest limitation.

Fuchs and Emanuel accurately describe the mechanism by which Americans have become enabled to ignore the truth, i.e., the myth that our present and future healthcare obligations can be “shared” into feasibility. But the truth is actually far more troubling than merely that Americans are already paying for their own healthcare without acknowledging it. The real truth is that, while individuals are already paying far more than they realize, they’re not paying nearly enough; and that indeed, they can’t pay enough to cover the multi-generational societal obligations we have have already signed up for (even excluding the new healthcare obligations our politicians are promising us, and which many of us seem quite anxious to add).

In this way, shared responsibility is not really a myth. In fact, we all - individuals, businesses and the government - do share responsibility for what we have wrought; and unless we figure out how to reestablish limits (either the natural ones or the kind established by rules), when the bill comes due we will all pay in a very similar manner.

In later posts we will consider how far the universal healthcare voucher system proposed by Fuchs and Emanuel might take us toward resolving our looming fiscal crisis in healthcare.

Note: This is the first in a series of posts that discuss healthcare economics, and the three basic questions we will have to answer before we can devise a way to fix American healthcare. The second post in this series, “Can a Voucher System Fix American Healthcare?” can be found here.

Posted in Fixing American Healthcare, Healthcare economics | 2 Comments »

One Hell of an Exit Strategy

November 13th, 2007 by DrRich

How else to explain the strange behavior of insurance companies?

Item 1: Bob Laszewski at Health Care Policy and Marketplace Renewal points us to a Los Angeles Times article describing how one health insurance company (Health Net Inc.) has systematized its practice of rescinding health insurance policies of patients who become sick. The article describes 51-year-old Patsy Bates, whose coverage was rescinded in the midst of her therapy for breast cancer, allegedly for failing to disclose her accurate weight and the possibility of a prior heart problem at the time she had applied for insurance. See the article for details, but the point is that the alleged (and disputed) failures to disclose have nothing whatever to do with her breast cancer. They amount to mere excuses to cancel her insurance (but not until she needed it - they were delighted to collect the premiums up to that point).

This story is entirely consistent with the tale told by Lee Einer, the notorious insurance company “hitman” featured in Michael Moore’s film, Sicko. Einer has subsequently expanded on his former activities in gaining rescission for insurance companies on the Honest Medicine blog:

(When you get sick). . .the insurer will go after you “like it’s a murder case.” They will contact every medical provider they believe treated you, and will request medical records. They will contact every pharmacy which you are believed to have used, and request their records. They will go into your health history as far back as five years before you applied for coverage. If they find anything — ANYTHING — which they determine that you did not fully disclose, and which could conceivably have been captured by the questions on your application, they have you.

Laszewski expresses the puzzlement that any thinking American would express in regard to this kind of activity:

It’s hard to imagine a worse headline for the health insurance industry just as we are heading into what will be a fundamental debate over who should run our health care system. It is even harder to imagine a dumber thing for the insurance industry to do than continue to argue and litigate the notion that an insurer can cancel–or rescind–an insurance policy for a misstatement of fact on an application for coverage no matter whether that statement was intentional or material.

Indeed, for the relatively small amounts of money it can save (relative to the massively expensive PR campaigns these companies run to convince us of how innately caring they are, and which they completely negate with such antics), it is hard to imagine why they take this kind of chance.

Item 2: Health insurance companies are big contributors to Hillary Clinton’s campaign. This might seem counterproductive considering the widespread notion that, if her reform plans are fully implemented, ultimately the role of private insurers in the healthcare industry will shrink or even disappear.

Why would insurance companies engage in high-profile, counterproductive activities, and contribute to political candidates who may want to put them out of business?

DrRich has a theory.

Insurance companies have recognized that the end-times are nigh.

In the early days, their chief mode of growth was in acquiring public assets (such as non-profit hospitals and HMOs) for a tiny fraction of their actual value, then after absorbing them, realizing the true value of these assets in their stock prices. The insurance industry has also nearly finished the exhilarating, immensely profitable consolidation phase of its business cycle, such that a very few large outfits now tower over the health insurance industry. So now, for the first time in their history, health insurance companies are going to have to try to make a profit - or even more difficult, to demonstrate continued growth - by actually managing the healthcare of their subscribers.

Faced with this impossible, panic-inducing task, the risk of running illegal, high-profile rescission operations begins to seem worth it. The risk of getting caught is now measured quarter to quarter - not long term. “Our risk of getting caught in the next 3 months seems relatively small,” they must be telling themselves. “As for the long-term risk of getting caught, who cares?”

Ditto with the contributions they are making to Democrats, especially the Democrats who seem most likely to win, and to push their healthcare reform plans. Republicans, who invariably promote the notion of private-insurance-based solutions, must seem really scary to the insurers. If Republicans win, there will follow completely untenable expectations on the part of insurance companies. They’re the ones who will have to figure out how to control costs!

Democrats will also put the industry in an untenable position, of course, and will at least arguably aim to drive them out of business (though without actually telling us so). But Democrats actually have no expectations for the insurance industry, other than that they fail in due time. This, DrRich submits, is the insurance industy’s plan, too.

But before they drive them into oblivion, the Democrats promise to create for them one last, massive windfall - namely, the government-paid insurance premiums for many of the 47 million uninsured Americans. (Joseph Paduda at Managed Care Matters thoughtfully estimates for us that windfall as $150 billion per annum - not exactly chicken feed.)

So, for at least a while, under Hillary’s plan the insurance industry profits will rise, stock prices will rise, and executive bonuses will rise. This is as good as it’s going to get.

In 1994 the insurance industry (then early supporters as well) took a look at Hillary’s massive plan for healthcare reform, and said, “My God! We’ll be out of business in 5 years!” And they became intractable enemies of her reform plan.

Today, they look at their situation and say, “My God! We’ll be out of business in 5 years!” And they see in Hillary a means to engineer those 5 years into one hell of an exit strategy.

Posted in General Rationing Issues | No Comments »