Health Care Disaster

Obama and the democratically controlled Congress are determined to ram through some sort of health care reform bill this year. I have mentioned this topic in two previous posts: “The Prescription Drug Conundrum” and “Your Health – Who Pays For It?” As Congress comes closer to a bill I thought it would be a good idea to talk about the ideas and costs on the table.

Fox News recently reported that the CBO estimated the cost of the draft health care reform bill at $1.6 trillion dollars. Let’s put that number in perspective - it is equivalent to approximately 12% of our annual economic output. We currently spend something close to 16% of our economic output on health care. Obama’s plan would probably take a little from the private system and add new people to the system so it doesn’t look like it is going to save us money. If we pass this bill health care expenditures could approach 25% of our annual economic output! The repercussions of this are huge. That leaves only 75% of our economic output for every other activity we engage in or we have to borrow massively to finance those activities. The federal government doesn’t have this $1.6 trillion dollars just lying around either – they will borrow to fund at least part of it. According to the article Congress has paid for about half of it.

What exactly are we getting for our $1.6 trillion dollars? Well first a large portion of that money is to subsidize the government health care premiums for low income people and households. The current form of the bill would allow subsidies for families with incomes up to 500% above the federal poverty line or $110,000 a year. I am sure that everyone would prefer not to have to pay for health care, but families making $110,000 a year are paying for health insurance now and are doing just fine. In fact if the supposed cost savings of this program pan out they could have the same coverage for less, so why do they need federal money. I’ll tell you why – so they have a vested interest in voting to continue funding the program, that’s why! Thankfully many Senators and Representatives baulked at the price tag, so they penciled in a change to reduce subsidies to only those making 400% of the poverty line or less, or $88,000 for families. That change alone would save the government $600 billion of the $1.6 trillion bringing the cost of the plan down to $1 trillion dollars.

Why would we want the government in the health care business again? The argument made by the Democrats is that the government can hold the industry’s feet to the fire by creating a low cost, efficient competitor that they have to match. Now just thinking off the top of my head I cannot think of anything that the government has proven to be the lowest cost or most efficient provider of…if you think of something please leave a comment. At least then we could say there might be a tiny of sliver of hope in all this mess!

One thing I was curious to know is how the government plans to pay for this new program. There are three clearly defined funding sources and a couple of fuzzy ones. The clearly defined ones are: raising a special tax on the rich, making employers that don’t offer insurance pay a fee/fine, taxing employee health care contributions and the benefits your employer covers. Let’s look at each of these a little more closely. First, Obama would like to make the rich pay more. His definition of “rich” is an income over $250,000 for couples. I don’t know about you, but particularly in cities like New York or San Francisco I doubt you feel rich if you make $250,000. Also, this is Obama’s default option for paying for everything he wants to spend money on – the catch is the rich cannot pay for it all or they won’t be “rich” any longer. Second, making employers pay a fine for not offering coverage is just stupid. First, if it was cost effective to offer coverage they would, but most will find it simply easier and cheaper to pay the fine. Of course the fine will not really amount a significant portion of the costs, because business will fight this tooth and nail. The other thing that I think Obama and the democrats have forgotten is that business never bears these costs in full they pass them on to consumers in high prices, lower quantity, or reduced quality or they pass it on to employees by reducing salaries or other non-health benefits. Third, taxing employer health benefits is among the dumbest idea of all. It is basically a tax that will fall hardest on the lower income, since most employers provide fairly flat benefit levels across employees. It is also a declining revenue base over time as the tax will encourage people to chose the government option so in the long run this source of income will generate precisely zilch.

Now we come to the fuzzy sources of income. The first is taxing things like alcohol, cigarettes, soda, and candy because they are unhealthy. The problems with this are huge. What right does the government have to dictate what I want to eat! This is also ludicrous because out of all of those only cigarettes are definitely bad for you. The others in moderation will have no significant impact on your health. This choice also suffers from the problem of a declining revenue base over time. If we tax these things to pay for this people will simply buy less of them and then we get less tax revenue. It’s a self-reinforcing cycle. The final source of so called funding is the fuzziest of them all – cost savings. I don’t know about you, but when was the last time that you managed to take over something and cut costs by enough cover half the cost of the program without sacrificing quality. My guess is somewhere close to zero. The notion that we can pay for health care through cost savings from the government is the dumbest idea I have heard in a long time. It is rather like predicting that we can reduce hurricane damage costs by making hurricanes less damaging! The fact that our elected leaders expect the American people to buy this just shows how dumb they really think we are.

Oh, don’t worry it gets better. It is likely the government will start taxing your employer based health benefits. This is something that is certain to irk a lot of people, particularly the democrats’ close friends the unions. After all, unions get the sweetest benefits so they would get the highest taxes, but alas Obama needs their support to ram this through. So what’s a politician to do – I know exempt them! You got it the current version of the bill would exempt union benefits from the tax. This is outrageous. Most Americans don’t work for unions so the loophole wins votes at a minimal cost. So much for the government stepping to get everyone insured so we all bear and spread out the costs – isn’t that what Obama claims to be doing. I guess unions just don’t fit the definition of everyone. This policy will have two effects. First, it will reward unions for supporting Obama and punish everyone else. Second, it will help unions to expand, because they can offer this as another benefit of membership, which if they are successful will probably disappear because then it would cost too much. You should definitely write your Senator and Representative about this one.

Luckily this one will not go down without a fight. The cost of this enormous program is turning heads on both sides of the aisle. Republicans are working to mount an effective opposition, but they need your help. Let your voice be heard – let your representatives know that you support their opposition to this bill. Do it for the sake of your pocketbook and the futures of your children and grandchildren before it is too late.

The Light Bulb Police

First, it's green house emissions. Second, it's health care. Now it's light bulbs - what is safe from the Obama regulation machine?

Monday Must Read

6/29/2009:

I missed a few weeks, but this week is full of stuff you just have to read!

"If democrats tax health benefits...," this post on The Lonely Conservative discusses how Democrats are considering taxing your employer health care contributions unless you are a member of a union.

"House Passes Climate Bill," from the Wall Street Journal June 27th edition. Yes it is true in the midst of this recession the house passed the largest tax increase in American history. Read up on this! Also, check out this related article from Fox News.

"Americans Increasingly Skeptical of Obama's...," this Fox News article talks about the impacts of Obama's huge deficits on public opinion plus its got this great photo of him!

If you have been wondering how we got into this mess, why our efforts don't seem to be getting us out, and how to prevent such problems in the future then you should definitely read Meltdown by Thomas E. Woods Jr.

Gasoline, Obama, and Your Wallet

Gas is on the rise again and so is oil. The one truly remarkable thing about the current recession is how high the price of oil and gasoline have remained despite huge decreases in demand. This signals that the market still views supplies as tight and costs as high. As soon as the economy began to show any signs of life the price of oil and gas started to trend up again. The question on every one's mind now is how high can it go. I think that oil in the $150 a barrel range is probably a little too high to be sustainable - it would encourage a huge expansion in supply that would ultimately drive prices down. A better long-term guess is approximately $100 a barrel. Gasoline on the other hand will probably rise much faster and stay much higher compared to historical price trends with oil.

There are three major reasons behind this. First, refinery capacity has not changed significantly for many years in the U.S. The cost of building new refineries or expanding existing ones has increased enormously thanks to regulation making it unprofitable to expand. This results in the U.S. importing more of its gasoline at a higher cost (shipping gasoline is expensive because it is well flammable). Second, strict environmental and formulary regulations and requirements have added a significant cost to producing gas. On top of the federal requirements there are regional requirements that make it impossible for gas produced in one part of the U.S. to be sold in another. This means supply cannot readily shift to areas of increased demand or reduced refinery capacity. That can lead to huge price swings in certain regions, anyone remember hurricane season on the gulf coast. Third, Americans have in a large way pulled back from our conservation efforts when gas fell from $4 to $1.50. We have short memories and that means big swings in price are needed to get us back on a gas diet. These three factors will be the primary drivers behind the market price of gas going up and up as the economy recovers.

I wouldn't get too worked up though because even if we managed to open new refineries (try to get Obama's EPA to approve that one), relaxed regulations, and/or undertook new efficiency efforts our President would like to tax gas up to $5.00 a gallon as part of his environmental agenda. Personally I'd rather give my money to Exxon that Obama.

The Prescription Drug Conundrum

Health care seems to be on everyone's mind lately. Our elected representatives are busy drafting legislation that will have broad reaching impacts on your future. One of the hot topics in health care is the cost of prescription drugs. It is no secret that drugs cost far less in many other countries. Canada has been touted as a place to buy cheap drugs and import them into the US to offset our higher prices. There are two questions we must ask ourselves.

First, why exactly are drugs cheaper in Canada or France? The answer is that the governments in Canada and France regulate the price firms may charge. They set a price slightly higher than the cost of manufacturing the drugs and do not allow advertising like we do. Reducing advertising reduces costs and may have additional benefits. This is really the only thing good about such a system. By forcing drug makers to charge only slightly higher than the cost of making the drugs these governments are preventing them from having sufficient funds to conduct research and development for new drugs. Bringing a new pharmaceutical to market can cost hundreds of millions if not billions of dollars and without making substantial profits on the sale of drugs for a period of time companies will not be able to make these investments. This is actually why our patent laws exist in the first place.

Second, why are drug costs so high in the US? The United States is currently the only major developed nation that allows drug companies to charge a market rate that factors in both research and development and manufacturing costs. This means that not only do American consumers pay the cost to manufacture the drugs they buy - we also pay the full research and development costs. Other nations have suggested that if they allow drug companies to charge a market price everyone will pay prices as high as the US. The US is already doing the bulk of the R&D for the entire world, so if the rest of the world paid market prices we would simply be spreading basically the same cost over a much large sales base. The result would be substantial declines in market prices. It would undoubtedly take time for these changes to happen, but patience would pay off.

The problem with drug prices in the US isn't from the US drug companies, but rather that the rest of the world doesn't pay its fair share.

Your Health - Who Pays for It?

The American health care system has been in need of an overhaul for years, but in the last decade the acceleration of health care inflation has been truly astounding. Everyone knows the system is broken, which is why it has become such a political issue. There are generally speaking two schools of thought on health care: a private system or a government system.

President Obama, and quite possibly a majority of Americans, seem to be favoring a more government run model. It is important that we understand the implications of such a system. First, the government must pay for the health care services it is to provide. The simple fact of the matter is that there are only three ways for the government to pay for health care. The government can raise taxes, ration care, or reduce payments to health care providers. All three options have serious consequences. Rationing care on a large scale or in an overt manner would simply be unacceptable to the American public (as it is strongly against American ideals). Not to mention it would have a devastating effect on the quality of health care in America and on medical innovation. Cutting payments to medical providers would certainly cut costs, but in all the wrong ways. It would discourage the brightest young minds from pursuing a career in medicine and would deprive medical technology firms and researchers of the funding they need to make additional discoveries. America has been the engine of medical advance for years mostly because our government does not set prices for medical care. Raising taxes will be difficult for some time with the economy in a deep rut and the recovery expected to be slow. Politically Obama may find sufficient support to raise taxes specifically on the rich. This kind of redistribution of wealth will have profound long-term impacts on economic growth. The wealthiest individuals are the ones that invest their money in our capital markets and provide the grease that keeps our economy moving. If we divert those funds to other purposes we may grind our economy to a halt. There is simply not a method of funding government based health care that does not have severe repercussions.

It has been suggested that the government could wring sufficient cost savings out of the system to cover the tab with minimal need to raise funds to pay for it. There are two major problems with this idea. One, while there are significant cost savings to be had they simply do not come anywhere near covering the increased government expenditures that would be required, logically it just doesn't make sense. Second, this idea relies on the belief that the government can run the system far more efficiently than private enterprise - this is a very dubious assumption (just try to think of an example of this happening).

Second, can we truly expect the government to be a good steward of our health care industry? The government already has its hands in the health care pot through the FDA, Medicare, and Medicaid. The FDA has proven to be somewhat inept at allowing safe drugs to reach the market with a minimal cost. The bureaucracy is astounding. Medicare and Medicaid are among the costliest programs run by our government. By 2050 Medicare alone will consume over half the federal budget! If the government has failed to manage these areas effectively why should we fork over more? I doubt that this argument would sway you if your attorney, financial advisor, or doctor asked the same of you, so why is this different? I would only expect more of the same from our government.

Third, earlier I stated that there are only two options for health care while many have advocated a mixed system (including President Obama). Over time a mixed system tends to evolve into a government only system. The current discussions about expanding government's role is the fruit of adding Medicare to the equation. Insurance requires a pooling of risk to function, this pooling requires scale. Insurance exhibits very large economies of scale (cost decline as the number insured rise). Health insurance in particular requires getting young and healthy people to find benefit in purchasing insurance to reduce the average risk of the pool - lowering all premiums. A private market left untampered with does just that - it is the same price mechanism at work in all other sectors of the economy. The government has an advantage though - it can subsidize premiums with tax dollars or rationing of care and prices. The result is that the government sets below market prices drawing people away from the private insurers and raising their costs at the same time. Over time this shift gains momentum until the only insurer left is the government. Of course the major problem is that the government's subsidies create an enormous deficit that in the end is unsustainable and they are forced to take actions that affect the quality and availability of health care.

There are pros and cons to the private market as well. The rising cost of health care is a con, but it is not inherent to a private system only the result of this private/public mix. When you consider the proposals of our President do so well informed and consider the long-term impacts on your children and grandchildren.

Another One Bites The Dust

As of Monday the 1st it's official - Ford is the only surviving member of the big 3 automakers. Oh how the mighty have fallen. GM's fate was likely unavoidable; this recession just accelerated the inevitable. GM has not been consistently profitable for years and has not really seen any sustainable growth in decades. GM and Chrysler never really learned how to compete with global competition in the key US market. Ford was a slow learner too, but is proof that an old dog can learn new tricks.





I don't lament the loss of GM. The firm failed because it did not adapt to changing customer tastes, competitive landscapes, and economic realities. There are lots responsible parties but the failure was primarily the result of poor management and the burden of the UAW. Management did a poor job of responding to the rise of Toyota, Honda, and others. Quality suffered and so did customer appeal because GM simply could not adapt fast enough. GM has long been criticized for having a very hierarchical structure that made it difficult for decisions to be made and change to happen swiftly. The fact is that in today's global world you simply have to be faster than that.


The UAW made it difficult for GM to cut costs and revamp organization and design to improve response times. The work rules and benefits awarded to union workers were incredible. It is amazing that everyone didn't want to work on GM's production line. While the UAW was trying to extract every extra cent out of GM, they lost sight of the fact that the welfare of the employees was inexorably tied to the health of the company, or at least it was until the UAW was brought under the graces of President Obama and his fiscal largess.



The sad truth is that the decisions made surrounding the fate of GM were made for political reasons not economic reasons. As if that wasn't bad enough, the people making these decisions don't exactly have years of experience selling cars. The result will be another gutted firm on taxpayer life support. You know, when I think about all the companies that Obama has bought in part or whole the U.S. is starting to look more like Russia or China in subtle little ways.

Reason from on High?

The Supreme Court issued a temporary injunction blocking the sale of Chrysler to Fiat. Could the high court be about to inject reason into this debacle? I would not count on it, but one can only hope that the court will end Obama's experiment in central planning. Keep a watch on this one....

Monday Must Read

6/8/2009:

"Glimmers of a Housing Recovery," Business Week June 8th edition. This article discusses how the housing sector has been performing in the recent months and why that matters for the recovery. Read up because this one will affect us all.

"The Hard Road Ahead for Government Motors," Business Week June 8th edition. This article discusses the market environment that GM and Chrysler will find themselves in once they emerge from bankruptcy. The short answer is - it's not pretty.

Supreme Court Antics

Obama's first nomination to the Supreme Court has turned out to be more than a little controversial. Sotomayor has made some remarks and authored some opinions that ruffle a few feathers and the response from conservatives has irked some democrats. One thing that I think has been overlooked in the media is, what exactly should we expect of Supreme Court Justices, political party aside?



One thing that I think the majority of Americans would agree on is that we want someone that does not rule based on personal bias, but based on what the law says. It is true that the law has many gray areas, but at its core the court is supposed to simply uphold the laws enacted by Congress. Sotomayor's comments and record are a little conflicting here and I think she should have to answer some questions. Some of her comments might suggest that she has allowed personal bias to have an undue influence on her rulings, but in other cases she adhered strictly to the letter of the law. We just need a little clarification.



I don't agree with many of her viewpoints, but I think that calling her a racist is a bit much. There is a lot of skepticism about her and rightfully so. Our Senators have their work cut out for them and let us hope they up to the challenge because once confirmed Supreme Court Justices are difficult to get rid of.

May's Tab + Tip

May's Bill



-GM shareholders got punished this month. GM shares closed at ~$1.80 a share on May 1st and they closed on Friday the 29th at $0.75 per share. That is a decline of ~$1.05 per share or ~58%. GM has just about 610 million shares outstanding so GM's total market value (Market Cap) on 5/1/09 was $1.099 billion and on Friday the 29th it was down to just under $460 million that is a an astonising loss of ~$640 million in just one month!



-First quarter GDP was revised to a drop of 5.7% from the original estimate of 6.1% (these are annualized). That revision adds about $.052 trillion (or $52 billion) to our annual economic output. Not much consolation to the GM shareholders though.



-The national debt has been increase at an average of $3.79 billion a day since 2007 so at that rate we added ~$118 billion to the debt this month alone. Just to put that in perspective there are ~306 million Americans so we added roughly $386 a person in debt in one month. Think about that for a second if: you borrow at that rate your whole working life, from 18 to 65, so 47 years say conservatively 300 days a year you would owe -- $5,428,500. That is what the government is borrowing on your behalf. We ended this month with a national debt record, anyone want to celebrate?



So to sum up:



- GM shareholders lost ~$640,000,000.00 (in one month)

-The total Economy gained ~$52,000,000,000.00 (per year) or ($4.33 billion a month)

- The government added just over $118,000,000,000.00 to the debt this month

So that comes to (-640,000,000-118,000,000,000+4,333,000,000)=



-114,307,000,000 in other words we came up $114 billion short this month!



Oh, well better luck next time.

Monday Must Read

6/1/2009



"The Fed Will Be In No Rush To Raise Rates," Business Week June 1st edition. This week's Business Outlook column provides an interesting take on where we are heading. In two of my recent posts, "The Economy and You" and "The Economic Outlook," I have noted that there are very real inflation risks. The article points out how capacity figures into the mix and where the author thinks the Fed is headed.



This week there has been a lot of news about North Korean missle tests and nuclear programs. This is defintely something everyone should watch in the coming weeks and months. The news is all over the place so I don't have a specific article.



"Someone Must Pay for Health Reform," Business Week June 1st edition. This article points out that almost everyone agrees the current system sucks, but no one wants to take any action. The reason is that no one wants to pay for it - there are really only 3 ways to pay for it and they are all unpaletable for one reason or another.



I am currently reading a book that I would reccommend everyone read. It's "Blink" by Malcolm Gladwell. So pick it up at Barnes and Noble, Amazon, or your local library!