The Profit Motive in Health Care

In case there was any doubt, Gapenski and Pink's textbook Understanding Healthcare Financial Management spells out the decision drivers for profit and not-for-profit hospitals. They're specifically referring to capital budgeting, but the principles hold across the health care financial board:

Projects that will contribute to shareholder wealth should be undertaken, while those that will not should be ignored. However, what about not-for-profit businesses that do not have shareholder wealth maximization as a goal? In such businesses, the appropriate goal is providing quality, cost-effective service to the communities served. (A strong argument can be made that investor-owned firms in the health services industry should also have this goal.) In this situation, capital budgeting decisions must consider many factors besides a project's financial implications. For example, the needs of the medical staff and the good of the community must be taken into account. In some instances, these noneconomic factors will outweigh financial considerations. [Emphasis mine.]

What does this mean? Simply put, when it comes to the for-profit sector, health care is no different than any other business: Maximization of shareholder wealth trumps all other considerations, including the good of the community and medical staff needs. For not-for-profit health care institutions, conditions are the opposite: freed of the responsibility to shareholders, they may make decisions based on the needs of the community.

Champions of privatization contend that the very nature of the profit motive dictates that maximizing shareholder wealth and community good are congruent, and that decisions based on the former will lead inevitably to the latter. Skeptics point out that given a choice between the two, the community good will always come in second and therefore suffer. One might also ask that if decisions based on profit are inherently good, what exactly prevents decisions driven by community good from producing maximized profits?

Country Profile: Canada

I felt that no boy should have to depend either for his leg or his life upon the ability of parents to raise enough money. I came to believe that people should be able to get...health services irrespective of their individual capacity to pay.

Tommy Douglas, father of Medicare, Canada's National Health Insurance system

Population 32,000,000

Government Constitutional monarchy based on parliamentary democracy

Health Care Model National Health Insurance

GDP 1.335T (2010 est)

% GDP Spent on Health Care 10.0%

Per Capita Income $39,600

Health Care Expense Per Capita $3,672

Health Care Expense Per Capita Normalized to Income of 50K $4,636

Life Expectancy (m/f) 78/83

Healthy Life Expectancy (m/f) 70/74

The health care writer T. R. Reid (The Healing of America) has described Canada's health care system as the paradigm for the national health insurance model. Its genesis goes back to 1910, when the Douglas family migrated from Scotland to Canada. A Winnipeg doctor chose young Tommy Douglas as the beneficiary of a new technique in orthopedic surgery, and a boy who had expected to limp through life suddenly had a normal stride.

But even then, the boy was troubled. Why him? Was it right that chance blessed one boy with health and left another crippled? The question gnawed at Douglas, and when he became governor of Saskatchewan in 1944, he instituted a hybrid form of the single payer model in which the government served as insurer while providers remained private. By 1961, every province and territory in Canada had adopted Saskatchewan's model. The Republic of Korea and Taiwan later followed suit, and in 1965, the U. S. Congress adopted the name of Douglas' model for the legislation that established Medicare. In 2004, a national poll named Tommy Douglas as the "greatest Canadian of all time."

Overview

• Goals: Universality, public administration, comprehensiveness, portability, accessibility
• Thirteen provincial and territorial single-payer systems varying approaches to financing, administration, delivery, and range of service
• Eligibility for national funding dependent on meeting the five goals listed above
• Heavy emphasis on equality of access regardless of income
• High level of population health
• Challenges: Aging population, medical inflation (especially pharmaceuticals), waiting times, shortage of health human resources

Structure

Canadian health care is organized around the federal government, provincial and territorial governments, and intergovernmental cooperation. Provinces fund hospitals, negotiate with physicians' association to determine remuneration, oversee public health, and may fund health research and evaluate new technologies. Intergovernmental councils and committee play a largely facilitative role, coordinating cross-provincial advisory committees and various national foundations and institutes.

Financing

Canada finances 70% of its health care services via a group of federal and provincial taxes, including an income tax, corporate taxes, consumption taxes, and targeted supplementary taxes called "premiums." The bulk of the remaining 30% comes from out-of-pocket payments and voluntary supplementary insurance.

Delivery
Canada's primary care physicians serve as gatekeepers to the rest of the health system. Canadians are free to choose a PCP, and most choose based on long-standing family relationships. Recent reforms have extended selected primary care responsibilities to nurse practitioners. While the physicians typically work on a basis of fee-for-service, provinces are experimenting with alternative payment contracts based on such modernizations as 24/7 availability and telehealth applications for rural and remote areas.

In general, care has trended toward a discrete model wherein family physicians and community health facilities provide provide primary care, hospitals provide secondary and emergency care, and nursing homes provide long-term care.

Federal and regional authorities provide public health services, as defined by these six categories: population health assessment, health promotion, disease and injury control and prevention, health protection, surveillance (i.e., collection of health data to guide public policy), and emergency response.

Challenges
The chief challenge facing Canada's health care system is well-known: Lengthy waits for diagnostic tests and non-acute surgical procedures and -- in some areas -- primary care physicians. In 2005, Canada's Supreme Court determined that the country's prohibition on private insurance limited access was therefore dangerous. The long-term effect on Canada's single-tier system remains to be seen.

Beyond that, Canada faces the vexing, worldwide issue of medical inflation. Its decision to address this by stinting on expenses has aggravated the issue of lengthy waits.


Overall
Despite issues with waiting times and mediocre survival rates on some chronic diseases, Canada ranks high in such aggregate indicators as healthy life expectancy, potential years of life loss, and survival rates from stroke. The 2005 court decision notwithstanding, Canada's commitment to equality of access remains the signature statement of its health care system. And it has provided an object lesson that Vermont may be taking to heart: Single-payer need not start at the national level. As T. R. Reid observes,

Universal coverage doesn't have to start at the national level. Once [Tommy] Douglas established free hospital care in a poor rural province and made it work, the demonstration effect drove other provinces to do the same thing. And once Douglas established his taxpayer-funded Medicare system to pay all medical bills in the province, the demonstration effect quickly turned Saskatchewan's idea into a national health care system that covers everybody.

WHO Ranking 30 (U.S. 37)

Click here to read more about Canada's health care system.  T. R. Reid's book The Healing of America: A Global Quest for Better, Cheaper, and Fairer Health Care, includes a chapter on Canada.

Quote of the Day: Greenspan's reputation dead as a parrot

“Greenspan is an ex-Maestro; his reputation is pushing up the daisies, it’s gone to meet its maker, it’s joined the choir invisible.

He’s no longer the Man Who Knows; he’s the man who presided over an economy careening to the worst economic crisis since the Great Depression — and who saw no evil, heard no evil, refused to do anything about subprime, insisted that derivatives made the financial system more stable, denied not only that there was a national housing bubble but that such a bubble was even possible.”

- Paul Krugman

Hat tip: Barry Ritholtz

"You can't build a car with 97% of the parts"

The title statement summarises the challenge for the global manufacturing sector with Japan's industry and logistics disrupted for an unknown span of time.

Power shortages threaten global supply chain

Ford Motor Co., Samsung and The Boeing Co. are waiting for suppliers in quake-stricken Japan to increase one key export: information.

A top supplier of high-end components for the global technology and auto industries, Japan may need weeks to recover output lost as a result of the country's strongest earthquake on record, according to a forecast by Barclays Capital. . . .

“Our production won't be affected this week, but then we'll see,” Volvo spokesman Per-Ake Froberg said.

Supply of batteries, Blu-ray compact discs and magnetic heads used in hard drives also may be affected by the quake and power shortages, according to a report by Taipei research company TrendForce Corp.

“The reality is, the companies don't know the full extent of what's happened,” said economist Kim Hill at the Center for Automotive Research. “You can't build a car with 97% of the parts.”

Damage to ports, railroads, and factories in northern Japan has yet to be fully assessed - not least because engineers, corporate management and insurance claims adjusters have been kept at bay by radiation leaks from the Fukushima crisis-hit nuclear complex. Fuel shortages, power blackouts and disrupted land and mobile communications further stymie any effort to document damage or predict reopening schedules for stalled manufacturing plants. Rolling blackouts occasioned by damage to power generation and electricity grids mean even undamaged industries across the nation are producing less than expected. The scale of human tragedy - with half a million displaced refugees and 21,000 lives lost - mean many workers will be unable to report to work, or too concerned with rebuilding their homes and comforting their families to work more than regular shifts.

We have a highly interdependent, global manufacturing sector for modern goods, particularly high end electronics and automobiles. Japan may only account for 3 percent of the modern product, but it is usually the high value components that will be very difficult to source elsewhere. And as the title suggests, a failure to supply the 3 percent might result in halting production for the rest of the supply chain.

As this week rolls on, and the scale of disruption becomes better understood, I expect a lot of companies worldwide will start evaluating the implications for their operations of a disrupted supply chain. Without more precise information from Japanese suppliers on the expected scale of the disruption, few businesses elsewhere have been able to issue statements on the implications. As the information begins to flow, we can expect more than a few negative shocks about Q2 and Q3 earnings as inventories of parts run down globally.

So far as the media has noticed the issue, concern has been limited to supplies of the iPad 2. We may find that the implications are more serious for our economies than delayed gratification of Apple fans.

Intererestingly, the Japanese companies most directly affected are the only ones likely to be able to claim insurance for business interruption. Companies elsewhere reliant on Japanese-sourced components might have comparable losses, or even greater losses, but have no recourse except their reserves and such corporate finance as might be available in already tight markets.

Magnitude of insurance claims still almost impossible to measure

While analysts and risk modellers are daily raising their estimates of the economic damage, with the latest Barclays Capital estimate coming in at $US185 billion, many insurance experts believe it will be well over $US200 billion.

In terms of insured losses, risk modeller AIR Worldwide estimates it at $US15 billion to $US35 billion.

But some big-name brokers are quietly suggesting it could be $US70 billion, making it one of the biggest losses to the insurance and reinsurance industry.

Claims adjusters have poured into Japan in the past few days trying to grapple with the size of the damages and their clients' exposure, but cannot get near the radiation-affected area. Japanese insurance companies are also being hampered by power cuts in Tokyo that make it virtually impossible for them to appraise the damage.

A growing concern is how the tsunami is covered by general insurance policies. For example, AIR's estimates for insured losses do not factor in tsunami-related damage, business interruption costs or potential losses from nuclear damage.

Adding to the uncertainty of losses and disruption is the likelihood that insurers may contest coverage for some damage or disruption. After Katrina, many hurricane insurers asserted that their policies did not cover flood damage to properties. Similar disputes may arise in Japan where a trifecta of catastrophe has complicated claims assessment. The longer companies are kept from rebuilding and restarting production, the longer and deeper will be the losses for the industries dependent on them for their own operations, production lines and profits.

Chop Off Their Hands . . .

President Truman famously called for a one handed economist. The Carolingian kings of France would have accommodated him. They realised that a kingdom required a common currency under the control of the king and well regulated markets to sustain the confidence of the people.

At first mints were established widely, spread across the kingdom. Local barons began to profit from debasing the coinage, undermining confidence in the monetary system. So Charles the Bald established mints under his direct control and regulated the issue of coins:

C.12. Following the custom of our predecessors, just as it is found in their capitularies, we decree that in no other place in all our kingdom shall money be made except in our palace, and in St. Josse and Rouen, which right in the past belonged to St. Josse, and in Rheims, Sens, Paris, Orleans, Chalon-sur-Saone, Melle, and Narbonne.

C.13. And those who have control of the money, with no desire for favor or gain, should select faithful coiners, as if they were seeking our favor and the grace of God. And the coiners should themselves take oaths that they will perform their office faithfully, as well as they know how. And they should not coin a denarius of mixed metal nor one of light weight, nor should they consent to such a thing. And, without any deception or evil disposition towards those whose silver they accept for purifying, they should cleanse the silver, and without practicing any deception in weighing it, they should change the purified silver into denarii. If it be reported that any one has acted contrary to his oath, he will be tried by the judgment of God; and if it be proved that he acted contrary to his oath he will lose his hand just as was decreed for false coiners in book four of the capitularies, chapter thirty-three, and as a sacrilegious person and despoiler of the poor he will be subjected to public penance by order of the bishop;---for he committed no greater fraud if he coined a denarius of mixed metal or of light weight than he would have done by taking the silver of the State, or of the Church, or of the poor, in purging and coining silver with evil intent. In those regions where trials are conducted according to Roman law, he will be tried in accordance with that law.

C.18. And if a false coiner from those places, in which we have decreed that money shall be made, stamps money secretly or offers a false denarius in a business transaction, so that he cannot be caught and punished; he will be seized by our minister, just as has been decreed, if he seeks refuge in our fisc, in any privileged place, or on the estate of any powerful person whatsoever.

C.19. In order that this provision for the non-rejection of good denarii, and concerning the making of false denarii, might be better observed, we wish that every overseer cause the markets of his district to be catalogued, that he report to us what markets there were in the time of our grandfather, and what new ones began in the time of our father, and what were established by his authority, and what markets began to come into existence in our own time, which of them remained in their ancient locations, and, if they had been changed, by whose authority they had been changed.

Modern states gave control of monetary policy and markets to the barons of global finance. The experiment has resulted in the same disasterous outcomes as before. The barons have debased the coinage and corrupted the markets. The state lost control of the currency as central banks allowed the barons in banks and shadow banks to "create" money from securitisation and quantitative easing. The state lost control of markets as the SEC, FSA and others allowed those same barons to set up alternative trading platforms beyond any public scrutiny and to bastardise public exchanges with algorithmic trading and synthetic instruments priced against fraudulent reference rates.

Now that the whole system is falling apart, banks and bondholders - the robber barons and false coiners of our times - want to take more money from depositors and taxpayers to prop it up. The state, the taxpayers and the depositors should not be compelled to protect bank bondholders. Central bankers and market regulators should stop being complicit in debasement of the currency and corruption of the markets - taking the silver of the state and of the poor.

Enough already. Chop off their hands.

Inflation and Deflation revisited

In December 2008 I came off the fence and plumped for deflation as inevitable. Mostly I reasoned that debasement of accounting practice, mismanagement of financial intermediaries, captured regulators that collaborated in perpetuating failure, and extremely poor market pricing of risks and fundamentals meant that there was litte incentive to save and no place safe to invest. I predicted that when the last great bubble in sovereign debt popped, deflation would work its cleansing power to restore fundamentals.

It is now clear to me that policy makers in the West are determined to apply every available resource to underpinning failure, misallocation and executive excess. As this discourages the honest saver from parting with cash, policy makers are ensuring that deflation will wreak its havoc on the financial and real economies of the world. Only when that deflation has played out and rational policies that reward market-based management and returns are restored will it be worthwhile to invest again.

The Fed permitting dividend hikes at bailed out banks only deepens my cynicism about the poor quality of regulation and the inadequacy of management controls.

Obviously, I was premature about deflation as events in 2009 and 2010 proved, but I am not convinced I was wrong in the longer term. Events this week in Japan, and political upheavals this year elsewhere, have me thinking that we are at a turning point in many ways. When the numbness that follows such a mammoth series of tragedies wears off, the public in Japan is going to be very angry. They have suffered three great catastrophes in one week: the 8.9 earthquake, the tsunami that swiftly followed, and the failure of safety controls at six nuclear reactors. We still don't know the scale of the final disaster, or what it will mean for the country or the world.

The Japanese state is to be congratulated that strict building codes preserved much of the physical infrastructure from the earthquake, and regular tsunami drills doubtless saved tens of thousands of lives during the tsunami. The most serious failure was in management, risk assessment and regulation of the nuclear industry. The anger will be that an industry critical to the economy, with powerful lobbyists close to government, was able to capture its regulators and erode safety standards until a crisis revealed the tragic short-termism. The anger will increase when the Japanese come to appreciate that the serial depredations of the banking industry have left them over-exposed with few fiscal policy options to meet the financial challenge of rebuilding and resettlement of refugees.

If the government and institutions of Japan are forced to liquidate and repatriate foreign assets, then fears of rising Yen and destabilisation of G7 economies are well founded. I believe it was the collective self-interest in preserving stability that motivated today's central bank interventions. The Yen appreciated 20 percent in the three months following the Kobi earthquake, and the scale of the current disaster - particularly with the risk of nuclear contamination of some part of the country - is likely to dwarf the Kobi effect.

As radiation reaches California from Fukushima today, we might all consider that regulatory capture places us all at some degree of risk. The crisis in California sub-prime real estate was borne by the currents of international finance to the pension funds of Norway and the savings banks of Germany. Both the nuclear energy industry and the banking industry had parallel patterns of political influence leading to regulatory capture and debasement of best practice, and ultimately ruination for a suffering public. It will be interesting to see how much accountability is demanded of management and regulators in the nuclear industry in Japan, and compare this with the lack of accountabiity for serial financial failures and bailouts.

Japan has 20 years more experience of financial sector accounting abuse and bailouts than the rest of us. And the result has been almost continuous deflation - even in the face of mounting deficits, ZIRP and quantitative easing.

Another factor that leads me to fear deflation over inflation is the risk of popping of the great China bubble. My view is that the Chinese economy slowed markedly in Q4 2010 as monetary tightening and administrative regulation of bank lending began to bite, and that the slowing has accelerated in 2011. This view has been confirmed by Gavyn Davies on his FT blog. With another rate rise today by the PBOC, and the supply chain shock of Japan's industrial disruption and power shortages, we could be in for a sharp, deflationary global contraction in the next few months.

UPDATE 20/03/11: Days before quake, plant operator admitted oversight

Days before Japan plunged into an atomic crisis after a giant earthquake and tsunami knocked out power at the ageing Fukushima nuclear plant, its operator had admitted faking repair records.

The revelation raises fresh questions about both Tokyo Electric Power Co (TEPCO)'s scandal-tainted past and the government's perceived soft regulation of a key industry.

The operator of the Fukushima No. 1 plant submitted a report to the country's nuclear watchdog ten days before the quake hit on March 11, admitting it had failed to inspect 33 pieces of equipment in its six reactors there.

A power board distributing electricity to a reactor's temperature control valves was not examined for 11 years, and inspectors faked records, pretending to make thorough inspections when in fact they were only cursory, TEPCO said.

It also said that inspections, which are voluntary, did not cover other devices related to cooling systems including water pump motors and diesel generators.

The report was submitted after the regulator ordered operators to examine whether inspections were suitably thorough.

Sympathy and concern for Japan

Children of Adam all come from the same source,
When one is wounded, all share the pain,
He who cannot feel the pain of others,
Cannot call himself Son of Man.

- Saadi

Your Bank: Fiduciary or Predator?

In the old days when banks were local, and owned either as partnerships or mutuals, bankers had a stake in promoting the prosperity of their clients. They wanted to see their clients do well so that savings in the bank would increase, and then the banker could lend more and do better too. Bankers were meticulous in evaluating the credit quality of local borrowers, because a loss hit their own capital and equity in the business.

Largely as a result of this happy local alignment of depositor/banker/borrower interests, bankers came to be regarded as trusted fiduciaries. Depositors expected the banker to exercise discretion in the lending of capital. Borrowers expected the banker to provide loans on fair and reasonable terms which would help the borrower's business to grow and perform on repayment obligations.

As we know, those days are long past. Banks are rarely partnerships or mutuals. Remuneration models that promote fierce competition and short term bonus mania are unlikely to leave much scope for ethical reflection on the promotion of either depositor protection or borrower prosperity. Modern bank funding models are focused on money markets and shadow banking conduits rather than making depositors secure long term. Their lending models are seeking ever higher margins on transactional speculation, cross-selling and hidden fees. They seek opportunities globally rather than the long duration lending that sustained growth of local businesses. Banks are no longer geographically dependent on the local community for either deposits or borrowers.

We are now forced to re-evaluate the role of banks. They clearly have little interest in performing as fiduciaries. They have a powerful interest in becoming predators.

But if banks are predators, then their beneficial social functions are undermined, and indeed, they become a threat to social welfare, economic growth and non-bank prosperity. If that is true, then they no longer warrant state protections.

It is the depositors and borrowers who now need the protection.

In the UK some banks have threatened to leave if the successor to Mervyn King is not less "hostile" to their predations.

This is like a fox threatening to go elsewhere unless the farmer makes the chicken coop more accessible. Worrying.

UPDATE: Today Greg Smith, head of equity derivatives at Goldman Sachs, very publicly resigned in the pages of the New York Times. It sums up his resignation to say that he preferred the days when he could be a fiduciary to the firm's clients rather than their predator.

State Profile: Vermont

Last November, Vermont voters elected Peter Shumlin as the state's 81st governor. Shumlin ran in part on a platform of health care reform in the state, which has absorbed one of the highest rates of medical inflation in the country. Since Shumlin's election, the Vermont General Assembly passed Act 128, which sets forth four goals for health care reform

1. Universal health insurance coverage;
2. Provision to every Vermont resident of an adequate standard benefits package and equal access to health care;
3. Control of the rapidly escalating health care costs in Vermont; and
4. Establishment of a system that prioritizes community-based preventive and primary care, as well as integrated health care delivery.

Vermont turned to Dr. William Hsiao to develop alternatives based on these principles. Hsiao designed Taiwan's health care system and has led or advised eight other nations on health care reform. He is one of the world's leading experts on health care economics and the implementation of health care reform. 

Vermont's health care issues are acute: The medical inflation rate of 8% exceeds the national rate of 5%, with a predictable impact on employment, wages, and quality of care. While Vermont has a relatively high coverage rate of residents (93%), the state estimates that 15% of Vermonters are underinsured. Combined with the 7% uninsured, over a fifth of the state lacks adequate access to health care.

In designing a plan for Vermont, Hsiao and his team operated within the parameters of six design factors:

1. We must maximize federal funds for Vermont;
2. There must be no increase in overall health spending and therefore all funding for the options must derive from savings;
3. No option could result in an overall increase of the health care cost burden faced by employees or employers;
4. No option could yield a reduction in the overall net income received by physicians, hospitals, or health care providers;
5. The implementation of any option must move Vermont toward an integrated health care delivery system that allows for a transition to global budgets and risk-adjusted capitated payments;
6. No option would entail changes for Medicare efficiencies in Vermont.

Guideline 5 in tandem with the first and fourth goals of Act 128 form the crux of a successful universal coverage: Elimination of fee-for-service replaced by capitated payments that finance a delivery system based on primary care and preventive health.


Hsiao has recommended that Vermont make significant structural changes in the way it delivers health care by adopting a single payer system funded by an employer-employee payroll deduction. Hsiao stated to the General Assembly that moving to single payer would by a conservative estimate save Vermont 25.3% in otherwise expected health care costs between 2015-2024. According to Hsiao, single payer in Vermont will

• yield administrative savings because there will be one standard benefits package and one common system for payment and adjudication of claims;
• significantly reduce instances of fraud and abuse within the system;
• allow providers to share information about their patients more efficiently, resulting in considerable savings and reduce overuse of services, tests, duplicative procedures, as well as the negative impact of overtreatment and drug interactions. 
• result in a favorable environment to reevaluate how medical malpractice claims are litigated and paid out. The opportunity to design tort reform, including the possibility of a no fault system, would reduce the practice of defensive medicine.

(Note: Strictly speaking, the recommendation is single payer for that portion of Vermont's population that is not on Medicare or Medicaid.)

As requested by the General Assembly, Hsaio's team designed packages of essential and comprehensive benefits based on these three principles:

1. Reduction of financial barriers to provide access to all levels of health services;
2. Emphasis on the need for prevention and primary care;
3. Protect Vermonters against the risks of poverty and bankruptcy brought on by health care expenses.

The comprehensive benefits package covers a range of services including prevention, primary and specialty medical care, mental health, other allied health services, prescription drugs, vision care, dental care, nursing home care and home health care. The essential package does not include nursing home care and home health care. For both packages, the cost-sharing burden on patients is light and based on co-payments. They also encourage employer-based incentives for a healthier workplace and preventive care, as well as a statewide initiative to promote healthier lifestyles. Hsiao estimates that the savings produced by changing systems will be more than adequate to finance either package of benefits.

In terms of provider payment, the proposal recommends a transition to Accountable Care Organizations by first establishing a uniform payment method and uniform rates for all insurance plans. Eventually, the ACOs will negotiate payment rates for providers; the proposal recommends that primary care providers be paid on the basis on risk-adjusted capitation (wherein the providers receive a premium for each person in a population as opposed to charging fee-for-service to individual patients) and pay-for-performance. Specialists would receive a salary and bonus.

The General Assembly anticipates passing some version of Hsiao's proposal. Vermont must also apply for a waiver from the Affordable Care Act, which the Obama Administration is expected to grant. Vermont would be come the first state to adopt single payer, and the second entity (after the Veteran's Administration). Meanwhile, Governor Shumlin's office released the following statement:

Healthcare reform is tremendously important. The current system will bankrupt us, and bankrupt small businesses. In just 10 years Vermont has gone from spending $2.5 billion to spending $5 billion a year on healthcare. Yesterday the best Congressional delegation in the country joined Governor Shumlin to talk about how they will help Vermont get a federal waiver to make single-payer a reality. We are not asking for a penny more than we would otherwise get from the federal government, we are simply asking to be able to distribute that money to providers in a way that is more fair. The current reimbursement is not sensible. It is not fair to patients. It is not fair to providers.

We are committed to moving as quickly as we possibly can. It is an ambitious goal but we need to get it done. And we will.

Dr Hsiao's statement to the General Assembly is here. His team's complete report is here. Click here and here for reactions to the proposal.

Conservative Health Care Proposal

I came across this comment recently, which is a response to a question asking for a conservative alternative to federally based health care policy. I've been looking for a community-based conservative perspective to round out some of the views I've expressed; the author graciously acceded to my request to publish it on HealthMatters. 

It's hard to lay out a program that will satisfy you given that you want something which deals with all issues better than Obamacare. But that rests on what your opinion if of those issues. For me, liberty is a major issue, for instance, but perhaps for you it is irrelevant to this debate. Still, there is an answer, though I doubt it will help you much.

First is to figure out how we got to the point we have, where most people using medical services use a third party payer to pay the bulk of the cost. Tax code provisions is the answer, along with wage controls, all during WW2. This matters because if any commodity is provided to you at a cost lower than its actual cost (someone else has to pay the difference) then you are likely willing to use more of it (health care services) than you otherwise would if you had to pay the full amount yourself.

So, if you want to control costs, which was a claim of Mr. Obama and which nothing has been done in this "reform" to do so, then you must connect the user of the service more closely to the cost of the service. Ah, but medicine is expensive, you might say. And you are right, but for most uses the costs are within the ability of most consumers to pay. Like regular check-ups, or visits to urgent care for colds, simple cuts, and so on. But you'd also want to connect consumers to those higher cost services more as well. Higher co-pays, higher deductibles, and so on, could help.

Second, eliminate all tax preferences for medical care costs. Employers should get no tax benefit to provide medical insurance for you, OR, you should have to declare the benefit as income. But we should not be able to both deduct the cost as a business expense and not have you declare it as income. It's this kind of irrationality that has helped to lead us to an era where we feel entitled to someone else's money in order to gain some personal benefit with it.

Third, for the millions in the USA unable to afford their own insurance, your state, or mine, but all states in total, should be able to provide intra-state benefits if they want. This is not a federal issue, and about the only thing, imo, that Romney gets right about this subject is that the feds have no constitutional authority to involve itself. How the states do this is up to them, but I would think that wise states might offer a refundable tax credit for state residents to buy their own major medical policy. But for those who want the benefit provided more directly I think there is a way to both help insure more people and cut costs.

Provide a voucher to each person who qualifies that provides to them something slightly less that what a regional policy for their status might cost. And if, during the covered year, those people using those vouchers are able to use less medical care, and so save money for the state, we should reward their frugality with a "savings sharing" policy--for every dollar saved to the state the person in question might get some percentage, say 25%, of that amount. Say a year of coverage costs $5,000 where you live. Give the beneficiary a voucher for $4,200 and let insurers work out ways to provide coverage for less. But say you end up finding a plan for $3,500 that is suitable, so you save $700 for the government. Well, let's reward you with part of that amount, in your pocket.

If taxes can be said to guide behavior, then certainly putting money into your pocket could guide your behavior too. So, everyone who wants coverage can get it, and incentives that would cause people to use less medicine though not punish them if they want to use more would be in place. More people covered, structural cost controls put into place which don't require some form of governmental rationing, and your liberty is not diminished. Add to that the fact that the US Constitution isn't once again peed on, and I think many conservatives would be right there willing to help.

But, and I mean this sincerely, you really didn't want someone to present a valid alternative which solves the problems you claim exist and does it without the oppresiveness of a federal program, did you?

Complexity Costs

I have had to deal with the idiocy of modern financial regulation rather more than I would like lately. The issue involves FSA regulations which create a bias in favour of the TBTF banks. (As almost all FSA regulation is biased in favour of TBTF banks, this isn't much of a clue.) The FSA acknowledges that their rule creates a bias. They acknowledge that the bias was created in error, without principled justification. (They allowed outside counsel retained by the big banks to write the rule for them.) They acknowledge that the restrictive rule is inconsistent with European Union directives on the subject matter, and inconsistent also with UK government objectives of reducing the implicit subsidy to TBTF banks and reintroducing competition to financial services. They acknowledge that a change to the rule could improve sector competition, consumer choice and reduce costs.

Will they change the rule? No. Changing the rule would require an expensive public consultantion and cost-benefit impact assessment that hasn't been budgeted by the relevant division of the FSA for this fiscal year. Additionally, there is no proof of a market demand for the benefits of the rule change, as the existing users of the rule - the TBTF banks - are telling the FSA that existing customers aren't asking for a rule change.

It's a good thing that this is a marginal issue for the business. If it were serious, I'd have to advise doing business elsewhere than the UK. It might be wise to do that anyway, as being subject to a regulator like the FSA will be such a miserable experience based on current observation that locating a business somewhere more sensible would probably help ensure the business succeeds longer term.

The frustration of this one case raises a broader issue. Is it possible to reform a failed regulatory system sufficiently to restore a functioning market?

Regulators operate monopolies and are virtually impossible to discipline for their errors. Being bureaucrats, most regulators do not really have a stake in whether their rules do more harm than good. No one outside the regulator knows or cares who had responsibility for crafting a particular regulation, much less how it promoted or restrained market efficiency in the long run. It's almost always easier and less risky to do what they are asked by powerful incumbents than to attempt to level the playing field in favour of consumer protection or increased competition. Fifteen years of the FSA pretty much proves this point, as complaints to the financial ombudsman were at record levels last year and financial services concentration is consolidating at a very rapid clip leaving consumers very little real choice.

And then there is the complexity of modern regulation. Changing any regulation requires a publication of proposals, a consultation period, a cost-benefit impact assessment, legal consultation to ensure compatibility with EU directives, etc. Consultation responses are more likely to be from TBTF incumbents with a stake in bad regulation, and very unlikely to be from ill-informed consumers or would-be market entrants who might benefit from good regulation.

The FSA is being disbanded for its failure to properly regulate UK banks in the run up to crisis. It will be split into three, with some functions going to the Bank of England, some to a new Prudential Regulatory Authority and some to a new Financial Conduct Authority. A change in structure does not necessarily yield a change in ethos or policy. Sadly, the same bureaucrats will turn up at the same desks and largely follow the same courses that led to failure of the old system. If anything, the added complexity of co-ordinating among the three new regulators will be an additional incentive to make as few changes as possible to regulations going forward.

I am reminded of a friend who went to Eastern Europe just after the Berlin Wall came down in hopes of investing there to modernise the economy. He came back determined never to venture an investment because the same bureaucrats as held office under Communism were still showing up to work in the ministries every day and following the same rules as before.

Insurance and Banking: Risk, Resiliency and Harmonisation

I attended an interesting discussion of risk management in the City this week, bringing together insurers with bankers. The two sectors manage risk quite differently, which is why there are rarely insurance crises and frequently banking crises. Insurance crises tend to occur when insurers act like banks (AIG Financial Products, MBIA and other monolines). Bank crises tend to occur when banks act like investment banks.

Insurers must not underwrite risks that they will not be able to cover in the event, and must therefore have reserves sufficient to perform at all times. This makes the insurers much more cautious about taking on risk, about pricing risk accurately at the time of contracting, and about managing reserves to be liquid when claims require payment. Regulation is fundamentally about solvency and selling.

Banks undertake risks on their books that they can only cover so long as they continue to have access to liquidity (funding, deposits, repos or central bank support). Bank capital is never enough to ensure performance without market liquidity for reserve assets. Banks are generally much less cautious about taking on risk, rely overmuch on incomplete models to price risk, and manage capital to optimise returns rather than ensure survival. Regulation focuses on capital (never enough on its own) rather than conduct, common sense and functional suitability.

One risk manager observed that in insurance the risks are exogenous, generally independent in occurrence, and finite. In banking the risks are too often endogenous, correlated in unpredictable ways, and of unknowable magnitude. As a result, a single bank failing has systemic consequences for the banking system, where a single insurance company failure has no systemic consequences for the insurance sector.

An interesting observation both insurers and bankers agreed on was that international harmonisation of regulation had driven formerly diverse business models and management preferences toward uniformity by enforcing preferred models for capital and solvency. As a result, the risks of total systemic failure are much, much higher than before Basel II and Solvency II, because when the models are wrong, the whole financial system is compromised.

Models are always wrong because they are partial, approximate, and use historic data and correlations. In internationally harmonised regulation, the failure of models is even more assured as many domestic factors which have great implications for financial risk are ignored or discounted. Quite simply, models are illuminating, not correct.

What this means is that the 25 year drive to harmonise regulation using financial models is almost certainly counterproductive if the aim was to ensure wider financial integrity and stability. Instead of a global financial system constructed as a spider's web, such that the breaking of one strand does not compromise the whole web, we have a system that has bound all the threads into a single cable. And if that cable frays under stress . . .

There was controversy around the idea of functionally segregating the pedestrian but systemically important functions like payments and mortgage intermediation from the riskier eccentricities of modern of investment banking. About half the room thought it perfectly sensible, and half thought it couldn't be done. I'm of the view that "narrow banking" for some functions might be a very reasonable way to secure the taxpayer from future losses by reducing the scope for contagion in the banking system. And if we could do that, we could allow bad banks to fail, restoring some morals and some hazard to the management of banking.

Sap rising, a new job and the NHS

I’m starting this month mildly optimistic. Those who have laden our societies with inequality and our economies with debt are being repudiated wherever the public is permitted to speak or vote. No longer dulled by panic, policy makers are realising there are other options than doing as they are told by their bankers, and their duty to their enraged public requires them to at least evaluate other options before caving into further banker demands. Emboldened by examples of bravery and solidarity in the Middle East, many publics are re-evaluating their relationship to the state and the service they receive from their political elites, and then finding a new voice to demand better.

The corrupt political machine that surrendered Irish sovereignty to a more corrupt banking system has been voted out of office. Denmark has allowed a bank to fail, imposing real losses for the first time in this crisis on bank bondholders. The governor of Wisconsin is being reminded that he works for the people of his state, within the bounds of its constitution and its laws. Signs of a shift toward accountability perhaps? It is spring, and I choose to hope.

I am in England, where a fine mist softens the air and birds sing in the budding trees outside my window. Contributing to my good humour is the imminence of a new challenge that will not require me to travel further than central London. I spent much of the autumn looking at the world, looking at my country, and searching for a way to make a difference here at home that will endure as a lasting contribution to economic stability. I have been fortunate enough to identify such a role, seek appointment, and be given the chance to fulfil my aims. It will be another adventure, but one I pursue in familiar surroundings and among friends.

Wish me luck.

And now a word about healthcare, a subject I rarely write about. I saw a chart at Wall Street Cheat Sheet this week that forced me to realise how blessed I am to be British. If I were an American, I would be shamed by this - especially when more than 30 percent of citizens have no entitlement to healthcare.

Here's an example of what I get for the money spent on the NHS.

In December I received a form letter from the NHS (National Health Service) saying that the time had come around again for a routine diagnostic procedure to detect a condition fairly common to people my age. It was the run-up to Christmas and I did nothing at the time. Yesterday I received a reminder that I had not had the test, urging me to schedule it. My GP (general practitioner doctor) is at the surgery (doctor’s office) on the high street five minutes’ walk from my door. I called the surgery’s appointments line, and the friendly receptionist gave me an appointment for later in the morning. I showed up, was seen within five minutes, and back home twenty minutes later. The doctor was even happy to chat about another minor matter that had been on my mind. The test results will be sent by post within two weeks. This was as easy, convenient, stress-free and professional as anyone could ever wish. And no one ever mentioned money.

The NHS is one reason why there is unlikely to be a revolution in Britain. Each of us living here can actually see the benefits of having a government that provides for the people in the ways that truly count. I never have to worry about whether I can afford a medical procedure. When my children are sick, they are seen quickly, often the same day. I can get urgent care 24 hours a day. I have even been pleasantly surprised by a Sunday house call. When I took my children to the emergency room (long ago now), they were seen and treated with all the professionalism and concern any loving parent might wish. All of this is provided by my government, and I never worry even for a moment about the cost. As a taxpayer, I enjoy a tangibly better life because my government provides for my care and the care of my family whenever it is required.

The NHS is far from perfect, but it is a great deal better than any insurance-intermediated system I could imagine. And it is infinitely better than no insurance and no entitlement to healthcare at all.

Not all taxes impoverish me. Some of what I pay enriches me too.

UPDATE:
I've just received a form in the post to permit me to register for patient management over the internet. I'll be able to book and change appointments online with my doctor or other doctors at the surgery, and I can request prescription renewals. This is my NHS delivering value and efficiency to me as a taxpayer, and I am again grateful.

Kaiser Permanente Poll on the Affordable Care Act

"Public opinion on health reform remains dug in this month, with the public roughly divided on the new law and partisans holding opposite views, a pattern that has been in place since passage last March. Overall, 48 percent of Americans have an unfavorable opinion of the law and 43 percent hold favorable views."

"Three in ten say they want Congress to expand the law, not something high on the legislature’s agenda at the moment. And two in ten votel for the status quo – leaving the law to be implemented as enacted. On the other hand, four in ten want to see the law repealed – with half of those (19 percent) hoping to see it replaced with a “Republican‐ sponsored alternative” and the Republicans other half (20 percent) wanting no further action."

"Even as there are ongoing legislative discussions as to whether implementation of the law can be effectively stalled by funding cuts inserted into this year's budget process, most Americans (61%)...oppose using the budget process in this fashion." 

"...while the public in general is divided over whether to keep or repeal the legislation, if they could pick and choose, the large majority (roughly eight in ten Americans) would keep the provisions providing tax credits to small business, and upwards of seven in ten would keep the provisions that close the Medicare doughnut hole, provide coverage subsidies to those of low and moderate income, institute the new voluntary long term care insurance program known as the CLASS Act, and prohibit insurance companies from denying coverage based on pre‐existing conditions. Even among those who want to repeal the law, most say they would like to keep five of the seven provisions queried. The one provision that the public remains happy to repeal: the individual mandate, which 67 percent would be happy to strip from the law, even as many experts say that without it the system may not work as intended."

Click here to read the complete report.