Thoughts on Health Care Reform

After reaching a compromise agreement over the weekend, the Senate looks poised to pass a health care bill by Christmas. This bill will then be merged with the House version to produce the final bill that will be voted on by both chambers. (How much more the Senate bill will ultimately reflect the more liberal House bill is another matter).

The Senate bill is far from perfect. Progressives failed to secure a government run insurance plan in either a weak or strong form. They also failed to secure an expansion of Medicare that would allow people ages 55-64 "buy in" to Medicare early, a would-be compromise that was shattered by recalcitrant Senator Joe Lieberman. The absence of these provisions from the bill have, rightfully, caused frustration among Progressive proponents: The private insurance sector is left largely in place without a substantive public competitor.

Yet despite these imperfections, I agree with Paul Krugman, Ezra Klein, Jacob Hacker, and others that this bill should be supported, passed, and built upon in the years and decades to come. This bill represents the most significant expansion of the social safety net since the Great Society programs of the 1960s and begins the process of complicated reform. To not pass this bill would be politically unwise, throwing away a chance at reform that will not be available again for perhaps a decade or more, by which time the system will have grown more costly and countless indivduals and families will continue to suffer.

Furthermore, the expansion of coverage and reforms contained in this bill will positively affect tens of millions of people. Premiums for many families and individuals will be substanially subsidized by the federal government; out of pocket expenses will be capped; insurers will no longer be able to refuse coverage due to preexisting conditions; and many other reforms.

This is a no brainer: Pass the bill and work hard to strengthen it over time.

What I think I think - Part 2 - Sports and Culture

-Okay, so the Yankees have won their 27th World Series championship as my beloved Red Sox were swept in the first round of the playoffs. Hats off to the Yankees for their terrific season and for being bold enough in the offseason to add the top three free agents in baseball.

-Important question: Is the Patriot mystique gone? After a heartbreaking loss to the Indianapolis Colts and an absolute drubbing by the explosive New Orleans Saints, it appears the Patriots are no longer among the true "elite" of the NFL. What's worst, the "Patriot Way" is in serious disrepair. This current manifestation of the Pats resembles their dynastic predecessors less and less each week. And with each passing week and month and season, the Brady/Moss/Belichick window of opportunity gets a little bit smaller.

-U2 finished their North American leg of the U2-360 tour in Vancouver, British Columbia on October 28th. What a tour! Having seen four shows live myself, I can honestly say it may have been the best U2 tour in many, many years. The performances were generally solid, the setlists were consistently good, and the presentation was spectacular. The edifice known as "the Claw" was breathtaking and magnificent (no pun intended). I've been to at least one show for each of the last three tours--Elevation, Vertigo, 360--and was most impressed with the most recent. Elevation was intimate and "back to basics", a truly great show. Vertigo was full of energy and emotion. But, as odd as it sounds, this tour was full of energy and surprisingly intimate for a stadium show--consisting of the best of Elevation and Vertigo. Now we await the (eventual?) release of the follow-up album to No Line on the Horizon, rumored to be called Songs of Ascent.

What I think I think - Part 1 - Policy and Politics

Quite a lot going on since my last set of posts.

-Healthcare reform has moved further along than at any other point since Medicare. The current makeup of both the Senate and House bills is not ideal, but we'll take what we can get and make improvements over time. My biggest concern is that the set of reforms likely to pass will be so watered down as to be ineffective at bringing costs down in any meaningful way. I stand by my assertion that a "strong" public option is necessary to keep long term costs down and to provide sufficient competition to embedded insurance companies.

-The state of the economy. With unemployment over 10% and rising, it is becoming increasingly apparent that those who called for a more robust stimulus back in February were correct. Although there has been at least a partial recovery in financial and stock markets, the real economy continues to suffer. Projections indicate that unemployment will remain high for several years, with far reaching political, social, and economic repercussions. (Speaking of which, a blog post exploring the social implications of persistent high unemployment may be in the offering soon).

-Escalation in Afghanistan. Can it work? It's almost impossible to truly know at this point. There are so many variables that are out of our direct control. Will the Afghan government increase its legitimacy among its own people? Will it reduce corruption? Will the Afghan security forces improve? Will Pakistan continue to hedge its bets by appeasing Taliban and Taliban-like groups in Northwestern Pakistan? A lot depends on the eventual answers to these questions.

-The rise of the Glenn Beck/Sarah Palin fringe. There have been right wing fringe groups in American politics, with varying degrees of power and influence, throughout this country's history--e.g. read Richard Hofstadter's The Paranoid Style in American Politics. But this group seems especially crazy. That's all I'm saying...

It's a musical journey...

Off to Foxboro and New York for the U2 360 tour!!!

Sunday, September 20th: Foxboro, MA

Monday, September 21st: Foxboro, MA

Wednesday, September 23rd: East Rutherford, NJ

Thursday, September 24th: East Rutherford, NJ

Health Care Analysis - Part 2 - Increasing Costs, Unequal Access

In this post, I propose to examine what makes the healthcare system in the United States so dysfunctional and inefficient. How is it that we pay much higher costs for healthcare than other advanced, industrialized countries, with similar health outcomes, while insuring less people? What are the main contributing factors to the rapid rate of healthcare cost inflation? Why are costs lower in other countries? Why are so many Americans left outside the health insurance market?

I begin by describing the characteristics of our healthcare system and how it is structured. I then proceed to compare the U.S. system to other countries’ systems. And finally, based on that understanding, I will argue why reform is necessary.

I. The U.S. Healthcare System

The structure of our healthcare insurance system arose out of historical accident. It is a patchwork system that includes both public and private insurance, as well as a significant percentage of uninsured. Of those privately insured, most get their insurance through employer-based group healthcare plans, while a smaller percentage obtained insurance on the open market, for a total of 67.9 percent of the entire population. Of the remaining population, 13.5 percent obtain insurance through the federal government run Medicare program, which is open to all citizens over 65 years of age; 12.8 percent are covered by Medicaid, which is a means-tested program whose financing is shared between the federal government and the individual state governments; and, finally, 15.8 % are uninsured. (Note: there is some overlap in private and public coverage for some citizens).

Source of Insurance (2006)	Total enrolled (2006)	Percentage of people (2006)
Employer-Based Insurance (Private)	177,152,000	59.6
Private Insurance (Non-employer-based)	24,538,000	8.2
Medicare (65+)	40,343,000	13.6
Medicaid	38,281,000	12.9
Uninsured	46,995,000	15.3

Source: U.S. Census Bureau (http://www.census.gov/compendia/statab/tables/09s0146.pdf)

(a) Employer-based insurance

The current system, to the extent that it does work, is largely due to employer-based private insurance, which grew out of historical accident during World War II. Corporation profits were heavily taxed and wage controls were instituted, resulting in employers offering health benefits to attract workers, which was fully tax exempt. The tax exemption continues to this day, allowing millions of workers to obtain health insurance for themselves and their family members as part of their overall compensation package. It remains to this day a pretty good deal, to those who are fortunate enough to benefit. But increasing premiums, due to a number of factors, including skyrocketing medical costs, are slowly unraveling this arrangement, leading to fewer and fewer people obtaining insurance through their employer, and at increasing costs for those who continue to receive such benefits. Additionally, such a system, as beneficial as it is to those who remain employed, can be equally tumultuous to those who become unemployed, particularly within the context of a prolonged economic downturn.

Employer-based insurance, also referred to as group coverage, is typically less expensive than purchasing insurance directly on the open market, mostly due to sheer numbers and bargaining power, presenting a “partial solution to the problem of adverse selection,” according to economists Paul Krugman and Robin Wells[i]. Of course, the bargaining power of a particular group plan will vary depending on the number of participants in the group and the degree of the insurance company’s market concentration, which varies by state.

To complicate matters further, this arrangement, as noted above, is slowly unraveling. Premiums have increased at a faster rate than income (measured in GDP growth), prompting fewer and fewer employers from offering insurance.

Below is a chart demonstrating the rise of employer-based health insurance premiums since 1999:

Source: Kaiser Family Foundation Employer Health Benefits 2008 Survey – Exhibit 1.9 http://ehbs.kff.org/?page=charts&id=1&sn=6&ch=616

And here is a chart demonstrating the cumulative changes in health insurance premiums compared with inflation and workers’ earnings:

Source: Kaiser Family Foundation Health Care Costs: A Primer http://www.kff.org/insurance/upload/7670_02.pdf

The above premium increases are well above the rate of inflation and income growth during the same time period. The increase in premiums is leading many employers to drop such benefits. Since peaking in 2000, the percentage of people who receive health insurance from their employer has begun to steadily decline (see chart below), which correlates with fast growing premium rates and turbulent economic conditions (which lead to a higher number of unemployed).

Source: U.S. Census Bureau (multiple years)

http://www.census.gov/compendia/statab/past_years.html

The increase in employer-based insurance enrollees during the mid to late 1990s can be attributed to the short-lived relative success of the emergent “managed care” systems in holding down costs during that time period. For several reasons, however, managed care failed to deliver sustained long-term cost reduction. With premiums growing at a significantly faster rate than both inflation and workers’ earnings, an ever-increasing proportion of total employee compensation is being devoted to health insurance.

While the percentage of people obtaining health insurance through their employer has begun to decline, employer-based insurance still represents approximately 59.6 percent of the population. What happens to the people who lose their employer-based insurance, either due to unemployment or their employer eliminating the benefit? What about those people who are self-employed or work for a business that does not offer group health insurance? What means do these people have in obtaining health insurance and at what price?

(b) Non-employer-based private health insurance

Individuals and their family members who are covered by employer-based health insurance, despite facing rising premiums, do not face the type of financial and health insecurity that those outside of the employer-based system face. Indeed, those who are not fortunate enough obtain insurance through an employer, and fail to qualify for Medicaid coverage, face enormous uncertainty and risk, leading many to forgo necessary medical procedures or face financial ruin, often culminating in bankruptcy. In fact, according to health economist Jacob S. Hacker, “roughly half of bankruptcy filings are related to medical care, with the vast majority of medical bankruptcies involving households that have health insurance.”[ii]

Purchasing insurance on the open market is much more complicated than obtaining coverage through an employer. Past medical history is highly weighted in an insurance company’s decision process as to what a particular insurance plan will cost the applicant and whether coverage will be offered at all. This, by itself, does not necessarily make the insurance company evil—after all, insurance companies need to turn some profit. But the fact remains that many people—often those who need it most—are unable to obtain health insurance on the open market, whether due to costs or access. Furthermore, those individuals who are fortunate enough to gain access to private insurance and are able to afford it, cannot be guaranteed that their coverage will not be rescinded upon serious illness—what is referred to as “rescission.” (Imagine that: paying enormous sums of money to purchase health insurance only to find out, upon becoming seriously ill, that your coverage doesn’t cover your illness; or that it only covers your illness for a certain amount of time; or that the insurance company has found some convenient loophole that renders them not responsible for coverage.)

In addition to the insecurity that many privately insured individuals face, private health care insurance has simply failed to control health care costs. In fact, private health care premiums have risen at a much faster rate than both publicly administered plans in the United States (such as Medicare) and compared to heath costs across industrialized countries. The track record is not very good. Healthcare economists point to several reasons why healthcare costs are so high in the United States and growing much more rapidly than other industrialized countries. Two of these reasons are (1) the unusually high administrative costs as a percentage of all healthcare spending and (2) the distribution of market power among insurers and healthcare providers. (I address these two factors primarily, as reform efforts to contain costs over time will hinge, at least initially, on addressing the high administrative costs and the market structure of the various insurance markets across the country).

Contrary to what free market ideologues would have you believe, the health care market has never been, nor could ever be, structured on free market principles, where goods and services are traded freely and resources allocated efficiently. The free market simply runs contrary to the very nature of health care and, in particular, health insurance, where there is considerable risk and uncertainty. For example, an individual does not know when or whether he or she will need care. And care, if needed, can be extremely expensive—hence the need to pool risks, the need for insurance. But insurance companies suffer a loss if and when the insured party requires medical payment. In such an environment, insurance companies spend considerable amounts of money attempting to deny as many claims as possible and also to screen applicants so as to avoid covering people most likely to need care. High administrative costs—from “underwriting” to marketing to profits—account for an ever-increasing share of premiums. For instance, plans for large employer-based groups contain administrative costs in the range of 5-10 percent of premiums, plans for companies in the “small group market” contain administrative costs of 25-27 percent of premiums, and, in the individual market, as high as 40 percent of premiums.[iii] Compare those numbers to the public Medicare plan (in the range of 3 percent) and the OECD average—where the U.S. pays approximately six times more per capita on administrative costs—and you begin to understand why both insurance market regulation and a competing “public option” plan are being discussed as part of the reform effort.

Market structure—both on the provider side and the insurer side—contributes to the unusually high health care costs in the United States in relation to other industrialized nations. According to a study of insurance market consolidation by James Robinson, “in 36 of the 50 states, three or fewer insurers accounted for 65 percent of the commercial [insurance] market in 2003.”[iv] And according to a 2008 study by Holohan and Blumberg, “thirty-four states had values of the Herfindahl-Hirschman Index (a measure of market concentration) that exceeded federal guidelines that deem industries of anti-trust concern.”[v] According to the study by Robinson (2004), private insurance revenue has increased even faster than medical costs, “indicating that insurer market power allowed the firms to not only pass on rising health care costs to purchasers but to also increase profits at the same time.” (For instance, while health spending by the privately insured increased by 6.7 percent annually between 2000 and 2007, increases in single and family premiums rose by 8.9 and 9.5 percent, respectively, over the same time period).[vi] On the flip side, hospital and provider rates are not set by the market either, but by hospitals (and providers) with different degrees of market power, according to the study by Holahan and Blumberg.

(c) The uninsured: who pays the cost?

A total of nearly 47 million people, or 15.3 percent of the population, were uninsured in 2006, a number that continues to rise and does not account for those who are underinsured. For starters, many people are self-employed, transitionally unemployed, employed by a business not offering insurance, and either cannot afford private health insurance or have been denied coverage. Several trends can account for this increasing number, including the aforementioned decline in employment-based insurance, rapidly increasing premiums, and increased efforts by insurers to screen applicants deemed too risky. Granted, some of the people who fall under the classification of “uninsured” choose to go without insurance, particularly, but not limited to, healthy young persons. But even the uninsured cannot be denied medical treatment in an emergency—nor should they—resulting in those costs being recycled back into the system in the form of higher premiums for everyone else. Therefore, as will be argued later, in addition to the moral imperative to provide all citizens access to affordable basic healthcare, there is also an economic imperative that effects us all—in the form of higher healthcare costs and premiums for everyone else. The United States is the only advanced country that does not guarantee basic healthcare to all citizens.

(d) Medicare: A brief word on cost inflation

Despite what critics of government-administered health insurance would have you believe, the United States already has in place a government-run single-payer insurance program that is both wildly popular and considerably more effective at holding down costs than private insurers. That program, of course, is Medicare—the federally financed health insurance program for seniors, instituted in the mid-1960s. Despite its flaws, the Medicare system has performed far better than private health insurance since at least the early 1980s, as the chart below demonstrates.

Source: Hacker, Jacob S. The Case for a Public Choice in National Health Reform

http://institute.ourfuture.org/files/Jacob_Hacker_Public_Plan_Choice.pdf

II. Cross-Country Health Care Cost Comparison

Before we examine U.S. health spending in relation to other countries, let’s first take a look at the actual growth in U.S. healthcare expenditures in isolation. Even without seeing these costs in relation to other advanced countries, we can see that healthcare costs have risen significantly and have accounted for an ever-increasing share of national income, or GDP—from a mere 5.2 percent in 1960 to 16.2 percent in 2007.

Source: Kaiser Family Foundation Health Care Costs: A Primer

http://www.kff.org/insurance/upload/7670_02.pdf

Both health expenditures per capita and the percentage of national income (GDP) spent on health care in the United States far exceed that of almost all other advanced industrialized countries. According to the Organization for Economic Cooperation and Development (OECD), the United States spent $7290 (adjusted for international purchasing power parity PPP) per capita in 2007. Compare that with France ($3601 PPP) or our neighbors to the north, Canada ($3895 PPP). Additionally, all other OECD countries spend a significantly lower percentage of national income, measured as GDP, on health care than the United States, but with no obvious advantage in health outcomes for the U.S. Such significant differentials in health spending would lead one to believe that health outcomes in the United States are at least somewhat better than in the other OECD countries, but that is clearly not the case:

OECD Country	Health Care Expenditure (% of GDP), 2007	Per capita health care expenditure ($PPP), 2007	Public health expenditure (% of total), 2007	Life Expectancy, Years, 2006	Infant Mortality Rate (Per 1000 births), 2006
United States	16%	$7290	45.4%	78.1	6.7
Canada	10.1	$3895	70	80.7	5
France	11	$3601	79	80.7	3.8
Germany	10.4	$3588	76.9	79.8	3.8
UK	8.4	$2992	81.7	79.1 (2005)	5
Switzerland	10.8	$4417	59.3	81.7	4.4
OECD median	8.2	$3588	80.7	73.3	9.5

Source: OECD Health Data 2009

http://www.oecd.org/document/16/0,3343,en_2649_34631_2085200_1_1_1_1,00.html

As can be seen from the table above, the United States spends at least 40 percent more on health care than the other OECD countries listed, yet life expectancy is slightly lower and infant mortality rates slightly higher in the United States. Life expectancy and infant mortality rates are not, prima facie, the only indicators by which we should measure a health care system, however. Other indicators, such as the number of deaths incurred from various medical conditions—cancer, diabetes, respiratory system diseases, and cerebrovascular diseases—paint a picture in which the United States is marginally better than other advanced counties in some health outcome indicators, while lagging behind in most others, despite enormous expenditure differentials:

OECD Country	Deaths per 100,000 – Reparatory system diseases, 2005	Deaths per 100,000 – Diabetes, 2005	Deaths per 100,000 – Cancer, 2005	Death per 100,000 – Cerebrovascular diseases, 2005
United States	59.8	20.3	157.9	33.4
Canada	43.3 (2004)	18.4 (2004)	169 (2004)	31.2 (2004)
France	30.6	10.9	165.6	29.9
Germany	38.6	16.2	159.3	42.9
United Kingdom	75.3	6.7	173.3	52
Switzerland	31	10.8	139.4	28.5

Source: OECD Health Data 2009

http://www.oecd.org/document/16/0,3343,en_2649_34631_2085200_1_1_1_1,00.html

To what extent does the American lifestyle, with its higher propensity for obesity and chronic illnesses, such as diabetes, contribute to the higher health expenditures? According to a study by the McKinsey Global Institute, only a fraction of the entire cost differential between the U.S. and other countries, or what amounts to approximately $100 per capita.[vii] A closer look at the numbers, and we’re not getting more for our health care buck, despite spending much more than other countries. For instance, according to the OECD, there are actually fewer physicians per 1000 people in the United States (2.43) than in France (3.37), Germany (3.50), and even the UK (2.48). The same applies to hospital beds per 1000 people, with vast differentials between the United States (3.1) on the one hand, and France (7.1) and Germany (8.2).

What accounts for such cost differentials between the United States and other industrialized countries? Princeton health economist Uwe E. Reinhardt, in a 2004 paper, identifies several factors:

(1) Higher GDP per capita in the United States, which provides us with a greater ability to pay for health care services.

(2) The distribution of market power and prices in the United States (i.e. market structure). Reinhardt points out that Americans “pay much higher prices for the same health services than citizens in other countries pay.” Reinhardt attributes this to the “highly fragmented organization of the financing of health care in the United States” which “serves to allocate relatively greater market power to the supply side of the health care system then to the demand side,” a point that will become important when analyzing potential reform proposals. Other countries, such as Canada, have large single-payer systems with significant market power, and others (such as Germany) are multipayer, but bargain collectively with the health care providers.

(3) According to OECD data, many countries have higher physician- and nurse-to-population ratios than the United States, as well as a higher hospital beds per capita. This puts more strain on the health care system, and increases demand relative to supply.

(4) Administrative complexity and costs, which, as we have seen above, is much higher in the United States system than in other countries’ systems.[viii]

As disquieting as the above comparisons may be, they only deal with cost differentials and speak nothing of the millions of Americans who are uninsured or underinsured. Remember, the United States is the only advanced democracy to not provide essential health insurance to all of its citizens. As these numbers come into view, it becomes very easy to see why the World Health Organization (WHO) ranked the United States 37^th in the world in terms of health care.

III. Concluding Remarks

Even those of us who feel secure in the current arrangement may find ourselves on the “outside” when the time for care arises. We have a system that contains out of control costs and does not adequately serve millions of Americans. The data above paint a clear picture for the need for reform. But what types of reforms are policymakers seriously proposing, and what effect will such reforms have on lowering costs while providing greater access, choice, and security?

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[i] Krugman and Wells (2006) – “The Health Care Crisis and What to Do About It,” The New York Review of Bookshttp://www.nybooks.com/articles/18802

[i] Jacob S. Hacker (2008) – “The Case for Public Plan Choice in National Health Reform” http://institute.ourfuture.org/files/Jacob_Hacker_Public_Plan_Choice.pdf

[iii] David Himmelstein, et al., "Illness and Injury As Contributors To Bankruptcy." Health Affairs, 2005. Accessed November 25, http://content.healthaffairs.org/cgi/reprint/hlthaff.w5.63v1.

[iv] Robinson, James C. 2004. “Consolidation and the Transformation of Competition in Health Insurance.” Health Affairs 23(6): 11–24. Cited in John Holahan and Linda J. Blumberg (2009) – “Is the Public Plan Option a Necessary Part of Health Reform?” – Urban Institute

http://www.urban.org/UploadedPDF/411915_public_plan_option.pdf

[v] Holahan and Blumberg (2009)

[vi] Robinson (2004)

[vii] Angrisano, et al (2007) – “Accounting for the Cost of Health Care in the United States” McKinsey Global Institute http://www.mckinsey.com/mgi/reports/pdfs/healthcare/MGI_US_HC_synthesis.pdf

[viii] Reinhardt, et al (2004) – “U.S. Health Care Spending in An International Context,” Health Affairs May/June 2004

Health Care Analysis - Part 1 - Intro

We find ourselves in the middle of the most ambitious and serious healthcare reform debate since Bill Clinton’s failed attempt during his first term (1993-94). In the face of growing opposition from powerful industry stakeholders and a minority political party whose sole goal is to block any reform, regardless of its form, it becomes increasingly important to understand (a) exactly why we are having this debate in the first place and (b) what the actual proposals are that are being discussed and debated. It is my goal, over the course of a series of blog posts, to explain the underlying necessity for reform, the reason why past reform efforts—dating back to Harry Truman—have failed, and to provide an analysis of the proposals currently on the table and their likely effects.

It has become increasingly evident that a small, yet vocal, minority of boisterous “astro-turf” protesters is attempting to stifle any reasonable discussion and debate over healthcare. These people can be seen (and mostly heard) shouting and acting in a very belligerent manner at town hall meetings across the country, often stifling actual debate (which I suppose is their end goal). Whether or not these people are actually interested in understanding the issues and discussing possible solutions appears very unlikely. Instead, such people are more interested in inciting fear and disseminating falsehoods. (Some of the more laughable include the government mandating, or at least promoting, euthanasia for elderly citizens—the so-called “Death Panels”—and mandatory sex changes for all).

Putting aside this small, angry, and disenchanted minority of far right-wing activists, however, there remains a significant informational gap in the population at large—in no small part due to the antics of said vocal minority, but also due to the Democrats’ failure to adequately explain the reasons for reform and what effects reform will have on the average citizen. Understandably, people fear change. But polling numbers indicate that it is not necessarily a fear of change, but a fear of the unknown that has so many people apprehensive in the face of healthcare reform. More importantly, people are simply ignorant of the basic issues being discussed and the irrefutable brute facts. I suppose it is a symptom of postmodernism that basic definitions and terminology have lost all meaning. For starters, “socialized medicine”—along the lines of the United Kingdom’s National Health Service, where medical equipment and hospitals are government owned and doctors are government employees—is not even remotely being discussed. (What is being discussed can, roughly, be described as socialized insurance, but even that is too broad for the reforms currently on the table, which, as we will see, keep most of the private structure largely intact). Another example I find telling of the current state of debate is that of a man at a recent town hall meeting who urged Representative Bob Inglis, a Republican from South Carolina, to “keep your government hands off my Medicare.”

It is in such an environment that informing people of the facts becomes so important. We may have disagreements as to best reform the health care system in this country, but we must first approach the subject in the same light, out from the murkiness of cable news echo chamber. I propose to outline why reform is needed, describe the current ideas/proposals on the table, and analyze the potential efficacy of such proposals. I intend to do this in a series of three blog posts:

(1) Tomorrow: The twin problems of healthcare cost inflation and unequal access, with a cross-country comparison and analysis.

(2) Future post: The current reform effort, including the leading ideas and proposals, and their potential efficacy in addressing the twin problems of cost and access.

(3) Future post: A brief history of previous healthcare reform efforts and why, with the exception of the Medicare and Medicaid reforms of the mid-1960s, these efforts largely failed.

Health Care Analysis

To my readers:

I apologize for the paltry amount of postings of late.

Over the next week or so, my plan is to post a three part series on healthcare policy:

1. An analysis of the status quo and what makes it so dysfunctional and inefficient.

2. A brief history of past healthcare reform efforts, and why such efforts ultimately failed.

3. An analysis of the current reform plans on the table and what it's going to take to pass such historic legislation.

Stay tuned.

The Recession and the Lessons of 1937

In the wake of the June 2009 employment numbers, released by the Bureau of Labor Statistics on July 2nd, there have been three competing responses:

(1) The "wait and see" argument, which goes like this: Only a fraction of the allocated $787 billion stimulus has been spent. As more funds are distributed to states, municipalities, and other recipients, particularly over the next 3-4 months, the effects on employment and GDP growth will become increasingly evident. If conditions continue to worsen, say 6-10 months down the line, the situation will be reassessed and additional funds can be requested. After all, the stimulus plan was intended to be an 18 month program.

(2) The "Obama's economic policies are a failure" argument. These are the folks who are opposed to any expansion of government spending or involvement in the economy, even when on the precipice of prolonged depression. These are the same people who have failed to learn the lessons not only of the Great Depression of the 1930s, but also of more recent economic downturns, including the so-called "lost decade" of Japan in the 1990s. Of course, for these people, any government action meant to soften the downturn or reverse its course is simply viewed as either counterproductive or, for the more conspiratorial minded, a socialist trojan horse.

(3) And finally, the "initial stimulus was too small" approach. These folks warned of the inadequacy of a $787 billion stimulus in the face of a much larger shortfall in effective aggregate demand and demanded a more robust stimulus. This view was made prominent by Paul Krugman, Brad DeLong, Joseph Stiglitz, among others.

Well, there are serious problems with both arguments 1 and 2. Argument 1 is based on two assumptions: (1) the economic situation will not deteriorate to such a degree that when the remaining stimulus funds are finally allocated, those funds, and the jobs they actually create, will be adequate to meet the gap in demand; and (2) if, in the event those funds are not adequate, additional funds can be requested from Congress.

Both of these assumptions will, unfortunately, likely be proven false: Assumption 1 is false because the gap in demand continues to widen (and the unemployment rate continues to increase), while the original stimulus projections were based on a peak unemployment of 9.0% in 2009, 8.7% in 2010, and 7.5% in 2011. However, as the adjusted June 2009 BLS report indicates, unemployment continues to rise and is currently at 9.5%. Furthermore, the worse the situation deteriorates, the more likely it becomes that this recession turns into a prolonged slump, perhaps akin to that of Japan in the 1990s, which is not easy or quick to recover from.

Assumption 2 (of argument 1) is by no means a given, and will be made increasingly more difficult given the potential efficacy and traction of argument 2 (above) and the looming 2010 midterm elections. As Paul Krugman wrote back in March of this year, an inadequate stimulus would pose political difficulties, in addition to its economic consequences. Opponents of President Obama's stimulus program, and of government intervention in the economy more generally, can stand up and say "I told you so!" Therefore, it would have been wiser and strategically more sensible--both politically and economically--to insist on a bigger package in March, rather than role the dice on a second, supplemental package at a time when both the economy and the administration's political standing has deteriorated.

Which brings us to argument 2, above, which is already claiming that Obama's economic policies have failed, despite only 3-4 months passing since the stimulus was originally passed, and only a fraction of its funds allocated. I don't have much to say specifically in regard to this argument, as it is almost entirely politically motivated and propagated in the absence of well-reasoned economic understanding. It flies in the face of economic history, including that of the 1930s, which may, before all is said and done, be viewed as the closest antecedent to the current crisis. The one comment I will make is that such views must be opposed and shown to be wrongheaded. It would be a colossal mistake to begin a process of debt reduction, budget balancing, and economic disengagement until the current crisis has subsided. To do so would be to repeat FDR's biggest blunder in which he was pressured into balancing the budget prematurely, even as the policies of the first four years of his administration began to bear fruit. As Christina Romer, chairwoman of President Obama's Council of Economic Advisers and a scholar of the Depression, writes in the Economist:

The recovery from the Depression is often described as slow because America did not return to full employment until after the outbreak of the second world war. But the truth is the recovery in the four years after Franklin Roosevelt took office in 1933 was incredibly rapid. Annual real GDP growth averaged over 9%. Unemployment fell from 25% to 14%. The second world war aside, the United States has never experienced such sustained, rapid growth.

However, that growth was halted by a second severe downturn in 1937-38, when unemployment surged again to 19% (see chart). The fundamental cause of this second recession was an unfortunate, and largely inadvertent, switch to contractionary fiscal and monetary policy. One source of the growth in 1936 was that Congress had overridden Mr Roosevelt’s veto and passed a large bonus for veterans of the first world war. In 1937, this fiscal stimulus disappeared. In addition, social-security taxes were collected for the first time. These factors reduced the deficit by roughly 2.5% of GDP, exerting significant contractionary pressure.

Therefore, it is becoming increasingly difficult to dismiss those claims made by the proponents of argument 3, above, in light of the continued deterioration in job numbers and growth. Additional stimulus may be necessary and should be fought for sooner, rather than later. Inflation is not what should be concerning policy makers at this juncture, as deflation is staring us in the face (see graph below). Debt reduction and budget balancing should be put on the back burner, as such policies would be currently counterproductive given the strain any increased and sharpened downturn would further put on the deficit. Paul Krugman hits the nail on the head in his latest column, which is, as always, a must read.

When in the Course of human events...

On July 4, 1776, fifty-six largely wealthy and prominent men signed a document that changed the course of human history drastically and radically. These men, many of whom were students of the Enlightenment and steeped in natural law philosophy, risked their "Lives, Fortunes, and sacred Honor," for a set of ideas whose time had finally arrived. The Declaration of Independence set in motion the ideas of liberty and unalienable, natural rights, that would soon not only forge a union of independent states in North America, but would set the Western world afire.

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. --That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, --That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness.

Happy 4th!

The Weekend Link (6/26 - 6/28)

Economist Paul Krugman lashes out against what he calls the "Great Ignorance" that is pervading his profession, that is, "the 'rediscovery' of old fallacies about deficit spending and interest rates, presented as if they were deep insights..." Krugman also links to a short piece he wrote "a long time ago" which outlines the crux of "real macroeconomics--the tradition that runs through Keynes and Hicks..."

Robert H. Frank, writing in The American Prospect, details what a "post-consumer prosperity" might look like.

Matthew Yglesias, writing for The American Prospect, argues that tax increases, even on the middle class, will be required to finance a long-term progressive agenda, despite Obama's campaign pledges to not raise taxes on the bottom 95 percentile.

Jonathan Cohn of The New Republic, argues that the public health insurance plan is a key element of reform, but not the only one. And here's a New Republic editorial making the case for the public plan.

Via Paul Krugman's blog, here's a look at average global temperatures since 1880. And speaking of climate change legislation, here is some analysis of the Waxman-Markey bill from Conor Clarke, projecting the bill's impact on the economy, and from The Economist magazine, describing the bill as "a bundle of compromises."

Nobel Laureate and Columbia University economist Joseph Stiglitz outlines the case for a global recovery to the current recession, arguing that short-sighted and uncoordinated policy is not suitable for the "most serious global downturn...of the post-Word War II era."

And we have much analysis of the growing national debt, structural deficits, and future fiscal prospects: Brad DeLong argues that policy in 2009-2010 should continue to focus on recession-fighting, only to give way to an agenda addressing the structural balance in 2011-2012. Ed Luce, writing for the Financial Times, disagrees, arguing that deficit reduction may become a top political priority with the 2010 mid-term elections looming. The Brookings Institute provides a thorough analysis of both the short-term and long-term outlooks (for summary, click here; for longer paper, click here). And via Brad DeLong, here are some charts offering historical perspective on the debt-to-GDP ratio. And finally, lest we forget, here's how we got here since 2001: two recessions, huge tax cuts, and increased military/war expenditure.

The Daily Link (6/24/09)

The Council of Economics Advisors outlines the "Economic Case for Health Care Reform."

Former Labor Secretary Robert Reich makes the case for a public insurance option.

Paul Starr, on the other hand, warns of potential unintended consequences of a public plan.

Atul Gawande, in The New Yorker, writes about the cost structure of the American health care system.

Economist Michael Mandel shows why the past decade has essentially been a "lost decade" in terms of private sector job growth.

Martin Wolf makes the case that strong incentives for risky investments and significant leverage helped facilitate the financial crisis, and the first step in reducing the likelihood of a repeat is to alter the incentive structure.

Quoted

"These arguments will come from the very people who denied that the economic recovery plan created any jobs. We have a very odd economic philosophy in Washington: It’s called weaponized Keynesianism. It is the view that the government does not create jobs when it funds the building of bridges or important research or retrains workers, but when it builds airplanes that are never going to be used in combat, that is of course economic salvation."

~Barney Frank (D - MA)

"Why would it drive private insurance out of business? If private insurers say that the marketplace provides the best quality health care; if they tell us that they’re offering a good deal, then why is it that the government, which they say can’t run anything, suddenly is going to drive them out of business? That’s not logical."

~President Obama on the public insurance plan option

The Daily Link (6/23/09)

Nate Silver, over at FiveThirtyEight.com, models the correlation between PAC dollars received by U.S. senators by private insurance companies, and the degree of support for a public health insurance option.

Jonathan Chait of the New Republic outlines "the Obama method."

Ezra Klein makes the case that the Obama administration is better off not directly taking control of the healthcare debate...at least not yet. He also links to his January 2008 essay detailing the lessons learned from the 1994 healthcare debacle.

Economists Barry Eichengreen and Kevin H. O'Rourke compare the trajectory of the current recession to that of the Great Depression of the 1930s, offering this revealing chart:

The Daily Link (6/22/09)

Paul Krugman asks why centrist Democratic senators are partying "like it's 1993."

Ezra Klein asks the following seemingly rhetorical question regarding the ongoing healthcare debate: "Are Republicans in this to preserve the healthy functioning of a competitive private market or preserve the profits of the currently dominant insurance companies?"

Martin Wolf explains the dangers of pulling back the fiscal and monetary lubricant too soon, with parallels from the 1930s and Japan in the 1990s.

And the NY Times looks at the Obama White House's approach to healthcare reform in the early goings.