Happy Friday

Just a few reasons why things are looking up for the U.S. Fiscal position (the largest single component of the American economy):

1) The economy is growing, jobs are being created, and tax receipts are growing as a result. Nearly 300,000 non-farm jobs were created in April. No one is saying employment levels are where they need to be, but they're trending in an encouraging direction. (http://www.bls.gov/news.release/empsit.nr0.htm)

2) Since February the federal government has been operating under Statutory Paygo, meaning any additional spending must be accompanied by an equal offset- it's the law. This combined with #1 will reduce the deficit. The President has also frozen all non-security discretionary spending for the next 3 years. This freeze is expected to reduce federal expenditures $1.1 trillion over the next 10 years. (http://www.whitehouse.gov/omb/budget/fy2011/assets/tables.pdf - Table 2 ; http://budget.house.gov/laws/CRS-stat-paygo.pdf)

3) Expiration of the Bush Tax Cuts. For individuals earning more than $200,000/year, rates will return to pre-cut rates- accounting for an estimated $678 billion over 10 years and further reducing the deficit gap. 39% of these cuts went to the 99th percentile of income earners, while the middle 20% of income earners recieved 8.5% (and under Obama will continue to). These cuts have caused the lowest level of federal tax collections as a share of GDP since 1950. When these temporary cuts are allowed to expire tax levels will not exceed those of the Reagan Administration. (http://www.cbpp.org/cms/index.cfm?fa=view&id=1811)

4) Healthcare reform. Officially this will reduce the deficit around $100 billion over the next decade of outyears and one $1 trillion the following decade (http://www.cbo.gov/ftpdocs/113xx/doc11355/hr4872.pdf). This is likely a very conservative scoring as it only accounts for direct cuts, not savings or efficiency gains, for example through the dozens of pilots it establishes to learn about cost control.

5) National Commission on Fiscal Responsibility and Reform (http://www.whitehouse.gov/the-press-office/executive-order-national-commission-fiscal-responsibility-and-reform). The President's Budget lays out a plan to cut the deficit in half by 2015, from 10% of GDP to 5%. The (very) long-term sustainable rate of deficit spending is equivalent to the economic growth rate, e.g. the ability to finance current borrowing with future growth in a non-zero sum fashion. The 50% reduction in the size of the deficit is an enormous accomplishment; the President's FY 2011 Budget released in February represented the largest reduction in the deficit in over 10 years. The previous Administration never proposed a budget that reduced the deficit, not one penny. Obama's budget reduces it over $2 trillion in the outyears, before throwing in the commission and likely the largest domestic policy reform in 50 years- healthcare.

Sit back and enjoy the show

There seemed to be at least two over-riding criticisms of the newly passed healthcare reform law:

1) It would not, contrary to official estimates, reduce the deficit, but rather add to it.

2) It would represent something more or less "un-American"- a significant expansion of government at the cost of free market choice and competition and a general ideological move towards socialism.

What I am perhaps most pleased about with this bill is that over the coming years, certainly the next 5-10 years, we can evaluate these claims with real world results and see who is right. We can test these claims, comparing Congressional estimates of cost with those of the Administration and the Wall Street Journal and Rush Limbaugh and the American Enterprise Institute and Brookings- and we can see who was most correct. Afterall, prejudging outcomes and assuming away complexity in favor of one sized fits all answers and ideology is anathema to science. So let's sit back and see the results of this experiment. These arguments will not linger abstractly out in the ether of public debate and controversy forever, with two sides eternally duking it out over fundamentally unproveable philosophical or moral questions (I'm sure more than a few come to mind). We will get hard data about how many more people get healthcare, on the rate of price growth, on the cost of these new mandatory government spending programs on the budget and tax rates, on the success and replicability of the 27 cost control and quality care pilots this bill establishes, on whether we remain a country of elections and predominantly privately produced and procured goods and services, or whether we become the new Venezuela. All of this, and much, much more, time will reveal.

For instance, the intent of these new pilots is to look for best practices, cost control measures, and general innovation in healthcare delivery. The point is to test new things for proof of concept, cutting funds for what doesn't work, and scaling up what does. Evidence based, pragmatic cost control measures are good ideas whether in corporate America or government. Many (potentially) good, cost-saving ideas are in this bill, and the potential savings weren't even priced into the budget estimates. Stuff like bundling payments across hospitals and outpatient services to reduce administrative costs and create greater negotiating leverage, paying hospitals with higher infection and readmission rates less, sending out undercover inspectors to look for waste and abuse, working on payment systems that reward quality of outcome and care over sheer volume (as is currently the case for the fee for service model) and clearly conveying the state of peer reviewed medical literature to practitioners in the field, so there is no ambiguity about the state of scientific knowledge on what works, and what is a waste, both of treatment and money. After all these assertions and claims that have been discussed the last 14 months during the genesis of this law, we will get to concretely see what savings and best practices come out of these 27 seperate case studies. For economists or researchers looking for good data sets and means to test null hypotheses, it's almost overwhelming to think of all the good analysis that could be done. Yet one thing is for sure, we know what healthcare costs today, we know how much waste there is, we know how many errors there are, we know how many people are covered- and now we are about to discover which way this law pushes all these indicators.

One could spend a great portion of her life reading criticisms and attacks of every aspect of this law (and even criticisms of things not in it!) from countless think tanks, research institutes, lobbies, and yes, gasbag bloggers such as myself. But what is so exciting about this historic piece of legislation, in addition to the potential to provide care for millions and root out inhumane abuses in the insurance industry and expand competition and choice- is that we will get to test these assertions very clearly. I just hope we keep score, and in 2020 if everyone takes for granted that kids can't be denied health coverage, or domestic abuse can't be classified as a preexisting condition, or a consumer isn't forced to buy into an oligopoly because the government now forces companies to post their plans side by side online to drive choice and innovation, or that healthcare costs are growing slightly above inflation rather than 250% of it- that we don't shrug this off as just the natural progression of things, as some inevitable outcome or industry innovation. No, like any good science experiment, we have been operating a good control scenario for about the last 50 years, and now we can compare it to the future. If these changes come about, we can make clear scientific arguments of attribution. Whichever side has it right, it will be a triumphant essay they pen in the National Review or Cato blog- an epic example of "told you so!" In other words, after 40 years of debate, it's finally down to the 4th quarter of a close contest, and we're getting closer to seeing who the winner is.

As a caveat, on the first two criticisms- deficit control and socialism- I would point out that this bill cuts $550 billion from Medicare in the next 10 years by eliminating 15 cents on the dollar of Medicare Part D (because it's 15% more expensive than public run plans and gets no better results). CEOs and turnaround private equity guys gets plaudits for this constantly, ruthelessly cutting waste and ineffeciency to force better results and make hard decisions. Oh, and in this case, it will also fulfill a promise the previous administration made to seniors about prescription drug coverage but didn't actually fund. But cutting medicare funding hardly seems like adding to the deficit to me, and curtailing the size of government payouts hardly seems like expanding government. Also, creating competitive transparent online exchanges, for customers to review and scrutinize plans, none of which will be government programs by the way, hardly seems like something that would be expected to increase prices, and hardly something that is socialist, in fact it seems like the essence of market based capitalism.

And from a behavioral economics standpoint, I've decided to take this new system for a spin, test out all my new government benefits by being a little clumsier here and there. JK

News

I started MyLastLecture.org - check it out, or don't. Hope it catches on like wild fire, not wildfire, like a fire, that is wild.

Also, regarding the current situation of healthcare reform legislation. Dammit. The votes aren't there in the Senate, so this means the House has to pass it, or as much of it as possible can be passed with a simple majority through the budget reconciliation process. This is the best method, because otherwise it will get pared down to a shell of itself. However, the Parlimentarian hasn't ruled yet on just how much of the bill could be passed this way. It only applies to spending or taxing, and many of the core programs (exchanges, eliminating heinous insurance company practices, setting up cost control pilots, Medicare Advisory Board) are not on budget. As is often the case in this life, the most important things are always both a blessing and a curse. These measures will likely save the most money (trillions, not to mention many lives), but because it doesn't dirctly spend money, it can't be considered through reconciliation. And all because of Kennedy's seat. The cruel cruel irony. Here's to good news out of the Parlimentarian's office.

Also, today J.D. Salinger died. From Catcher-

When I was all set to go, when I had my bags and all, I stood for a while next to the stairs and took a last look down that goddam corridor. I was sort of crying. I don't know why. I put my red hunting hat on, and turned the peak around to the back, the way I liked it, and then I yelled at the top of my goddam voice, "Sleep tight, ya morons!" I'll bet I woke up every bastard on the whole floor. Then I got the hell out. Some stupid guy had thrown peanut shells all over the stairs, and I damn near broke my crazy neck.

Anyway, I'm sort of glad they've got the atomic bomb invented. If there's ever another war, I'm going to sit right the hell on top of it. I'll volunteer for it, I swear to God I will.

Boy, when you're dead, they really fix you up. I hope to hell when I do die somebody has sense enough to just dump me in the river or something. Anything except sticking me in a goddam cemetery. People coming and putting a bunch of flowers on your stomach on Sunday, and all that crap. Who wants flowers when you're dead? Nobody.

Don't ever tell anybody anything. If you do, you start missing everybody

5 Pretty Convenient Truths about Healthcare

5) The government will not take over healthcare in the rather unlikely political event that a public option is passed. Four of the five bills out of committee have an individual mandate requirement that precludes individuals who are already insured, or offered insurance by their employer, from leaving for a public option. Additionally, there are strong tax incentives in place for employers to continue to offer competitive insurance. Adding one more public plan to the 2500 private ones in existence, and putting them on one central exchange for consumers to search, will definitionaly result in more competition and choice.

4) The cost curve must be bent. Medicare and Medicaid could be cash flow negative in 8 years. For true fiscal conservatives the most expensive thing government could do is continue on the present trajectory of healthcare spending growth (~1.5% above inflation) with no meaningful attempt at reform. Denying or obfuscating on the need for reform is the surest way to continue to grow the public debt. By not insisting on a public option, President Obama has wisely left negotiating room for moderate conservatives not ideologically opposed to reform.

3) There is reason to believe the government could run a pretty good health benefits plan. When private insurers make money they pass a significant portion onto their shareholders and (often a larger amount) to their executives. However because the government has no profit margin, any net income the government made would go right back into Treasury’s coffers to either provide more or cheaper insurance, or pay down the debt. Government already runs three of the largest insurance systems in the world in Medicare, Medicaid and Social Security – and you haven’t heard a single opponent of healthcare reform suggest repealing any of these (a classic inter-temporal allocation problem – people love the money already committed to them, but loathe the idea of spending future money for the same improvement). Additionally, the Federal government has unique comparative advantage in negotiating lower drug and procedure costs by virtue of its size. This is one reason why Senator Baucus’ attempt at political compromise with non-profit coops (in lieu of a public plan) is well intentioned but off the mark- these would be run at the State level and miss the huge economies of scale of a Federal plan.

2) For something as important and scientific as medicine and healthcare, there should be basic best practices established. The fact that there is such a disparity in healthcare utilization across both hospitals and regions, procedures for identical conditions (like $10,000 radiation versus $200,000 proton radiation with the same success rate for prostate cancer), and a wide divergence in collection rates is definitionaly inefficient. There can be only one best way. Creating comparative effectiveness research centers and expert panels to guide technical decision-making can improve both outcomes and reduce costs.

1) The majority of opposition to reform doesn’t come from people who actually disagree with true reform. Health is one of the most universal and personal concepts imaginable, and it is understandable that people who have good existing coverage would be intensely resistant to change. But herein lies a tremendous opportunity to explain that reducing cost growth by opening up competition is not the same as denying coverage, in fact it’s the opposite. Should be a good reason to tune in tonight.

A Housecall for Incoming Health and Human Services Secretary Daschle

HHS Secretary-designate Daschle will have a lot on his plate. He will oversee the largest federal agency, administering everything from Medicare to the FDA to global health initiatives, at a time when his boss has promised massive reforms in healthcare. It’s going to be a tough job. To kick things off, Daschle has said he plans to embark on a discussion of healthcare reform with households all across America, a sort of big-tent experiment in brainstorming. This is a genuine and admirable goal, if not hard to understand coming from a man who has spent the last 30 years visiting people as a professional politician. Both Obama and Daschle have literally been on the road for years, and they are not short on (often very personal) stories about healthcare in America. But how could a couple more months of it hurt? I think Secretary Daschle should focus on three key areas if he hopes to simultaneously improve the quality of care Americans receive, and the number who receive it.

One, he needs to contain costs. Healthcare expenses are growing far faster than the revenue base is expanding and at the current trajectory, non-discretionary spending will eat up the entire federal budget in about 25 years. A good model of controlling prices can be found in Japan, where they have half the per capita healthcare costs and twice the per capita utilization rates as Americans. That sounds good. In Japan the government has sole purchasing power of pharmaceuticals and healthcare procedures. They use their massive negotiating power to exert downward price pressure on everything from the cost of antibiotics to the cost of an EKG. Private insurance providers can still design their own policies and set their own prices, but the basic inputs that go into those plans are purchased in bulk by the entire government. The same concept is already pervasive in the private sector, where a few key buyers negotiate entire supply chains. Secretary Daschle’s HHS would be a great place to house the Office of Negotiation, where they set up 5-year forward purchase agreements on the largest and most common drugs and procedures.

Second, just like decoupling in the electric utilities sector, there needs to be decoupling in the medical sector. Utilities over the last decade or so have realized that electric providers in a normal market have no incentive to be efficient; in fact they have an incentive for their customers to use as much energy as possible because it translates into larger profits. This results in excess energy usage and general inefficiency. This has been more or less solved via utilities taking a percent or two out of monthly electric bills and redistributing it based on a formulaic measure of a company’s energy efficiency. Suddenly energy efficiency is monetized and energy providers start paying attention. The same basic idea should be established in the medical industry, where doctors, particularly specialists, have an incentive to carry out, and charge for, expensive procedures. Daschle’s HHS should charge a small fee to existing healthcare providers (maybe .5%) and reward medical providers who are particularly efficient in their utilization. This does not mean doctors will be rewarded for not doing expensive procedures for sick patients who need them; it means they will have an incentive not to do procedures just because they are profitable (which is perfectly rationale). HHS could measure certain key and widely available statistics, like referral and utilization rates and costs per treatment at the institutional level, and then reward those institutions accordingly, decoupling profit from wasteful overutilization.

And three, if Obama and Daschle really want universal coverage they will have to subsidize about the lowest quintile of American households. This is a decision Americans will ultimately have to make, but controlling prices and rewarding efficiency will still not be enough to provide universal coverage. Obama proposes instituting a healthcare tax on employers who do not contribute to their employees’ coverage as a means to fund subsidy programs. This seems like a good idea, as it preserves price parity across the market, as every firm will have to meet the same basic operating costs (chipping in to provide basic healthcare and not free-riding on firms that already do). Revenues here could be distributed by Daschle’s HHS based on a family’s combined income level to provide basic coverage for the uninsured.

I don’t think Secretary Daschle will be knocking on my door anytime soon, but I hope that once he hears from all these households that he starts getting specific soon. Generic goals or hollow bromides have gotten us nowhere with healthcare reform in the past, and today’s no different. Healthcare reform will be a long difficult debate, and policymakers should start working on the nuts and bolts now. None of these ideas is easy or particularly desirable, but neither are higher taxes in the future for worse benefits.