The High Cost of U.S. Health Care and What To Do About It

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The United States spends 17.2% of GDP on healthcare costs, public and private, almost twice as much as any other developed country, and this percentage is gradually increasing.  In today’s New York Times there is a good discussion about these rising costs (see below).
Capture1My recent post, “Fixing Obamacare Rather Than Replacing It,” discusses a comprehensive new healthcare reform proposal by Avik Roy of the Manhattan Institute.  Mr. Roy’s plan both expands health insurance coverage beyond ACA levels as well as reining in the huge costs of healthcare. As Mr. Roy says “Among the industrialized member countries of the OECD, the average hospital stay cost $6,222 and lasted 7.7 days in 2009.  In the United States, the average hospital stay cost $18,142, despite lasting only 4.9 days.  In other words, the average daily cost of a hospital stay in the U.S. was 4.6 times the OECD average.”  Mr. Roy goes on to show that it is hospital system consolidation which is especially responsible for driving up the cost of health insurance.
CaptureThere is a clear example of this situation in Omaha NE where I live.  There are three hospital systems here: Catholic Health Initiatives, the Nebraska Health System and the Methodist Health System.  As stated by the CEO of Blue Cross and Blue Shield of Nebraska in the Omaha World Herald on August 28, 2014, “Our experience in addressing health care costs is precisely what led us to our current negotiations with Denver-based Catholic Health Initiatives.  CHI’s Alegent Creighton Health network of hospitals and physicians charges our members up to 30 percent more than other providers in Omaha for the same services. … These numbers reinforce a simple truth: We cannot allow one provider group to charge our members more for the same services they can receive elsewhere.”
We are fortunate in Omaha to have a choice of three different hospital systems and an insurance company with sufficient clout and integrity to fight price gouging by one of these systems.  But not every community is as fortunate as Omaha in this respect.  This is just one simple example of why cost control needs to be at the center of healthcare reform.

Why Medicare Needs to Be Reformed and How to Do It

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My last post, “Fixing Obamacare Rather Than Repealing It,”presents a comprehensive new healthcare reform proposal by Avik Roy of the Manhattan Institute.  His plan has the ambitious goal of expanding health insurance coverage beyond ACA levels and at the same time achieving a huge deficit reduction compared with current CBO projections.
Capture1Mr. Roy points out, for example, that for all of Medicare’s huge cost, $635 billion in 2014 alone, it does not provide catastrophic coverage against long-term hospitalizations.  The supplemental insurance program, “Medigap,” accelerates Medicare’s wasteful spending by wiping out cost-sharing features such as co-pays and deductibles.  Medigap has proven hard to change because it generates huge royalty fees for the AARP, $458 million in 2011, for example.  For all of these reasons and others, Medicare needs big changes.
The core Medicare reform of Mr. Roy’s Universal Exchange Plan is to increase the eligibility age by four months per year forever, beginning in 2016.  This means that current seniors can stay in the existing Medicare program but that future retirees will remain in the universal state-based exchanges for an increasing period of time.  This is estimated to save $6.5 trillion over 30 years.
Additional features of the new Medicare program are:

  • Reduce Medicare subsidies for hospital’s uncollected bills saving $4 billion per year.
  • Exempt Medicare Part C and Part D from state and local taxes.
  • Combine Part A and Part B into a single insurance product saving $30 billion per year by reforming Medigap.
  • Introduce additional means-testing into Part D premiums.
  • Reduce waste, fraud and abuse systematically, saving approximately $50 billion per year.
  • Restore the ability of seniors to opt out of Medicare.
  • Restore the pre-ACA tax subsidy for employer-sponsored retiree coverage (to encourage more employers to sponsor retiree health benefits).
  • Address the physician shortage through additional medical education funding costing $6 billion per year.

Medicare spends 30% of its overall budget on end-of-life care (for the last six months of life).  The reforms suggested by Mr. Roy will allow it to operate much more efficiently and thereby put a greater focus on the end-of-life care which is its fundamental purpose.

Fixing Obamacare Rather Than Repealing It

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The Manhattan Institute’s Avik Roy has just released a comprehensive and very impressive new study of the American healthcare system, “Transcending Obamacare: A Patient-Centered Plan for Near-Universal Coverage and Permanent Fiscal Solvency.”  By 2025 it will increase insurance coverage by 12.1 million above Affordable Care Act levels.  It will at the same time achieve a 30 year deficit reduction of $8 trillion compared to current CBO projections (see chart below).
CaptureMore specifically Mr. Roy’s new Universal Exchange Plan will

  • Expand coverage well above ACA levels without an individual mandate
  • Improve the quality of coverage and care for low-income Americans
  • Make all U.S. healthcare entitlement programs permanently solvent
  • Reduce the federal deficit without raising taxes
  • Reduce the cost of health insurance

The five core elements of Mr. Roy’s Plan are:

  • Exchange Reform. The ACA’s individual mandate is repealed. The Plan restores the primacy of state-based exchanges and insurance regulation. Insurers are encouraged to design policies of high quality tailored to individual need. By lowering the cost of insurance for younger and healthier individuals, the Plan will expand coverage without a mandate.
  • Employer-sponsored Insurance Reform. The employer mandate is repealed, thereby offering employers a wider range of options for subsidizing employees insurance.
  • Medicaid Reform. The Plan migrates the Medicaid acute-care population onto the reformed state-based exchanges with 100% federal funding. The Plan returns to the states full financial responsibility for the Medicaid long-term care population.
  • Medicare Reform. The Plan gradually raises the Medicare eligibility age by four months each year forever. The end result is to preserve Medicare for current retirees and to maintain future retirees on their exchange-based or employer sponsored health plans.
  • Other Reforms. The Plan tackles the growing problems of hospital system monopolies and malpractice litigation and also accelerates the pace of medical innovation by reforming the Food and Drug Administration.

These reform proposals are amazingly ambitious and far reaching in scope.  How can they possibly be achieved?  Stay tuned!

Another Voice for Abolishing the Corporate Income Tax: Sheila Bair

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My last post “Real Tax Reform: Abolish the Corporate Income Tax,” gives six substantial reasons for abolishing the U.S. corporate income tax.  As shown in the table below, many American companies are keeping large percentages of their total cash balances overseas in order to avoid paying the very high U.S. corporate tax rate of 35% on these funds.
Capture1Sheila Bair, former chair of the Federal Deposit Insurance Corporation from 2006 – 2011, has recently endorsed the same idea in “Why Getting Rid of the Corporate Income Tax Makes Sense”.  Ms. Bair’s recent book, “Bull by the Horns,” is one of the best books written about the financial crisis.
Ms. Bair makes many of the same points as in my last post including the suggestion that in return for totally eliminating this tax, both dividends and capital gains should be taxed at the same (higher) rates as for ordinary earned income.  She points out that applying ordinary tax rates to realized investment income would make up only about $90 billion of the approximately $300 billion annual cost of eliminating the corporate tax.  She suggests that the remaining $210 billion could be raised by implementing Martin Feldstein’s proposal to cap individual tax deductions, excluding for charitable contributions, at 2% of adjusted gross income.
As she says, “We are on an unsustainable path.  Caught between eroding corporate revenue on one side and low tax rates for wealthy investors on the other, middle and upper-income wage earners are being squeezed – and there are only so many of us.  At some point we might start thinking about moving too.”
Keep in mind the fundamental reason for this proposal: to incentivize U.S. companies to bring their foreign earnings back home for reinvestment and distribution of profits to shareholders (who will then be taxed on this income).  This will give our economy the large and permanent boost which it so badly needs to regain its former vigor.

Real Tax Reform: Abolish the Corporate Income Tax

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Several large U.S. corporations have recently announced that they are planning to move their headquarters to a low tax company such as Ireland or Great Britain, in order to reduce the high corporate taxes which they now have to pay. Many observers agree that the best way to address this problem is to lower the corporate tax rate down to an internationally competitive rate of about 20% to 25%.  Such a rate cut would be paid for by closing the loopholes and deductions which many corporations now enjoy.
CaptureThe Business Insider reporter, Danny Vinik, makes a very good argument for going further and completely eliminating the corporate income tax for the following reasons:

  • Corporate taxes don’t collect that much revenue. As shown above the revenue from this tax has dropped to about 2% of GDP which is about $300 billion at the present time. This is roughly 10% of total annual federal tax revenue.
  • Tax capital gains and dividends at the same rate as earned income. This would make up for the lost revenue and is justified because there would no longer be double taxation of corporate earnings.
  • The corporate tax is not progressive. It is now paid for by both workers (with lower wages) and shareholders. Eliminating this tax (and replacing it with higher taxes on dividends and capital gains) makes the tax more progressive.
  • Corporations waste huge amounts of money trying to reduce their tax bill.  What they now spend on tax lawyers and lobbyists could be put to more productive use.
  • The current system disadvantages new businesses. It’s the old firms which have collected all the deductions. New firms start out paying the full 35% rate which puts them at a large competitive disadvantage.
  • It will make our financial system safer. Since debt payments are tax deductible and equity financing is not, debt financing is currently incentivized. The elimination of the corporate tax would end this preference of debt over equity.

Taking this action would not only have all of these benefits, it would make the U.S. the most desirable place in the world to locate a business.  We would experience a huge economic boom, creating millions of new jobs.  It would end our present economic funk and put us back on a rapid growth trajectory.   What are we waiting for!

Frustration Has Deep Economic Roots

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My last two posts have dealt with the racial unrest in Ferguson MO and how American society should respond to the basic underlying causes.  In particular Omaha NE where I live is in the process of setting up a large scale pilot project in early childhood education to better prepare children from low-income families to succeed in school.
The St. Louis Post Dispatch had a recent article “Frustration in North County Has Deep Economic Roots” pointing out, for example, that unemployment for young black men in St. Louis is 47% compared to 16% for young white men.  Said the author, David Nicklaus, “If police tactics were the spark which set off the explosion in Ferguson this week, then poverty and hopelessness were the tinder.  Those in charge of the police can begin the healing process, but it won’t be complete unless we tackle the deeper economic issues too.”
CaptureThe Equality of Opportunity Project at Harvard University has published a chart (above) showing the degree of upward mobility for children born into low-income families in different parts of the country.  Omaha ranks much higher than St. Louis but not as high as it could.  The current unemployment rate in Omaha is 3.8% which essentially represents full employment.  This means that there are plenty of jobs available for well qualified applicants.
Capture1However the above chart shows the extent of the achievement gap in metro Omaha between middle class children and children living in poverty.  It is already substantial for fourth grade reading proficiency and becomes much worse in the higher grades. Conclusion:  in Omaha NE the root cause of lack of economic opportunity for racial minorities living in poverty is not the availability of jobs but the inadequate educational achievement to hold a good job.
Omaha is a prosperous community in a prosperous state.  But it could do a better job of educating children living in poverty.

Can Omaha Avoid Having Its Own “Ferguson”?

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As racial tensions begin to ease in Ferguson MO, it is natural to inquire about the root causes of this turmoil and how to avoid future recurrences.  Of course, police brutality and public distrust were the triggering events and need to be thoroughly investigated by the proper authorities.
CaptureBut the problem goes deeper than this.  The above chart from Think Progress  demonstrates the very high unemployment rate among black teenagers.  Is it surprising that idle teenagers get into trouble?
Omaha NE, where I live, is not immune to these problems.  In 2011 Nebraska had the worst black homicide rate in the nation at 34.4 per 100,000 population, just ahead of Missouri with a rate of 33.4.  Black unemployment in Omaha is estimated to be 20% compared with Omaha’s overall unemployment rate of 3.8%.
The problem goes still deeper yet.  To be employable, black youths need to become educated, i.e. to stay in school and remain on track to graduate.  This, in turn, means that they need to succeed in school from the very beginning, for example, by being proficient in reading at the end of third grade.
My last post, “Responsibility Goes Along With the “Good Life,” describes steps that are now getting under way in Omaha to turn around this whole vicious downward spiral of destructive black teenage behavior.  The Buffett Early Childhood Institute has put together a long range plan to work with children in poverty from birth to age eight to make sure that they are prepared to succeed in school. It is funded by an annual property tax levy of $5 per $100,000 of assessed valuation throughout the two county metropolitan Omaha area.  With such a local funding source, the program will inevitably receive much public attention.
Nebraska is aware that not all of its residents share in the “Good Life” and is making a conscious effort to find its own solution for a very serious national problem.

Responsibility Goes Along With the “Good Life”

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The New York Times recently compiled a map rating each of the 3,135 counties in the U.S. according to the following six factors:  educational attainment, median household income, unemployment rate, disability rate, life expectancy and obesity.  As can be seen (below) the whole state of Nebraska (motto: the Good Life) comes out very well in this rating scheme.
CaptureOn the other hand, Omaha has the highest black child poverty rate in the country at 59.4% (Omaha World Herald (4/15/2007)).  Partly for this reason the Nebraska Legislature established the Learning Community of Douglas and Sarpy Counties in 2008 whose purpose is to close the academic achievement gap between middle class and low-income students in the Omaha metro area.
Just a few days ago the Learning Community Coordinating Council approved an early childhood education plan developed by the Superintendents of the 11 Omaha area school districts to help children in poverty in the metro area.  It will cost about $2.5 million per year and will fund 29.5 full-time equivalent positions.  The plan will be managed by the newly established Buffett Early Childhood Institute in Omaha.  The increase in the property tax throughout the two county area to support this program will amount to $5 per year for the owner of a $100,000 house.
It is quite appropriate for an overall wealthy community like Omaha in a very well off state like Nebraska to pitch in, in this way, to help out its less fortunate residents.  It represents an example of how state and local governments can and should step in and take more responsibility for addressing their own problems without help from the federal government which is broke and needs to cut back on what it does.
If the Early Childhood Education plan lives up to its high expectations (as I believe it will), it is likely to receive much national attention and will become a model for other parts of the country.  Nebraskans should be proud of supporting such a forward looking initiative!

Barack Obama vs Paul Ryan: Who Is Moving Us in the Right Direction?

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“If you give a man a fish you feed him for a day.  If you teach a man to fish you feed him for a lifetime.”
Chinese Proverb

Several weeks ago my post, “How to Improve America’s Welfare System,” described a new proposal from the House Budget Committee (Chair, Paul Ryan) to let selected states experiment in consolidating separate federal programs such as SNAP, TANF, child-care and housing assistance programs, into a new composite Opportunity Grant Program.  The idea is to let participating states choose qualified providers who would then be held accountable for moving people off of assistance, out of poverty and into productive employment.
CaptureA recent report from the Tax Foundation compares what families pay in taxes with what they receive in government benefits.  In 2010, 60% of American families (with incomes up to $86,000) received more in federal benefits than they paid in federal taxes.  However in 2012, this percentage grew to 70% (those families with incomes up to $109,000).  In other words, the trend under Obama is for more people to be net receivers of benefits than net payers of taxes. There are two basic problems with this trend towards more and more benefits for more and more people:

  • As it stands right now, we’re making people more dependent on government programs. Instead we should be helping them become more independent and more capable of supporting themselves on their own. This would improve their quality of life.
  • Our federal government is spending way too much money and not collecting enough tax revenue to pay the bills. According to report after report from the Congressional Budget Office, the trajectory of growing debt is getting much worse and the problem will become harder and harder to rectify as we continue down this path.

My natural inclination is to be optimistic that our political process will respond to this bleak current path we’re on and that things will be turned around before we have another financial crisis.  But it is easy to imagine a course of events where this does not happen.
It’s clear what we need to do but how will this get done?

 

The Big Picture on Debt Part IV The Full Model

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For the past week I have been discussing different aspects of our alarming debt problem as vividly illustrated in a recent report from the Congressional Budget Office  (see chart below).  My last post discusses what I call the Buffett Model:  G > D, meaning that as long as nominal growth G (real growth plus inflation) is greater than the deficit D, then the accumulated debt will decrease as a percentage of GDP and the debt is said to be “stabilized”.  This, of course, is what has happened in the U.S. historically after all of our major wars and especially after WWII (see below).  The problem is that our current situation in 2014 appears much bleaker going forward because the debt is projected (by CBO) to just keep on growing indefinitely.
CaptureToday I look at a broader model, the so-called BRITS model:  R + I > (S – T) + B   where

  • B = borrowing costs
  • R = real growth
  • I = inflation
  • T = taxes
  • S = spending.

The BRITS model reduces to the Buffett model by letting G = R + I and D = (S – T) + B.  The value of this more general model is to show the relationship between all five of these important variables.  To meet the objective of stabilizing debt, according to this intuitive model, we should increase both R and I and decrease S – T and B.
The Federal Reserve is involved by keeping B as low as possible and making sure that I is large enough (but not too large or other problems will occur).  Congress can help by cutting spending or raising taxes but, of course, both of these actions are hard to do politically.
If real growth R is high enough then the desired inequality will hold and debt will be stabilized.  But how is this accomplished?  The Fed has been trying to increase growth through quantitative easing but it’s not working very well.  Many economists think that it would be more helpful for Congress to implement broad based tax reform, whereby tax rates are lowered and loopholes and deductions are closed in a revenue neutral manner so that overall tax revenue remains the same.  But nobody wants to lose their own deductions so this is hard to do.
CaptureAs much as faster growth will help, it is still critical for Congress to get spending under control.  The above chart from the Heritage Foundation shows that under current trends by 2030 federal spending will have increased so much that all federal tax revenue will be spent on just entitlements and interest payments alone!  Since this is unrealistic, some sort of a major new crisis is likely to occur before 2030!
Conclusion: The BRITS model helps to understand the complexity of our debt problem and some of the steps that need to be taken to alleviate it.  I will return to it in the future.