A Broadband Free Lunch?

(HT to the Drudge Report)  The Federal Communications Commission is considering a plan to allocate spectrum to free or very low cost broadband Internet service nationwide ("U.S. considers some free wireless broadband service").  The Reuters article suggests that the provision of this service is some sort of free lunch by not mentioning tradeoffs.

WASHINGTON (Reuters) – U.S. regulators may dedicate spectrum to free wireless Internet service for some Americans to increase affordable broadband service nationwide, the Federal Communications Commission said on Tuesday.

The FCC provided few details about how it would carry out such a plan and who would qualify, but will make a recommendation under the National Broadband Plan set for release next week. The agency will determine details later.

One way of making broadband more affordable is to "consider use of spectrum for a free or a very low cost wireless broadband service," the FCC said in a statement.

What is the tradeoff?  At a time of imposing deficits, the FCC could auction off the spectrum to the highest bidders lowering the deficit.  Companies with winning bids value the spectrum more presumably because they can repackage it and sell services to end users.  One function of markets is to allocate goods and services to those who value it most.  An auction achieves that goal but a government give away does not.  There is not such thing as a free lunch and this lunch is paid for by taxpayers and consumers who would be happy to buy products utilizing the spectrum that the government plans to give away.  
Permanent link
Read more!

Sebelius Plays Two Political Tricks

Last Friday in "A Health-Coverage Tax and Its Burden" I demonstrated that the burden of a tax placed on restaurant owners would be shared between patrons and the owners in the short-run, and exclusively by the patrons in the long-run.  I also claimed that politicians frequently claim that taxes placed on business will not affect employees or consumers.  Two days later Kathleen Sebelius, the Secretary of Health and Human Services, added evidence to my claim in an interview with David Gregory on Meet the Press in which she stated that it is insurance companies will pay the tax on "gold-plated or Cadillac plans."  To give context to her statement I have included the question by Gregory and her response with the pertinent statement highlighted.   

GREGORY: I want to go to just a couple of issues. One has to do with how this gets paid for. That is a tax, an excise tax on so called gold-plated or Cadillac plans. But in the Senate bill that's been put off until 2018.

And the reasonable question comes up which is, do you really think a future Congress which will be under a lot of pressure not to raise $1 trillion worth of taxes, is going to withstand that pressure, or are you going to be left where -- because this Congress won't raise the tax now, they're going to put it off to 2018 so you're going to have all of the spending and not get any of the savings until 2018. Isn't that unrealistic?

SEBELIUS: I think two things happen right away with the way this is designed. First of all, it puts insurance companies who pay the tax ultimately on notice that this is coming. And they can begin to change the kind of policies that are in the market.

But what we want to do is change insurance company behavior which hasn't been very strategic in terms of cutting costs. And in fact, as the Goldman analyst said they are driving up cost, they have a market strategy that they are willing to dump customers and continue to raise costs; so changing their behavior, putting them on notice that this is coming.

Besides claiming consumers and taxpayers will not share the burden of taxes on business, politicians also like to find enemies to justify actions.  Voters should not allow politicians to scapegoat insurance companies; they are no more or less moral than other businesses which also seek profits or consumers who attempt to get the most out of every dollar spent.  Creating enemies out of whole cloth increases tension between consumers and business and undermines business confidence.   

Three questions come to mind.  First, why do we need a complete overhaul of health care if a simple change in tax structure will alter incentives of insurance companies and consumer incentives as well?  While I don't support an overhaul of the health care system, I do support equal tax treatment of income used to purchase health care through employee provided plans and privately purchased plans as I wrote in the above linked post and here, but why limit taxes to these plans?  Wouldn't a broader based tax further alter insurance company and consumer behavior?  
Read more!

A Health-Coverage Tax and Its Burden

Ed Perkins, a travel writer for the Chicago Tribune, sniffs out a scam but I believe attributes it to the wrong party in "New charge on dinner tab is in bad taste."  Perkins believes that restaurateurs are scamming customers by adding a charge to their bill to cover the new tax on owners for the "Healthy San Francisco" health-coverage system.  I agree that someone is running a scam, but it is politicians who sold the tax as a new business tax that was somehow independent of prices consumers pay.  The restaurants are engaging in a political protest and economic education.  Perkins writes 

Nothing succeeds in the travel industry like a bad idea. The latest hidden mandatory add-on is a "health" charge added to restaurant bills. As far as I know, this scam cropped up first in San Francisco, but you can count on it to spread.

The rationale for this one is to cover the employers' mandatory contribution to the City's "Healthy San Francisco" health-coverage system. The charge actually is levied on employers, but at least some restaurants are adding a few dollars or percentage points to each customer's bill to cover this charge.

The economic impact of the tax is relatively straight forward involving three steps.  First, San Francisco restaurants become somewhat less competitive losing a little business to restaurants in surrounding communities. 


I will explain the second step with a graph.  The numbers are fictional but the direction of the movement of equilibrium prices and quantities are predicted by widely accepted economic theory.  As pictured in the above graph, the original equilibrium before the tax results in an equilibrium price of $22.50 dollars per meal with 32,500 meals per week consumed.  The city government imposed a tax of $5.00 per meal.  The restaurateurs added the tax to their cost structure which helped determine their supply of meals.  Supply shifted inward from S1 to S2.  The vertical distance between the two supply curves is the $5.00 tax.  The new equilibrium shown by the intersection of S2 and demand is at a price of $25.00 per meal with 27,500 meals per week consumed.  Consumers now pay $2.50 more per meal than they paid prior to the tax.  That is their burden of the new tax.  The restaurateurs receive $25.00 per meal but must subtract out the $5.00 tax.  Net the tax, they receive $20.00 per meal, $2.50 less than they received prior to the tax.  In my simple model, the burden of the tax is shared evenly between the restaurateurs and their consumers.



The long-run outcome shifts the burden to the tax entirely or almost entirely to the consumer.  This is because restaurants compete in something close to a perfectly competitive market.  As they adapt to new costs, including the tax, their supply curves becomes perfectly elastic, or something approximating a perfectly elastic.  Without the tax, the long-run equilibrium price was $22.50 per meal as determined by the intersection of demand and S1.  With the tax the new equilibrium is at $27.50 per meal as determined by the intersection of demand and S2.  The consumer pays $27.50 per meal and the restaurants receive $22.50, the price they received before the tax.  But the restaurateurs still have good reason to oppose the new tax.  Prior to the tax, they were selling 32,500 meals per week, after the tax, sales fall to 22,500. 

I did not pay attention to the political debate surrounding the implementation of the health-coverage tax, and I am assuming that politicians used an age old tactic of telling consumers that a tax will be paid for business and not them.  Maybe politicians are more honest in San Francisco.  If my assumption is incorrect, I apologize to these politicians.   
Read more!

Fever on the Health Care Bureaucracy

A guest, Fever, wrote in a comment titled, "No new bureaucracy will be necessary"

I don't care which cost savings idea you decide to back, if you create a massive new entitlement there will be bureaucracy and the entitlement will come at an additional cost. Furthermore, the reason the Democrats won't support your tax plan is because the people that pay out-of-pocket for healthcare are rich.

I thank Fever at starvethemachine.net for the comment and acknowledge some common ground: we both want a smaller government.  He wants to starve the machine and I would like to see it at least skip a few meals. 
As in my previous post, I am attaching a proviso to remarks.  My information source is the governor of Indiana who instituted the plan and his presentation of the program may be biased, but if his information is approximately correct, I stick by my statement that no new bureaucracy will be necessary to offer health savings accounts to all workers as a optional replacement of traditional preferred provider plans, Medicare and Medicaid.  These bureaucracies already exist and Indiana's experience demonstrates that it is less expensive to provide health care and manage payments with health savings accounts than traditional preferred provider plans.  In 2010, the state will save $20,000 or about $950 per state worker enrolled in a health savings account (70% of 30,000).  Health care costs are growing faster than the rate of inflation elsewhere.

A health savings account gives the insured a financial interest in rationally reducing costs as demonstrated by the experiences of Indiana state workers.  Comparing the gradual replacement of Medicare and Medicaid with health savings accounts to current reforms before Congress is a no brainer.  I trust people to make better decisions about their health care than a government committee.  I also trust people to spend their money more carefully than the government would spend it for them.  The real beauty of markets is that health care providers will adapt products to price conscious consumers. 

Should the government expand health care insurance to cover every citizen?  Given the massive size of the deficit and national debt, and the projected increase in these accounts due to unfunded government liabilities, I believe this is an odd time to ask this question.  Let's try to control costs before we increase enrollment. 
Read more!

Llosa on Paulson and the Fear Factor

Alvaro Vargas Llosa of the Independent Institute reviewed former Treasury Secretary Henry Paulson's memoirs, "On the Brink," on the bursting of the housing bubble, the ensuing financial crisis, and government response in, "Paulson and the Fear Factor."  I quote a three paragraphs of his insightful review.  The remaining review is very much worth the time and effort to read.

WASHINGTON—There is a moment in former Treasury Secretary Henry Paulson’s memoirs when—during a Capitol Hill discussion over a financial rescue plan—he succumbs to stress and suffers an attack of dry heaves in front of a U.S. senator.

This episode is symbolic of what was happening in the country—the panicked spasms of government action to save big banks from going under that Paulson narrates in On the Brink, his inside account of the U.S. financial catastrophe. It is punctuated with episodes of fear; at one point he tells his wife: “Everybody is looking to me, and I don’t have the answer. I am really scared.” The entire government was scared. The result was that between the rescue of Bear Sterns in March 2008 and the rescue of the auto companies in December of that year, an array of bailouts, takeovers and money-pumping acts of desperation gave the U.S. government near-dictatorial control over much of the world’s foremost economy.

We think of statism as born out of altruism or megalomania. But here a third cause transpired: naked, primeval fear. The notion that people could be left to sort themselves out in the biggest financial crisis since the 1930s was terrifying even for Paulson, a true believer in free markets who keeps repeating in his book that he disliked what he was doing. The fear was so overpowering that Paulson, his colleagues and Wall Street decided to put unconditional faith in the very institution, the federal government, that the author tells us was responsible for the conditions under which the housing bubble occurred: easy money, political incentives for homeownership and regulatory incompetence.

Permanent Link
Read more!

Indiana's Health Savings Accounts

I have often expressed the opinion that much of our nation's high cost for health care is the result of bad tax policy that allows taxpayers to make tax free payments for health care through an employer provided health care plan but forces them to pay taxes on out-of-pocket expenses for the same services(see here or here).  People rationally responded to incentives and made payments through their group plans.  As out-of-pocket expenses fell, consumers paid less attention to price. 

Employees also have little incentive to minimize health care payments made through their employers.  In essence, the group plan adds up all health care purchases made by members of the group, divides the sum by the number of members of the group, and charges each member the quotient.  The third party payment system through a group plan turns medical expenditures into a public good which theory tells us is overused and underfunded.  As an example, if 100 people belonged to a group that ran up an annual bill of $240,000, each member would be charged $2,400 ($240,000/100).  Suppose an average member of the group who ran up a medical tab of $2,400 this year were able to cut expenses in half the next, but everybody else maintained their original expenditures.  The frugal group member would decrease group expenditures by $1,200 or $12 per member per year.  Why would anyone cut their annual health care expenditures by $1,200 for a $12 savings?  
Mitch Daniels, the governor of Indiana, implemented health savings accounts that restore individual incentives to limit medical expenditures.  He describes the plan and its consequences in "Hoosiers and Health Savings Accounts," which was published in the Wall Street Journal. 

When I was elected governor of Indiana five years ago, I asked that a consumer-directed health insurance option, or Health Savings Account (HSA), be added to the conventional plans then available to state employees. I thought this additional choice might work well for at least a few of my co-workers, and in the first year some 4% of us signed up for it.

In Indiana's HSA, the state deposits $2,750 per year into an account controlled by the employee, out of which he pays all his health bills. Indiana covers the premium for the plan. The intent is that participants will become more cost-conscious and careful about overpayment or overutilization.

Unused funds in the account—to date some $30 million or about $2,000 per employee and growing fast—are the worker's permanent property. For the very small number of employees (about 6% last year) who use their entire account balance, the state shares further health costs up to an out-of-pocket maximum of $8,000, after which the employee is completely protected.

Because the plan is elective, it will only be chosen if it is better for state workers than alternatives.  Daniels writes

The HSA option has proven highly popular. This year, over 70% of our 30,000 Indiana state workers chose it, by far the highest in public-sector America. Due to the rejection of these plans by government unions, the average use of HSAs in the public sector across the country is just 2%...

State employees enrolled in the consumer-driven plan will save more than $8 million in 2010 compared to their coworkers in the old-fashioned preferred provider organization (PPO) alternative. In the second straight year in which we've been forced to skip salary increases, workers switching to the HSA are adding thousands of dollars to their take-home pay. (Even if an employee had health issues and incurred the maximum out-of-pocket expenses, he would still be hundreds of dollars ahead.) HSA customers seem highly satisfied; only 3% have opted to switch back to the PPO.

The state is saving, too. In a time of severe budgetary stress, Indiana will save at least $20 million in 2010 because of our high HSA enrollment. Mercer [an independent health care consulting firm] calculates the state's total costs are being reduced by 11% solely due to the HSA option.

Costs were lowered because people responded to incentives by reducing expenditures with no adverse consequences to their health.

Most important, we are seeing significant changes in behavior, and consequently lower total costs. In 2009, for example, state workers with the HSA visited emergency rooms and physicians 67% less frequently than co-workers with traditional health care. They were much more likely to use generic drugs than those enrolled in the conventional plan, resulting in an average lower cost per prescription of $18. They were admitted to hospitals less than half as frequently as their colleagues. Differences in health status between the groups account for part of this disparity, but consumer decision-making is, we've found, also a major factor.

Overall, participants in our new plan ran up only $65 in cost for every $100 incurred by their associates under the old coverage. Are HSA participants denying themselves needed care in order to save money? The answer, as far as the state of Indiana and Mercer Consulting can find, is no. There is no evidence HSA members are more likely to defer needed care or common-sense preventive measures such as routine physicals or mammograms.

Currently, I am nibbling at the bait that Daniels is offering, but I would need questions answered before I bought into this type of plan hook, line and sinker as a way to reform Medicare and Medicaid.  Is it actuarially sound?  Are the savings in Indiana due to young people signing into the plan who currently have low needs signing but who will eventually need to make health care expenditures that exceed their savings balances?  How would such a plan protect retirees and those near retirement?

With those provisos, such reform of Medicare and Medicaid, and altering the tax structure to treat out-of-pocket expenses the same as those made through a group plan should go a long way to ease future deficits and assure quality medical care. 

Eventually, health care providers will respond to frugal, price sensitive consumers and the real benefits of market driven reform will spontaneously materialize.  No new bureaucracy will be necessary.  Because the provision of good health will cost less, universal health care will be cheaper if majority of voters desire it. 
Read more!

Warren Buffett As General Bullmoose?

Li'l Abner was a comic strip that ran from 1934 through 1977.  One of the characters was General Bullmoose, the epitome of a greedy, ruthless businessman, based on Charles Wilson, a former head of General Motors and Secretary of Defense under President Eisenhower who quipped before the Senate, "What is good for the country is good for General Motors, and what's good for General Motors is good for the country."  General Bullmoose's tag line was, "What's good for General Bullmoose is good for the USA."

Warren Buffett, a very smart man and our country's most successful investor in the past 50 years, and comparing him to a cartoon character is not fair, but his recent statement on health care reform captures a Bullmoose like quality.  AP Business writer, Josh Funk, reports on Buffett's statement ("Buffett says health care costs hurt US economy").

OMAHA, Neb. (AP) -- Billionaire Warren Buffett says health care costs are a major drain on U.S. businesses and act like an "economic tape worm."

The head of the holding company Berkshire Hathaway Inc. said Monday on CNBC that America's health care system needs fundamental reform to attack costs because it's not practical to continue devoting roughly 17 percent of the nation's gross domestic product to health care.

Buffett says much of the rest of the world is paying about 9 percent of their GDP on health care and have more doctors and nurses per person.

He says he hopes Congress will develop a new health care reform proposal that will restrict costs more than any of the current plans would.

First and foremost, if markets are functioning well, it is none of his business, or the business of anyone in the government, how much of a worker's wage he or she chooses to devote to health care.  If markets are not functioning well, the government may have a role in improving market structure.  Given that one element of that structure, tax benefits for health care payments made through an employer, causes distortions and reduces consumer incentives to monitor costs, it seems straight forward where reform should begin.  The payments should lose their tax benefits or all health care payments should be granted the same advantage. 

Second, I would like to see evidence that the portion workers' wages are "an economic tapeworm" eating at our nation's competitiveness.  If the reference is to unionized rust belt manufacturers, the government again has some responsibility having granted unions cartel like privileges during the Great Depression.  Many American firms that pay high salaries are prospering, take Google or Microsoft as examples.  I would bet that these firms and most our successful firms pay high salaries with generous benefits. 

Finally, the health care reform before Congress does not cut costs, it reduces payments.  If the reform passes, and a committee is used to ration health care, it will still cost as much for a procedure but fewer people will meet the committee's guidelines.  If the government attempts to pay less for the procedure, the supply of doctors willing to provide the service at that price will decline and a shortage will ensue. 

Many people mistakenly believe that rich business executives must like markets, but this is only conditionally true.  They like whatever makes them richer; if that's bailouts, other types of corporate welfare, taxes on competitors, or markets, it's all good.  Buffett did tell us something important.  The health care reform is corporate welfare as well as consumer welfare.  Because there is no such thing as a free lunch, we have to ask, who will pick up the tab?
Read more!