Rube Goldberg Rides Again


We don’t need to malign the good intentions of those who delivered the ACA to us as we’ve needed serious, honest healthcare reform for at least a generation. But it’s our sad fate to cobble together a system that tries to re-engineer human behavior by creating a better “exchange market” for the production and distribution of an essential good. This is akin to trying to improve on Mother Nature, an experiment that has been tried and failed on a much more catastrophic scale than national healthcare. The sadness relates to the fact that none of this is or was necessary, but it does reflect the incredible hubris of the technocratic mindset. It seems we always choose to learn these simple truths the hard way and being able to say “I told you so,” will offer little consolation to anyone.

From the WSJ:


Website problems don’t matter when your intentions are good.

‘More than a website” is the latest defense of the Affordable Care Act’s painful rollout, and liberals are partly right. ObamaCare has larger ambitions than the basket case called and the 36 federally run insurance exchanges.But building the website was supposed to be the easy part. The health law’s fiasco of a debut doesn’t inspire confidence in those other ambitions, such as re-engineering how U.S. medicine is provided, but it does help explain the modern liberal project.

The White House pitched President Obama’s Rose Garden event on Monday as a new transparency, but the event amounted to an infomercial, complete with a 1-800 number. Operators are standing by and “the product is good,” the President said. He even encouraged Americans to bypass the website and apply for benefits over the phone or by mail.

Too bad this infomercial lacked tangible information. Mr. Obama might have explained what went wrong, and why, and where the buck stops, or if there is even a provisional timetable for when the exchanges will function properly. Instead he minimized the severity of the problems, perhaps for political reasons. Or maybe he didn’t say because the defects are so deep that no one can identify the specific solutions.

By the way, we called the hotline on Monday and the automated menu redirected us to, which in turn told us to get in touch with someone at the call center.

In an era where Google is making self-driving cars and Amazon offers next-day delivery for just about anything, the White House plunged ahead with a system it knew to be defective and is relying on the technology of the 19th century as the fall-back. Five days before the exchanges launched, the Health and Human Services Department increased the Virginia information technology company Serco’s $114 million contract by $87 million—to help process paper applications. Are contingency plans in place to sign up via telegraph?

The consequences of this mismanagement go beyond the technical. Mr. Obama bragged that millions of people are using the website and many (he didn’t say how many) are signing up for coverage. But this overlooks that no one knows what the risk profiles on the exchanges will look like.

The danger is that those who manage to enroll will mainly be the most expensive patients. Younger and healthier patients who don’t need ObamaCare will have to cross-subsidize the sick and old or else the premiums won’t cover the cost of claims. So the 36 malfunctioning exchanges could take an entire market down with them.

Insurance companies are also already sending out notices to millions of consumers cancelling individual policies because they are non-compliant with ObamaCare’s new mandates. Kaiser Health News, usually a cheerleader for the law, reports that “Florida Blue, for example, is terminating about 300,000 policies, about 80 percent of its individual policies in the state.” Kaiser Permanente in California has sent notices to 160,000 people, Highmark in Pittsburgh is dropping about 20% of its individual market customers, and Independence Blue Cross of Philadelphia is dropping about 45%.

Remember when Mr. Obama said you could keep your policy if you liked it?

The White House could have asked Congress for a delay to get the exchanges right and avoid this debacle. Liberals claim to be in favor of “what works and what doesn’t,” as Mr. Obama likes to say, and the exchanges clearly belong to the latter category.

But the exchanges fiasco is revealing the larger truth that ObamaCare’s claim to technocratic expertise was always a political con. It won over the New Yorker and made ObamaCare designer Peter Orszag a celebrity. But it was all a veneer for ObamaCare’s real goal, which is to centralize political control over health care.

That false front is clear now as we are told to ignore the faulty rollout because it will get fixed, eventually, and in any case the law is really about reducing inequality. At least now Democrats are being honest. The actual results will always matter less to liberals than their good intentions and expanding the reach of government.

In a blog post over the weekend, the Health and Human Services Department sought to assure Americans that “Our team is bringing in some of the best and brightest from both inside and outside government to scrub in with the team and help improve” HHS won’t even disclose who these ringers are. Just wait until the Independent Payment Advisory Board gets up and running and starts to review individual medical treatments without explaining its data or the reasons for its decisions.

Mr. Obama did identify one culprit on Monday—naturally, the Republicans who he claimed somehow sabotaged despite having nothing to do with its development. “I just want to remind everybody, we did not wage this long and contentious battle just around a website,” he said. Yes, and that’s what should really scare the public.

Ain’t That the Truth?


Pursuing the follies of social insurance.

Full article here.

The complexities of ObamaCare make it less likely to achieve its goals, but the broader point is that health-care reform didn’t have to be this morass. Liberals and conservatives agree on the two big problems in health care, an industry that accounts for 18% of GDP: that almost 50 million Americans don’t have health insurance, and that employer-provided coverage gives patients little incentive to monitor spending. Even if Americans want to control costs, they have almost no information to let them compare prices.

Both problems grew out of World War II wage and price controls. Companies got around wage controls by providing health insurance, which Washington has treated as an untaxable benefit ever since.

The result is that employees have been largely insulated from the costs of health care, most of which have been paid by employers. That means there is no functioning market. There is little transparency of pricing for medical services, devices or drugs. Pricing fluctuates wildly depending on whether the patient has insurance or what deal the insurer happened to cut with the provider.

Have you ever seen a price list in your doctor’s office or at a hospital? Probably not, except for services like laser eye surgery and elective plastic surgery, which aren’t covered by insurance. In these rare cases, there is price transparency and open competition.

As hospitals have merged to cope with the costs of increasingly complex regulation, competition has further diminished. This is a reminder of the truism that monopolies can only be sustained when government policy supports them.

Simpler reform would provide subsidies for the uninsured while encouraging transparency in health-care costs so that Americans can become better-informed consumers. That simpler approach, alas, is for a future government.

Managing and Mismanaging Risk

riskThis is the kind of issue that makes readers’ eyes glaze over, but it’s crucially important to understanding our financial situation today and for the future. The political management of risk through guaranteed benefits means that uncertainty risks and losses are borne by third party taxpayers. This is a highly inefficient strategy to manage risk because future outcomes are a function of present behavior. When people see there is no consequence to their present behavior, they do things that blow up the assumptions about the future. This is a form of moral hazard that renders insurance pooling ineffective and unworkable.

Social Security is a form of defined benefit plan that relies on uncertain assumptions about future growth. If we mismanage that growth, the assumptions will fall seriously short of expectations. Our Medicare entitlements follow the same logic and it’s no wonder that we see enormous moral hazard costs in the form of unsustainable deficits. The idea that raising taxes can meet this need is fallacious in its basic premises. If we mismanage risk in this way the hole we dig will only get deeper and deeper. This is the most consequential statement of fact to take from the following analysis: In the long run, defined-contribution plans that most corporations have embraced will also be adopted by local and state governments.

From the WSJ:

The Pension Rate-of-Return Fantasy

Counting on 7.5% when Treasury bonds are paying 1.74%? That’s going to cost taxpayers billions.


It has been said that an actuary is someone who really wanted to be an accountant but didn’t have the personality for it. See who’s laughing now. Things are starting to get very interesting, actuarially-speaking.

Federal bankruptcy judge Christopher Klein ruled on April 1 that Stockton, Calif., can file for bankruptcy via Chapter 9 (Chapter 11’s ugly cousin). The ruling may start the actuarial dominoes falling across the country, because Stockton’s predicament stems from financial assumptions that are hardly restricted to one improvident California municipality.

Stockton may expose the little-known but biggest lie in global finance: pension funds’ expected rate of return. It turns out that the California Public Employees’ Retirement System, or Calpers, is Stockton’s largest creditor and is owed some $900 million. But in the likelihood that U.S. bankruptcy law trumps California pension law, Calpers might not ever be fully repaid.

So what? Calpers has $255 billion in assets to cover present and future pension obligations for its 1.6 million members. Yes, but . . . in March, Calpers Chief Actuary Alan Milligan published a report suggesting that various state employee and school pension funds are only 62%-68% funded 10 years out and only 79%-86% funded 30 years out. Mr. Milligan then proposed—and Calpers approved—raising state employer contributions to the pension fund by 50% over the next six years to return to full funding. That is money these towns and school systems don’t really have. Even with the fee raise, the goal of being fully funded is wishful thinking.

Pension math is more art than science. Actuaries guess, er, compute how much money is needed today based on life expectancies of retirees as well as the expected investment return on the pension portfolio. Shortfalls, or “underfunded pension liabilities,” need to be made up by employers or, in the case of California, taxpayers.

In June of 2012, Calpers lowered the expected rate of return on its portfolio to 7.5% from 7.75%. Mr. Milligan suggested 7.25%. Calpers had last dropped the rate in 2004, from 8.25%. But even the 7.5% return is fiction. Wall Street would laugh if the matter weren’t so serious.

And the trouble is not just in California. Public-pension funds in Illinois use an average of 8.18% expected returns. According to the actuarial firm Millman, the 100 top U.S. public companies with defined benefit pension assets of $1.3 trillion have an average expected rate of return of 7.5%. Three of them are over 9%. (Since 2000, these assets have returned 5.6%.)

Who wouldn’t want 7.5%-8% returns these days? Ten-year U.S. Treasury bonds are paying 1.74%. There is almost zero probability that Calpers will earn 7.5% on its $255 billion anytime soon.

The right number is probably 3%. Fixed income has negative real rates right now and will be a drag on returns. The math is not this easy, but in general, the expected return for equities is the inflation rate plus productivity improvements plus the expansion of the price/earnings multiple. For the past 30 years, an 8.5% expected return was reasonable, given +3%-4% inflation, +2% productivity, and +3% multiple expansion as interest rates plummeted. But in our new environment, inflation is +2%, productivity is +2% and given that interest rates are zero, multiple expansion should be, and I’m being generous, -1%.

So what to do? I recall a conversation from 20 years ago. I was hoping to get into the money-management business at Morgan Stanley. I wanted to ramp up its venture-capital investing in Silicon Valley, but I was waved away. It was explained to me that investors wanted instead to put billions into private equity.

One of the firm’s big clients, General Motors, had a huge problem. Its pension shortfall rose from $14 billion in 1992 to $22.4 billion in 1993. The company had to put up assets. Instead, Morgan Stanley suggested that it only had an actuarial problem. Pension money invested for an 8% return, the going expected rate at the time, would grow 10 times over the next 30 years. But money invested in “alternative assets” like private equity (and venture capital) would see expected returns of 14%-16%. At 16%, capital would grow 85 times over 30 years. Woo-hoo: problem solved. With the stroke of a pen and no new money from corporate, the GM pension could be fully funded—actuarially anyway.

Things didn’t go as planned. The fund put up $170 million in equity and borrowed another $505 million and invested in—I’m not kidding—a northern Missouri farm raising genetically engineered pigs. Meatier pork chops for all! Everything went wrong. In May 1996, the pigs defaulted on $412 million in junk debt. In a perhaps related event, General Motors entered 2012 with its global pension plans underfunded by $25.4 billion.

In other words, you can’t wish this stuff away. Over time, returns are going to be subpar and the contributions demanded from cities across California and companies across America are going to go up and more dominoes are going to fall. San Bernardino and seven other California cities may also be headed to Chapter 9. The more Chapter 9 filings, the less money Calpers receives, and the more strain on the fictional expected rate of return until the boiler bursts.

In the long run, defined-contribution plans that most corporations have embraced will also be adopted by local and state governments. Meanwhile, though, all the knobs and levers that can be pulled to delay Armageddon have already been used. California, through Prop 30, has tapped the top 1% of taxpayers. State employers are facing 50% contribution increases. Private equity has shuffled all the mattress and rental-car companies it can. Buying out Dell is the most exciting thing they can come up with. Expected rates of return on pension portfolios are going down, not up. Even Facebook millionaires won’t make up the shortfall.

Sadly, the only thing left is to cut retiree payouts, something Judge Klein has left open. There are 12,338 retired California government workers receiving $100,000 or more in pension payments from Calpers. Michael D. Johnson, a retiree from the County of Solano, pulls in $30,920.24 per month. As more municipalities file Chapter 9, the more these kinds of retirement deals will be broken. When Wisconsin public employees protested the state government’s move to rein in pensions in 2011, the demonstrations got ugly—but that was just a hint of the torches and pitchforks likely to come.

Meanwhile, it’s business as usual. California Gov. Jerry Brown released a state budget suggesting a $29 million surplus for the fiscal year ending June 2013 and $1 billion in the next fiscal year. Actuarially anyway.

Or as Utah Rep. Jason Chaffetz told Vermont Gov. Peter Shumlin, upon learning at a 2011 House hearing about that state’s unrealistic pension assumptions: “If someone told me they expected to get an 8% to 8.5% return, I’d say they were probably smoking those maple leaves.”

Change, Chance, and Politics

We live in a world that can be scientifically (and poetically) described as uncertain, probabilistic, and risky. Politics is defined as the “art of governing,” in other words, managing the affairs of the citizenry. This definition implies the imperative of setting social priorities and making social choices. So, to complete the big picture, we have a landscape that is uncertain, probabilistic and risky, and on that landscape we live in human societies that collectively try to manage their survival as the landscape constantly changes through time. This is how we should conceptualize the political.

This essay is not about the method of social choice, such as voting and various theories of government such as democracy or autocracy, but about the goals of politics given the uncertain state of the world. At the turn of the 15th century, Niccolo Machiavelli, who spent considerable time contemplating politics, surmised that our fate was determined by two factors, in about equal parts: one’s virtù (or character), and pure random chance. A successful “prince,” or political leader, was one who possessed noble virtù, but who was also able to adapt to the changing times. In modern terms, we interpret this to mean successful politics is promoted by institutions that are rooted in timeless principles of human nature, but are flexible enough to adapt to changing conditions. Sometime around the 19th century, science came to accept this idea that the world was not deterministic, but probabilistic. Kings became kings not because of ancestral claims or divine right, but due to a series of random historical events. Governments designed by the people were products of their constitutions, nothing more.

It’s odd that more than a half a millennium after Machiavelli’s insight and more than a century after science’s confirmation, many people adopt a governing philosophy, unwittingly perhaps, that assumes government policy is deterministic, rather than probabilistic and uncertain. Such people believe that if the government passes a law, the outcome is a given. If the government doubles taxes, then revenues naturally double. Of course, if laws were deterministic, we would have no need of courts, judges, or juries, but such inconveniences are easily overlooked or dismissed by believers of a deterministic world.

The salient point here is that the ‘government,’ as a collection of fallible and self-interested human beings, cannot really ‘manage’ the economy. It cannot manage global climate change. It cannot manage its citizens’ political preferences. What it can do, quite unintentionally, is mismanage it all. But we do need functioning institutions to manage social choice, so we stumble along with the best we have, which in our case is some form of participatory democracy. But the governing function of ‘managing change’ is severely limited. The best the government can do is help its citizens to manage the uncertainties of change.

This is not as intangible as it sounds. We have all been blessed by nature with a keen sense of how to survive by managing the risks we face in an uncertain world, as have all living species. Nothing has changed that much in a few million years. Nature manages the risks of change and random chance through biological diversification. We also diversify our risks by pooling them with others for mutual protection. I would guess that this was one of the primary motivations for creating tribes, communities, cities, and nation-states in the first place (the other being our innate sociability).

At this point we should make the connection to modern politics and democratic government. Pooling through diversification is merely a definition of insurance, such as what you buy for your car or your house. And social insurance describes the logic of entitlement programs, such as Medicare and Social Security. Bismarck is credited with introducing the first examples of state-managed social insurance in Germany in the late 19th century. More than a century later, social insurance entitlements make up the largest share of government budgets in all advanced democracies. Should we assume that this demonstrates the best government can do is provide cradle-to-grave social insurance to manage the vicissitudes of an uncertain world? On the contrary.

There is a cost to insurance that sometimes outweighs its benefits. The primary cost is called moral hazard. Insurance can cause people to assume excessive risks. The common example is a driver who drives more recklessly because he has insurance, imposing more costs on the insurance company than they receive in premiums. Another case with social insurance is that Social Security causes people to reduce saving for their retirement, making them more dependent on the program than they would be otherwise. These moral hazard problems show up with deteriorating financials for the pool – in the private case the insurance company would go out of business, in the public case we get ever-increasing deficits in the programs. (Social Security and Medicare are not true social insurance pools, but inter-generational transfer programs—this creates another whole set of problems.) Either way, the pool will eventually fail. Private insurance avoids this fate by monitoring the behavior of its participants and pricing accordingly (i.e., a speeding ticket results in an premium increase). But social insurance, as part of a social compact, cannot discriminate between risky and prudent behavior, so the good risks end up subsidizing bad risks and the bad risk pool grows. In other words, if you get subsidized healthcare, why eat well and exercise? Why not just indulge? Somebody else will pay for it. And that’s what we do and the deficits grow. (Politicians also increase benefits without increasing tax contributions in order to win votes for re-election. This would be like an insurance company approving all claims no matter how frivolous and never raising premiums, kind of like Santa Claus. The company would be out of business rather quickly.)

So, private insurance is always more efficient, cheaper, and more abundant than social insurance. This implies that the government should do what it can to assure a functioning, competitive private insurance industry. Our government has failed us in this regard by hampering competitiveness and fostering monopolies. More importantly, the most efficient form of insurance that avoids all moral hazard costs is self-insurance. We self-insure when we save for a rainy day. We can design tax and regulatory policies that empower self-insurance across the population by allowing for private asset accumulation and diversification. (This essentially is what insurance companies do with your premiums in order to make a profit.) Why can we not have tax-free accounts set up for healthcare costs, educational costs, retirement, and even first time housing purchases? Then we could assume most of our own economic burdens in life that currently flow unnecessarily and inefficiently through the government. Self-insurance also fosters a competitive market in the goods and services we need by creating a discriminating consumer market. Our politicians have made such private alternatives overly restrictive and over-regulated instead of making them more available.

Social insurance, private insurance, and self-insurance are all complementary means to managing the risks of change in an uncertain world. Social insurance must be the last resort when private markets fail, but we should never allow social insurance to drive out the more efficient alternatives offered by a thriving private economy. That is how a free society and a free people will best ‘manage its affairs,’ in a world of constant change and uncertainty.

Income Inequality by State

This looks a lot like the 2012 Presidential election map, with the most unequal states voting for more liberal state policies consisting of more redistributionist policies such as a higher minimum wage, more generous welfare and unemployment insurance policies, and more “progressive” state tax systems. Democratic strongholds of California, New York, Massachusetts and Illinois all rank in the top 10 for “greatest income inequality between top and the bottom.”

Kind of makes you think about the correlation and causation between policies and their outcomes…

Income Gaps by State




Common Sense and Healthcare Reform

There is no other economic model out there that delivers a desired good, priced efficiently, and in abundance, other than an open, competitive market. We need to move in this direction if we want enough 1st rate healthcare to go around. No matter what political ideology we subscribe to. Aside from the economy, this is more important than all the other partisan B.S.

From the WSJ:

The Wrong Remedy for Health Care

The Affordable Care Act will exacerbate the problems with our current health-care system. Fortunately, market reforms are still possible.


In upholding the Affordable Care Act, the Supreme Court has allowed the president and Congress to put the country’s health policy on a path that will restrict individual choices, stifle innovation and sharply increase health-care costs. Now the only recourse is to repeal the law through the legislative process and replace it with policies that rely on the power of the markets.

The American health-care system’s principal strength is its ability to produce ever more impressive innovations. The U.S. has no equal in developing new medical technologies, surgical procedures and pharmaceuticals. These extraordinary advances are not the product of government direction but rather the efforts of scientists, investors and entrepreneurs pursuing their individual goals and aspirations in a competitive market system. The Affordable Care Act puts these strengths at risk.

The law also exacerbates the central problem of our health-care system: high costs without corresponding value. The “individual mandate” will require that people purchase health insurance with generous benefits and limited cost-sharing. This flawed conception of health insurance has created the bad incentives that have led us to where we are today.

The principal factual claims made by the individual mandate’s supporters are that the failure to purchase conventional health insurance causes harm to the uninsured person (in the form of worsened health) and to others (in the form of a shifting of the burden of the costs of care).

The evidence supporting each of these claims is weak at best. Peer-reviewed studies from the National Health Insurance Experiment and other data dating back to the 1980s have concluded that there is little or no causal relationship between health insurance and a person’s health outcomes.

What about the claim that the costs of caring for the uninsured are significantly shifted onto doctor and hospital bills, thereby raising insurance premiums? George Mason University Prof. Jack Hadley and John Holahan, Teresa Coughlin and Dawn Miller of the Urban Institute published a comprehensive, peer-reviewed study on this in Health Affairs in 2008. It concluded that “Private insurance premiums are at most 1.7 percent higher because of the shifting of the costs of the uninsured to private insurance.”

The problems with the U.S. health-care system are mainly the result of a handful of government policies that have prevented market forces from reducing costs and making services more widely available. So what to do?

Fix the tax code. First and foremost is the federal tax code’s long-standing exclusion from taxation of employer-sponsored health insurance. The exclusion has created a tax advantage for purchasing health care through insurance rather than directly with out-of-pocket dollars. This, in turn, has caused consumers to overutilize health-care services as they and their physicians perceive that someone else is footing the bill. As a result, health-care costs have been driven upward.

Policy makers should make the tax treatment of health care neutral by allowing out-of-pocket expenses and individual insurance to be tax deductible. Alternately, neutrality could be achieved by eliminating the tax exclusion for employer-sponsored health insurance. The Affordable Care Act’s tax on high-cost health plans is a first step toward tax neutrality. Unfortunately, the act couples this policy with others that work at cross-purposes.

Redesign Medicare and Medicaid. The Affordable Care Act includes numerous reforms to the way that Medicare pays health providers, some of which are on the right track. But in Medicare, the main problem is the nearly complete neglect of patient incentives. The Medicare Part B average copayment rate has fallen nearly in half during the past 35 years. One near-term solution is to allow beneficiaries to choose health plans that have lower premiums but higher deductibles, more coinsurance, or more tightly managed networks of providers than those in traditional Medicare. The long-term solution is to provide beneficiaries with a defined level of support to allow them to purchase a private insurance plan. Such an approach is modeled on today’s Medicare prescription drug coverage and is similar to one proposed by Rep. Paul Ryan (R., Wis.) and Sen. Ron Wyden (D., Ore.).

In Medicaid, the emphasis on access to health insurance, rather than access to health care, has stifled innovation in delivering care to the uninsured. The Affordable Care Act does little to change this. Medicaid should be converted to a block grant in which states are given a fixed sum of money and allowed greater flexibility to experiment with new approaches, such as delivering care through organizations that tailor available services to patient needs at reduced costs.

Reform insurance markets. State price controls and the proliferation of state mandates that insurers cover particular medical services and providers have driven up the cost of insurance by as much as 15%, made it less portable, and increased the number of uninsured by as many as 10 million. Unfortunately, the Affordable Care Act enshrines many of these flawed policies in federal law.

The key objective of insurance regulation should be to increase the availability of low-cost, portable health insurance—insurance that delivers the benefits that people want, at a price they can afford. To this end, individuals should be allowed to purchase insurance across state lines or in a federal market that is free of insurance mandates.

The Affordable Care Act will expand the reach of government into our personal health-care choices, while exacerbating the problems with our current health-care system. Market forces, if allowed to work properly, are the best means for reducing the growth in health costs, encouraging continued innovation, and ensuring that consumers have access to quality health care.

Obamacare and “Information”

Good quote applying Hayek and market theory to the illusion of centralized health care:

Perhaps ObamaCare will be remembered as the breaking point for top-down planning. There is not enough information available for the government to micromanage a system as complex as health care, which represents more than 15% of the economy. Austrian economist Friedrich Hayek wrote some 50 years ago about the “pretence of knowledge,” meaning the conceit that planners could know enough about complex markets to dictate how they operate. He warned against “the belief that we possess the knowledge and the power which enable us to shape the processes of society entirely to our liking, knowledge which in fact we do not possess.”

True enough, ObamaCare was built on an unworkable foundation. The original sin in health care goes back to the wage and price controls in effect during World War II. The federal government let employers avoid wage controls by adding health insurance as an untaxed benefit for employees. Employer-provided insurance has since insulated most Americans from the cost of care. The predictable result is endless demand for increasingly inefficient services.

When was the last time you saw prices posted in a doctor’s office or hospital? Yet price is the key means through which information is transmitted, at least in functioning markets. There are many ways to make sure that the poor and seriously ill get medical care, including direct subsidies that don’t undermine the price mechanism. But the complexity of accomplishing this goal in a hyperregulated health-care industry overwhelmed the system.

If the justices do send ObamaCare back to be rethought, politicians should address the problem with more humility. We’ll know health care is on the road to recovery when basic information such as clear rules and transparent prices are again part of the system.

Full article here.