Possible Insight

Archive for January 2010

Robert Reich: Wrong About State/Local Bailout

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Rafe linked to this essay by Robert Reich.  I don’t have much of a problem with his first point backing Obama’s plan to offer a tax credit for hiring.  I think temporarily suspending the employer’s share of payroll tax is a better mechanism (as suggested by Bryan Caplan a year ago), but close enough.

However, I think he goes off the rails at the end where he suggests the federal government should prop up spending by state and local governments.  No.  They’re the problem, not the solution.  Fortuitously,m Bryan’s partner Arnold Kling referred just today to this Reason essay by Steven Greenhut revealing that the number of state and local workers per 100 citizens has grown from 2.3 to 6.5 since 1946.  Yes, that’s 180% growth in the fraction of people employed by state and local governments.

Recall my own analysis showing that real per capita state and local spending in California increased 38% in the last 10 years and that we would have no budget problem if we had kept real per capita spending at 1999 levels.

The problem is we have more bureaucrats riding on the backs of productive workers.  Economic innovation and growth comes from the private sector.  Much better to substitute every single dollar Reich wants to give to state and local governments for more tax breaks to private sector employers that hire people.

Written by Kevin

January 29, 2010 at 9:39 pm

Posted in Economics

Quest for Insurance Part II: The Coverage

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The trials chronicled in Part I have a happy ending.  I eventually obtained an excellent individual plan from Assurant Health. I followed my own advice and got a high deductible plan that covers no primary care. I thought it would be worth comparing to the traditional PPO coverage I had previously.

The table below shows the salient aspects of each plan.  To compare apples to apples, I had to estimate the 2010 premiums for the previous plan. I used a 9% increase over 2009, which is what a PricewaterhouseCoopers survey says will be the average for employer sponsored plans. Note that this is less than the 10.8% actual increase my company saw from 2008 to 2009 on this plan.

Insurer Aetna Assurant Health
Annual Premiums $17,593 $7,760
Deductible $2,000 $10,000
Co-Insurance 20% None
Out-of-Pocket Maximum $8,000 $10,000
Office Visits $35 $0, after meeting deductible
Generic Drugs $15 $0, after meeting deductible
Brand Name Drugs $35 $0, after meeting deductible
Lifetime Maximum $6M $15M

We see something very interesting here. The annual premium on the new plan is $9,833 less than the estimated annual premium on the old plan. Now, we all get checkups each year.  Also, my wife and son have monthly medications they take for allergies.  Adding in the copays for those yields extra $500 on the old plan, pushing us to $10,333 more guaranteed expenditures on the old plan than the new plan. Obviously, this excess is more than the new plan’s deductible.

So there’s no way I can loose on the new plan.  If we stay healthy, I get to pocket $10,333 minus the cost of routine visits and medications.  If something bad happens and someone has a major medical issue, I save at least $8,333 due to the deductible and coinsurance on the old plan. Probably much more due to co-pays for additional office visits and prescriptions, which are not limited by the out-of-pocket maximum.  I actually ran the scenarios and there’s no way I don’t save at least $5,000 per year.

Moreover, the new plan is much better at insuring against catastrophic loss.  The lifetime maximum is 2.5 times as high.  That’s a real selling point for me. I don’t want the plug pulled on my ventilator because my insurance ran out.

How can this be? Why do we even have PPO plans? You may think the tax deductibility of employer-paid premiums is the reason.  But this doesn’t explain why employees wouldn’t choose an employer-sponsored version of the high deductible plan. Those are paid with the same pre-tax dollars.  (It also doesn’t affect me because I’m technically self-employed and deduct my premiums anyway). It certainly explains why the CEO of Whole Foods is absolutely right to offer his employee’s a high deductible plus HSA plan.  It saves everyone money. The math speaks for itself.

The only explanation that makes sense is that people want to spend more on health care when it doesn’t come out of their own pockets. A combination of moral hazard and mental accounting. On the moral hazard front, they go to the doctor more often than they otherwise would because the marginal cost to them is so low. On the mental accounting front, the automatic monthly deduction from their pay is less painful than personally writing checks to pay doctors. But it’s irrational.

Perhaps some marketing wizards should figure out how to pitch high-deductible plus HSA plans in a way that the average person would find attractive.  How about an infomercial that promises to save you thousands of dollars every year with a proven system and throws in a set of handy dandy steak knives if you act now?

Written by Kevin

January 20, 2010 at 3:14 pm

Quest for Insurance Part I: The Search

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As you may recall, I previously posted about my recommendations for fixing health care (Part I, Part II, Part III). Recently, I had to navigate the current system and thought I’d share my experience in the context of those recommendations. You see, COBRA ran out on my health insurance from the last startup I founded and the new one hasn’t set up a company health plan yet. Thus I had the, um, “pleasure” of trying to obtain individual coverage.

I started by going to eHealthInsurance and hitting up the big three companies: Aetna, Anthem (BlueShield/BlueCross), and HealthNet. My first disappointment came when I discovered that there is no universal application. You have to type in roughly the same information in substantially different formats for each company. What value exactly is eHealthInsurance adding here?

My second disappointment came when they all rejected the applications for different reasons. There are four people in our family. One of them was rejected by two companies, two of them were rejected by one company, one of them was not rejected at all. The reasons were allergy shots, acne, possible acne, and being underweight. The first two are minor ongoing issues.  Considering we were applying for $10K deductible plans with no office visit or prescription coverage, it’s hard to see what the problem is. The second one was unconfirmed by the first doctor, totally minor, and subsequently excluded by a second doctor. The last one is the only one that should have been of any concerned and a check with that person’s doctor would have eliminated the concern.

My working hypothesis is that these companies don’t actually want to offer individual health coverage. For regulatory or political reasons, they have to appear to offer such coverage. But unless an individual is so low risk as to be obscenely profitable, why go to the effort? It’s so much easier to focus on selling group coverage to employers.  This is a side effect of the tax deductibility of premiums for most companies but not most individuals.

Luckily, there are niche providers that pursue opportunities that are not attractive to the largest players. One of them is Assurant Health. After filling out the online application at their Web site, I received a call from their underwriting department within two days. They wanted to review the medical records for the two family members receiving allergy shots to make sure these were not indicative of larger issues. No problem, we had signed a release and I had no objection to paying a premium based on actual risk.

Now, the story takes a funny turn. Apparently, HIPAA has made doctors so paranoid about penalties for breaching patient privacy, that they don’t want to give out your medical records to anyone. Despite the general release we signed, two medical clinics wanted us to sign special releases. It took a month to actually get these special releases so we could sign them. Even then, one of the clinics also required us to call them on the phone and give them verbal permission as well. Government intervention strikes again! If the government had clearly specified the mechanism for releasing medical records, there wouldn’t have been a problem. Even better, if the government hadn’t distorted the market for insurance toward employer-sponsored coverage, this transaction would be so routine that the free market would have solved the problem

The story has a happy ending.  In Part II, I will analyze the excellent coverage we got from Assurant in the context of my previous recommendations.

Written by Kevin

January 14, 2010 at 4:17 pm

I Admit It, I Panicked

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I’m usually a rather optimistic person.  But yesterday, I thought I saw a sign of the apocalypse and panicked.  The usually insightful Coyote Blog posted a chart that I interpreted as saying that the number of people on government payrolls was now larger than the number of people on private payrolls in the US. Such a crossover would be a very bad indicator.

Luckily, I slept on it before posting.  I realized from my background knowledge that this fact was unlikely to be true, so I followed the links to the ultimate source.  You see, I thought “Goods Producing” was in contrast to “Government” in the chart label, i.e., that the categories were collectively exhaustive. No.  According to the original post at NRO, “Goods producing”=construction, manufacturing, mining and agriculture.  Well, duh.  Our employment in those sectors has been gradually decreasing as they become extremely efficient.  Unsurprisingly, government efficiency has not been increasing as fast.

I went to the BLS database and looked up the right statistic.  In Jan 1939, private employment was 25,935,000 and government employment was 3,988,000 for a ratio of 6.50.  In Dec 2009, projected private employment was 108,443,000  and projected government employment was 22,467,000 for a ratio of 4.83.  This is still a relative increase in government employment, which I don’t like, but far from a sign of the apocalypse. A clear indication that private enterprise is more efficient than public enterprise, but I already knew that.

Written by Kevin

January 8, 2010 at 12:56 pm

Posted in Economics

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