Obamacare - Mind-numbing Complexity

"Professor Butts and the Self-Operating Napkin"

The implementation of the Patient Protection and Affordable Care Act is causing some considerable perplexity and dissension among the citizenry. But its goal is crystal clear.  According to Kathleen Sibelius, Obamacare’s primary objective is to “make coverage more secure for those who have insurance, and extend affordable coverage to the uninsured.”

This presumes that expanded insurance coverage will improve health, and well it might. But this is not a given – there are many other factors affecting the nation’s health. (Hint – obesity, alcohol, tobacco).

A secondary goal of Obamacare is to “bend the cost curve”, that is, to make health care (and hence insurance premiums) cost less than it otherwise would have. Again, this is within the realm of the possible, perhaps over a long time frame. But early experience shows 2014 insurance premiums increasing at an alarming rate, often double the cost of 2013.

A key feature of Obamacare is its complexity: a multitude of tightly interdependent moving parts. The inauspicious roll out of Healthcare.gov (termed a "debacle" by the administration) is only a symptom of the law's impenetrable convolution. 

One might make reference to Rube Goldberg, whose contraptions were fantastically complex. But in the end, they could actually be made to work. The administration is fervently hoping for such good fortune.

As well meaning as it is, Obamacare has two fundamental shortcomings:

1. Mind-numbing complexity

1. Valiant but misdirected goals

To the first point, Obamacare features a flurry of economic features intended to fund the program. These include requiring all policies to provide a broad range of “essential” services regardless of whether the policyholder wants or needs those services. For instance, young single men do not require maternity coverage but will be forced to pay for it. Older folks do not need pediatric care but are obligated to purchase it. This is not “essential” coverage at all but, rather, hidden taxes.

But Obamacare has plenty of obvious taxes, too. From a sympathetic website (www.obamacarefacts.com), here is a partial list of Obamacare taxes:

• 2.3% Tax on Medical Device Manufacturers

• 10% Tax on Indoor Tanning Services

• Blue Cross/Blue Shield Tax Hike

• Excise Tax on Charitable Hospitals which fail to comply with the requirements of Obamacare

• Tax on Brand Name Drugs

• Tax on Health Insurers

• Elimination of tax deduction for Rx drug coverage with Medicare Part D

• Employer Mandate $2000 to $3000 per employee

• Medicare Tax on Investment Income of 3.8%

• Medicare Part A Tax increase of 0.9%

• 40% Excise Tax on "Cadillac" plans

• Annual $63 fee per subscriber to fund “risk corridors”

• Medicine Cabinet Tax (OTC medicines no longer qualified as medical expenses for HSA/FSA)

• Additional Tax on HSA Distributions

• Contributions to FSAs are Reduced

• Medical Deduction Threshold tax increase

• Individual Mandate (the tax for not purchasing insurance if you can afford it)

Using static scoring, the Congressional Budget Office has projected the revenue to be garnered from these sources. But humans aren't static and behavior easily morphs. Another source of complexity and uncertainty.

This combination of mandates and complicated funding sources (not to speak of over 11,000 pages of regulations) has made the program mind-numbingly complex and led to the first of many unintended consequences (the recent cancellation of millions of “non-conforming” policies). People are perplexed, puzzled, and, perhaps, a little bit scared.

To the second point, the stated goals of Obamacare are misdirected in that what we want, what we really really want, is to directly improve the health of the American public. Obamacare assumes that insurance for all will improve general health. And it might.

But if we’re in a mandating mood, then let’s mandate that sugar and fructose and salt and unhealthy fats be removed from our diets. Require that people eat high fiber, low glycemic-index diets under threat of penalty. Demand that everyone walk 10,000 steps per day (age adjusted) or pay a sloth tax.

According to Harvard Health, the medical costs of poor diet and obesity run nearly $200 billion per year to treat diabetes, cancer, heart disease, etc.  That amount, if even partially avoided, would most assuredly “bend the cost curve”.

But we are Americans, free of spirit in our loose fitting clothes. We’d rather purchase mandated “essential” insurance coverage than have our love affair with junk food disrupted. As voters, that’s our prerogative. And who knows - it just might work.

Bitcoin - a Layman's Guide

A physical bitcoin.

A recent computer virus infection at the Swansea, Massachusetts, police department brought the topic of bitcoin to local attention. This nasty virus encrypted several computer files, effectively holding them for ransom. If the cops wanted their files back, the perps demanded to be paid in bitcoin. Luckily, all ended well with no damage, injury, or loss of confidential data. But it did require the very real expenditure of $750 to buy two bitcoins.

What the heck is a bitcoin?

One thing is certain – bitcoin is extremely popular on the web. As of this writing, Google reports nearly 35 million hits on the term. Most of the descriptions are highly technical and loaded with computer jargon. Let’s try to demystify it.

Bitcoin is a virtual currency. This means that no physical bills or coins are required to represent value – bitcoins live in computers. While this may seem odd, consider that our own dollar has very nearly become a virtual currency. For many folks, it is common to have their wages (or government pension) automatically deposited into their bank account. Bills can then be paid using the bank’s online bill paying system. Groceries, restaurant meals, gasoline, and untold other goods may be purchased using a credit card. Nary a dollar bill is seen.

Another characteristic of bitcoin is that it can facilitate anonymous transactions. (That’s why the perps required the Swansea police to pay in bitcoins). But this is not an unfamiliar characteristic of our dollar. While credit card and banking transactions are easily tracked, a suitcase full of cash is fairly anonymous (unless the bills are marked).

Bitcoin differs from the dollar in one significant way: it is not a fiat currency. Fiat currencies are issued and backed by central authorities such as the Federal Reserve Bank (dollar), European Central Bank (euro), or Bank of England (pound). For citizens living in these stable countries, a fiat currency is a good thing. But not so for those living in economic paradises such as Venezuela and Argentina, where bitcoin is gaining popularity as an alternative to the uncertainties of high inflation rates, devaluation, and the risk of expropriation. Further to their credit, bitcoins cannot be counterfeited.

Where did bitcoin come from? The idea was first presented in a 2008 paper written by "Satoshi Nakamoto" (which may be a pseudonym for an individual or group). The currency is only possible because of developments in powerful yet affordable computers, high speed networks, and distributed processing. It is very much a child of the Internet Age. Bitcoins are “mined” by enthusiasts with powerful computers searching for the solution to a very difficult cryptographic problem. When a new bitcoin is discovered, its existence is added to a distributed, public ledger.

Each bitcoin is unique and the total number of bitcoins is limited (mathematically) to some 21 million. All of the easy bitcoins have been discovered and it is becoming progressively more difficult to find (solve) each new one. This insures that bitcoins will never be devalued by “printing money”, which governments are wont to do.

Bitcoins are stored in (and spent from) electronic wallets. Your wallet might be an iPhone app or a discrete (miniature computer) device. You can buy bitcoins from a broker and store them in your "wallet". From there, they can be spent to buy goods and services in much the same way as a debit card. Physical bitcoins are available from vendors such as Casascius. These physical coins each contain the unique identifiers of the virtual bitcoins they represent.

How is all this working out in practice? Pretty darned well. On October 30, Time Magazine reported that “Bitcoins took yet another step toward mainstream use on Tuesday, as the world’s first ATM converting the virtual currency to conventional cash, and vice versa, was introduced at a coffee shop in Vancouver, Canada.” In a recent Wall Street Journal article (11/14/13), the story of the Craigs was chronicled. Austin and Beccy, an adventurous couple, successfully paid all of their expenses using bitcoins during a 100 day, three continent odyssey (albeit with some difficulty at times).

Are bitcoins here to stay? The signs are good. At a Senate committee hearing on Monday 11/18/13, US authorities termed bitcoin a “legitimate financial service.” The concern of illicit activity was felt to be manageable under existing banking and currency laws. Federal Reserve Bank Chairman Ben Bernanke, in a letter to the committee, wrote that virtual currencies “may hold long-term promise, particularly if the innovations promote a faster, more secure, and more efficient payment system”. Bitcoin prices surged on the Tokyo Mt. Gox exchange in response.

At one time, ATMs were new and strange to many of us. But given time, this brave new world of virtual currency will become equally ordinary. This is how science fiction comes true – one iPhone app at a time.

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Update 11/21/13 - "Bitcoin now accepted as tuition payment at Cyprus university."

Risk and the Affordable Care Act

Storm-tossed ship at sea

Life is risk. Only inanimate objects need not deal with it.

All organisms have evolved ingenious ways to manage risk (or become extinct as a penalty for not doing so).  A squirrel buries its acorns in multiple locations to avoid starvation if a single cache were compromised. Field mice use a keen sense of smell to locate food under cover of darkness. Early humans, while successful hunters, learned to avoid SabreTooth Cats (the South American variety having 12 inch canines and weighing in at 1,000 pounds).

As mankind’s civilization became more robust, the daily risks of predation and starvation faded. The business of trade created a huge new requirement for risk management. Storm tossed seas, brigands, and shifting desert sands imperiled many a caravan and convoy. Trade was risky and techniques evolved to manage it. Four thousand years ago, the Chinese divided up shipments over many vessels when traversing dangerous rapids, a technique possibly borrowed in concept from squirrels.  All of these human and animal techniques are a form of insurance, a method to protect against risk.

The first hint of commercial insurance emerged nearly 3,000 years ago when Babylonian merchants paid a premium on their cargo loans in exchange for a promise that the loan would be discharged if the cargo were lost or stolen. The premiums could be steep, but the expense was far preferable to a total loss.

In the United States, commercial insurance was pioneered by, perhaps not unsurprisingly, our own Benjamin Franklin. As well as having invented the Franklin stove, Ben also developed a means to insure property owners from fire losses. The concept was to spread the risk of fire over a large population, with owners paying premiums into a common pool. Franklin as well developed the concept of risk mitigation by refusing to insure high risk properties (all-wooden structures). This was intended to modify the behavior of builders and buyers, and it worked.

Later in the 19^th and 20^th centuries, commercial insurance companies did much to reduce the risk of fire by sharing statistics with state and local governments and suggesting building codes to reduce the incidence of accidental fires. By refusing to insure noncompliant properties, the industry was able to influence builder and buyer behavior and further reduce the risk of loss. During this time, commercial insurance expanded widely beyond property to include coverage for life and accidents. The key was statistical analysis by actuaries who determined risks, probability of losses, and set the required premiums.

Health insurance evolved slowly beginning early in the last century. Medical fees then were typically handled directly between the patient and the provider (doctor or hospital). This could be financially devastating if a serious or chronic health condition occurred. Baylor Hospital in Dallas Texas approached the problem by offering a prepaid plan where participants (subscribers) would be assured up to 21 days of hospitalization for $6 per year. This evolved into the Blue Cross Plans.

At about the same time, lumber and mining camps in the Pacific Northwest wanted to provide medical care for their employees (it’s hard to think of more dangerous occupations). The camp owners paid monthly fees to “medical service bureaus,” groups of physicians, who then provided medical services to the lumberjacks and miners. In 1939, the first Blue Shield Plan was established in California based on this model.  In 1982, the hospital and doctor groups joined to become the Blue Cross and Blue Shield Association.

Broad employer-based health insurance emerged as a consequence of government wage controls during World War II. Competing for scarce labor, companies created non-wage fringe benefits to attract workers. Company paid sick leave and health insurance became a standard offering. In an odd way, we have Hitler and Hirohito to thank for our current system. Perhaps that was their way of getting even.

So here we are, about to embark on the next great phase of health insurance now promised to all Americans. It was inevitable and only the mechanisms remain to be debated. What are some factors to be considered? Here are a few:

1. The third-party payer system we use insulates us from price information. We have no idea how much a knee replacement is going to cost and little incentive to find out. Yet a study by a large California employer revealed that arthroscopic knee surgery varied from $4,300 to over $26,000 across a number of reputable hospitals. There is no incentive for the patient to shop around and no competitive pressure on the hospitals to rein in prices.

2. Economists have written much on the moral hazards of insurance. These range from arson fires for profit to murder in order to collect life insurance, but also include the overutilization of services simply because one knows that one is insured. It is this overutilization that is most pertinent to our consideration.

3. Community rating rather than risk-based premiums reduces the incentive to avoid risky behavior. For instance, imagine if fire insurance premiums were the same for all regardless of property conditions. The owner of a tumbledown wreck of a building with open fireplaces and candles in every window would pay the same rate as a modern structure built of fire-retardant materials and utilizing the latest in monitoring and fire suppression technology. That doesn’t seem right because it isn’t. But that’s precisely what we’re doing with health insurance.

There is one existing model that directly addresses these issues and has already proven successful. Policymakers should do more to encourage Health Savings Account (HSA) plans. With these, the employee and employer regularly deposit funds in a tax-advantaged account which can be invested and grow over time. The important distinction is that this money is yours – it belongs to you. Medical expenses are paid from this account as they occur. You are highly incented to avoid unnecessary services and to seek out the most favorable pricing. Further, you will optimize healthy habits (diet, nutrition, and exercise) out of enlightened self interest. You are protected from catastrophic expenses by a deductible provision in the policy. 

If a broad swath of Americans used HSA accounts, we would see improved health and, for the first time, downward pressure on medical costs. (HSA plans are allowable under the Affordable Care Act – this would require no new legislation).

As for any plan, there are critics. But this seems a rational place to begin. Assuming, that is, that you view the majority of people as responsible adults, capable of successfully leading their lives as they please. If not, that’s a pretty dismal outlook on your fellow humans.