This post was originally written for Americans for Tax Reform, where I was an Associate (intern):
Title 1, Subtitle D of the Senate Finance Committee’s Chairman’s Mark establishes “Shared Responsibility” requirements for individuals and employers. For employers, this requirement entails a tax linked to the number of their employees receiving subsidies in the General Fund.
For each full time employee (defined as working 30 hours or more each week) enrolled in a state exchange and receiving a tax credit, the employer would be required to pay a flat dollar amount… equal to the average tax credit in the state exchanges.
The tax is no doubt intended to strong-arm employers into providing insurance. But what does it actually do? In essence, the fine punishes employers who hire low-wage employees. The value of subsidized employee’s productivity decreases by the amount of the tax the employer is expected to play – so their market wage will drop by the same amount. If this wage falls below the minimum wage – likely, because their wages are already low – then many employers will simply fire them.
Realizing this dilemma, the tax planners attempt to “fix” this problem with an arcane tax cap:
The assessment is capped for all employers at an amount equal to $400 multiplied by the total number of employees at the firm (regardless of how many are receiving the state exchange credit).
Baucus’s planners provide a helpful scenario to demonstrate how the cap will affect incentives:
For example, Employer A, who does not offer health coverage, has 100 employees, 30 of whom receive a tax credit for enrolling in a state exchange offered plan. If the flat dollar amount set by the Secretary of HHS for that year is $3,000, Employer A should owe $90,000. Since the maximum amount an employer must pay per year is limited to $400 multiplied by the total number of employees (for Employer A, 100), however, Employer A must pay only $40,000 (the lesser of the $40,000 maximum and the $90,000 calculated fee).
Because the employer is paying a $400 penalty per employee, rather than a $3000 penalty per subsidized employee, the employer has no specific incentive to decrease the wages of subsidized workers. Problem solved, right? Wrong.
Now the employer has an incentive to lower the wages of all of his workers (or fire them if they are already at minimum wage). Instead of “fixing” the costs created by the original tax, the government planners have spread it across a new group of employees. The tax penalty is of course lower – but this simply means it will be less successful in achieving its questionable objective.
And what if the company in the above example had only 13 workers receiving subsidies? Then the penalty paid would be $39,000 (13 subsidized employees times the $3000 average tax credit, which is less than the $40,000 cap). Now of course, the incentive is to decrease the wages or fire only the subsidized workers. And because the tax is higher, it affects each of these subsidized (and therefore “low-wage”) workers more strongly.
Other costs abound. Because the fee is applied only to subsidized employees working for more than 30 hours a week, companies can dodge the fee by reducing these employees’ hours. Only companies with more than 50 employees are subject to fees, so companies have an incentive to reduce the scale of their operations, or to spin off part of their business as a smaller subsidiary. Seeking these new arrangements bears a cost on the company and the economy at large. Even determining what arrangement is most efficient bears a cost on a company – even if it ultimately decides the best option is to provide health insurance!
The tax planners have attempted to “fix the market’s behavior, and then fix the perverse consequences of their original intervention. Inevitably a new perverse consequence is created. All of this for what? Wages are determined by productivity – this measure only strong-arms employers into offering compensation in a less liquid form than cash. However undesirable the other health care goals of central planners may be, none of them require an employee mandate. Planners could just as easily force citizens to buy health care with an individual mandate – then consumers would have at least the option of directly picking their preferred level of insurance. Community rating, guaranteed issue, pre-existing coverage, and deductible caps do not rely in any important sense on an employer mandate. Only Baucus’s arbitrary desire that employer insurance dominate the market is satisfied by this harmful web of byzantine regulations. Employers, workers, and taxpayers, as usual, are left with the bill.
The following was originally written for Americans for Tax Reform, where I am an intern:
Perhaps the most frustratingly incoherent part of Obama speech Wednesday was his repeated portrayal of the market and government planning as just two possible, non-exhaustive, mutually-reinforcing “solutions” to the current health care “crisis”.
There are those on the left who believe that the only way to fix the system is through a single-payer system like Canada’s — (applause) — where we would severely restrict the private insurance market and have the government provide coverage for everybody. On the right, there are those who argue that we should end employer-based systems and leave individuals to buy health insurance on their own…. I have to say that there are arguments to be made for both these approaches.
Obama likes to present his plan as a sort of third way between government-run health care and the market, incorporating, as he said, “the best ideas of both parties together”. This is essentially nonsense. Our health care system cannot be made “more free market” and “more government-regulated” simultaneously.
The free market and government planning are exhaustive opposites. Every health care choice is either made freely by consumers selecting their most favored option, or it is chosen for them by government mandates. Under a market system, for example, consumers can either choose to buy health insurance through their employer or on the individual market. In a planned economy, by contrast, the government may order them to buy through their employer.
President Obama leaves little doubt as to which direction he will take our health care system:
Now, even if we provide these affordable options, there may be those — especially the young and the healthy — who still want to take the risk and go without coverage. There may still be companies that refuse to do right by their workers by giving them coverage.
And that’s why under my plan, individuals will be required to carry basic health insurance — just as most states require you to carry auto insurance. (Applause.) Likewise — likewise, businesses will be required to either offer their workers health care, or chip in to help cover the cost of their workers.
But we can’t have large businesses and individuals who can afford coverage game the system by avoiding responsibility to themselves or their employees. Improving our health care system only works if everybody does their part.
Obama’s plan, at its heart, requires that consumers be deprived of their free choice, so that the government can micromanage insurance premiums based on arbitrary notions of “just cost distributions”. This is, at its heart, socialism.
The following post was originally written for Americans for Tax Reform, where I am an Associate (intern):
“I understand that the politically safe move would be to kick the can further down the road — to defer reform one more year, or one more election, or one more term. “
– President Obama, September 9, 2009, in his address to Congress
In his speech last night, Obama tried to imitate a man concerned by the costs of his health care proposal. Obama promised that his bill would be deficit neutral:
I will not sign it if it adds one dime to the deficit, now or in the future, period. And to prove that I’m serious, there will be a provision in this plan that requires us to come forward with more spending cuts if the savings we promised don’t materialize.
Obama’s “serious” promises lack substance. As previously argued, pledging “not to sign” a bill is meaningless: the President must veto a bill to block its passage. But the “promised savings” suggestion is even more insidious. Such a provision merely promises to delay any budgetary solution until a crisis has actually arrived. As Obama would say, it kicks the can further down the road to defer reform one more year, one more election, or one more term.
What faith should people have that actual budget cuts will be made at this future point, when they cannot be made now? Congress would have to actively draft specific cuts – cuts that hurt special interests eager to preserve their spot at the public trough. Congress would retain all power to break this non-binding promise. So how likely is it that Congressmen would take up arms against their campaign contributors, instead of raising taxes or taking on more debt?
If Obama were really interested in proposing a fiscally responsible bill, he would be proposing conditional spending, not conditional spending cuts. He would propose subsidies that took effect after his “savings” were realized, not unspecified spending cuts after the savings proved illusory. “Trust me” is not a cost-cutting reform worth $900 billion – or any amount.
Obama’s unserious proposals force us to choose between two conclusions. Either he doesn’t know what he’s doing, or he is insincere. Given his eloquence, education, and the vast resources of his office, the former seems precluded.
This piece was originally written for Americans for Tax Reform’s blog, where I am an Associate (intern):
In his speech to Congress last night, President Obama grounded his health reform plans two contradictory claims. First, President Obama insisted that health insurers were increasingly denying health care to their clients. Then, he argued that America was suffering from a crisis of rising health care expenditures.
More and more Americans pay their premiums, only to discover that their insurance company has dropped their coverage when they get sick, or won’t pay the full cost of care. It happens every day.
Then there’s the problem of rising cost. We spend one and a half times more per person on health care than any other country, but we aren’t any healthier for it. This is one of the reasons that insurance premiums have gone up three times faster than wages.
Obama’s argument betrays either ignorance or a willful disregard for economic reasoning. If insurers engaged in wholesale jettisoning of their most expensive customers, their costs would fall. An insurance company with lower costs would be able to capture more market share from its rivals by lowering its prices. Those rivals would be forced to compete either by matching the new lower premiums or competing in quality – i.e. by indulging in less rescission!
Health care premiums are rising, so we can safely assume that more, not less, health care is being delivered by insurers. To argue that both costs and rescissions are increasing simultaneously is to deny the basic reality of free market competition. Radical overhauls of the health care system should not be grounded in this populist fantasy.
This piece was originally written for Americans for Tax Reform’s blog, where I am an Associate (intern):
Every day after ATR posts new state figures on how cap and trade will destroy jobs and increase energy costs, Media Matters Action’s blog responds, like clockwork, that Waxman-Markey would instead create “green jobs”. For example, after Tuesday’s post on Kansas, Media Matters responded that 17,000 green jobs would be created. Because we know that Media Matters is reading our blog, we figured that we should give them a free economics lesson to explain why cap and trade may “create green jobs” but will still hurt the economy. Read on, Media Matters!
Cap and trade works by setting a cap on CO2 emissions – effectively creating a carbon energy quota. Firms bid for permits from the government to contribute toward this quota. The bidding process imposes a de facto excise tax on the carbon-based energy market. This tax causes the supply of carbon-based energy to decrease. The tax increases – and supply decreases – by the amount necessary to create a new supply-demand equilibrium at the level set by the carbon quota. This can be represented graphically.
The above is a standard supply-demand model of the carbon-based energy market. The horizontal axis represents the quantity of energy produced and consumed. The vertical axis is the unit price of energy. The red line D is downward-sloping demand. The blue lines shows supply, which decreases (shifts left) after the imposition of the cap and trade quota. The quota is shown by the green vertical line “capping” carbon-energy at Q2. The vertical distance between the two supply lines shows the size of the excise tax created by cap and trade.
Economists use the concept of “total surplus” to measure the benefits of a market. Roughly explained, total surplus represents the sum of differences between the benefit for each consumed unit (shown by the demand curve) and the cost for each produced unit (shown by the supply curve). On the graph, the total surplus can be seen as the triangular area between the supply (S) and demand (D).
What happens to the total surplus when the government imposes cap and trade? When the de facto tax goes into effect, the cost of each additional unit of production increases by the amount of the tax. Thus, each unit of energy produced and consumed yields less surplus; the unit surplus by the excise tax. Part of this surplus is taken from consumers in the form of a price increase (P2 is higher than P1). The rest of this reduction is felt by lower unit revenues for producers (P2-Tax is lower than P1).
This tax revenue is retained by society in the form of government revenue. This area is shown on the graph as the two green areas. We can think of this tax revenue as the source of “green job” funding. As the graph demonstrates, “green jobs” are created by eating into and displacing pre-existing economic prosperity. Where the government creates “green jobs”, it destroys other jobs or eats into the taxpayer’s wallet.
But worse than arbitrarily distributed government revenue is dead-weight loss. Dead-weight loss represents goods whose benefit exceeds their cost, but are not produced. The energy quota and tax ensures that a certain amount of production will be lost– represented by the two purple areas on the graph. The real production costs of these goods are lower than their benefit to consumers, but taxes put them out of reach. Dead-weight loss is felt as a decrease in consumer wealth and supplier jobs, and these losses do not yield any ameliorating increase in government spending – the wealth simply disappears.
The government cannot “create” jobs. It can only arbitrarily displace one industry with taxes and then replace it with spending. When it does this, it creates dead-weight losses that harm the economy as a whole. When Media Matters writes that the government will “create” green jobs, they really mean that the government is going to rearrange the energy sector for the detriment of all – what we have argued all along!
This piece was originally posted on Americans for Tax Reform’s blog where I am an associate (intern).
A “public option” health insurer would create a new government sponsored enterprise in our health care market. Government enterprises are not merely inefficient – they are the harbringer of private competition’s slow death by regulation. Previously, we noted how the government has jealously legislated an anti-competitive zone around the US Postal Service. But there is an equally compelling example of government’s inability to tolerate competition in the health care market itself: Medicare.
In a Cato Policy Analysis publication, Kent Brown explains how Congress and the Medicare bureaucracy have systematically limited seniors’ choices to purchase health care outside of the Medicare bureaucracy. Through a combination of penalties for seniors who opt-out, regulations on providers, and subsidies, the government has driven private competition out of the senior health insurance market.
For most seniors, enrolling in Medicare need not be a conscious choice. Congress automatically enrolls most eligible seniors in the program. In order to opt out of Medicare Part A (hospital insurance), a senior must give up all Social Security benefits – an extremely painful option for low or middle income individuals who have been forced to pay payroll taxes for their entire working lives. Medicare Part B (outpatient care) is subsidized by general tax funds. Most seniors pay only 25% of their Medicare Part B premium. For every year that eligible seniors opt out of the program, their premiums increase cumulatively by 10%.
Between automatic enrollment, the loss of Social Security funds for opting out of Part A, punitive premium increases for opting out of Part B, and the artificially low cost of enrollment, choosing not to enroll in Medicare has become such an unrealistic option that, by 1997, private insurers had completely left the senior health insurance market. Only seniors rich enough to pay their own unexpected health care fees can afford to seek health care outside of Medicare.
Once seniors have enrolled in Medicare, they essentially lose the option to pay for their own health care. This is accomplished by a rule against “private contracting” for Medicare-covered services. This rule prohibits physicians from accepting private reimbursement for procedures that would be covered under Medicare. If a physician wishes to receive private reimbursement for these services, he must agree not to participate in Medicare for a period of two years. Because nearly all seniors have been herded into the program, opting out entirely would cripple most providers’ practices. Medicare ensures that providers will not find this alternative profitable by fixing rates for coverage of its beneficiaries.
Medicare has bullied away competition at both the insurer and provider level. The government’s freedom from competition has allowed it to act as an arbitrary monopoly. The result is predictable. Medicare operates inefficiently and unresponsively. Brown points to studies showing that nearly 30% of its provided care yields no health benefits. Medicare does not bother to provide true catastrophic coverage; as Sue Blevins has noted, Medicare does not cover the expenses of hospital visits after they exceed 150 days. Medicare also carefully regulates the legal amount of care that patients can purchase from even those providers who have opted out of the system – subjecting them to a government rationing scheme without alternatives.
These failings are not incidental to Medicare. They are predictable results of government entrance into the market. Because government enterprises rely on subsidies to provide “cheap” goods, people over-consume their products. Only by arbitrarily limiting the services it produces can Medicare control its costs. But if it allows competitors to remain in the market, consumers will notice the arbitrariness of these rationing decisions. Since only private, unsubsidized competitors will offer the rationed-away services, consumers will realize that the government inherently does not give them “what they want”. Killing private competition is the government’s way of covering up its own inevitable arbitrariness.
The public option can be no different from every other government venture. Because it has no stake in success and a government guarantee against failure, it will be run inefficiently. Subsidies will be necessary to ensure its health. And if these subsidies do not drive away its competitors outright, the public option will still have the same incentives for undercutting the private market as Medicare and the Postal Service: the private sector makes them look bad.
This piece was originally posted on Americans for Tax Reform’s blog, where I am an Associate (intern).
“If you think about it, UPS and FedEx are doing just fine, right? No, they are. It’s the Post Office that’s always having problems.”
– President Obama, 8/11/09
Obama is right – the post office isn’t doing so well. Recently, Postmaster General John Potter requested that Congress end Saturday mail delivery in order to cut costs. As a rule, government sponsored enterprises (GSEs) fail to operate efficiently. GSEs exist to fill political, rather than market, demands, and they may not offer a product at a price that anyone is really willing to pay. Because politicians will ensure that organizations like the post office continue to function, its directors have limited incentives to cut unnecessary costs or operate at a profit.
So what will happen when the public option realizes, like the post office, that it cannot, metaphorically speaking, pay for health care “every day of the week”? It could imitate the post office and simply shut down on Sunday and perhaps Saturday as well. No consumers would sign up for insurance that only offered a 6/7 chance of providing coverage.
But a plan so bad that no one would purchase it fails to satisfy the arbitrary political demand for substantial government interference in the market. A government determined to have a “viable” public alternative to the private market is left with a few options once their offering fails on its own merits. They can subsidize it openly and have taxpayers pay for “weekend health care”. They can subsidize it implicitly by outsourcing administrative functions to other branches of the government (as the government outsources Medicare funds collection to the IRS). Or it can tilt the market in the public option’s favor by granting it special tax status and immunity from certain types of regulations and by passing laws that require the private market to adopt the public offering’s more expensive methodology.
Or it can do all of the above. As Edward Hudgins explains, the post office is a vivid example of government interference in defense of its sponsored firm. Congress has favored the post office with direct subsidies, tax privileges, and bans against “first-class mail” delivery in inter- and intra-city markets. Despite this generous patronage, the US Postal Service is $6 billion in debt.
Government offerings are a threat precisely because they respond to political, rather than market demand. Like the post office, they can only control costs by rationing. And like the post office, they can only ration after their competition has been regulated away. The government can cut health care on Saturday only after it has cut the rest of the private market. The twin arbitrary political demands of a public option ensure that we will be left with one meager, inefficiently delivered option. Why cater to politicians’ demands instead of actual consumer preferences?
Photo Credit: Davonteee
And probably not a co-op.
Note: this post was originally written for Americans for Tax Reform. It has been posted here in advance and may be serialized later to the ATR blog.
The White House has started to hint that the public option may no longer be a required feature of health care reform. Yesterday, Obama’s Health and Human Services Secretary Kathleen Sebelius suggested that a “co-op” might be an acceptable alternative to a government run public plan. But what, exactly, is a co-op? And would a government run co-op be substantially different from the public option supported by most Democrats?
In general, a co-op is a company owned by its customers, or members. The members or owners of an insurance co-op would be its policy holders. Co-op advocates claim, somewhat speciously, that co-ops deliver superior care because policy holders will be co-owners of their policy (alongside the tens of thousands of other co-op members).
If co-ops are more efficient in delivering health care, why don’t they exist? They do, after a fashion. Michael Tanner of the Cato Foundation notes that successful insurers regarded as co-ops such as Seattle’s Group Health Cooperative, California’s PacAdvantage, and Minneapolis’s Health Partners, Inc. have existed for some time. Tanner concludes:
By all accounts the people insured through these co-ops are happy with their choice. But there is no evidence that they are significantly less expensive or more efficient than other insurers.
Why are Democrats excited about a co-op if its slightly different corporate organization yields an identical product? For one thing, they aren’t actually proposing a co-op. They’re offering a public plan and just calling it a co-op.
In particular, Senator Chuck Schumer, one of the key Finance Committee negotiators, has proposed a co-op that would be subsidized by a $10 billion start up fund and controlled by presidential appointees. Schumer has made it clear that he wants a government-run national alternative to the private market.
If a “co-op” is controlled by presidential appointees, it’s unclear in what sense it would actually be a co-op. It would be meaningless to claim that an insurance option was owned by its policy holders if it were in fact controlled by the government. Importantly, HHS Secretary Sebelius seems to have been endorsing Schumer’s version of the co-op, and not the more moderate version being discussed by others like Senator Kent Conrad. Co-ops are ok, she explained, as long as they are not private insurance companies (i.e. they are public government insurance companies):
That’s really the essential part, is you don’t turn over the whole new marketplace to private insurance companies and trust them to do the right thing. We need some choices, we need some competition.
A government controlled, subsidized, “co-op” national insurance option is not an alternative to the public plan – it is the public option. Despite rhetoric to the contrary, it would be a rigid, bureaucratic entity. The massive $10 billion subsidy would tilt the market in the co-op’s favor. Congress and the President would be invested in its success because of the politically appointed directorship. This makes further subsidies, perhaps glossed as temporary start-up funds, likely or inevitable.
As the Heritage Foundation has noted, the government sponsored enterprise (GSE) model has a long and dismal history. Smaller rural electricity cooperatives have remained subsidized for nearly 80 years. The larger GSEs Fannie Mae and Freddie Mac were able to drive many competitors from the housing finance market because they had the implicit backing of the Federal government. This guarantee became explicit when the government bailed out the failing firms after the housing market collapse – at a cost that may exceed $100 billion. Even if a government sponsored co-op were not explicitly subsidized past its start-up costs, it would still receive the same implicit subsidies that covered Fannie and Freddie.
Absent the direct government controls envisioned by Schumer and, apparently, Sebelius, explicit and implicit subsidies would still be a risk for any government-sponsored national “alternative” to the private market. The more moderate co-op proposals advanced by Senator Conrad and others on the Finance Committee suffer from these fatal flaws.
Heritage has laid out conditions under which co-ops could be created – if co-ops, and not a public government-run option were what Congress really wanted. As usual, increased health care choice requires less and not more government interference. Government cannot create options for consumers; it can only choose whether or not it wants to limit them. This reality may be upsetting to Schumer, Sebelius, et al. who undoubtedly want to be able to make something new for Americans. If the frustration grows unbearable, they can always look for a job in the private sector.
This post was originally written for Americans for Tax Reform’s Blog, where I am an Associate (intern).
This weekend, the CBO shot down another hollow Obama administration “savings” proposal. Obama’s budget director Peter Orszag endorsed an Independent Medicare Advisory Council (IMAC), which would have transferred some authority to the executive to reduce Medicare expenses (probably by reducing payments to doctors).
Savings might not be realized at all because the proposal specifies a process without specific goals for savings or a “fall-back” plan for ensuring spending reductions if the combination of annual IMAC recommendations and Presidential approval does not produce hoped-for savings.
To translate for the CBO: “Trust me” is not a savings proposal. IMAC is a vague promise to figure out, at some unspecified date in the future, some unspecified way of generating an unspecified amount of savings. Congress and Obama might as well just admit that they don’t want to deal with the hard, important stuff now. To be nice, CBO scored the proposal for just $2 billion in savings over the next ten years.
Democrat policy cheerleaders like Ezra Klein have complained that Americans aren’t paying enough attention to supposed-cost control measures. There’s a good reason Americans aren’t impressed. The cost-cutting reforms just aren’t serious and the draft health care bills prove it. The Democratic “reform” proposals are larded with massive subsidies that cost hundreds of billions of dollars a year. Why? Because if they smother the health care industry with money they can make costs look like they are decreasing – for a while.
If Democrats believed their proposals actually cut costs, they wouldn’t need the subsidies. Alternatively, if they were confident that measures like IMAC actually produced budgetary savings, they could make subsidies floating and dependent on CBO measurements of actually attained savings. Until the subsidies go away or are linked to attained savings, it is reasonable to assume that Democrats don’t take their own reforms seriously. With the stakes this high, “trust me” is not an option.