Understanding the House Democrats' health care bill

Understanding the House Democrats' health care bill

Yesterday I posted and described the draft Kennedy-Dodd health care bill. Today I would like to do the same for an outline produced by House Democrats.

Here is a three-page outline of “Key Features of the Tri-Committee Health Reform Draft Proposal in the House of Representatives,” dated yesterday (June 8, 2009).

The three committees are:

  • The House Ways & Means Committee, chaired by Rep. Charlie Rangel (D-NY). The Health Subcommittee is chaired by Rep. Pete Stark (D-CA).
  • The House Energy & Commerce Committee, chaired by Rep. Henry Waxman (D-CA). The Health Subcommittee is chaired by Rep. Frank Pallone, Jr. (D-NJ).
  • The House Committee on Education & Labor, chaired by Rep. George Miller (D-CA). The Health, Employment, Labor and Pensions Subcommittee is chaired by Rep. Robert Andrews (D-NJ).

The document suggests this is a joint product of the three committees and/or their subcommittees. My sense, however, is that it is Speaker Pelosi who is driving the bus. This is in contrast to the Senate, where the committee chairmen (Kennedy/Dodd and Baucus) appear to have the pen, in less well-coordinated efforts.

Kennedy-Dodd and the House bill outline are remarkably similar. Whether this represents House-Senate coordination or parallel thought processes is unclear.

I think the easiest way for me to present the House bill outline is in comparison with the Kennedy-Dodd bill. So here my description from yesterday of the Kennedy-Dodd bill, with today’s comparison to the House bill outline in red. I hope it’s comprehensible and useful this way. If you read yesterday’s post, you can skim the text in black and focus on the new text in blue.

Here are 15 things to know about the draft Kennedy-Dodd health bill and the House bill outline.

  1. The Kennedy-Dodd bill would create an individual mandate requiring you to buy a :qualified” health insurance plan, as defined by the government. If you don’t have “qualified” health insurance for a given month, you will pay a new Federal tax. Incredibly, the amount and structure of this new tax is left to the discretion of the Secretaries of Treasury and Health and Human Services (HHS), whose only guidance is “to establish the minimum practicable amount that can accomplish the goal of enhancing participation in qualifying coverage (as so defined).” The new Medical Advisory Council (see #3D) could exempt classes of people from this new tax. To avoid this tax, you would have to report your health insurance information for each month of the prior year to the Secretary of HHS, along with “any such other information as the Secretary may prescribe.” The House bill also contains an individual mandate. The outline is less specific but parallel: Once market reforms and affordability credits are in effect to ensure access and affordability, individuals are responsible for having health insurance with an exception in cases of hardship.
  2. The Kennedy-Dodd bill would also create an employer mandate. Employers would have to offer insurance to their employees. Employers would have to pay at least a certain percentage (TBD) of the premium, and at least a certain dollar amount (TBD). Any employer that did not would pay a new tax. Again, the amount and structure of the tax is left to the discretion of the Secretaries of Treasury and HHS. Small employers (TBD) would be exempt.The House bill outline also contains an employer mandate that appears to parallel that in Kennedy-Dodd: “Employers choose between providing coverage for their workers or contributing funds on behalf of their uncovered workers.”
  3. In the Kennedy-Dodd bill, the government would define a qualified plan:
    1. All health insurance would be required to have guaranteed issue and renewal, modified community rating, no exclusions for pre-existing conditions, no lifetime or annual limits on benefits, and family policies would have to cover “children” up to age 26.The House bill outline is consistent with but less specific than the Kennedy-Dodd legislative language. The House bill outline would “prohibit insurers from excluding pre-existing conditions or engaging in other discriminatory practices.” I will keep my eye on what “other discriminatory practices” means in the legislative language. Does that mean that a health plan cannot charge higher premiums to smokers? Like the Kennedy/Dodd bill, the House bill outline would preclude health plans from imposing lifetime or annual limits on benefits: “Caps total out-of-pocket spending in all new policies to prevent bankruptcies from medical expenses.” This would raise premiums for new policies. The House bill outline “introduces administrative simplification and standardization to reduce administrative costs across all plans and providers.” I don’t know what this means, but suggest keeping an eye on it.
    2. A qualified plan would have to meet one of three levels of standardized cost-sharing defined by the government, “gold, silver, and bronze.” Details TBD. Same: “… by creating various levels of standardized benefits and cost-sharing arrangements…” It also contains this addition relative to Kennedy-Dodd: “… with additional benefits available in higher-cost plans.” But note the “various levels of standardized benefits.” This appears to be more expansive government control of health plan design than in the Kennedy-Dodd draft.
    3. Plans would be required to cover a list of preventive services approved by the Federal government.This is unspecified in the House bill outline. We’ll have to wait to see legislative language.” The House bill would require plans to “waive cost-sharing for preventive services in benefit packages.”
    4. A qualified plan would have to cover “essential health benefits,” as defined by a new Medical Advisory Council (MAC), appointed by the Secretary of Health and Human Services. The MAC would determine what items and services are “essential benefits.” The MAC would have to include items and services in at least the following categories: ambulatory patient services, emergency services, hospitalization, maternity and new born care, medical and surgical, mental health, prescription drugs, rehab and lab services, preventive/wellness services, pediatric services, and anything else the MAC thought appropriate.This appears parallel but is less specific for now: “Independent public/private advisory committee recommends benefit packages based on standards set in statute.” I find the “standards set in statute” interesting. It suggests that provider and disease interest groups will have two fora in which to lobby for their benefits to be mandated: Congress, and the advisory committee.
    5. The MAC would also define what “affordable and available coverage” is for different income levels, affecting who has to pay the tax if they don’t buy health insurance. The MAC’s rules would go into effect unless Congress passed a joint resolution (under a fast-track process) to turn them off.The House bill outline is silent on this.
  4. Health insurance plans could not charge higher premiums for risky behaviors: “Such rate shall not vary by health status-related factors, … or any other factor not described in paragraph (1).” Smokers, drinkers, drug users, and those in terrible physical shape would all have their premiums subsidized by the healthy. The House bill outline says it would “prohibit plans [from] rating (charging higher premiums) based on gender, health status, or occupation and strictly limits premium variation based on age.” If the bill were to provide nothing more, this would appear to parallel the Senate bill and preclude plans from charging higher premiums for risky behaviors.
  5. Guaranteed issue and renewal combined with modified community rating would dramatically increase premiums for the overwhelming majority of those Americans who now have private health insurance. New Jersey is the best example of health insurance mandates gone wild. In the name of protecting their citizens, premiums are extremely high to cover the cross-subsidization of those who are uninsurable.The House bill outline is silent on guaranteed issue and renewal. I’m going to make an educated guess that the bill includes these provisions as part of “other discriminatory practices,” and they have just left them out of the outline. Given the philosophy behind this outline (with which I disagree), it would be a striking omission. But for now, the outline says nothing specific on these topics.
  6. The bill would expand Medicaid to cover everyone up to 150% of poverty, with the Federal government paying all incremental costs (no State share). This means adding childless adults with income below 150% of the poverty line.The House bill outline “expands Medicaid for the most vulnerable, low-income populations,” so we have no specifics other than that there’s an expansion.” I cannot tell if this is expanding eligibility or benefits. The outline also “improves payment rates to enhance access to primary care under Medicaid.” I assume this means the bill would expand the Federal share paid of each dollar spent by a State Medicaid program on primary care, rather than the Federal government actually mandating specific payment rates to be implemented by States. Federal micromanagement of specific Medicaid provider payment rates was eliminated in the mid 1990s.
  7. People from 150% of poverty up to 500% (!!) would get their health insurance subsidized (on a sliding scale). If this were in effect in 2009, a family of four with income of $110,000 would get a small subsidy. The bill does not indicate the source of funds to finance these subsidies.The House bill outline has a sliding scale up to 400% of poverty. If this were in effect in 2009, a family of four with income of $88,000 would get small subsidy.
  8. People in high cost areas (e.g., New York City, Boston, South Florida, Chicago, Los Angeles) would get much bigger subsidies than those in low cost areas (e.g., much of the rest of the country, especially in rural areas). The subsidies are calculated as a percentage of the “reference premium,” which is determined based on the cost of plans sold in that particular geographic area.The House bill outline is not specific on this point. I would not expect it to be – this is something you can tell only from legislative language.
  9. There would be a “public plan option” of health insurance offered by the federal government. In this new government health plan, the federal government would pay health care providers Medicare rates + 10%. The +10% is clearly intended to attract short-term legislative support from medical providers. I hope they are not so naive that they think that differential would last.The House bill outline “creates a new public health insurance within the Exchange … the public health insurance option competes on ‘level field’ with private insurers in the Exchange.” There are no specifics on how the public plan would work, or on provider payment rates.
  10. Group health plans with 250 or fewer members would be prohibited from self-insuring.” ERISA would only be for big businesses.The House bill outline is silent on this point.
  11. States would have to set up “gateways” (health insurance exchanges) to market only qualified health insurance plans. If they don’t, the Feds will set up a gateway for them.The House calls it an Exchange rather than a Gateway. While the Senate bill would tell each State, “Create a Gateway or we’ll create one for you,” the House bill outline says to each State, “We’re creating a single new national Exchange. You’re in it unless you develop your own State or Regional Exchange.”
  12. Health insurance plans in existence before the law would not have to meet the new insurance standards. This creates a weird bifurcated system and means you would (probably) be subject to a different set of rules when you change jobs.The House bill outline appears to parallel the Kennedy-Dodd draft: “Phases-in requirements to benefit and quality standards for employer plans.” This means that new plans will be more expensive than old plans. It also means they’re creating a bifurcated system with all sorts of perverse unintended consequences for employment flexibility.
  13. The bill does not specify what spending will be cut or what taxes will be raised to pay for the increased spending. That is presumably for the Finance Committee to determine, since it’s their jurisdiction. The House bill outline lists specific topics for changes to Medicare reimbursement:
    • Changing (how?) the Medicare reimbursement for doctors, called the “Sustainable Growth Rate” (SGR).
    • “Increasing reimbursement for primary care providers”
    • “Improving” the Medicare drug program. I won’t be surprised if, when I see the specifics, I disagree that their changes are “improvements.” In the past this has meant having the federal government mandate specific prices for drugs.
    • Cutting payments to Medicare Advantage plans.
    • Expanding low-income subsidies for seniors and eliminating cost-sharing for all preventive services in Medicare.

    The House bill outline also uses positive language to describe things that might generate budgetary savings from Medicare and/or Medicaid. The hospital readmissions point is specific. The first two points could increase or decrease federal spending, depending on the specifics.

    • “Use federal health programs … to reward high quality, efficient care, and reduce disparities.”
    • “Adopt innovative payment approaches and promote[s] better coordinated care in Medicare and the new public option through programs such as accountable care organizations.”
    • “Attack the high rate of cost growth to generate savings for reform and fiscal sustainability, including a program in Medicare to reduce preventable hospital readmissions.”
  14. The bill defines an “eligible individual” as “a citizen or national of the United States or an alien lawfully admitted to the United States for permanent residence or an alien lawfully present in the United States.” The House bill outline is silent on this point.
  15. The bill would create a new pot of money for state gateways to pay “navigators” to educate people about the new bill, distribute information about health plans, and help people enroll. Navigators receiving federal funds “may include … unions, …” The House bill outline is silent on this point.

This would have severe effects on the more than 100 million Americans who have private health insurance today:

  • The government would mandate not only that you must buy health insurance, but what health insurance counts as “qualifying.”
  • Health insurance premiums would rise as a result of the law, meaning lower wages.
  • A government-appointed board would determine what items and services are “essential benefits” that your qualifying plan must cover.
  • You would find a tremendous new disincentive to switch jobs, because your new health insurance may be subject to the new rules and would therefore be significantly more expensive.
  • Those who keep themselves healthy would be subsidizing premiums for those with risky or unhealthy behaviors.
  • Far more than half of all Americans would be eligible for subsidies, but we have not yet been told who would pay the bill.
  • The Secretaries of Treasury and HHS would have unlimited discretion to impose new taxes on individuals and employers who do not comply with the new mandates. (The House bill outline is not specific on this point.)
  • The Secretary of HHS could mandate that you provide him or her with “any such other information as [he/she] may prescribe.” (The House bill outline is not specific on this point.)

I strongly oppose the Kennedy-Dodd bill and the House Tri-Committee bill.

If this topic interests you, I highly recommend Jim Capretta’s blog Diagnosis.

(photo credit: speaker.house.gov)

Understanding the Kennedy health care bill

Understanding the Kennedy health care bill

Over the weekend a draft of Senator Kennedy’s (D-MA) health care bill leaked. After playing with Adobe Acrobat, here is the text of the draft Kennedy bill as a text file (173 K), and as a single Acrobat file (3.4 MB). Update: I fixed the broken link to the PDF. Unlike the leaked version, both of these are searchable.

Calling it the “Kennedy” bill is something of an overstatement. Senator Kennedy chairs the Senate Health, Education, Labor, and Pensions committee, and his staff wrote the draft. By all reports, however, Chairman Kennedy’s health is preventing him from being heavily involved in the drafting. Senator Reid has designated Senator Chris Dodd (D-CT) to supervise the process, but as best I can tell, it’s really the Kennedy committee staff who are making most of the key decisions. For now I will call it the Kennedy-Dodd bill.

As the committee staff emphasized to the press after the leak, this is an interim draft. I assume things will move around over the next several weeks as discussions among Senators and their staffs continue. This is therefore far from a final product, but it provides a useful insight into current thinking among some key Senate Democrats.

Update: I now have a three-page outline of the House Democrats’ health care bill. I have a new post which contains all of the content below, and compares it to the House bill. If you read the new post, you’ll get two for the price of one: Understanding the House Democrats’ [and Kennedy-Dodd] health care bill[s].

Here are 15 things to know about the draft Kennedy-Dodd health bill.

    1. The Kennedy-Dodd bill would create an individual mandate requiring you to buy a “qualified” health insurance plan, as defined by the government. If you don’t have “qualified” health insurance for a given month, you will pay a new Federal tax. Incredibly, the amount and structure of this new tax is left to the discretion of the Secretaries of Treasury and Health and Human Services (HHS), whose only guidance is “to establish the minimum practicable amount that can accomplish the goal of enhancing participation in qualifying coverage (as so defined).” The new Medical Advisory Council (see #3D) could exempt classes of people from this new tax. To avoid this tax, you would have to report your health insurance information for each month of the prior year to the Secretary of HHS, along with any such other information as the Secretary may prescribe.”
    1. The bill would also create an employer mandate. Employers would have to offer insurance to their employees. Employers would have to pay at least a certain percentage (TBD) of the premium, and at least a certain dollar amount (TBD). Any employer that did not would pay a new tax. Again, the amount and structure of the tax is left to the discretion of the Secretaries of Treasury and HHS. Small employers (TBD) would be exempt.
    1. In the Kennedy-Dodd bill, the government would define a qualified plan:
        1. All health insurance would be required to have guaranteed issue and renewal, modified community rating, no exclusions for pre-existing conditions, no lifetime or annual limits on benefits, and family policies would have to cover children up to age 26.
        1. A qualified plan would have to meet one of three levels of standardized cost-sharing defined by the government, gold, silver, and bronze. Details TBD.
        1. Plans would be required to cover a list of preventive services approved by the Federal government.
        1. A qualified plan would have to cover “essential health benefits,” as defined by a new Medical Advisory Council (MAC), appointed by the Secretary of Health and Human Services. The MAC would determine what items and services are “essential benefits.” The MAC would have to include items and services in at least the following categories: ambulatory patient services, emergency services, hospitalization, maternity and new born care, medical and surgical, mental health, prescription drugs, rehab and lab services, preventive/wellness services, pediatric services, and anything else the MAC thought appropriate.
        1. The MAC would also define what “affordable and available coverage” is for different income levels, affecting who has to pay the tax if they don’t buy health insurance. The MAC’s rules would go into effect unless Congress passed a joint resolution (under a fast-track process) to turn them off.
    2. Health insurance plans could not charge higher premiums for risky behaviors: “Such rate shall not vary by health status-related factors, … or any other factor not described in paragraph (1).” Smokers, drinkers, drug users, and those in terrible physical shape would all have their premiums subsidized by the healthy.
    1. Guaranteed issue and renewal combined with modified community rating would dramatically increase premiums for the overwhelming majority of those Americans who now have private health insurance. New Jersey is the best example of health insurance mandates gone wild. In the name of protecting their citizens, premiums are extremely high to cover the cross-subsidization of those who are uninsurable.
    1. The bill would expand Medicaid to cover everyone up to 150% of poverty, with the Federal government paying all incremental costs (no State share). This means adding childless adults with income below 150% of the poverty line.
    1. People from 150% of poverty up to 500% (!!) would get their health insurance subsidized (on a sliding scale). If this were in effect in 2009, a family of four with income of $110,000 would get a small subsidy. The bill does not indicate the source of funds to finance these subsidies.
    1. People in high cost areas (e.g., New York City, Boston, South Florida, Chicago, Los Angeles) would get much bigger subsidies than those in low cost areas (e.g., much of the rest of the country, especially in rural areas). The subsidies are calculated as a percentage of the “reference premium,” which is determined based on the cost of plans sold in that particular geographic area
    1. There would be a “public plan option” of health insurance offered by the federal government. In this new government health plan, the federal government would pay health care providers Medicare rates + 10%. The +10% is clearly intended to attract short-term legislative support from medical providers. I hope they are not so naive that they think that differential would last.
    1. Group health plans with 250 or fewer members would be prohibited from self-insuring. ERISA would only be for big businesses.
    1. States would have to set up “gateways” (health insurance exchanges) to market only qualified health insurance plans. If they don’t, the Feds will set up a gateway for them.
    1. Health insurance plans in existence before the law would not have to meet the new insurance standards. This creates a weird bifurcated system and means you would (probably) be subject to a different set of rules when you change jobs.
    1. The bill does not specify what spending will be cut or what taxes will be raised to pay for the increased spending. That is presumably for the Finance Committee to determine, since it’s their jurisdiction.
    1. The bill defines an “eligible individual” as “a citizen or national of the United States or an alien lawfully admitted to the United States for permanent residence or an alien lawfully present in the United States.”
  1. The bill would create a new pot of money for state gateways to pay “navigators” to educate people about the new bill, distribute information about health plans, and help people enroll. Navigators receiving federal funds “may include … unions, …”

This would have severe effects on the more than 100 million Americans who have private health insurance today:

    • The government would mandate not only that you must buy health insurance, but what health insurance counts as “qualifying.”
    • Health insurance premiums would rise as a result of the law, meaning lower wages.
    • A government-appointed board would determine what items and services are “essential benefits” that your qualifying plan must cover.
    • You would find a tremendous new disincentive to switch jobs, because your new health insurance may be subject to the new rules and would therefore be significantly more expensive.
    • Those who keep themselves healthy would be subsidizing premiums for those with risky or unhealthy behaviors.
    • Far more than half of all Americans would be eligible for subsidies, but we have not yet been told who would pay the bill.
    • The Secretaries of Treasury and HHS would have unlimited discretion to impose new taxes on individuals and employers who do not comply with the new mandates.
  • The Secretary of HHS could mandate that you provide him or her with “any such other information as [he/she] may prescribe.”

I strongly oppose this bill.

Update: If this topic interests you, I highly recommend Jim Capretta’s blog Diagnosis.

(photo credit: kennedy.senate.gov)

By focusing only on covering the uninsured, are we solving the wrong problem?

By focusing only on covering the uninsured, are we solving the wrong problem?

The traditional Beltway logic on health care reform goes like this:

  • The problem is that 46 million Americans lack health insurance. (I addressed why this number is incorrect and misleading last Thursday.)
  • Government should provide health insurance to those 46 million people, or at least pay for it.
  • Let’s expand a taxpayer-subsidized health insurance program to cover the 46 million, or maybe create a new program.
    • (Alternately: Let’s mandate that everyone has to buy/have health insurance.)
  • This means everyone will have health insurance. We have solved the problem.

Much of the health policy debate centers on how to solve this problem. Liberals want to expand government programs: Medcaid, S-CHIP, Medicare, or the federal employee health benefit program (FEHBP). Conservatives argue that we should instead provide tax incentives to subsidize the purchase of private health insurance.

I fall in the latter camp. My preferred health reform includes taxpayer subsidies for the purchase of private health insurance. But before we jump into the argument about the solution, it is important that we define the problem correctly. Today I would like to challenge the premise that the goal of health reform should be only, or even primarily, to provide taxpayer-subsidized health insurance to those who are uninsured. That defines the problem too narrowly.

Here is my alternate logic:

  • The problems are (a) health insurance is expensive, and (b) the cost of health insurance grows faster than compensation.
  • These two factors (expensive and getting more so) mean that:
    1. Private health insurance gets more expensive each year for the 202 million Americans who have it. This directly squeezes wages when health insurance is provided by an employer, and household budgets no matter how it is purchased.
    2. Uninsured people cannot afford health insurance. Those who can just barely afford it this year risk losing it next year and becoming uninsured as their premiums grow faster than their wages.
    3. Public health insurance expenditures for Medicare, Medicaid, S-CHIP, and FEHBP roughly track private health insurance expenditures over time. High and rapidly-growing health insurance costs therefore crush federal and state government budgets.
  • If we can figure out ways to make health insurance less expensive, and/or slow the growth of health insurance premiums, we will solve all three of these problems.
  • If our solution slows the growth rate of health insurance premiums, we will have a lasting solution, unlike those solutions which just shift costs from one payor to another (usually, the taxpayer).

health insurance cost flowchart

Washington focuses on the blue box problem, driven by the phrases “46 million uninsured” and “universal coverage.” In doing so, policymakers often forget that the red box problem is the primary cause of the blue box problem.

I argue that policymakers should try to solve the red box problem, not the blue box problem, for two reasons:

  1. Solving the red box problem solves the blue box problem of the 11-35 million uninsured. It also helps the 200+ million people who have private health insurance, and it helps solve the #1 problem of federal and state government budgets.
  2. If you just try to solve the blue box problem, and if you do so by shifting the costs onto someone else (the taxpayer), you will end up chasing your tail, because within a few years the growth of health insurance premiums will put you right back where you started. You will create an additional unsustainable burden on the taxpayer.

Rather than just trying to expand taxpayer-financed health insurance to the uninsured, policymakers should try to understand and address why health insurance is expensive and getting more so each year. If they can address the red box problem, they will solve all three symptoms and create a longer-lasting solution.

My alternate logic may seem trivially obvious. Yet in Washington it is frequently forgotten or ignored.

How many uninsured people need additional help from taxpayers?

How many uninsured people need additional help from taxpayers?

When discussing health insurance we frequently hear that there are “46 million uninsured” in America. This figure is from a monthly survey of about 50,000 households done by the Bureau of Labor Statistics and the Census Bureau. This Current Population Survey (CPS) then uses statistical techniques to paint a picture of the entire U.S. population.

Advocates for expanding taxpayer-subsidized health insurance, and their allies in the press, repeat this 46 million number constantly. It paints the following technically accurate but misleading picture:

insured v uninsured

This looks really bad. At least there are more than 250 million people with health insurance – that is clearly a good thing that we never hear it in the press. Still, there’s a lot of red there. It means that in 2007 (15%) of Americans lacked health insurance, according to the CPS. Advocates, some elected officials, and the press round that number up to “1 in 6 Americans.” We hear that there are “46 million uninsured,” and then we jump to the conclusion that government needs to help 46 million people buy health insurance, subsidized by taxpayers.

Let’s look inside that 45.7 million number and see what we can learn. Here is our key graph:

uninsured subpopulations

First, I need to make a technical disclaimer. I had this same detailed breakdown for 2005 data, done by health experts when I was part of the Bush Administration. I now have a 2007 total (45.7 million), and so I have proportionately adjusted the components to match that new total. It is a back-of-the-envelope calculation, but I am confident that it is solid, and it does not move any component by more than two hundred thousand. In addition, the expert analysis I am using ensures that the subdivisions shown above do not overlap. I will slightly oversimplify that point in the following description of the breakdown to make the explanation readable.

Let us walk through the graph from top to bottom.

  • There were 45.7 million uninsured people in the U.S. in 2007.
  • Of that amount, 6.4 million are the Medicaid undercount. These are people who are on one of two government health insurance programs, Medicaid or S-CHIP, but mistakenly (intentionally or not) tell the Census taker that they are uninsured. There is disagreement about the size of the Medicaid undercount. This figure is based on a 2005 analysis from the Department of Health and Human Services.
  • Another 4.3 million are eligible for free or heavily subsidized government health insurance (again, either Medcaid or SCHIP), but have not yet signed up. While these people are not pre-enrolled in a health insurance program and are therefore counted as uninsured, if they were to go to an emergency room (or a free clinic), they would be automatically enrolled in that program by the provider after receiving medical care. There’s an interesting philosophical question that I will skip about whether they are, in fact, uninsured, if technically they are protected from risk.
  • Another 9.3 million are non-citizens. I cannot break that down into documented vs. undocumented citizens.
  • Another 10.1 million do not fit into any of the above categories, and they have incomes more than 3X the poverty level. For a single person that means their income exceeded $30,600 in 2007, when the median income for a single male was $33,200 and for a female, $21,000. For a family of four, if your income was more than 3X the poverty level in 2007, you had $62,000 of income or more, and you were above the national median.
  • Of the remaining 15.6 million uninsured, 5 million are adults between ages 18 and 34 and without kids.
  • The remaining 10.6 million do not fit into any of the above categories, so they are:
    • U.S. citizens;
    • with income below 300% of poverty;
    • not on or eligible for a taxpayer-subsidized health insurance program;
    • and not a childless adult between age 18 and 34.

As a policy matter, we care not about the total number of uninsured, but about the subset of that group that we think “deserves” taxpayer-subsidized health insurance. That is a judgment call that involves some value choices.

I will make one value choice for you and boldly assert that, if you are already enrolled in or eligible for one free or heavily subsidized health insurance program, we can rule you out as needing a second. That simple statement reduces the 45.7 million number down to 35 million, by excluding the Medicaid undercount and Medicaid/SCHIP eligible from our potential target population.

I think most people would also say that the 10.6 million I have labeled as “remaining uninsured” and shaded in yellow above are the most sympathetic target population.

It then gets tricky.

  • Should people with incomes near or above the national median get health insurance subsidized by taxpayers?
  • How about non-citizens? Should we distinguish between documented and undocumented non-citizens? Between those who pay taxes and those who do not? Remember that we are not talking about who should get emergency medical care, but instead who should get taxpayer subsidies to finance the purchase of pre-paid health insurance. Does that change your answer?
  • Many young adults and childless couples are in good to excellent health. Do they deserve subsidies, when they may be making what they believe to be a rational economic decision and using their financial resources for things other than buying health insurance? Should a 25-year old Yale graduate triathlete making $30K per year get his health insurance subsidized by taxpayers if he chooses not to buy it because his budget is tight?

There is no clear right or wrong answer to the above questions. You need to make your own value choices for them.

Now let us look at the effects on the totals for several hypothetical answers to these questions. Remember that the advocates, some elected officials, and press tell us that the numbers are: 46 million uninsured, 15% of the population, and 1 in 6 Americans “are uninsured.” I suggest you try to figure out which of the following is closest to your view.

  1. Ann wants to subsidize everybody, but agrees that we don’t need to double-subsidize. She excludes the Medicaid undercount and Medicaid/SHIP eligible from her target population and ends up with 35 million people. That is still an enormous amount, but it is 10.7 million less than the headline number she heard in the news. Her target population is now 11.7% of the total U.S. population, down from 15%. Put another way, she would like taxpayers to help between 1 in 8 and 1 in 9 Americans who she feels are deserving of subsidies to buy health insurance, rather than the 1 in 6 she heard in the press.
  2. Bob agrees with Ann, but thinks that subsidies should go to the poor, or at least not to those who have above the median (or near median) incomes. His target population is therefore about 25 million people, way down from 46 million. That is 8.4% of the total U.S. population, or 1 in 12 Americans. That is still a huge problem, but it is very different from 1 in 6.
  3. Carla agrees with Bob that subsidies should not go to those with incomes near or above the national median. She also thinks that undocumented citizens should get emergency medical care, but not taxpayer-subsidized pre-paid health insurance. I will guess a 50/50 split between documented and undocumented of the 9.3 million uninsured non-citizen, and I would appreciate it if someone could help me refine this. With this assumption, Carla’s target population is about 21 million, or 7% of the total U.S. population. That is roughly 1 in 14 Americans.
  4. Doug thinks only American citizens with incomes below the national median (and who are not already eligible for another program) should be eligible for additional aid. His target population is therefore the bottom two bars on the graph, or 15.6 million people. That is 5.2% of the U.S. population, or 1 in 19 Americans. If Doug were to further limit subsidies to those below 200% of poverty or 150%, his target population would be a few million people smaller.
  5. Edie agrees with Doug, but thinks that if you are a young adult without kids, you should fend for yourself. Her target population is 10.6 million people, or 3.5% of the total U.S. population. That is 1 in 28 Americans.

These are, of course, not the only possible answers, but I think they are a representative bunch. Even for the most “liberal” set of answers (Ann’s), the headline numbers we hear in the press overstate the extent of the problem by more than 10 million people.

Now even Edie’s narrowest 10.6 million target population is still a lot of people who lack health insurance. So why does it matter that the press gets the numbers wrong?

  1. If we misdiagnose the problem, we could easily design the wrong policy solution. A solid quantitative understanding of who we would like to help and why is important.
  2. Health insurance subsidies cost taxpayers tens of billions of dollars each year. If we target these funds well and prioritize, we can help more of the people whom we think are deserving of additional assistance, and fewer of those who need less help. If we target those funds poorly, we will waste a lot of money. This point is independent of the total amount we spend on subsidizing health insurance.
  3. Health insurance competes with other policy goals for an enormous but still ultimately limited pool of taxpayer funds. We should neither overstate nor understate the problem to be solved, so that the tradeoffs with other policy goals can be considered fairly.

When you hear “46 million uninsured,” or “1 in 6 Americans don’t have health insurance,” remember that this is technically correct but misleading. The more important question is, “How many uninsured people need additional help from taxpayers?”

What’s your answer?

Does the President's budget cut the deficit in half?

Does the President's budget cut the deficit in half?

Budget Director Peter Orszag wrote on his blog yesterday that he thinks “Debt held by the public net of financial assets is the most meaningful measure of current federal debt.”

I wrote earlier today why I think Director Orszag’s new metric is misleading and dangerous. Now, however, I’m going to take his argument and apply it to the President’s budget, for which Director Orszag is responsible.

It seems to me that his own logic invalidates his claim (and therefore President Obama’s statement) that the President’s budget would cut the deficit in half by the end of the President’s first term.

Therefore, while our Budget will run deficits, we must begin the process of making the tough choices necessary to restore fiscal discipline, cut the deficit in half by the end of my first term in office, and put our Nation on sound fiscal footing. (President’s Message on the Budget, page 4)

You will remember from my earlier post that debt held by the public is simply the accumulation of the federal budget deficits and surpluses of prior years. It is the sum of all current and past borrowing by the federal government from those outside the government. The deficit is an annual measurement, and the debt is a total of deficits and surpluses over time.

Director Orszag writes that “the most meaningful measure of current federal debt” should net out financial assets held by the U.S. government. If he believes this when measuring debt, then logically you should do the same with the annual deficit. His logic argues that this year’s projected $1.752 trillion federal budget deficit (OMB numbers) is not as good a measure as if we net out the amount of financial assets the U.S. government will purchase this year, which according to OMB is $915 billion (my calculation from Table S-1 of the President’s Budget). The Director’s logic suggests that he would think that the most meaningful measure of this year’s federal budget deficit is to net out this year’s purchase of financial assets. Instead of $1.752 trillion, the “most meaningful” deficit figure for 2009 would be $837 billion.

If the Director disagrees with me extending his logic from the debt to the deficit, I would be intrigued to hear his rationale.

The President has said that his budget will “cut the deficit in half by the end of my first term in office.” Director Orszag has defined that to mean that the 2013 deficit is less than half of the 2009 deficit, as measured on January 20th before they implemented any policy changes:

We project that the deficit for the current fiscal year, including the recovery and stability plans, will be $1.75 trillion, or 12.3 percent of GDP. Of that, $1.3 trillion, or 9.2 percent of GDP, was already in place when we assumed office.

The President is determined to cut this $1.3 trillion deficit by at least half in four years. This would bring the deficit down to $533 billion by fiscal year 2013. More importantly, it would reduce the deficit to about 3 percent of GDP. (Director Orszag’s testimony before the House Budget Committee, March 3, 2009, p. 2.)

If you take the figures in the President’s budget as face value, the Director hits the goal:

  • He projects that the 2009 deficit will be $1.752 trillion.
  • He projected that the 2009 deficit before enacting their new policies would be $1.3 trillion.
  • He projects a 2013 deficit under the President’s budget of $533 billion. That’s 41% of the $1.3 trillion figure, well below half.

Most economists and budgeteers prefer to measure deficits as a percent of the economy. They easily hit their goal using this measure:

  • He projects that the 2009 deficit will be 12.3% of GDP.
  • He projected that the 2009 deficit before enacting their new policies would be 9.2% of GDP.
  • He projects a 2013 deficit under the President’s budget of 3.0% of GDP, well under half the 2009 deficit. They hit this goal with ease.

But his starting (and ending) point for these measurements includes the purchase in 2009 of more than $900 billion of financial assets by the U.S. government (using OMB numbers). According to his blog post yesterday,

If I take a $100 loan from my bank and stick that amount into my bank account without spending any of it, my family and I aren’t poorer, because even as I owe $100 to my bank, my bank owes $100 to me. On net, and as long as the new asset is equal in value to the new liability, there’s no change in my overall financial state. There’s a similar effect when the federal government borrows money in order to invest in financial assets.

It seems to me that this logic (which I don’t buy) should apply equally to the debt and the deficit. His logic suggests that his starting point in 2009 for measuring “cutting the deficit in half” is inflated by hundreds of billions of dollars used to purchase financial assets.

Look at what happens, though, if instead you look at the deficit net of financial assets purchased:

  • The 2009 deficit, net of financial assets purchased in 2009, is $837 billion.
  • The 2013 deficit, net of financial assets purchased (and sold) in 2013, is $565 billion. That’s 67% of the 2009 deficit, well more than half.

And if we do the same thing as a share of the economy, they still fail to hit the President’s goal:

  • The 2009 deficit, net of financial assets purchased, is 5.1% of GDP.
  • The 2013 deficit, net of financial assets purchased, is 3.2% of GDP. That’s 63% of the 2009 deficit, again well more than half.

Now the Director’s test as stated in his testimony uses the 2009 deficit, measured as of January 20th before President Obama’s policies were enacted, as a starting point. OMB’s public numbers do not allow me to net out the financial assets to develop a precise figure for comparison. But we know that logically it’s not bigger than the $837 billion figure given above, so this ambiguity shouldn’t matter, either for aggregate dollars, or for percent of GDP. If anything, it should mean that they miss their “cut in half” target by an even greater amount.

If Director Orszag thinks that debt held by the public net of financial assets is the most meaningful measure of current federal debt, then it would seem logical that the same should apply to the annual federal budget deficit.

But then, using the Administration’s own numbers, the President’s budget does not come close to meeting the President’s goal of cutting the deficit in half by the end of his first term.

(Note to budget reporters: If you hear a response from OMB and would like to share it with me, I’ll give you my reaction.)

Update (12:20 PM Wed): A friend corrects my statement that the debt is simply the accumulation of past deficits. It’s not. The Credit Reform Act measures credit subsidies (like for federal loan or loan guarantee programs) differently than it measures cash flows, and the deficit does not capture “means of financing and cash management, like when Treasury borrows funds and deposits the cash at the Fed.” I stand corrected on these points. But I don’t think this should change my logic above about whether to net out the purchase or sale of financial assets. I don’t see why the differences between deficit and debt accounting should mean that the purchase or sale of financial assets should be treated differently. If the Director or his staff have an answer, I’m all ears.

Let's not hide $1.4 trillion of IOU's

Let's not hide $1.4 trillion of IOU's

Yesterday on his blog the President’s Budget Director, Peter Orszag, asks himself and then answers the question, “How much does the federal government owe?”

This sounds like a technical question of concern only to “those of us wearing the green eyeshades,” but the Director’s suggested answer has dangerous ramifications, and could mislead, or at least confuse taxpayers and financial market participants.

The Director’s answer makes the federal debt appear $1.4 trillion smaller than the way it is traditionally measured. He argues that we should, in effect, ignore 1.4 million million dollars borrowed by the federal government. That is breathtaking.

Let’s look at the Director’s argument and why I think it’s dangerous.

Most budget experts focus on debt held by the public, which Director Orszag accurately describes as “the amount that the federal government owes to others.” I will expand on that a bit with some concrete numbers:

  • Take the total amount the Federal government will spend this year. Specifically, we’re looking at cash”paid” by the U.S. government to someone outside the government in 2009. A budget wonk would call these outlays. I’ll use the nonpartisan Congressional Budget Office’s numbers for current law, so I get $3.85 trillion of outlays for 2009. That is way (way) above historic norms, in part due to the financial stabilization efforts, and in part due to the new “stimulus” law.
  • Now take the amount the Federal government will collect in revenues this year. This is cash coming into the U.S. government from someone outside it. Almost all of this is taxes. CBO says this is $2.186 trillion of revenues for 2009.
  • If the U.S. government is paying out $3.85 trillion in cash (outlays) this year, but collecting “only” <sigh> $2.186 trillion in cash, then we need to come up with the difference somewhere. That difference is $1.667 trillion for 2009. This is what CBO says is the federal budget deficit for 2009.
  • The U.S. government gets this cash by issuing IOUs to people outside the government, aka Treasury bonds. The government gets cash from anyone who buys Treasury bonds – individuals, firms, and foreign governments.
  • The debt held by the public is simply the accumulation of these IOUs. It is the sum of money owed by the U.S. government to others. (Update: See the caveat at the bottom.)

Nothing I have said so far is the slightest bit controversial, but this is where Director Orszag and I part ways. Tuesday he wrote:

As I said at the beginning of this post, I think the most meaningful measure of federal debt is debt held by the public net of financial assets. If I take a $100 loan from my bank and stick that amount into my bank account without spending any of it, my family and I aren’t poorer, because even as I owe $100 to my bank, my bank owes $100 to me. On net, and as long as the new asset is equal in value to the new liability, there’s no change in my overall financial state. There’s a similar effect when the federal government borrows money in order to invest in financial assets.

Suppose I tweak the Director’s metaphor to make it better fit the current situation and illustrate my point. If he takes a $100 loan from his bank and invests it in the business of his deadbeat neighbor Alan I. Gorp, he still owes the bank $100. The bank cannot loan that $100 to anyone else. His (the government’s) borrowing has “crowded out” borrowing by someone else. And who knows how much his $100 investment will be worth next month? We should care not just about his net position, but also about his total liabilities, and especially about how much he (the government) is borrowing from the bank (private sector).

In normal times this would not be a big difference, because the U.S. government in large part stays away from owning financial assets. Now, however, the federal government is buying equity stakes in banks and other large financial firms, and issuing loans to financial and non-financial firms. Director Orszag’s numbers show that the U.S. government owned $506 billion of financial assets last year, and will buy another $915 billion this year. (I’m subtracting “Debt net of financial assets” from “Debt held by the public” on Table S-1 of the President’s budget.) Those are huge numbers, and have a huge effect on what figure you cite for the federal debt.

If you look at the traditional measure of debt held by the public, which you’ll remember is the sum of all IOUs (Treasury bonds) issued by the Federal government, then under the President’s budget and using OMB numbers, that’s equal to $8.36 trillion. Compared to one year of our entire national output (GDP), that’s almost 59% of GDP.

If, however, you net out OMB’s estimate of the value of the financial assets, then the debt held by the public net of financial assets, is “only” $6.94 trillion, equivalent to almost 49% of GDP. That’s still a big bad number, but it’s $1.4 trillion and 10% of GDP less bad than the debt held by the public numbers. That’s a convenient way to make the problem look much smaller. Director Orszag argues that it is also the “most meaningful measure of current federal debt.”

Here is his key paragraph:

As the federal government has acted to stabilize the financial sector amidst the worst financial crisis since the Great Depression, the federal government has purchased significant financial assets … such as preferred equity stakes in Fannie Mae and Freddie Mac. The federal government will likely take a loss on these purchases, but the assets have value. And just as what my bank owes me should be netted against what I owe the bank in determining the health of my personal finances, the value of these assets should be netted against publicly held debt in determining the health of the government’s finances. … Debt held by the public net of financial assets is the most meaningful measure of current federal debt …” (emphasis added)

I disagree with this last statement, but I think I understand why he says it. From his perspective of the federal budget, he’s netting out some of his liabilities with a somewhat liquid asset that he now holds and hopes someday to sell. He concedes the point, however, that he is including some assets and liabilities with his new measure, but excluding others. This makes his new metric suspect.

From the perspective of the U.S. economy, the “netting” comes from different places. The U.S. Treasury has to issue $905 billion of Treasury bonds this year to raise the cash to buy those financial assets. This makes it harder for private firms and individuals to borrow, because they are competing with the government for cash, so they have to pay a higher interest rate. Those funds are then invested in other parts of the economy.

Another way to see why this is a poor metric is to imagine that the U.S. government were to borrow another trillion dollars by issuing even more Treasuries, and then immediately buy one trillion dollars of credit default swaps with the cash raised. According to Director Orszag’s preferred measure, nothing would have changed, because the two transactions would net out. But clearly we would have just had a major impact on the U.S. (and global) financial economies. U.S. government borrowing in these enormous amounts hurts financial markets, no matter what is done with the funds raised.

Director Orszag touches on another problem with his new metric when he writes “The federal government will likely take a loss on these purchases, but the assets have value.” He’s right, but the value of the particular assets being purchased by the government is highly uncertain. How much is he counting as the value of the $19.4 B loaned (so far) to General Motors? I sure hope he is not counting it at face value. What about the $70 B “invested” in AIG, or the $5.5 B in Chrysler? Any private firm valuing these assets would say their values need to be discounted.

The values of these financial assets are highly uncertain and depend heavily on what assumptions OMB uses about the likelihood of them being repaid. For people to trust this metric, they need to understand how it is calculated, which means that OMB should divulge the discounts they are applying to their financial assets. I will guess that he does not want to divulge those assumptions. I wouldn’t if I had his job.

I think the most meaningful measure of current federal debt is still debt held by the public. I think the public policy debate can be further informed by also disclosing the estimated value of the financial assets held by the U.S. government. But policymakers should not net out the two and use that measure instead of the one that most directly measures how much the U.S. government is borrowing from the private sector. This is particularly true when that new measure hides $1.4 trillion of debt borrowed by the U.S. government from the private sector.

Director Orszag, and those measuring his performance, should continue to use debt held by the public as the most meaningful measure of current federal debt. Budget projections will account for that measure to come down over time as the financial assets are sold and funds recouped.

Net measures can hide meaningful information. This is a theme I will return to often. Any time someone in economic policy gives you a net figure, see if you can learn something more by asking about the components that make up the net calculation.

The President’s Budget is titled “A New Era of Responsibility.” In his February 24th Address to the Congress, the President said,

The only way this century will be another American century is if we confront … the mountain of debt they stand to inherit. That is our responsibility.

A new era of responsibility does not begin with hiding $1.4 trillion of that mountain of debt. These IOU’s will not go away just because we ignore them.


Update (12:20 PM Wed): A friend corrects my statement that the debt is simply the accumulation of past deficits. It’s not. The Credit Reform Act measures credit subsidies (like for federal loan or loan guarantee programs) differently than it measures cash flows, and the deficit does not capture “means of financing and cash management, like when Treasury borrows funds and deposits the cash at the Fed.” I stand corrected on these points. I don’t think this changes my logic above about whether to net out the purchase or sale of financial assets.

The President's strong free trade language in Strasbourg

I would like to compliment and thank President Obama for saying this in Strasbourg, France last Friday:

As we take these steps, we also affirm that we must not erect new barriers to commerce; that trade wars have no victors. We can’t give up on open markets, even as we work to ensure that trade is both free and fair. We cannot forget how many millions that trade has lifted out of poverty and into the middle class. We can’t forget that part of the freedom that our nations stood for throughout the Cold War was the opportunity that comes from free enterprise and individual liberty.

I know it can be tempting to turn inward, and I understand how many people and nations have been left behind by the global economy. And that’s why the United States is leading an effort to reach out to people around the world who are suffering, to provide them immediate assistance and to extend support for food security that will help them lift themselves out of poverty.

All of us must join together in this effort, not just because it is right, but because by providing assistance to those countries most in need, we will provide new markets, we will drive the growth of the future that lifts all of us up. So it’s not just charity; it’s a matter of understanding that our fates are tied together — not just the fate of Europe and America, but the fate of the entire world.

The President’s words have meaning, especially when he is speaking overseas. It is particularly important that he said this in France. French farm subsidies and politics are a key stumbling block on the road to a Doha global free trade agreement.

I wish the President’s negotiators had pushed for language like this in the final G-20 statement.

Is $700 billion enough? Part 3: Secretary Geithner says we have more room

Last Friday I posted that I thought the Administration had less than $40 B of room remaining in the TARP. The Wall Street Journal reported today Monday that Treasury says “it has about $134.5 billion left in its financial-rescue fund.” Secretary Geithner addressed this question Sunday on This Week with George Stephanopolous.

GEITHNER: George, we have roughly $135 billion left of uncommitted resources. Less is out the door, but in terms of, if you look at what’s not committed yet, it’s roughly, you know, $135 billion.

Can we reconcile the two? If so, how?

We can piece some of it together from the public record. Here are the key data points:

  1. Geithner: “That estimate [of $135 B] includes a judgment, a very conservative judgment about how much money is likely to come back from banks that are strong enough not to need this capital, now, to get through a recession. But that’s a reasonably conservative estimate.”
  2. Wall Street Journal: “In its estimate, the Treasury projects that it will receive about $25 billion back from banks that have participated in TARP.”
  3. Wall Street Journal: “A Treasury official said Saturday that while the program could cost as much as $250 billion, the $218 billion number is a more-accurate estimate given that a key application deadline for the program has passed.”

The Secretary highlights an important but less well-known feature of the TARP. The law enacted last September limits to $700 B the Treasury’s net outlays at any one point in time. If Treasury gets money back from an investment, they can do something else with it.

Let’s begin by adding a column to my first table from last Friday. The right-most column marks in red the above two adjustments to the Capital Purchase Program (CPP) line, resulting in a new $193 B net estimate. The Administration has not signaled any changes to other elements of this table, and I don’t see how they could. The other funds have all been spent, so there’s not really any available discretion that I can see.

My Fridayestimate
Monday’sTreasurynumbers
Banks — Capital purchase program $250 193
AIG $40 40
Citigroup $25 25
Bank of Amrerica $27.5 27.5
Autos
….GM $13.4 13.4
….Chrysler $4 4
Auto finance
….GMAC(including $1B from UST –> GM –> GMAC) $6 6
….Chrysler Financial $1.5 1.5
Term Asset-backed Lending Facility (TALF)for new securities for consumer credit $20 20
Subtotal, commitments duringthe Bush Administration
$387.4 $330.4

Now I’m going to take their new commitments and put them in tabular form, starting with the new $330.4 B figure above.

Subtotal, commitments duringthe Bush Administration 330.4
+ new commitments bythe Obama Administration
Additional AIG funds 30
Housing subsidies from TARP 50
auto parts suppliers 5
small business loans 15
Further TALF expansion forconsumer credit and mortgages 80
Public Private Investment Plan 75-100
Total 585.4 — 610.4
Remaining room within $700 B total 89.6 – 114.6

We need to get this range ($89.6 B — $114.6 B) up to the Secretary’s $134.5 B figure. To close this gap, we have only a few options:

  1. They dial back some of these commitments.
  2. There is overlap between the items on this table, so that they are, at least in part, non-additive.
  3. I’m missing something fundamental.

I do not see how they can dial back on the $30 B for AIG. I will assume I am not missing something fundamental. That means that the other items must overlap.

I will now start guessing. I will guess they are not going to change the $50 B number for housing, nor the $15 B for small business loans, nor the $5 B for auto parts suppliers. The obvious places for them to go are to start overlapping the big $80 B TALF figure with the other elements, and to squeeze PPIP.

I had assumed that the Administration’s publicly-stated “$100 B consumer and business lending initiative” was $20 B Bush + $80 B Obama, and that they added another $5 B for auto parts suppliers and $15 B for small business loans. Now I cannot see how that assumption is consistent with the Secretary’s statement that he has more room within the $700 B.

Look what happens if instead we assume that the $5 B and $15 B are a part of the “$100 B consumer and business lending initiative.” I will repeat this table with a new column. Let us also assume the lower $75 B figure the Obama team has used for PPIP, rather than the higher $100 B.

Subtotal, commitments duringthe Bush Administration 330.4 330.4
+ new commitments bythe Obama Administration
Additional AIG funds 30 30
Housing subsidies from TARP 50 50
auto parts suppliers 5 5
small business loans 15 15
Further TALF expansion forconsumer credit and mortgages 80 60
Public Private Investment Plan 75-100 75
Total 585.4 — 610.4 565.4
Remaining room within $700 B total 89.6 – 114.6 134.6

We have hit the Secretary’s figure within $100 M. To summarize, this means that a plausible explanation for the Secretary’s figure is:

  1. They are assuming no more funds go out the door in the Capital Purchase Program, beyond the $218 B that already has been invested.
  2. They are assuming “a conservative” $25 B of the existing investment will be repaid by the time they need it for something else.
  3. The TALF subsidy for new securitizations is only $80 B, rather than the $100 B I (and others?) had previously thought.
  4. But the Consumer & Business Lending Initiative is still the advertised $100 B, because they count the $5 B for auto parts suppliers, and the $15 B for small business loans, as part of that $100 B total.
  5. The PPIP is at the low end of the Administration’s range ($75 B), rather than the high end ($100 B).

I need to emphasize that I do not know these last three items. They are educated guesses about how to back into the Secretary’s publicly stated number.

I am also left with one huge uncertainty. I don’t know where the TALF subsidy for the purchase of toxic assets goes. Is it a subset of the $80 B TALF number I’m assuming, in which case there’s less TALF available for new securitizations? Or is it a subset of the $75 B number I’m assuming for the PPIP, in which case there’s less available for equity investment?

So was I wrong last Friday? There are three possibilities:

  1. I was wrong.
  2. Circumstances changed.
  3. While over the past several weeks the Administration has emphasized the size of their new programs, they are now looking for flexibility so they can maximize their chance of avoiding another request of Congress. They know that Congress is in a foul mood about the TARP, and are therefore looking to emphasize this flexibility by stating the largest number they can justify.

I think it’s #3. The Administration needs to balance the needs of the market with what is feasible from the Congress. Given recent AIG coverage, they are now leaning hard in the maximum flexibility direction. If this direction is sustained, I think the cost will fall upon the new programs, the TALF expansion and the PPIP, which would have to be smaller than some market participants may expect.

Health spending fallacy

Health spending fallacy

The President emphasized the importance of health care reform in Tuesday evening’s press conference. One of his arguments was that reforming health care would help address federal and state government fiscal problems:

What we have to do is bend the curve on these deficit projections. And the best way for us to do that is to reduce health care costs. That’s not just my opinion; that’s the opinion of almost every single person who has looked at our long-term fiscal situation.

His statement is excellent but incomplete. There are two problems driving future deficits: rising health care costs, and the aging of the population. Both factors drive projected Medicare and Medicaid spending increases, and demographics helps drive projected Social Security spending increases. To fix our long-term deficit problem, we need to address both factors, and spending trends in all three programs.

The President then defended the increased health spending proposed in his budget:

What we’ve said is, look, let’s invest in health information technologies; let’s invest in preventive care; let’s invest in mechanisms that look at who’s doing a better job controlling costs while producing good quality outcomes in various states, and let’s reimburse on the basis of improved quality, as opposed to simply how many procedures you’re doing. Let’s do a whole host of things, some of which cost money on the front end but offer the prospect of reducing costs on the back end.

This is the health care investment myth: if only government will spend more money on health care, then that will reduce costs and, eventually, government health spending.

The correct response is a tautology: if government spends more money on health care, then government health care spending will go up, not down.

The President argues this spending is an investment that will address the sources of health care cost growth and “ultimately” drive down costs for the federal and state government. I dispute that, and will expand on my argument in the future.

But there’s a more important point. The President’s budget would increase health spending by $634 B over ten years. That’s a full order of magnitude larger than the current law program to subsidize health insurance for children (known as “S-CHIP”). You cannot spend $634 B on health IT, preventive care, and outcome measurement. You’ll run out of things on which to spend it.

When you’re setting aside that enormous sum, you’re doing it to expand taxpayer-subsidized health insurance coverage, as the Congress began to do in the so-called stimulus bill. That’s a policy choice that I’m happy to debate. But it is irrefutable that an expansion of taxpayer-funded health insurance coverage will dramatically increase government spending on health care, not reduce it.

The flawed logic goes like this:

  • Health care spending is a big problem for government finances.
  • Therefore, we will increase health spending in the federal budget to cover more people.

Proponents of this argument point out that federal, state, and local governments indirectly subsidize the uninsured through subsidies to cover some of the costs of uncompensated care (in clinics and hospital emergency rooms). By subsidizing health insurance coverage, they argue, we will keep them out of the emergency room and reduce total health care spending. They claim that we can cover more people and reduce spending without hurting anyone (except the taxpayer who is footing the bill).

This is incorrect, for three reasons:

  1. People receive more and better medical care if they have health insurance than if they are relying on free care. That’s a good thing for those people. It’s also more expensive for the payor.
  2. Every proposal to expand taxpayer-subsidized health insurance would have the government pay all or almost all of the cost of health insurance, while today the government pays only part of the cost of charity care.
  3. Medical expenditures tend to be highly concentrated in a relatively small proportion of the population. For each uninsured catastrophically sick person whose costs go down because they are receiving better or preventive care, you will get many more who would not use medical services if they were free, but will do so if someone else pays for it. When government is subsidizing pre-paid health insurance, the taxpayer will spend a lot to pay the premiums of a healthy previously uninsured person who may use no medical care at all. In the aggregate, government spending on heatlh care will increase.

Some argue that it’s worth it — that we have a moral obligation as a society to ensure that everyone has health insurance. That’s a separate question. I am instead disagreeing with the budgetary point. Expanding taxpayer-subsidized health insurance coverage by $634 B will increase government spending on health care, not reduce it. The President’s proposed $634 B health reform fund would severely worsen our long-term entitlement spending problem.

If this subject interests you, the best health policy writing I know is Jim Capretta’s blog Diagnosis.

Auto loans, part 2: options for the President

Auto loans, part 2: options for the President

In part one of this series I reviewed some background and long-term problems facing the U.S. auto manufacturers. I pointed out that General Motors and Chrysler, and the Obama Administration, face a more immediate cash flow problem. The Obama Administration is in the midst of rolling out the President’s new game plan. I’d like to walk you through the options the President faces.

Now let’s examine the benefits and costs of each option. I will soon ask you to pick your own recommendation to President Obama.

Option 1: Extend the current loan and lend additional funds from TARP

Assume a loan cost of roughly $5 B per month for GM, Chrysler, and their finance companies combined. This could be off by a factor of two either way, and can easily vary from one month to the next as external pressures on the companies change their needs.

Likely short-term outcome: 99% chance GM and Chrysler continue operating for the duration of the loan.

Benefits

  • It avoids immediate failure and the associated job loss. If GM and Chrysler both were to enter a Chapter 7 bankruptcy and shut down operations permanently, we had estimated (back in December) total job loss of roughly 1.1 million jobs, heavily concentrated in Michigan and surrounding states. This would be a significant hit to an overall weak national economy, and would devastate the region. We further estimated that U.S. GDP would be 0.5 — 0.75 percentage points lower in 2009 as a result.
  • It buys the firms time to continue working to solve the above-described long-term problems. It also buys time to allow the economy to recover, with the hope that vehicle sales improve.
  • It buys the President and his team time to focus on implementing and selling their financial plan, passing their budget through Congress, and maybe asking Congress for additional TARP funds.

Costs

  • The taxpayer would be placing at risk more funds ( ?$5 B per month), in addition to the $25 B already loaned in December and January.
  • New loans would consume scarce TARP resources, which are needed for the banking sector (their original intended purpose).
  • The December loans require the firms to prove that they are “viable” to continue receiving funds beyond March 31st. By rewriting or extending these loans, the President risks taking a political hit for explicitly relaxing or delaying the viability requirement. By providing even more taxpayer funds, he exacerbates this risk.
  • By temporarily removing the threat of a bankruptcy filing, it may delay a deal among stakeholders (labor, dealers, suppliers, creditors, and management).
  • Each time the taxpayer injects funds, it reinforces the incentive for those stakeholders to negotiate with the government (both the Administration and, separately, with the Congress) rather than with management.
  • In a competitive market, management and equity holders are supposed to face the full downside risks of their failures. By insulating them from some of that downside, the government is creating a moral hazard for the future. This is the “bailout” point, applied to management and shareholders.
  • It is harder to say no to other industries and firms that request relief. The Obama Administration already said yes to certain auto suppliers, lending them $5 B of TARP funds [last week]. This is a slippery slope.
  • It is harder to justify saying no the next time. If you lend them funds for another three months, how do you justify saying no three months from now? Each extension and additional loan increases the chance of these becoming “zombie firms” — firms which can survive only by consuming an ongoing stream of taxpayer subsidies.

Option 2: Offer to extend the current loan, and lend additional funds, but only to help a firm that attempts a restructuring by filing for bankruptcy.

This is called “debtor-in-possession” financing, or DIP financing. The firm enters a Chapter 11 bankruptcy proceeding, and then someone shows up and provides the cash for them to continue operating. In this case, that someone would be the U.S. taxpayer, through the TARP.

Assume that, as a part of this option, some of the DIP financing goes to support a guarantee of service (from third party services, if necessary) for cars bought during restructuring. This should help address the bankruptcy purchase fear.

You should assume a significantly higher initial cost to the taxpayer: $20 B up front, and $100 B total over time, if GM and Chrysler both did this. When a firm enters bankruptcy, everybody wants cash up front for everything. So the taxpayer outlay of DIP-financing is equivalent to roughly 10-12 months of ongoing support in option 1.

Likely short-term outcome: GM files for bankruptcy and takes the DIP financing. Chrysler files for bankruptcy. Maybe they take the DIP financing, or maybe their primary shareholder, the private equity fund Cerberus Capital Management, liquidates them and sells off the valuable parts.

Possible medium-term outcomes: This is where it gets tricky. The bankruptcy restructuring process creates a greater likelihood of the firm reducing its costs dramatically, at the expense of other stakeholders: labor, creditors, and dealers would all take significant hits, because the bankruptcy judge can void their existing contracts. This improves the firms balance sheet, and can improve their cost structure.On the other hand, bankruptcy means the firm defaults on payments to suppliers, which may hurt their ability to get new supplies and increase their costs. In addition, the conventional wisdom is that the word “bankruptcy” in headlines will make it harder for that firm to sell cars, as customers will be (rightly) concerned that the firm may not exist to service their car in the future. It’s unclear how these factors would balance out: will the benefit of cost savings from reorganization and reductions in legacy costs outweigh higher supplier costs and lost sales?

We guessed that there would be a high probability of a Chapter 11 restructuring leading to a Chapter 7 liquidation. This is particularly true when aggregate vehicle sales are so low — sales in 2009 are down about 38% from a year ago. GM’s sales so far this year are down 51% compared to last year; Ford’s are down 45%, and Chrysler’s are down 49%.

If, instead a restructured firm emerges from Chapter 11, it probably has a higher probability of longer-term success than if it had not entered Chapter 11, because it was probably able to achieve greater cost savings and potential future productivity improvements.

Benefits

  • It may avoid immediate failure (liquidation) and the associated job loss.
  • It buys the President and his team time to focus on implementing and selling their financial plan, passing their budget through Congress, and maybe asking Congress for additional TARP funds.
  • If the firm survives Chapter 11 restructuring intact, it probably has a higher probability of being viable in the long run.
  • If the firm survives restructuring, the taxpayer has a higher probability of being repaid.
  • Equity holders face the full costs of the firm’s failure. No more moral hazard is created.

Costs

  • There is a fairly high probability that at least one of GM and Chrysler liquidate. Chrysler’s owners might choose to do so immediately. Either firm may find that their sales loss is so great that they cannot emerge from restructuring, especially beginning from an already low level of sales. If they liquidate, then a portion of the 1.1 million job loss happens, with consequent economic and political effects.
  • This is a bigger cash outlay from the taxpayer than under option 1, at least initially. If these are TARP funds, a $100 B outlay squeezes out an element of the Administration’s financial and housing plan. If not, it dramatically increases the likelihood that the Administration has to go to Congress for more funds.
  • The President would be blamed for “allowing the U.S. auto industry to go bankrupt,” even if the firm is in restructuring and trying to emerge from bankruptcy. The word “bankruptcy” has tremendous political power. The President’s team might try to shift the blame back to his predecessor, but the failure would have occurred on his watch. This would have a national impact on the rest of his agenda, and would have a severe regional political cost for the President, especially in Michigan and neighboring states. It would also likely force some Members of Congress of his own party to attack him publicly. It is easy to imagine midwestern Democrat Members voting no on the budget resolution in protest of a Presidential decision not to provide further aid.

Option 3: Allow the loan to be called and provide no additional funds.

Likely short-term outcome: GM and Chrysler file for bankruptcy no later than mid-April.

Likely medium-term outcome: GM and Chrysler likely liquidate.

Benefits

  • U.S. auto manufacturers succeed or fail based on their own merits, and are therefore on a level playing field with most other American firms. (I said “most.”)
  • There’s no additional direct cost to the taxpayer. There would be indirect costs from higher unemployment insurance payments, higher health insurance subsidies through “COBRA”, and lost income tax revenues.
  • There’ no more moral hazard. Investors and managers face the full costs of their actions and decisions (present and past).

Costs

  • Assume roughly 1.1 million lost jobs, beginning within weeks.
  • (Same as option 2, but more intensely): The President would be blamed for “allowing the U.S. auto industry to go bankrupt.” His team might try to shift the blame back to his predecessor, but the failure would have occurred on his watch. This has a national impact on the rest of his agenda, and would have a severe regional political cost for the President, especially in Michigan and neighboring states. It would also likely force some Members of Congress of his own party to attack him publicly. It is easy to imagine midwestern Democrat Members voting no on the budget resolution in protest of a Presidential decision not to provide further aid.

Option 4: Punt to Congress. Refuse to spend additional TARP money, and tell Congress that if they want the companies to survive, they should appropriate new funds.

Given that the December loans expire within a week, the practical implementation of this option is likely a combination of this with option 1: extend the December loans for, say, one additional month, and provide additional TARP funding to cover that month. But tell the Congress and the auto manufacturers that you will not lend any funds beyond that without a new law from Congress that explicitly appropriates those funds.

Likely short-term outcome: GM and Chrysler survive for as long as you provide your last short-term loan.

Likely medium-term outcome: Completely unknown.

Benefits

  • Some argue that TARP funds were never intended for this purpose, and that Congress has the power of the purse. This is a decision, they argue, that should be made by the Legislative branch, not the Executive branch. Your decision not to spend any more (beyond, say one additional month) of TARP funds returns both the policy and political responsibility “where it belongs.”

Costs

  • Reactions from Congress will be mixed.
    • Conservatives (not usually this President’s allies) will likely relish the opportunity to try to block or amend legislation. Environmental advocates may take a similar view.
    • Members from auto states, as well as the auto manufacturers themselves, will likely try to pressure you and the President to reverse this decision, “Just as a fallback, in case Congress does not act.” This pressure will come from friends of labor and management, as well as from investors and “the markets” generally.
  • You lose control of the outcome, which is highly uncertain. In past years, the smart money would have bet heavily on the firms getting additional relief, and that’s still probably a better than 50 percent chance. But in last Fall’s debate there were signs of bailout fatigue on both sides of the aisle, and the environmental advocates had powerful friends who were not sympathetic to the industry’s views.
  • You look like a wimp who is trying to duck responsibility.

Coming soon: parts 3 and 4, comparing the Bush and Obama approaches, and part 5, in which I pose some hard questions and ask you to make your recommendation to the President.

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