Monday, November 26, 2007

New Health Cost Projections from CBO

CBO's Director, Peter Orszag gave an extremely interesting talk at the New America Foundation (NAF) a couple of weeks ago. After accepting seven Diet Cokes in honor of the late hours he and his staff have been working, he went on to present the following, very interesting conclusions.

The above graph was the crown jewel of his presentation and is so counter-intuitive to the prevailing wisdom that it currently graces the CBO's graphic sparse home-page. Most of the budget worries in the current discourse are over paying for the retirement and increasing health costs of the Baby Boomers. From this view, saving Social Security and Medicare are a matter of either depriving the Boomers of promised benefits, or squeezing more taxes from a shrinking working-age population.

But these new projections only attribute ten percent of health cost increases to the Boomers. Orszag posits that our biggest problem is that we spend too much on techniques with low rates of success. He believes that 30% of medical spending could be removed without adverse effects.

To support this conclusion he produced another two charts (of which I sadly do not have digital versions). The first showed how regionally, medical outcomes were not correlated with spending. The second showed how even at famous research hospitals such as UCLA and the Mayo Clinic (an admittedly small sample), spending was in no way correlated with outcomes. He attributed the difference to interventionist versus non-interventionist professional norms, which in the absence of solid evidence on best practices, play a very strong role in guiding doctors' decisions.

The simple solution would seem to make patients more accountable for health spending. That is, make sure they feel the financial bite of each extra dollar they want to spend on tests and treatments which they might otherwise forego. Unfortunately, a small portion of patients absorb the lion's share of health care spending and it is very hard to restrict care to these individuals. Doing so would mean doing away with catastrophic coverage which our nation is very unlikely to do.

So what are we left to work with? We need to do a lot of research. No one has good information on best practices and we have very few resources devoted to discovering or promoting them. Orszag believes that we should have started our research into best practices 15 to 30 years ago. Perhaps we can blame the Boomers for not starting earlier?

Thursday, November 8, 2007

Economic Outlook

I went to hear Bernanke speak to the Joint Economic Committee today. He's projecting moderate to low growth in the near future despite oil prices, the weak dollar, falling housing prices, and the credit crunch. I wouldn't say there were any startling revelations but it is quite a spectacle to watch Schumer question Bernanke and realize that neither of them quite knows where the economy is going. As Bernanke said, "economists are notoriously bad at predicting turning points."

A Breakthrough Policy on Healthcare?

Yesterday the Committee for Economic Development (CED), a think tank composed of businesses and university presidents, had the East Coast launch of its healthcare reform policy. (Full disclosure I am married to the event organizer). The event was keynoted by Senators Bennett and Wyden, cosponsors of the closely related Healthy Americans Act. Congressman Jim Cooper and Dr. Alain Enthoven, a widely respected figure in the field of health policy, also spoke.

The CED's plan would seek to cut costs in the healthcare field and boost productivity by giving individuals discretion where they spend their healthcare dollars. The idea being that they will select more efficient providers and shun unnecessary tests if given the choice.

The federal government would create a series of regional exchanges in which every individual would be guaranteed the right to choose between multiple private insurance plans. Premiums would be flat in respect to age and preexisting conditions and "fine print" would be standardized. A "Health Fed" would be created to risk adjust the premium revenues to each insurer, that is compensate insurers for signing-up relatively more people who were likely to make claims.

This plan is significant in that the group five years ago called for an employer-centric solution to skyrocketing health costs. CED now believes government intervention is necessary to prod insurance markets and health providers into healthy competition.

This is only a tiny first step for this particular policy. The plan still has numerous details to be hammered out. For example, how the "Health Fed" will be organized and adjust for various conditions will be an incredibly contentious and complicated issue. (Holland, which has implemented a similar plan is having problems appropriately adjusting premiums for all pre-existing conditions.) Furthermore, as Rep. Cooper noted, there is $2.15 trillion in spending under the current system and there will be a lot of groups fighting to protect every penny they currently get.

Still, a policy that combines universality (for the Democrats) with cost-cutting (for the Republicans) might just stand a chance of success.

Monday, November 5, 2007

Subprime Fall Out Battle In Full Swing

A bill that would provide greater bankruptcy protection for consumers facing foreclosure advanced yesterday despite protests by the Financial Services Roundtable, several large banks, and the White House. H.R. 3609, legislation co-sponsored by Reps. Brad Miller (D-N.C.) and Linda Sanchez (D-N.C.), was referred to the full Judiciary Committee today on a 5-4 vote. The legislation would, according to the WSJ, allow bankruptcy judges to adjust mortage interest rates and the length of mortgages to help borrowers avoid foreclosure. Judges could also possibly adjust the balance of the loan to reflect declining home values. For example, if $150,000 were owed on a house now worth $125,000, the judge could mark $25,000 to be "unsecured debt," making collection much more difficult.

This new law would naturally afford borrowers more protection than they enjoy under current law presumably at the expense of banks. Banks would have a more difficult time foreclosing on insolvent borrowers and would end up holding mortgages of lower value. David Kittle, the Chairman-Elect of the Mortgage Bankers Association (MBA) argued before the Subcommittee on Commercial and Administrative law that lenders would take into account this risk by increasing interest rates on mortgages by as much as 1.5-2%.

This legislation is interesting for two reasons. From an economic perspective, would it actually raise interest rates by 1.5-2%?Given that the source has an interest in killing this legislation, my guess would be no not now? But would this lead to some rise in the cost of obtaining a mortgage, either monetarily or administratively? It is definitely possible. Mr. Kittle is correct that risk should in theory be priced into the load. But considering that we have just come out of a period in which risk has been priced so badly, how much of this risk will be priced in for average buyers?

Much of the lending which fueled the bubble occured because risk was ignored. Mortgage originators did not end up holding risk at the end of the day so they originated as many loans as possible to maximize their fees. Meanwhile, borrowers and lenders alike anticipated (unrealistic in hindsight) ever-rising home prices so that borrowers could refinance. Now if this risk is better priced into the system (a good thing), we will expect interest rates to rise on their own. If interest rates are already rising will lenders be able to simply tack on another 1.5-2% when they are trying to bring borrowers back to the market?

From the political perspective, this legislation is interesting because a good deal of the subprime lending occured in Republican districts. This means it has potential of passing and could lead to some interesting defections.