When a failure is a win and a win is a failure

From my days as a general policy wonk instead of a health policy wonk, there were two common sayings on optimal taxation policy:

“Lower rates, broader base”


“Tax the bads, subsidize the goods”

Yes, policy wonks are not wordsmiths, but I want to focus on the intersection of tax policy and healthcare policy that is implicit in the second shibboleth.

Taxing the bads usually means declining long term revenue as over the long term, fewer people consume the bad thing.  A classic recent example is the use of high levels of cigarette and other smoking tobacco taxes to fund the Childrens Health Insurance Program (CHIP).  In 2009, CHIP was reauthorized and expanded.  The federal share of the program was to be paid for with a $0.61 per pack increase in the federal cigarette tax.  There is a long term problem with using a tobacco tax to fund CHIP — tobacco usage is going down and has been going down for over a generation now as we as a society are starting to approach the point of having smokers fully internalize the costs of smoking.  This trend will continue as cigarettes and other tobacco products are more heavily taxed.

The basic mechanism is higher cash prices for cigarettes keeps non-smokers from becoming addicted smokers because they never try or they never quickly get to a pack a day.  Long term smokers will brand shift downwards or less likely quit if they are cash constrained, but cash constrained non-smoking 17 years olds will grow up to be non-cash constrained 51 year old non-smokers.  We’ve decided as a society that tobacco usage is a bad that we really want to significantly reduce or eliminate over the long term.  So we’ve been taxing a “bad” to subsidize a “good”, health insurance for kids.

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Taxing mission drifters

I’m of the opinion that things that look like ducks, quack like ducks, and taste like ducks are probably ducks even if they are called something else. The tax exemption was yanked because the California Franchise Tax Board thought Blue Shield of California had been acting like a for-profit company under its tax exempt status, so now it can act exactly like it has been operating for years but under a different tax status.

NPR has details:

California tax authorities have stripped Blue Shield of California, the state’s third largest insurer, of its tax-exempt status in California and ordered the firm to file returns dating to 2013, potentially costing the company tens of millions of dollars….
One likely explanation, however, is the $4.2 billion the company reports it is holding in financial reserves. That’s four times larger than the national trade organization, Blue Cross and Blue Shield Association, requires members to hold in surplus to pay out member claims….

If Blue Shield of California was acting like a for-profit entity under its tax advantaged status in 2013 and 2014, it will act like a for-profit entity under its taxable status in 2015 and 2016. I don’t think it will significantly change behavior or pricing as its current set of overpriced premiums that led to the reserve accumulation were sufficiently competitive with other for-profit and non-profit insurers pricing that people still bought their policies at a profitable rate. Their cost structure will change a bit, but the basic cultural push of the enterprise will be the same profit or retained earnings maximization.

I think it may have a deterrant effect on some other smaller medical non-profits as it could be enough of a shock to the boards that they focus on their mission and core values for several years or at least spend some serious time discussing what those core values are and should be. The successful, large and efficient non-profit insurers and medical providers are the ones that are extremely concerned about their values which becomes their mission. Mission drift is the concern not the tax status of large entities.

Paved With Bad Intentions

I wonder what my douchebag of a Congressman, Thomas Massie, is up to.

Wait, die-hard Glibertarian Thomas Massie sponsoring an infrastructure bill? What’s the catch?

Today, Congressman Thomas Massie introduced the DRIVE (Developing Roadway Infrastructure for a Vibrant Economy) Act of 2015 with Congressman Jim Jordan (R-OH), Congressman Justin Amash (R-MI), Congressman Jim Bridenstine (R-OK), and Congressman Ken Buck (R-CO) as original co-sponsors. The DRIVE Act (H.R. 1461) would help keep the Highway Trust Fund solvent and improve our national infrastructure, without raising the gas tax, by refocusing the Highway Trust Fund on its original and proper role of building and maintaining federal highways and bridges.

OK.  So again, what’s the catch?

“Currently, gas tax revenue is diverted from the federal Highway Trust Fund for bike paths, sidewalks, mass transit, and other local projects,” said Congressman Massie. “But due to inflation and fuel efficiency improvements of today’s vehicles, there is no longer enough money in the Highway Trust Fund to maintain our nation’s critical highways and bridges while also funding local projects that have no federal nexus. By eliminating diversion of gas tax revenues, the DRIVE Act ensures that the Highway Trust Fund can fulfill its namesake duty – to fund highways, without an increase in the gas tax rate.”

Oh I get it.  Let’s cut to the chase.

Annually, over $9 billion of the Highway Trust Fund goes to the Mass Transit Account, which provides funds for local public transportation projects, including subways, light rail, buses, and streetcars. Additional authorizations exist for sidewalks and bike paths to be funded from the Highway Trust Fund. The DRIVE Act repeals these authorizations and reduces Highway Trust Fund obligations by approximately $10 billion annually.

Ding ding ding!  So we’re going to fix the Highway Trust Fund by cutting $10 billion a year from mass transit projects, like, say, Cincinnati’s streetcar.

Oh well played, Mr. Massie.  Your bill has no chance in hell, but thanks for the heads up on what the GOP “fix” for the Highway Trust Fund is. Austerity for all the kids and trees and dogs and probably you too, because mass transit is the communist devil.

(Bonus: the Mass Transit Fund part of the Highway Trust Fund was created by Congress and signed into law by…*drum roll*…that known socialist collectivist Ronald Reagan in 1982. Orange Julius and the Gang That Couldn’t Legislate tried to kill the Mass Transit Fund in 2012 as part of their “JOBS” Act, which burst into flames the moment it was exposed to air and died miserably. Looks like they’re at it again.)

Cause and effect in Louisiana

A major hospital in Baton Rouge, Louisiana is closing its emergency room because it is hemorrhaging money:

 Baton Rouge General Medical Center-Mid City will close its emergency room within the next 60 days, a victim of continuing red ink and the Jindal administration withdrawing the financial support that kept it open….

The closest emergency rooms from Baton Rouge General’s Mid City campus is Lane Regional Medical Center, 30 minutes to the north in Zachary, and Our Lady of the Lake Regional Medical Center, 30 minutes to the south on Essen Lane. Mid-City’s ER recorded 45,000 patient visits last year…..

More and more poor and uninsured patients from the low-income neighborhoods of north Baton Rouge ended up at the Mid City hospital, which was the next-closest facility.

Mid City hospital reported losses of $1 million a month as more and more patients who could not pay arrived…. Officials projected losses would grow larger, reaching $25 million to $30 million in 2015.

Poor people can’t pay full freight nor are they likely to be covered by insurance. There just happens to be an extremely attractive offer to get lots of poor people covered by insurance. Medicaid expansion would help safety net hospitals in high poverty areas the most. Poor people covered by insurance will either be able to pay something towards their emergency room visits or divert to lower levels of appropropriate care.

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Like A Kansas Tornado

Storm system Brownback continues to ravage the state of Kansas unabated, and the next casualty involves some good old fashioned school austerity bombing.

Kansas Gov. Sam Brownback’s proposed budget cuts about $127.4 million from state support to local school districts, according to a report released Tuesday by the state Department of Education.

Some Senate Republican leaders dispute that the cut is that deep, saying the Education Department figure doesn’t account for spending on bonds and interest for school construction or payments to the state retirement fund.

The governor’s plan, released Friday, is to roll four major categories of spending into block grants to school districts. The block grants will include the money now spent in general state aid, supplemental state aid, capital outlay aid and the school district finance fund.

This year’s budget for those categories is almost $3.14 billion. The block grants proposed by the governor would total slightly more than $3 billion.

Block grants for schools that are already badly underfunded to the point where the state supreme court ordered Brownback to spend more, huh.  This should go over well.  Oh, but here’s the best part.

More broadly, Kansas state workers’ pension funds are also being used to patch Brownback’s fiscal gap. He is proposing to cut state payments to pension funds by $446 million over three fiscal years including the current one while also refinancing some of the funds’ debts. But the executive director of the Kansas Public Employees Retirement System says Brownback’s proposed tweaks will ultimately cost the state more than 8 times what they save in the short term.

The near-term cuts would raise long-term costs by $3.7 billion — nearly a quarter of the current size of the pension system. Reneging on pension obligations in the short term and creating larger retirement system problems in the long term helps create political pressure to cut workers’ retirement benefits down the road, according to critics of similar maneuvers in states like New Jersey.

Another big-ticket Brownback cut strips roughly $300 million in transportation department funding over the next couple years — a move that shares the penny-wise, pound-foolish DNA of Brownback’s schools and pensions cuts. The road repair cuts will save a little bit of money now, but “all you’re going to do is create bigger problems for yourself later,” the head of a trade group for heavy construction firms in Kansas City told the Star.

And that’s on top of his plan to raise cigarette and liquor taxes so he can keep cutting the state’s income taxes, which caused all this mess in the first place.

If you want to see what a Republican budget will do to the country should they get control of the whole playing field in 2016, look no further than the tornado ripping through Kansas right now.

Gas and nuts

The ‘nut’ in a family budget is the bare minimal amount of money that has to go out the door every period to minimize negative consequences.   It is the short term mostly fixed costs.   This concept of the nut is very important in thinking about presidential popularity and gas prices as I don’t think it is gas prices per se that can drive presidential popularity but the gap between the nut and total family income which has a strong influence on presidential popularity.  The post-nut gap is a more restrictive definition of income than disposable personal income.

In my family, the nut is the sum of the mortgage, gas, electric, student loans, car insurance, life insurance payment, food, gas for the cars, daycare, car loan, and bus passes.  If my family was only meeting the nut, life would be tough, and it would only work as long as nothing goes wrong.  It is a stressful life to have very little space between the current nut and total income.

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Calling the consolidation efficiency bluff

Last week, a major specialty practice in the east suburbs of my central city announced that they had agreed to be bought out by Big City Medical Group.  BCMG will now control 85% of the orthopedists, 100% of the dermatologists, 90% of the nephrologists, 75% of the oral surgeons and 50% of the cardiologists who practice in three well populated counties east of the Big City.  The press releases claim that BCMG will realize significant efficiencies and cost savings.  The buy-out price only makes sense if BCMG either sees 30% efficiencies or 25% above trend reimbursement increases.   The latter is far more likely than the former.

Aaron Carroll at the Incidental Economist passes along some further confirmatory research on the effects of provider consolidation on pricing in healthcare.  As expected, consolidated providers get paid more:

The authors looked at more than 1050 counties in the US to see if changes in physician competition were associated with prices between 2003 and 2010. They used the HHI …

Variation existed in competition by counties. The 90th percentile HHIs were 3-4 times higher than in the 10th percentile. They also found that prices were $5.85 – $11.67 higher in the counties with the highest decile of HHI versus the lowest decile. Price indexes in the same deciles were 8%-16% higher as well. Over seven years of the study, prices went up more in areas of less competition than in areas of more competition.

One of the great weaknesses of PPACA is that it encouraged provider consolidation while fragmenting the insurance market.   The power imbalance which had already led to very high pricing compared to other industrial countries was not corrected, nor improved upon but it was exacerbated.  Provider consolidation has been encouraged by the significant push towards adapting electronic medical records which is a massive capital investment for two and three doc practices and the move towards population health management in the ACO model.  ACOs require big populations and significant back-end administrative support to target the right patients with the right care.  Small practices can’t do that well.

So far, pricing has been moderated primarily through the aggressive use of narrow networks that are excluding high cost providers, and some quality improvements through the Medicare re-admission reduction program among others.  But these are marginal changes within a dysfunctional quasi-competitive market.

Assuming that a full National Health Service style take-over of all providers is off this table (and I’ve not had enough shrooms to keep that option on the table) what are the policy options to increase competiveness in the provider market?

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