Difficult Year Gone By

Washington area has been been blanketed by snow. On this weekend before Christmas, instead of being struck in traffic trying to finish that last minute shopping, I am enjoying the breathtaking beauty of the white snow cover combined with bright sun peaking from the sky. Scenery gave me a pause and I started reflecting on the year which has gone by. Undoubtedly it was a tough year. With everything that happened this year, it seems that it has diminished our own confidence in American exceptionalism. Are we still the hope of the world? Can the world look to us for leadership on major challenges of our time? Domestically can we tackle thorny issues of health care and unemployment?

I think on the international front, policies of the current administration are on the right track. We have adopted a "realist" foreign policy approach which takes into account the contraints in which we operate. We have been deliberate in our thinking and multilateral in our approach, almost exact opposite of the operating principles of the last administration.

On the domestic front, the administration has a mixed record in its first year. Fed and the Treasury get good grade for pulling us back from the financial abyss. It is easy in the hindsight to criticize the administration for bailing out banks and shoveling lot of money thru TARP. However it achieved its purpose. Our financial institutions survived and are healthy again. Now we should sit down and devise the kinds of financial regulations which will prevent us from being in the same situation again.

Another major initiative of the administration has been health care reform. Anybody who whole heartedly supports the bill or wholeheartedly opposes the bill, has really not understood the bill. I think it is a very difficult call. While there are a lot of good measures in the bill for health insurance reform, it does not do enough to bend the cost curve in the long run. David Brooks captures this difficult choice very well in his NYTimes article http://www.nytimes.com/2009/12/18/opinion/18brooks.html

If I were a senator, I will vote for the bill giving the benefit of doubt to the current administration. President has shown in his major foreign policy initiative that he is very pragmatic and that gives me the confidence that he will take the issue of cost seriously and implement the provisions of the bill in a way to ultimately reduce the deficit.

All in all, a very tough year has gone by and coming year may not be any easier. However I think we will remain a force of good in the world, our strength will come from our ability to marshell the world opinion and not just thru our arms and our economy will turn around, though at a slower pace.

Happy Holidays and a very Happy New Year.

No More Public Option

Majority leader senator Harry Reid announced this week that a "grand compromise" has been reached between liberal and centrist democrats where they agreed to drop the "public option". They replaced it with two new proposals. One proposal is to expand Medicare for people between the ages of 55 and 64 (currently Medicare is available to people 65 & above). Second proposal will require Insurance companies to create not-for-profit insurance plans in every state to be sold on the "exchange" along side for-profit plans. These plans will be supervised by the Office of Personnel Management which currently administers the health insurance plans offered to federal employees.

There is a very good analysis of this new proposal at http://www.nytimes.com/2009/12/10/opinion/10thu1.html

I will wait to see how CBO "scores" these proposals with respect to the budget deficit but my initial reaction is of a sigh of relief. I have argued in this blog before that public option will not help reduce cost. The biggest lacuna of this bill is its inability to "bend the cost curve" in any significant way and that will undo everything else that is good in this bill in the long run.

However politics is an art of compromise. I am hoping that thru amendments on the senate floor and thru more back-room deals like this, final product will be a major improvement on what is being debated in the senate currently.

Worlds most deliberative body deliberates healthcare reform

Last week senate started debating the healthcare reform bill. Most of the senators agree that this might be the most important vote they will cast in the senate but listening to the debate one does not get a sense of the importance and urgency of the debate. Here is an example of the focus of the debate from last week.

Republicans brought out their big guns to oppose the "big cuts in medicare". They derided almost $500 billion of proposed cuts in medicare. They read thru countless letters sent by seniors who urged them to oppose this bill which will, in their view, bankrupt medicare. Listening to them defend medicare, you will not get a sense that same senators are tooth and nail opposed to any "government involvement in healthcare" and were earlier lambasting medicare for being an entitlement program which is full of fraud, run by "government bureaucrats" who want to come between you and your doctor.

Democrats on the other end read thru their own letters sent by their constituents on how insurance companies are "robbing" common man to pay millions of dollars in compensation to their CEOs. They did not stop there. Senator Blanche Lincoln from Arkansas actually proposed an amendment which will limit the deductibility of executive compensation for insurance companies to $400,000. You wonder why $400,000! Her argument is that if it is good enough for the President of United States (US President makes $400,000 a year), it should be good enough for insurance companies executives. This amendment will raise around $650 million in new taxes which she plans to use to "save" medicare.

This is the tenor of the debate in the most deliberative body in the world when it is debating possibly the most important bill of our generation and you wonder why people are cynical about politicians...

Government & Healthcare

If you listen carefully to the debate on healthcare and for that matter on other pending legislations in Congress, you will find that the basic argument is over how far we want government involved in private enterprise. There seem to be two schools of thought.

On the left, there is a general disdain for businesses who make profit from healthcare. They want to "rescue" the common man from the "clutches" of big business. Their approach is to get government micro-manage private enterprise.

On the right, there is a general disdain for government. They like the laissez-faire approach where government has no role in private enterprise. WSJ recently published an article Ayn Rand on the Economic Crisis - WSJ.com which discusses Ayn Rand's take on government involvement in private enterprise.

I feel the answer lies somewhere in the middle of this continuum. An important lesson from the current economic crisis is that laissez faire approach does not work. Alan Greenspan, an ardent follower of Ayn Rand and a strong proponent of deregulation admitted this in his testimony to Congress last year after the economic crisis when he said that he was "shocked" to learn that markets can not self-regulate.

If we start with the premise that government has a role to play in private enterprise then we need to decide how much government involvement is appropriate. In my view, government should ensure there is no monopoly, should ensure that no one company holds the whole industry or sector hostage by becoming "too big to fail" and should establish broad regulatory framework based on outcomes. Government should not be too narrowly defining what a company can or can not sell.

For example, current healthcare bills actually defines what should or should not be covered by an insurance plan. It goes on to define what procedures should have no co-insurance cost ("mammograms should be free"). Government should not legislate what type of products are sold in the market. It should just ensure that there are enough companies selling that product and market will take care of the rest. I say this from my personal experience. Recently I was in the market for health insurance for my family. After comparing various plans in the individual market on an exchange like the one my company hCentive http://www.hcentive.com/ is building , I recently bought a very high deductible HSA (Health Savings Account) compatible plan. My deductible is $10,000 but my monthly premium is very low. Knowing the health of my family and our financial risk appetite, I feel this is the right plan for me. Until my deductible is met, nothing is "free" in this plan. If Congress has it way, it will be illegal for me to buy this plan in future. Congress is substituting its mandate for my judgement on what is right for me.

I feel this is the problem with the current approach to healthcare reform. Government has an important role to play but that role should be to ensure their is true competition in the market place and proper regulatory framework exists. Congress should not substitute its mandate over consumers own judgement on what is right for them.

Faith in the Future

Current economic climate has had a profound impact on people's outlook on life. I find people who used to be cheery, hopeful, excited about the future have become cynical, suspicious and angry. I am an avid listener of "Washington Journal" program on C-SPAN. This is a program where people call in to speak their mind about current hop topics like Health Care, War, Climate, Education etc. There is a palpable shift in the mood of the callers from what it used to be couple of years back. Rationality has given way to partisanship. Cyncisim about governement seems at all time high. Instead of being hopeful about future, more and more people are succumbing to a victims mentality where they are looking to lay the blame for their current state of affairs on somebody else like Wall Street, Politicians, Globalization, Immigrants etc.. How did we reach here and what is the remedy for it?

David Brooks address this topic beautifully in his column in NYTimes http://www.nytimes.com/2009/11/17/opinion/17brooks.html?_r=1

I can think of one group of people who has remained untouched from all this gloom and doom. They are the entrepreneurs. They are eternal optimist. Odds of survival of a startup are less than those who landed in the beaches of Normandy and that was 1 in 500. Even with such high odds, every day new companies are started, innovation boundaries pushed further, capital raised, people hired. This is the real stimulus. Instead of spending stimulus money in artificially creating jobs (cash for clunkers is a classic example), we should make long term investments in things like basic R&D, education, health care with proven ROI over the long term.

People will again begin to have faith in the future if they see their political, community and business leaders take on tough problems, make hard decisions and think long term.

House Passes Landmark Health Reform Bill

On Saturday house passed the landmark health reform bill by a narrow margin, 220 to 215. In the final tally, 219 Democrats voted for the legislation, and 39 voted against it. Rep. Joe Cao (R-Louisiana) was the only Republican who voted in favor of the bill.

While the bill is being hailed by many as a victory for healthcare reform, I think it is more apt to call it an insurance reform bill. The bill addresses issues with coverage and insurance. It does not address issues with health care delivery in any material fashion.

At the outset, the two main objective of this effort were expanding coverage and reducing cost of health care. If I were to rate the bill on these objectives, it gets “B+” on coverage expansion but gets “ F” on reducing cost. The irony is that it is impossible to meet the objective of coverage expansion on a long term basis unless we address the issue of rising cost.

Bill achieves coverage expansion by establishing a mandate for most legal residents to obtain health insurance. Individuals and families who cannot afford to buy health insurance in the private market can use “insurance exchanges” like http://www.hcentive.com/ where they will receive federal subsidy based on their income. Bill also mandates “guaranteed issue” which means insurance companies cannot deny coverage on the basis of pre-existing condition. Considering that now there should be no reason for individuals not to have health insurance (individuals cannot be denied coverage and coverage is affordable thru government subsidies if you cannot afford), bill levies a penalty on those who still do not buy coverage.

All this makes sense so far. However here is the challenge. Cost of health care has been increasing 8% to 12% year after year. Because of the looming budget deficit which was $ 1.4 trillion last year and is expected to be around $ 9 Trillion over the next 10 years, government is limited in its capacity to provide subsidies to people who cannot afford to buy health insurance. At the current level of subsidies proposed in the bill, the cost of the bill is close to $ 894 billion over the next 10 years. To pay for this cost, bill proposes an income tax surcharge on high- income individual (which brings in $ 572 billion in additional revenue) and proposes other spending cuts, primarily in Medicare to make up for the rest. Federal subsidies will be limited because congress is limited in its capacity to pass massive tax hike because of the current economic and political conditions. If the current trend of double digit cost escalation continues, people at the lower end of the strata will not be able to afford health coverage even after receiving federal subsidy which will not be enough to cover rising cost. So the bill will not achieve its stated goal of universal health coverage if nothing is done to address the issue of cost escalation.

When it comes to the issue of bending the cost curve, I feel congress has punted. It is easy to blame profit motives of insurance companies for the rising cost. If one buys this argument, one automatically suggests an easy but ineffective solution which is public option. Reality however is more complex. The main reason for rising cost is increase in utilization of health care which is happening for a number of reasons. First it is the demographic changes. % of older people who tend to use health care system more is increasing. Second we have fee for service model. Providers are paid on the “unit” of health care delivered not on the “outcome”. This results in increased utilization of the system. Add to this the fact that more and more advancements in the area of pharmaceutical, medical devices and biotechnology results in better but more expensive medical care. While these are the main reasons for the rising cost there are other factors as well like practicing of defensive medicine by doctors because of lack of malpractice reform, higher administration cost at providers and payers because of lack of electronic medical records, Medicare fraud etc. As you can see, it is a very complex problem which congress has failed to tackle in the current bill.

Unless congress address the difficult issue of bending the cost curve, just expanding coverage will further exasperate the budget deficit problem which we have with current entitlement programs. The total present value of unfunded federal obligations for Medicare and Social Security alone is around $ 38.8 trillion which translates into a mortgage of $150,000 placed in the lap of each and every baby born in America. I think of my daughter who is one year old. When she joins the work force in 20 some years, majority of the taxes she will pay will go to cover the interest on the money federal government is borrowing now to pay for these unfunded mandates. This is un-conscionable. Congress should address the difficult issue of bending the cost curve first before it expands the entitlement programs.