Archive for the ‘Uncategorized’ Category

The Insanity has not ended.

January 5, 2013

Aurora, CO is back in the news with four more people shot dead today:

http://www.reuters.com/article/2013/01/05/us-usa-shooting-colorado-idUSBRE90408W20130105

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S&P: Negative Outlook for U.S. Treasury Bonds

April 19, 2011

Typical comment on S&P outlook change for U.S. Treasury Bonds:

“Why are we paying attention to Standard and Poor’s opinion, a firm that gave favorable [AAA] ratings to junk mortgage funds at the behest of their investment-banker clients? I don’t think the firm has any credibility left.”

Mark Gordon, Tucson

Healthcare Public Option and Costs

July 4, 2009

Let me start by saying that for more than 50 years, I have favored universal healthcare.  The question is how do we get it?

I have been receiving solicitations for support of the Healthcare Public Option.  They say, please send a fax to your senators, or sign a petition to Congress urging them not to abandon the Public Option so that everyone will have a choice of private healthcare insurance or the Public Option.  Here are four Healthcare Reform criteria recommended by one of the emails I received:

  • Available to all of us: A strong public health insurance option should be available to anyone who chooses to participate. If you like your current plan, you can keep it; if you want to participate in the public health insurance plan, you can choose that.
  • A national plan with real bargaining clout: In order to truly control costs and compete with private health insurance plans, a strong public health insurance option must be available nationwide.
  • Ready on day one: Every day we wait on real reform, health care costs continue to rise. A strong public health insurance option with a broad network of providers right out of the gate is key to building a competitive program that will help control costs.
  • A truly public plan: To ensure it’s held to the highest standards of accountability, a public health insurance option must be truly publicly run—accountable and transparent to Congress and to voters.

This sounds like Medicare for everyone

There seems to be an assumption that a national public healthcare insurance organization can use its bargaining power to reduce healthcare costs.  This point of view may be a little naïve.  Nancy-Ann DeParle and her staff at the White House have been holding weekly seminars on healthcare reform, and serious discussion of controlling costs usually leads to a consensus that we need a different model of healthcare delivery to control healthcare costs.

Medicare is certainly better than being old with no health insurance.  However, Medicare is a fee-for-service health insurance plan whose costs have been rising rapidly, at a rate far exceeding the rate of inflation.  The only way that Congress has agreed to fix the escalating costs of Medicare is to cap payments to doctors and hospitals, and threaten to actually reduce the fee schedule.

Medicare needs reform.  Medicare does not pay for preventive care; it should, even if it does not substantially reduce overall healthcare costs.  Medicare does not pay for immunization; it should.  Medicare does not pay physicians for telephone or email consultations.

In my opinion, the Medicare fee schedule pays primary care physicians too little, and in many cases pays specialists too much.  We need a healthcare system that allows people to go to the physician of their choice, including both primary care physicians and specialists, but encourages people to use their primary care physicians to coordinate their care when they have complex conditions or chronic diseases.

We need a healthcare system that pays for treatment of a disease or condition, rather for each procedure performed.

We all want to control healthcare costs; who does not?  It would be nice to have a list of major healthcare cost categories, so that we could focus on the major cost categories.

Here is my list of major healthcare cost categories:

  • Care during last year of life.
  • Treatment of chronic diseases such as diabetes, Parkinson’s disease, Cerebral Palsy.
  • Lifestyle issues such as obesity, smoking, nutrition, and lack of regular exercise.
  • Mental health problems such as depression.
  • Emergency room visits by the uninsured
  • Insurance administrative costs (healthcare providers and insurers)

The Public Option may reduce the last two costs, but what about the first four cost categories?  It is difficult to find credible data on what these costs are in the U.S. Nevertheless, I assert that these categories need to be addressed by healthcare reform.  How is the Public Option going to reduce costs for these categories better than a system of non-profit healthcare cooperatives?

Dr. J. Deane Waldman, MD, gives the following list[i] of what drives up healthcare costs:

There are nine reasons for escalating health care costs.
1. New value (new medical capabilities) resulting in
2. More people who live longer.
3. Inefficiency, Reconciliation and Disconnection
4. Regulatory compliance and unfunded mandates
5. Perverse incentives
6. Defensive medicine
7. Adverse outcomes and errors
8. Profits taken out of healthcare (insurance and medical malpractice)
9. Fraud and embezzlement

As Dr. Waldman writes, we want to preserve the first two items while reducing the others.  Again, it is difficult to find credible data quantifying these reasons for health care costs.  Nevertheless, any comparison of the Public Option versus the Non-Profit Healthcare Cooperatives Option should address these causes of rising healthcare costs.

I hasten to explain that I support President Obama’s overall objectives and guiding principles for healthcare reform, whereas Dr. Waldman has been very negative about President Obama’s program.  Remember, however, that the President has stated that he would like to achieve a bipartisan agreement on healthcare reform.  Therefore, I call on Dr. Waldman to tell us what program he would propose in place of the Public Option proposed by the Obama Administration.  How would Dr. Waldman design legislation to reduce the factors driving up healthcare costs?

There seems to be a consensus on the creation of a healthcare insurance exchange from which people could choose a healthcare plan if they don’t get one from their employers.  The debate is over whether the choices offered through the healthcare insurance exchange should include a publicly managed option in addition to private insurance plans.

Senator Kent Conrad (D, ND) has proposed a national network of healthcare cooperatives as an alternative to the public health insurance option favored by the Obama Administration.  Rather than being dismayed by this proposal, I am reminded of the Japanese healthcare system.

Japan spends 8% of GDP on healthcare, versus 16% for the United States, but Japan has lower infant mortality and the Japanese live longer than we Americans.  Although genetics and diet may play small roles, Japan must be doing something right with their universal healthcare system.  The Japanese government requires everyone to have health insurance.  Many Japanese get their healthcare insurance through their employer, but if not, they can get healthcare insurance through a nonprofit community-based insurer.  These insurers are not allowed to deny anyone coverage, or charge extra, because of pre-existing conditions.  Only the poor get a government subsidy for their healthcare insurance.

The Japanese healthcare system is highly competitive.  There is no gatekeeper requirement.  Anyone can go to their internist, or directly to a specialist of his/her own choosing.  Unlike the British National Health System, 80% of Japanese hospitals are privately owned and managed by doctors.

To hold down costs, Japan regulates the prices of healthcare procedures in great detail.[ii] The Japanese regulators hold biannual meetings with doctors and hospitals to negotiate prices.  There is constant pressure to increase efficiency and reduce prices for healthcare procedures such as MRIs and quadruple coronary bypass surgery.

The argument for a public option is that it will provide competitive pressure to hold down healthcare costs.  The tacit assumption is that Japanese-style price regulation is not possible in the United States, so we must rely on artificial market forces to control healthcare costs. Of course, you can imagine the Republicans howling about the giant government bureaucracy that would be required to regulate healthcare prices in the United States, despite the fact that the Japanese Health Ministry is not so large.  The rest of us should howl about the high cost of our current healthcare system.

Fundamentally, we must make a commitment that everyone in the country is entitled to good quality healthcare.  We need to end a system that provides incentives to insurance companies to drop sick people and deny coverage to people with pre-existing conditions, or make premiums for those people so expensive that they cannot afford their healthcare insurance.  I think we should take the profit out of healthcare insurance, crack down on fraud and abuse, pay doctors well but not exorbitantly, and relieve new doctors of the huge debts that they now face by public financing of accredited medical schools.   Germany has competitive healthcare insurance companies, even though they are not allowed to make a profit.  Just the prospect of higher executive salaries for growing insurance companies is enough to keep the companies competitive [ii]. If we made all U.S. healthcare insurance companies nonprofit, we would not need a “public option”.


[i] http://thesystemmd.com/?p=248

[ii] http://www.pbs.org/wgbh/pages/frontline/sickaroundtheworld/

Credit Default Swap Clearinghouse

September 19, 2008

The term “Credit Default Swap (CDS)” is not a household term.  Politicians almost never mention it.  I have never heard it explained on Good Morning America, or even on the Jim Lehrer News Hour.  Unrecognized by the public, the unregulated CDS market has grown huge, and threatens the stability of the entire capitalist system. The AIG CDS inventory is one of the core reasons that the U.S. government felt obliged to take over AIG and extend $85B in Federal Reserve loan guarantees.  AIG had a CDS inventory with a notional value of over $400 Billion.  That was too large an amount for the U.S government to let unravel in a chaotic bankruptcy.  Yet that amount is small compared to the total CDS market.

To be more specific, under the Bush Administration laissez faire policy toward the financial industry, the notional value of the Credit Default Swap market has grown from approximately $900 Billion at the end of the year 2000 to a total of $62.2 trillion at the end of 2007 (according to the International Swaps and Derivatives Association).  That is more than four times the U.S. Gross Domestic Product and larger than the entire world stock market.[i] 

Credit Default Swaps are derivative instruments intended to insure losses to banks and bondholders when companies fail to pay their debts.   A CDS is a private contract between two parties, in which the buyer of protection agrees to pay the seller premiums over a set period of time; the seller pays only if a particular credit crisis occurs, like a default or a government takeover. A CDS can be sold, on either end of the contract, by the insurer or the insured. 

There is no standard form for these contracts, they are not regulated, and the market is so large that even sophisticated computer accounting systems have trouble keeping track of who the counterparties are.  During the credit market upheaval in August 2007, 14 percent of trades in these contracts were unconfirmed, meaning one of the parties to the resale transaction was unidentified in trade documents and remained unknown 30 days later. In December, that number stood at 13 percent. Because these trades are unregulated, there is no requirement that all parties to a contract be told when it is sold.  In general, there is a risk that if a one counterparty tries to collect on a CDS obligation, it may be difficult to determine who owes the payment due (i.e., who the other counterparty is).  Furthermore, because there is no public market for these derivatives, it is difficult to determine what their value is at any point in time (e.g., at the end of the accounting quarter).  That is why the market size is described using the term “notional value”. 

There was a precursor to this week’s problems that led to the AIG bailout.  In the first week of February 2008, AIG said that it had incorrectly valued some of the swaps it had written and that sharp declines in some CDS’s had resulted in $3.6 billion more in losses than the company had previously estimated.[ii]   This week, the U.S. Treasury and the Federal Reserve clearly worried that a disorderly AIG bankruptcy could result in a chain reaction of losses at financial institutions, creating a liquidity crisis that would plunge the country into a severe recession. 

There are no legal reporting requirements, although the Federal Reserve Bank of New York has urged financial institutions to inform other counterparties of a change of ownership.  There is a risk that some entity E could purchased a CDS from insuring counterparty A (e.g. J.P Morgan Chase) insuring against a default on a bond bought from party B (e.g., Washington Mutual) and may not be informed that the insuring counterparty sold the CDS liability to counterparty C (e.g. AIG).  If counterparty C (e.g., AIG) goes bankrupt, followed some time later by party B’s default, the insured counterparty E would have difficulty collecting what it was owed on the CDS, and might not have known that it should have been on the list of creditors involved in counterparty C’s bankruptcy proceedings.

This example is not trivial.  Barclays analysts estimated in February that if a financial institution that had $2 trillion in credit-default swap trades outstanding were to fail, it might trigger between $36 billion and $47 billion in losses for those that traded with the firm. That doesn’t include the market-value losses investors face as the cost to protect companies against a default widens.[iii]  So, assuming linearity, the bankruptcy of AIG could have resulted in between $7 billion and $10 billion in losses for its counterparties.  Since investment banks are often leveraged at 20 to 1 or higher, the asset sales necessary to maintain a leverage of 20 to 1 could have been of the order of $140 billion to $200 billion. 

Large commercial banks (e.g. JP Morgan Chase and Bank of America) use CDS as part of their risk management.  However, many speculators, including hedge funds, use these instruments to bet on a company failure easily. Before the insurance was developed, such a bet would require selling short a corporation’s bond and going into the market to borrow it to supply to the buyer.[2]  In times of market turbulence, such as we have seen recently, undercapitalized participants could have trouble paying their obligations.  This perceived threat adds to the instability and lack of liquidity in the financial markets.

There are many cases of more CDS contracts being written than there are bonds to insure.  If the bond issuer defaults, there will be a scramble of insured parties to find bonds to deliver to the insurer counterparty, in order to collect.  There have been bankruptcy cases in which the holder of naked CDS contracts received a fraction of the bond value.  If the naked CDS was valued on the insured counterparty’s books at the face value of the bond, there could be a large problem if the insured counterparty is highly leveraged and needs to raise capital as a result of an accounting loss.  This problem was well described by Gretchen Morgenson in the New York Times on February 17, 2008 [2].

The policy implications are clear.  The U.S. government needs to regulate derivative markets such as the CDS market.  There needs to be a centralized CDS clearinghouse, privately managed by the financial industry, but regulated.  The CDS clearinghouse would provide a standardized CDS contract with rules for reporting counterparties to a transaction, price, and settlement terms.  All CDS transactions would be required to be made through the CDS clearinghouse, so that counterparties would be known, minimum capital requirements could be established and enforced, and CDS value could be determined for mark-to-market accounting rules. 

What is the appropriate regulatory agency?  Not the toothless Commodity Futures Trading Commission (CFTC)!  Not the Federal Reserve, which is already overloaded in dealing with monetary policy formulation and implementation, as well as ongoing financial crisis management.  Legislation is needed to establish a streamlined framework for regulating the equity, debt, commodity and derivatives markets.  The functions of the SEC and CFTC, as well as functions undertaken by the Fed and the Treasury on an ad hoc basis, should be transferred to this new regulatory agency. 

 

The regulatory principles needed to underpin this new regulatory authority, as well as the details of the legislation to establish it, are yet to be decided.  The International Swaps and Derivatives Association will probably oppose this recommendation.  However, the collapse of Lehman and the nationalization of AIG have provided impetus to the establishment of a clearinghouse for credit derivatives.[iv] Let the debate begin.

 


 

[i] http://en.wikipedia.org/wiki/Stock_market

[ii] http://www.nytimes.com/2008/02/17/business/17swap.html?scp=4&sq=Credit%20Default%20Swaps&st=cse

[iii] http://marketpipeline.blogspot.com/2008/09/lehman-collapse-spurs-call-for-credit.html

[iv] http://marketpipeline.blogspot.com/2008/09/lehman-collapse-spurs-call-for-credit.html

Hello world!

April 19, 2008

Welcome to the Weston Policy blog on WordPress.com.  The purpose of this blog is to discuss national, state and local policy issues.  The posting authors will be members of the Weston DTC, but anyone is welcome to make reasonable, relevant and civil comments.