Merton Finkler

In 2010, Congress passed, and the President signed, the Patient Protection and Affordable Care Act.  This law runs roughly 1000 pages in length and features 10 Titles or chapters as described below:

Economist Jonathan Gruber, a chief architect of both the Massachusetts reform in 2006 and the ACA, argues that the act stands on a three legged stool; therefore, the following three components are necessary for the program to succeed in reaching its primary goal: a significant reduction in the share of the population without health insurance.

• Private insurance market reform based on no pre-existing condition exclusions and adjusted community rating
• Mandated purchase by individuals and businesses
• Subsidized purchase inversely related to income or through expanded Medicaid.

Subsidies for the purchase of health insurance for people under 65 have been in existence since the 1950s.  The Congressional Budget Office estimates that for 2016, the net amount of Federal subsidies for those under age 65 will be $660 billion, over 20 percent of what is spent annually on medical care in the U.S.  Of these, the ACA accounts for roughly $82 billion and employer-based coverage $268 billion, with the latter amount regressively structured as displayed in the following graphic.

Despite these efforts, the burden of health expenditures has continued to rise for American workers and their families.  Since 2011, worker earnings have risen by 11%, while premiums have gone up by 19%.  Furthermore, the relatively small rise in premiums over the past five years reflects the increased share of costs passed on to workers through a 63% increase in the average deductible portion of their insurance package; that is, the amount people must spend, with some exceptions for preventive service and primary care, before expenses are covered by insurance.

The ACA has been effective in reducing the number of uninsured from roughly 50 million to 30 million with about 12 million purchasing insurance on the newly created market exchanges for individual insurance and 8 million through expanded Medicaid in 31 states (and the District of Columbia.) In particular, those with incomes below 200% of the Federal Poverty Level have seen their rate of uninsurance fall by more than 10 percentage points.  Furthermore, quality improvement initiatives have been effective in reducing the rate of patient harm in hospitals by 17% for both 2013 and 2014.

The individual market exchanges, however, have not achieved the stability required for sustainable existence.  Recent premiums have risen markedly, although increased premium subsidies based on income, have moderated the effects for lower middle income participants.  Three components of the program designed to assist in stabilizing these exchanges in its first three years – risk adjustment, re-insurance, and risk corridors – have been inadequately funded to sustain the participation of many private insurance companies. Several insurers have dropped out of the exchanges as well as sued the Federal government for payments they expected to receive through the risk corridor program (which is set to expire at the end of 2016.)  Additionally, the penalties for lack of purchase of insurance have been inadequate to induce relatively young and healthy Americans to enroll; thus, the existent risk pools in the market exchanges tend to consist of those in relatively poor health and low income.

In short, even without a significant change in Federal administration, major reform or at least major gap filling would be required to sustain the market exchange portion of the ACA.  Of course, the recently elected President and the majorities in Congress have loudly proclaimed their intent to “repeal and replace” Obamacare.  What should we expect?

There is much speculation about what the new President and Congress will do.  They will NOT be able to repeal the entire act as that would require 60 votes in the Senate, which will not happen given that no Democrat is likely to vote for repeal.  Much of the existent Republican proposals focus on repealing the provisions that relate to private insurance (Title 1 of the Act.)
The “A Better Way” Plan proposed by Congressmen Tom Price, M.D. (newly selected to head the Department of Health and Human Services) and Paul Ryan (Speaker of the House) highlights several key provisions including (but not limited to)

• Providing refundable tax credits for those without employer sponsored health plans
• Capping the tax breaks available to those who receive employer organized coverage
• Allowing people to purchase insurance offered in other states beside the ones in which they live
• Encouraging coalitions of individuals and businesses to jointly purchase insurance
• Guaranteeing coverage of people who maintain continuous insurance (i.e., no pre-existing conditions clauses)
• Allowing children to remain on their parents’ plan until they reach the age of 26
• Turning Medicaid in to a Federal block grant program with minimal Federal mandates
• Strengthening Medicare Advantage with premium support as a way to control the cost of medical services to the elderly

As one can readily tell, the “A Better Way” proposal shares many of the objectives with the proponents of the Affordable Care Act.  In a previous blog posting, I address to what degree Republicans and Democrats share goals and means.  Skilled leaders who seek to act in the public interest would be able to find a viable path to sustainable health policy reform.  This scarce commodity, however, is likely to be absent from the forthcoming debate about how best to reform our very inefficient and inequitable structure, some call the U.S. health care system.

For a more complete discussion of the above topics, see the slides for my presentation entitled “The Patient Protection and Affordable Care Act (aka Obamacare); an Efficient and Equitable Path to Life Liberty, and the Pursuit of Health?” PPACA – Noon Hour Philosophers -Nov 2016

Investment analyst and former Lawrence professor Jeff Miller provides a weekly column entitled Weighing the Week Ahead  that employs many charts and offers an array of insights related to both the state of the U.S. economy and investment opportunities.  This week’s version provides a link to a quarterly chartbook assembled by JP Morgan that will give even the most numerate among us plenty of food for thought. One chart of particular interest to investors suggests that when 10 year U.S. Treasuries offer relatively low interest rates (e.g., below 5%), increases in their yield are correlated with increased stock returns over rolling two year periods.

The size of the U.S. Federal government debt has been commonly cited as a major concern for the future of the U.S. economy.  Some view it as  burden we have and will continue to place on our children.

Others believe that the current generation bears the burden by either holding governmental securities rather than investing in the private sector or by the current generation increasing its savings to help their progeny with the prospective burden.  A third view suggests that the debt can be shifted onto foreign holders, which we certainly have done in recent decades.

This post, however, does not attempt to assess the nature of burden sharing; it seeks to highlight the nature of prospective increases in the debt level (relative to GDP) and why such rises matter.  Consider the chart below:

The Congressional Budget Office’s median estimate for debt to GDP in 2046 is 141%.  This assumes the following:

1. Labor force participation rate falls from the current 64% to 59%.
2. Labor productivity growth remains at 1.3% per year, roughly inline with the average for the past two decades.
3. 10 year U.S. Treasury interest rates rise only slightly from 1.6% to 1.9%.
4. The growth in Federal spending on Medicare and Medicaid above governmental spending in general falls from around 2% per year to below 1% per year.

Clearly, satisfaction of these median estimates is not a given.  Some economists have argued that labor productivity rate could fall well below 1% and that U.S. Treasuries could return to a more “normal”  3% or higher.  Given the increase in the number of residents covered by Medicare and Medicaid, a 0.9% excess gap in spending also seems optimistic.  Pessimistic estimates for the key variables indicated above yield a CBO projection of a debt to GDP ratio of almost 200 percent.  That would be higher than all high income countries today with the exception of Japan.

The work of Carmen Reinhart and Kenneth Rogoff (including This Time is Different: Eight Centuries of Financial Folly) suggests that when debt to GDP rises above 90% then GDP growth begins to fall significantly (approaching 1% per year.)  Clearly, European countries with debt to GDP ratios above 100% (which presently includes France, Greece, Italy, Portugal, and Spain – see World Debt Clock) have been economically stagnant in recent years.

Given the above prognosis, will debt undue the U.S. economy?  To avoid economic stagnation long term, the U.S. must engage in some combination of the following actions: restrict benefits paid out for Social Security and other entitlement programs, expand taxes, increase income through either more work hours or higher labor productivity, make more efficient use of medical care, or induce our population to be much healthier.  One should not, however, view debt reduction as an immediate threat; the U.S. should employ debt in ways that make the labor force more productive such that the benefits of debt exceed its costs. (For a more complete presentation on this topic, see Will Debt Undue the U.S. Economy? (Talk given to the Oshkosh Rotary Club, September 21, 2016) .)

Republicans and Democrats are strongly divided over what should happen to the ACA.  Most Republicans have identified the repeal of the Act as a high priority.  Most Democrats seek to reform the Act by addressing gaps and errors in the legislation.  Such a characterization of these battle lines is much too simplistic.  In some cases, the proponents share the same goals but offer different strategies and policies to achieve them; in others, the proponents disagree about both goals and policies.  This blog posting seeks to illuminate a few of these distinctions.[1]

 

Goal #1            Ensure access to health insurance for all Americans

This goal tends to be shared by many proponents from both parties; however, they disagree about the means for achievement.   Republicans typically suggest that policy should provide a refundable tax credit for those without employer-arranged coverage; they also would fund to a limited degree high risk pools in each state.  Furthermore, many Republicans would repeal the individual mandate and its related penalties.  In their view, purchase should be voluntary and a tax credit should be available for all but not be tied to purchase through market exchanges; given that medical expenses increase with age, the credit should also be age based. The ACA does provides a tax credit inversely related to income, available on a monthly basis, and usable only for purchasing health insurance on the state or federally facilitated exchanges. Democrats would expand the program to cover more of the 30 million or so not presently covered.

Neither view seriously addresses to what degree insurance coverage provides adequate access to medical services.  Such access is a primary reform objective for Democrats. Some Republicans, Senator McConnell for example (http://www.npr.org/sections/health-shots/2012/07/27/157439331/gop-says-coverage-for-the-uninsured-is-no-longer-the-priority), have begun to back away from the access goal all together.

Goal #2            Reduce incentives to purchase expensive health insurance plans

Proponents in both parties share this goal; however, they suggest different means to accomplish it. Republicans want to cap the tax-exempt amount of the insurance premium with amounts spent above the cap subject to the income taxation.  Democrats, as reflected by the ACA, also employ the cap idea; however, premiums above the cap face a 40% excise tax – known as the “Cadillac” tax.

Both approaches exempt a substantial share of insurance premiums from taxable compensation.  Current income tax policy exempts insurance premium payment, for both employer and employee shares; this results in two to three hundred billion dollars per year of foregone federal income tax revenue.  On both equity and efficiency grounds, many economists argue that the income tax exemption should be replaced with a tax credit; furthermore, many suggest that such a tax credit be inversely related to income, as exists for the credit currently provided in state and federally facilitated exchanges.

Goal #3            Regulation of Health Insurance Markets

Proponents do not share this goal.  Republicans would eliminate many existing mandates as well as the caps on out-of-pocket pay for individuals or families and let markets determine what to provide.  In particular, pre-existing conditions clause prohibitions would only remain for those who have continuous insurance coverage.  Clearly, strong prohibition against any type of pre-existing condition clauses forms a major part of policies endorsed by Democrats.  In addition, Republicans would like to see the allowable range of premiums based on age rise from a maximum of the top rate three times the bottom rate to a 5 to 1 ratio; as noted above, age-related tax credits would help reduce the effect on older purchasers.

Regulation of health insurance and medical care markets is a much more complex endeavor than utility regulation.  The policy challenge is to employ regulatory mechanisms consistent with the desired goals without dramatically increasing cost or reducing the incentives for productive innovation. More on such mechanisms below.

Goal #4            Choice of Health Plan

Health plan choice is a partially shared goal.  Some Democrats prefer socializing the health plan process through some type of single payer plan (similar to what exists in Canada or a Medicare-for-all plan.) Republicans typically would like consumers to be able to purchase plans licensed in states other than the own (as well as in their own state).  Some also tend to support funding a high risk pool to increase access to insurance (see goal #1 above.) Democrats typically prefer state-based purchasing since insurance regulation is done at the state level.  The ACA includes temporary reinsurance and risk corridor programs to assist those health plans offered through the exchanges that draw more expensive enrollees than common in each marketplace.  In addition, it also includes permanent risk adjustment mechanisms that take a portion of the revenue from insurers that enroll less expensive members and transfers such funds to their more expensive counterparts.  The implementation of these transfers has not been fully funded and is somewhat dependent on high levels of enrollment of healthy people through the exchanges.  Some insurers, many of the cooperatives in particular, have lost significant income from participation, especially if they have been identified as having relatively low risk enrollees and, thus, some of their revenue must be transferred to other insurers.  Some major commercial insurers have reduced their participation in the exchanges as a result. (http://www.modernhealthcare.com/article/20160806/MAGAZINE/308069989?utm_source=modernhealthcare&utm_medium=email&utm_content=20160806-MAGAZINE-308069989&utm_campaign=am.)

Prior to the opening of the exchanges in 2014, the individual insurance market was relatively thin and expensive for individuals.  The ACA envisioned a $20 billion reinsurance pool along with the risk corridor limits as transitional mechanisms until the exchanges stabilized.  The available funding for the pool has ended, but few analysts view these markets as stabilized given the large change from year to year in both enrollees and insurers.  The number of enrollees in individual plans, however, has gone from just over 4 million in 2013 to 12.7 million in 2016.  (See Hall and McCue http://www.commonwealthfund.org/publications/issue-briefs/2016/jul/the-affordable-care-act-and-health-insurers-financial-performance). Despite this three-fold expansion, premiums in the exchanges in 2014 were 10-21 percent lower than 2013 individual market premiums and even with expected 2017 increases will be lower than without the ACA. https://www.brookings.edu/research/affordable-care-act-premiums-are-lower-than-you-think/?utm_campaign=Engelberg+Center+for+Health+Care+Reform&utm_source=hs_email&utm_medium=email&utm_content=32433757.

Goal #5            Provide Medicaid for Low Income Residents

Though a shared goal, the means offered by Republicans and Democrats to reach this goal differ markedly.  Republican proponents want states to have maximum flexibility in shaping their Medicaid offerings for the various eligible groups (singles, couples, families, etc.); the only role for the federal government would be to provide block grants to states based on population, income, or number of eligible residents.  This approach aims to limit the contribution from the federal tax base. In contrast, Democrats want the federal government to have a much larger role in determining both eligibility and benefits with the federal revenues used to fund expansions.  Despite having a similarly broad objective, Democrats and Republicans envision very different programs in terms of both who is covered and for what.

 

Since the ACA law covers well over 900 pages, many provisions are not addressed here.  This posting seeks to illuminate where Democrats and Republicans might find common ground and where they are unlikely to do so.  Furthermore, given the instability in the exchanges in many states, reform of the 3 Rs – reinsurance, risk corridor, and risk adjustment – will be a priority if the exchanges are to be stabilized and survive.  (See Adelberg and Bagley’s recent posting on the 3 Rs http://healthaffairs.org/blog/2016/08/01/struggling-to-stabilize-3rs-litigation-and-the-future-of-the-aca-exchanges/ .)

[1] Insights in this posting come from a variety of sources, but the AEI document entitled “Improving Health and Health Care” (http://www.aei.org/publication/improving-health-and-health-care/) serves as the primary source for Republican views and Emanuel’s book Reinventing American Health Care provides the basis for Democratic views.  Drew Altman, president of the Kaiser Family Foundation has also opined on this subject in a recent WSJ opinion piece. (http://blogs.wsj.com/washwire/2016/06/07/the-fundamentally-different-goals-of-the-affordable-care-act-and-republican-replacement-plans/.)

Central bankers in all major developed economies have adopted NIRP, ZIRP, or near ZIRP policies.  The Bank of Japan and the European Central Bank now “offer” negative interest rates (NIRP) on deposits and project to do so for the foreseeable future.  The Bank of England and the Federal Reserve Bank of the United States remain committed to targeting interest rates slighted above zero (near ZIRP).  10 year government bonds offered by these countries range from -0.225% in Japan to -0.027% in Germany to 1.57% in the U.S. Such policies are not consistent with sustainable economic growth.

In a recent book entitled The End of Alchemy, former Bank of England Governor Lord Mervyn King argues that the policies we have employed in the past (and present) to stabilize our economies – such as keeping interest rates low until economic growth returns to its long term rate or unemployment falls below some designated benchmark (full employment? natural rate of unemployment?) – are inconsistent with sustainable economic growth.  Furthermore, he suggests that central bank and regulatory policies adopted post Great Recession (December 2007 – June 2009 in the U.S.) fail to address the potential for a repeat of the financial failures witnessed during that period. King provides many insights including the following:

1. In the contemporary world economy, many shocks to the economy are unpredictable; thus, one cannot use probability-based forecasting models to design policy to stabilize economies. As he puts it, “stuff happens;” we can’t plan in advance for failures in large, highly leveraged investment banks, country defaults, common market dissolution, or other disruptive political forces.  He labels these forces as “radical uncertainty”, and, as characterized by Frank Knight almost a century ago, such circumstances cannot be addressed as one would risk, for which reasonably employable probabilities might be posited.
2. Policies designed to stabilize economies in the short run, such as aggressive monetary and fiscal policies, leave a residue inconsistent with long run economic growth unless stagnation is viewed as the desired norm. In the contemporary developed world, this traditional Keynesian prescription yields low interest rates that discourage savings and encourage debt build-up but not necessarily with productivity inducing investment that can generate sustainable economic growth consistent with that featured in the 20^th century.  Some economists (such as Robert Gordon and Larry Summers) argue that we need to learn to adapt to such secular stagnation in our economies.  Other economists (including Eric Brynjolfsson and Andrew McAfee) are much less pessimistic.  For King, policymakers face the stark trade-off of short term stability for long term sustainable economic growth.  This parallels the Triffin dilemma the U.S. faced in the 1960s when inflation dictated more restrictive monetary policy but expanding world trade, predominantly in dollars, argued for more accommodating monetary policy.
3. Central banks that serve as “lenders of last resort” may evolve into “lenders of continuous resort,” as seem to be the case for the Bank of Japan and the European Central Bank. King offers the innovative idea of “pawnbroker for all seasons” as a constructive substitute.  In short, central banks would evaluate the assets of banks on a regular basis and indicate what would be acceptable as “good collateral” – consistent with what is required by the Federal Reserve Act (1913) and Walter Bagehot’s prescription in Lombard Street (1873.)  Such an approach reminds me of how cash strapped Monopoly players must mortgage their properties at 50% of list price and forego rent collection to obtain immediate cash.

Each of the above points demonstrates how King views central banking and bank regulation in a world characterized by radical uncertainty.  In short, policy makers need to find viable coping strategies to reduce the downside cost of economic recessions in general and financial meltdowns in particular. With radical uncertainty, the “forward guidance” offered by central banks lacks credibility and fails to address such uncertainty.  Charles Plosser, recently retired President of the Federal Reserve Bank of Philadelphia, argues that the Fed should replace its discretionary implementation of policy and the confusing “guidance” about the future with a clear set of robust rules that would be operative unless the Fed publicly made the case that such rules should be overridden (http://www.cato.org/cato-journal/springsummer-2016.)  Robust rules are one example of King’s desire for “coping” strategies that reduce at least one dimension of radical uncertainty. In the words of Michael Lewis ( of Liar’s Poker, Moneyball and the Blind Side fame), “if his book gets the attention it deserves, it might just save the world.” (http://www.bloomberg.com/view/articles/2016-05-05/the-book-that-will-save-banking-from-itself)