We do need to revamp Health Care Policy

Obama has put forth his health care plan.  Understandably, within the constraints of this blog we cannot dissect every detail.  So let’s look at the broader points.  First, it takes much of the private market for health care and puts it under government supervision and administration.  Secondly, it taxes some segments of the population early, and promises benefits later.  Third, there has been a lot of horse trading to get the bill through, so special interests were able to lobby benefits that other groups couldn’t get.  For example, comprehensive plans offered by unions to their members come away scot free from any changes.  Plans that small to mid size corporations offer are taxed heavily.  By now if you have been paying attention, you know that certain Senators and Representatives were able to eek out tremendous advantages for their own states as well.

My question is “Why do it this way?”  Why not do it the simple way, that will cover even more people at a more cost effective price?  Changes in the way health is doled out in the US have to happen.  No one really argues with that. Here is how I would do it on a macro level.  As Wendy Gramm once said in a CME Board meeting before we started on the CFMA in 2000, “The devil is always in the details.”.  But you need a framework to build on.

The goal is to cover the largest amount of American citizens at the lowest price(not cost which is different than price)

First, let’s start with doctors.  The supply of doctors is restricted by the government via Medicare/Medicaid rules.  They only admit so many doctors to med school.  This supply is further narrowed because the AMA will only allow a certain number of doctors in each specialty.  You can only have so many specialists per specialty.  So when demand spikes, supply is constrained and prices go up. End the restrictions.  Train more docs.  Let them choose to practice medicine in any specialty or place they want.  They will make economic choices that are best for them.  The choices they make will be best for the entire medical market.  Coase theorem works.

I am not advocating admitting unqualified people into medical school.   Just admit more qualified people.  If you don’t have space, start more medical schools.

Once a doctor enters a practice he needs an army of people to keep up with insurance company bullcrap. Most of a doctors’ overhead will be to employ number crunchers to extract payment from insurance companies-or to pay insurance company premiums.  One of the reasons for this is the majority of bills in America are 3rd party payed.  You don’t pay them, your insurance does.  That is probably good for major operations and medical needs.  However, most of America just needs basic commodity care.

Next time you are at your doctor, ask him how much they charge for a vaccine or shot?  They won’t be able to tell you, they will have to look it up and see how they are going to charge you.  For commodity procedures, doctors should post the price in their office. Then you can comparison shop and choose where you want to go.  There are lots of places to get this sort of thing done besides a doctors’ office.  Take Care Health Clinic’s at Walgreen’s are a perfect example.  Posting prices now injects lots of competition into the doctor market.  The amount you pay will go down, and the amount of care being given will go up. Doctors will still make a profit, but they will have to figure out how to price things to make more or less on certain procedures.  Price will not be set by a central government controlled agency.

Everyone hates insurance companies.  They have mini-monopolies state by state.  End it.  Force them to compete.  They will innovate.  New policies will emerge for different segments of the market.  The price of insurance will come down, and the amount you can get will go up.  End restrictions on people trying to buy insurance as well.  Allow people to group up in creative ways to purchase insurance.  This will force companies to innovate more, and the price you pay will come down.  Insurance companies will also innovate to cover “pre-exisiting conditions” that they don’t cover today.  Why?  Read the next paragraph.

People of the US today choose if they want insurance.  Give them that choice if they are above a certain asset level.  Otherwise they have to buy insurance.  Bill Gates probably doesn’t need insurance.  Even the worst medical condition wouldn’t break him.  But a person like me needs insurance.  Single people after the age of 18 would have to buy at least catastrophic insurance.  This increases the pool of insured people.  That spreads out risk among a far greater population, and insurance companies will cover everything.  Besides that, we have already increased competition among insurance and doctors, so costs have come down.  If people are truly indigent, then the government would issue them a voucher to purchase insurance for their family.  We would “Nudge” (Richard Thayler) them with a few simple choices to choose from.  They could comparison shop for the best priced insurance like everyone else, but they would have to spend that voucher on some policy.  Whatever was left over they could keep for themselves. 100% of the US citizen population would be covered.

Lawyers are the bane of everyone’s existence.  They are the root cause of a lot of the high prices that you pay.  We would have to have tort reform to curb crazy or unending lawsuits.  The lawsuits over asbestos, and now mesothelioma, went from lawyers truly trying to help people to gigantic unending fishing expeditions that have bankrupted companies and courtrooms. Tort reform is a key component of any health care reform.  Doctors insurance premiums would also come down with tort reform.  35-50% of their premiums are charged because of the threat of lawsuits from lawyers.

Lastly, if the government were truly concerned with providing health care to all American citizens they wouldn’t tax it.  Incentivize citizens to get health care by allowing Americans to open a tax free account (like and HSA or MSA) and let the account grow tax free.  If you don’t need a lot of medical care, you won’t have to spend the money on it.  You can spend it on yourself.  This also makes it pay for Americans to take care of themselves.

That’s a pretty broad outline.  Democrats certainly have not proposed anything that resembles this.  Republican’s have proposed bits and pieces, but their proposal isn’t really bold.  It seems that both parties really want some government involvement so they can keep control.  What we really need is to own it and control it ourselves.  All the bits and pieces of legalese and restrictions and mandates that come out of the beltway just keep us further away from doing what’s best for us.

Figure of the Day

What the heck do we do with Wall Street?

There are two bills pending in each house of Congress that are re-regulating the financial industry. The premise is that we can’t let Wall Street do this to us again.

Some Senators, and Thomas Frank in Tuesdays Wall St. Journal have called for a reinstatement of Glass-Steagall. This shows how desperate, and inept the two bodies of Congress are. Frank is a PhD in History, not Finance or Economics, so he simply wants to go back in time. The simple answer is we can’t.

In 1999, I was part of a group that was meeting with the then Chairman of the Senate Banking Committee, Senator Phil Gramm. Yra Harris, a CME Board member at the time asked Senator Gramm, “Are you creating institutions that are too big to fail?”. Gramm smartly replied, “No, we don’t think we are.”  This was after the Long Term Capital Debacle in 1998, and before the Y2K scare of December of 1999.  (Yra Harris blogs at  Notes From Underground)

Flash forward through all the turmoil of the NASDAQ bubble bursting, Y2K, 9/11, and the crash of 2008.  What to do now?  We have seen that the TARP, TALF, and all the other methods put forth by Treasury and the Federal Reserve have been ineffective.  The actions of government over the past year have simply rebuilt the house of cards that existed pre-crash.  Economist John Taylor even wonders if we are headed for another boom/bust cycle like we had in the 1950’s-70’s.

Why not take a novel approach to re-regulation?  Why not take an approach that recognizes the role and risk that an entity plays in the market and prohibit activities that detract from transparency and competition?  If we did that,  Wall Street would be very different, markets would be different, and Wall Street would be more self regulating than it is today.

First, we need to separate functions.  For example, you could ban any dual trading at any entity.  This would mean a business like Goldman would have to choose, be a broker or a risk taking trader.  They would not be able to have investment advice, market making, hedge fund, lending, brokering all under one roof. However, they could be an insurance company, bank, investment advisor.  They would just have to end/spin off all trading for profit.   There is a massive conflict of interest within entities like Goldman.  They even sent a letter to their customers apologizing for that conflict.  Why have it at all?  In the early 1990’s, the CME took steps to ban dual trading in all financial products traded at the exchange.  It didn’t hurt markets one bit.

Second, there are several industry practices that detract from transparency and competition.  One is payment for order flow.  It’s legal under the SEC, illegal under the CFTC.  It creates market distortions.  Part of the profit stream of newly controversial high frequency traders is harvesting the payment for order flow.  Ending it ends that game.  High Freq. Traders would have to adopt different strategies to make a buck.

Third, we need to end the practice of internalization.  The big boys on Wall Street take huge orders from places like pension funds and “internalize” them.  This means they take the opposite side of the order, or a part of the order and then arbitrage them against the market for profit.  Do it enough, and you can generate massive profits.  Look at the top line revenue of the largest investment banks on Wall Street.  At least 30% of their revenue comes from proprietary trading. It grows every year.  No trader makes money year after year after year.  Sometimes you have a loser.  The big investment banks never have a loser.

The other change I would advocate is to prohibit hedge funds or trading groups from accessing the public markets for their risk capital.  When you are trading your own money, or your investors’ money, you use a far different trading strategy than you do with public money.  If I have to look my partner or investor in the eye and explain a risky trading strategy, it’s a lot different than just selling some stock to a schmuck and using the money to put on the same strategy.  If a bank didn’t trade, they could be a public company.  Simple.

The other thing that will make markets work better is transparent clearing.  Wall Street banks have resisted it.  Why?  They want to internalize as many orders as they can and make money for themselves off them.  The OTC market is a perfect example.  It’s okay to have the Wild West, but their customers are showing up to a gunfight with a pistol.  The big banks have tanks and an army.  Clearing allows counter parties to manage their risk effectively.  Clearing also requires parties to put up real money to hold positions.  With adequate clearing, the crash of 2008 theoretically could never have started.  A good clearing house would have liquidated positions at whatever the prevailing market price was.

Instead of focusing on these kinds of things, Congress is focusing on executive pay, creating more agencies and writing the rules to benefit whoever gives them the most cash.  They feign concern for the American public.  In reality, they are scared and don’t know what to do.

Figure of the Day

http://www.cosmopolitan.com/celebrity/news/scott-brown-nude-in-cosmo?click=main_sr

Something for the females, and gays

Tim Geithner and the Treasury

Today the Wall Street Journal (www.wsj.com) has an opinion piece on Tim Geithner and AIG.  When the AIG troubles surfaced, Geithner was President of the NY Fed, and Hank Paulson was the Treasury Secretary.  Previously I have written about Paulson (http://tinyurl.com/6oyuma).  Whenever private companies get bailed out by governments, there is always trouble.

No matter what the Wall Street talking heads have said, or are saying, they were all virtually bankrupt as far back as August of 2007 when the financial melt down first surfaced.  Way back then Paulson came up with emergency measures to prop up the banks. Paulson did this to protect his cronies on Wall Street.  They can talk all they want about saving the American financial system, but while it would have hurt badly, the system would have rebuilt itself with different banks and different people in charge.  We would never have had troops in the streets and long bread lines like we did in the 1930’s.

Geithner acting on Paulson’s behalf began trying to piece together a quilt which would allow the NY Bankers to recoup all their assets, hide the bad debt and bad assets in the Federal Reserve System and Treasury, and make AIG the scapegoat for everything that is wrong with American finance.  This preserved the oligopoly that the Wall Street bankers created and used to reap tremendous profit off the backs of their own customers.

Rather than looking at the verbiage, let’s look at the facts.  Wall Street got paid 100 cents on the dollar for all the bad paper that they floated with AIG.  Yet, when arguing about mark to market accounting rules, Wall Street wanted to suspend them because they said “the market” was not pricing the assets correctly.  At the depths of the financial crisis, many of those assets would have been lucky to get ten cents on the dollar.  But since, Wall Street has deep pockets and spent a lot of that largesse on lobbying in DC.   They also have a revolving door between the Treasury, Justice and other departments within every administration going back to before I was born.   Amazingly, they were able to recoup 100% of their assets and have government sweep it under the rug.  Government with it’s long investment time horizon now gets to wait and see if those “investments” pan out.

Interestingly, Geithner in questioning took the same approach virtually every mindless bureaucrat has taken since 1987 when there is a disruption in the financial system.  He blamed derivatives.  Derivatives themselves were not the problem.  Government was the problem.  Nobel Prize winner Merton Miller wrote about derivatives in the context of Orange County in the early 1990’s and his words are even more impressive today(http://tinyurl.com/ydk8x6m).  He says, “These are policy disasters, tracing not to transactions between private-sector parties, but to the deliberately deflationary actions of a central bank somewhere, usually reacting to its previous policy errors in the other direction.”  Many fingers in this crisis can be pointed at many culprits, but the ringleader of the crime was the Federal Government and its easy money policy at the Federal Reserve, and the fiscal policy using Fannie Mae and Freddie Mac to subsidize portions of the populace.  Geithner doesn’t want to point the finger at his bosses, and isn’t prescient enough to understand how culpable they are.

As we start to sift through the wreckage, it is very important for our Representatives and Senators to ask tough questions.  How complicit were government officials in moving things around, and how much have they lied to us about what they did and what they promised?  I wouldn’t trust anything anyone says, but would rather see some documentation.  This is one of the times you want your elected official to be a really good criminal attorney.  They are trained to ask and pore through to find the truth.  Of course, many of our elected representatives from both parties have been bought with Wall Street cash.  Reagan said, “Trust but verify”, but I honestly don’t think that any of these guys can be trusted.  They are too busy lining their pockets and trying to save their own skins.

How Ya doin’! No House Youse doin’?!

That’s how we say hello in Chicago, or as Chicagoans would say, “Chicaga”. This blog will take a hard but irreverent look at topics in economics, finance, trading, and politics. Feel free to upload photos, videos, and comment on anything at the blog-just make sure it’s something your mom would want to watch too. I hope your mom wasn’t someone like Myra Hindley or someone like that! I will do my best to keep the comments moderated and in decent taste. So, Cheers, and let’s have some fun.