Daily Archives: October 11, 2009

Healthcare Diversions Part 3: The Financialization of Health and Everything Else in the Universe

By L. Randall Wray

In the previous two blogs I have argued that extending healthcare insurance is neither desirable nor will it reduce healthcare costs. Indeed, healthcare insurance is a particularly bad way to provide funding of the provision of healthcare services. In this blog I argue that extension of healthcare insurance represents yet another unwelcome intrusion of finance into every part of our economy and our lives. In other words, the “reforms” envisioned would simply complete the financialization of healthcare that is already sucking money and resources into the same black hole that swallowed residential real estate. It is no coincidence that Senator Baucus, the Chair of the Senate Finance Committee, has been chosen to head the push on healthcare—not, say, someone who actually knows something about healthcare. The choice was obvious, similar to the choice of Goldman Sach’s flunky, Timmy Geithner to head the Treasury. (In truth, many of President Obama’s appointees have no more expertise in their assigned missions than did President Bush’s “heckuvajob” Brown chosen to oversee the response to Hurricane Katrina. The difference here is not really incompetence but rather inappropriate competence—as in foxes and henhouses.) When it comes to Washington, “Wall Street R Us”.

I have previously written about the financialization of houses and commodities (go to www.levy.org) and the plan to financialize death (earlier on this blog). In all of these cases, Wall Street packages assets (home mortgages, commodities futures, and life insurance policies) so that gamblers can speculate on outcomes. If you lose your home through a mortgage delinquency, if food prices rise high enough to cause starvation, or if you die an untimely death, Wall Streeters make out like bandits. Health insurance works out a bit differently: they sell you insurance and then the insurer denies your claim due to pre-existing conditions or simply because denial is more profitable and you probably don’t have sufficient funding to fight your way through the courts. You then go bankrupt (according to Steffie Woolhandler, two-thirds of US bankruptcies are due to healthcare bills) and Wall Street takes your assets and garnishes your wages.

Here’s the opportunity, Wall Street’s newest and bestest gamble: there is a huge untapped market of some 50 million people who are not paying insurance premiums—and the number grows every year because employers drop coverage and people can’t afford premiums. Solution? Health insurance “reform” that requires everyone to turn over their pay to Wall Street. Can’t afford the premiums? That is OK—Uncle Sam will kick in a few hundred billion to help out the insurers. Of course, do not expect more health care or better health outcomes because that has nothing to do with “reform”. “Heckuvajob” Baucus is more concerned about Wall Street’s insurers, who see a missed opportunity. They’ll collect the extra premiums and deny the claims. This is just another bailout of the financial system, because the tens of trillions of dollars already committed are not nearly enough.

You might wonder about the connection between insurance and Wall Street finance. They are two peas in a pod. Indeed, we threw out the Glass-Steagall Act that separated commercial banking from investment banking and insurance with the Gramm-Leach-Bliley Act of 1999 (note how easily that rolls off the tongue—sort of like a mixture of wool and superglue) that let Wall Street form Bank Holding Companies that integrate the full range of “financial services” such as loans and deposits, that sell toxic waste mortgage securities to your pension funds, that create commodity futures indexes for university endowments to drive up the price of your petrol, and that take bets on the deaths of firms, countries, and your loved ones.

Student loans, credit card debt, and auto leases? Financialized—packaged and sold to gamblers making bets on default. Even the weather can be financialized. You think I jest? The World Food Programme proposed to issue “catastrophe bonds” linked to low rainfall. The WFP would pay principal and interest when rainfall was sufficient; if there was no rainfall, the WFP would cease making payments on the bonds and would instead fund relief efforts. (Satyajit Das, Traders, Guns & Money, p. 32). As are earthquakes—Tokyo Disneyland issued bonds that did not have to be repaid in the event of an earthquake. (ibid) It is rumored that Wall Street will even take bets on assassination of world leaders (perhaps explaining the presence of armed protestors at President Obama’s speeches). Why not? Someone even set up a charitable trust called the “Sisters of Perpetual Ecstasy” as a special purpose vehicle to move risky assets off the books of its mother superior bank, to escape what passed for regulation in recent years. (Das, again) I once facetiously recommended the creation of a market in Martian ocean front condo futures to satisfy the cravings of Wall Street for new frontiers in risk. Obviously, I set my sights too low. The next bubble will probably be in carbon trading—financialization of pollution!—this time truly toxic waste will be packaged and sold off to global savers. According to Das (p. 320), traders talk about new frontiers “trading in rights to clean air, water and access to fishing grounds; basics of human life that I had always taken for granted”.

Is there an alternative? Frankly, I do not know. Leaving aside the political problems—once Wall Street has got its greedy hands on some aspect of our lives it is very difficult to wrest control from its grasp—health care is a very complex issue. It is clear (to me) that provision of routine care should not be left to insurance companies. Marshall Auerback believes that unforeseen and major expenses due to accidents might be insurable costs. I am sympathetic. Perhaps “single payer” (that is, the federal government) should provide basic coverage for all of life’s normal healthcare needs, with individuals purchasing additional coverage for accidents. Basic coverage can be de-insured—births, routine exams and screening, inoculations, hospice and elder care. On the other hand, a significant portion of healthcare expenses is due to chronic problems, some of which can be traced to birth. I have already argued that these are not really insurable—they are the existing conditions that insurers must exclude. Others can be traced to lifestyle “choices”. Some employers are already charging higher premiums to employees whose body mass index exceeds a chosen limit—with rebates provided to those who manage to lose weight. While I am skeptical that a monetary incentive will be effective in changing behavior that is certainly quite complex, this approach is probably better than excluding individuals from insurance simply because of their BMI.

Some have called for extending a Medicare-like program to all. Although sometimes called insurance, Medicare is not really an insurance program. Rather it pays for qualifying health care of qualified individuals. It is essentially a universal payer, paygo system. Its revenues come from taxes and “premiums” paid by covered individuals for a portion of the program. I will not go into the details, but “paygo” means it is not really advance funded. While many believe that its Trust Fund could be strengthened through higher taxes now so that more benefits could be paid later as America ages, actually, Medicare spending today is covered by today’s government spending—and tomorrow’s Medicare spending will be covered by tomorrow’s government spending. At the national level, it is not possible to transport today’s tax revenue to tomorrow to “pay for” future Medicare spending.

I realize this is a difficult concept. In real terms, however, it is simpler to understand: Medicare is paygo because the health care services are provided today, to today’s seniors; there is no way to stockpile medical services for future use (ok, yes, some medical machinery and hospitals can be built now to be used later). And the true purpose of taxes and premiums paid today is to reduce net personal income so that resources can be diverted to the health care sector. Many believe we already have too many resources directed to that sector. Hence, the solution cannot be to raise taxes or premiums today in order to build a bigger trust fund to reduce burdens tomorrow. If we find that 25 years from now we need more resources in the health care sector, the best way to do that will be to spend more on health care at that time, and to tax incomes at that time to reduce consumption in other areas so that resources can be shifted to health care at that time.

Our problem today is that we need to allocate more health care services to the currently underserved, which is comprised of two different sets of people: folks with no health insurance, and those with health insurance that is too limited in coverage to provide the care they need. A general proposed solution is to provide a subsidy to get private insurers to expand coverage. (According to Taibi, the current House Bill subsidies are projected to reach $773 billion by 2019.) If we take my example pursued in an earlier blog of a person with diabetes who is excluded because of the existing condition, the marginal subsidy required would have to equal the expected cost of care, plus a risk premium in case that estimate turns out to be too low, plus the costs of running the insurance business, plus normal profits. If on the other hand diabetes care were directly covered by a federal government payment to health care providers, the risk premium, insurance business costs, and profits on the insurance business would not be necessary. In other words, using the insurance system to pay for added costs of providing care to people with diabetes adds several layers of costs. That just makes no sense.

It will be clear by now that I really do not have any magic bullet. We face three serious and complex issues that can be separately analyzed. First, we need a system that provides health care services. Our current healthcare system does a tolerably good job for most people, although a large portion of the population does not receive adequate preventative and routine care, thus, is forced to rely on expensive emergency treatment. The solution to that is fairly obvious and easy to implement—if we leave payment to the side. As discussed in my first blog we must also recognize that a big part of America’s health expenses are due to chronic and avoidable conditions that result from the corporatization of food—a more difficult problem to resolve.

Second, our system might, on the other hand, provide in the aggregate too many resources toward the provision of healthcare (leaving other needs of our population unmet). Rational discussion and then rational allocation can deal with that. We don’t need “death panels” (which we already have—run by the insurance companies), but we do need rational allocation. I expect that healthcare professionals can do a far better job than Wall Street will ever do in deciding how much care and what type of care should be provided. Individuals who would like more care than professionals decide to be in the public interest can always pay out of pocket, or can purchase private insurance. Maybe the cost of botox treatments is an insurable expense? Obviously, what is deemed to be necessary healthcare will evolve over time—it, like human rights is “aspirational”—and some day might include nose jobs and tummy tucks for everyone.

Third, we need a way to pay for healthcare services. For routine healthcare and for pre-existing conditions it seems to me that the only logical conclusion is that the best risk pool is the population as a whole. It is in the public interest to see that the entire population receives routine care. It is also in the public interest to see that our little bundles of pre-existing conditions (otherwise known as infants) get the care they need. I cannot see any obvious advantage to involving private insurance in the payment system for this kind of care. If we decided to have more than one insurer, we would have to be sure that each had the same risks, hence, the same sort of insured pool. It is conceivable that competition among private insurers could drive down premiums, but it is more likely that competition would instead take the form of excluding as many claims as possible. We’d thus get high premiums and lots of exclusions—exactly what we’ve got now.

We could instead have a single national private insurer pursuing the normal monopoly pricing and poor service strategy (remember those good old days when you could choose from among one single telephone service provider?), but in that case we would have to regulate the premiums as well as the rejection of claims. Regulation of premiums cannot be undertaken without regulating the health care costs that the insurer(s) would have to cover. If we are going to go to all the trouble of regulating premiums, claim rejections, and healthcare prices we might as well go whole-hog and have the federal government pay the costs. Difficult and contentious, yes. Impossible? No—we can look to our fellow developed nations for examples, and to our own Medicare system.

Finally, there may still be a role for private insurers, albeit a substantially downsized one. Private insurance can be reserved for accidents, with individuals grouped according to similar risks: hang-gliders, smokers, and texting drivers can all be sorted into risk classes for insurance purposes. If it is any consolation to the downsized insurers, we also need to downsize the role played by the whole financial sector. Finance won’t like that because it has become accustomed to its outsized role. In recent years it has been taking 40% of corporate profits. It takes most of its share off the top—fees and premiums that it receives before anyone else gets paid. Rather than playing an auxiliary role, helping to ensure that goods and services get produced and distributed to those who need them, Wall Street has come to see its role as primary, with all aspects of our economy run by the Masters of the Universe. As John Kenneth Galbraith’s The Great Crash shows, that was exactly the situation our country faced in the late 1920s. It took the Great Depression to put Wall Street back into its proper place. The question is whether we can get it into the backseat without another great depression.