Adverse Selection on Steroids

March 22, 2010

I was hoping no one would ask me about the healthcare legislation. Then I got this email from someone who doesn’t follow politics:

Since you work for a health insurance company, what impact will this health bill have not only on you, but the policy holders?

I’m sick of everyone having their hands out but I’m especially sick and tired of the politicians, Democrats and Republicans, who vote with what the latest poll indicators reflect rather than voting what they think is best
for their constituents and the country. As I’ve said many times before, the number one priority of every politicians is to win reelection.

I really don’t follow politics that close so I’m showing my ignorance here. But I needed to vent.

My response:

I have to correct you on two points. First, this isn’t Democrats and Republicans doing. Not a single Republican in either the House or the Senate voted for this. Second, this isn’t a case where the politicians are following polls instead of principles because a majority of Americans don’t want this. The Democrats are following principles, they’re just principles that are radically at odds with everything this once great country stood for, but would fit in with what Chavez is doing in Venezuela.

This healthcare law creates yet another unaffordable government entitlement program when the government has essentially maxed out its credit. The real purpose isn’t to lower costs (which will actually skyrocket once it fully takes effect in 2014), but to greatly expand the size and power of government and radically redefine the relationship of citizen and state, and not in a good way, i.e., more dependency, less freedom and personal responsibility.

Consider that our current national debt is approximately $15 trillion. Consider also that the national debt is not measured according to generally accepted accounting principles (GAAP) that businesses use to report their finances, which include unfunded liabilities. Using GAAP, the US as a business would have a net worth of negative 70 trillion, nearly double the GDP of the entire world. Would you invest in such a business?

Given the predicament we are in, what’s Obama done? He’s increased the deficit from $400 billion under Bush’s last year in office to $1.8 trillion, with $2 trillion or greater annual deficits projected for the next decade. Using the government-created financial crisis as a pretext, Obama decided that healthcare “reform” was needed to “fix” the situation.

Instead of doing things that would help lower healthcare costs, the Democrats opted to take over 1/6th of the US economy. They used Enron-like accounting gimmicks to make the legislation appear almost affordable when it will cause the deficit to skyrocket. These gimmicks include: (1) counting 10 years of tax revenue and 6 years of spending (most of its provisions don’t take effect until 2014 after the Presidential election, (2) double counting the same savings under different headings, (3) funding some of the cost via Medicare cuts that are unlikely to happen, and (4) using unrealistically rosy projected economic growth to skew the numbers further.

Despite the various gimmicks, the CBO still says the legislation will cost 1 trillion. Take away the accounting gimmicks and the cost rises to 2.5 trillion. Even that figure’s too low because CBO estimates are invariably lower than actual costs. Why? Because they fail to take into account the spike in demand when something is “free” or somebody else is paying. Spikes in consumption when goods/services are provided “for free” are the CBO’s blind spot (not their fault, they have to score based on the assumptions they’re given and the government never assumes “free” will increase demand).

The 75% of Americans who currently have health insurance won’t see any benefit from this, but they will see their taxes go up. If this bill would leave the 75% of us alone and actually do something for the remaining 25%, it likely would have had bipartisan support. In reality, the bill will drive up costs on insurers and small businesses, causing premiums to skyrocket. This in turn will cause many companies to stop providing health insurance altogether, thereby increasing, not lowering the number of uninsured.

Costs will go up because the law says insurers can no longer deny coverage for pre-existing conditions or impose lifetime maximums. You don’t have to be an actuary to understand that this will cause premiums to skyrocket. Imagine if auto insurance companies were forced not to deny coverage for your car’s pre-existing conditions? What that means is people will wait until AFTER they get into an accident to buy insurance, and the insurance company will have to cover them as though they already had insurance. This undermines the very concept of insurance, which depends on the many people who stay healthy to cover the few who get sick.

The elimination of lifetime maximums has the same effect. When you buy auto insurance, you can get minimum coverage or pay extra for more coverage. The cost doesn’t go down when you increase coverage, it goes up. Another way of looking at what the bill does is from a financially responsible customer’s point-of-view. I have much more than minimum coverage with my auto insurance policy, but I don’t have unlimited coverage, because that costs more than I can reasonably afford. The government bill forces everyone to have unlimited coverage, whether we can afford it or not. What will that do to premiums?

Some people think this doesn’t affect them because their employer “pays for their healthcare.” This is nonsense. Our employers pay us less than they otherwise would because of the high cost of healthcare. When premiums skyrocket (Did I mention the bill also includes additional mandates that private insurance must provide, which will further drive up prices?), either our salaries will go down, our cost share will go up, or we’ll lose our healthcare coverage altogether. So much for the empty promise that if you like your existing insurance (most do), you can keep it (many won’t).

To address these obvious problems, the law forces people to buy insurance whether or not they want/need it. Except it doesn’t. The fine is much less than the cost of health insurance so most healthy people will find it cheaper to pay the fine than buy insurance until they get sick. One of the things that causes premiums to skyrocket and insurers to go broke is a problem known as adverse selection, which is what happens when you have a much sicker insurance pool than the general population. ObamaCare is adverse selection on steroids.

The new law also massively expands access to Medicaid, another bankrupt entitlement program largely responsible for the financial crises in many states. Think about this. While the government is cutting Medicare (which our parents and grandparents PAID FOR), it is expanding Medicaid. In other words, it’s taking away health benefits from seniors who paid for them while providing care for those who didn’t. Spread the wealth, eh, eh comrades?

I haven’t even mentioned the bloated Byzantine health care bureaucracy the legislation creates to decide what treatments/drugs will and won’t be covered, how much doctors/hospitals are paid, etc. The bill is over 2,000 pages long (not counting the many thousands more pages in regulations to follow). Compliance costs associated with this legislation will be enormous. Needless to say, this regulatory burden will not add one penny to our wealth as a nation. In fact, it will make us poorer. It’s as if we forced farmers to run on treadmills for several hours a day during harvest time, leaving them too tired to gather crops before they spoil. Government never seems to consider the opportunity cost of time wasted on activities that serve no other purpose than complying with arbitrary government rules and regulations.

To put this legislation in everyday terms, imagine if the government was an individual named Uncle Sam. Sam is completely broke, yet he wants to buy a brand new Rolls Royce (ObamaCare). Sam can’t afford the Rolls Royce, so he plans to use his inheritance from his grandfather (Medicare) to cover the payments. But Grandpa is broke too, and even if he had the money, he wouldn’t give it to his miserable grandson who stole from Grandpa to buy a new sports car for his girlfriend (Medicaid).

Even if Grandpa had the money and was willing to give it to Sam, how can Sam afford a Rolls Royce when he’s maxed out all his credit cards and has several girlfriends with expensive tastes. Yet Sam just went and bought himself a Rolls Royce.

What kind of person behaves this way? Someone who belongs in jail or on Jerry Springer. Which tells you exactly the kind of Congress and President we have.

And to top it all off, that Rolls Royce is actually a lemon.

That’s why Americans who’ve been following this are so stoked. But I’m not worried for the poor Democrats. They’re going to ram through immigration “reform” next to add 7–10 million new Democrat voters to provide even more Hope and Change.

Just like in Venezuela.


Toyota Hybrid Hoax

March 12, 2010

Toyota Hybrid Horror Hoax:

“On the very day Toyota was making a high-profile defense of its cars, one of them was speeding out of control,” said CBS News–and a vast number of other media outlets worldwide. The driver of a 2008 Toyota Prius, James Sikes, called 911 to say his accelerator was stuck, he was zooming faster than 90 miles per hour and absolutely couldn’t slow down.

It got far more dramatic, though. The California Highway Patrol responded and “To get the runaway car to stop, they actually had to put their patrol car in front of the Prius and step on the brakes.” During over 20 harrowing minutes, according to NBC’s report, Sikes “did everything he could to try to slow down that Prius.” Others said, “Radio traffic indicated the driver was unable to turn off the engine or shift the car into neutral.”

In fact, almost none of this was true. Virtually every aspect of Sikes’s story as told to reporters makes no sense. His claim that he’d tried to yank up the accelerator could be falsified, with his help, in half a minute. And now we even have an explanation for why he’d pull such a stunt, beyond the all-American desire to have 15 minutes of fame (recall the “Balloon Boy Hoax” from October) and the aching need to be perceived as a victim.

I wonder if this character is connected to Government Motors and/or the UAW.

Finding Lost

March 8, 2010

This is a clever idea: commentary on the final season of LOST from someone who’s never watched the show before: Never Seen Lost. Funny and surprisingly good.

Here’s a snippet from Episode 1 of Season Six:

These people are stuck on an island. They tried detonating a bomb to disrupt a space time continuum, which is 100 times better than using a boat when trying to get somewhere. The bombing didn’t work (or did it?!?!?! it didn’t.) so now everyone is dying left and right and everyone is mad at Jake (sic) because his plan didn’t work. Juliette is trapped under a bunch of steel. How’d she get there? She fell down a hole, survived, and then beat an H-bomb (according to my cable TV episode guide) with a rock til it blew up. Sawyer seems pretty grouchy about the whole thing. Juliette dies. Meanwhile, the Indian guy got shot but they just ignored him even though he was coughing up blood and still had a chance to live. I guess they figured since Juliette was at the center of a bomb detonation, they had less time to save her.

This island also has ghosts of people who died in Westside Storyesque knifefights (Jacob) or bald people (John). The ghosts are of differing helpfulness. The Jacob ghost tells the fat guy to take the dead Indian to a hole in a temple and not to forget the guitar case. That sounds like the beginning of a joke or one of those sentences that contains every letter of the alphabet.

Good News From the Silver Lining Department

March 5, 2010

The more I watch this character, the more I’m reminded of a 1970’s era Soviet apparatchik desperately grasping for smidgens of positive news to report amid the devastating failure of the latest Five Year Plan. Witness Harry in December 2009 describing the 3.7 million jobs lost during Obama’s first year in office as “great progress.”

“The great enemy of clear language is insincerity.”
—George Orwell, “Politics and the English Language,” 1946

H/t: Drudge

Obama Imitates Castro

March 5, 2010

Obama signs a bill to boost US tourism promotion:

Looking for an edge in the global war for tourism dollars, US President Barack Obama Thursday signed into law moves to attract more overseas travelers (emphasis added).

Interesting way of putting it. One could argue that he’s already done much to attract “tourists” from places like Nigeria, Sudan and the Middle East, especially ones with names like Mohammed Atta and Umar Farouk Abdulmuttallab. The terror issue aside, it appears TOTUS is getting economic advice from Castro.

Obama signed the act “which establishes a corporation for travel promotion to encourage international travel to the United States,” the White House said in a statement.

The effort is to be funded through a matching program featuring up to 100 million dollars in private sector contributions and a 10-dollar fee on foreign travelers who do not pay for a visa, with no money from US taxpayers (emphasis added).

Just what we need, a new quasi-governmental agency to regulate tourism. Note too, which countries travelers will foot the bill.

But critics said the fees imposed on travelers from visa-waiver countries, mostly in Europe, could deter some would-be tourists (emphasis added).

From the Wikipedia link above, this snippet gives you an idea how well Cuba’s state-run tourism industry operates:

Until 1997, contacts between tourists and Cubans were de facto outlawed by the Communist regime.[2][3] Following the collapse of Cuba’s chief trading partner the Soviet Union, and the resulting economic crisis known as the Special Period, Cuba’s government embarked on a major program to restore old hotels, remaining old pre-communism American cars, and restore several Havana streets to their former glory, as well as build beach resorts to bolster the tourist industry in order to bring in much needed finance to the island. To ensure the isolation of international tourism from the state isolated Cuban society, it was to be promoted in enclave resorts where, as much as possible, tourists would be segregated from Cuban society, referred to as “enclave tourism” and “tourism apartheid”.[4] Until 2008 Cubans were not allowed to enter such tourist only stores, hotels, restaurants, beaches, etc. By the late 1990s, tourism surpassed Cuba’s traditional export industry, sugar, as the nation’s leading source of revenue. Visitors come primarily from Canada and eastern Europe and tourist areas are highly concentrated around Varadero Beach, Cayo Coco, the beach areas north of Holguin, and Havana. The impact on Cuba’s socialist society and economy has been significant. However, in recent years Cuba’s tourism has decreased due to the economic recession, escalating foreign investment conflicts and fears, and internal economic restrictions. Since its reopening to tourism in the mid 1990s Cuba has not met the projected growth, has had relatively little restoration, and slow growth due in major part to the fact that many foreigners don’t feel secure investing in Cuba under its current regime and Cubans are still forbidden by the state from owning private property or participate in any development. Since then, the Dominican Republic has surpassed Cuba in tourism, new development, and investment.[5]

One wonders if the legislation will include the construction of foreigners-only resorts here in the U.S. followed by rafts going the other way.

Update (March 9, 2010): Just when you think things can’t get crazier, he does this:

The Obama administration will accept no more public input for a federal strategy that could prohibit U.S. citizens from fishing the nation’s oceans, coastal areas, Great Lakes, and even inland waters.

First I’ve heard of this, yet apparently “the time for debate is over.”

Another idea borrowed from Castro. In an island blessed with ideal climate year-round for agriculture and a plentiful supply of fish in the surrounding Carribean and Atlantic waters, the average Cuban “citizen” is not permitted to fish in Cuban waters (The Cuban Cuban Coast Guard shoots at “unauthorized” vessels on sight.) Instead, most Cubans are forced to subsist on meagre food rations the government deems sufficient.

To each according to their needs, etc., eh Comrades?

Keynes vs. Hayek

March 3, 2010

I greatly enjoyed this item from Cafe Hayek, which is quickly becoming one of my favorite economics blogs.

Two things I normally hate: rap music and Daily Kos, yet these are well worth watching/reading:

(1) “Fear the Boom and Bust” pits Keynesian macro-economic theory vs. von Mises/Hayek’s Austrian School presented as a rap song:

(2) VA Classical Liberal at the Daily Kos does an outstanding job of annotating/explaining the two economists’ ideas referenced in the video here.

Most encouraging are these Daily Kos poll results:

Honor system here. If you read the diary, you get to vote. Who won- Keynes or Hayek?

John Maynard Keynes
3% 42 votes

F.A. Hayek
86% 1154 votes

I don’t know but I’m inspired to do more research of my own.
4% 64 votes

Are you kidding me? This damn diary is too long by 10 pages. I jumped to the bottom and voted for Keynes.
0% 11 votes

I agree with that guy, but I voted for Hayek.
4% 61 votes

That’s a conservative/classical liberal (i.e., libertarian) uber-rout of the liberal economist superhero, and it’s in a Daily Kos poll. Simply remarkable. George Soros might finally understand what von Mises meant when he coined the term malinvestment.

As the Hayek rap fellow says, in the long run, it’s [Keynes’] theory that’s dead. Obama is merely demonstrating the fallacy of trying to borrow our way out of debt and spend our way into prosperity even as we speak.