I just read an article about prepaid cellphone service competition.
http://finance.yahoo.com/family-home/article/109153/how-low-can-low-cost-wireless-carriers-go
Without going into detail on the article, one point raised is that because prepaid customers are free to switch at any time, this spurs intense competition to retain customers as they cannot rely on contracts to retain customers. So how about extending this principle to post-paid plans to spur competition in that market. But first we need to look at some of the principles of postpaid plans. One of the principles of post-paid plans is that the plan subsidizes the cost of the handset. A purchaser of a post-paid plan buys a handset at a reduced price subsidized by the carrier. The carrier recoups this cost from the monthly plan price. The contract exists, from a pricing model perspective, because the carrier wants to ensure that they recoup the cost of the handset that they basically fronted. Now we could say that they are not allowed to subsidize the cost of the phone, but the carriers would rightly claim that this creates a burden to the customer to front the money for the full handset cost.
So here's the solution. The carrier can continue to subsidize the upfront cost of the handset, but this is essentially billed as a "loan". That is, the repayment of the subsidized handset cost shows up as a line item on the bill, and there is no plan contract as the only contract is the repayment of the phone cost. Several things then happen. Once the phone is paid off, your monthly rate goes to the actual service plan cost - you no longer continue to subsidize the phone that has already been paid off by continuing to pay the same plan price indefinitely. You can better plan your cell phone costs as you now have better information as to what you are really paying for in terms of hardware vs service. You know what your handset really costs and can make better informed choices of handsets, plans, and carriers and on things such as how much of the handset is subsidized. You can control how the handset is paid for. You are no longer forced into accepting the carrier's subsidizing the cost. And most importantly, you are free to change carriers at any time and you know the true costs of doing so - the only "penalty" cost is to pay off any remaining balance on the handset cost. This means the carriers now have to compete more ardently on all fronts of handsets, service plans, and payment plans. They can no longer obfuscate real costs and the information the consumer should be entitled to as a mechanism to retain customers.
Tuesday, March 23, 2010
Principles on Taxation
Just a random comment. I think we approach spending and taxation policy from the wrong angle. We always seem to fixate on a balanced budget but a large part of what keeps us from a balanced budget is we can't fundamentally agree on what that budget should even be. This is due in large part to an inability to agree on what is the right size government economically. It always seems to be from one side that they just keep wanting to add more stuff to government without regard for the economic cost and then devise ways, ie taxes, to come and get their hands on more of our money to feed that ever growing government. Basically politicians argue and fight about spending and taxation to get to a "balanced budget" when they fundamentally have no consensus on what that budget should be. And then in the rare cases where agreement is reached, it all gets thrown out the window when the economy changes. What got me to thinking about this is it seems they just keep thinking up new ways to get more of our money and more ways to spend it. Obviously they can't just keep taking more and spending more because eventually we would end up just giving everything we make to government and this is just not tenable nor sustainable. We ought to be able to just have the proper taxes in place and then it should just be able to be left more or less alone with minor adjustments as the economy shifts. If we communally have to devise new taxes or ways to circumvent limitations, then this is a sign that something is wrong and we are not on a sustainable path.
Maybe an approach that would be more successful in achieving this as well as getting a "right size government" is to first decide what the budget should be and then argue about how to raise that budget funding and how to spend it. First we decide first how much of our economy we want government to consume. This would be as a percentage of GDP (whether we're talking state GDP for state budgets or national GDP for federal budgets). Then we decide how to raise that revenue and separately we decide how to spend it.
What got me to thinking about this is that in the EU they have benchmarks for debts and deficits in terms of percentage of GDP. Fundamentally, government can't continue to grow disproportionately to growth (or shrinkage) in the economy. There is an optimum percentage of the economy for government. The "right size government" is set by a percentage of GDP. If government is too large with respect to GDP it has a deleterious affect on the economy as it "sucks the air out" of the economy. Government can't continue to grow indefinitely as if there is no limit to the amount of GDP that it can consume. Too small can also have a deleterious affect as it makes insufficient investment in infrastructure to promote growth and does too little for the health of the general society. So the "right size" government is the one that is the right percentage of GDP so that it does not become so large it stifles the economy or too small that it doesn't support a healthy state. More specifically, the level of annual revenue that the government takes in should be set to some percentage of annual GDP and of course there should be some range of wiggle room. There should be a target percentage of GDP plus or minus some range. There should be a range so that there is some flexibility in adjusting for short term needs. Of course the trick is that revenue really should be the at the nominal level and not just end up effectively at the upper end of the range. Perhaps something like a policy of every year that revenues exceed the nominal target, there must be offsetting years below nominal. Thus they can't just "run it to the max" indefinitely without consequence, because if there are no consequences to just always running it at the max then that's just what they'll do. In short, setting revenue as a percentage of GDP basically let's us decide up front how big we want our government to be and how much government is fundamentally economically sustainable, ie how much government we can actually afford.
It is much easier to set up a spending budget once we know how much we can spend rather than approaching it from the other end of trying to decide taxing and spending to reach some vague, nebulous undefined "budget" figure. Once we have a budget, we can decide how to spend it. We know how much we are allowed to spend so now we can set about prioritizing what's really important and not just what pork can be jammed into the spending bill. And, importantly, some percentage of this "spending" should be savings for a rainy day. And independently of spending we can set about deciding how best to construct a tax regime to raise the tax revenue that has already been determined as the level of taxation we want. Again, we can decide what are the really best tax revenue sources and not just who we can keep soaking for more and more or on whom to levy punitive taxes just because someone doesn't like them.
Simply, rather than trying to establish a "budget" in one colossal spending/taxing/budgeting process, break it down into tractable pieces (are you seeing a trend on how I think government should work?) First decide how much GDP should go to government, that is how big we want government and how much we think we can afford. Then once we know how much we think we SHOULD be spending, we can figure out how we OUGHT to be spending it because we can much more effectively prioritize spending when we have a fixed spending limit. And separately we can decide what is the best way to go about obtaining that revenue that is least deleterious to the economy and where we want the economy to go. We turn the tables from government deciding how much they're going to spend then taking our money to fund it, to telling government how much they can spend and they then decide how best to spend that.
Maybe an approach that would be more successful in achieving this as well as getting a "right size government" is to first decide what the budget should be and then argue about how to raise that budget funding and how to spend it. First we decide first how much of our economy we want government to consume. This would be as a percentage of GDP (whether we're talking state GDP for state budgets or national GDP for federal budgets). Then we decide how to raise that revenue and separately we decide how to spend it.
What got me to thinking about this is that in the EU they have benchmarks for debts and deficits in terms of percentage of GDP. Fundamentally, government can't continue to grow disproportionately to growth (or shrinkage) in the economy. There is an optimum percentage of the economy for government. The "right size government" is set by a percentage of GDP. If government is too large with respect to GDP it has a deleterious affect on the economy as it "sucks the air out" of the economy. Government can't continue to grow indefinitely as if there is no limit to the amount of GDP that it can consume. Too small can also have a deleterious affect as it makes insufficient investment in infrastructure to promote growth and does too little for the health of the general society. So the "right size" government is the one that is the right percentage of GDP so that it does not become so large it stifles the economy or too small that it doesn't support a healthy state. More specifically, the level of annual revenue that the government takes in should be set to some percentage of annual GDP and of course there should be some range of wiggle room. There should be a target percentage of GDP plus or minus some range. There should be a range so that there is some flexibility in adjusting for short term needs. Of course the trick is that revenue really should be the at the nominal level and not just end up effectively at the upper end of the range. Perhaps something like a policy of every year that revenues exceed the nominal target, there must be offsetting years below nominal. Thus they can't just "run it to the max" indefinitely without consequence, because if there are no consequences to just always running it at the max then that's just what they'll do. In short, setting revenue as a percentage of GDP basically let's us decide up front how big we want our government to be and how much government is fundamentally economically sustainable, ie how much government we can actually afford.
It is much easier to set up a spending budget once we know how much we can spend rather than approaching it from the other end of trying to decide taxing and spending to reach some vague, nebulous undefined "budget" figure. Once we have a budget, we can decide how to spend it. We know how much we are allowed to spend so now we can set about prioritizing what's really important and not just what pork can be jammed into the spending bill. And, importantly, some percentage of this "spending" should be savings for a rainy day. And independently of spending we can set about deciding how best to construct a tax regime to raise the tax revenue that has already been determined as the level of taxation we want. Again, we can decide what are the really best tax revenue sources and not just who we can keep soaking for more and more or on whom to levy punitive taxes just because someone doesn't like them.
Simply, rather than trying to establish a "budget" in one colossal spending/taxing/budgeting process, break it down into tractable pieces (are you seeing a trend on how I think government should work?) First decide how much GDP should go to government, that is how big we want government and how much we think we can afford. Then once we know how much we think we SHOULD be spending, we can figure out how we OUGHT to be spending it because we can much more effectively prioritize spending when we have a fixed spending limit. And separately we can decide what is the best way to go about obtaining that revenue that is least deleterious to the economy and where we want the economy to go. We turn the tables from government deciding how much they're going to spend then taking our money to fund it, to telling government how much they can spend and they then decide how best to spend that.
Tuesday, March 16, 2010
The Best Health Care Solution
Due to the importance an timeliness of the issue, I wanted to get something posted rather than wanting until I had the time to polish it. I may be updating this post as I have time to fine tune it.
Ok, here it is. The (financial) solution to the health care debacle is composed of 4 components. The problem with current implementations and proposals is that is having a hammer as the only tool. The problem is that paying for health care is principally composed of three distinct components.
In the current situation, the only tool is that of "insurance." When your only tool is insurance, then you pervert and contort "insurance" to service these three distinctly different financial aspect. The first step in fixing health care and providing the best health care possible is to realize that the "problem" is not solved with one overarching solution, but is actually composed of multiple distinct issue that are each best addressed with targeted solutions. The three components are (1) ordinary and customary health care such as regular doctor visits, (2) "acute" care for things such as broken bones, heart surgery, hip replacements and the like that are of a one time nature, and (3) "chronic" health care problems such as cancer, diabetes, and other health issues that require ongoing care. The insurance hammer only deals well with category number 2. It doesn't handle either of the others very well at all, yet we try to contort "insurance" into servicing these types of costs as well. Our current health care implementation is like trying to use our auto insurance provider to finance our auto purchases and to pay for regular maintenance in addition to accident coverage. We intuitively understand that to do so would be inane, yet for some unknown reasons, this is exactly the approach we gravitate to for health care.
Similarly, the current proposed "solutions" are trying to apply the tool of government control which is not a good tool for providing goods and services.
Now, what tools do we really need for these distinctly different classes of problems?
(1) Two key issues driving the cost of health care are accountability and financial efficiency. The first level solution to this is to restore accountability and efficiency with the effective use of health care spending accounts (HSAs).
One of the biggest factors that drive of the cost of health care is that of accountability. That is, those receiving health care are not accountable for the cost. Who ever makes the payment is the one in control of the product. When some other agent, be it insurance or government, acts as the paymaster, control over the product is relinquished by the receiver of that product to the payer of that product. He payer becomes the driving force in how health care is provisioned, not the end user of that health care. That is, the utilization of health care is not accountable to a cost benefit analysis by those obtaining the service but to the whims of those who pay the providers of the service. One effect of HSAs is to restore control over health care to those actually receiving health care (which in and of itself is a good thing) so that those receiving health care make the choices such that they receive the best health care for their dollar. This drives prices down while driving up quality of service. This IS a fundamental property of free markets.
For ordinary expenses, the most effective and efficient means of dealing with this is the same way we handle all of our other day to day expenses - we simply pay directly for them. If we give our money to someone else to write the check for us, they will simply bill us the full cost, plus add additional expense to cover their cost of providing the check writing service. So the first step to reducing health care costs is to stop paying someone else to write our checks for us. Now, there are two arguments against this. One is that of getting people to see a doctor regularly or at least before minor issues become major issues. But on the other hand it is argued that people who don't go to a doctor regularly subsidizes the cost of those who do and if this "subsidizing" is not done then people will have to pay more to cover their full cost. Well, first, you can't have it both ways. If everyone took full advantage of what they are paying for, then there is no "subsidizing" and we all pay our own full cost. And if the goal is for everyone to fully utilize regular doctor visits, then achieving this goal means we all pay full price for regular doctor visits anyway. If "health care spending accounts" are used to pay for regular medicine, then people are incentivised to see a doctor regularly because they have money sitting in an account that is available to them for this purposes, which addresses the first counter argument. And how does the money get into this account? It gets there the same way our "insurance" premiums are currently paid. An additional benefit to this is that since we possess the money, we can see any doctor we want and obtain any services we want. Regular medicine now operates in a fully functional competitive market place which drives down cost and improves services. And the insurance companies don't take their cut.
This saves money because we are not paying a third party to write the checks for us. This drives down costs and drives up service because there is accountability and free market competition.
(2) For acute medical treatment, this is actually where insurance in conformance to the actual insurance business model actually works the way it is supposed to. It looks a lot like a regular auto insurance policy. You purchase a policy for a set period of time at a set price for set coverage. This doesn't pay for "regular maintenance" but only "accidents." Break a bone or have a heart attack or other emergency during the coverage period of the policy, and this policy covers the financial liability. This policy is cost effective and efficient because the financial liability to the insurer is well defined and they can construct an effective and efficient policy and premium structure. These types of problems are well defined and tractable, so we should isolate this class of problems so that we can at least keep the solution for this type of issue as simple as possible.
This saves money because the insurance company can focus on that which conforms to the well understood insurance business model and mathematics without have to also finance liabilities that are essentially 100% probable.
(3) The third category is somewhat trickier. This is where the conventional (as currently implemented) health care insurance fails as is a major contributor to the overall failure and expense of the current system. The problem is that what we have is what started as a conventional insurance business model that has been contorted to handle expenses and liabilities that don't conform to conventional insurance mathematics. From a perspective of current insurance, what we are expecting health insurance companies to do is the same as if we expected an auto insurance company to cover the liability for an accident we had before obtaining the insurance. The problem is that, as I have previously posted, insurance operates on a statistical mathematical principle called "expected value" which is a function of probability of an event. The problem with chronic illness is that the probability of a liability for treatment is 100%. When the probability is 100%, the price of the policy is simply set to include the cost of that liability. If you have an illness that it is known will cost $100,000 to treat, this means the "insurance" company know a priori that you will cost them $100,000. To charge you less that $100,000 when it is known in advance that they will have to pay $100,000 is not insurance, it is charity. And if they are going to charge you the $100,000, you would simply be better off just paying that yourself. Probably the best approach to this is something that would look more like a life insurance policy. You would purchase a lifetime insurance policy to insure against the onset of a chronic illness. Of course the issue remains as to what happens if you do not have such a policy in place before the onset of a chronic illness. Now, while this is still a form of insurance, it needs to be separate from insurance for acute problems. The issue is that these two type of insurance become unmanageable (read inefficient and expensive) when commingled. Separating these two forms allows the exclusive application of the most appropriate models to the particular needs of the particular issue.
The overarching objective here is to break the distinctly different factors apart so that the most appropriate, effective, and efficient mechanisms can be applied to each rather than an "every problem looks like a nail when your only tool is a hammer" approach. When we recognize that what we are dealing with is not one homogeneous issue but is comprised of distinctly different types of problems, we can separate them so that the best solutions can be applied to each. When we fail to do this, we have not only the complexities of each type of problem, but the added complexity of attempting to handle distinctly different problems with one all encompassing solution. The better approach is the peel away the simple problems and dispatch those with simple solutions. Paying for regular every day health care? Simple, just pay directly like any other regular every day expense. Have an isolated health issue? Simple cover that with insurance just like we carry auto insurance to cover accidents. We are already familiar with this type of insurance and it's operation, which is well defined. Now we are left with the somewhat more complex issue of chronic illness, but it is much more tractable now that we can focus on the specific issues of this type of problem without all of the distractions and complications of other unrelated types of problems.
This doesn't solve the issue of people who fail to properly obtain the necessary coverage and then become chronically ill. It also doesn't explicitly solve how to ensure that everyone has access regardless of financial means. However, what this does do is to peel away the "easy problems" and deal with those in a simple and effective manner. These "easy problems" are not held hostage by that which is at the kernel of the "hard problem." And once the kernel of the "hard problem" is isolated, it makes that much more tractable.
If we could adopt these solutions, we could then discuss how to make sure everyone has access. Also, once we have deconstructed health care into it's constituent problems, we can much more readily address how to handle government assistance to extend the availability of health care.
Ok, here it is. The (financial) solution to the health care debacle is composed of 4 components. The problem with current implementations and proposals is that is having a hammer as the only tool. The problem is that paying for health care is principally composed of three distinct components.
In the current situation, the only tool is that of "insurance." When your only tool is insurance, then you pervert and contort "insurance" to service these three distinctly different financial aspect. The first step in fixing health care and providing the best health care possible is to realize that the "problem" is not solved with one overarching solution, but is actually composed of multiple distinct issue that are each best addressed with targeted solutions. The three components are (1) ordinary and customary health care such as regular doctor visits, (2) "acute" care for things such as broken bones, heart surgery, hip replacements and the like that are of a one time nature, and (3) "chronic" health care problems such as cancer, diabetes, and other health issues that require ongoing care. The insurance hammer only deals well with category number 2. It doesn't handle either of the others very well at all, yet we try to contort "insurance" into servicing these types of costs as well. Our current health care implementation is like trying to use our auto insurance provider to finance our auto purchases and to pay for regular maintenance in addition to accident coverage. We intuitively understand that to do so would be inane, yet for some unknown reasons, this is exactly the approach we gravitate to for health care.
Similarly, the current proposed "solutions" are trying to apply the tool of government control which is not a good tool for providing goods and services.
Now, what tools do we really need for these distinctly different classes of problems?
(1) Two key issues driving the cost of health care are accountability and financial efficiency. The first level solution to this is to restore accountability and efficiency with the effective use of health care spending accounts (HSAs).
One of the biggest factors that drive of the cost of health care is that of accountability. That is, those receiving health care are not accountable for the cost. Who ever makes the payment is the one in control of the product. When some other agent, be it insurance or government, acts as the paymaster, control over the product is relinquished by the receiver of that product to the payer of that product. He payer becomes the driving force in how health care is provisioned, not the end user of that health care. That is, the utilization of health care is not accountable to a cost benefit analysis by those obtaining the service but to the whims of those who pay the providers of the service. One effect of HSAs is to restore control over health care to those actually receiving health care (which in and of itself is a good thing) so that those receiving health care make the choices such that they receive the best health care for their dollar. This drives prices down while driving up quality of service. This IS a fundamental property of free markets.
For ordinary expenses, the most effective and efficient means of dealing with this is the same way we handle all of our other day to day expenses - we simply pay directly for them. If we give our money to someone else to write the check for us, they will simply bill us the full cost, plus add additional expense to cover their cost of providing the check writing service. So the first step to reducing health care costs is to stop paying someone else to write our checks for us. Now, there are two arguments against this. One is that of getting people to see a doctor regularly or at least before minor issues become major issues. But on the other hand it is argued that people who don't go to a doctor regularly subsidizes the cost of those who do and if this "subsidizing" is not done then people will have to pay more to cover their full cost. Well, first, you can't have it both ways. If everyone took full advantage of what they are paying for, then there is no "subsidizing" and we all pay our own full cost. And if the goal is for everyone to fully utilize regular doctor visits, then achieving this goal means we all pay full price for regular doctor visits anyway. If "health care spending accounts" are used to pay for regular medicine, then people are incentivised to see a doctor regularly because they have money sitting in an account that is available to them for this purposes, which addresses the first counter argument. And how does the money get into this account? It gets there the same way our "insurance" premiums are currently paid. An additional benefit to this is that since we possess the money, we can see any doctor we want and obtain any services we want. Regular medicine now operates in a fully functional competitive market place which drives down cost and improves services. And the insurance companies don't take their cut.
This saves money because we are not paying a third party to write the checks for us. This drives down costs and drives up service because there is accountability and free market competition.
(2) For acute medical treatment, this is actually where insurance in conformance to the actual insurance business model actually works the way it is supposed to. It looks a lot like a regular auto insurance policy. You purchase a policy for a set period of time at a set price for set coverage. This doesn't pay for "regular maintenance" but only "accidents." Break a bone or have a heart attack or other emergency during the coverage period of the policy, and this policy covers the financial liability. This policy is cost effective and efficient because the financial liability to the insurer is well defined and they can construct an effective and efficient policy and premium structure. These types of problems are well defined and tractable, so we should isolate this class of problems so that we can at least keep the solution for this type of issue as simple as possible.
This saves money because the insurance company can focus on that which conforms to the well understood insurance business model and mathematics without have to also finance liabilities that are essentially 100% probable.
(3) The third category is somewhat trickier. This is where the conventional (as currently implemented) health care insurance fails as is a major contributor to the overall failure and expense of the current system. The problem is that what we have is what started as a conventional insurance business model that has been contorted to handle expenses and liabilities that don't conform to conventional insurance mathematics. From a perspective of current insurance, what we are expecting health insurance companies to do is the same as if we expected an auto insurance company to cover the liability for an accident we had before obtaining the insurance. The problem is that, as I have previously posted, insurance operates on a statistical mathematical principle called "expected value" which is a function of probability of an event. The problem with chronic illness is that the probability of a liability for treatment is 100%. When the probability is 100%, the price of the policy is simply set to include the cost of that liability. If you have an illness that it is known will cost $100,000 to treat, this means the "insurance" company know a priori that you will cost them $100,000. To charge you less that $100,000 when it is known in advance that they will have to pay $100,000 is not insurance, it is charity. And if they are going to charge you the $100,000, you would simply be better off just paying that yourself. Probably the best approach to this is something that would look more like a life insurance policy. You would purchase a lifetime insurance policy to insure against the onset of a chronic illness. Of course the issue remains as to what happens if you do not have such a policy in place before the onset of a chronic illness. Now, while this is still a form of insurance, it needs to be separate from insurance for acute problems. The issue is that these two type of insurance become unmanageable (read inefficient and expensive) when commingled. Separating these two forms allows the exclusive application of the most appropriate models to the particular needs of the particular issue.
The overarching objective here is to break the distinctly different factors apart so that the most appropriate, effective, and efficient mechanisms can be applied to each rather than an "every problem looks like a nail when your only tool is a hammer" approach. When we recognize that what we are dealing with is not one homogeneous issue but is comprised of distinctly different types of problems, we can separate them so that the best solutions can be applied to each. When we fail to do this, we have not only the complexities of each type of problem, but the added complexity of attempting to handle distinctly different problems with one all encompassing solution. The better approach is the peel away the simple problems and dispatch those with simple solutions. Paying for regular every day health care? Simple, just pay directly like any other regular every day expense. Have an isolated health issue? Simple cover that with insurance just like we carry auto insurance to cover accidents. We are already familiar with this type of insurance and it's operation, which is well defined. Now we are left with the somewhat more complex issue of chronic illness, but it is much more tractable now that we can focus on the specific issues of this type of problem without all of the distractions and complications of other unrelated types of problems.
This doesn't solve the issue of people who fail to properly obtain the necessary coverage and then become chronically ill. It also doesn't explicitly solve how to ensure that everyone has access regardless of financial means. However, what this does do is to peel away the "easy problems" and deal with those in a simple and effective manner. These "easy problems" are not held hostage by that which is at the kernel of the "hard problem." And once the kernel of the "hard problem" is isolated, it makes that much more tractable.
If we could adopt these solutions, we could then discuss how to make sure everyone has access. Also, once we have deconstructed health care into it's constituent problems, we can much more readily address how to handle government assistance to extend the availability of health care.
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