About The Healthcare Debate

The Atlantic has an interesting commentary on US healthcare, and why it's so expensive. The author(s) list(s) three reasons for the costs:

1) We pay more for our medical services. But though the pharma industry is important, the real action is in wages. Our medical personnel cost vastly more than their counterparts abroad in almost every category.

2) We consume more services. Americans get shiny new facilities--my British colleagues once derisively commented that American hospitals are "like hotels". American hospitals don't have open wards for almost anyone. They staff at very high levels. Doctors conduct an inordinate amount of tests. We use an expensive machine rather than watchful waiting. And often, those expensive machines catch conditions that never would have turned into anything, which we then treat. Natasha Richardson probably would have lived if she'd had an accident here, because doctors would have done a cat scan, and there would have been a Medevac helicopter available. That's tens, maybe hundreds of thousands of dollars to save a single life.

3) There are inefficiencies. I don't mean "compared to other systems"--every system has some screwed-up illogicality that costs it money and makes patients worse off. But compared to what we could have. For example, Medicare pays for procedures, not wellness, which means that there's a chronic undersupply of geriatricians, because the specialty isn't particularly well paid even though the nation's largest healthcare provider is specifically designed for old people. This is madness. But every real-world system that has attempted to pay physicians for wellness has ended up giving up in disgust.

I can't disagree with the reasoning within the scope of the argument, but I do think there are factors the article does not consider.

1) External cost factors are not considered. Part of the reason healthcare professionals earn more in the US than elsewhere is that, in comparable economies, there is a stronger social safety net which affords a shield against catastrophe to the worker and more comfortable retirement for those who reach that point. Without that, the uncertainty of living in the US demands of the healthcare professionals (as it does of us all) higher compensation in order to protect themrselves against the unforeseen while in the workforce and poverty once out of it. This in itself is not a bad thing; however, the increasing inability for public sources to keep pace with the costs of living makes that demand all the more imperative.

2) Healthcare professionals in the US face substantially higher insurance rates, particularly for malpractice coverage, than their peers in other industrialised nations. This is anecdotal to those not in the profession or in academia, since resources on specific rates is difficult to find. However, the evidence that is available is staggering: there are multiple reports like this one of physicians leaving the country to find more affordable coverage, for example. And two studies, one by Dartmouth College and one by the advocacy group Americans for Insurance Reform, indicate that premiums in the US have continued to skyrocket in spite of the fact that payouts have either remained constant or declined, and in spite of the fact that state after state has enacted so-called "tort reform" designed to make those premiums lower by reducing the payouts. A telling quote appears here:

"Going into 2007 you're going to see very aggressive pricing as these companies have boatloads of cash. They're going to go out and spend it. That spurs the cyclical market of 'we're back to competition,'" [Richard "Rick" W.] Mortimer [vice president of HealthCare Professionals' Insurance Services] said.

Yet instead of pricing more affordably, the carriers seem to have increased their rates instead. As recently as 2004, those increases were somewhere near 100% as this item shows.

3) The insurance market in the US is a for-profit sector, and those companies offering coverage are doing so to make money for themselves and their shareholders. This is not to say that private, for-profit insurance is a strictly US phenomenon; however, the remainder of the industrialised world relies on public programmes first and retains a for-profit sector as a niche market, while the US takes a nearly inverted approach. As both the AIR and Dartmouth studies indicate, the industry profits from premiums have improved dramatically of late. Both studies imply that the increased premiums are intended to offset bad investments by the companies.

Briefly: a private insurer essentially charges a fee to guarantee that a related loss by the covered will be honoured, and invests that fee speculatively to provide the means with which to honour a claim; as the investments intended to fund claims shrink, premiums should rise proportionally. This is both a strength and weakness of the private model: the private insurer is more likely to have the resources to honour a more substantial claims, but is vulnerable to the markets in which it invests and is more inclined to aggressive pricing than a public or non-profit alternative which would only seek to break even rather than show a profit - a profit that, in the recent Wall Street mindset, should not only remain stable but regularly and predictably increase.

The problems that arise from articles like the one in the Atlantic stem from analysis of the subject in a vacuum. Without the related factors, such as overall costs of living, retirement and safety net investments, and analysis not only of the healthcare industry's own behaviour but that of the individuals and industries that (presumably) serve that industry, and then of the motivations and impediments placed on them, the question cannot be accurately answered, or even truly effectively addressed. The Atlantic article highlights some very valid points about US healthcare - but it misses enough to make its argument far less than convincing overall.

On Banking, Philanthropy and Excess

ThinkProgress has compiled a concise condemnation of the latest bankers-on-holiday scandal, this time from Northern Trust.

Northern Trust received $1.6 billion in bailout funds and announced in December that it was eliminating 450 jobs because “the macroeconomic environment has been extraordinarily difficult.” But as TMZ reports, that hasn’t stopped the bank from spending “a fortune last week in L.A. hosting a series of lavish parties and concerts with famous singers.”

The article references an ABC News item on the subject:

The Chicago-based Northern Trust bank may have received $1.6 billion in federal bailout funds, but that did not dampen the lavish long weekend featuring a golf tournament and headliner music the bank threw in Los Angeles last week, much of which was caught on tape by the celebrity news outlet TMZ. Critics are up in arms over yet another apparent boondoggle hosted by a bank that received federal bailout funds.

TMZ lists the highlights of the event:

- Wednesday, Northern Trust hosted a fancy dinner at the Ritz followed by a performance by the group Chicago.

- Thursday, Northern Trust rented a private hangar at the Santa Monica Airport for dinner, followed by a performance by Earth, Wind & Fire.

- Saturday, Northern Trust had the entire House of Blues in West Hollywood shut down for its private party. We got the menu -- guests dined on seared salmon and petite Angus filet. Dinner was followed by a performance by none other than Sheryl Crow.

There was also a fabulous cocktail party at the Loews. And how's this for a nice touch: Female guests at the Chicago concert all got trinkets from ... TIFFANY AND CO.

Northern Trust is a well-known - and generally highly-respected - financial institution, which caters to the millionaire set and up. I've dealt with them before, and I know several employees there, so I have an idea of the scale of their investments and the nature of their clientele.

The golf tournament is perhaps defensible. In these days of withering funding for all but the most necessary of expenditures, any effort to support the arts, athletics of any kind or any other obviously philanthropic effort deserves at least a little praise.

The parties, on the other hand, may be what NT's clients have become accustomed, but then again they have also been accustomed to regularly increasing wealth and profit, much of it from real estate. With the property market still tumbling, these same people should be feeling at least a little discomfort, and it reflects poorly on those who should be attending to their investments putting on such an extravagant display with their profits. Clearly somebody is getting fleeced. And while I will not say that any business that can make obscene profits off the obscenely wealthy doesn't deserve some applause, those same obscenely wealthy folks ought to start thinking twice about what's being done with their money and at what cost if those they trust with it can put on such displays.

The doubly offensive component of this particular situation is this: at the same time NT was celebrating with the bigwigs, it was at once taking in substantial Federal bank bailout dollars and laying off 450 of its staff as a cost-cutting measure. NT may protest that it never asked for the funds and only agreed to participate in the financial system stabilisation efforts the Treasury advocated, but that hardly excuses the bank from leveraging decreased personnel overhead to engage in spendthrift entertainment for its clients.

As for the Federal funds NT received, that too is cause for concern. NT is, due to its investment practices and preferred clientele, probably among the financial institutions most insulated from the lending crisis. The funds it received were not, however, intended to stabilise the institution: they were intended to promote lending and backstop the risk involved. NT is showing no inclination to increase its lending, and has instead apparently reserved the funds as a safety net so it can go on treating its preferred clients to the same round of glitz they have come to expect.

The layoffs themselves might make for sound business in some world, but again with employment skyrocketing adding to the problem is counterproductive. It's also hard to deny given the current evidence that those employees might still have their jobs if NT valued their ongoing work as much as it did the impact of and evening with Chicago or Sheryl Crow. And again, those with investments in NT might wonder at the wisdom of those they trust if they think a night of music is worth more than the people they're depending on to keep their investments safe and productive.

The thing that bothers me the most is that NT isn't even abashed at the bad publicity from their reaction to date. They took Federal dollars intended to unfreeze the credit markets (dollars they likely did not need) and used them to bolster their reserves. They let go several hundred staff even as unemployment is skyrocketing, which only worsens the employment outlook, and in spite of their new safety cushion. And they spent millions on entertaining their clientele even after similar excess began bringing intense scrutiny to other similar businesses and even after others in their own field cut back on such spending to bolster their bottom line and public image. Yet their public statements on the matter can be boiled down to "We always do this, we didn't use bailout money to do it, and the folks we let go - well, those were just the costs of doing business in a bad market, so there's really nothing here to discuss." Rarely is this sort of fiscal solipsism so clearly or crassly enunciated.

Each step in the Northern Trust progression shows just how removed from the realities of modern US life the upper financial tier and their support institutions have become. Once again, we have an illustration that the moral obligation to do what's best for the market, without the legal requirement to back that up, gets ignored by the same financial professional cadre that created the crisis in the first place. And once again we see that, for some, the drive to behave as if nothing has changed overrides fiscal responsibility and common sense.

Strings and Arrows

Bankers on both sides of the Atlantic are having second thoughts about public involvement, mostly because they're facing tough questions about how they do business.

In the US, several TARP recipients are looking into returning the bailout funds. Not that they don't need the capital, mind you: they just don't like Washington watch them carry on business as usual.

“We just think that operating our business without the government capital would be an easier thing to do,” said David A. Viniar, the chief financial officer of Goldman. “We’d be under less scrutiny, and under less pressure."

It was in large part a lack of oversight that brought us to this point. Now the oversight is being applied, the big players not unsurprisingly are squirming in the spotlight. It's little wonder that they'd prefer less scrutiny: it's a lot harder to buy that sixth jet for your fleet or host a lavish conference when you have the government looking over your shoulder. With appearances before Congress only days away the discomfort must be substantial.

It's unlikely that they have much choice, though: none of the TARP recipients are in a particularly good position to simply hand the money back, and the TARP programme specified that recipients repay Washington in stock before cash.

Across the pond, the UK is looking at similar stringent constraints on the banking sector, and are already holding inquiries. Royal Bank of Scotland and Halifax Bank (the latter now part of Lloyds Group) were grilled unmercifully by Parliament yesterday for continuing to pay bonuses following government assistance. At least the Brits are willing to state outright that substantial public assistance to an enterprise equates to substantial public ownership, and are seeking to exercise governance over what is now public property.

The British member of Parliament fixed a withering eye on Frederick A. Goodwin, the former chief executive of the Royal Bank of Scotland, now government-owned, and put the question to him: “Do you have a different moral compass from other bankers?” he asked.

...[The bank executives'] defense drew angry responses from lawmakers, who accused them of blaming their problems on the collapse of the markets.

“But are you culpable?” asked Nicholas R. Ainger, a Labor representative who interrupted a meandering explanation by Mr. Goodwin.

“It’s just too simple to blame it all on me,” Mr. Goodwin replied.

The sad thing is that, in a way, Goodwin was right, and the MP posing the ethical question was wrong. From all appearances the problem has become systemic, which of course means that the behaviour shows a common - and misdirected - moral compass among finance professionals. The crisis as it has unfolded indicates it is the entire banking culture that suffers from this malaise, which makes blaming key players and ignoring the industry as a whole perilous. After all, the current woes weren't created by a single business unit or a single institution: they were the product of the entire finance industry and were sanctioned by the regulators (themselves largely industry insiders), which makes the sudden demands for propriety and accountability for the executives sound dangerously close to scapegoating. On the other hand, following the old models for doing business while the current crisis continues to deepen appears more and more like lemmings following their leaders over a cliff: this hardly qualifies as effective leadership in today's business climate.

I'm waiting until someone in one of these hearings has the audacity to claim that it's all those people who died owing a balance on their credit cards that's really the root of the problem.

UPDATE: It seems Congress is taking its turn at having grilled Big Cheese sandwich for lunch.