Tag: price controls

Laszewski on ObamaCare: ‘Get Ready for Some Startling Rate Increases’

The invaluable Robert Laszweski:

The Affordable Care Act: Ten Months to Launch “Obamacare”––Get Ready for Some Startling Rate Increases

[…]

I conducted an informal survey of a number of insurers…None of the people I talked to are academics or work for a think tank. None of them are in the spin business inside the Beltway. Every one of them has the responsibility for coming up with the correct rates their companies will have to charge…

On average, expect a 30% to 40% increase in the baseline cost of individual health insurance to account for the new premium taxes, reinsurance costs, benefit mandate increases, and underwriting reforms…

In states with the least mandates or for health insurance companies with the tightest underwriting now, the increase could be a lot more…

[E]xpect individual health insurance rates for people in their 20s and early 30s to about double…

Will the feds be ready to provide an insurance exchange in all of the states that don’t have one on October 1, 2013?

I have no idea. And neither does anyone else I talk to inside the Beltway. We only hear vague reports that parts of the new federal exchange information systems are in testing.

The former CIA director couldn’t get away with an affair in this town but the Obama administration has a complete lid on just where they are on health insurance exchanges and haven’t shown any willingness to want to talk about their progress toward launching on time––except to tell us all not to worry.

We are all worried. I would not want to be responsible for the work that remains and only have ten months to do it…

The Republicans said this would not work. If it does not launch on time, or does with serious problems, I would not want to be an incumbent Democrat.

I told them not to call this the “Affordable Care Act.”

Shades of Nixon

Reason magazine has a characteristically excellent video about the gas shortages in New York and New Jersey. Which is to say, the video is really about the insane responses of officials in those states to the scarcity of gas. Reason’s Jim Epstein writes: “Govs. Chris Christie and Andrew Cuomo…threatened to prosecute any station owners caught raising prices, thus removing any incentive to truck more gas in from other parts of the country.” Here’s the video:

The Washington Post reports Christie responded with an age-old government-rationing scheme:

New Jersey Gov. Chris Christie ordered…drivers with even-numbered license plates being allowed to fill up on even-numbered dates and odd-numbered cars on the other days. But several motorists said they hadn’t heard the news because they had no power at home, and gas station managers said they didn’t bother to look at the plates.

“I don’t have any time to check plates,” David Singh said as he pumped gas into a car at the Delta station he manages on McCarter Highway in Newark.

So not everyone heard about the government’s rationing scheme, and even fewer people cared. You know what conveys information a lot better than tired government edicts? Market prices.

Fortunately, market prices are still breaking through:

Shauron Sears, 37, a waitress, said she spent 12 hours vainly waiting for gas on Friday and another hour waiting Saturday at a Sunoco station on McCarter Highway. Just as she got to the front of the line, a manager started waving his arms and shouting, “No more gas!”

Sears said…since her house flooded she and her family have been camping at her sister’s house in Orange, N.J. Nine people are in the house, including a baby, and Sears is eager to return to her own home. But her first priority is to get gas.

“There are people who are buying gas and selling it for $8 a gallon,” she said. “Maybe I can buy some from them.”

The entrepreneurs selling gas at illegal mark-ups might affect Sears in a manner the government’s price controls won’t. By helping her.

The Fraud Lobby

Evidently, there’s fraud in Medicaid.

The following are excerpts from an article in today’s Wall Street Journal. See if you can spot the fraud lobby:

In 2011, New York charged [Medicaid] a per-diem rate of $5,118 for residents of the [state-run] institutions, a network of 11 centers that now house about 1,300 people with severe developmental disabilities. Over the course of a year, Medicaid spends $1.9 million for every resident, or $2.5 billion in total—with half coming from the federal government. But the cost of running the institutions is only a quarter of that amount.

[A congressional] report said New York took advantage of a complex formula and kept federal officials in the dark for years…

The committee’s report said Gov. Andrew Cuomo’s administration refused to cooperate with the investigation. Joshua Vlasto, a spokesman for Mr. Cuomo, said the report’s conclusions were “wrong and totally misleading” and that a threatened “precipitous reduction” in funding would jeopardize administration efforts to modernize and restructure its Medicaid program…

But at a Thursday hearing, Penny Thompson, a CMS deputy director, suggested…, “You can expect to see a rate that’s about one-fifth of its current level” … without specifying a time frame. Such a reduction would reduce the annual federal reimbursement by about $1 billion, punching a hole in New York’s $54 billion Medicaid program…

The skewed methodology traces back more than 20 years, when New York got permission from the federal government to use a different formula for state-run developmental centers, assuring officials that the rates would hew close to costs.

But almost immediately, reimbursements began to skyrocket. The new methodology allowed New York to bill Medicaid for ghost patients: When a patient was discharged from a state-run facility, New York retained nearly two-thirds of the reimbursement amount. The formula also double-billed taxpayers: Many of those patients who left the centers moved into Medicaid-financed group homes.

Between 1990 and 2011, the daily reimbursement rate grew to $5,118 from $348. Ms. Thompson said it wasn’t clear if CMS “completely understood” the cost projections when it approved the rates. CMS officials acknowledge they first became aware of the problem in 2007 but waited three years before launching a probe.

In June 2010, the Poughkeepsie Journal ran a lengthy investigative piece about the rates. CMS started its investigation in response to the newspaper’s report, the committee said.

Lest you think I’m blaming Medicaid fraud on one political party, have a gander at my recent article, “Entitlement Bandits”:

Even conservatives fight anti-fraud measures, albeit in the name of preventing frivolous litigation, when they oppose expanding whistle-blower lawsuits, where private citizens who help the government win a case get to keep some of the penalty.

Protecting Medicare and Medicaid fraud is a bipartisan pastime.

Why ObamaCare Won’t Help the Sick

The Financial Times published my letter to the editor [$]:

Sir, “Imminent ‘ObamaCare’ ruling poses challenge for Republicans” [$] (May 25) doesn’t quite capture my views when it reports that I believe “resurrecting protections for patients with pre-existing conditions would be wrong.” ObamaCare is wrong precisely because those provisions will not protect patients with pre-existing conditions.

Those “protections” are nothing more than government price controls that force carriers to sell insurance to the sick at a premium far below the cost of the claims they incur. As a result, whichever carrier attracts the most sick patients goes out of business. The ensuing race to the bottom will even harm sick Americans who currently have secure coverage.

The debate over ObamaCare is not between people who care and people who don’t care. It is between people who know how to help the sick, and those who don’t.

That’s Not a Limiting Principle, Charles Kolb Edition

Charles Kolb is president of the Committee for Economic Development and was a domestic policy adviser to Bush the Elder. Over at Huffington Post, he articulates why (he thinks) the Constitution’s Commerce Clause empowers Congress to force people to purchase health insurance, but not broccoli. That is to say, he offers (what he thinks is) a limiting principle that (he thinks) would enable the Supreme Court to uphold ObamaCare’s individual mandate, but still leave some constraints on Congress’s ability to force people to buy things. Like broccoli.

Yet Kolb’s proposed limiting principle is no more a limiting principle than Harvard law professor Noah Feldman’s proposed limiting principle, because the two make the same argument. Almost verbatim. So rather than regurgitate my response to Feldman, I’ll just link to it.

Okay, I’ll regurgitate this part:

Like every other so-called limiting principle offered by ObamaCare’s defenders, Feldman’s[/Kolb’s] has no basis in the Constitution or any other law. It is a post hoc rationalization, made by people who are shocked to find themselves before the Supreme Court, defending the constitutionality of their desire to bully others into submission.

Couldn’t resist.

What Is Causing Drug Shortages?

A number of people have asked me what is causing the current shortages in certain types of drugs. Here’s what I’ve been able to discern so far:

In general, there are two reasons why shortages might appear in a market. The first is high fixed costs. These include regulatory costs, the costs of converting a manufacturing plant to a new use, or the costs of creating a new factory. Industries with high fixed costs will see temporary shortages after either supply shocks (e.g., a factory goes offline) or demand shocks (e.g., an increase in the population needing a drug). The price mechanism eventually resolves such shortages. The duration of the shortage is related to the size of the fixed costs.

Shortages also appear when something interferes with the price mechanism’s ability to resolve a shortage. The classic example is government price controls (i.e., a binding price ceiling). Such shortages persist as long as the price controls (e.g., rent control) remain in place and binding.

From my study of the current spate of drug shortages, the best accounting for these shortages appears in this publication by the U.S. Department of Health and Human Services: “Economic Analysis of the Causes of Drug Shortages,” Issue Brief, October 2011.

I initially suspected these drug shortages were caused by Medicare’s Part B drug-payment system. Others, including Scott Gottleib and the Wall Street Journal, have made that claim. However, this study and a lengthy discussion with the U.S. Department of Health and Human Services’ assistant secretary for planning and evaluation have persuaded me that not only is Medicare’s Part B drug-payment system not the cause, that system doesn’t even impose binding price controls. Rather, it controls the margins that physicians earn for administering a drug.  (If Medicare did impose binding price controls, would we see mark-ups of 650 percent or more for the shortage drugs?)

Rather, the shortages appear to be the result of a number of dynamics in the market for rare drugs:

  1. The first dynamic is that the small number of potential manufacturers for these drugs must decide which drugs to manufacture, and they must make those decisions in part based on what they expect the demand for the drugs will be and in part based on which drugs they expect their competitors will produce. You can imagine what happens if one or more manufacturers guess “wrong”: there will be too many firms making some drugs, and too few firms making other drugs. The latter drugs exhibit shortages.
  2. A second dynamic is the high fixed costs inherent to bringing a new pharmaceutical factory online, or from converting existing factories from producing the “wrong” drug to producing the “right” drug.
  3. A third dynamic is the price rigidity introduced by the contracts with middlemen (“group purchasing organizations”) that purchase these drugs from manufacturers and then sell them to providers. These GPOs typically negotiate long-term contracts for drugs, which can temporarily prevent the price mechanism from resolving a shortage by locking manufacturers into churning out an already over-supplied drug. If shortages occurred frequently, one would expect the manufacturers and GPOs to negotiate shorter-term contracts. As I understand these shortages, they are infrequent.
  4. All that said, no doubt some of the high fixed costs in this market are iatrogenic. There are fixed costs associated with getting FDA approval to (a) market a new/substitute drug in the same class as the shortage drug, (b) switch manufacturing capacity to a shortage drug, and (c) import a shortage drug from a new foreign manufacturer. No doubt, there should be some fixed costs—principally related to quality control—associated with each of these activities. But since the FDA implicitly values lives lost to unsafe drugs more highly than it values lives lost to “drug lag,” we can be confident that the fixed costs the FDA imposes on these activities are higher than optimal, and therefore unnecessarily lengthen the duration of such drug shortages.

This analysis suggests that, rather than impose reporting new requirements on manufacturers, Congress should reduce the fixed costs that the FDA imposes on drug manufacturers. Medicare’s Part B drug-payment system is no doubt encouraging physicians to switch to higher-margin drugs, but it doesn’t seem to be playing much of a role in these shortages.

I’d be interested to know if others think I’m missing something.