Topic: Tax and Budget Policy

Medicare Rx: Let the Sickie-Dumping Begin

When Republicans created the Medicare prescription drug entitlement, I warned that the private drug plans would take steps to avoid sick seniors and enroll only healthy ones. Since the plans receive the same amount per senior, the healthy ones are a cash cow while the sickies are a liability.

It seems that the sickie-dumping has begun.

The Hill reports that one private drug plan, Sierra Health Services’ SierraRx, noticed that a lot of new and very costly enrollees were formerly enrolled in Humana Health Services’ Complete plan. Sierra alleges that Humana urged maybe 4,000 to 7,000 of its sickest enrollees to switch to SierraRx. According to the article:

Humana counters that it merely passed along information to its customers about a competing product that might better suit their needs, and said federal regulators approved its actions….

“Our goal was to make sure these people continued to have access to prescription coverage,” Humana’s director of media and public relations, Dick Brown, said. Humana also asserts that CMS approved the script the company used for these calls.

Brown would not explain, however, whether the company contacted each of the more than 400,000 Complete customers with the same information or if Humana targeted the calls to a subset of these beneficiaries  such as those with the highest drug costs, as Sierra implied.

Did they? Didn’t they? Was it intentional? Wasn’t it? Really, who cares. It doesn’t matter if the drug plans deliberately dump the sickies, because Part D will reward such behavior even if it’s unintentional.

That’s why the last chapter has not been written on the cost of Part D. The drug plans can play avoid-the-sickies for a while. But when enough plans lose that game, there won’t be many places for the sickies to go. Their expected utilization will be built into the projected costs of all drug plans, which means that younger workers will have to shell out more to fund the program. It also means that healthy seniors will have to shell out more — but they’ll scream so much that Congress will probably pass even more of the cost on to younger workers, either through tax hikes or price controls on prescription drugs.

Strap yourselves in. It’s going to be a wild ride.

Edwards’s 2-to-1 Budget Law

How should government officials decide on whether to fund big projects such as fighter aircraft, highways, bridges, and other types of infrastructure?

First, they should check the Constitution to see whether they are legally allowed to spend on the object in consideration.

Second, they should assume that the item will cost at least twice as much as initial estimates indicate. There should be a 2-to-1 hurdle when the price tag of a project is being considered.

Government purchases of military hardware, highways, energy projects, space equipment, and other items often cost 50% or 100%, or more (see here and here), above what politicians originally promise.

Let’s be conservative and say that a 50% cost overrun is typical, such that we can expect a new $1 billion project to actually cost taxpayers $1.5 billion. But as economists often point out, paying for $1.5 billion in government spending will cost taxpayers much more than $1.5 billion because of the “deadweight losses” or inefficiency costs created by extracting taxes from the private sector with a complex and high-rate system.

How much more? Harvard’s Martin Feldstein thinks deadweight losses might be $1 for each added dollar of taxes. But let’s be conservative and say it’s only 50 cents on the dollar. So government projects impose deadweight losses of 50% on costs that are likely to balloon at least 50%. 

The bottom line is that when America’s taxpayers hear that politicians want to spend, say, $10 billion on a new scheme, they should assume that they will face an ultimate financial hit of $22.5 billion. And that’s conservative!

Soaring Cost Overruns

Last week, we found out that new combat ships for the Navy will cost taxpayers at least 59% more than promised.

Today, the Washingon Post reports that upgraded Air Force cargo planes will cost taxpayers at least 35% more than originally promised.

Are such cost overruns some sort of unfortunate accident? Or are they a routine scam perpetrated by an iron triangle of federal officials, companies feeding off the government’s teat, and members of Congress with taxpayer-financed activities in their districts? 

Examine the record of overspending in the table here and decide for yourself.

‘Terror Porn’

The Homeland Security budget has become a business-as-usual way for politicians to steer tax dollars to contributors and supporters. But even though the budget is being allocated using traditional pork-barrel methods, the arguments for more homeland security spending are based on exaggerated claims that the money is necessary to thwart terrorism.

Veronique de Rugy, an American Enterprise Institute scholar and Cato adjunct, call these claims ”terror porn.” ABC News’ John Stossel quoted de Rugy as part of a recent report:

[T]he bureaucracy hypes terrorism to justify its pork. “Terror porn” is what economist Veronique de Rugy calls it. Why “porn”? “Because porn sells, [and] terrorism sells even better,” she says. “It’s great for politicians. They can campaign on the fact that they are protecting us. They also can campaign on the fact that they’re bringing more money to their states.”

Lots of small towns do get absurd grants for homeland security. Lake County, Tenn., a rural county with only 8,000 people, got nearly $200,000 in homeland-security money. …”I don’t know that terrorists will come, but I don’t know they won’t come,” Lake County Mayor Macie Roberson told us, smiling.

At least he didn’t do what Columbus, Ohio did: spend it on bulletproof vests for police dogs.

Inordinate fear of terrorism leads to more than just wasteful spending. Stossel also cites a study estimating that 1,000 people have died because they avoided air travel and instead relied on a much riskier mode of travel:

Of course, terrorism is a real threat. But fear kills people, too. A University of Michigan study found that an additional 1,000 Americans died in car accidents in the three months after Sept. 11, because they were afraid to fly. We need to keep risk in perspective.

Paging Dr. Smith…

In the Economix column of today’s New York Times, David Leonhardt commits health policy heresy:

there is no question that the country would be better off if everyone were covered. But the gaps in insurance aren’t the only problem with the medical system. They are not even the biggest problem.

You’ll have to read the column to learn what Leonhardt thinks The Biggest Problem is. But he points out that the market is moving to fix that problem without government direction.

Personally, I’m not sure that a government mandate is necessary to get hospitals to report quality data. (Malpractice insurers, are you listening?) But Leonhardt documents well how the Invisible Hand works even in health care.

European Politicians Continue Push for New Tax Powers

The tax burden in most European nations already is stifling growth and undermining competitiveness. Yet many European politicians – as well as the European Commission bureaucracy in Brussels – think that there should be a new pan-European tax. Currently, the European Union’s budget is financed by contributions from member states. This is bad enough, especially since it finances the highly protectionist and inefficient system of farm subsidies, but European politicians and bureaucrats doubtlessly would concoct even worse ways of spending money if they had their own tax. The EU Observer reports:

The commissioner argues that any new “own resources system” – where Brussels raises money directly – should be “simple and very transparent.” … One way of changing the EU’s financial system – supported by some in the European Parliament – would be introducing its own tax to replace member states’ donations. The idea came up several times after the bitter budgetary talks both in 2005 and previously in 1999, with for example senior French centre-right MEP Alain Lamassoure suggesting that the EU could levy a tax on SMS and email messages.

Overpaid Bureaucrats in Alabama

As Chris Edwards has shown, federal government bureaucrats are grossly overpaid. The same is true for government workers in Alabama. A report published by the Alabama Policy Institute finds that public sector workers gets 21 percent more compensation per hour than workers in the productive sector of the economy. But even this analysis understates the problem since many bureaucrats are involved in activities that are not legitimate functions of government: 

This report evaluates information available on Alabama state employee compensation, making comparisons to other states and to the private sector. Generally, the conclusion is that Alabama state employee pay is higher than in comparable states. More importantly, it is concluded that state employee compensation (that is, wages and employer-paid benefits) in Alabama is substantially higher than for equivalent employees in the private sector in the state. …an analysis of comparable state and private employees (equal education, equal skill), this discrepancy in pay is principally the result of the fact that the state, unlike the private sector, does not establish employee compensation using reliable market mechanisms. …State government employer-paid benefits are considerably higher than in the private sector. State government employee-benefit costs are estimated at 28.5 percent compared to wages and salaries. Private employee-benefit costs are estimated at 21.9 percent of wages and salaries. Thus, the employer-paid benefit factor for state employees is nearly one third higher than that of private employees. …State employees receive more paid time off than private employees in Alabama. On average, full-time state employees spend 10 percent fewer hours on the job for their compensation than private employees. State employees use more than twice as many annual sick days as private employees (10.2 compared to 4.4). It is estimated that state employees spend 1,726 hours per year at work. Private employees spend an average of 1,915 hours on the job. It is estimated that Alabama private employees are at work, on average, more than a month more each year than state employees (189 hours). Each month, the average state employee is paid for not working approximately two days that private employees would work. As a result, the average private employee is compensated $21.41 per hour worked. The average state employee is compensated $25.88 per hour worked, 21 percent more than the average private sector employee.