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.

Hill Fires Back at Bolton

A lot of observers took note when former U.S. ambassador to the UN John Bolton blasted the Bush administration’s new North Korea deal before the ink was dry:

You know, Secretary Powell in 2001 started off the administration by saying he was prepared to pick up where the Clinton administration left off. President Bush changed course and followed a different approach. This is the same thing that the State Department was prepared to do six years ago. If we going to cut this deal now, it’s amazing we didn’t cut it back then. So I’m hoping that this is not really what’s going to happen.

Now that the deal has been seemingly endorsed by the president, it looks like Christopher Hill, the architect of the deal, is feeling his oats and looking to shoot back at Bolton. On the Charlie Rose Show the other night, Hill engaged in this exchange:

CHARLIE ROSE: You believe — there are those who suggest there are hard-liners in North Korea who don’t believe this will happen.

CHRISTOPHER HILL: Hard-liners in North Korea? There are hard-liners all over the place.

CHARLIE ROSE: Hard-liners in Washington?

CHRISTOPHER HILL: I sometimes think they’re all related, because there are hard-liners who don’t believe in a negotiated process.

Now, for those not versed in the subtlety of cufflinked diplo-speak, this isn’t such a jab, but in the State Department lexicon, this is about as close as you get to a middle finger. (Secretary of State Rice had responded to Bolton’s criticism by stating flatly, “He’s just wrong.”)

Substantively, there’s an interesting question here: do you take what you know to be an imperfect deal in order to at least, say, retard the North Koreans’ nuclear program? In a Korea war game conducted by the Atlantic magazine a couple years back, former Clinton administration official Robert Gallucci described the thinking after having argued with Kenneth “Cakewalk” Adelman and retired Lt. Gen Thomas McInerney about the right approach to dealing with North Korea:

“When I came back with the Agreed Framework deal and tried to sell it,” he said, “I ran into the same people sitting around that table — the general to my right, Ken across from me. They hated the idea of trying to solve this problem with a negotiation.

“And I said, ‘What’s your — pardon me — your [expletive] plan, then, if you don’t like this?’

“ ‘We don’t like—’

“I said, ‘Don’t tell me what you don’t like! Tell me how you’re going to stop the North Korean nuclear program.’

“ ‘But we wouldn’t do it this way—’

“ ‘Stop! What are you going to do?’

“I could never get a goddamn answer. What I got was, ‘We wouldn’t negotiate.’”

I pointed out that the North Koreans had — as McInerney emphasized — cheated on the 1994 agreement. “Excuse me,” Gallucci said, “the Soviets cheated on virtually every deal we ever made with them, but we were still better off with the deal than without it.”

To people who say that negotiating with the North Koreans rewards bad behavior, Gallucci says, “Listen, I’m not interested in teaching other people lessons. I’m interested in the national security of the United States. If that’s what you’re interested in, are you better off with this deal or without it? You tell me what you’re going to do without the deal, and I’ll compare that with the deal.”

He was adamant that we were better off under the Agreed Framework—cheating and all — than we are now. “When the Clinton folks went out of office, the North Koreans only had the plutonium they had separated in the previous Bush administration. Now they’ve got a whole lot more. What did all this ‘tough’ [expletive] give us? It gave us a much more capable North Korea. Terrific!”

On a less substantive note, all the back-and-forth sniping between the diplomats and the Boltonites should make Bolton’s forthcoming memoir all the more readable. He’s reportedly “typing as fast as his fingers can go.”

California’s Burgeoning Nanny State

Los Angeles Times reporter Nancy Vogel has a roundup of nanny-state bills pending in the California legislature:

Enjoy fast food? Like to light up while you watch the waves? Forget to sock away money for your kids’ education?

Some California lawmakers want to change your ways. They’ve planted a crop of proposals this year — “nanny” bills, as they’re called — that would:

•  Restrict the use of artery-clogging trans fat, common in fried and baked foods and linked to heart disease, in restaurants and school cafeterias.

•  Bar smoking at state parks and beaches, and in cars carrying children.

•  Open a savings account, seeded with $500, for every newborn Californian to use at 18 for college, a first home purchase or an investment for retirement.

•  Fine dog and cat owners who don’t spay or neuter their pets by 4 months of age.

•  Require chain restaurants to list calorie, saturated fat and sodium content on menus.

•  Phase out the sale of incandescent light bulbs, which are less energy-efficient than compact fluorescent bulbs.

The debate has commenced in the Capitol: How far should government go?
Vogel notes that all these proposals come from Democrats and that

Republicans, who say the sponsors are trying to parent the whole state, are having none of it.

“Could you imagine the founding fathers dealing with — I don’t know — wearing a helmet when you’re in the buggy?” said the Assembly’s Republican leader, Mike Villines of Clovis.

“We all know you can’t mandate behavior; it just does not work,” he said. “It creates criminals of people for things that are not criminal behavior…. You can’t legislate for stupidity.”

Of course, Republicans are no slouches in the nanny-state department. From New York mayor Michael Bloomberg’s jihad against smoking to Arkansas governor Michael Huckabee’s war on obesity to President Bush’s grab-bag of Clintonesque hand-outs and religious-right prohibitions, Republicans have proved themselves equally adept at hectoring, monitoring, nudging, and punishing recalcitrant citizens.

As I wrote last year at Cato Unbound:

Republicans used to accuse Democrats of setting up a nanny state, one that would regulate every nook and cranny of our lives. They took control of Congress in 1994 by declaring that Democrats had given us “government that is too big, too intrusive, and too easy with the public’s money.” After 10 years in power, however, the Republicans have seen the Democrats’ intrusiveness and raised them.

So from the Republicans we get federal money for churches; and congressional investigations into textbook pricing, the college football bowl system, the firing of Terrell Owens, video games, the television rating system, you name it; and huge new fines for indecency on television; and crackdowns on medical marijuana and steroids and ephedra; and federal intervention in the sad case of Terri Schiavo; and the No Child Left Behind Act; and federal subsidies for marriage; and (for less favored constituencies) a constitutional amendment to override the marriage laws of the 50 states.

As far as California’s Democratic nannying goes, let me just say this: Governor Schwarzenegger, only a girlie-man would be afraid to veto these bills that treat adult Californians like children.

The IBD Calls for More Central Planning

The Investors’ Business Daily newspaper is viewed as “exceptionally pro-economic individualism” with an editorial page that is “especially pro-capitalist.” But there is at least one issue on which the paper’s stance would be more at home in a politburo meeting than a capitalist publication: the federal No Child Left Behind law.

An editorial in yesterday’s edition opens with the assertion that the law is “far from perfect,” but that its “no-excuses approach to school accountability is worth keeping.” The NCLB’s ”most fundamental flaw”, according to the IBD, is “the lack of credible national benchmarks for school performance. Without these, no reform has much of a chance.”

When I regained consciousness after reading that, I had to double-check that I was indeed reading the IBD and not the IBRP.

The editors of Investors’ Business Daily are telling us that Washington must set output targets for the education industry and that, without them, no reform can succeed. They would not make that recommendation for any other industry.

It seems that the IBD’s editors have bought into the myth that education is somehow different from all other human endeavors, and therefore not able to benefit from the market forces that have been responsible for the economic miracle of the last 200 years. Nothing could be further from the truth. As I summarized in my talk at our NCLB forum yesterday, there is overwhelming evidence that choice and financial responsibility for families, coupled with freedom, competition, and the profit motive for schools, produce by far the best educational outcomes on both an individual and a social level.

The research shows that markets are not only better at raising achievement overall, but also at diminishing the racial and socio-economic achievement gaps that have been created, to a significant degree, by the existing top-down monopoly system.

The IBD is right that accountability is crucially important in education as in every other human exchange. But simulated bureaucratic “accountability” has proven grossly inferior to real market accountability. Being able to leave bad schools and move to good ones at will is the only kind of accountability that produces real and sustained results.

The IBD’s editors not only should know this, they already do know this with respect to the rest of the economy. They need only recognize the fact that education and educators are part of the same reality that is discussed on the news pages of their own publication.