AHIP Says Premiums Will Rise

Costs will rise? Tell us what else is new. We already learned premiums for small business will rise about 15% in 2010.

America's Health Insurance Plans (AHIP) tells us that premiums will rise under reform.

But we already know that premiums must rise under reform because insurance will have to begin to cover health care without tricky loopholes, won't be able to exclude sick people, and can't drop policy holders that become sick.

When Americans will have more of the significant health care costs (the bigger bills) covered by insurance under reform, they will therefore have to pay for this newly-improved coverage through additional premiums, instead of paying those same costs out-of-pocket.

For lower income people, federal subsidies will help pay those premiums. Instead of some dying from lack of basic care, and some going bankrupt or losing their homes, they be able to get good, basic coverage. Some will get coverage for the first time.

For upper-middle-income households (north of $80,000/yr), the increased health insurance premiums will be like taking money from one pocket and putting it in the other. More spent on premiums, less spent out-of-pocket. As this true insuring for health costs occurs, the long term costs of health care become more visible.

This is similar to how the current administration reversed the Bush policy of counting the costs of the wars in Iraq and Afghanistan off-budget (as if the wars didn't count as part of federal spending), and began instead to count the war spending as part of the federal spending and deficit.

Reacting to the House health reform bill, AHIP put out a statement hoping to undercut the public option in the bill by trying to associate the reality of already skyrocketing costs (before reform) with the future under reform as proposed with a public option.

Let me offer the AHIP statement (in red) with my illuminations:

AHIP says:
“The promise of health care reform has been that if you like your current coverage, you can keep it. We are concerned that this proposal will break this promise by increasing health care costs for families and employers across the country and significantly disrupting the quality coverage on which millions of Americans rely today.

My interpretation: We know people change their current coverage often, even every year, and employers are now rapidly dropping coverage or changing coverage, so let's take advantage of the political rhetoric about "keeping your current plan." Our payments to doctors/hospitals/labs are skyrocketing, and the new 2010 premium increases are huge. We don't want a public option competitor, so we'd like everyone to associate the current reality into the future, and imagine it is happening because of coming health reform. We want you to feel that the coming health care reform is responsible retroactively for what is happening to you right now and will soon happen as the new 2010 premiums are unveiled.

“The lack of system-wide cost containment is a missed opportunity. Without a greater focus on health care costs, families and employers will not be able to afford coverage and health care costs will rise at a rate much faster than the overall economy is able to sustain.

We'd love health cost inflation to somehow be controlled by federal regulation, so we wouldn't have to work hard to create new efficiencies and care-coordination innovations on our own. {See my footnote about cost containment at the end of this post}

“We share the concerns that doctors, hospitals, employers, and patients have all raised about the significant disruption a new government-run plan would have on the current health care system. A new government-run plan would bankrupt hospitals, dismantle employer coverage, exacerbate cost-shifting from Medicare and Medicaid, and ultimately increase the federal deficit.

We know that the current finances of health care are already a train wreck, worse than the public realizes. We know this news will be coming in 2010, so let's try to associate this coming reality to the public option, if we can. Many hospitals are already in serious financial trouble -- let's pin that on having a public option in the health care reform somehow. Let's use the disproven canard of "cost-shifting" again. Let's try to use financial fear to fight the public option.

“Estimates show that a government-run plan would cause millions of people to lose their current coverage. Moreover, massive Medicare Advantage cuts would cause millions of seniors to lose their Medicare Advantage coverage altogether, while millions more would face benefit cuts and higher out-of-pocket costs.

We already know for sure that "millions of people to lose their current coverage" is going to happen, no matter what. It's underway. We'd like for Medicare recipents to be afraid of reform. We DO NOT want to lose our Medicare Advantage subsidy, because we pocket 86% of that extra federal subsidy as pure profit for ourselves, and only pay out 14% of that extra money for actual benefits. We'd like people over 65 to falsely think reform will lessen their health care.

“Health plans strongly support comprehensive, bipartisan health care reform and have proposed sweeping insurance market reforms and new consumer protections to ensure that every American has guaranteed access to affordable health care coverage. Experience in the states has shown that insurance market reforms must be paired with an effective personal coverage requirement for these reforms to work. While this legislation recognizes the key linkage of market reforms and a personal coverage requirement, more needs to be done to ensure coverage is affordable and our health care system is sustainable.

Listen, "insurance market reforms must be paired with an effective personal coverage requirement [a mandate] for these reforms to work" -- people, we are actually telling you the truth on this one! If people can just wait until they are sick to buy real insurance, the whole health insurance system is in great danger. But...we'd love it if the main solution for this is to increase the subsidy levels, since that provides the most headroom for us to keep profits stronger.

“As the process progresses, health plans will continue to work to advance bipartisan legislation this year that will cover all Americans, make coverage more affordable, and improve quality.”

We like the "bipartisan" approach, because it has no public option. Please, let's just do some kind of reform, any kind! without a public option. And, let's be sure to increase the premium subsidies for health insurance!

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"Cost Containment"

The "missed opportunity" for cost containment is about what is possible politically, and just exactly how deeper health care delivery reforms could be designed.

Legislators should not feel confident enough to try to specify everything. Indeed, it's better to set up systems that encourage the needed innovation.

Congress has proposed some helpful pieces of cost-reduction, some pilot programs for delivery reform (to change away from fee-for-service) and a panel of experts to recommend changes in Medicare -- IMAC. But even these cautious but good moves toward controlling costs could become a "missed opportunity" if lobbyists can weaken and betray these proposed cost-containment measures in the details of the legislation.

If the currently proposed cost-containment measures are weakened it will be due to influence buying --in plain language, corruption.

Buying influence with money.

Americans call this "bribery" most of the time.

The trillion dollar question now is whether Congress will be bribed this time, now, today, under the spotlight of public attention.

Health care inflation is a bigger issue than the Public Option or even Single Payer. Some of the most crucial kinds of change that will counter the health care inflation are in the way health care is paid for, and proposed legislation attempts to make avenues for significant reform over time by such mechanisms as giving IMAC (modeled on the existing MEDPAC) leeway to innovate. IMAC isn't unchecked -- its proposals would not be enacted unless accepted by Congress and the President. Since future IMAC proposals might limit some forms of easy profit (based on non-market-like structures), the challenge for Congress is to avoid corruption.

The danger is that vested interest groups making contributions here and now -- direct payments (contributions) to Congress from entities that profit from current non-market-like structures likely to eventually be reformed -- will be bribes meant to pay representatives to cripple or reject the proposed legislation.

I'm not sure one way or the other how this will turn out -- whether Congress will resist the bribery this time.

Is Obama in a Bubble?

Perhaps.

While Obama was known before his inauguration to have the habit of taking in many sources of information and ideas, it is likely the amount of information and briefing materials available to him daily is stupefying.

So his challenge now is to see the forest in spite of being pushed up against trees every day.

Every form of briefing and information has its presumptions, its bias. The most profound bias is which information is thought to be important enough to present.

For instance, what is most important in Afghanistan is not among these:
a) troop positioning
b) Pakistan's offensive
c) road building
d) military strategies against the Taliban; or even...
e) disrupting Al-Qaeda

Instead, what is most important in Afghanistan might not be in any briefing materials dumped on the President each day.

Instead, the most important factors are likely among these:
f) number of television satellite dishes
g) freedom of the local press
h) distribution of popular local and regional writers of all kinds by various means across Afghanistan (poetry and novels and religious views being of equal significance in the evolution of thought)
i) state of progress with lowering India's tariffs on Afghan trade goods
j) state of progress with lowering Turkey's tariffs on Afghan trade goods
k) respect for local village preferences (if they don't want us there, then leave that area)

Similarly, for financial reform, Obama certainly hears the world view and ideas which dominate the Federal Reserve, no doubt articulated quite well by Timothy Geithner, such as ideas and theories about how to sustain or increase lending. The TARP Bailouts were about sustaining lending. But other forces are at work, and not every one of them might be brought up for examination in the White House.

Does his information intake include the current average household credit card balance and current average credit card interest rate? Does he have an analysis such as this one of how the recent increase in money diverted from local economies by higher card interest rates affects the general U.S. economy?

Or does he have only the competent, convincing presentation of certain points of view, perhaps with two or three angles or alternatives -- alternatives which themselves are only variations on certain presumptions common to a particular world view?

In other words, is Obama in a bubble?


I think it is too soon to say.

Afghanistan will be one of the tests of how well he is able to step back and include broader vision in his decisions. Will Obama be able to bring insights to bear in these complex, real-world situations in spite of powerful interests that are accustomed to continuing along their current paths?


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Update: My wife sent this article that shows way Obama is clearly not in a bubble on Afghanistan.

Ranking the Public Options (updated)

There are a lot of essential pieces to health care reform. First, before ranking the various Public Options, here are the brief fundamentals of reform (familiar to some already):

Reform Necessities

1. Effective Coverage without loopholes/Individual Mandate/Individual-Family affordability subsidies (These pieces require each other in order to work well)

2. Beginnings of move away from paying for quantity (fee-for-service) to Paying for Quality.

3. Exchanges that allow individuals and small groups to obtain the insurance prices that larger groups obtain, such as by enforcing Community Rating (everyone in a local area (community) pays the same rates as all other members of their age group, regardless of status).
Exchanges can also increase competition and reduce cost inflation if they are set up to allow more people to participate and if they have defined benefits plan levels required ("bronze," "silver," etc.) so that insurance purchasers can compare plans in an apple-vs-apple manner.

4. Permanent Reinsurance (sharing the cost of the most expensive patients among all insurers, without an expiration, as compared to the proposed 3 years expiration. The best form of reinsurance is based on the number and type of conditions instead of total costs).

and finally...
5.0 Comprehensive Insurance Reform
AND/OR
5.1 A widely available Public Option.

(note that the current proposals limit who can access a Public Option, since the Option would only be available in the new exchanges, which themselves are only open to certain people. Senator Wyden has proposed to open up the exchanges more widely to more people. Update: many people don't realize the limited availability being proposed. Finally, note that even though a Public Option as currently proposed would be initially available to only a limited portion of the population, the exchanges and thus any Public Option will become available to more people over time. Getting the structure right at the beginning is a plus.

Comprehensive Insurance Reform done correctly has the outcome that insurance would not discriminate even indirectly in benefits or premium prices against individuals or small groups by any quality of any kind except age, community location, and tobacco use.

Further, good insurance reform would allow insurers to offer health incentives such as vouchers for certain health purchases such as exercise equipment/gym membership. The real health costs incurred by unhealthy foods and second-hand smoke can be handled separately via special sales taxes, with the sales-tax revenue sent into the federal health care budget.

But for Comprehensive Insurance Reform to actually work, a lot of necessary pieces must be set up correctly.

That might not happen.

An alternative that seeks to eliminate the uncertainty of relying on insurance reform is the Public Option. The point of the Public Option is to use a powerful competitor to prevent insurers from taking as much advantage of policy holders and the public as they might under mixed reform.

Why can't private competitors work just as well?

Because insurers negotiate payment rates to doctors and hospitals, and since big insurers win better rates by virtue of their bargaining power, the biggest insurers therefore gain more and more market share, eliminating competition gradually until they have a near monopoly.

Note that establishing a Public Option still requires risk sharing (sharing the cost of very sick patients) among all insurers (including the public option insurer) in proportion to the number of insured. Correctly set up reinsurance would accomplish this risk sharing.

Below, I rank the forms of Public Option in terms of their overall quality, accounting for their cost, effectiveness, and their long-term effects on the quality of health care.

A popular alternative is Single Payer -- which could work well if specifically set up to allow, encourage and reward innovation by medical providers. While this is not currently on the table, a well-devised Single Payer system can be thought of as a fallback position.

Okay. To the rankings!

In the list below, "national" refers to a Public Option that is run as a single national organization; "State-based" refers to state based public options without any national public option.
"rates" refers to payment rates to providers such as doctors, hospitals, labs, clinics;
"negotiated" refers to the public plan establishing payment rates by negotiating with health care providers as private insurers do (these rates typically vary by region and locality);
"medicare+5%" refers to payment rates that are set to be equal to medicare rates plus 5% (Medicare rates vary by location already, but the effective costs also depend on the quantity of medical care use for a medical condition, which also varies by location);
"modified by states" refers to individual states having the option to themselves modify the rates in their own state by adding or subtracting a fixed % onto the nationally determined rates (which already have regional and local variations); such modifications create a need for:
"net cost balancing" -- if a state modifies a nationally-set provider rate structure in a "modified by state" option, it should be required to pay to or be refunded from the federal insurance premium subsidy program the difference in cost this modification creates on the total state-wide affordability subsidies (that subsidize individuals purchasing health insurance), to balance the fiscal effect on the federal affordability subsidies of it's provider rate modifications;
"opt-out" refers to a national plan set up in all states by default, to which a state may formally choose to opt out of;
"opt-in" refers to a national plan that states may join only by formally choosing to join.


Rank ---- Public Option Variation

1. National Plan, Medicare rates modified by states by a % level w/net cost balancing, with opt-out
2. National Plan, Medicare rates modified by states by a % level w/net cost balancing, with opt-in
3. National, nationally negotiated local rates, w/opt-out
4. National, nationally negotiated local rates, w/opt-in
5. National, state-set-or-negotiated rates w/net cost balancing, w/opt-out
6. National, state-set-or-negotiated rates w/net cost balancing, w/opt-in
7. State-based (states may also form regional groups), state-set rates, opt-in
8. National, Medicare+5%, with opt-out
9. National, Medicare+5%, with opt-in
10.... Trigger type variations of the above. (With an effort to make the Trigger real)

Clearly there are more permutations and combinations, but this is illustrative. If a generic opt-out plan is enacted, further modifications years later are likely, so this list may be relevant after this round of reform. The principles used to rank the qualities of the Public Options are that:

a) A National Plan is less likely to be corrupt or have as much revolving-door problems as state-based Plans. Laws, regulations, or plan administration are corrupt if and when they benefit for-profit groups or entities at the expense of the general citizenry.
b) Negotiated rates can have advantages in that the public insurer can make providers compete on price to meet the percentage of providers in an region it wants to have as plan providers, via a bidding process, which would tend to encourage value-oriented innovations (see the "Setting Prices" section in this post).
c) Opt-out allows states to choose and helps make the Public Option more legitimate (more a matter of local choice). Opt-in does the same, but is a more of a hurdle, since it requires a formal state effort to join the public plan. By increasing political legitimacy, opt-out and opt-in strengthen the Public Option initially and over time.

A Trigger is considered likely to be gamed by insurers over time to make it ineffective -- it might rarely or never be invoked, even if needed. One of the qualities that makes a Trigger so problematic is that the numerical (or worse, subjective) criteria by which it would be triggered are themselves subject to manipulation and massaging over time.

Many consider a Trigger to be a way to pretend to have a Public Option on the horizon, but in fact prevent a Public Option from occurring even in circumstances the original spirit of the legislation would have intended.

The alternative to all Public Options remains Comprehensive Insurance Reform -- itself no small thing -- which must have all of its many details working to prevent insurers from gaming the system, of which risk sharing (reinsurance based on patient condition) is most crucial. Those aiming at Comprehensive Insurance Reform should look to European nations where it is in effect.

Write to Ben Nelson and Olympia Snowe and Newspapers

Reid still has some work to do. Sen. Ben Nelson (D-Neb.) has continued to express skepticism about the state opt-out, preferring instead to allow states to choose their own competitor to private insurance.

And Reid’s best hope for a Republican vote, Sen. Olympia Snowe of Maine, has said it would be difficult to support a national public option with a state exemption.

Reid may well settle on an alternative, such as Snowe's "trigger" option, which would allow states to join a national insurance plan if affordable coverage is not widely available. Bipartisanship remains an important factor to the White House, and the trigger could be the only way to get there. -- Politico

This begs a question or two:

Question for Ben: Under a state opt-out public option, do you doubt Nebraska voters are wise enough to decide if they want to opt-out of the national public option and "choose their own competitor to private insurance?"

Question for Ben: Do you think unless you yourself restrict the options Nebraskans have, Nebraskans can't choose what is best for Nebraska?

Question for Olympia: Do you think unless you restrict the options for Maine yourself, Maine won't do what is best for Maine?


Everyone, think it through. The only subsidies are to individuals and families to purchase insurance, public or private. Not to the public plan.

If the public plan isn't so great, states can see that and then opt-out.

If it is really great, they can change their minds and opt back in.

This kind of dynamic is called a "market dynamic."

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My letter to Senator Ben Nelson:

Senator, we read you "prefer instead to allow states to choose their own competitor to private insurance."

This is a great idea.

My state will be able to opt-out IF WE CHOOSE, and "choose our own competitor to private insurance."

I like this plan.

Please let us have that choice to opt-out, so we can *choose for ourselves* on a state level whether we want the national public option.

Let us choose, and don't let Congress choose for us, one way or the other.

Support Increases for a Good Version of the Public Option.

The leading versions of the Public Option (a government-run health insurance option) are "level-playing field" versions, where the public option insurance plan is supported after startup only by the premiums from its policy holders. It gets no ongoing subsidy.

The only ongoing subsidies are to individuals and families for purchasing health insurance, regardless whether that insurance is private or publicly-run.

If you qualify for this subsidy, you get help to pay your health insurance premium. You can use your subsidy to buy any qualifying insurance plan (a plan that qualifies because it has no tricks or loopholes to deceive you). You get the same subsidy whether you buy a public or private insurance plan.

(note, as currently proposed, the Public Option would only be available in the coming new exchanges, which themselves are only open to certain people -- small businesses and those buying insurance in the individual market. Senator Wyden has proposed opening up the coming exchanges to more Americans, a great idea regardless of whether there is a Public Option.)

The other way the playing field is level is via the public option plan using "negotiated rates," where the public plan must negotiate with health care providers for what rate they are paid, just like private insurers. (The non-level rates would be rates tied to Medicare rates, such as Medicare rates + 5%.)

With these two qualities the Public Option is on a level playing field -- it has all the same conditions and limitations private insurers do, except for a need to pay profits to shareholders (because taxpayers are the shareholders!) or to pay gigantic multi-million dollar "bonuses" to executives.

Finally, the idea of letting states opt-out of this national Public Option is gaining momentum.

This is the best version of a Public Option -- national, negotiated reimbursement rates, and with a state opt-out clause (which implies a state could also later reverse and opt-in).

It will allow everyone to see over time how states with the Public Option perform versus states without the Public Option.

States without the Public Option will get the same level of subsidies as states with the Public Option, since the subsidies are to individuals and households.

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Update: More on individuals Senators about the Public Option today.

One of the centrists, Senator Mary L. Landrieu, Democrat of Louisiana, said: “I am pressing to get a government-run, taxpayer-supported public option out of the bill. I want to rely on a reformed private marketplace — not the current wasteful, abusive, unaffordable private market.’’

Now, if a genuinely effective “reformed” marketplace happened, that would be great. It takes a lot of pieces. Not only risk-sharing reinsurance (to prevent the harm of adverse-selection) to last more than only 3 years, but also well-defined standard defined plans: “bronze,” “silver,” etc. that insurers must offer (to allow us to compare plans and avoid tricky loopholes), and..that insurers must price the same in and out of the exchange (to avoid tricky games by insurers to get only healthy people and avoid risky people), and…that something like the Wyden free choice amendment or similar rules would open the exchanges to more people, and…etc.

A lot of ifs are needed to establish a well-functioning reformed market that would actually work to help control costs.…

But the most telling part of Landrieu’s rhetoric (which seems political, about votes) is the phrase: “taxpayer-supported public option.”

This implication is flatly false.

The proposed public option will be supported by insurance premiums alone after startup. The subsidies are to individuals and families to help pay their premiums, whether they chose public or private insurance.

This rhetoric reveals the main trick being played politically — to intentionally confuse the subsidy to help individuals and families buy insurance for a imagined subsidy to the public option itself, a subsidy that does not exist.

Afghanistan (updated)

Suppose 20 years from now France had a large Islamic population, and in a very divided three-way election the Islamic faction managed to elect a powerful parliamentary block and that a coalition government was formed including the Islamic party. Imagine that you are fervent French Catholic.

Now, stretching our imaginations farther, imagine the Islamic-friendly French government invited some Muslim troops from Saudi Arabia to be stationed in France to help "protect the rights of women to wear veils and burkas" or some such, and eventually there were Muslim troops stationed in Lourdes for instance. Suppose that Lourdes has taken on more religious significance to French Catholics. Suppose you often have to see these Muslim troops along your way as you go on your annual religious pilgrimages to special Catholic sites such as the Grotto of Massabielle.

Suppose you had been demanding for years to the French government and also to the Saudi government that these foreign Muslim troops be removed from Lourdes, and from France.

Suppose some half-crazed Christian radical group from southern Cyprus sets off bombs in Riyadh, Saudi Arabia to protest against Muslim troops near holy Christian sites in both France and northern Cyprus. (Yes, I know that such an act of terrorism isn't Christian.)

Now suppose you yourself don't believe in such acts of terrorism, but you watch in horror as the response to the bombings is that additional Muslim troops arrive from Saudi Arabia to "protect" French Muslims.

Suppose Saudi Arabia also launches a war against Cyprus to rid the nation of "terrorists." Along the way, many non-combatant Christians civilians are also killed.

Ok, yes, this scenario is far-fetched and fantastic, but our current situation with American troops in Saudi Arabia and Afghanistan seems a little surprising historically, given the original heritage of the United States.

The real point is how would you feel, as a fervent Catholic, about the Saudi "war on terror" against Cypriot "Christian terrorists" -- would you feel sympathetic to the Saudi invasion of Cyprus, or outraged?

If the Saudi troops were powerfully armed, and "won" every battle in Cyprus, driving the Christian "militants" off the island in boats, would your feelings of outrage fade in time?

Or would you actually become more outraged?

The point here is that the United States cannot "win" hearts and minds in much of Afghanistan or in the neighboring region by fighting.

We cannot defeat a religious belief system with force of arms or by killing people.

Instead, the outcome of fighting for territory against a religious belief system is that we engender more and more hatred.

Analysts advising on the Afghan war generally cannot see the forest for the trees.

The real outcome of the "war on terror" is that more militants are inspired for the future. Worse, militants will be inspired in more than one country.

We cannot defeat ideas with guns.

But...we could defeat some ideas with a combination of better ideas and virtues.

It may even be that the better ideas and virtues that will eventually defeat the intolerance and power-abuse of the Taliban's ideology will come mostly from Afghans. We don't necessarily know how Afghans should live. It is up to them to decide this for themselves.

....

So what should the United States do in Afghanistan?

Let me offer two alternatives that would greatly improve our longer-term outcome in the battle of hearts and minds.

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First strategy:

We should specifically advertise in a thorough and lengthy way that we have the over arching goal of capturing Osama bin Laden as a "criminal" for "killing children, Christians and Muslims in 2001."

In each village we should specifically ask the village elders or council whether or not they wish our troops to be on their lands. We should then draw up a map showing what areas would like to be non-Taliban. Some families might wish to relocate.

We should then seek peace with the Taliban itself, and demand it give up bin Laden, and respect the rights of Afghan villages to decide their own alignments. We should expect and entreat the Taliban to co-exist and live in peace with its neighbors, even though many of them do not want to.

We would then begin to enforce that peaceful co-existence (but read note below on this!) by allowing the Taliban to return to areas that strongly prefer the Taliban, and protecting the areas that do not want the Taliban.

We tell the Taliban exactly that they may be in any part of Afghanistan that democratically wants them to be there, and that we require they respect their neighbors' rights of self-determination. Even though many current Taliban do not. We could also arm local Afghan village self-defense forces.

In other words, we treat the Taliban with respect, and wait for them to gain maturity and tolerance, even if it takes a long time.

The war would become assertive, power-backed peacekeeping.

When I mention peacekeeping, I do not propose a foolish strategy such as checkpoints and bases, so that our troops become easy targets.

Not at all.

Instead, the American bases could be well back (2-10 miles usually) from this new, fluid border region. Instead of checkpoints, the Americans are a reactionary force, that watch the border in a variety of ways (drones, allies, interviews, occasional overflights), so that we know what is going on. Our troops can as needed conduct operations to counter any use of force by the Taliban. So, day-to-day, non-Taliban Afghans and Taliban can mingle, and the Taliban can try to convert people, and perhaps gradually take over some villages and towns. But the people would know that not far away the American guns are ready to back up their freedom of choice. If some towns become Taliban, that means both the towns and the Taliban are evolving, and the longer-run outcome isn't predictable.

The key is that the Taliban would be forced to operate through peaceful means. That's a world of difference.

If your ideology is attractive after years of time through peaceful means, then it is something the people want. An ideology that can succeed by peaceful means is a very different ideology than one that requires force to maintain.

We should begin treating everyone in that region with more respect, and allow them to choose and be responsible for their own fate.

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Second strategy:

An alternative strategy for the long-term battle for hearts and minds is to withdraw from all Muslim lands around the world and let them be entirely responsible for their own fates, in every way.

We are now sufficiently able to gain progressively more independence from middle-eastern oil, and general oil imports. We could rapidly convert much of America's trucks and automobiles to natural gas, supplies of which are set to rapidly increase around the world due to new shale extraction technologies.

We would let the Taliban retake Afghanistan (if they are so strong), and show the world its style of governance, but this time under the inevitable spotlight of the media of an aware world.

Let them show their colors and let everyone see just how good the Taliban can be, or how bad.

This war is ultimately a war of ideas and ideals. We can only win it by using integrity and ideals, fully.

We can say we are satisfied we have fought the murderers of 9/11 and now will "go home in peace." Going in peace is explicitly in the Koran, and Muslims are required to allow an enemy to retreat in peace.

We can defend ourselves here, at home, on our own land. We would need to refocus a large part of our "defense" expenditures (Department of Defense) to actually be defensive, such as by effectively monitoring the cargoes of all incoming ships, and generally increasing our ability to detect and intercept any attack. I think at least 1/2 of our entire defense expenditures should be refocused in this way. This would be many times larger an effort than our current Department of Homeland Security.

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This second strategy is more viable than many would think, and would take plenty of planning and teaching. We should be preparing technologies and strategies to do this scenario even if we don't implement it immediately, as we may need to use this strategy in time by virtue of cost.

I think the first strategy could be implemented immediately.

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Update 10/27: U.S. official resigns over Afghan war: Foreign Service officer and former Marine captain says he no longer knows why his nation is fighting

"There are plenty of dudes who need to be killed," he said of al-Qaeda and the Taliban. "I was never more happy than when our Iraq team whacked a bunch of guys."

But many Afghans, he wrote in his resignation letter, are fighting the United States largely because its troops are there -- a growing military presence in villages and valleys where outsiders, including other Afghans, are not welcome and where the corrupt, U.S.-backed national government is rejected...

"At one point," Hoh said, "I employed up to 5,000 Iraqis" handing out tens of millions of dollars in cash to construct roads and mosques. His program was one of the few later praised as a success by the U.S. special inspector general for Iraq reconstruction....

Frank Ruggiero, the Kandahar-based regional head of the U.S. PRTs in the south, considered Hoh "very capable" and appointed him the senior official among the three U.S. civilians in the province. "I always thought very highly of Matt," he said in a telephone interview. ...

With "multiple, seemingly infinite, local groups," he wrote, the insurgency "is fed by what is perceived by the Pashtun people as a continued and sustained assault, going back centuries, on Pashtun land, culture, traditions and religion by internal and external enemies. The U.S. and Nato presence in Pashtun valleys and villages, as well as Afghan army and police units that are led and composed of non-Pashtun soldiers and police, provide an occupation force against which the insurgency is justified."

We cannot win this war by fighting.

Consider this from the NYTimes reporter who spent so much time close up with Taliban:

One evening, Abu Tayyeb declared that the Taliban treated women better than Americans did. He said women in the United States were forced to wear revealing clothes and define themselves solely as sex objects. The Taliban protected women’s honor by not allowing them to appear in public with their faces unveiled.
My captors saw me — and seemingly all Westerners — as morally corrupt and fixated on pursuing the pleasures of this world. Americans invaded Afghanistan to enrich themselves, they argued, not to help Afghans.

They ignored the fact that the United States helped build hundreds of miles of paved roads in Afghanistan and more than a thousand schools and health clinics. My captors denied widespread news reports that the Taliban burned down scores of newly built schools to prevent girls from getting an education.
I argued that the United States was not the menacing, predatory caricature that they believed.
I also tried to counter their belief that all Americans were astonishingly rich.
Nothing I said, though, seemed to change their minds.

These are not beliefs that fighting will change. These beliefs will begin to change when the stress of fighting disappears (and if not too many relatives have been killed), people move freely, and have a chance to learn more about how things really are compared to their beliefs.

Effective Substitue for the Public Option (& Slowing Medical Inflation)

Congress faces a political quandary: how to make health insurance work better yet still be affordable, without raising taxes for subsidies too sharply.

Senator Olympia Snowe is focused on a couple of the most crucial aspects of reform -- general cost inflation and whether middle class families will be able to afford to their health insurance premiums in 2014 or 2016.

At the moment, Senators Baucus, Reid, and Snowe have great influence on what form reform will take, as they work to blend the two Senate committee bills.

Senator Baucus says a Public Option (which would help control costs) is not going to get 60 votes in the Senate, and Senator Snowe only proposes a "trigger" where a Public Option would come into effect in an individual state only after competition in the state is shown to be inadequate.

Does the idea of a trigger sound effective? It would be amazing for an effective trigger to emerge in the legislative details. But if the triggered public plans are limited to individuals states, the resulting public plans would often be relatively small in size and thus lose ability to control costs well.

I think the best proposal is to set up a nation-wide public option plan, and then allow individual states to opt in and opt out, as they like. This way, states where sentiment dislikes the idea of a public option (if there are any states where a majority does in fact feel that way) could opt out of the national public option. Later, if the voters of the state feel a public plan option is better, they can elect different state representatives and opt into the national public plan.

But...in case none of these variations on a public plan are chosen, there is another way to control costs quickly (within a year of implementation) that Congress should use in the absence of any public option plan.

Supporters of a Public Option should think about "medical loss ratio" regulation as a very good alternative strategy.

The medical loss ratio (or "health benefit ratio") is the portion of total revenues from health insurance premiums that an insurer pays out for health care claims. The average in the U.S. is about 80% now. It was well above 90% in the 1990s.

A strong regulation of the medical loss ratio would be as good as a strong national public option in its immediate effect on costs.

New regulation of medical loss ratios is already in the proposed reform, but hasn't been in the spotlight, and so lobbyists have kept this provision weaker than it should be.

Strengthening this regulation is something that both Snowe and Baucus can do politically.

Reform proposals at the moment suggest regulating the medical loss ratio up to a 85% minimum.

That is not high enough.

The insurance lobby claim on Monday that premiums will go up more quickly under reform isn't all smoke and mirrors (although it has plenty of smoke and mirrors). Premiums will go up for simple reasons -- like closing loopholes, for instance. When you pay less out-of-pocket, then you must pay more in premiums, even before including increases from health costs inflation. But of course, there will also be subsidies for lower income households to allow them to afford this coverage.

The real bottom line elements for costs in the medium and long term are health system inefficiencies and the bigger issue of health care inflation itself.

When I think about the political tradeoffs between insurance reform and costs (the costs of health insurance premiums and federal subsidies), I keep coming back to the implication that two kinds of cost reduction *must* happen for reform to succeed.

1. Near Term Cost Reduction, which requires either:

• A) "health benefit ratios" (medical loss ratios) must go *much* higher in exchange for the individual mandate -- such as 90% instead of only the meager 85% currently on the table.
• OR
  
• B) some method of powerful cost competition must come into effect quickly, such as a national public option default that states can opt out of by state choice, and/or a powerful opening of the exchanges such as Senator Wyden proposes (with effective regulation that designates certain types of policies offered ("bronze," "silver", etc.) so that shoppers are able to make real apples-vs-apples comparisons of actual benefits covered).
• 
  
• We really need either option A) or option B) to help control costs near term.
  

2. Long Term Cost Reduction, which is the type of reform I've focused on in my blog, such as how to get to more "integrative" medical practice (like the Mayo clinic) by changing how treatment is paid for.

But near-term cost reduction is key to the Congressional political quandary I think.

Insurers must give to get.

With the mandate, they will get millions of new customers.

In exchange for continuing to have their profitable niches with the new captive customers the necessary individual mandate will create, and without public competition, they should raise their payout ratios much more sharply than only from the current 80% up to 85%.

They will be able to increase payout ratios easily. They will no longer need to spend huge amounts of money to weed out and exclude sick people or struggle with providers over every claim detail, under reform.

Under reform, their administrative costs are going to go down sharply. That much is already in the cards.

We should be talking about regulating the medical loss ratio up to 92-94% (90% at a absolute minimum). I lay out in this post how a "health benefits ratio" payout level of 94% is a good example of reasonable efficiency.

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(This part below is meant for policy wonks or Congressional staffers: There is one important wrinkle in such a regulation to allow for....

First, the adequate regulation of medical loss ratios (e.g. above 90%) is needed when the insurance exchanges are not extremely active and powerful -- either by lacking sufficient participation (without Senator Wyden's plan to open up the exchanges), or by lacking sufficient ability for shoppers to compare policies if the regulation specifying benefit levels doesn't really make comparing "bronze" policies real apple-to-apple comparisons. In other words, when option B) above is not in full effect, then option A) becomes necessary, due to lack of competition to hold prices in check. But option A) has to allow for whatever provisions gradually bring about option B) over time.

This note is about a further, crucial issue though.

When an insurer considers whether to try delivery system innovation to lower medical costs, they must be able to expect to gain extra profit for some period of time.

If an insurer is required to pay out for instance 92% of their premium revenues to claims, and then that insurer considers whether to spend money to innovate and set up a pay-for-outcome system, and this new system might in turn quickly lower actual claims costs while maintaining or improving quality... then a perverse effect from the regulation could occur. Lower total claims would force the insurer to rebate more of their policyholder premiums at years end, actually decreasing their profits unless they rapidly expand by picking up a lot of new policy holders. This temporary fall in profit would create a disincentive for this kind of innovation. The danger from the insurer's point of view is that before their new lower payout medical costs allow them to gain more new customers in their marketplace (how active is that marketplace, with how many potential customers?), there will be a lag in time, during which they will not yet have much increase in new policyholders but will have lower payout ratios, and thus must pay rebates, and thus lower their profits below normal.

Of course, the outcome of a good innovation that lowers costs should instead be an increase in profits, at least for a few years.

Therefore, a regulation of medical loss ratios must include a provision to allow insurers to *lower* medical costs through delivery innovation, without being required to rebate the excess retained premiums above the required payout ratio (as described below) that result during some fixed period of time, such as 2-4 years (or until the entire industry adopts their innovation). Instead, they would be rewarded with more profits for their beneficial innovation.

One way to accomplish this provision would be to allow insurers to use an industry average payout cost (per type of procedure or condition), or their previous payout costs per condition, instead of only their own new payout costs. They could optionally use an annually established payout level average for certain conditions or treatments, these averaged basis numbers (for each condition or treatment) calculated annually by the regulator for the entire region health industry, and maintained in an online table, etc. In short, the insurer would be able to temporarily use the old costs levels to calculate their legal payout ratios even while they have lower payout ratios in reality due to the savings in the new delivery system. They can act for a specified time period as if they are paying the old costs that existed previous to the new cost levels their innovation creates.

In this way, an insurer is motivated to try to improve value by increasing medical effectiveness per dollar, as it will increase their medium term profits directly (and also in the longer run as their better cost levels allow them to win new policy holders for the long run).

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Something for insurers themselves to consider: This would payoff even on the level of individual conditions. For instance, if a knee replacement costs on average in claims paid in the medical region $19,500, but an insurer manages to innovate and lower costs to $17,100, then the insurer would be able to use the average number -- $19,500 -- for the purpose of accounting for what they paid versus the regulatory requirement of payout ratio vs. premiums, keeping the difference as profit for a specified time period (such as 3 years). Thus good innovation in just one procedure would be rewarded by profit. The same applies to any costly and common treatment. Finally, since this insurer can lower overall premiums in response, they can attract a larger customer base, spreading their overhead costs and thus increasing long term profits also.

Consumer Debt/Credit Contracting at Rapid Pace

Consumer credit decreased at an annual rate of 5-3/4 percent in August 2009. Revolving credit decreased at an annual rate of 13 percent, and nonrevolving credit decreased at an annual rate of 1-1/2 percent.

Nonrevolving credit includes auto loans, and was boosted by the Cash-For-Clunkers program during August, yet seasonally-adjusted nonrevolving credit still decreased during August. Revolving credit includes mainly credit cards. Consumers are paying off credit cards at a furious pace.

It's time to re-post the Where We Are Now post from March.

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I thought it would be good to give just a 2-minute, off-the-cuff sketch of Where We Are, without many explanations (see previous posts for these). Just a quick bunch of thoughts.

After a 30-year, massive credit/debt boom aided by advertising, the ratio of American household indebtedness vs. income rose to levels similar to the peak in 1932 , and even doubled vs. incomes over 30 years. When the last easy-money extreme -- NINJA loans -- finally faltered, the bubble of credit began to reverse in late 2007, and house prices began their downward return towards normal. In response, people are trying to save for retirement since their houses and stocks are worth considerably less.

The change in consumer spending is likely to be semi-permanent (lasting, and only partially reversing), and that's for the people who have jobs. Meanwhile, jobs servicing the artificially high demand of the credit-bubble times are being lost, and that will be huge.

Rogoff and Reinhart's study of past financial bubbles shows it's likely that house prices will continue down for years more, and jobs losses are likely for years. The average GDP decline after such busts is 9%.

The Fed is acting more aggressively than ever before, yet how can extra credit availability matter when people everywhere simply choose to save? Consumers choose to save regardless, and businesses will choose to be conservative regardless of credit availability, since we all see the same reality. One way the Fed can do something meaningful is to manage to get mortgage rates under 5% and hold them there for a long time, thus freeing up more discretionary spending for many households after they refinance.

In short, one necessity to help prevent a Long Slump (near Depression-like) that lasts more than 3 years is by somehow creating effective incentives to start new kinds of industry and business to produce new kinds of products and services that people want and do not already have.

Obama may realize this in part, but it's not yet clear how well.

That's where we are.

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(Extra note: The Administration and Congress should not lowball the incentives for new business and job creation when they legislate. There is a tendency to work on the margin (for instance Obama's 2008 idea of a $3000 tax credit for new jobs). We will need something much more powerful, such as a 20% subsidy in the first year on the first $1 million of domestic investment and/or payroll increases that create jobs on net, paid a year later based on payroll continuation, and this subsidy percentage gradually attenuating over 3 years, for instance. It's not at all hard to set up rules to prevent substitutions or other abuse of such a subsidy. I could do it in an hour, and so could many experienced businesspeople.)

The Real Reason Reform is So Difficult

Imagine you are on an ocean liner, well out at sea. There's plenty to do, plenty of choices to make. Perhaps you are thinking with anticipation about dinner. You might wonder how you look in your shorts. You think about someone you met. You have your own world, with its pleasures, challenges and preoccupations.

One day, as you are going to your next activity, the ship wide loudspeaker system suddenly announces the captain has decided to conduct daily evacuation drills. The alarm rings, and everyone has to find their life vest, put it on, and find and assemble at their designated lifeboat.

How would you feel?

If you are like most people, you'd feel a little disconcerted, and at some moment or two...or three, you might feel a little fear. You might begin to wonder just how safe the ship is. Is there a reason for these drills?

What if the afternoon bridge club you attend has some noisy talkers who don't like the captain much, and they start to claim that if everyone knows how to get to the lifeboats then it would create a rush to the boats in a real emergency and there might not be enough boats, and therefore those that are already are on the ball and already know where their life vests and lifeboats are will now actually become less safe, because now they have to compete with the mass of people who now will rush the boats. Later, as you lie down to sleep that night, perhaps you'd even begin to imagine floundering in stormy water in your life vest as the ship goes down.

But even without noisy talkers making up new fears out of thin air, just normal imagination alone would be able to come up with a fear or two.

While the lifeboat drills actually increase your safety, it is likely you would feel less safe in response to this new change.

Health care reform is like this, but worse.

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Why worse?

Because of costs.

Before reform, cost was something we could ignore mostly. Costs were hidden to most people, most of the time. Mostly our employer paid those costs, and we simply went when we needed care, without consideration of prices.

...

Before reform, we didn't have to mull over daily the fact that our health care contributions and deductibles and co-pays just keep going up and up, or that our pay raise is small since employer health premiums ate it up. Our own health costs still seemed possible to tolerate, since it appeared our employers were paying most of the costs. Most of us did not have any major illness or accident to even test out these new levels of out-of-pocket expenses.

Serious out-of-pocket expenses were only theoretical for most people.

Besides, maybe the costs would stop going up next year, or next....

Maybe next year we'd start eating more healthy. Maybe we'd start working out.

That way those larger deductibles wouldn't be quite so scary -- you'd hedge your bets and hope to make it to 65 and Medicare before the big bills.

But...that would all be tomorrow. Next year. You wouldn't have to deal with it today.

You'd get some ice cream and settle down in front of the TV.

After all, your premiums for this month were already paid.

...

But behind our backs all these years, health care costs have been operating under a strange and powerful dynamic. We don't choose how much to pay and for what. Many people are at an all-you-can-eat health care buffet where someone else pays the bills, and you have to choose full buffet or nothing. Others look in from outside the restaurant, starving. Others eat and then get a bill at the end of the meal rather different than they expected. Planet Money has a nice podcast that illustrates some pieces of this health care pricing dynamic.

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There are several pieces to how American Health Care became so very expensive (and what to do about it (also Mayo Clinic's version of good value-based reform is here)).

Overwhelmingly expensive.

Like houses (more on this later).

So expensive that health care itself has created a large part of the "middle class squeeze."

This feeling of being in trouble financially is widespread.

We are not talking about a minority of Americans...

Consider -- the fears in the electorate are all about cost and care:

• Will I be able to afford health care next year, or two years from now, with premiums going up 8%, 10%, or sometimes even 15% or more?
• Can I even afford my current health care premium right now?
• Will I be able to afford to pay my other monthly bills if I also have to pay more for health care?
• If my bills are already squeezing my household budget, how can I possibly help pay for other people over the years if reform passes and poor people get subsidies? If health care costs go up in general because reform provides more people more health care, then won't that mean higher taxes 5 or 10 or 15 years from now for me, and thus won't the squeeze I feel now will become overwhelming then?

The fear springs from the pressures on our family budgets right now, and where we feel things are going financially.

The reason this fear is strong is that Americans are already squeezed as noted here in January:

Slightly over half said that their household income provided them with just enough money to pay their bills.

...

Reform is difficult because over half of Americans feel a real financial fear right now, and so narratives in which health care reform is portrayed as doing little to control costs are viscerally frightening.

Not quite as frightening as being told that terrorists have been taking photos of your child's school. But...frightening enough. Frightening more on the order of hearing that your company CEO is on a trip to China or India to scout for some outsourcing. Ok, perhaps not quite that frightening, but....it's up there.

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That reform would in fact greatly improve the health care security of most everyone can get lost in the fray when these types of fundamental fears are so active.

What can Congress do?

They can talk more about how reform will bend the cost curve, and lower costs for everyone in the future.

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Different polls suggest different levels of support for reform, depending on how the poll question presents reform. Polls also suggest that simply adding a significant tort reform (such as a moderate cap on "non-economic damages") to the health care reform would increase public support, as would adding a "public option." Either one of these additions would bring in more support from the sides to add to that in the center. Both would guarantee reform popularity.

Meanwhile, the learning process is painful and slow, but progressing:

How Wyden's "Free Choice" Plan Would Help Reform Succeed

This very-aware and well-informed individual chooses to self-insure, and will do well so long she avoids the worst accidents or illnesses. One of the key needs in health insurance reform is that a sufficient choice of genuinely competitive insurance plans must be available so that persons like Lyn Robinson can find a coverage that makes sense.

Like Lyn, my own family is part of the numerous minority that spends time and money working to live a healthy lifestyle. For instance we spend an extra premium of about $200/month on food (for relatively more fresh vegetables and fruits, more fresh fish, etc.) and $25/month on health clubs. This extra expenditure leaves less available for traditional illness-based insurance, so that having both the healthy lifestyle and comprehensive health insurance works so long as...our income goes up a little faster than health insurance premium increases. Or else we'd have to cut more spending from other areas of life. Imagine that economic effect on the general economy when replicated hundreds of millions of times.

We need a sufficient level of choice and competition in the insurance market so that some insurers will have a motivation to offer plans that make some kind of sense for those that want to spend time and money to lower our health risks.

But there is little motivation for an insurer that already has 50-80% of the market in a state to bother to work up new options, new kinds of health plans for those that work on leading a healthy lifestyle and lowering their risks, unless....

Unless there is sufficient competition, and genuine market transparency (an ability to realistically compare and shop among insurers and plans) such as would be strongly increased under Senator Wyden's Free Choice Proposal.

In additional to smoking, insurers must be allowed by law to consider lifestyle choices like health clubs and current fitness as they devise plans and set insurance premiums.

Current reform proposals prohibit insurance premium price discrimination against preexisting conditions, just as they should. I'm not suggesting differently. Instead, we need to see discounts or perks available to those that work to lower their future health risks.

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Update:

Current reform proposals in Congress now allow better insurance discounts for healthy lifestyles.