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Archive for December, 2009

Thursday is a nice milestone in TARP’s history: with the help of Deutsche Bank, Treasury is auctioning off the warrants it received when it invested in Capital One. The company has already paid off the preferred stock that the government purchased last fall, and will now be free from TARP oversight once the warrants are in private hands. Or, perhaps, in its own hands. Although Capital One declined to purchase the warrants from Treasury at a negotiated price (as had other firms that repaid the government’s TARP investments), it can still bid in the auction.

A few months ago, I pointed out many benefits from auctioning the warrants rather than selling them back to the companies at negotiated prices. To my mind, the biggest benefits are transparency and the fairness of market pricing. Everyone—including, at least in principle, small investors—can bid in the auction.

If you are interested, here’s the prospectus, which includes (pp. S-15 to S-16) a list of participating brokers. I don’t see my broker on the list, which is disappointing, but maybe others will be luckier.

For a nice discussion of the auction mechanism (a modified Dutch auction in which all winning bidders pay the market-clearing price, very similar to the method used to sell Treasury bonds) and some estimates of the warrant values, see this Seeking Alpha piece by Linus Wilson.

Disclosure: I have no position in Capital One and, apparently, no way to bid on the warrants. If I find a way, I might do it for fun.

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Over at the National Journal’s Economy blog, John Maggs asks some budget experts for recommendations of how President Obama can bring the budget deficit down by 2016.

Here’s an excerpt from my contribution:

President Obama should combine his concern about climate change with his concern about the budget. …  President Obama should demand … that any climate change bill achieve significant deficit reduction. For example, he could refuse to sign any cap-and-trade bill unless it auctions a large fraction of the allowances and dedicates the resulting revenues to deficit reduction. … A reasonable approach could easily reduce deficits by $300 to $400 billion over the next ten years, including both the value of the allowances and lower interest payments.

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Yesterday, the Congressional Budget Office released its much-anticipated analysis of how the Senate health bill might affect insurance premiums. As a political matter, the analysis appears to be a clear win for proponents of the bill. Most importantly, CBO found that average premiums in the large group market—which provides about 70% of private health insurance—would decline slightly in 2016. That provides comfort to Senate moderates who were concerned by claims that the bill would increase premiums significantly.

On the other hand, the report also found that average premiums in the nongroup market would increase by 10 to 13%. That substantial boost is providing some ammunition to opponents of the bill.

To put these impacts in context, it’s useful to dig a bit deeper to understand the various channels by which health reform may affect insurance premiums. CBO identifies three such channels: changes in the amount of health insurance coverage that each beneficiary purchases, changes in the types of people with coverage, and changes in the price of a given amount of insurance for a given group of enrollees:

For me, the most interesting of CBO’s findings is that the Senate bill would make the nongroup and small group markets more efficient. The price of nongroup coverage would be reduced by 7 to 10% (holding constant the amount of coverage and the type of people covered), while the price of small group coverage would be reduced by 1 to 4%. Where do these savings come from? From reduced administrative costs and competition in the exchanges (not, CBO notes, from any material reduction in cost-shifting from the uninsured to the insured).

The second key finding is the enormous increase in the amount of coverage that consumers would purchase in the nongroup market. CBO finds that the bill would induce people in the in the nongroup market to purchase insurance that covers a larger share of their costs; the bill would also require insurers to cover a broader range of services. Both of these changes would boost nongroup premiums.

The third major finding is that the changing mix of enrollees would lower average premiums in the nongroup market. Premiums in the large group market would decline slightly.

A fourth major implication, overlooked in most discussions thus far, is that we shouldn’t assume that average premiums going up is always bad (or, for that matter, that average premiums going down is always good). Consider, for example, the increase in average nongroup premiums, which occurs because nongroup insurance would expand to cover more services and a larger fraction of beneficiary costs. To what extent is that increase harming people in the nongroup market? It depends on how much the beneficiaries value their new coverage. When consumers move up from a Honda Civic to a Honda Accord, it’s usually safe to assume that they are benefitting, even though the Accord is more expensive. On the other hand, we would look askance (I hope) at a government program that forced potential Civic buyers to purchase Accords instead.

So it is with nongroup insurance. If people are trading up willingly to more expensive coverage, we shouldn’t view that as a bad thing (there is an issue about how broader coverage affects their consumption of health services, but let’s leave that aside for now). On the other hand, if the government is forcing them to buy coverage they don’t fully value, we might be concerned (with the obvious caveat that with health insurance, unlike car purchases, there are some legitimate reasons why the government might mandate some level of coverage). But even then, the most important concern is the net burden (how much consumers value the coverage less what they have to pay for it), not simply the gross burden of paying for it. CBO doesn’t get into these particulars in detail, but it does provide the following breakdown of the amount of coverage effect: two-thirds is due to greater actuarial value of the plans and one-third is due to coverage of more services (including those induced by the greater actuarial value). The increase in actuarial value means that, on average, about two-thirds of the increase in nongroup premiums will be offset by reductions in out-of-pocket spending. As a result, I think the increase in average premiums significantly overstates the burden that beneficiaries in the nongroup market might bear (and, indeed, some may well be better off).

Of course all of these conclusions come with numerous caveats. Most importantly: (a) YMMV; individuals may experience much larger premium increases or decreases than the averages, (b) CBO didn’t model some impacts that could raise premiums — most notably the possibility that increased demand for health services would drive up prices, (c) CBO didn’t model some impacts that may eventually reduce premiums — most notably provisions that might reduce health costs somewhat after 2016, and (d) these findings don’t include the effects of any subsidies or the tax on Cadillac plans; see the CBO report for analysis of those.

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