Month: September 2011

High-Deductible Health Plans Are Growing Rapidly

High-deductible plans are gaining market share.

Here’s another important fact from the Kaiser Family Foundation’s recent survey of the employer health insurance market. As shown in the chart above, health insurance plans with high deductibles and a saving option (HDHP/SO) have been gaining market share rapidly. Only 1-in-25 enrollees were in such plans in 2006; today that figure is more than 1-in-6.

The increased popularity of these plans–which involve Health Savings Accounts (HSAs, created by the 2003 tax law) or Health Reimbursement Arrangements (HRAs)–has come at the expense of health maintenance organizations (HMOs, down from 21% in 2005 to 17% in 2011), preferred provider organizations (PPOs, down from 61% to 55%), and point-of-service plans (POS, an unfortunate acronym, down from 15% to 10%).

When paired with HDHPs, HSAs and HRAs are often called consumer-driven health plans because they give the patient / consumer more direct responsibility for health spending. In return for lower premiums, beneficiaries face higher cost-sharing. To help cover those out-of-pocket costs, beneficiaries make contributions to tax-advantaged saving accounts.

Bottom line: The employer market is moving toward more consumer-driven plans. Big question: Will translate into lower health spending?

Taxes and Energy Policy

Last week I had the opportunity to testify before two Ways and Means subcommittees–Select Revenue Measures and Oversight–about the way our tax system is used as a tool of energy policy. Here are my opening remarks. You can find my full testimony here.

As you know, our tax system is desperately in need of reform. It’s needlessly complex, economically harmful, and often unfair. Because of a plethora of temporary tax cuts, it’s also increasingly unpredictable.

We can and should do better.

The most promising path to reform is to reexamine the many tax preferences in our code. For decades, lawmakers have used the tax system not only to raise revenues to pay for government activities, but also to pursue a broad range of social and economic policies. These policies touch many aspects of life, including health insurance, home ownership, retirement saving, and the topic of today’s hearing, energy production and use.

These preferences often support important policy goals, but they have a downside. They narrow the tax base, reduce revenues, distort economic activity, complicate the tax system, force tax rates to be higher than they otherwise would be, and are often unfair. Those concerns have prompted policymakers and analysts across the political spectrum—including, most notably, the Bowles-Simpson commission—to recommend that tax preferences be cut back. The resulting revenue could then be used to lower tax rates, reduce future deficits, or some combination of the two.

In considering such proposals, lawmakers should consider how tax reform, fiscal concerns, and energy policy interact.  Six factors are particularly important.

  • Our tax system needs a fundamental overhaul. Every tax provision, including those related to energy, deserves close scrutiny to determine whether its benefits exceed its costs. Such a review will reveal that many tax preferences should be reduced, redesigned, or eliminated.
  • The code includes numerous energy tax preferences. The Treasury Department, for example, recently identified 25 types of energy preferences worth about $16 billion in 2011. These include incentives for renewable energy sources, traditional fossil fuel sources, and energy efficiency. In addition, energy companies are also eligible for several tax preferences that are available more broadly, such as the domestic production credit.
  • Tax subsidies are an imperfect way of pursuing energy and environmental policy goals. Such subsidies do encourage greater use of targeted energy resources. But, as I discuss in greater detail in my written testimony, they do so in an economically wasteful manner. Subsidies require, for example, that the government play a substantial role in picking winners and losers among energy technologies. The associated revenue losses also require higher taxes or larger deficits.
  • A key political challenge for reform is that energy tax subsidies are often viewed as tax cuts. It makes more sense, however, to view them as spending through the tax code. Reducing such subsidies would make the government smaller even though tax revenues, as conventionally measured, would increase.
  • Tax subsidies are not created equal. Production incentives reward businesses for producing desired energy and are agnostic about what mix of capital, labor, and materials firms use to accomplish that. Investment incentives, in contrast, reward businesses merely for making qualifying investments and encourage firms to use relatively more capital than labor. For both reasons, production incentives tend to be more efficient than investment incentives.
  • Well-designed taxes can typically address the negative effects of energy use more effectively and at lower cost than can tax subsidies. I understand that higher gasoline taxes or a new carbon tax are not popular ideas in many circles, but please bear with me. As I explain at length in my written testimony, well-designed energy taxes are a much more pro-market way of addressing energy concerns than are tax subsidies. Taxes take full advantage of market forces and, in so doing, can accomplish policy goals at least cost and with minimal government intervention. Subsidies, in contrast, make much less use of market forces and inevitably require the government to pick winners and losers. Energy taxes also generate revenue that lawmakers can use to cut other taxes or to reduce deficits.

P.S. Not surprisingly, that last point wasn’t picked up by anyone else, at least during my panel (one of three at the hearing). New energy taxes would, of course, be problematic for the macroeconomy if enacted immediately. And we’d have to make some adjustment, either in the tax code or in benefit programs, to offset the impact on low-income families. In the long-run, however, I think that would be a much better way to address many energy concerns, including carbon emissions and oil dependence. But that’s not the way our system works. Instead, as noted, it’s much more popular to use tax preferences, whose benefits are visible and whose costs are obscure, to pursue energy and environmental goals. Other participants discussed the particular incentives, existing and proposed, in greater detail; their testimony is available here.

Health Reform and Skyrocketing Insurance Premiums

Family health insurance premiums surged 9% in 2011 according to new data from the Kaiser Family Foundation. That’s the fastest health insurance inflation since 2005:

Insurance premiums (in red) thus outpaced both general inflation (gray) and worker earnings growth (blue) by a wide margin.

That scary spike raises an obvious question: Is health insurance more expensive because of the health reform enacted last year?

Kaiser crunched the numbers and says yes, but only modestly:

The two provisions in the Affordable Care Act likely to have the greatest effect on the premiums for employer-sponsored health coverage in 2011 are allowing children up to age 26 to remain on their parents’ plans and requiring plans that are not grandfathered to provide preventive services with no patient cost-sharing. Our analysis, based in part on estimates provided by federal agencies when regulations implementing these provisions were issued, suggests that these provisions are responsible for 1-2 percentage points of the 9% increase in family premiums in 2011. (emphasis added)

Stripping out those two specific ACA effects, premiums would still have increased by 7-8% according to Kaiser’s estimates.

But that isn’t the end of the story. A remaining question is whether other aspects of the ACA might also have contributed to the premium increase. Kaiser argues, plausibly, that the two factors it considered were the most direct link between the ACA and 2011 premiums. But perhaps there were indirect links as well?

I expect we will hear critics of the ACA make exactly that argument in the days ahead. Somewhat surprisingly, though, the first example I found came from the Administration. Writing on the White House blog, health adviser and deputy chief of staff Nancy-Ann DeParle pins some of the blame for higher premiums on insurance companies overestimating what their costs would be:

[2011 health insurance] premiums were generally set in 2010, when insurance companies thought medical costs would be significantly higher than they turned out to be. The Bureau of Labor Statistics found that the health insurance employer cost index (a measure of the price of health care services) was the lowest it has been in over 10 years in the first half of 2011. Additionally, some insurers assumed  that the Affordable Care Act would dramatically raise their costs. In the end, both assumptions were wrong – but insurance companies still charged high premiums and earned impressive profits. Wall Street analysts’ review of results from the first quarter of 2011 found that 13 of the top 14 health insurers exceeded their earnings expectations, with profits that were over 45 percent higher than estimated. (emphasis added)

DeParle thus believes that the ACA did lead to higher premiums in 2011–beyond what can be explained by direct cost increases–but only because insurers overreacted. In other words, the ACA did cause premium increases beyond what can be explained by costs (since insurers would not have made the mistake about ACA costs otherwise), but the ACA doesn’t deserve the blame for those premium increases.

Without any numbers, we don’t know, of course, how much such misestimates might have contributed to the 7-8% rise that isn’t explained by the direct effects of ACA. Any such mistakes will, one hopes, be corrected in setting 2012 premiums. If so, that would soften health insurance inflation in 2012.

Indebted Countries Come in Three Flavors

The IMF’s latest Fiscal Monitor includes a colorful chart of who owns the debt of six countries with well-known debt concerns:

The debt owned by foreign investors and foreign central banks are in red and yellow; the other colors represent debt owned domestically.

Based on IMF’s accounting, the six countries come in three flavors:

  • The “PIG” countries. Portugal, Ireland, and Greece owe most of their debt to foreigners.That’s a key reason their shaky finances are of international concern.
  • Japan. It owes almost all of its debt to itself (i.e., its citizens and institutions). That’s a key reason the international community isn’t freaking out about its debt levels.
  • The U.S. and U.K. The two “Uniteds” owe most of their debt to themselves (including their central banks, in orange), but also owe a substantial amount to foreigners. The yellow pie slice for foreign official holdings is, of course, notably large for the United States.

Note: Such cross-country comparisons inevitably involve accounting choices. Note, for example, that the IMF includes amounts owed to the Social Security Trust Fund in the U.S. debt measure, but does not include state and local debts. The first choice arguably understates America’s reliance on foreign borrowing, while the second arguably overstates it. 

Groupon’s Revenue Measure Shrinks More Than 50%

About a month ago, I remarked on Groupon’s explosive revenue growth (and its equally impressive cost growth).

The company revised its financial results yesterday, and the revenue picture looks less explosive. In the latest update of its S-1 registration statement, Groupon reported $393 million in Q2 revenues. That’s a remarkable figure for such a young company but a far cry from the $878 million it previously reported.

And what happened to the almost $400 million in missing revenue? That money–payments to the merchants who provide goods and services for Groupons–is now subtracted before reporting revenue rather than deducted after as an expense. In short, Groupon went from a gross measure of revenue to a net one.

The bad news for Groupon is that the new presentation makes the company appear less than half as big as it did previously. The good news, I suppose, is that its expenses went down by the same amount.

Groupon’s effort to go public has been one of the bumpier ones in recent memory. Its first filing emphasized a profit measure, essentially profits before less marketing expenses, that was widely ridiculed. That got dropped in the second draft. And now a gigantic restatement of revenue in the third draft. Not to mention, the company’s recent difficulties with the SEC’s quiet period requirements.

Deadlines, Deadlines, Deadlines

My latest column for the Christian Science Monitor argues that a slew of budget deadlines will drive policy action this Fall. Case in point, the potential for a government shutdown when the government’s fiscal year ends next week. I don’t think that’s likely, at least not yet, but such deadlines will be the big thing this fall:

September brings the change of seasons. Football players return to the gridiron. New television programs replace summer reruns. In Washington, legislators gear up for another season of legislative brinkmanship.

What distinguishes such brinkmanship from ordinary legislating? Hard deadlines.

Such deadlines force Congress to address policy issues that might otherwise languish due to partisan differences or legislative inertia.

Last spring, for example, the repeated threat of a government shutdown forced Congress to decide how much to spend on government agencies in fiscal 2011. This summer, the debt limit forced Republicans and Democrats to reach a budget compromise before Aug. 3, the day we would have discovered what happens if America can’t pay all its bills.

Hard deadlines thus can force Congress to address major issues. But they also invite that brinkmanship.

Like students who put off writing term papers until the night before they’re due, legislators often drag out negotiations until the very end. As we saw with the debt-limit debate, the ensuing uncertainty – will the United States really default? – can damage consumer, business, and international confidence. Hard deadlines also give leverage to those legislators who are least concerned about going over the brink.

So get ready for the new season. The fall legislative season is full of deadlines that could invite such brinkmanship. Here are five.

[The first two were funding for the Federal Aviation Administration, whose short-term funding was scheduled to expire on September 16 and the highway bill, whose funding was scheduled to expire on September 30. Both won temporary extensions between the time I wrote my column and when it appeared online. FAA funding now runs to January, and highway funding through March.] …

Sept. 30 also marks the end of the fiscal year – an especially important deadline. Congress has made woefully little progress in deciding next year’s funding. So we again face the prospect of temporary funding bills being negotiated in the shadow of threatened government shutdowns.

The fourth deadline comes on Nov. 23, the day the new “super committee” has to deliver a plan to address government debt and cut the deficit by at least $1.2 trillion over the next decade. If any seven committee members agree by that date, their plan will get special, expedited consideration in the House and Senate.

If the committee fails to reach agreement or Congress fails to enact it by Dec. 23, however, then automatic budget cuts go into effect for a range of programs, including defense, domestic programs, and Medicare, starting in 2013.

A final deadline comes at the end of the year, when several economic initiatives are set to expire, including the 2 percent payroll tax holiday and extended unemployment insurance benefits.

Each of these deadlines will command congressional attention. The downside of inaction will be tangible and visible. With renewed concern about jobs, policymakers will feel extra pressure to continue any funding or tax cuts that can be directly linked to employment.

These deadline-driven policy issues will thus dominate the fall legislative season. That will leave little space for any new initiatives that don’t come with a deadline.

Helicopter Ben Needs to Pick Up His Game

Federal Reserve Chairman Ben Bernanke is often characterized as a inflation-monger. There’s just one problem with that criticism. As David Leonhardt demonstrates in the New York Times, when it comes to inflation, Bernanke is a piker compared to most of his predecessors:Inflation has averaged just 2.3% under his leadership (as officially measured), less than under Greenspan, Volcker, Burns, or Miller and only slightly more than under Martin.

It’s conceivable, of course, that inflation will take off in coming years, and the critics will be proven right. At this point, however, that’s nothing more than speculation. And before you make that bet, keep one thing in mind. Bernanke is the first chairman to have the ability to pay interest on excess bank reserves. That’s a powerful tool for keeping reserves out of the marketplace if the inflation genie threatens to come out of its bottle.

The Latest Sovereign Debt Meme? Going Big

The developed world is awash in sovereign debt. Greece stands on the precipice of painful (and inevitable) default. Italy and Spain struggle to convince markets that their debts are good. Portugal and Ireland hope to get in the lifeboat with Italy and Spain, rather than drown with Greece. And then there’s the United States. Much further from a sovereign crisis than many Euro nations, but still on a worrisome long-term path of spiraling debt.

So what should policymakers do? Well, the dominate meme this week was clear. If you are faced with sovereign debt worries, you should go big:

  • On Tuesday, the Committee for a Responsible Federal Budget released a letter signed by a group of former government officials, budget experts, and business leaders (including me) urging the Joint Select Committee, aka the super committee, “to ‘go big’ and develop a large-scale debt reduction package sufficient to stabilize the debt as a share of the economy.” A group of 38 senators followed with a similar letter, and a host of people made this argument at the super committee’s first hearing.
  • The same day, Mario Blejer–who led Argentina’s central bank after its default–urged Greece to go big: “Greece should default, and default big. A small default is worse than a big default and also worse than no default,” he said in an interview reported by Reuters Eliana Raszewski and Camila Russo.
  • And then there was Benjamin Reitzes of BMO Nesbitt who was quoted by The Globe and Mail’s Michael Babad offering similar advice to the BRICS. Not, of course, to deal with their own debt, but with Europe’s: “Considering Chinese purchases of European peripheral debt over the past year have provided only temporary relief, a small purchase won’t likely have much impact … go big or go home.”

So there you have it. If you find yourself at a loss for words in a weekend discussion about sovereign debt, you know what to say: Go big. Or, if you are contrary sort, go small. Either way, you can keep the conversation going.