How Real are the Defects in Toyota’s Cars? The Atlantic‘s Megan McArdle parses the data. It appears to me that this whole episode may have created a once in a lifetime “buying opportunity” for people who may currently be in the market for a new, high quality car; i.e., a Toyota or a Lexus!]]>
Category Archives: Risk and Uncertainty
How Real are the Defects in Toyota’s Cars?
How Real are the Defects in Toyota’s Cars? The Atlantic‘s Megan McArdle parses the data. It appears to me that this whole episode may have created a once in a lifetime “buying opportunity” for people who may currently be in the market for a new, high quality car; i.e., a Toyota or a Lexus!
Health Insurance Rate Hikes and Adverse Selection
I recommend reading the WSJ Health Blog entry entitled “WellPoint’s Argument for 39% Rate Hike: Adverse Selection”, by Jacob Goldstein. This article explains how adverse selection is causing health insurance claims costs to increase substantially in the individual health insurance market in California. The adverse selection has come primarily in the form of healthy policyholders dropping coverage in the face of job losses due to the recession as the sickest individuals do all that they can do to hold onto their policies. Thus premiums on such policies are increasing (in line with increases in the underlying claims costs) by as much as 39%. This makes total sense because after all, the net effect of this “downard spiral” is that the morbidity risk of the average remaining policyholder in Wellpoint’s California health insurance risk pool has substantially worsened. In other words, there are real economic factors behind these so-called “skyrocketing” premiums, and it is not due (as some in the Obama administration and news media suggest) to some newfound avarice on the part of various and sundry sleazebag insurance CEO’s who are “putting profits ahead of people”.
Keep in mind that since insurance is state regulated, HHS Secretary Kathleen Sebelius has no legal authority to undertake a regulatory enforcement action against private insurers. This is why the White House is urging repeal of the health insurance industry’s exemption from the McCarran Ferguson Act of 1945 as part of its latest health care proposal (specifically, see page 3 of the proposal under the section entitled “Strengthen Oversight of Insurance Premium Increases”). Thus the administration’s current political strategy is to create a regulatory “carve-out” of the health insurance industry so that the feds can regulate health insurance premiums. Presumably the rest of the insurance industry would, for the time being, continue to be regulated primarily at the state level, as has been the case for the past 65 years.
The Minds Behind the Meltdown?
Today’s Wall Street Journal cites a forthcoming (February 2, 2010) book entitled “The Quants”, written by Scott Patterson, who also writes for the Journal. An excerpt from this book appears on WSJ.com today under the title “The Minds Behind the Meltdown”, with the (provocative and candidly, rather hyperbolic) subtitle: “How a swashbuckling breed of mathematicians and computer scientists nearly destroyed Wall Street”. Also, here’s a video interview concerning the book excerpt which appeared in today’s Journal:
I would like to offer, as an antidote to Patterson’s article and video, Steven Shreve’s October 2008 Forbes article entitled “Don’t Blame the Quants”. Steven Shreve is the Orion Hoch Professor of Mathematical Sciences at Carnegie Mellon University, where he has built one of the world’s leading quantitative finance educational programs. Professor Shreve notes that:
“It is easy … to point an accusing finger at the “quants” on Wall Street, that cadre of mathematics and physics Ph.D.s who crunch numbers in esoteric models. Without the quants, the complicated mortgage-backed securities that fueled the housing bubble and led to the freezing of credit might not have been created…To prevent a recurrence of financial crises, some call for a return to a simpler time, before derivative securities and the quants who analyze them–a time when investors bought stocks and bonds and little else. Such complaints miss the point (italics added for emphasis). When a bridge collapses, no one demands the abolition of civil engineering. One first determines if faulty engineering or shoddy construction caused the collapse. If engineering is to blame, the solution is better–not less–engineering. Furthermore, it would be preposterous to replace the bridge with a slower, less efficient ferry rather than to rebuild the bridge and overcome the obstacle.”
I completely agree with Professor Shreve’s perspective on the role played by “quants” during the financial crisis. The problem was not with the technology per se. Rather, the problem involves a combination of poor managerial judgment coupled with perverse managerial incentives. It is difficult to exercise sound judgment about financial engineering and risk management when top management views risk models as black boxes which exist for the purpose of printing money.
The economics of the market for swine flu vaccine
I would like to call attention to a short article entitled “Swine flu vaccines and elasticity of supply”. The author of this article, Geoff Riley, claims that most of the swine flu market is being contested by only four companies: GlaxoSmithKline, Sanofi-Aventis, Novartis AG and AstraZeneca. He also notes that “For students of the price mechanism it is a fascinating example of many supply and demand concepts at work: the challenge of scaling up production to meet huge levels of demand – this has involved out-sourcing, the relative importance of fixed and variable costs in developing and manufacturing/distributing a new drug, the elasticity of supply of vaccines to meet short term health requirements, the oligopolistic race to win and protect market share, economies of scale in production, the balance of power between the major buyers and the multinational drug suppliers, price discrimination tactics.” I hope that Mr. Riley will expand further upon these topics in future blog postings. If he does, I will be sure to pass this information along.
It appears (to me, anyway) that the U.S. is not all that well prepared this time around for either the seasonal flu or the swine flu. Both types of flu appear to be in full swing, and yet there are pervasive shortages of both types of vaccines. I can only hope that the situation does not deteriorate as badly as it did in 2004, which was the last time that a major vaccine shortage occurred. Back then, the U.S. government had contracted with just two companies, Aventis (now Sanofi-Aventis) and Chiron (now a division of Novartis AG), for each firm to supply roughly 1/2 of the entire U.S. flu vaccine market that year. The problem then was that in early October 2004, the UK’s Medicines and Healthcare Products Regulatory Agency (MHRA) suspended Chiron’s license to manufacture influenza virus vaccine in its Liverpool facility, which in turn prevented the company from releasing any of its flu vaccine product during the entire 2004-2005 influenza season. In fact, the shortage became so severe in the U.S. that by late October 2004, numerous articles began to appear touting medical tourism to Canada for the purpose of getting vaccinated for the seasonal flu; e.g., see my 10/27/2004 blog entry entitled “Some Canadian Flu Shot Alternatives”. Considering that (according to the Centers for Disease Control (CDC)) seasonal influenza by itself typically accounts for 140,000 hospitalizations and 40,000 deaths per year in the United States, this demonstrates how hazardous it can be to rely upon such a small number of suppliers.
Baylor economists Grinols and Henderson on health insurance and health care reform
One month ago, I blogged about a new book entitled “ Health Care for Us All: Getting More for Our Investment” written by Baylor economists Earl Grinols and Jim Henderson (see “ Baylor University Economists Call for Different Tack on Health Care Insurance”). I would like to call attention to guest columns by both of my colleagues that appeared this Sunday in the Waco Tribune-Herald:
- Waco Tribune-Herald: Earl L. Grinols, guest column: A lesson on how health insurance really works
Waco Tribune-Herald, Sept. 20, 2009 (guest column about health care reform by applying basic economic principles by Dr. Earl L. Grinols, Distinguished Professor of Economics at Baylor, and co-author of the book, “Health Care for Us All,” with Baylor economics professor Jim Henderson)Americans have expressed displeasure with House Bill 3200, “America’s Affordable Health Choices Act of 2009,” as well as a proposed Senate version still in process, because both contain bad economics and bad ideas. Yet, one cannot beat something with nothing.
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- Waco Tribune-Herald: James W. Henderson, guest column: Busting apart the big myths about health care
Waco Tribune-Herald, Sept. 20, 2009 (guest column by Baylor economics professor James Henderson, who separates fact from fiction in the ongoing health care debate; Henderson is co-author of “Health Care for Us All” with Dr. Earl L. Grinols, Distinguished Professor of Economics at Baylor)The great enemy of the truth is very often not the lie — deliberate, contrived and dishonest — but the myth: persistent, persuasive, and unrealistic. — President John F. Kennedy, commencement address at Yale University, June 11, 1962. It’s often difficult to sort out fact from fiction in the ongoing health care debate. Both sides are exaggerating issues and torturing data to make their points. The result is often confusing and misleading.
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How to Fix America's Health Insurance Crisis: GET SOME
Although this video is somewhat dated (since it makes passing reference to the health care reform proposals of the 2008 presidential candidates), it provocatively illustrates why a nontrivial proportion of the nearly 47 million Americans who lack health insurance may be “voluntarily” uninsured. Indeed, a recently released study by the Employment Policies Institute puts the number of uninsured Americans ages 18-64 who could likely afford health coverage at roughly 18 million people. This video provides some anecdotes as to why this occurs.
]]>How to Fix America’s Health Insurance Crisis: GET SOME
Although this video is somewhat dated (since it makes passing reference to the health care reform proposals of the 2008 presidential candidates), it provocatively illustrates why a nontrivial proportion of the nearly 47 million Americans who lack health insurance may be “voluntarily” uninsured. Indeed, a recently released study by the Employment Policies Institute puts the number of uninsured Americans ages 18-64 who could likely afford health coverage at roughly 18 million people. This video provides some anecdotes as to why this occurs.
My preferred approach for reforming health insurance…
I don’t think that the question of whether the health care system should be reformed is particularly controversial; what is controversial is the manner in which health care reform ought to be structured and implemented. I have always thought that the system could be much better designed, and that if you were going to do design such a system from scratch, you definitely would not want to tie the provision of health insurance to employment. This is the problem with “path dependence”; the institutional arrangements depend critically upon the starting point. I think that it is fairly well known that in the case of the United States, the seminal event in tying the provision of health insurance to employment was the imposition of wage-price controls at the end of World War II. Also, as Whole Foods CEO John Mackey recently pointed out, health care reform is not just health insurance reform. We also need tort reform so that the corrosive influence of the trial bar on the practice of medicine can be mitigated, and liberalization of health insurance markets so that there is a national (rather than the current “balkanized” state-by-state) market for health insurance. While the latter reform would require some changes in insurance regulation, I think it would have the salutory effect of introducing much more competition into the health insurance market.
I personally favor a market-oriented reform along the lines described by Mr. Mackey. This would involve the expansion of Health Savings Accounts (HSA’s) coupled with high deductible insurance coverage. Since we are concerned about controlling costs, it seems obvious that there ought to be more of an emphasis placed upon first party as opposed to third party payment, particularly for low severity, high frequency claims. By exposing consumers more to the financial consequences of their health care consumption decisions, Health Savings Accounts have the potential to “bend the cost curve” by creating incentives for better decision-making by consumers and greater innovation and competition by health care providers. Efficiently priced excess of loss insurance coverage that is layered on top of the HSA’s protects consumers from catastrophic loss, and also further reinforces incentives for competition and innovation in the financing and provision of health care services. To Mr. Mackey’s plan, I would also add assigned risk/joint underwriting association (JUA) mechanisms in order to address the problems of the uninsured and pre-existing conditions. These types of mechanisms are widely and effectively used in property-casualty insurance markets (e.g., auto insurance, workers compensation, etc.) for the purpose of providing coverage to individuals and firms who are otherwise “uninsurable” in the voluntary markets.
As I have already noted, such reforms would also create even more opportunities for innovation in the financing of health care. For example, University of Chicago Professor John Cochrane has proposed a particularly compelling idea about insurers offering long-term health insurance contracts in which future insurability is guaranteed, regardless of the manner in which one’s morbidity risk changes throughout the term of the insurance contract. This is conceptually similar to so-called level term contracts offered in the term life insurance market already, and it seems like an obvious innovation in a free market. However, this kind of innovation is not possible as long as we continue to tie the provision of health insurance to employer groups. Group policies are typically contracted for on a 12 month basis, and level term health insurance contracts are inherently less feasible with groups than for individuals.
Baylor University Economists Call for Different Tack on Health Care Insurance
See “Baylor University Economists Call for Different Tack on Health Care Insurance” for a description of the new book entitled “Health Care for Us All: Getting More for Our Investment”. The following quote by one of the book’s authors speaks for itself: “Rather than redesigning the nation’s entire health care industry,” said co-author Dr. James Henderson, The Ben Williams Professor of Economics at Baylor, “we should do more for the smaller group of people who genuinely need help. A targeted intervention plan allows us to be more effective without collateral damage to the health care arrangements of the rest of us. Insurance reform and pro-competitive reforms that we identify will reduce costs for all of us while expanding coverage to the 47 million Americans who are uninsured.”