Posts tagged ‘insurance’

My Wish for the Republican Debates: Less Talk on Taxes, More Talk on Regulation

I would be all for reductions in tax levels, but I don't think that current Federal tax rates are particularly a barrier to growth and prosperity.  A much bigger, and ever-growing barrier to growth is regulation.

5-10 years ago, in my small business, I spent my free time, and most of our organization's training time, on new business initiatives (e.g. growth into new businesses, new out-warding-facing technologies for customers, etc).  Over the last five years, all of my time and the organization's free bandwidth has been spent on regulatory compliance.  Obamacare alone has sucked up endless hours and hassles -- and continues to do so as we work through arcane reporting requirements.  But changing Federal and state OSHA requirements, changing minimum wage and other labor regulations, and numerous changes to state and local legislation have also consumed an inordinate amount of our time.  We spent over a year in trial and error just trying to work out how to comply with California meal break law, with each successive approach we took challenged in some court case, forcing us to start over.  For next year, we are working to figure out how to comply with the 2015 Obama mandate that all of our salaried managers now have to punch a time clock and get paid hourly.

Greg Mankiw points to a nice talk on this topic by Steven Davis.  For years I have been saying that one effect of all this regulation is to essentially increase the minimum viable size of any business, because of the fixed compliance costs.   A corollary to this rising minimum size hypothesis is that the rate of new business formation is likely dropping, since more and more capital is needed just to overcome the compliance costs before one reaches this rising minimum viable size.  The author has a nice chart on this point, which is actually pretty scary.  This is probably the best single chart I have seen to illustrate the rise of the corporate state:

decline of new business employment


Postscript:  I had thought that all the difficult years converting all of our employees from full to part time to avoid Obamacare sanctions would be the end of our compliance hassles (no company will write health insurance for us, so our only defense against the mandates and penalties is to make everyone part-time).  But the hassles have not ended.  For every employee, next year we must provide a statement that has a series of codes, by month, for that employee's health care status.  It is so complicated that knowledgeable people are still arguing about what codes we should be using.  Here is a mere taste of the rules:

  A code must be entered for each calendar month January through December, even if the employee was not a full-time employee for one or more of the calendar months. Enter the code identifying the type of health coverage actually offered by the employer (or on behalf of the employer) to the employee, if any. Do not enter a code for any other type of health coverage the employer is treated as having offered (but the employee was not actually offered coverage). For example, do not enter a code for health coverage the employer is treated as having offered (but did not actually offer) under the dependent coverage transition relief, or non-calendar year transition relief, even if the employee is included in the count of full-time employees offered minimum essential coverage for purposes of Form 1094-C, Part III, column (a). If the employee was not actually offered coverage, enter Code 1H (no offer of coverage) on line 14.  For reporting offers of coverage for 2015, an employer relying on the multiemployer arrangement interim guidance should enter code 1H on line 14 for any month for which the employer enters code 2E on line 16 (indicating that the employer was required to contribute to a multiemployer plan on behalf of the employee for that month and therefore is eligible for multiemployer interim rule relief). For a description of the multiemployer arrangement interim guidance, see Offer of health coverage in the Definitions section. For reporting for 2015, Code 1H may be entered without regard to whether the employee was eligible to enroll or enrolled in coverage under the multiemployer plan. For reporting for 2016 and future years, ALE Members relying on the multiemployer arrangement interim guidance may be required to report offers of coverage made through a multiemployer plan in a different manner.

Here are some of the codes:

  • 1A. Qualifying Offer: Minimum essential coverage providing minimum value offered to full-time employee with employee contribution for self-only coverage equal to or less than 9.5% mainland single federal poverty line and at least minimum essential coverage offered to spouse and dependent(s).

    This code may be used to report for specific months for which a Qualifying Offer was made, even if the employee did not receive a Qualifying Offer for all 12 months of the calendar year. However, an employer may not use the Alternative Furnishing Method for an employee who did not receive a Qualifying Offer for all 12 calendar months (except in cases in which the employer is eligible for and reports using the Alternative Furnishing Method for 2015 Qualifying Offer Method Transition Relief as described in these instructions).

  • 1B. Minimum essential coverage providing minimum value offered to employee only.
  • 1C. Minimum essential coverage providing minimum value offered to employee and at least minimum essential coverage offered to dependent(s) (not spouse).
  • 1D. Minimum essential coverage providing minimum value offered to employee and at least minimum essential coverage offered to spouse (not dependent(s)).
  • 1E. Minimum essential coverage providing minimum value offered to employee and at least minimum essential coverage offered to dependent(s) and spouse.
  • 1F. Minimum essential coverage NOT providing minimum value offered to employee; employee and spouse or dependent(s); or employee, spouse and dependents.
  • 1G. Offer of coverage to employee who was not a full-time employee for any month of the calendar year (which may include one or more months in which the individual was not an employee) and who enrolled in self-insured coverage for one or more months of the calendar year.
  • 1H. No offer of coverage (employee not offered any health coverage or employee offered coverage that is not minimum essential coverage, which may include one or more months in which the individual was not an employee).
  • 1I. Qualifying Offer Transition Relief 2015: Employee (and spouse or dependents) received no offer of coverage; received an offer that is not a qualifying offer; or received a qualifying offer for less than 12 months.

An Obamacare Alternative

After criticizing Obamacare at a party, another person said something like "well you can't criticize it without suggesting an alternative."  This of course is total bullsh*t.  The passage of a bad law to imperfectly achieve objectives with which I disagree does not obligate me to craft alternative legislation to achieve those objectives.

But I decided to take a swing at it anyway.  Taking a step back, I said that I thought there were two overriding problems in health care that the government might address.

The first is a problem largely of the government's own creation, that incentives (non-tax-ability of health care benefits) and programs (e.g. Medicare) have been created for first dollar third-party payment of medical expenses.  This growth of third-party payment has eliminated the incentives for consumers to shop and make tradeoffs for health care purchases, the very activities that impose price and quality discipline on most other markets.

The second problem that likely dominates everyone's fears is getting a bankrupting medical expense whose costs are multiples of one's income, and having that care be either uninsured or leading to cancellation of one's insurance or future years.

So my suggestion I made up on the spot (and I am a little fuzzy on the details as my friend had actually cracked open a bottle of Van Winkle bourbon for a few of us, my first taste of that magic elixir) was to scrap whatever we are doing now and have the government pay all medical expenses over 10% of one's income.  Anything under that was the individual's responsibility, though some sort of tax-advantaged health savings account would be a logical adjunct program.

I obviously make policy better when I am drinking absurdly rare and expensive bourbons, because Megan McArdle (who knows a hell of a lot more than I about health care economics) has apparently been advocating something similar for quite a while

How would a similar program work for health care? The government would pick up 100 percent of the tab for health care over a certain percentage of adjusted gross income—the number would have to be negotiated through the political process, but I have suggested between 15 and 20 percent. There could be special treatment for people living at or near the poverty line, and for people who have medical bills that exceed the set percentage of their income for five years in a row, so that the poor and people with chronic illness are not disadvantaged by the system.

In exchange, we would get rid of the tax deduction for employer-sponsored health insurance, and all the other government health insurance programs, with the exception of the military’s system, which for obvious reasons does need to be run by the government. People would be free to insure the gap if they wanted, and such insurance would be relatively cheap, because the insurers would see their losses strictly limited. Or people could choose to save money in a tax-deductible health savings account to cover the eventual likelihood of a serious medical problem.

The missing piece here, as was in my plan, is I have no idea how much this would cost.

Thanks Obamacare!

I just got the first year bill from my payroll company for the extra reporting we have to do each year vis a vis Obamacare:  $7195.50 for 2015.  Note that this adds absolutely no value -- this is not the cost of insurance or cost of any extra taxes sent to Uncle Sam.  This is merely the cost to handle all the new paperwork required in the law.

I will repeat what I have said before -- the Republicans tend to focus narrowly on taxes and often tend to miss or downplay the regulatory issues, which I think actually loom larger in destroying economic growth.

So How Can Anyone Be Opposed to Non-Discrimination Laws

First, let me establish a few background facts.  Several years ago I headed an attempt to put a Constitutional amendment legalizing gay marriage on the ballot here in Arizona.  As far back as 2004 I had a gay couple running a campground, and faced a customer petition demanding we remove them because they promoted moral degeneracy by being gay (it's for the children!).  I told those customers to camp somewhere else, as we were not changing our staffing.  Since then I have probably hired more gay couples to run campgrounds than anyone else in the business.

So how could I possibly be opposed to this:

After a period of foreshadowing and rumor, the Equal Employment Opportunity Commission has now gone ahead and ruled that employment discrimination on the basis of sexual orientation is forbidden under existing federal civil rights law, specifically the current ban on sex discrimination. Congress may have declined to pass the long-pending Employment Non-Discrimination Act (ENDA), but no matter; the commission can reach the same result on its own just by reinterpreting current law.

There are multiple problems with non-discrimination law as currently implemented and enforced in the US.  Larger companies, for example, struggle with disparate impact lawsuits from the EEOC, where statistical metrics that may have nothing to do with past discrimination are never-the-less used to justify discrimination penalties.

Smaller companies like mine tend to have a different problem.  It is an unfortunate fact of life that the employees who do the worst job and/or break the rules the most frequently tend to be the same ones with the least self-awareness.  As a result, no one wants to believe their termination is "fair", no matter how well documented or justified (I wrote yesterday that I have personally struggled with the same thing in my past employment).

Most folks grumble and walk away.  But what if one is in a "protected group" under discrimination law?  Now, not only is this person personally convinced that their firing was unfair, but there is a whole body of law geared to the assumption that their group may be treated unfairly.  There are also many lawyers and activists who will tell them that they were almost certainly treated unfairly.

So a fair percentage of people in protected groups whom we fire for cause will file complaints with the government or outright sue us for discrimination.  I will begin by saying that we have never lost a single one of these cases.   In one or two we paid someone a nominal amount just to save legal costs of pursuing the case to the bitter end, but none of these cases were even close.

This easy ability to sue, enabled by our current implementation of discrimination law, imposes a couple of costs on us.  First, each of these suits cost us about $20,000 to win (insurance companies are smart, they know exactly how this game works, and will not sell one an employment practices defense policy without at least a $25,000 deductible, particularly in California).  It takes a lot of effort for the government, even if neutral and not biased against employers as they are in California, to determine if the employee who was fired happened to be Eskimo or if the employee was fired because he was an Eskimo.  Unfortunately, the costs of this discovery are not symmetric.  It costs employees and their attorneys virtually nothing to take a shot at us with such discrimination cases, but costs us$20,000 each to defend and win (talk about Pyrrhic victories).  Which is why we sometimes will hand someone a few bucks even if their claim is absurd, just to avoid what turns out to be essentially legal blackmail.

Second, the threat of such suits and legal costs sometimes changes our behavior in ways that might be detrimental to our customers.  A natural response to this kind of threat is to be double careful in documenting issues with employees in protected groups, meaning their termination for cause is often delayed.  In a service business, almost anyone fired for cause has demonstrated characteristics that seriously hinder customer service, so drawing out the termination process also extends the negative impact on customers.

To make all this worse, many employees have discovered a legal dodge to enhance their post-employment lawsuits (I know that several advocacy groups in California recommend this tactic).  If the employee suspects he or she is about to be fired, they will, before getting fired, claim all sorts of past discrimination.  Now, when terminated, they can claim they where a whistle blower that that their termination was not for cause but really was retaliation against them for being a whistle-blower.

I remember one employee in California taking just this tactic, claiming discrimination just ahead of his termination, though he never presented any evidence beyond the vague claim.  We wasted weeks with an outside investigator checking into his claims, all while customer complaints about the employee continued to come in.  Eventually, we found nothing and fired him.  And got sued.  The case was so weak it was eventually dropped but it cost us -- you guessed it -- about $20,000 to defend.  Given that this was more than the entire amount this operation had made over five years, it was the straw that broke the camel's back and led to us walking about from that particular operation and over half of our other California business.

Obama Thinks The Free Market Killed Neighborhood Diversity. In Fact, It Was the New Deal

Here is a very telling paragraph from the HUD's new proposed fair housing rule

Despite the existing obligation to AFFH, in too many communities, the Fair Housing Act has not had the impact it intended — housing choices continue to be constrained through housing discrimination, the operation of housing markets, investment choices by holders of capital, the history and geography of regions, and patterns of development and the built environment.

So, they list "discrimination" as a problem, but then look at the other four items they list as problems.  These can all be summarized as "the normal operation of free markets, property rights, and individual choice."

Oddly missing from this list of causes is what many historians consider to be the #1 cause of lack of neighborhood diversity and ghetto-ization:  The Federal Government and the New Deal.  New Deal rules essentially forced the concentration of blacks into just a few neighborhoods.   The biggest unmixing of races in New York can be seen between 1930 and 1950.   Blacks in Brooklyn went from fairly evenly mixed to concentrated in Bed-Stuy, all directly attributable to New Deal rules.   Basically, ever since then, we have just been living with the consequences.  Via NPR in an interview with Richard Rothstein

On how the New Deal's Public Works Administration led to the creation of segregated ghettos

Its policy was that public housing could be used only to house people of the same race as the neighborhood in which it was located, but, in fact, most of the public housing that was built in the early years was built in integrated neighborhoods, which they razed and then built segregated public housing in those neighborhoods. So public housing created racial segregation where none existed before. That was one of the chief policies.

On the Federal Housing Administration's overtly racist policies in the 1930s, '40s and '50s

The second policy, which was probably even more effective in segregating metropolitan areas, was the Federal Housing Administration, which financed mass production builders of subdivisions starting in the '30s and then going on to the '40s and '50s in which those mass production builders, places like Levittown [New York] for example, and Nassau County in New York and in every metropolitan area in the country, the Federal Housing Administration gave builders like Levitt concessionary loans through banks because they guaranteed loans at lower interest rates for banks that the developers could use to build these subdivisions on the condition that no homes in those subdivisions be sold to African-Americans.

Postscript:  Here is how the Ken Burns New York documentary series explained it, though the source page is no longer available:

Government policies began in the 1930s with the New Deal's Federal Mortgage and Loans Program. The government, along with banks and insurance programs, undertook a policy to lower the value of urban housing in order to create a market for the single-family residences they built outside the city.

The Home Owners' Loan Corporation, a federal government initiative established during the early years of the New Deal went into Brooklyn and mapped the population of all 66 neighborhoods in the Borough, block by block, noting on their maps the location of the residence of every black, Latino, Jewish, Italian, Irish, and Polish family they could find. Then they assigned ratings to each neighborhood based on its ethnic makeup. They distributed the demographic maps to banks and held the banks to a certain standard when loaning money for homes and rental. If the ratings went down, the value of housing property went down.

From the perspective of a white city dweller, nothing that you had done personally had altered the value of your home, and your neighborhood had not changed either. The decline in your property's value came simply because, unless the people who wanted to move to your neighborhood were black, the banks would no longer lend people the money needed to move there. And, because of this government initiative, the more black people moved into your neighborhood, the more the value of your property fell.

The Home Owners' Loan Corporation finished their work in the 1940s. In the 1930s when it started, black Brooklynites were the least physically segregated group in the borough. By 1950 they were the most segregated group; all were concentrated in the Bedford-Stuyvesant neighborhood, which became the largest black ghetto in the United States. After the Home Owners Loan Corp began working with local banks in Brooklyn, it worked with them in Manhattan, the Bronx, and Queens.

The state also got involved in redlining. (Initially, redlining literally meant the physical process of drawing on maps red lines through neighborhoods that were to be refused loans and insurance policies based on income or race. Redlining has come to mean, more generally, refusing to serve a particular neighborhood because of income or race.) State officials created their own map of Brooklyn. They too mapped out the city block by block. But this time they looked for only black and Latino individuals.

This site has some redlining maps, including one of Brooklyn, prepared by the Feds.  Remember, this is not some evil Conservative business CABAL, these are Roosevelt Democrats making these maps.  This site adds:

While the HOLC was a fairly short-lived New Deal agency, the influence of its security maps lived on in the Federal Housing Authority (FHA) and the GI Bill dispensing Veteran’s Administration (VA). Both of these government organizations, which set the standard that private lenders followed, refused to back bank mortgages that did not adhere to HOLC’s security maps. On the one hand FHA and VA backed loans were an enormous boon to those who qualified for them. Millions of Americans received mortgages that they otherwise would not have qualified for. But FHA-backed mortgages were not available to all. Racial minorities could not get loans for property improvements in their own neighborhoods—seen as credit risks—and were denied mortgages to purchase property in other areas for fear that their presence would extend the red line into a new community. Levittown, the poster-child of the new suburban America, only allowed whites to purchase homes. Thus HOLC policies and private developers increased home ownership and stability for white Americans while simultaneously creating and enforcing racial segregation.

The exclusionary structures of the postwar economy pushed African Americans and other minorities to protest. Over time the federal government attempted to rectify the racial segregation created, or at least facilitated, in part by its own policies. In 1948, the U.S. Supreme Court case Shelley v. Kraemer struck down explicitly racial neighborhood housing covenants, making it illegal to explicitly consider race when selling a house. It would be years, however, until housing acts passed in the 1960s could provide some federal muscle to complement grassroots attempts to ensure equal access.


Update on Applied Underwriter Issues

After my article last week identifying costly aspects of Applied Underwriters' workers compensation insurance policies that are unusual, hard to predict, and totally undisclosed in the market/sales process, I have gotten a lot of feedback.

The first, of course, was from the lawyers at Applied Underwriters who have threatened me with a libel suit unless I take down my comments.  While my blog article wills stay up, Applied Underwriters have apparently managed to get Yelp to hide my reviews in the secret purgatory they maintain for reviews that displease corporate lawyers.

More recently, I have had calls from not one but two different attorneys who are representing Applied Underwriter customers.  The one this morning was especially evocative -- he had years of experience as an attorney and litigating over contracts like this but thought he was crazy because he could not figure out the math on the Applied Underwriters statements until he read my post.  I had had the exact same issue, almost in tears because I could not figure it out, until an industry insider explained to me that the numbers don't add up.  After pages of step by step calculations, there is one step where they simply pull a number out of the air, essentially rendering irrelevant all the calculations that went before.  I will respect their client confidentiality but say that the issues involved were very parallel to those I discussed in my article.

Feel free to contact me if you need help or are considering a policy with Applied Underwriters and I will lend you what knowledge I have.

Applied Underwriters Is Threatening Me With Lawsuits If I Don't Remove Negative Reviews About Them

About a week or so ago I wrote a long and detailed post (with frequent updates as I discovered new information) about my extreme dissatisfaction with my workers compensation insurance from Applied Underwriters, a Warren Buffet-owned insurance company.  I also wrote a shorter, parallel review on Yelp** (where Applied Underwriters already has an abysmal rating).  For reasons I will guess at in the next post, Yelp keeps marking my post as "not recommended" despite the fact that it is one of the few that is not just a rant of the sort "this company sux" but actually has real details.  There is a tiny almost invisible link at the bottom to see other reviews not recommended.

Yesterday, I received a letter from Applied Underwriters (Letter here (pdf)) demanding that I take down the Yelp review and my blog post or else they will sue me for libel.  Based on my understanding of libel law, the content of my posts (which are all legally protected opinion), and recent court cases, Applied Underwriters has essentially no chance of ever winning such a suit.  But my guess is that this is not their intention.  I presume they are hoping that the fear of legal action, and the expense of legal defense, will cause me to stop my perfectly valid public criticism of their product.

I am seeking legal advice from a well-known First Amendment attorney, so Applied Underwriters will get my final response after I have had advice of counsel.  But here are a few thoughts:

You can read the attorney's letter in full if you are a fan of such things, but if you read sites like Popehat much, you can pretty much predict what you will see.

The gist of their complaint, from the only paragraph of mine quoted in the letter, seems to be the word "scam".  By the text of their letter, they seem to believe that "scam" is libelous because their company is well-rated financially and that they provide reasonable claims service.  I concede both these facts.  However, I called it a "scam" because there is a big undisclosed cost to their product that was never mentioned in the sales process, and that could only be recognized by its omission in the contract I signed -- that there is nothing in the contract committing them to any time-frame under which to return deposits and excess premiums I have paid, which may well amount to hundreds of thousands of dollars.  This fact about the contract is confirmed by their customer service staff, who have said further that the typical time-frame to return such over-collections and deposits is 3-7 years after the contract ends, or at least 6-10 years after the first of the deposits was made.

If I had gotten any descriptions of their service terms wrong, I would have been happy to correct them.  Hell, given that apparently Applied Underwriters will hold over $200,000 of my money for as many as ten years before they maybe return it to me, I am hoping I somehow have misunderstood.  Unfortunately, their staff is pretty adamant that I understand these terms perfectly, and you will see that the letter sent by the attorneys does not attempt to refute any of the specific issues that drive my negative review.  And of course none of this was ever disclosed in the sales process.  The company attorneys point to the fact that I read the agreement and signed that I understood, but in fact this issue is only in the agreement by its omission.  In its 10 pages of arcane boilerplate, the agreement never includes any clause giving them any legal obligation to return your deposits and excess premiums in an defined timeframe.  It is that omission that I missed.   Would you have caught it?  Is this a substantial enough issue that you would expect disclosure in the sales process?

So is this a "scam"?  I believe that this issue is costly enough, and hard enough to detect, and far enough outside of expected business practices to be called such.  You may have your own opinion, but ask yourself -- When you enter into, say, a lease and have to put down a security deposit, is it your reasonable expectation that the landlord has the right in your lease to keep your deposit for 3-7 years (or more) after you move out?  Oh, and by the way, how might your evaluation of something as a "scam" be affected by the knowledge that the company is threatening to sue anyone who writes a negative review?

Anyway, I take responsibility for my own failure as a consumer here.  But in a free society it is perfectly reasonable to communicate issues one has with a product or service to help others avoid similar mistakes.  Which is what I have done.


**  I have problems with Yelp as well.  What is linked is not my original review.  My original review linked to my blog post.  Yelp took it down.  I will tell that saga in a future post.

Beware Applied Underwriters Workers Compensation Insurance

After you read this, there are more updates on 4/18

Well, I have managed to get myself into a scam.  It is not your normal scam, like the ones that are run by some mafia boiler room with guys working under aliases.  This scam comes via a major insurance company called Applied Underwriters (working under the names California Insurance Company and Continental Indemnity Company) which is owned by Berkshire Hathaway and none other than Warren Buffett.  If you feel sorry for Warren Buffett and want to give him a large interest-free loan for an indeterminate number of years, this is your program.

Update 4/16:  Let me insert here that Applied Underwriters has sent me a letter threatening a libel suit if I do not take down this post and a parallel review at Yelp.  AU Takedown demand here (pdf).   The gist of the matter seems to be the word "scam".  By the text of their letter, they seem to believe that "scam" is libelous because their company is well-rated financially and that they provide reasonable claims service.  I concede both these facts.  However, I called it a "scam" because there is a big undisclosed cost to their product that was never mentioned in the sales process, and that could only be recognized by its omission in the contract I signed -- that there is nothing in the contract committing them to any time-frame under which to return deposits and excess premiums I have paid, which may well amount to hundreds of thousands of dollars.  This fact about the contract is confirmed by their customer service staff, who have said further that the typical time-frame to return such over-collections and deposits is 3-7 years after the contract ends, or at least 6-10 years after the first of the deposits was made.

So is this a "scam"?  I believe that this issue is costly enough, and hard enough to detect, and far enough outside of expected business practices to be called such.  You may have your own opinion, but ask yourself -- When you enter into, say, a lease and have to put down a security deposit, is it your reasonable expectation that the landlord has the right in your lease to keep your deposit for 3-7 years (or more) after you move out?  /Update

Anyway, let's take a step back and look at this in detail.

First, I need to give a bit of background on how workers comp works.  When you are a new company, they assign you an experience rating -- that is a multiplier of your premium based on past loss experience.  There is some default starting number that if I remember right, in most states, is a bit over 1.0x.  Each year, the workers comp world looks back at your past history and computes a new loss rating -- higher if you have had more payouts, lower if not.  Generally it is based on three years experience not counting the last year (so 2-4 years in the past).  Your future premiums get multiplied by this loss rating.

Several years ago we had a couple bad injuries that drove our loss number into the 1.7-1.9x area.   Neither were really due to a bad safety issue, but both involved workers in their seventies where a minor initial injury led to all sorts of complications.  Anyway, my agent at the time calls me one day a couple of weeks before renewal and says that none of the major companies will renew me.  This seemed odd to me -- I understood that my recent claims history was not good, but isn't that what the premium multiplier was for?  In fact, if my loss history returned to normal, they would make a fortune as I paid high rates based on old losses but had fewer new ones.

Apparently, though, insurance companies have fixed rules that keep them from underwriting higher loss ratings.  Probably for the same reason Vegas won't take action on Ivy League football games any more -- just too much variability.  I found out later with my new broker we could probably have overcome this, but I learned that too late.

My broker at the time put me into a 3-year program from Applied Underwriters, in part because they were taking everybody.  This program was set up differently from most workers comp programs.  You had a basic policy, but there was a second (almost indecipherable to laymen) reinsurance agreement that adjusted the rates of the basic policy based on you actual claims.   Here is the agreement (pdf)  In other words, based on your claims, they would figure up at the end how much you owed and what your premium multiplier would be.

I saw two red flags that I ignored in signing up.  1)  The reinsurance agreement was impossible to understand, violating one of my foundational rules that I shouldn't sign things I don't understand.  And 2) The rate structure was very suspicious.  They touted a rate structure that could go as low as, say, $100,000 a year and was capped around $400,000 a year.  But when you pulled out a calculator, the $100,000 was virtually unobtainable.  It would require about zero claims.  If there were any claims at all, even for a few bandaids, the price would march up to $400,000 really fast.  It was the equivalent of a credit card teaser rate, and it should have made me suspicious.

Anyway, I was desperate.  For a business like mine, being told I had no workers comp insurance just a few weeks before the old policy ran out was a death sentence.  No one would write me or even quote me a policy that fast.  So I took the Applied Underwriters offer.  Shame on me, I should have worked on this much harder.

I won't bore you further with my voyage of discovery in trying to figure out how this thing works.  I will just tell you the results that I have found.  There are apparently other companies with similar issues, one of which is documented here: Applied Underwriter Suit (pdf)Newsletter publisher objected to scan of article, so I have taken it down at their request.  Here is a link to roughly the same article.

I spent hours and hours trying to figure out AU's statements.  There is a whole set of terminology to learn that is actually not used in most of the rest of the workers comp world.  The key page of the statement is page 7, which I will show below because it highlights several of the issues with Applied.  Page 7 is the page where the monthly premium is "calculated".  I have added the red numbers and arrows for the discussion below.


Here are some of the Applied Underwriter problems:

  1. Large deposits that must be made each year and may never be returned.    You can see that I am making deposits over $40,000 a year.  And that is each year.  The first year deposit is not returned.  The second year and third year are just added to it.  And I have found out since I joined this program that they are not contractually obligated to return them in any time frame.  Maybe some guy who was hurt in his thirties has a relapse and claims more money when he is 75.  Gotta keep your deposit just in case, don't we?  The timing of the return of your deposits (and overpaid premiums below) is entirely at their discretion, and that has been confirmed by their customer service staff.  In fact, their standard answer is that on average, such monies are not returned to customers for 3-7 years after the contract ends, or at least 6-10 years after the first deposits were made.
  2. Premiums based on the worst of your experience and their estimate of your losses, and they keep the difference for years and years.   For those in the same trap as me, I will try to explain the numbers above.  The estimated loss pick containment at the top is basically their estimate of your losses.  Note that it drives every number on the page and is basically their arbitrary number -- they could have set it anywhere.  The loss pick containment to date is just pro rated for the amount of the year that has gone by.  The 65% is an arbitrary number.    The $25,278 is my actual losses to date.  You can see where I point with #2 above, though, that my losses are irrelevant to my premiums.  They take the higher of my losses and what is essentially their estimate of my losses and I pay based on that.   Note that their higher number is not based on the reserved amounts on actual claims -- the $25,278 includes their reserves.  It is just the number they established at the beginning of my policy they think my claims are going to be and gosh darnit they are going to stick to that (and my claims even in my worst year in history were never even half of their estimate).  Yes, at the end of the policy if my losses stay low, they owe me money back for all the premium they overcharged me based on their arbitrarily high estimates.  But see #1 above -- there is no time horizon under which they have to return the money.  They can keep it for years and years.
  3. The final premium is, after all these calculations, entirely arbitrary.  So after this loss calculation (which essentially just defaults to their arbitrarily high estimate and not my actual loss history) they do some premium calculations.  These actually sort of make sense if you stare at the agreements for a really long time.  But then we get to the line I point to in red labelled 3.  It is the actual amount I owe.  But it does not foot to any other number on the page.  How do they come up with this?  They won't say.  To anyone.  It might as well be arbitrary.  I actually had some dead time and took all my reports and tried to regress to a formula they use for this, but I couldn't figure it out.   So all the calculation on this page is just a sham, it's the mechanical wizard in the Wizard of Oz.  It looks good, but does not actually directly lead to what you are billed.

So I thought I understood my problems.  I put in large deposits and overpaid premiums based on arbitrarily high loss estimates they make -- all of which will take me years and years of effort to maybe get back.  It turns out that I likely will have a third problem.  In the lawsuit linked above, the plaintiff complains that when they left the program after three years, Applied arbitrarily wrote up all their estimated losses on open claims to stratospheric levels and then demanded a large final premium payment at the end.  Folks on Yelp complain of the same thing.  You should know how this works by now -- the plaintiff will theoretically get all this back someday, maybe, when the claims prove to be less costly, but in the mean time Warren Buffet gets to invest the money for years and years (cost of capital = 0) until it is returned.

This is why I think Applied Underwriters actually likes companies with high lost histories.  Rather than costs, losses for them are excuses to over-collect on deposits and premiums -- money that can then be invested and held for years free of charge.

As an aside, I want to thank my new agents at Interwest Insurance for helping decipher all of this.  They actually flew a guy in to help me understand this policy.  They didn't get me into it, but they are helping me pick up the pieces as best we can.

I Hate to Say I Told You So, But Retail Sector Full-Time Work At An End

I have to say I told you so, but, from a reader, Staples threatens to fire anyone who works over 25 hours:

Part-time Staples workers are furious that they could be fired for working more than 25 hours a week.

The company implemented the policy to avoid paying benefits under the Affordable Care Act, reports Sapna Maheshwari at Buzzfeed. The healthcare law mandates that workers with more than 30 hours a week receive healthcare.

If Staples doesn't offer benefits, it could be fined $3,000 in penalties per person.

I can tell you from personal experience that $3000 is a staggering penalty.  For a full time worker at $8 an hour, this is over 2 months pay -- 2 months pay extra the company has to pay but the worker never sees.

As I have written before, we have moved heaven and Earth to get every employee we can in our company converted to part-time.  We had absolutely no alternative -- after seeking quotes from about 20 places, no one would offer our company any sort of health insurance plan at any price**.  So no matter what we did, we were facing the $3000 penalty for each full-time workers, so all we could do to manage the situation was convert full-time workers to part-time.


** We have seasonal workers, which makes insuring us awkward and expensive because there are high administrative costs with people constantly going on and off the plan.  We also have a very old work force.  Obamacare prevents insurers from charging the much higher premiums to older people that our costs might justify -- it milks younger people with prices well above their cost to serve to pay for subsidizing older people.  Insurers would be crazy to voluntarily add groups that are purely old people, they would lose their shirt.  So they refuse to quote us.

Republican Hypocrisy: On-Again, Off-Again Federalism

Both political parties have issues on which they are systematically rank hypocrites.  Republicans are particularly so on Federalism, or on the power of states vs. the Federal government.

In the last week, an AZ Republican has proposed to defend Federal law against state pre-emption:

A Flagstaff lawmaker is hoping to throw a new roadblock in the path of those who want to legalize marijuana in Arizona.

Only thing is, his plan may be too little – and too late.

The measure by Republican Rep. Bob Thorpe would spell out that any voter-sponsored initiative that proposed anything that conflicts with federal law could take effect only if approved by 75 percent of those who cast ballots. Right now, a simple majority is all that is needed.

Thorpe told Capitol Media Services he has one particular measure in mind: a proposal by the Marijuana Policy Project to get voters here to adopt a Colorado-style law legalizing the recreational use of marijuana.

He pointed out that marijuana use remains illegal under federal law. Yet Arizona voters decided in 2010, by a margin of just 4,340 votes, to allow the use of the drug for medical purposes.

Wow, principled stand for the rule of law, right?  Well, just year or so ago the same AZ state Republicans put on the ballot, and got passed, a Constitutional amendment essentially pre-empting large parts of the PPACA, a different Federal law:

Section 2.

A. To preserve the freedom of Arizonans to provide for their health care:

1. A law or rule shall not compel, directly or indirectly, any person, employer or health care provider to participate in any health care system.
2. A person or employer may pay directly for lawful health care services and shall not be required to pay penalties or fines for paying directly for lawful health care services. A health care provider may accept direct payment for lawful health care services and shall not be required to pay penalties or fines for accepting direct payment from a person or employer for lawful health care services.

B. Subject to reasonable and necessary rules that do not substantially limit a person's options, the purchase or sale of health insurance in private health care systems shall not be prohibited by law or rule.

And just so it is understood that this is not some populist end-around Republican legislators, these same Republicans passed a bill last year, vetoed by the Governor, to essentially ban enforcement of Federal health care law

Arizona - S 1088, passed House and Senate; vetoed by governor, May 28, 2011. Would oppose any state role in compulsory participation in a health care system or purchase of health insurance; would prohibit any government official from enforcing prohibitions on purchase or sale of health insurance in private health care systems otherwise authorized by the laws of the state; would affirm a right to direct payment or purchase of lawful health care services; would prohibit threats of penalties, fines, taxes, salaries, wage withholding, surcharges or fees to punish or discourage the exercise of such right. Also would establish an Interstate Health Freedom Compact, to unify states opposing the ACA.

In the last several years, I can count at least four "principled" positions taken by AZ Republicans on Federalism:

  1. State law should not pre-empt Federal law (marijuana criminalization)
  2. State law should pre-empt Federal law (Obamacare)
  3. States should enforce Federal laws that we think the Feds refuse to enforce sufficiently aggressively (immigration)
  4. States should prevent the Feds from enforcing Federal law when we think they are being too aggressive in enforcing (Grand Canyon National Park closure during shutdown)

So there you have it.  Pick a position, stick to it.

Wow, Who Could Have Predicted This?

Full-time employment in one fast-food survey drops over last several years from 50% of workers to less than 2%.

This is the conclusion I draw from my survey in December of 136 fast-food restaurants (franchisees) that employed close to 3,500 workers. Before 2014 about half the employees were “full time” as defined by ObamaCare; that is, they worked 30 hours or more a week. The potential cost to the employers of providing mandated health insurance to their full-time staff would have been about $7 million a year. But by the time the employers took advantage of all their legal options they were able to reduce their cost to less than 1% of that amount.

The first step was to make all hourly workers part time. That may seem easy to do, but in the fast-food business it’s not uncommon that employees fail to show up for work. Other employees are asked to work additional hours to prevent the restaurant from shutting down. By the end of 2014, 58 employees had crossed the line to full-time status and were eligible for mandated health insurance in 2015.

My 2012 article about the end of full-time work in the retail service sector.  The follow-up at Forbes was here.

Well, My Company Is Officially Required to Buy a Product That Does Not Exist For Us

As of next year, my company is required to offer health care plans to our full-time employees or else pay a penalty.    Unfortunately, after an extensive market search, no one will sell me such a policy -- not even the government health care exchange for small businesses.

Let's take a step back.  Business owners have had the rules pounded into us over the last few years, but many of you may not be familiar with the details.  The detail rules are here, as "simplified" as much as possible by the NFIB, but don't read them unless you have to or your head will explode.  The simple way to think of it is that there are two penalties out there:

  • The "A" penalty is for companies that do not offer any sort of health plan, no matter how crappy, to their full-time employees.  The A penalty in this case is $2,000 per full-time employee, with the first 30** free (so with 60 FT employees and no health plan, the penalty is (60-30) x $2,000 = $60,000 a year.
  • The "B" penalty is for companies that avoid the "A" penalty.  If a health plan is offered, but is not affordable (ie the employee monthly share of premiums is higher than a government-set floor) then the company gets penalized $3,000 for every full-time employee who both goes into an exchange and gets a plan with a government-subsidized premium.   There is a cap on the "B" penalty that it can be no higher than if the "A" penalty was applied to the whole company.

We have always pretty much assumed we were going to get the B penalty.  For minimum wage workers, the floor contribution is something like $9o a month, so the company share over a year for a typical employee of ours would be way over $3000.  Also, since over half of our full-time employees are on Medicare and another portion of them are on some sort of retirement plan from a corporation, we don't expect that many to go into the exchange anyway.  So we plan to just pay the penalty.

But we had expected to avoid the A penalty by offering some sort of policy to our employees.  When experts present this stuff, they act like only the dumbest of the dumb companies would ever be saddled with the A penalty.  After all, the company does not even have to pay anything for the policy, they just have to offer something.

But it turns out that all the things that protect us from the B penalty make us almost un-insurable.  First and foremost, insurers have a minimum participation rate they demand.  They are not going to go through all the overhead costs of setting you up on their plan if no one is going to sign up.  In the Government Small Business Health Care Exchange (SHOP), that minimum participation rate is around 70%.  No WAY we can meet that, since over half or our employees are on Medicare and would thus not sign up for anything.  The fact that the average age of our workforce is in the 60's, maybe even the 70's, just makes things worse.  Obamacare gives insurers only limited ability to price for higher risk, so they lose money on older people.  That means they are going to avoid like the plague signing up any group like ours that is all older people.

So, as a result, I am required by law, under harsh financial penalties, to purchase a product that is not available to me.  Had President Obama required that I buy 2 pounds of rocks from Mars, the result would not have been any more unfair.

By the way, I have for a couple of years now been discussing my efforts to convert all our full-time employees to part-time.  I have gotten a lot of grief for that in the comments.  But do you see why now?  The Administration is levying a penalty on me that I cannot avoid.  That penalty is calculated as a multiple of the number of full-time workers I employ.  The only way I can reduce the penalty is to reduce the number of full-time employees.

It is a sorry state of affairs to have to see my greatest business achievement of the last year was to get my number of full-time employees in a workforce of over 350 people down to just 42.  This year, we will work to get it under 30.  If we can do that, we will avoid all penalties entirely without having to mess with the health insurance marketplace.


** As a transition measure, the first 80 are free in 2015, which means my company will avoid penalties in 2015 no matter what but not in 2016 unless we can get our full-time employee count down further.


Postscript:  One of the oddball and confusing parts of the law is that the word "full-time" has multiple meanings.  This year, companies with more than 100 full time equivalents (FTE) are subject to the mandate.    Because of this, at cocktail parties, I have people walk up to me all the time saying the law does/doesn't apply to me based on a factoid they heard about minimum workforce sizes.  I have 350 total employees of whom 42 are full time.  Some say that puts me over 100 (the 350) and some say that puts me under the 100 (the 42).  It turns out that neither are relevant in determining if I am under or over 100, it is a third calculation that matters.  We do have more than 100 FTE, but we have less than 80 full-time employees that triggers the penalties in 2015.  Go figure.

Arrogance of the Elite

I am pretty freaking cynical about the political process, so it takes something pretty bad to catch my attention.  This attitude by Obamacare architect Jonathon Gruber, which is likely shared by most of the Administration, simply makes me sick:

An architect of the federal healthcare law said last year that a "lack of transparency" and the "stupidity of the American voter" helped Congress approve ObamaCare.

In a clip unearthed Sunday, Massachusetts Institute of Technology Professor Jonathan Gruber appears on a panel and discusses how the reform earned enough votes to pass.

He suggested that many lawmakers and voters didn't know what was in the law or how its financing worked, and that this helped it win approval.

"Lack of transparency is a huge political advantage,” Gruber said. "And basically, call it the stupidity of the American voter or whatever, but basically that was really, really critical for the thing to pass."

Gruber made the comment while discussing how the law was "written in a tortured way" to avoid a bad score from the Congressional Budget Office. He suggested that voters would have rejected ObamaCare if the penalties for going without health insurance were interpreted as taxes, either by budget analysts or the public.

"If CBO scored the [individual] mandate as taxes, the bill dies," Gruber said.

"If you had a law that made it explicit that healthy people are going to pay in and sick people are going to get subsidies, it would not have passed," he added.

By the way, Jonathon Gruber was the one in 2012 who said over and over that the limitation of subsidies to state-run exchanges was not a drafting error, but was an intentional feature meant to give incentives to states to create exchanges.  Now that it is clear that incentive did not do its job, and a case is in front of the Supreme Court attempting to enforce the plain language of the law, Gruber is now saying that he mispoke (over and over again) in 2012 and it was a typo.  Given the fact that he has now admitted he would gladly lie (and has) to the public to defend Obamacare, how much should we believe his current claims?

The Madness of Software Design: Designs that Require Customizing Browser Setting to Operate

We are looking at a number of third-party internet-based software solutions for a range of things from HR onboarding to safety and training management.  With minimum wages and other government-imposed employment costs rising, we are looking for ways to automate anything we can.

We have run into a useability issue on most of this software.  As a note, my employees tend to be 55 years old and older, and so many do not have a firm handle on computer skills.  So stuff needs to be simple and just work.  Unfortunately, no one seems to be willing or able to design a system that works with default browser settings.  In particular, everyone wants to design their software to require popups.  I have no idea why.  But time after time I put a system out for a subset of my employees to test and I immediately get 19 people calling me back saying that it does not work, they can't get in, etc.  The typical problem is that most of this software seems to require that the browsers popup blocker be turned off.  Why in the world would you design software for a feature that 99% of browsers today have turned off by default?  And worse, that require users to change a setting that only exists deep in setup menus most users don't even know exist.  I am pretty capable and it took me some poking around to find the popup options in Chrome.

This makes me totally crazy.  I had a long talk today with my onboarding company trying to explain why getting rid of an hour of HR time with their software at the cost of an extra hour of IT support time for each new employee trying to access the system does not save me any freaking money.  We received access to a training and safety system for free from our insurance company but it took so much of my personal time to get each employee able to successfully log into it that we abandoned it this year, despite it having a lot of good resources in it.  I will tell you guys that despite the world of these business solutions being apparently crowded, there is still room out there for someone who can program a front-end that reliably works with a variety of browsers and systems.

Healthcare Deductibles Rising -- Why This is GOOD News

Things like Obamacare cannot be discussed, it seems, in anything but a political context.  So if you don't like Obamacare, everything that happens has to be bad. But I actually think this is good news, and goes against my fears in advance of Obamacare.  I had been worried that Obamacare would just increase the trends of more and more health care spending being by third-party payers.  And my guess is that this is happening, when you consider how many people have gone from paying cash to having a policy, either a regular policy or expanded Medicaid.

A report out today puts numbers behind what hit many workers when they signed up for health insurance during open enrollment last year: deductible shock.

Premiums for employer-paid insurance are up 3% this year, but deductibles are up nearly 50% since 2009, the report by the Kaiser Family Foundation shows.

The average deductible this year is $1,217, up from $826 five years ago, Nearly 20% of workers overall have to pay at least $2,000 before their insurance kicks in, while workers at firms with 199 or fewer employees are feeling the pain of out-of-pocket costs even more: A third of these employees at small companies pay at least $2,000 deductibles.

“Skin-in-the-game insurance” is becoming the norm,says Kaiser Family Foundation CEO Drew Altman, referring to the higher percentage of health care costs employees have to share.

Honestly, this is good news, sort of.  I don't like the coercion and lack of choice, but the main problem with health care is that the person receiving the benefits is not the person paying the bills, which means there is no incentive to shop or make care tradeoffs.  Higher deductibles mean more people are going to be actively shopping and caring what health services cost, and that is a good thing for prices and health care inflation.

Penny-Ante Police Harassment and the Poor

The other day I wrote:

[Cars owned by African-Americans in Ferguson] are stopped at about a 6x higher rate for "equipment" deficiencies than whites.  Nitpicky regulations on car conditions (in Arizona your licence plate frame cannot cover any part of the word "Arizona" on the licence plate) are the great bugaboo of the poor and a nearly unlimited warrant for the police to stop minorities.  Mexicans here in Phoenix will tell me "woe to the Mexican who drives around here with a broken tail light -- he will be pulled over 3 times a day to have his immigration status checked".  In Phoenix, at least, stops for equipment issues are roughly the equivalent of pulling someone over for "driving while brown."  Even beyond the open-ended warrant these silly violations give the police, the fines and court costs create meaningful indebtedness problems for the poor which are hard to overcome.

Alex Tabarrok highlights some numbers from Arch City Defenders

new report from Arch City Defenders, a non-profit legal defense organization, shows that the Ferguson municipal courts are a stunning example of these problems:

Ferguson is a city located in northern St. Louis County with 21,203 residents living in 8,192 households. The majority (67%) of
residents are African-American…22% of residents live below the poverty level.

…Despite Ferguson’s relative poverty, fines and court fees comprise the second largest source of revenue for the city, a total of $2,635,400. In 2013, the Ferguson Municipal Court disposed of 24,532 warrants and 12,018 cases, or about 3 warrants and 1.5 cases per household.

You don’t get $321 in fines and fees and 3 warrants per household from an about-average crime rate. You get numbers like this from bullshit arrests for jaywalking and constant “low level harassment involving traffic stops, court appearances, high fines, and the threat of jail for failure to pay.”

If you have money, for example, you can easily get a speeding ticket converted to a non-moving violation. But if you don’t have money it’s often the start of a downward spiral that is hard to pull out of

I can testify to that last point.  I worked in the Emerson Electric headquarters for a couple of years, which ironically is located in one corner of Ferguson.  One of the unwritten bennies of working there was the in house legal staff.  It was important to make a friend there early.  In Missouri they had some bizarre law where one could convert a moving violation to a non-moving violation.  A fee still has to be paid, but you avoid points on your license that raises insurance costs (and life insurance costs, I found out recently).  All of us were constantly hitting up the in-house legal staff to do this magic for us.  I am pretty sure most of the residents of Ferguson do not have this same opportunity.

The Other Shoe Drops on Businesses From Obamacare: Reporting

A lot of discussion has gone into the costs of the employer mandate.

These costs certainly were potentially high for my company.  If we had to provide health care for all of our employees, it would cost us an annual sum between 3 and 4 times our annual profit.  As many of your know, my company runs public parks and campgrounds.  Already, we have struggled to get government authorities to approve fee increases driven by local minimum wage increases.  Most of these authorities have already told us that they would not allow fee increases in most cases to offset the costs of the PPACA employer mandate.   So we have spent a lot of time converting between 90 and 95% of our employees to part-time, so the mandate would not apply to them.  I have gotten a lot of grief for my heartlessness on this in the comments, but I have zero idea what else I could have done short of simply shutting down the business.

Yesterday I was in an information session about the employer mandate and saw that the other shoe had dropped for companies -- the reporting requirement.  Despite the fact that the employer mandate was supposed to kick in almost 9 months ago, until recently the government had still not released the reporting requirements for companies vis a vis the mandate.  Well, apparently the draft reporting requirements was released a few weeks ago.  I may be missing something, but the key requirement for companies like mine is that every employee must receive a new form in January called an IRS 1095-C, which is parallel to the W-2 we all get to report income.

I know that many of you have probably been puzzled as to what some of those boxes mean on the W-2.  Well, you are going to love the 1095C

click to enlarge

Everyone is scratching their heads, wondering what this means.  For someone like me who has seasonal and part time workers, this form is a nightmare, and I have no idea how we are going to do this.  Just to give you a flavor, here are the code choices for line 14:

1A. Qualified Offer: Minimum Essential Coverage providing Minimum Value offered to full-time
employee with employee contribution for self-only coverage equal to or less than 9.5% mainland
single federal poverty line and Minimum Essential Coverage offered to spouse and

1B. Minimum Essential Coverage providing Minimum Value offered to employee only.

1C. Minimum Essential Coverage providing Minimum Value offered to employee and at least Minimum Essential Coverage offered to dependent(s) (not spouse).

1D. Minimum Essential Coverage providing Minimum Value offered to employee and at least Minimum Essential Coverage offered to spouse (not dependent(s)).

1E. Minimum Essential Coverage providing Minimum Value offered to employee and at least Minimum Essential Coverage offered to dependent(s) and spouse.

1F. Minimum Essential Coverage not providing Minimum Value offered to employee, or employee and spouse or dependent(s), or employee, spouse and dependents.

1G. Offer of coverage to employee who was not a full-time employee for any month of the calendar year and who enrolled in self-insured coverage for one or more months of the calendar year.

1H. No offer of coverage (employee not offered any health coverage or employee offered coverage not providing Minimum Essential Coverage).

1I. Qualified Offer Transition Relief 2015: Employee (and spouse or dependents) received no offer of coverage, or received an offer of coverage that is not a Qualified Offer, or received a Qualified Offer for less than all 12 Months.

Completing lines 14-16 will require an integration of our payroll provider with our health insurance information that I have no idea how we are going to pull off.

Obamacare Newly Insured Numbers Miss by at least 50% vs. Projections

With our new prosthetic memory, called the Internet, it should be easy to go back and look at past predictions and see how well those predictions played out.  Heck, sports talk radio hosts do it all the time, comparing their beginning of season predictions with what actually happened.  But no one ever seems to hold the government or politicians similarly accountable.

Here is one I found by accident.  In July of 2011, Kevin Drum quotes this prediction from the CMS (Center for Medicare and Medicaid Services, a government agency).

In 2014, the Affordable Care Act will greatly expand access to insurance coverage, mainly through Medicaid and new state health insurance exchanges which will facilitate the purchase of insurance. The result will be an estimated 22.9 million newly insured people.

In March of 2014 Kevin Drum quotes this from the LA Times

As the law's initial enrollment period closes, at least 9.5 million previously uninsured people have gained coverage. Some have done so through marketplaces created by the law, some through other private insurance and others through Medicaid, which has expanded under the law in about half the states.

The tally draws from a review of state and federal enrollment reports, surveys and interviews with insurance executives and government officials nationwide.

....Republican critics of the law have suggested that the cancellations last fall have led to a net reduction in coverage. That is not supported by survey data or insurance companies, many of which report they have retained the vast majority of their 2013 customers by renewing old policies, which is permitted in about half the states, or by moving customers to new plans.

This is presented as a great victory, but in fact it is nearly 60% below expectations of less than two years earlier.  We don't know the final number.  Drum, who should be expected to be on the optimistic end of projections, has upped his estimate to 11-13 million, but this is still barely half what was expected.   The disastrous Obamacare exchange rollout did one thing at least -- it hammered expectations so low that even a 50% miss is considered a great victory.


Hobby Lobby, Obamacare and Contraception

A few thoughts

  1. This is one of those "bad policy conflicts with bad policy" decisions that I have trouble getting excited about.   The government should not be mandating tiny details of health insurance policies.  On the flip side, personal religious beliefs should not trump the rule of law (example:  the fact someone has a religion that says it is legal to beat his wife should not create an exception allowing spouse abuse).
  2. That being said, the case only seems legally difficult if one completely ignores the existence of the 1993 RFRA, which most on the Left seem to want to ignore.
  3. I have zero patience with the facile argument that corporations have no individual rights.  Corporations are just assemblies of people.  Our right to assembly should not cause us to lose our other rights.  If I have freedom of speech as an individual, I don't give it up when I create a corporation.
  4. I am even more exhausted with the argument that opposing government subsidies of an activity is the same as opposing the activity itself.  Though half the readers who see this post will assume that I am anti-abortion or anti-contraception, which I am not. (Update:  This seems to be a prevalent argument today, though -- see here)
  5. The most ignored fact of this case in my mind is the absolute insanity of the government mandating that regular, predictable purchases be covered in an insurance policy.  Intelligent health insurance policies should no more cover routine contraception than home insurance policies should cover the cost of light bulb replacements.   Sure, I have no problem if some private person wanted such a policy and a private company offered one -- but mandating this craziness is just amazingly bad policy.
  6. If you really want to help women and reduce their net cost of contraception, stop requiring a prescription for certain contraceptives, like birth control pills.

Why We Are Seeing Long Waits And Shortages of Doctors and Basic Medicines in Health Care

This is a re-post of an article I wrote in 2012.  I am re-posting it to demonstrate that recent stories about doctor shortages and wait times are absolutely inevitable results of government interventions in the health care economy.

My son is in Freshman econ 101, and so I have been posting him some supply and demand curve examples.  Here is one for health care.  The question at hand:  Does government regulation including Obamacare increase access to health care?  Certainly it increases access to health care insurance, but does it increase access to actual doctors?   We will look at three major interventions.

The first and oldest is the imposition of strong, time-consuming, and costly professional licensing requirements for doctors.  At this point we are not arguing whether this is a good or bad thing, just portraying its inevitable effects on the supply and demand for doctors.

I don't think this requires much discussion. For any given price for doctor services, the quantity of doctor hours available is certainly going to increase as the barriers to entry to the profession are raised.

The second intervention is actually a set of interventions, the range of interventions that have encouraged single-payer low-deductible health insurance and have provided subsidies for this insurance.  These interventions include historic tax preferences for employer-paid employee health insurance, Medicare, Medicaid, the subsidies in Obamacare as well as the rules in Obamacare that discourage high-deductible policies and require that everyone buy insurance rather than pay as they go.  The result is a shift in the demand curve to the right, along with a shift to a more vertical demand curve (meaning people are more price-insensitive, since a third-party is paying).

The result is a substantial rise in prices, as we have seen over the last 30 years as health care prices have risen far faster than inflation

As the government pays more and more of the health care bills, this price rise leads to unsustainably high spending levels, so the government institutes price controls.  Medicare has price controls (the famous "doc fix" is related to these) and Obamacare promises many more.  This leads to huge doctor shortages, queues, waiting lists, etc.  Exactly what we see in other state-run health care systems.  The graph below posits a price cap that forces prices back to the free market rate.

So, is this better access to health care?

I know that Obamacare proponents claim that top-down government operation is going to reap all kinds of savings, thus shifting the supply curve to the right.  Since this has pretty much never happened in the whole history of government operations, I discount the claim.  When pressed for specifics, the ideas typically boil down to price or demand controls.  Price controls we discussed.  Demand controls are of the sort like "you can't get a transplant if you are over 70" or "we won't approve cancer treatments that only promise a year more life."

Most of these do not affect the chart above, since it is for doctor services and most of these cost control ideas are usually doctor intensive - more doctor time to have fewer tests, operations, drugs.  But even if we expanded the viewpoint to be for all health care, it is yet to be demonstrated that the American public will even accept these restrictions.  The very first one out of the box, a proposal to have fewer mamographies for women under a certain age, was abandoned in a firestorm of opposition from women's groups.  In all likelihood, there will be some mish-mash of demand restrictions, determined less by science and by who (users and providers) have the best lobbying organizations.

My longer series of three Forbes articles on this and other economic issues with Obamacare begin here:  Part 1 InformationPart 2 IncentivesPart 3 Rent-Seeking

Update:  Pondering on this, it may be that professional licensing also makes the supply curve steeper.  It depends on how doctors think about sunk cost.


VA Scandal Proves My Contention: The Only Government Health Care Cost Reduction Ideas are Rationing and Price Controls

I feel like I was way ahead of the pack on May 1 reminding everyone that the Left until recently held up the VA as a model for government health care.  I pointed to articles by Kevin Drum and Phil Longman in 2007, but since then others have highlighted articles by Paul Krugman and Ezra Klein that made the same point.  Klein said:

If you ordered America's different health systems worst-functioning to best, it would look like this: individual insurance market, employer-based insurance market, Medicare, Veterans Health Administration.

Paul Krugman said

Well, I know about a health care system that has been highly successful in containing costs, yet provides excellent care. And the story of this system's success provides a helpful corrective to anti-government ideology. For the government doesn't just pay the bills in this system -- it runs the hospitals and clinics.

No, I'm not talking about some faraway country. The system in question is our very own Veterans Health Administration, whose success story is one of the best-kept secrets in the American policy debate.

Supposedly, the reason for this success according to Drum and Longman was that ever-popular Lefty magic bullets, electronic medical records and preventative care.  On medical records:

"Since its technology-driven transformation in the 1990s...the VA has emerged as the world leader in electronic medical records — and thus in the development of the evidence-based medicine these records make possible." Hospitals that joined Longman's "Vista network" (his name for the VA-like franchise he proposes) would have to install the VA's electronic medical record software and would "also have to shed acute care beds and specialists and invest in more outpatient clinics." By doing this they'd provide better care than any current private network and do it at a lower cost.

On preventative care:

How is a supposedly sclerotic government agency with 198,000 employees from five separate unions outperforming the best the private market has to offer? In a word: incentives. Uniquely among U.S. health care providers, the VA has a near-lifetime relationship with its patients. This, in turn, gives it an institutional interest in preventing its patients from getting sick and in managing their long-term chronic illnesses effectively. If the VA doesn't get its pre-diabetic patients to eat right, exercise, and control their blood sugar, for example, it's on the hook down the road for the cost of their dialysis, amputations, blindness, and even possible long-term nursing home costs....The VA model is that rarest of health care beasts: one with a perfect alignment of interest between patients and providers.

Neither of these have ever proven in real life to actually lower costs in anything but tiny pilot programs, and there is a lot of reason to believe that while preventative care can improve health outcomes, it tends to increase costs.

I have said for years that at the end of the day, the only ideas government planners have for cost control are rationing (which leads to queuing) and cost controls on things it buys from private markets, like doctor time (which leads to shortages and more queuing).  This is why every health care system that offers free care to all comers, whether it be socialist systems in other countries or the VA or even an urban emergency room, has long queues.

In fact, the situation, as I think we will find at the VA, is worse.  Not only is the old pie being allocated differently (shifting from price-sensitivity to queue tolerance) but the pie of available supply is likely getting smaller as resources are consumed by government red tape and price controls drive suppliers out of the market.  The next stories will be about the staggering waste of money on red tape in the VA system, and the stories after that will be about a few VA users jumping the queue because of political connections.

This stuff is so inevitable that it was all addressed years ago in my three part series of Obamacare.  In that series, the issues were not failing exchanges and the mess we have seen so far, but the issues we are more likely to see over the long term.  The VA is merely a preview, but we shouldn't have needed a preview because we could have looked at countries like England.  Of course, if the media had any desire to honestly tell these socialized medical stories we would not get fawning profiles of the horrendous system in Cuba.

My Forbes series:

Tracking Changes in Those With Health Insurance

RAND has a study out on changes in people's sources for health insurance.  Once you get the hang of reading it, this is a great table:

click to enlarge


This is how to read it -- of the 40.7 million uninsured in September of 2013, 26.2 million remained uninsured, 7.2 million got new employer health insurance (ESI) , 3.6 million joined medicaid, etc.  But then some new uninsured were added back so the new total uninsured is 31.4 million.

One of the first things to notice is the marketplace number of 3.9 million is well below the Administration's claim of 7.1 million.  The Administration's number is not even within the error bar here, so one needs to be skeptical, if he was not already, of Administration sign-up figures.

We also can notice that the individual marketplace seemed to have shrunk from 9.4 million to 7.8 million.  No huge surprise, with all the cancellations that made the news last year.

The really interesting question, of course, is what happened to the uninsured.  We can use this table to look at net changes (millions of people).

2013 Uninsured 40.7
     To Employer -5.1
     To Medicaid -2.6
     To Individual +0.2
     To Exchange -1.4
     To Other -0.3
2014 Uninsured 31.4

To make sure everyone understands the math, 7.2 million left the ranks of the uninsured to get an employer policy, but 2.1 million previously insured by employers became uninsured.  The net is -5.1 million as shown.  All the other numbers are calculated the same way.

I have always had serious questions about the value of the Medicaid signups during this period.   Medicaid is not a limited enrollment product.  You can sign up bleeding on a gurney being rolled into the operating room, and in fact many do -- Hospitals are very good at enrolling people into Medicare as they walk in.  So it was really a misnomer in the first place that someone eligible for Medicaid is "uninsured" -- they are in fact insured, they just have not done the paperwork.  The Medicaid expansion in the PPACA probably helped, but many states that did not expand Medicaid had a lot of signups as well.

The exchange seems to have done little to affect the uninsured.  Net of the reductions in individual insurance presumably driven also by the PPACA, the exchanges reduced the uninsured by 1.2 million.

The really interesting number everyone is  looking at is the huge number of the insured that gained employer coverage.  Three quarters of the non-Medicare related reduction in uninsured (since I don't consider a lot of the Medicare signups a real reduction) were from people going onto employer plans.

Kevin Drum quotes Andrea Mcintyre as saying

If it’s correct, it was probably motivated multiple factors—I hate the word “synergy” on principle, but it comes to mind. The economy has been improving, so some of the previously unemployed have secured jobs with benefits. But CBO built in expectations about economic recovery, so I don’t think it’s quite right to try pinning all (or even most?) of the 8.2 million on that. The individual mandate, while weak in its first year, might be a stronger stick than we expected, nudging people to take their health benefits where they’d previously been opting out. Employers could be helping this move this trend along; the University of Michigan, for example, eliminated “opt out dollars” in 2014 (cash compensation for employees who declined coverage).

Drum add triumphantly

If this finding is confirmed, it's a genuine shocker. Although CBO projected that ESI would stay steady, there's been a lot of chatter about the likelihood of employers dropping coverage thanks to Obamacare. But that sure doesn't seem to have happened. So in addition to the usual sources of coverage—Medicaid, exchanges, sub-26ers—it looks like Obamacare has yet another big success story to tell, one that was almost completely unexpected.

Uh, maybe.  The employer insurance changes could also be an artifact of normal churn and of the odd study period.   The study period is only about half a year.  If there were annual patterns, ie with people losing employer health care early in the year and then gaining it at the end of the year, then only the gains would show up in the study and not the losses.  In fact, there is some reason to believe this is the case, as most corporations have open enrollment periods at the end of the calendar year.

But there is a more interesting issue here.  Folks arguing for Obamacare in the first place sold it by implying that most all the uninsured were uninsured because they could not afford coverage or did not have access.  Now it turns out a large block of the uninsured actually did have access and could afford it, they just chose not to buy it, for whatever reason.  Was this really what it was all about from the very beginning, forcing people to buy a product that they could afford but did not want?

Things That Would Have Gotten Me Fired in the Corporate World

This week's episode:  Spending enormous resources on a program to reduce X, and then not tracking (or even putting in place a mechanism to track) whether X was reduced as promised.   James Taranto quoting the National Journal quoting Administration officials:

The Congressional Budget Office estimates that the health care law will reduce the number of uninsured people by about 24 million over the next few years, and that about 6 million previously uninsured people will gain coverage through the law's exchanges this year. So, is enrollment on track to meet that goal? Overall enrollment is looking pretty decent, but how many of the people who have signed up were previously uninsured?

"That's not a data point that we are really collecting in any sort of systematic way," Cohen told the insurance-industry crowd on Thursday when asked how many of the roughly 4 million enrollees were previously uninsured.

Nicely done.  The PPACA was passed first and foremost to bring insurance to the uninsured.  I always thought that the Left misunderstood (accidentally or on purpose, I do not know) the nature of the uninsured and thus overestimated what impact the PPACA would have in this regard.  But one way or another, you would track the impact, right?  I can just imagine trying to explain to my old boss Chuck Knight why we spent billions to gain new customers for a product but didn't track how many new customers we gained.

Postscript:  Here is my prediction -- The Administration will declare that no one had "real" insurance (as they define it) so everyone in the exchange was previously uninsured.

Can One Be A Principled Moderate? And What the Hell Is A Moderate, Anyway?

Sorry, this is one of those posts where I am still struggling to figure an issue out, so bear with me if we wander around a bit and the ideas are a bit unfinished.

Kevin Drum and other progressives have been bending over backwards to argue that the now three year delay in implementing PPACA standards for private insurance policies is no big deal.

Really?  The PPACA is likely, for Progressives, to be the most important piece of legislation passed during this Administration.  Hell, based on the discussion when it was passed, for many it is likely the most important piece of legislation passed in the last three or four decades.  And when Republicans suggested delaying these same rules and mandates, e.g. during the government shutdown, they freaked, arguing that people should not have to go another day with their old crappy health care policies.

But now they just roll over and say, yeah, ho hum, this thing that everyone supposedly wanted is a political liability so its fine to delay it, no big deal.

If this were a signature piece of libertarian legislation (yeah, I know its hard to imagine such a thing) that was not being implemented by somebody I voted for and supported, I would be pissed.  I would be raking the President over the coals.

This difference in outlook may be why the Republican leadership hates the Tea Party.  The Tea Party gets pissed when folks they elect punt on the ideological goals they got elected to pursue.  They have no tribal loyalty, only loyalty to a set of policy goals.  The key marker in fact of many groups now disparagingly called "extremists" is that they do not blindly support "their guy" in office when "their guy" sells out on the things they want.

I have friends I like and respect -- smart and worldly people -- who are involved in a series of activities to promote political moderation.  What I have written in this post is the core of my fear about moderation -- that in real life calls for moderation are actually calls for loyalty to maintaining our current two major parties (and keeping current incumbents in office) over ideas and principles.

Which leads me to an honest question that many of you may take as insulting -- can one be a principled moderate?  I am honestly undecided on this.  But note that by moderate I do not mean "someone who is neither Republican or Democrat," because I fit that description and most would call me pretty extreme.  So "fiscally conservative and socially liberal" is not in my mind inherently "moderate".  That is a non-moderate ideological position that is sometimes called "moderate" because it is a mix of Republican and Democrat positions.  But I would argue that anyone striving to intellectual consistency cannot be a Republican or Democrat because neither have an internally consistent ideology, and in fact their ideology tends to flip back and forth on certain issues (look at how Republican and Democrat ideology on Presidential power, for example, or drone strikes changes depending on whose guy is in the Oval Office).

Moderates in my mind are folks willing to, or even believe it is superior to, take average positions, eg. "the PPACA just went too far and we should have had a less-far-reaching compromise" or "free trade agreements go too far we need a mix of free trade and protectionism".  They value compromise and legislative action (ie passing lots of laws in a fluid and timely manner) over holding firm on particular ideological goals.  I guess the most fair way to put it by this definition is they value consensus and projecting a sense of agreement and teamwork over any individual policy goal.

Postscript:  One other potential definition of "moderate":  One could argue that in actual use by politicians and pundits, "moderate" effectively means "one who agrees with me" and "extremist" means "people who disagree with me."  The real solution here may be to accept that "moderate" is an inherently broken word and stop using it.

Update:  There are areas where I suppose I am a moderate.  For example, I think that making definitive statements about what "science" has been "settled" in the realm of complex systems is insane.  This is particularly true in economics.  Many findings in economics, if one were honest, are equivocal or boil down to "it depends."  The Left is insanely disingenuous to claim that the science is settled that minimum wage increases don't affect employment.  But it is equally wrong to say that minimum wage increases always have a large effect on unemployment.  For one thing, almost no one (percentage wise) actually makes the minimum wage so we are talking about changes in the first place that affect only a couple of percent of the workforce, and may be mitigated (or exacerbated) by other simultaneous trends in the economy.  So of course their impact may not be large (in the same way that regulations on left-handed Eskimo Fortran programmers might not have much of an impact on the larger economy).

We have gotten into this bizarre situation that the science is suddenly always settled about everything, where it would be safer to argue that given the complexity of the systems involved the science can't be settled.  I liked this bit I read the other day in the Federalist

One of the more amusing threads that runs through the conversation among the online left is the viewpoint that the science is settled in every arena, and settled in their favor. The data backs the leftward view, and if it doesn’t, there must be a flaw in the data, or in the scientist, or secret Koch-backed dollars behind the research. This bit of hubris leads to saying obviously untrue things – like “every economist from the left and right” says the stimulus has created or saved at least two million jobs. Or that there’s “no solid evidence” that boosting the minimum wage harms jobs. Of course the media knows that these aren’t true, but they largely give these politicians a pass, because dealing in data and with academic research is their turf.

Folks on the Left who want to blame the Tea Party for the destruction of civil discourse need to look at themselves as well, declaring the science settled on everything and then painting their opponents as anti-science for disagreeing.  As I have pointed out before, this sort of epistemology is not science but religion, the appeal to authority backed by charges of heresy for those who disagree.

If I were going to make a political plea, it would not be for moderation but for better more respectful practices in the public discourse.

How Did Obamacare Authors Ever Fool Themselves Into Believing They Were "Bending the Cost Curve" With These Kind of Incentives?

I guess I never really paid much attention to how the Obamacare "risk corridors" work.  These are the reinsurance program that were meant to equalize the risks of various insurers in the exchanges -- but as exchange customers prove to be less healthy than predicted, they are more likely to become a government subsidy program for insurers.

I never knew how they worked.  Check out the incentives here:

According to the text of Obamacare, the health law's risk corridors—the insurance industry backstop that’s been dubbed a bailout—are only supposed to last through 2016. For the first three years of the exchanges, insurers who spend 3 percent more on health costs than expected will be reimbursed by the federal government. It’s symmetrical, so insurers who spend less will pay in, but there’s no requirement that the program be revenue neutral

So what, exactly, are the incentives for cost control?  If you lose control of your costs, the government simply pays for the amount you overspent.  Combine this with the fact that Obamacare puts caps on insurer non-patient-cost overhead spending, and I don't think you are going to see a lot of passion for claims management and reduction.  Note after a point, excess claims do not hurt profits (via the risk corridor) but more money spent on claims reduction and management does reduce profits (due to the overhead caps).

Nice incentives.

Postscript:  There is one flaw with my analysis -- 3% is a LOT of money, at least historically, for health insurers.  Why?  Because their margins are so thin.  I know this will come as a surprise with all the Obama demonization of insurance profits, but health insurers make something like 3-5% of revenues as net income.  My Boston mother-in-law, who is a very reliable gauge of opinion on the Left, thinks I am lying to her when I say this, even when I show her the Google finance pages for insurers, so convinced is she by the NYT and PBS that health insurer profits consume a huge portion of health care spending.

All that being said, I am pretty sure if I were an insurer, I could raise prices slightly, cut back on claims overhead, and make a guaranteed profit all while the government absorbs larger and larger losses.