It struck me quite suddenly how the sub-prime lending meltdown with all the associated money madness that nearly caused a market meltdown resulting in bailouts that angered most and a recession that’s hurt many, is connected to Health Care.

Many years ago (30 if you believe some stories), the government decided it wasn’t fair that certain people couldn’t afford to buy a house. After all, it is the American Dream. Someone probably even mentioned it was “a right” to own your own home.

Naturally, the government had to do something. So it forced banks to lend money to people who were at high risk of not paying them back, people who had little or no money for a down payment, no collateral, etc. These people would lose little more than their credit rating if they simply walked away and paid nothing back to the banks.

To manage the risk financial institutions were forced to take on these mortgages, they came up with all the monkey business we’ve heard about. The assumption was that by grouping high risk mortgages together and buying securities (credit default swap, etc.) on them, they could sell them around and reduce their individual risk.

This was all well and good until the risky mortgages started to show why they were risky. So many people were defaulting on their loans, some because they couldn’t afford them, others because they were totally irresponsible, more yet because they were convinced they could afford them. The result of all that buying and selling of bundled debt and securities on that debt was lower individual risk, but unacceptably high systemic risk.

So it all fell apart and only ridiculously large sums of money from governments around the world kept the economy from collapsing (or so we’re told).

So goes Health Insurance (not the same as Health Care). Health Insurance is a bet. When you buy health insurance, you’re betting you’ll get sick. The insurer is betting against you. If you get sick, you win the bet and the insurance company pays. If you don’t get sick, the insurance company wins and you pay (your premium).

Insurance companies disallow preexisting conditions because it isn’t a fair bet. If you’re betting you’ll get sick when you’re already sick, that’s cheating. There’s probably ways the insurance companies take advantage of this rule, unfairly excluding people, particularly those who were cut off of their insurance just when they got sick, but that’s not the issue here.

Each bet insurance companies make is a risk. They try to balance the risk by charging appropriate premiums so they can pay out potential insurance claims, pay their employees, and make a profit in the process, which is the whole point of running a business. Decent profits allow them to grow and expand coverage and make more policies. Exorbitant profits should show consumers they don’t play fair (or possibly are just winning a lot of bets at the moment).

Once again however, the government has stepped in saying “it’s not fair.” This time, it’s not fair that people can’t afford insurance or are being excluded for preexisting conditions, etc. Instead of changing the rules so valid preexisting conditions are covered while others may still not be, the government has simply said, “Insurance companies can’t deny coverage based on preexisting conditions.” Or essentially, “Insurance companies have to cover everyone, or else.”

Insurance companies will essentially be forced to take on excessive risk, resulting in much more money going out in claims, so more money must come in.

“That’s okay,” the government says. “Everybody must buy insurance, or else.” This the government says so insurance companies have a chance at balancing risk. If healthy young people have to buy insurance, it’ll help pay for the older or sicker people to get health care, instead of simply waiting until they’re old and sick to get insurance.

Sounds like a win for everyone, right? Possibly. If all the rules are written just right, it might balance risk well enough to allow insurance companies to continue operating in the long term. But if there’s anything wrong with the rules, risk will be unbalanced and we’ll be headed for a health insurance crisis on the scale of the sub-prime mortgage fiasco.

Further, mandating that everyone buy insurance is outright unconstitutional. I buy insurance. I like having insurance. But I don’t think the government has the right to mandate that I do so. I’ve heard all the arguments and they fall flat. Car insurance is not required, unless you want to drive on public roads. Regulating commerce is not the same as mandating that commerce take place. Promoting the general welfare is not the same as mandating the purchase of a commodity.

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I hear a lot of argument about whether or not the proposed Health Care Reform bill will be deficit neutral. Proponents of the bill claim it will be deficit neutral by means of taking money from other areas of spending, reducing fraud, and raising taxes. Opponents claim it won’t be, pointing out that three or four years of taxes will be collected before any benefits are paid (as if that’s proof against deficit neutrality), claim some of the money is double counted, and that reducing fraud won’t work (or they’d already be doing it).

The truth of the matter is no one knows. We can put our best people and their best calculations on solving the question, but even if they decide that after all the money wrangling involved in the bill, it comes out to be deficit neutral – or even better, reduces the deficit – it isn’t good enough.

What we should be worried about is whether the bill will reduce our health care liability. By liability, I mean the amount we, the government, and we, the people, spend on health care each year. If all the bill is doing is throwing more money at the problem, that’s not a solution, it actually worsens the problem.

Allow me to explain. The government, like each of us has a limited capacity to earn money. We do it by working at our various occupations, the government does it mostly through taxation. In our case, there’s only so high a salary the market will bare. The better we are at our jobs, more experience, etc. the more the market tends to bare. The worse or less experienced, the lower the salary.

Taxation follows a different set of rules, but it still has rules. The Laffer Curve is one representation of those rules. Summarized, it goes like this: If the government wants to increase revenue, it can do so by raising taxes, so long as it is on the left side of the curve. Once it passes the peak, raising taxes any further will tend to reduce revenue. This is due in part to those people and companies that are taxed the most will start moving to where taxes are lower, or finding loopholes in tax laws that allow them to pay less, when the tax rates start to get too high. It is also because taxes are a drain on the economy. Drain too much at one time and the economy as a whole suffers, resulting in lower tax revenue for even higher tax rates.

I don’t know where we currently sit on the curve, so raising taxes might still be a reasonable thing to do. But if we raise taxes now to pay for supposed Health Care Reform, if the reform doesn’t also include real and credible methods of “bending the cost curve” downward, more taxes will eventually have to be raised again and again to keep the program “deficit neutral” until we pass the peak point on the curve and start to head down the back of it.

The only thing I’ve heard about this bill’s effort to actually reduce costs has to do with two things. First, I hear payments to doctors from the government will most likely be reduced further for government plans such as Medicare. This isn’t reducing the cost of health care, it’s cheating doctors and patients on other insurance plans. Those costs that aren’t paid by the government are subsidized by other patients who are charged more for their services. This essentially helps drive up the cost of health care for those of us not on a government plan.

Second, they propose that by getting more people insured, the cost of insurance will go down. This isn’t necessarily true. Without an individual mandate to purchase health insurance (which many believe is unconstitutional, myself included), there is no reason an otherwise healthy person would buy health insurance. By disallowing preexisting conditions as grounds for denying insurability of a person, people will be allowed to buy insurance when they get sick. In other words, healthy people won’t buy insurance, but sick people will. Sick people then will need coverage, something more expensive than their premiums so insurance companies will either go bankrupt, or raise their premiums more.

If anyone knows how else this bill is supposed to actually reduce the cost of health care, I’d sure love to know. The above two points don’t even address the cost of health care itself, just of health insurance. Either they love to conflate the two, or they don’t understand the difference between them. Health care costs are the costs of doctors, facilities, medical supplies and pharmaceuticals. Health insurance costs are the payments we make to a third party as part of a contract that if we need medical care, they’ll pay a predetermined type and portion of the costs.

The real problem isn’t that health insurance costs are skyrocketing, it’s that medical care costs are skyrocketing. We can weep and wail and gnash our teeth about insurance companies making profits, and there’s real legislation we might pass to mitigate that “problem” without directly penalizing them for being successful capitalists, but it’s still not addressing medical costs.

What health care reform needs rather than more money thrown at it (not that money won’t or can’t help), is actual reform. We must do something to control the costs of health care, not insurance. If we open up the insurance market, the market will take care of the insurance costs, but only if we do something about the real problem.

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Software and Health Care

February 24th, 2010

Recently, at work I was given the task of improving a piece of software that ran slowly, consumed far to many resources and was far to rigid to perform any more than the single task for which it was originally created. As I began looking into the code, I discovered that worse than all that, the code was an utter mess and there was absolutely no way I could may even the most marginal of improvements without starting from scratch.

So I did. While I worked on recreating one part of the software, a colleague of mine worked on another. Eventually, I finished my parts and got to testing and tuning his parts. As I went, I continually tested my new code and ideas against the existing system to ensure the new product was better than the old one. With little exception, the new product ran at least twice as fast as the old, consumed fewer resources and was flexible enough to handle the original task as well as a wide range of current and future potential tasks. I was pleased.

Then I got to the code my colleague worked on. There didn’t seem to be anything wrong with it on the surface. Given ideal and even the least ideal circumstances we imagined the software might face, it appeared it would run faster than the old code, perhaps even two or three times faster. Yes, we had to admit it would consume much more memory, but the speed improvement would be worth it as the old software was far too slow.

But once I got into testing against the old software (like I did for the parts I worked on) I came to a stunning and all together disappointing realization. First, we were consuming far too many resources which was bringing the hardware to its knees, even more so than the old software did. Second, and far worse, we were running as much as seven to ten times slower.

So what happened? Even in far from ideal circumstances the software should have easily out performed the old software. The answer was simple: circumstances were even farther from ideal than we thought. This made our software (which was smart enough to deal with even the worst case) take much more time and resources dealing with the terrible cases it faced. Unfortunately, this was the standard case and our beautifully crafted software was far from adequate for the task.

So I worked tirelessly (then tiredly) for weeks trying to squeeze the new code my colleague wrote to get the performance out of it that we needed. After all, we couldn’t go back to the old software since it was a nightmare to maintain and too rigid for even current tasks. But finally, I had to admit there was nothing I could do.

Nothing short of rewriting it yet again myself. So I finally threw away the code my colleague wrote and started from scratch for a second time. Carefully considering how the old software did the task, comparing it to the flexibility of how our attempted solution was designed, in the space of just two days, I wrote a solution that not only consumed fewer resources, but ended up running two to three times faster than the old software.

Yay for me, right? Sort of. If it hadn’t been for the original implementation I wouldn’t have known what works well. If it hadn’t been for the second implementation I wouldn’t have known how bad the circumstances were the software faces, and wouldn’t have seen how that can effect performance. While I’d like to claim a stroke of genius here, I pretty much have to say it was the process of elimination: we already did everything that wouldn’t work, then I did what would.

This, it seems to me, is like the Health Care debate/bill in the United States Congress today. Clearly, the current system isn’t working for everyone, and increasingly for anyone. It is slow, cumbersome, expensive and getting more expensive at a rate no one can afford in the long term. The Federal budget already devotes a huge percentage to health care related programs and will continue to have to devote more money to them, else abolish or diminish them. So, President Obama rightly made it his agenda to “fix” it, by asking Congress to create a piece of legislation that would somehow make things better.

There’s probably a lot of good things in the bill Congress eventually came up with. I hear there’s some sort of tax incentive, rules against insurance companies dropping patients when they actually become sick. There’s probably a lot that’s good. However, there’s enough that is – let’s call it “less good” – about the bill that public opinion has turned sharply against it. Some examples of “less good” qualities of the bill include throwing money at states wholesale just to win votes from their senators/representatives.

Does that mean we should keep the current system as is? Absolutely not. Many people still want reform, just not this reform. Like my software system, the original health care system isn’t working like we want and consumes far too many resources. But if the new system is only being approved by a slim margin (if indeed it gets that much) because votes were effectively purchased for it, how much better can we hope it will actually be? Reform yes, for the better? Maybe not.

I don’t expect us (by “us” I mean Congress) to just throw that bill away and let it go to waste. I expect us to start from scratch again, taking lessons learned from the current system as well as the bill and try to make something beautiful. I don’t pretend to know what that bill will look like, but whatever it is, it had better not resort to pork, special interests, or any other means of purchasing votes to get through either house. Health care is far too important a subject for any bill to be voted for or accepted for anything other than its merits.

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