Grading the States on Health Care Costs

On the morning of February 26, the health committee of the National Governors Association met. According to The Washington Post, the goal was to come up with ideas to reduce state health care costs.

Temporarily putting aside deep divisions over the costly ObamaCare scheme, which faces attacks from Republicans on the presidential campaign trail as well as a Supreme Court challenge with arguments to be heard in March, there was a different emphasis. The Post reported that "both Obama's assistant health secretary, Howard Koh, and Iowa Gov. Terry Branstad, a major opponent who sued to block the law, focused Sunday on what they could agree on: cutting medical suffering and costs by encouraging disease prevention and healthier lifestyle choices."

Unfortunately, this is either political fluff, at best, or an expansion of government intrusiveness and busybody-ness, at worst.

A more substantive endeavor would start with a look at the SBE Council's "Health Care Policy Cost Index 2012," which ranks the 50 states and District of Columbia according to key public policies affecting health care costs and the costs of health insurance coverage.

For example, as noted in the report, the Kaiser Family Foundation/Health Research & Educational Trust reported, based on its "2011 Employer Health Benefits Survey," that the average annual premium for employer-sponsored family health coverage increased by 9 percent in 2011 to $15,073.

In terms of broader costs and spending, national health spending continued to rise, but at a slower rate in 2009 and 2010. The latest data from the Centers for Medicare & Medicaid Services noted that expenditures increased by 3.8 percent in 2009 and 3.9 percent in 2010. At the same time, though, government health care spending, and therefore taxpayer costs, have continued to rise rapidly - increasing by 9.7 percent in 2009 and 6.5 percent in 2010.

What drives health care costs higher? Part of the increase is positive, due to new and improved treatments and care. As for the negative aspects, though, costs are pushed higher due to third-party payments (e.g., when employer-provided insurance or a government program pays for treatment, neither the health care provider nor consumer needs to be concerned about costs, as a result prices and utilization increase); and more regulations and mandates, with government overruling the marketplace and forcing health insurers to extend coverage, or assess risk and price services based on political preferences.

The 2012 index ranks the states according to eight criteria. They include both negative measures, along with some positive reforms:

• Health Savings Accounts (HSAs). Health Savings Accounts provide much-needed choice, competition and consumer control in the health insurance marketplace. HSAs are tax-free savings accounts owned and controlled by individuals, with funds deposited tax free into the account by the employee, employer or both, and earnings accumulate tax free. The funds are used to cover regular, predictable medical expenses, and each HSA is tied to a traditional catastrophic insurance plan to cover large health care expenditures.

• Guaranteed Issue for Self-Employed Group of One and the Individual Market. Health insurance represents a significant cost for businesses. Taxes, mandates and regulations increase health care costs, increase the number of uninsured, and act as another disincentive to starting up or locating a business in a high-cost state. Guaranteed issue means that individuals may not be turned down for health insurance coverage no matter the condition of their health or risk status. So, incentives for people to purchase health insurance before they become ill are removed. A guaranteed issue mandate raises health care costs, in this case for the self-employed. The index looks at guaranteed issue for self-employed group of one and for the individual market.

• Community Rating for Small Group Market and the Individual Market. Community rating mandates that an insurer charge the same price for everyone in a defined region regardless of their varying health care risks. So, no matter what the risks involved, everybody pays the same price for insurance. That translates into higher costs across the board. The index includes community rating gauges for both the small group market and the individual market.

• High-Risk Pools. For individuals that cannot get health coverage due to pre-existing conditions, some states have set up high-risk pools. According to the Council for Affordable Health insurance, high-risk pools "provide a safety net for the ‘medically uninsurable' 1% to 2% of the population, who have been denied health insurance coverage because of a pre-existing health condition, or who can only access private coverage that is restricted or has extremely high rates." CAHI notes that "state high-risk pools are a much better alternative to providing coverage for the medically uninsurable than imposing guaranteed issue laws on insurers which eventually increase the cost of insurance for everyone."

• Number of Mandates. Beyond regulations like guaranteed issue and community rating, state laws impose a host of mandated benefits on insurers. These mandates, while often sounding reasonable, carry real and sometimes significant costs. Health care mandates are easy to impose, as politicians take credit for expanded benefits while denying the related costs.

• Per Capita Medicaid Spending. Taxes imposed on entrepreneurs, businesses and consumers are a reflection of the level of government spending. Medicaid spending is a significant cost for taxpayers, whether paid at the state or federal levels. For good measure, as government spends more on a service, in this case health care, the opportunities for waste, fraud, abuse, etc. increase, and spending accelerates faster than it otherwise might due to the incentives at work in government, which can best be summarized as elected officials and their appointees spending other people's money. In the end, as government spends more on health care services, the costs in those services accelerate.

According to these measures, the best 15 states in terms of state health care policies are: 1) South Carolina, 2) Iowa, 3t) Indiana, 3t) South Dakota, 5) Nebraska, 6) Utah, 7) Wyoming, 8) Montana, 9) Alabama, 10) Wisconsin, 11) North Dakota, 12) Oklahoma, 13) Kansas, 14) Alaska, and 15) Tennessee.

Meanwhile, the worst states are: 34t) Florida, 34t) Colorado, 34t) Maryland, 37) Michigan, 38) Pennsylvania, 39) Minnesota, 40t) Delaware, 40t) California, 42) Oregon, 43) District of Columbia, 44) Connecticut, 45) Washington, 46) New Jersey, 47) Vermont, 48) Rhode Island, 49) Massachusetts, 50) Maine, and 51) New York.

In the end, at the federal and state levels, three policy paths actually exist on health care. One is about political fluff and platitudes, which means the status quo. A second option is more government control and interference, and therefore increased costs and diminished care. And the third would mean pro-market reforms that expand choice and competition for consumers and businesses, and restraining the growth in negative costs. The choice is clear, but apparently many elected officials fail to see the obvious.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is "Chuck" vs. the Business World: Business Tips on TV.

On Deck in the House: 20% Tax Cut for Small Businesses

The U.S. House will vote on a bundle of capital formation bills on March 8, which includes the crowdfunding measure long supported by the White House. This package is expected to handily advance as it has wide bipartisan appeal, and several of the measures have already passed the House with large bipartisan majorities. In the next several weeks, the House will move to tax issues where it will focus on a major tax relief initiative for small businesses.

The proposal calls for a 20 percent tax cut for small businesses that employ fewer than 500 people. As Majority Leader Eric Cantor (R-VA) announced earlier in the year, "Our pro-growth proposal will provide every small business that employs fewer than 500 people with a 20 percent deduction, helping them retain and create new jobs. I hope every Democrat will join us in passing the small business tax cut by April 15."

Such a tax cut will free up resources for small business owners, which they can invest in their businesses and hire needed employees. With health coverage, energy and other costs on the rise, small business owners and getting squeezed. The business environment remains challenging and accessing capital is difficult. Indeed, with President Obama proposing a major (and SBE Council would argue needed) tax cut for corporations, small businesses also need tax relief. SBE Council looks forward to House action on this tax proposal.

Karen Kerrigan, President & CEO

The Mystery of Regulation Via the Federal Reserve

Call it another case of "regulation without representation." Well, it might not be just another case; instead, it could rank as one of the most blatant cases of "regulation without representation" in recent history.

Our elected officials in the nation's capital are notorious for writing legislation that regulates all kinds of activities, and then leaving the actual details of regulating to the bureaucrats. For good measure, there is no follow up, such as requiring that Congress actually vote for or against these rules and mandates. The federal regulatory process, quite simply, is a glaring abdication of lawmakers' responsibilities.

The Dodd-Frank financial regulation law stands out as a glaring example of nonsensical law, which puts enormous power in the hands of government bureaucrats and hurts the economy.

When President Obama signed the measure into law in July 2010, a New York Times report noted, "A number of the details have been left for regulators to work out, inevitably setting off complicated tangles down the road that could last for years." That was the epitome of understatements. As for the epitome of overstatements, the Times piece went on: "But ‘because of this law, the American people will never again be asked to foot the bill for Wall Street's mistakes,' Mr. Obama said before signing the legislation. ‘There will be no more taxpayer-funded bailouts. Period.'"

In reality, Dodd-Frank in no way bars taxpayer-funded bailouts. Indeed, there are only two broad things that we know for sure about Dodd-Frank.

First, we know that it did nothing to redress the problems that generated the housing/credit mess, unprecedented taxpayer bailouts, and one of the deepest recessions since the Great Depression. The causes of this historical meltdown were loose monetary policy, and an assortment of federal laws, entities, subsidies, incentives, rules and regulations that detached home ownership from sound economics. In turn, the private sector acted in accordance with the incentives set up by government, which amplified some of the worst impulses among many borrowers and some lenders. So, all of the key mistakes made by government remain in place. Loose money, imposed in the hopes of ginning up the housing market, is running full throttle; the role of federal entities like Fannie Mae and Freddie Mac, after receiving enormous taxpayers bailouts, actually has been expanded; and nothing has been done to fix assorted laws and regulations that push non-economic mortgages.

Second, given this reality, we know that the massive Dodd-Frank regulatory endeavor will generate enormous costs that will further distort markets; create a false sense of security among the electorate; and further empower unelected government bureaucrats.

Consider Dodd-Frank's much-vaunted Volker Rule, named for former Federal Reserve Chairman Paul Volker, which prohibits banks from undertaking proprietary trading. The rule maker is the Federal Reserve. But Fed Chairman Ben Bernanke told Congress in late February that the Volker Rule would not be ready by its July 2012 deadline, and he was not sure when the rule would be ready. The problem? The Fed is having trouble figuring out what kind of trading by banks would and would not be allowed. That's not surprising. After all, what kind of trading is done on behalf of customers and what is done on behalf of shareholders? For good measure, if one understands markets and the reality that shareholders only benefit in the end when the firm serves consumers well, how can various types of trading really be disentangled?

So, the Volker Rule was silly from the start. It does nothing to redress the actual causes of the 2008 credit/economic mess, and only limits banks abilities to enhance value for both bank shareholders and customers.

As for the enhanced power of bureaucrats via regulation, on February 21, The Wall Street Journal published a powerful front-page story on how the Dodd-Frank regulatory undertakings by the Federal Reserve are going on behind closed doors. While the Fed has emphasized greater transparency in its monetary policy decision-making process, it's rule-making process ranks as the most secretive in the federal government, according to this report.

Consider the following from the story:

"While many Americans may not realize it, the Fed has taken on a much larger regulatory role than at any time in history. Since the Dodd-Frank financial overhaul became law in July 2010, the Fed has held 47 separate votes on financial regulations, and scores more are coming. In the process it is reshaping the U.S. financial industry by directing banks on how much capital they must hold, what kind of trading they can engage in and what kind of fees they can charge retailers on debit-card transactions. The Fed is making these sweeping changes-the most dramatic since the Great Depression-almost completely without public meetings. Rather than discussing rules and voting in public, as is done at other agencies with which the Fed often collaborates, Fed Chairman Ben Bernanke and the Fed's four other governors have held just two public meetings since July 2010. On 45 of 47 of the draft or final regulatory measures during that period, they have emailed their votes to the central bank's secretary."

That's not just troubling. It's scary.

Obviously, the Fed carries heavy responsibility for its own actions, as it is breaking with tradition and with what goes on at other federal regulatory entities. At the same time, though, as the Journal noted, the Fed is not breaking any laws. Congress must take responsibility for not specifically dictating that the Fed needs to hold an open process.

Of course, perhaps those in Congress who passed Dodd-Frank are not too keen on having an open process. After all, an open process just might reveal how clueless and misleading lawmakers were when they passed the law, and how bankrupt and costly the law will turn out to be.

All of this matters to the entrepreneurial sector of our economy, as increased costs, limited returns, and government dictates regarding risk for banks inevitably translate into restraints on the availability of credit and ability to grow.

A February 23 Wall Street Journal story further drives home this disturbing reality. Since stepped up regulations occur when regional banks top $10 billion in assets, the incentives to restrain growth are substantial. The Journal noted, "The new Consumer Financial Protection Bureau oversees the banks above $10 billion in assets, and bank regulators require them to strengthen risk-management measures. Under a Federal Reserve proposal, they also would have to undergo an annual stress test to prove they can withstand economic hardship."

What's the reaction? As reported, "As such, some banks have made the unusual decision of growing more slowly and even turning away money to stay under the regulatory benchmark. Some banks have lowered the interest rates they pay for customer deposits in an effort to attract less cash. And the timing of growth initiatives also is now a factor, as some banks think it makes little sense to trip the $10 billion trigger unless they are to grow much bigger."

The astoundingly misguided Dodd-Frank then has incentivized an entire portion of the banking industry to avoid growing, unless that growth is large and quick enough so as to more easily absorb the added regulatory costs. That's a recipe for reduced savings, restricted credit, less business growth, and therefore, reduced economic and employment growth.

Politicians excel at blaming the private sector for the problems they usually cause, and then causing more problems with additional misguided actions. This most often is the case with regulation, as elected officials make grandiose claims, pass legislation, and leave bureaucrats to sort out the details and private sector businesses and consumers to absorb the costs. Dodd-Frank is a glaring, costly example. What the economy needs is to repeal this grossly misguided law, and instead, implement reforms that actually address the problems underlying the 2008 mess.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is "Chuck" vs. the Business World: Business Tips on TV.