Professor Cole's Finance Blog

Harry Reid and his Senate colleagues have borrowed a page from Angelo Mozilo and his Countrywide cronies to come up with a financing vehicle for their 2,000 page, trillion-dollar, "pig-in-a-poke"health care reform bill that no one outside of the Democrat leadership has even seen. (Did Harry miss the President's promise of public debate televised on C-SPAN?) What is this financing contraption?

Well, it looks an awful lot like a subprime teaser mortgage, but with a twist.

Just like a subprime mortgage, Harry is going to sell this to us taxpayers without any loan documentation or income verification to see if we can afford this trillion-dollar albatross. Never mind that we already owe $13 trillion and are going into the hole at the rate of another $1 trillion per year. Of course we can afford it!

Just like a teaser mortgage, this loan has an artificially low payment for the first few years, but then, BANG, the payment will double after ten years. But don’t worry, in the bizarro-world of the Senate, we only look at your payments for the FIRST TEN YEARS!!! After that, uh, er, KEEP QUIET. (If I taught corporate finance like this, I’d get fired, and rightly so.)

As for the twist, it's a doozy--you don’t get to “live in the house” for the first three years. In other words, you PAY into the kitty for the first three years, but get no health insurance policy. Aren't these Senators creative?

Hmm. Do we as a country really want to go down the "subprime" path—AGAIN?

How about if we try to calculate how much this “reform” is going to cost per policy-year. Now that is a metric we all can understand. We all have a pretty good idea about how much a health insurance policy costs, at least if we count the subsidy that  most of our employers throw in pre-tax. A good ballpark estimate for an average person is about $400 per month or $4,800 per year.

How does the Senate bill stack up? The bill is supposed to cost about $1 trillion and provide health insurance for about 15 million persons for six years. Yes, only six years. Harry’s financing plan forces you to pay into the kitty for three years before you get ANY insurance! What a financial genius Harry is! Bernie Madoff has nothing on our Harry! Ok, back to the calculations. So that’s six times 15 million or roughly 90 million policy-years. We now divide $1 trillion by 90 million to get our estimated cost per policy-year, which comes in at about $11,000.

Oops. We forgot to account for the $500 billion in “savings” from fraud and waste in Medicare. This is a "cost offset," so the real cost of coverage is not $1 trillion, but $1.5 trillion. Now, our cost per policy-year jumps to almost $17,000! For a policy that you or I could buy today for $5,000. Now, that is what I call “bending the cost curve.” Unfortunately, it is bending it in the wrong direction!

Now, I think that there is a lot of room for agreement on the need for health insurance reform.  Most agree that we need to cover pre-existing conditions. Most agree that we need portability of coverage across employers and across state lines. Most agree that we need to cover the uninsured, who now clog the nation’s emergency rooms, which they use as their primary provider of health care, at massive cost to the rest of us.

Portability is going to require a total revamping of our payment system, which, since World War II, has relied upon employers instead of individuals. So long as you get your health insurance where you work, you will NEVER have true portability because it is your employer’s plan as much as it is your plan. Let’s put this one aside for now.

We can cover pre-existing conditions. Most large employers where I have worked during my career, such as the federal government and even DePaul University, already cover pre-existing conditions because their “risk pools” are large enough to spread the costs of covering these workers across the pool. By making such pools available to other employees, we can easily deal with this problem. Of course, it will require legal reforms to allow insurance companies to sell plans across state lines in order to create risk pools that are sufficiently large. Politicians don't like this reform because they get a lot of political contributions from insurance companies with near-monopolies in individual states.

We can cover the uninsured. For less than half of the cost of Harry’s plan, we can simply BUY coverage for 15 million uninsured.  For a lot less than that, we could provide a tax credit enabling the uninsured to buy their own plan. Health savings accounts sell for as little as $100 per month. While bare-bones plans are not for everyone, they certainly fill a niche for the young and relatively healthy who are willing to bear the risk of non-catastrophic health care costs; the HSAs cover the risk of catastrophic costs. Isn’t this a better way to deal with the problem than forcing everyone to buy a Cadillac plan on the taxpayer’s dime?

I think so, but, then again, I’m an economist . . . .