Who Owns Your Money? Paul Krugman Does

In Sunday's New York Times editorial section Paul Krugman ponders the "white-hot rage" sweeping America. Not that of Tea Partiers, he notes, that of "the rich."

If you want to find real political rage - - the kind of rage that makes people compare President Obama to Hitler . . . [y]ou'll find it among the very privileged, people who don't have to worry about losing their jobs, their homes, or their health insurance, but who are outraged, outraged, at the though of paying modestly higher taxes.

I have a steady job, and I work hard at it. I don't worry too much about losing my job, my home, or my health insurance, though I suppose any or all of those are possibilities. And I'm not anyone who will benefit from the extension of the Bush tax breaks.

But I can tell you that I am indeed outraged. Outraged that progressives like Krugman feel as if they have the ability to judge how much income is "too much" for any one person.

Krugman cites Oliver Wendell Holmes for the prospect that "Taxes are what we pay for civilized society." Holmes did indeed say that, in a case called Compania General De Tabacos De Filipinas v. Collector of the Internal Revenue (275 US 87 (1927)). "But that was a long time ago," says Krugman, as if to suggest that those disgusted by contemporary taxation are merely boorish descendants from an earlier, more genteel and clearly more elightened era.

Indeed 1927 was a long time ago. In Holmes' lifetime, for example, income tax was held by the Supreme Court to be unconstitutional. (Pollock v. Farmers' Loan & Trust Co., 157 U.S. 429 (1895)). An amendment was required to clarify Congress' power.

In 1913, the tax rate paid by the top income earners was a whopping 7%. To merit paying that much in taxes it was necessary to earn more than $500,000 in 1913 dollars - - more than $10 million today.

Holmes' statement also pre-dated Social Security, which came along in the '30s and results in an additional subtraction from your income before you even touch it. And it predated Medicare and Medicaid, which came along in the '60s, with similar result.

Of the "undeniably rich," Krugman observes that "a belligerent sense of entitlement has taken hold: it's their money, and they have the right to keep it." In Krugman's eyes, the belief that one's income is one's own is audacious and unjustifiable. There comes a point of being "too rich," he thinks, therefore any income above a certain level belongs not to the individual but to the people to spend, through Congress, as they see fit.

Krugman's position makes a fallacy of the word "earn." My high school dictionary suggests that to "earn" means "to gain or deserve for one's service, labor, or performance." Krugman eviscerates this sense of the word, and would rather have us think of earned income - - at least above certain amounts - - as merely "temporarily borrowed," certainly not "deserved." How anyone, who has had the assiduity, intelligence, or just enough blind dumb luck to make more than what Krugman thinks is "appropriate", dare to the belligerent prospect that he has "earned" his income and is "entitled" to keep it.

Well, I do. I dare, even though my hope of ever earning enough to be truly "outraged" by top margin taxes is a dim one. I dare, because if you let Congress believe that all of a rich man's income is a public good, there is nothing to prevent it from believing that all of an ordinary man's income is public good as well. And all of a poor man's income - - such as it is - - for that matter as well. The idea that all income belongs to the people is a communist notion. It is a foreign notion - - foreign to the capitalist principles that - - for better or worse - - this country is founded upon.

There is another striking difference between the world that Holmes lived in when he wrote "Taxes are what we pay for civilized society," and it is this: Holmes figured that if the state can demand, through draft and war, the life of its citizens, then it could also demand sacrifices far less than that, such as state-ordered involuntary sterilization:

We have seen more than once that the public welfare may call upon the best citizens for their lives. It would be strange if it could not call upon those who already sap the strength of the State for these lesser sacrifices, often not felt to be such by those concerned, in order to prevent our being swamped with incompetence. It is better for all the world, if instead of waiting to execute degenerate offspring for crime, or to let them starve for their imbecility, society can prevent those who are manifestly unfit from continuing their kind. The principle that sustains compulsory vaccination is broad enough to cover cutting the Fallopian tubes. ... three generations of imbeciles are enough. (Buck v. Bell, 274 US 200 (1927).)

Read that carefully. I underlined the best part. I should think a Nobel laureate economist such as Krugman should think twice before alluding to the "happier times" of the Holmes-ian era. One might suspect he is in favor of cutting the marginal tax rate to 7% and involuntarily sterilizing the poor.

Of course Krugman is probably not in favor of sterilizing the poor (although who knows, economists think some nutty things sometimes), but here is what distinguishes thinking of "then" versus thinking of "now": Holmes recognized the obligation of the "haves" to pay for a civilized society, and he also recognized an obligation of society to prune itself of the "have-nots." Since Holmes' time, the latter obligation is no longer recognized, while the former has continuously expanded - - by several orders of magnitude.

Krugman believes that the wards of the state have an entitlement to the income of the rich, while the rich themselves have no entitlement to their own income. Needless to say, that makes them angry.

I'd be too.

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Why Wait For a Convention, New York?

Every year when the budget deadline passes without a budget, or whenever there is a stalemate between the Governor and the only two legislators that actually wield legislative power (I speak of the Assembly Speaker and Senate President), someone asks, "Why don't we amend the state Constitution to fix this?"

And then the news stations dig up a softspoken constitutional scholar from a SUNY basement somewhere and he explains, with great solemnity, why amending the Constitution now is just not possible. According to the state Constitution itself (Art. XIX Sec. 1), he says, amending the document first requires legislative approval in two consecutive legislative sessions, then approbation by popular ballot, and then a delayed effective date. Figure three years minimum, likely more. The most we can do right now, he says in so many words, is wring our hands and hope for the best.

And then someone says, "well then let's have a convention and write a new constitution," and the constitutional scholar goes even grayer as he explains that under the Constitution (Art. XIX Sec. 2) this is something the legislature must first consent to be put on the ballot, or else we must wait up to 20 years for the question of a convention to be put on the ballot automatically, and we should then hope everyone's paying attention and still angry enough about the legislature's antics from 10 or 12 or 18 years ago to vote for a convention.

And through all of this the newscaster will nod in understanding until it's time to go back to the anchor desk for the weather or a reel of the latest fire, and that is that.

Now in my mind, that approach puts the relationship entirely backwards.

That approach has so-called "experts" looking no further than the state Constitution for the origin and definition of their powers of self-governance.

In my mind, it is the citizens' powers of self-governance that give rise to the Constitution, not the other way around.  It is the citizens' ability to say for themselves how they wish to be governed that gives birth to a constitution of government.  It is not for the constitution of government to define that ability, or to so limit it as to the point of virtual extinguishment.

If the document by which we govern ourselves can provide no genuine redress for the ineffectiveness of our elected officials, is it truly a democratic document?  No.  Is a document that so severely limits our ability to exercise the powers of self-governance that we cannot act even in the face of impasses that threaten to close down our government truly a democratic document?  No.

If the legislature has the power to cancel, for the span of 20 years, any initiative that would alter its composition or powers, then where is its incentive to act appropriately? If the ridiculous antics of the legislature of late are any indication, there is no such incentive.

We should not be so quick as to assume that our form of government has not become a perverted form of democracy. What we have in New York is at least this:

• inequitable ballot access laws that protect entrenched political parties
• a campaign finance process that obscures the public's view
• a budget process that all but guarantees a late and irresponsible budget
• a partisan legislative districting process that protects incumbents
• most egregiously, a manner of amending the Constitution to more accurately reflect the will of the people that, in operation, sets itself against the will of the people.

And this is only a small list.  Are we truly only left to line up behind our constitutional scholars and wring our hands mightily for the next dozen years, as they suggest? Or can we not conceive of a different path?

Do we not have the right, arising from our own powers of self-governance, to collectively rip up the current Constitution and begin anew?

Of course we do. Of course we can.

It is a bold idea, yes, to abolish a government by replacing it with a new one. But it is certainly not a new idea. Each year on the Fourth of July we celebrate and pay homage to the men and women who were brave enough to carry out that idea even in the face of armed resistance from the old government. Are we less brave?

Adherents to the current government will poo-hoo the idea, claim that it is too radical, too disruptive, would never work, isn't possible, etc. Look carefully and you will see in all instances that they speak either out of a vested interest in the current government or else out of pure fear.

And before you poo-hoo the idea yourself, ask whether the current government is working for you, or for some other interest?

A convention of the people to form a government is indeed a radical concept, but it is the very mechanism on which our state and our federal governments were born.  Could anyone legitimately challenge such a mechanism?  We have so many examples in our national history that we need not question the validity of the process.  And we can look to the process by which those conventions were held for guidance on how to compose the convention and ratify its product, if the product is indeed worth ratifying.

We have only to find the bravery to do it.

How To Cut Health Care Costs By 64%: Let The Patient Ask

For some months now I have been suggesting on this blog (and everywhere else I can) that the best mechanism for exerting downward pressure on health care costs (meaning, the price of care) is to have the ultimate consumer (meaning, the patient) pay for the services.

Republicans and Democrats alike seem to be bent on ignoring such a tactic in favor of other approaches that cater to their pet constituencies.

In today's Kaiser Health News columnist Lisa Zamosky relates a real-life example of what happens when you force health care providers to justify their prices in the harsh light of day. The story involves a patient who has a high-deductible health plan, requiring her to pay on her own for the first $5,000 of care she gets in any year. When the patient went for an annual checkup and was handed a $350 bill (which she described as "ridiculous"), she asked for a discount. Removing a few routine tests from the bill brought it down to $125, which the patient then paid.

That's a discount of 64%.

Detractors from the market approach would likely suggest that a 64% discount is not a result that could be achieved on a large scale. The primary care industry would evaporate if it were forced to take a pay cut of approximately 2/3 of their income.

Which is true to this extent: the primary care industry as we currently know it would evaporate. In its place, I have no doubt at all, some enterprising individuals would figure out how to package primary care services in a way that deliver value to the patient and still allow physicians and nurses to eat. I don't think for a moment that the system will look anything like what we currently have. But why should it? The current system is both overpriced and inefficient; why should we continue to prop it up?

Health care reform proponents squawk about "access" and how free market solutions will fail to provide universal access to care. I wonder at that. It did not require massive government spending programs to make cellphone ubiquitous; it did not require impinging on personal liberties to put televisions in every home; it did not require nationalizing an industry to make personal computers affordable.

Imagine a sprawling government system whose purpose was to extend the life of the recording industry at a given point in time, say, the year 2000. We would be stuck with regulations forcing us to buy overpriced CDs and CD players, perhaps even cassette tapes, in order to keep the music stores open, while foreclosing the development of the iPod and other forms of music content delivery yet to be thought of. Why would we agree to such a thing? Why did we agree to such a thing?--because that's exactly what we have now.

Reform advocates posed this question may cough nervously and suggest that health care is different. But they can't quite say how.

I saw pshaw.

By the millions, Americans have concluded that the current third party payor system does not deliver the care they need at the price they can pay. The reformer's response: buy it anyway.

That's the definition of a command market.

Why would we agree to such a thing. Why did we?

A City of Two Tales - - Which One Prevails?

BOSTON - - In yesterday's Kaiser Daily Health Policy Report two columnists offered conflicting assessments of the state of Massachusetts.

In the first, Austin Frakt of Boston University's School of Public Health trumpeted the happy news that "the individual mandate requiring state residents to buy health insurance is working." He hopes that will give national reform advocates some confidence.

In the second, Grace-Marie Turner of the Galen Institute says "[i]f Massachusetts is a harbinger - - and all evidence indicates it is - - the new federal health overhaul legislation is headed for serious trouble."

You might be inclined to say, as if to children, "You can't both be right." But I think they are, though not to the same end.

Frakt's argument is quickly exposed as a farcical case of bootstrapping. He first asks "what does it mean for the mandate to 'work'?" He points out that the purpose of the individual mandate is to prevent adverse selection (which is true). And then answers his initial question by saying "the individual mandate is working because it is preventing a destabilizing level of adverse selection."

Adverse selection is when someone waits to buy insurance until they need it, and then drops it when they don't. When the government orders health insurers to issue policies to all buyers whenever and wherever they appear, people will stop buying insurance when they don't need it. (Which is, by the way, an entirely rational economic decision.) Frakt's solution, therefore, is for the government to further order people to buy health insurance even when they don't need it, thereby "solving" the problem which the government itself created to begin with.

That's a twisted definition of a "working" law if ever I saw one.

Turner, in stark contrast, looks at the big picture. Adverse selection is indeed occurring, she says (and as even Frakt admits), and it adds a point or so to premiums. Increased coverage has fueled increased demand for care, she points out, which is pushing up costs. Decreased availability of primary care has led to subsequent increased use of emergency facilities as a substitute, she says, pushing up costs even further. Because of the purchase mandate, providers have found their bargaining positions with insurers much improved, pushing up costs.

All of these cost increases translate (rather predictably, actually) into higher premiums. She sites a study from Stanford which found that since Massachusett's health insurance reforms were initiated, "premiums for private employer-sponsored health insurance in Massachusetts increased by an additional six percent in aggregate compared to the nation as a whole." And, she adds, "[i]t's even worse for smaller firms: Their health insurance costs grew 14 percent more than in the country as a whole from 2006 to 2008." Smaller firms have begun dropping coverage, relying instead on publicly-funded insurance for their employees.

I've seen no analysis that explains how or why federal reform should be different.

So yes, Frakt is right that a purchase mandate "works" to prevent adverse selection from completely destabilizing the market. Imagine for a moment you are on a plane, plummeting to the ground. As the oxygen masks deploy you put yours on and find that indeed it is "working." Take such "confidence" from that as you will.

Health Reform: Banking on Telekinetics - Part I

Now that the shock of having actually passed a health reform bill (if you want to call it "passing," it was really just "deemed passed") is wearing off, conversations seem to be turning more towards costs. The problem of uncontrolled costs persists, and threatens to break the bank if not the very back of the United States.

Happily, some very smart people are sporting their opinions about costs. One of them is David Cutler, the Otto Eckstein Professor of Applied Economics at Harvard University, who spoke recently at a symposium organized by the prominent journal "Health Affairs."

Cutler's take is this: health reform will bend the cost curve, "because it has to." So there. Take that, all you doubters and haters.

"Health reform will only be successful," he says in his symposium remarks, "if it can successfully bend the cost curve."

"If it can," he continues, "then we will be able to afford the commitments we've made under the legislation as well as the committments that were already in place through Medicare and Medicaid. And if we cannot bend the cost curve, then not only will the new commitments we made fail, but the older commitments to Medicare and Medicaid and a variety of other programs will fail as well. And we know that from look - - any cursory look at the federal budget will tell you that. So the success or failure of health care, and health reform, will be determined to a great extent by what this legislation does about cost issues." (Emphasis is mine.)

Agreed.

But if you were wishing Cutler would then proceed to explain why he thinks health reform will actually bend the curve, well, keep on wishing. Instead of talking specifics, Cutler jumps ahead to explain how you will know if health reform is in fact bending the curve: "I think the right way to view this now is not as a kind of, he-said . . . she-said or, or this-team-said . .. that-team-said in the sense of what is likely to happen," he said, "but what I want to do is leave you with the sense of 'how will you know when reform is actually working.'"

He then looks to industries outside of health care, and points out what makes those industries successful. If you see those things happening inside of health care, the theory goes, it means (one supposes) that health care is also becoming a successful industry - - one with "high value, low production costs."

Point one: Information Technology.
"Very successful industries use information technology a lot," Dr. Cutler says, "so they know what they're doing, who's doing it, why they're doing it, who's the right person to do it, how long it's taking, how much it costs . . . everything about the nature of production. Of course in health care the most interesting thing is that we know essentially none of that. And when we do observe it, we observe that it's bad."

Now one hopes it doesn't take a doctoral degree from Harvard to understand that IT can be a useful tool to manage production. Which leads one to wonder, why hasn't the production side of the health care industry already adopted IT solutions to reduce production costs? Especially technologies that have been around for a while and are proven value-adds?

One reason might be because they have no incentive to do so. In other industries, production costs translate directly into retail costs, and retail costs need to be justified in the harsh light of day both against consumer expectations (I'm paying $100 for THAT?) as well as against competitor prices (But I can get it at Joe's for $80!)

Unfortunately, neither of those two factors appear in the health care industry. Either the consumer/patient remains blissfully unaware of the actual retail price of the good or service they are obtaining, or the price is obfuscated by byzantine policies, procedures, and billing practices. "The system" usually shows you nothing, and when it does show you something what you see is a Gordian knot. To top it off, if there is a third party payor involved (private insurance, Medicare, etc.) there is no need for either the hospital or the patient to rationalize the price, because it's someone else's money being spent.

In that basic environment, "cost-cutting" means only reducing your revenue and "productivity gains" means only staff-cutting. Neither of those things would make a hospital CEO very popular, especially the latter, especially in smaller communities where the hospital is likely one of the very few stable employers left in the area.

Take, for example, bar codes. Reading, for example, McKesson's summary of the "glacial" progression of bar code technology in the health care industry (see Appendix B of the target document) is downright depressing. Following adoption of the "uniform product code" in 1972, US grocers began adopting point-of-sale bar code systems "en masse." Throught the 80s, other industries "began leveraging bar codes for unprecedented efficiency gains." Not so health care. Come 2003, there is still more foot-dragging than progress despite proven benefits of bar-coding in terms of efficiency and patient safety.

So what is changing about that basic environment to provide an incentive for health care producers to adopt IT solutions? Nothing, so far as I can tell. And as any IT consultant can tell you, American businesses are full of IT products that were purchased and never implemented, or implemented and later abandoned. If there's no good reason to use the product, it won't be used.

Under Dr. Cutler's theory, if we look at the health industry and we see that it has finally gone mainstream on bar-coding, does that mean health-reform is working? Well, if your employer told you he was getting your computer up-to-par by mid-80s standards, would you be pleased about that? TRS-80, anyone? I didn't think so.

Once the incentive money to buy electronic health records, for example, runs out, nothing about the health care industry's basic environment will draw its major players either to spend the money to upgrade the current technology, or to adopt the NEXT technology - - the technologies that other industries are developing and adopting NOW to boost their productivity and cut costs. The result: a health care industry that is perpetually 20 years behind the times and experiences technology adoption if and only when massive government spending and perhaps a mandate or two is involved.

How successful do YOU think such an industry will be at controlling health care costs?

You Can't Get There From Here

Imagine your car has a bit of a snuffle, so you take it in to your friendly neighborhood auto mechanic. He throws the car up on a lift, pokes around under the chassis, then puts it back down.

"I don't see anything wrong from here," he says, "but I need to put it on a diagnostic machine to check the computer."

"Great," you say naively, "do it."

"Can't," he says. "It's against the law for me to own a diagnostic machine."

"Why?" you ask.

"Because then I might run your car on the diagnostic machine and charge you for it even if you really don't need it."

"Oh," you say. "But you might also decide to throw in the diagnostic run for free as part of your overall service."

"Can't." he says. "It's against the law for me 'throw in' anything for free."

"Why?" you ask.

"Because I might try to 'throw in' a bunch of stuff you need for free in order to lure you into buying even more stuff that you don't need."

"I guess," you say.

A week later you go back to your mechanic with the diagnostic report. He tells you that you have a bad valve which needs to be replaced.

"Great," you say, "replace it."

"Can't," he says, "It's against the law for me to do valve replacements here."

"Why?" you ask.

"Because I might try to con every customer into getting a valve job done even if they don't need one."

"But that's someone else's problem," you say. "I actually need one, and now I have to go somewhere else and pay someone else's overhead - - in addition to yours - - in order to get the job done?"

"That's right," he says. "And the state keeps a strict lock on who actually gets to do valve jobs."

"Why?" you ask.

"I'm not really sure," he says. "I think they want to make sure the people who do valve jobs are really good at it."

"I see," you say, "but that means they can charge whatever they want."

"Basically, yes," he says.

"And there isn't anywhere else I can go?"

"Nope," he says.

"So I'm forced to pay higher prices, to multiple people - - each of whom get their profit cut - - plus suffer the inconvenience of trotting all over town, in order to get a procedure done that you're perfectly capable of doing here all on your own, right now?"

"That's right." he says. "And the law says it has to be that way."

"The law should change," you say.

"Good luck with that," he says.

Happily, such is not the state of auto care. You go to the shop, they put your car on the lift, they run the diagnosis machine, they fix the car, you get it back the same day. Not that the service shop doesn't make money, that's a given. But that's OK, it's an expected part of the deal. What's not expected is that you will have to pay for three or four or seven profit margins instead of just one, or have to spend an extra week or two or three and a lot of hours running around to get it done.

But such is the state of healthcare, for two reasons. One, the third-party, fee-for-service reimbursement model that predominates the industry creates an incentive for providers to deliver care that is not really necessary (or at least is only arguably necessary). Second, arcane laws that were designed to offset that incentive (by paternalistically substituting the state's judgment for the patients) force the sort of fractured and siloed care delivery models that nearly everyone complains of. (Those that wrote the law don't complain. They are the only ones that do not.)

The health reform bills did nothing to address the second of these reasons and both expanded and perpetuated the first, and that by leaps and bounds.

Imagine a market landscape where health care providers could spend their time dreaming up ways to make it more convenient and less expensive for patients to get the care they need. As it is now, providers are forbidden from exploring most alternative delivery means, and are rewarded only for dreaming up new ways to get more money from third party payors.

Cheap and convenient one-stop-shopping? It would be great, but you can't get there from here.

The Law of Unintended Consequences

In a famous scene in the movie "Top Gun," the salty naval commander Stinger admonishes Maverick (Tom Cruise's character) that "your ego is writing checks your body can't cash."

One might well give the same admonition to Congress, poised this week to extend unemployment benefits yet again ($47 billion), assuage bellyaching physicians with increased Medicare reimbursement ($64.9 billion), and increase Medicaid payments to the States ($24 billion), along with a handful of other initiatives both noble and nefarious to the total tune of $190 billion.

Uhm.

That besides, at the official health reform blog (HealthReform.gov), Stephanie Cutter, Assistant to the President for Special Projects, put up a post May 19 titled "Yes, You Can Keep Your Health Plan." In it, she says, "while the Act makes many changes to the individual market, it specifically allows those who want to keep their current insurance to do so. Most of the Act's protections apply only to new policies, allowing people to stick with their current plan if they prefer."

Of course, this statement is premised on the assumption that the individual's "current plan" will remain available, a condition that is - - at present - - beyond the administration's control. For those Americans whose health insurance is provided as a fringe benefit to employment, the continued availability of the "current plan" is the decision of the employer. Not the individual, and certainly not the Obama administration.

Employers understand this, and have for some time. Long before the reform bill passed, employers were considering whether continuing the paradigm of employer-based coverage still made economic sense:

The primary source of instability in the employer-sponsored insurance market is the decrease in employers offering health insurance coverage to workers and their families. Between 2000 and 2008, the percentage of firms offering health insurance coverage to their employees declined from 69 to 63; for firms employing less than 10 workers, the decline was even greater – from 57 to 49 percent.

The administration understands this too, because the above quote comes (also) from the HealthReform.gov website.

Consider the following factors in play:

• The reform bill did nothing to address the cost of care, which will continue to go up


• Premiums, which reflect the cost of care, will also continue to go up


• A surplus of employable individuals mean that businesses need not offer enhanced benefits to attract workers


• More employers, already at or near the break point of providing health insurance coverage as an employment benefit, will elect not to


• When employers drop health insurance as a benefit, the Obama administration's promise of being able to keep your "current plan" will be worthless.

Not that that would be a bad thing, necessarily. There are lots of reasons why employer-sponsored health insurance is a poor model on which to structure health care delivery.

But remember, of course, that we now have an individual mandate to purchase insurance. Individuals will be forced to continue supporting a third-party-payor model that overpays providers for poor quality care - - propping up what will be then be 1/5 of our entire national output while servicing a debt that exceeds 90% of GDP. That is what living in America will mean: being forced to support an otherwise unsupportable industry using money our grandkids will work their entire lives to pay off. That's not a future I want, and it's not a future I want for my children.

The "health care crisis" can be traced back directly to government intervention. The employer-based, third-party payor system thrived in the 50s and 60s because Congress and state governments thought it was a great idea and enacted laws that favored that model over others. Managed care thrived and became mainstream in the 70s and 80s because Congress and state governments thought they were awesome and enacted laws that favored that model over others.

The unintended consequences of all that government intervention is a system that has priced itself out of viability and yet delivers low quality care. Free markets frown on such results, and thus both individuals and business had begun to turn away from that model. But rather than return to free market principles, the recent reform bill corrals all of those that would flee and throws them right back into the third party-payor, managed care system by way of the individual purchase mandate.

That is not legislating to the benefit of the American people; it is legislating to the benefit of an outdated idea that should have died a long time ago. That is not legislating to the principles of a free market; it is legislating to the principles of a command market. That is not liberty; it is involuntary servitude to the third- party payor model of health care reimbursement. And involuntary servitude is the unintended - - but very real - - consequence of Obama's health care reform.

To See How National Health Reform Could Play Out, Watch Massachusetts Carefully

In 2006, Massachusetts enacted a series of health reforms similar in many ways to those enacted at the national level in 2010. The state instituted an "individual mandate," an independent insurance "exchange," expansion of publicly funded health programs, and individual market reforms. The hope was to make insurance more affordable by adding more people to the insured pool.

That hasn't happened, because lawmakers forgot (or perhaps never bothered to learn) that most of an insurance premium derives from the prices paid out for medical services under the policy.

By insuring more individuals, the reform law increased demand for services, creating upward price pressure. Do you suppose a doctor with a waiting list of 1,600 individuals could afford to raise prices just a bit? Ya' think?

Insurers, taking such price increases into account, foresaw premium increases. But big premium increases didn't fit the nice political picture of How Things Are Supposed To Be, particularly when Massachusetts is the poster child for federal health reform eforts. A disaster in Massachusetts would take the momentum out of national efforts modeled on the same principles.

So to make it right, Massachusetts insurance regulators simply declared all of the premium increases "unreasonable" and denied them. (OK, not ALL - - just 235 out of 274.)

Now what do you get if you are an insurer and you have upward pressure on your expense side and a regulator has imposed a freeze on your revenue side? You get losses. Big time.

Here in New York we have heard this song before. A couple of times, actually, but most recently when it was revealed that Physicians' Reciprocal, a medical malpractice insurer, was more than $43 million in the hole and insolvent from an accounting perspective. Why? In no small part because Eliot Spitzer, before being drummed out of office for soliciting prostitutes, imposed a premium freeze on malpractice insurance rates. Like the Massachusetts freezes, that was done for political reasons. Like the Massachusetts freezes, the result is cash-strapped insurers.

Health care providers like to pretend that health insurers hold all the cards when in comes to negotiating price. Available data (again from Massachusetts) suggest otherwise. Networks sell policies, and in the case of sole hospitals in unpopulated areas insurers are virtually at the mercy of the hospital - - because without the hospital, the health plan can't sell any policies at all.

If all of this is true, Massachusetts hospitals should be sitting fat and happy under the new reform regime. And indeed they are.

Health plans are also boxed in by federal anti-kickback and antitrust laws, which prevent them in many cases from forging new relationships with providers or devising new payment methods that would incent quality over quantity.

As a result, there is very little, if any, downward pressure on the largest component of health insurance premiums - - the price of medical services. And so the costs go up - - and up and up and up. Even in places like Provo, Utah, where healthy residents live in an area dominated by a medical system famed for its quality-over-quantity intitiatives, the price of care is still soaring.

Massachusetts proves that spreading the pain over a larger pool of members still results in unbearable pain when no effort is made to control the cost of care. The federal reform effort is not much different. Health reform proponents point to a few measures in the bill that hint at cost control. This is tinkering, if you could even call it that.

The Obama administration will do its best in the coming months to prop up Massachusetts and to paint a rosy, rosy picture of health reform. It will do this to protect the Democrats in Congress who supported the measures and try to avoid bloodletting at the polls.

It will do this at the ultimate expense of the ultimate payors for health care services: you and I.

A free market would require health care providers to justify their prices to the ultimate payors - - their patients. The problem with health care is that the current market is anything but free. Unless and until we take steps in that direction, look for the cost of care to go nowhere but up.

Braly's Obama Letter is a Bad Move

WellPoint CEO Angela Braly has told President Barack Obama by way of a letter that attacks on health insurers "must end."

I feel fairly comfortable in saying that Obama's attacks on health insurers will not end, Braly's letter notwithstanding, anytime soon. And here's why:

Support for Obama's health reform is weak. More American's opposed the health reform bill than supported it, and of those that were undecided at the time the bill passed, more have decided against it than in favor of it. Generally speaking, social programs do not begin with much popular support as they go against a very long tradition in the United States of self-determination and personal responsbility.

Backlash against health reform is strong. Tea partiers, 9/12 movements, and traditionally conservative organizations are using health reform as a rallying cry. Twenty states have launched legal challenges to the reform bill and more yet may be coming. Incumbent Senator Bob Bennett of Utah was recently decapitated (figuratively speaking) by his own Republican party due in no small part to his support of the Wall Street bailout and support of bipartisan health reform efforts.

In light of these two factors, Obama needs to work continually to gin up support for the health reform initiative and protect his party. If he doesn't, his party and centrist Republicans are facing certain slaughter in the November elections. That is why Secretary of Health and Human Services Kathleen Sebelius has become the most vocal Obama cheerleader, "trumpeting" health reform's immediate impact even as she cajoles insurers into acting early on select implementation issues.

Health insurers were the whipping boy of the Obama administration. Anthem's (a WellPoint subsidiary) ill-timed rate increase in California breathed life into what was a very nearly dead effort to pass a reform bill.

The AMA grudigngly supported Obama's reform in exchange for the "Doc fix," a change to Medicare reimbursement that the Congressional Budget Office recently re-estimated will cost $276 billion over the next 10 years - - an increase, by the way, of 33% over CBO's previous estimate and a giveaway of more than twice the entire estimated "savings" of the health reform bill itself.

Hospitals are community anchors and are untouchable despite growing skepticism over their financial practices. In rural communities, hospitals are often the only sizable employer other than government and school districts.

Patients, of course, are ultimately voters and so they must be made out as innocent if not unwitting victims.

And that leaves insurers. And hey, it worked in March because the health reform bill indeed became a reality.

So it is a fair bet that Obama will go back to the "health insurers are evil" well many, many times between now and November.

Braly now says the country has a history of coming together after tough debates, and "health reform should be no different." This conciliatory statement underestimates the robustness of the backlash against reform, and will ultimately serve only to hearten the administration in its effort to gain support for its agenda - - from anywhere they can get it.

WellPoint would have been better served by throwing an elbow. Eighty-five to ninety percent of the increasing cost of insurance is due to the increasing cost of care. Health care payors are largely hamstrung by restrictive state and federal laws from pursuing efforts to reduce the cost of care, and the administration has done nothing but protect physicians and drug manufacturers from downward price pressure. WellPoint would have been better off asking why Obama is working so hard on only 12% of the problem while ignoring the other 88%.