Mandates in Health Insurance Policies

The Wall Street Journal has an editorial last week on "New York's Mandate Disorder"

On Tuesday Governor Andrew Cuomo signed a bill that will require Empire State insurance companies to cover autism, including screening and a variety of treatments. Mr. Cuomo called it "inexcusable that financial constraints would stand in the way of a brighter future for those affected by this disorder." ...

The economics of mandates are simple: Benefits aren't free, and their costs will be built into insurance premiums. If the government requires insurers to, say, allow "children" as old as age 26 to remain on a family plan, the plan will be more expensive. This is especially true for autism, where therapy can cost as much as $72,000 annually and even $67,000 for a moderate case, according to a study by the Harvard School of Public Health.

The academic rule of thumb is that the average mandate increases premiums by 0.5%, which doesn't sound like much except that states usually go in for dozens. New York has more than 50, which means premiums are at least 20% more expensive than they might be if individuals and small businesses were allowed to make the cost-benefit tradeoffs for themselves. Premiums in New York are roughly twice the national average.

Since the worst of New York's coverage and pricing rules passed in 1994, the individual market has contracted by 96%. Research in 2009 by University of Minnesota economist Stephen Parente and Tarren Bragdon of the Manhattan Institute found that 36% of the New York uninsured would have coverage today if state regulations were merely in line with the national trend.

New York does not say that a company has to provide insurance for employees, just that any insurance company operating in New York must provide coverage for autism and other specific things. Should New York have any such mandates, or should it let the marketplace decide what insurance is offered?

Using Credit Histories for Employment

The Wall Street Journal story "Next Frontier in Credit Scores: Predicting Personal Behavior," tells how credit report companies are developing new numerical predictors. The company Fair Isaac developed the FICO score which is a standard predictor of whether someone will repay loans. They are now developing products such as the Medical Adherence Score that tries to predict whether someone will take the pills they've been described without needing a reminder. The data collected for one purpose are increasing used for others. The story says:

About 60% of employers check credit histories of some or all prospective hires, according to a 2010 survey by the Society of Human Resource Management....

A credit history may have hurt Deborah Aston, who managed the city-owned parking lot at the Eugene, Ore., airport from 2006 to 2010, after the city hired a new company, Republic Parking System, to run the lot. Republic required a background check for employees who wanted to keep their jobs.

Ms. Aston, who had filed for bankruptcy in 2009, wasn't re-hired. She said a Republic manager initially cited her bankruptcy filing, then later told her she had a poor attitude. She filed a complaint under an Oregon law that took effect in July 2010, limiting employers' use of credit information.

Should companies be allowed to use credit histories in deciding which job candidate to hire?

Which Loans Should Be Paid Off First?

From an interview with Professor Dan Ariely of Duke:

ARIELY:Imagine you have two credit card debts, one is for $10,000, one is for $4,000. The one that is for $10,00 you're paying 10 percent interest rate, the one that is $4,000 you pay 4 percent interest rate. Which one would you pay first?

Ryssdal: I'm going to pay down the $10,000 one because it's got the higher interest rate, and it's the larger principle.

ARIELY: That's right. And it seems quite trivial that that's what people should do.

Ryssdal: All right, just for the record I think that's the first time in one of your hypothetical studies that I've actually gotten the right answer. I'm just saying. Anyway, go ahead.

ARIELY: So it sounded quite a simple problem to solve. And we assumed initially that people would just get it right, but nevertheless we did an experiment. We gave people six different loans, that's varied on how much money they owed, and how big the loan was, and what was the interest rate. And people played this game over time, with 36 periods. And what we saw was that people overemphasized closing loans. So if you had four loans, and you could put some money into closing one of them, this was too tempting for people, and they did it very often. And they did it instead of putting the money where it could work the best.

Why do you think people don't reduce their high-interest loans first?

The Lincoln Park Raid

The Harris family had lived in Lincoln Park, Chicago since 1970. Since then, it had become a wealthy neighborhood, but they had stayed put, despite offers of over a million dollars for their dilapidated home. The owner is now 77. His son Michael lived there, who had a history of burglary and shoplifting, and other relatives too, with cleaner records. Then they were raided by the police. Here are some excerpts from the news story (but read the whole thing):

No meth was found inside the Harris home. The police did arrest two family members on animal-related misdemeanors, and took away four dogs. But they found no evidence of the crimes some neighbors had suspected, the kind that typically call for 40 officers. No drugs. No guns. No dogfighting. The 40 officers on the scene — from the Chicago Police Department Animal Crimes Unit, two SWAT teams and the Cook County Sheriff's Department — left....

As the smoke cleared, a building inspector arrived. The Harrises knew that their house was rundown. In a neighborhood of new mansions, it stood out, with its bedraggled American flag, the window fan, the brown wooden steps that sloped straight to the sidewalk. But they had never been issued a building code violation. Now the inspector wrote down dozens of infractions, and made another list for an adjacent home where two of the Harris daughters live. Bad wiring, clogged gutters, torn siding, broken plaster, rotting window sashes, unsanitary living conditions. An emergency order to vacate was issued....

From the beginning, friends and relations were in and out of the Harris house on Sheffield. Mr. Harris masterminded the community garden. Friends sat out front talking, drinking and playing checkers, customs the family maintained through the decades, sometimes to the consternation of new neighbors who conducted their social lives in the privacy of back patios and decks....

After the raid, a news release about it appeared on the 18th District CAPS website. The release, noting that citizens had complained of animal cruelty and "gang/drug sales," concluded with the statement: "This is an excellent example of the police and citizens working together." What the release did not note, however, was that no one was charged with "gang/drug" sales. It did not note that Michael Harris was arrested only for the largely unknown misdemeanor of being a felon in possession of non-neutered dogs. After he got out of jail, he collected money from neighbors to have one of the dogs, Kiki, spayed and returned to the family. Meanwhile, the case against one of the Harrises' grandsons, Andrew, 21, remains in court. According to the misdemeanor charges, his two pit bulls were malnourished and maltreated. According to the family, they were fed and watered daily and never used to fight.

Building codes are a response to asymmetric information. Animal cruelty laws can be seen a a response to externalities--- that some people feel disutility if other people mistreat animals. What does the Harris story tell of the dangers of regulation?

Irradiating Food--- Scary, but Safe?

In "When Precaution Trumps Public Safety" Matt Ridley talks about the regulation of irradiating food to kill germs:

A technology that might have prevented contaminated produce from infecting thousands of Germans with E. coli was vetoed—by Germany—11 years ago for use in the European Union. Irradiating food with high-voltage electrons is a process that can kill bacteria on or in solid objects, just as pasteurization can kill them in liquid foods.

When the European Commission proposed in 2000 that irradiation be allowed for a greater range of foods and at a higher dose, the German government vetoed the measure. In the U.S., food irradiation is used for various products, including ground beef, but most retailers resist the practice, lest the word "irradiated'' on the label scare off customers....

The food-irradiation industry has argued strenuously for decades that its technology is proven to be safe, cannot leave food radioactive and does not taint the taste of food. Yet even in the U.S., legislation requires that irradiation be shown not just to have net benefits but to do no harm at all—no diminution of vitamin content, for example....

The most common means of food irradiation is to use an electron gun of the kind found, until the arrival of flat screens, in every ordinary TV set.

Politically, why do you suppose Germany would ban such an apparently safe technology? Why would U.S. regulators be wary of approving it?

Japan's Nuclear Power Plants

"Power Companies Borrow Record in Loans as Cost of Fuel Jumps" talks about the troubles of Japan's investor-owned utilities.

Tokyo Electric Power Co., Japan’s largest utility, and its peers are facing lower profit margins as the shutdown of Japan’s atomic plants after the world’s worst accident since Chernobyl has forced the utilities to burn more natural gas and coal to meet demand. ...

There were no bond sales announced by nuclear plant operators in Japan since the quake, Bloomberg data show. The extra yield investors demand to own power company debt instead of similar-maturity government notes soared to a peak of 202 basis points on June 29, from 12 basis points a day before the disaster, according to Bank of America Merrill Lynch data.

The spread narrowed to 39 basis points on Oct. 5, following Tokyo Electric’s win of state support to help compensate Fukushima victims on July 28. ...

The March 11 disaster triggered explosions at the Fukushima plant operated by Tokyo Electric, contaminating soil, waters and forests with radiation. Since then, reactors that were stopped for maintenance remain shut amid government- mandated tests to assess whether the plants can withstand strong quakes, tsunamis or a loss of power to cooling systems.

As of Oct. 6, only 10 of the country’s 54 nuclear reactors were generating power, according to Japan Nuclear Technology Institute data.

Should the utilities bear the cost of the nuclear plant shutdowns?

Duke Energy's Coal Gasification Plant

Daniels: Duke Energy Should Underwrite Edwardsport Plant says:

Utility Company Duke Energy wants customers to underwrite $920 million in over budget expenses at its Edwardsport plant.

The Indiana Utility Consumer Counselor's Office said Duke was unqualified to build the plant and should be held responsible for going over budget, 6News' Norman Cox reported.

Indiana Gov. Mitch Daniels said he supports the recommendation and said he just wants to see the plant finished.

"I just want to see it there, using Indiana coal, paying Hoosiers, as opposed to people in other states paying for the energy we need," Daniels said.

Upon completion, Edwardsport will be the largest coal gasification plant in the world.

The plant will process Indiana coal into cleaner-burning natural gas which it will burn to produce electricity.

The Consumer Counselor's Office testimony said that Duke essentially botched the construction of the plant because it refused to hire a qualified outside construction manager to build it.

As a result, the plant, which was supposed to cost $1.98 billion, ballooned to $2.9 billion.

This looks bleak for Duke Energy. Can you think of any excuses they might have that would justify putting the entire $2.9 billion in the rate base?

A No-Compete Agreement

In "Ninth Circuit Limits the Scope of In-Term Covenants Not to Compete," the Intellectual Property Blog tells how the comedy club Improv West made a contract with CCI that gave CCI exclusive use of the trademarked "Improv" name, but also prohibited CCI from opening comedy clubs under any other name:

Defendant Improv West ("Improv") is the founder and owner of the Improv Comedy Club trademark. It entered into an agreement with Comedy Club International ("CCI") providing that: 1) CCI had an exclusive right to use the "Improv" name to open comedy clubs in the United States, 2) CCI had to open four clubs a year for the first three years, and 3) CCI was prohibited from opening comedy clubs under any other name until the agreement expired in 2019.

CCI failed to open the requisite number of clubs. Improv immediately cancelled CCI's right to use the Improv name, began opening its own clubs, and sought to enforce the non-compete for the term of the agreement because CCI continued to run established Improv clubs.

The court ruled that the agreement did not violate anti-trust laws, because it didn't reduce the competitiveness of the comedy market substantially. The Court did say that it would enforce the no-compete agreement only in markets where new CCI clubs would directly hurt Improv profits, since California state law bans extreme no-compete contracts.

What the courts try to do in a case like this is to see whether the contract will end up destroying value (by reducing existing competition in the market) or increase it (by allowing two firms to help each other improve their product or reduce their costs.

California law, however, says the state will not enforce agreements not to compete that block competition in a substantial section of the market, so the Court ruled that CCI was only blocked from opening new clubs in counties where it already was operating an Improv club.

A Tax Software Merger

In "U.S. Sues to Stop H&R Block Deal for Rival,", the WSJ says:

The Department of Justice filed a civil antitrust lawsuit on Monday to stop the biggest U.S. tax preparer, H&R Block Inc. from buying the maker of a rival, do-it-yourself tax preparation product called TaxAct....
The top three companies in the field account for 90% of the sales of online tax programs and do-it-yourself tax-filing computer software.

The proposed purchase "would combine the second- and third-largest providers in that market and essentially create a duopoly," the department alleged in a complaint filed in a Washington, D.C., federal court. H&R Block had agreed to buy 2nd Story Software, or 2SS, in a transaction valued at $287.5 million in October.

TaxAct has served as "a maverick in the market," prompting its two rivals to lower prices by introducing such innovations as offering free filing of federal tax returns on the Internet in 2005, the Justice department said. The department's complaint cites internal H&R Block emails that it said show Block wanted to buy the TaxAct maker to "regain control of industry pricing and avoid further price erosion."
... The department cited an internal H&R Block email saying that "the other possible strategic consideration is that Intuit and HRB together would have 84% of the digital market and we both obviously have great incentive to keep this channel profitable."

Will blocking this merger encourage further entry into the industry?

One thing I wonder is why the US government does not itself give away or sell tax preparation software. Is there a good reason for it not to?

The Proposed Merger of ATT and T-Mobile

In "T-Mobile Antitrust Challenge Leaves AT&T With Little Recourse on Takeover," Bloomberg says

AT&T Inc. (T) wouldn’t have much luck trying to salvage its proposed $39 billion takeover of T-Mobile USA Inc. through negotiation with the U.S. Justice Department, leaving a court fight as its only recourse, lawyers said.

The combination of the country’s second- and fourth-largest wireless carriers would violate antitrust law and “substantially lessen competition,” the U.S. said in a lawsuit filed yesterday in federal court in Washington. The Justice Department asked U.S. District Judge Ellen Segal Huvelle to block the deal.

It would be strange for a merger of such large firms in a concentrated market to be permitted. What is most surprising is that ATT has agreed in its contract with T-Mobile, owned presently by Deutsche Telekom, to pay about $10 billion if the merger doesn't go through:

Rejection by regulators would leave AT&T liable to pay Deutsche Telekom $3 billion in cash, to give T-Mobile USA wireless spectrum, and to reduce charges for calls into AT&T’s network, a package valued at as much as $7 billion

FTC vs. Justice Department

"This Takeover Battle Pits Bureaucrat vs. Bureaucrat," in the WSJ says

Many antitrust lawyers believe that several deals that were approved by the Justice Department during the Bush administration—including Whirlpool Corp.'s purchase of Maytag Corp. and the merger of Sirius Satellite Radio Inc. and XM Satellite Radio Holdings Inc.—would have been challenged by the FTC. Whirlpool and SiriusXM declined to comment, as did the two agencies....

Some methods used to resolve agency disputes belie the stakes involved. In addition to the most recent coin toss—which several people familiar with the matter said the Justice Department won—the agencies have employed the "possession arrow" system borrowed from college basketball, in which they take turns.

How else might the agencies decide who should analyze a given merger proposal?

Scott Adams on Taxing the Rich

Dilbert cartoonist Scott Adams says in "How to Tax the Rich: Try giving them perks and privileges (an extra vote?) in return," (Wall Street Journal, January 29, 2011):

When you are poor, you are willing to trade your time to earn money. When you are rich, you trade your money to get more time. For example, the rich hire people to clean their homes, and they don't waste time shopping for bargains. In business school I learned that when people have different preferences, you can usually find a way to engineer a deal.

Suppose we change the tax code so that in return for higher taxes on the rich, we figure out a way to give the rich some form of extra time. The bad version is that anyone who pays taxes at a rate above some set amount gets to use the car pool lane without a passenger. Or perhaps the rich are allowed to park in handicapped-only spaces.

Another suggestion is this:

Suppose the tax code is redesigned so that the rich only pay taxes to fund social services, such as health care and social security. This gives the rich an incentive to find ways to reduce the need for those services, which would in turn keep their taxes under control. Perhaps you'd see an explosion of private investment in technologies that make it less expensive to provide health care. You might see rapid advances in bringing down the cost of housing for seniors.

Would both of these be more value-maximizing than simply an increase in the tax rate?

Inframarginal and Extramarginal Workers

Ike Brannon says in "What is a Life Worth?" Regulation, Vol. 27, No. 4, pp. 60-63, Winter 2004:

If I make $40,000 and my twin brother makes $42,000 at a job that is identical to mine in all respects except for a 1 percent greater chance of death, then an economist assumes that the $2,000 difference is a premium my twin brother requires to accept the riskier job. If he requires $2,000 for a 1 percent greater risk, then I can infer that he is placing a value on his life of $2,000 x (1 ÷ 0.01), or $200,000. There are problems with this approach. University of Wyoming professors Jason Shogren and Tommy Stamland argue that nearly all revealed preference studies are biased upwards to some degree. They observe that the wage at a particular job is just enough to entice the marginal worker. The other workers require less some limit money to accept the risk.

On the other hand, a downward bias is that there are lots of people who did NOT take the job because they require even more money to accept that risk.

Negative Interest Rates?

"Inflation Bonds Are Sold With Negative Yield for First Time" said the New York Times in 2010.

The $10 billion auction of the five-year bonds sold at a negative yield of 0.550 percent, according to the Treasury Department....Bond prices rose, with the yield on the 10-year Treasury down to 2.53 percent from 2.56 percent late Friday.

How could this happen?

A Successful Lobbying Campaign--- The Connecticut Education Reform Bill Watered Down

The second biggest teacher's union is the AFT, the American Federation of Teachers (the biggest is the National Education Association, made up of state unions such as the CEA, Connecticut Education Association). They put a powerpoint presentation, "How Connecticut Diffused The Parent Trigger" on their website (in pdf) explaining in detail how they gutted a bill that would have given parents more power over poorly-performing schools. Rather than kill it, they purposely kept it alive but made it empty of meaning.

This is standard stuff, and a good case study for how a business can affect legislation, but the webpage "The AFT’s Real Feelings about Parent Power" criticized it, and it didn't look good that prominent on the slide "What Helped Us" was "Absence of charter school and parent groups
from the table". As I said in class, though, that's central to politics--- if you're unorganized or rationally ignorant, your surplus is weighted less heavily or not at all in politics.

Should Judges Be Appointed, Elected, or Chosen by a Nonpartisan Commission?

"Missouri: Trial-Lawyer Heaven" at National Review's Bench Memos blog says:

Late last week Missouri’s judicial-nominating commission selected the three nominees from which Gov. Jay Nixon must choose the state’s next supreme-court justice. ...
Three of the commission’s seven members have extremely strong ties to the state’s trial lawyers, and the chairman, Chief Justice Richard Teitelman, is on the board of the Soros-funded American Judicature Society. So it shouldn’t surprise anyone that the commission came through with a trial lawyer’s wish-list.

The Missouri Plan was designed to produce precisely this sort of result. The progressive legal reformers who came up with the idea saw it as the surest way of placing control over judicial selection in the hands of “experts,” left-leaning bar apparatchiks. ... It does so by allowing a commission, usually lawyer-dominated, to make the judicial nominations. Not surprisingly, this structure benefits the special-interest group that dominates the state bar: trial lawyers. Textbook agency-capture.

Justice O’Connor and her allies in various Soros-funded groups have been campaigning across the country on the argument that the Missouri Plan is a non-political method for selecting judges. ... They argue that, unlike the federal model or contested elections, the Missouri Plan removes partisanship and money from the equation and forces “merit” ahead of philosophical considerations.

As the Wall Street Journal documented (see here and here), former Republican governor Matt Blunt was repeatedly sent lists of trial lawyers and Democrats. And Professor Brian Fitzpatrick’s empirical study of the Missouri Plan nominees demonstrates that it would probably be impossible to tilt judicial nominations further to the left without actually having the Democratic party itself pick the judges.

"The Dog Ate My Homework" Bill

In "A Late Addition Worth $214 Million: Amendment to the Patent Reform Bill Last Week Would Benefit Powerful Law Firm, Drug Company," Roll Call magazine writes about what is known in the blogosphere as the "The Dog Ate My Homework" bill:

The House might have sworn off earmarks, but that didn’t stop the chamber from essentially passing one last week that would allow a single drug company to avoid generic competition while saving a powerful law firm from paying out $214 million in a malpractice suit.

The amendment, authored by Rep. John Conyers (D-Mich.) and added to the patent reform bill Thursday, would have a direct benefit for the Medicines Co. by essentially ensuring it retains control of the patent for Angiomax, a blood-thinning medication and MDCO’s flagship product.

The provision would also be a financial boon to WilmerHale, which since February has had a malpractice settlement with MDCO hanging over its head that would require the firm to pay $214 million to the drug company — $115 million out of its own pocket and $99 million from malpractice insurance — if a generic drug is introduced before June 15, 2015.

Here's how the saga started:

At issue is MDCO’s 2000 application to maintain its patent over Angiomax. Following approval of the sale of the drug by the Food and Drug Administration in December 2000, the company had 60 days to file for a patent extension, which under the law would have precluded the sale of generic versions of the drug until 2014.

WilmerHale attorneys handling the application for MDCO technically filed the extension 61 days after the approval, and because the Patent and Trademark Office does not have authority to give applicants wiggle room in filing, the application was denied, meaning generics would hit shelves in 2010, costing MDCO an estimated $500 million to $1 billion in profits.

Here's the business strategy:

To regain control of the patent, MDCO opened up a three-pronged offensive. It filed suit against the PTO, arguing that because the FDA used a different interpretation to calculate the 60-day permit trigger, its 61-day filing time actually fell within the PTO’s definition.

MDCO also began malpractice proceedings against WilmerHale over its handling of the patent extension, while both MDCO and WilmerHale launched an aggressive effort to pass legislation overturning the extension rejection.

Over the next several years, MDCO and WilmerHale spent millions of dollars lobbying Congress, and several ultimately unsuccessful efforts to pass the legislation were attempted.

The amendment was sponsored by the Detroiter who I think is the longest-serving current member of the House, John Conyers:

In a floor statement before Thursday’s vote, Conyers, the Judiciary Committee’s top Democrat, called the language a “bipartisan amendment” that would make a “technical — but important — revision” to federal patent law.

“It addresses confusion regarding the calculation of the filing period for patent term extension applications,” Conyers said, adding that, “By eliminating confusion regarding the deadline for patent term extension applications, this amendment provides the certainty necessary to encourage costly investments in lifesaving medical research.”

For reference (you don't have to read it): Medicines v. Kappos, 731 F.Supp.2d 470 (2010).

The Canadian Government Wheat Monopoly

Canada Is Taking Aim at Its Wheat Monopoly says the WSJ:

The Canadian Wheat Board is poised to lose its monopoly grip on the country's wheat sales. Canada's Conservative Party captured a parliamentary majority this past spring, and newly elected government officials took that as a mandate to end the wheat board's reign.

The ripple effects from eliminating—or even weakening—the board's power would be widespread. Wheat prices, which already have experienced extreme highs and lows over the past three years, could become more volatile, some analysts say....

Farmers who favor the board, including its current chairman Allen Oberg, contend the benefits far outweigh the cross-border price differences that can emerge. By controlling the whole crop, the board has considerable power in global commodity markets to ensure Canadian farmers get the best price. Farmers also get an up-front payment that is backed by the government, and the board doesn't aim for a profit, so more money goes back to farmers than under an open-market system....

The board basically sells the grains and then divides the returns among the wheat and barley growers in western Canada.

So farmers get the average price over the course of a year, never capturing the top of the market, but also never selling at annual lows.

The board has added other pricing options over the years, including allowing farmers to sell their crop up-front for a fixed price.

The estimated return for a Canadian farmer in the board's traditional sales program is estimated at $7.19 to $7.48 a bushel for the spring wheat coming out of the fields now. That compares with Wednesday's U.S. cash price of $8.85 a bushel, according to MGEX.

The wheat board cautions against trying to compare the price Canadian farmers are expected to receive against current market prices in the U.S., saying the timing, location and system of sales are all different.

Poor Information about Borrower Quality

The New York Times writes in "U.S. Is Set to Sue a Dozen Big Banks Over Mortgages" that

The federal agency that oversees the mortgage giants Fannie Mae and Freddie Mac is set to file suits against more than a dozen big banks,...

The suits will argue the banks, which assembled the mortgages and marketed them as securities to investors, failed to perform the due diligence required under securities law and missed evidence that borrowers’ incomes were inflated or falsified. When many borrowers were unable to pay their mortgages, the securities backed by the mortgages quickly lost value.

Fannie and Freddie lost more than $30 billion, in part as a result of the deals, losses that were borne mostly by taxpayers.

It seems the claim is that the banks purposely refrained from checking whether the borrowers were lying about their creditworthiness, since the banks intended to resell the loans to Fannie and Freddie anyway.

Should the Rich Pay a Lower Tax Rate?

"Court strikes down Obwalden tax break for rich" says

The Swiss Federal Court has ruled that canton Obwalden's degressive tax system, aimed at attracting wealthy residents, is unconstitutional.

The country's highest court said on Friday that degressive income taxes ran counter to constitutional measures designed to ensure taxation according to economic performance.
...

Obwalden had adopted a degressive income tax system which meant that the richer you are, the less you pay. Those earning over SFr300,000 ($233,000) per year, for example, had a tax rate as low as one per cent.

It was introduced in 2006 following a cantonal vote as a way of boosting the fortunes of Obwalden, one of the poorest cantons located in Switzerland's mountainous centre.