Enron’s Ghosts Capture Health Insurance Reform - FDL

[WillyT]

Enron’s Ghosts Capture Health Insurance Reform
By: Scarecrow - FireDogLake
Thursday March 18, 2010 9:39 am

<snip>

Last July, I wrote a post on how Enron’s free market views influenced the original design of the California electricity market and contributed later to its collapse. I pointed out the parallels between Enron’s flawed market designs and the debate over the public option in the proposed health insurance reforms.

It’s worth revisiting, because matters are now much worse than they were then.

So what kind of structure and rules did Enron demand? First, it needed to eliminate competing institutions that might be able to connect producers and consumers more directly and efficiently. It argued for, and got, a structure that tended to require middlemen.

There was a proposal for a quasi-government "power pool" — a public pool in which producers could sell and consumers/buyers could purchase power directly without a middleman. For a year of debates, Enron and other marketers did their best to eliminate that "socialist," government-controlled concept, but the small band of bureaucrats and allies convinced the state to keep the pool.

Second, once the pool was accepted, Enron’s next tactic was to limit access to the pool. Enron argued for rules that required all non-utility buyers to arrange private contracts to cover their needs, instead of relying on the public pool. That would result in many more opportunities for Enron to be the middleman in those private contracts. The small band of bureaucrats argued against that limitation with some success, but Enron got concessions that tended to discourage many parties from using the public pool.

Enron’s third tactic was to demand operating rules that would force the public pool to operate at higher costs. The bureaucrats objected to these rules and took the dispute all the way to the Governor’s office, but they lost to the Governor’s largest campaign contributors (he still had debts from a failed Presidential run). It was an important defeat.

The Power Pool was eventually created, but it’s rules hobbled it and forced it to operate at higher costs. One particular rule required the public pool to ignore feasible cost-savings and instead deliberately choose higher cost energy when serving customers of the public pool. That made non-pool contracts more attractive and drove non-utility buyers/sellers to Enron’s traders.

Enron and its gullible supporters convinced state and federal regulators that since they were market competitors, their competition would always achieve the lowest cost results, so the public plan should be deliberately forced not to achieve the lowest cost, because that would drive marketers out of business, and they should be protected. California’s largest electricity customers, and federal regulators, bought this ridiculous argument.

Finally, Enron demanded, and got, rules that required the grid system operator to be separated from a part of the public pool — the market separation fallacy. When combined with other ill-advised rules, this meant that the public plan and system operator were often flying "blind," unaware of grid conditions when Enron and other parties were manipulating the market. The result: Enron and others manipulated the market with virtual impunity, raking off hundreds of millions (and some claim billions) of dollars.

If you recognize this pattern, it’s because we’re seeing analogous tactics and strategies in the current health care reform debates.

We see a powerful group of middlemen, the insurance industry, trying to structure the market to require that they remain in the middle of, and extract a rent from, all money flows between providers and patients, as though that’s the only logical structure, even though it’s not.

We see efforts to eliminate any public alternative — the public plan (operating inside a public exchange) — that might be more efficient in reducing and covering costs.

And we see the middlemen and their political supporters in Congress deliberately hobbling the public plan, raising its costs, and restricting access to that public option, on the theory that we shouldn’t do anything to undermine the current private insurance industry. After all, they argue, private markets are always more efficient than a government operation.

That was how I saw the parallels last July, when the public option was still a possibility, but I warned that differences between products, markets, institutions, etc, made such comparisons risky. Yet the sad and astonishing part is that as the health care debate has evolved, the Enron free market view from 15 years ago has triumphed in the proposed health insurance reforms.

There is no public option, so there will be no public insurance altenative and safety net to protect consumers from private insurance discrimination, excessive rates, and other abuses. The insurance market now embedded in the Senate bill is worse that what Enron and its political allies helped design for California’s electricity markets.

We can now see other parallels and predict what might occur in this new insurance market. In California, state and federal regulators failed to pay attention to the concentration of producers — only a few large firms controlled most of the generation, even after the utilities were induced to divest much of their generation monopolies. The predictable problem of market power would then combine with the ability of Enron and other financial marketers to manipulate Enron’s flawed rules. They would then create artificial shortages, exacerbate real shortages (from droughts, nuclear outages, etc) and then bilk consumers for hundred of millions of dollars. And on top of that, state regulators imposed a mandate on utilities to purchase all their residual power from the new flawed "exchange" market. Sound familiar?

Will something analogous happen in health insurance markets? We don’t know, and all crises are different. But we know the health insurance and provider markets are egregiously concentrated — one or two mega-firms control most of the market in most states. We know the industry is still protected from anti-trust laws; until that’s fixed, there’s no way for state or federal governments to bust up the firms with the most market power or prevent collusion to fix prices. And we know consumers will be forced to purchase insurance within this concentrated market and given subsidies to help them do it.


Link: http://seminal.firedoglake.com/diary/35854

:shrug:

[ibegurpard]

1. but at least it's something...

right? right?

[leftstreet]

2. K&R

This has the potential to make Enron look like child's play

[ProSense]

3. Nothing demonstrates intelligence

more than comparing Enron to health care reform.

[girl gone mad]

6. NoSubstance.

[laughingliberal]

4. Do we have no elected officials who can learn from history?

Oh...wait...they have health care paid for by us. Guess as long as its the working and middle classes getting gouged, it's NBD.

[EFerrari]

5. They learn the wrong things. Enron nearly yielded the Republicans CA.

We were hanging by a thread here until the 2006 midterms put in a Dem Secretary of State that started rolling back the election fraud. It was *that* close, imo.

[eridani]

7. Health risk pools happen to be a natural monopoly

My employer used to offer three health care plan options—Cigna, Premera and Group Health. They just cancelled all but Premera. So much for “choice” and “competition.” The reason why they eliminated choice ought to be obvious—by giving Premera a much larger captive risk pool, they likely got a much lower per capita price for the insurance. Eliminating choice and competition is saving them a lot of money. And now Vanna, tell our contestants what they will win if they correctly answer the grand prize question “What is the biggest and cheapest possible risk pool of all?”

The answer is obvious—the entire population of the country. Large risk pools that reduce choice are cheaper by nature, which is why health care risk sharing trends toward being a natural monopoly, like the provision of electrical power. And any natural monopoly which is not either owned by or regulated by the public will inevitably screw consumers big time just because they can.

The last time a big state gave in to the ridiculous argument that deregulation, fragmentation and “choice” was the answer to reducing energy prices, we had Enron and Reliant withholding power from the California market to jack up prices, causing a major energy “crisis.” Few in the mainstream media noise machine bothered to point out that none of the cities with municipally owned utilities had any “brownouts.”

Yet the President and even Congressional members of the Progressive Caucus are spouting bullshit about how more use of “competition” and “choice,” that is to say creating as many smaller risk pools as possible, is the way to hold down health care costs. The reality is that all private health insurance, whether for profit or non-profit, currently operates on the Enron/Reliant business model, and current health “reform” offers nothing but throwing our tax dollars at Enron/Reliant and asking them to pretty please not charge members of the public as much.

It is a general economic principle that competition in the area of what should be public goods does nothing but drive costs skyrocketing upwards. If you aren’t familiar with the studies demonstrating that communities of similar size with more than one hospital have health care costs that are much higher than those communities with only one hospital, you could at least apply basic common sense to the issue.

If Seattle had three competing for-profit fire departments, fire protection costs would rise dramatically, as the public would have to pay capital and operating costs for three duplicate sets of equipment. If a new hospital opens in a town with one hospital, the public is not going to obligingly start to have more heart attacks. Both hospitals will have fewer patients per item of capital equipment, and will dramatically raise prices to compensate.

Therefore it ought to be obvious that current health care proposals cannot possibly work, because Congress and the administration flat out refuse to regulate health insurance. (Requiring a higher medical loss ratio is in no way shape or form regulation—there is no enforcement mechanism, and it is much too indirect.) Single payer (HR 676/HR 1200), which is health care that is publicly funded and privately delivered, is the best solution that has been legislatively proposed so far, although it is not the only way to reign in the insurance companies.

In Britain and Scandinavia, the government owns and operates the entire system, as is the case with Seattle City Light. However, given that we are having enough trouble just making health care financing rational, changing the entire delivery system as well is impractical and hopeless at this point.

In countries like the Netherlands, Japan and France, universal health care is provided by government regulation of private insurers (and hospitals, pharmaceuticals and health care providers), the way that the Public Utilities Commission regulates privately owned utilities here. In other words, their governments directly dictate what benefits must be offered and what they must cost. That could work here, except that Congress flat out refuses to consider it for the exactly the same reason they refuse to consider single payer. The premiums that the Dutch pay under their mandatory private insurance system are 100 euros/month/adult, with NO co-pays, NO deductibles and NO age rating. This is in the same ballpark as the $125/month/adult proposed in HR 676, or the $100/month/adult proposed by the Washington Health Security Trust. (The Netherlands has, and single payer legislation here proposes, payroll taxes above a certain threshold paid by employers as well.)

Many people argue that we shouldn’t attempt to get single payer all at once. It is certainly possible to start out smaller, but only if there is a government-run program for a risk pool that is large enough. A public option that anyone could join would work, given that about 60% of the population wants government-paid health care. So would gradual Medicare expansion, assuming that the problem of geographic inequities in reimbursement rates is addressed. Of course insurance companies oppose both of those things on the grounds that they could lead to single payer, which is why our bought and paid for representatives eliminated even extremely watered down and restricted versions of these two options, as well as government-negotiated drug prices and drug reimportation. Therefore the issue is not gradual vs. immediate implementation of public control of health care costs; it is how long the public is going to tolerate Enron-style abuse of a pricing monopoly.