The Incidental Economist

This post originally appeared on The Finance Buff.

I’m only now getting around to writing up something that happened several weeks ago at the London G-20 summit. Among the achievements was an agreement to issue $250 billion in new Special Drawing Rights (SDRs).

SDRs are diversified currency. A unit of SDR is a weighted sum of currency of the US (dollars), the Eurozone (euros), Japan (yen), and Great Brittan (pounds). They’re used as a unit of account by the IMF and traded and loaned like other currency (source). SDRs were created in 1969 to replace gold as the reserve asset. The idea was that exchange rates would be held fixed through SDR trades, a more convenient method than shipping gold. Today exchange rates float, obviating the original purpose of SDRs.

When new SDRs are issued the funds do not go to the IMF. Rather they are distributed to IMF member countries in proportion to their quotas. Based on this system, about 60% of the $250 billion in new SDRs will go to the reserve currency countries (the US, Eurozone, Japan, and Great Brittan), none of which have a need for new SDRs.

Some of the remaining 40% will end up in countries in greater need. A guide to SDRs published in The Economist reports that

“[T]he increases in the reserves of some emerging economies are not trivial. South Korea’s will grow by $3.4 billion, India’s by $4.8 billion, Brazil’s by $3.5 billion and Russia’s by $6.9 billion.”

Other poor countries can obtain more SDRs through loans from richer countries with higher quotas, something that could be done outside the SDR system as well.

The G-20 SDR agreement has been confused by some as a move toward a dominant world reserve currency. Such a thing could only happen if large, regular increases in SDRs were issued, an idea supported by Martin Wolf and George Soros. The confusion may have stemmed from misinterpretations of a white paper by the People’s Bank of China governor Zhou Xiaochuan and statements by US Treasury Secretary Tim Geithner. Both support only a one-time increase in SDRs, such as was accomplished by the G-20.

China may welcome the opportunity to purchase additional SDRs to diversify its foreign reserve holdings, though this is something it could do outside the SDR system.

Therefore, the role of SDRs is rather limited and a one-time increase in issuance of them does little to change the fundamentals. It did, however, make for a nice, if somewhat inscrutable, G-20 talking point.

This post originally appeared on The Finance Buff.

This is the third and final post on the basics of Medicare’s structure and payment systems. The two prior posts in the series covered fee-for-service (FFS) Medicare (post I) and Medicare Advantage (MA) (post II). In this post I focus on the relatively new Medicare outpatient prescription drug benefit, Medicare Part D.

Part D Basics

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) added an outpatient prescription drug benefit to Medicare (Part D), starting in January 2006. The highly subsidized benefit is available exclusively through private insurance plans, either MA plans offering bundled Part A (hospital) and Part B (outpatient) insurance along with a drug benefit or stand-alone prescription drug plans (PDPs) that offer no non-drug coverage (i.e., they complement FFS Medicare).

Medicare Part D accounts for 12% of Medicare spending, and about 60% of Medicare beneficiaries are enrolled in a Part D plan. Most enrollment in Part D plans (72% of it) is in PDPs. While I will focus more on PDPs below, the drug benefits available through MA plans are identical in structure and share the same payment system as PDPs.

PDPs serve multi-state regions, of which there are 34. Each region has at least 45 PDPs offered in 2009. Part D plan benefits take two fundamental forms: basic or enhanced. Basic coverage either follows a statutory minimum standard or is actuarially equivalent to it, while enhanced coverage offers additional benefits for a higher premium. Standard coverage has an average monthly premium of about $34 (in 2009) and is designed so the average beneficiary pays, at most, 25.5% of the cost of coverage, while Medicare pays the remaining 74.5%.

Standard coverage cost sharing is characterized by different coinsurance rates in each of four ranges of total drug spending (the sum of spending by the plan and beneficiary). In 2009 the standard benefit cost sharing is: 100% coinsurance for drug spending between $0 and $295 (i.e. a $295 deductible), 25% coinsurance for drug spending between $295 and $2,700, 100% coinsurance for drug spending between $2,700 and $6,154 (the so-called “donut hole” or “coverage gap”), and 5% coinsurance for drug spending above $6,154 (catastrophic coverage). These dollar amounts are indexed to average per beneficiary outpatient drug expenditures (MMA statute).

Part D Competitive Bidding

In contrast to the way in which MA plans are paid for Parts A and B (see my MA post), Part D benefits are paid by Medicare via a competitive bidding system. All Part D plans (PDPs and the drug portion of MA plans) submit bids for the cost of standard coverage. From these bids a nationwide average is computed and a statutorily determined fraction of this average cost is set as the “base premium” (about $30 in 2009). Finally, a plan’s premium (charged to each enrolled beneficiary) is the base premium plus the difference between that plan’s bid and the national average bid.

Ignoring adjustments for beneficiary risk and other details (found here) a plan is paid by Medicare a fixed monthly per-beneficiary rate equal to the national average bid less the base premium. Because the payment is tied to national average bids (a market signal) this is a form of competitive bidding. In contrast, MA payments are not set competitively. They are set via administrative pricing in which payments are determined by Congress. The Part D competitive pricing mechanism theoretically should drive payment downward as plans compete to offer lower-premium plans.

The Drug Negotiation Controversy

Part D plans may negotiate with drug manufacturers for volume discounts, but Medicare as a whole may not. This prohibition on direct Medicare-drug manufacturer negotiation was among the more controversial aspects of the Part D program and has received considerable attention from policy makers and academe.

Another related element to Part D is that plan formularies have inclusion requirements. In particular, they must include “all or substantially all” drugs in six categories: antidepressants, antipsychotics, anticonvulsants, antiretrovirals, immunosuppressants, and antineoplastics.

Critics argue that Medicare’s lack of authority to negotiate drug prices leads to higher expenditures for plans, beneficiaries, and Medicare. Others have pointed out that providing Medicare the authority to negotiate directly with manufacturers would not lead to price reductions on its own. To achieve savings Medicare would also need the ability to exclude drugs from its formulary. This ability to tighten the formulary would provide the leverage to negotiate bargains.

Interest remains among policy makers and certain advocacy groups in reducing Medicare drug prices. This idea is part of President Obama’s agenda so the issue may arise as he looks for ways to finance health reform.

This post originally appeared on The Finance Buff.

I am in the middle of a three-post series on the basics of Medicare and its payment systems. The first post covered FFS Medicare and the second covered the Medicare Advantage (MA) program. I’ll release the third post next week. This post applies a bit of what was covered in my review of the MA program to touch on a recent development.

On 6 April 2009 the Centers for Medicare & Medicaid Services (CMS) made a complicated announcement about how Medicare Advantage (MA) plans will be paid in 2010. The details were not explained well by CMS or the news media. It was widely reported that payments to MA plans would decrease by 4-5% in 2010. Plans warned of increased beneficiary premiums and reduced benefits.

MA plans are paid a fixed rate for each enrolled beneficiary. Ignoring risk-adjustment, these rates are capped by “benchmarks,” which vary by county. (I summarized the MA payment system in a prior post. See also this MedPAC paper.)

Examining CMS benchmark data, from 2009 to 2010 MA benchmarks will decrease by about 0.5% on average, or about $3 per month. I’ve created a spreadsheet with the 2009 and 2010 monthly benchmarks by county so you can see for yourself that they only differ by a few dollars per month.

So where are the big payment cuts that plans are complaining about? It turns out CMS made another change to how plans are paid, not to the benchmarks directly but to how they are adjusted to reflect “upcoding.” The effect of this change will be to reduce payments to plans by 3.41% in 2010. This plus the 0.5% reduction in benchmarks plus a few other small changes in 2010 bring the total reduction into the 4-5% range.

Upcoding is like grade inflation. It is the coding of health care in a beneficiary’s medical record in such a way to make the beneficiary seem less healthy than he or she actually is. To the extent MA plans upcode they benefit financially from it because plan payments are adjusted for risk. Payment is higher for beneficiaries that appear sicker based on the codes in their health care record. However, if the beneficiary is not actually as sick as his codes make him seem then the plan is paid more for that beneficiary than it should be.

CMS and the Congressional Budget Office (CBO) studied coding pattern differences between MA plans and FFS Medicare and found evidence of upcoding among MA enrollees. Having found that MA plans are overpaid due to coding creep, for the first time in 2010, CMS will adjust payments accordingly.

So, while the benchmarks hardly change, the plans are right that they’ll get less. I have a minor semantic quibble with how this is characterized. I would not call it a “reduction in payment.” I would call it a “reduction in overpayment.”

This post originally appeared on The Finance Buff.

This post is the second in a three part series on Medicare’s structure and payment systems. The first post is found here. I expect the final post to be released next week (link to final post).

In my first post on Medicare I summarized some of the elements of fee-for-service (FFS) Medicare. Beginning in the early 1970s and growing in fits and starts since then, Medicare has included other types of insurance plans offered through private carriers. This post will review some of these other Medicare products.

Medicare Advantage

The Medicare Advantage (MA) program (a.k.a., Medicare Part C) shifts the cost risk from the Medicare program to a private insurance company. For the moment think of an MA plan as an HMO or a PPO. Through an MA plan, beneficiaries receive the hospital (Part A) and outpatient (Part B) insurance they would otherwise get directly from FFS Medicare. Many MA plans offered a drug benefit before such benefits became available to all beneficiaries in 2006 (via Part D).

Medicare pays an MA plan a predetermined monthly rate for each beneficiary it covers, independent of the services used (the rate is adjusted to reflect the financial risk of the beneficiary to the plan). The plan may also charge enrollees a premium and other cost sharing. An MA plan may offer benefits more generous than FFS Medicare, covering more services at lower cost to the beneficiary. About 20% of Medicare beneficiaries are enrolled in an MA plan, and the program accounts for nearly the same proportion of Medicare spending.

Thus, an MA plan acts as a middleman between Medicare (the taxpayer) and the service provider (the doctor or hospital). The plans, not Congress, negotiate payments with service providers and are at risk for the cost of covering each enrolled beneficiary. Since MA plans are private entities bearing risk, negotiating with providers, and competing for beneficiaries the MA program has the patina of a “free market” solution to cost control.

But Congress sets the payment rates. The payment system uses terminology that sounds like competitive bidding. Plans “bid” against a “benchmark,” which is the payment rate cap (the most paid for an average-risk beneficiary). If the bid is below the benchmark, the plan receives 75% of the difference to fund additional benefits and/or lower cost sharing.

However, the benchmark has nothing to do with plan costs. It is set by Congress via a complex formula. Today, on average payments to MA plans are 14% higher than average FFS Medicare payments. This is not because MA plan enrollees are 14% more costly. In fact, evidence suggests that MA enrollees are, if anything, less costly than FFS beneficiaries. Besides, the payments are risk adjusted. No, MA plans are simply overpaid.

The History and Future of MA Payment Rates

Plans weren’t always overpaid. Prior to 1997, for each enrollee, Medicare HMOs were paid 95% of per beneficiary FFS cost. The logic was that private plans ought to be able to provide Medicare services more efficiently than FFS Medicare through a combination of controlling utilization and driving hard bargains with providers. So, Medicare took 5% off the top. Competition was supposed to ensure quality and the provision of services of value to beneficiaries. A consequence, however, was that insurers didn’t offer plans in rural areas where contracting and marketing were too costly relative to the payment.

To increase the role and availability of Medicare HMOs, payments were increased over the years and are now above FFS costs. In addition, a new plan type was introduced, Private Fee-for-Service (PFFS). These plans are exempt from many of the requirements other MA plans face but are paid just as generously. In particular they do not have to set up provider networks and can base their costs on the FFS physician payment schedule. They’re indemnity insurance just like traditional FFS Medicare, only offered through private insurers. In recent years PFFS plans have been the fastest growing and most costly MA plan type.

There have been numerous calls by Medicare and budget watchdog groups to reduce MA plan payments to 100% of FFS cost (the Medicare Payment Advisory Commission, the Congressional Budget Office). Another option likely to reduce payments would be to abandon the administrative pricing scheme altogether and shift to a competitive bidding model. Plans with lower bids for standard benefits would win contracts while higher bid plans would not. Or, in another variation, plans with bids above the average would simply charge the difference as premium, while those below the average might be able to offer a rebate or extra benefits with the difference.

President Obama’s budget proposal includes a plan for MA competitive bidding. I will be watching closely to see if Congress retains this idea as next year’s budget works its way through the legislative process.

In my next post on the basics of Medicare I will discuss the relatively new prescription drug program. It already has competitive bidding (for real). But it has other features which cause it to be more costly than it could be.

This post originally appeared on The Finance Buff.

It makes sense to know at least a little bit about Medicare. For one, you pay for it through payroll and income taxes. Moreover, if you’re not on Medicare now someday you will be, provided you live long enough. Also, some issues and options under debate for national health reform have analogs in Medicare.

Part of my job is to study Medicare so I speak with some authority in saying that the program is a confusing mess. In this and two subsequent posts (one on Medicare Advantage and one on prescription drug plans) I will review the essential facts about the program, its payment systems, and the mechanisms and prospects for controlling its cost.

The Basics

Medicare is a federal health insurance program for the elderly (at least 65 years old), disabled, and a few other categories of individuals with specific diseases. Established in 1965, the program’s initial intent was to increase the welfare of the elderly, half of whom had no health insurance at that time. Today the program covers 45 million individuals (called “Medicare beneficiaries”), 84% elderly. Accounting for 13 percent of the federal budget and 19 percent of total national health expenditures (2009), in dollar terms Medicare is the largest federal health program. Medicare is financed by a 2.9% payroll tax, general revenue, state payments, taxation of Social Security benefits, and beneficiary premiums.

Medicare is an insurance program, not a health delivery system. That is, it pays for the cost of care but does not directly employ the providers of that care. (By way of contrast, the Veterans Health Administration and the Military Health System are financing and health care systems: the systems employ their own doctors.)

Some confuse Medicare with Medicaid, probably because of similarities in spelling. Medicaid is a joint federal-state program for low-income individuals who fall into certain eligibility categories (like aged, blind, disabled, and others). One way to remember which is which is as follows: Medicare is principally for retirees. The word “Medicare” ends in and the word “retirees” starts with “re”. Though not quite true, for mnemonic purposes one can think of Medicaid as a program for the disabled: “Medicaid” ends in and “disabled” starts with “di” (or “id”).

Traditional Medicare: The Essence of Simplicity

Originally, the only form of Medicare was fee-for-service indemnity insurance. A beneficiary saw a provider for a service, and the provider billed Medicare a fee for that service. This is called traditional Medicare or fee-for-service (FFS) Medicare. FFS Medicare still exists today and is the most popular form of Medicare. About 80% of Medicare beneficiaries are enrolled in FFS Medicare.

There are two parts to FFS Medicare: A and B. Together they account for 69% of Medicare spending (the remaining 31% of Medicare spending is not under FFS and will be discussed in subsequent posts). Part A is hospital insurance, which accounts for 41% of Medicare spending. It has no premium but has an over $1,000 deductible. Daily co-payments for hospital visits are $267 per day after 60 days and $534 per day after 90 days of care. To care for a patient, a hospital is paid by Medicare prospectively according to a schedule of payments tied to the expected resources required. If the hospital can care for a patient for less than the payment it keeps the difference. If the care costs more, the hospital, not Medicare, is at risk for the additional cost.

Part B is outpatient insurance, which accounts for 28% of Medicare spending. It has a nearly $100 per month premium and a $135 annual deductible. The doctor visit and medical equipment co-insurance is 20%. (All above figures are for 2009 and are summarized in this AARP document.)

Alone, FFS Medicare does not cover outpatient prescription drugs. It covers very little of what would be considered long-term care.

Controlling Spending under FFS Medicare

Since Congress sets the payment rates and fees for FFS Medicare they can be political footballs. For example, updates to the doctor fee schedule are usually accompanied by big fights in Congress. These fights are almost guaranteed by the way planned fee schedule updates are set to bring Medicare spending in line with a projected budget. The complicated update mechanism sometimes calls for a decrease in payments to physicians over time. Unless such updates are overridden by an act of Congress, fees would trend downward. You can imagine that doctors will not sit idly by and accept a lower payment from one year to the next. Beneficiaries and beneficiary advocacy groups would not react favorably if doctors refused to accept Medicare patients due to low reimbursement rates. Instead, these groups lobby Congress and get fee increases passed.

Price setting through legislation, such as the Medicare physician fee schedule, is known as “administrative” pricing (a misnomer, I know). The only way to control spending under an administrative pricing regime is for Congress to restrain payment increases, which is politically challenging, as evidenced by the fact that they override low or negative Medicare physician fee schedule updates regularly.

Administrative pricing is to be contrasted with “competitive pricing,” which relies on market signals to adjust prices. Competitive pricing can take some (but not all) of the politics out of the problem of restraining the growth of Medicare spending.

If I were describing Medicare in its first decade then I would be done. FFS Medicare was it back then. Today Medicare is much more complex. Completing the overview will require two more posts. In my next post on Medicare I will review some of the other components of the Medicare program that involve competitive pricing or have other “free market” characteristics.

This post originally appeared on The Finance Buff.

A question posed to me by a reader turns out to be relevant to the current debate over the inclusion of a public plan option in a remade US health system. After I address the question posed, I’ll make the policy connection in the final paragraph.

Question: “I hear that the US spends a lot more per person on health care than other countries. How much of that difference is due to the price of care and how much is due to quantity of care consumed?”

The premise is correct: the US does spend more on health care than all other Organization for Economic Cooperation and Development (OECD) countries. The OECD median was 9.1% of GDP in 2005, at which time the US rate was 15.3% and the country with the second highest proportion was Switzerland at 11.6% (source). In 2009 the US will spend an estimated 17.6% of GDP on health care (source).

The relatively high US spending on health care must be due to relatively higher prices or greater health care consumption or both. The consensus in the academic literature is that price, not quantity, is the driver of costs in the US. In a thorough review of the literature, a 2007 Congressional Research Service report concludes

“[T]he United States has far fewer doctor visits per person compared with the OECD average; for hospitalizations, the United States ranks well below the OECD and is roughly comparable in terms of length of hospital stays…U.S. prices for medical care commodities and services are significantly higher than in other countries…”

Uwe Reinhardt and colleagues simply conclude “it’s the prices, stupid.” In another paper the same authors attribute higher prices to higher provider wages, lower consumer purchasing power (single payer systems in other nations can negotiate lower prices), greater supply constraints, higher administrative costs, and consumer demand for care at any cost. These ideas are echoed elsewhere. Adoption of new and costly medical technology is also blamed for increased costs.

When we spend money on health care what are we purchasing? Are we buying a specific service (like a vision exam) or are we buying a degree of health (like better vision)? Since the ultimate goal is better health there is good reason to think of the product in terms of the outcomes it produces: longevity, quality-adjusted life years (QALYs), etc.

Taking this perspective, the academic literature suggests that the US spends more on health care for poorer outcomes. Findings of this type are summarized in Tom Daschle’s Paying More but Getting Less. For instance, Americans have a lower life expectancy than other OECD countries, a point made forcefully by Anderson and Frogner. They show that the US is an outlier among OECD countries with both far greater health care spending and far lower life expectancy. They report that the US has mixed performance on other quality indicators: it is about as likely to be in the top half as in the bottom half of countries ranked.

There is no good excuse for the higher costs and poorer outcomes in the US. The US population is younger than the average OECD country, with lower rates of smoking and drinking (source). Growth of US health spending is much higher than that of other OECD countries even after controlling for population aging (source).

What do you call a transaction in which you pay more than others for the same or lower quantity and mediocre or low quality? I call it a rip-off.

The foregoing discussion suggests that in reforming the health system for the non-elderly we should not place emphasis on reducing aggregate quantity since it is not particularly high. Reducing costs via quantity reduction would require an aggregate level of health services substantially below other OECD nations. Therefore, the emphasis should be placed on driving down price, which is high, while increasing quality. These are precisely the things that could be achieved with a greater concentration of purchasing power. A popular public plan is one way, though there are others (see also Ezra Klein’s post, and that of Uwe Reinhardt). One thing seems clear based on the record; lowering price is something the current marketplace of private plans is unlikely to achieve on its own.

7 May 2009 update: A December 2009 report (and executive summary) by the McKinsey Global Institute addresses the issues discussed in this post.

This post originally appeared on The Finance Buff.

Over on the Bogleheads Forum, occasionally someone asks whether or not to count emergency fund (EF) cash as part of one’s asset allocation (AA). Typically one holds a fixed amount of cash (or equivalent) as an EF. The amount is often a multiple of a number of months of salary or necessary expenses. Over the short- and medium-term, one’s EF may stay at a fixed dollar value because one’s salary or monthly necessary expenses may not go up.

Here’s what some find bothersome: If one’s fixed EF is counted as part of one’s AA, figured in percentages of stocks, bonds, and cash then an inconvenient time-varying distortion is introduced. (Actually, there’s a distortion even if the EF does not stay constant. All that is necessary is that the EF target is a dollar amount, not a percentage of the portfolio.)

To illustrate, suppose at age 30 an investor has $20,000 in cash as an EF, $10,000 in bonds, and $90,000 in equities. Apart from the EF, his AA in percentage terms is 90/10 equities/bonds. Including the EF, his AA is 75/8/17 equities/bonds/cash (I always list AAs in order from most to least risky asset class).

Imagine that between the ages of 30 and 35 this investor pumped another $100,000 into stocks and bonds in a 90/10 ratio. At age 35 he holds $20,000 cash (EF), $20,000 bonds, and $180,000 equities. Apart from the EF, his AA is still 90/10. Including the EF, his AA is 82/9/9.

In one sense the investor’s AA has not changed from age 30 to 35. Apart from his EF it stayed 90/10. But because the EF held steady at a fixed dollar level while his stock and bond holdings increased by $100,000 in a 90/10 ratio, his AA including his EF shifted from 75/8/17 to 82/9/9. Therefore, if he includes his EF in his AA then his AA shifts over time simply because his EF stays at a fixed dollar amount.

It’s annoying to have an AA that shifts over time even though your basic investment strategy is fixed. It makes it harder to track and rebalance. On the other hand, if you exclude your EF from your AA then you might feel like you’re not tracking it or counting it in your portfolio. That bothers some people, though I’m not sure why.

Here’s my solution. Nobody says you have to specify your AA in percentages. Absolute dollar levels are fine too. You can mix percentages and dollar levels if you want. The investor above is 90/10/$20k, held constant between ages 30 and 35. This reflects exactly what he intends to do: hold his EF cash constant at $20,000 and keep is stock/bond mix at 90/10.

If you want to peg an asset class or sub-class at a dollar level, just put that dollar level in your AA plan. If you want the amount to be relative then use a percentage. There is no need to worry about whether or not you should count your EF in your AA. Your AA should reflect your intentions. If you intend a dollar level then set your AA accordingly. Problem solved.

This post originally appeared on The Finance Buff.

Last week I argued that Geithner’s bank rescue plan (PPIP) preserved Obama’s political capital for other parts of his agenda. While the alternative, nationalizing some banks, may be more effective and ultimately necessary, for now Obama has judged the political cost of doing so to be too high. For what, then, is Obama saving his political capital?

Enter: health reform.

For the first time since early in the Clinton Administration, the President and Congress seem likely to take up the issue of comprehensive, national health care reform. For any reform to be meaningful and lasting it will have to make significant progress toward covering all Americans and reining in health care spending. Both are daunting technical and political problems.

Addressing these issues will require substantial adjustments to government programs and accommodations by interest groups. Indeed, a tremendous allocation of political capital will be required for success, more relative to the level of opposition than our last two Democratic presidents had or were willing to invest (one reference and another).

Where do things stand now with respect to health reform?

President Obama campaigned on the idea, and the fundamentals of his plan have not changed. His late February address to Congress and his remarks before a White House summit on health care in early March signal a serious health reform effort. Key members of Congress share the President’s vision.

Senator Baucus has also proposed a plan to achieve universal coverage. Both the Obama and Baucus plans encourage coverage with income-related individual and small-business subsidies and a requirement that large employers offer insurance. Under either plan, large employers would offer coverage or contribute toward the cost of a public plan. Non-group insurance available through regional health marts would more closely resemble current group coverage. Baucus’ proposal also includes a requirement that individuals have insurance (an individual mandate) with tax penalties for noncompliance.

Another plan proposed by Senators Wyden and Bennett offers a different approach. Their Healthy Americans Act would replace the current employer-based system with state or regional insurance pools. Like the Baucus plan, the Wyden-Bennett proposal includes an individual mandate and subsidies.

Meanwhile key members of Congress and stakeholders have shown signs of cooperation. Senator Baucus and three vital House committee chairmen—George Miller (Education and Labor Committee), Henry Waxman (Energy and Commerce Committee), and Charles Rangel (Ways and Means Committee)—aim to produce a bill this summer (see this and this). Senators Baucus and Kennedy wrote to President Obama “to affirm our continuing commitment to enacting comprehensive health care reform this year.” And members of Senator Kennedy’s staff have been holding regular meetings with stakeholders on issues pertaining to health reform since late 2008.

All key Democrats in Congress agree that health reform should include an individual mandate and that a government health plan should be available as an alternative to private insurance. Both issues are likely to be controversial. While the insurance industry appears to welcome a mandate, making insurance affordable to all may prove too costly. Senator Grassley (the top Republican on the Senate Finance Committee) is “adamantly opposed” to a public health insurance plan. (See also this NY Times editorial.)

President Obama’s FY2010 budget proposal includes a number of components of reform. It would establish a $630 billion reserve fund for health reform, offset by increased taxes on wealthier Americans and efficiencies found elsewhere in the health care system. So far, budgets passed by the House and Senate support parts of Obama’s health reform agenda, but differ on how to pay for it.

Obama’s budget proposal also calls for major changes in areas of health programs, law, regulation, or practice such as reduced payments to private Medicare plans achieved through a competitive bidding system, lower prescription drug prices for federal health programs, expansion of comparative effectiveness research, and accelerated use of electronic health records.

Though not part of Obama’s budget, creeping into the debate is the idea of partially removing the tax deductibility of employer-provided health benefits. Doing so could provide a way to pay the expected one-trillion dollar cost of comprehensive health reform.

I’ve only touched on a few of the more controversial issues related to health reform. In future posts I expect to comment further on them as they arise in the debate. To lay the groundwork for those pertaining to Medicare (e.g., competitive bidding, drug price negotiation), in an upcoming series of posts I will summarize and explain the structure and payment systems of that large and important health care program.

This post originally appeared on The Finance Buff.

There has been a lot written lately about the possible effect of Federal Reserve activities on the inflation rate.

One person I trust on this topic is economics professor James Hamilton (UC San Diego). He tracks the Fed’s balance sheet pretty carefully and has put out an exceptional post that explains its recent activities and the extent to which they’re inflationary. He followed up that post with another good one and I’m sure there will be more.

I encourage you to read Hamilton’s posts on this topic. In summary, in the above-referenced posts he shows that very few of the dollars the Fed has pumped out recently have entered circulation. Banks are sitting on most of it because they’re not lending. The Treasury Department soaked up some more by issuing additional US debt. Meanwhile, what the Fed has mostly been doing is swapping its Treasury holdings for other types of assets.

In the vernacular of macroeconomics, the Fed has been utilizing qualitative easing. On paper they have also been engaging in quantitative easing. Since the funds have ended up in bank reserve accounts or in Treasury accounts and not in the hands of the citizenry, effectively the amount of quantitative easing has been small so far.

The tricky bit down the road is how quickly the Fed can soak up dollars if and when inflation shows up. To facilitate doing so, the Fed wants to hold assets that would be in high demand during times of inflation. This is why Hamilton recommends the Fed buy TIPS.

Nevertheless, he says that inflationary pressures remain under control at the moment, “but stay tuned.”

April 12, 2009 update: How the Fed induces banks to hold on to reserves above the required minimum is explained clearly in this post by Susan Woodward and Robert Hall.