By Vijay K. Mathur
Published in Standard-Examiner, Ogden, Utah, Jan 9, 2010
Most people are aware of complaints by politicians and general public about corporate CEOs' outrageous compensation, especially in large corporations. Economist Arantxa Jarque reports in his paper in the Richmond Fed's Economic Quarterly, Summer, 2008, that the average compensation of CEOs in the top 500 corporations in the U.S. was $15 million in 2007. That was 300 times the average pay of workers. Even the severest recession in recent memory and the dismal managerial performance in the financial sector have not prevented companies from awarding large bonuses to executives.
There are no standard benchmarks which can be used to evaluate the performance of executives. The concern is with compensation (salary, bonus with stock options, stock grants, retirement benefits, severance payments and other deferred payments) for executives in large companies. According to a study by C. Frydman and R. Saks, median CEO pay rose 54 percent from 1970-79 to 1980-89, but it jumped to 125 percent from 1990-99 to 2000-2005.
The question therefore is what determines the compensation of CEOs in large corporations? Various determinants have been investigated to explain CEOs' compensation, for example, sizes of the corporations, rates of return on stocks (dividends and change in stock prices as a percent of stock prices), market values of the companies (values of assets and stocks), and competition companies face in the market. But, aside from measurement problems, there is no unambiguous agreement on uniform standards of performance to base compensations.
CEOs are principal agents (hired managers) who represent shareholders' (owners') interests. Therefore, part of their compensation is for managerial and organizational abilities. However, there is one problem. CEOs, possessing critical information, may have different interests than the interests of shareholders. Hence they may not disclose complete and accurate information to shareholders in order for them to make important decisions good for the health of the corporations. Hence the problem shareholders face is to design a compensation package which provides the incentive to CEOs to maximize shareholders' value.
In the current system there is conflict of interest when CEOs are involved in recommending members to the board of directors, consultants to the compensation committees who decide CEOs' compensation. The Wall Street Journal reported on Dec. 15,2009, that in addition to the widening salary gap, the gap is also widening in pension plans of executives and employees.
The claim that bonuses and stock options are meant to compensate CEOs for the risk they take in maximizing shareholders value has not produced desired results. In fact, we have recently witnessed awards of large bonuses despite the financial meltdown in the banking and financial sector and enormous losses suffered by employees and shareholders. Stock option grants, where CEOs benefit from the spread between the granting price of the stock and market price, have been manipulated and misused.
Shareholders must take an active interest in the decision making process of corporations. In Europe stock holders are already taking an active role in many of the decisions of corporations, especially mergers and acquisitions -- one of the strategies CEOs use to maximize their own compensation and power.
However, most mergers fail and/or are unprofitable. Professor Dennis Mueller found in his major study on profits in 1980s that the more diversified a company, greater is the difference between "actual and potential recorded profits."
Thus the question arises, what is the best standard for CEOs' compensation? Professor Henry Mintzberg of McGill University argues in his opinion piece in WSJ of Nov. 30, 2009, that CEOs should not be paid bonuses in the form of stocks and options. They should get competitive salaries and be entitled to the same benefits, commensurate with their salaries, as other employees.
I propose the following:
* (1) CEOs' compensation should be based upon competition for talent in the international market place, because large corporations compete globally and the average worker in those corporations is subjected to international competition. At present American CEOs' compensation on average is way above the compensation of CEOs in other advanced countries.
* (2) Stock grants, vested in five years, should be a greater proportion of total compensation and be redeemable at prevailing market prices.
* (3) Retirement plans should be the same for all employees and no golden parachutes for CEOs.
* (4) CEOs should have no role in the choice of directors and/or consultants which determine their compensation.
* (5) Boards of directors, who are supposed to monitor CEOs' performance for shareholders, must also be stakeholders in the corporations they serve.
* (6) Shareholders must have a limited role in the decisions on CEOs' compensation.
Legislation will not solve this problem. Ultimately, corporate structure's survival and success depends upon the emergence of responsible corporate leaders who look beyond their narrow self-interest and work for the interest of their shareholders and employees.
As Professor Mintzberg states, "all this compensation madness is not about markets or talents or incentives, but rather about insiders hijacking established institutions for their personal benefit."
Mathur is former chairman of the economics department and professor emeritus of economics at Cleveland State University, Cleveland, Ohio. He is also adjunct professor of economics at Weber State University. He resides in Ogden.
Sunday, January 24, 2010
Thursday, November 19, 2009
All mandates are not alike
Published in Standard-Examiner, Ogden, Utah, November 12, 2009.
By Vijay K. Mathur
The health insurance industry is regulated primarily by states. Over the last two decades, mandates of benefits, providers and covered persons in health insurance have proliferated. In 2008 there were 1,961 total state mandates, while Utah had only 12 mandated benefits. Mandated benefits, according to the Council for Affordable Insurance, are partly responsible for increasing the cost of basic health coverage "from a little less than 20 percent to more than 50 percent, depending on the state and its mandates." But a detailed literature review of various actuarial and statistical studies by the Rutgers Center for State Health Policy for the state of New Jersey found no clear cut evidence for an adverse effect of mandates.
Even though the evidence is murky, insurance companies have responded to cost increases of state mandates, for example, by increasing insurance premiums, deductibles, co-pays, and denying insurance for pre-existing conditions. The House bill, passed recently, contains federal-mandated benefits as well.
Aside from insurance companies and providers, most people do not raise objections against mandated benefits, providers and covered persons. To alleviate asymmetric information problems, when patients have limited information about medical procedures and quality of treatments, the states mandate benefits and quality of care. Also, certain minimum benefits and quality requirements are deemed important, because a healthy society is in the public interest.
In 1986 Congress passed the Emergency Medical Treatment and Active Labor Act (EMTALA), as part of the Omnibus Budget Reconciliation Act. It mandated that participating hospitals and ambulance services provide emergency health care to anyone needing the services. Those who accept payment from the Department of Health and Human Services, Centers of Medicare and Medicaid Services, are considered participating hospitals. Exceptions are Shriners hospitals, Veterans Affairs hospitals and Native American health service. Besides increasing cost to providers of emergency care, this mandate by EMTALA provides the incentive to people not to buy health insurance. Hence,those who are uninsured and do not have Medicare or Medicaid, and can afford to buy insurance, impose cost on others when they get sick and show up in emergency clinics. This is the "free-rider problem." The difference between this mandate and mandated benefits in health coverage, as pointed out above, is that free choice in insurance in light of EMTALA imposes cost of health care of noninsured on those who do buy health insurance.
The right of freedom of choice does not come with the right of freedom to impose cost on others of one's personal decisions. That is the reason why the House of Representatives proposed in their bill that most people have to buy health insurance. It is supported by incentives of penalties for those who do not comply and subsidies to those who cannot afford insurance as based upon the income test.
According to the Centers for Medicare and Medicaid Services (CMMS), 55 percent of emergency care is uncompensated. Kaiser Commission on Medicare and Medicaid found that in 2004 the cost of uncompensated care was $40.7 billion in community hospitals. Current Population Report (CPR) data shows that almost 75 percent of the uninsured in 2008 are within the age group of 18 to 44. If most in this younger age group were part of insurance pools, it would lower health risk factors and hence insurance premiums.
According to CPR, 38 percent of uninsured had household income of $50,000 or more in 2008. CMMS data shows that in 2006 private health insurance expenditure in the U.S. was 6.65 percent of personal income. It would be preferable that everyone must buy affordable insurance, with penalties equivalent to the annual cost of insurance -- to put some teeth in the mandate. No one should be allowed to game the system. In Switzerland cash subsidies are provided to people when insurance expenditure is more than 8 percent of personal income, but the health care system produces better health outcomes with lower per capita expenditure than the U.S. To implement the subsidy cut off point in the U.S., the Swiss model could be used as a benchmark for personal spending on health insurance by all earning Americans, including the uninsured.
The contemplated Senate bill provides an option for states to opt out of the national public health insurance plan. Differences in state plans will result in inequities in insurance coverage. The cost to taxpayers will increase due to the duplication of insurance plans at the federal and state levels. Moreover, differences in state plans will make them less portable across state lines. Lack of portability deters mobility of labor and hence disrupts efficient functioning of labor markets. The mandated federal public option will be more cost effective and equitable.
It is hoped that the legislators are paying attention to the best features of the Swiss and Dutch models and design an efficient and equitable health care system which elicits responsible behavior from Americans.
Mathur is former chair of the economics department and professor emeritus of economics at Cleveland State University, Cleveland, Ohio. He is also adjunct professor of economics at Weber State University. He resides in Ogden.
By Vijay K. Mathur
The health insurance industry is regulated primarily by states. Over the last two decades, mandates of benefits, providers and covered persons in health insurance have proliferated. In 2008 there were 1,961 total state mandates, while Utah had only 12 mandated benefits. Mandated benefits, according to the Council for Affordable Insurance, are partly responsible for increasing the cost of basic health coverage "from a little less than 20 percent to more than 50 percent, depending on the state and its mandates." But a detailed literature review of various actuarial and statistical studies by the Rutgers Center for State Health Policy for the state of New Jersey found no clear cut evidence for an adverse effect of mandates.
Even though the evidence is murky, insurance companies have responded to cost increases of state mandates, for example, by increasing insurance premiums, deductibles, co-pays, and denying insurance for pre-existing conditions. The House bill, passed recently, contains federal-mandated benefits as well.
Aside from insurance companies and providers, most people do not raise objections against mandated benefits, providers and covered persons. To alleviate asymmetric information problems, when patients have limited information about medical procedures and quality of treatments, the states mandate benefits and quality of care. Also, certain minimum benefits and quality requirements are deemed important, because a healthy society is in the public interest.
In 1986 Congress passed the Emergency Medical Treatment and Active Labor Act (EMTALA), as part of the Omnibus Budget Reconciliation Act. It mandated that participating hospitals and ambulance services provide emergency health care to anyone needing the services. Those who accept payment from the Department of Health and Human Services, Centers of Medicare and Medicaid Services, are considered participating hospitals. Exceptions are Shriners hospitals, Veterans Affairs hospitals and Native American health service. Besides increasing cost to providers of emergency care, this mandate by EMTALA provides the incentive to people not to buy health insurance. Hence,those who are uninsured and do not have Medicare or Medicaid, and can afford to buy insurance, impose cost on others when they get sick and show up in emergency clinics. This is the "free-rider problem." The difference between this mandate and mandated benefits in health coverage, as pointed out above, is that free choice in insurance in light of EMTALA imposes cost of health care of noninsured on those who do buy health insurance.
The right of freedom of choice does not come with the right of freedom to impose cost on others of one's personal decisions. That is the reason why the House of Representatives proposed in their bill that most people have to buy health insurance. It is supported by incentives of penalties for those who do not comply and subsidies to those who cannot afford insurance as based upon the income test.
According to the Centers for Medicare and Medicaid Services (CMMS), 55 percent of emergency care is uncompensated. Kaiser Commission on Medicare and Medicaid found that in 2004 the cost of uncompensated care was $40.7 billion in community hospitals. Current Population Report (CPR) data shows that almost 75 percent of the uninsured in 2008 are within the age group of 18 to 44. If most in this younger age group were part of insurance pools, it would lower health risk factors and hence insurance premiums.
According to CPR, 38 percent of uninsured had household income of $50,000 or more in 2008. CMMS data shows that in 2006 private health insurance expenditure in the U.S. was 6.65 percent of personal income. It would be preferable that everyone must buy affordable insurance, with penalties equivalent to the annual cost of insurance -- to put some teeth in the mandate. No one should be allowed to game the system. In Switzerland cash subsidies are provided to people when insurance expenditure is more than 8 percent of personal income, but the health care system produces better health outcomes with lower per capita expenditure than the U.S. To implement the subsidy cut off point in the U.S., the Swiss model could be used as a benchmark for personal spending on health insurance by all earning Americans, including the uninsured.
The contemplated Senate bill provides an option for states to opt out of the national public health insurance plan. Differences in state plans will result in inequities in insurance coverage. The cost to taxpayers will increase due to the duplication of insurance plans at the federal and state levels. Moreover, differences in state plans will make them less portable across state lines. Lack of portability deters mobility of labor and hence disrupts efficient functioning of labor markets. The mandated federal public option will be more cost effective and equitable.
It is hoped that the legislators are paying attention to the best features of the Swiss and Dutch models and design an efficient and equitable health care system which elicits responsible behavior from Americans.
Mathur is former chair of the economics department and professor emeritus of economics at Cleveland State University, Cleveland, Ohio. He is also adjunct professor of economics at Weber State University. He resides in Ogden.
Thursday, October 22, 2009
Spending priorities to build a solid economic foundation
Published in Standard-Examiner, Ogden, Utah, October 17, 2009
By Vijay K. Mathur
It is disturbing to watch the news media and see our leaders make false and illogical statements on many of the policy issues facing the country. The economy is undergoing some fundamental economic changes. Unless we implement a strategy which builds our shattered financial and industrial base, our future will not be merciful on our standard of living. Disagreement over policies to stimulate growth and employment is expected in a democracy. However, abusive slogans, name-calling, and racial slurs only dissuade us from making sound decisions to solve problems collectively.
The U.S. faces the near-term problems of anemic economic growth and high unemployment rate and the long-term problems of depletion of human capital stock due to neglect in funding for education and diminished industrial base.
In the near term we face anemic and slow recovery. However, even if the economy's growth picks up at 2 percent to 3 percent in 2010 or 2011, according to some forecasts, the unemployment problem -- especially for young adults -- will be with us for some time to come. Federal Reserve Bank of Cleveland reports that in the Blue Chip survey 80 percent of the respondents predict that unemployment rate, which is close to 9.8 percent (not counting discouraged workers who dropped out of the labor market), "will not fall back below 7 percent until the second half of 2012 ...."
Government may have to address the problem of unemployment by implementing policies like investment tax credit and generous depreciation allowance to businesses (provided they promote investment in the U.S.), a payroll tax holiday (as recommended by former labor secretary Robert Reich) to small- and medium-size businesses, two-tier system of minimum wages, and permanent reduction in personal income tax rates for the middle class.
The service sector usually responds to the growth in manufacturing sector. From the long-run perspective, we have not made the required significant investments in new industries of the future to replace traditional manufacturing capacity. Therefore, outsourcing of manufacturing capacity would also lead to outsourcing of business and technical services over time.
If we wish to create an industrial base which carves out comparative advantage in order to compete in the world markets and solve the long term structural unemployment problem, our future lies in developing technologies, products and services in the fields of renewable energy, environment, information technologies, bio technologies, education and health care. And none of the innovations in the above areas will materialize without investment in the educational system to build human capital stock.
Many conservatives contend that the Obama administration is spearheading too many new initiatives: health care, education, cap and trade to limit CO2 emissions, renewable and alternative energy other than oil. But if one rationally examines the current economic situation facing the country, one would conclude that neglect of these issues now will haunt us in the future. Fiscal conservatives who are worried about the burden on future generations should support initiatives for long term investments now, so that we leave a prosperous economy for generations to come. Note, that besides the amount, efficient allocation of investment also matters for economic growth.
Fiscal conservatism is a virtue when the macro economy is growing and those who want to work have satisfying jobs. But when the economy is in shambles and we as a nation are determined to fight others' wars, fiscal balance is the main casualty. Fiscal stimulus to finance investment rather than current consumption is precisely the right medicine at this point in the economy, even with the rise in deficits, because the economic consequences of postponing such investment could be disastrous. The benefit-payoff of investments, especially in new technologies and new products' development and in education, has a long lead time. Hence, it requires patience and sacrifice of current consumption.
We are still enjoying the benefits of the innovation of electricity in 1880, investment in highway network in the 50s, public investment in Internet technology in 1969. Due to high risks involved in investments like basic science and technologies, education, renewable energy, power network, transportation systems, environment and health care, it will require a private-public partnership. In addition, a concerted effort has to be made by the private sector in partnership with the public sector to facilitate commercialization of technologies to build the industrial base.
I hope that our political leaders provide accurate information to the voters about the perils our economy faces and sacrifices they have to make to build a strong economic foundation that can support sustainable economic growth. Growth with prosperity shared by all Americans in the near term and in the future, will assure us economic, social and political stability. In addition, as Professor Benjamin Friedman of Harvard would argue, an added advantage of shared prosperity due to economic growth is that it makes a society more tolerant.
Mathur is former chair of the economics department and professor emeritus of economics at Cleveland State University, Cleveland, Ohio. He is also adjunct professor of economics at Weber State University, Ogden, Utah. He resides in Ogden.
By Vijay K. Mathur
It is disturbing to watch the news media and see our leaders make false and illogical statements on many of the policy issues facing the country. The economy is undergoing some fundamental economic changes. Unless we implement a strategy which builds our shattered financial and industrial base, our future will not be merciful on our standard of living. Disagreement over policies to stimulate growth and employment is expected in a democracy. However, abusive slogans, name-calling, and racial slurs only dissuade us from making sound decisions to solve problems collectively.
The U.S. faces the near-term problems of anemic economic growth and high unemployment rate and the long-term problems of depletion of human capital stock due to neglect in funding for education and diminished industrial base.
In the near term we face anemic and slow recovery. However, even if the economy's growth picks up at 2 percent to 3 percent in 2010 or 2011, according to some forecasts, the unemployment problem -- especially for young adults -- will be with us for some time to come. Federal Reserve Bank of Cleveland reports that in the Blue Chip survey 80 percent of the respondents predict that unemployment rate, which is close to 9.8 percent (not counting discouraged workers who dropped out of the labor market), "will not fall back below 7 percent until the second half of 2012 ...."
Government may have to address the problem of unemployment by implementing policies like investment tax credit and generous depreciation allowance to businesses (provided they promote investment in the U.S.), a payroll tax holiday (as recommended by former labor secretary Robert Reich) to small- and medium-size businesses, two-tier system of minimum wages, and permanent reduction in personal income tax rates for the middle class.
The service sector usually responds to the growth in manufacturing sector. From the long-run perspective, we have not made the required significant investments in new industries of the future to replace traditional manufacturing capacity. Therefore, outsourcing of manufacturing capacity would also lead to outsourcing of business and technical services over time.
If we wish to create an industrial base which carves out comparative advantage in order to compete in the world markets and solve the long term structural unemployment problem, our future lies in developing technologies, products and services in the fields of renewable energy, environment, information technologies, bio technologies, education and health care. And none of the innovations in the above areas will materialize without investment in the educational system to build human capital stock.
Many conservatives contend that the Obama administration is spearheading too many new initiatives: health care, education, cap and trade to limit CO2 emissions, renewable and alternative energy other than oil. But if one rationally examines the current economic situation facing the country, one would conclude that neglect of these issues now will haunt us in the future. Fiscal conservatives who are worried about the burden on future generations should support initiatives for long term investments now, so that we leave a prosperous economy for generations to come. Note, that besides the amount, efficient allocation of investment also matters for economic growth.
Fiscal conservatism is a virtue when the macro economy is growing and those who want to work have satisfying jobs. But when the economy is in shambles and we as a nation are determined to fight others' wars, fiscal balance is the main casualty. Fiscal stimulus to finance investment rather than current consumption is precisely the right medicine at this point in the economy, even with the rise in deficits, because the economic consequences of postponing such investment could be disastrous. The benefit-payoff of investments, especially in new technologies and new products' development and in education, has a long lead time. Hence, it requires patience and sacrifice of current consumption.
We are still enjoying the benefits of the innovation of electricity in 1880, investment in highway network in the 50s, public investment in Internet technology in 1969. Due to high risks involved in investments like basic science and technologies, education, renewable energy, power network, transportation systems, environment and health care, it will require a private-public partnership. In addition, a concerted effort has to be made by the private sector in partnership with the public sector to facilitate commercialization of technologies to build the industrial base.
I hope that our political leaders provide accurate information to the voters about the perils our economy faces and sacrifices they have to make to build a strong economic foundation that can support sustainable economic growth. Growth with prosperity shared by all Americans in the near term and in the future, will assure us economic, social and political stability. In addition, as Professor Benjamin Friedman of Harvard would argue, an added advantage of shared prosperity due to economic growth is that it makes a society more tolerant.
Mathur is former chair of the economics department and professor emeritus of economics at Cleveland State University, Cleveland, Ohio. He is also adjunct professor of economics at Weber State University, Ogden, Utah. He resides in Ogden.
Sunday, October 4, 2009
Impact negligible from malpractice cap
Published in Standard-Examiner, Ogden, Utah, October,3,2009
By Vijay K. Mathur
In the current debate on health care reform some people are critical of the Congress and the President for not paying much attention to medical malpractice tort liability reform. Some claim that we have reached a crisis in medical tort liability. Even though others dispute the crisis claim, there is no denying the fact that medical malpractice tort liability reform should be an essential part of health care reform. It must also be recognized that national caps on non-economic damage awards will neither remedy frequency of malpractice law suits nor will it solve the overall problems in health care.
Tort liability law is mainly a civil law and is based upon common law tort system. If the patient is harmed by the negligent behavior of a physician or other medical care provider, the victim is entitled to recover for all losses, both financial and for pain and suffering. Financial losses include medical and household expenses and lost earnings. Pain and suffering include loss of enjoyment of life of the patient and the family due to disability. The most heated debate is on the magnitude of claims for pain and suffering. The current law is tort-fault liability law, as opposed to no-fault liability (strict liability) law (as in New Zealand) and a very limited no-fault law applicable to infants in the states of Virginia and Florida.
Many Republican politicians, including Senator Hatch of Utah, and many physician groups argue that huge damage awards are driving the insurance cost of health care providers and the cost of health care due to the practice of defensive medicine. Therefore, to deal with this problem they are proposing a federal cap on damage awards, especially for pain and suffering, to a maximum of $250,000. California was the first to cap such damage awards to $250,000 in 1972 and now 30 other states have such caps.
Using data from National Practitioners Data Bank, the study by A. Chandra, S. Nundy and S. Seabury in the journal Health Affairs, May 31, 2005, finds that the inflation adjusted average payment amount (court judgments and out of court settlements) increased from $173,018 to $263,101 (average growth of 3.55 percent per year), and the average payment amount for top 10 percent of all payments increased from $867,792 to $1,155,031 (average growth of 2.41 percent per year) from 1991 to 2003. These estimates are not indicative of a crisis requiring Federal intervention.
Estimates also show that defensive medicine accounts for only 5 percent to 9 percent of total health care cost. This wide range indicates that it is hard to measure defensive medicine. There is a great deal of variation in procedures and medical tests among physicians, states, and regions of states and partly because of widespread variation in medical practice guidelines. Perhaps national uniformity in up-to-date guidelines would help mitigate this problem. Moreover, emphasis on diagnostic techniques based upon new but expansive technologies has substituted diagnostic skills of physicians. Emphasis on diagnostic skills in medical schools would curtail the use of tests and cost of health care.
The current tort liability system has not deterred the medical error rate. The Institute of Medicine's 2000 report found 44,000 to 98,000 hospital deaths per year due to medical errors. The consensus evidence is that medical malpractice problem is driven partly by extreme claims cost, insurance premiums driven by poor returns on investment of insurance premiums, and by poor pricing strategies of insurance companies. A cap on non-economic damage awards will not significantly reduce the cost of malpractice insurance for certain medical specialties and thus health care cost.
There are a few other issues which must also be considered. First, medical malpractice problem is concentrated in a few states; 50 percent of total paid claims in the U.S. were concentrated in 8 States in 2007. Second, the problem varies among specialties. It is more severe, for example, in surgery and obstetrics-gynecology, where insurance premiums have skyrocketed since 1960's. Third, The New York Times reported in 2005 that the study of 22 states for the years 1992, 1996 and 2001 by Professor Catherine Sharkey, Columbia Law School, found no significant difference in average damage awards among states with or without caps -- perhaps a result of change in tactics by plaintiff lawyers. Fourth, a cap on non-economic damages may discriminate against stay-at-home mothers or fathers, who have no work history, lower income people and/ or poor. In fact, lawyers may not even take legitimate malpractice cases for such people. Finally, a national cap would violate state control of tort law, thus breaking historical tradition.
States primarily regulate malpractice insurance and implement rules governing tort liability law. Therefore, a call for a national cap is unwarranted. Rather, federal guidance and help to states in handling malpractice issues would be more productive. Successful outcomes of ongoing experiments in states may show us the path to an efficient solution to this problem without national legislation on caps.
Mathur is former chair of the economics department and professor emeritus of economics at Cleveland State University, Cleveland, Ohio. He is also adjunct professor of economics at Weber State University, Ogden. He resides in Ogden. His articles also appear at vijaykmathur.blogspot.com
By Vijay K. Mathur
In the current debate on health care reform some people are critical of the Congress and the President for not paying much attention to medical malpractice tort liability reform. Some claim that we have reached a crisis in medical tort liability. Even though others dispute the crisis claim, there is no denying the fact that medical malpractice tort liability reform should be an essential part of health care reform. It must also be recognized that national caps on non-economic damage awards will neither remedy frequency of malpractice law suits nor will it solve the overall problems in health care.
Tort liability law is mainly a civil law and is based upon common law tort system. If the patient is harmed by the negligent behavior of a physician or other medical care provider, the victim is entitled to recover for all losses, both financial and for pain and suffering. Financial losses include medical and household expenses and lost earnings. Pain and suffering include loss of enjoyment of life of the patient and the family due to disability. The most heated debate is on the magnitude of claims for pain and suffering. The current law is tort-fault liability law, as opposed to no-fault liability (strict liability) law (as in New Zealand) and a very limited no-fault law applicable to infants in the states of Virginia and Florida.
Many Republican politicians, including Senator Hatch of Utah, and many physician groups argue that huge damage awards are driving the insurance cost of health care providers and the cost of health care due to the practice of defensive medicine. Therefore, to deal with this problem they are proposing a federal cap on damage awards, especially for pain and suffering, to a maximum of $250,000. California was the first to cap such damage awards to $250,000 in 1972 and now 30 other states have such caps.
Using data from National Practitioners Data Bank, the study by A. Chandra, S. Nundy and S. Seabury in the journal Health Affairs, May 31, 2005, finds that the inflation adjusted average payment amount (court judgments and out of court settlements) increased from $173,018 to $263,101 (average growth of 3.55 percent per year), and the average payment amount for top 10 percent of all payments increased from $867,792 to $1,155,031 (average growth of 2.41 percent per year) from 1991 to 2003. These estimates are not indicative of a crisis requiring Federal intervention.
Estimates also show that defensive medicine accounts for only 5 percent to 9 percent of total health care cost. This wide range indicates that it is hard to measure defensive medicine. There is a great deal of variation in procedures and medical tests among physicians, states, and regions of states and partly because of widespread variation in medical practice guidelines. Perhaps national uniformity in up-to-date guidelines would help mitigate this problem. Moreover, emphasis on diagnostic techniques based upon new but expansive technologies has substituted diagnostic skills of physicians. Emphasis on diagnostic skills in medical schools would curtail the use of tests and cost of health care.
The current tort liability system has not deterred the medical error rate. The Institute of Medicine's 2000 report found 44,000 to 98,000 hospital deaths per year due to medical errors. The consensus evidence is that medical malpractice problem is driven partly by extreme claims cost, insurance premiums driven by poor returns on investment of insurance premiums, and by poor pricing strategies of insurance companies. A cap on non-economic damage awards will not significantly reduce the cost of malpractice insurance for certain medical specialties and thus health care cost.
There are a few other issues which must also be considered. First, medical malpractice problem is concentrated in a few states; 50 percent of total paid claims in the U.S. were concentrated in 8 States in 2007. Second, the problem varies among specialties. It is more severe, for example, in surgery and obstetrics-gynecology, where insurance premiums have skyrocketed since 1960's. Third, The New York Times reported in 2005 that the study of 22 states for the years 1992, 1996 and 2001 by Professor Catherine Sharkey, Columbia Law School, found no significant difference in average damage awards among states with or without caps -- perhaps a result of change in tactics by plaintiff lawyers. Fourth, a cap on non-economic damages may discriminate against stay-at-home mothers or fathers, who have no work history, lower income people and/ or poor. In fact, lawyers may not even take legitimate malpractice cases for such people. Finally, a national cap would violate state control of tort law, thus breaking historical tradition.
States primarily regulate malpractice insurance and implement rules governing tort liability law. Therefore, a call for a national cap is unwarranted. Rather, federal guidance and help to states in handling malpractice issues would be more productive. Successful outcomes of ongoing experiments in states may show us the path to an efficient solution to this problem without national legislation on caps.
Mathur is former chair of the economics department and professor emeritus of economics at Cleveland State University, Cleveland, Ohio. He is also adjunct professor of economics at Weber State University, Ogden. He resides in Ogden. His articles also appear at vijaykmathur.blogspot.com
Saturday, August 1, 2009
Cap and trade a sound market principle
Published in Standard-Examiner, July, 16, 2009
VIJAY K. MATHUR
The U.S. House of Representatives just passed cap and trade legislation limiting CO2 emissions. Opposition to this legislation misses the fundamental economic reason for cap and trade.
First, those who object to any kind of government regulation oppose the legislation because restrictions on CO2 emissions of industries using fossil fuels will impose significant cost on all of us. Second, those who are skeptics of climate change oppose it because they suspect that the legislation will not have much effect on global warming, especially when other large CO2-emitting countries like China, Russia and India will continue using fossil fuels in the foreseeable future to meet their energy needs.
Most Americans also would not be very enthusiastic about this legislation if they themselves do not see direct benefits from it. Many Americans do not realize that cap and trade policy is in their self-interest, is based upon market principles, and would directly benefit them more than the cost of such legislation.
Let me first discuss why government has to intervene by legislating CO2 emissions. There are two types of goods which we consume: private goods and public goods. Private goods benefit those who pay the price for those goods, for example, cars, food, and clothing. There is no leakage of consumption benefits to others who do not pay the price for private goods. Therefore, people who pay the price have property rights to those goods and their benefits. When property rights emerge and are enforced, markets will arise for those goods.
Private property rights can not be defined and enforced for public goods, since benefits of public goods can not be completely appropriated by persons who may be willing to pay the price. If goods are provided, it would also benefit those who do not pay for the goods. Therefore, there is no incentive for individuals to buy the goods and hence there will not be any supply of the goods. Private markets for the goods will not emerge. Hence, public goods have to be provided collectively; it implies that government has to be assigned the property rights, and it is the government that enforces and allocates those rights for all of us. For example, national defense is provided by the government because it is a public good, and our taxes support its provision.
Clean air is a public good and air pollution is a "public bad." Since government has the property right to the resource clean air on behalf of Americans, it can allow the use of that resource either by direct regulation of CO2 emissions (quantity control), or a tax-price per unit of CO2 emissions, or a combination of quantity control and a tax- price, or capping the quantity of emission rights and creating a market to regulate the allocation of rights (cap and trade). Self-interest of Americans demands that we all breathe clean air because our life depends upon it. Therefore, all of us must be willing to pay the price to obtain clean air.
Cap and trade policy is meant to create a market for CO2 emissions, where given emission rights are traded at a positive price. It is better than outright quantity control and better in many ways than a tax, because it removes uncertainty about the level of CO2 emissions, allows the market and its price mechanism to allocate rights, and as Paul Krugman argues, it is effective in achieving international cooperation. Also in a democracy, changing tax levels is time consuming if quantity goals are not met. Businesses that object to paying for emission rights want to be free riders. The public is paying for their use of the resource by tolerating depletion of air quality, property damages, and adverse health affects.
Monitoring and management costs will be minimized if this policy applies to major polluting industries. Cap and trade will cause prices of private goods to increase, but not by the full amount of the price of emission rights.
Competition in the private goods' markets will determine the extent of shifting the cost of emission rights to consumers. Substitutes emerge in the market to reduce price shifting. For example, the evidence in the case of gasoline shows that demand is very sensitive to price change in the long run, hence there is less shifting on consumers of any price increase.
Air quality is too precious a resource to waste. Utahns are frequently reminded of the scarcity of this resource with air pollution alerts. It is in the self interest of Americans to support cap and trade policy to obtain cleaner air and maintain healthy life styles.
Mathur is professor emeritus of economics at Cleveland State University, Cleveland, OH and adjunct professor of economics at Weber State University, Ogden, UT. His articles can be read at vijaykmathur.blogspot.com. He resides in Ogden.
VIJAY K. MATHUR
The U.S. House of Representatives just passed cap and trade legislation limiting CO2 emissions. Opposition to this legislation misses the fundamental economic reason for cap and trade.
First, those who object to any kind of government regulation oppose the legislation because restrictions on CO2 emissions of industries using fossil fuels will impose significant cost on all of us. Second, those who are skeptics of climate change oppose it because they suspect that the legislation will not have much effect on global warming, especially when other large CO2-emitting countries like China, Russia and India will continue using fossil fuels in the foreseeable future to meet their energy needs.
Most Americans also would not be very enthusiastic about this legislation if they themselves do not see direct benefits from it. Many Americans do not realize that cap and trade policy is in their self-interest, is based upon market principles, and would directly benefit them more than the cost of such legislation.
Let me first discuss why government has to intervene by legislating CO2 emissions. There are two types of goods which we consume: private goods and public goods. Private goods benefit those who pay the price for those goods, for example, cars, food, and clothing. There is no leakage of consumption benefits to others who do not pay the price for private goods. Therefore, people who pay the price have property rights to those goods and their benefits. When property rights emerge and are enforced, markets will arise for those goods.
Private property rights can not be defined and enforced for public goods, since benefits of public goods can not be completely appropriated by persons who may be willing to pay the price. If goods are provided, it would also benefit those who do not pay for the goods. Therefore, there is no incentive for individuals to buy the goods and hence there will not be any supply of the goods. Private markets for the goods will not emerge. Hence, public goods have to be provided collectively; it implies that government has to be assigned the property rights, and it is the government that enforces and allocates those rights for all of us. For example, national defense is provided by the government because it is a public good, and our taxes support its provision.
Clean air is a public good and air pollution is a "public bad." Since government has the property right to the resource clean air on behalf of Americans, it can allow the use of that resource either by direct regulation of CO2 emissions (quantity control), or a tax-price per unit of CO2 emissions, or a combination of quantity control and a tax- price, or capping the quantity of emission rights and creating a market to regulate the allocation of rights (cap and trade). Self-interest of Americans demands that we all breathe clean air because our life depends upon it. Therefore, all of us must be willing to pay the price to obtain clean air.
Cap and trade policy is meant to create a market for CO2 emissions, where given emission rights are traded at a positive price. It is better than outright quantity control and better in many ways than a tax, because it removes uncertainty about the level of CO2 emissions, allows the market and its price mechanism to allocate rights, and as Paul Krugman argues, it is effective in achieving international cooperation. Also in a democracy, changing tax levels is time consuming if quantity goals are not met. Businesses that object to paying for emission rights want to be free riders. The public is paying for their use of the resource by tolerating depletion of air quality, property damages, and adverse health affects.
Monitoring and management costs will be minimized if this policy applies to major polluting industries. Cap and trade will cause prices of private goods to increase, but not by the full amount of the price of emission rights.
Competition in the private goods' markets will determine the extent of shifting the cost of emission rights to consumers. Substitutes emerge in the market to reduce price shifting. For example, the evidence in the case of gasoline shows that demand is very sensitive to price change in the long run, hence there is less shifting on consumers of any price increase.
Air quality is too precious a resource to waste. Utahns are frequently reminded of the scarcity of this resource with air pollution alerts. It is in the self interest of Americans to support cap and trade policy to obtain cleaner air and maintain healthy life styles.
Mathur is professor emeritus of economics at Cleveland State University, Cleveland, OH and adjunct professor of economics at Weber State University, Ogden, UT. His articles can be read at vijaykmathur.blogspot.com. He resides in Ogden.
Saturday, July 4, 2009
Health care reform can be a net win for all parties
Published in Standard-Examiner, August 1, 2008
Vijay K. Mathur
During President Bill Clinton’s administration health care controversy began with an intelligent and serious debate among its supporters and opponents about the merits and demerits of the proposal to reform health care. However, as time progressed the debate degenerated into a politicized, “caricaturized” circus sideshow with Harry and Louise in a television commercial as its main characters.
Interest groups championing their own self interests lost sight of the main issues in the debate, like how to provide health insurance, quality medical care, drugs at a reasonable price. My intent here is to point out that the parties involved in the debate and the general electorate must take lessons from the “prisoners’ dilemma game” so that they do not repeat the same mistakes when the new President takes over and makes a health care reform proposal.
Game theory – a branch of mathematics – is the study of conflict and strategic interactions between thoughtful, rational, “untrusting”, and sometimes deceitful and uncooperative opponents motivated by self interest. Prisoners’ dilemma game, an experimental game, was invented in 1950 at the Rand Corporation. Simply put, the game demonstrates that self interests of two criminals, partners in a crime, who know their guilt (charged with the same crime and held separately), persuade them to adopt the strategy of confessing to the crime and thus suffering heavier punishment. Had these criminal trusted each other and adopted a cooperative strategy of not confessing to the crime, both could have gotten off with lighter sentences.
The parties in the health care reform debate are politicians, small businesses, big businesses, insurance industry, doctors, hospitals, AMA, drug industry, right-to-life and right-to choice groups, religious institutions, and other consumer groups like AARP, women’s groups and labor.
If these groups defect from the reform and pursue their self interests we will all face escalating medical care cost, insurance cost and inadequate care. Decisions based on self interests in the market place promote individual as well as society’s welfare only when private decisions do not impose significant costs or benefits on others (labeled as spillover effects). Health care market fails due to spillover effects, because many individual decisions on health care impose costs and benefits on the rest of the society. For example, those who do not buy health insurance and show up in emergency care increase insurance cost of others. Hence, health care reform requires a cooperative strategy.
There are many prisoners’ dilemma games in the on-going debate. For example, small businesses do not want employer mandates, but big businesses consider them “free riders”; many religious groups would not want abortion as part of the health care or health insurance packages, but certain women’s groups would like it to be included; AMA would like its members’ merger activities and price fixing activities to be exempt from antitrust laws, but insurance industry may oppose the idea. If the parties involved do not follow a cooperative strategy, they and the general public will lose and end up facing higher costs for same or less health care.
Health care reform does not have to be a “zero sum game”, like a recreational game where one party wins and the other loses. With a cooperative strategy, reform could be a “net win” for all parties concerned, especially in the long run. In addition, unlike the prisoners’ dilemma problem where criminals have to make the decision to confess or not confess to the crime unaware of the others’ decision, the parties in the health care reform game do not face this problem. They can see the benefits of their cooperative strategy as well as the losses if any one defects.
Society is better off if all parties surrender their narrow self-interests in order to gain the security of health care at reasonable costs to all. Conservatives and liberals alike in and out of Congress have to realize that the way out of the prisoners’ dilemma is to adopt a cooperative strategy, because defection from health care reform could be tragic to the nation. Prosperity of a nation over the long run is closely tied to human capital formation, and health of the people is the primary input in that formation.
Mathur is former professor of economics and chair, and currently professor emeritus of economics in the economics department of Cleveland State University, Cleveland, Ohio. At present he resides in Ogden Utah.
Vijay K. Mathur
During President Bill Clinton’s administration health care controversy began with an intelligent and serious debate among its supporters and opponents about the merits and demerits of the proposal to reform health care. However, as time progressed the debate degenerated into a politicized, “caricaturized” circus sideshow with Harry and Louise in a television commercial as its main characters.
Interest groups championing their own self interests lost sight of the main issues in the debate, like how to provide health insurance, quality medical care, drugs at a reasonable price. My intent here is to point out that the parties involved in the debate and the general electorate must take lessons from the “prisoners’ dilemma game” so that they do not repeat the same mistakes when the new President takes over and makes a health care reform proposal.
Game theory – a branch of mathematics – is the study of conflict and strategic interactions between thoughtful, rational, “untrusting”, and sometimes deceitful and uncooperative opponents motivated by self interest. Prisoners’ dilemma game, an experimental game, was invented in 1950 at the Rand Corporation. Simply put, the game demonstrates that self interests of two criminals, partners in a crime, who know their guilt (charged with the same crime and held separately), persuade them to adopt the strategy of confessing to the crime and thus suffering heavier punishment. Had these criminal trusted each other and adopted a cooperative strategy of not confessing to the crime, both could have gotten off with lighter sentences.
The parties in the health care reform debate are politicians, small businesses, big businesses, insurance industry, doctors, hospitals, AMA, drug industry, right-to-life and right-to choice groups, religious institutions, and other consumer groups like AARP, women’s groups and labor.
If these groups defect from the reform and pursue their self interests we will all face escalating medical care cost, insurance cost and inadequate care. Decisions based on self interests in the market place promote individual as well as society’s welfare only when private decisions do not impose significant costs or benefits on others (labeled as spillover effects). Health care market fails due to spillover effects, because many individual decisions on health care impose costs and benefits on the rest of the society. For example, those who do not buy health insurance and show up in emergency care increase insurance cost of others. Hence, health care reform requires a cooperative strategy.
There are many prisoners’ dilemma games in the on-going debate. For example, small businesses do not want employer mandates, but big businesses consider them “free riders”; many religious groups would not want abortion as part of the health care or health insurance packages, but certain women’s groups would like it to be included; AMA would like its members’ merger activities and price fixing activities to be exempt from antitrust laws, but insurance industry may oppose the idea. If the parties involved do not follow a cooperative strategy, they and the general public will lose and end up facing higher costs for same or less health care.
Health care reform does not have to be a “zero sum game”, like a recreational game where one party wins and the other loses. With a cooperative strategy, reform could be a “net win” for all parties concerned, especially in the long run. In addition, unlike the prisoners’ dilemma problem where criminals have to make the decision to confess or not confess to the crime unaware of the others’ decision, the parties in the health care reform game do not face this problem. They can see the benefits of their cooperative strategy as well as the losses if any one defects.
Society is better off if all parties surrender their narrow self-interests in order to gain the security of health care at reasonable costs to all. Conservatives and liberals alike in and out of Congress have to realize that the way out of the prisoners’ dilemma is to adopt a cooperative strategy, because defection from health care reform could be tragic to the nation. Prosperity of a nation over the long run is closely tied to human capital formation, and health of the people is the primary input in that formation.
Mathur is former professor of economics and chair, and currently professor emeritus of economics in the economics department of Cleveland State University, Cleveland, Ohio. At present he resides in Ogden Utah.
Health care reform must address problems
Published in Standard-Examiner, June 30,2009, Ogden, UT
VIJAY K. MATHUR
The vigorous debate in the U.S. Congress and in the public arena seems to indicate that there are good chances of passage of a health care reform bill this year. I hope President Obama, before signing the bill, makes sure that the final bill represents reform not in name only, but as a fundamental change from the status-quo.
According to the most recent published data for 2000-2006, unadjusted for price changes, growth rate in total national health care expenditure has averaged 8 percent per year as opposed to 5 percent average growth rate of Gross Domestic Product (GDP); public expenditure grew at the rate of 8.6 percent per year. In relation to our capacity to pay, total expenditure increased from 13.8 percent to 16 percent of GDP. A report issued by the Council of Economic Advisors (CEA) on June, 2009 states that if health care cost keeps rising at historical rates, its share of GDP will reach 34 percent by 2040, an obviously unsustainable burden on the economy. Hence President Obama has stated two main goals of health care reform, 1) cost containment and 2) covering all uninsured people.
Health care faces four different market-inefficiency problems which require government intervention. Those who are fearful of encroaching socialism lack understanding of these problems. The first is "free-rider problem" where those who do not buy insurance get a free ride on emergency health care either in hospitals or in free clinics. It results in higher premiums for the insured and requires more tax revenue to support other medical care institutions supported by Medicaid funds.
Free rider problem could be mitigated if all people are required to buy insurance, the so-called mandate. Even low income household should be required to pay for insurance according to their ability to pay and the difference between the market price for insurance and their payment could be subsidized. This could ultimately eliminate the need for the Medicaid program. This universal insurance program would also ameliorate costs imposed by uninsured on insured when they spread infectious diseases.
Two other market failure problems in health care are "adverse selection" and "moral hazard." Insurance premiums increase due to adverse selection when an insurance company ends up with people in the pool who require more than average medical care. In other words, the health risk is not diversified with an appropriate mix of young and old people. Data show that during 2005-06, the highest percentage of uninsured Americans were 18 to 34 years old. On average, young people do not require more frequent medical care as do those above the age of 60. Hence, young people lack incentive to buy insurance, not only due to high cost of insurance but also because they can free ride on emergency care. A broader mix of people in the insurance pool will reduce risk and insurance premiums.
Moral hazard also contributes to higher insurance cost. If the insurance coverage is generous relative to premiums, insured people have a tendency to engage in risky behavior resulting in adverse health outcomes, e.g., smoking, obesity. If the insurance coverage is less relative to premiums, insured people will bear most of the health risk and hence will opt out of the insurance market. Thus, we will face increasing ranks of uninsured and less than efficient level of coverage for insured. Insurance companies in general pass costs of risky behavior by increasing deductibles and co-pays.
Besides deductibles and co-pays in insurance contracts, any reform proposal must relax laws so that insurance companies are encouraged to provide more positive incentives to the insured to make lifestyle changes, e.g., to reduce the incidence of cardiovascular diseases, obesity, diabetes. Even under current laws, self-insured Safeway Inc. is successful in implementing such an incentive program and reducing cost of medical care.
The last problem source is the "principal-agent" problem. A physician is supposed to be the agent of his or her patient (principal), representing the patient's interests in dispensing quality care at least cost. However, the fee-for-service compensation structure creates divergence of interests between patients and doctors, thus resulting in high cost without significant changes in the quality of medical care.
The principal-agent problem is more acute when physicians have commercial interests in clinics, hospitals and pharmaceutical companies. Evidence-based medicine, doctors on salaries, fixed payment for a bundle of services, capitated payments over a specified period of time and payments based upon health outcomes are attempts to minimize this problem and control cost. This problem also occurs when employer is the sponsor of a health insurance plan and employees have little choice in picking an insurance plan which suits their needs.
The health-exchange proposal should provide choice to all, including employers, between private and public insurance, with the added feature of portability within and across state lines. If private health insurance industry is more efficient in its service they need not fear public insurance and if they are not, they should become more efficient.
Congress must take the bold step in solving this lingering health care problem which is gradually eating away our material and human wealth.
Mathur is former chair of the economics department and professor emeritus of economics at Cleveland State University, Cleveland, Ohio. He is also an adjunct professor of economics at Weber State University, Ogden, UT. He resides in Ogden, UT.
VIJAY K. MATHUR
The vigorous debate in the U.S. Congress and in the public arena seems to indicate that there are good chances of passage of a health care reform bill this year. I hope President Obama, before signing the bill, makes sure that the final bill represents reform not in name only, but as a fundamental change from the status-quo.
According to the most recent published data for 2000-2006, unadjusted for price changes, growth rate in total national health care expenditure has averaged 8 percent per year as opposed to 5 percent average growth rate of Gross Domestic Product (GDP); public expenditure grew at the rate of 8.6 percent per year. In relation to our capacity to pay, total expenditure increased from 13.8 percent to 16 percent of GDP. A report issued by the Council of Economic Advisors (CEA) on June, 2009 states that if health care cost keeps rising at historical rates, its share of GDP will reach 34 percent by 2040, an obviously unsustainable burden on the economy. Hence President Obama has stated two main goals of health care reform, 1) cost containment and 2) covering all uninsured people.
Health care faces four different market-inefficiency problems which require government intervention. Those who are fearful of encroaching socialism lack understanding of these problems. The first is "free-rider problem" where those who do not buy insurance get a free ride on emergency health care either in hospitals or in free clinics. It results in higher premiums for the insured and requires more tax revenue to support other medical care institutions supported by Medicaid funds.
Free rider problem could be mitigated if all people are required to buy insurance, the so-called mandate. Even low income household should be required to pay for insurance according to their ability to pay and the difference between the market price for insurance and their payment could be subsidized. This could ultimately eliminate the need for the Medicaid program. This universal insurance program would also ameliorate costs imposed by uninsured on insured when they spread infectious diseases.
Two other market failure problems in health care are "adverse selection" and "moral hazard." Insurance premiums increase due to adverse selection when an insurance company ends up with people in the pool who require more than average medical care. In other words, the health risk is not diversified with an appropriate mix of young and old people. Data show that during 2005-06, the highest percentage of uninsured Americans were 18 to 34 years old. On average, young people do not require more frequent medical care as do those above the age of 60. Hence, young people lack incentive to buy insurance, not only due to high cost of insurance but also because they can free ride on emergency care. A broader mix of people in the insurance pool will reduce risk and insurance premiums.
Moral hazard also contributes to higher insurance cost. If the insurance coverage is generous relative to premiums, insured people have a tendency to engage in risky behavior resulting in adverse health outcomes, e.g., smoking, obesity. If the insurance coverage is less relative to premiums, insured people will bear most of the health risk and hence will opt out of the insurance market. Thus, we will face increasing ranks of uninsured and less than efficient level of coverage for insured. Insurance companies in general pass costs of risky behavior by increasing deductibles and co-pays.
Besides deductibles and co-pays in insurance contracts, any reform proposal must relax laws so that insurance companies are encouraged to provide more positive incentives to the insured to make lifestyle changes, e.g., to reduce the incidence of cardiovascular diseases, obesity, diabetes. Even under current laws, self-insured Safeway Inc. is successful in implementing such an incentive program and reducing cost of medical care.
The last problem source is the "principal-agent" problem. A physician is supposed to be the agent of his or her patient (principal), representing the patient's interests in dispensing quality care at least cost. However, the fee-for-service compensation structure creates divergence of interests between patients and doctors, thus resulting in high cost without significant changes in the quality of medical care.
The principal-agent problem is more acute when physicians have commercial interests in clinics, hospitals and pharmaceutical companies. Evidence-based medicine, doctors on salaries, fixed payment for a bundle of services, capitated payments over a specified period of time and payments based upon health outcomes are attempts to minimize this problem and control cost. This problem also occurs when employer is the sponsor of a health insurance plan and employees have little choice in picking an insurance plan which suits their needs.
The health-exchange proposal should provide choice to all, including employers, between private and public insurance, with the added feature of portability within and across state lines. If private health insurance industry is more efficient in its service they need not fear public insurance and if they are not, they should become more efficient.
Congress must take the bold step in solving this lingering health care problem which is gradually eating away our material and human wealth.
Mathur is former chair of the economics department and professor emeritus of economics at Cleveland State University, Cleveland, Ohio. He is also an adjunct professor of economics at Weber State University, Ogden, UT. He resides in Ogden, UT.
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