Regulatory Capture

This story has been floating around the last few days but rather than focus on the specific issue - banning denial of coverage for preexisting conditions for children, which I believe will be resolved by a forceful HHS reg and statement, I want to focus on the issue of regulatory capture:

Regulatory capture is a term used to refer to situations in which a state regulatory agency created to act in the public interest instead acts in favor of the commercial or special interests that dominate in the industry or sector it is charged with regulating. [. . .] For public choice theorists, regulatory capture occurs because groups or individuals with a high-stakes interest in the outcome of policy or regulatory decisions can be expected to focus their resources and energies in attempting to gain the policy outcomes they prefer, while members of the public, each with only a tiny individual stake in the outcome, will ignore it altogether.

A cogent rebuttal about concerns about regulatory capture regarding the health bills has never been provided to my satisfaction. More . .

This Harpers piece by Luke Mitchell is instructive:

The story of capture is repeated again and again, in industry after industry, whether it is the agricultural combinations creating an impenetrable system of subsidies, or television and radio broadcasters monopolizing public airwaves for private profit, or the entire financial sector conjuring perilous fortunes from the legislative void. The real battle in Washington is seldom between conservatives and liberals or the right and the left or “red America” and “blue America.” It is nearly always a more local contest, over which politicians will enjoy the privilege of representing the interests of the rich.

And so it is with health-care reform. The debate in Washington this fall ought to have been about why the United States has the worst health-care system in the developed world, why Americans pay twice the Western average to maintain that system, and what fundamental changes are needed to make the system better serve us. [. . .] The health-care industry has captured the regulatory process, and it has used that capture to eliminate any real competition, whether from the government, in the form of a single-payer system, or from new and more efficient competitors in the private sector who might have the audacity to offer a better product at a better price.

The polite word for regulatory capture in Washington is “moderation.” [. . .] No one today is more moderate than the Democrats. Indeed, the triangulating work that began two decades ago under Bill Clinton is reaching its apogee under the politically astute guidance of Barack Obama. “There are those on the left who believe that the only way to fix the system is through a single-payer system like Canada’s,” Obama noted (correctly) last September. “On the right, there are those who argue that we should end employer-based systems and leave individuals to buy health insurance on their own.” The president, as is his habit, proposed that the appropriate solution lay somewhere in between. “There are arguments to be made for both these approaches. But either one would represent a radical shift that would disrupt the health care most people currently have. Since health care represents one-sixth of our economy, I believe it makes more sense to build on what works and fix what doesn’t, rather than try to build an entirely new system from scratch.”

You can agree or disagree with the IDEA of reform propounded in the health bills, but you must admit that the issue of regulatory capture must be addressed if you are going to favor the regulatory reform framework that ObamaCare seeks to advance. Nothing I have seen seems to do this. The closest attempt to it by Ezra Klein seemed laughably naive:

[A] lot of people are concerned that private insurers will jack their rates up in anticipation of the exchanges. This is not a concern I fully understand, to be honest. The virtue of a competitive market -- that is to say, a market in which it's easy for a lot of people to compare products and prices -- is that this sort of behavior is actually very difficult. For a rate-raising strategy to work for insurers, you'd need pretty impressive collusion. [. . .] The fear of deceptive rates comes, I think, from the fact that people really, really hate and mistrust private insurers. And they have good reason for that. But private insurers aren't monsters. They're capitalists. And when the rules and incentives of the market change, so too will their behavior.

The invisible hand of the health insurance market will cure everything says Ezra. Makes you wonder why we needed reform in the first place. We could have just put in mandates and left the rest to the market. Well, as Paul Krugman noted, the health insurance market does not work:

There are two strongly distinctive aspects of health care. One is that you don’t know when or whether you’ll need care — but if you do, the care can be extremely expensive. The big bucks are in triple coronary bypass surgery, not routine visits to the doctor’s office; and very, very few people can afford to pay major medical costs out of pocket. This tells you right away that health care can’t be sold like bread. It must be largely paid for by some kind of insurance. And this in turn means that someone other than the patient ends up making decisions about what to buy. Consumer choice is nonsense when it comes to health care. And you can’t just trust insurance companies either — they’re not in business for their health, or yours.

This problem is made worse by the fact that actually paying for your health care is a loss from an insurers’ point of view — they actually refer to it as “medical costs.” This means both that insurers try to deny as many claims as possible, and that they try to avoid covering people who are actually likely to need care. Both of these strategies use a lot of resources, which is why private insurance has much higher administrative costs than single-payer systems. And since there’s a widespread sense that our fellow citizens should get the care we need — not everyone agrees, but most do — this means that private insurance basically spends a lot of money on socially destructive activities.

No reasonable person could argue that the "market" will take care of the problem. And indeed, after some thought, Klein tries a better gambit:

[E]conomist Austin Frakt notices that there's actually a policy that will directly police rate increases. "The rate reviews that take effect this year (85% and 80% loss ratio minimums in the large and small/individual markets, respectively) would be a means by which to cap rate increases," he e-mails. "Consumers are supposed to get rebates if those minimums are exceeded. Thus, the vast majority of rate increases will have to be justified by actual medical expenses."

(Emphasis supplied.) I highlighted the phrase "supposed to get" because a lot of things are "supposed" to happen and never do. From paper to reality is a long journey. And in between this particular journey is the issue of regulatory capture. But then again, when you do not doubt the efficacy of the health insurance market, you are not likely to think regulatory capture is in issue.

But I want folks to imagine this - it is 2016, in the middle of a Presidential race and election season. Democrats are touting the health care reform accomplishment and Republicans have been paid off like slot machines by the stakeholder in the health care industry - who is going blow the whistle on health insurance companies not complying with the great Dem achievement? Good luck with that one.

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    I've never gotten over the first skirmishes... (5.00 / 3) (#2)
    by Salo on Mon Mar 29, 2010 at 10:30:29 AM EST
    ... About the symbiotic neeccesity for mandates & a PO. ( this of course leaves out single payer). Obama's early arguments against mandates ( cynically designed to knock off Edwards and Clinton)  struck me as false because he was also offering a PO.  

    I personally have never trusted him on healthcare after witnessing the Obfuscating arguments he put forth back then.  He either had to be paid off or deeply unserious.

     The mandates will prove to be unworkable and perhaps even resisted.  The new  regulations will be turned into Swiss cheese and the government will provide no refuge from industry abuses unless one has already been Previously stripped of all assets and requires a hand out in the form of Medicaid.    

    Your comment on primary candidate (5.00 / 1) (#8)
    by oculus on Mon Mar 29, 2010 at 11:51:47 AM EST
    Obama adamantly rejecting mandates resonates.

    The best of both worlds. (5.00 / 5) (#3)
    by inclusiveheart on Mon Mar 29, 2010 at 10:47:22 AM EST
    The reality is that in the health insurance arena co-opting the regulatory process is actually their very best option.  There are many regulations that are favorable to their cause.

    The irony is that if we were to totally deregulate the private health insurance industry, they would lose a good deal of their advantage that keeps them in business.  And I mean totally deregulate including who gets to form an insurance group - so that some of us could get together and create our own risk pool.  So that we could hire and fire companies hourly if we chose to do so.  Stripped them of their special exemtion from the anti-trust laws...  They would quickly go out of business without the protections hat government regulation have afforded them.

    The game then becomes minimizing unfavorable regulation and maximizing regulation that keeps the game afloat.  Because in the end, the private health insurance business model is a losing proposition unless they are given special status to operate.

    True (5.00 / 2) (#6)
    by gyrfalcon on Mon Mar 29, 2010 at 11:44:46 AM EST
    And also true of most of our economy, which is nowhere near to actually being a free market system.

    There are good reasons to (5.00 / 2) (#9)
    by inclusiveheart on Mon Mar 29, 2010 at 11:51:50 AM EST
    go this route in certain arenas, but in recent years many consumer protections have been stripped and the regulations favoring corporations have been strenghened.  Which has really gotten the system out of whack.

    The fact that we got a mandate without any real premium price controls is a glaring inequity.


    Btd (5.00 / 3) (#4)
    by Salo on Mon Mar 29, 2010 at 10:48:06 AM EST
    "The invisible hand of the health insurance market will cure everything says Ezra. Makes you wonder why we needed reform in the first place. We could have just put in mandates and left the rest to the market."

    isn't this precisely what the bill did though? Without a refuge from the capitalists (aka the PO) we are at their tender mercy.  

    Delusion (5.00 / 3) (#5)
    by Stellaaa on Mon Mar 29, 2010 at 11:28:15 AM EST
    What I found fascinating was the " this is a start" argument for not pushing harder.  My thought was always, yes a start for the "industry" to really get what they want out of the regulations.  I find it interesting that people think that it will be a cake walk to change the "monster" to our favor.

    I assure you right now the industry is setting up the regulatory fight.  

    This is as good as we are gonna get and it will get less by the time it's offered in 2014.  

    "Ezra Klein seemed laughably naive" (5.00 / 3) (#11)
    by MO Blue on Mon Mar 29, 2010 at 12:10:16 PM EST
    [A] lot of people are concerned that private insurers will jack their rates up in anticipation of the exchanges.

    AT&T Inc, AK Steel Corp., Caterpillar Inc., Deere & Co. and Valero Energy announced that they are taking a non-cash charge in the first quarter because of the health care overhaul. ATT&T Analysts say retirees could lose the prescription drug coverage provided by their former employers as a result of the overhaul. link

    A poster at Open Left received a letter from employer stating that because of the provisions in the bill that now insure children up to the age of 26 and no lifetime caps, the company is already in negotiations with the insurance company. They warned of significant increases as a result.

    Wonder how many announcements or letters like these on "employer plans" will go out between now and November.

    Political Disaster for the Dems (5.00 / 5) (#12)
    by BDB on Mon Mar 29, 2010 at 12:14:47 PM EST
    this is only the beginning.  As many of us warned, this is going to be a political disaster for the Democrat as the truth about what is (mandates, pharma giveaways) and isn't (cost controls) in the bill become known to people.

    Brought it on themselves, as far as I'm concerned.  

    Obamacare is not a liberal or a conservative (5.00 / 2) (#13)
    by Buckeye on Mon Mar 29, 2010 at 12:21:58 PM EST
    solution, but a ticking time bomb.  Obamacare tries to address the lack of coverage with a complex labryinth of regulations, price controls, mandates, penalties, buracracy, etc. that will only cause inflation to keep spiraling up.  It does not try to reform an unsustainable system, but subsidizes it and compels people to participate in it.  People will keep paying ever increasing premiums which will require ever increasing subsidies and penalties or there will be ever increasing uninsured people.  A inflationary synergy putting enourmous pressure on premiums and our national deficits.

    And the Democratic party will own everything that is wrong with it.


    It will all be proof (5.00 / 2) (#14)
    by TeresaInSnow2 on Mon Mar 29, 2010 at 12:39:18 PM EST
    that the greatest piece of progressive legislation since FDR doesn't work.

    It proves that FDR is ineffectual in this era, you see..../snark.

    It's disaster on many levels.


    It is a prime example of Corporatism -- government (none / 0) (#44)
    by jawbone on Mon Mar 29, 2010 at 10:23:40 PM EST
    and corporations working together for the interests of, mostly corporations, but also those in power who want to stay in power.

    Needless to say, single payer avoids the capture (5.00 / 3) (#16)
    by lambert on Mon Mar 29, 2010 at 01:00:38 PM EST
    ... since the financial (hence political) power of the insurance companies would have been destroyed.

    Too bad the Dems and "progressives" took a workable solution off the table -- not even using it as a "madman" tool of bargaining.

    Makes you wonder whose interest the Dems and "progressive" were really working in. Eh?

    We will never have the political capacity (5.00 / 2) (#19)
    by masslib on Mon Mar 29, 2010 at 02:37:17 PM EST
    in this country to properly regulate insurance markets.  It's just not gonna happen.

    I Tend To Agree (none / 0) (#20)
    by squeaky on Mon Mar 29, 2010 at 02:55:52 PM EST
    And believe a single payer plan is the only way to go. Although it would seem possible that the Insurance cos could be regulated like the Utilities are.

    It can be done (none / 0) (#23)
    by MKS on Mon Mar 29, 2010 at 03:38:43 PM EST
    In California there are tons of cases against insurance companies.....Here, if a carrier denies benefits "unreasonably," they have to pay the other side's attorneys fees and are subject to puntive damages....

    Entire law firms make their living suing insurance carriers for "bad faith."

    The problem with respect to medical insurance is that most of the policies are provided under a employer's plan, and ERISA pre-empts state law, and you cannot sue your insurance company at all--let alone for bad faith....

    Hopefully, the same ERISA exemptions do not apply to the rebates.....and, now that I think of it, they probably do....  


    The real problem is that health (none / 0) (#30)
    by inclusiveheart on Mon Mar 29, 2010 at 04:09:27 PM EST
    insurance isn't a workable for-profit enterprise if you are actually making good on the promise of coverage.  Regulation isn't really the issue.  The issue is that if they were properly regulated and held to their contracts, they wouldn't be profitable.  At its core, this is an admission that they have an unworkable business model.

    Maybe (none / 0) (#31)
    by MKS on Mon Mar 29, 2010 at 04:44:54 PM EST
    But even if it were a workable business model, they would still push the limits....

    Insurance works in other areas....

    And, as I understand it, the smart carriers make their money, not from having premiums exceed payouts, but from investing on the float.....  


    Yes, insurance works with cars (none / 0) (#33)
    by inclusiveheart on Mon Mar 29, 2010 at 05:20:16 PM EST
    for example because while it might break our hearts for sentimental reasons when they proclaim one "totaled" - proclaiming a human being as being "totaled" is not acceptable.

    Health insurance coverage is unlike any other insurance coverage specifically because it deals with life and death issue for people.  The very idea of actually trying to compare health insurance with any other kind of insurance is pretty ridiculous from the start.


    No doubt, it would be better (none / 0) (#35)
    by MKS on Mon Mar 29, 2010 at 05:38:47 PM EST
    to take private insurance out of the equation entirely.....or at least have a large component of government insurance for basic coverage, as they do in France....

    But that ship sailed, I'm afraid.....So regulations will have to do.


    It has sailed? (none / 0) (#36)
    by inclusiveheart on Mon Mar 29, 2010 at 05:49:43 PM EST
    It wasn't even ever allowed to be in the water.

    I doubt that it is dead.  I know it will take a while, but don't underestimate the private health insurers' power to provoke.  They're already actively seeking ways to avoid covering sick kids; and there's lots more where that comes from.


    That would be nice (none / 0) (#38)
    by MKS on Mon Mar 29, 2010 at 05:54:21 PM EST
    Hopefully insurance carrier abuses will lead the public to want more restraint of the carriers, rather than less as the free marketeers would argue....

    "Nice," meaning it would be good (none / 0) (#39)
    by MKS on Mon Mar 29, 2010 at 05:58:38 PM EST
    if we get the public option or single payer, not the avoiding of covering sick kids.....Hopefully most would assume that that was the point.

    Yes. (none / 0) (#40)
    by inclusiveheart on Mon Mar 29, 2010 at 06:17:56 PM EST
    And they will push the limits.

    I personally think that this experiment in regulation is a big waste of time, but, OTOH, it may just solidify a movement towards a strong government administered program in this country.

    If the private insurers had been really smart, they would have advocated for a small public option to take these undesireable kids and others off of their hands; and rigged the game so that they got all of the healthy people.  That would have been smart strategy in preserving their businesses.


    And for most consumer (none / 0) (#32)
    by TeresaInSnow2 on Mon Mar 29, 2010 at 05:13:35 PM EST
    , especially young consumers, insurance isn't a good value.  If you're buying it yourself, you're paying far more for the insurance than the medical bills cost.

    Spreading the risk (none / 0) (#34)
    by MKS on Mon Mar 29, 2010 at 05:34:01 PM EST
    Not really because it doesn't (none / 0) (#37)
    by inclusiveheart on Mon Mar 29, 2010 at 05:53:56 PM EST
    minimize the risk for them.  They can pay, but if they happen to be in between jobs - experiencing a gap in coverage - when they get sick or injured - it makes no difference what they've paid in the past - they are still out of luck.  This new legislation doesn't really change that equation from the provider's perspective or the consumer's perspective.  The risk pools are still poorly administered in how they actually work.

    Rapture (5.00 / 1) (#45)
    by Edger on Tue Mar 30, 2010 at 08:59:21 PM EST
    ... is a term used to refer to situations in which a state regulatory agency created to act in the public interest instead acts in favor of the commercial or special interests that dominate in the industry or sector it is charged with regulating.

    lol (5.00 / 1) (#46)
    by squeaky on Tue Mar 30, 2010 at 09:05:30 PM EST
    One man's rapture is another man's  rupture...  

    Heh! (5.00 / 1) (#47)
    by Edger on Tue Mar 30, 2010 at 09:10:14 PM EST
    When I saw his title I at first read it as "rapture".

    Then I read the post and it made sense, you know?


    Yeah, this has been the problem all along (none / 0) (#1)
    by andgarden on Mon Mar 29, 2010 at 10:16:42 AM EST
    I think Ezra knows it too, which is why his language is so weak, and why he has been so hesitant to substantively defend the Magic Exchanges.

    Who's going to oversee the accounting? (none / 0) (#7)
    by gyrfalcon on Mon Mar 29, 2010 at 11:47:41 AM EST
    on those "loss ratio" minimums?  I wonder if it's possible to track, say, all those Lehman number-crunchers and see how many of them are ending up at the big health insurance outfits.

    Income verifications (none / 0) (#10)
    by Stellaaa on Mon Mar 29, 2010 at 12:02:16 PM EST
    Many aspects of HCR require income certifications for the subsidies.  Go and ask your local Housing Authority what it costs them to verify family income.  This program will generate the complexity of the IRS everyone involved.  

    Watch for Health and Rx shops in your local strip mall:  "we will help you get your healthcare benefits, are you a small business?  Are you confused? "  Walk ins welcome.  

    I am already optioning some leases and will need lawyers.  Start at the ground floor of the regulatory battle.  


    "Cognitive regulatory capture" (none / 0) (#15)
    by lambert on Mon Mar 29, 2010 at 12:57:07 PM EST
    Here are two useful links on "cognitive regulatory capture" -- that is, the inability of the "regulators" to think except in terms provided by those that they supposedly regulate. Willem Buiter of the FT, and  Yves of Naked Capitalism, who writes:
    The idea that the needs of the financial sector can trump those of the productive sector are dangerous and destructive to our collective well being, and need to be combatted frontally.

    So, if, as Krugman points out, health insurance is a lemon market, is there any reason to believe that a neo-liberal, market-based "solution" for HCR (Higher Corporate Returns) is going to provide better care?

    I'd argue know. And to those few DFHs who've paid attention to how Obama serviced financial interests since Lehman and TARP in October 2008 won't be surprised when the insurance companies capture this regulatory process, too. After all, an insurance company executive drafted the Baucus bill!

    Class Action lawsuits to recover (none / 0) (#17)
    by MKS on Mon Mar 29, 2010 at 01:02:29 PM EST
    the rebates.....That could be one way to put teeth into the regulations.....

    And, we now have the actual statute in place....If there is a basis for a class action lawsuit to challenge the insurance carriers spending on benefits, the lawyers here in California, if nowhere else, will figure out the way.

    Although they are busy trying to (none / 0) (#18)
    by oculus on Mon Mar 29, 2010 at 02:24:13 PM EST
    establish a class action against Toyota--in CA S. District.  

    Are you talking about Lerach's old firm? (none / 0) (#22)
    by MKS on Mon Mar 29, 2010 at 03:30:48 PM EST
    When I first heard about "rebates" in the bill, I immediately thought that meant class actions....They could have just left the issue as one of regulation as the enforement mechanism for making sure the requisite percentage was spent on benefits.....That would have left it to state AGs or US Attorneys to enforce--and some no doubt would....

    But when you create a right by a customer to a rebate, presumably you create a right to sue to enforce that right--he or she would have standing to sue to collect his or her personal rebate.....And I do not know if there really is a private right of action but allowing for rebates sure makes it sound like it.  And with a private right of action, you then get a shot at class actions.....

    I wonder if the "rebate" idea was an idea of the dreaded plaitiffs' bar?

    There are plenty of firms that would try the class action route....Hungry and opportunistic lawyers out there will find a way....


    Here: (none / 0) (#24)
    by oculus on Mon Mar 29, 2010 at 03:39:09 PM EST
    ERISA (none / 0) (#25)
    by MKS on Mon Mar 29, 2010 at 03:40:28 PM EST
    It is possible that ERISA would pre-empt any right to sue for the rebate....ERISA pre-empts such claims against carriers under an employer's plan.

    Act in the public interest (none / 0) (#21)
    by vicndabx on Mon Mar 29, 2010 at 03:17:09 PM EST
    That's why doctors are supposed to follow an ethical code, why we expect more from them than from bakers or grocery store owners.

    My intention is not to impugn a whole profession, but come on, doctors are in it to make money just like everyone else.  They exert the same amount of pressure on lawmakers; to act in their profession's best interest as opposed to the public, more so probably because they are not often viewed as the villians.  Witness the drive to increase Medicare/Medicaid reimbursment amounts as an example.  Is it in our best interest to increase payments in our current fiscal mess?

    This also

    Consumer choice is nonsense when it comes to health care.

    is not entirely true.  In acute care scenarios, e.g. you're having a heart attack no.  When you need a doc to check out your runny nose however, you can indeed shop around to see who charges the lowest for an office visit.  We don't because we don't have the time nor patience.  We allow others to do it for us (for a fee) and thus we only pay $25 for a copay.

    Regulatory Capture happens for the same reasons you talk about fighting dems and negotiation techniques.  We should be talking about regulatory capture in a way such that it's dealt with based on facts and evidence, not politics and spin.

    Even with the "runny nose" (5.00 / 1) (#29)
    by sj on Mon Mar 29, 2010 at 03:54:33 PM EST
    I prefer to go to a doctor that has my entire medical history and with whom I have established a relationship of trust.  If it's a chronic runny nose, that might be important.

    And yes, I would say it's in our national interest to increase Medicare/Medicaid payments.

    But that's just liberal me.


    To me, you are impugning the integrity (none / 0) (#26)
    by oculus on Mon Mar 29, 2010 at 03:41:55 PM EST
    of the medical profession, though.  There are lots of ways to make much more money and work much less hard.  

    Not saying they don't work hard (none / 0) (#27)
    by vicndabx on Mon Mar 29, 2010 at 03:51:33 PM EST
    they do.  Not my point at all.  Note, I have family members in healthcare.  We all advocate for our own group is different way of putting it, YMMV.

    I agree with your last sentence. (none / 0) (#28)
    by oculus on Mon Mar 29, 2010 at 03:52:40 PM EST
    And I agree with your second: (5.00 / 1) (#42)
    by NYShooter on Mon Mar 29, 2010 at 09:30:21 PM EST
    "There are lots of ways to make much more money and work much less hard."

    As the son of a doctor I can tell you that doctors work just as hard when approaching their final days as they did in Medical School (and internship)

    Go into the study of any doctor who has just passed on and you will see stacks and stacks of earmarked, partially read, books, manuals, reports, periodicals, studies, etc. When life and death is your game, studying isn't merely a way to "get ahead" as it is in most other fields.

    Yes, there are some greedy, money grubbing, bast*ards, but there's no escaping the inhuman workload they all must endure.


    Not impugning the integrity but point to ponder (none / 0) (#43)
    by Politalkix on Mon Mar 29, 2010 at 09:39:43 PM EST
    There are lots of ways to work as hard as doctors and make less money and have less job security. Research scientists in the pharmaceutical sector and electrical engineering, physicists, rocket scientists get paid a lot less than doctors. Even medical technology would not be anywhere close to what it is today, were it not for physicists, engineers, computer scientists and biochemists.
    Doctors do not make so much more money compared to other specialized professionals in most industrialized nations as they do in the United States.

    preexisting red herring (none / 0) (#41)
    by diogenes on Mon Mar 29, 2010 at 07:12:52 PM EST
    In NY State, there is a law against discriminating based on preexisting conditions.  A simple law to ban discrimination based on preexisting conditions could have been passed a year ago with substantial bipartisan support.