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Wonkbook: Fed split on more action; new fees on mortgage lenders; school overhauls delayed

Dylan Matthews is writing Wonkbook while Ezra is on vacation.

The Federal Reserve's monetary policy body was split down the middle on its latest decision. Meanwhile, the Obama administration is leaning toward financing federal support for mortgages through fees on lenders. And despite the administration's push, school overhaul plans in many states are not being implemented in time for the new school year.

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The Federal Open Market Committee was split on its recent, mild quantitative easing measure, reports Jon Hilsenrath: "In one camp, Mr. Dudley, and the presidents of the Boston and San Francisco Fed banks, Eric Rosengren and Janet Yellen, were distressed that the Fed was far from its objectives of low unemployment and stable inflation. ... Fed governor Kevin Warsh, a former Wall Street investment banker who worked closely with Mr. Bernanke during the crisis and who attends many Washington Nationals baseball games with the chairman, worried that a decision to reinvest mortgage proceeds into Treasurys would confuse investors and lead many to believe the Fed was paving the way to resume major purchases before it had decided to do so."

The administration is considering levying fees on lenders to fund government support for mortgages, report Deborah Solomon and Nick Timiraos: "The industry appears prepared to pay some type of premium to get the government's backing. Under proposals floated by two trade groups, the Financial Services Roundtable and the Mortgage Bankers Association, new private-sector entities created to securitize and insure mortgages would pay a fee into a government-insurance fund. Researchers at the New York Federal Reserve Bank, writing on their own behalf, have proposed creating lender-owned cooperatives that would replace Fannie and Freddie."

The administration's pledge to overhaul 1,000 schools a year is not being met this school year, reports Sam Dillon: "Experts have been warning for months that the administration’s timetable was too tight, forcing schools and districts to create last-minute plans. 'To do this right, schools needed to know probably nine months ago that they’d be funded, but many are only finding out now,' said Robert Manwaring, an expert on school turnaround efforts at Education Sector, a nonprofit research center in Washington. In March, Mr. Manwaring wrote in his blog that the Education Department was pursuing a 'crazy timeline' and should postpone the initiative to allow better planning."

Indie rock on Broadway interlude: Ted Leo and the Pharmacists present "The Brutalist Bricks: The Musical."

Still to come: AIG pays back some of the funds used to bail it out; Feinberg under fire for fund claim rules; congressional Democrats are worried insurer regulations will be too lax; and a trombone that doubles as a flamethrower.

Economy/FinReg

AIG is paying the government $4 billion in bailout debt, reports Brady Dennis: "The payment reduces AIG's outstanding balance on the Fed loans to about $21 billion, including interest and fees. If AIG fails to repay the loans in full, the Fed's losses will ultimately fall on taxpayers. The Fed also invested tens of billions of dollars more to help AIG rid itself of troubled derivatives contracts that were bleeding it dry. ... AIG must repay a total of more than $90 billion before the company can regain its full independence."

A fifth TARP-supported bank has failed.

House Democrats are redoubling to pass a small business lending bill today, reports Russell Berman: "The chairman of the Democratic Congressional Campaign Committee, Rep. Chris Van Hollen (D-Md.), and the chairman of the House Ways and Means Committee, Carl Levin (D-Mich.), will hold a conference call Tuesday to push the legislation and highlight small-business tax cuts included in other bills that have already passed. The bill before the Senate would provide more than $12 billion in tax breaks and create a $30 billion government lending program for small businesses, as well as expand other loan initiatives."

An appeals court has ruled again that the Fed must release documents from "last resort" lending programs.

The U.S. may retain a stake in GM beyond this year, reports Jeff Bennett: " 'I don't know if you get totally out of GM' by the end of this year, Mr. Biden told reporters during a tour of Chrysler Group LLC's Toledo, Ohio, assembly plant, where the Jeep Wrangler is made. 'I think that IPO will be successful.' ... The U.S. Treasury could sell some of its 61% ownership stake in GM when the company undergoes an initial public stock offering later this year, but just how much it will sell remains uncertain. U.S. officials have said details on timing and the number of shares the Treasury will sell will be determined largely by market conditions."

A panel of economists consider whether there is a bubble in government bonds.

Andrew Ross Sorkin argues the merger boom isn't a sign of economic strength: "While stock investors may take the recent spate of deals as a sign of confidence in the economy, they shouldn’t get too excited. With unemployment hovering near 10 percent, the latest wave of deals is unlikely to bolster the job market any time soon. Indeed, expect quite the opposite: Some of these deals are being driven by “savings,” an overused euphemism for layoffs. Moreover, many of the deals are being driven by a slowing of organic growth as companies with cash look to pump up their bottom lines."

Former Bush NEC director Keith Hennessey defends the Bush tax cuts against Paul Krugman's criticisms.

Ill-advised invention interlude: A (playable) combination flamethrower/trombone.

Energy

State officials are attacking oil spill fund head Kenneth Feinberg's rules for claimants, reports Neil King: "Critics complain that the time table is unrealistic, and allows ailing businesses little time to assess the long-term damages potentially caused by the spill. State officials are also raising alarms over Mr. Feinberg's plans to base payment decisions, at least in part, on how close a business is to the oil-slicked coastline. Florida Attorney General Bill McCollum cited the proximity question in a letter to Mr. Feinberg on Friday, saying that the federal Oil Pollution Act laid out less stringent restrictions for liability than Mr. Feinberg was looking to impose."

Gas prices are at an eight-month low.

BP is still working on a "bottom kill" to end the oil spill permanently, reports Mark Peters: "Bringing to the surface about 3,000 feet of pipe is the latest step as BP works to permanently end the deepwater spill. The well stopped leaking oil in mid-July when a sealing cap was place on top of it, and then a cement plug was put into place in early August. The pipe and blowout preventer need to be fished out of 5,000 feet of water before BP can execute what's known as a 'bottom kill.' The operation is meant to permanently kill the well by injecting mud and drilling cement into it through a freshly drilled relief well."

Climate change is causing plant growth to fall.

Even extreme "geoengineering" policies would not stop sea levels from rising, writes David Biello: "Nor would drawing down the carbon dioxide in the atmosphere yield better results. Replanting trees on all the lands that have been cleared of forests during the past 200 years only ends up lowering atmospheric concentrations of greenhouse gases by 45 parts per million (current levels are roughly 390 ppm, 110 ppm above pre-industrial levels). Biochar nets even less: 35 ppm, though it has other benefits."

Robert Bryce questions the emissions savings from wind: "The U.S. Energy Information Administration (EIA) has estimated the potential savings from a nationwide 25% renewable electricity standard, a goal included in the Waxman-Markey energy bill that narrowly passed the House last year. Best-case scenario: about 306 million tons less CO2 by 2030. Given that the agency expects annual U.S. carbon emissions to be about 6.2 billion tons in 2030, that expected reduction will only equal about 4.9% of emissions nationwide. That's not much when you consider that the Obama administration wants to cut CO2 emissions 80% by 2050."

Travel efficiency interlude: How one driver can break up a traffic jam.

Domestic Policy

Congressional Democrats are worried medical loss ratio regulations drafted by state insurance commissioners will be too lax, reports Jennifer Haberkorn: "Sebelius is waiting for the National Association of Insurance Commissioners to suggest rules surrounding how much insurance companies must spend on medical costs versus administrative expenses or profits. The report, expected in weeks, isn’t likely to be as strict on insurers as top Democrats have hoped...In the case of the Medical Loss Ratios, top House and Senate chairmen want to include as many items as possible on the administrative side of the ledger, which would make the quota harder to reach."

A judge has blocked Obama's executive order expanding stem cell research.

The salmonella outbreak has given new life to the House-passed Food Safety Modernization Act, reports Alicia Mundy: "On Monday morning, FDA Commissioner Margaret Hamburg hit the network shows to stump for the bill. It would make imported foods subject to the same safety standards as food produced in the U.S. and establish for the first time a mandatory frequency of FDA inspections. From the perspective of FDA officials, the most important part of the bill is the one giving the agency the power to order a recall of tainted food. However, small farmers say they are concerned that the recall power and other new regulations will raise costs and slice profits."

The FDA will run hundreds of inspections to ensure recent egg regulations are being enforced.

Ben Miller and Phuong Ly examine colleges that fail to graduate the vast majority of their students: "As a percentage of their student bodies, these college dropout factories enroll twice as many part-time students, nearly twice as many from low-income families, and around 50 percent more blacks and Hispanics than the average American college or university. They mainly serve local communities, admit most of their applicants, and have much less money than colleges that are higher in prestige. Most upper-middle-class parents would never send their kids to these schools -- nor have they generally even heard of them. Not surprisingly, the worst of the dropout factories are allowed to roll along in dysfunction, year after year."

The Obama administration is toughening medical privacy rules.

Dylan Matthews is a student at Harvard and a researcher at The Washington Post.

By Dylan Matthews  |  August 24, 2010; 8:19 AM ET
Categories:  Wonkbook  
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Comments

Senator Rockefeller and others had better tread lightly on the MLR issue. If they make it too strong any negative impacts in healthcare over the coming years will legitimately be able to be attributed to this decision by them. Its is amazing that Sen. Rockefeller and others want to include CURRENT federal taxes on insurance as administrative costs.

Posted by: visionbrkr | August 24, 2010 8:37 AM | Report abuse

House Ways and Means Chair is Sandy Levin, Senator Carl Levin's older brother.

Posted by: btb1 | August 24, 2010 9:03 AM | Report abuse

I'm generally skeptical of geo-engineering as a solution to global warming (at least a solution in and of itself), but it does seem like we should be able to engineer a plant or tree which gobbles up much more CO2 than the average plant, which would make re-forrestation, or something like it, much more effective. On the other hand, I'm not a scientist, so take "seems like" in its proper context. I'd probably also say that it "seems like" we should have the hoverboards from Back to the Future II by now.

As for GM, I get that there are some people out there that are just allergic to the government owning any piece of private companies. Still, as long as the government becomes a minority shareholder this year so that GM can begin acting more like a private company I don't see where those people will have a lot to complain about (with GM at least). Surely it's better for the government to wait a little longer to hopefully recoup its full investment while GM gets to make its own decisions than for the government to make a hasty sell off as soon as possible and lose money.

Posted by: MosBen | August 24, 2010 10:00 AM | Report abuse

visionbrkr,

To what extent could the following occur if MLR regulations are too stringent?

Insurers cut fraud prevention - overhead would fall and medical loss outlays would increase, helping the ratio on each end.

Insurance companies could also offer very high reimbursement rates to providers so that they would have the best network possible, and it would rarely make sense to deny a claim. Between a great network and rave reviews, I'm sure these companies would have customers lined up out the door - after all, most of them will not be paying full freight for the premiums. Sure, there would be lower cost networks available but the other networks would have outbid them for the best providers.

With happy customers (voters) and a favorable MLR, I'm sure these companeis could get rate increases required to keep the operation afloat. I'm not even sure the excise tax becomes a huge issue provided the insurance companies in question target people in the exchange, the vast majority of whom will be subsidized.

Is there something in ACA that would prevent this type of scenario where costs become increasingly irrelevant and everyone competes by offering better and better benefits for subsidized customers on the exchanges?

Posted by: justin84 | August 24, 2010 10:14 AM | Report abuse

justin,

there are sadly LOTS of ways it could be too stringent. If there is not enough admin cost allowed insurers could scrimp on positive cost factors like utilization review, step therapy for drugs and fraud prevention.


Insurers cutting fraud prevention activities would actually increase fraud. Doctors that commit fraud would sense and see that and increase their fraudulent activities.

Also why do you think insurers deny claims? They have to (and do) have a legal standing to deny any claims otherwise I'm sure we'd hear about it from all our liberal friends.


My state of NJ already has MLR that's required at 80% on the small group market and each of the last several years every insurer in the state has already met that burden of proof. Costs are still skyrocketing here. There's a current myth traveling around the internet stating that w-2's for next year are going to require the amount paid towards health benefits listed on there and while that is true people are trying to say its because you're going to be taxed in 2011 on that. That's not true. Its to show the value of your health insurance to gear up towards the excise tax. The problem is that its considered a "cadillac tax" in most states but in NJ you'll be driving a Hyundai but paying cadillac tax prices. Same goes for NY and I would expect much of the northeast. This is something that I've screamed about for some time on here and not many people pay attention to. They need to do more separation by region because costs vary so much.

Posted by: visionbrkr | August 24, 2010 11:40 AM | Report abuse

justin,

better put if the MLR is too strict and includes NON-admin costs like taxes etc then insurers won't have the necessary resources to continue cost saving measures like fraud prevention, utilization review and step therapy.

Their true MLR will end up being higher than what congress acted like they intended.

Posted by: visionbrkr | August 24, 2010 11:43 AM | Report abuse

Another negative impact of a too-stringent MLR could be some insurers going out of business or at least exiting the individual market. My company and others are approaching it like this: we have 20 cents on the dollar to use, so what are the absolutely vital expenses and what can we eliminate? As it is right now they're expecting us to spend some of that 20 on things we have no control over like federal income tax and ICD-10. If those costs don't get excluded there's not going to be enough money for things that are necessary, and claim costs increase even faster or we go out of business.

Posted by: ab_13 | August 24, 2010 11:52 AM | Report abuse

ab_13,

exactly. People who aren't in the business have no clue about the ICD-10 costs to implement. I'd expect insurers like yours are now ramping up as quickly as possible to get all those costs in 2010 before the MLR takes effect. Who knows if they can do that in time and what pitfalls that causes.

Its sad that in their deluded minds (I'm talking to you Senator Rockefeller) they THINK they're saving people money but in the long run they'll be costing way way more. But hey many of us will be subsidized by the government so who cares, right?

Posted by: visionbrkr | August 24, 2010 11:58 AM | Report abuse

"Insurers cutting fraud prevention activities would actually increase fraud. Doctors that commit fraud would sense and see that and increase their fraudulent activities."

But doesn't insurance fraud here count as a medical loss, as it is undetected and paid as if it were a regular claim?

In an nutshell, this is the risk I see:

Insurers can only grow profit by growing revenue - in fact they may have to grow revenue to have any profit at all if the MLR is too restrictive. Revenue grows with rate increases. Profit also depends on streamlining administrative costs, and what better costs to streamline than fraud control, which if you can hike rates to cover expenses only serves to reduce revenue in the long run. The vast majority of customers are insensitive to rate increases (particularly if the government low-balled the number of people who are eventually on the exchanges), and the only entity that can hold the line will be government. If the government denies rate increases, the insurer can aggressively crack down on claims across the board, and while doing so it can send policyholders a nice letter about how they want to help but the government isn't providing the resources. Either the government cracks or the people running the company throw up their hands and do something else.

Is there anything in the bill which breaks this cycle?

"My state of NJ already has MLR that's required at 80% on the small group market and each of the last several years every insurer in the state has already met that burden of proof. Costs are still skyrocketing here."

Completely unsurprising. This is what happens when policymakers convince themselves insurance company profit is a cost driver here, and it certainly isn't.

Posted by: justin84 | August 24, 2010 12:55 PM | Report abuse

justin,

But doesn't insurance fraud here count as a medical loss, as it is undetected and paid as if it were a regular claim?

In a short answer, NO. Monies spent to help prevent fraud COULD be considered an administrative expense and then something (as ab_13 says) that could be severely limited if costs are wrung so much from the system so quickly.

Again they're politically going after insurers profits as you say but not touching for the most part the true drivers of costs, doctors, pharma, hospitals.

Posted by: visionbrkr | August 24, 2010 1:19 PM | Report abuse

"But doesn't insurance fraud here count as a medical loss, as it is undetected and paid as if it were a regular claim?

In a short answer, NO."

visionbrkr,

Could I get the long answer? I'll take your word for it given your expertise here but I need a little more detail.

How can an insurance company distinguish from undetected fradulent claims and legitimate claims? If the fraudulent claim went undetected, wouldn't the insurance company be none the wiser and consider the payment a medical loss?

At the end of the day, the fraud issue was somewhat minor. Extending consumer cost insulation from medical expenses to insurance premiums is going to be a huge negative in the cost control department.

Posted by: justin84 | August 24, 2010 2:36 PM | Report abuse

justin,

How can an insurance company distinguish from undetected fradulent claims and legitimate claims?

------------------------

in short they really can't. They have a good idea of who is submitting the claims. Insurers have billing codes that are "red flagged" as normally fraudulent claims but you'll certainly have some in there that are legitimate and some that aren't and some codes that aren't flagged that are fraudulent. What about the doctor that does one more test that isn't really necessary.

If the fraudulent claim went undetected, wouldn't the insurance company be none the wiser and consider the payment a medical loss.


Technically yes if an insurer paid a fraudulent claim it would go towards medical costs and actually improve the way their MLR looks but then again are we really controlling costs then?

As always beware of the unintended consequences.

Posted by: visionbrkr | August 24, 2010 3:26 PM | Report abuse

justin, you're right that fraudulent claims gone undetected would simply count as a claim and go into the numerator of the MLR. But the thing to remember is that insurers do not spend money on fraud detection out of some sense of moral indignation, they do it because it pays for itself and then some! So if they can't count the fraud detection expenses in the MLR at a certain level it makes sense to stop doing it, so removing that 1% of admin expense results in say 2% more in claims (theoretical numbers, I'm not sure of the current ROI on fraud detection). This is a good thing for hitting the MLR requirement, but obviously a bad thing for cost control. It may also create a sentinel effect as people realize there is less fraud detection happening so they become more willing to try and submit fraudulent claims.

Posted by: ab_13 | August 24, 2010 5:29 PM | Report abuse

ab_13,

I agree under normal circumstances. But what if insurance company profit margins are squeezed to just 1 or 2%?

As things stand now, cutting fraud prevention might not work, because cutting admin (as a % of earned premium) by 1% leads medical losses to increase (again as % of EP) by 2%, a money losing venture. Raising your rates might lead your best risks to migrate to other carriers.

But spending on admin is considered bad under the new rules, and spending on medical losses are considered good. Higher medical losses are something insurers can legitimately charge higher rates for. And your customers are subsidized and not sensitive to higher rates. If healthy people leave, well, no big deal since profit margins will be effectively capped anyway.

So the insurance company looks at its cost structure and decides it's at best going to make 2%/yr in profit. It could struggle to minimize costs all the while stuck with mediocre margins, or it could accept a rough year upfront while increasing the revenue growth trajectory and assuming it can increase rates enough to maintain a low profit margin. The company decides to take a rough year upfront.

Administrative expenses are cut in accordance with the wishes of politicians - you don't can everyone working on fraud detection and prevention, but you might cut budgets and you certainly wouldn't fund something like software to help catch fraud, etc. You have a flat year, as the increase in medical losses related to fraud hit your bottom line.

The company appeals for a rate hike - it had cut administrative expenses, but the jump in medical losses more than offset that. For the following year, the company meekly asks to be able to raise rates enough to return to the 2% profit margin - stating loudly how it isn't even taking a single tenth of a percentage point in administrative savings from the first year away from patients.

If by the late 2010s most customers are in exchanges and subsidized, the company's higher rates mean nothing to them due to the subsidies which cap premiums as a percent of income.

This situation relies on several different factors all being true:

1. MLRs force profit margins up against a wall. Attempts to get lean on administration to boost profit margins will be met with resistance from political types.

2. Insurance companies can always raise rates as to maintain a small profit margin, but only on higher medical losses, not on any sort of administration expenses.

3. There will be a sizable population of subsidized people in the exchange indifferent to rate hikes, and willing to vote out the cost control politicians.

If all of these hold, then pushing the revenue growth trend up flows right into the bottom line.

More importantly, given the risks of being caught giving up on fraud control, a potentially bigger risk for cost growth might be bidding wars for the best provider networks, as so many people will be subsidized and cost insensitive.

Posted by: justin84 | August 24, 2010 8:31 PM | Report abuse

justin,

insurers profits are actually already at almost 1-2% and some are losing money. But in this consumer centric time we're living in now with state insurance departments wanting to make liberal headlines but declining required rate increases I wonder if those same dept of insurance heads will be glad they made those headlines once insurers go out of business or leave states where they're not profitable and it constricts choices and if it eventually led insurers to default. I'm thinking they wouldn't be tooting their horns then.

Posted by: visionbrkr | August 25, 2010 9:23 AM | Report abuse

justin, no disagreement on much of what you said, except I think people are more sensitive to premium hikes than you realize, especially in the individual market. Rate increases in the individual market are typically 15-20%, getting as high as high 20s low 30s. Most families cannot continue covering those year after year. Lapse rates at renewal are typically ~15%, and total annual lapse rates including ones that happen mid plan year are usually close to 30%. There is a high amount of churn and turnover in that market.

Posted by: ab_13 | August 25, 2010 2:57 PM | Report abuse

visionbrkr,

At some point, the government will need to let sufficient rate increases to go through so that insurers can maintain a 1%-2% profit, although I doubt they will allow more. At this point, the only way to grow profit is to grow revenue. Of course, rate increases could simply be denied and we see a wave of insurance companies going bankrupt. As you say, that will look bad for politicians at some point.

ab_13,

I agree that right now people are very sensitive to premium hikes. The relative lack of premium sensitivity I refer to depends on a large portion of the individual insured market being protected in the exchanges by the subsidies.

Since premiums are capped as a share of income, the insured feels no effect from a rate hike - it all turns into a larger government refundable tax credit.

What about individuals who make too much to subsidize? Unhealthy individuals will probably pay what they can afford to get the best network. Healthy individuals will probably pay the mandate penalty, although they might try to wiggle out of that payment as well.

I don't think there's anyway of knowing how everything unfolds given all the moving parts, but there are a lot of incentives which seem to work against the cost control efforts.

Posted by: justin84 | August 25, 2010 4:34 PM | Report abuse

Ahh, I see now you were talking about after the subsidies kick in that cap premiums as % of income. I agree they'll be much less sensitive then, because they won't ever see the increase!

As to how it will all play out with so many moving parts, I think savvy insurance agents, who are being marginalized in the post-PPACA marketplace and losing out on much of the commission they used to make selling policies, will shift their business model to helping individuals and businesses maximize the value they get from subsidies. There is opportunity for people willing to spend time learning all the intricacies of the new rules to help people minimize their own costs which will typically mean maximizing the government's cost. Depending on how well these entrepreneurs do there is high potential for worst-case-scenario costs for the government, blowing up the projections from the CBO. I've been working on reform for my employer for months, and I've joked with them that I'm going to quit and get into that game myself.

Posted by: ab_13 | August 26, 2010 11:21 AM | Report abuse

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