Friday, April 9, 2010

Weekly Wrap

Barack Obama is leaning on Governor Deval Patrick for a very good reason. Massachusetts, you see, is providing a test run for the kind of healthcare reform that the President envisions on a national scale. If universal health coverage can be made to work in the Bay State, then perhaps it can work in the other 49 states as well. ObamaCare needs CommonwealthCare to succeed.

But Massachusetts is struggling with costs. It has some of the best hospitals in the country--and some of the most expensive. It spends more per capita on healthcare than any other state. Insurance premiums continue to skyrocket. Campaigning for re-election in November, Patrick figures he has to do something to soothe voters. So when insurance carriers filed last month for hefty increases in rates for small-group coverage, Patrick said no.

That's when the sugar hit the fan. The insurers, caught in the same death spiral plaguing small-group pools all across the nation, need the higher premiums to break even. Since April 1 they have stopped enrolling new applicants in Massachusetts until they get a rate structure that makes sense. Patrick's insurance commissioner, on the other hand, has directed them to offer coverage at the old rates. The industry's response: we'll meet you in court.

Yesterday Suffolk Superior Court Judge Stephen E. Neel heard from counsel for the insurers that 2009 base rates are "completely inadequate and completely arbitrary." The Commissioner's office countered that insurers need to file an administrative appeal first before seeking relief in court. That is a delay that the Commissioner can more easily abide because, after all, it is not his bottom line that is hemorrhaging red ink. Judge Neel will decide by Monday whether the insurers must retreat to Square One.

By attempting to cap rate increases, the governor is skirting, not solving, the problem of runaway healthcare costs. As Scot Lehigh remarks in this morning's Boston Globe, "Patrick’s approach is a bit like banging on the TV screen because you don’t like the DVD that’s playing." The problem is embedded in the medical delivery system itself, according to a recent report by Massachusetts AG Martha Coakley. (Remember her? The roadkill plastered to Scott Brown's tire treads?) The insurers are merely messengers.

The crux of the dispute is this: can a government regulator compel private carriers to subsidize services at below-market rates? For that matter, can the government compel consumers to buy the services? And can the government dictate what providers charge for their services? These are all things that ObamaCare proposes to do.

Democrats who are celebrating the new health reform act as "historic" in the same way as Franklin Roosevelt's New Deal legislation in the 1930s should re-read their history. FDR's reform agenda came to a screeching halt when he tried to pack the U.S. Supreme Court. Some things, as today's dealers may soon find out for themselves, just ain't legal.

A cautionary graphic appeared in yesterday's Financial Times:

The graph plots the difference between the interest rate demanded for Greek government bonds compared to that for German bonds. The bigger the difference (or "spread"), the greater the perceived risk of default for Greek debt relative to Germany's (Germany being the safe-haven benchmark within the Euro-zone).

What do I care? asks Joe Six-Pack, I only drink Bud anyways.

See, Joe, here's the deal. A higher debt premium makes it more expensive for Greece to service the debt, thereby impairing its credit standing (Fitch just downgraded Greek debt to BBB-, one notch above junk status), thereby driving rates even higher. It is a vicious feedback cycle over which Greece has absolutely no control. None. At some point the bond vigilantes take over and cause the default that lenders and borrowers both are trying so desperately to avoid. (Think back to Lehman Brothers in September 2008.) Minyanville's James Kostohryz reports today that bank runs have started in Greece, presaging that the end is near. In his words, "If Greece goes down, this is a big deal."

The bigger problem is that there are a raft of countries ready to "go Greek," including (I hafta tell ya, Joe) the U-S-of-A. Through its Zero Interest Rate Policy, the Administration here at home has been able to roll over government debt at historically low rates. But ZIRP can get zapped at any moment, if the bond vigilantes so decide. Earlier this week the rate on 10-year notes flirted with 4%. If we get a breakout on yields, the federal budget deficit (now running at about $1.5 trillion annually) will explode higher.

That makes America's economic recovery a lot like Cinderella's coach at 11:59 p.m. It looks good--until it doesn't.

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