The High Price of Static Analysis Obstinacy

by Martin Harris

Martin Harris

If I had my druthers, one of them would be enforcement of that very basic rule-of-justice used by the retail antique industry: if you break it, you’ve bought it. I’d apply it to a particular mode of breakage caused by the political class as they continue to use a practice which, by now, you’d think, they’d have to recognize doesn’t work. It’s called static analysis, and it’s based on the law-makers’ interesting notion that, if they change some of their laws, the citizenry subject to those laws won’t change some of their own behaviors in response. Scottish economist Adam Smith knew (and wrote) better in the 18th century, when he codified in print the observeable truth that, in trade for example, changing the rules (the price for a product or service) triggers an inverse change in the buyer response. In Economics 101 I was taught to call it the supply-demand curve. I wasn’t taught anything about its applicability to taxation; back then, the Laffer Curve’s illustration of lower tax rates producing higher tax revenues was still a couple of decades in the future. At about the same time that Arthur Laffer was doodling charts on restaurant napkins, professional economists began using the labels “static analysis” for law-makers’ policies which don’t recognize predictable tax-avoidance behavior, and “dynamic analysis” for policies which do. On the “you-break-it-you-bought-it” side, if I had my druthers, there’d be suitable penalty, fiscal preferred (beyond mere Capitol-building de-fenestration) for law-makers who get their taxpayers into deep-debt by increasing spending (and tax levels) by refusing to recognize (static analysis) that revenues won’t rise just because marginal rates do, or new targets are selected.. And the same goes for the universal health-care problem. Here Tennessee has posted a classic case-study example, and Vermont is about to.

The Tennessee example, TennCare, is now some 17 years old. Its first budget, $2.64 billion, was based on a not-very-dynamic analysis of the increase in health-care-service demand as a half-million more previously uninsured or uninsurable mostly low-income consumers were given access to “expanded Medicaid”, or “TennCare Standard”, for modest premiums and co-pays. By 2005 the budget had grown past $8.5 billion. As both Adam Smith and Arthur Laffer had earlier observed and codified, consumer demand and participation increase as prices fall, whether those prices are health-care charges or taxes: when they’re seen as high, consumers passively go without or actively avoid, and when they’re seen as lower, they do the opposite. The TN experts had foreseen some of these behaviors, and a key part of TennCare was the creation of a dozen new Medical Care Organizations to provide “managed care” for all the 1.2 million beneficiaries, with the expectation that “managed care” would produce, by means of judicious gate-keeping, reasonable cost control. It didn’t, and by 2002 the MCO’s got the State to relieve them of the previous cost-guarantee provision (“capitation”) in their original contracts. After that, understandably, costs went even higher, so the State responded, in 2005, by changing the rules to reduce the enrollment numbers in TennCare Standard by 170,000. More recently, the Tennessee Hospital Association has revealed plans to “tax” its membership (except the tiny rural ones) at the rate of 3.5% of net patient revenues, and donate the proceeds (which, in an arcane Federal-funds-increase formula, bring in an additional $430 million from Washington) and the monies would go to Nashville to be used to prevent further cuts in TennCare, which by 2009 had been whittled down to the $7.6 billion level. Of course VT, a highly-skilled-in-taxation governance, already has a 6% provider tax. This year the new TN Guv, first-Republican-in-150-years Bill Haslam has proposed another $40 million in TennCare cuts, which will require either further enrollment cuts or more intensive gate-keeping. The aim of both would be to rescue as much as possible the original budget, by reducing the dynamic aspect of service-demand growth closer to the original more static analysis number, which is exactly what the innovative MCO’s were set up (and failed) to accomplish.

One additional note: TennCare went through 12 directors in 12 years, a leadership casualty rate which suggests that, while each new director knew what to do, he didn’t know how to get his proposals approved by the Marble-Cupola folks who function within the Greek-Revival octastyle-but-no-Dome-Golden-or-otherwise “Parthenon” in Nashville.

As befits this opinion column, here’s my opinion: the TennCare lesson to Vermont’s ShumlinCare experts is that demand and costs will rise dynamically when a formerly more costly or unavailable service (heath-care) is made less costly and/or more available, and that most State governments, even those in newly-red states like TN, fail to construct, successfully, health care policies with both a more dynamic analysis to forecast the increased beneficiary demand, and a more static analysis coupled with more rigorous gate-keeping to keep beneficiary demand (and the resulting costs) from increasing past budgeted levels.

A recent Wall Street Journal article (22 Mar 11) discussing variations in States’ gate-keeping for another health-related service, disability insurance, shows why an optimistic forecast for rigorous medical gate-keeping in Vermont is very probably a mis-placed and insufficiently guarded prognosis: it turns out that VT is one of the dozen easiest States when measured as “the percent of Social Security Disability Insurance applications which received initial approval in 2010”, and TN is one of the most rigorous; and yet, even TN couldn’t keep its own TennCare under control. Vermont is already #1 in the nation for number of Medicaid recipients in managed care per poverty-level person, and #4 in the nation for per capita welfare expenditures, the Taxpayers’ Network reports.

An approach which is so politically-incorrect that it hasn’t even been mentioned elsewhere, I’ll mention here: just as poor driving behavior produces higher vehicle insurance rates, poor personal health status, stemming from voluntary social recreational activity, food, tobacco, potable ethanol use or vegetation-parts-ingestion, should be, in my opinion, deemed by gate-keepers as indicators for higher beneficiary co-pays or premiums. More on this unpleasant subject next week.