What's up with gas prices?

Everyone (except people like my wife who drive company cars, and have their gas paid for) is feeling the hit to their wallet coming from the ever increasing cost of gasoline. The prices we see now were unimaginable for most of us several years ago, and frankly, it's a shock that's felt everytime I fill up. It's understandable to start feeling bitter, especially when the rise in fuel costs is far outpacing the rise in household earnings.

Since it is the aim of this blog to avoid knee-jerk reactions, let's see if we can sort out the reasons why prices are climbing so quickly. It's a laundry list; and in no particular order:

- the value of the dollar is plummeting relative to other world currency
- more people across the world than ever are starting to drive
- Middle East production is near maxed out
- no new refineries being built in the U.S. - production maxed out; upkeep of current plants is expensive.
- refineries must produce different "mixes" for different regions, limiting capacity and flexibility.

Unless you haven't watched TV news, or read a news article in the last year or so (unlikely if you're reading this blog), you realize there is a credit "crisis" in this country tied to subprime mortgages, and their portion of various investment portfolios belonging to banks and other financial institutions. The amount of money the U.S. is borrowing, and our ability to pay back those loans plays a large factor in the value of our currency, which is no longer backed by a solid asset like gold. The credit crisis is forcing us to borrow more foreign money, and lower interest rates, two factors leading to our currency losing value in foreign markets. In fact, some foreign markets are refusing to accept dollars, which are losing value rapidly, and instead are requesting payment in Euros, which are currently more stable.

One of those markets is the oil market. Whereas the dollar used to be the standard by which oil prices were measured around the world; because of its recent rapid decline in value, this is no longer the case. Since the dollar is valued less, it therefore can purchase less oil. That is why a barrel of oil cost $50 dollars not that long ago, but today that same barrel costs over $100. It's not that the value of the barrel of oil has increased that significantly, it's that the value of the currency used to purchase it has decreased. This may be the most important factor affecting gas prices.

Something else to consider is increased demand around the world. While most Americans seem to be insulated from news in other parts of the world (we can thank our standard media for that), nations like India, and China, along with other Asian countries, have been rapidly building modern industrial/manufacturing complexes. An acquaintance of mine reported upon his return from a recent trip his amazement at a factory he had witnessed in China. Having expected to see the equivalent of thousands of sweat-shop laborers manually producing parts as cheaply as possible in some dark and dreary factory, he was instead surprised to see a brand new, clean, and thoroughly modern manufacturing center, with production robots, and a few skilled laborers. Now think about how many products we purchase that are manufactured overseas. You're starting to get the picture?

All that production is increasing the standard of living in many of these previously "developing" countries, and their citizens are demanding more modern convenienes to go along. Automobiles, whose manufacturing process is based on the Japanese model, are now being produced in record numbers in places like India and China, for their native populations. GM, and other major automotive manufacturers, like Volkswagen, are pouring major investment dollars into these markets, viewing them as the next great frontier, upon which their future survival and success depends. And what is powering all these new cars? That's right - gasoline. As the two most populous nations start driving, demand for oil will increase exponentially.

As it is, however, there are reports that production is near maxed out in the Middle East, and in other regions. They can't pull the oil out of the ground any faster. If production can't be increased significantly, but demand rises significantly, prices are sure to follow that demand.

Here in the U.S., we're not doing much to help ourselves. A new refinery hasn't been built in ages, and the existing plants are struggling under the weight of aging systems, technology, and regulation. Not only that, but those plants must produce different fuel combinations for different regions, seriously limiting market flexibility here at home. That's one of the reasons gas prices in California outpace those in Iowa. There are many other factors, which are too complicated to give proper treatment to here, such as the effects of ethanol, and taxes, which also play a significant role.

Bottom line, gas prices aren't going to come down anytime soon, and even worse, probably won't even stabilize for a while. Yes, with expanding markets for the oil companies, allowing them to sell more fuel to more people than ever before; even if they lowered their profit margins - their overall profitability would surely increase, just due to increased sales volume. And so they will reap record profits. That's how capitalism works.

Americans need to wake up to the fact that we are no longer the only consumers of technology and convenience in the world anymore; and that with demand for the finer things in life across the planet, we are going to have to work harder, and become more competitive in order to maintain our standard of living. To stay ahead, we cannot rest on our past success in a mire of complacency, but must develop new fuels, and new sources of energy to propel us forward. We must find a new manufacturing base, for without that valuable developmental environment, we lose the human resources that emerge from its ranks, its springboard of invention and innovation, and the skills that bring them forth. We need to rediscover the building blocks upon which we achieved our prominent position on the world stage.

Continuing the Healthcare Conversation

In the last rather lengthy installment, I talked about what I think are the problems with our current healthcare system. Namely, limited employer-sponsored plans; which limit market forces on the insurance companies; are especially burdensome on employers; and while offering limited coverage for routine medical expenses to the insured, resulting in an increased amount of claims, often fail to protect them from catastrophic medical events. A further burden on the system is unregulated litigation, which has made risk unpredictable, and therefore results in artificially high malpractice insurance rates, along with related increases in diagnostic evaluations and administrative record keeping, in order to protect caregivers.

The end result is a system that can't get out of it's own way. Insurers do a poor job of providing protection. Employers feel an escalating burden from their healthcare obligations. Doctors are being hit even harder; increased risk to their livelihood, combined with decreased financial incentive from educational, insurance, and administrative cost escalation, is pushing physicians out of fields they are otherwise inclined to, or forcing them to abandon their practice altogether. So where does that leave the patients? We are left with fewer choices about our coverage, trapped with an employer to maintain coverage, fewer available physicians to treat us, and the serious risk of financial ruin if we get sick. Seems to me, the only group making out in all this is...the lawyers. Didn't John Edwards just build himself a 20,000 sq.ft. mansion? No wonder he feels so guilty about "two Americas".

So how do we get out of this? It is somewhat understandable that many doctors, who feel that they have been yolked with an unfair amount of the burden (which they have), would prefer a single payor, "universal healthcare" system administered by the government, as it would lift much of the insurance and administrative burdens off of their shoulders, and redistribute it among the population (through the form of much higher taxes), as would some overstretched employers currently trying to keep their heads above water. However, that is a particularly short-sighted view, since, instead of paying higher rates to insurers and office personnel in order to administer the programs, that money will instead be fed to the government and its bureaucrats at higher and higher rates every year. Anybody who thinks the government is going to manage that money wisely to sustain the program, must be living under a rock, and have never heard of that great government program called S o c i a l S e c u r i t y. Nevermind the fact that, while we are not all doctors, or employers, we are all patients at various points in our life, and such a federally administered system will certainly not improve our healthcare, but more likely, make it much worse. No, "universal healthcare" is not the answer.

Instead, I think we should take a serious look at a two-pronged approach. First, health insurance policies must become like life, home, and auto policies - written for, and paid by, the individual. If my employer wants to offer me a health benefit, or otherwise, an incentive, to carry adequate health insurance, then that employer should be able to offer an untaxed amount of their choosing, say for example, up to $300 per month, towards my health insurance premiums. Therefore, regardless of the claims one employee makes relative to another (which is none of the employers business anyway), their contributed benefit remains under their control. Just like many employers offer a contribution towards an employees personal mobile phone at a "to not exceed" rate, rather than paying for the service in full and trying to limit it's useage, this approach would work in much the same way.

The second part to this approach, untaxed medical savings accounts, must also be greatly expanded. By building up an account, moving in a direction towards being self-insured, we become less beholden to our insurers, and gain even greater freedom over our own healtcare, or the care of our families. Again, it should also be available to employers who would like to offer a health benefit - to make a matching contribution, or a contribution of their own denomination, tax-free, to their employees accounts, if they so choose.

The approach I'm describing works much the same way any other insurance does. If a person limits their risky behavior, they are rewarded with lower rates. Eating healthy, exercising, and getting enough sleep, in other words; living cleanly, will have its rewards. If however, you still get sick, your insurance company will provide coverage to rescue you from financial disaster. Also, routine medical expenses such as checkups and prescriptions would be paid out of pocket, much as one pays for gas, oil changes, and tires on their car, which will inevitably result in much more competitive rates for these health services and prescriptions. This will result in a significantly lowered administrative burden on physicians, who will have less paperwork to process with insurance companies, as well as give them more freedom to run their practices as they see fit, being dictated to much less by those same insurance companies.

That is of course, if we decide to enact effective tort reform at the same time. The effect of this reform cannot be underestimated, as it would have the most dramatic result of all in reducing the cost of healthcare, and increasing its quality. A dramatic reduction in unnecessary procedures and tests would be one such contribution; cutting costs dramatically, and giving doctors more diagnostic authority. Insurance premiums for doctors could be reduced significantly, offering an incentive for certain practitioners, especially Ob/Gyns to return to practice. And, there should be less litigation, as the incentive to sue will have been reduced.

How we get from where we are, to where we need to be, will be difficult, and if our nation can't be convinced in a great enough majority, it may be impossible. Political opponents on the left need this to continue as a hot button issue in order to achieve their goal of a "universal" government run healthcare program. As conservatives, we must start talking about this issue, and about positive solutions to the problem, because right now the Left seems to own the issue. We must show that we are not the party of the "status quo", but that we have great ideas to reform our systems, and improve the lives of citizens. What do you think?

Let's Talk Healthcare

Supposedly our healthcare industry is going to be a major issue in the upcoming election cycle. I say "supposedly", because other than the initial (and predictable) pledges from the Democrats running to provide alleged "universal healthcare" through the already bloated and broke federal government, not much has really been discussed. From what information I can gather, both the Democrat Party candidates are offering a system that is pretty much the same as the one provided today, with a  couple significant exceptions. Rather than private insurance underwriters placing limits on coverage, the tax burden on our shoulders will have to increase to support new wider limits. And who will decide those limits? Politicians looking to pander to this group, or that, in order to win re-election, or some other political prize. Won't that be lovely? Then we can look forward to the threat of an ever-expanding federal healthcare bureaucracy every election cycle, and a growing sucking sound on our wallets to support it. And in the end, we'll still be just as dissatisfied (or more so) with our healthcare.

Unfortunately, the political party I more closely associate myself with doesn't seem to want to engage the voters on the issue at all, unless I'm missing something. Alright, maybe they're whispering. Maybe they've got a secret plan so wonderful, it'll just sink the Democrat competition when they release it this fall. Then again, maybe not. So I'm going to throw a few ideas out there, and would love to hear what my fellow citizens think.

A Little History

The history of healthcare as I understand it, is that many years ago, when you got sick, or were due for a regular checkup, the doctor either visited you, or vice versa, and was paid directly for their services. If it was serious, you visited a hospital (often established and sponsored by Christian denominations as a charitable outreach) where there was more specialized care, and equipment. Health insurance was paid for like automobile or life insurance, by the individual or head of household, and was meant to cover only unexpected and financially catastrophic medical expenses. Sounds pretty good so far.

Then, at some point, large (and of course,...evil) corporations, looking to ensure a more reliable workforce, with fewer missed days due to illness, offered to provide limited health services and some insurance to their blue-collar employees, who often couldn't afford to pay for their own healthcare expenses. This practice might have become even more attractive following the return of soldiers from the WWII, who had probably been provided comprehensive health services while serving.

As corporations competed for the best workers, they started offering greater benefits packages including retirement, expanded healthcare coverage and the like, until insurance companies, seeing a growing demand, started offering packages for smaller employers. Eventually the market expanded to serve even small businesses, until healthcare insurance benefits became a standard part of the job offer package as they are today. 

The Problem

In the process, we, as individuals, by accepting the offer of a third party to bear the brunt of our healthcare burden, have subsequently lost control over our healthcare choices. What originally had been a real benefit, has now become a chain around our necks. We are now in a situation where insurance companies, for the most part, have found themselves insulated from market forces exacted by direct consumer satisfaction, and now primarily deal with intermediaries whose main concern is holding onto the bottom line. These intermediaries, our employers, then must choose the least expensive policies they can for their employees, often resulting in less adequate coverage as the costs of coverage continue to multiply.

So let's talk about why those costs continue to multiply every year.

A major problem, is that without the healthcare consumer bearing the brunt of the insurance and healthcare costs, that consumer has lost sight of what those costs really are. Healthcare insurance after all, works just like every other kind of insurance paid for by the consumer; the more, and more expensive the claims made against a policy, the higher the rates climb. After all, insurance companies don't make money by paying out claims - they make money by not having to pay out, or by denying claims against their policies. While insurance companies market themselves to the consumer as "the company that's going to be there for you when you encounter hardship", they employee thousands of underwriters doing their best to calculate the risk of actually having to do so, and charging you a high enough rate to offset that statistical risk.

Ironically, by reducing the co-pay amounts paid by the healthcare consumer, making services more affordable under the theory that regular preventative visits will curb treatment costs down the road; instead - consumers tend toward utilizing those services more often, resulting in a substantial increase in the number of claims against health insurance policies when they do. This trend of increased claims has invited insurance companies to, in turn, raise their rates to compensate. Unlike with their other insurance policies, however, the consumer does not necessarily feel the impact of the rate increase on their wallet the next month; instead, that hit is absorbed by their employer who's caught in the middle. The employer, concerned with retention and recruitment, must offer a health benefit package that is competitive. However, the insurance companies they must carry policies with, in order to offer such a benefit, continue to institute continual, and substantial rate increases on those policies, cutting into the employer's profitability, or forcing them to downgrade to cheaper policies that offer less coverage, which can affect retention. It's a Catch-22.

The end result, is that this current system is hurting just about everybody; doctors, patients, their employers, and yes, even the insurance companies. Everybody that is, except perhaps, the trial lawyers. 

Consider how things have changed for doctors. In the old days, the doctor performed a service, and was paid directly. Now a doctor, prior to performing a service, must verify insurance, determine the co-pay required of the patient, and in many cases, the patient must obtain pre-authorization from their insurance carrier for coverage of those services. Once coverage is verified, before deciding on treatment, the doctor must understand what treatments are covered by that carrier, or if that carrier's level of coverage is adequate to proceed. Then once treatment is performed, the doctor must submit a request for payment, and process the correct paperwork, according to insurance company guidelines, in order to receive payment in full. If any of the above is not completed correctly, the physician risks non-payment in full or in part. Imagine the administrative burden this adds to the process, nevermind the cost associated with hiring quality people to ensure its proper completion.

But wait, there's more. With increased documentation, comes increased ease of litigation. With so much documentation available, it doesn't take as much effort for lawyers to determine whether they have a case or not. After all, all it takes is a mistake on the paperwork; a documented procedural error, or even clerical error, to invite a lawsuit in today's litigious society. Without limits on the amount of money that can be rewarded to the plaintiff, which might affect the amount of lawsuits brought every year, insurance companies have found it nearly impossible to assess risk in such an unpredictable environment, and therefore, are forced to set artificially high rates for malpractice insurance, or risk unacceptable losses. Even so, insurers still face considerable risk of loss.

With the high cost of medical school education, the risk to their livelihoods from malpractice, or to the profitability of their practices from unresolved patient bills, insurance rates, insurance payouts, and increasing administrative costs; many fields especially vulnerable to these forces are shrinking rapidly, or being extinguished completely in some areas. For the healthcare consumer (translate: me and you) this means more scarce, and therefore, lower quality care, than was previously available.

Speaking of the consumer, we are now in a position where, with the exception of the independently wealthy among us (kudos to them), we are now forced to accept one of several inferior health insurance plans offered to us through our employer (who can barely afford them). These policies, until we get really sick, don't seem so bad (as they tend to offer attractive basic health services like low pharmaceutical and scheduled visit co-pay rates) , but fail to protect from financial ruin in the event of a medical catastrophe, which is what insurance was supposed to guard against in the first place, right? Furthermore, the rarer the illness we face, or the more specialized care required, it seems, the less coverage we can expect to receive. And lest we forget, there's always the "pre-existing condition".

Where To Now?

So, the question facing us now is,"How can we break the cycle?" Universal healthcare, as previously discussed, doesn't solve any of these problems, but simply shifts the financial burden to taxpayers, and will encourage politicians to forever "tweak" the system as they pander to one group or the other, inevitably resulting in more regulation, bogging the system down even more with administrative requirements (think IRS - a multi-billion dollar industry exists mainly to avoid audit or penalty from this government bureaucracy, instituted to collect an income tax - but that's for another article). Instead, we must find a way to restore market forces to the healthcare equation. Consumers need to once again be made directly aware of the costs of healthcare (and therefore, the costs of risky behavior or unhealthy living). Insurance claims need to once again be reserved for catastrophic protection, not for the basic visits and prescriptions. Tort reform must be enacted in order to limit, and make more predictable, the risk to both doctors and their insurers. Employers need to be removed from the equation all together.

How we go about accomplishing this, should certainly be a continuing conversation, but I plan on offering some ideas that I think make sense next week. To be continued...