A Centrist Health Plan

Introduction:

Most of the current health care debate in the Democratic party revolves around the adoption of a single-payer health care plan or the addition of a public option to the current system.

The Medicare for-all-option offered by Senator Sanders is on paper a comprehensive solution fixing all health insurance problems.   While many countries have high-quality public health insurance, there has never been an example of a country with an advanced private system abruptly replacing it with a public system

The proposals to expand Medicaid or Medicare currently circulating in Congress could help certain communities or groups.  The provision of Medicaid on state exchange market places would be useful in several rural counties where few private insurance companies choose to compete.   A reduction in the Medicare age or a Medicare buy-in option would benefit older workers who do not have access to employer-based health insurance coverage. 

The adoption of a public option, unlike single-payer proposals does not purport to be a comprehensive solution.  The task of fixing health care system without simply blowing up the current system is difficult.   President Trump, famously observed “Nobody knew that health care can be so complicated.”     There are multiple inter-related  health problems with our current health care system.  A policy that fixes one problem (say high premiums) can worsen another (say high out-of-pocket costs).

A centrist health care plan must do more than shore up state exchange market places through new public options.  The ACA expanded coverage to millions of people but even after the enactment of the ACA many Americans lacked health insurance and under the Trump Administration the number of Americans without health insurance has increased.

This article reports that the uninsured rate went from 10.9 percent in late 2016 to 13.7 percent in December 2018.

https://www.vox.com/2019/1/23/18194228/trump-uninsured-rate-obamacare-medicaid

Moreover, even after the enactment of the  ACA many Americans saw higher premiums, higher out-of-pocket expenses, and reduced access to specialists.  Increasingly, many Americans covered by insurance choose to forego procedures rather or prescription drugs because of high out-of-pocket costs.  Simply adding a public option does not fix these problems.

The remainder of this essay outlines health care problems and centrist solutions.

Health Care Problems and Solutions

Problem One  The Erosion of the Individual Mandate:   The ACA individual mandate was repealed in a recent tax law.  As a result, some people with pre-existing conditions have an incentive to delay the purchase of health insurance until they become sick.  The repeal of the individual mandate undermines state exchange market places and increases health insurance premiums.

Potential Solution:   There are two potential solutions to this problem. 

The first potential solution involves the reinstatement of the individual mandate.  Politically, this is a difficult option because the individual mandate is unpopular and strongly opposed by libertarians and other conservatives who believe that government has no right demanding people spend money in  a particular way.

The second  approach involves creating new financial incentives in the form of tax credits and other subsidies contingent on people holding continuous health insurance coverage.

Subsidies that could be made available only to people with continuous health insurance coverage include:  (1) a tax credit for contributions to health savings accounts, (2) a partial subsidy for high cost out-of-network treatments, and (3) subsidies for some prescription drugs.   Note that a tax credit for health savings account contributions would not even require an additional explicit linkage between the tax credit and health coverage because under current law contributions to health savings accounts are only available to people who have health insurance coverage.

Problem Two: Distortions caused by growing use of health savings accounts and high deductible health plans:   The growing use of health savings accounts coupled with high deductible plans has exacerbated three problems – (1) higher out-of-pocket health care costs, (2) increase in patients forgoing prescribed medicines and medical tests, and (3) reduced funds placed in 401(k) retirement plans.

Potential Solutions:   The distortions caused by the increased use of health savings accounts and high deductible health plans can be mitigated by several policy changes.

First, lower income households would benefit from a refundable tax credit for contributions to a health savings account.  (Current law only allows deductibility of contributions to health savings account, a feature that provides less benefit to low-income low marginal tax rate households.)

Second rules governing contributions to health savings account could be altered.   Current rules only allow contributions by people with a high-deductible health plan.  The revised rule would allow health savings account contributions by people who have a plan with a lower deductible but a high coinsurance rate.   (People with high coinsurance rate plans can have substantial cost sharing obligations but may be less likely to forego needed treatments prior to the deductible being met.)

Third, many existing high deductible health plans now forego all payments on prescription drugs until health expenses exceed the deductible.   By contrast, many traditional health plans with lower deductible pay some prescription drug costs prior to the patient paying the deductible.   The combination of high deductible and absolutely no reimbursement for prescription drugs until the deductible is met results in many people with chronic health conditions like diabetes forgoing needed medicines.  This worsens health conditions and increases costs. 

A rule requiring partial reimbursement for prescription medicines needed to prevent expansion of certain diseases would reduce the incentive for people to forego prescribed medicines.  It might be possible for HHS to adopt this rule change without input by Congress because the current ACA allows high-deductible health plans to reimburse patients for certain preventive health care measures prior to the deductible being met.    

Problem Three:  The limited role of state exchange market places.   State exchange health care markets are much smaller and much less robust than the employer-based health insurance markets.  Around 8 million people are covered by state exchange market places compared to around 155 million people covered by employer-based insurance. 

 Household receiving health coverage from state exchange markets tend to be less affluent than people obtaining health insurance from employer based market.   Go to this post on my math blog for statistics on this point.

http://www.dailymathproblem.com/2019/05/comparing-employer-sponsored-and-state.html

There are relatively few young adults under age 26  in state-exchange markets compared to employer-based markets.  Go to this post in my finance blog for a discussion of this issue.

There is less choice and fewer high quality products in state exchange markets than in employer-based markets.   In some counties few health insurance companies offer coverage and often there is concern that no health insurance companies will offer health insurance in a county.  There is evidence that state exchange insurance policies are more likely to restrict access to certain hospitals and specialists.

Potential Solutions:   It should not be a surprise a small health insurance market with relatively few young adults, and relatively few affluent households will provide less desirable outcomes than a larger health insurance markets with more younger adults and a lot of affluent people. 

The characteristics and limitations of ACA state exchange market places are largely a result of the rules laid out in the ACA.

First, the ACA contains an employer mandate, which provides a financial penalty on employers with more the 50 full time equivalent employees who do not provide health insurance to their employees. The employer mandate could be modified to allow and encourage employers to pay for health insurance on state exchange market places rather than offer a company-specific plan.

Second, the ACA eliminates tax credits to people once they obtain a position offering employer-based insurance coverage.  The rule eliminating tax credits for people with employer-based health plans would be eliminated.

Third, state exchange market places do not provide any preferential tax treatment for the 41 percent of American households with income greater than 400 percent of the federal poverty line.  Households in this income group receive untaxed health insurance from their employer.  This rule reduces political support for state exchange marketplaces.   Support for state exchange marketplaces could be increased through an expanded tax credit.

A Political Note on the Role of State Exchange and Employer-Based Health insurance Marketplaces:

The introduction of state exchange market places to compete with employer-based health insurance is the central aspect of the ACA, a law that was strongly opposed by conservative economists and Republican politicians.   However, the provision of health insurance through private markets separate from the employer was an idea originated by conservative economists and supported by Republican politicians.   To be fair, there were major differences between Republican proposals, which allowed underwriting of premiums and denials of insurance for people with pre-existing conditions and the ACA.  

Republicans are on record of supporting reductions in the use of employer-based health insurance.  In fact, a health care plan offered by Senator McCain replaces the entire current employer based tax preference with a tax credit for the purchase of health insurance through state market places.   

The protections for pre-existing conditions and the limitations on underwriting of premiums increase access to health insurance for many people who would otherwise be uninsured.   (The election results of 2018 indicate the Democrats largely won this debate.)   There is some Republican support for moving the purchase of health insurance from the employer to private markets.   Could Republicans support proposals that move more people from employer-based insurance to current ACA state exchanges?

Problem Four  The introduction of short-term bare-bones health plan has increased household financial risk and undermined state exchange market places.  The  Trump Administration has enacted rules that allow use of short term health plans.   These health plans often do not cover many services that are considered essential health benefits in an ACA plan. The coverage gaps result in unanticipated bills and financial exposure.  The short term option reduces demand for ACA policies.

Potential Solutions:   There are two way to address problem caused by the introduction of ACA plan.

The first approach is to repeal the Trump era regulation and return to a system where short term health plans are prohibited.   Repeal creates a situation where people who took out short term health plans will either lose coverage or purchase an ACA plan with a higher premium.

The second approach involves modifying short term plans to allow for an annual cap but to require coverage of all essential health benefits.  People with expenditures over the annual cap would get automatic Medicaid coverage once the cap was reached.

This policy essentially converts Medicaid into a reinsurance program responsible for health care costs over the annual limit.  I loosely describe this approach in a 2008 paper on SSRN.  https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1162887)

Problem Five:  Lack of access to elite out-of-network hospitals and specialists.  Typically, narrow network HMOs provide excellent health care and charge lower premiums.   However, people who get extremely sick with certain illnesses require treatment by specialists that are only offered at certain hospitals.   This is called the “breaking bad” problem as portrayed by the fictional high school chemistry teacher who chooses to make meth to pay for his cancer treatments.

Potential Solutions:  The “breaking bad” problem can be solved by having the government share part of the costs of expensive specialized out-of-network care.  Having the government pay for a portion of complex treatments that could only be handled in sophisticated out-of-network hospitals would reduce premiums for limited network HMO plans.  This reduction in health care premiums would also reduce tax subsidies on health care purchases both on the ACA state exchange subsidies and the employer-based health insurance subsidies.

This proposal offers two benefits – lower premiums on basic narrow-network health care and access to more expensive out-of-network care should the narrow network be unable to treat certain health conditions.

Problem Five:  A lack of affordable health coverage for people nearing the end of their careers who are not eligible for Medicare.

Potential Solution:    One approach to this problem is to allow the purchase of Medicare by individuals 50 or over without an offer of employer-based health.

An expanded Medicare option for people over the age of 50 could be combined with a higher (old-young) age-rate premium ratio to lower costs for younger households.    

Problem Six:   Limited State Exchange Offerings and High Premiums for Certain Counties.  Some counties have few health insurance companies offering ACA coverage.   It has been reported that in 2018 around half of counties had only  insurance company offering ACA coverage.

Heritage Foundation article on counties with limited health insurance coverage

https://www.heritage.org/health-care-reform/report/2018-obamacare-health-insurance-exchanges-competition-and-choice-continue

Potential Solution:  Senator Schatz’s health insurance bill allowing states to offer health insurance on state exchanges would create another option in many counties with only one or relatively few ACA providers

Go here for a description of the Schatz-Lujn legislation:

https://www.schatz.senate.gov/press-releases/schatz-lujn-introduce-legislation-to-create-public-health-care-option

Summarizing the Centrist Health Care Plan

A comprehensive centrist health care plan might both expand and improve health insurance coverage.   It would lower premiums and reduce out-of-pocket expenses.   The simultaneous achievement of these two goals is often difficult because many policy changes that reduce premiums increase out-of-pocket costs while policies that reduce out-of-pocket costs often increase premiums.

Here are some aspects of the plan:

  • Link all new tax subsidies and the standard deduction to a requirement that  people maintain health care coverage.
  • Change rules governing health savings accounts to allow for contributions by people who have high-cost sharing plans even if the plan has a low deductible.
  • Create tax credits for contributions to health savings accounts
  • Require partial insurance coverage for prescription drugs used to treat chronic health care conditions prior to health expenses exceeding plan deductible.
  • Modify the employer mandate to encourage businesses to subsidize state exchange insurance rather than choose and administer an employer-based policy.  
  • Modify rules governing tax subsidies for insurance on state exchanges to allow people to keep their state exchange policy after obtaining offers of employer-based coverage.
  • Repeal current short-term bare bones health plans.
  • Create health plans with an annual cap while guaranteeing Medicaid coverage once health expenditures exceed the cap.
  • Create a new subsidy for out-of-network costs for people with narrow-network plans who require procedures not covered in the narrow network.
  • Allow people over 50 without access to employer-based health plan the right to buy into Medicare.
  • Modify the age-rate premium formula to lower costs for younger households.
  • Allow states to authorize the sale of Medicaid policies on state exchanges.

Authors Note:  A lot of these ideas and proposals are discussed in greater detail in  the second chapter of my policy primer “Defying Magnets:  Centrist Policies in a Polarized World”  

Defying Magnets:  Centrist Policies in a Polarized World

The first chapter of the book examines student debt policies.   The third chapter examines retirement income.  

I believe you will find the analysis and proposals innovative, potentially useful, and drastically different than what is being offered in Washington.

Overview of Health Insurance Issues


Republicans are seeking to repeal and replace the affordable care act, even as Republican candidates for office profess support for many parts of the act including protections for people with pre-existing conditions. The primary Republican achievement since 2016 involves a tax law that repealed the individual mandate and a Texas federal court ruling currently under appeal that voided the entire law because of the individual mandate repeal.

Democrats have robustly opposed Republican efforts to repeal the ACA but are now split between fixing the Affordable Care Act or moving towards a single-payer system.   Many 2020 Democratic candidates have endorsed Medicare for all without fully considering details of and implications of their proposals.

Some Democrats are now advocating proposals that would allow some private firms or some individuals to buy into Medicare or Medicaid. One advantage of adding a government (Medicare or Medicaid) option is that these options allow people to keep private insurance.

This section starts with a review of the current health care policy debates.   The analysis reaches the following conclusions.

  • Republican efforts to repeal the ACA would substantially increase the number of uninsured people in the United States.
  • Democratic Medicare for all proposals have not been fully vetted, would leave many people with private insurance worse off and would be more expensive than anticipated.
  • The combination of a decrease in the eligibility age for Medicare combined with a higher ratio of insurance premiums for older households relative to younger households could decrease the number of uninsured people in all age groups.

The section contains discussions of three technical health insurance issues with important implications for health insurance markets that have not received attention during the debate over repeal of the ACA.

The first issue involves modifications of rules governing health savings accounts and high deductible health plans.  Proposals designed to mitigate problems created by the increased use of health savings accounts and high deductible plans include:

  • Creation of a tax credit for contributions to health savings account by low-income and mid-income households.
  • Expansion of the type of health plans, which allow contributions to health savings accounts.
  • Require high deductible health plans pay a portion of prescription drugs used for chronic diseases prior to deductible being met.

The second issue involves modification of rules and incentives governing the use of employer-based insurance versus state exchange insurance.  

Proposals designed to strengthen state exchange insurance and to allow more firms to replace employer-based coverage with state exchange coverage include:

  • An expansion of the tax credit for premiums on health insurance policies purchased through state exchanges.
  • An alternative to the employer mandate for employers subsidizing the purchase of health insurance on state exchanges.
  • Financial incentives for young adults to leave their parent’s health insurance policy and obtain health insurance on state exchanges.

The third issue involves how to mitigate financial distortions caused by extremely expensive and complex health care cases.  Proposals designed to mitigate problems associated with the most expensive health care costs include:

  • Government and private firms sharing health care expenses over a certain threshold.
  • Automatic Medicaid enrollment for people purchasing a health plan with an annual benefit cap once expenditures exceed the cap.
  • Government assistance for certain health care cases that are difficult to treat in narrow-network HMOs.

The health care debate is eerily analogous to the student loan debate with each side taking extreme positions.  Republican efforts to repeal the ACA would increase the number of uninsured.  Democratic initiatives would crowd out private insurance for many households that are well served by the existing system.  The road to improving health care like the road to reduce student debt problems involves the analysis of arcane rules and incentives and the design of economically efficient alternative regulations.

Senator Warren and Big Tech

Presidential candidate Elizabeth Warren is proposing anti-trust action against major tech firms including Google, Facebook, Apple and Amazon.   This proposal if enacted would increase prices and reduce options to consumers.   The main beneficiary of rules restricting Big Tech would be Walmart, other larger brick and mortar stores, Cable Television firms, and large established brands.   Smaller companies that are attempting to enter markets and compete with larger older firms with the assistance of Google, Amazon or Facebook will have fewer opportunities and higher costs.

One element of her plan designates on-line firms with more than $25 billion as Internet Utilities.   These Internet Utilities would be prohibited from selling both their own products and products of their competitors on the same web site.   This would most immediately impact Amazon, Google and Apple but could also in a very short period of time impact Netflix.

A second element of her plan involves reversing mergers, which have contributed to the growth of the tech giants.    These mergers include Amazon’s purchase of Whole Foods and Ring, Google purchase of Waze, Nest and Double Click, and Facebooks purchase of Instagram and WhatsApp.

Let’s start our discussion by observing that Walmart has larger revenues than Amazon.  In 2018 Walmart revenue was around $500 billion compared to around $233 billion for Amazon.   Amazon obtains a larger percent of revenue by partnering with third-party businesses. Partnerships with small firms are less important to Walmart than Amazon.

Amazon purchased Whole Foods sparking fears that Amazon would take over the grocery sector.   There are at least five firms with grocery sales larger than Whole foods.     Walmart has the largest market share of the U.S. grocery market with a 14.5 percent market share.   Kroger is second with market share around 7.2 percent.   The market share for Whole Foods — around 1.2 percent.

https://www.cnbc.com/2017/06/21/dont-worry-wal-mart-amazon-buying-whole-foods-is-just-a-drop-in-the-bucket.html

Amazon is now actively promoting its own private label groceries on line, a strategy which would be hampered by Warren’s new rules.   What firms are threatened by the Amazon private label?  According to Wall Street research firm Bernstein (no relation to me) J.M Smuckers and Mondelez are the two firms most threatened by Amazon’s private labels.

https://www.cnbc.com/2019/01/28/bernstein-smuckers-mondelez-are-most-unprepared-for-amazon-in-food.html?&qsearchterm=impact%20of%20amazon%20on%20campbell%20and%20kraft%20heinz%20and%20mondoleze

I suspect that Amazon may purchase and fund small jam and snack producers to bolster their private label.   Explain to me why this is anti-competitive.

Bernstein finds e-commerce makes up around 1 percent of packaged food sales.   This may rise to 5 to 6 percent in a few years.   This does not strike me as anti-competitive.  Really bad news for some older established firms but hardly anti-competitive.

The Apple app store serves to provide updates for many items that are sold with a phone, computer, or IPAD.  I doubt that direct sales of Apple products in the App store are a large source of profit for Apple.  Apple might respond to the mandate for separate third-party and Apple-only App store by increasing purchases of third-party apps from developers or increased in-house App development.

Many people come to the Amazon site or the App store to either buy products sold directly by the sponsor of the site but end up buying a product or service created by a third party.  The creation of separate web sites for the big tech firm and for third parties could decrease traffic towards third-party offerings.

Google has purchased Nest giving this product a potential advantage over its several competitors including Carrier, Ecobee, Honeywell and several other smaller firms.   Is this a big problem?  There are several smart thermostats available in the market.  I haven’t seen a case made that Nest has market power over its rivals. Any case for divesting Nest from Google should be based on actual evidence monopoly power, which may not exist.

Amazon and Apple may both enter this field because home thermostats can connect with Alexa and Siri.   Should entry by Apple and Amazon be prohibited because their Alexa and Siri give Tech firms an advantage over older non-Tech competitors?

Amazon buys ring and hooks it up to Alexa, gaining an advantage of existing security companies.   This is all good news for consumers.    Any existing problems could be solved with modest regulations rather than a broad anti-trust action.

Google owns both Google Maps and Waze creating a challenging situation for Apple Maps.  Does Apple really need government help?

Currently, Google appears to have a monopoly or near monopoly on search and Facebook has a monopoly or near monopoly on social networks.  Both industries and both firms are young.  Both monopolies are contestable.   A new superior search engine could give Google a run for its money.   A new social network with a different look and policies could do the same to Facebook.

Google and Facebook and Amazon, while in different narrowly defined industries, are all in competition.   All three firms are competing for ad revenue from businesses who are marketing their goods and services to the world.   It may be tempting to stop Facebook from purchasing Instagram and other Apps to level the competition between Facebook and other social networks like Snap.   However, this could adversely impact the ability of Facebook to get advertisers and compete with both Amazon and Google, two much larger powerful firms.

The clearest potential harm caused by Warren’s proposal involves the possibility that Netflix and maybe Hulu would be treated as utilities and prohibited from producing their own content.   Netflix revenue could soon rise above 25 billion and become subject to Warren’s rules on Internet utilities.   Netflix is the main competition to cable companies, an industry that exerts monopoly pricing power in local markets.   The availability of Netflix allows people to cut the cord and save hundreds of dollars a month.  Netflix is an example of private industry fixing an anti-competitive situation.   This could all be undone by Senator Warren’s proposal.

Senator Warren is a highly skilled lawyer and candidate who has made useful contributions to discussion of several issues including bankruptcy reform, the safety net, taxes, inequality health insurance and student debt.   I admire her and readers of my blog and my books know that I share her much of her outlook and priorities.  However, her attack on Big Tech is not supported by economics and may derail her candidacy.

Author Notes:   The Trump Administration is accelerating its war on student borrowers.  It had previously proposed the elimination of subsidized student loans and the public service loan program.   The new budget proposes the elimination of income contingent loan programs and loan forgiveness programs.

The Democrats seem fixated on free college a proposal that most experts believe is unaffordable.  My book Innovative Solutions to College Debt Problems considers benefits and costs of making the first year of college free.   The book also proposes several different ways to assist overextended borrowers that are more sustainable than Income Contingent Loan Programs.

Innovative Solutions to the College Debt Problem:

https://www.amazon.com/Innovative-Solutions-College-Debt-Problem/dp/1982999446

Liberals appear to be dominating the contest for new ideas for the Democratic Presidential nomination.  Amy Klobuchar gets some points for honesty, an attribute that used to be expected.  However, honesty does not by itself solve problems.   Centrists need to put forth bold proposals that will reduce student debt, improve health insurance, and expand retirement income.

Pragmatic centrist solutions to these problems are outlined in my book.

Defying Magnets: Centrist Policies in a Polarized World.

https://www.amazon.com/Defying-Magnets-Centrist-Policies-Polarized/dp/179668015X

A final note:   I would love to do some consulting work on these topics.  Contact me through linked in.  https://www.linkedin.com/in/dbecon/

 

 

 

 

 

 

 

 

 

 

 

Is long term care insurance a viable product?

Many financial planners maintain that long term care insurance (LTCI) is an essential purchase.  Many policy makers and politicians believe that the Medicaid long term care benefit needs to be reduced and that private long term care insurance is a viable substitute for Medicaid.  Let’s agree that the political issue of how to reform Medicaid is separate from the personal decision on how you should prepare for retirement.  In my view, private LTCI is not a suitable investment for most individuals preparing for retirement.  Furthermore, private LTCI may not be a viable product.

Many households have insufficient levels of liquid asset and insufficient savings in their retirement accounts.  Studies conducted before the financial crisis indicated that only around one half of the baby generation were adequately preparing for retirement.  These households need to focus on increasing their saving rate rather than divert savings towards an illiquid asset.

Comprehensive multi-year LTCI insurance with inflation protection is extremely expensive.   Ironically, even most LTCI purchasers have only a few years of coverage and must rely on Medicaid for long stays in the nursing home.

LTCI almost always costs more than anticipated at the time the policy is purchased.    Insurance firms cannot raise premiums on a policy simply because a person claims benefits.  However, an insurance company can raise premiums on an entire class of policies if actuaries determine that the sum of premiums and investment income will not cover benefits.    Premium increases, even among the strongest and most conservative firms, are now commonplace only a few years after a policy is issued.

Premium increases are in part attributable to poor investment returns and low interest rates.    Perhaps premium increases will be less prevalent in the future.  However, current premium increases are occurring when individuals can least afford them, when their own portfolios are down in value.

Many of the better-run insurance companies are currently leaving the industry altogether.   (MetLife left the industry and I believe Prudential stopped selling on the individual market.)    This is what Fitch had to say about LTCI in a recent report.

“In addition to higher than expected claims, historically low interest rates have negatively affected LTC results.  We believe the long-tail nature of the product and future renewal premiums make the LTC business more vulnerable to interest-rate risk.  Low rates continue to curb investment income needed to help fund LTC benefits.

We believe mispricing of the LTC product will continue to weigh on the insurers’ earnings and capital, but we note the current in-force individual LTC business accounts for less than 2% of industry reserves and premiums.”

There is one LTCI product that intrigues me.  Many states participate in the LTCI partnership program.  Individual who purchase a partnership policy can keep assets equal to their amount of coverage and still qualify for Medicaid.

It is highly likely that if you live long enough you will need long term care.  You need to prepare.  However, for most of us the purchase of LTCI is not the appropriate option.  More on my views on LTCI can be downloaded on Kindle.  The article can be purchased for $4.99 or borrowed for free.

http://www.amazon.com/Things-consider-purchasing-insurance-ebook/dp/B008N5QO8G/ref=sr_1_1?s=books&ie=UTF8&qid=1342917035&sr=1-1&keywords=thing+to+consider+before+purchasing

Overview of Student Debt Issues

My view on student debt problems is somewhere between Bernie Sanders and Hillary Clinton.  I don’t believe that free college is economically feasible but my evaluation of statistics on the growth of student debt, the growth in overextended borrowers, and the growth in the number of elderly with unpaid student loan balances convinces me the college debt problem cannot be solved with minor adjustments.  

My book “Defying Magnets:   Centrist Policies in a Polarized World” attempts to find progressive centrist (not an oxymoron) solutions in three areas — student debt, health insurance, and retirement income.    

https://www.amazon.com/Defying-Magnets-Centrist-Policies-Polarized-ebook/dp/B07NLLWH1H/ 

The analysis in this book leads me to propose substantial increases in financial assistance concentrated on first-year students, changes to student loan contracts, and changes in programs and policies designed to assist overextended student borrowers.   The overview of the student debt section of my book is below.

Overview of Student Debt Issues

The Republicans and Democrats are far apart on their approach to student debt and the increasing cost of college.

The Trump Administration and many Republicans in Congress are more interested in reducing taxpayer costs than assisting students borrowing for college.  Their current proposals include — the repeal of subsidized student loans, the elimination of the public service loan program and major modifications to income contingent loan programs.   Their administrative actions and enforcement decisions almost always favor loan servicers and for-profit schools over students.

The Democrats have been advocating free-college or debt-free college at public universities.  Democrats also favor the Income Contingent Loans, a program that links loan payments to income and offers to forgive unpaid loan balances at the end of the loan term.

The analysis presented here indicates that Trump Administration proposals would adversely impact many students.   Proposals by Democrats to offer free or debt-free college are expensive and inefficient.  Moreover, Income Contingent Loan programs are not the most effective way to assist overextended borrowers.

Proposals are presented for additional financial assistance, which are designed to reduce the growth of student debt.  These proposals include:

  • Provision of additional assistance for first-year students.
  • Allocation of a modest sum to a program that funds college internships at start-up firms.

Proposals are offered to assist overextended borrowers and reduce the reliance on Income Contingent Loan programs.  These approaches include:

  • Interest rate reductions on student loans after 15 years of payments
  • Limits on increased student loan interest rates when general interest rates rise.
  • Limits to the liability of parents on PLUS loans and cosigned private student loans and other alterations to the PLUS loan program.
  • Provision of priority to student debt over consumer loans in chapter 13 bankruptcy
  • Allowing discharge of private student loans in bankruptcy
  • Revisions to the Public Service Loan Program

The proposals presented here have the potential to expand access to education and improve the financial condition of student borrowers entering the workforce.  Additional subsidies are carefully crafted to assist people who might not otherwise try higher education or would experience severe payment problems.

The proposals presented here also will be less costly to taxpayers than many current policies and policy proposals.

 

 

 

Questions for Candidates – Student Debt

Questions for Candidates – Student Debt

The Trump Administration is proposing the elimination of subsidized student loans for low income borrowers.  The main advantage of subsidized loans is the government pays all interest while the borrower is enrolled as a full-time student. Do you support or oppose the elimination of subsidized student loans?

The Trump Administration is proposing the elimination of the public service loan forgiveness program.   Do you support the elimination of this program?  Are there any changes that you would like to make to the public service loan forgiveness program?

The Trump Administration is considering changing the undue hardship provision in the bankruptcy code to allow for some discharges of student debt in bankruptcy?  Do you support this idea? What changes to the undue hardship rule would you support?

Chapter 13 bankruptcy payment plans generally treat student debt and other unsecured consumer loans in the same manner.   Should Chapter 13 bankruptcy rules be altered to give priority to student debt over other unsecured consumer loans?   How would you alter these rules?

The number of Americans over age 60 with a student debt rose from 700,000 in 2005 to 2,800,0000 in 2015. The average amount of student debt held by borrowers over age 60 rose from $12,100 to $23,500 in the same period.[1]  What policies are needed to reduce the number of older Americans nearing retirement with substantial student debt?

One recent study revealed that around 28 percent of direct student loans are now Income Based Replacement loans.[2]  The study also found the lifetime cost of the IBR loan subsidy for loans originated in 2014 was around $11.0 billion.  Is the IBR program the most economically efficient way to assist overextended students?

The Income Based Replacement program is complex. Several loan servicers have been accused of making it difficult to enroll in IBR.  Student borrower finances change over time and as a result many students who initially enroll in IBR end up with larger student loan payments.   Does this program need to be modified?

Should student loan interest rates be automatically reduced 15 years after repayment is initiated?   Would this approach be a more effective way to assist overextended borrowers than Income Contingent Loan programs or other loan forgiveness programs?

Several candidates support laws allowing people to refinance their student debts at lower interest rates.  However, many economists believe that interest rates will soon rise.  Wouldn’t this proposal be of limited value in a rising-rate environment?

Current student loan interest rates are linked to the value of the 10-year Treasury bond. Do you support changing the student loan interest rate formula to cap potential increases in student loan rates if Treasury rates rise?

Currently lenders do very little underwriting or credit checks on PLUS loans.   (Why should they?   The loans are insured by the government and not discharged in bankruptcy.)  Do you support stricter underwriting standards on PLUS loans to graduate students and parents? Do you support the discharge of PLUS loans in bankruptcy ten years after loan origination?

Do you support debt-free or free four-year public college proposals?

The Tax Policy Center a highly reputable think tank concluded that one free public college program would cost $807 billion over a decade.[3]   These cost estimates were based on favorable assumptions – no increase in college attendance, no switches from private to public schools and no tuition increases at public schools.  Do you agree with these conclusions?  Are cost estimates for your proposal consistent with the work by the Tax Policy Center?

Around 28 percent of students drop out after their first year of college and around 12 percent of first-year students transfer to another institution.[4] Almost half of students with debt who dropped out of college are in default on their student loans.[5]  Should programs to reduce debt incurred by first-year students take priority over proposals to spread additional debt over the entire population of students?

Do you support efforts to eliminate debt incurred by first-year college students at four-year institutions?   How much should the government spend on such efforts?

Some Articles on Student Debt Policies

Article on Trump Student Loan Programs

https://thecollegeinvestor.com/21636/trump-student-loan-forgiveness/

Where 20-20 candidates stand on student debt?

https://www.marketwatch.com/story/where-the-2020-candidates-stand-on-student-debt-and-college-affordability-2019-02-20

GOP blocks Warren’s Student Loan Bill

https://thehill.com/blogs/floor-action/senate/217908-gop-blocks-warrens-student-loan-bill

Klobuchar and Baldwin push to lower student debt

http://www.startribune.com/klobuchar-baldwin-push-to-lower-student-debt/378202791/

Bills to help students with student debt sponsored by Klobuchar and Franken

https://www.studentsunited.org/blog/2017/6/2/federal-update-bills-introduced-to-help-students-with-higher-education-costs

Forbes article on student loan refinance changes;

https://www.forbes.com/sites/zackfriedman/2018/08/09/student-loans-refinance-changes/#6f65764d749b

 

[1] Source:  https://www.documentcloud.org/documents/3319386-201701-Cfpb-OA-Student-Loan-Snapshot.html

 

[2] Article from New America Foundation on cost of IBR loans. https://www.newamerica.org/education-policy/edcentral/income-based-repayment-cost/

 

[3] Tax Policy Study includes an assessment of cost of free college proposals. https://www.taxpolicycenter.org/sites/default/files/alfresco/publication-pdfs/2000786-an-analysis-of-senator-bernie-sanderss-tax-and-transfer-proposals.pdf

[4] Statistics on drop-out rates after the first year of college are found here. https://www.creditdonkey.com/college-dropout-statistics.html

 

[5] A statistic on percent of student who have dropped out in default can be found here. https://lendedu.com/blog/college-dropouts-student-loan-debt/

Authors Note:  I have written a book on how a progressive centrist (not an oxymoron in my view)  would deal with student debt, health insurance and retirement income.   Go here for the book.

https://www.amazon.com/Defying-Magnets-Centrist-Policies-Polarized/dp/179668015X/ref=tmm_pap_swatch_0?_encoding=UTF8&qid=1551214070&sr=8-1

Publishers Note:   I am taking polls.   The current polling question — what is your first choice and second choice candidate for the Democratic Nomination for President — can be found here.

 

https://docs.google.com/forms/d/e/1FAIpQLSch4lBKZkabruXcyftP6yqt8wjicFQ6BFQzK79gvWLye8qgAg/viewform

or for the latest poll go to the community Policy and Politics.

https://www.facebook.com/groups/441029743334277/

 

 

Tweaking Amy Klobuchar’s Student Loan Proposal

Tweaking Amy Klobuchar’s Student Loan Proposal

Senator Klobuchar gave an honest and realistic response to a question on free college at the New Hampshire town hall.   Free college for all is unaffordable and would end up burdening the nation with higher debt or taxes.

Senator Klobuchar proposes additional assistance for students at two-year colleges and for additional Pell grants and loans.   These proposals are not likely to substantially reduce the trend growth of student debt or the number of overextended student borrowers.

  • The percent of borrowers leaving school with more than $50,000 in student debt rose from 2 percent in 1992 to 17 percent in 2014.[1]
  • The number of Americans over age 60 with a student debt rose from 700,000 in 2005 to 2,800,0000 in 2015. The average amount of student debt held by borrowers over age 60 rose from $12,100 to $23,500 in the same period.[2]

Two-year colleges are a good and less expensive option for many students.  However, student debt is skyrocketing for students at four year schools.  Many students who start a four-year college drop out or transfer after the first or second year.   These students often have substantial repayment problems.  The most effective way to reduce this problem is increased assistance for first-year students.  The increase in first-year assistance will also reduce total debt for students who complete their degree.

Many overextended students are counting on Income Contingent loans, which have substantial problems.    Alternative ways to assist overextended borrowers need to be considered including:

  • Interest rate reductions on student loans after 15 years of payments
  • Limits on increased student loan interest rates when general interest rates rise.
  • Limits to the liability of parents on PLUS loans and cosigned private student loans and other alterations to the PLUS loan program.
  • Provision of priority to student debt over consumer loans in chapter 13 bankruptcy
  • Allowing discharge of private student loans in bankruptcy
  • Revisions to the Public Service Loan Program

I recognize that many people who have repaid their loans and many taxpayers oppose debt relief to overextended student borrowers.   However, some people get substantially overextended and need assistance.   The debt relief proposals presented here attempt to establish a balance between assisting overextended borrowers and protecting the interests of taxpayers.

Kudos to Senator Klobuchar for recognizing the obvious fact that free-college is unsustainable.   She need to develop a more extensive set of policies to mitigate student debt problems.

One place to find these policies is my book Defying Magnets:   Centrist Policies in a Polarized World.   This book proposes centrist solutions to student debt, health care and retirement income.

Defying Magnets:  Centrist Policies in a Polarized World

https://www.amazon.com/s?k=defying+magnets%3A+Centrist+policies+in+a+polarized+world&rh=n%3A6669702011&ref=nb_sb_noss

Book is free for Kindle unlimited users.

The book is free on promotion days.   The second promotion day is February 20, 2019.   Day after this post is published.

Please consider reviewing the book for Amazon and Kindle.

[1] Source: https://www.brookings.edu/wp-content/uploads/2018/02/es_20180216_looneylargebalances.pdf

[2] Source:  https://www.documentcloud.org/documents/3319386-201701-Cfpb-OA-Student-Loan-Snapshot.html

 

Defying Magnets:  Centrist Policies in a Polarized World

Abstract of

Defying Magnets:  Centrist Policies in a Polarized World

 Many Americans are experiencing increased financial stress even though the economy has performed well in the last several years.  Student debt levels and the number of overextended borrowers continue to increase.   Health Insurance premiums in state exchange health insurance markets are unstable and many state exchange markets have few providers.   People are paying more for out-of-pocket for health care.  High debt levels and the lack of funds for basic emergencies have persuaded many Americans to delay or reduce contributions to their retirement savings plan.

The policy debates on student debt, health care, and retirement income in Washington follow a similar pattern.  Conservatives offer a free market approach – reduction of financial assistance to student borrowers, repeal of the Affordable Care Act, and private accounts inside Social Security.  Liberals offer expanded government programs – free or debt-free colleges, Medicare for all, and expansion of Social Security.   In most cases, the conservative proposals would increase household financial risk while the liberal proposals are often unaffordable and poorly designed.

This book analyzes and compares conservative and liberal approaches to student debt, health care, and retirement income.  The book also outlines a centrist economically feasible policy agenda in each area, with the goal of reducing household financial risk.

The centrist agenda on college costs and student debt targets financial assistance and debt relief to students and borrowers in greatest need.

The centrist health care agenda fixes problems with the Affordable Care Act and reduces distortions caused by high out-of-pocket costs and the most expensive health care cases.

The centrist agenda seeks to expand health insurance and retirement benefits for contractors and workers at firms without employer-based benefit plans.

The centrist agenda changes rules governing 401(k) plans and IRAs to facilitate increased savings by people with high debt levels and very little cash saved for emergencies.

The centrist agenda includes an honest discussion on Social Security, which will likely infuriate both the left and the right.

 

Get the book on Kindle or Amazon:

 

https://www.amazon.com/s?k=defying+magnets+centrist+policies+in+a+polarized+world&rh=n%3A6669702011&ref=nb_sb_noss

Overview of Retirement Issues

This post describes my work on retirement issues that was published in “Defying Magnets: Centrist Policies in a Polarized World”   The book can be found on Amazon and Kindle.

https://www.amazon.com/Defying-Magnets-Centrist-Policies-Polarized/dp/179668015X/ref=sr_1_2?keywords=defying+magnets%3A+Centrist+policies&qid=1550091821&s=amazon-devices&sr=8-2

There are two pillars of retirement income in the United States.   The first pillar involves Social Security a mandatory program covering most workers.   The second system involves voluntary defined contribution pension plans.  This section starts with a basic description of the Social Security system and private defined contribution retirement plans.

The Social Security program has been highly popular with Americans and many retirees are highly dependent on this government-run program.   However, the Social Security system is running shortfalls which will lead to automatic benefit cuts around 2035.   Defined contribution pension plans — 401(k) plans and IRAs — have over the last 40 years become the dominant vehicle for private retirement savings.

Many people forego investing in 401(k) plans and IRAs even though these plans provide generous tax benefits to savers.   The failure of many people to fully invest in tax-deferred retirement plans puzzles many financial advisors.   The analysis presented here indicates that saving for emergencies and reducing debt is and should be a higher financial priority than saving for retirement for many people.

Several changes to rules governing retirement savings accounts which would allow more people to save for retirement while aggressively reducing debt and preparing for emergencies are presented here.

  • Allow tax-free and penalty-free distributions on a portion of total contributions (perhaps 25 percent) for emergencies, student debt reduction, mortgage restructuring and long term care expenses prior to age 59 ½
  • Allow for some tax-free and penalty-free distributions for paying off the mortgage for people over age 50.
  • Eliminate all other distributions from 401(k) plans prior to the age of 59 ½.
  • Prohibit 401(k) loans.
  • Prohibit states from denying Medicaid and food stamp benefits for low-income people with 401(k) assets.

This proposal could be paid for by imposing a haircut on tax exemption for 401(k) contributions.   (Currently, 100 percent of contributions to a 401(k) plan are exempt from income tax.   The new rule would exempt 85 percent of contributions.)

People without access to an employer-sponsored retirement plan have substantially lower retirement savings than people with access to retirement plans at work.  We consider ways to expand retirement savings for people without employer-based retirement savings.   Specific proposals include:

  • Equalization of contribution limits between IRAs and 401(k) plans.
  • A rule change allowing firms without 401(k) plans to contribute to employee IRAs.
  • A rule change allowing firms to compensate contractors and employees of contractors with non-taxed fringe benefits including contributions to IRAs.

According to the trustees of the Social Security system, financial imbalances impacting Social Security stemming from the decrease in the working-age population will result in automatic cuts to Social Security benefits around 2034.   In my view, it will be difficult to implement any compromise that reduces Social Security fiscal imbalances and prevents future automatic cuts to benefits without first increasing private retirement savings and reducing the dependence on Social Security.  The final chapter of this section outlines and reviews some policy proposals related to improving the Social Security system.

On-time graduation and student debt

Issues:   One way to limit college costs for some students is to implement policies that enable students to graduate on time or even early.  This post discusses issues and presents data related to on-time graduation from college and costs incurred by delaying graduation.

The Department of Education College Score Card web site provides statistics on the percent of people at four-year undergraduate institutions that graduate within six years of first enrolling in a school after high school.  However, there is a big difference in potential debt accumulation and lost earning for a person who graduates on-time or earlier and a person who graduates two years after the expected graduation rate.

The analysis presented here provides some insight on the impact of the number of years it takes to finish undergraduate programs on debt levels at graduation?

The Department of Education Web Site providing information on different colleges stresses median federal guaranteed debt at graduation.   Less information is available on PLUS loans for parents and for private loans.

The analysis presented here provides information on whether colleges need to provide more information on other types of loans and on how these loan total vary with the number of years in school.

The increase in the number of students taking Advanced Placement Exams has allowed some students to graduate with a BA or BS Degree in three rather than in four years.   However, in response to an increase in the number of students taking AP exams many schools have scaled back or are reconsidering the amount of credit that students get from AP exams.

The analysis presented here provides some information on the costs associated with colleges impeding early graduation.

The Data:

The statistics presented here were generated from the National Postsecondary Student Aid Study NPSAS 2012 database from the Department of Education.

The logical variable to look at with the analysis of this issue is cumulative amount borrowed, which is called BORAMT1.  However, the NPSAS documentation reveals this variable does not include information on PLUS loans for parents and may also omit some information on private loans.

I present statistics on cumulative debt and cumulative PLUS loans for parents for people who graduated in 2012 with a BA or BS degree.     Statistics on the cumulative amount borrowed variable are presented for private non-profit colleges and for public institutions.

Cumulative Debt Results:

Below is a table presenting information on cumulative amount borrowed for graduates in 2012 based on when their undergraduate career began

Duration of Undergraduate Career and Cumulative Debt at Graduation
# of years from initial enrollment and graduation Public Universities Private Non- Profit

Universities

% With Debt Average Cumulative Debt for Borrowers % With Debt Average Cumulative Debt for Borrowers
3 50.5 $19,625 68.5 $27,822
4 56.9 $22,504 70.0 $29,123
5 67.0 $25,537 80.2 $34,683
6 72.4 $27,163 72.0 $29,069
7 71.1 $27,707 64.2 NA
>7 69.3 $30,043 79.5 $39,102
Total 64.1 $25,640 73.5 $32,308

Observation on cumulative debt and duration of undergraduate career.

The results presented here indicate that people who finish their undergraduate careers efficiently have less debt on average.

The increase in debt with years in school exists for increases from 3 years to 4 years and for increases from 4 to 5 for both private and public schools.

The increase in debt with years in school exists for increases from 5 to 6 years for public universities but not for private universities.

These figures don’t include PLUS loans for parents.  I proceed to look at the relationship between usage for PLUS loans for parents and duration of undergraduate career.   The PLUS loan analysis looks at all undergraduate institutions together – public universities, private non-profit universities and private for-profit universities.   I combine the three types of universities because of sample size constraints impacting the PLUS loan usage variable.

PLUS loan for Parents Results:

Duration of Undergraduate Career and PLUS loan for Parents Usage
# of Years from Initial Enrollment to Graduation % with Plus Loans for Parents Average PLUS Loan for PLUS Loan Borrower
3 12.0 $33,770
4 18.5 $30,218
5 21.2 $31,463
6 18.4 $22,120
7 14.4 $18,199
>7 5.9 $16,345
Total 15.5 $27,352

Sample includes public universities, private non-profit universities and private for-profit universities.

Observations on PLUS loan for parent usage and duration of undergraduate career:

The percent of people who rely on PLUS loans by parents is dramatically lower for people who graduate in three years compared to people who graduated in four or more years.

However, the average cumulative PLUS loan for people graduating in three years is a bit higher than for people who took longer to graduate.  (I suspect the average for three years was driven by a few outliers.

Policy Discussion:

It is apparent that the amount of time it takes for a student to finish their undergraduate career is an important determinant of debt at time of graduation.

Policies that help students finish on time can greatly reduce financial debt incurred in college.

Detailed information about the frequency distribution on the number of years it takes for students to get their degree at each college would be invaluable for students and their parents.   The College Score Card reveals information on the percent of students who graduate in six or fewer years.  This statistic is inadequate.   The Department of Education should require that schools report 3-year, four-year, five-year six-year and > 6-year graduation rates.

Statistics based exclusively on federal guaranteed debt, like the ones presented in College Score Card are inadequate.   Cumulative PLUS loans and cumulative private loans also contribute to financial risk associated with taking on too much debt in college.   Several articles have revealed that many parents who take out PLUS loans on behalf of their children are incapable of repaying these loans and there has been an increase in the number of instances where PLUS loan borrowers have had Social Security payments garnished.  One of my previous posts on this topic revealed that the proportion of PLUS loan parents with low income levels has increased over time.

The Department of Education should insist that colleges report detailed information on the usage of PLUS loans and private loans by their students.

Many colleges are now deliberately making it much more difficult for students to graduate in three years by denying college credit for AP exams.

Article on AP credits being denied to students at major colleges:

http://www.msn.com/en-us/money/careersandeducation/as-advanced-placement-tests-gain-popularity-some-colleges-push-back/ar-AAmXr6o

The results presented here indicate that there are potentially large financial costs incurred by colleges choosing to deny credits for AP exams.    Some states have enacted laws requiring that publicly funded colleges provide credits to student who pass AP exam.

I believe all colleges should be required to provide detailed information on AP credit awards and information on frequency distribution describing years it takes for student to graduate.  it would be inappropriate for the state to mandate AP credit policies at private institutions.  However, the state does have an interest in insuring that markets run efficiently and market efficiency is impossible when consumers lack basic information.

Academically trained economists generally support providing consumers with better information unless they are being paid to advocate for special interest.   You would expect that university presidents might place a higher priority on the public’s right to know than other industries.   Interestingly, as demonstrated in the post below college presidents have successfully stopped meaningful college ratings

Ranking Colleges on Value and Costs:

http://policymemos.blogspot.com/2016/04/ranking-colleges-based-on-value-and.html

On this issue colleges are behaving like tobacco firms and insurance companies.