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How Large a Burden are Administrative Costs in Health Care?

By Joshua D. Gottlieb and Mark Shepard·September 6, 2018
University of British Columbia and Harvard University

The Issue:

The U.S. health care system spends hundreds of billions of dollars each year on administrative costs. Would it be possible to reduce health care spending without affecting quality of care by focusing on administrative costs? Given the share of health care resources that these costs command, a concerted effort to reduce them could yield significant savings. Yet little is known about what influences these costs, and to what extent administrative spending deters fraud or improves the quality of health care.

The Facts:

  • Between 15-30 percent of overall health care spending, and one-quarter of the medical labor force, are involved in “administrative costs” or “back-end” functions including medical billing, scheduling patient appointments, hiring and managing staff, and investing in quality improvement efforts.
  • International comparisons suggest that administrative spending levels are uniquely high in the United States. Many explanations for high administrative costs focus on the complex, multi-payer structure of the U.S. healthcare system.
  • However, many administrative requirements have arisen for reasonable purposes. Documentation requirements respond to concerns about health care fraud and improper payments. Efforts to ensure appropriate use of care, and to measure quality of care, also require significant documentation of patients’ conditions and treatments.
  • Within the United States, billing complexity varies dramatically across insurers, with Medicaid exhibiting much higher levels than other insurers. The difficulty of billing Medicaid plans is two to three times higher than Medicare and commercial insurers.
  • It is not clear how a significant overhaul of the health insurance system would affect administrative costs. In particular, would switching to a single-payer system or a more centralized multi-payer system, as in some European countries, reduce administrative costs? The evidence suggests caution: while Medicare and Medicare Advantage have low administrative costs, fee-for-service Medicaid has some of the highest costs. In other words, government systems can perform differently in terms of administrative costs.

What this Means:

It is clear that health care has a significant administrative burden, especially in the context of billing and payments, and that this is higher in the United States than elsewhere. But we do not yet know whether this burden is justified, and whether it is worthwhile. The key question for health care policy is whether the burdens are commensurate with the benefits. Which insurers best manage the tradeoff between billing simplicity and spending resources effectively? More research is needed to determine how administrative costs relate to quality of care, rates of fraud, and health care costs.

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Why are Coal and Nuclear Power in Trouble?

By Stefan Koester·August 27, 2018
Tufts University

The Issue:

The Trump administration is considering several policies that would provide economic relief to coal and nuclear electric power plants.

The Facts:

  • Coal was the main source for electricity generation in the United States for many decades, but its market share has been declining. It was recently displaced by natural gas as the main source of electricity (see chart).
  • A significant number of power plants have been retired in recent years — primarily coal but also nuclear plants. National peak coal plant capacity has shrunk from 310GW in 2011 to about 260 GW in 2017, with an additional 25 GW of capacity to be retired between 2018 and 2020.
  • Environmental regulations have played a role in coal plant retirements, but, as a Columbia University report highlights, other factors account for a much greater portion of the decline. For instance, increased competition from cheap natural gas was responsible for 49 percent of the decline in domestic coal consumption.
  • While the Department of Energy has not released cost estimates, the proposed bailouts for coal and nuclear plants are likely to cost billions of dollars a year, increasing the cost of electricity for most consumers. The measures would also do little to stop the falling costs of natural gas, wind, and solar.

What this Means:

Coal and nuclear power plants have been suffering financially for the last decade due to the emergence of cheap and abundant natural gas, power market reforms, the decreasing cost of renewables, and, for coal plants, environmental regulations on emissions. Clearly, the U.S. electric sector is shifting into something that is more low-carbon, distributed, cheaper, more resilient, and reliable than a centralized grid, and only drastic federal intervention will be able to slow that shift.

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The Financial and Economic Crisis in Turkey

By Sebnem Kalemli-Ozcan·August 22, 2018
University of Maryland

The Issue:

The Turkish lira has lost more than 40 percent of its value against the dollar since the start of 2018, the country's debt has been downgraded, and experts are predicting a recession in 2019. President Recep Tayyip Erdogan has blamed the crisis on western countries, and the United States in particular. But, the combustible conditions are the result of an unsustainable credit boom and overborrowing.

The Facts:

  • Turkey had a large credit boom over the last decade financed with capital inflows from abroad. The Turkish government has kept monetary policy loose, allowing the economy to grow steadily but also failing to keep inflation in check. With annual inflation at 16 percent, the Turkish lira has been losing value with respect to foreign currencies and raising investor concerns. Indeed, the lira began 2018 at about 3.8 per dollar, by April it had depreciated to 4 lira to the dollar, and it began to plummet in value in August (see chart).
  • A key macroeconomic vulnerability in Turkey is private-sector short-term borrowing in U.S. dollars. About 60 percent of the corporate sector debt in Turkey was in foreign currency in 2013, which is particularly risky for sectors such as construction whose earnings are in Turkish liras. (About 70 percent of the construction sector's debt is in foreign currency and for manufacturing it is 50 percent). The vulnerability of Turkish companies makes lenders less willing to roll over their debt. Also, the rise in interest rates in the United States and Europe with improving growth in these economies, as well as the prospect for even higher interest rates, have made emerging market debt relatively less attractive than it had been when interest rates were rock bottom in richer countries.
  • A standard first response to this type of crisis is that the central bank raises interest rates, but this has not happened in Turkey. Central banks can attempt to stem the outflow of money and keep the currency from plummeting by raising interest rates and making domestic debt more attractive. This also has the advantage of demonstrating the independence of the central bank, which gives investors confidence that the currency will not continue to fall.

What this Means:

The Turkish crisis did not come about because of the United States, but it has been made worse by the political fight between the Presidents Erdogan and Trump. Political pressure in Turkey might mean that the central bank finds it difficult to take measures to stem the collapse of the lira, a precondition to the resolution of the crisis. But, at this point, raising interest rates might not be enough if confidence in the Turkish economy cannot be regained. The crisis could spread to other potentially vulnerable emerging markets, those that are borrowing heavily from abroad, especially if the borrowing is in foreign currency and inflation is high (which is an indicator that the domestic currency will likely weaken). There is the possibility that the Turkish economic crisis has an impact on Europe as well, since many European banks have lent to Turkish banks and companies. The pivotal role that Turkey has played in the refugee crisis introduces another set of concerns, since Europe cannot afford to have an unstable Turkey in its backyard. The United States, while more insulated from the economic fallout of a Turkish crisis, will face political pressures if the crisis brings Turkey closer to Russia and introduces a new source of economic and political tension in a volatile region.

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The Capital Gains Tax and Inflation

By Daniel Bergstresser·August 13, 2018
Brandeis University

The Issue:

The United States Treasury Department is reportedly studying whether it can issue regulations that would allow taxpayers to account for inflation when calculating taxes on capital gains.

The Facts:

  • Taxes on capital gains are an important – and at times highly variable – source of revenue for the federal government (see chart). A capital gain (or loss) occurs when an asset – real estate, a security, a cryptocurrency, or any other asset – that was purchased for one price is later sold for a different price.
  • Proposals to account for inflation when calculating capital gains taxes reflect an effort to tax the increase in the real purchasing power of an asset rather than the increase in its value that only reflects overall rising prices.
  • A potential benefit from indexing capital gains would be enhanced incentives for savings and investment. These incentives would depend upon the change being credibly believed to be persistent.
  • But, any type of inflation indexation would lower tax revenue at a time of rapidly increasing budget deficits. It would also overwhelmingly benefit high-income households. Moreover, adjusting the capital gains part of the tax code for the impact of inflation without addressing real/nominal discrepancies elsewhere will open up new tax shelters for people and businesses with the resources to access them.

What this Means:

Tax policy reflects a tradeoff between raising revenue and distorting the functioning of the economy; the goal is to raise the required revenue in a way such that the damage done by economic distortions created by taxes is as low as possible. The goal of minimizing tax distortions on savings is a legitimate one, and the tax code already includes a number of ways in which capital gains enjoy preferential treatment. The ability to defer capital gains until an asset is sold is an important benefit, and tax rates on capital gains for assets held more than a year are generally lower than tax rates on other sources of income. Indexing capital gains taxes for inflation by regulatory fiat – if it were actually determined to be legal – would have significant costs and questionable additional benefits.

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Is China Weakening the Yuan to Fight U.S. Tariffs?

By Michael W. Klein·August 7, 2018
Fletcher School, Tufts University

The Issue:

The Chinese currency has declined in value against the dollar by over 7 percent since mid-May. This lowers the cost of Chinese exports to the United States and could help counteract the effect of U.S. tariffs on Chinese goods. The Trump administration has interpreted the weakening of the yuan against the dollar as an effort to undo the effects of the proposed 10 percent tariffs on Chinese goods, and has responded by threatening to raise the proposed tariff rate to 25 percent.

The Facts:

  • The Chinese government largely controls the value of its currency. Unlike the United States, where the value of the dollar is determined by market forces, the Chinese government exerts more active control over its currency through restricting capital flows into and out of the country, using its foreign currency reserves to intervene in the foreign exchange market, and regulating foreign currency trade.
  • The bilateral yuan / dollar exchange rate has depreciated since the Spring of 2018, after a run up in its value that began in the summer of 2017 (see solid black line in the chart, a fall in the value represents a weakening of the yuan against the dollar). But this movement is not restricted to the dollar; the yuan has weakened against a broad index of other currencies, which may also be a purposeful move by authorities to bolster an economy that is showing signs of softening.
  • The broad weakening of the yuan against many currencies is matched by a broad strengthening of the dollar against a wide range of U.S. trading partners. An index of the U.S. dollar against 61 currencies (the solid blue line in the chart) has strengthened by about 9 percent since the beginning of February 2018. The continued strength of the U.S. economy and the likelihood that the Federal Reserve will raise interest rates to keep the economy from overheating have both contributed to the dollar’s strength.

What this Means:

While a weaker yuan does soften the impact of U.S. tariffs on Chinese exports, domestic economic factors in both China and the United States are important underlying contributors to the change in the value of the dollar/yuan exchange rate. For now, the weakening of the yuan and the strengthening of the dollar are both likely to exacerbate trade tensions. Beyond the question of whether the trade war has shifted into a currency war, these currency moves make narrowing the bilateral trade deficit between the countries — one of the Trump administration's stated trade goals (despite the fact that this is a deeply flawed statistic) — more difficult and, with that, comes a greater risk of a broadening trade war.

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