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Public Health Care Competition?

Monday, August 10th, 2009

By Bob Bestani

In medicine, the primary rule that is the Hippocratic Oath is “First Do No Harm”. The new healthcare public sector initiative that Congress is proposing openly violates this standard.

As the health care reform debate rages in Congress, the establishment of a new publicly funded medical insurance provider seems to be on center stage. With their monopoly on power in Washington, the Democrats are fully intent on creating yet another new government agency to handle this function. This is hardly shocking; the Democrats have always represented growth in government.

But what is interesting and new is the argument being used that the creation of such entity will keep the private sector competitive and on its toes. This novel idea represents a first. Where, one is tempted to ask, has the public sector ever provided honest competition to the private sector?

The fact of the matter is that it is always the other way around. Governments around the world a re actively trying to privatize state owned entities to make them more competitive and self sustaining. Proponents of privatization have always pointed out that state owned enterprises are almost always slow, inefficient and consistently devoid of innovation. Not even the opponents of privatization have ever claimed that state owned enterprises are more efficient and competitive.

One is hard pressed to think of a single instance where a government enterprise has out performed the private sector. Certainly this was not the case with Fannie Mae and Freddie Mac, Amtrak, TVA, the Export-Import Bank, etc.

The public sector has rarely, if ever, successfully competed with the private sector. Recognizing this, governments are thus forced to provide state owned enterprises with monopoly powers, as for example, with NH’s state liquor sales. Another prop that is given to state owned entities is the subsidy that comes through the lower cost of borrowing that governments often enjoy. Moreover, they often use the argument that since they “don’t have to make a profit” they are cheaper service than the private sector. In point of fact, that profit is usually a measure of the value added that any enterprise offers society.

These artificial props and subsidies are the reason that in those countries where there is a very large public sector, the private sector never gets a foothold. They are consistently crowded out at the cost of long term development and growth.

On the whole, governments are usually quite bad at providing goods and services. Governments cannot usually provide either the culture or the reward structure for managers to be innovative or cost efficient. This is not government’s strength and wherever this has been tried, the government’s efforts are usually second rate. The much better role of government is to provide the proper “enabling environment” (security, the rule of law, a level playing field, proper regulation, etc.) and let the private sector play to its strength – the provision of societal goods and services.

The smarter way to approach this problem is to return to an idea that America invented: public-private-partnership. Where government wants to encourage the provision of a societal good or service, it should contract the private sector to provide it. With the appropriate incentives to promote competition and with the appropriate checks and balances, this can be readily accomplished – as we have in the electric power industry.

There is no doubt that health care reform is much needed in America. Our present system is a mess with all the wrong incentives. As a result, Americans pay almost twice as much as most industrialized countries, while the quality of our health care is ranked in the mid-twenties. But delegating this task to the public sector is not the right answer.

World history has proven this point over and over again. Let’s not repeat the mistakes of the past in something this important.

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Public Health Care Competition?

Wednesday, July 8th, 2009

by Bob Bestani

In medicine, the primary rule that is the Hippocratic Oath is “First Do No Harm”. The new healthcare public sector initiative that Congress is proposing openly violates this standard.

As the health care reform debate rages in Congress, the establishment of a new publicly funded medical insurance provider now seems to on center stage. With their monopoly on power in Washington, the Democrats are fully intent on creating yet another new government agency to handle this function. This is hardly shocking; the Democrats have always represented growth in government.

But what is interesting and new is the argument being used that the creation of such entity will keep the private sector competitive and on its toes. This novel idea represents a first. Where, one is tempted to ask, has the public sector ever provided competition to the private sector?

The fact of the matter is that it is always the other way around. Governments around the world are usually trying to privatize state owned entities to make various state owned enterprises more competitive and self sustaining. Proponents of privatization have always pointed out that state owned enterprises are usually slow, inefficient and consistently devoid of innovation. Not even the opponents of privatization have ever claimed that state owned enterprises are more efficient and competitive.

One is hard pressed to think of a single instance where a government enterprise has out performed the private sector. Certainly this was not the case with Fannie Mae and Freddie Mac, Amtrak, TVA, the Export-Import Bank, etc.

The public sector has rarely, if ever, successfully competed with the private sector. Recognizing this, governments are thus forced to provide state owned enterprises with monopoly powers, as for example, with NH’s state liquor sales. Another state owned subsidy is the lower cost of capital that governments often enjoy. Moreover, they often use the argument that since they don’t “have to make a profit” they are cheaper service than the private sector. In point of fact, that profit is really a measure of the value added that any enterprise offers society.

It is for precisely this reason that in those countries where there is a very large public sector, the private sector never gets a foothold. They are consistently crowded out at the cost of long term development and growth.

The fact of the matter is that governments are usually quite bad at providing goods and services. This is not government’s strength and wherever this has been tried, the government’s efforts fail. The much better role of government is to provide the proper “enabling environment” (security, the rule of law, a level playing field, proper regulation, etc.) and let the private sector play to its strength – the provision of societal goods and services.

The much better way to approach this problem is to return to an idea that America invented: public-private-partnership. Where government wants to encourage the provision of a societal good or service, it should contract the private sector to provide it. With the appropriate incentives to promote competition and with the appropriate checks and balances this can be readily accomplished – as we have in the electric power industry.

There is no doubt that health care reform is much needed in America. Our present system is a mess with all the wrong incentives. As a result, we pay almost twice as much as many industrialized countries, while the quality of our health care is ranked in the mid-twenties. But delegating this task to the public sector is not the right answer.

World history has proven this point. Let’s not repeat the mistakes of the past.

Bob Bestani is a Visiting Scholar at Stanford University and a candidate for Congress in NH’s 1st Congressional District

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Balanced Budget or House of Cards?

Monday, June 22nd, 2009

This is a legislative report from Senator Jeb Bradley (R-3)

After two marathon weeks of discussions between House and Senate members charged with negotiating a budget, early Friday morning a package emerged. Its fate is uncertain as the full House and Senate must pass it before it reaches Governor Lynch for signature. Counting votes before the June 24th Session will be almost as daunting as reaching this compromise — anything can and may well happen.

Let’s first focus on what is in this package and what is not, then on the impact it will have on people and businesses, and lastly how this budget will affect New Hampshire’s future.

Like any compromise, this budget is a mixed bag of good news and bad news. Several very controversial new taxes and tax hikes that had previously been approved by either the House or Senate, were dropped. These include the capital gains tax, death tax, gas tax, insurance premium tax, and a specific increase in business taxes by loss of a tax credit. All of these taxes would have directly undermined New Hampshire’s ability to attract businesses, investors, or visitors to our state. Also dropped from the final package were expanded gambling and a controversial plan to use toll revenue for highway improvements all over the state. Several taxes rumored for late consideration never made the final package including an entertainment tax and a tax on mortgage re-financing.

There are new taxes galore however. The tobacco tax will go up by 45 cents — the fourth hike in five years. Non-smokers may generally be callous to the impact this tax has, but smokers, especially low income people, justifiably believe they are carrying far more than their fair share of the tax burden. This increase will also undermine the cross border advantage New Hampshire has long enjoyed – attracting visitors to purchase tobacco products here and fill our revenue coffers. Convenience stores near the borders will be impacted, and meeting our revenue goals with this tax hike is questionable.

Any gambling winnings will be taxed at 10% including those garnered outside of New Hampshire. Will we be sending auditors to Foxwoods and Las Vegas — or charitable events in New Hampshire — to guarantee tax collection? Under those circumstances, is the $14 million of anticipated revenue farfetched?

The Rooms and Meals tax got increased 12.5%. I have written before that this huge increase will make our states less competitive for tours, vacations, conventions, and weddings. But budget writers slapped this tax for the first time on campgrounds – without a public hearing. Campground owners are outraged at this abuse of process. One owner felt so betrayed by the Legislature not having a public hearing, he told me the only people qualified to serve in the Statehouse are the janitors. Campers arriving this summer may be just as angry when they discover this new “marshmallow tax”. Again, revenue projections may suffer if campers take their marshmallows elsewhere.

Business owners were certainly dinged too. Business owners already are subject to an 8.5% tax on profits as well as a .75% tax on all payroll expenses. Now however, business owners organized as limited liability companies or as partnerships will be subject to an additional 5% tax on any income distributed to an owner. This significant change in the 1923 Interest and Dividends tax was also snuck in at the last minute – again with no public hearing. The estimate is that this change will raise $30 million of new taxes from business over the next two years. This dramatic increase in taxes on small business may prove to the biggest $30 million mistake that New Hampshire could make — as it threatens to undermine New Hampshire’s ability to build new jobs at exactly the wrong time.

The ‘rest of the story’ behind this last minute business tax increase is that it is just the latest step by the New Hampshire Department of Revenue Administration to strangle small business in New Hampshire. Desperate to raise revenue, DRA has recently taken it upon itself to essentially determine how much compensation a business owner may pay him or herself. Should the business owner pay him or herself additional compensation beyond what DRA has pre-determined is allowed, the DRA with bureaucratic hubris will simply assesses the 8.5% Business Profits Tax on this so called excess compensation.

If people are concerned about the Administration in Washington determining pay levels for executives – well it has been happening here in New Hampshire – right under our noses – with questionable legal authority for DRA to determine what is profit and what is income for a business owner.

This attack against successful small business owners, hidden from the light of day behind the audit curtain, is by itself a terrible threat to New Hampshire’s ability to build new jobs here. But now under this budget it gets worse. The business owner will pay a new 5% tax on income on top of the 8.5% tax on the balance of income that DRA has determined is excessive. The Legislature may say it wants to attract business to New Hampshire, but in fact, the Legislature is sending business a strong signal: move to Massachusetts. When tax policy in Massachusetts is more attractive than ours—that is dangerous! The pink slips will follow for NH workers.

It is not just taxes – fees are going up dramatically. Drivers will pay at least $30 to $75 more for registering a car. Boat registration fees double. Condominium registrations will nearly double. There is even a new salt water fishing license fee and a permit to carry a concealed weapon for out of staters skyrockets from $20 to $100 which means people will no longer register firearms in NH and we will likely lose money.

What about property taxes? This budget spreads the pain to them as well as property taxes will climb across New Hampshire by nearly $90 million as this budget downshifts traditional state responsibilities onto the backs of already struggling property owners.

With all these new taxes, higher fees, and soaring property taxes – what happened to spending levels? I have maintained throughout this budget process that spending needs to be reduced to avoid raising taxes on families, small business, and property owners struggling to stay afloat. While this budget did make some last minute cuts to programs and personnel – it was still not enough in my view. Overall spending will still increase 10.5%.

Governor Lynch warned that projected revenue is going to fall to 2004 levels and will be 10% lower than 2008 levels. Business tax revenues alone are currently some 27% below the projections for expected revenue.

But budget writers were still short and desperate for revenue. So despite the Governor’s warning, budget writers magically inflated revenue expectations by $75 million in order to sustain spending. Lastly, $90 million of traditional state expenditures to reimburse school districts for construction projects was moved from the operating budget to the capital budget – meaning this $90 million will be borrowed! Experts have warned that borrowing of this magnitude is unsustainable.

So what does all this mean? Economically strapped New Hampshire residents will have to dig deeper into wallets filled with fumes rather than cash. The business climate will suffer significantly at a time that nearly 50,000 New Hampshire people are out of work and that New Hampshire’s unemployment picture has also darkened relative to other states.

But what has gone under the radar is this budget’s impact on future budgets. Not enough people realize that about $500 million of spending in this budget depends directly upon one time sources of revenue: federal stimulus funding, increased federal Medicaid funding, and a $110 million raid of New Hampshire doctor’s medical liability funds. (Litigation filed against this raid as well as the $75 million magical revenue projections are likely to leave this budget with a gaping deficit.) Can New Hampshire realistically expect future federal largess as Congress stares straight into the white eyes of indefinite trillion dollar federal deficits.

This $500 million one-time spending crater is a ticking time bomb for the next budget. Will the re-financing tax, the entertainment tax, the gas tax, the capital gains tax, the death tax rise from the dead? Will existing taxes on business, hospitality, tobacco, interest and dividends, real estate sales, and communications continue on their relentless climb? Will the state dump more costs onto property taxpayers? Or will it be a sales tax or an income tax—how about both?

That is the bleak future for New Hampshire families, businesses, and property owners unless state spending, which will have grown by nearly 24% in three budget cycles, is not brought under control.

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