Health Care And Too Big To Fail

Since last fall we have had a great deal of discussion and debate concerning the phrase of too big to fail (TBTF) which was a newly coined term created seemingly just for this current economic mess.  That concept led to the TARP; it also produced the TALF program, remember that?  Likewise, a substantial portion of the Stimulus bill was indirectly to support the same idea that some companies were TBTF.   Additionally, we must recall the Federal Reserve has gone to extraordinary lengths to prop up those institutions with their 1.5 trillion dollar purchase of mortgage-backed securities, treasury bills and the simple act of printing more money and keeping the funds rate a virtually zero.  Yes, some of those actions and some of that money was for the general economy allegedly but huge bundles went directly to those TBTF concerns.

First it was Fannie and Freddie, they were followed by AIG and after Lehman collapsed they blinked again even worse and the major banks were brought into the fold along with GM and Chrysler.   The worst of the panic is over.   The economy is still hurting badly and will continue to do so for years to come especially if the current proposals for cap and tax and health care and the other tax increases all take effect.  The theory was that these TBTF’s went down or any one of them it would destroy the economy.  Well, I am not an economist but I have dealt with bad times and struggling companies during my 43 year career and have seen over pretty severe down turns.  The ’70’s were no picnic.  That entire decade was a downer for those of you too young to know about it.  Here is not the place to examine in detail the likely results if we had let those institutions go under or some of them.  If Fannie and Freddie went down there would still be a demand for housing and house loans and a profit to be made there.  The S and L’s made money for decades doing just that.   Lots of big investment houses, many foreign might have lost lots of money on an AIG failure but all those policies would have been honored which is much more important to my mind.  The decision to bailout GM and Chrysler and have them become Government, Inc. entities was clearly a political decision not an economic one.  New smaller companies would have emerged from a Chapter 11 and no one would have been left without a car if they wanted to buy one. 

We made a mess of things by allowing ourselves to be duped with that concept of TBTF.  Yes, things would have been difficult if they had gone down.  But I can argue just like the White House that but for those actions things would have been better by now, not worse.    They say everything would have been much worse if we hadn’t taken all those actions.  An argument can be made to the contrary very cogently.  Remember that only 350 billion of the TARP  money had been spent by inaugural day.  Everything else came after that date.  The GM/Chrysler bailout, the extra money to the institutions, Stimulus, TALF and all the buying by the Fed at the urging of the WH.   Whether you agree or not is not important, but I bet most of you would agree that it hasn’t been handled well.  It could have been done better.  I favor letting any failing company to fail, others would promote more government regulation and takeovers.  Guess a lot depends on your trust level in the free market system vis a vis Government.  Take your pick.  I will trust a businessman any day over a politician.

However we now will soon face another serious problem of the same ilk.  All the current proposals for health care reform will raise taxes greatly and will severely cut back on expenditures to hospitals, insurance companies and doctors.  There will be special taxes assessed against the medical device makers and pharmaceutical companies.  Hospitals do go broke in spite of what you may think about them making way too much money. I have represented three hospitals over the years in Chapter 11.  Yes, the insurance companies will get more customers but they will also have to add many new ones that carry much higher risks and thus larger claim payouts.  Doctors facing cutbacks will make choices.  Many will decide to move locations, probably to the larger urban areas.  Not many will quit practicing altogether but those moves will further deplete the need for medical care in the rural and outlying regions.  Many of the health insurance companies are affiliates or subsidiaries of life insurance companies.  If some of them go under because they can’t make sufficient profits then that will impact the life company they are affiliated with.  Those life policies will be endangered and those annuities that many people bought.

We need to think long and hard now on the front end how we are going to deal with those hospitals, insurance companies and drug makers that are TBTF.  Will we even acknowledge that concept for any of them?  What about the drug company that has promising research for a specific cancer cure but then goes under due to the weight of the new taxes imposed on it and the reduction in the tax breaks for research.  Trust me there will some of these entities that do go under as the Government, Inc. health program develops over the next decade.   They are proposing a 21 % cut just for the doctors.  Would you like a 21% cut in your pay today?  How would that effect you?  For some such a cut would produce bankruptcy.  If you live in an outer suburb and have only two hospitals and one goes under then you might have to drive 50 miles for medical treatment or wait inordinate amounts of time at the survivor hospital.    Are we going to simply bailout these failing hospitals, insurance companies, and pharmaceutical companies like we did GM?  Where is that money allocated in the CBO report.

“The lust of government is the greatest lust.”   James Harrington


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Filed under business, Economics, Politics, Socialized Medicine

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