…Why should an insurer agree to insure a pre-existing condition? It does not make sense to expect a business to agree to a proposition wherein it knows it will have to pay out 10x on a premium of x….

Insurance by its very definition is protection against the unknown. If the condition and its medical costs are known why take such a customer on board?

Methinks that the reason insurance premiums went up at your small business is because these guys figured out that they will now have to shell out treatment money for everyone and hence they are trying to do a CYA before overall costs go up.

For medical issues, I think either
- a public run healthcare or
- government rights to a percentage of facilities/medicines at institutions that it then distributes among the needy works best.

If there is no government healthcare in the US, it is only logical that average insurance premiums will go up for everyone if the insurance business is expected to mix humanitarian issues with cold-hearted business decisions.

The humanitarian side is actually the governments job. Making money is the private insurance business’s job. Why mix the two?

The main argument the reader makes is perfectly rational. Why should an insurer take on a pre-existing condition when they know they are going to make a loss on it?

They don’t have to today. And that is why we have over 30 million people uninsured.

Health insurance is a system. It needs to be designed to meet certain objectives. Take the internet, for instance. If it is open, egalitarian and free today, it is because it has been designed that way. If we had left it to the carriers to define the rules by which internet traffic is priced, things would have looked very different today.

The big question here is what do you want your country’s healthcare system’s objectives to be. And this is where the US departs from almost every other developed country. The US doesn’t even come close to universal healthcare. More than 10% of the country is not insured. And healthcare is 17% of the economy. Canada’s is 7% and they have a longer life expectancy.

But let’s not go into the issue of cost of healthcare, because that is an even bigger ball of wax that the current bill only begins to address. Except to note that in the US, because of the high cost of healthcare, if you are not insured, you may not be able to afford to go to a doctor. And a chronic disease will likely bankrupt you.

Many of my readers live in India. To them, this might be a storm in a teacup. India has no healthcare insurance to speak of. You get sick, you pay for your own treatment. The cost of healthcare is much, much lower, but even then many people can’t afford the cost of their treatment. But India cannot afford to provide its citizens a safety net on health. At this time, its focus, is rightly is on economic growth. There will come a time when these difficult issues will need to be addressed, but that time is not now.

The US, on the other hand, can afford such things. It provides social security which gives you a minimum living income when you are unemployed and after retirement. It provides complete healthcare coverage at the government’s expense after retirement, called Medicare. It provides free public education till high school for everyone.

But the US does not provide universal healthcare. Most other developed countries do. Some like Canada and the UK have government run healthcare. Others, like Switzerland have private healthcare but universal coverage. Their healthcare systems may differ, but the developed world does not let its citizens lose their life’s savings because they got sick. Except, that is, the United States.

Now, if universal coverage is the objective, you must either have a government run healthcare system like Canada’s or insurance companies have to accept pre-existing conditions. If insurance companies didn’t accept pre-existing conditions and the government had to pick up the tab for them, we would essentially be incentivizing the insurance companies to get rid of sick people and send them over for government aid. Eventually, this would be one huge transfer from tax payers to the insurance companies.

On the other hand if insurance companies had to accept everybody, with no other change, premiums would rise, healthy people would drop out of insurance, and premiums would rise further until the system breaks.

The only way to make this work is to force insurance companies to accept pre-existing conditions and at the same time make it unlawful for people to not have insurance which is called the individual mandate.

In my previous post, I may have bellyached about insurance companies. But really, they are products of the system we have today. They use pre-existing conditions to deny coverage because they can. They use millions of dollars to lobby lawmakers to stop healthcare reform because they can. But what Americans can do is put a stop to this. Tell your elected representatives where you stand on healthcare.

Oh, and one more thing. My company’s insurance did not go up because insurers are being forced to accept pre-existing conditions. That hasn’t begun yet, and though some people think that the huge premium increases being reported are because the insurers want to reset the baseline quickly, I don’t think that is why our premiums went up. It was probably because, on our small account, Aetna was losing money. The sum of premiums over the year was exceeded by expenses.

In the late 90s, we had a similar rate hike when I was at Infosys. We were already a sizable employer in the US and so the massive rate hike wasn’t because we were too small and they didn’t care if they lost our account. It was, and we were told as much, because our employees were having too many babies! We had a young workforce, almost entirely H1-B visa employees. There might have been some eagerness to have a baby while they were here with their spouses so that the child got a US passport. Consequently, the pregnancy rate was way over what the insurers pregnancy tables told them. And pregnancies cost a lot. So they decided that they had to lose the account. If you priced it high enough, we would leave. And we did.

That’s what healthcare insurance has become today. Sifting through the population to get to the healthy population. It’s a broken system and needs to be fixed.

Related posts:

1. My Personal Tale of Healthcare Insurance
2. Does Complexity Have Regressive Social Effects?
3. Pay for Performance is Difficult to Implement

Here’s my personal experience with healthcare from this week. Our healthcare insurer Aetna informed the company that our premiums were almost tripling. For a family of four, our premiums would go up from just over $1000 to over $3000. Why?, we asked. That’s just the way it is, they said. We’re going to have to drop our insurance, we said. Yes, they said, we expected that. And that was that. If you are a business with a small payroll, you and your employees are at the mercy of the healthcare insurer.

So, now I have to go out and get insurance for the family. My wife’s employer, also a small business, offers insurance, but I thought I’d go out and see if I could get insurance directly.

I called Anthem Blue Cross. Nice lady at the other end. Took down all the details. Then we came to pre-existing conditions. I said my son had one and described it. She said that she’d have to put me on hold. She was back in less than 10 seconds. Anthem Blue Cross could not offer any insurance at all. Sorry.

I then called Kaiser Permanente. My wife’s employer offers Kaiser and I thought I’d see if I could something directly with them. Kaiser doesn’t decline on the phone, you have to put in an application, which may be declined (it’s more polite, but everyone spends much more time making and reviewing applications). The guy on the phone was helpful. If you get Kaiser at your wife’s company, take it, was his advice.

Now, we have options. Even if we didn’t have my wife’s insurance, we wouldn’t be out on the streets, if something were to happen. But for many Americans (over 30 million of them) there are no options. If they don’t have a job or they have a job that doesn’t offer insurance, and they have a pre-existing condition, they won’t get insurance. Hospitalization in this country can cost $20,000 and up. Which means that they could be just one major illness away from bankruptcy.

Now, about this bill. It’s a very, very long bill. If you really want to understand the issues it tackles, go read Ezra Klein. But basically it boils down to a few things. Health insurers should not be able to deny insurance based upon pre-existing conditions. It also bans recissions (kicking an insured person out) and life time caps (another cute trick to limit payouts). To make this work for insurance companies there has to be an individual mandate (everyone must get insurance).

Six months after the bill is passed, denying insurance based upon pre-existing conditions for children will become illegal. That’s when I’m going to call Anthem Blue Cross again. I can only imagine how many people are waiting with far more desperation for that six month boundary to be crossed.

Here’s where you find out who to call http://www.congress.org/

If you are calling right now, call your Congressman. If you read this blog, and you live in the US, you probably have a nice job and healthcare at work. If I were you, here’s what I would say to his or her aide on the phone:

Congressman (or Congresswoman) I have a nice job and healthcare insurance. I am calling you in spite of the fact that I have nothing to gain if this bill passes. That’s because I feel for those people who do not have insurance today or can’t get it. We cannot be a great country if we let our people sink into misery because we’ve let healthcare become the monster it is today.

Please fix healthcare by voting yes on healthcare reform.

Related posts:

1. Here’s How You Manage Healthcare Costs
2. Pay for Performance is Difficult to Implement
3. Does Complexity Have Regressive Social Effects?

Now if you think about it, if the child has learnt to use the word in a sentence, there is little value in an illustration. Especially, since most of the words pertained to intangible things like “blatant”. If it were an art class I can still see some value in an exercise where students reflect and then draw a picture depicting “blatant”. But not for 50 such words and not for an English class.

There is a phrase for this kind of work. Its called “Make Work”. Basically teachers are giving homework just to make up the 3 hours or whatever of homework they need to give per day. Like many issues, there is economics behind Make Work Homework.

Public schools and most private schools in the US have a student-teacher ratio that has gotten higher and higher over time. Obviously, there are cost reasons for this. The primary driver of cost efficiencies in a school is the average number of students in a class.

A teacher spends time on preparing for class, grading homework and other small activities. The time required for preparing for class does not vary by the number of students in class. It also goes down with experience. But grading homework varies directly with the number of students. And it can add up to quite a lot of work. If the teacher is hard pressed for time, she can’t reduce the amount of homework given to students. But she can give the kind of homework that takes less time to check. The example I cite above is exactly that kind of homework – with asymmetric workloads for student and teacher.

I believe this is the root cause of Make Work Homework. It takes a lot of time for the student to draw an illustration and very little to eyeball it while grading. This asymmetry works in favor of the teacher. She can give the prescribed amount of homework and still keep her grading workload low.

This is not to say that anything requiring an illustration is Make Work. Not at all. Sometimes it is absolutely necessary. Visual learning can be very powerful. And sometimes it can be justified with the argument that children learn in different ways and at different paces. What may seem like gratuitous drawing and coloring to one student may be essential reinforcement of what is being taught in class for another student.

But a lot of what passes as homework for our children, is the product of a teacher trying to reduce his workload.

No related posts.

An FT article [pay wall] shines some light on why the negotiations were so difficult. The biggest reason is of course that these are multi-lateral negotiations. And different groups have different interests. Developed countries want developing countries to make commitments on emission reductions while not over committing themselves. They also want transparency in developing country emission measurement.

Developing countries don’t want emission reductions to get in the way of development. They want developed countries to pay for clean technology.

There are a also a whole bunch of developing countries in Africa who are not significant emitters but will feel the brunt of climate change. They have nothing to give in the negotiations but a lot is at stake for them.

And then there are also a few heads of state like Chavez, Morales and Ahmadinejad, who simply use the stage to take potshots at the US and the West. But they still have to be invited to party.

Obviously, 170 independent actors can never achieve any consensus. So groups were formed. US, UK, Germany, France as representatives of the developed countries and China, India, Brazil and South Africa as representatives of the developing world. But this still wasn’t enough to get an agreement. The bulk of the world’s emission in the next 20 years is going to come out of the US and China. If only these two countries had sat down and thrashed it out, we would have had a deal.

The world is not going to be happy with their leaders if they don’t put their shoulders to the wheel and get a deal together soon in the new year.

No related posts.

In the best report since the recession began two years ago, only 11,000 jobs disappeared last month, the government said on Friday, and the unemployment rate actually dipped, to 10 percent, from 10.2 percent the previous month.

What’s the math that allows the unemployment to go down when 11,000 jobs were lost? Did the denominator suddenly go up? Did all the returning Indians suddenly decide to go back to the US like Shiva Ayyadurai?

The answer seems to be

Not only did the rate of job losses drop to 11,000 but losses in the previous two months were revised down by 159,000.

which is not really offered as an explanation but as an aside by FT. But the numbers look like they should be able to explain the drop in unemployment. Does anybody have the official explanation?

Economics by its nature is complex. Good reporting should make it more accessible. Not leaving obvious questions unanswered would be a start.

No related posts.

His flagship heart hospital charges $2,000, on average, for open-heart surgery, compared with hospitals in the U.S. that are paid between $20,000 and $100,000, depending on the complexity of the surgery.

Although the data is not strictly comparable, it appears that the outcomes are at least as good, if not better than the averages in the US.

Dr. Shetty’s success rates appear to be as good as those of many hospitals abroad. Narayana Hrudayalaya reports a 1.4% mortality rate within 30 days of coronary artery bypass graft surgery, one of the most common procedures, compared with an average of 1.9% in the U.S. in 2008, according to data gathered by the Chicago-based Society of Thoracic Surgeons.

So what is behind the success of Narayana Hrudalaya. Two words – scale and throughput. It alone does 12% of India’s cardiac surgeries.

Narayana’s 42 cardiac surgeons performed 3,174 cardiac bypass surgeries in 2008, more than double the 1,367 the Cleveland Clinic, a U.S. leader, did in the same year. His surgeons operated on 2,777 pediatric patients, more than double the 1,026 surgeries performed at Children’s Hospital Boston.

But this scale is not just a result of having more doctors and being bigger. The number of surgeries per doctor and the utilization of the expensive medical equipment is both higher.

Narayana surgeon Colin John, for example, has performed nearly 4,000 complex pediatric procedures known as Tetralogy of Fallot in his 30-year career. The procedure repairs four different heart abnormalities at once. Many surgeons in other countries would never reach that number of any type of cardiac surgery in their lifetimes.

There were some quotes alluding to the impact of such high throughputs on quality. But others said that the higher level of experience gained by the surgeons should actually result in better results.

I hope policy makers in the US are paying attention. (This was the most read and emailed article on WSJ online today). When the difference in price of the same service is 10X to 50X, there is probably more than one difference between the two systems.

The easiest one is of course wages. Aside from surgeons wages (the article says $110,000 to $240,000) which are somewhat lower, all other wages in the hospital system in India will be much lower – perhaps by 5X to 10X.

The other is scale. Centers like Narayana Hrudalaya are like oases in a desert and get patients from around the country. A 12% national market share is huge. Scale allows the hospital to negotiate and get the best deals for equipment and consumables.

But even putting both these together can’t explain everything. As Dr. Shetty says in the article,

“In health care you can’t do one big thing and reduce the price,” Dr. Shetty says. “We have to do 1,000 small things.”

But Dr. Shetty and Narayana Hrudalaya have the will to do that. No, make that compulsion. They have to lower the price to $2,000. Otherwise they don’t have a market. In the US, hospitals try to save costs to improve margins. Their revenue comes from patients who don’t care about the price because insurance is paying for it. That’s a very different dynamic.

A couple of years ago I was in Mumbai over a weekend and decided to take Hinduja Hospital’s Premium Health Checkup. It was a full day affair with a battery of tests and consultations (the page carries a list). It included lunch and a session on yoga and meditation. The total bill was Rs. 5,000 (it’s now Rs. 10,000 or about $240). Cut to the US. My annual physical is a half an hour visit to the doctor’s office and a lipid profile. That’s all. Total bill $540.

No related posts.

As could be expected, the issue of Wall Street compensation raised its head again. And this time there is the weight of the federal government behind it. Banks that have taken TARP money will see their executive compensation capped. And the Federal Reserve has suggested that all large banks that fall under its jurisdiction will be reviewed on on going basis to ensure that executive bonuses do not produce risk taking behavior that could put the banking system at risk.

There are several memes that get mixed up in any discussion about Wall Street compensation in the media. Add a lot of emotion from a distraught public and it becomes for a tangled mess where the media feeds the furore but there’s no real understanding of the underlying issues. Let’s see if we can parse the issues out.

These are the issues as they are played out in the media
- Issue #1 – The taxpayer bailed out Wall Street. How can they pay themselves these kinds of bonuses.
- Issue #2 – The rest of the country is going through agonizing pain – high unemployment, pay freezes and cuts – how can these people pay themselves what they do?
- Issue #3 – Their companies have been (and some still are) hemorrhaging cash. How can they pay their investment bankers so much?

I don’t think any of these issues merit any attention from lawmakers. #1 could be argued many ways but at the end of the day, if the bank has taken TARP money and hasn’t yet returned it, the federal government as shareholder with special rights, can do as it pleases. Politics dictates that compensation should be curbed and so it will be. #2 amounts to appealing to a cold corporation’s heart – a futile endeavor. #3 is the company’s call. They have a board and shareholders. If they think that they need to pay top dollar to retain talent, then that’s what they need to do.

In my mind there are two fundamental issues that need consideration. One, is related to risk increasing compensation practices. The second is a larger issue of high, untrammeled growth in the capital markets in the last two decades.

On the first issue, everyone agrees that Wall Street’s bonus bonanzas encourage traders and management to pile on the risk, collect their super size bonuses and when things turn south, leave the shareholders to pick up the pieces. And when things go really really bad, like what happened to the markets last year, let the federal government foot the bill.

What is not clear to me is why the shareholders just stand there and let this happen. The expectation that the bank is too big to fail and that the fed will bail you out, doesn’t explain it. If you were a shareholder in Citigroup and held the stock prior to the crash, even though you were bailed out, you probably lost your shirt on Citi.

I am not sure what the answer to this is. It could be that in the normal course of things, shareholders don’t really exert any influence on the board of the company. Election of board members and votes on CEO compensation, need to see a lot more vigor in the shareholder meetings, especially in the US.

Or it could be that shareholders think they’re smart and will be able to get out before the stuff hits the fan – a variant of what the trader or management thinks – except that the employee just loses her job, the shareholder his savings.

It could be that there isn’t enough disclosure. That Wall Street companies, on the pretext of not revealing proprietary information on trades and investments, is actually throwing a cloak on dodgy, heads-I-win-tails-you-lose schemes.

There could be other things going on that only behavioral economics can explain. Thinking that if everyone has been doing risky trades for so long then maybe its not that risky, is both irrational and perfectly natural.

Whatever, the reason behind it, this nexus between risk and compensation needs to be tackled head on. It is going to be a very tough problem. But not addressing it is not the answer.

The other question is also a big one. In the last two decades, the capital markets have grown much faster than the rest of the economy. The chart here shows that the profits in the US Financial sector went from about 15% of total corporate profits in 1998 to over 40% in 2007. When an industry grows at that pace, the competitive intensity is low and margins are high. The use of technology raises productivity further increasing margins. In the capital markets the only significant cost is the cost of people. When there is no or low downward pressure on prices, compensation has no place to go but up.

But is the ‘natural’ size of the industry as a share of GDP what it is today or what it was two decades ago? Can an industry that essentially allocates capital, and doesn’t really make anything, have such a large share of the GDP? Is there something in the laws of the land that make it so? For instance the credit rating industry, many say, is a creation of legislation and would not have existed at least in this twisted model of today, had it not been for an easy regulatory environment. Are there other such areas that would wilt in the face of an openly competitive field or lower entry barriers?

I don’t know the answers to these questions. But I do know that if the world has a problem with Wall Street traders, bankers and CEOs making tens of millions a year, not just in today’s recession, but beyond as well, we will need to look at taming the industry, not capping salaries. If that’s even the right thing to do. Or possible at all.

No related posts.

The one untapped source that could easily provide the amount of money needed is the foreign currency market, which handles almost $800 trillion in trades annually, all of which is untaxed. A tiny levy of 0.005 percent on transactions involving the world’s most traded currencies — the dollar, the euro, the pound and the yen — would raise more than $33 billion annually for development, while not hurting the market or affecting the average international traveler.

Earlier this year, Bob Herbert, also writing in the New York times said

The economist Dean Baker is a strong advocate of a financial transactions tax. This would impose a small fee — ranging up to, say, 0.25 percent — on the sale or transfer of stocks, bonds and other financial assets, including the seemingly endless variety of exotic financial instruments that have been in the news so much lately.

I am actually surprised that there has not been a much more active discussion about a financial transaction tax. Politically it should be a very convenient tool. As the Senate Finance Committee wrestles with how to raise revenue to pay for health care reform they are considering measures like capping the Flexible Spending Account. While I think that FSA is a poorly designed, regressive tax deduction (I wrote about it earlier this month) it will definitely hurt some middle class tax payers. Keeping in mind the current economic situation and President Obama’s campaign promise not to raise taxes on people earning less than $250,000, it is hard to see how any such measure will succeed.

On the other hand, a financial transaction tax has minimal if any impact on tax payers. If there is an impact, in the form of reduced trading, it will be on the broker-dealers, who are not exactly popular at this time. So, in fact a financial transaction tax could be politically expedient.

What of the argument that a transaction tax will reduce liquidity and thus harm the global financial system and ultimately the tax payer? To that I have two arguments to offer.

There are countries that already have a transaction tax. India has had a securities transaction tax on equities and equity derivatives since 2004. On most equities it is currently 0.125%. India’s stock markets have not appeared to have suffered at all during this period. On the contrary they are healthy, growing and competitive.

If you take the total of brokerage commission and the transaction tax to be the ‘friction’ to financial transactions, the friction on financial transactions has been steadily (even rapidly) coming down as regulation, innovation and technology have squeezed the margins from when they were quoted in percentage points to today’s basis points. An additional transaction tax will increase the friction, no doubt, but at worst the friction will take you back a few years. At which time, the markets were functioning well enough.

What the transaction tax actually is, is worth careful consideration. 0.25% may be too high. Perhaps it should be pegged to the brokerage commission where that is transparent. Perhaps it should just be a very low tax but on all kinds of asset classes. But that discussion is possible only if a transaction tax is on the table.

The argument that minimizing friction and maximizing liquidity in financial markets is an objective that trumps all other objectives runs thin, in my opinion. Which makes it all the more surprising that law makers aren’t considering it as an option to raise revenue.

Related posts:

1. What’s So Difficult About a Gas Tax?

Such a tax would make our economy healthier by reducing the deficit, by stimulating the renewable energy industry, by strengthening the dollar through shrinking oil imports and by helping to shift the burden of health care away from business to government so our companies can compete better globally. Such a tax would make our population healthier by expanding health care and reducing emissions. Such a tax would make our national-security healthier by shrinking our dependence on oil from countries that have drawn a bull’s-eye on our backs and by increasing our leverage over petro-dictators, like those in Iran, Russia and Venezuela, through shrinking their oil incomes.

Most economists would have preferred a gas tax to the cap and trade legislation that is in Congress. But a gas tax is off the table politically. It is so off the table that there hasn’t even been a serious debate over it. So no one really understands why it is off the table, except, I suppose Washington insiders.

In the US gasoline (called petrol in most countries) costs less to the consumer compared to just about any non-oil exporting country. So why is it that the American consumer won’t tolerate an increase in the price of gas? Because nobody cares about what is the “right” price or the “customary” price of a staple commodity. What matters to voters is the inflation. Just like increases in taxes matter more than the average level of taxation. Or like in India, an increase in the domestic price of diesel leads to trucker strikes, even when the price is well below the cost of petrol. What the voter is saying is in all these cases is “I neither care nor understand what your reasons are for the price hike, I just don’t want it.”

Last year, the price of crude shot up to $140. The price of gas in the US followed suit doubling in just a few months. There was a lot of pain felt but there were no ‘tea party’ protests since (at least in the US) it is OK to be pummeled by prices set in the market. What is not OK is for the government to administer some bitter medicine in the form of a gas tax that can help lower the demand for oil providing a more long-term solution to the many ills associated with our gas guzzling habits. That is the political reality that holds back politicians from even touching the gas tax issue.

How about if a gas tax bill was designed to be totally neutral to the consumer? Whatever consumers spent on the gas tax would be returned to them in the form of say, an increase in the standard deduction. The problem with simple, flat tax ‘give backs’ like an increase in standard deduction is that it would end up hurting some consumers (while benefitting others). If some segments of the population like the rural poor bear a disproportionate share of the burden, the tax would be regressive and wouldn’t stand a chance of becoming law. Other problem areas would be small businesses where the cost of gas can be a big part of their total costs (e.g. a pizza delivery business). By the time you protect all these constituencies, the bill becomes less a simple gas tax and more a huge complex piece of legislation like Cap and Trade which is weaker and has loopholes for special interests.

Eventually, this is about guts. Unlike healthcare where there are 47 million uninsured Americans pushing for reform, there are no voters asking for a gas tax. And if you think the health insurance lobby is fiercely defending its turf, wait till you see Big Oil in action. To go up against these odds, even for something that can do so much good, needs real guts, perhaps even a bit of a death wish. It could end your political career quickly. So its no wonder that a gas tax is not on the legislative agenda.

But then how was Denmark able to slap a $5 per gallon tax on gas and make it work? Maybe they’re just smarter people.

Related posts:

1. Pay for Performance is Difficult to Implement
2. Does Complexity Have Regressive Social Effects?

Take the tax code for instance. The US tax code is so complex it is almost impossible to deal with for the average tax payer. An example of this is the Flexible Spending Account.

The FSA is supposed to give the tax payer a tax deduction on healthcare expenses that are not covered by their health insurance. It includes deductibles, co-pays and some kinds of health care expenses that are typically not covered by health insurance.

So far there’s not much you can object to. But the implementation is where it gets tricky. At the beginning of the year the employee must elect the amount to be deducted from their pay towards funding their FSA account. They can’t spend more than what is pre-funded in their accounts. If they spend less, they lose the money!

To me this seems hare-brained. If you are expenses go way over say because of some dental surgery expenses where the copays are high, you are out of luck if you didn’t foresee this at the beginning of the year. If your expenses are well under at the end of the year, you either lose the money or in the last month go hog wild buying OTC drugs that you don’t need. Who wants to see their own money go waste?!

To finesse a benefit like the FSA and maximize your gain from it, you have to be well informed, alert and always on top of your spending data. Also, you have to be quite motivated to deal with your benefits provider on a regular basis.

There are many such examples where you have to make active decisions in order to save taxes (IRAs, 529 plans etc.). This is true not just about the tax code but almost everything in American life – from health insurance to frequent flier programs. The complexity of these things – the tax code, health insurance contracts, frequent flier programs – make it difficult for people to make the decisions necessary to get the benefit they were designed to give. Sometimes understanding how the benefit works is difficult. Sometimes taking the action requires too much time and effort. Sometimes its both.

This phenomenon is generally well understood by business and law makers. Take mail-in rebates. Businesses expect a certain redemption rate on mail-in rebates. I think it is something like an x% rebate will result in an x% redemption rate. Which means that if you offer a 10% mail-in rebate you will get a 10% redemption. I can think of other things that should matter, but the point is that the effort of mailing in the rebate form results in a large percentage of buyers not redeeming what is essentially free money.

Similarly, 401(K) plans with opt-in results in about 25% of employee not participating in the plan in spite of an employer contribution. In this case it is the lack of information or guidance that becomes the hurdle, not so much the effort to sign up. Opt-out plans are now becoming more common which on average results in over 90% participation rates.

The big problem here is that the people who tend to miss out on these benefits are the people who could use the benefits the most – people who typically don’t have a college degree and are working too many hours to spend the rest of them on the phone with their benefits provider. They can’t afford professional advice and their friends are all in the same boat.

There are other costs of complexity as well. Complexity hinders change. Healthcare reform will take much longer than it would have if people understood it better. Complexity can sometimes be introduced deliberately to take advantage of the consumer (credit card fine print, for instance). Complexity is expensive for the whole system. If the tax code was a simple progressive tax schedule with a deduction for family size and that’s all, we wouldn’t need tax accountants, most of the IRS and H&R Block and Turbo Tax.

But the biggest reason to simplify is that the burden of complexity in our tax code, health care and consumer finance is borne by lower income households. It is regressive.

Related posts:

1. Pay for Performance is Difficult to Implement