– James Pethokoukis is a Reuters columnist. The views expressed are his own –

What just happened to American healthcare reform?

The political prospects for major U.S. healthcare reform have taken a decided turn for the worse in recent days (at least from the point of view of many Democrats). And you don’t need to be some totally plugged-in Washington insider to understand that.

Just take a look-see at the stock market performance of industry players such as Aetna Inc, Cigna, UnitedHealth Group, and WellPoint. Shares have been trending higher of late. What’s been slowly dawning on Wall Street is that the legislative process in Washington is unlikely to produce a national public health insurance option that could eventually squeeze out the private sector.

Fact is, the prospects for any sort of bill that would produce major changes are in as much doubt as at any time since President Obama took office. Worried that the plan was growing too expensive, the critical Senate Finance Committee appears to have jettisoned any idea of a public plan option and is also cutting back on subsidies to help fully insure the nearly 50 million Americans who don’t have health insurance for one reason or another.

So what just happened? How is it possible that Democrats cruised to a huge victory on Election Day in November 2008 and are yet again unable to make good on their top legislative priority? Why are the ghosts of Bill Clinton’s 1994 healthcare reform debacle suddenly flitting about Capitol Hill?

What happened was the Great Recession, the political impact of which the Obamacrats completely misunderstood. Oh, they knew the financial and economic crisis helped sweep them to office. That part they got just fine.

But they also assumed that the downturn would create such a sense of economic insecurity that time would be ripe for the sort of expansive, government-led healthcare changes that the party has been dreaming of for two generations.

Instead, the Great Recession made healthcare less of a priority for voters than economic recovery — as fast as possible, please — and job creation. A recent spate of polls shows concern about healthcare (and climate change and pretty much everything else) lagging concern about unemployment.

Healthcare lags concern about the shocking enlargement of the federal budget deficit, which has grown partly due to government actions — such as the $800 billion Obama stimulus package — to deal with the recession, as well as by the decline in tax revenue caused by the downturn itself.

And then this week, the Congressional Budget Office, the respected arbiter of what new government programs might cost, calculated that the Senate Finance Committee’s health reform bill would cost more than $1.6 trillion over 10 years. That was determined to be a political no-go by Senate Democrats– a smart conclusion given the recent polling — and the committee moved on to a still evolving plan B.

It is also ironic that the Obama administration, so aware of the latest research in behavioral economics, would forget about a phenomenon called “loss aversion”, which suggests people feel the pain of financial losses more acutely than comparable gains. Seems the whole healthcare plan was built up on the theory of losing something now — such as tax-free, employer-provided health benefits — for something later, like lower costs and a more sustainable government fiscal situation. To recession-shocked voters, that probably doesn’t seem like a more economically secure situation at all.

(Editing by Martin Langfield)

– James Pethokoukis is a Reuters columnist. The views expressed are his own –

For the populists who really, really want to make Wall Street pay by slashing their pay, Treasury Secretary Timothy Geithner certainly isn’t giving them what they want.

Yes, the top executives of the remaining TARP firms seem destined to be salary serfs to the “pay czar”, Kenneth Feinberg.

Of course, it’s hard for even the most die-hard free marketeer to feel sorry for financial firms that mismanaged their businesses terribly, took government bailout money and now find themselves under Uncle Sam’s thumb.

But as for everyone else? Well, here’s how Geithner put it: “We are not setting forth precise prescriptions for how companies should set compensation which can often be counterproductive. Instead, we will continue to work to develop standards that reward innovation and prudent risk-taking, without creating misaligned incentives.”

Even worse for those who wanted the Treasury secretary to bring down the hammer, he went on to highlight how the financial sector is already making changes on pay and how he looks forward to a “continuing conversation”. Yes, self regulation in action! Hardly what the torch-and-pitchfork crowd craved to hear.

That’s just too bad. To his credit,  Geithner seemingly understands his goal isn’t to punish, but to play a constructive role in nudging financial industry compensation in a direction that better connects risk and reward.

Ultimately, it is shareholders and management who should decide what executives make. Indeed, Geithner’s recommendations centered on empowering the Securities and Exchange Commission to give shareholders a stronger say over executive pay.

And changes are taking place. Firms like Credit Suisse, Morgan Stanley and Goldman Sachs have tried to rework pay systems by allowing bonus clawbacks, for instance.

Good thing, too. Government has a terrible record in rejiggering executive compensation. Example: Legislation back in 1993 intended to rein in corporate pay by eliminating the tax-deductibility of executive compensation above $1 million unless pay was linked to performance.

But one unintended effect of the law, academics James Wallace and Kenneth Ferris have found, “was that executives’ total compensation actually increased in the post-1993 period” thanks in big part to the use of stock options.

Not surprisingly, executive pay issues moved back into the spotlight earlier this decade after Enron and other corporate scandals. One part of the 2002 Sarbanes-Oxley Act prohibited executive loans. As with the 1993 law, corporations responded in ways perhaps not anticipated by legislators.

Signing bonuses and fatter severance packages became more popular — just the sorts of things now being frowned upon.

What sort of compensation might work better to align executive compensation with long-term shareholder interests? A group of academics — Alex Edmans of Wharton, Xavier Gabaix and Tomasz Sadzik of New York University and Yuliy Sannikov of Princeton — have devised an approach based on what they call “dynamic incentive accounts.”

Unlike bonus clawbacks, this system doesn’t try to recoup money already sent out the door.

Here is how it works, according to their new study: Executive pay is escrowed into an account, a fraction of which is invested in the firm’s stock and the remainder in cash. The account would be rebalanced each month according to company guidelines — rules would certainly also vary by industry — and by how close the executive is to retirement.

The gradual vesting of the account — cash from a sold stock cannot quickly withdrawn — even after retirement, “allows the CEO to consume while simultaneously deterring myopic actions.”

In other words, the goal is to promote long-term thinking over short-term manipulation.

For instance: If company’s stock soared, the executive could sell, though the proceeds would say in the account. If the stock then dropped, that money would have to be used to buy more stock. He couldn’t just take the money and run.

Is this the best system out there?. Maybe, maybe not. Or maybe for some firms or sectors and not for others. But that is why you don’t want a one-size-fits-all plan devised in Washington, particularly one with political rather than economic goals. That is a pothole that Barack Obama and Timothy Geithner have so far avoided.

– James Pethokoukis is a Reuters columnist. The views expressed are his own –

It’s an unhealthy sign for the U.S. economy that the most fascinating, if not divisive, player on the financial stage is the head of the Federal Deposit Insurance Corporation. But such is the case with Sheila Bair.

Although there is mounting evidence that the worst of the banking crisis may have passed, Bair continues to command center stage. The latest, if the unnamed sources chatting to the Wall Street Journal are to be believed, is that Bair wants to shake up top management at Citigroup. Presumably this would include the ouster of Citi’s chief executive, Vikram Pandit.

To be sure, Pandit would rank high on anyone’s list of “CEOs most likely not to make it to 2010.”

The Obama White House has mulled pushing out Pandit, but has hesitated to pull the trigger reportedly because of a lack of a compelling successor. And one could certainly make the argument that because of both moral hazard and governance issues, troubled banks should see management decapitated if forced to seek government support.

But that Bair would be the catalyst for Pandit’s dismissal is surprising, or at least weird. In a recent television interview, Bair said that management at U.S. banks “needs to be evaluated” with tough questions asked: “Have they been doing a good job? Are there people who can do a better job.” Queried whether she thought some managers should be replaced, Bair replied, “Yes”.

But before the program was even broadcast, the FDIC was out with a clarifying explainer that explicitly emphasized that Bair “did not suggest the federal government will remove the bank CEOs.”

Now less than a month later, it appears that Bair is doing just what the FDIC said she was not doing, with government officials even whispering to U.S. Bancorp Chief Executive Jerry Grundhofer, who recently joined Citi’s board, to see if he wants the gig.

What’s more, this apparent play to push out Pandit comes at the same time that Bair has been suggesting the FDIC be designated at the new “super-regulator” to deal with systemically important financial institutions. (The Federal Reserve now appears likely to get the designation instead.)

All this plays into a growing suspicion — originally sparked by her quick-trigger seizure of Washington Mutual — that the former business school professor and Republican political aide, passed over for Timothy Geithner as Treasury Secretary, is doggedly determined to maintain her “power player” status in the nation’s capital.

Enough now. The first 4-1/2 months of the Obama administration has seen record spending, the de facto nationalization of General Motors and Chrysler, and the legislative wheels put in motion for the wholesale, government-led revamping of the country’s healthcare and energy industries.

Any business or investor looking for certainly or stability in public policy would find only the whirlwind.

This all began on Wall Street, let it end there as well. Allow the banks to take advantage of the favorable yield curve and inch their way back to health — and let the head of the FDIC return to relative anonymity.

– James Pethokoukis is a Reuters columnist. The opinions expressed are his own –

Here’s why the U.S. government’s growing control over General Motors — Uncle Sam may soon own some 70 percent of the troubled U.S. automaker — is so vexing: This is supposed be the “no drama, no emotion” White House, a place where cool, calculating reason holds sway.

If George W. Bush was the presidential version of the impulsive Captain Kirk of “Star Trek”, then Barack Obama’s supposed counterpart is the superbrainy, hyperlogical Mr. Spock. (It’s a much-bandied about analogy here in Washington, one that the current president says he’s aware of. Indeed, he actually seems to dig it.)

Then you have the highly regarded White House economic team. It’s a bright group steeped in the latest behavioural economics research, a revolutionary field which theorizes that human decision-making is riddled with “cognitive biases” (such as seeing patterns in random sequences of information) and psychological quirks. Homo economicus and rational agents we usually aren’t, say behavioural economists.

Given all that intelligence and self awareness, it’s surprising to find Team Obama’s approach toward GM (and Chrysler, for that matter) marbled with so much illogical economic policy that could have a terrible long-run impact:

1) Bullying creditors. Yes, bondholders may well accept General Motors’ new proposed offer of 10 percent of a reorganized company and warrants to purchase another 15 percent. But that doesn’t change the topsy-turvy reality of unions being favoured over creditors.

Coming out of bankruptcy, the government could own 72.5 percent of the automaker, the United Auto Workers 17.5 percent and creditors 10 percent.

By favouring a political ally over the rule of law — in this case, the fundamental principles of contractual rights — the White House has created both a terrible precedent and enormous uncertainty (perhaps resulting in even higher interest rates for borrowers with worrisome debt loads) as the government continues to inject itself into the private sector.

2) Perpetuating “too big too fail”. Back in December, GM submitted a plan to Congress requesting $4 billion to get through the month and $8 billion to operate though the end of 2009 with the option of an additional $6 billion if the economy really went into the tank.

Imagine if instead asking for $18 billion, then-CEO Rick Wagoner had asked for $50 billion? A more accurate figure since that is apparently what it is going to take to get the company through its probable bankruptcy — with tens of billions of U.S. taxpayer money needed in the future.

Maybe Congress would have balked, though probably not. But many millions of American taxpayers would have had a better idea of what they were getting into.

Letting GM and Chrysler fail would certainly have made the economy worse off and raised unemployment in the short run. But by sheltering companies from the full effects of their own poor decision making, Obama risks creating a less competitive business climate here that could result in higher long-term unemployment as seen in Europe.

3) Creating an auto policy that doesn’t match energy policy. What if GM and Chrysler, at the behest of the U.S. government, create a bunch of small, gas-sipping cars that Americans don’t have much interest in buying unless pump prices start creeping toward $4 a gallon?

Be prepared for even more losses. Now one way to generate interested buyers is by instituting a gas tax that would put a floor under gas prices.

But the Obama administration apparently has no interest in this approach anytime soon. In a new interview, Energy Secretary Stephen Chu said a gas tax wouldn’t be “politically feasible” during a recession. Any sort of carbon tax where the money goes straight back to the government will probably never be politically feasible in the United States. But balancing it with a cut in, say, payroll taxes just might be.

Maybe, in the end, Team Obama is merely falling prey to the classic behavioural economics phenomenon of sunk cost bias. Unrecoverable or difficult to recover costs already incurred tend to influence people’s future decision making, studies show.

Let’s say you have already paid for pro basketball tickets but there’s a terrible storm on the night of the game. You’ll have a tendency to still attend the game because you’ve already paid for the tickets. This is also called good money chasing after bad. Unfortunately for taxpayers, a lot more of their good money is headed into GM.

– James Pethokoukis is a Reuters columnist. The opinions expressed are his own –

You can’t beat something with nothing” often passes for political wisdom in Washington. In 1994, Republicans defeated Bill and Hillary Clinton’s healthcare reform plan with pretty much nothing — well, at least with nothing positive.

Republican congressional solidarity, along with help from business group attack ads and the Clintons’ own political miscues, were enough to doom the landmark legislative effort. Back then, “No” was sufficient.

But 2009 is not 1994. A “Just say no” strategy seem laughably insufficient this time around. Economic anxieties are much higher, the Democrat president more popular, the Democrat-controlled Congress more committed and aggressive.

Want even more evidence of the changed economic and political landscape?

Just take a look at the 248-page Patients Choice Act, a comprehensive GOP healthcare reform plan drafted by Senators Tom Coburn and Richard Burr, and Representatives Paul Ryan and Devin Nunes.

A big feature of the plan calls for redirecting the $300 billion-a-year tax exclusion for employer-based health benefits into refundable tax credits to purchase private plans.

Low-income families would be subsidized so they could also buy private health insurance. The theory here is that people act more like cost-conscious consumers when they have to select and purchase their own health insurance rather than pay premiums indirectly through their employers via lower wages.

While the bill doesn’t stand a chance of passage with the Obamacrats in charge, it does reflect a recognition by congressional Republicans that if they are to derail or significantly modify Democratic healthcare efforts, they need a positive and serious policy rejoinder of their own.

“I think it is a good, bold, free-market alternative,” says James Capretta, an economist at the Office of Management and Budget under President George W. Bush and now a fellow at the Ethics and Public Policy Center.

“Broadly defined, this is where the conservative coalition can plant a flag and begin engaging in the debate.”

But is the bill really a choice rather than an echo? The indisputable conservative credentials of Coburn, Burr, Ryan and Nunes have not prevented some free marketeers from scowling and some liberal policy wonks from cackling after taking a look at the legislation.

Michael Tanner, a healthcare expert at the libertarian Cato Institute immediately tagged the plan “Obamacare Lite” and claimed it would “increase regulation, mandates and government control over the healthcare system.”

At the same time, liberal healthcare blogger Ezra Klein was almost rapturous: “The core elements of this plan…make it the same type of plan Democrats are offering….And it’s further evidence that the argument over health reform is narrowing, rather than widening. And it’s narrowing in a direction that favors the Democrats.”

Both Tanner and Klein have read page 5 of the bill’s summary and this sentence in particular: “Many states have led the nation in finding comprehensive healthcare solutions for their citizens, including the well-known, bi-partisan achievement of universal healthcare through a private system in Massachusetts.”

Now many on the right consider that state’s 2006 healthcare reform, led by former Governor Mitt Romney, to be a big-government system which mandates every resident buy health insurance.

Even worse, in their view, is the Connector, a “state exchange” that Tanner describes as “a super-regulatory body, adding new mandated benefits, restricting consumer’s choice of plans, and adding both regulatory and administrative costs to insurance.”

Indeed, the Coburn-Burr-Ryan-Nunes bill explicitly states that it “will utilize state-driven exchanges to facilitate real competition between private plans and give Americans — for the first time — a choice of health care plans.”

But no worries, say the bill sponsors who have been reassuring worried conservatives privately that their version of a state exchange is similar to the one found in Utah which acts more like a matchmaker between insurers on one side and individuals and small businesses on the other than a big regulatory body.

When pressed on whether the Coburn-Burr-Ryan-Nunes plan increases the role of the government in healthcare or diminishes it, Tanner can conclude only that “it’s mixed”.

Now all this brings to mind what a high-ranking Republican House member asked me earlier this spring: “So what should we do about healthcare? More health savings accounts?”

Given both the member’s snarky tone and the context of our preceding conversation, this is what I’m pretty sure the high-ranking House Republican actually meant by those questions: “We are going to get our collective heads kicked in if we don’t come up with a strong alternative to Obamacare. Health savings accounts alone ain’t going to cut it. We need to raise our game, and fast.”

And part of that “game raising” means accepting that it won’t be easy to budge voters.

Not all American families are going to prefer high-deductible HSAs — previously the Republican healthcare policy of choice — especially when one of the supposed selling points of these plans is the ability to invest money from accounts into the battered stock market.

And certainly voters are not ready for a hypermarket approach such as the one advocated by libertarian economist Arnold Kling. He has argued that “real” health insurance would pay only for treatments that are “unavoidable, prohibitively expensive and relatively rare.” Everything else would be out of pocket.

And that “game raising” also apparently means adopting some of the Democratic rhetoric on healthcare to appeal to more centrist voters.

In addition to using the Massachusetts plan as an example rather than the plan from conservative Utah, the authors employ a liberal-flavoured critique of America’s healthcare system:

“The health care system in America is broken. Costs are rising at an unacceptable rate — more than doubling over the last 10 years, which is nearly four times the rate of wage growth. Too many patients feel trapped by healthcare decisions dictated by HMOs. Too many doctors are torn between practicing medicine and practicing insurance. And 47 million Americans worry what will happen to them or their children if they get sick.” Ted Kennedy couldn’t have said it better.

The big risk to Republicans is that if they adopt the language and critique of Democrats, the public will miss the policy subtleties and start viewing the Dem and GOP approaches as more less the same. That could give further momentum to Democratic healthcare efforts and actually bring about the outcome Republicans are trying to avoid.