BP’s Egregious Conflict of Interest is Wreaking Havoc on the Gulf

(June 8, 2010)

For every barrel of “free oil” discharged into the Gulf, the Clean Water Act establishes fines of at least $1,100 per barrel, and possibly as high as $4,300 per barrel, if the discharge is the result of gross negligence. These fines, and BP’s overall financial liability, have been skewing BP’s actions throughout the first 50 days of this crisis, necessitating action from other oil companies to stop the leak.

The Entrenched Conflict of Interests

BP’s dual roles – as the financially responsible party and as the principal party that is trying to stop the leak – have been on a collision course. BP’s financial liability has been directing its judgment throughout its many attempts to stop the free flow of oil. The result is a conflict of interest of monumental proportions and extreme consequences. BP’s inherent conflict of interests emphasizes the need to sideline BP, and instead turn to a combined effort of the other major oil companies to develop strategies and get the work done.

Obviously, the Federal government itself cannot do the undersea work to contain the leak, since the Federal government does not engage in undersea oil drilling and remediation, nor own the necessary equipment. Initially, the government reasonably relied on BP to solve the problem, partly based on the “you break it, you fix it” maxim, and partly based on the assurances that BP gave in its filings for permits, in which it claimed to be prepared to contain any leaks. But now that BP’s conflict of interests has eroded trust, and has been incapable of stopping the leak, it is time to call upon other oil experts to implement a fix.

Oil Discharge Estimates & Its Consequences

Initially, it was BP that claimed that the leak was allowing just 5,000 barrels of oil per day (BPD) to flow into the Gulf. That estimate was grossly inaccurate, and has been supplanted by much higher estimates from multi-party evaluators in recent weeks. It has been widely perceived that the earlier estimates had been deliberately deflated by BP in order to minimize its liability.

The earlier minimalistic estimates damaged the Gulf profusely, and cost its residents dearly. Had the initial estimates been even close to realistic, then the attempted solutions would have been gauged and scoped to meet that challenge. Instead, the containment dome, top hat, junk shot, hot tap, and top kill were developed as remedies to a much smaller problem than what actually existed. These stopgap measures were not sufficient to curtail a flow of 20,000 to 25,000 BPD, nor withhold the force that propelled such volume. They were destined to fail, or, at best, have only minimal impact.

Oil Dispersants Also Disperse The Truth

BP’s use of dispersants has been especially misguided and troubling. As the name implies, dispersants merely disperse the problem, spreading the oil around more broadly to minimize its appearance and mitigate its impact on any single location. In so doing, dispersants expand the area that is harmed by toxic oil, such that the Gulf is now confronting “a massive collection of smaller spills” and “an aggregation of hundreds or thousands of patches of oil that are going a lot of different directions” (Admiral Thad Allen, June 7, 2010).

The more sensible approach would have been to do the opposite. BP should have done – and could still do – everything possible to limit the reach of the oil, concentrate it, apply coagulants to the oil to make it gel or solidify, and then collect it from the water’s surface before the oil could dissipate and infect marshlands and beaches. But BP’s conflict of interest came into play again. Collecting the gelled or solidified oil would have communicated the volume of oil that was leaking from the wellhead, establishing BP’s liability.

The Conflict of Interest Spawned Bad Options

In light of the leak’s actual volume and the force behind it, efforts to plug the leak (e.g., top hat and junk shot) and smother it (e.g., top kill) were misguided. From the start, BP should have aimed to capture the oil, preventing it from infecting the Gulf habitat and the shoreline, and even retaining it as useable petroleum product. But BP did not do so, ostensibly because that would have illuminated the volume of oil jettisoned into the Gulf prior to the onset of the effective capture, and impacted its liability.

BP should have disclosed the leak’s actual volume and its early work should have been to place a wide-mouthed vertical pipeline over the point(s) where oil was escaping, tighten the mouth at some point below the escape point, and run the pipeline up to the water’s surface. A vacuum could have been created at the water’s surface to stimulate the upward flow of the oil, just like when using a straw in a carton of milk. The oil that spewed into the Gulf in recent weeks could have been channeled into tanker-vessels, presenting a win-win-win solution. But BP’s conflict of interest gave priority to not exposing the volume of oil involved.

The Containment Cap’s Math Doesn’t Add Up

The latest efforts to capture the oil have exposed BP’s aversion to transparency. Over the past two days, it has been reported that 11,000 BPD of oil have been captured by the latest containment cap, estimated to be 40% to 80% of the total leak. There are also aspirations to soon capture 20,000 BPD, which is acknowledged to be still less than the total flow (optimistically estimated as 90% of the total flow). However, the aspiration to collect 20,000 BPD indicates that the current capture of 11,000 BPD is only, at best, about half of the total flow (not up to 80% of the total, as BP still claims). This rudimentary math – comparing the current and anticipated barrel estimates with the corresponding percentage estimates – makes it obvious that BP is still not willing to acknowledge that the actual volume of the leak is higher than its publicized estimates. Again, BP’s conflict of interests is driving its lack of transparency and distorting its conduct.

What Is Meant By “All Legitimate Claims”?

If it were not amply clear that financial liability is the primary driver of BP’s actions and decisions, one would find confirmation in BP’s consistent mantra that it will pay all “legitimate” claims. That word raises questions about which metric BP will use to determine legitimacy. Will BP try to be the arbiter of what it determines to be legitimate? Will BP submit to guidelines from a Federal government office? Will BP insist upon the legitimacy of a claim being determined by court verdicts, following extensive litigation? BP should be required to immediately clarify – in very tangible, effective, operational language – what it means by “legitimate” so that claimants can have guidance, and so that federal, state, and local governments can influence that interpretation, or challenge it, if necessary.

Disaster Spawns Opportunity

As appalling as it may be to acknowledge it, the Gulf oil leak will probably not be the last of its kind. Off-shore oil drilling occurs in many parts of the world, by many companies. Although the Gulf calamity will hopefully encourage stricter regulation and enforcement to prevent any other tragedies of this type, it certainly is possible that more deep-sea leaks might occur. The companies that devise effective solutions to our current problem will instantly become the world leader in oil crisis response services. Since it is clear that BP has no special knowledge in this domain (based on its scattershot tactics, none of which has been effective), this is an opportunity for US oil companies to devise a solution and develop the competency to address future problems of this type, regardless of where on the globe they may occur. Although it is a skill set that will hopefully never need to be deployed, US pre-eminence in addressing tragedies of this type would further solidify our nation’s leadership in environmental remediation services.

Most importantly, by immediately convening a group of US oil companies, their combined expertise would be more likely than BP alone to develop a solution that completely stops the Gulf leak. Naturally, the US companies’ joint operations to stop the leak must be fully financed by BP, as it would be a very legitimate claim.

Eliminate BP’s Conflict of Interests

BP absolutely must remain the financially responsible party. But it should not continue to be the principal actor in stopping the leak. It is now obvious that BP does not have the capacity to fully stop this leak on its own, and that its conflict of interests is affecting both its options and its judgment along the way.

Americans Want Health Security & Affordability, and Don’t Care About Myths & Legislative Procedures

As the House of Representatives prepares to vote on health care reforms that President Obama made a priority and which the electorate brought him to the presidency to enact, it is vital to focus on the big picture. The American people – and Members of Congress – should recognize the unique nature of this historic opportunity. This is a watershed moment that will define our nation’s social responsibility, preserve our economy, and improve our quality of life.

Americans Care About the Policy, Not the Process & Sideshow Issues

When facing such a transcendent turning point, it is no longer appropriate to be dissuaded by the arcane intricacies of the legislative process, nor by myopic devotion to sideshow issues. We all want enhanced health security and affordability, and, once we have it, we won’t care if it came by way of Reconciliation, the “deeming” mechanism, or some other legislative vehicle. After reforms are enacted, Americans who are protected against termination of their coverage for pre-existing conditions won’t care about targeted programs for Vermont, Florida, Connecticut, and Montana.

The same Americans who are angry now about the reform process will become much angrier in future years if reforms are not enacted and their insurance is terminated or becomes unaffordable because they are not protected. Without reform, an ardently pro-life family whose insurance stops due to reaching their lifetime coverage limits after a serious illness of their child will be much more focused on that than on their opposition to the 2010 bill due to its abortion language.

Policy That Does What Is Right for Americans

Ultimately, the benefits of substantive policy – and its improvement of our social fabric and quality of life – prevail. Abraham Lincoln did not allow projections of commodity market fluctuations to alter his drafting of the Emancipation Proclamation. Franklin Roosevelt did not withhold his leadership on Social Security legislation until the intricacies of tax treatment of deferred income for early retirees could be fully coordinated. Lyndon Johnson did not delay the enactment of Medicare until the anti-government naysayers – who today have organized into Tea Parties – were on board. Today’s America would be unimaginable without these advances.

At historic moments, such as the one that our country is currently facing, it is necessary to simply do what is right. The health care reforms that are under consideration are the right policies for America, in both the near- and long-terms, as they would have a positive impact for virtually all Americans (even including the insurance industry, which would collect premiums from millions more people, and enable the risks and costs to be spread among a much larger pool).

Myths, Misconceptions, & Deceptions Are Overcome By Facts & Courage

Doing what is right takes courage and commitment to the facts, especially in light of the many myths, misconceptions, and deceptions that have been propagated by self-focused special interests. Insurance companies fear the reforms because they will have to stop certain activities that have given them a competitive advantage, at the expense of the people who they are supposed to serve. But, since it would be unseemly and transparent for them to fight the bill on those grounds, they have instead manufactured illusory demons which fuel opposition by those who are susceptible to such manipulations.

Knowing that some percentage of the population is stridently anti-government, the myth of a government takeover of health care was created, even though there is absolutely nothing in the bill – nor even in earlier incarnations – which substantiated this. Knowing that most Americans are strongly supportive of their chosen health care providers, the myth was created that the ability to choose one’s providers and insurer would be curtailed, even though President Obama repeatedly emphasized that if you like your doctor and/or your insurer, then you can keep them, and the legislation confirms that. Knowing that everyone is worried about the cost of health care, the myth was created that the legislation would cause premiums to skyrocket, which has been debunked by economists and the Congressional Budget Office, and is patently untrue by virtue of the millions of Americans who would enter and pay premiums into the health insurance market.

In the current climate of unfounded, unsubstantiated, and even paranoid fears of change, doing what is right for the overwhelming majority of Americans requires fortitude to take action based on the facts, rather than on fears, by summoning dedication and determination. Moving the country and the people toward increased health security and affordability will depend on decision-makers’ willingness to embrace the responsibilities, ideals, and commitment to public service that are inherent in serving the greater good, rather than the good of special interests.

Policy Based on Core American Principles

The upcoming vote on health care reform is about principles. Humanism and equality are at the core of expanding coverage to those who do not have it, and preserving coverage for those who do. Fairness and consumer protection are at the core of affordability, to ensure that insurance corporations cannot price families out of the market with hikes in premiums, copayments, and deductibles. Fiscal responsibility is at the core of reforming the economics of our health care system to ensure its long-term sustainability for both the public and private sectors. Opportunity and justice are at the core of health security, which enables individuals and families to engage in “the pursuit of happiness” as they choose, without vulnerability to corporate self-interest.

The denial of these principles for the benefit of all Americans would be tantamount to giving amorphous, intangible, unsubstantiated fears priority over people. If a republic relegates the needs of its people to the back bench, it would be a foreboding sign of the unraveling of the social fabric. The deficiencies and injustices of our health care system have been so extensively evidenced and documented that it is imperative that they be remedied. Anyone who thinks that they are not vulnerable to these shortcomings is just one serious diagnosis or illness away from discovering that they are wrong. Reform is necessary to reinvigorate our core principles. The moral deficit that is being inflicted by our health care system is reprehensible and intolerable.

The health reform legislation being considered might possibly mean that each of us would pay an extra dollar for a meal at a restaurant to ensure that the cook, the waiter, the cleaning team, and their families have health coverage and the security that comes with it. But who among us would rather pay a dollar less for a nice dinner while looking at a crew that is uninsured and living in fear of illness? Moreover, if they do not have insurance, they may not have gotten treatment for an illness or disease that could be communicable to us at the restaurant. And, without insurance, if they did get treatment, it is likely that they went to an emergency room or a public health facility which was paid for by the rest of us anyway, as taxpayers and by shifting the cost to those with insurance. The waiter who serves the dinner would also like to be served well by legislators who can provide them with health security.

Rising to the Occasion to Do What Is Right

The day of reckoning on health reform is rapidly approaching. It will be one of the most important votes in the career of every legislator. It is a vote that each legislator will remember long after their retirement, either with satisfaction for having done the right thing or with dismay for having succumbed to pressure, special interests, and unfounded fears.

Some might worry that support for reform could impact their career, including their re-election prospects. But, opposition to reform could also result in their electoral defeat, both for denying their constituents the benefits of health security and affordability, and for their failure to take a courageous, principled stand that would improve the quality-of-life of those who they were elected to serve.

The legislation would advance health security and affordability in many ways, from prohibiting denials of coverage due to pre-existing conditions, to enabling millions of uninsured Americans to obtain coverage; and from limiting insurer hikes in premiums, copayments, and deductibles that price people and small business out of the market, to ensuring long-term sustainability of the health care system by containing costs for the public and private sectors. This is very tangible, meaningful progress. Yet, that doesn’t mean that the legislation is perfect, nor that it exactly reflects what any single person would most like it to contain. But that is the nature of democracy and politics as “the art of the possible” between President Obama, 535 Members of Congress, and a long list of citizen- and interest-groups. The old maxim that “the perfect must not be the enemy of the good” is perhaps more true in the context of health reform than any other issue.

An Historic Moment For the Country…..and For Each Legislator

If Congress does not pass health reform now, there will not be another opportunity for many years to come. And, when it does come again, the problems with our nation’s health care system will be so much more extensive, intractable, amplified, and varied, with costs having skyrocketed past the point of being able to be reined in. Reform at that time will be much more extreme and painful, and much less likely to resolve deficiencies and put our nation’s health spending on a sustainable track. It is critical that we do not miss this historic chance at substantial progress for the sake of individuals and families, businesses and economic growth, and preservation of our society and fiscal health. Now is the time to unite our diverse citizenship under the tent of health security and affordability for all, or risk further fragmentation and hardship which will be monumentally more difficult to repair.

Legislators for whom the vote on health reform is especially vexing would be well served to consider not only the impact of voting for the bill, but also the impact of voting against the bill. This vote goes right to the heart of public service. It will become increasingly apparent in the years to come that supporting this legislation was the right thing to do for America and Americans. Years from now, when looking in the mirror, a legislator will not see the insurance lobbyists, a group of Fortune 500 CEOs, nor a little room of over-heated Tea Partiers. Instead, the person looking back will be the person who voted on the 2010 legislation to increase health security and affordability for all Americans.

A 10-Point Program for Job Creation and Economic Transformation

Job growth is a top priority right now for most government officials, regardless of party. But recent job-growth proposals have mainly offered measures to avoid layoffs, assist those already unemployed, and induce only incremental hiring, mostly in well-established industries. Although the recent proposal by Sens. Chuck Grassley (R-Iowa) and Max Baucus (D-Mont.) was encouraging for its bipartisan process, its job-related provisions suffered from these limitations.

We have reached the point when the USA must rapidly stimulate major, broad-based job growth over a sustained period of time. The focus should be on transformative economic development in key industries that hold the promise of becoming the drivers of economic prosperity and exports for years -- and even decades -- to come. Rather than merely keeping workers and the economy afloat, we must invest in industries that will create the need for workers, both today and over the long-term, on a massive scale. When spending tax dollars on job growth, the emphasis should be on emerging industries, to invigorate the demand for workers in companies with global high-growth potential.

As President Obama stated on February 16th, "Whether it's nuclear energy, or solar or wind energy, if we fail to invest in the technologies of tomorrow, then we're going to be importing those technologies instead of exporting them. We will fall behind. Jobs will be produced overseas, instead of here in the United States of America. And that's not a future that I accept."

Starting Points for the "Jobs Bill"

The "Jobs Bill" that will emerge from Congress should include support for job retention and incremental hiring, as well as for the unemployed, both to stop our economic bleeding and to capture the "low hanging fruit." These steps include aid to state and local governments, a payroll tax credit for small businesses that hire unemployed workers, assistance to homeowners who are in jeopardy of foreclosure, and extension of unemployment insurance and COBRA benefits. The bill should also accelerate the Obama Administration's initiatives for highway and bridge construction, energy-efficiency retrofits of homes and buildings, and a seamless national broadband infrastructure.

Long-Term Job Growth and Transformation via the "Jobs Bill"

Yet, to maximize its impact in the near-term and lay the groundwork for future prosperity, the "Jobs Bill" must fully embrace President Obama's vision for economic transformation fueled by investment in innovation-intensive industries which will propel exports and economic primacy of the US economy for decades to come. The US must aggressively grab the advantage and secure the leadership role in these fast-evolving global industries. The key technologies and industries that should be designated as top national priorities include: renewable energy / clean energy, mobile telephony, broadband computing, biotech and health care, water desalinization and clean water production, transportation safety, homeland security, recycling and waste management, and environmental protection and remediation.

Although there is already considerable activity in the US in these industries, the progress is far short of positioning the US as the dominant world leader in them. The "Jobs Bill" provides a prime opportunity to galvanize our aim, commit our resources, and accelerate our activity in these transformative industries. The level of commitment and support should be akin to that given to the "Manhattan Project" in the 1940s and space exploration in the 1960s.

President Obama reiterated the case for such a commitment, and the high stakes involved, during his State of the Union address last month, in the context of clean energy and energy efficiency: "I know there have been questions about whether we can afford such changes in a tough economy... But here's the thing -- even if you doubt the evidence, providing incentives for energy-efficiency and clean energy are the right thing to do for our future -- because the nation that leads the clean energy economy will be the nation that leads the global economy. And America must be that nation."

The importance of the "Jobs Bill" in advancing US long-term leadership and economic prosperity can be illustrated by envisioning the WTO trade negotiations of 2025 and 2035. The US will seek to secure fair trade and competitive advantages in industries with maximal worldwide growth opportunities in those eras and beyond. The question will be whether the US is trying to wrest a foothold from others, or be in the driver's seat. We must work TODAY to build the competencies, technologies, infrastructure, and supportive services that enable the US to lead in the high-growth industries of the future.

10-Point Program for Job Growth Now and in the Future

A program could be included in the "Jobs Bill" to propel near-term and long-term US job growth, exports, innovation, and economic leadership in the global economy. To be eligible for government assistance and benefits under this program, a company would have to be involved in one or more of the national priority industries identified above, and need to be engaged (or seek to be engaged) in at least one of the following activities:

(a) research and development of a new technology or service for which there is a high growth potential;

(b) manufacturing of a product utilizing a high-growth potential technology in connection with a patent or patent pending;

(c) implementation of a marketing and sales plan that would reach, or significantly expand penetration into, export markets with a demonstrable high-growth potential;

(d) execution of a business model that would bundle products and/or services relating to one of the targeted industries, by partnering with at least one other US-based company, for enhanced reach, scope, and impact in high-growth export markets; and/or

(e) fulfillment, order processing, inventory management, transportation, and/or delivery services for companies engaged in one or more of the targeted industries.

For qualifying companies - including start-ups, micro-enterprises, and existing companies - government assistance and benefits under this program would include:

(1) an enhanced Research and Development Tax Credit, for companies described in paragraph "a", above;

(2) an Expedited Review and Processing of Patent Applications, in the case of companies described in paragraphs "a" and "b", above.

(3) a Payroll Tax Credit for two years for each unemployed person hired by a company of any size, if the hire is directly and predominantly for the above activities;

(4) a Loan, for companies described in "c" and "d", above (re: exports) to pay the salary of new hires for one year, with such loans being repaid over the ensuing four years (which could include a requirement to retain the employee for at least one more year);

(5) Job Skills Training assistance for employees who are directly and predominantly engaged in the above activities;

(6) Technical Assistance to start-up companies and micro-enterprises for help in formation, incorporation, and otherwise establishing their company;

(7) expedited Processing Assistance with documents and procedures to enable exports;

(8) Technical Assistance with fulfillment, transportation, and delivery of exports; and

(9) an Online Partnership Development Match-Making Directory for companies that seek to access / provide value-added services from / to other companies in their industry, and for other companies to identify market opportunities that could justify additional hires;

(10) development of a Network of Business Parks throughout the US that are dedicated to accelerating the key national priority industries by co-locating many companies engaged in the same emerging industry so that participants can leverage each other's research, resources, and manufacturing and deployment capabilities, resulting in synergistic benefits for all participants (extended discussion of this proposal is found below, in blog post entitled "Job Creation as Job One: 3 Ideas for The Forum on Jobs and Economic Growth", December 2, 2009).

Achieving Compromise on the Public Option Through A Hybrid Solution

When baseball and basketball players went on strike in past years, they eventually went back to the field and the court by crafting a hybrid solution that met the essential needs of both players and owners, rather than one side winning an “all or nothing” victory. A similar approach for negotiating a hybrid solution could be valuable in resolving differences on health care reform.

Both the House and Senate bills offer myriad improvements to our nation’s current health system in terms of access to coverage, cost controls, health care quality, and insurance regulation. Yet, the fate of the “public option” remains an important, and contentious, issue. Although the House bill includes only a scaled down version – accessible only to the individual, family, and small business markets, which face the steepest premiums – insurance companies opposed it strenuously. They and others were, of course, successful in keeping the public option out of the Senate bill (for example, by the efforts of Senator Lieberman, who represents Connecticut, the nerve center of the insurance industry).

Insurance companies will rake in premiums from having millions of new customers, and they are fighting hard to keep these premiums exclusively within their domain. They suggest that they could not handle the competition that a public option would provide. But it is precisely that competition that would pressure them to restrain premium rates and rises, since the small group and individual markets are the most vulnerable to insurer pricing schemes.

A solution is still being sought which would satisfy the competition, coverage, cost control, and quality improvement rationales of the public option, while doing so in a way that would not allow the Federal government to function as a full-fledged insurer for this market (even though the government does fulfill this role with Medicare and Medicaid).

There is a solution to this quandary.

Proponents of the public option envision it functioning just like a private-sector insurance company, as one of the options accessed through the “purchasing exchange”. To do so, it would engage in a number of activities: (a) it would market the program, and pool together individuals, families, and small businesses who choose to enroll; (b) the Federal government would underwrite the program and take on the financial responsibility (i.e., assume the risk); (c) the government would establish the premium rates; and (d) the government would administer all aspects of the program, including collecting premiums, enlisting providers, and paying claims.

However, the goals of the public option could be achieved by fulfilling just some of these roles, and, in so doing, placating its opponents. A hybrid model could serve this market through a true public-private partnership between the government and the insurance companies, with a blend of roles:

1. the Federal government would market a “publicly-administered option” to individuals, families, and small businesses who are eligible to participate in the “exchange”, enroll those who select this option, and create a risk pool among those who would be covered by this option;
2. insurance companies that seek to cover enrollees would apply to the program to be a participating insurer under this program, and would submit its underwriting, coverage, and customer service plans to the program administrator, to ensure conformance with standards established by the administrator;
3. proposed premium rates would have to be approved by the administrator, and an insurer could not participate – nor, in the future, increase premiums – until the administrator approves the rate schedule;
4. enrollees in the “publicly-administered option” would select an insurer from among those that are approved for participation, pay their premiums directly to their chosen insurer, and interface with the insurer for all of their customer service needs and related issues;
5. participating insurers would assemble a provider network to satisfy all enrollee health care needs (in conformance with standards issued by the option’s administrator), manage all financial aspects of its relationships with providers (e.g., payment of claims and other forms of compensation), and transfer to the option’s administrator a small amount of premiums to cover the expenses incurred in executing the administrator’s role;
6. enrollees in the “publicly-administered option” could switch insurers during an annual open-enrollment period if they are not satisfied with their insurer for any reason (e.g., cost, customer service, the provider network, etc.); and
7. the option’s administrator would establish an ombudsperson and a review board for enrollees to resolve complaints and appeal decisions relating to the insurer’s practices and decisions.

This hybrid of roles would satisfy each of the objectives that are sought to be achieved by the public option, while still keeping the Federal government from becoming a direct competitor of the private insurers. Coverage would be expanded by virtue of element #1; competition would be enhanced by elements #2, #4, and #6; cost control would be advanced by elements #3, #5, and #6; and health care quality would be improved by elements #2, #5, #6, and #7. At the same time, the private health insurers’ role in the market as underwriter would be maintained by virtue of #2.

Although private insurers would still be the underwriters of policies under this hybrid, and they may also compete for business in the “exchange” as a stand-alone option, the “publicly-administered option” still offers considerable value to consumers. This option will ensure that the risk pool is large enough to minimize costs, premium rates and rises are scrutinized and approved by the administrator, customer service mechanisms are in place, the provider networks are sufficient, and that there is recourse to challenge practices and decisions which consumers find objectionable.

Bridging the gap between the House and Senate bills with regard to the public option is certainly challenging. However, the development of a public-private partnership for a “publicly-administered option” has the potential to satisfy a broad range of stakeholders and achieve sufficient support to enable the health reform legislation to proceed on to other issues.

A 10-Point Plan to Drive Down Health Care Costs & Expand Coverage

Without health care reform, premiums are expected to escalate dramatically in the upcoming years, pricing many Americans out of the market and into the ranks of the uninsured. There is also a rampant misconception that health insurance is stable and reliable, which is easily disproven by multitudes of coverage and treatment denials. Reform is just as essential for the sake of the insured as for the uninsured.

Objectives of Health Care Reform

Health care reform – including a palatable public option – is capable of achieving each of the key objectives which must be satisfied for a bill to emerge from Congress. #1: The plan must drive down costs for all Americans, all health care payors, and the overall health care system. #2: All Americans must have access to affordable, reliable health insurance, and quality, affordable health care. #3: Americans must retain their ability to choose among health insurance and health provider options. In conjunction with other components of the Senate and House bills, the ten elements below could meet these objectives and appeal to key legislators and constituencies.

Opposition to Health Care Reform

The opponents to meaningful reform mainly base their resistance on three misconceptions: (a) individuals, families, and small businesses are adequately served by the existing system and can fend for themselves; (b) market forces should be the sole driver of competition to private insurers, and no governmental action should be taken that could result in a decline in the market share of insurers that are not providing reliable, affordable coverage for all applicants in their coverage area; and (c) the Federal government should have no role in pooling risk and providing coverage even for Americans who are not being adequately and affordably served by insurers.

The first objection is rooted in the centuries-long debate on the primacy of the community versus that of the individual. Advocates of comprehensive reform recognize that all payors and providers are inter-dependent, as evidenced by the uncompensated costs of health care pushing up costs and premiums for both private and public insurance (e.g., higher costs of care lead to lower reimbursement rates to achieve cost savings, which result in higher premiums). Reform opponents often focus on their own coverage and care, believing that free market principles allow their needs to be fulfilled in isolation from the needs and payment mechanisms of others.

But it is an illusion for anyone to believe that the cost of their health care – whether public or private – is isolated from other cost and coverage factors. Whether or not they realize it, families, individuals, and businesses need competition and a system that affordably serves everyone, in order to stabilize the scope and cost of coverage. Currently, neither exists. Each of us is one diagnosis away from learning that we are not insulated from the failures of the current system. Buyers in the individual and small-group markets are neither empowered nor self-sufficient, due to risk pooling, the practices of insurers, and the inequality of bargaining power between small purchasers and insurers. The shortcomings of the today’s marketplace cannot be ignored.

The second objection is rooted in the absurd suggestion that private insurers, who need to generate profits, cannot compete with an option that is not designed to generate profits. That argument is self-defeating. If profits account for the disparity in premiums between the two, then profits are unjustifiably high, and the amount spent on health claims is irresponsibly low. An insurer that retains modest profits can compete well. But insurers that manipulate coverage and care decisions to ensure high profits will not be able to compete. Why should anyone defend the right of insurers to generate windfall profits at the expense of the families that they insure? Why would reform opponents want to limit our choices to the most expensive insurance alternatives, which are also notorious for denying care? These insurers have been escalating costs, and have caused great hardship for many Americans. They should not be rewarded. If the bad actors lose market share, the responsible insurers will benefit, along with the American people.

The third objection is rooted in denial of the intrinsic nature of insurance: the pooling of resources of the many to pay for the needs of the few. That is also a normal and regular role of government in many contexts. People pay into a collective repository – even if they do not need services at the time – in exchange for that repository paying their own expenses in the future when needed. For most Americans, the health care repository is a private-sector insurer, whereas for senior citizens and people with disabilities, the main repository is Medicare. People pay into a collective fund for Medicare while they are able to do so, and become beneficiaries years later. Whether health insurance is provided by private insurers or the government, the principles of communal pooling of funds are the same. Thus, anyone who supports Medicare but objects to Federal risk pooling and health insurance is being hypocritical.

Reform, With a Palatable Public Option, that Achieves the Three Main Objectives

Many legislators would prefer a public option that is maximally robust and extensive. However, to pass a reform bill, the public option should be constrained to the part of the market for which it is most needed, and must not exclude insurers that wish to compete with it. The following ten elements could be combined to achieve the three objectives, and gain legislative support.

(1) Private-sector and non-profit insurers that serve the individual and small-group markets would be aggregated into a marketplace exchange for eligible purchasers that is similar to the Federal Employee Health Benefits program. This component would be similar to what was proposed by the Senate’s “Gang of Ten” in early December, and would be administered by the government.

(2) Insurers in the exchange could offer low-premium catastrophic care plans, to provide families, individuals, and small businesses with a less expensive “safety net” just in case of a major health need. Consumers could choose between comprehensive coverage or a catastrophic care plan, which would be a lower-cost alternative for those who seek coverage just for major illnesses, and would alleviate the strain on health care providers from uncompensated care for major treatment.

(3) The public option would be in the exchange as just one of the many options for purchasers. Enrollment could be limited to individuals, families, high-risk populations, and small businesses (up to 50 or 100 employees, or under a payroll threshold). The eligibility of small businesses could mute some objections since their advocates maintain that they often cannot afford private insurance (even the opponents of the public option acknowledge that it would be less expensive). Insurance companies would benefit when high-risk persons enroll in the public option (their care is often more expensive). Large and medium sized groups and employers would be ineligible, continuing the major role of private insurers in this market. Although some oppose any coverage option that is not profit-driven, most would not mind getting a bigger bang for their premium buck.

(4) Health care practitioners who wish to participate in the public option would be required to meet new Health Information Technology (HIT) standards by a specified timetable that is sooner than that required for other providers. This would accelerate the adoption of HIT among providers who participate with both the public option and private insurers. Insurance companies would benefit because their providers would begin to use HIT – resulting in cost containment and administrative efficiencies for both providers and insurers – without insurers applying the same early efforts toward that transformation.

(5) All plans in the exchange – the public option, the non-profits, and the private insurers – would adhere to an “expense to premium ratio”. This ratio indicates the amount of premiums spent on administrative expenses rather than on claims for health services and treatment. If an insurer’s expenditures on overhead (including administration, advertising, utilization review, agent fees, corporate retreats, lobbying, and profits) exceed the specified ratio, a steep fee would apply. Insurers could avoid the fee by having a low ratio, signifying that premiums are paying for care, not disproportionately paying overhead. Use of “expense to premium ratios” would promote cost containment and consumer value, minimizing spending on activities that are devoid of benefit to consumers. The ratio is a strong tool for evaluating proposed hikes in premiums, deductibles, and copayments. It would apply separately to each line of business of an insurer, not allowing insurers to leverage and distort results among consumers by aggregating lines of business.

(“Expense to premium ratios” are a more accurate reflection of insurer behavior than “loss ratios” because “loss ratios” do not include insurers’ revenues from the investment of premiums. “Loss ratios” are cited by insurers because they erroneously create the impression that health insurers only have premium dollars, and no other finances. They allow profiteering and high expenses.)

(6) Since the 1940s, the McCarran-Ferguson Act has exempted insurers from most Federal regulation. This has created a patchwork of inconsistent state regulations for health insurers, and limited competition. It might also impair the effectiveness of the marketplace exchange: for example, the use of “expense to premium ratios” to enhance value for consumers and cost containment. Amending or repealing this law is necessary so that competition, cost containment, and reliable, affordable health insurance may thrive. Also, if health insurers were allowed to provide coverage nationally, as proposed by some Republican legislators, the outright repeal of McCarran-Ferguson would be essential.

(7) Claims administration – with each insurers’ distinct forms, processes, and rules – has become overwhelmingly time consuming and expensive for health practitioners. These problems would be solved by use of a single set of uniform, standardized forms and procedures for claims filing, and interactions. The system would be based on electronic filing, applied nationwide, and utilized by all providers, payors, and regulators. It would advance cost containment, facilitate evaluation of data to improve health care quality and treatment protocols, and magnify efficiency of the exchange. Providers and insurers who participate in the exchange could be required to adopt these systems first, ahead of the schedule for adoption by others, as a trade-off for the additional business that they would gain by joining the exchange. The cost savings and alleviation of burden would be incentives for others to embrace the standardized system.

(8) Rules should be developed that prohibit denials of coverage based on traditional underwriting schemes, and limit rate variances among enrollees in the exchange. The rules, which must apply to all plans in the exchange, would establish that premium rates are either to be constructed on the basis of Community Rating, Adjusted Community Rating, or tightly limited “rate bands” which allow only minor variances based on specified criteria.

(9) Consumers have been reassured that they can keep their health insurance and providers if they would like to do so. However, it is also vital to annually enable enrollees in the exchange to switch to a different insurer if they are not satisfied. The plans in the exchange should have the tightest controls against cost increases and coverage limitations, to enable continuity.

(10) Medical malpractice liability insurance and defensive medicine have played a role in the escalating cost of health care. It is important yet difficult to assess the justifiability of premium rates, due to the lack of data from liability insurers. Increased reporting from them is necessary, including premium rates and revenues, med mal claims made, claims defended, claims paid, court settlements reached. Reasonable regulation of premium rates would contain costs and enhance accountability, alleviating the burden on doctors, hospitals, and payors. Defensive medicine costs, on the other hand, will be reduced not by legal reform, but through the adoption of HIT. When electronic medical records and practice guidelines are fully implemented in the US, defensive medicine will be ameliorated by the access of providers to patient records of treatment, tests, and health history, as well as guidance from the aggregated data.

Job Creation as Job One: 3 Ideas for The Forum on Jobs and Economic Growth

President Obama’s commitment to job creation and revitalization of the economy is highlighted by his designation of job growth as a top priority for the Administration, and his Forum on Jobs and Economic Growth. In addition to the myriad efforts by his Administration to establish, implement, and accelerate initiatives for job creation, his leadership is amplified by his call to all sectors of American society for ideas and strategies that will further advance these objectives.

The dialogue is certain to address a wide range of issues, from access to capital and insurance to promotion of key industries and market development, and from small business incentives and micro-lending encouragement to tax benefits and trade enhancement. As a contribution to this national brainstorming session, the following three perspectives could also add significant value to our national effort to create employment opportunities in the short-term, and institute sustainable economic and job growth over the long-term.

1. Job Skills Training via E-Learning

Job skills training and workforce development are critical components in job growth and economic development. There is often a co-dependent “chicken-and-egg” relationship between the need for well-trained workers and the availability of jobs for well-trained workers, such that progress toward the two objectives necessarily must advance concomitantly. Companies are usually reluctant to establish or increase operations without assurance of the availability of qualified personnel to hire for such operations. Similarly, once people have gained high-value job skills, there is a need to place them in jobs in which they will be able to put their skills to remunerative use. Thus, it is vitally important that job skills training and workforce development resources be widely available, and be correlated with and calibrated to the proliferation of jobs and work opportunities. Online e-learning provides a highly scalable and relatively low-cost solution for dissemination of a vast array of job skills. Americans would be well served by Federal support for e-learning of job skills training that enables convenient access at a place and time of the learner’s choosing.

2. Information Technology and Business Skills for Competitive Advantage in the Global Economy

For maximal relevance to today’s 21st century information-based economy, it is increasingly necessary for new workers, re-trainees, and displaced workers to obtain information technology and business skills. With the acceleration of the global economy, digital-based skills have become a core competency in many industries and roles that are transitioning to advanced business methods, mechanization, and reliance on information technology tools. This trend is prominent in the manufacturing sector, which, in past decades, may not have embraced these developments as closely as in other sectors. Even more crucially, in the services sector --- including financial services, health care, IT and telecom services, fulfillment and delivery, etc. --- these skills have long been of paramount importance. Job growth in each of these sectors depends upon workers having contemporary IT and business skills, as well as the foundational capacity that will enable them to quickly achieve operational competency in the IT and business skills that are used by a specific employer.

This imperative was illuminated earlier this decade during the concern over “outsourcing”, by which many jobs were being relocated outside of the United States. As the global economy allows – and even promotes – the free flow of jobs to locations with lower operating costs, the key to success for US companies and job growth for US workers is the mass proliferation of advanced IT and business skills. With such skills, US workers and industries can remain pre-eminent in innovation, cost-efficiency, and value. These outcomes will continue to be the cornerstone for product development, service delivery, entrepreneurship, and new business models, each of which propel our economy, and, ultimately, are essential for job growth among people who can advance these objectives.

3. Development of Industry-Specific Technologies for the Future Economy via “Business Parks”

The Federal government can fulfill a critical role in developing and implementing strategies to accelerate job growth for skilled workers, due to its unique capacity and powers for policy development, resource coordination, stakeholder collaboration, and incentive creation. The Administration could convene a task force (comprised of government officials, industry leaders, university leaders, financiers, economic development thought-leaders, scientists, educators, and others) to chart the course of future innovations through accelerated and coordinated creation of “business parks” to catalyze technologies, products, and services that will become industrial leaders and revenue generators for decades to come. Deployment of these initiatives would have a strong impact on localized job growth in the near-term, and become focal points of our country’s global economic leadership in future decades. Some of the key steps include:

(a) identification of industries, products, and services with very high growth potential that are anticipated to address US and global economic and societal needs in the future, e.g., clean-tech energy production, resource conservation, clean water production including de-salinization, health care and biotech advancement, environmental remediation, recycling and waste management, high-volume food production, mobile telephony and computing, transportation safety, homeland security technologies, etc.;

(b) identification of stakeholders who have resources that could contribute significantly to development of those industries, products, and services, e.g., technologies, intellectual capital, financial capital, facilities, delivery or deployment infrastructure, end-product usage, etc.;

(c) development of conceptual frameworks for the coordination of resources in physical “business parks” that are dedicated to an individual industry, product, or service, so that participants can leverage each other's research, resources, and manufacturing and deployment capabilities, resulting in synergistic benefits for all participants;

(d) specification of components, inputs, and services with which each business park would be equipped, including high-tech communications and technology infrastructure (with fiber and wireless connectivity), energy-efficient facilities that are tailored to each business park’s needs, support services, and, possibly, environmentally-friendly affordable housing;

(e) identification of localities that would be appropriate for the siting of business parks, considering their access to facilities, infrastructure, research, intellectual capital, local and business funding, planning coordination, technology transfer, zoning variances, skilled workers, job skills training resources, manufacturing or production capacity, markets, leadership, etc.;

(f) identification of incentives, business relationships, and the legal framework associated with the business parks, e.g., ownership and partnership characteristics, sharing of patent and licensing revenues (including for the Federal government), tax incentives, establishment of enterprise zones, coordination with Federal science and research institutions, anti-trust waivers to allow for coordination of activities, procedures for accelerated initiation of operations to stimulate job growth and economic impact, etc.; and

(g) coordination of the activities and results emanating from the business parks with the industry stakeholders who are engaged in the products and services that are designated for development through this initiative.

USA vs. USA: HEALTH REFORM’S UNDERLYING DIVISION

The recent debates on health care reform in Congress and in town hall meetings have exposed a dramatic fissure in America. On one side are many who see the benefits of health care and health insurance becoming accessible to the uninsured, as well as lowering costs for everyone. On the other side are insured people who are concerned that any changes to the system will adversely affect the health care and health insurance that they already have. The proponents are highly focused on its long-term benefits, and are willing to do what is needed to ensure sustainability of the system. The opponents are highly adverse to short-term changes, even though the status quo will put everyone at risk (families, businesses, government, providers) from increasingly steep cost increases (both for health insurance and health care), and make the entire system vulnerable.

The Roots of Division

This divide illuminates a classic philosophical tension in American culture that has deep roots and even transcends politics, going to the heart of the American psyche. Each of the two dominant viewpoints has key characteristics. One group seeks linkages to, and success for, the larger community, and is amenable to reform to achieve it. The other group gives priority to the individual (and family unit), and is oriented toward the status quo, with the notion that, on their own, people earn prosperity over time. The current divide is similar to the 1820s’ battle between elitism and populism, the 1890s’ conflicts between “laissez-faire” proponents and muckrakers, the 1910s’ and 1920s’ disagreements between isolationists and those who favored global engagement, the 1930s’ success of “New Deal” concepts, the 1980s’ “trickle-down economics”, and the 1990s’ and 2000s’ debates between big and small government. A notable recent example was in the 1990s, when Hillary Clinton’s book “It Takes A Village” was countered by Republicans at the national convention who claimed that “it takes a family”.

The Cultural Division on Health Care Reform

In the context of health reform, rather than the division being crudely defined as a dialectic between Democrats and Republicans, it is actually the underlying philosophies that are at issue. Health reform is a microcosm of the centuries-long debates on the community versus the individual, and reform versus the status quo. Advocates of comprehensive reform recognize that all payors and providers are inter-dependent, as evidenced by the uncompensated costs of health care pushing up costs for the insured and government programs, which again affect the insured down the line (e.g., lower reimbursement rates in government programs, to achieve cost savings, then result in higher health care costs for the insured). Those who oppose major health reform focus on their own coverage and care, believing that free market principles allow their needs to be fulfilled in isolation from the needs and payment mechanisms of others.

These two views are intertwined. Individuals’ satisfaction with their choices and costs require cohesive policies and structures that enable each person to access reliable and affordable health insurance; and the viability of the American community requires that policies and structures allow for all individuals and families to choose and afford services that meet their quality-of-life needs.

Health reform is a natural arena for this conflict in philosophies to play out. The intrinsic nature of insurance is based on the pooling of the resources of the many to pay for the needs of the few. The underlying principle is that people pay into a collective repository --- even though they may not need services --- in anticipation of that repository paying their own expenses somewhere down the line when needed. For most Americans, the central repository has been the private-sector insurance companies, whereas for senior citizens and persons with disabilities, the primary central repository has been the Federal government (via Medicare). Medicare itself is based on everyone paying into a collective fund while they are able to do so, and then becoming beneficiaries of that fund years later. So, in essence, whether health insurance is provided by private insurers or by the Federal government, the principles of communal pooling of funds are at the core.

Flashpoint: The Federal Option

The debate over the “Federal option” thus comes down to a question of how to pool and administer the collective risk. Insurance companies oppose it because it may draw away the premiums from some lower-risk, and therefore lower cost, sectors of society. Insurers appreciate Medicare, because older Americans are the most costly group to ensure, as they need the most health care services and pharmaceuticals. It is fine with them if the Federal government picks up the tab for them. Similarly, insurers do not mind Medicaid, because most recipients would not be able to afford health insurance on their own. But insurers want to maintain their flow of premiums from healthier groups. Insurance companies have mobilized many to oppose health reform, and especially the Federal option, because it is in their interests to do so. It is not because insurance companies would not be able to compete with the Federal option, but rather, that they would miss out on some of the premiums from people who are not expensive to insure.

It has been argued that private insurers, who need to generate profits, could not compete with an option that does not need to generate profits. But that argument is self-defeating. If profits account for disparity between the two, then insurers’ profits are unjustifiably high, and the amounts being paid for health services are irresponsibly low. For an insurer that structures their operations for profits at a reasonable level -- which can be achieved through smart investments of premium dollars before they are needed to pay for care -- competition would not be a problem, since they provide good value for premiums paid. But for insurers that manipulate coverage and care decisions to ensure high profits, competition will, indeed, be difficult. Why should anyone defend the right of private insurers to generate windfall profits at the expense of the families that they insure? These insurers have been escalating costs, and have caused great hardship for many Americans. They should not be rewarded. If the bad actors lose market share, the responsible insurers will benefit, along with the American people.

It is an illusion for any individual or family to believe that the cost of their health insurance or health care is isolated from other cost and coverage factors. This is the case for all risk pools, managed by insurers or by the government. Family premiums escalate according to the cost, underwriting, risk-spreading, and administrative expense decisions of their insurer. The premiums which are set by each insurer are also affected by the health care marketplace, and are thus impacted by the uninsured, other insurers, Medicare, Medicaid, and other payors. Whether or not they realize it, the ability of individuals, families, and businesses to maintain the level of coverage that they desire, and maintain some semblance of restraint on premium increases, is dependent upon competition and an overall system that affordably covers and serves everyone. Currently, neither exist. Anyone who thinks that they are insulated from the effects of the overall system needs only to be diagnosed with a serious illness or condition to learn otherwise.

If no one ever got sick, then everyone’s costs would be low. But, since people do get sick, insurers have a choice of paying for those costs in either of three ways: (a) to deny coverage or treatment; (b) to spread the costs via premiums among those who they insure; and (c) to minimize profits and administrative expenses to pay for those costs. All too often, private insurers opt for the first two choices, and skip the third. A Federal option would spread the costs via premiums, because it would not deny coverage or treatment, profits would be irrelevant, and administrative expenses would be kept low. Thus, when insurers complain that they would not be able to compete with a Federal option, they are really saying that they are not prepared to responsibly manage risk and costs as well as the Federal government would. However, private insurers who provide good value for premiums paid would attract more people, and in so doing, expand their pool of insured people amongst whom to spread their risk and costs.

How Does This Impact the Current Debate on Reform?

Lawmakers should recognize the underlying philosophies of both the proponents and opponents of reform, as well as how their views relate to the Federal option.

The first imperative is to raise awareness of the basic nature of health insurance: that it involves a communal sharing and spreading of the risk and costs, whether by private insurers, the government, or anyone else. The illusion of families and businesses being isolated and insulated from the overall health system must be dispelled. Much of the current opposition is based on this misunderstanding.

Second, it is not enough to explain that people will be able to keep their insurance despite reform. This approach perpetuates a misconception by suggesting that their health insurance is stable and reliable. It is not. It is vital to speak directly to the opponents by explaining that they are currently at risk of being denied coverage and treatment. It is also imperative to explain that, without reform, their premiums will escalate dramatically, pricing many of them out of the market and into the ranks of the uninsured. Since opponents are more likely to focus on their own status quo rather than the long-term needs of the broader American community, reform must be explained as essential for their sake, rather than for the uninsured or people already victimized by the system. Individual liberty to choose affordable, reliable health coverage is in jeopardy.

Third, the Federal option should be discussed as just an alternative pool for families, individuals, small businesses, and high-risk people. This would place the focus on those who would be served, rather than those who would be serving them. It would merely aggregate a pool of people, just like insurance companies do. Whereas the “Federal option” conjures images of a “big government” program, an alternative pool emphasizes that it is basically just another source of insurance. Since opponents of reform tend to focus on the rights and choices of individuals / families, an alternative pool that is designed to meet their needs would appeal directly to them. For those who are uninsured or facing very high premiums (especially if they are covered through the “individual market”, rather than the “group market”), they could join the alternative pool. If a small business cannot afford premiums charged by traditional insurers, they could more likely afford the alternative pool. The main distinction would be that it would not pursue profits. Although some opponents might object to any coverage that did not provide profits to a company, most people would not object to getting a bigger bang for their premium buck. The alternative pool could also offer a low-premium catastrophic care plan, to provide individuals, families, and small businesses with a less expensive “safety net” just in case of a major health need.

Fourth, since it is likely that any bill that reaches the President’s desk will include some compromises (e.g., narrowing the Federal option’s scope, enrollment eligibility, etc.), reform should be promoted to proponents in terms of the many gaps that it will fill. Since reform proponents are more likely to focus on the overall American community, the tightening of the overall fabric of the system should be embraced. Even without becoming airtight, the new system would prevent denials of coverage and care, greatly expand the pool of people who can afford coverage, increase competition, and decrease uncompensated care. These advances would lower costs for all payors of health insurance and health care services, including families, businesses, and the Federal government.

Conclusion

The heated debate on health care reform is an extension of a philosophical division about the role of government in our lives that can be traced back to the early days of our nation. Recognition of these views is vital to successful reform. By directly addressing these underlying principles, reform can appeal to many of their adherents, and concerns that have been raised can be alleviated.