Buttigieg's McKinsey work included the financial carnage at Blue Cross and Blue Shield

It is going to be quite interesting to see how long Buttigieg survives in the presidential race (or continues to have a political career at all) now that he’s released the names of his clients at the evil empire of corporate consulting and progressive boogeyman, McKinsey & Co.

Buttigieg was always a bit of a laughable candidate, kind of like Beto 2.0. He’s the mayor of a city about the same size of the small beach town we live in, and he suddenly wants to be leader of the free world. From debating landscape designs for street medians to dealing with Iran. Good times.

He’s also the first presidential candidate that goes around bragging about his six-figure student loan debt and low (negative?) net worth. If it weren’t for the fact that he’s sharing the stage with someone who pretended to be a person of color for 70 years, a senator who ate a salad with her plastic hair comb to shame a staffer for not bringing her a fork, an old dude who likes to sniff women’s hair, and a billionaire who wears the same plaid tie every day as a matter of principle, he’d seem like the strangest candidate up there.

The Atlantic was quick out the gate tonight with a fawning article trying to put lipstick on the McKinsey pig. But it’s not going to work. In fact, knowing the clients he worked with, Buttigieg is now probably the most unelectable candidate of the entire batshit lot, including Fauxcahontas.

Top on his list is Blue Cross and Blue Shield in Michigan. In the Atlantic piece, Buttigieg explains that his work for the company was just “math.” As if math in financial analysis is some abstraction like the blackboard scratching of theoretical physicists, which may or may not have import in the real world. He worked on nebulous things like “efficiency” and “cutting costs.” Hmm, what costs organizations money? Especially a health insurer? Oh, right, jobs and people who make heavy claims on their insurance. What’s another term for what those people have? Oh right, pre-existing conditions. And how do you get an insurer to have more money on hand? Oh, right, by jacking up premiums. Do you think that is what Buttigieg’s team recommended?

The work of Buttigieg’s team at McKinsey was actually the subject of a report by the Michigan Attorney General, which you can see here: Profits Over People: The Drive to Privatize and Destroy the Social Mission of Blue Cross and Blue Shield.

Remember that this guy is running on fixing health care policy. It’s literally the only public policy issue that he has a track record in for voters to consider, and that track record was brutal for ordinary people in a state struggling with the catastrophic loss of its manufacturing industry.

A former (reformed?) health care executive went on the following rant about what McKinsey did with Blue Cross and Blue Shield:

BREAKING: As a former corporate exec who worked with McKinsey, I may be able to shed light on one of @petebuttigieg’s unnamed McKinsey clients, and why it’s very significant in this campaign.
(Note: I have not endorsed anyone in this race, nor do I intend to) 1/13

When I was a health insurance exec, my CFO had McKinsey on retainer. Every year or so, especially when one division or another wasn’t making enough profit, McKinsey would be brought in to “assess” current operations. (2/13)

Those of us who knew about McKinsey’s involvement at our insurance corporation knew it would lead to “cost cutting.” That’s consultant talk for laying off workers, offshoring, and hiking rates. The McKinsey efforts would have code names because it had to be kept secret. (3/13)

Now what does this have to do with @petebuttigieg? In his description of his McKinsey work, he says he worked in Michigan at a “health insurance provider… performing analytical work… identifying savings in administration and overhead costs.” 4/13
 https://medium.com/the-moment-by-pete-for-america/my-time-at-mckinsey-466f058e9401 …

To an old health insurance exec, those are code words that translate roughly to cutting costs through layoffs, restructuring, and potentially denying health coverage to those in need. 5/13

Important: You’ll notice @petebuttigieg describes his McKinsey insurance client as “a nonprofit” insurer. So that means it was a different kind of company, right? No. “Nonprofit” insurers behave just like “for-profits.” In fact, you might not be able to tell them apart (6/13)

Blue Cross Blue Shield of Michigan is a “non-profit” health insurer, that fits the description of the @petebuttigieg client. Its financials in 2007 were not great, which is when execs call in firms like McKinsey to come up with tactics to right the ship. 7/13

Based on this article below, BCBS laid off hundreds of people and increased premiums dramatically not long after. Those premium increases likely led to a lot of people losing their insurance. (8/13)
 https://www.crainsdetroit.com/article/20090118/SUB01/901190322/blue-cross-seeks-double-digit-rate-hikes-layoffs …

If indeed the @petebuttigieg client was Blue Cross, this report by the Attorney General of Michigan in 2007 has a lot to offer. The title: “Profits over People: The Drive to Privatize and Destroy the Social Mission of Blue Cross and Blue Shield” (9/13)
 https://www.michigan.gov/documents/ag/Blue_Cross_11.29.07_217273_7.pdf …

If it wasn’t Blue Cross, it would have to be another big insurer to be able to afford McKinsey. They don’t come cheap. As I recall, my company paid them a monthly retainer of $50K. And paid more for big special projects with code names. (10/13)

Why is this relevant to 2020? I’ll leave analysis of @petebuttigieg’s transparency, or his potential role in rate hikes and layoffs, to political experts. What I can speak to is how this experience might lead him to defend and protect health insurance companies now. (11/13)

Pete is fighting to preserve the role & profits of health insurance companies, spending huge sums on ads slamming plans to rein them in. I’ll be watching to see if my former insurance colleagues send him big campaign checks. He’s probably one of their favorite candidates (12/13)

As I know firsthand, insurers intentionally deny coverage to Americans, to hoard their profits. The result is people dying and millions in medical bankruptcy. Pete’s plan protects and preserves this very system. Now we may know why. (13/13)

This is just one of his clients. Crikey.

I’ve joked for a while that the Democratic primary has been like the children’s song… “take one down, pass it around.” There is no person who clearly deserves to be a front-runner, so the electorate keeps trying available candidates on for size. Usually the momentum of the current darling lasts for a few weeks, but fear Buttigieg has now been passed around. This was faster than folks discovering that Kamala Harris put many undeserving people in prison. (They didn’t even get to the crime lab that falsified data to get convictions before her candidacy was effectively over.)

Where were regulators when PG&E caused over 400 fires? The same place they were when a PG&E pipeline exploded.

The Wall Street Journal has an excellent article today asking a question I have been asking for a long while now: PG&E caused over 400 fires in 2018. Where were the regulators? The answer, which has been obvious for some time, is that the California Public Utility Commission (CPUC) prioritized user rates and green projects over the safety of California residents and their property.

As I noted in an earlier blog post, the transmission line that caused the deadliest fire in California history last year was constructed in 1921 and had last been inspected in 2001. California is witnessing a systemic failure both of its grid and of its governance structure.

But the details of how this situation came to be are probably uglier than you’d think.

Utilities throughout the country have a social contract with the residents they serve collectively: The utility gets the pricing power and economic security of having a natural monopoly. Residents, via their government, get to subject the companies to higher levels of supervision, to ensure that prices remain relatively fair and the community is not faced with a long period without essential services. The CPUC has failed spectacularly on both counts to maintain a balance between corporate interests and the interests of the people.

Early on in the WSJ article, the reporters bring up the revolving door between California utility companies and the CPUC. The term “revolving door” refers to a situation where employees from a company take jobs at the government agency tasked with regulating that company and vice versa. Revolving door situations tend to destabilize an industry over time. Other examples of revolving doors would be folks from Wall Street going to work for financial regulators during the Bill Clinton and George W. Bush administrations, thus bringing about the financial crisis, or the hundreds of Google employees that found work within the Obama administration, which has given us a highly politicized tech industry where some people feel targeted online for their personal beliefs.

The revolving door between California utility companies and the CPUC is nothing new. This is from a 2012 column in the San Francisco Examiner, Revolving door between CPUC and PG&E must shut:

Several current and former CPUC officials have intimate connections with the energy utilities they are supposed to regulate. Commission President Michael Peevey is a former CEO of SoCal Edison. The agency’s top lawyer, Frank Lindh, worked at PG&E for 16 years. Delaney Hunter, a former CPUC government affairs chief, became an energy lobbyist in 2008. Former Executive Director Steve Larson left the CPUC in 2007 to work at a natural gas company. Ex-Commissioner Jessie J. Knight now leads San Diego Gas & Electric.

CPUC officials deny there is a conflict of interest, pointing out that the CPUC has imposed more than $500 million in fines on utilities in the past 10 years.

“We’re a long way from being a ‘cozy regulator,’” said CPUC Executive Director Paul Clanon.

This is hard to believe, particularly when a yearlong National Transportation Safety Board investigation of the San Bruno explosion concluded that lax oversight contributed to the disaster.

When CPUC staff discovered problems, as they did in an audit months before the San Bruno blast, they failed to bring the utility before the commission for months. And then the commission often did nothing.

NTSB Chairwoman Deborah Hersman said PG&E “exploited weaknesses in a lax system of oversight” and regulators placed “blind trust in an operator that doesn’t deserve that trust.”

How did such a grotesque revolving door come to be? Well, you can ask previous California governors, as they were the ones responsible for appointing and vetting these people according to law. Safety was less of a concern at the statehouse than finding people who would respond well to political mandates surrounding environmental populism.

A 2015 expose in The Mercury News (whose readership is situated within the path of many recent fires) listed specific cases where CPUC officials had intervened to benefit the companies they were supposed to be regulating:

Over the past 20 years, a number of high-ranking officials at the state Public Utilities Commission — including its top boss for 12 years, Michael Peevey — joined the agency after working for utilities that the PUC regulates, or landed jobs in the power industry after stints at the PUC. That includes at least two current staff members whose emails with utility executives were among tens of thousands that revealed the cozy relationship between the agency and utilities, including PG&E.

Reform proponents point to several examples to argue that stronger rules are needed to shut or at least slow down the door:In 2008, Peevey intervened in a rate case involving his former employer, Southern California Edison, and the utility ended up with hundreds of millions of dollars more from ratepayers.

In several instances, PG&E executives who came from the PUC worked closely with their former colleagues to shape policy and influence decisions to set the utility’s rates, and they often received advance notice of pending action by the PUC.

Current PUC staffer Marzia Zafar, a former executive at an energy company, bantered with utility officials about shutting off the microphone of a long-winded PUC commissioner, and joked about returning to her old job, a sign to critics of what they say is the too-close relationship between regulators and the regulated.

“Peevey created an atmosphere at the PUC where it was known that if you serviced the needs of the utility industry, you would be advantaged at the PUC or you’d get a job in the utility industry,” said former PUC Commission President Loretta Lynch. “The revolving door really perverts the purpose of the PUC. And the ones who inevitably lose in this are the ratepayers.”

Because the utility companies are renting the people at the top of the bureaucratic hierarchy at their regulator, they have control over the entire structure. These folks are not going to hire or continue to employ people who have a gotcha attitude toward the utilities. This is how you end up with a situation where a transmission line has not been inspected for nearly two decades.

The WSJ quotes a retired administrative law judge for the commission, who complained that there was no one internally at the CPUC who could figure out the weather events that posed the highest risk situations. That would involve a level of critical thinking that regulatory capture precludes.

Government consultants in the past had highlighted concerns about the state caring more about environmental populism than the safety and stability of the grid:

Utility commissioners, appointed by California’s governors, have focused much of the past two decades on implementing politicians’ increasingly ambitious goals to reduce the state’s carbon footprint by requiring utilities to buy more wind and solar power.

Those efforts were largely successful in pushing the utilities toward renewable power, turning California into a green-energy leader. But now, as state fire officials link outdated PG&E and Southern California Edison equipment to an increasing number of destructive fires, the CPUC faces criticism it should also have prepared the state for the rising wildfire threat.

In 2013, a consultant interviewed CPUC staff about the agency’s safety-enforcement efforts and issued a report concluding the safety division received less money and staffing than others focused on delivering green energy and setting rates.

The report stated: “There has been little attention and limited resources directed toward reliability, and even fewer toward safety, by the Legislature and the Commissioners.”

Several of its safety auditors and other staffers have moved into roles at PG&E and other utilities in recent years to oversee the functions they were once charged with regulating.

When Gavin Newsom became California’s governor, he moved a previous appointee of Jerry Brown’s, Marybel Batjer, to the utility regulator to supervise a restructuring. Before Ms. Batjer decided to work in government, she was an executive at Caesar’s Entertainment Corporation in Las Vegas. Because why hire, you know, an engineer or something, when you can have someone who used to run a casino? This is the kind of shit that happens when literally the only thing you care about is politics.

The WSJ provides a long history of the state’s love affair with green contractors to the peril of the safety and stability of its existing infrastructure:

The 1,200-employee CPUC, whose roots trace to 19th-century efforts to check railroad tycoons’ power, is the nation’s largest state-utility commission. The next largest, Virginia’s, has about 625 employees to regulate utilities and other industries, according to the National Association of Regulatory Utility Commissioners. California’s commission oversees a range of industries, including telecommunications and ride-sharing companies like Uber Technologies Inc.

From the early 2000s, the commission’s focus was on setting rates and implementing Sacramento’s renewable-energy goals. Starting in 2002, three consecutive governors, two Democrats and a Republican, signed bills ratcheting up the percentage of wind and solar power utilities had to buy.

These mandates required investor-owned utilities such as PG&E to change their mix of generation, effectively phasing out burning coal and lowering reliance on natural gas while signing contracts to buy electricity from new solar and wind farms. The CPUC oversaw these deals, as well as figuring out how to integrate thousands of new rooftop solar installations.

“Was there a considerable amount of resources placed on policy? Yeah, there was,” says Timothy Alan Simon, a commissioner between 2007 and 2012 and now a utilities consultant. “It’s a challenge to balance between the safety aspects and the need for policy deliberation.”

Michael Peevey, a former Southern California Edison president, and CPUC president between 2002 and 2014, was a vocal champion of renewable-energy policies. Now retired, he says the regulator was large enough to focus on safety and renewables simultaneously but that it was tough to get Sacramento lawmakers excited about funding safety.

When compared with eliminating coal and adding solar energy, he says, “Safety is not a glamorous thing.”

Got that? The California’s utility regulator was being run by a former utility executive who made a conscious decision to prioritize green projects over safety because politicians only care about bragging about green projects. They don’t care about essential government services. Dozens of people died over this. Many thousands of people have lost their homes and become uninsurable over this.

But it wasn’t just about green projects being sexy. It was also about money. California governors continued to appoint these people because they represented some of their largest donors:

PG&E was among nine corporations that made the maximum $58,400 contribution to Democratic Gov. Newsom’s 2018 campaign. It was a major contributor to the gubernatorial campaigns of Democrat Jerry Brown and Republican Arnold Schwarzenegger before him.

The company reported in a federal court filing earlier this year that it made $5.3 million in contributions to candidates, political parties and political-action committees in 2017 and 2018. The top recipients were the state’s Republican and Democratic parties, which each received more than $400,000, according to campaign-finance records …

Those political donations were rewarded with an ever larger sandbox to play in:

The commission’s budget for regulating utilities was roughly $200 million in the 2018-19 fiscal year, up from $98.5 million in the 2015-16 year, a budget that funds all activities related to the oversight of utility companies, including inspections, rate-setting, auditing, writing reports, doing investigations and other bureaucratic tasks—but that budget doesn’t fund its regulation of other industries. The CPUC has historically struggled to find sufficient resources to conduct safety inspections and investigations, despite a long string of California utility disasters that have suggested the need for closer oversight.

Of course, the missing piece there is that CPUC officials stopped talking to lawmakers about funding for safety because safety is boring. You aren’t going to get an appropriation for something no one cares about. You can’t blame a lack of funding when you are the reason for the lack of funding. California has had massive budget surpluses in recent years. The money was there.

The CPUC safety culture (or lack thereof) became a major focus of scrutiny after the 2010 San Bruno explosion. San Bruno is a suburb of San Francisco. In September of that year, a natural gas pipeline operated by – y0u guessed it, PG&E – ruptured, killing several people. The explosion was so significant that it registered on the Richter scale.

PG&E’s handiwork in the San Bruno explosion. This used to be a residential neighborhood.

Back to the WSJ:

Lawyers for San Bruno, who were suing PG&E following the explosion, uncovered evidence commissioners had engaged in back-channel communications with PG&E executives, which was supposed to be banned under the commission’s rules. Thousands of emails were made public that raised questions about whether the CPUC was too cozy with PG&E.

After an investigation, the commission last year fined PG&E, which admitted wrongdoing, $97.5 million for improper communications with its own officials.

Among those involved was Mr. Peevey. Four months before San Bruno, the commission’s then-president had invited a PG&E executive to his house for dinner. “No matter the menu,” he wrote, “we have some great bottles of Pinot to drink.”

Mr. Peevey says he extended the invitation upon running into the executive at a grocery store near his home. They discussed the company’s politically unpopular effort to push a failed ballot initiative that would have made it harder for local governments to form electricity-buying authorities, he says, calling the meeting “pretty innocent.”

At the end of 2014, then Gov. Brown appointed Michael Picker to succeed Mr. Peevey as president. Shortly thereafter, the commission fined PG&E $1.6 billion for negligence in record-keeping and other problems that led to San Bruno, the largest penalty ever levied against a utility in the state.

Mr. Picker pressed the agency to consider going beyond imposing fines to hold utility executives accountable for operating safely. He opened the 2015 investigation into PG&E’s safety culture and pushed to strengthen the commission’s approach to safety regulation. He declined to comment.

Last month, Mr. Picker expressed frustration that the CPUC was tasked with enforcing safety in addition to overseeing rates, which he saw as the regulator’s main mandate. “Utility commissions across the country were designed for one purpose, but now are expected [to] tackle everything,” he wrote on Twitter.

If it weren’t for PG&E’s history of leaving death and destruction everywhere it goes, this would be an entertaining remark. The CPUC has over a thousand employees, and its former head thinks it is impossible for them to handle more than financial analysis that a junior high student could do on a basic calculator. It’s just unfathomable that they should be concerned with stupid things like safety too. The struggle is real, y’all.

It took the regulator with over a thousand employees 5 years to map statewide fire risk. It took them over a year to review a consultant report on their safety problems, and then they decided to do nothing about the report’s recommendations until several years had passed and they needed something to grab onto after PG&E caused the deadliest wildfire in California history under their supervision:

In 2012, the regulator had launched an effort to map high-threat fire areas throughout the state, but the maps weren’t completed until the end of 2017. By that time, a wave of wildfires in the state’s wine country had killed 44 people and burned more than 6,600 homes. State fire investigators later determined that 18 of the fires, responsible for half the deaths, were started by PG&E equipment; the company concurred.

As part of the 2015 probe into PG&E’s safety culture, a consultant produced a report in May 2017 that spelled out the utility’s failings and made recommendations that involved increasing field training and supervision, hiring leaders with stronger safety qualifications and improving risk analyses.

The commission spent more than a year evaluating the report, and it didn’t vote to adopt the recommendations until last November, after the Camp Fire killed 85 people and destroyed the town of Paradise in the Sierra Nevada foothills. State fire investigators later linked the fire to PG&E equipment, a conclusion with which PG&E concurred.

How much of a disparity was there between green projects and maintenance expenditures? According to Forbes, in 2017, the year before the Camp Fire, PG&E spent $44 billion on purchase agreements with renewable providers versus $1. 5 billion on maintenance for their entire grid. And policymakers cheered this decision-making. Jerry Brown signed into law Senate Bill 100, which would remove fossil fuels from California’s grid by 2045. PG&E was visionary in managing its budget!

It is not a mystery how California ended up in the crisis it is currently in. It’s also not a mystery that this is a systemic problem. California’s infrastructure can be divided into two categories: (1) infrastructure that has failed, and (2) infrastructure that is about to fail. And judging from my personal interactions in the past with water and sewer utilities in California and their political radicalization, the state has probably repeated this issue across the board.

One generation. That’s all it takes to fuck up a good place.

If the story of this regulator scares you, just imagine: the same electorate that put these people in power also want the government to control the entire health care industry. What could possibly go wrong?

New York lawmakers try their best to spin Amazon lease

Amazon has decided to lease 335,000 square feet of office space in New York City after famously ditching its plans to build a second headquarters in the city. According to Amazon, the company’s move will create 1,500 new jobs in the city.

New York lawmakers, who were personally responsible for destroying the headquarters deal over tax incentives, were quick to take credit for the lease. See, the company will do business here without tax breaks! Our philosophy of cranking up taxes on the “rich” and breaking the state budget on social services is actually good for the economy! We can math!

Won’t you look at that: Amazon is coming to NYC anyway – *without* requiring the public to finance shady deals, helipad handouts for Jeff Bezos, & corporate giveaways.

Maybe the Trump admin should focus more on cutting public assistance to billionaires instead of poor families. https://t.co/BbqhXbB9MM— Alexandria Ocasio-Cortez (@AOC) December 6, 2019

Me waiting on the haters to apologize after we were proven right on Amazon and saved the public billions https://t.co/AC64pG0nZI pic.twitter.com/xzCepkX4AV— Alexandria Ocasio-Cortez (@AOC) December 6, 2019

The Amazon headquarters would have brought 25,000 new jobs to the city, with most of them being high-level, high-wage jobs. Instead, New York City is getting a small fraction (1,500) of the original plan and they are getting marketing folks. Yay?

They are also talking about Amazon leasing space there as if that makes them special. Amazon is buying up properties across the country at a pace you wouldn’t believe.

If you look at Amazon’s annual 10-K filing with the federal Securities and Exchange Commission, Amazon is currently sitting on 288 million square feet of real estate, including offices, warehouses, and data centers. The company adds 70 million+ square feet to its real estate portfolio every year. Congratulations to New York City on capturing 0.05% of that goodness. Boy, you sure know how to play the game.

Telling Amazon to pound sand over bringing a headquarters to the city and then declaring victory because you got a 335,000 square-foot lease is batshit. Telling them to take their corporate executives elsewhere and then rejoicing because you got marketing grunts is batshit. But such is the logic of Millennials who hate The Man.

Amazon can’t afford to leave any region of the country fully ignored. They are in the business of logistics. The company was never going to fully stop investing in New York City over the headquarters war. But that’s not the same as saying that Amazon is making New York City its most privileged location.

We are at a very interesting point in American economic history, where theses about how important tax structure is to people and corporations in choosing where to live is being actively tested. So far, New York’s tax structure has been a major liability for commerce in the state. To suggest otherwise is fake news.

Peloton's hilarious market sell-off

The other day, I was watching television and a commercial for the American Cancer Society came on. It had a woman with a bald head covered in a scarf talking about how she had never considered how important the American Cancer Society was until she was diagnosed with cancer. She listed all the great things the American Cancer Society does for her – they give her rides to treatments, they give her places to stay near her doctor, and so on. She concludes with the plea, “I need these things like you don’t know. But now that you know, please give [money to the American Cancer Society].”

I had seen that commercial many times before, but now that it is an endless repeat cycle for the holiday giving season, I finally noticed the small print. The woman talking about all the great things the American Cancer Society has done for her is an actress. She doesn’t have cancer. She’s not using American Cancer Society resources. They aren’t helping save her life. They are paying her to tell a story that seems real so people will send their nonprofit money.

That’s really strange, I thought. Why does a nonprofit even need to use an actor to beg for money on television? Don’t they have a bunch of real people with compelling real stories to tell? Are real people with cancer not pretty enough for television? If viewers see a little old lady who just had her breasts cut off, does that make them less likely to donate than a bald model talking about her struggles from her trendy bungalow?

Marketing is an awful sport.

When I saw all the headlines about Peloton this week, like most people I went searching for a video of the “sexist” commercial. I was expecting it to be really bad. A husband fat-shaming his wife, whatever. Instead, it was – well – boring.

It wasn’t any different than any of Peloton’s other marketing efforts. The most offensive aspect of it is conspicuous consumption. Most of Peloton’s advertisements showcase expensive real estate. Look at how rich I am. I have a room in my apartment just for my expensive stationary bike. And that room has sweeping views of the Upper East Side. My fitness room was in Architectural Digest last year, the same issue with Anderson Cooper’s vacation house in Peru.

This isn’t really special in the marketing industry. Folks in marketing have a term for Peloton’s audience: aspirationals. People who are not wealthy but crave status. They will spend $2,000 on an exercise bike just to signal the wealth they don’t have. And people who are not celebrity skinny, but they will pay to meet with a personal trainer one day a week before going to Krispy Kreme. Emphasis on pay. Those people don’t want to see people who look like them and that’s precisely why the marketing works.

Like Harvard buying the SAT scores of kids they know they are going to reject so they can send them marketing materials, coax them to apply only to be rejected, and keep their exclusivity statistics high, Peloton markets the lifestyle of the rich and skinny to ordinary Americans. They aren’t doing this because they are sexist. They are doing it because they are in the business of envy.

I guess it is possible to get worked up over that, but I think the American Cancer Society’s fake cancer stories are far less ethical marketing endeavors. And totally unnecessary, as there are not many people in the country who have not been impacted by the disease in some way or another.

But Peloton’s stock fell over 15% in the course of three days because people on Twitter suddenly became angry over the existence of fitness models. $1.5 billion was erased from Peloton’s market value. Talk about buy the dip.

People are ditching New York for lower-cost states, so New York lawmakers want to raise taxes even higher

New York currently faces a massive structural budget gap. The state is not bringing in enough revenues to fund its programmatic spending binges. And on top of that, the state is losing population to low-tax states like Florida. This exodus includes some of the state’s highest earners, corporations, and investment managers. Data suggest that the majority of households leaving New York for Florida have incomes over $150,000.

The state’s budget gap for the current budget period is $6.1 billion. Of that amount, $4 billion comes from the state’s Medicaid program, which provides health care for low-income households.

New York’s political climate ensures that the state keeps expanding the benefits provided through the program with no real concern for how to pay for them. The state’s Medicaid program already costs more per capita than any state in the country.

New York’s fiscal crisis is also distinguished by the fact that it is occurring during a robust economy. Usually programs like Medicaid encounter problems during recessions, when enrollment balloons and revenues decrease. Right now, enrollment in New York’s program is stable and they still can’t afford it. “Can’t afford it” is something of an understatement, in fact. This suggests that New York will be in major trouble during an economic decline.

Now, what do think New York is looking at doing in this situation? They have droves of high earners (i.e. their tax base) leaving the state for lower-cost destinations. They are watching the cost of their programs climb. Do you think they are going to cut back on spending?

Nope. The speaker of the state’s assembly says the legislature wants to raise taxes in New York even higher:

Democratic State Assembly Speaker Carl Heastie (D-Bronx) said Tuesday the only way to combat the mammoth $6.1 billion budget deficit is to raise taxes.

“This is gonna be a tough budget year … unless money’s gonna fall from the sky,” Heastie told reporters in Albany.

“For us in the Assembly, we always believe in raising revenue.”

We always believe in raising revenue. Can’t you just picture the economic development bureaucrats in Florida laughing their asses off at this? From the golf course, naturally.

California decides to blow up its market for homeowner's insurance

A few weeks ago, I wrote a post, Could Wildfires Set Off Another Housing Crisis in California? Some Thoughts on the Insurance Market. In it, I argued that California has a major problem looming as residents in fire-prone areas (which is an ever-expanding category) are being priced out of private market insurance policies or being denied them altogether and the state government’s insurer of last resort is leaving homeowners under-insured. Maintaining insurance coverage at a specific level is usually a term of mortgages. Without insurance, the bank can (and will) foreclose on a property. A loan is only as good as its security.

Last night, a friend in California sent me an article from the Los Angeles Times, California bans insurers from dropping policies in fire-ravaged areas. Obviously my line of reasoning has made it to Sacramento as well.

My first thought in seeing this article was “How can a government force a private company to insure anyone?” Insurance is regulated at the state level, so I suppose the state can say to a company “If you do not insure these people, then you will lose your license to insure anyone in the state.” But that’s some Venezuela logic. For insurers, this would amount to a simple cost-benefit analysis. They aren’t some charity that is going to forgo making money to comply with batshit orders. For California, however, having major insurance companies tell the state to pound sand would be catastrophic. I mean, that truly would be a financial crisis in the state.

This is exactly the kind of problem we saw folks on the left create with Obamacare. The government tells insurers that they must provide certain kinds of benefits, and insurers look at the insurable population and decide to pick up and leave, creating financial deserts. When we lived in Kentucky, for example – a state with a very unhealthy population – the only insurer available on Obamacare exchanges for major cities was a nonprofit from Ohio that had only been in the insurance business for a couple years. Their insurance was rejected by most health care providers in the area, and it still cost more than a mortgage to insure a household. You’d have to be a very special kind of stupid to think that scenario is an improvement in the marketplace or that you are doing the middle class any favors.

California already passed a law prohibiting insurance companies from factoring the cost of reinsurance into insurance premiums. So the state has been down an insane path for a while. It’s being run by economically illiterate socialists. Unintended consequences are their forte.

Well, upon reading the article, that is exactly what they are doing to insurers in the state. Note that the Los Angeles Times falsely blames the fires on climate change and not utilities and regulators failing to inspect and maintain the grid, and allowing infrastructure to operate decades past its useful life. Folks in California are so detached from reality that they can’t even begin to reason through the causes of the the environmental catastrophes they’ve created. So they are going to create even bigger catastrophes.

Responding to several years of unprecedented fires across California, regulators on Thursday imposed a one-year moratorium banning insurers from dropping policies for homeowners in wildfire-ravaged areas of the state.

The move comes amid an exodus of some insurers in communities hard hit by fires, forcing some homeowners to take plans that provide less coverage, sometimes at higher premiums. Some have had to go without insurance altogether.

“I have heard the same story again and again. People getting dropped by their insurance after decades,” California Insurance Commissioner Ricardo Lara said. “To add insult to injury, many struggle to find coverage.”

Though existing law prohibits insurers from dropping policies for homeowners who have suffered a total loss in a wildfire, the moratorium relies on a law that went into effect this year that extends that rule to homeowners who live adjacent to a declared wildfire emergency and did not lose their home.

On Thursday, Lara said the moratorium will give both homeowners and insurers time to reassess a path forward for living with wildfires.

The plan affects more than 800,000 homeowners in Northern and Southern California who live in ZIP Codes next to 16 recently declared wildfire disasters, including those near the Kincade fire in Sonoma County, the Saddleridge fire above Sylmar and the Tick fire in Canyon Country.

Though the moratorium is legally binding for insurance providers around those fires thanks to the law that went into effect this year, Lara called on insurers statewide to voluntarily follow suit.

“This wildfire insurance crisis has been years in the making, but it is an emergency we must deal with now if we are going to keep the California dream of home ownership from becoming the California nightmare, as an increasing number of homeowners struggle to find coverage,” he said.

The order is the latest move regulators have made to try to adjust California’s insurance market to increasingly destructive disasters and oncoming climate change.

In July, Lara and other state lawmakers hosted a roundtable discussion at UCLA at which he announced his agency was collaborating with a U.N. group tasked with establishing a framework for insurers to operate in a more efficient, disaster-hardened world.

A California Department of Insurance report last year found that the number of homeowners in the wildland-urban interface who complained about getting dropped by their plans more than tripled from 2010 to 2016. Complaints about increased premiums rose 217%.

Those statistics provide a limited view of the problem, as the state has no way of tracking policy nonrenewals and individual premium hikes. But they reflect the cusp of a trend that is expected to worsen, officials have said.

Areas where fires are common, such as Lake County, have been particularly hard hit.

After a series of massive fires, residents living in or near forested areas are facing rate hikes so significant they’re taking circuitous routes to find cheaper and less comprehensive coverage. Sometimes that path ends at the California Fair Access to Insurance Requirements, also known as the FAIR plan.

The FAIR plan was created in 1968 amid a decade of riots and brush fires that led people in California to lose coverage for reasons beyond their control. It’s an insurance pool for high-risk policies that counts every insurer in California as a member.

The moratorium won praise from experts such as Jeffrey Michaels, a public policy expert at the University of the Pacific. But he cautioned it could have unintended consequences for companies looking to enter or stay in an existing housing market that hasn’t experienced a wildfire.

“It can make insurers even more reluctant to insure those areas if they could have a moratorium imposed,” he said.

Jim Steele, a former Lake County supervisor who worked on the insurance issue for years while in office, said the moratorium “isn’t going to help unless we make some big changes.”

“We’ll be in the same place in a few years if we don’t give authority to rural counties to work directly with insurance companies,” he said.

If that were the status quo, he argued, local officials could ask insurance companies what fire-safety criteria homeowners could meet to keep their insurance, and pass that information along to their constituents.

How the AARP scams seniors on health insurance

I feel like I am a fairly cynical person when it comes to government and finance. I enjoy the whodunit aspect of corruption – i.e. the wonky mechanics of some scheme that participants never imagined someone would pay attention to. But corruption itself rarely surprises me anymore. It’s ubiquitous in Washington DC.

Before today, I was passively confused by the political positions of the American Association of Retired Persons (what everyone knows as the AARP). Now that I understand the appalling, anti-social business model behind their politics, I think this organization should not be allowed to exist. Literally all the AARP does is screw old people out of money with their bogus charity.

Most people think of the AARP as a nonprofit organization that lobbies federal policymakers on behalf of seniors. That’s because that’s how the AARP markets itself. When someone mentions the AARP, the first thing that comes to mind is snail mail spam. Apart from the World Wildlife Federation offering you a stuffed tiger from some sweatshop in Asia and a lifetime supply of address stickers with the name of the person who lived in your house 15 years ago in exchange for a $25 donation, seemingly no nonprofit generates as much physical waste as the AARP. I think I started getting junk mailers from the AARP after my 30th birthday. Lavender hair, here I come!

But member donations actually make up a very small fraction of the AARP’s revenues. The AARP cash cow is financial services – specifically insurance services.

The AARP is not benevolently helping seniors manage their financial risks, however. The AARP is using its political connections to create financial risk that seniors have to pay the AARP to manage.

I happened to start looking at the AARP after a conversation I had with a family member about insurance coverage for our parents. An AARP-affiliated plan was one of the options. Said family member remarked that the AARP had turned into a “liberal lobbyist group” and carried on for a while about how the AARP now routinely backs legislation that most seniors in the country vehemently oppose.

He cited the AARP’s support for Obamacare and Nancy Pelosi’s new prescription drug legislation. (Pelosi’s legislation aims to establish federal price controls for prescription drugs – something that any economist will tell you never works out well. Arguably, the countries elsewhere in the world that have imposed price controls have merely been free-riding off of Americans who will pay higher prices for medication and for health insurance to fund research and development enterprises that humanity in general benefits from. They have lower drug costs only because they have passed the costs on to our marketplace. It’s really not all that different than people in high-tax states passing their state and local tax bills on to federal taxpayers prior to tax reform, if you think about it. When everyone has imposed price controls, you will see significantly less R&D and fewer cures for important diseases. But I digress.) I was as puzzled by these policy stances as he was. There are not a lot of cheerleaders for socialized medicine and tax increases in retirement communities. You are talking about people who are living on a fixed income. There’s a reason Alexandria Ocasio-Cortez lives in New York and her retired mother lives in Florida.

Being something of a public policy geek, I wondered why an entity that purportedly lobbied on behalf of seniors would support legislation that hurt seniors financially. Legislation that destabilized Medicare and raised taxes. AARP lawyers obviously aren’t stupid, so they had to have some motivation.

To understand why the AARP takes political positions against its own constituency, you first have to understand what Obamacare does. And I do mean what Obamacare does, in reality, not how it was sold to Americans politically.

From a policy perspective, Obamacare was essentially a giant Medicaid expansion. (For the uninitiated, Medicaid provides health care benefits for low-income households. Medicare provides health care benefits for seniors.) Most Americans probably don’t realize that because politicians on the left talk incessantly about the health care exchanges, which turned out to be epic failures, with major insurers exiting some marketplaces entirely. Obamacare drove rapid consolidation in the health care industry and the creation of geographical health care monopolies. The only real legacy of Obamacare is that there are a lot more people eligible for Medicaid and everyone else’s premiums increased fourfold because that’s what happens to captive consumers. Of course, if universal health care at any cost is your ultimate goal, that’s a feature not a bug.

The Medicaid expansion reduced the number of “uninsured” people in the country by changing the income thresholds at which someone would qualify for entitlement status, among other things.

A Medicaid expansion and all the other mandates the legislation involved were not cheap for federal taxpayers. The Obama administration had to find some way to offset massive new spending in the federal budget, and they accomplished that by raising taxes on various demographics and by cutting funds to Medicare. So the AARP was backing a piece of legislation that adversely impacted their constituents’ financial interests in several ways.

If you are lobbying on behalf of seniors, wouldn’t preserving Medicare be a major concern of yours? Did they get something that otherwise helps seniors in return? Likewise with the concept of imposing federal price controls on prescription drugs. The loss of funding for research and development would have the largest impact on the aging population. Young whippersnappers don’t care about cancer research and less destructive heart medications. Seniors do.

And as the actual execution of Obamacare eventually revealed, young whippersnappers were quite willing to take the financial hit and opt out of the whole Obamacare system altogether, because you can do that when you do not have any immediate ailments. A little over a third of the folks who paid a tax penalty for being uninsured had incomes under $25,000. Almost 80% of the folks taking the penalty had incomes under $50,000 (link takes you to Internal Revenue Service data). It was an unequivocal slap in the face for the working class and younger generations – or, if you prefer, Obamacare is how you got Trump.

So why does the AARP take these positions? The answer is that like most organizations peddling influence in Washington DC, the AARP does not make money the way you probably think they do. Because you associate a charity with donations.

The AARP has a partnership with UnitedHealth such that the AARP receives a kickback for selling Medigap insurance policies to seniors, which supplement the health benefits provided by the underfunded Medicare program. UnitedHealth, which is based in Minnesota, is the largest health insurance company in the world, with annual revenues of over a quarter-trillion dollars. When the AARP threw its support behind Obamacare as it was drafted, they were in fact actively lobbying to prevent Medigap reform. They were making sure seniors had to seek additional coverage over the program they had paid their entire working lives to fund. Your Medigap policy is a paycheck to the folks at the AARP, so there better be a funding gap. And Obamacare made one.

In its financial statements, the AARP likes to call these kickbacks “royalties,” as if receiving a kickback is a form of intellectual property. I imagine that is no accident, either. I am sure they are counting on the semantics to make what they are doing seem legal-ish.

The Obamacare legislation included language providing a specific carve-out for the UnitedHealth / AARP arrangement. It also exempted the AARP arrangement from other provisions that made competing health plans less competitive, like not rejecting someone for pre-existing conditions. In fact, Obamacare had harsh implications for a specific population of seniors – disabled seniors who were over the age of 65, who qualified for Medicare because of their disability, but the disability would have counted as a pre-existing condition, which would not be covered by gap insurance.

Yet you never hear Elizabeth Warren, Bernie Sanders, or Nancy Pelosi bitching about the AARP though, because the AARP supports liberal policy ideas while engaging in blatant rent-seeking behavior. (In economics, rent-seeking behavior refers to manipulating public policy in order to profit from artificial circumstances.) In fact, Senate Democrats have routinely tried to shut down inexpensive short-term insurance plans which would compete with the AARP’s kickback scheme. Because they care so deeply about your access to health care.

The AARP’s kickback scheme is nothing to shrug at either. Since Obamacare was enacted, the AARP has collected over $4.5 billion in “royalties” from UnitedHealth. In case you didn’t make the connection there, that’s $4.5 billion that the AARP has taken from the savings of seniors. Did I mention that the umbrella entity here is a tax-exempt organization? Oh, and they get investment income from those payments. I’m sure the 25% return on the S&P 500 has been gooooood to the AARP.

It turns out, member donations account for only around a fifth of the AARP’s funding. The lion’s share comes from this insurance kickback scheme.

When people ask me why I oppose socialized medicine, I can name a lot of reasons. I have had three medical emergencies in my family, and I cannot conceive of how those events would have proceeded if the government was in 100% control of my loved one’s fates, applying some fucked up cost-benefit analysis to every line of treatment they were receiving along the way. Beyond that, as someone who has worked in finance and economics my entire life, these programs are not the kind of thing any economically literate person should support.

But the best argument against letting politicians run the health care industry is that they simply do not have your best interests in mind. They care a million times more about some trampy female lobbyist covering their steak dinner than they ever will about your kid who was just in a car accident. Most people could not invent the elaborate schemes DC folks come up with to steal money from ordinary people if they tried. They do this over and over and over again, and then they go on television in committee hearings and on debate stages, and they cry crocodile tears and they speak with dramatic pauses and they wag their finger at The Man. And some people will be dumb enough not to realize that they are looking at The Man. And the charlatans can park their asses in DC for four decades and send their kids to the very best schools so their kids can then do the same thing to another generation. All on your dime.

Probably the easiest reform that would revolutionize how our country operates is fixing how the federal tax code defines a charitable organization. Right now, we have shit like local authorities that operate sports stadiums for highly profitable teams being classified as a charity. We have “charities” dropping hundreds of millions of dollars in elections. Special interest groups have produced more fake news than the most aspiring Russian troll farm ever will. But it will never happen. Because influence has created both a wage bubble and a real estate bubble in Washington DC, Maryland, and Virginia. They’ll never let the music stop.