Ok, so how many ‘clunkers’ will this C4C Act actually take off the road?  Let’s do some math (a practice lost on many of the unwashed bloggers out there).

With the recent injection of another $2Billion, the C4C program now has $3billion.  It provides from $3,500 to $4,500 guaranteed trade in. Only 7% of the entire $3bl can be used for light trucks – it’s meant as a ‘family car’ stimulus.  Many reasons for this, not the least of which are: Truck sales are withstanding the downturn much better; there are less inventories of trucks; and the difference in gas mileage between a 20yr old F150 and a 3yr old F150 is nominal.

For sake of this illustration we will use an average of $4,000 per vehicle; or 750,000 vehicles ($3Bil / $4k = 750,000). So we are looking at taking about three quarters of a million clunkers in trade for new cars.

As of 2005 the U.S. alone manufactured about 5 million cars and 7 million trucks annually (12mil vehicles a year). Looking at just cars (the C4C target) we will assume the U.S. manufactured about 4 million autos a year for the last 25 years – That’s a nice round 100million vehicles produced in the U.S. Imports roughly matched exports over the period, so we will stick with roughly 100million autos ‘on-the-road’ since 1984.

If we assume that 80% of that production is still on the road, we have about 80million clunkers – as defined by the 25yr rule in the C4C Act.  That means the cash for clunkers program affects less than 9/10ths of one percent (.0095% to be exact) of the production over the 25yr period.

So the C4C is obviously not about minimizing ‘clunker impact’ on the environment.  Although, the 4 to 10 mpg higher MPG requirements will have an impact, of sorts, on gas consumption. In example, an overall average gain of 7mpg for each of the 750,000 vehicles would amount to 5,250,000 more miles per gallon.  Not a bad number.

Ok, we can put down the calculators now.  I just wanted to make a point: The C4C program is all about reducing inventory of new cars. Period. It has some nominal side effects, but its target is the auto glut in the nation’s dealerships.

Here’s some facts around the auto inventory:  For those of you that cry about U.S. manufactured vehicles not given favoritism; foreign car makers manufacture a lot of vehicles in the U.S., and 60% of the auto industry employment in the U.S. comes directly or indirectly through foreign auto sales.  U.S. auto manufactures (both U.S. owned and foreign owned) export more vehicles that we import (81.5% of production exports vs. 71.8% imports) so the affect of foreign auto manufacturing, sales and export on this economy is greater than the affect of U.S. auto industry – especially after the recent plummet in manufacturing at GM & Chrysler. If C4C were focused only on U.S. brands, it would fail as a stimulus.

There is also a myopic view by some right wingers that stimuli that “favor some industries at the expense of others” is ineffective and somehow unfair. This view fails to take into consideration all the supply chain and service chain functions that follow manufacturing and employment – no matter what the industry.

As inventories decline, demand will have the effect, in time, of reigniting manufacturing.  In turn, the suppliers to these manufactures will start seeing their excess inventory of parts and components dwindle as manufacturing ramps back up.  Industry suppliers will need to soon replenish through the extensive Just-in-Time (JIT)  supply chains that support the industry.  Even at below normal manufacturing output, employment and the services that support the employees will be better off than at zero output – as many manufacturing plants have all but stopped production with the current inventory glut.

I also read a blog from a pretty good blogger (you know, one of those that finds time to research and actually ‘think’) about the loss of the clunker as a social crutch for the poor (can’t afford new cars – must buy used) with all the inventory of clunkers being traded in (the C4C requires the vehicles be recycled – they cannot be resold).  But as I noted before, the real impact on the used care market (that has its own inventory glut right now anyway) is less then 1%.

This same blogger must be my age. He remembers “the art of reviving and coaxing old cars as a boyhood ritual” – and laments the loss of ‘all those clunkers’ that today’s youth will not be able to keep running after their prime.  Have you looked under the hood of the vehicles made in the last 20 years?  You need a computer degree, a plumber’s license and a shop full of unique tools & equipment for each component on the vehicle.  I’ll challenge any shade tree mechanic out there to change the spark plugs on a 2001 Taurus in the 15 minutes it took me to change the ones on my 1966 Plymouth Valiant slant six!

I installed my own Hurst shifter, Holly 4BBL Double pumper and Hooker Headers on my ’71 Mustang Fastback 351 Cleveland – now THAT was a car! I looked under the hood of a 2009 Mustang at a dealership not long ago. I cried for a week.

My friend, the C4C is not what has ruined “the art of reviving and coaxing old cars as a boyhood ritual” – it’s Technology.

JB

References and Sources

CARS. (2009). Helpful Q&As for Consumers, The Car Allowance Rebate System (CARS), retrieved August 8, 2009 from: http://www.cars.gov/faq

Miron, J. (2009).  Commentary: Cash for clunkers is a clunker, CNNPolitics.com, retrieved August 8, 2009 from: http://www.cnn.com/2009/POLITICS/08/03/miron.clunkers/index.html?iref=hpmostpop

NationMaster. (2009). North America; United States; Industry – Manufacturing, NationMaster.com International Statistics, retrieved August 8, 2009 from: http://www.nationmaster.com/country/us-united-states/ind-industry

Raach, C. (2009). Clunkers used to build American pride; The Daily News Journal, retrieved August 8, 2009 from:  http://www.dnj.com/article/20090807/OPINION02/908070316/RAASCH++Clunkers+used+to+build+American+pride

First of all, it’s important to understand that this Act, as written today, is as much a framework as it is a specific set of laws and edicts.

Four yet-to-be-assembled organizations will control the administration, coverage, limits, costs and applicability to individual plans – both public and private.  They will have two years to get established, become operational, and provide specific details on administration and operation before the “Act” kicks in.  These four organizations are:

1. The Health Choices Administration headed by the Health Choices Commissioner (Commissioner).  An independent organization (operating much like the Social Security Administration) the Commissioner is appointed by the President and ratified by the Senate.  The Commissioner establishes the rules governing access to, and the provisions of, personal medical insurance coverage in the U.S..  Overall, the Commissioners power to control insurance providers (including Medicare & Medicaid) is exceptional.
2. The Health Insurance Exchange (Exchange) – it is essentially the government’s public insurance portal. The competition to private single carrier insurance, if you will. State based exchanges are encouraged – but not mandated.  The Exchange is established by, and reports through, the Health Choices Administration.
3. The Office of the Special Inspector General for the Health Insurance Exchange.  At this juncture, there is no way to insure that the Act will deliver on the promises to lower costs and improve coverage. Thus, an independent oversight office was established to annually audit the Exchange and report findings to the Commissioner and Congress.  I thought it was interesting that the Special Inspector General office was established for only the first five years of the Act.
4. The Health Benefits Advisory Committee (HBAC). Chaired by the Surgeon General, the HBAC has up to 26 members. It is an independent panel that is appointed by the president (up to 17) and the Comptroller General (9).  Three year terms for each member.

The HBAC can only advise The Dept of Health & Human Services (HHS) and the Commissioner on the definition of benefit standards and the level of cost sharing for premium and enhanced plans.  But I expect that advice will carry the power of an edict.  Low is the political career of any HHS Secretary or Commissioner that does not heed the advice of the HBAC

The Commissioner is a Kingpin of sorts and appoints several others; such as the Qualified Health Benefits Plan (QHBP) Ombudsman – a central complaints department for any individual or business that has a problem with a QHBP provider.

Before I get too far along here, we need to understand the QHPB.  It appears that all insurance plans (covering more than one person or one business) in the U.S. will need to be “QHPB” certified – but they do not need to be part of the Insurance Exchange.  “QHPB” certified means only that the plan meets the minimum coverage outlined in the Act.

The QHPB “Minimum Standard Plan” (Sec 122 (b)) includes hospitalization, emergency treatment, outpatient and preventive care, as well as a basic prescription plan.  This minimum coverage includes wellness care, vision & dental for those under the age of 21. So the “Minimum Plan” is pretty comprehensive from a content point of view. However, actual coverage, costs, co-pays, etc. – will be determined by the Commissioner (see what I mean about a framework? – A lot of detail TBD).

An insurance plan must be a “QHBP Offering” to be offered by the Exchange as a public plan.  By default, it appears, Medicare and Medicaid will be QHBP Offerings.  Any insurance company that wants to participate in the insurance Exchange program must submit their proposed “QHBP Offering” to the Exchange for approval – much like a Request for Proposal (RFP) is submitted for contract consideration.

It is obviously the hope of the authors of the Act that all national health insurers, and most state and local insurers, will place QHBP offerings with the Exchange – thus diluting their risk and improving their premium base – throughout the U.S..

The exchange will set up a ‘Trust Fund” that gets filled by tax credits, premium payments and tax collections. The Exchange pays the QHPB providers from this fund for policyholders that qualify for premium assistance.

There are provisions for State or regional Exchanges that will preempt the national exchange program. It is not clear how the Commissioner with administer and regulate these exchanges.

The Secretary of HHS also has a lot of preparation. This includes working with the Commissioner and the Labor Department on a major study on how to keep small and medium business from self-insuring to avoid taxes or payments to the exchange.  This could be a big deal. A topic for another day.

Here’s an eye catcher: Insurance Company profit from QHPB premiums are to be controlled! (Section 116).  A substantial portion (“substantial” to be defined by the Commissioner) of the premiums paid must go to patient care. If an insurer exceeds the profit margin on any plan in a given year, they will have to return the difference to policy holders.  This section is trying to address the issue of insurance companies routinely denying claims and limiting payments to improve profits.

However, the minimum actuarial value for standard minimum QHPB with no cost-sharing is 70% (Section 122).  This might be seen by insurers as a baseline for a 30% ROR (rate of return) on premiums applicable to Sec 116.  That’s higher than the industry reports today!  Enhanced and Premium plans will have cost-sharing limited to 85% and 95% respectively.  So it’s really all over the board as to what the profit margin should be.  The problem is that the actual margin will be dictated by the Exchange Commissioner – sometime over the next 18 months. The reason for the Special Inspector General becomes clearer.

From an industry point of view, I could find no provisions for the establishment of arbitration or appeal processes to Commissioner “rulings’ on profit restriction.  That is sure to get attention by the Republicans in the Senate.

CONCLUSIONS

Well, there’s the “quick and dirty” on the “Healthcare Reform” Act.  It has 243 subtitles spanning three sections. So there’s a lot of detail I did not think was critical – yet. It’s pretty compact by government standards. It won’t stay that way.  The Senate is sure to pump it up by an unnecessary 50%.  If they didn’t they would not be necessary.

My take is that it is an expensive gamble.  We will not know for three years if it is likely to pan out.  More like a NASA project than Health Reform in that regard.

However, I am hopeful, because we need to be hopeful.  The Act is banking on one thing: Greed.  And as long as the Senate does not dilute that, it may just work.  The Act is betting that insurance companies would rather have volume than margin.  It’s the McDonald’s economic approach wherein you would rather make .50cents each on a million hamburgers than $10 each on 1000 hamburgers. ($500,000 vs. $10,000).

You see, that’s the real solution in a capitalist society.  More is less and less is more. The over-quoted “win-win” scenario.  In this scenario a greater portion of individual premiums go to care providers; nearly everyone gets insurance; individuals get more coverage for their money; insurance company stockholders get more return for theirs; the government gets a net-zero trust fund and American business is no longer holding the bag.

Looks good on paper.

But if insurance companies would rather have the status quo – or individuals don’t want government insurance – the whole cost will go to the taxpayer and the deficit. Disaster and success share a common bed.  It also assumes that individuals and businesses will comply by joining the Exchange. You know what they say about assumptions.

A lot of ‘ifs’.  If you have a better idea… let me know.

JB

References and Sources

HR3200. (2009). The Library of Congress, Thomas Bills & Resolutions, Retrieved August 1, 2009, from: http://thomas.loc.gov/cgi-bin/query/z?c111:h3200: