“Very few people spend other people’s money as carefully as they spend their own.”
— Milton Friedman, 1975
Seven years after professor Milton Friedman spoke of “other people’s money” on “The Open Mind” television show, the Nobel Prize-winning economist came into my life.
It was 1982. I was a freshman at UC Santa Barbara. The course was Robert Crouch’s Econ 1: Introduction to microeconomics. In a Phelps Hall classroom packed with hundreds of undergraduates, professor Crouch had us watch Friedman’s 1980 television series, “Free to Choose,” and read the book of the same name.
One particular lesson has stuck with me ever since.
In “Free to Choose,” Friedman explained why so many municipal governments were then on the verge of bankruptcy: Unions had won too much in “bargaining” sessions with managers who failed to stand up for the public good.
The problem was and is an imbalance of incentives. The employees are motivated by self-interest. They will ask for everything they can get and more. The managers hired to speak for the public have no reason to spend the taxpayers’ money as carefully as they would spend their own. The taxpayers who pay the bills are kept out of the negotiations.
As Davis amassed a $64 million unfunded retiree health care debt, one thing that never occurred to me was that the massive increases in the city’s medical costs over the past 15 years were the result of CalPERS unwisely and irresponsibly spending other people’s money.
I had incorrectly assumed that health care inflation was something beyond the control of the Public Employees Retirement System.
I thought that until I read a recent statement by Peter Orszag, who directed the Office of Management and Budget for President Obama.
Orszag wrote, “… health care costs have decelerated over the past few years, and Medicare costs have decelerated more than other health costs.”
That was news to me.
Last summer, CalPERS announced that its rate for the Kaiser Family Plan — the HMO Davis uses as a base for its medical benefit — was going up another 9 percent in 2013. That was on the heels of a 7.28 percent price increase in 2012.
I had assumed the prices CalPERS was charging Davis, after negotiating with Kaiser, tracked with general medical inflation. It turns out they don’t. It turns out that CalPERS is doing a terrible job when it comes to spending our money.
As bad as it is now, it’s been even worse in the past. In 2002, CalPERS agreed to a 23.3 percent premium increase. That was 5.8 times the medical inflation rate that year. In 2003, the Kaiser price inflated another 17.83 percent — 4.1 times the health care CPI. In 2004, it was a 16.13 percent rate hike — 3.82 times the medical inflation rate.
I tried multiple times over the past three weeks to get CalPERS to explain to me why our costs keep going up so dramatically. They have not replied to my queries.
Next month, the city of Davis will spend $470,710 for health care premiums. That does not count approximately $200,000 more for cash-outs to employees who do not use their entire $1,730 monthly benefit. February’s $470,710 bill covers 239 current employees ($278,314) and 240 retirees ($192,396).
Over the past 14 years, the rate Davis pays for health benefits has increased on average 10.29 percent per year compounded. In 1999, what cost $100 now costs us $394.10.
Over that same period, health care costs in urban areas, according to the Bureau of Labor Statistics, have gone up 3.95 percent per year compounded. That means a 1999 medical bill of $100 is today $171.90.
If Kaiser’s prices had inflated at 3.95 percent per year since 1999, our $470,710 monthly bill would be $205,273. Davis taxpayers would be spending $3,185,300 less in 2013 to cover the costs of the city’s medical benefit, not counting millions more we would be saving on cash-outs.
The fact that the prices CalPERS pays Kaiser have inflated 2.3 times more than general medical inflation cannot be explained by the fact that the Kaiser Family Plan is a premium service. It is now and it was then.
The reason Kaiser and other “not for profit” insurers have been able to increase the prices they charge PERS as much as they have is well explained by Friedman’s aphorism: “Very few people spend other people’s money as carefully as they spend their own.”
In its latest labor contracts, Davis has made a small dent in our growing problem of medical debt. We are also now funding retiree medical costs. However, CalPERS is still run by and for the public employee unions. And as long as that remains the case, we can expect to get ripped off every year it spends our money.
— Rich Rifkin is a Davis resident; his column is published every other week. Reach him at [email protected]