Whatever the merits of that view, the GFC did highlight debilitating trends in US finance infrastructure that have been intensifying for years. In this week’s Businessweek, Hernando de Soto (with Karen Weise) highlights one of the most important: the opacity of key markets and relationships. With scant exaggeration, de Soto warns that the US is on its way to levels of uncertainty more common in developing and communist countries:

During the second half of the 19th century, the world’s [...]]]> In his press conference last week, Ben Bernanke concluded on an upbeat note. He had high hopes for a US recovery, since he believed that the Great Financial Crisis (GFC) of 2008 hadn’t taken from the US any of its basic productive capacity.

Whatever the merits of that view, the GFC did highlight debilitating trends in US finance infrastructure that have been intensifying for years. In this week’s Businessweek, Hernando de Soto (with Karen Weise) highlights one of the most important: the opacity of key markets and relationships. With scant exaggeration, de Soto warns that the US is on its way to levels of uncertainty more common in developing and communist countries:

During the second half of the 19th century, the world’s biggest economies endured a series of brutal recessions. At the time, most forms of reliable economic knowledge were organized within feudal, patrimonial, and tribal relationships. . . . The result was a huge rift between the old, fragmented social order and the needs of a rising, globalizing market economy.

To prevent the breakdown of industrial and commercial progress, hundreds of creative reformers concluded that the world needed a shared set of facts. . . . The result was the invention of the first massive “public memory systems” to record and classify—in rule-bound, certified, and publicly accessible registries, titles, balance sheets, and statements of account—all the relevant knowledge available, whether intangible (stocks, commercial paper, [etc]), or tangible (land, buildings, boats, machines, etc.). Knowing who owned and owed, and fixing that information in public records, made it possible for investors to infer value, take risks, and track results. The final product was a revolutionary form of knowledge: “economic facts.”

Over the past 20 years, Americans and Europeans have quietly gone about destroying these facts. The very systems that could have provided markets and governments with the means to understand the global financial crisis—and to prevent another one—are being eroded. Governments have allowed shadow markets to develop and reach a size beyond comprehension. . . . In a few short decades the West undercut 150 years of legal reforms that made the global economy possible.

de Soto gives a number of concrete examples of how we are kept in the dark about the “thousands of filaments that businesses are creating between themselves,” including:

1) Mortgage Bundling: Law professor Christopher L. Peterson observes that, “For the first time in the nation’s history, there is no longer an authoritative, public record of who owns land in each county.”

2) Default Swaps: “these risks have slipped outside the public memory systems, making it very difficult to know who ultimately bears the risk and where it is.” And you can count on Tim Geithner to exacerbate the problem. McClatchy’s Greg Gordon identified the problem in 2009:

Cayman Islands deals . . . . became key links in a chain of exotic insurance-like bets called credit-default swaps that worsened the global economic collapse by enabling major financial institutions to take bigger and bigger risks without counting them on their balance sheets. The full cost of the deals, some of which could still blow up on investors, may never be known.

3) Exemptions: “Businesses are left to figure out [accounting realities] on the basis of connections, influence, and private information. Just like we do in developing and former communist countries.”

4) Off-Balance-Sheet Accounting: “In the 1990s governments began . . . allowing companies in financial difficulty to pass facts concerning debts from their public balance sheet to a less visible memory system called a special purpose entity (SPE) (or to sweep debt information into the balance sheet’s footnotes in words so obtuse that the statements cease being factual).”

5) Government Use of Swaps and Repo Markets: “Gary Norton at the Brookings Institution has argued that we still do not have the vaguest idea of the size of the repo market.”

6) Rating Agencies: We need “to consider whether overreliance on ratings based on co-variance formulas is a trustworthy substitute for facts. Any reform effort must keep in mind the difference between facts, which can be tested for truth, and opinions, such as ratings, which can’t. Facts are not simply about transparency; facts are about empirical truth.”

de Soto has long been a hero of conservative property rights groups. Unfortunately, the official Republican position on finance reform appears not merely to tolerate, but to affirmatively encourage the “destruction of economic facts” that de Soto laments. Leaders like Spencer Bachus want to reduce funding for the SEC, the Office for Financial Research and the Office of Credit Ratings (or kill the latter offices outright).

Some might be astonished that a political movement based on the rhetoric of “property rights” sees fit to undermine the very institutions necessary for us to understand who owns (and owes) what. But perhaps we shouldn’t be surprised, since rapidly increasing opacity in political donations makes it very difficult to understand what dominant donor classes are demanding. Just as the Koch-allied groups have largely drown out other libertarian voices on monetary policy, so too can veiled money flows trump the doux commerce ideal of an invisible hand. Who wants to be on the wrong side of Rove’s Crossroads group? There is a much broader “process of social control” at work here.

Ideas for Reform

de Soto gives several brief suggestions for reform; more are developed in detail in the Roosevelt Institute report “Make Markets Be Markets.” For example, Joshua Rosner elaborates on worries about bundled mortgages, and proposes a solution:

[K]ey terms that define contractual obligations are not standardized across the industry, across issuers of securities with the same type of collateral (e.g. RMBS, CMBS or RMBS based CDOs) or even by issuer (each issuer often had several different Pooling and Servicing Agreements and Representation and Warranty Agreements).

The lack of standardization and the length of the documentation effectively created opacity, which contributed to the problems in the securitization market. When panic set in and investors began to question the value of their securities, they knew that they did not have the time to read all of the different several- hundred page deal agreements. This reinforced the rush to liquidate positions. . . .

In order to accurately price securities, investors need timely loan-level performance data on the assets backing each deal. We need loan-level data on a daily, or at least monthly, basis in both the primary and secondary markets. Without frequently updated and standardized disclosure of loan-level data, market participants can’t independently analyze and credibly value asset-backed securities based on full information.

I think these are very good points, but reformers will need to overcome much entrenched dogma about the sanctity of trade secrets and proprietary information. In coming weeks, I’ll be focusing on other solutions, suggested in sources ranging from the de Larosiere report to Eric J. Weiner’s book The Shadow Market. I’ll also look at journalists’ ideas of their role, ranging from Gillian Tett’s pre-crisis “Iceberg Memos” (which warned FT managers that they were only covering the tip of an increasingly murky financial world) to Joe Nocera’s recent declaration that journalists have a fundamentally different role than, say, law enforcement, because they lack surveillance tools.

Consumer Combat: Crouching Exceptions, Hidden Fees

I have one more big picture point to make: “gotcha capitalism” extends from the highest levels of finance down to the consumer end of the economy. As Nathalie Martin recently noted:

I heard a humorous radio program this morning in which Europeans were complaining about how you never know the real price of anything in America. Things seem cheap, but once you consider the taxes, the tipping, the hidden ad-ons, the price is so much more. There is no transparency. Boy, they don’t know the half of it. At times it seems everywhere you turn, you find a scam or an unauthorized fee.

I have been following efforts to improve transparency in health insurance contracts, especially those sponsored by the Center for Consumer Information & Insurance Oversight. Recently, Daniel Schwarcz has demonstrated the need for more clarity in homeowners’ insurance policies, too:

The current personal lines insurance marketplace is largely organized around a myth. That myth is that personal lines insurance policies are completely uniform. This myth explains regulatory rules that do nothing to promote insurance contract transparency. It explains the ignorance of most information intermediaries about the details of contract terms. And, to a substantial degree, it explains the willingness of courts to treat insurance policies as ordinary contracts. . . .

[The situation] reflects the efforts of carriers to limit coverage relative to the presumptive industry baseline. These insurers have actively hidden and obscured this trend, in notable contrast to the comparatively transparent marketing of the few carriers who have departed from standardized policies to improve coverage. If regulators do not act to substantially improve consumer protection in this domain, then it can be expected that coverage will continue to degrade for most carriers, in a modern day reenactment of the race to the bottom in fire insurance that triggered the first‐wave of standardized insurance policies.

Many commentators have worried that consumer protection has been a neglected goal of bank and insurance regulators, whose primary goal was promoting credit and industry. Consumer protections in the financial world have too often been treated as a distraction from the primary goals of regulators, rather than as a critical part of their mission. As work from de Soto’s to Schwarcz’s shows, that attitude is impossible to sustain. Practices that harmed borrowers contributed to a larger crisis of confidence that threatened to initiate a chain reaction of catastrophic consequences for the finance system. In 2010, legislators realized that the regulatory arbitrage persistent in the financial sector—where the Office of Thrift Supervision, Office of the Comptroller of the Currency, and other regulators competed to offer the most lax regulatory regime—served neither consumers nor the larger economy. The Dodd-Frank Act addresses both concerns by establishing a Financial Stability Oversight Council, the Consumer Financial Protection Bureau, and the Office of Financial Research. Each could help rebuild institutions devoted to the “economic fact-finding” that de Soto recommends.

Photo Credit: Autovac.

A form of progesterone known as 17P was used for years to reduce the risk of preterm birth. . . Because no companies marketed the drug, women obtained it cheaply from “compounding” pharmacies, which produced individual batches for them [at about $20 each]. Doctors and regulators had long worried about the purity and consistency of the drug and were pleased when KV won FDA’s imprimatur for a well-studied version, which the company is selling as Makena.

The list price for the drug, Makena, turned out to be a stunning $1,500 per dose. That’s for a drug [...]]]> The past few weeks have been worrying ones for expectant mothers who wanted a hormonal treatment designed to stop preterm births. As Rob Stein of the WaPo explains,

A form of progesterone known as 17P was used for years to reduce the risk of preterm birth. . . Because no companies marketed the drug, women obtained it cheaply from “compounding” pharmacies, which produced individual batches for them [at about $20 each]. Doctors and regulators had long worried about the purity and consistency of the drug and were pleased when KV won FDA’s imprimatur for a well-studied version, which the company is selling as Makena.

The list price for the drug, Makena, turned out to be a stunning $1,500 per dose. That’s for a drug that must be injected every week for about 20 weeks, meaning it will cost about $30,000 per at-risk pregnancy. . . . The approval of Makena gave the company seven years of exclusive rights, and KV immediately fired off letters to compounding pharmacies, warning that they could no longer sell their versions of drug.

A day after Stein’s article appeared, the FDA made it clear that it “does not intend to take enforcement action against pharmacies that compound” 17P, “in order to support access to this important drug, at this time and under this unique situation.”

This is a fascinating, and in some ways troubling, response to the accusations of price-gouging by KV. Nonenforcement here has some eerie parallels to the epidemic of waivers now undermining the implementation of the ACA.

Compounding pharmacists had already averred that “many of [KV's] assertions that the compounding of an FDA approved product is prohibited are not supported by the legal citations it references.” Though the FDA’s letter preserves access to 17P for now, that access could be revoked at any time. As the FDA states on its website:

FDA understands that the manufacturer of Makena, KV Pharmaceuticals, has sent letters to pharmacists indicating that FDA will no longer exercise enforcement discretion with regard to compounded versions of Makena. This is not correct. In order to support access to this important drug, at this time and under this unique situation, FDA does not intend to take enforcement action against pharmacies that compound hydroxyprogesterone caproate based on a valid prescription for an individually identified patient unless the compounded products are unsafe, of substandard quality, or are not being compounded in accordance with appropriate standards for compounding sterile products. As always, FDA may at any time revisit a decision to exercise enforcement discretion.

Moreover, the problem persists for at least one other drug, colchicine. As Arthur Allen explains at Slate,

The colchicine and [17P] stories have their roots in the FDA’s historically complex relationship with the drug industry. Since 1962, the agency has required that all new drugs be proven safe and efficacious before hitting the market. Many drugs marketed before 1962, however, remain on sale without having been formally approved by the FDA and are technically illegal. In 2006, the FDA launched the Unapproved Drugs Initiative, aimed at getting rid of as many of these drugs as possible. . . .

The FDA campaign has two approaches. In some cases, the agency simply warns companies to stop producing and shipping unlicensed drugs by a given date. In other cases the FDA warns a group of companies producing a particular class of drug, notifying them that it plans to crack down on their unapproved substances. The idea here is to give the companies an opportunity to submit their drugs to the rigorous testing required for FDA approval. This is what happened with . . . at least 86 newly approved drugs. The problem is that after submitting such drugs to expensive testing, drug makers typically jack up the prices, in a position to do so under congressional patent incentives aimed at producing innovative drug research. The FDA has no say in how a drug is priced.

As the Post notes, KV says it “is spending more than $200 million to develop the drug and conduct follow-up studies that the Food and Drug Administration demands.” Had it kept its pricing power, it was estimated that Makena would cost the US health care system $4 billion per year. Assuming that 3/4 of that would be revenue to Makena, and it lasted for the full 7 years of exclusivity, that would be a $21 billion return on a $0.2 billion investment. That seems excessive, especially given that KV didn’t develop the drug. On the other hand, if the Makena price were to be reduced one hundredfold, that’s a $0.21 billion return on a $0.2 billion investment. Unless we hit some serious deflation, that doesn’t cover the time value of the money invested in studies and development.

Are there any better models here? Stein’s story says that “experts said the FTC could sue KV if it concludes the company is illegally impairing competition,” but I don’t see the theory there. The FTC has lamented post-merger price hikes for life sustaining drugs (see FTC v. Lundbeck), but has precious little authority over price hikes here. Perhaps liberal constitutional law professors could fuse the “medical self-defense” theory of Eugene Volokh with the expansive Yoo/Vermeule/Posner theories of executive power, and find inherent executive authority here to save preemies? Probably not; the current Supreme Court is only receptive to creative con law from one side of the political spectrum.

Another idea is for legislation to create “risk corridors” for researchers who engage in the FDA’s Unapproved Drugs program, as CMS has for prescription drug insurance plans in Medicare Part D. As Kip Piper explains,

Using a system of risk corridors that compares actual incurred drug benefit costs to estimated costs submitted in bids, Medicare limits the profits and losses of Part D drug plans. Specifically, if a Medicare drug plan’s actual benefit costs exceed expected (bid) levels by a sufficient degree, the plan will receive an additional federal payment to cover a portion of the loss. However, if a drug plan’s actual spending falls sufficiently below projections, the plan must share some of the profit with the feds. Risk corridors apply to actual and expected drug benefits costs but exclude plan administrative costs and federal reinsurance payments.

Unfortunately, estimates of the value of testing unapproved drugs vary widely. The FDA’s director of the FDA’s Office of New Drugs and Labeling Compliance insists on the importance of these programs. But, looking specifically at colchicine, an Austin rheumatologist said “Doing one trial in patients and a few drug interaction studies doesn’t justify marketing exclusivity and a 50-fold increase in price.” As Allen puts it, we need “legislative remedies to improve the drug supply without costing the public an arm and a leg.”

In health care finance, the “cost-shift” hydraulic is a familiar model. When policymakers cut reimbursements for, say, Medicare or Medicaid, providers still have the same income target, and respond by raising prices for the privately insured. One scholar estimated that the privately insured pay over 120% of costs, while Medicare payments are between 95 and 99%. We might think of pharmaceutical patents as another manifestation of “cost-shifting,” from the future (which will enjoy drugs in the public domain) to the present (which must pay the monopolist’s price). Other forms of exclusivity can also lead to that type of cost-shift, as the Makena controversy makes clear. Perhaps the people most benefited by a regime of pharmacovigilance and evidence-based medicine should be asked to pay something for that new reassurance. But they shouldn’t be price gouged. A risk corridors approach might better balance patients’ interests in research on, and reasonable prices for, unapproved drugs.

X-Posted: Health Reform Watch.

Most employees assume that if they lose their job and the health coverage that comes along with it, they’ll be able to purchase insurance somewhere. . . .My husband, teenage daughter and I were all active and healthy, and I naïvely thought getting health insurance would be simple. . . .

Then the first letter arrived — denied. . . .What were these pre-existing conditions that put us into high-risk categories? For me, it was a corn on my toe for which my [...]]]> Those with criminal records have long faced devastating collateral consequences for their convictions. Those with “preexisting conditions” should also keep worrying, especially if the big plan to repeal the ACA goes ahead. Consider this story on one person’s quest to obtain insurance:

Most employees assume that if they lose their job and the health coverage that comes along with it, they’ll be able to purchase insurance somewhere. . . .My husband, teenage daughter and I were all active and healthy, and I naïvely thought getting health insurance would be simple. . . .

Then the first letter arrived — denied. . . .What were these pre-existing conditions that put us into high-risk categories? For me, it was a corn on my toe for which my podiatrist had recommended an in-office procedure. My daughter was denied because she takes regular medication for a common teenage issue. My husband was denied because his ophthalmologist had identified a slow-growing cataract. Basically, if there is any possible procedure in your future, insurers will deny you. . . .

As I filled out more applications, I discovered a critical error in my strategy. The first question was “Have you ever been denied health insurance”? Now my answer was yes, giving the new companies reason to be wary of my application. I learned too late that the best tactic is to apply simultaneously to as many companies as possible, so that you don’t have to admit to a denial.

As was recently reported, “50 to 129 million (19 to 50 percent of) non-elderly Americans have some type of pre-existing health condition.” The “health care market” is sending a strong signal: don’t step out of the system, even for a day, if you have any continuing need for even minor care.

The job market is becoming similarly unforgiving. As an LA Times story relates, “there’s a growing trend of employers refusing to consider the unemployed for job openings.” Again, stay in the system, or else.

Someone has to pay for the private insurer CEO salaries, or the “business efficiencies” I noted in my last post. There is so much economic pain to go around that the rationales for distributing it are becoming increasingly harsh and arbitrary. When so many of society’s resources go to the top, there is little margin for error at the (ever larger) bottom. Kudos to the House representatives who gave up their employer-provided health insurance to discover this harsh reality.

CHAPTER 2 EXCERPTS ON UNDERSTANDINGS OF WHAT PLAINTIFFS WANT:

Chapter 2 explores and attempts to make sense of an issue fundamental to litigation in general as well as mediation in particular: What do plaintiffs want? Why plaintiffs sue, and their consequent litigation aims should have a marked impact on their objectives and experiences in litigation and litigation-linked mediations. Likewise, attorneys’ objectives, approaches to their cases and conduct throughout litigation and [...]]]> I want to provide some support for the claims made in my previous post, summarizing the main findings of my book Perceptions in Litigation and Mediation. Below are two of the many areas that support the “parallel worlds” theme relating to the different understandings of legal case processing and case resolution as between legal actors and lay litigants.

CHAPTER 2 EXCERPTS ON UNDERSTANDINGS OF WHAT PLAINTIFFS WANT:

Chapter 2 explores and attempts to make sense of an issue fundamental to litigation in general as well as mediation in particular: What do plaintiffs want? Why plaintiffs sue, and their consequent litigation aims should have a marked impact on their objectives and experiences in litigation and litigation-linked mediations. Likewise, attorneys’ objectives, approaches to their cases and conduct throughout litigation and mediation are affected by their basic understandings of what those who commence these suits want; that is, what the cases are about. Little is known about what litigants really want from the civil justice system and what they aim to achieve. Consequently we have little knowledge of whether litigants’ real objectives are met by the realities of civil litigation including litigation–linked processes such as mediation.

PHYSICIAN LAWYERS: IT’S ONLY ABOUT MONEY

Virtually all physician lawyers were of the strong belief that plaintiffs had sued for financial compensation alone. Even the two who mentioned that non-fiscal objectives might also have been involved put much emphasis on claimants’ primary monetary aims.

The following excerpts are typical of defense physician lawyers in answering the global question, ‘WHAT IN YOUR VIEW WERE THE PLAINTIFF’S AIMS IN LITIGATING?’

‘My view is the issue was money, to compensate for the pain associated with the deterioration, and to compensate for lost income associated with the surgery that was necessary. SO IT WAS MONEY ALONE? I believe so.’ Male attorney-50’s-prescription alleged to have destroyed bone tissue, resulting in 40-year-old plaintiff undergoing hip replacement surgery-litigating several months

‘To settle it. Their assumption was that this would never go to trial; that they would get money out of this beforehand. SO, YOU FEEL IT IS SOLELY AN ISSUE OF OBTAINING FINANCIAL COMPENSATION Yes, but I also think that they are of the view that if they obtain financial compensation it will make…them feel better. I think they’re misguided on that.’ Female attorney-30’s-abdomen not left intact after surgery litigating several months

‘I think in virtually all cases it’s directly driven by their desire for compensation…The sole aim, you know, in most of the cases it is to be financially compensated for the wrong. And I would say that’s in 99% of the cases I do, that’s what plaintiffs want.’ male attorney-30’s-child fatality case-litigating 4 years

PLAINTIFF LAWYERS’ VIEWS ON PLAINTIFFS’ LITIGATION AIMS

The bulk of plaintiffs’ lawyers viewed monetary recompense as their clients’ primary aim. Yet, they were more aware of extra-legal litigation objectives as compared with defense lawyers. Nonetheless, claimants’ monetary aims were prominent in most plaintiff lawyers’ parlance. In fact, a significant minority of both specialist and generalist plaintiff lawyers viewed financial compensation as their clients’ only aim. Yet, in comparison to most defense lawyers, they generally explained this on a less legal, more ‘human’ level. Of course, plaintiffs’ lawyers would generally be most likely to acknowledge other motives, as plaintiffs express their emotions directly to their legal counsel.

PLAINTIFFS: ‘IT’S NOT ABOUT THE MONEY! IT’S ABOUT PRINCIPLES’

Of all respondents, plaintiffs’ views are arguably the most important in answering the question of what motivated them to sue and what precisely they wanted. Interestingly, plaintiffs’ articulations of their litigation objectives rarely correlated with legal actors’ perceptions. In fact, a regular and conspicuous occurrence was the failure to mention financial compensation as an objective at all unless probed (occurring in 65% of interviews). Instead, what plaintiffs recurrently repeatedly was a lexicon of non-fiscal, extra-legal objectives for litigation. The issue of ‘principle’ was prominent for plaintiffs as revealed in the various objectives they passionately spoke about. ‘It’s not about the money’ was a recurrent theme throughout. Many of the comments concerned dignity and respect after the injury, inability to be heard, refusal to listen, dismissal and victim blaming. Moreover, plaintiffs’ extra-legal objectives did not appear to be affected by the passage of time, as there were no marked disparities in the way plaintiffs spoke of why they sued and what they wanted from the civil justice system as between plaintiffs who had commenced litigation three to four months earlier (interviewed subsequent to court-mandatory mediations) and claimants who had been litigating for several years (interviewed after voluntary mediations of cases already on trial lists).

Claimants’ Descriptions Of Their Litigation Aims

Plaintiffs’ articulated litigation aims were thickly composed of extra-legal objectives of principle, with 41% not mentioning monetary compensation at all, 35% viewing it of secondary importance, 18% describing money as their primary objective in suing, and only one person (6%) saying it was money alone.

CHAPTER 5 EXCERPTS ON LAWYERS VERSUS PARTIES AIMS FOR CASE RESOLUTION AT MEDIATIONS

Plaintiffs’ mediation objectives were quite consonant throughout the claimant group. Plaintiffs agreed that financial settlement was one aim. However, they regularly stressed that they wanted numerous things from mediation apart from settlement Most wanted defendants to admit fault or accept responsibility (94%), aimed to hear defendants’ perspectives (65%) and sought answers or explanations of what had occurred (71%). All plaintiffs stressed the need to be seen, heard, and understood by the defense in terms of what they had been through and their present situations. This included obtaining acknowledgements of their suffering. Such objectives contributed to plaintiffs’ pervasive desires for catharsis and closure. These findings are consonant with chapter 4 data highlighting plaintiffs’ perceptions of mediation as a place for information, human communication and psychologically ‘feeling better’. Consequently, most plaintiffs also wanted defendants in mediation to show they cared (53%) and to assure them the events would not recur (59%). Importantly, plaintiffs’ articulated extra-legal mediation objectives for closure, catharsis, wanting to be heard, wanting answers, apologies, admissions of fault and defendants to show they cared were the same or similar regardless of whether mediations were mandatory (occurring within months of the commencement of legal suits) or voluntary (often years later). This suggested that plaintiffs’ extralegal needs did not change over time. Moreover, when comparing claimants’ discourse on their litigation aims with their mediation objectives, the findings here reinforce those in chapter two on what plaintiffs said they sought from the justice system through litigation.

Plaintiffs’ Versus Plaintiff Lawyers’ Case Resolution / Mediation Aims – The disparity in mediation aims of plaintiffs and plaintiff lawyers revealed important differences in what each planned for mediation in terms of how to resolve the same case.  Other than wanting settlement, the mediation objectives of plaintiffs and plaintiffs’ lawyers were diverse in all categories. For instance, though some plaintiff lawyers noted their clients wanted defendants to admit fault (37%), regardless of feasibility not a single one sought this at mediation. In comparison, virtually all plaintiffs (94%) sought fault admissions at mediation. Similarly, plaintiff lawyers never mentioned wanting to hear defendants’ explanations of the disputed incidents. Again this was something that most plaintiffs desired (71%). Finally, as compared with the bulk of claimants (88%) who sought apologies at mediation, only a minority (32%) of plaintiff lawyers did (though almost half remarked that apologies were important for their clients).

Defendants’ Versus Defense Lawyers’ Mediation Aims

Gross disparities in mediation aims were found when comparing the discourse of defendant physicians with defense lawyers, particularly in the areas of apology, explaining their perspectives, listening to plaintiffs’ viewpoints and showing care. Moreover, physician lawyers’ discourse of tactical mediation objectives contained little of what plaintiffs said they sought at mediation. For instance, only one physician lawyer (10%) intended to show plaintiffs ‘the defendant cared’ about what happened. This was in sharp contrast to defendant physicians’ aims, where most (83%) aimed to show care. Moreover, regardless of their case assessments, no physician lawyer intended to admit any fault or to provide explanations or answers to plaintiffs about defendant physicians’ perspectives on what occurred. This was despite virtually all physician lawyers’ questionnaire responses indicating that underlying issues were more important for their physician clients than financial compensation. Yet, none discussed relaying this information as a mediation objective.

The disparities in mediation aims between legal actors and disputants were particularly clear in the following case.

LOSS OF SIGHT CASE – VOLUNTARY MEDIATION – The plaintiff explained that she had asked her optometrist of 16 years to do a glaucoma test because her father had been inflicted with the disease, and she felt film on her eye. She said, ‘He told me he’d already done the test and I was negative . . . I then went to another clinic and tested positive for glaucoma and was told that the right eye was at an advanced stage and could not be repaired—and that it should have been detected many years ago.’

MALE PLAINTIFF -50′s ‘…I wish he or his lawyer would express some remorse…an apology…their acceptance of guilt. We received absolutely nothing like that…Dr…wasn’t there…He could express remorse some way….It was like “I’m here to write a check”…It’s much more than dollars…It’s my wife’s eyes…’

MALE PHYSICIAN LAWYER-50′s-‘WHAT WERE YOUR MEDIATION OBJECTIVES Only to get the case settled.’

MALE SPECIALIST PLAINTIFF LAWYER-40′s ‘APART FROM SETTLEMENT, DID YOU HAVE ANY OTHER MEDIATION OBJECTIVES No…If there had been no mediation and just a bilateral settlement between the lawyers, I don’t know if the clients would have felt any loss in doing it that way…I’m not sure…because I really haven’t asked them about that.’

I will speak in my next post on my current scholarship, on the very different topic of international human rights laws and norms relating to formal courts versus informal/quasi-legal processing of violence against women cases throughout India.

At the outset, I’ll stipulate that I am no expert in health care but that my biases are strongly against the expansion of government entitlements in this or other areas. Discount my meanderings as you see fit. My understanding, however, is that a large part of the problem in health care costs comes in the way in which we price the system. We pay for services rather than outcomes. [...]]]> One of the joys of being a contracts prof is that you get to teach Hawkins v. McGee, the hairy-hand case of Paper Chase fame. Reading this week’s Economist briefing on health care has got me thinking about the meaning of the holding in that case for the current health care debates.

At the outset, I’ll stipulate that I am no expert in health care but that my biases are strongly against the expansion of government entitlements in this or other areas. Discount my meanderings as you see fit. My understanding, however, is that a large part of the problem in health care costs comes in the way in which we price the system. We pay for services rather than outcomes. This creates an incentive for providers to create a system structured around providing expensive procedures rather than providing positive health outcomes. I wonder, however, if Hawkins v. McGee doesn’t provide a way forward.

The case is normally presented as being about the proper measure of damages. Hawkins had a badly burned hand, and McGee promised that if he could perform an experimental skin graft Hawkin’s hand would be a “one hundred percent good hand.” The operation was a horrible failure, leaving Hawkins with a maimed and hairy hand. The court awarded expectation damages, namely the difference between what was promised — a good hand — and what was delivered — a maimed and hairy hand. (It turns out that a hand wasn’t worth much in New Hampshire in 1929; Hawkins got a couple of hundred bucks.) The case is odd because it presents what would ordinarily be a malpractice claim as a contract claim precisely because McGee did more than simply promise to perform services for a fee. He promised an outcome.

Suppose that we replaced the ordinary healthcare contract with the Hawkins v. McGee contract, namely that hospitals promised to deliver healthcare outcomes rather than healthcare services. First, it would align the incentives of health care providers much more closely with patients. Second, it would inject a lot of uncertainty into health care providers liabilities. After all, in many cases they will not be able to deliver particular outcomes, causing a breach of their contracts. This second issue could be controlled in two ways. First, health care providers could specify the amount they would pay in the event of unsuccessful treatment in a liquidated damages clause. Provided the courts enforced these clauses, they would diminish the unpredictability of payouts. Second, and perhaps more importantly, a fee-for-outcome contract would create a powerful incentive for healthcare providers to actuarialize the effectiveness of treatments, carefully compiling data on how likely successful outcomes actually are.

Were this contract adopted, going to the doctor would involve the purchase of a very different bundle of rights. Rather than buying services on the advice of a conflicted expert advisor, one would in effect purchase a form of insurance. In return for a fee, you would be promised a favorable outcome or the payment of some sum of money. The hospitals would then, in effect, be in the position of making bets on the effectiveness of their own treatments, bets that would become more profitable the better the outcomes were.

[M]aterial available on the Web shows that people who have specific illnesses or use certain drugs can’t buy coverage.

”This is absolutely the standard way of doing business,” said Santiago Leon, a health insurance broker in Miami. Being denied for preexisting conditions is well known, but when a person sees the usually confidential list of automatic denials for himself, “that’s a eureka moment. That shows you how harsh the system is.” . . . .

Searching the Web, The Miami Herald found underwriting guidelines for Coventry Health Care, which owns Vista; Wellpoint; [...]]]> For the millions of people losing their jobs and having to obtain health insurance on their own, they are in for quite some difficulty if they have a pre-existing condition. According to the Miami Herald:

[M]aterial available on the Web shows that people who have specific illnesses or use certain drugs can’t buy coverage.

”This is absolutely the standard way of doing business,” said Santiago Leon, a health insurance broker in Miami. Being denied for preexisting conditions is well known, but when a person sees the usually confidential list of automatic denials for himself, “that’s a eureka moment. That shows you how harsh the system is.” . . . .

Searching the Web, The Miami Herald found underwriting guidelines for Coventry Health Care, which owns Vista; Wellpoint; Assurant Health; and Blue Cross Blue Shield of Nebraska.

Among the health problems that the guides say should be rejected: diabetes, hepatitis C, multiple sclerosis, schizophrenia, quadriplegia, Parkinson’s disease and AIDS/HIV.

For cancer, the key is how patients have been doing in remission. Wellpoint, a national insurer, rejects applicants who have had breast or prostate cancer within the past five years. With other types of cancer, 10 years must have passed. Assurant Health, based in Milwaukee, rejects most patients whose cancer has not been in remission for at least eight years.

Other reasons for automatic denial by various companies: alcohol-related problems of people who have not been abstinent for at least six years, chronic bronchitis, severe migraines, and a cardiac pacemaker installed within the last two years.

Some insurers will automatically reject applicants who are using certain prescription drugs. Wellpoint denies anyone who within the past year has taken Abilify and Zyprexa for mental disorders as well as Neupogen, which is used to treat the side effects of chemotherapy. Vista lists the anticoagulant Warfarin and the pain medication Oxycontin. Both companies list insulin.

The article also discusses how the insurers use database companies to gather data about people’s medical conditions and prescription drug use:

To make sure that applicants are not lying, insurers hire a data-gathering service — Medical Information Bureau, Milliman’s Intelliscript or Ingenix Medpoint.

Intelliscript and Medpoint do computerized searches of a person’s drug use, gleaned from pharmacy benefits managers and other databases.

The difficulty is that if a person has a disease, then it may be nearly impossible for that person to obtain health insurance. My advice: (1) stay employed; (2) don’t get ill. Otherwise, you’re basically out of luck.

Originally, of course, there weren’t insurance companies. Rather, individual merchants and speculators would meet informally at Lloyd’s Coffee House in London. Suppose that there was a merchant with a ship that was about to make a voyage to America that he wished to insure against loss due to the perils of the sea. He would arrive at Lloyd’s with a written contract promising to pay him so much in the event that his ship went [...]]]> Of late I’ve been reading Niall Ferguson’s The Ascent of Money: A Financial History of the World, and I’ve been struck again at how similar the rise of the modern CDS market is with the rise of maritime insurance at Lloyd’s Coffee House in the early 18th century.

Originally, of course, there weren’t insurance companies. Rather, individual merchants and speculators would meet informally at Lloyd’s Coffee House in London. Suppose that there was a merchant with a ship that was about to make a voyage to America that he wished to insure against loss due to the perils of the sea. He would arrive at Lloyd’s with a written contract promising to pay him so much in the event that his ship went down. He would also arrive with money — or at least the willingness to pay it. He would then circulate through the coffee house, looking for those who were willing to sign the contract. Suppose that the contract promised to pay out 5,000 pounds in the event that the ship went down. Some people would sign for one pound of liability, some for 100 pounds, some for 1,000 pounds. Each underwriter would, of course, be paid by the merchant for their signature in proportion to the amount of liability that the underwriter took on. In the end, the merchant would have an insurance contract on his ship signed by a pool of investors who in aggregate were paid less than the insured value of the ship. Of course, while he was at Lloyd’s the merchant might pick up a bit of money by signing on as an underwriter on another merchant’s insurance contract. Before too long there were people who made their living (or at least tried to) entirely with in Lloyd’s Coffee House.

Thus maritime insurance started out much like the modern CDS market. It was an entirely over the counter trade. (Literally!) There were no reserve requirements for underwriters, there was a lot of speculation by those who didn’t have a clear idea of the risks they were taking on, as well as underwriting by experienced market participants who probably had a very good idea about the perils of the sea. And of course, there was an endemic problem of counter party risk. If an underwriter turned out to be insolvent in the event that a ship did sink off Cape Hatteras, there wasn’t much that the hapless owner could do. There was, I suppose, the consolation of debtor’s prison and the knowledge that you could drive welshing underwriters and their children into a Little-Dorrit-esque existence.

There was a two fold response to the wild world of Lloyd’s. On one side, the common law courts reacted with skepticism if not outright hostility to the contracts written in the smokey coffee rooms. There was a persistent suspicion that these contracts were little more than gambling devices, something disreputable that ought to be suppressed or limited. On the other side, the regulars at Lloyd’s realized that they needed to clean up the insurance market. The result was a system of trading within an association to which one could not gain access unless certain basic proofs of reliability were met. In the end, pay-as-you-go was replaced with insurance based on an insurance pool and investment proceeds, which gradually reduced the problem of counter party risk in insurance. (Although it far from eliminated it.)

I actually think that there are some important lessons to be learned from Lloyd’s. First, over the long term I think that it is pretty clear that the insurance-as-gambling meme turned out to be a legal dead end. Judicial hostility toward insurance contracts injected legal uncertainty into the mix of other risks, but did little or nothing to deal with the underlying problems of counter-party risk and proper risk assessment. These problems, it turned out, were solved despite legal hostility rather than because of it. Second, a completely decentralized market of spot contracts in pure risk allocation doesn’t work horribly well. Regulating the capital requirements of players in the game (or at least insuring their transparency) is absolutely necessary. Better yet is a clearing house system that eliminates counter party risk through asset pooling and the ruthless exclusion of unreliable or undercapitalized players. Not surprisingly, the commercially sophisticated parties at Lloyd’s did both of these things long before the courts and parliament managed to sort out a sensible attitude toward insurance. I suspect that the same will be true of the CDS market.

Nearly 30% of the total nursing-home population is receiving antipsychotic drugs. . . . In a practice known as “off label” use of prescription drugs, patients can get these powerful medicines whether they are psychotic or not.

Federal and some state regulators are pushing back, questioning the use of antipsychotic drugs and citing nursing homes for using them in ways that violate federal rules. New York has increased its focus [...]]]> The market has done a characteristically fantastic job of “trimming the fat” at nursing homes–i.e., squeezing out more profit by providing less care. One may wonder, how do the residents of such homes get taken care of when staff are fired and other corners are cut? The WSJ reports on one solution: drug them.

Nearly 30% of the total nursing-home population is receiving antipsychotic drugs. . . . In a practice known as “off label” use of prescription drugs, patients can get these powerful medicines whether they are psychotic or not.

Federal and some state regulators are pushing back, questioning the use of antipsychotic drugs and citing nursing homes for using them in ways that violate federal rules. New York has increased its focus on antipsychotics in nursing homes, training inspectors to spot signs of medication abuse.

Meanwhile, some employees are finding their health increasingly managed by their employers. “Employers Tell Workers To Get Healthy or Pay Up” is the headline, and here are some of the pressures:

Employees at some companies who are overweight, smoke, or have high cholesterol, for instance, and who don’t participate in supplementary wellness programs, will pay more for health insurance. In extreme cases, employees’ insurance deductibles could rise by $2,000.

What I wonder is: will the same people who are so distressed by the possibility of government-mandated purchase of health insurance also rise up against the corporate imposition of health standards? Or is paternalism perfectly fine when it’s a product of the market?

Finally, I highly recommend Frederick Crews’s piece on the increasing pressures to conform one’s personality to a sanguine norm. Observing some trends I noted in a review of a book on the pathologization of shyness, Crews notes that we are entering a world “in which convictions, perceived needs, and choices regarding health care are manufactured along with the products that will match them.” Here’s one part of a fascinating review:

[E]pisodic sadness has always been a socially approved means of adjusting to misfortune and that much is lost, both medically and culturally, when it is misread as a depressive disorder. Yet [DSM-III] has propagated that very blunder by failing to clarify the difference between environmentally prompted moods—those responding to stress or hardship—and dysfunctional states persisting long after the causes of stress have abated. In no sense, however, can that indictment be confined to just one disorder. The Loss of Sadness [a book reviewed by Crews] implies that nearly every nonpsychotic complaint is subject to overdiagnosis unless contextual factors—familial, cultural, relational, financial—are weighed in the balance.

As I have suggested in Technology, Competition, and Values, we cannot ignore how “financial factors” play into our pathologization of certain ways of thinking, feeling, and acting. If Medicaid were funded adequately, perhaps we could properly pay the number of staff necessary to treat elderly nursing home residents as people in need of care, not sedation. Perhaps a universal health care system would excuse employers from the terrible choice the market forces on them: avoid sick workers or face a competitive disadvantage vis a vis the companies that do. And finally, perhaps a society with less pressure to “sell oneself” would give the shy, the sad, and the anxious a little breathing room to explore many alternative routes to well-being.

Image Credit: Wikipedia, Bentham’s Panopticon.