Listen to the chatter from top officials, and you’d think that World War III was about to break out on the Internet. The defense secretary is warning about a digital “Pearl Harbor.” Former director of national intelligence Mike McConnell declares that the United States is “fighting a cyber war, and we’re losing.” Every new hack brings more pronouncements of network doom.

The scare talk, however, is misplaced. Yes, we’re facing enormous cybersecurity problems — just look at the high-profile penetrations of such companies as Sony and Lockheed or the millions of Americans whose personal information has been stolen online.

But these aren’t signs of some impending cataclysmic showdown as I explain in my new cybersecurity paper for The Brookings Institution. They’re markers of a rising tide of online crime that, in its own way, could be more dangerous than a cyberwar. According to the British government, online thieves, scammers and industrial spies cost U.K. businesses an estimated $43.5 billion in the past year alone. Crooks-for-hire will infect a thousand computers for $7 — that’s how simple it’s become. Sixty thousand new malicious software variants are detected every day. Forget “Pearl Harbor”; if we’re not careful, the Internet could be in danger of looking like the South Bronx circa 1989 – a place where crooks hold such sway that honest people find it hard to live or work there.

Could there be some online conflict in the future? Maybe. But crooks are draining billions from the legitimate global economy right now. Even the Pentagon’s specialists are worried, noting in their new cybersecurity strategy that “the tools and techniques developed by cyber criminals are increasing in sophistication at an incredible rate.”

Those tools also are becoming easier to use. The latest crimeware makes stealing passwords about as simple as setting up Web pages. One gang, recently arrested, used it to drain $9.5 million in just three months.

Read the full article at washingtonpost.com >>

In December 2009, the Saban Center for Middle East Policy conducted a day-long simulation of the diplomatic and military fallout that could result from an Israeli military strike against the Iranian nuclear program. In this Middle East Memo, Kenneth M. Pollack analyzes the critical decisions each side made during the wargame.

The simulation was conducted as a three-move game with three separate country teams. One team represented a hypothetical American National Security Council, a second team represented a hypothetical Israeli cabinet, and a third team represented a hypothetical Iranian Supreme National Security Council. The U.S. team consisted of approximately ten members, all of whom had served in senior positions in the U.S. government and U.S. military. The Israel team consisted of a half-dozen American experts on Israel with close ties to Israeli decision-makers, and who, in some cases, had spent considerable time in Israel. Some members of the Israel team had also served in the U.S. government. The Iran team consisted of a half-dozen American experts on Iran, some of whom had lived and/or traveled extensively in Iran, are of Iranian extraction, and/or had served in the U.S. government with responsibility for Iran.

Read more »

Downloads

• Download

INTRODUCTION

Later this month, Egyptians will go to the polls, or attempt to, in order to vote in the country’s parliamentary elections. The elections will unlikely be a democratic affair in the Western sense. In fact, opposition candidates, voters, citizen groups—essentially everyone other than government representatives—are fully expecting the elections to be a violent and rigged episode. For easy reference, one can look to the June elections for the Shura Council, or upper house of Parliament, in which the governing National Democratic Party (NDP) managed to land 80 out of a possible 84 seats. Those elections were marked by violence and allegations of rampant violations.

Elections in Egypt are not generally democratic, they do not necessarily reflect the will of the people, and they will invariably usher in a house in which the NDP has an unshakeable majority. More so, the elected body has very little control over the government and none over the president, who, thanks to some creative constitutional amendments in 2007, can dissolve the Parliament at will. Election results are apparently so preordained that many have questioned the wisdom of participating at all. Opposition groups, among them the National Alliance for Change (NAC), led by former International Atomic Energy Agency (IAEA) head and current political reformer Mohamed ElBaradei, have been calling for a boycott. ElBaradei told reporters at a Ramadan Iftar meeting on September 7 that voting “would go against the national will.” Many political analysts and some members of the opposition have echoed the belief that participation in the elections only gives credence to a fundamentally flawed system and perpetuates the state myth of a democratic nation.

The above argument certainly has its merits, but it misses the point. Elections in Egypt are not about who wins seats—that is usually a foregone conclusion. They are about the “how and the what,” in the sense that they are oases of political activity, demand, and dissension in an otherwise arid climate. In that way, every election fought represents losses and gains for the respective participants in ways that invariably influence the following elections. Also, the ballot boxes can yield surprising results—as in the case of the 2005 elections when the Muslim Brotherhood (MB) gained a jawdropping 88 of 454 seats in the elections for the lower house. This outcome certainly would not have come about if the Brotherhood had not participated. To be sure, there are also significant, detrimental changes that happen as a direct consequence of the elections, among them constitutional amendments designed to hobble the opposition’s ability to field candidates and campaign. Still, for opposition parties and movements, boycotting the elections is the equivalent of throwing away the only political participation they have. It would mean relinquishing any visibility or influence and it would mean admitting to their supporters that they are essentially mere window dressings in the democratic façade. Arguably, this is a reason why these elections have only ever been boycotted once, in 1990. The Egyptian political arena is one where contestants scrabble for the smallest patch of ground. The high moral ground simply does not figure into it.

Downloads

• Download Full Report - English

INTRODUCTION

A year after President Hosni Mubarak’s fall, U.S.-Egypt relations are at an all-time low. Not, as many expected, because of the rise of Islamist parties, but because America’s longtime allies in the Egyptian military have whipped up anti-American sentiment at a feverish pace. It may have started as a political ploy, a way to build support on the street and highlight the army’s nationalist credentials, but the generals soon lost control. In January, the Egyptian government announced that sixteen Americans—including the son of a top U.S. official— would be put on trial, facing up to five years in prison. Their apparent crime was working for American nongovernmental organizations (NGOs)—the National Democratic Institute, the International Republican Institute, and Freedom House—that offered support, funding, and election monitoring for Egypt’s uneven transition.

On March 1, the Egyptian government lifted the travel ban on seven Americans who were still in Egypt, allowing them to leave the country. A major diplomatic breach was avoided, giving the impression that the crisis had been resolved. This appears to be the interpretation of the Obama administration, which waived congressional conditions on military aid, citing the importance of maintaining a “strategic partnership” with Egypt.2 However, the charges against the Americans remain, and there is no sign that the American NGOs in question will be able to reopen anytime soon. More importantly, the vast majority of affected NGOs—which are Egyptian rather than American—still find themselves on trial and under attack.

The NGO episode, however worrying it is on its own, reflects something larger and more troubling: the slow descent from the national unity of the revolution to a fog of paranoia, distrust, and conspiracy theorizing. Who is with the revolution, and who isn’t? The roots of the problem lie in the uncertainly inherent in Egypt’s muddled transition. Unlike in Tunisia, where the Higher Committee for the Achievement of Revolutionary Objectives (HCARO)—accepted as legitimate by all of the country’s main political forces—was responsible for managing the transition, Egypt has featured various competing actors claiming their own distinct sources of power. The struggle for legitimacy between the Supreme Council of the Armed Forces (SCAF), the Muslim Brotherhood-dominated parliament, and the protest movement has created a fragmented political scene. Everyone wants to lead the transition, but no one wants to take full responsibility for the results.

Downloads

• Download the full paper

The potential for confrontation between the United States and Iran, stemming from ongoing tensions over Iran’s nuclear program and western covert actions intended to delay or degrade it, remains a pressing concern for U.S. policymakers. The Saban Center for Middle East Policy hosted a one-day crisis simulation in September that explored different scenarios should a confrontation occur.

The Saban Center's new Middle East Memo, A Series of Unfortunate Events: A Crisis Simulation of a U.S.-Iranian Confrontation, authored by senior fellow Kenneth M. Pollack, presents lessons and observations from the exercise.

Key findings include:

• Growing tensions are significantly reducing the “margin of error” between the two sides, increasing the potential for miscalculations to escalate to a conflict between the two countries.

• Should Iran make significant progress in enriching fissile material, both sides would have a powerful incentive to think short-term rather than long-term, in turn reinforcing the propensity for rapid escalation.

• U.S. policymakers must recognize the possibility that Iranian rhetoric about how the Islamic Republic would react in various situations may prove consistent with actual Iranian actions.

Download » (PDF)

Downloads

• Download the paper

Last September, as part of its annual conference with the United States Central Command, the Saban Center for Middle East Policy at the Brookings Institution conducted a day-long simulation of a confrontation between the United States and Iran arising from a hypothetical scenario in which the Syrian opposition had made significant gains in its civil war and was on the verge of crushing the Assad regime.  

The simulation suggested that, even in the wake of President Rouhani’s ascension to power and the changed atmosphere between Tehran and Washington, there is still a risk of misunderstanding and miscalculation between the two sides.

This new Middle East Memo examines the possible U.S. foreign policy lessons that emerged from this crisis simulation, and stresses the importance of communication, understanding the Saudi-Iran conflict and the difficulty in limited interventions. 

Downloads

• Hard Road to Damascus: A Crisis Simulation of U.S.-Iranian Confrontation over Syria

Editor’s Note: This analysis is part of The Leonard D. Schaeffer Initiative for Innovation in Health Policy, which is a partnership between the Center for Health Policy at Brookings and the USC Schaeffer Center for Health Policy and Economics. The Initiative aims to inform the national health care debate with rigorous, evidence-based analysis leading to practical recommendations using the collaborative strengths of USC and Brookings.

The passage of the Medicare Access and CHIP Reauthorization Act (MACRA) just over a year ago signaled a strong and unique bipartisan agreement to move towards value-based care, but until recently, many of the details surrounding how it would be implemented remained unknown. But last week, the Centers for Medicare and Medicaid Studies (CMS) released roughly 1,000 pages that shed more light on how physician payment will hopefully dramatically change for the better.

Some Historical Context

Prior to MACRA, how doctors were paid for providing care to Medicare patients was subject to a reimbursement formula known as the Sustainable Growth Rate (SGR). Established in 1997 to control the rate of increase in spending on physician services, the SGR pegged total spending among all Medicare-participating physicians to an overall budget target. Yet in this “tragedy of the commons,” no one physician benefitted from her good stewardship of health care resources. Total physician spending often exceeded the overall budget target, triggering reimbursement rate cuts. However, lawmakers chose to push them off into the future through what were called “doc fixes,” deferring the rate cuts temporarily. The pending cut rose to over 21 percent before MACRA’s passage as a result of compounding doc fixes.

Moving Forward with MACRA

When it was signed into law on April 16, 2015, MACRA ended the SGR, its cuts, and many previous payment incentive programs. In their place, MACRA established two overarching payment incentive schemes for providers to choose from:

1. the Merit-Based Incentive Payment System (MIPS) program, which supplants three previous payment incentives and makes positive or negative adjustments to a physician’s payment based on her performance; or


2. the Alternative Payment Model (APM) program, which awards a 5 percent bonus through 2024—with higher annual payment updates thereafter—for having a minimum percentage of Medicare and/or all-payer revenue through eligible APMs. Base physician fee rates for all Medicare providers would be updated 0.5 percent for each of the first four years, followed by no increases until 2026, when base fees would increase at different rates depending on the payment incentive program in which a physician participates.

MIPS addresses providers’ longstanding complaints that reporting that reporting under the existing programs—the Physician Quality Reporting System, the Value-Based Modifier, and Meaningful Use — is duplicative and cumbersome. Under the new MIPS program, physicians report to the government payer directly (CMS) and receive a bonus or penalty based on performance on measures of quality, resource use, meaningful use of electronic health records, and clinical practice improvement activities. The bonus or penalty physicians may see starts at 4 percent of the fee schedule in 2019 (based on their performance two years prior—in this case 2017) and increases successively to 5 percent in 2020, 7 percent in 2021, and 9 percent from 2022 onward. From 2026 onward, MIPS providers would receive an annual increase of 0.25 percent on their base fee schedules rates.

In contrast, the APM incentive program awards qualifying physicians a fixed, annual bonus of 5 percent of their reimbursement from 2019- – 2024, and provides that their fee schedule rates grow 0.5 percentage points faster than those of MIPS in 2026 and beyond, in recognition of the risk they assume in these contracts.

Yet, according to MACRA, not all APMs are created equal. APMs eligible for this track must use quality measures similar to those of MIPS, ensure electronic health records are used, and either be an approved patient-centered medical home (PCMH) or require that the participating entity “bears more than nominal financial risk” for excessive costs. Then, in order to receive the APM track bonus, physicians must have a minimum of 25 percent of their revenue from Medicare come through eligible APMs in 2019, with the minimum increasing through 2023 up to 75 percent. In 2021, a new all-payer Advanced APM option becomes available, allowing providers in APM contracts with other payers to participate in the Advanced APM incentive. To do so, they must meet the same minimum thresholds—50 percent in 2021, 75 percent in 2023—but through all provider contracts, not solely Medicare revenue, while still meeting a significantly lower Medicare-specific threshold. By creating an all-payer option, CMS hopes to enable greater provider participation by allowing all payer revenue to count toward the same minimum threshold. Under the all-payer model in 2021, for example, providers must have no less than 25 percent of Medicare revenue through Advanced APMs and 50 percent of all revenue through Advanced APMs.

MACRA Implementation Details Revealed

The newly released proposed rule provides answers to significant questions that had been left unanswered in the law surrounding the specifics of implementation of MIPS and the APM incentives. At long last, providers are gleaning insight into how CMS intends to implement MIPS and the APM track. Given the fast-approaching MIPS performance period in January 2017, here are three key highlights providers need to know:

1. Qualifying for the APM incentive track—and getting out of MIPS—will be difficult. In order to qualify for the bonus-awarding Advanced APM designation, APMs must meet the “nominal financial risk” criteria, which will be measured in three ways: an APM’s marginal rate sharing for losses, minimum loss ratio (the threshold above which providers would begin sharing in losses), and total potential risk as a percent of expected costs. Clinicians must further have a minimum share of revenue that comes in through the designated APMs.


2. Providers will have fewer opportunities to see and improve their performance on MIPS. Despite calls from provider groups for more frequent reporting and feedback periods, MIPS reporting periods will be annual, not quarterly. This is true for performance feedback from CMS, as well, though they may explore more frequent feedback cycles in the future. Quarterly reporting and feedback periods could have made the incentive programs more “actionable” for providers, alerting them to their performance closer to the time the services were rendered and providing more opportunities to improve performance.


3. MIPS allows greater flexibility than previous programs. Put simply, MIPS is the performance incentive program clinicians will participate in if not on the Advanced APM track. While compelling participation, the proposed MIPS implementation also responds to stakeholder concerns that earlier performance incentive programs were onerous and sometimes irrelevant—MIPS reduces the number of measures required in some categories and allows physicians to select from a set of measures to report on based on relevancy to their practice.

With last week’s release of the proposed rule, the Leonard D. Schaeffer Initiative for Innovation in Health Policy is kicking off a series of work products that will focus dually on further MACRA implementation issues and on translating complex policy into providers’ experience. In the blogs and publications to follow, we will dive into greater detail and discussion of the pieces of MACRA implementation highlighted here, as well as many other emerging physician payment reform issues, as the law’s implementation unfolds.

The Medicare Access and CHIP Reauthorization Act of 2015, referred to most often as “MACRA,” set in motion a new approach to Medicare physician payment and replaced the oft-criticized Sustainable Growth Rate with two new payment schemes. In late April, the Centers for Medicare and Medicaid Services (CMS) released many proposed details surrounding the law’s implementation; however, it is important to keep in mind that the final rule is still forthcoming and may incorporate significant changes in response to public comments made on the proposed rule.

While there are many stakeholders trying to understand the implications of this significant legislation, physicians and other providers—whose response is critical to the success of MACRA—must prepare quickly and almost immediately make decisions about which incentive program to pursue and what steps will increase prospects for success. Starting January 1, 2017, physicians’ and other providers’ performance will determine their payment rate updates. Because of the time required to gather and evaluate performance data, spending and other performance measures in calendar year 2017 will provide the basis for physician payments in 2019.

In this piece, we offer a glimpse into the potential financial changes in physician payment based on the proposed rule. Due to the complexity of the MACRA provisions and their significant effects on payment, policymakers, physicians, and other providers alike must better understand the various dimensions of MACRA. We focus on the financial flow of dollars to help physicians and other providers assess which path within MACRA to take and how best to forecast the impact on their payments, as well as to provide an overview for policymakers on the financial implications of different options physicians are actively weighing now as a result of MACRA.

MACRA overview

As established in the law, MACRA creates two primary payment schemes that physicians accepting Medicare can choose to be judged under:

1. The Merit-Based Incentive Payment System (MIPS), which administers bonuses or penalties based on how well physicians perform relative to other physicians on a set of quality and value measures (detailed later); or
2. The Advanced Alternative Payment Model (APM), which initially offers bonuses and then provides higher annual fee updates than MIPS when physicians earn a sufficient amount of their revenue (or see a sufficient percentage of their patients) through qualifying Medicare or approved private payer payment models that require accepting financial risk if spending exceeds targets.

At least initially, the large majority of physicians and other providers likely will be judged under MIPS, with CMS projecting in the proposed rule that only 4 to 11 percent of Medicare providers will qualify for the Advanced APM payment approach in its first year because of the relatively strict standards to qualify. Unlike the expectations expressed during congressional debate over MACRA, which mainly focused on encouraging physicians to form or contract with APMs, the rules proposed by CMS will lead many to remain in MIPS for the foreseeable future. Indeed, we understand that many physician specialty societies are advising their members to remain in MIPS. In a comment letter to CMS, we suggested ways to better support the pipeline of physicians and other providers into APMs.

The graph below illustrates the potential scenarios for the flow of funds under the proposed rule. In MIPS, payment is based upon physician performance relative to all other physicians in the program, with bonuses and penalties centered around the base fee-for-service (FFS) payment rates and annual payment updates. MACRA explicitly requires bonuses or penalties in MIPS—not including exceptional performance bonuses—to be budget neutral.

Unlike MIPS, the Advanced APM program dictates that physicians receive a fixed 5 percent bonus for each of the first six years and higher base payment rate updates than MIPS from 2026 onward, in addition to additional bonuses or penalties based on quality and cost performance under their respective Advanced APM contracts. Adding to the contrast with MIPS, bonuses in the Advanced APM program, as well as contractually specified bonuses or penalties, have no requirement to be budget neutral.

The graph below illustrates that consistently high performers in MIPS can actually financially outperform physicians in APMs for many years. In theory, therefore, physicians in an APM—for instance, a Next Generation Accountable Care Organization (ACO)—who are confident that they would score well on relevant quality and value metrics might actually prefer to be judged as a group under MIPS.

In assessing their options, though, it is important to recognize that performance under MIPS as an individual physician or small group may be less predictable than as a part of an APM, because performance in MIPS is relative to the performance of other physicians. This unpredictability occurs because, as explained above, MACRA requires MIPS incentive payments to be budget neutral, which makes performance among MIPS providers a zero-sum-game—one physician’s increase in performance threatens the payment of another, such that bonuses and penalties offset each other overall.

The Merit-Based Incentive Payment System (MIPS)

MIPS consolidates three existing programs that dictate physician bonuses or penalties for Medicare physicians and other providers (the physician quality reporting system, a meaningful use incentive program for electronic health record use, and the value-based payment modifier) into a new system that creates a composite score based on:

• The quality of care provided (30 percent in 2021 and beyond), as measured under current law;
• Resource use (30 percent in 2021 and beyond), which consists of the “measures of resource use established for the value-based modifier under current law and, to the extent feasible, accounting for the cost of Part D Drugs”;
• Meaningful use of electronic health records (EHRs) (25 percent), established under current law to determine whether a provider is meaningfully using EHRs; and
• Clinical practice improvement activities (15 percent), a broad subsection decided on by the Secretary.

Physicians and other providers’ weighted scores in each of these categories for a year are aggregated into an overarching Composite Performance Score (CPS) for each practice. The CPS values are ranked from highest to lowest, and the relative ranking of each score determines how provider payments are adjusted, dictating whether a bonus or penalty results as well as its size. Each year, the Secretary will select either the mean or the median of CPSs for that year to serve as the performance threshold above and below which physicians and other providers will receive bonuses or penalties, respectively.

Initially in 2019, 4 percent of a medical professional’s revenue generated through Medicare fee-for-service payments will be redistributed under MIPS, growing to 9 percent by 2022 and remaining at that level indefinitely. By comparison, under the three previous reporting programs, physicians in small practices were subject to combined penalties as high as 6 percent or bonuses up to 2 percent; larger practices (with 8 or more physicians) were subject to maximum penalties and bonuses of 8 percent and 4 percent, respectively.

Maintaining budget neutrality requires that CMS pay the same amount in bonuses as it receives in penalties. To assure that penalties offset bonuses, the MIPS bonus percentages described above are potentially subject to a scaling factor of up to three-times to maintain budget neutrality. For example, having the Secretary adopt the median CPS would mean half of all physician practices would rank above that value and half would rank below. However, because practices can differ in both number of physicians and the extent of their Medicare billing, there is no guarantee that the Medicare payments—and associated bonuses—earned by practices above the midpoint would exactly equal the penalties owed by practices below the midpoint. CMS would compute and apply an appropriate scaling factor to assure total bonuses equal total penalties and achieve budget neutrality.

Outside of the budget neutrality requirement, the law provided $500 million each year from 2019 to 2024 to award “exceptional performance” bonuses to MIPS providers with the highest composite performance scores. The bonuses would be awarded on a sliding scale up to as high as 10 percent added to the base MIPS bonus.

Advanced Alternative Payment Models (Advanced APMs)

The other pathway under MACRA involves alternative payment models that meet the criteria established by CMS to be designated “advanced.” Advanced APMs are defined as (i) measuring physicians and other providers according to metrics similar to those of MIPS, (ii) requiring providers’ use of certified EHRs, and (iii) holding providers accountable for at least “nominal financial risk.” In the proposed rule, CMS outlines which of its current APMs measure up to this “Advanced” threshold, including:

• Medicare Shared Savings Program ACOs, Tracks 2 and 3;
• Medicare Next Generation ACOs;
• Comprehensive Primary Care Plus (CPC+) Model;
• Oncology Care Model (two-sided risk); and
• Comprehensive End-Stage Renal Disease Care Model (Large Dialysis Organization arrangement).

Notably absent from this list of proposed approved Advanced APMs are Track 1 MSSP ACOs and various bundled payment models.

By earning a sufficient percentage of their revenue through an Advanced APM, physicians can qualify for a bonus payment equal to 5 percent of their annual fee-for-service revenue in years 2019-2024 and a 0.5 percentage-point higher annual fee rate increase than physicians and other providers in MIPS each year starting in 2026 (0.75 percent vs. 0.25 percent). Alternatively, as a new feature under this rule, physicians can also qualify by seeing a sufficient percentage of their patients through an Advanced APM; notably, the patient percentage thresholds are lower than the revenue percentage thresholds.

Specifically, for physicians participating in Advanced APMs, there are four ways to qualify for the bonuses and higher payment updates of the Advanced APM track. Across all, the thresholds increase in the initial years and remain constant from 2023 onward. However, the thresholds are distinct in whether they are based on revenue or patient volume, as well as whether they are based on Medicare alone or on all payers. The four categories for qualification are:

1. Earn a minimum percentage of their Medicare Part B revenue through an Advanced APM;

2. Starting in 2021, earn a lower minimum percentage of their Medicare Part B revenue AND a minimum percentage of their revenue from all payers through an Advanced APM;

3. See a minimum percentage of their Medicare patients through an Advanced APM; or

4. Starting in 2021, see a lower minimum percentage of their Medicare patients AND a minimum percentage of their patients from all payers through an Advanced APM.

Importantly, if physicians and other providers fall short of these minimums, they would not qualify under the Advanced APM track. However, physicians and other providers participating in APMs who meet the lower “Partial Qualifying Provider” percentage thresholds for either revenue or patients can choose to opt out of MIPS reporting altogether, guaranteeing that they will receive neither a penalty nor bonus for the year. Further, the providers participating in APMs that were not designated Advanced may still qualify as MIPS APMs and receive some automatic credit under the Clinical Practice Improvement Activities (CPIA) category.

Potential for low specialist participation in the Advanced APM program

Over time, MACRA is likely to continue to evolve and the All-Payer Combination Advanced APM option will become available, making payment models developed by private insurers increasingly available and allowing more payment models to gain “advanced” recognition.

Notably, however, the “advanced” list does not include any of the current bundled payment models established by CMMI. This omission will be particularly critical to specialists, as bundled payments represent a significant share of their participation in APMs and many of the proposed “advanced” APM qualifiers have more effectively engaged primary care physicians and other providers than specialists to-date.

To this end, in their proposed rule, CMS’ requested comment on how to offer an option based on bundled payments, a model that has garnered comparatively greater specialist participation. Bundled payments as a concept have often been cited by economists and health care policymakers as a strong policy lever to shift to value-based payment, but their exclusion may effectively limit many physicians and other providers.

Concluding thoughts and outstanding questions

With only six months before physicians’ performance will have an impact on their payment under MACRA, physicians are intensely scrutinizing the two payment incentive programs and how they would fare under them. But most are confused about how best to navigate the various programs given the complexity of the rules and options. The lack of timely data with which to assess their performance on an ongoing basis may further handicap the ability of physicians to make informed choices and improve their performance.

While the proposed rule elucidates many elements of the new payment systems and the final rule will help clarify some remaining questions, many questions about moving parts remain, including those related to: the different risks and rewards for MIPS vs APMs; the uncertainty of movement between both pathways; and the potential for additional payment models (such as the Physician-Focused Payment Model option). These and other uncertainties have raised concerns about the viability of small practices in this environment and the risk that MACRA will lead large numbers of physicians to seek employment by hospitals and large physician organizations. This risks potentially leading to to much higher degrees of consolidation and losses in physician productivity.

MACRA remains a fundamentally important change from the status quo. It offers significant promise to change—and hopefully improve—physician practice and move payment from volume to value. Without question, its implementation will be watched intently.

President Barack Obama's April 17 debut before the hemisphere's main gathering of democratically elected leaders offers an important test of his administration's commitment to longstanding bipartisan support for democracy abroad. So far, the signals are not encouraging.

No doubt, the president inherits an unfortunate legacy on this front. President George W. Bush's over-the-top freedom agenda was seen by many as a veiled attempt, by military means or otherwise, to assert U.S. hegemony. At best, it was an overly ambitious and ham-handed effort to boost prospects for political reform in every corner of the world.

The more pragmatic Mr. Obama will take a different, more muted approach, bending U.S. advocacy on human rights to other concerns. Secretary of State Hillary Clinton apparently suggested that in her February visit to Beijing, where she signaled to the Communist Party's leaders that the United States would not let human rights get in the way of other priorities. But how far will this pragmatism go? Are we entering a new era in which the rights of the hundreds of millions of people who still live under authoritarian rule are relegated to third-tier status in the U.S. agenda?

In Latin America and the Caribbean, the good news is that most citizens not only have a secure voice and vote in how they are governed, but live in increasingly free societies. Freedom of the press is robust, civil society is active and independent judiciaries are slowly consolidating. Threats to these critical components of any democratic society emanate less from a restless military and more from heavily armed criminals who create havoc in once safe neighborhoods and target investigative journalists and honest judges with "plata o plomo" - money or lead.

There are, however, a few exceptions to this generally positive trend. Venezuela, under Hugo Chavez's tutelage, has deteriorated badly on several indicators of democratic life and is no longer invited to the Community of Democracies, a global association of governments committed to fundamental practices of democracy and human rights. Not far behind is Nicaragua which, under Sandinista leader Daniel Ortega, is reverting to old-style tactics of repressing the opposition and clamping down on dissent. Other states worth watching closely are Ecuador and Bolivia which, as they undertake dramatic reform to incorporate once marginalized groups, are vulnerable to civil conflict.

And then there is Cuba. Raul Castro will not be at the Summit of the Americas in Trinidad and Tobago because Cuba does not adhere to the inter-American system's fundamental principles of democracy and human rights. That is as it should be. But Mr. Obama will face considerable pressure from his colleagues to fudge this bright line by engaging, rather than isolating Cuba, as they and nearly every other country has done. Indeed, the White House has already begun moving in this direction by easing restrictions on family travel and remittances to the island. Much more can and should be done in the coming months to continue this process of rapprochement between Washington and Havana. But lifting Cuba's suspension as a member of the Organization of American States (OAS), as many are advocating, would be a step too far.

The governments of the region, as they emerged from years of military dictatorship in the 1980s, agreed to lock arms and resist any attempt to overthrow civilian constitutional rule. This joint approach has served the region well when such countries as Peru, Paraguay, Guatemala and Haiti faced political turmoil. The commitment to core democratic standards, expressed through the Inter-American Democratic Charter, is central to the region's identity and compares well to the European model of integration based on common democratic values and forms of government.

All this progress is at risk if the region's governments decide to lift Cuba's suspension as a member of the OAS without preconditions. Unless the Castro regime takes serious steps toward meeting the region's basic human rights standards, including rights to free speech, fair elections and due process for political prisoners, it should not be considered for renewed membership. The Obama Administration, which appears determined to open new paths of dialogue with difficult countries like Cuba, Iran and Syria, must be careful not to lower the bar so far that its own neighborhood loses its distinct identity as a community of democratic states.

President Obama, thus, should walk a fine line at the Summit gathering. He needs to lead by example by implementing human rights reforms at home while reminding his colleagues they share a common responsibility to follow and promote universal democratic standards. This must include encouraging the Castro government to adopt genuine political reforms before it can be welcomed back to the OAS, as well as strengthening the region's collective defense of democracy in backsliding states. Anything less would surely set the human rights cause back for the region, and the world.

High unemployment, the Gulf oil spill, and mounting fiscal worries clouded our July 4th celebrations. Yet, one patriotic highlight in President Obama's first year was bipartisan support of the Serve America Act, which expanded opportunities for Americans of all ages to meet urgent domestic challenges through community and national service. In the process, Americans who otherwise would have been unemployed are engaging in productive work, at low cost to taxpayers, to meet problems like the high school dropout epidemic. Similar efforts can expand volunteer service abroad.

As President Obama made clear in his first major policy speech to the international community in Cairo, Egypt, the world must unleash its collective imagination through social innovators, entrepreneurs and citizen diplomats to contribute to global development, respond to natural disasters, and initiate interfaith action to tackle preventable diseases like malaria. The moment is now.

Fifty years after John F. Kennedy's call for a Peace Corps, we might reconsider our obligations to meet needs around the world. President Kennedy said that the Peace Corps would be serious when 100,000 Americans were serving abroad each year. Although the Peace Corps is America's flagship international service program, today less than 8,000 volunteers are spread across 77 countries. Since 1961, America has sent and returned nearly 200,000 volunteers, a number significantly less than the millions Kennedy envisioned by his Peace Corps' 50th year. Had the Peace Corps grown at the rate Kennedy envisioned, the course of our country's foreign policy, diplomatic strategy and global awareness over the past 50 years would be very different.

Last week, ServiceWorld, an international service coalition of more than 300 non-profits, colleges, corporations and faith-based institutions, released a bold plan to meet President Kennedy's goal of mobilizing 100,000 Americans every year - and one million over a decade - to serve abroad. The proposed Sargent Shriver International Service Act calls for doubling Peace Corps to 15,000 by 2015, lowering costs per volunteer, and forging partnerships with the hundreds of non-profits that have emerged since its creation. Doubling of the Peace Corps is a goal that both Presidents George W. Bush and Barack Obama have embraced.

Volunteers for Prosperity will tap 75,000 skilled Americans for flexible term assignments to work on international challenges Congress and many Presidents have made priorities, such as HIV/AIDS, malaria, and clean water. Global Service Fellows will enable Members of Congress to nominate top talent from their districts and states, as they do for the military academies today, to serve for up to one year abroad. Together with the Peace Corps, these efforts will meet John Kennedy's goal of mobilizing 100,000 Americans to serve abroad each year.

The Service World plan focuses on multi-lateral partnerships and exchanges so Americans serve side-by-side with people from other countries, including in the United States. Under the plan, both skilled and non-skilled volunteers of all classes and ages will serve abroad for both long- and short-term assignments and veterans have specific opportunities to utilize their many skills in a civilian capacity. We believe an inclusive and mobile model of volunteering will contribute to the development of a new generation of global leaders, provide skills for U.S. citizens to compete in a global economy, increase international awareness, strengthen development, and improve the image of America abroad.

Volunteer service by people of all nations should become a common strategy in meeting pressing challenges in education, health, the environment, agriculture and more. By having national policies that engage more Americans in international service at every stage of life, we will be sharing our most valuable assets - the skills, talents and perspectives of our people - to make a significant difference in communities and nations throughout the world.

UPDATE 4: Sarah Binder explores the questions, "Why did the Senate go nuclear now, and what will be the consequences for future majorities eager to further curtail the filibuster?"

UPDATE 2: Sarah Binder writes that "this is big" in another new post on Monkey Cage blog, "Boom! What the Senate will be like when the nuclear dust settles." 

UPDATE: Sarah Binder has a new post on Monkey Cage blog, in which she explains why GOP targeting of the D.C. circuit may not be as unprecedented as some think and why it would be difficult to parse out "acceptable" filibusters from those that aren't. "We'll learn soon enough," Binder writes, "if Democrats have the guts to go [nuclear] and, if so, whether that compels any Republicans to stand down."

Over the past few weeks, Senate Republicans have filibustered President Obama's three nominees to the Court of Appeals for the D.C. Circuit, claiming alternatively that Obama was trying to pack the court and characterizing the court's caseload as lighter than other circuits. News reports now say that Senate Majority Leader Harry Reid is considering changing the filibuster rule for some executive and judicial nominees, the so-called "nuclear option.

In 2010, Brookings Senior Fellow Sarah Binder, an expert on Congress and congressional history, testified to the Senate that "the filibuster was created by mistake."

We have many received wisdoms about the filibuster. However, most of them are not true. The most persistent myth is that the filibuster was part of the founding fathers’ constitutional vision for the Senate: It is said that the upper chamber was designed to be a slow-moving, deliberative body that cherished minority rights. In this version of history, the filibuster was a critical part of the framers’ Senate.

However, when we dig into the history of Congress, it seems that the filibuster was created by mistake. Let me explain.

The House and Senate rulebooks in 1789 were nearly identical. Both rulebooks included what is known as the “previous question” motion. The House kept their motion, and today it empowers a simple majority to cut off debate. The Senate no longer has that rule on its books.

What happened to the Senate’s rule? In 1805, Vice President Aaron Burr was presiding over the Senate (freshly indicted for the murder of Alexander Hamilton), and he offered this advice. He said something like this. You are a great deliberative body. But a truly great Senate would have a cleaner rule book. Yours is a mess. You have lots of rules that do the same thing. And he singles out the previous question motion. Now, today, we know that a simple majority in the House can use the rule to cut off debate. But in 1805, neither chamber used the rule that way. Majorities were still experimenting with it. And so when Aaron Burr said, get rid of the previous question motion, the Senate didn’t think twice. When they met in 1806, they dropped the motion from the Senate rule book.

Why? Not because senators in 1806 sought to protect minority rights and extended debate. They got rid of the rule by mistake: Because Aaron Burr told them to.

Once the rule was gone, senators still did not filibuster. Deletion of the rule made possible the filibuster because the Senate no longer had a rule that could have empowered a simple majority to cut off debate. It took several decades until the minority exploited the lax limits on debate, leading to the first real-live filibuster in 1837.

Binder makes additional insightful points about the origin and historical uses of the Senate filibuster in that testimony to the Senate Rules and Administration Committee.

She also calls attention to another of Obama's recent judicial nominees: Ronnie White for the U.S. District Court for the Eastern District of Missouri, which is yet another window, she says, on the "evolving wars of advice and consent."

Binder also has data on whether Senate Minority Leader Mitch McConnell and the Senate GOP have "played fair" on President Obama's nominees.

For additional analysis about the filibuster, see Binder's "What Senate cloture votes tell us about obstruction," in which she wrote:

Ultimately, the rise of the 60-vote Senate in a period of polarized parties signals that the minority party has mastered the art of blocking the majority. Sometimes, the minority leader drives the opposition in his conference; other times, he follows it. Regardless, what’s true of the tango is also true of the Senate: It takes two parties to make it look good. The minority party no doubt often feels that the majority leader is too quick to call for a vote, and its members might reasonably oppose cloture on that ground. However, my sense is that far more often, majority leaders resort to cloture when they find themselves unable to cajole the minority party to cooperate. As the Senate GOP conference fractures between pragmatists and ideologues, securing GOP consent will likely become even harder. Counting cloture votes remains an imperfect — but still valid — method of capturing minority efforts to block the Senate.

Get all of Sarah Binder's research and commentary about the Senate filibuster on her bio page.

HHS Secretary Kathleen Sebelius may lose the most from the Senate’s rule change on the filibuster—and the Affordable Care Act may be healthier for it. I wrote last month on the FixGov blog that “Republicans are the Reason Secretary Sebelius Won’t Resign” (or be fired). That argument is no longer valid. My claim—the president’s inability to get her successor confirmed because of filibustering Republicans—is nullified by the Senate’s rule change, and the benefits may reach far beyond Obamacare.

The Implications of Filibuster Reform for Healthcare

Problems exist in HHS. No one denies it. However, for many appointees in the Department, the Senate rules served as a life preserver in a torrent of poor implementation, managerial failures, and bad PR. So long as the president faced the prospect of long-term vacancies among appointees overseeing ACA, the HHS leadership would be spared.

Today, that all changed. Moving forward, President Obama needs the support of only 51 Senate Democrats to replace top-level political appointees throughout the executive branch. This offers the president substantial breathing room. Nominees no longer need the support of every Democrat and a scarcely identifiable five Republicans. Instead, nominees can draw the ire of as many as four Democrats and still be confirmed.

Maybe Kathleen Sebelius is not to blame for the botched healthcare marketplace roll out. Maybe her Office did not give the thumbs up for the President to repeat “if you like your plan you can keep it.” Maybe she did not contribute to the poor salesmanship of the legislation from the start. However, if she was to blame (and perhaps if she wasn’t), her days in the president’s cabinet may well be numbered. The same may be true for deputies and other administrators in the Department who oversaw the weaker areas of the roll out of this law.

By repositioning HHS personnel or breathing new life into a Department facing continued struggles, the president may well ensure the administration of his signature legislation accomplishment improves. The right appointees can coordinate and communicate policy needs and goals up and down the bureaucratic hierarchy. Rather than settling for a program that meets or falls short of expectations, there is an opportunity to build an effective ACA.

Good Governance beyond Obamacare

The first half of October showed us that political actors in Congress contributed to a broken legislative branch. The second half of October showed us that political actors in the Administration contributed to a broken executive branch. Now is the time for the president to start anew and fix one branch, in the shadow of a Senate trying to fix itself.

In my piece from last month, I also argued that the filibuster rules in the Senate allow for the continuation of poor management and governance. If weak appointed personnel are causing policy problems, communication miscues, and other headaches for the president, the ability to replace them with something other than the word “ACTING” was limited by the 60-vote threshold.

President Obama, who has faced a string of personnel and management issues over the past year, now has greater freedom not simply to oust problematic appointees, but to install talented, effective leaders. With this ability comes a tremendous opportunity to jumpstart an administration that is sputtering.

Arne Duncan, former U.S. secretary of education during the Obama administration and now a nonresident senior fellow with the Brown Center on Education Policy, discusses the crisis of youth violence in Chicago and solutions that strengthen schools and encourage more opportunities for those who are marginalized to make a living in the legal economy.

“The best thing we can do is create hope, opportunity and jobs particularly on the South and West side for young and black men who have been disenfranchised, who have been on the streets. If we can give them some chances to earn a living in a legal economy not selling drugs and not on street corners, I think we have a chance to do something pretty significant here,” Duncan says. “My fundamental belief is that the police cannot solve this on their own we have to create opportunities for young people in communities who have been marginalized for far too long.”

Also in this episode, Bruce Katz, the Centennial Scholar, who discusses how European cities are addressing the refugee crisis in a new segment from our Refugee Series.

Thanks to audio engineer and producer Zack Kulzer, with editing help from Mark Hoelscher, plus thanks to Carisa Nietsche, Bill Finan, Jessica Pavone, Eric Abalahin, Rebecca Viser, and our intern Sara Abdel-Rahim.

Subscribe to the Brookings Cafeteria on iTunes, listen in all the usual places, and send feedback email to BCP@Brookings.edu 

Editor’s note: This week the Democrats gather in Philadelphia to nominate a candidate for president and adopt a party platform. Given that there are no minority reports to the Democratic platform, it is likely that it will be adopted as-is this week. And so we can begin the comparison of the two major party platforms. For those who say there are no differences between the Republican and Democratic parties, just read the platforms side-by-side. In many instances, the differences are—as Donald Trump would say, yuuuge. But in one surprising instance, the two parties actually agree. This piece walks readers through one of the biggest contrasts, while an earlier piece by Elaine Kamarck detailed a striking similarity.

When it comes to Republicans and the environment, black is the new green. In addition to denouncing “radical environmentalists” and calling for dismantling the EPA, the platform adopted in Cleveland yesterday calls coal “abundant, clean, affordable, reliable domestic energy resource” and unequivocally opposes “any” carbon tax.

Meanwhile, Democrats are moving in the opposite direction. By the time the party’s draft 2016 platform emerged from the final regional committee meeting in Orlando, it contained a robust section on environmental issues in general and climate change in particular. One of the many amendments adopted in Orlando contains the following sentence: “Democrats believe that carbon dioxide, methane, and other greenhouse gases should be priced to reflect their negative externalities, and to accelerate the transition to a clean energy economy and help meet our climate goals.” In plain English, there should be what amounts to a tax (whatever it may be called) on the atmospheric emissions principally responsible for climate change, including but not limited to CO2.

As Brookings’ Adele Morris pointed out in a recent paper, this proposal raises a host of design issues, including determining initial price levels, payers, recipients, and uses of revenues raised. It would have to be squared with existing federal tax, climate, and energy policies as well as with climate initiatives at the state level.

But these devilish details should not obstruct the broader view: To the best of my knowledge, this is the first time that the platform of a major American political party has advocated taxing greenhouse gas emissions. Many economists, including some with a conservative orientation, will applaud this proposal. Many supporters and producers of fossils fuels will be dismayed.

It remains to be seen how the American people will respond. In a survey conducted in 2015 by Resources for the Future in partnership with Stanford University and the New York Times, 67 percent of the respondents endorsed requiring companies “to pay a tax to the government for every ton of greenhouse gases [they] put out,” with the proviso that all the revenue would be devoted to reducing the amount of income taxes that individuals pay. Previous surveys found similar sentiments: public support increases sharply when the greenhouse gas tax is explicitly revenue-neutral and declines sharply if it threatens an overall increase in individual taxes.

Once this plank of the Democratic platform becomes widely known, Republicans are likely to attack it as yet another example of Democrats’ propensity to raise taxes. The platform’s silence on the question of revenue-neutrality may add some credibility to this charge. Much will depend on the ability of the Democratic Party and its presidential nominee to clarify its proposal and to link it to goals the public endorses.

SUMMARY

The financial crisis that has been wreaking havoc in markets in the U.S. and across the world since August 2007 had its origins in an asset price bubble that interacted with new kinds of financial innovations that masked risk; with companies that failed to follow their own risk management procedures; and with regulators and supervisors that failed to restrain excessive risk taking.

A bubble formed in the housing markets as home prices across the country increased each year from the mid 1990s to 2006, moving out of line with fundamentals like household income. Like traditional asset price bubbles, expectations of future price increases developed and were a significant factor in inflating house prices. As individuals witnessed rising prices in their neighborhood and across the country, they began to expect those prices to continue to rise, even in the late years of the bubble when it had nearly peaked.

The rapid rise of lending to subprime borrowers helped inflate the housing price bubble. Before 2000, subprime lending was virtually non-existent, but thereafter it took off exponentially. The sustained rise in house prices, along with new financial innovations, suddenly made subprime borrowers — previously shut out of the mortgage markets — attractive customers for mortgage lenders. Lenders devised innovative Adjustable Rate Mortgages (ARMs) — with low "teaser rates," no down-payments, and some even allowing the borrower to postpone some of the interest due each month and add it to the principal of the loan — which were predicated on the expectation that home prices would continue to rise.

But innovation in mortgage design alone would not have enabled so many subprime borrowers to access credit without other innovations in the so-called process of "securitizing" mortgages — or the pooling of mortgages into packages and then selling securities backed by those packages to investors who receive pro rata payments of principal and interest by the borrowers. The two main government-sponsored enterprises devoted to mortgage lending, Fannie Mae and Freddie Mac, developed this financing technique in the 1970s, adding their guarantees to these "mortgage-backed securities" (MBS) to ensure their marketability. For roughly three decades, Fannie and Freddie confined their guarantees to "prime" borrowers who took out "conforming" loans, or loans with a principal below a certain dollar threshold and to borrowers with a credit score above a certain limit. Along the way, the private sector developed MBS backed by non-conforming loans that had other means of "credit enhancement," but this market stayed relatively small until the late 1990s. In this fashion, Wall Street investors effectively financed homebuyers on Main Street. Banks, thrifts, and a new industry of mortgage brokers originated the loans but did not keep them, which was the "old" way of financing home ownership.

Over the past decade, private sector commercial and investment banks developed new ways of securitizing subprime mortgages: by packaging them into "Collateralized Debt Obligations" (sometimes with other asset-backed securities), and then dividing the cash flows into different "tranches" to appeal to different classes of investors with different tolerances for risk. By ordering the rights to the cash flows, the developers of CDOs (and subsequently other securities built on this model), were able to convince the credit rating agencies to assign their highest ratings to the securities in the highest tranche, or risk class. In some cases, so-called "monoline" bond insurers (which had previously concentrated on insuring municipal bonds) sold protection insurance to CDO investors that would pay off in the event that loans went into default. In other cases, especially more recently, insurance companies, investment banks and other parties did the near equivalent by selling "credit default swaps" (CDS), which were similar to monocline insurance in principle but different in risk, as CDS sellers put up very little capital to back their transactions.

These new innovations enabled Wall Street to do for subprime mortgages what it had already done for conforming mortgages, and they facilitated the boom in subprime lending that occurred after 2000. By channeling funds of institutional investors to support the origination of subprime mortgages, many households previously unable to qualify for mortgage credit became eligible for loans. This new group of eligible borrowers increased housing demand and helped inflate home prices.

These new financial innovations thrived in an environment of easy monetary policy by the Federal Reserve and poor regulatory oversight. With interest rates so low and with regulators turning a blind eye, financial institutions borrowed more and more money (i.e. increased their leverage) to finance their purchases of mortgage-related securities. Banks created off-balance sheet affiliated entities such as Structured Investment Vehicles (SIVs) to purchase mortgage-related assets that were not subject to regulatory capital requirements Financial institutions also turned to short-term "collateralized borrowing" like repurchase agreements, so much so that by 2006 investment banks were on average rolling over a quarter of their balance sheet every night. During the years of rising asset prices, this short-term debt could be rolled over like clockwork. This tenuous situation shut down once panic hit in 2007, however, as sudden uncertainty over asset prices caused lenders to abruptly refuse to rollover their debts, and over-leveraged banks found themselves exposed to falling asset prices with very little capital.

While ex post we can certainly say that the system-wide increase in borrowed money was irresponsible and bound for catastrophe, it is not shocking that consumers, would-be homeowners, and profit-maximizing banks will borrow more money when asset prices are rising; indeed, it is quite intuitive. What is especially shocking, though, is how institutions along each link of the securitization chain failed so grossly to perform adequate risk assessment on the mortgage-related assets they held and traded. From the mortgage originator, to the loan servicer, to the mortgage-backed security issuer, to the CDO issuer, to the CDS protection seller, to the credit rating agencies, and to the holders of all those securities, at no point did any institution stop the party or question the little-understood computer risk models, or the blatantly unsustainable deterioration of the loan terms of the underlying mortgages.

A key point in understanding this system-wide failure of risk assessment is that each link of the securitization chain is plagued by asymmetric information – that is, one party has better information than the other. In such cases, one side is usually careful in doing business with the other and makes every effort to accurately assess the risk of the other side with the information it is given. However, this sort of due diligence that is to be expected from markets with asymmetric information was essentially absent in recent years of mortgage securitization. Computer models took the place of human judgment, as originators did not adequately assess the risk of borrowers, mortgage services did not adequately assess the risk of the terms of mortgage loans they serviced, MBS issuers did not adequately assess the risk of the securities they sold, and so on.

The lack of due diligence on all fronts was partly due to the incentives in the securitization model itself. With the ability to immediately pass off the risk of an asset to someone else, institutions had little financial incentive to worry about the actual risk of the assets in question. But what about the MBS, CDO, and CDS holders who did ultimately hold the risk? The buyers of these instruments had every incentive to understand the risk of the underlying assets. What explains their failure to do so?

One part of the reason is that these investors — like everyone else — were caught up in a bubble mentality that enveloped the entire system. Others saw the large profits from subprime-mortgage related assets and wanted to get in on the action. In addition, the sheer complexity and opacity of the securitized financial system meant that many people simply did not have the information or capacity to make their own judgment on the securities they held, instead relying on rating agencies and complex but flawed computer models. In other words, poor incentives, the bubble in home prices, and lack of transparency erased the frictions inherent in markets with asymmetric information (and since the crisis hit in 2007, the extreme opposite has been the case, with asymmetric information problems having effectively frozen credit markets). In the pages that follow, we tell this story more fully.

Downloads

• Download English Version

EXECUTIVE SUMMARY

Despite a long-standing policy debate, insurance remains the only major financial industry not to be regulated at the federal level, a tradition dating from the 19th century. However, recent financial turmoil has fundamentally changed the terms of this important discussion.

Many contend that as opposed to as many 51 separate regulators, a single federal insurance regulator would: allow insurers to pass substantial savings on to their consumers; preempt market distorting state regulation of rates; attract the expert talent needed to supervise the increasingly complex industry products; improve competition between insurers and non-insurance financial institutions for insurance-like products; better position insurers to compete globally and; make national policy with respect to insurer solvency.
 
However, state insurance regulators and some smaller insurers and insurance agents favor the current system, arguing that: they alone have the interest, expertise, and accessibility to consumers to handle best consumer complaints; insurance rates must be subject to oversight if not outright control to protect consumers; and state regulators have moved aggressively in recent years to improve their solvency regulation.

After weighing these arguments, I conclude in this essay that insurers and agents operating in multiple states should have the option to operate under a more streamlined regulatory system, and in particular to choose between being chartered and thus regulated by individual state regulators, or by a new federal insurance regulator. Congress has considered but not yet enacted legislation establishing this “optional federal charter” system, analogous (although not identical) to the regulatory system that has long governed the U.S. banking industry.

Further, the recent financial crisis and associated bailout of AIG make it is clear that, in addition to the optional federal charter, the government should require federal solvency and consumer protection regulation of the largest insurers that are deemed to be “systemically important financial institutions.” Clearly, if the federal government is potentially needed as a source of debt or equity funds for certain insurers, there is a strong case for having the federal authorities actively oversee the financial safety and soundness of at least those firms that may benefit from federal, and thus national taxpayer, assistance.

Downloads

• Download

INTRODUCTION

The Obama administration needs to focus on executing its existing financial rescue plans, keep the TARP focused on the banking sector, and create a contingency plan should the banking system destabilize again.

Crystal balls are dangerous, especially when it comes to economic predictions, which is why it is important for the administration to chart a path forward. Public policy must remain focused on the very real possibility that the apparent easing in the economy’s decline may be followed by little or no growth for several quarters and there could possibly be another negative turn. One of the risks is that the United States is very connected to the rest of the world, most of which is in severe recession. The global economy could be a significant drag on U.S. growth.

Cautious optimism should be the order of the day. We fear that the recent reactions of the financial markets and of some analysts carry too much of the optimism without recognizing enough of the uncertainty. There remains a lot of uncertainty and policymakers should not rest on their laurels or turn to other policies, even if they look more exciting. It is vital to follow through on the current financial rescue plans and to have well-conceived contingency plans in case there is another dip down.

We propose three recommendations for the financial rescue plans:

• Focus on execution of existing programs. The Administration has created programs to deal with each of the key elements necessary to solve the financial crisis. All of them have significant steps remaining and some of them have not even started yet, such as the programs to deal with toxic assets. As has been demonstrated multiple times now since October 2008, these are complex programs that require a great deal of attention. It is time to execute rather than to create still more efforts.
• Resist the temptation to allocate money from the TARP to other uses—it is essential to maintain a reserve of Congressionally-authorized funds in case they are needed for the banks. It would be difficult to overemphasize the remaining uncertainties about bank solvency as they navigate what will remain a rough year or more. The banks could easily need another $300 billion of equity capital and might need still more. It is essential that the administration have the ammunition readily available.
• Third, make sure there is a contingency plan to deal with a major setback for the banking system. The plan needs broad support within the administration and among regulators and, ideally, from key congressional leaders. We probably won’t need it, but there is too high a chance that we will require it for us to remain without one. The country cannot afford even the appearance of the ad hoc and changing nature of the responses that were evident last fall.

Downloads

• Download Full Paper - English