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2:37 PM

Just How Much Do We Trust These Phones We All Carry?

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Most of us know the Federal Reserve Board as the central banker for the United States. It is the entity that conducts the nation's monetary policy, supervises and regulates banking institutions, provides financial services to those institutions, and stabilizes the financial system during times of crisis.

But fewer people know that the Fed has a vibrant research department that provides cutting edge data on issues that affect consumer finance, including how we pay for things.

The Fed recently released “Consumers’ Use of Mobile Financial Services 2013,” which updates similar research done in 2011. Within the payments industry you won’t find a hotter topic than mobile payments (unless it’s EMV, but that’s a story for another day). But it can be difficult cutting through all the hype to get an accurate picture of how consumers look at mobile: who uses it, who doesn’t, what do they use it for, and how confident are they in mobile as a payment system.

The Fed, with no dog in the hunt, has done this. “Consumers Use of Mobile Financial Services 2013” is a thorough collection of data with objective analysis. It covers 4 areas: mobile banking, mobile payments, shopping with mobile technology and how secure consumers think it is to entrust important personal information to a channel like mobile.

Among the report’s findings:

·       52% of mobile phone users own smartphones and are significantly more likely to be users of mobile payments. The logical conclusion is that as more and more people get smartphonesthe adoption of mobile commerce will also grow.
·       Age has a lot to do with whether a consumer adopts mobile banking. Fewer than 9% of respondents 60 or older copped to having tried mobile mobile banking.
·       37% of those surveyed said that the main reason they began banking by mobile phone was that they got a smartphone.
·       Consumers who engage in mobile banking are most likely to check an account balance or recent transaction, or to transfer money between two accounts.

Those who had adopted mobile payments appear pleased with the channel. Over 90% of these respondents said they were “satisfied” or “very satisfied” with their mobile payment experiences. In fact, a number appeared ready to take the next step in the mobile payment march. About a third of them said it was “likely” or “very likely” they would use contactless payments if given the change. That’s up from 5% in the previous survey.

The report also digs into why consumers have rejected the concept of mobile banking. The reasons seem to be more visceral than anything else. Top reasons include having their banking needs met by more traditional channels, and concerns over security.

Only a third of mobile banking users, when asked to rate the overall security of mobile banking, labeled it “safe” or “very safe,” hardly a ringing endorsement.

Despite the lingering concerns over security, more and more consumers are using their mobile phones to check their bank balances or buy their morning coffee. And while use of mobile payments has remained constant over the last two surveys, according to the Fed, the use of mobile banking is up 33% over the last year.

Clearly these gains are tied to the increasing proliferation of smartphones. As mobile telephony grew over the last 15 years, proponents of mobile commerce kept saying that it would take off once the industry found the “killer app” that would drive the market. It appears now that the killer app wasn’t an app at all. It was the phone itself. 

2:55 PM

Is the Current Trend of Price Stability in Healthcare Costs Permanent?

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In a “Man Bites Dog” lead, we’re pleased to announce that healthcare spending appears to be declining. As of now.

Earlier this month, the Wall Street Journal editorialized that the growth in health spending has leveled out at about 4% over the last three years. That’s lower than it’s been for 40 years and way down from its mark of 6% to 10% over the last decade.

At first glance it looks like the decline is tied to the continuing weak economy: fewer jobs mean less employer-subsidized health insurance and medical treatment. In fact, according to the Journal, the Kaiser Family Foundation recently estimated that nearly 80% of the health spending slowdown can be attributed to economic conditions.

If that’s the case, then we can expect an explosion in health care costs as the economy improves. Right? Not so fast.

There is also evidence that the change in healthcare spending has been going on for longer than thought and that it may indicate a permanent leveling of cost. If so, this would be contrary to everything we think about healthcare.

In fact, another economic model now shows that the slowdown has been going on for a long time. That it is systemic, durable and, perhaps, permanent. Economist David Cutlerand Nikhil Sagni say that their model shows that the recession of 2007 only accounts for about 45% of the decline in spending. That’s about half of the Kaiser estimate.

Taking it a step further, another model by Michael Chernow of the Harvard Medical School has suggested that the spending decline is the result of market choice and competition, introduced into the healthcare market beginning in the last decade. Investigating changes in the large market insurance business he found that these firms did better than smaller ones controlling cost through the use of higher deductibles and co-pays, as well as innovative program designs. These changes account for 20% of the slowdown, the model suggests.

When patients, rather than a third party, are empowered to make their own spending decisions about healthcare, they tend to be more frugal. Over the long haul this lowers overall costs, the models seem to suggest.

During World War II the War Labor Board determined that wage and price controls did not apply to fringe benefits, including health insurance. Providing health insurance was a way employers could retain workers—by raising their overall standard of living without fattening the pay envelop.  In today’s healthcare market there are those who suggest that large companies can reverse the effect of the Board’s wartime decision by plowing money saved by these new high deductible/co-pay models into workers’ paychecks. What would be nice would be a study to validate whether this theory is true.

Which brings us back to today’s current healthcare morass. The Affordable Care Act outlaws most of the types of plan innovation that seem responsible for the slowdown in health spending. For example, the law’s arcane rules outlaw what the government considers to be excessive cost-sharing with beneficiaries.  There go the higher deductibles and co-pays.

Cutler estimates that entitlement spending in healthcare will be about three-quarters of a trillion dollars lower over the next decade if the current slowdown in spending continues. But that doesn’t seem possible under the current ACA rules.

Look for costs to start rising again as the ACA kicks in in 2014. The government will mitigate this effect on consumers by injecting money to inflate the healthcare system. But that money will come out of the left pocket of consumers and go back into their right pocket as a subsidy. The resulting loss in price stability will be greater than the entitlement gain.
5:26 AM

Inventing Durable Solutions to Welfare Fraud

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The late Supreme Court Justice Louis Brandeis once famously referred to state governments as  laboratories of democracy. It is at the state level that lawmakers who are closer to their constituents than the Congress craft legislative solutions to solve the pressing issues of the day.

If that’s the case, then there are a lot of state lawmakers walking around places like Springfield, Albany and Austin in their white lab coats trying to discover how to eradicate the thorny issue of welfare fraud.

In early 2012 as a sidebar to the Middle Class Tax Relief and Jobs Creation Act Congress for the first time sought to reform the Temporary Assistance to Needy Families, or Tanf, program. This is the grant program, jointly funded by the states and the federal government, that provides cash subsidies to poor families and is often called as welfare.

The law cracks down on the use of Tanf money by beneficiaries at what I call vice locations: liquor stores, casinos and adult entertainment (read strip clubs) venues. That all sounds well and good, but it is going to be difficult if not impossible to enforce the law from Washington, which seems to have its own law enforcement issues these days.

So rather than waiting, a host of states are getting into the act, looking for their own solutions to the misuse of cash benefit programs like Tanf. A recent survey shows that there are some 40 bills pending in state legislatures across the country that would in one way or another tighten up on misuse of welfare reform. Some states have multiple bills pending. New York and Illinois, for example, are considering three bills. Tennessee legislators are sorting through four.

Three states—California, New York and Indiana—are considering whether to mandate a “systemic” solution to misuse of benefits. Since many benefits, like Tanf, are delivered to beneficiaries via an electronic benefits transfer system, a systemic solution would vest in the EBT system the intelligence to decide whether a payment card was issued by the government and therefore should not be honored at a specific location.

At least seven states—Illinois, Massachusetts, Oregon, Pennsylvania, Rhode Island, Tennessee, and Texas—are looking to strengthen security in these benefit programs by switching in some way to photo I.D.s.

The problems with the new federal law is that states will be responsible for policing fraud according to yet unwritten rules into which they have had limited input. The effect on fraud will be limited at best. Those states which fail to clean up their acts will see their Tanf grants cut by five percent. This ancient moribund solution, which penalizes everyone for the sins of a few, dates back to the days of imperial Rome. States, on the other hand, are closer to the problem. They can take enforcement down to the level where it should be: the beneficiary and the sin venues where the EBT cards are used.

For example, in Arizona, liquor stores could lose their licenses for accepting EBT cards. In Missouri, beneficiaries who use their cards for purchase of forbidden goods or services could lose their benefits for up to three years. Rhode Island would suspend retailers from the Snap, formerly food stamp, program who fail to validate the identity of shoppers presenting EBT cards for payment.

Perhaps most creative is an Illinois bill that would force the state’s Human Services Department for the first time to share recipient information with the Department of Corrections to prevent cons from receiving public aid while they’re locked up.

Most of these bills will never make it out of committee, let along make it to a floor vote. But they show the ingenuity that lawmakers are using to solve a local problem that has become a national one. Congress was right to address this problem, but states know welfare fraud first hand. They’re the ones better positioned and more experienced in crafting longer lasting, more effective solutions to the misuse of taxpayer dollars. 
7:03 AM

Unintended Consequences

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After being told that the Affordable Care Act would increase access to health care, Americans are waking up this week to find that’s not necessarily the case. As companies try to comply with the healthcare mandate and still preserve their margins and the jobs of their workers, those with high numbers of low-skill workers are turning to what the Wall Street Journal calls “bare-bones health plans.” Employers fitting this profile can get by with offering preventive care and little else and still avoid the law’s penalties.

These plans defy the predictions that the ACA would result in more coverage for more people. Instead, these so-called “skinny plans” provide minimal coverage. If you’re covered by one of these plans and you need an X-ray, prenatal care or surgery, you may be out of luck.

The law requires that employers with 50 or more workers have to provide health insurance or pay a $2,000 penalty per employer. Up till now this has generally been interpreted as meaning a full range of benefits. But apparently this requirement applies to those plans sold to small businesses and individuals. These are the two groups that typically have had the most difficulty obtaining reasonably priced insurance.

The feds say that these skinny plans appear to answer the mail with respect to larger companies that employ lots of low-wage workers. With typical American ingenuity a cottage industry may be developing around the need for these stripped down plans, which allow employers to comply with the law but not at a cost that would cost jobs. When the ACA bill was passed by Congress, accompanied by emotional speeches from its supporters, I don’t think this is what they had in mind.

The ACA is another example of what can go wrong when you try to carve things like technology or social policy into federal legislation. You may not end up with what you thought you were going to have. More importantly, while the law ossifies on the books, technology, policy and business practices change, creating a law that can obsolesce before anyone realizes it (Hello, Alternative Minimum Tax).

Look for the bill’s supporters to bob for another bite at the apple and close what they see as a loophole in the law’s application. But with the House controlled by Republicans this time around, don’t look for ACA II anytime soon. Lawmakers who try to out think and out pace a free market are most often on a fool’s errand.