Over the counter, out of sight

Derivatives

Over the counter, out of sight

Nov 12th 2009
From The Economist print edition

Derivatives are extraordinarily useful—as well as complex, dangerous if misused and implicitly subsidised. No wonder regulators are taking a close look

Illustration by Otto Dettmer

IN 1958 American onion farmers, blaming speculators for the volatility of their crops’ prices, lobbied a congressman from Michigan named Gerald Ford to ban trading in onion futures. Supported by the president-to-be, they got their way. Onion futures have been prohibited ever since.

Futures are agreements to trade something at a set price at a given date. They are perhaps the simplest example of a derivative, a contract whose value is “derived” from the price of a commodity or another asset. Derivatives continue to be vilified, usually when someone loses a lot of money. Orange County and Procter & Gamble lost fortunes on them in the 1990s. They were at the core of Enron’s failure. And in September 2008 they brought American International Group (AIG), a mighty insurer, to its knees. Its fetish for credit default swaps (CDSs), a type of derivative that insures lenders against borrowers’ going bust, led it to guarantee at least $400 billion-worth of other companies’ loans—including those of Lehman Brothers. The American government forked out $180 billion to save AIG from collapse.

Every catastrophe brings calls for restrictions on derivatives. This year Joseph Stiglitz, a Nobel economics laureate, has said that their use by the world’s largest banks should be outlawed. But derivatives have defenders too. Used carefully, they are an excellent—some would say indispensable—tool of risk-management. Myron Scholes, another Nobel prize-winner, says a ban would be a “Luddite response that takes financial markets back decades.”

Because of the mayhem of the past year or so, lawmakers in America and Europe are on the point of giving derivatives markets their biggest shake-up since the 1970s. For the world’s biggest banks, billions of dollars are at stake. For taxpayers, the stakes are just as high.

Derivatives come in many shapes. Besides futures, there are options (the right, but not the obligation, to buy or sell at a given price), forwards (cousins of futures, not traded on exchanges) and swaps (exchanging one lot of obligations for another, such as variable for fixed interest payments). They can be based on pretty much anything, as long as two parties are willing to trade risks and can agree on a price: commodities, currencies, shares or bonds. Derivatives create leverage too. Contracts are sealed with initial payments that are a small fraction of the potential gain or loss.

In the main, businesses use derivatives to shift risks to other firms, chiefly banks, that are willing to bear them. An airline worried about fuel prices can limit or fix its bills. A bank concerned about its credit exposure to the airline can pass some of its default risk to other banks without selling the underlying loans. About 95% of the world’s 500 biggest companies use derivatives. A lack of them can be costly. “The absence of derivatives in iron-ore markets makes negotiations between Australian suppliers and Chinese buyers very confrontational,” says Philip Killicoat of Credit Suisse. Earlier this year Rio Tinto’s chief negotiator, Stern Hu, was arrested in China during hard bargaining over prices. And the futures ban has not stopped the price of onions from going up and down.

Derivatives have a long history, stretching back thousands of years. In the 17th century the Japanese traded simple rice futures in Osaka and the Dutch bought and sold derivatives in Amsterdam. But trading in financial derivatives really took off only in the 1970s. The fluctuations in currencies and interest rates after the collapse of the Bretton Woods system gave a push to demand. The option-pricing formula developed by Fischer Black and Mr Scholes, plus advances in computing power, made valuing derivatives much easier. Regulators encouraged them, too. Thrift Bulletin 13, issued by the Federal Home Loan Bank System in 1989, obliged American thrifts to hedge their interest-rate risk.

Derivatives are bought and sold in two ways. Contracts with standardised terms are traded on exchanges. Tailored varieties are bought “over the counter” (OTC) from big “dealer” banks. These banks support the OTC market by hedging their clients’ risks with each other or on an exchange.

The OTC market dwarfs exchange trading (see chart 1). Estimating its size, however, demands caution. In figures published this week the Bank for International Settlements, the central bankers’ central bank, puts its “notional” value at $604.6 trillion. But “those numbers don’t appear on anyone’s balance sheet,” says Barry Epstein, an accountant who specialises in derivatives. For example, the notional value of the CDS market is $36 trillion, says the BIS. But that counts all guaranteed debt—the equivalent, in home insurance, of the value of houses covered rather than premiums paid.

For interest-rate contracts, notional values are even more misleading because they are based on principal amounts; actual obligations depend on interest payments. “Gross market values”, which show how much money would change hands if derivative contracts were sold on the reporting date at prevailing prices, are a better guide. But even they are an overstatement. Once banks’ claims on each other are stripped out, the residual (“gross credit exposure”) is $3.7 trillion, well under 1% of the notional total (see chart 2).

Even so, $3.7 trillion is a large sum. And although derivatives did not cause the financial crisis, they (or their misuse) made it worse. They concentrated risk as much as they spread it, and amplified bad judgments. Their leverage magnified losses on underlying assets like mortgages and crippled even the biggest firms.

Size is not the only reason for regulators’ interest. Another is a practice called “close-out netting”. Traders of OTC derivatives record their net obligations to each other. On any day, each trader’s thousands of bilateral contracts boil down to a single net position owed to or by its counterparties. Netting agreements ensure that if a trader goes bankrupt its position is settled at once, with no need to wait for a court.

“Counterparties to derivative contracts effectively get a super-senior claim to each other’s assets,” says Craig Pirrong, a finance professor at the University of Houston. For example, in 2008 Goldman Sachs extended credit to CIT, a troubled American lender, but in the form of a “total return swap”, a type of derivative, rather than a conventional loan. Now that CIT has filed for bankruptcy, close-out netting puts Goldman up the queue for repayment.

Another problem is that governments implicitly subsidise derivative markets. Dealer banks are so important to the financial system that they cannot be allowed to fail. This government guarantee lowers their cost of borrowing and allows them to provide derivatives more cheaply than they otherwise could. “Even if dealers keep much of the benefit for themselves, everyone is getting derivatives more cheaply at the expense of the taxpayer,” says Edward Kane, a professor of finance at Boston College. About one-third of OTC trades require no margin or collateral requirements at all. In effect, firms can get leverage for nothing. On exchanges, traders must put up margin or collateral.

Complexity is a further worry. Richard Bookstaber, who headed market-risk management at Morgan Stanley, says that “complexity cloaks catastrophe”. Clients—even supposedly sophisticated ones—do not always understand the risks they are taking on. That’s their lookout, you might say, so long as traders do not defraud them and so long as bankrupted clients do not have to be bailed out by the state.

But regulators do have an interest in complexity. It makes valuation difficult: dealers often allocate different values to the same contract. This in turn makes financial accounts more opaque. (Remember Enron.) And the popularity of arcane derivatives has been sustained by “less than lofty purposes”, says Mr Bookstaber. For example, under the Basel capital-adequacy rules, when a bank makes a loan to an ordinary company it has to set aside 8% of the loan’s value as capital. But for loans to other banks the charge is only 1.6%, because the rules assume banks are more creditworthy. The less they must put aside, the more banks can lend and the more money they can make. This is where CDSs come in handy. A bank overexposed to airlines can use CDSs to share credit risk with other banks and slash the cost of holding the loan. Buying a CDS from AIG, which had a high credit rating, gave banks a similar deal. No wonder they were so eager.

Time to clear up

Regulators have a two-part answer to these problems. First, they want more OTC contracts to be cleared by central counterparties (CCPs). A central banker in Europe thinks this will offer “a clear point of entry for authorities to rescue the financial system next time, rather than rummaging through a mire of interlocking obligations.” Second, they want more of them to be shifted to exchanges.

The American Treasury has made specific proposals. The European Commission is a couple of steps behind, but promises to “ensure global consistency”. To prod derivative markets towards clearing, and ideally trading on exchanges, OTC trades that are not cleared will face a higher capital charge than contracts that are. This may ruin the habitat of more exotic OTC species. Regulators think this is a cost society can bear.

In America supervision would remain split between the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). The SEC would regulate derivatives tied to individual securities and the CFTC much of the rest. For instance, the SEC would oversee CDSs for a single company, whereas the CFTC would regulate those for an index with more than ten names.

CCPs have been around since 1925, when the Chicago Board of Trade Clearing Corporation became the legal counterparty to buyers and sellers of derivative contracts. CCPs take margin and collateral according to the size of trades, so that if a trader defaults, the clearing house should see his counterparty right. They also allow traders to net their positions across all their counterparties, reducing the margin and collateral required.

A sizeable proportion of CCPs are likely to be owned by banks, even though a cap of 20% on their stakes is being mooted in Congress. This year at least three new CCPs have been given approval to clear credit derivatives. Two of them failed to attract significant volume. The other, ICE Trust, is backed by leading dealer banks. In October LCH. Clearnet, an established clearing house, underwent a €330m ($489m) share buyback that happened to boost banks’ shareholdings.

To calculate margins, CCPs need to compute a derivative contract’s volatility, but for a lot of customised OTC contracts the necessary historical price data do not exist. So the proposed rules require only that “standardised” derivatives be cleared. Clearing CDSs presents another difficulty: because a firm is either bankrupt or not, it is difficult for CCPs to demand margins or collateral that vary smoothly with the risk of the loans insured. The world’s largest banks have promised the Federal Reserve they will clear more than 90% of “eligible” interest-rate and credit derivatives by the end of the year. But this includes only derivatives now accepted for clearing.

Deciding what else should be cleared will be fraught. Some argue that regulators should choose, others that CCPs themselves should: if they can clear it, then it must be cleared. Different CCPs may have different motives. Independent clearing houses may overreach themselves in the hope of scooping up more business. CCPs owned by dealer banks might be more reluctant to clear because their owners might find it more profitable to keep trades purely two-way and charge bespoke prices.

CCPs are lauded for their safety and efficiency. When Lehman Brothers defaulted, LCH.Clearnet, the largest clearer of interest-rate swaps, processed its $9 trillion of OTC interest-rate derivatives seamlessly. Even so, regulators may be creating another set of institutions that are too important to fail. CCPs are supposed to have enough money in hand to withstand the default of one member under “extreme but plausible” conditions—whatever that means. As Ben Bernanke, the Fed’s chairman, has noted, CCPs’ margin and collateral will never be enough to protect them from a financial earthquake. Taxpayers will have to back them.

Exchange of views

Reforms will accelerate a shift to CCP clearing that was already under way, but proposals to push standardised and cleared derivatives onto exchanges are new, and more contentious. Critics believe large dealers “have a strong incentive to steer clients towards complex OTC rather than exchange-traded derivatives, because the margins are so much greater,” says Frank Partnoy, a professor of law and finance at the University of San Diego.

Indeed, commercial banks in America have pocketed $115 billion from cash and derivatives trading in the past ten years, according to the Office of the Comptroller of the Currency, a regulator. “Banks lump their trading revenue together but the significant majority of it comes from derivatives,” says Kevin McPartland of TABB Group, a research firm. The market is concentrated, too. In America the leading five dealer banks account for about 95% of all banks’ derivative contracts by value. This year trading has been especially lucrative. In the first six months of 2009 American banks earned $15 billion (see chart 3). Market insiders at an inter-dealer broker believe that derivative revenues at the biggest European banks are at least as large.

Robert Pickel, chief executive of the International Swaps and Derivatives Association, a trade group, dismisses accusations of profiteering. He says that users can always phone different dealers to get the best price. And dealer banks are rewarded for risks they assume.

Even so, exchanges would eat into banks’ trading profitability by making prices more widely available to buyers of OTC derivatives. But getting OTC derivative markets to use trading platforms is harder than getting them to clear: anything traded on an exchange can be cleared, but the converse is not true.

A simple OTC contract with an obscure maturity date is easy to value and margin. But it would not elicit enough interest from buyers or sellers to justify listing on an exchange. And OTC derivative trades are usually big. On an exchange, a single order could move the market price, creating uncertainty for traders. Mr McPartland likens this to buying a book on Amazon instead of eBay: you often pay more at Amazon, but at least you know the price in advance.

Regulators will permit use of a “swap execution facility” in place of an exchange. But that term remains undefined. It could mean simply allowing broking over the telephone to continue. Or it could mean an electronic trading system provided by a third party. ICAP, the biggest inter-dealer broker, has two such platforms ready to go.

Watchdogs are also expected to establish data repositories, which will give them unfettered access to dealers’ trades. BME, the Spanish stock exchange, launched a new one this month. These should alleviate uncertainty about inter-bank exposures. But Darrell Duffie, a finance professor at Stanford University, worries the reforms will not go far enough. “Any derivatives that are cleared should have the prices made public, regardless of whether they are put through an exchange,” he says.

Non-financial firms that use derivatives are keen to escape the new rules. They have no wish to be forced into joining a clearing house and thus into more demanding margin calls. Nor do they like the idea of capital charges. More than 170 of these “end users” wrote to Congress last month arguing that they needed derivatives but would not be able to afford them under the new rules. So far the proposals leave them out. But Mr Duffie asks: “What sort of firm is General Electric?” (it has a big financial division). Regulators fear that hedge funds, which are not strictly financial institutions, will wriggle out, too.

Some argue that those who use derivatives should face the economic cost whatever their legal status. Easier standards for end-users could encourage them to trade even more. Mr Partnoy thinks they are already predisposed to trade too much: “Making $10m profit here and there irresistibly snowballs into a bigger trading operation.” Their risk-management, he adds, is not as savvy. Josh Rosner, managing director of Graham Fisher, a financial-research firm, says banks will game the rules: “Dealers like Goldman Sachs could reach agreements with exempted firms like Cargill [a food trader] and funnel their derivative trades through them.”

Some companies are acting already. Paul Chrispin of Principal Search, a recruitment firm, reckons that physical trading firms like Noble and Vitol have been on a recruitment drive among banks’ derivative traders. “Traders are worried about their future compensation at banks; and the freer regulatory environment at non-financials makes them an attractive place to work right now,” he observes.

The ingenuity of derivatives traders in adapting to both market forces and regulations may well send supervisors back to the drawing board in a decade or so. For now, a higher capital charge for OTC contracts is a sensible step. Doing away with derivatives altogether is neither wise nor likely. As Mr Scholes says: “Cars cause accidents but we don’t ban them.” But the state does insist on seat belts.

Options have a future

Derivatives

Options have a future

Nov 12th 2009
From The Economist print edition

Economies need derivatives, but reform is justified

KING HAMMURABI of Mesopotamia regulated the use of derivatives almost 4,000 years ago. The Japanese have been trading rice futures since around 1650. That contracts based on the price of some commodity or asset have been around for about as long as mankind has been trading indicates that they are pretty useful.

Derivatives enable individuals and companies to insure themselves against risk. Just as they fear the destruction of their belongings by fire or theft, businesses may also be concerned that exchange- or interest-rate movements may turn a good idea into a lossmaker. Derivatives allow them to lessen that risk. But someone needs to take the other side of the bargain, and that usually requires a speculator. Some of those speculators will go bust. Those who insure against fire and theft can set premiums on the basis of decades of experience; financial markets are inherently less predictable.

In the latest crisis, the problem was that investors erroneously believed property prices were quite predictable and built a whole edifice of derivatives on the back of the American housing market. To make matters worse, regulators wrongly believed that the use of derivatives, and the bundling of property loans into securities, had spread risk evenly throughout the system. They accordingly allowed banks to gear up their balance-sheets to a greater extent than before. In fact, much of the risk of a property crash still resided in the banks, and the complex nature of derivatives made their exposure very hard to calculate, leading to a loss of confidence in almost all of them.

Derivatives’ tendency to magnify problems has led to calls for regulators to ban some types. Their economic usefulness, it is argued, is far outweighed by their capacity to create systemic risk. Similar arguments were advanced two decades ago, when equity futures may have contributed to the Black Monday crash of 1987 and British local councils lost money in the obscure world of interest-rate swaps.

But after a few modest reforms, equity and interest-rate futures traded without incident, even through the latest crisis. And the same could be true of the more complex stuff. Even the much-maligned credit default swaps have their uses; by allowing investors to separate default risk from the other risks involved in buying bonds, they potentially reduce the cost of capital for business. Nor is a ban likely to achieve its aims. Congress banned onion futures in the 1950s on the ground that speculators were driving the price of the vegetable. The initiative ended in tears: onion prices since have been no less volatile than they were before.

Clearing and present danger

More modest reform, however, is needed (see article). Proposed legislation to encourage the trading of more derivatives on exchanges or through central counterparties deserves support, for it would make it easier to monitor what market participants were doing. Capital requirements need to be increased, so derivatives cannot be used as an easy way for banks to get around restrictions on gearing.

The trickiest issue concerns exemptions for end-users, such as manufacturers. Allowing companies to hedge their risks is the whole point of the instrument. But if the rules favour them over financial companies, trading will tend to migrate towards them, and away from banks. AIG, once the world’s biggest insurer, thought it was making “easy money” by using its strong credit rating to sell protection against credit defaults; in fact, it was digging its own grave.

These reforms may raise the price of using derivatives, but that would not necessarily be a bad thing. When fire and theft premiums rise, those who really need insurance still pay up.

The Fatal Conceit

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October 27, 2009

Op-Ed Columnist

By DAVID BROOKS

Humans are overconfident creatures. Ninety-four percent of college professors believe they are above average teachers, and 90 percent of drivers believe they are above average behind the wheel. Researchers Paul J.H. Schoemaker and J. Edward Russo gave computer executives quizzes on their industry. Afterward, the executives estimated that they had gotten 5 percent of the answers wrong. In fact, they had gotten 80 percent of the answers wrong.

Fortunately, for those who study the human comedy, the epicenter of overconfidence moves from year to year. Up until recently, people in the financial world bathed in the warm glow of their own self-approval. Hubris in that world always takes the same form: The geniuses there come to believe that they have mastered risk. The future is an algorithm and they’ve cracked the code.

Over the past year, the bonfire of overconfidence has shifted to Washington. Since the masters of finance have been exposed as idiots, the masters of government have concluded (somewhat illogically) that they must be really smart.

Overconfidence in government also has a characteristic form: that of highly rational Olympians who attempt to stand above problems and solve them in a finely tuned and impartial manner. In moments of government overconfidence, officials come to see society not as a dynamic and complex organism, but as a machine, which can be rebuilt. In such moments, governance and engineering merge into one.

Examples of this overconfidence abound. But let us pick just one: the effort to cap financial compensation.

Back in the days of Wall Street overconfidence, the financial titans believed that they deserved to give each other G.D.P.-level pay packages, even though there is no evidence that such packages improve performance. Now in disgrace, Wall Street firms are rewriting their rules, but the Obama administration has decided it should take control of compensation reform. Nobody seriously believes high pay caused the financial meltdown; it was bubblicious groupthink. But cutting executive pay just polls so well.

Every great action can be done in a spirit of humility or in a spirit of overconfidence. Regulating pay in a spirit of humility would mean rebalancing the power between shareholders and executives, without getting government involved in micromanaging individual pay decisions.

But this is not a moment of humility. Treasury officials are now making individual pay-package decisions across an array of different companies — and they must have really big brains to understand the motivational psychology of all those different people. The Federal Reserve, meanwhile, has decided to police banks and veto pay deals that lead to excessive risk. Those experts must have absolutely gigantic brains if they can define excessive risk years before investments pay off.

The best and the brightest in government are now rewriting existing pay contracts and determining that certain firms will be compelled to pay much less than their competitors. They’re not leveling the playing field, as a humble government would do. They’re making it less level in complicated ways.

Reality, of course, has a way of upending finely crafted plans. The effort to cap golden parachutes in 1989 perversely caused companies to increase their golden parachute packages right up to the legal limit. A 1993 law to cap C.E.O. pay led to greater use of stock options and encouraged riskier behavior.

In advance of the current new pay restrictions, 12 out of the 25 highest-paid executives have already left A.I.G., and 11 out of 25 have left Bank of America. We’ll never know how much future talent was dissuaded from working at these ailing firms.

Citigroup used to have a really high-performing energy unit. But under the new salary regime, the bank wasn’t permitted to pay the chief of that unit what he thought he was worth. Citigroup was forced to sell that profitable unit at bargain-basement prices to Occidental Petroleum.

These rules probably won’t even have a big effect on executive wealth. They’ll just drive compensation into back channels and risk-taking into unseen parts of the market.

Again, the issue is not whether government acts, but whether it acts with an awareness of the limits of its knowledge. Sometimes we seem to have a government with no sense of those limits, no sense that perhaps government officials don’t know how to restructure General Motors, pick the most promising battery technology, re-engineer the health care system from the top, or fine-tune the complex system of executive pay.

Furthermore, when extending federal authority, the Obama folks never seem to ask how Republicans will use this power when they regain the White House. The Democrats trust themselves to set private-sector salaries and use extralegal means to go after malefactors, but would they trust a future Dick Cheney?

I hope they know what they’re doing. Because when a future Cheney comes into office, I’m pretty sure he’ll be coming after columnists’ salaries first.

October 28, 2009

Op-Ed Columnist

Don’t Build Up

By THOMAS L. FRIEDMAN

It is crunch time on Afghanistan, so here’s my vote: We need to be thinking about how to reduce our footprint and our goals there in a responsible way, not dig in deeper. We simply do not have the Afghan partners, the NATO allies, the domestic support, the financial resources or the national interests to justify an enlarged and prolonged nation-building effort in Afghanistan.

I base this conclusion on three principles. First, when I think back on all the moments of progress in that part of the world — all the times when a key player in the Middle East actually did something that put a smile on my face — all of them have one thing in common: America had nothing to do with it.

America helped build out what they started, but the breakthrough didn’t start with us. We can fan the flames, but the parties themselves have to light the fires of moderation. And whenever we try to do it for them, whenever we want it more than they do, we fail and they languish.

The Camp David peace treaty was not initiated by Jimmy Carter. Rather, the Egyptian president, Anwar Sadat, went to Jerusalem in 1977 after Israel’s Moshe Dayan held secret talks in Morocco with Sadat aide Hassan Tuhami. Both countries decided that they wanted a separate peace — outside of the Geneva comprehensive framework pushed by Mr. Carter.

The Oslo peace accords started in Oslo — in secret 1992-93 talks between the P.L.O. representative, Ahmed Qurei, and the Israeli professor Yair Hirschfeld. Israelis and Palestinians alone hammered out a broad deal and unveiled it to the Americans in the summer of 1993, much to Washington’s surprise.

The U.S. surge in Iraq was militarily successful because it was preceded by an Iraqi uprising sparked by a Sunni tribal leader, Sheik Abdul Sattar Abu Risha, who, using his own forces, set out to evict the pro-Al Qaeda thugs who had taken over Sunni towns and were imposing a fundamentalist lifestyle. The U.S. surge gave that movement vital assistance to grow. But the spark was lit by the Iraqis.

The Cedar Revolution in Lebanon, the Israeli withdrawals from Gaza and Lebanon, the Green Revolution in Iran and the Pakistani decision to finally fight their own Taliban in Waziristan — because those Taliban were threatening the Pakistani middle class — were all examples of moderate, silent majorities acting on their own.

The message: “People do not change when we tell them they should,” said the Johns Hopkins University foreign policy expert Michael Mandelbaum. “They change when they tell themselves they must.”

And when the moderate silent majorities take ownership of their own futures, we win. When they won’t, when we want them to compromise more than they do, we lose. The locals sense they have us over a barrel, so they exploit our naïve goodwill and presence to loot their countries and to defeat their internal foes.

That’s how I see Afghanistan today. I see no moderate spark. I see our secretary of state pleading with President Hamid Karzai to re-do an election that he blatantly stole. I also see us begging Israelis to stop building more crazy settlements or Palestinians to come to negotiations. It is time to stop subsidizing their nonsense. Let them all start paying retail for their extremism, not wholesale. Then you’ll see movement.

What if we shrink our presence in Afghanistan? Won’t Al Qaeda return, the Taliban be energized and Pakistan collapse? Maybe. Maybe not. This gets to my second principle: In the Middle East, all politics — everything that matters — happens the morning after the morning after. Be patient. Yes, the morning after we shrink down in Afghanistan, the Taliban will celebrate, Pakistan will quake and bin Laden will issue an exultant video.

And the morning after the morning after, the Taliban factions will start fighting each other, the Pakistani Army will have to destroy their Taliban, or be destroyed by them, Afghanistan’s warlords will carve up the country, and, if bin Laden comes out of his cave, he’ll get zapped by a drone.

My last guiding principle: We are the world. A strong, healthy and self-confident America is what holds the world together and on a decent path. A weak America would be a disaster for us and the world. China, Russia and Al Qaeda all love the idea of America doing a long, slow bleed in Afghanistan. I don’t.

The U.S. military has given its assessment. It said that stabilizing Afghanistan and removing it as a threat requires rebuilding that whole country. Unfortunately, that is a 20-year project at best, and we can’t afford it. So our political leadership needs to insist on a strategy that will get the most security for less money and less presence. We simply don’t have the surplus we had when we started the war on terrorism after 9/11 — and we desperately need nation-building at home. We have to be smarter. Let’s finish Iraq, because a decent outcome there really could positively impact the whole Arab-Muslim world, and limit our exposure elsewhere. Iraq matters.

Yes, shrinking down in Afghanistan will create new threats, but expanding there will, too. I’d rather deal with the new threats with a stronger America.

Fox wars

The 'post-partisan' president makes an enemies list

By Charles Krauthammer
Friday, October 23, 2009

Rahm Emanuel once sent a dead fish to a live pollster. Now he's put a horse's head in Roger Ailes's bed.

Not very subtle. And not very smart. Ailes doesn't scare easily.

The White House has declared war on Fox News. White House communications director Anita Dunn said that Fox is "opinion journalism masquerading as news." Patting rival networks on the head for their authenticity (read: docility), senior adviser David Axelrod declared Fox "not really a news station." And Chief of Staff Emanuel told (warned?) the other networks not to "be led [by] and following Fox."

Meaning? If Fox runs a story critical of the administration -- from exposing "green jobs" czar Van Jones as a loony 9/11 "truther" to exhaustively examining the mathematical chicanery and hidden loopholes in proposed health-care legislation -- the other news organizations should think twice before following the lead.

The signal to corporations is equally clear: You might have dealings with a federal behemoth that not only disburses more than $3 trillion every year but is extending its reach ever deeper into private industry -- finance, autos, soon health care and energy. Think twice before you run an ad on Fox.

At first, there was little reaction from other media. Then on Thursday, the administration tried to make them complicit in an actual boycott of Fox. The Treasury Department made available Ken Feinberg, the executive pay czar, for interviews with the White House "pool" news organizations -- except Fox. The other networks admirably refused, saying they would not interview Feinberg unless Fox was permitted to as well. The administration backed down.

This was an important defeat because there's a principle at stake here. While government can and should debate and criticize opposition voices, the current White House goes beyond that. It wants to delegitimize any significant dissent. The objective is no secret. White House aides openly told Politico that they're engaged in a deliberate campaign to marginalize and ostracize recalcitrants, from Fox to health insurers to the U.S. Chamber of Commerce.

There's nothing illegal about such search-and-destroy tactics. Nor unconstitutional. But our politics are defined not just by limits of legality or constitutionality. We have norms, Madisonian norms.

Madison argued that the safety of a great republic, its defense against tyranny, requires the contest between factions or interests. His insight was to understand "the greater security afforded by a greater variety of parties." They would help guarantee liberty by checking and balancing and restraining each other -- and an otherwise imperious government.

Factions should compete, but they should also recognize the legitimacy of other factions and, indeed, their necessity for a vigorous self-regulating democracy. Seeking to deliberately undermine, delegitimize and destroy is not Madisonian. It is Nixonian.

But didn't Teddy Roosevelt try to destroy the trusts? Of course, but what he took down was monopoly power that was extinguishing smaller independent competing interests. Fox News is no monopoly. It is a singular minority in a sea of liberal media. ABC, NBC, CBS, PBS, NPR, CNN, MSNBC vs. Fox. The lineup is so unbalanced as to be comical -- and that doesn't even include the other commanding heights of the culture that are firmly, flagrantly liberal: Hollywood, the foundations, the universities, the elite newspapers.

Fox and its viewers (numbering more than those of CNN and MSNBC combined) need no defense. Defend Fox compared to whom? To CNN -- which recently unleashed its fact-checkers on a "Saturday Night Live" skit mildly critical of President Obama, but did no checking of a grotesquely racist remark that CNN falsely attributed to Rush Limbaugh?

Defend Fox from whom? Fox's flagship 6 o'clock evening news out of Washington (hosted by Bret Baier, formerly by Brit Hume) is, to my mind, the best hour of news on television. (Definitive evidence: My mother watches it even on the odd night when I'm not on.) Defend Fox from the likes of Anita Dunn? She's been attacked for extolling Mao's political philosophy in a speech at a high school graduation. But the critics miss the surpassing stupidity of her larger point: She was invoking Mao as support and authority for her impassioned plea for individuality and trusting one's own choices. Mao as champion of individuality? Mao, the greatest imposer of mass uniformity in modern history, creator of a slave society of a near-billion worker bees wearing Mao suits and waving the Little Red Book?

The White House communications director cannot be trusted to address high schoolers without uttering inanities. She and her cohorts are now to instruct the country on truth and objectivity?

letters@charleskrauthammer.com

Doctors as the Key to Health Care Reform

Posted by NEJM • September 23rd, 2009 • Printer-friendly

Arnold S. Relman, M.D.

Experts agree that sustainable health care reform requires reining in rising costs, but few people understand that the control of medical expenditures is largely in the hands of the medical profession. Doctors, in consultation with their patients — not insurance companies, legislators, or government officials — make most of the decisions to use medical resources, thereby determining what the United States spends on medical care.
Most doctors are paid on a fee-for-service basis, which is a strong financial incentive for them to maximize the elective services they provide. This incentive, combined with the continued introduction of new and more expensive technology, is a major factor in driving up medical expenditures. The same incentive is attracting more and more young doctors into specialties that command much higher fees — and therefore guarantee much greater income — than those earned by primary care practitioners. Primary care is rapidly becoming an endangered specialty; an important, but not the only, reason is its relatively low economic rewards.

A system like ours, which is grossly deficient in primary care physicians and dominated by specialists who are trained to use expensive tests and procedures, is inevitably costly, particularly when most specialists practice as independent small businesses, competing for patient referrals and for income. Adjusting the fees paid by insurers, with increases for primary care and decreases for specialized procedures, or basing fees on the quality or outcome of care won’t solve this problem, because specialists can easily control the volume and kinds of services they provide. Furthermore, competition doesn’t lower prices in medical care as it does in other markets, because physicians usually choose the services to be provided and are paid largely by insurance — not by the consumers for whose business they would compete if this were an ordinary market.

To judge from the health care reform proposals getting serious attention in Washington, there is little evidence that lawmakers are aware of, or understand the significance of, these facts — or that, even if they did, they would have the stomach for the major reforms needed to solve this problem.¹ Having surveyed all the current legislative proposals for slowing the continued inflation of costs, the Congressional Budget Officeis not optimistic. Why should it be? We are not likely to control medical inflation unless the incentives in the traditional fee-for-service payment of doctors are eliminated, but nothing on the table in the health care reform debate even comes close to eliminating them. This fact explains why the private insurance and drugindustries have so far been willing to support the Obama administration’s reform proposals. These proposals would expand coverage and increase total health care expenditures, which means more income for insurers and drug manufacturers. Even after their promised help in reducing the increase in costs, these industries will make more money in the reformed system than they do now.

Massachusetts, often mentioned as a model for the nation, enacted legislation more than 3 years ago that achieved nearly universal insurance coverage but from the outset found itself struggling to keep up with rising costs. To control expenditures, a special state commission on health care payment has recommended the elimination of traditional fee-for-service payment.^2,3 The commission envisions the creation of new, as-yet-undefined medical management entities that it calls “accountable care organizations” (ACOs), which would organize physicians into multispecialty teams with strong primary care staffing. ACOs could include hospitals, could be for-profit or not-for-profit, and would be expected to take risks only for their performance. Insurance carriers would continue to hold the insurance risk for their contracts with ACOs, and they would pay the latter on a per capita, risk-adjusted basis for comprehensive care. They would also use “pay for performance” as an incentive to promote quality and efficiency. The commission does not specify how physicians in ACOs would be paid, but a salary system is implied by the report’s emphasis on the argumentthat Massachusetts cannot afford fee -for-service payment of its doctors if it wants to provide near-universal health insurance. Whether the commission’s proposals will prove acceptable to stakeholders and, if so, whether they will ever be implemented remain to be seen.

As it moves to expand insurance coverage, the federal government will soon face the financial difficulty now confronting Massachusetts.

^{Relman AS. The health reform we need and are not getting. New York Rev Books 2009;56:38-40.}

^{Recommendations of the Special Commission on the Health Care Payment System. Boston: Commonwealth of Massachusetts, July 16, 2009.}

^{Steinbrook R. The end of fee-for-service medicine? Proposals for payment reform in Massachusetts. N Engl J Med 2009;361:1036-1038. [Free Full Text]}

Economic vandalism

Sep 17th 2009
From The Economist print edition

A protectionist move that is bad politics, bad economics, bad diplomacy and hurts America. Did we miss anything?

YOU can be fairly sure that when a government slips an announcement out at nine o’clock on a Friday night, it is not proud of what it is doing. That is one of the only things that makes sense about Barack Obama’s decision to break a commitment he, along with other G20 leaders, reaffirmed last April: to avoid protectionist measures at a time of great economic peril. In every other way the president’s decision to slap a 35% tariff on imported Chinese tyres looks like a colossal blunder, confirming his critics’ worst fears about the president’s inability to stand up to his party’s special interests and stick to the centre ground he promised to occupy in office.

This newspaper endorsed Mr Obama at last year’s election (see article) in part because he had surrounded himself with enough intelligent centrists. We also said that the eventual success of his presidency would be based on two things: resuscitating the world economy; and bringing the new emerging powers into the Western order. He has now hurt both objectives.

Deeply tyresome

Last year the fear was that Mr Obama would give in to enormous protectionist pressure from Congress. By introducing the levy, Mr Obama has pandered to a single union, one that does not even represent a majority of American tyre-industry workers, and he has done so against the interests of everyone else (see article). America’s tyre-makers, who have more or less given up making low-end tyres at home in favour of importing them (often from joint-ventures in guess where) declined to support the application for import “relief”. Consumers will have to pay more. The motor and garage trades will be harmed. And no one can seriously imagine that any American tyre-making job will be saved; firms will simply import cheap tyres from other low-cost places like India and Brazil.

One might argue that these tariffs don’t matter much. They apply, after all, only to imports worth a couple of billion dollars last year, hardly the stuff of a great trade war. China is incandescent with rage; but China is a master of theatrical overreaction. Its actual response so far has been the minor one of announcing an anti-dumping investigation into American chicken and car-parts exports. The whole affair might blow over, much as did the furore surrounding George Bush’s selective steel tariffs (much worse ones than Mr Obama’s on tyres) back in 2002. Presidents, after all, sometimes have to throw a bit of red meat to their supporters: Mr Obama needs to keep the unions on side to help his health-reform bill.

That view seems naive. It is not just that workers in all sorts of other industries that have suffered at the hands of Chinese competitors will now be emboldened to seek the same kind of protection from a president who has given in to the unions at the first opportunity. The tyre decision needs to be set into the context of a string of ominously protectionist policies which started within weeks of the inauguration with a nasty set of “Buy America” provisions for public-works contracts. The president watered these down a bit, but was not brave enough to veto. Next, the president stayed silent as Congress shut down a project that was meant to lead to the opening of the border to Mexican trucks, something promised in the NAFTA agreement of 1994. Besides these sins of commission sit the sins of omission: the president has done nothing at all to advance the three free-trade packages that are pending in Congress, with Colombia, Panama and South Korea, three solid American allies who deserve much better. And much more serious than that, because it affects the whole world, is his failure to put anything worthwhile on the table to help revive the moribund Doha round of trade talks. Mr Bush’s tariffs, like the Reagan-era export restraints on Japanese cars and semiconductors, came from a president who was fundamentally committed to free trade. Mr Obama’s, it seems, do not.

America is needed to lead. The global trading system has many enemies, but in recent times the man in the White House could be counted as its main champion. As the driver of the world’s great opening, America has gained hugely in terms of power and prestige, but the extraordinary burst of growth that globalisation has triggered has also lifted hundreds of millions out of poverty over the past few decades and brought lower prices to consumers everywhere. The global recession threatens to undo some of that, as country after country is tempted to subsidise here and protect there. World trade is likely to slump by 10% in 2009, and a report from the London-based Global Trade Alert claimed this week that, on average, a G20 member has broken the no-protectionism pledge once every three days since it was made. For Mr Obama now to take up the no-protection cause at the G20’s forthcoming meeting in Pittsburgh would, alas, be laughable. But if America does not set an example, no one else is likely to.

Dumb and dumber

Nor is the potential fallout from Mr Obama’s wrongheaded decision limited to trade. Evidence of a weak president being pushed leftward might cause investors to worry whether he will prove similarly feeble when it comes to reining in the vast deficits he is now racking up; and that might spook the buyers of bonds that finance all those deficits. Looming large among these, of course, are the Chinese. Deteriorating trade relations between the world’s number one debtor and its number one creditor are enough to keep any banker awake at night.

And America needs China for a lot more than T-bonds. Any hope of securing a climate-change agreement at Copenhagen in December on a successor treaty to Kyoto will require close co-operation between America and China. So does the work of negotiating with North Korea on its nuclear weapons. And as for Iran, where America is keen to seek a fresh round of UN sanctions in the hope of forcing it to scrap its nuclear programme, China holds a power of veto at the Security Council. Under the relevant trade laws, Mr Obama had the absolute discretion not to impose the recommended tyre tariffs on the grounds of overall economic interest or national security. Given everything that is at stake, his decision not to exercise it amounts to an act of vandalism.

Fact-Checking the President on Health Insurance

• 

• OPINION
• SEPTEMBER 14, 2009, 9:51 A.M. ET

His tales of abuse don't stand scrutiny.

• By SCOTT HARRINGTON

In his speech to Congress last week, President Barack Obama attempted to sell a reform agenda by demonizing the private health-insurance industry, which many people love to hate. He opened the attack by asserting: "More and more Americans pay their premiums, only to discover that their insurance company has dropped their coverage when they get sick, or won't pay the full cost of care. It happens every day."

Clearly, this should never happen to anyone who is in good standing with his insurance company and has abided by the terms of the policy. But the president's examples of people "dropped" by their insurance companies involve the rescission of policies based on misrepresentation or concealment of information in applications for coverage. Private health insurance cannot function if people buy insurance only after they become seriously ill, or if they knowingly conceal health conditions that might affect their policy.

Traditional practice, governed by decades of common law, statute and regulation is for insurers to rely in underwriting and pricing on the truthfulness of the information provided by applicants about their health, without conducting a costly investigation of each applicant's health history. Instead, companies engage in a certain degree of ex post auditing—conducting more detailed and costly reviews of a subset of applications following policy issue—including when expensive treatment is sought soon after a policy is issued.

This practice offers substantial cost savings and lower premiums compared to trying to verify every application before issuing a policy, or simply paying all claims, regardless of the accuracy and completeness of the applicant's disclosure. Some states restrict insurer rescission rights to instances where the misrepresented or concealed information is directly related to the illness that produced the claim. Most states do not.

To highlight abusive practices, Mr. Obama referred to an Illinois man who "lost his coverage in the middle of chemotherapy because his insurer found he hadn't reported gallstones that he didn't even know about." The president continued: "They delayed his treatment, and he died because of it."

Although the president has used this example previously, his conclusion is contradicted by the transcript of a June 16 hearing on industry practices before the Subcommittee of Oversight and Investigation of the House Committee on Energy and Commerce. The deceased's sister testified that the insurer reinstated her brother's coverage following intervention by the Illinois Attorney General's Office. She testified that her brother received a prescribed stem-cell transplant within the desired three- to four-week "window of opportunity" from "one of the most renowned doctors in the whole world on the specific routine," that the procedure "was extremely successful," and that "it extended his life nearly three and a half years."

The president's second example was a Texas woman "about to get a double mastectomy when her insurance company canceled her policy because she forgot to declare a case of acne." He said that "By the time she had her insurance reinstated, her breast cancer more than doubled in size."

The woman's testimony at the June 16 hearing confirms that her surgery was delayed several months. It also suggests that the dermatologist's chart may have described her skin condition as precancerous, that the insurer also took issue with an apparent failure to disclose an earlier problem with an irregular heartbeat, and that she knowingly underreported her weight on the application.

These two cases are presumably among the most egregious identified by Congressional staffers' analysis of 116,000 pages of documents from three large health insurers, which identified a total of about 20,000 rescissions from millions of policies issued by the insurers over a five-year period. Company representatives testified that less than one half of one percent of policies were rescinded (less than 0.1% for one of the companies).

If existing laws and litigation governing rescission are inadequate, there clearly are a variety of ways that the states or federal government could target abuses without adopting the president's agenda for federal control of health insurance, or the creation of a government health insurer.

Later in his speech, the president used Alabama to buttress his call for a government insurer to enhance competition in health insurance. He asserted that 90% of the Alabama health-insurance market is controlled by one insurer, and that high market concentration "makes it easier for insurance companies to treat their customers badly—by cherry-picking the healthiest individuals and trying to drop the sickest; by overcharging small businesses who have no leverage; and by jacking up rates."

In fact, the Birmingham News reported immediately following the speech that the state's largest health insurer, the nonprofit Blue Cross and Blue Shield of Alabama, has about a 75% market share. A representative of the company indicated that its "profit" averaged only 0.6% of premiums the past decade, and that its administrative expense ratio is 7% of premiums, the fourth lowest among 39 Blue Cross and Blue Shield plans nationwide.

Similarly, a Dec. 31, 2007, report by the Alabama Department of Insurance indicates that the insurer's ratio of medical-claim costs to premiums for the year was 92%, with an administrative expense ratio (including claims settlement expenses) of 7.5%. Its net income, including investment income, was equivalent to 2% of premiums in that year.

In addition to these consumer friendly numbers, a survey in Consumer Reports this month reported that Blue Cross and Blue Shield of Alabama ranked second nationally in customer satisfaction among 41 preferred provider organization health plans. The insurer's apparent efficiency may explain its dominance, as opposed to a lack of competition—especially since there are no obvious barriers to entry or expansion in Alabama faced by large national health insurers such as United Healthcare and Aetna.

Responsible reform requires careful analysis of the underlying causes of problems in health insurance and informed debate over the benefits and costs of targeted remedies. The president's continued demonization of private health insurance in pursuit of his broad agenda of government expansion is inconsistent with that objective.

Mr. Harrington is professor of health-care management and insurance and risk management at the University of Pennsylvania's Wharton School and an adjunct scholar at the American Enterprise Institute.

• 

• OPINION
• AUGUST 27, 2009, 12:52 P.M. ET

Obama's Health Rationer-in-Chief

White House health-care adviser Ezekiel Emanuel blames the Hippocratic Oath for the 'overuse' of medical care.

By BETSY MCCAUGHEY

Dr. Ezekiel Emanuel, health adviser to President Barack Obama, is under scrutiny. As a bioethicist, he has written extensively about who should get medical care, who should decide, and whose life is worth saving. Dr. Emanuel is part of a school of thought that redefines a physician’s duty, insisting that it includes working for the greater good of society instead of focusing only on a patient’s needs. Many physicians find that view dangerous, and most Americans are likely to agree.


The health bills being pushed through Congress put important decisions in the hands of presidential appointees like Dr. Emanuel. They will decide what insurance plans cover, how much leeway your doctor will have, and what seniors get under Medicare. Dr. Emanuel, brother of White House Chief of Staff Rahm Emanuel, has already been appointed to two key positions: health-policy adviser at the Office of Management and Budget and a member of the Federal Council on Comparative Effectiveness Research. He clearly will play a role guiding the White House's health initiative.

The Reaper Curve: Ezekiel Emanuel used the above chart in a Lancet article to illustrate the ages on which health spending should be focused. "Principles for Allocation of Scarce Medical Interventions" The Lancet, January 31, 2009

Dr. Emanuel says that health reform will not be pain free, and that the usual recommendations for cutting medical spending (often urged by the president) are mere window dressing. As he wrote in the Feb. 27, 2008, issue of the Journal of the American Medical Association (JAMA): "Vague promises of savings from cutting waste, enhancing prevention and wellness, installing electronic medical records and improving quality of care are merely 'lipstick' cost control, more for show and public relations than for true change."

True reform, he argues, must include redefining doctors' ethical obligations. In the June 18, 2008, issue of JAMA, Dr. Emanuel blames the Hippocratic Oath for the "overuse" of medical care: "Medical school education and post graduate education emphasize thoroughness," he writes. "This culture is further reinforced by a unique understanding of professional obligations, specifically the Hippocratic Oath's admonition to 'use my power to help the sick to the best of my ability and judgment' as an imperative to do everything for the patient regardless of cost or effect on others."

In numerous writings, Dr. Emanuel chastises physicians for thinking only about their own patient's needs. He describes it as an intractable problem: "Patients were to receive whatever services they needed, regardless of its cost. Reasoning based on cost has been strenuously resisted; it violated the Hippocratic Oath, was associated with rationing, and derided as putting a price on life. . . . Indeed, many physicians were willing to lie to get patients what they needed from insurance companies that were trying to hold down costs." (JAMA, May 16, 2007).

Of course, patients hope their doctors will have that single-minded devotion. But Dr. Emanuel believes doctors should serve two masters, the patient and society, and that medical students should be trained "to provide socially sustainable, cost-effective care." One sign of progress he sees: "the progression in end-of-life care mentality from 'do everything' to more palliative care shows that change in physician norms and practices is possible." (JAMA, June 18, 2008).

"In the next decade every country will face very hard choices about how to allocate scarce medical resources. There is no consensus about what substantive principles should be used to establish priorities for allocations," he wrote in the New England Journal of Medicine, Sept. 19, 2002. Yet Dr. Emanuel writes at length about who should set the rules, who should get care, and who should be at the back of the line.

"You can't avoid these questions," Dr. Emanuel said in an Aug. 16 Washington Post interview. "We had a big controversy in the United States when there was a limited number of dialysis machines. In Seattle, they appointed what they called a 'God committee' to choose who should get it, and that committee was eventually abandoned. Society ended up paying the whole bill for dialysis instead of having people make those decisions."

Dr. Emanuel argues that to make such decisions, the focus cannot be only on the worth of the individual. He proposes adding the communitarian perspective to ensure that medical resources will be allocated in a way that keeps society going: "Substantively, it suggests services that promote the continuation of the polity—those that ensure healthy future generations, ensure development of practical reasoning skills, and ensure full and active participation by citizens in public deliberations—are to be socially guaranteed as basic. Covering services provided to individuals who are irreversibly prevented from being or becoming participating citizens are not basic, and should not be guaranteed. An obvious example is not guaranteeing health services to patients with dementia." (Hastings Center Report, November-December, 1996)

In the Lancet, Jan. 31, 2009, Dr. Emanuel and co-authors presented a "complete lives system" for the allocation of very scarce resources, such as kidneys, vaccines, dialysis machines, intensive care beds, and others. "One maximizing strategy involves saving the most individual lives, and it has motivated policies on allocation of influenza vaccines and responses to bioterrorism. . . . Other things being equal, we should always save five lives rather than one.

"However, other things are rarely equal—whether to save one 20-year-old, who might live another 60 years, if saved, or three 70-year-olds, who could only live for another 10 years each—is unclear." In fact, Dr. Emanuel makes a clear choice: "When implemented, the complete lives system produces a priority curve on which individuals aged roughly 15 and 40 years get the most substantial chance, whereas the youngest and oldest people get changes that are attenuated (see Dr. Emanuel's chart nearby).

Dr. Emanuel concedes that his plan appears to discriminate against older people, but he explains: "Unlike allocation by sex or race, allocation by age is not invidious discrimination. . . . Treating 65 year olds differently because of stereotypes or falsehoods would be ageist; treating them differently because they have already had more life-years is not."

The youngest are also put at the back of the line: "Adolescents have received substantial education and parental care, investments that will be wasted without a complete life. Infants, by contrast, have not yet received these investments. . . . As the legal philosopher Ronald Dworkin argues, 'It is terrible when an infant dies, but worse, most people think, when a three-year-old dies and worse still when an adolescent does,' this argument is supported by empirical surveys." (thelancet.com, Jan. 31, 2009).

To reduce health-insurance costs, Dr. Emanuel argues that insurance companies should pay for new treatments only when the evidence demonstrates that the drug will work for most patients. He says the "major contributor" to rapid increases in health spending is "the constant introduction of new medical technologies, including new drugs, devices, and procedures. . . . With very few exceptions, both public and private insurers in the United States cover and pay for any beneficial new technology without considering its cost. . . ." He writes that one drug "used to treat metastatic colon cancer, extends medial survival for an additional two to five months, at a cost of approximately $50,000 for an average course of therapy." (JAMA, June 13, 2007).

Medians, of course, obscure the individual cases where the drug significantly extended or saved a life. Dr. Emanuel says the United States should erect a decision-making body similar to the United Kingdom's rationing body—the National Institute for Health and Clinical Excellence (NICE)—to slow the adoption of new medications and set limits on how much will be paid to lengthen a life.

Dr. Emanuel's assessment of American medical care is summed up in a Nov. 23, 2008, Washington Post op-ed he co-authored: "The United States is No. 1 in only one sense: the amount we shell out for health care. We have the most expensive system in the world per capita, but we lag behind many developed nations on virtually every health statistic you can name."

View Full Image
McCaughey
Associated Press
McCaughey
McCaughey

This is untrue, though sadly it's parroted at town-hall meetings across the country. Moreover, it's an odd factual error coming from an oncologist. According to an August 2009 report from the National Bureau of Economic Research, patients diagnosed with cancer in the U.S. have a better chance of surviving the disease than anywhere else. The World Health Organization also rates the U.S. No. 1 out of 191 countries for responsiveness to the needs and choices of the individual patient. That attention to the individual is imperiled by Dr. Emanuel's views.

Dr. Emanuel has fought for a government takeover of health care for over a decade. In 1993, he urged that President Bill Clinton impose a wage and price freeze on health care to force parties to the table. "The desire to be rid of the freeze will do much to concentrate the mind," he wrote with another author in a Feb. 8, 1993, Washington Post op-ed. Now he recommends arm-twisting Chicago style. "Every favor to a constituency should be linked to support for the health-care reform agenda," he wrote last Nov. 16 in the Health Care Watch Blog. "If the automakers want a bailout, then they and their suppliers have to agree to support and lobby for the administration's health-reform effort."

Is this what Americans want?

Ms. McCaughey is chairman of the Committee to Reduce Infection Deaths and a former lieutenant governor of New York state.

The Death Book for Veterans

* The Wall Street Journal

* OPINION
* AUGUST 18, 2009, 7:12 P.M. ET

The Death Book for Veterans
Ex-soldiers don't need to be told they're a burden to society.



By JIM TOWEY

If President Obama wants to better understand why America's discomfort with end-of-life discussions threatens to derail his health-care reform, he might begin with his own Department of Veterans Affairs (VA). He will quickly discover how government bureaucrats are greasing the slippery slope that can start with cost containment but quickly become a systematic denial of care.

Last year, bureaucrats at the VA's National Center for Ethics in Health Care advocated a 52-page end-of-life planning document, "Your Life, Your Choices." It was first published in 1997 and later promoted as the VA's preferred living will throughout its vast network of hospitals and nursing homes. After the Bush White House took a look at how this document was treating complex health and moral issues, the VA suspended its use. Unfortunately, under President Obama, the VA has now resuscitated "Your Life, Your Choices."

Who is the primary author of this workbook? Dr. Robert Pearlman, chief of ethics evaluation for the center, a man who in 1996 advocated for physician-assisted suicide in Vacco v. Quill before the U.S. Supreme Court and is known for his support of health-care rationing.

"Your Life, Your Choices" presents end-of-life choices in a way aimed at steering users toward predetermined conclusions, much like a political "push poll." For example, a worksheet on page 21 lists various scenarios and asks users to then decide whether their own life would be "not worth living."

The circumstances listed include ones common among the elderly and disabled: living in a nursing home, being in a wheelchair and not being able to "shake the blues." There is a section which provocatively asks, "Have you ever heard anyone say, 'If I'm a vegetable, pull the plug'?" There also are guilt-inducing scenarios such as "I can no longer contribute to my family's well being," "I am a severe financial burden on my family" and that the vet's situation "causes severe emotional burden for my family."

When the government can steer vulnerable individuals to conclude for themselves that life is not worth living, who needs a death panel?

One can only imagine a soldier surviving the war in Iraq and returning without all of his limbs only to encounter a veteran's health-care system that seems intent on his surrender.

I was not surprised to learn that the VA panel of experts that sought to update "Your Life, Your Choices" between 2007-2008 did not include any representatives of faith groups or disability rights advocates. And as you might guess, only one organization was listed in the new version as a resource on advance directives: the Hemlock Society (now euphemistically known as "Compassion and Choices").

This hurry-up-and-die message is clear and unconscionable. Worse, a July 2009 VA directive instructs its primary care physicians to raise advance care planning with all VA patients and to refer them to "Your Life, Your Choices." Not just those of advanced age and debilitated condition—all patients. America's 24 million veterans deserve better.

Many years ago I created an advance care planning document called "Five Wishes" that is today the most widely used living will in America, with 13 million copies in national circulation. Unlike the VA's document, this one does not contain the standard bias to withdraw or withhold medical care. It meets the legal requirements of at least 43 states, and it runs exactly 12 pages.

After a decade of observing end-of-life discussions, I can attest to the great fear that many patients have, particularly those with few family members and financial resources. I lived and worked in an AIDS home in the mid-1980s and saw first-hand how the dying wanted more than health care—they wanted someone to care.

If President Obama is sincere in stating that he is not trying to cut costs by pressuring the disabled to forgo critical care, one good way to show that commitment is to walk two blocks from the Oval Office and pull the plug on "Your Life, Your Choices." He should make sure in the future that VA decisions are guided by values that treat the lives of our veterans as gifts, not burdens.

Mr. Towey, president of Saint Vincent College, was director of the White House Office of Faith-Based Initiatives (2002-2006) and founder of the nonprofit Aging with Dignity.