When it comes to rooting out wasteful spending in federal entitlement programs, attention has long focused on preventing beneficiaries from gaming the system.

A new Stanford study identifies a fresh cause for concern: the for-profit companies that the U.S. government increasingly tasks with providing benefits to Americans who are often poor, elderly or both.

In a new working paper, Maria Polyakova, an assistant professor of medicine, finds that outsourcing public assistance services to third parties can lead to unanticipated effects on prices as well as on which beneficiaries gain the most from public dollars.

That’s because companies are in the business of making money. And when they know which of their consumers are likely to get certain levels of public support, they will try to use this information to maximize their profits, according to the research published this week by the National Bureau of Economic Research.

Polyakova shows that when companies act in their self-interest, unforeseen inequities and inefficiencies can arise that may hurt some consumers while helping others. At a time when governments in the United States and around the world are increasingly turning to the private sector to provide public benefits — namely in health care and in education — Polyakova says policymakers need to better understand how these intermediaries are affecting welfare programs.

“Policymakers have to be more careful about introducing intermediaries into public services,” says Polyakova, who is a faculty fellow at the Stanford Institute for Economic Policy Research (SIEPR), and teaches at the Stanford School of Medicine. She is also a core faculty member of Stanford Health Policy. “They may want to revisit how they think about outsourcing when research is showing that there are unintended consequences that may be positive or negative.”

Health Insurance Pricing under the Microscope

Intermediaries are central to a number of public services where the U.S. government provides subsidies to consumers, often based on income, age or employment status. Prominent examples include privately-managed Medicare Advantage Plans, drug benefits under Medicare Plan D, and charter schools in secondary education.

According to Polyakova, most research into wasteful spending within government subsidies has focused on consumers and how they try to trick the system by, for example, hiding income to qualify for a tax credit or cash assistance. Governments, though imperfect, have long been seen as benign players.

The increasing involvement of for-profit companies, she says, shows there’s a need to closely examine what’s happening on the supply side of public welfare.

To do that, Polyakova found an ideal setting: the federal health insurance marketplace created by the Affordable Care Act of 2010. Most consumers who shop for coverage through www.healthcare.gov receive a subsidy in the form of a tax credit that covers all or part of their insurance premium. The amount of their tax credit is tied to their household income.

The dollars at stake are significant. The Congressional Budget Office estimates that in 2019 the federal government will pay $560 billion in subsidies for privately-provided health insurance, including the spending on the Affordable Care Act marketplaces as well as other similarly designed programs. That figure is expected to hit $1.2 trillion over the next decade.

The Neighborhood Effect

Polyakova and her co-author — Stephen Ryan of Washington University’s Olin Business School — analyzed data from 2017 covering more than 9 million enrollees across some 2,570 counties around the country. They find that the presence of an intermediary significantly impacts insurance prices and key measures economists use to calculate the effects of a policy beyond a given benefit’s face value.

Specifically, they show that health insurance companies will have an incentive to raise premiums in markets where more consumers receive the higher tax credit because their incomes are low and the government is required to subsidize them.

On the flip side, insurers will charge lower prices in places where such subsidized consumers are less willing to buy coverage if they think it costs too much.

To illustrate the unintended consequences of the insurers’ actions, the researchers point out that, in the first instance where prices increase, consumers with incomes that are slightly higher than other community members will end up paying more for the same coverage. Under the second scenario, consumers who don’t qualify for the tax credit because their incomes are too high benefit from the lower premiums aimed at nearby residents.

“The price you pay for insurance will depend on who your neighbors are,” says Polyakova. “If you live near people who are poorer than you, you will be affected differently than if you live near people who are richer than you.”

Change the subsidy, change the calculation

Like with financial aid, tax credits for insurance coverage are calculated based on consumer income. But there is another type of subsidy that policymakers could use — flat vouchers, in which all members of a market receive the same benefit regardless of income, age or some other characteristic. For their research, Polyakova and Ryan also analyze how flat vouchers that only vary by age, but not by income, would hypothetically alter private health insurance prices in the federal Affordable Care Act marketplace.

Here, too, the scholars find different impacts on different types of consumers whether the subsidy is based on income or delivered as a flat voucher.

The analyses, says Polyakova, drive home the point that policymakers need to understand that there are trade-offs to relying on for-profit companies to provide government services and that the type of subsidy offered can alter how they calculate prices in disparate ways.

“There’s nothing wrong with companies trying to maximize their profits,” says Polyakova. “But sophisticated policymakers need to understand what happens when private markets get involved.”

On October 1st, with a massive National Day parade down Chang’an Avenue in Beijing, the People’s Republic of China celebrated the 70th anniversary of its establishment in 1949. Like a split-screen T.V., however, on the other side of the border in Hong Kong, black-clad protesters wearing gas masks and goggles undertook one of the most violent protests in Hong Kong SAR since the 1997 handover.

With those contrasting images still fresh on everyone’s minds, FSI, Shorenstein APARC, Stanford China Program, and the Center for East Asian Studies jointly sponsored a conference on October 2nd titled “Hong Kong: A City in Turmoil” to an overflow audience. Jean Oi, Director of the Stanford China Program who moderated the program opened the conference by quoting Stanford President Marc Tessier-Lavigne and Provost Persis Drell who, in a campus-wide message, had recently encouraged the university community to not shy away from difficult conversations. “We have an extraordinary opportunity [at Stanford],” she quoted from their email, “to learn from each other, to have our thinking challenged, to sharpen our arguments and to develop better ideas from a thoughtful debate.” Even while explicitly aware, therefore, that differing opinions rage on both sides of the debate regarding Hong Kong’s protests, but trusting that “there are thoughtful people on both sides of the debate,” she continued, “we have decided to organize this special event.”

The former Chief Secretary for Administration of the Hong Kong Government (1993-2001) Anson Chan gave the keynote speech followed by a panel discussion featuring Harry Harding, University Professor and Professor of Public Policy, University of Virginia; David M. Lampton, Oksenberg-Rohlen Fellow, FSI, Stanford University; and Ming Sing, Associate Professor, The Hong Kong University of Science and Technology.

The Honorable Anson Chan speaks at Hong Kong: A City in Turmoil conference.

The Honorable Anson Chan gives the keynote speech at the "Hong Kong: A City in Turmoil" conference.

Keynote Speech

In her keynote, Anson Chan first recalled the handover ceremony in 1997, which she attended as Hong Kong SAR’s Chief Secretary, bridging the transition from British sovereignty to Chinese sovereignty. Chan spoke of her dawning realization at the time that the transition of sovereignty “would call Hong Kong people to forge a new identity” that “reconciled our community both with its past and future.” She noted “that many Hong Kong people, particularly the young, have indeed forged a new identity, but not as loyal, submissive Chinese patriots that Beijing had hoped for.” The central government had “singularly failed to win hearts and minds,” Chan added, especially of its young people. Hong Kong is, indeed, now at a crossroads and, she admitted, is a “city in turmoil.”

In Chan’s recollection, the central government exercised its power with “great restraint” following the handover. At first, the SAR government, too, was vigilant in protecting Hong Kong’s high degree of autonomy. Gradually, however, the city’s autonomy and civil liberties, she asserted, suffered increasing erosion. In particular, “[o]ver the past fifteen years, things changed drastically.” Describing the series of events that have caused Hong Kong’s residents increasing alarm -- including the forced abduction of Hong Kong-based booksellers; disappearance of a mainland Chinese billionaire from a luxury hotel in Hong Kong; Legislative Council members’ oath-taking controversy; the resulting disqualification of six legislative members; and the political screening of pro-democracy electoral candidates, etc. -- she further noted that the “snail’s pace of progress” in implementing full universal suffrage for the election of the Chief Executive and all members of the legislature promised in the Basic Law also brought on mounting popular frustration and despair.

“Was this progressive erosion of Hong Kong’s autonomy inevitable?” Chan asked. “I don’t think so,” she answered. Since 1997, Hong Kong SAR’s successive Chief Executives, she countered, have progressively failed to reassure the Hong Kong people that, first and foremost, they will do their utmost to uphold “one country, two systems,” and to defend Hong Kong’s autonomy. In an unsparing critique, she noted, they have instead increasingly come across as “mouthpieces of the central government, toeing the Beijing line.” Chan also suggested that “some years back, Beijing began to both lose confidence in the judgment and competence of the Hong Kong administration and to fear that growing sense of people’s identity as ‘Hong Kongers’ rather than Chinese citizens could pose a threat to the long-term, successful integration of Hong Kong into the motherland.” This growing distrust, then, proved catalytic to increasing tensions and difficulties in Hong Kong-PRC relations.

Characterizing 2003 as the first watershed moment when large public demonstrations – Hong Kong people’s “first taste of people power” -- forced the SAR government to withdraw its proposed bill under Hong Kong Basic Law Article 23, Chan recounted the failure of the constitutional reform consultation process in 2013-2014, the decision of the Standing Committee of the National People’s Congress on August 31, 2014 to set institutional limits on universal suffrage, and the resulting 2014 Occupy Movement, which later morphed into the Umbrella Movement. These popular movements failed to yield genuine universal suffrage, however, and this failure, Chan stated, “left wounds that went unhealed and festered quietly.”

The million-strong protests on June 9th and 16th to register popular opposition to Hong Kong SAR government’s introduction of its extradition bill “broke all records,” Chan noted. Recounting the five demands of the current protesters, Chan voiced support for the establishment of an independent commission with “carefully crafted terms of reference” that could objectively examine the handling of the current unrests. Such a commission could go a long way towards pacifying the protesters, she suggested, and “[s]top the violence, at least for the time being.” She also urged the reopening of broad-based consultation on political reforms, lain dormant since the collapse of the Umbrella Movement in 2014; and to even consider a measure of amnesty to exonerate a subset of both the protesters and the police. Recognizing how problematic such a recommendation might be in the face of spiraling violence and vandalism, she noted, “we are in an unprecedented crisis, and for society to heal, unprecedented measures such as an amnesty applying to certain actions by the protesters and the police force may well prove to be necessary.”

Calling herself an “unrepentant optimist” even against formidable odds, Chan highlighted how Hong Kong has come through many challenges before and after the handover. She sought to emphasize how “[t]he majority [of Hong Kong people] are not anti-China and accepts that Hong Kong is a part of China.” However, she continued, “they are also proud of their Hong Kong identity and fiercely protective of the rights and freedoms they enjoy and which are guaranteed by the Joint Declaration and the Basic Law.” Condemning the violence committed by both the police and the protesters, Chan ended her speech with the following words.

So, on this seventieth anniversary of the founding of the People’s Republic of China, we in Hong Kong recognize the huge progress that our country has made in a breathtakingly short time, lifting hundreds of millions out of poverty, improving living standards and achieving economic growth and social advancement that are the envy of the world. We are proud of the unique contribution that Hong Kong has made to our nation’s spectacular achievements and modernization. But we are distressed that the central government feels it necessary to be increasingly repressive towards its Hong Kong subjects. I urge the Beijing leadership to act with greater confidence and to trust us more completely with stewardship of our own future by allowing us to elect our own leaders. In these troubled times, we ask Beijing respectfully to listen with greater understanding to the voices of Hong Kong’s upcoming generations, to recognize and respond to their fears and aspirations and, above all, to harness their talent, their energy and commitment for the benefit of the city we all love and for the benefit of our nation as a whole.

Panel Commentary

Harry Harding, University Professor and Professor of Public Policy, University of Virginia, next spoke from the panel. He applauded the clear and concise rendering that Chan provided of how Hong Kong arrived at the current crisis but noted that his was “a more pessimistic forecast” of Hong Kong’s future. With “one country, two systems” due to expire in 2047, he surmised that Beijing will further whittle away at Hong Kong’s key institutions, such as the judiciary, the press, and universities, and, perhaps, even the freedom of expression of its business community. With respect to Taiwan, Harding noted the increasing urgency in President Xi Jinping’s call for Taiwan to be reunified with the motherland. Yet, Harding noted, the developments in Hong Kong have made “one country, two systems” increasingly unpalatable to even those traditionally favorably disposed towards Beijing. For the U.S., the recent protests have enabled Hong Kong to take center stage with legislative action around the Hong Kong Human Rights and Democracy Act, the PROTECT Hong Kong Act, and debates surrounding the Hong Kong Policy Act. The recent unrest has also contributed to declining favorability ratings for the PRC from all sectors of the United States, he noted.

Harry Harding, one of the panelists at the conference, gives his thoughts on the situation in Hong Kong.

Harry Harding, one of the panelists for the conference, gives his thoughts on the situation in Hong Kong.

Ming Sing, Associate Professor, The Hong Kong University of Science and Technology, first delineated the increasing levers of political and economic controls imposed by the PRC government upon Hong Kong SAR since 2003; and the corresponding rise in intensity of political protests in Hong Kong. He then provided a fine-grained analysis of the different phases of the 2019 protests, which began as a peaceful mobilization of public resistance, then grew in violence and counter-violence. He further presented a number of surveys that showed how the majority of the protesters are, indeed, well-educated and young with many of the frontline protesters being university and secondary students. Despite media reports that have suggested that economic discontent lies at the heart of protesters’ grievances, Sing presented survey data that the demonstrators’ grievances are, in fact, mainly political, including Hong Kong’s lack of universal suffrage and central government intervention, among others. Such data, he concluded, further highlights the gaping distrust between Hong Kong’s youth and the central government. 

Ming Sing speaks during the Hong Kong: A City in Turmoil conference.

Ming Sing explains the information presented in his slides.  

David M. Lampton Oksenberg-Rohlen Fellow, FSI, Stanford University, characterized himself as “hopeful but worried” about the situation in Hong Kong. Raising five observations in particular, Lampton noted the first worrying sign: i.e., neither the outside world nor the SAR have a “road map to the future” with the PRC. Neither the Basic Law nor the Joint Declaration of 1984 can now serve as such a “roadmap,” Lampton asserted, and without a “shared vision,” he stated, “[i]t’s hard to be optimistic.” Secondly, in this “leaderless” protest movement, Lampton asked whether anyone can authoritatively negotiate with and enforce upon its followers any agreement reached with Beijing, should any transpire, so that it can lead to an effective resolution. Thirdly, as evidenced by the PRC’s mass display of “muscular nationalism” on October 1^st, Lampton questioned whether Xi Jinping has any incentives to accommodate Hong Kong protesters’ demands, especially when Beijing’s leadership may have its own worries about domestic stability in the PRC. Fourth, with constitutional crises engulfing both the U.S. and Great Britain, Lampton noted, Western democracies are also hampered from effectively and responsibly addressing the situation in Hong Kong. And lastly, Lampton acknowledged how, in the policy vacuum left by the Trump White House with respect to Hong Kong, U.S. Congress was speeding towards adopting punitive legislation against the PRC. But Lampton again expressed doubts as to whether sanctions and threats are effective tools to extract concessions from the PRC government under Xi Jinping.

David M. Lampton shares his viewpoint with the other panelists.

David M. Lampton shares his viewpoint with the other panelists.

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The Honorable Anson Chan gives summarizing remarks to close out the "Hong Kong: A City in Turmoil" conference.

Watch the entire conference below. You can also listen to the audio version below, selecting individual tracks.

Smoking guns are the stuff of spy movies. In real-life intelligence-gathering, they are exceptionally rare. That’s why the business of intelligence typically requires collecting and analyzing fragments of information—putting together secret nuggets with unclassified information—to try to make sense of complex reality. If nothing else, the whistle-blower who filed a complaint against President Donald Trump clearly followed his or her training. SECOND PARAGRAPH I’ve spent 20 years reading intelligence reports and researching the U.S. intelligence community. And I’m not automatically inclined to believe the worst allegations about any administration; everyone has agendas and incentives to reveal information, some more noble than others. Trump and his allies have dismissed the complaint as hearsay and accused the whistle-blower of acting on political motives. But a close reading of the whistle-blower’s lengthy complaint, which accuses Trump of “using the power of his office to solicit interference from a foreign country in the 2020 U.S. election,” yields a lot of concrete leads for investigators to follow.

Here are three things I learned:

Read the rest at The Atlantic

Over the past two weeks, a CIA whistleblower’s complaint, a White House record of a July 25 telephone conversation between President Donald Trump and Ukrainian President Volodymyr Zelensky, and texts exchanged by American diplomats have dominated the news and raised questions about the president’s handling of policy toward Ukraine. Here are five observations: SECOND PARAGRAPH First, President Trump was not doing the nation’s business on July 25. Trump has described the call as “perfect,” but the memorandum of conversation shows that he did not seek to advance U.S. interests. He did not ask Zelensky about progress in ending Russia’s war against Ukraine. He did not propose steps to facilitate more American trade. He did not raise how U.S. liquified natural gas might strengthen Ukraine’s energy security (something of interest to Secretary of Energy Rick Perry, whom Trump now says instigated a call that he did not want to make).

Read the Rest at FSI's Medium.com