Trends

Private Care in Britain Enjoys robust Health Britain's 35-year-old socialized medicine program has weathered "budget cuts, conservative efforts to abolish it, strikes, and the exodus of thousands of physicians," the Los Angeles Times recently noted. But in the last few years, it has faced an entirely new challenge—people who are so dissatisfied with the National Health Service that they pay for private health care and insurance even while their taxes are financing the government system.

Britain has always permitted private health care, but in the last few years the industry has mushroomed. The Economist reports that in the five-year period ending December 1981, the number of Britons covered by private health insurance doubled to 4.1 million. The entire private health-care industry there is now worth some 330 million pounds a year, compared to 90 million pounds in 1976.

An important reason for the growth of private health care has been widespread dissatisfaction with some aspects of the state-run service. The Los Angeles Times says most Britons are "reasonably happy" with the care they receive for acute illnesses and emergencies, but "they must put up with long waits for non-emergency surgery such as hip or knee replacement, plastic surgery, and similar elective procedures. It is estimated that 700,000 Britons are on one-to-two-year waiting lists for elective procedures."

Britons with private health insurance generally have it as an employee benefit (this is the source of four-fifths of insurance companies' subscribers). At first, company-linked insurance was a perk only for senior staff, but gradually firms began offering group plans available at a discount to other employees as well. All told, 7 percent of the British population is now covered by private health insurance.

There have been vigorous protests against private health care, notably from the Trades Union Congress (the British equivalent of the AFL-CIO), which refuses to allow unions to organize workers in private hospitals. But Dr. David Bolt of the British Medical Association says: "We don't think arguments against the private system are valid. People should have a choice—it's part of ordinary freedom. We don't like state monopolies. It is good for the National Health Service to have competition."

There's some doubt about the future for private health care—whether it will continue to grow as rapidly as in the past. "Nobody knows whether we're 50 feet from the cliff's edge or 10 inches," a British economist told the Times. One variable is the cost of medical care provided by "the two big American invaders," Hospital Corporation of America (with 94 beds) and American Medical International (with 877 beds).

But clearly, the only question at this point is how much private health care will grow, not whether it will continue to exist. Because of the failures of socialized medicine, Britain's market for private health care is secure.

Ground Floor Housing Boosts Whenever there's a shortage of affordable housing—which there certainly is now—it's a sure bet that most politicians will have in their back pockets a government housing program that is both dazzling and unworkable. In fact, experience suggests that (to paraphrase Thoreau) that government housing policy is best which governs least.

Last year, the President's Commission on Housing pointed out that "excessive regulation raises housing costs by restricting available land, imposing unnecessary requirements in site development and construction standards, and lengthening the time needed to obtain regulatory permits. Many studies have examined the impact of governmental regulations on the cost of single-family homes, and…all the studies have a common finding: regulations increase costs—as much as 25 percent of the selling price in some cases."

Happily, the commission's insight is gaining some acceptance. In a speech last December, Sen. Richard Lugar (R–Ind.) declared that "promoting affordable housing at the local level is primarily an issue of deregulation and streamlining processing." And the Department of Housing and Urban Development (HUD) has started a project called the Joint Venture for Affordable Housing, which is, among other things, looking at the practical consequences of reducing local housing regulation.

The Joint Venture has already started demonstration projects in 30 cities. Although it's been in existence less than a year, some results are in. In Lincoln, Nebraska, HUD worked with local contractors and the city government to reduce on a trial basis local regulations for a housing development. For instance, the city streamlined the process for obtaining variances and building permits (instead of muddling their way through five agencies, builders had to contend with only one). It also relaxed restrictions on common-wall systems, a policy that had effectively eliminated the building of new duplexes, and lifted a requirement that units be set back at least 15 feet from lot lines.

The consequences were encouraging. One contractor sold new homes for $39,950 and made a profit, even though a private appraiser reported that such homes would normally sell for $51,000 in the Lincoln market. According to a HUD official, the contractor saved an estimated $3,000 simply because the city reduced its paperwork processing by 67 days; the remainder of the savings came from innovative use of construction materials. Not incidentally, residents of the neighborhood were generally delighted with the stylish and attractive new housing—and the city has now made permanent and expanded to the rest of the city the ideas tried in the demonstration project.

A more controversial reform that the Joint Venture hasn't dealt with is secondary units, or "granny flats." As noted earlier in Trends (Feb.), these are new housing units created on developed properties or added on to existing houses. They're far less expensive than building an entirely new structure, and they use costly urban space very efficiently. The only problem is that they're usually restricted—if not completely prohibited—by local zoning regulations, and formidable political forces (such as construction unions and homeowners' associations) have opposed permitting secondary units.

But somehow, Hawaii, which was the first state to pass a land-use control law, has seen its way clear to "ohana zoning," or permitting construction of a second residence on lots zoned for only one. It is the first relaxation of Hawaii's land-use controls in two decades. While this would be an important reform in any housing market where space is at a premium, it's especially valuable in Hawaii. Because of the huge demand for living space and the relatively small supply, Hawaiian lots cost an average of $10.18 per square foot—12 times the national average of 86 cents. And in 1980 the cost of land, as a percentage of the total cost of a single-family home, was 40 percent in Hawaii, compared to the national average of 24 percent. The First Hawaiian Bank predicts that Hawaii's horrendously expensive housing stock can be increased considerably at almost half-price—that is, just the construction costs without additional land costs.

Big Scores for Alternative Schools Is the state a disinterested party when it comes to the regulation of private schools? No, answered a Michigan court recently. Not only did the state, in attempting to control the curricula and teacher qualifications of two fundamentalist academies, violate the schools' religious freedom—it also engaged in a conflict of interest, the court ruled. Reason: a local school district in Michigan loses about $2,000 in state funds for each student that transfers to a private school; the state therefore has an incentive to restrict private schools.

Though the conflict-of-interest ruling is binding only in Michigan, it may well serve as a precedent in other cases throughout the nation. The decision puts into question Michigan's compulsory-schooling law, which—like laws in many other states—requires parents to send their children to state-approved schools.

Independent Christian schools, whose enrollments are approaching the 600,000 mark nationwide, form only a part of a widespread upsurge of alternatives to the public schools. The Washington, D.C.-based National Center for Neighborhood Enterprise estimates there are between 200 and 500 community-based, nonreligious, black private schools nationwide, for example. A standout among them is Los Angeles's Marcus Garvey School, which is now completing construction of a new building to accommodate 500 students. It will be the largest—and the first newly constructed—black alternative school in the country.

Donations of time, money, and labor made possible the construction of the $650,000 new facility, which will mainly serve children from low-income families. Impressed by the achievement of Marcus Garvey students—Garvey third-graders, for instance, taught by nonlicensed teachers, scored higher in both reading and math than did public-school sixth-graders—Los Angeles's black community rallied to support the project.

Such superlative achievement could be replicated across the land through a restructuring of federal aid to education, suggests a presidential advisory committee. In a report submitted to President Reagan at last year-end, the 14-member panel recommended vouchers for low-income families and tuition tax credits for parents sending their children to private schools as ways of stimulating competition between public and private schools. Such measures are necessary, the report proposed, to get public schools to respond to parental demands for better education.

A Future for Fusion So far, the government has spent billions of dollars of taxpayers' money trying to develop nuclear fusion as a source of commercial energy, yet the Department of Energy estimates that success is still 50 years away—at least. But according to Business Week, two small companies, Inesco and GA Technologies, believe they can develop working fusion reactors far sooner. "We're hoping to be commercial by the end of the decade," says Inesco's president and founder, Robert Bussard.

The government is experimenting with enormous, costly projects—in December, the Energy Department was working with a $314-million "Tokamak" at a Princeton University laboratory, designed to prove for the first time that it's possible to get as much energy out of a fusion reaction as it takes to make it operate. But Inesco and GA Technologies are working on a far smaller scale. Inesco has designed what it calls a Riggatron (a mini-Tokamak with a disposable reactor chamber). The company estimates that a production model would sell for only $1 million—much more feasible for investor-owned utilities than the price tags of most government-sponsored projects.

Business Week reports that some in the fusion community "doubt the wisdom of Inesco's approach." The Department of Energy's associate director for fusion, John Clarke, says, "They're extrapolating the results of known fusion research well beyond the range of what is predictable.…It's a very risky experimental approach." But another skeptic, Ronald Parker of MIT, says, "If you could prove it wouldn't work, you could dismiss them as a bunch of crackpots—but you can't."

Peter Rose of Mathematical Sciences Northwest says that if Inesco's and GA Technologies' fusion reactors are in fact successful, they could have a revolutionary impact on the whole fusion-power strategy.

Jitneys Ajumpin' For years, supporters of private-enterprise approaches to urban transportation have known of the advantages of jitneys—small (usually 8- to 12-passenger) vehicles that carry passengers along relatively fixed routes. While jitneys have been more common in other countries than here, they have begun to enjoy a comeback in California's three major cities.

San Diego, where service is most extensive, began permitting jitneys in 1979; since then, they have flourished. According to Maggie Smith of San Diego's Paratransit Administration, there are 36 vehicles currently in operation by about 12 companies. They transport passengers on shopping routes and to and from the airport, hotels, the five military bases in the area, and nearby La Jolla.

A big reason for the success of jitneys has been the city government's hands-off attitude. Regulation is minimal: companies can run any size of vehicle they want—or, to be exact, whatever size vehicle the market will bear, which has proven to be far smaller than the elephantine city-owned buses. Companies can also service any routes they choose, except for a congested downtown corridor three-quarters of a mile long and routes identical to those plied by the city-owned buses.

Jitney fares in San Diego are determined by the market; companies have only to file their rate schedules with the city and post the rates on the sides of their vehicles. "Prices used to vary quite a bit," says Smith, "but fares have begun to come down as the different companies see what their competition is charging." The jitney service is attractive enough to passengers for them to pay $1.50 to $6.00, depending on the company and the length of the route, while the city-owned transit is losing money charging 80 cents for its basic fare.

Several if not all of the private jitney services are doing well, and passengers are obviously happy with the innovation. As Smith says, "We think that jitneys have been very successful in San Diego."

Los Angeles is just getting started with jitney service. The state Public Utilities Commission has given two jitney services permission to operate, and one, Express Transit District (ETD), has already begun operation. Thus far on 6 of the 14 routes granted to it by the commission, ETD runs 56 converted airport rent-a-car vans. Referring to the gigantic, inefficient, government-owned Southern California Rapid Transit District, ETD co-owner Manuel Medinilla says, "He is Goliath and I am David."

David is holding his own. Medinilla and his brother, Francisco—natives of Juarez, Mexico—are now transporting some 6,500 passengers daily after less than a year in business, and they're about to start a radio and television advertising campaign. Despite their prices being undercut by the government-owned Rapid Transit District system, they're nearly breaking even.

In San Francisco, according to the San Francisco Examiner, "jitneys that operate on Mission and Third streets may be loved by their riders, but they're catching hell from San Francisco city government." All jitneys are restricted to the Market Street corridor and only one other route; they must be owned by an individual, not a company (and since 1978, a person can't get a permit for more than one vehicle). Jitneys are required to charge 60 cents (the same as the government-owned transit's basic fare) if they stay on one route and 70 cents if they cross over to the other. The Police Commission sets a maximum number of passengers a vehicle may carry; and to receive a permit, a would-be operator has to satisfy the Police Commission in a public hearing that his or her jitney would serve the "public convenience and necessity."

All those restrictions, however, haven't satisfied the transit workers union—which doesn't like any competition—and some elected officials. The Board of Supervisors is currently considering restrictions on the maximum size of jitneys. The main object of their wrath is a 21-passenger "big blue bus" on the Market Street route, the largest operation, and the number of passengers that a jitney can carry. Last fall, the police halted the big blue bus because it was carrying more riders than its permit specified. Owner Jesus Losa had to ask some of the riders to get off, and the police charged Losa with violations such as the absence of half a door that was being repaired. The blue bus's passengers were incensed.

In January, the police department reprimanded Losa, and his bus still may be grounded by city-imposed passenger load limits. Could popular outrage at such meddling still save the day? Possibly.

First-Class Competitor Flying High It will come as no surprise that in the last few months the Postal Service has not suddenly mended its ways and become more competent and reliable. Nor is it any wonder that the market for alternative mail delivery by the private sector continues to thrive. On February 15, a Denver-based operation called Western Airletter—the first company specializing in delivery of first-class-size mail—celebrated its first anniversary, and it looks like the company may have quite a few more.

Western Airletter actually relies on both private services and the Postal Service. When an airletter is deposited with Western, it is transported by air to a central sorting hub in Denver, where US postage is affixed, then flown to Postal Service centers at or near destination cities. Managing partner Jim Hanifin explains that a letter deposited with the Postal Service normally goes through 37 stages, but a Western airletter bypasses 34 of them. While it is with Western Airletter, a piece of mail may be in the hands of Western Airlines, Burlington Northern, or American Express, the three companies that make up the private airletter system. (Each company also provides delivery service independent of Western Airletter.)

According to Hanifin, the system is already delivering "in excess of 100,000 pieces of mail a week." In Denver, the test market, customers can drop off their letters at Safeway grocery stores, Photomat drive-up windows, U-Tot'em convenience stores, and American Express travel agencies. Service is also available on a smaller scale in Los Angeles, New York, Houston, Salt Lake City, San Francisco, Tulsa, and Atlanta. Mail can be received in about 200 cities.

Other distinctive features of Western's system include its low costs ($6.50 for 24-hour service compared to $11 via Federal Express); the magnetically codable stamps it issues, which hold up to 380 pieces of information (Hanifin got the idea after seeing the stamps that the Pony Express system had issued); and a double-money-back guarantee, partly insured by Lloyd's of London, if the system fails to deliver the service it promises. Western also provides such services as sworn statements that mail was dispatched on a certain date, 48-hour delivery service, and handling of intercompany mail.

Hanifin admits that in the preparations for Western Airletter, it never occurred to anyone involved (including the Postal Service officials that Western negotiated with) that the stamps would generate much interest—but they have. The company has been deluged with tens of thousands of requests from stamp collectors all over the world. ("We got about 15,000 requests in just a three-day period after an article about us appeared in the Wall Street Journal," Hanifin recalls.) The stamp collectors' bible, Scott's Specialized United States Catalogue, even lists Western's stamps in its 1983 edition.

Western Airletter is not and doesn't aspire to be a full-blown competitor to the Postal Service—even if it did, such obstacles as the private-express statutes would be powerful discouragement. But Western and its entrepreneurial brethren are showing that given half a chance—which is about what they have received—private enterprise can do a considerably better job than the Postal Service, and for less money.

Foreclosing on Fannie and Freddie? Since the mid-1970s, two federally chartered companies—the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac")—have been the major sources of mortgage money to the nation's small-property buyers. Operating through the so-called "secondary market"—where investors buy and sell mortgage obligations—Fannie Mae alone holds $69 billion worth of home loans. But now, reports Washington Post columnist Kenneth Harney, the Residential Funding Corp. (RFC) is stepping in as the first private-sector mortgagee to operate on the scale of the federal entities.

Created by Northwest Bancorporation—a major bank-holding company with $17 billion in assets—and its Minneapolis subsidiary, Banco Mortgage, RFC deals its mortgage securities through Wall Street's Salomon Brothers investment house. With 2,000 local savings and loans, banks, and mortgage bankers targeted for participation by year-end in RFC's nationwide network of loan originators, the corporation has already signed up 500 network members, reports Harney. In operation since December, RFC expects to provide $2 billion to $4 billion for loans on residential and small properties in its first year.

How can RFC compete with the federal gargantuans? For one, RFC, because it is free from congressional controls, can trade mortgages for single-family homes exceeding Fannie and Freddie's $108,300 limit. This is especially beneficial to home buyers in metropolitan areas where housing prices are high. In addition, unlike the federal entities, RFC is free to deal in mortgages that use innovative financing mechanisms—such as quick principal pay-off plans, "step" loans, and favorable discount rates.

The arrival of RFC is certain to benefit the mortgage market and thousands of small-property buyers. It also makes us ask, Do we need Fannie and Freddie after all?

Less Loco in Mexico In Mexico, the bad news is (and for some time has been) that the economy is in shambles. The good news is that the government of President Miguel de la Madrid, who came to office last December, is taking steps that may help restore a measure of economic sanity and stability that Mexico desperately needs.

First, de la Madrid has ordered the lifting of price controls imposed by his predecessor, José Lopez Portillo, on 4,700 items. Controls on 300 staples have been left intact. De la Madrid has also proposed measures allowing private investors to hold one-third ownership of Mexico's banks that were nationalized by Lopez Portillo shortly before he left office. Finally, de la Madrid established a 25-percent increase in Mexico's minimum wage—which falls far short of keeping pace with the country's current 100-percent annual inflation rate. The effect will be, of course, a far lower real minimum wage than before, which experience indicates will spur employment. Indeed, even before the official announcement of the new minimum wage, United Press International reported that "the lure for U.S. companies to establish Mexican border assembly factories will be even greater. All other labor-intensive companies receive similar benefits."

Mexico's economy cannot be healed in a day, but at least de la Madrid seems intent on putting it on the right track.

Unilateral Deregulation The Federal Communications Commission (FCC) regulates the US end of international telecommunications, which include telephone, teletypewriter, and other computer-aided, high-speed data-transmission services. Presently, only five companies—the so-called international service carriers (ISCs)—are licensed by the FCC to offer international telecommunications services. But that will soon change—the FCC last December decided to deregulate the market.

Already, MCI Communications Corp., a discount long-distance telephone service with 3 percent of the domestic market, plans to provide service between the United States and Canada starting in April and anticipates offering service to Europe and elsewhere later this year. American Telephone and Telegraph has approached N.V. Phillips, a Holland-based company, about a link there.

One specific FCC deregulatory move—a proposal to allow ISCs to invest directly in satellite services, rather than requiring them to lease satellite capacity from Comsat, as has been the rule—won support from the Department of Justice. And though there has been some favorable response from the Canadians and British, most European governments are protesting the deregulatory scheme. In those countries, international telecommunication is a state monopoly; their governments fear a frantic scramble of US companies wanting to connect into their systems. Some countries have responded by declaring a limit on the number of hook-ups and requiring companies to bid for the limited connections.

The FCC, however, appears firm in its resolve to open the market to competition, which it reasons, will stimulate technological innovation and bring down prices. As to be expected, not all domestic firms in the telecommunications market favor deregulation. The ISCs now holding licenses will lose their guaranteed share of the market, while other firms fear deregulation may expose them to foreign competition.

Heroin and Crime: Rx for a Solution When 243 heroin addicts in Baltimore were asked to report on their activities over the previous 11 years, they admitted to committing a total of 500,000 crimes—many of them theft, robbery, and larceny—an average of 187 crimes per addict each year. Only one of every 120 crimes committed by heroin addicts results in an arrest, let alone a conviction. And one out of every five US prison inmates serving time for robbery was a heroin addict at the time he committed the crime.

These figures, reported by Prof. Arnold Trebach in his book The Heroin Solution (published last year), only begin to suggest the magnitude of the nation's heroin problem. Trebach, director of American University's Institute on Drugs, Crime, and Justice, cautions that data regarding heroin addicts are sketchy because so much goes unreported. But the correlation in this country between heroin addiction and violent and property crime, says Trebach, is "stupendous." On the other hand, Trebach notes, in the United Kingdom—where heroin is legally dispensed to addicts by prescription—"there is no significant statistical connection between being a heroin addict and being a violent criminal."

The number of reported addicts in the United Kingdom has risen slightly in recent years, a phenomenon some see as a condemnation of the British system. But, Trebach suggests, the attendant slight rise in addict crime is due to Britain's clinics' "tightening up on dispensing injectable drugs," thus forcing addicts to turn to the expensive heroin black market—and to crime to finance their dealings there. The British, Trebach says, are "Americanizing" their problem. As one step toward dealing with the heroin-crime problem in America, Trebach suggests allowing doctors to prescribe heroin for addicts—as one option, among others, for treating addiction.

It is simply because heroin is illegal in this country that the average addict's habit costs $300 a day to support—which accounts for the correlation between addiction and crime. If heroin were legal, that amount would perhaps be less than $2. Yet the federal, state, and local governments continue their multibillion-dollar effort to enforce laws that are virtually unenforceable—users and suppliers, acting voluntarily, have no reason to inform on one another.

Heroin may be a problem for those who are addicted to it. But only unwise laws make it a problem for those who aren't. The way to cure the social disease of drug-related crime is to remove its root cause—drug laws.

Adopting Orphan drugs Signed into law by President Reagan in January, the Orphan Drug Act is one more example of new legislation designed to ease the problems created by prior legislation. In this case, the new act provides drug companies with tax breaks and money grants to develop so-called orphan drugs—those that treat rare diseases, of which there are 2,000 or so.

Burdensome government regulations have added tremendously to the cost of developing and getting market approval for a drug. The cost is now estimated to average upward of $70 million. To make a profit from such a costly venture, drug manufacturers need a large market for the final product—at least 2 million potential users. Hence, potential drugs for diseases afflicting fewer than that—Elephant Man's disease, for instance, and Tourette's syndrome—are usually left "orphaned" by manufacturers.

Under the new act, written by Rep. Henry Waxman (D–Calif.), the larger manufacturers may take tax deductions and credits amounting to 73 percent of the clinical-testing costs for an orphan drug. For smaller companies, the measure authorizes $12 million in research and development grants over three years, and it gives all firms a 7-year exclusive marketing period for nonpatentable drugs.

Remarks by both Waxman and Reagan indicate just how obscured is their understanding of why these drugs have been left in the cold. The profit-seeking "drug-development system has failed us," lamented Waxman on the bill's signing, while Reagan viewed the measure as legitimate government intervention "where the free market alone can't do the job." The fact is, of course, that it is government regulation in the first place that has distorted the market for new drugs.

Though the act has been loudly applauded by many involved in the search for rare-disorder cures, extreme optimism may be unwarranted. Many rare diseases are of a genetic nature, requiring much basic research in biology and chemistry—costs not addressed by the bill.

MILESTONES • ICC ends barriers. In January the Interstate Commerce Commission voted to eliminate a 48-year-old prohibition on railroads' moving into the commercial trucking business. An indignant trucking-industry lawyer warned of a "free- for-all" and said the decision would be challenged. A railroad spokesperson predicted the emergence of "full-service transportation companies" and lower prices for shippers.

• First for broadcasting? Sen. William Proxmire (D–Wis.) has introduced the First Amendment Clarification Act, which would give broadcasters the same First Amendment rights now enjoyed by the print media—and would mean the end of the "fairness doctrine" and the equal-time rule. The act goes to a subcommittee chaired by Sen. Robert Packwood (R–Ore.), who has proposed a similar constitutional amendment.

• Postal power checked. After House hearings uncovered widespread abuses of the US Postal Service's police powers, Congress killed a bill to expand its authority to regulate the content of mailed materials. The bill would have allowed the USPS to issue subpoenas without a judge's prior approval and to issue cease-and-desist orders against companies whose mail-order products or advertising is objectionable to postal authorities.

• Opening pipelines. The Department of Justice has drafted a proposal to deregulate the majority of the nation's oil pipelines. Justice Department data show that deregulation, which must be approved by Congress, would result in more efficient resource allocation.