Federal Flood Insurance

• “Efficient Adaptation to Flood Risk,” by Winston P. Hovekamp and Katherine R.H. Wagner. SSRN Working Paper no. 4344415, January 2023.

Federal flood insurance is available only in communities that have agreed to land-use controls that limit construction in a high-risk area—a so-called “100-year floodplain,” known officially as a Special Flood Hazard Area. New construction must be elevated so that the structure’s first floor is above the high-water level—the Base Flood Elevation (BFE)—predicted to occur with 1 percent annual probability. Also, existing properties that are “substantially damaged or substantially improved” must be rebuilt with elevation above the BFE. Federal regulation defines “substantially damaged or substantially improved” as repairs or alterations that equal or exceed 50 percent of the market value of the structure before damage or renovation occurred.

Are the elevation requirements cost effective? This paper examines the universe of flood insurance contracts in-force from 2001 to 2017 for the 20 Atlantic and Gulf Coast states. It compares claims for houses that are built in the same decade and ZIP code and experience floods of the same severity, but that face different elevation requirements because of the timing of their construction relative to participation in the flood insurance program.

Houses that were required to be elevated had 30 percent lower damages than non-elevated houses. Expected damage savings are approximately $9,000 over 80 years, assuming a 4 percent discount rate, while the elevation cost for new construction is a one-time upfront investment of $5,000. The elevation of existing houses is much more expensive (their estimate is $40,000) and may only be efficient for a small share of the highest-risk houses.

Corporate Share Buybacks

• “The Attack on Share Buybacks,” by Harry DeAngelo. SSRN Working Paper no. 4255207, November 2022.

Corporate share buybacks are under political attack. The 2022 Inflation Reduction Act imposed a 1 percent excise tax on the fair market value of shares repurchased by corporations. Now, President Biden has proposed increasing the tax to 4 percent. (See “Against Taxing Corporate Stock Buybacks,” p. 5.)

Opponents of buybacks believe that they enrich managers (whose pay is tied to stock prices) and shareholders at the expense of workers and consumers who would benefit from increased corporate investment. But investors supply capital to firms only if they receive future after-tax distributions (in present value adjusted for risk) that exceed the initial investment in the firms. And taxes on buybacks reduce the future net-of-tax distributions received by shareholders, which in turn reduces the flow of capital into firms, lowering employment levels and total wage payments.

What about large, mature firms that are generating large amounts of cash? If managers are opportunistic, a tax on payouts will be used as an excuse for the company to retain cash and spend it in self-interested ways. If managers are not opportunistic, they retain cash and invest in a variety of financial assets rather than invest in negative present value investment projects that make shareholders worse off.

Automated Regulatory Enforcement

• “Man vs. Machine: Technological Promise and Political Limits of Automated Regulation Enforcement,” by Oliver Browne, Ludovica Gazze, Michael Greenstone, and Olga Rostapshova. NBER Working Paper no. 30816, January 2023.

There are many laws and rules on the books, and some of them are rarely enforced. My favorite example is speed limits on interstate highways. On I‑270 in suburban Maryland, where I live, the posted limit is 55 miles per hour. If you actually traveled that slowly, you would risk being rear-ended or at least having headlights flashed in your rearview mirror.

Strict laws with limited enforcement might be described as optimal hypocrisy. The laws or regulations satisfy the demands of activists. The lack of enforcement is harder to observe, which allows for the strict laws to not impinge on the behavior of more-numerous voters with more-moderate preferences.

Fresno, CA has outdoor watering restrictions. Since the mid-1990s, Fresno has restricted summer outdoor watering to three nights per week. To detect violations of these restrictions, Fresno had five part-time water cops who issued 3,113 fines in 2016. Violations were rampant because of lack of enforcement: 68 percent of households violated the restrictions at least once in the summer of 2016, but only 0.4 percent of violations were sanctioned. Sounds like speed limits on I‑270.

What if enforcement were automatic? Fresno installed smart water meters in all single-family residences that allowed real-time observation of water use. Excessive water use was defined as exceeding 300 gallons per hour. From July through September 2018, Fresno conducted an experiment, randomly assigning households to automatic versus traditional enforcement. The share of households fined for non-compliance grew from 0.1 to 14.3 percent. Improved enforcement reduced violations by 17 percent and violating households by 8 percent per month and decreased summer water consumption by about 3 percent.

But complaint calls to the city increased by 654 percent. Elected officials responded by essentially returning to enforcement hypocrisy. The city enacted a fine moratorium the day after the experiment ended. In April 2019 the city council voted unanimously to lower the maximum financial penalty from $200 to $100, increase the permitted hours of outdoor water use, relax the excessive water use threshold from 300 to 400 gallons per hour, and stipulate that fines cannot be imposed based on meter readings, which ended automatic enforcement.

Hospice Care

• “Dying or Lying? For-Profit Hospices and End of Life Care,” by Jonathan Gruber, David H. Howard, Jetson Leder-Luis, and Theodore L. Caputi. NBER Working Paper no. 31035, March 2023.

Hospice care allows patients with a life expectancy of less than six months to receive palliative care at home in return for agreeing to forgo curative therapy. Hospice supporters argue that it improves the experience of dying while reducing Medicare spending.

From 2000 to 2019, the number of for-profit hospice firms quintupled while the number of non-profit firms was roughly unchanged. Medicare spending on the hospice program increased from roughly $2.5 billion in 1999 to over $20 billion in 2019.

The number of patients admitted with a diagnosis of Alzheimer’s Disease and Related Dementias (ADRD) has also increased. In 1999, about 4.4 percent of ADRD patient-years included a hospice stay. By 2019 that number had risen to nearly 14.7 percent. ADRD patients now make up 38 percent of hospice episodes and account for roughly half of all hospice episodes that last more than six months.

As for-profit hospices have proliferated, the share of hospice patients who die within six months of admission has fallen. The share of hospice episodes for which the patients died within six months declined from 86.4 percent in 2000 to 79.2 percent in 2018, driven by trends in for-profit care. In fact, only 73.4 percent of 2018 for-profit hospice patients died within six months.

The increase in for-profit hospice providers combined with the increase in ADRD patients and the decrease in patients who die within six months has led to allegations of Medicare fraud by the Justice Department. Since 1999, the largest for-profit hospices have collectively paid hundreds of millions to the Justice Department to settle allegations that they admitted ineligible patients whose life expectancy exceeded six months. In addition, to combat the incentive to admit long-stay patients, Medicare has imposed an aggregate cap on hospice payments per firm that limited reimbursement for six months to $29,205 in 2019.

This paper examines the expenditures and medical outcomes for Medicare fee-for-service recipients over the 2000–2014 period for the five years after they received an ADRD diagnosis. It compares individuals in the same ZIP code before and after a for-profit hospice enters or exits. Patients who live closer to for-profit hospices were weakly more likely to participate, conditional on ZIP-code fixed effects and distance to a non-profit hospice.

The paper estimates that 58 percent of the marginal users of for-profit hospice would otherwise have used no hospice, and 42 percent were diverted from non-profit hospices. Patients induced to hospice who would otherwise have not attended hospice saved Medicare about $44,000 given the cost of the care those patients otherwise would have received, while patients induced from nonprofit hospice had savings that were not different from zero with 95 percent confidence. Five-year mortality effects were concentrated among patients induced into hospice from a no-hospice alternative, with a 15 percent increase in five-year mortality. Patients induced from non-profit hospice had no change in mortality.

For-profit hospices appear to save Medicare money by diverting ADRD patients from more intensive care settings. The Justice Department crackdown and the payment caps would appear to be inappropriate blunt instruments that do not benefit taxpayers.

Water Markets

• “The Economic Value of Clarifying Property Rights: Evidence from Water in Idaho’s Snake River Basin,” by Oliver R. Browne and Xinde “James” Ji. Working paper, June 2021. Recently published: Journal of Environmental Economics and Management 119 (May 2023).

Water in the American West is again in the news. Conventional accounts often blame farmers and their excessive use in places like the vegetable-farming Central Valley. But as University of California, Santa Barbara professor Gary Libecap argued in a book review in Regulation: “Farmers are not the source of the problem. … Most would be pleased to sell or lease water that could earn more than is generated in agricultural production.” (See “The Problem of Water,” Fall 2014.)

However, the development of markets for water has been hampered across the West by the lack of institutional support. Although water rights exist as legal entitlements, states have historically spent few resources attempting to verify or document these rights systematically.

In a recent Regulation article, Public Policy Institute of California researcher Andrew Ayres described the slow, painstaking efforts to create groundwater rights in the Mojave aquifer in California. (See “Easier Said than Done,” Fall 2021.) This working paper describes a similar effort in Idaho. Between 1987 and 2014, the Snake River Basin Adjudication determined who had legal rights to use water and what trades would be hydrologically permissible, covering 139,000 water rights and 90 percent of Idaho’s water use.

The adjudication caused a 140 percent increase in the frequency of water rights trading that moved water to relatively more productive parcels of land. The one-time $94 million in state expenditures to determine the water rights increased the value of Idaho’s agricultural output by $250 million per year.