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Self test on whether you think healthcare is a right or a privilege (from an event that actually happened):

Imagine you are at the beach and see a person in obvious physical distress, not drunk, but possibly having some sort of medical event:

  • If you help them (or think someone should help them), you think healthcare is a right.
  • If you pass them by as you say to yourself “they should get help”, you think healthcare is a privilege.

This is a quick guide on who’s likely to win or lose with healthcare reform.  It’s for those too busy to study it or who lack the background in economics, financial markets and business necessary for a broad view of what’s likely to happen.  Particularly, this is for my wife, who is one of the dedicated healthcare workers who has been worried by the claims of disaster but know from real experience that there are opportunities to deliver better care.   

I’ve had the privilege of recently talking to a number of major hospitals’ Chief Nursing Officers (CNO’s) about the proposed healthcare reform and have found that most of them are concerned that reform will make delivering quality care more difficult due to payout reductions.  They admit that they have limited knowledge of what the plan actually entails because their 60 hour (or more) workweeks actually making sure care is delivered properly don’t allow them the time to study it – some number cruncher somewhere else in their organization is looking at it.

The recent endorsement of the house version of the health care reform bill by the American Medical Association let me know that many doctors have already decided that reform will improve things.  While doctors might be motivated by some payment changes promised in the House plan, the American Nurses Association has endorsed it too which makes me think that there is good reason to believe that patient care might actually improve.  

So if nurses are concerned about care and doctors think it might be OK for whatever reason, why do most stories state that health care reform will be a disaster for all except the currently uninsured?   In fact, the worst of the horror stories has the plan bankrupting the country, not covering all the uninsured, destroying insurance companies and small business while reducing the health coverage of the currently insured.  It looks like the groups that will be hurt are putting on a full court press to stop reform and save their bacon. Their complaints plus the whining of the obvious winners about individual provisions is making it difficult for the average person to understand what is happening.

As a business person with turnaround experience, I can see that healthcare cost savings are an opportunity because other developed countries spend no more than 11% of GDP on health care for equal or better outcomes while we spend 16%.  A turnaround manager coming in to a bankrupt company with this sort of health care bill would see this as low hanging fruit that can be quickly harvested (think GM.)    The Congressional Budget Office estimates there will be no savings from reform so I’m going to do what good managers always do when someone who is part of the failing company makes an emphatic statement:  Ignore them and try to find out the truth  (note this link from Paul Krugman on the CBO estimates on Healthcare.)


More importantly, if the low hanging fruit is 5% of GDP, there should be more than a few winners that a smart investor would want to back.  The problem is that we don’t know exactly what healthcare is going to be.  Let’s try to find the winners and losers and look at the opportunities where the only certainty is the requirement to buy insurance and more or less guaranteed affordable coverage (no rejections by insurance companies) which will achieve universal coverage (Congressional Budget Office estimates that plans like this will cover 97% of legal residents).


Insurance Companies:  The big loser in any universal insurance program is current healthcare insurers.  Even without the “public option” where insurance is directly issued by the government, healthcare insurers will see dramatic reductions in profits.  Premiums from insuring “risk” will essentially be removed from Insurance companies and they will make money by being the most efficient processor.  Their ability to make money by dropping people likely to be expensive will be eliminated and rates premiums will be restricted, possibly to as low as 2 times the base rate. 

Selling “gold plated” insurance (with benefits much greater than the required plan) will probably be limited to no more than 40% – 45% of the current market (roughly, based on European programs) and even this will be of limited profitability as the public option is being design to mimic current coverage and appears comprehensive.   Gold Plated plans will have to offer faster access to specialists (if possible) and treatments that are not approved by the base plan which, based on the European and Canadian plan treatment offerings, will be restricted to new, unproven, elective or lower efficacy treatments.  Some people will find this appealing but most people want to stay away from the doctor’s office and avoid questionable treatments.

The overall lower risk of insurance after healthcare reform will severely reduce insurance company margins and should give significant advantages to the largest operators who can generate economies of scale and technology.  The net result should be significant industry consolidation which may be an investment opportunity.  This consolidation may be slowed down by state Insurance Board activities to protect local insurers at the cost of higher in-state insurance rates (the final law may forbid this.)  If either the “public option” or the Health Insurance Exchange exists, state protectionist activities will not work due to the existence of a baseline comparison visible to all insurance purchasers.


Free Riders:  A free rider is a person or company that can afford health insurance but, for whatever reason, decides not to purchase it.   There is not much economic effect from mandated healthcare insurance with this group as they have the resources, just don’t pay their fair share of the cost.

Individuals in this group are lottery players betting they won’t need health care, and, as a group, would be better off financially with healthcare insurance.  The cost for the individuals who actually need health care is either 100% paid out of their assets or becomes charity care when their assets are exhausted.

Free riding companies, usually small businesses, shift the burden of health care insurance to other companies and organizations as most people do have insurance either from spouses or other relationships (VA, etc.)  As their employees are already covered by insurance and it’s no significant burden for these companies to pay for insurance this will be a wash with no significant economic effect on the company or the country’s economy.

Marginal Small Business:  Small business is the heart of the uninsured problem.  According to the Employee Benefit Research Institute, 26 million of the 46 million uninsured are the owners, employees or dependants of Small Business (usually defined by the Small Business Administration as a company with less  than 500 employees; some industries it’s as low as 50.)

Some small businesses that do not offer health benefits and are struggling to meet payrolls and achieve profits may suffer under an enforced insurance plan.   The proposed plan imposes an 8% tax on payrolls of employers who do not offer healthcare. 

Small businesses with less than 10 employees and an average salary of $20,000 or less will only pay 4% tax (the difference is given back as a tax credit.)  This tax will increase from 4% to the full 8% on a proportional basis as employees go from 10 to 15 and average salaries go from $20000 up to $40000. Small businesses with 15 or more employees and/or $40,000 in average salary will pay the full 8%.  An average salary of $40,000 would pay a tax of $3200, while the average cost of insurance for a family is $12,000 or more.  This is a really big savings for low wage firms that currently offer health care insurance.

Census data is not broken out exactly this way and the closest break is firms with 9 or less employees which are 15% of all firms employing 11.1% of the workforce and paying 8.5% of salaries.   About 49% of these currently offer health benefits to their employees according to the Kaiser Family Foundation and would see a significant reduction in their healthcare insurance cost from the current bill. The 51% (about 7% of all firms) that don’t offer healthcare might be negatively affected. 

The net effect is that Small Business is ahead under the plan but it may be the final stroke for struggling companies.

Non-Medicare/Medicaid (Non-MM) Doctors and Hospitals – Some doctors and for-profit hospitals do not currently accept Medicare or Medicaid patients and might see significant decreases in income if patient volume or payout decreases under healthcare reform.  This group would include some for-profit doctor owned hospitals and clinics but not non-profit doctor organizations like the Cleveland Clinic or for-profit doctor owned hospitals with extensive Medicare and Medicaid practices.  Note that Non-MM groups may suffer loses even if healthcare reform results in higher payouts than current Medicare and Medicaid.  Both the nature of their relationship with private insurers and private insurers’ ability to absorb higher rates by expelling sicker patients will change.  Particularly vulnerable will be specialists who generate high incomes by doing large numbers of fee-for-service procedures that are of questionable benefit.  Orthopedic surgeons that do hips would be unaffected but those that do back surgery purely for pain relief will have to modify their practice.

Note on the Wealthy as losers:  The current plan has a direct tax on those making over $350,000 per year to pay for healthcare reform.  While I could put them down as losers under health care, I haven’t because they are almost certain to see tax increases so linking the increases to healthcare is a distortion.  The wealthy seem doomed to tax increases; particularly when you consider that there is no theoretical reason to tax capital gains at a preferential rate compared to other income (when there is a sophisticate capital market, income is income and its origin does not affect the amount of investment.) Lower tax rates for capital gains can actually be shown to distort investment into unproductive programs that would not be undertaken without tax advantages.  


Healthcare reform is made even more difficult to understand because even the obvious winners whine about the proposed plans. 


For example, since 1986 the National Federation of Independent Business’ (NFIB) members have said that healthcare costs are their No.1 concern yet the NFIB opposes both employer mandates and the public option.  78% of firm with 10 to 24 employees and 90% of firms with 25 to 49 offer health benefits and these firms pay an average of 18% more that large firms so it’s pretty obvious that they will be better off if they can get the same insurance rates as large business and the mandate is a non-issue.   Nevertheless, NFIB is one of the most vocal opponents of the current healthcare reform; possibly due to a scary but flawed study that actual supports some of the benefits of the public option.  (This study is reviewed in the Small Business section below.) 


Here are the winners and their whines:


Currently Insured


The currently insured are the group that appears most confused.  Polls show agreement that healthcare needs reform which is combined with concerns that the insurance they have will be reduced.  The truth is that the insurance they have is steadily decreasing due to cost increases and free markets can’t cure this.


The reason that the currently insured are concerned is that estimates of the proposals don’t assume any significant cost savings.  The Congressional Budget Office (CBO) refuses to include any calculation that healthcare costs will be reduced in their estimates because the exact details of the savings can’t be foretold.  The CBO discusses many proven cost saving measures and then dismisses them from budget calculations.  For example, the budget savings for the reduction of payments for ineffective fee-for-service is calculated only on the dollar reduction without any additional savings from the linked increase in lower cost outcome based treatments that must occur if ineffective treatment is reduced.


Any estimate that included cost savings shows a large benefit for the currently ensured.  If the estimate assumed that we would drive our costs down to those of the next lowest developed nation, the total savings would be approximately 30% with the currently insured benefiting even more. Finally, the currently insured would not have to worry about losing insurance if they actually became ill so there would be a reduction in bankruptcies which could be easily calculated.


American Large Business


All American Large Businesses offer health benefits (99% of firms with 200 or more workers) so anything that will lower costs will benefit them and make them more competitive.  American Manufacturers will be the biggest winners because they have the most competition from countries where healthcare is much less expensive, not offered or covered by lower cost universal programs.  A good example of this benefit is the fact that GM is profitable in Europe where there is universal healthcare.


Costs for companies that currently offer healthcare will decrease slightly once universal healthcare is enacted for a very simple reason: the government will be picking up the cost of the uninsured and paying for it with deficits in the short term and general tax increases in the long term (possibly in the short term, too.)  As companies that offer health insurance usually pay 75% of the total cost, this transference of cost will disproportionately benefit companies that currently offer insurance.  This benefit for companies will occur even without any of the savings that can be expected from a universal health care plan.


Some companies whine about increased cost but it is clear that the universe of American Companies will benefit due to lower costs.  Those companies that will fail due to being forced to pay the cost of insurance are marginal producers that don’t currently carry healthcare insurance.  These represent no more than 1% of firms with 200 or more workers, according to the Kaiser Family Foundation (some of these firms are profitable and currently choose to free ride.)


Wal-Mart supports healthcare reform and lays out why clearly in their letter to President Obama.  Manufacturers like GM and the steel industry would benefit the most which may be why many also support healthcare reform.




Anybody who’s ever lost or change jobs and gotten a COBRA form knows the truly staggering cost of individual health insurance.  If you or anyone in your family actually has a health problem then health insurance will be unaffordable.   A friend of mine who was relatively well-off retired in his 40s because his high stress job was making his diabetes worse.  After discovering that he was uninsurable, he took a much lower stress and pay job at a nonprofit to get insurance.  This story has a happy ending: he loves what he is doing and the nonprofit is ecstatic to have him and continually offers him promotions which he turns down.   My friend was lucky; most people have to stick with the job they have until they are too ill to work to make sure they get health insurance.


 The typical entrepreneur is not a young person but rather an experienced business person who is older and more likely to have health problems. Eliminating the barrier of lack of insurance will allow people who currently have the resources and ideas to start new businesses to open small businesses.    Small businesses are the generators of two thirds of new jobs so removing barriers to their startup will increase economic growth.


Doctors and Hospitals


Doctors and Hospitals have the biggest potential to benefit financially from the switch from fee-for-service to outcome based payouts.  Not performing unnecessary services means more funds are available for payment as rewards for good outcomes.  Accountable Care Organizations, modeled on the Cleveland Clinic and the Mayo Clinic, are included in the current bill in limited form.  A secondary benefit for doctors could be more time to spend with patients. 


Doctors and Hospitals would also benefit from significantly lower paperwork (after insurance company consolidation) and insurance on almost all patients.  Currently a significant portion of doctor’s income is spent on filling out insurance forms and screening patients for ability to pay.   Hospitals have the same issue with paperwork but can’t screen patients so they have to absorb much of the cost of the uninsured.  Finally, the current bill has provisions to increase payments to family practice physicians.


Significant investment opportunities may exist with for-profit hospitals that embrace the Accountable Care Organization model.


Small Business


Very Small Business (up to 15 low wage employees) would have additional cost savings under the proposed plan as there are supplements for low income individuals which would make it easier to attract people even at the minimum wage.  The 4 to 8% of salary that these businesses would be required to pay is far below the actual cost of insurance for a minimum wage individual.


As mentioned above, NFIB, a leading small-business organization, recognizes the need for health care reform but is adamantly opposed to the current plan.  This appears to be due to a study they commissioned that did laboratory testing of small-business behavior under various healthcare models.   This study is flawed in that it did not benchmark the real world as the base case and did not assume any cost savings under any of the universal insurance test cases.  This lack of real world linkage is a typical problem with today’s academic economists and fixing either of these assumptions should show a real benefit for Small Business.   


 The Small Business Majority, another small business organization, commissioned Professor Jonathan Gruber of MIT to model small business performance under three real-world healthcare reform scenarios.  Each of these situations showed small business to be far better off under health care reform.




The failures to recognize the benefits of health care reform appear to be caused by the refusal to recognize the cost savings from reform for both individual companies and the country as a whole.  Fortunately, the USA is not bankrupt yet but with current health care growing at 8% a year, the country is doomed to shrink economically unless it controls the cost of health care.  Major companies from Wal-Mart down recognize this and have endorsed health care reform. 


Investors should support health care reform as a way to strengthen United States economically while they look for those companies that could benefit.    Specific opportunities will be explored in more detail in future posts.

Dear Mom,
You’ve taught me the value of trusting in others and hoping for the best and I’ve been very successful as a result. Now is the time for me to show you how I’ve learned to apply what you taught me. 
I’ve learned that people who make money with other people’s money won’t necessarily tell you everything you need to know when it is your money. For example, that mutual fund representative who told you that now was a good time to invest in the stock market didn’t tell you that the market hadn’t reached a historical valuation bottom. When he said that it might go lower, he didn’t mention that it had always gone lower from the market levels on Mother’s Day 2009 after a speculative top like in 2000.
I’ve learned that you should listen to people who don’t get paid if you invest. People like Robert Shiller who wrote Irrational Exuberance explaining the market cycles. Professor Shiller keeps the Price Earnings valuation chart from his book updated on the internet for anyone to look at for free at http://www.irrationale… (this uses 10 year average earnings to smooth out variations.) The chart below shows that the S&P 500 stocks have not hit the historical bottoms like they did after the peaks in 1901, 1929 and 1966. On May 5, the S&P 500 was more than twice as high as the historical bottom so you could lose one half your investments if you invest today.

I’ve learned that the internet has made it easier to find data you can trust. Standard & Poor’s calculates the S&P 500 stock market index and puts the data and future earnings estimates online at www2.standardandpoors….SP500EPSEST.XLS. Currently, the last 12 months reported earnings have a PE of 119. Standard & Poor’s does not project the PE ratios to improve until after the 3rd quarter 2009.
Finally, I’ve learned that our government officials don’t have the courage to control things that are obviously going wrong. When Alan Greenspan was Chairman of the Federal Reserve he had access to the same charts that you do so he could see that the stock market was at historic highs yet he didn’t even try to talk down the market. Now, we have banks that are not lending because they are broke yet our current Treasury Secretary and Federal Reserve Chairman are not taking the actions needed to quickly fix these problems. Maybe their plan will work eventually but history states it will take years, maybe more years than you have left.  
A retired widow like you should wait until after the market bottoms to risk any money in the market. In fact, the best Mother’s Day Gift I can give you is to convince you to sell all your stocks after the recent rally.
Your Son,
The One Eyed Guide
S&P500 PE History

S&P500 PE History

I enjoy observing the evolution of the economy, but we should name the new animals that have been created.

Modern bankruptcy laws were implemented in 1898 after literally hundreds of years of experience proved that debtor’s prisons were ineffective. After all, if someone has no money putting them in prison simply eliminated the opportunity for them to make money to repay their debts.  Since then, businesses have been trying to eliminate the opportunity for individuals to get out of debt, though they have never come up with a solution to most debtor’s major problem:  lack of money.

The 2005 revision to the bankruptcy law tried to make sure people would try to repay debt.  One section of it eliminated the opportunity for bankruptcy courts to modify mortgages on primary residences by placing the portion above the market value of the house on par with other unsecured debts.”  The logic in 2005 was that the financial companies that owned the mortgages would be better at judging whether to modify them than a bankruptcy judge.   In 2009, we have some reason to doubt the judgment of finance companies.

In any case, I’ve never understood how banks could justify removing bankruptcy protection for primary residences while leaving it for second homes and investment properties.  … When enacted, this clearly encouraged individuals to undertake moral hazard by gambling with the bank’s money on vacation homes and investment properties.  It actually did this in practice (along with a lot of other distorting factors) as 1/3 of homes sold in 2005 were second or vacation homes. These vacation and second homes represent the majority of excess housing in the United States.

Worse, making primary residences a unique class of assets distorts the system and slows down the “creative destruction” that is key to renewal of an economic system. The questions this note addresses are:
1.   “What is the rationale behind continuing this distortion?”
2.   “What should this rationale to be called?”
This could simply be a distortion to benefit financial companies which could be called Bankism, the preference of banks and other financial companies over other interests. This is certainly prevalent in today’s government with preference for financial institutions’ interests over those of taxpayers. 
However, the recent refusal by the Senate to repeal this distortion may indicate that it is part of a larger trend to favor business (and managers) over the interests of private individuals. The net result of the primary residence exclusion is to favor ownership by business over ownership by individuals. After all, the current rule holds the individual 100% responsible for paying too much for his home and eliminates the ability of the bankruptcy judge to hold the bank at least partly responsible for lending more than the home was worth. 
What do you call favoring business ownership over private ownership? If Capitalism is the private ownership of property and Socialism is the state ownership of property, is tilting the rules of ownership of property in favor of business “Business Socialism”, “Business Capitalism” or something new like “Businessism”?

There has been a lot of discussion (or hot air, depending on your opinions) generated on whether deficit stimulus spending helps or hurts the economy in the long run. Keynesians are pretty straight forward in their support of deficit investment as the fastest way out while many conservatives support only Monetary Policy as the better alternative. 

There is support for both ideas but recently I received a statement by Van Hoisington and Dr. Lacy Hunt that seemed to be contrary to the historical record that it quotes: “the historical record indicates that massive increases in government debt will weaken the private economy, thereby hindering rather than speeding an economic recovery.“  If it was true, it would certainly indicate that deficit stimulus spending was bad. However, it could only be true if deficit spending lowers the growth rate because the United States, as a capitalistic country, has private ownership of the means of production. Any GDP growth benefits the private economy.
To check this, I did the simple chart below showing the Budget Surplus or Deficit for the USA from 1929 to present versus GDP Growth (Inflation Adjusted)  using Census data.  The upwardly distorted mirror image on the chart over an 80 year period makes it clear that in the USA increases in deficit have usually resulted in leveraged increases in growth. (It has to be this causation because GDP Growth increases tax revenues so Growth could not increase the Deficit.) How this can be interpreted as weakening the private economy is beyond my comprehension and it certainly does not show any “hindering” of recovery.  Perhaps they used foreign data not applicable to the USA?
GDP Growth Vs. Budget Deficit
Note that after 1972 the leverage relation… weakened, probably due to more reliance on tax cuts instead of direct investment when we were already running a deficit.   There was an even bigger disconnect in deficit effectiveness in 2004, possibly indicating that tax cuts when the USA is running deficits actually have a negative effect, probably because people save most (or pay down debt) recognizing that they will just have to pay the tax cut back in the future.   The Dr. Romer’s, in their paper The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks, showed that an increase in taxes designed to reduce an inherited deficit had a positive effect on GDP growth (1993, for example) so perhaps the opposite is also true.
Based on this information, it’s pretty clear that Keynesians are correct that deficit stimulus investment can speed economic recovery without long term negatives. The question that remains open is whether tax cuts help or hinder recovery when we are running a deficit. The answer has significant policy implications as further tax cuts may just make the current crisis worse while tax increases could speed the recovery.