Socialism, oh Socialism......

One rallying cry for those opposed to healthcare reform has been that we are moving incrementally toward the socialistic decadence of western Europe. While these countries provide high quality health care to all of its citizens at half the cost, the very idea of a government run system is anathema to the free marketers here in the good old U.S. of A.

This argument has been very successful in rallying support against a greater role for government in healthcare but is ultimately specious. While it is true that the public plan (proposed as a hybrid of Medicare to compete with private corporate insurance plans) is a definite move toward socialism, the unvarnished truth is that we are NOT moving away from a free-market system.

Medicare has set reimbursements for medical services for years; physician fees are set and DRG's (Diagnosis Related Groups) have set hospital reimbursements for decades. To a large degree, private insurance has followed suit by paying some percentage premium or discount to these set payments. Yet...Medicare (the government) has set the basic price; Medicaid, Medicare's ugly sister, pays at a steep discount to Medicare....often at a level below the providers' actual costs incurred in providing those services.

In our existing system, an entrepreneur is NOT free to make a capital investment which might make him a nice profit....the very bedrock of the free enterprise capitalistic system. He or she must obtain a "Certificate of Need" to build or upgrade a facility. If an entrepreneur wants to build an MRI center to compete with a local hospital, he must obtain a certificate of need from the government--a lengthy and possibly politically charged event.

The Stark Amendment prohibits doctors from referring patients to a facility which they may have built as a way of providing better or more-timely care. Stark reasoned that (oh my god), they might have a conflict of interest and make a few bucks from the investment of time, energy and capital. Stark thus prevents the very entrepreneurial role of return- on- investment embraced by free market capitalism.

Many other examples abound, but only serve to provide further examples of the point that we do NOT have a free market form of capitalism at work in our health care system. Rather, we have a system of authoritative capitalism--the nucleus of the form of capitalism that we have seen at work in China over the past two decades. This system, also based on return-on-investment, picks winners and losers at the discretion of the regulators. This form can and does squash entrepreneurial activity which does not enjoy strict government approval. Unfortunately, the winners so anointed are often chosen on the basis of political influence rather than on total utility to the system. Corruption is always lingering in the background.

Free market capitalism may not work for the healthcare system. Maybe the health care system (like the military) is too important to the public to allow it to function under free market rules. Health care is really not optional. However, the next time that you hear the fear-mongering cry of "Socialism is taking over health care", think about where we really are now and whether an incremental move toward a more socialistic system (government run), is an improvement or a deterioration to the system that we now "enjoy".

Dump and Run

I cut my AARP membership card in half and mailed it to headquarters; I have been questioning their values for some time but an article in this month's magazine finished me off. I'm done with them

The article covers the story of a couple reaching retirement age (both working professionals with good jobs); they plan to travel. Unfortunately, the husband develops dementia at age 64 and begins to become a burden. After conferring with an attorney who specializes in geriatric issues, the wife divorces the man, keeping all the remaining assets and the house for herself. The husband is put in a nursing home on the taxpayers' dime (Medicaid). I do not really blame this woman for her actions; her husband was gone....only a shell remained. She made a tough, cold, pragmatic decision to save herself and her independence. Unfortunately, the article couches this whole sordid situation in terms of how loving and caring the wife was as she carried out her plan. She had no choice.

She had no choice???? She could have taken care of him. She could have purchased long-term care insurance. She could have divorced him and given him half of the assets (but why waste assets on a demented nursing home patient)? The article goes on to describe other legal maneuvers to disengage from situations like this.

I do not blame this woman for her action but let's speak plainly and call a spade a spade. She kept the assets and put the "love of her life" on the public dole. In these cases, the State will appoint a guardian to make critical decisions for the patient. As a rule, to avoid litigation, guardians insist that all medical interventions be taken until the end. Instead of allowing nature to take its course, this patient will be subjected to feeding tubes, trips to the ER, medical procedures and even possibly life supporting measures such as ventilators--all on the taxpayers' dime. By the way, if he is demented, who represented him in the divorce where he got no assets? These maneuvers may be legal but are they moral?

AARP comes off as advocating this kind of arrangement. Seek out an attorney who specializes in geriatric law; protect yourself--yourself being the key word. The sanctity of marriage is frequently discussed in the political discourse these days. No wonder the young think marriage is a joke and are trending toward cohabitation (with children) as an alternative.

The author of this diatribe concludes by chastising Medicare for not doing more to help with home nursing and nursing home care. Hello!....Medicare has a 36 trillion dollar UNFUNDED obligation. Adding to this burden would be insane during this economic melt-down. I realize that AARP is a lobbying organization for the elderly, but this is an embarrassment. The new culture wars will not be the old ones (black vs. white or rich vs. poor); they will be the old vs. the young. The old are embarking on a trip to suck the economic life out of the young. Medicare and Social Security are called the third rail of politics. The tsunami of baby boomers about to hit age 65 will crush the young who simply do not have the demographic strength to support all that the elderly are demanding. I want no part of it.

I hope that loving spouse enjoys her travelling.

Poster Boy

Billy Tauzin, the president of the Pharmaceutical Research and Manufacturers of America (PhRMA), just quit his job. Mr. Tauzin is the poster boy for everything that is wrong with health care reform in this country.

Go back to 2004. Billy Tauzin was a republican congressman from Louisiana; he was largely responsible for shepherding the Medicare Part D Prescription Plan through committee and through passage in the House. This Medicare Prescription Bill was one of the biggest government give-aways to industry in recent history. It forbade Medicare from negotiating with drug companies over price; Medicare was about to become the biggest purchaser of drugs in the world and they were forbidden to negotiate the price???? Medicaid, Medicare's ugly sister, has had a drug benefit for decades; in contrast Medicaid, by law, gets its drugs at the lowest price the manufacturer offers to any other concern. The new bill further outlawed the re-importation of drugs from Canada or from other cheaper sources. Those with Medicare and Medicaid (elderly and poor) had their drug benefit switched from Medicaid (with the lowest negotiated price) to Medicare (with no negotiated price). Overall, a windfall for PhRMA and the shaft for the taxpayer.

Several months after passage of this bill in 2004, its chief architect, Mr. Tauzin, abruptly quit his day job as a Congressman and secured a new job as the President of PhRMA, its Lobbyist-in-Chief if you will. The job paid a cool $2 million dollars per year before perks. This raised some eyebrows but when Mr. Tauzin declared that there was no conflict of interest, nothing was done.

Fast forward to 2009; Mr. Tauzin, as Lobbyist-in-Chief, was intimately involved with Rahm Emanuel in the back-room deal hashed out early in the evolution of Obamacare; in this deal, PhRMA would give back part of its windfall by agreeing to cut drug costs by $80 billion dollars over a ten year period. In return, they would avoid what they must have perceived would be a much greater hair-cut if true reform were to be passed. As it turned out, true reform was a pipe-dream; ironically, one of the things that helped to kill Obamacare was the perception of non-transparency elicited by these back-room deals. Obama, who had campaigned on encouraging negotiation on drug prices and on the importation of drugs from Canada, retreated from these positions after the deal was struck with PhRMA. Quid pro quo anyone?

In any event, now that true reform appears remote, some republicans and some PhRMA representatives obviously think that Billy Tauzin was a little too quick to hand back some of the windfall and a little too quick to facilitate the expanding role of government in health care. Hence, he is gone and it is back to business as usual. Those who live by the sword, die by the sword. Billy Tauzin stands as my poster boy for all that is wrong with the process.

Tipping Point

While a fragile recovery to the credit crunch of '08 is proclaimed around the country, a very dangerous undercurrent is being ignored. That danger is the "strategic default". While most of those, mailing in their keys to creditors, are those who can no longer afford to pay their mortgages due to loss of job, ramp up of interest rates on an ARM, or perhaps now facing the need to address principle on their loans, a new class of defaulters is about to swamp this fragile recovery. A strategic defaulter is one who stops paying his mortgage because it no longer makes sense even though he can afford to pay it. This class of homeowners has taken a very rational, unemotional look at their homes and has determined that staying in them is just not worth it. Many homes are more than 25% underwater. The chances of those homes recapturing that 25% over the next decade are remote. Some bought their home at the peak in 2006; some bought well before that but sucked every cent of equity out as the house appreciated in value (for what seemed like forever). The prosperity of the last 10 years was fueled by borrowed funds from this "smoke and mirror" spending: vacations, dinners, jewelry and whatever.

The WSJ reported today that 10% of all mortgages (still existing) are more than 90 days past due on a payment; this is the benchmark figure for considering a loan on its way to default. You cannot even apply to the bank for consideration until you are 90 days late. In other words, one out of ten mortgaged homes is on the route to default. This process is creating a death spiral. As more mortgages default, the floor for housing prices falls further. As prices fall, more mortgages become underwater. As more mortgages become underwater (or further underwater), the benefit from a strategic default becomes greater. If you are 15% underwater, and you like your home and can afford to pay monthly, what do you do three months from now when you are 25% underwater? With the new frugality being hip, maybe that McMansion you bought 5 years ago doesn't look so appealing.

Is there a moral imperative to sticking with your mortgage? After all, you took out a loan and promised to pay it back. It varies from State to State as to how much personal liability one has for sending the keys to the lender. As recently shown in New York, commercial landlords have no problem sending in the keys. Stuyvesant Town/ Peter Cooper Village is an 11,000 unit, 110 building complex in midtown Manhattan. It was purchased a few years ago for 5.4 billion dollars by Tishman/Speyer and BlackRock Realty; they defaulted last month and turned the project over to its creditors. The property is worth only 1.8 billion now. Yet, neither company has declared bankruptcy or sold other holdings to keep this project afloat. In other words, they have made a strategic decision to walk away from a business deal which has gone bad. Is there a difference, morally, between a commercial enterprise walking away and a homeowner walking away?

I have been looking for a house here in Miami. It seems that there are two main categories of homes for sale in decent neighborhoods: one category is the group who still think that their house is worth 2006 prices; the second is the "short sale" where you can make an offer below the mortgage amount. Unfortunately, it takes four months to receive an answer from the bank on any offer. FOUR MONTHS! They will tell you that they are very busy and are working as quickly as possible. In reality, they are keeping bad loans on the books as "performing" and putting off the inevitable loss which will necessitate them having to raise more capital. Isn't that how Japan lost a decade or two?

The administration has been trying desperately to put a floor on housing prices but has come up empty. The can is being kicked down the street. Sooner or later, the invisible hand of the market that we hear so much about is going to smack us in the head, and the wallet.

Off the Tracks

When did health care in this country go off the tracks? I would date it to the mid eighties when there was a seismic shift in how health care was perceived and provided. Getting healthcare back on track will require addressing this fundamental derailment.

Recall back to your days in Economics 101; you probably remember the golden rule of addressing exam questions: look to operate where the marginal utility of an item is equal to the marginal cost of that item. As a consumer, you will purchase another item where the utility of that item is equal to its additional (marginal) cost. As a business, you will employ labor up to the point where the marginal productivity (utility) will equal the marginal cost of that additional labor. As an investment banker, you will apply additional capital up to the point where the marginal revenue from that capital will equal the additional cost of that capital. As a manufacturer, you will make widgets up to the point where the marginal revenue from each widget equals the marginal cost.

To operate below the intersection of these two curves is to forgo maximizing your benefit; to operate above the intersection is to overextend yourself and actually lose utility (or money) by oversubscribing. Pretty simple stuff.

In health care, the marginal utility of something ( a medicine, a procedure, a therapy) used to be measured as the extra benefit that it afforded to the patient. It could be measured in extended life, improved quality of life, relief of pain, improved function or some other measure. Hence, healthcare gravitated to an equilibrium where the additional utility of some medical intervention was equal to its marginal cost. When I was in medical school, dialysis machines were in short supply; those needing dialysis were presented to a committee to allocate the scare resource. It was thumbs up for a high-school kid with renal failure and it was thumbs down for a 90 year old demented patient from the nursing home with bed sores and renal failure.

There was a sea-change in this way of thinking in the 1980's. Instead of operating where the marginal utility to the patient intersected the marginal cost, the new paradigm became to operate where the marginal revenue from a medical intervention intersected the marginal cost. In blunt terms, how much money can be made from an intervention as opposed to how much benefit can be extended to the patient.

Pharmaceutical companies lobbied for the right to advertise directly to the public; once secured, it became one of the most successful advertising programs in history. Scores of "me-too" drugs were developed and hawked to the public as new and improved. In fact, most were minimally different from preceding drugs but were priced at very high levels, armed with new patents or patent extensions.

Hospitals sought out and courted doctors who had lucrative "books of business". In other words, they could bring patients into the hospitals who need expensive and profitable procedures. These books of business were further categorized into sources of revenue. An orthopod who brings 100 cases per year to the hospital for knee replacements with Medicare is not the same as the orthopod who brings 100 cases with private insurance. Many procedures are of dubious value to the patient; yet, they are still performed.

Emergency rooms became revenue centers. Sprained ankles routinely get MRI's now when a simple x-ray will do. Colds get Chest X-rays and antibiotics.

Insurance companies are complicit; they figure out their costs (medical stop-losses) and tack on a percentage for profit and administrative fees. As costs go up, so do the profits.

In short, the next time that you wonder why health care costs are going up so much faster than inflation, just remember that health care is now operating where its marginal revenue intersects its marginal cost. In other words, the outcome sought is the maximization of revenue not the maximization of the patient's benefit. Until this is acknowledged and corrected, health care will continue to be dysfunctional. Unfortunately, Congress has been part of the problem instead of part of the solution.