Dear NYTimes editor-re:health care

November 15, 2009

Mssrs. Arthur Sultzberger, Publisher

Bill Keller, Executive Editor

The New York Times

620 Eighth Avenue

New York, New York 10018

Gentlemen:

This is a friendly letter commenting on your recent editorial “Reform and Medical Costs”. God knows that two constants in my life, (traveling 250,000 miles a year for 35 years doing management consulting), has been the Charlie Rose show and The Sunday NY Times. But, I have written a book on health care reform. Since I am vain enough to believe I possess deep expertise in health care economics, it is not surprising that I depart company from you on the matter of reform of the system.

You outlined some of the proposed reforms and cited the NEJM as proof positive that it’s time to tie the bow on the filled package. Specifically:

1. Forced Productivity Gains by reducing annual Medicare payments;
2. Imposition of an excise tax on Cadillac Coverage;
3. Simplification of Standardized Forms for billing;
4. Implementation of EHR, or electronic medical records;
5. Reform of the Delivery System by moving to fixed payments(bundling or capitation);
6. An Independent Commission to test innovations;
7. Managed Competition to create exchanges to promote competition amongst insurers;
8. A Public Plan to negotiate rates with providers;
9. Comparing Treatments to compare which treatments work and don’t work;
10. Negotiating Drug Prices for Medicare and Medicaid, and;
11. Malpractice Reform to rein in malpractice costs.

When any outside party, particularly government, who has monopoly power by virtue of paying for the majority of health care in this country, institutes the above eleven items, it should be considered a blunt force capable of producing trauma. You fail to mention that the injection of $1 or more trillions additional dollars into the health system is stimulative and sure to exacerbate health care inflation.

Contrast all of this with the subtle, nuanced way that Honda or Toyota run their manufacturing. They work in the microcosm to implement a thousand small changes continuously over time to improve productivity, costs and quality. They do so because their industry is competitive and sheer survival depends on it, particularly if you are trying to unseat incumbents such as Ford and GM.

Do you think government could wade into the computer industry and force companies like Apple to be more productive or use best practices? First, the industry is fiercely competitive and has a declining cost experience curve; intervention would not be supported by either the customers or companies. Government can only do its mischief in economic sectors that are failed and they do it best in cases where they are the original perpetrators of destruction rushing to save us from ourselves.

Neil Gabler once said, and I am paraphrasing, that when public policy debate becomes bipolar and defocused all nuance is lost. I suggest that has happened in the health care reform debate. The chefs in the kitchen are by-and-large attorneys who do not possess the foggiest notion of how to reform the system. Journalists with the mike and camera are tasting the food as it is prepared as if they are on Good Morning America. They too lack any deep knowledge of health care reform. The live audience is a cacophony of voices; most of them really wanted to see the Dave Letterman Show rather than the cooking show. And, the audience at home, that vast majority of Americans who get their meals on wheels are sitting in front of the TV in stunned disbelief.

Now, I know that you sincerely believe you have hit the bulls-eye with your editorial. On the surface it all sounds reasonable and rational. The problem is that it is misdirected and will fail to get the job done. In Big Timber, Montana, where I was raised it’s called “being-a-day-late-and-a-dollar-short”.

Take the very notion of intensifying competition in the health industry by focusing on insurance companies. If you didn’t like the price or quality of automobiles would you complain to Ford Credit or GMAC? No, you would focus on the manufacturers. And in the end you would go full circle and question why the consumer continues to buy millions of poorly built cars from such people when they could easily go down the street and buy a Honda or Toyota. The uncomfortable truth you fail to accept about health care is that outcomes such as poor quality and high costs are produced in the interaction between demand and supply, ie patient and provider. The intermediaries, be they insurance companies or government, who are supposed to be our loyal agents,  are usually meddlers taking their customary percentage off each transaction to support their own estate.

In the end, health care will only be reformed by the use of subtle forces that impose a disciplining on the system. This includes defined contribution health plans, member-owned  cooperatives and a dozen other proven strategies. Any attempts to further the centralization, control and hierarchy of the current system will lead to disintegration. Disruptive technology waits for no man.

Sincerely yours,  Francis M. Miller, Parker, Colorado

BRIEF BIO–Fran Miller is an elite management consultant with over 35 years of experience with firms such as Deloitte Touche, KPMG, and DTG. He graduated from the Graduate School of Public Affairs (health policy) at the University of Colorado. He is nationally known for his work in health data, business coalitions and governance. He started the first health cooperative for small business and is president of the Colorado Employers and Consumers Health Care Cooperative(1992). He has done significant independent scholarly work in the area of health futures contracts as an alternative to today’s health insurance industry. His web site is www.lonetreeconsulting.com and www.healthfuturesexchange.com. His book, Health Care 2050: The 13^th Strategy is available on Amazon Kindle.

Vet’s Day from an observation point

I sit down to write this, having just returned from a free lunch provided by Applebee’s in Castle Rock. It resembled the homeless par-taking of Thanksgiving dinner down at the Salvation Army ; a group of mostly old men commonly bound by their experience, breaking bread together in silence. Of course, the dead and handicapped were not there to make the sample representative, so we will never know.

As we carved our 7. oz steaks and drank iced tea, there was no talk of past conflicts. No amount of reframing of the experience, other than cursing reference to Robert McNamara coming out years later and saying ‘never-mind’. We did talk about Afghanistan and uniformly agreed  that we hoped President Obama possesses wisdom that our prior civilian leaders lacked during Vietnam and Korea.

Why don’t veterans talk more about their military experiences? Usually, a person will reveal his branch of service and the years he was in or maybe the war period. But, great pains are taken to avoid more detail. Let’s say you mentioned you were a U.S. Navy Seabee during Vietnam. That’s begs the question did you go overseas? Where were you stationed? Did you participate in the Thet Offensive? were you in that platoon that got hammered by friendly fire?  Did you take Hill 465? Such interrogation is all designed to distinguish importance, much like a cream separator. The mature veteran doesn’t give a hoot whether you were an officer or E-1, or anything else. He is just glad to commune with someone who is a brother in a common experience. We know the only true heros are the dead and wounded. And, most of them were just grist for the mill in some elitist’s determination that war settles grievances.

Now, I didn’t appreciate getting drafted back in 1971, and I found the military in a sorry state of affairs, mostly due to Congress and civilian leadership. I would guess it’s the same today; nature of the beast, you know. But, looking back nearly 40 years I feel the experience imparted something to me that no corporate job or university could ever deliver. I don’t deserve to be buried in my uniform or get a 21-gun salute, but I still carry that dog-tag on my key chain and periodically run my fingers over the raised letters.

I noticed one other thing that was striking in the gang at Applebee’s. There was a group of Air Force Academy cadets there. I was struck at the number of non-whites and women in the group. Back in 1971, when I went through boot camp, there were no women and our sister company was black. Segregation and sexism still reigned supreme. I was also struck with how young they are and how old my cohort has become. God, I am proud of those young people and I pray for their safety.

My guess is that a lot of people didn’t alter their day much on behalf of Veteran’s Day. It was a day much like other days: civilians going about exercising their freedoms while the vets sit huddled down together for lunch-smok’em if you got’em! I have to believe it wasn’t any different in the Revolutionary War, or the Civil War, or any conflict since. In the final analysis, I didn’t enlist in the Navy for you, but for me. It gave meaning to my life at the time and no one can take it away from me. I have no regrets. Can you say as much about most other things in life?

Suddenly you find yourself embroiled in a lawsuit

The cowboy culture was long ago replaced with a legal system that wants to resolve all conflicts through an elaborate process within the Courts. Try as you might, you will inevitably find yourself the subject of a lawsuit, either as defendant or plaintiff. The process server will someday appear like a Grim Reaper on Halloween night.

Now, whether it is civil or criminal, the first thing you will likely do is hire an attorney to respond to the outrageous charges or to prosecute redemption on your behalf, if you feel the victim. In the case of small claims, normally under $15, 000 or often $5, 000 you can respond yourself pro se.  Books from a company called Nolo Contendre will advise you on the process. But, let’s say you head downtown to find yourself an attorney. If you are the defendant, he will likely want $5,000 upfront out of which to draw upon. If it is a criminal case, he will want money and probably the keys to your house and titles to your cars. In either case the attorney will advise you to say nothing and go through him on all matters big and small.

Now, at first blush this is a relief. You can take comfort that you have a professional on the job working on your behalf dealing with this distasteful matter going on in the background of your life. In the foreground, hopefully you believe you can continue to function at your job and with the family. But, beware, this is the first tarpit  you are about to fall into and you will soon find yourself mired like the proverbial Woolly Mammoth. And,  remember what happened to the Woolly Mammoths and Sabre Toothed Tigers. They dug them up 10,000 years later with fresh flowers in their mouth.

The fundamental problem here is two-fold. First, the opposition will also hire an attorney and he will advise his client to do the same thing. So now you have two attorneys billing out at $250 an hour with communications only flowing through the attorney’s. It is a deluxe triangulation that reduces you to an object in someone else’s process. By allowing an “attorney-to-attorney communication to dominate you will find you have little influence or control over the matter.

All lawsuits have a rational component and an emotional component. The rational side is the damages that were inflicted on the party and the amends that should be made. But, on the emotional side, it is pride, anger, fear and a host of feelings that provide the fuel to keep most lawsuits alive. While you will  need an attorney to respond to the complaint and handle motions with the court, in the end, most lawsuits get settled on the courthouse steps and rarely go to trial. And, criminal matters are by-and-large plea bargained. Why is that? Because trials are risky for both sides. Sure you can win big, but you can also lose big. Handing your life, lock, stock and barrel, over to an attorney is like riding on the back of a motorcycle without a helmet going 100 miles an hour; I can assure you a trial is the equivalent of an 18-wheeler suddenly materializing out of the fog. In war, it’s called the “fog of uncertainty“. When someone declares war they feel justified, and they want vindication and think there is some chance of winning. But, as the real battle begins to take shape, a “fog of uncertainty” sets in because there are too many variables that could not have been predicted or controlled. Success is never guaranteed. Ask Napoleon, Rommel, or Lee.

Litigation is the equivalent of a declared war. With it comes all of the uncertainties of war and in the end, both sides are normally left devastated. One side may have to make reparations, but make no mistake about it, both sides pay a price emotionally and financially. In the end, I believe both the plaintiff and the defendant need to have a covert strategy whereby they will personally, if at all possible, negotiation face-to-face without the attorneys and try to reach a settlement. If you allow your pride, anger, resentment and grievances to prevail, you can plan on spending large amounts on attorneys and, at best, winning a hollow victory.

So, let’s say you decide to play both offense and defense. You hire an attorney to handle things inside the courtroom, like responses, motions, etc. But, you reserve the negotiations to yourself and wait until the situation is ripe to try and resolve the matter with the opposing party face-to-face. How do you get the other person in the frame of mind to do so? All of us have pressure points and fulcrums that come with levers. Maybe it is the possibilty of losing or some other reason to get the person to sit down and talk. At the outset negotiations are unlikely because the emotions run too high, but as the case progresses most people cannot maintain a high level of adrenaline flow and will at some point be more receptive to talking. When that time comes, that is when you have to make your move and try to get things settled.

Sometimes negotiations can be facilitated by third parties and other times by picking up the phone or jumping on an airplane. I am also not so naive as to recognize that there are also situations where people want their day in court so as to make a statement and they could care less about the result. From a rational point of view that is hard to overcome, but try you must.

In the end, you will have to be prepared to do four things. First, you must take ownership of the role you played in creating the situation. Second you must be prepared to make amends and that will likely involve money. Third, you must be prepared to forgive the transgressions of the other person, no matter what. And, there is a fourth, that, depending on your religious orientation, you might feel is hokey, but I sincerely believe is the singularly most important thing you can do.

After struggling with a situation as much as you can and doing everything within your personal power you must turn the problem over to your higher power, call him God,  or whatever works for you (the Divine Matrix?) and ask that the right moral outcome take place. When you do this you must be prepared to accept that outcome and live with it.

In the end, it is not about who was right or wrong. Rarely are there situations where things are so clear cut. But, even in cases where one party is clearly to blame and the other is clearly a victim, achieving a peaceful settlement normally involves the victim being willing to transcend the situation. You see it all the time when the family of a murder victim chooses to forgive the perpetrator because that  is the only way transcendence can be achieved.

In an ideal world, attorneys would be the lubricant to make such outcomes occur. In reality, there are far too many attorneys trying to make a living and there are more than enough victims and perpetrators to wallpaper the wailing walls around the World. But, and I cannot say this too strongly or often enough, if you choose to deliver yourself over to an attorney and be a passive participant, you will pay an immense price for the luxury of that indulgence. You must be prepared to reassert yourself sometime during the process and become the master of your own destiny–the captain of the ship. Yes, it is risky and it takes courage and energy. But, I guarantee you will come away feeling better about the situation.

I say all of this from direct personal experience and I have the scars on my back to prove it.

 

Initial Reactions to H.R. 3962-Health Care Affordability Act

As many of you know, health care reform has been a cornerstone in my career since the 1980’s. So, I spent the night reviewing H.R. 3962, aka the2009 Affordable Health Care for America Act. Here is my initial reaction, with more detail to follow in the days ahead. As I ploughed through the 1,990 pages I had mixed feelings. First, was my personal disappointment at Congress’s decision to make cooperatives state run collectives. But, overall it was shock and awe at the over-reaching scope and impact of the bill on the American health system. As an integrated totality it is sure to irreversibly transform the industry in the decades to come.

My bias in the health care matter is that the health care market is a failed market, far from efficient due to a series of actions perpetrated or allowed by market players over the years. The insurance companies have treated health care as an extractives industry and the political establishment unknowingly perpetrated the market’s demise in its existential quest to seize power by pandering to various constituencies. In my mind we should long ago have stopped doing what we were doing, have reversed course and began a decade long process of restoring the market through the 12 strategies I outlined in my book, Health Care 2050. I do not believe that we as a nation can afford to have 1 out of 5 workers employed in high paying positions in health care, nor can we allow health care to consume 20% of our country’s gross national product. It’s unsustainable and will eventually push us past a tipping point. That having been said, there is another even more dark side to all of this.

Free market ideologues have failed to accept that you cannot allow a market to evolve organically, particularly when that market distributes services that are of a life and death matter. Organic markets are volatile and periodically suffer the natural equivalent of hurricanes and earthquakes. The insurance market long ago walked away from the elderly and the poor and government had to act. Then, the industry failed to move toward more disciplined payment schemes and costs exploded as cost shifting became pervasive. The insurance industry gorged on profits from life insurance and reinsurance products and let the individual and small group market overheat until political solutions were sought by those constituencies.

Employers used health care as a carrot-and-stick in their labor negotiations and never had the backbone to initiate meaningful reforms. The large employers and labor unions got what they wanted when ERISA was passed in 1974 and they let the small employers and individuals twist in the wind. They collaborated with the insurance companies on managed care and reinsurance and shifted costs onto their employees whenever they could. The resentment built and a political redress was predictable.

Consumers have enjoyed decades of being buffered from the reality of costs and have failed to take personal responsibility for their health care. They act like they are victims when fully 70% of disease is avoidable. The elderly who are supposed to be our greatest generation have failed to transcend their personal wants and needs and have been more than content to let others pay for an array of health care services that merely extend life a few weeks or months before the inevitability of death arrives.

The political establishment as a species behaves in a predictable way. They fill vacuums and seize opportunity. But they also act when others will not act. Their intervention is by nature messy, partisan and influenced by special interests. But, when market players with skin in the game fail to act morally and rationally, eventually, the political operatives will move in. Such is the case in health care.

Whether H.R. 3962 passes “as-is” is irrelevant. Something along these lines is going to pass because the Democrats have majorities in the Congress and a President who has staked his political career on the matter. So, I would predict that 80% or more of what is in this bill will become law.

The legislation about to be passed represents not only a defining moment for the health care system, but for our political economy as a whole.  Health care is destined to be 20% of our economy and by far the largest sector. This Act puts a stake in the heart of a free market approach and moves health care towards a regulated, government controlled system. Whether it will morph into a single-payor system or remain some hybrid, it is a move towards the models of the social democratic countries of Europe.I leave it to you to outlines the distinctions without a difference.

We are now far enough along in this melodrama to predict how the play will end. Republicans, insurance companies and the wealthy are losers. The “have-nots” will benefit at the expense of the “haves”. Whether that is social justice or moral is up to you to determine based on your values. But, health care is analogous to alcoholism. Some believe the alcoholic is a moral failure lacking in courage and will power. Others believe it is a sickness. Irrespective, the alcoholic seldom changes and is often willing to lose everything and has to hit rock bottom before any real change takes place. Even then recidivism rates are high and many substitute other addictions for alcohol. We as a society are addicted to this thing called health care. It is both our friend and our enemy at the same time. We cannot live without it and we can’t stand to be in the same room with it. We have given up our personal power and handed it over to it all-the-while rationalizing. It is destined to be both our downfall and our salvation.

I assert that great events will determine where all this goes, not Nancy Pelosi, Harry Reid or Barack Obama. Health care is on a path from its early roots: the Barber Surgeon, the Civil War Amputator and the Country Doctor. Technology, pandemic, demographics, maybe even world events will be determinants. By the year 2040, the power of genetics, biomaterials, computerization and super drugs will reign supreme. The retirement of the baby-boomers and the tsunami of unfunded liabilities could easily render H.R. 3962 a house of cards or a sand castle.

I came of age in the 1960s and 1970s and, sometime in this period health care crossed a great divide, where everything was different after the crossing than before. We are now firmly in the 21st century; it is a time when all the rules are changing and where periodic cycles are giving way to irreversible transformations. It would be as if someone in 1890 invented a new kerosene lamp, ignoring Thomas Edison and the incandescent bulb. Within a short time, electricity, automobiles, air flight and war, famine and pestilence combined to transform the 20th century in ways my great grandfather could not have imagined.

Our founding fathers had a noble idea when the American Constitution was written. But, these Colonial Men of the Enlightenment  would have struggled mightily, as do we, to deal with our modern world. It is though we are now riding Albert Einstein’s beam of light and we are merely particles on a fiber optic roadway.

The massive nature of H.R. 3962 demonstrates that much work and thought was put into the matter. It is the culmination of 50 years of political economic thought by the Democrats. The Republicans who had similar power over the past 25 years could probably have fit their ideas on a 3×5 index card. Shere energy and political will have now trumped everything else in the matter. Whether this is our final destiny, or merely a punctuation point in a much bigger story is yet to be determined.

In closing, I feel comfortable in saying that I am glad I am not in the health insurance industry. I am also glad that I cultivated hobbies and other interests over my life to reduce the dominance health care reform once had over my life. That past turns out to have been merely prelude.

Oh, by the way, if any of you want the 1990 page pdf of the bill, I would be happy to email it to you.

The triangulation of power in health care reform

Have you ever wondered why it has taken 50 years to get on the cusp of health care reform and why it is so difficult? My take on the matter is that a triangulation of power has developed between three major constituencies: 1) consumers, 2) large employers/labor unions and the insurance companies, who are their loyal agents and 3) government. This is a clash of the titans.

First, a nutshell explanation of triangulation. When two parties meet to discuss, collaborate and negotiate,  an exchange of energy and information is flowing between the two parties. Now, introduce an attorney and you know what will happen: triangulation. Two people want to go to lunch and everything is hunky-dory and then a third person wants to come along. Suddenly you can’t get agreement on where to eat or when to leave the office. Triangulation! Buckminster Fuller discovered that the most rigid structure is a triangle and that is why geodesic domes are comprised of interlocking triangles. The energy is dispersed around the triangle. So, whenever anything becomes triangulated, look out, life is about to go to hell in a hand-basket.

Now, with regards to health care. After the Great Depression, Congress gave the insurance industry virtual oligopoly status and freedom from anti-trust. Life was good as Blue Cross became the titanic equivalent of the Bell Operating companies. It was not until 1965 that things changed with the introduction of Medicare and then, later, Medicaid. The insurance companies weren’t too concerned because old sick people and poor people ( in their mind) just contaminated the risk pool. Better to have government take them off their hands. But, to paraphrase Willie Nelson: stuff happens and then all hell breaks loose.

In 1974 Congress passed ERISA which gave large employers and the labor unions control over their pensions and health plans and ushered in the era of self-insurance. This caused a bifurcation of the insurance market. Individual and small group plans were still sold, but most self-insured plans retained much of the risk and used reinsurance. This also altered the regulation of insurance and the collecting of premium taxes at the State level. Self-insured plans were regulated at the federal level and the States were left as caretakers over the remainder.  ERISA altered the landscape for benefit consultants, attorneys, insurance brokers and college professors.

Pan forward to 1986. About the time the insurance industry decided it wasn’t going to get out of the desert and needed to figure out how to live in the desert, along comes TEFRA and the Budget Reconciliation of 1986. This legislation moved Medicare and Medicaid from cost+ reimbursement to more of a prospective payment approach. This ushered in the great era of managed care and cost-shifting. Suddenly, the insurance companies and employers and unions were absorbing hyper-inflationary costs cascading down on them from government entitlement programs paying 70 cents on the dollar to fund entitlements. The only places to shift the costs were toward the consumer in the form of premiums for individuals and small groups and co-pays and deductibles onto the consumer. Employers and unions quickly followed suit and began to hire the big insurance companies to carry out their will. It was the equivalent of a Cold War.

Suddenly, the private sector, both insurance companies and employers found themselves clashing with a political establishment that discovered they could derive votes and power by pandering to constituencies that were not yet feeding at the trough. When Bill and Hillary Clinton made health care an issue in the early 1990’s the private sector drafted Harry and Louise as foot soldiers in a war of demagoguery. They thought they had killed and then kept the zombie buried by spending the past ten years buying Congress in general, and the Republicans in particular.  They even sent Bill Frist, part of the Nashville HMO cabal to Congress and insinuated him into the leadership as majority leader. Frist successfully prevented any meaningful legislation from ever getting out of committee in the Senate and making it to the floor for a vote. His last stake-in-the-heart was the defeat of S.B. 1955, which would have allowed the formation of association health plans using the cooperative model.

With the country trending conservative, no one ever imagined the Democrats ever achieving a power majority in both the Congress and the Executive branch. Of course, they didn’t anticipate 9/11 and the opening of unpopular wars in Iraq and Afghanistan. Couple this with an economic collapse of historic proportions and we all know the underlying  pressure for change that brought Democrats into a majority and emboldened them to pursue a single payor, socialized solution to health care.

Now, you would think that getting out of the war on terrorism, changing our dependency on fossil fuels and figuring out how to get the economy to rebound would occupy the full-time attention of the political establishment. But, only by reforming health care in a way that bestows an entitlement on a whole new group of voters can future elections be assured. So, the Democrats have embarked on a great adventure to further socialize 16% (soon to be 20%) of our economy. The political establishment, aided by the Republicans who killed their spirit by selling their souls on K Street, now seems bound-and-determined to put into place a public option or state run collectives that will lay the railroad track for the subsequent running of a locomotive called a single payor system, comparable to the social democracies in Europe. Anyone who believes otherwise is either a fool, naive or has already sold out.

Like all political debates that arise from market failure, the argument soon becomes defocused and bi-polar. Either you support the public option (a “Trigger” is a rose by any other name; its just a land-mine waiting to explode) or you believe in the free market. But, the market has been so ravaged by the rape and plunder of financial intermediaries who amorally treat it as an extractives industry and by government who seeks power that it would take years of enlightened remediation to change the course of history. An addict must first hit rock bottom, get out of his denial and then take the 12 steps to recovery, all the while admitting that he will be an alcoholic at best for the rest of his life or, at worst, if he falls off the wagon, a common drunk.

So, how has this situation become triangulated? The consumer, all the while consuming benefits paid for by someone else, has become intoxicated and abandoned any semblance of personal responsibility. Community rating, guaranteed issue, price regulation, ignorance of pre-existing conditions, are all means to shift costs to the other members of the risk pool. By doing so, I can smoke, drink, ride my motorcycle without a helmet, gorge myself on Big Macs without the chickens ever coming home to roost. The employer, who, cunningly, has traded-off salary increases against the tax-free nature of health benefits is no virgin in the matter, either. Many employers are as addicted to cheap immigrant labor and not paying pension and health benefits as the old-time plantation owner was when he couldn’t make a go of it growing cotton without slave labor. Then there’s government, inserting itself into the situation, ever ready to take advantage of a market failure. Now that health providers have been seduced and become dependent after years of feeding at the public entitlement trough, they can no longer survive in a free market and must march to the beat of government’s drum.

The interplay between these three major players, who are interlocked in a triangulation, is fed by professional sophisticates who parasitically feed off the system and provide the lubrication for the wheels and gears that turn. Benefit consultants, attorneys, insurance brokers, mid-level bureaucrats at both the state, federal and local level derive jobs and high salaries from the situation. Health care now employs 14% of the working population and it will soon employ 20%. What would all these scooter salesmen do if health care was 7% of the GNP and represented, only 5% of the workforce. Sheesh, we are retraining auto workers to be nurses and there seems no end to the insanity.

In the end, this situation cannot endure. Unforeseeable events are sure to intervene. It is unlikely that from here on out either government or large employers and their labor unions can do anything but tinker with the health care system at the margins. Their mischief is sure to be inflationary and it will not alter the ever-rising course of the cost curve. If anything, it will further fuel the flames of inflation in the health care sector and push us toward the day when health care dispossesses us all before we die. In the short run, we can temporarily ignore the $36 trillion dollars of unfunded liabilities lurking as a bomb for Medicare baby-boomer retirees, but not in the long term. You don’t think that the Russian bureaucrats wouldn’t have done anything within their power to prevent the demise of communism, do you? No, and the three major players who form this triangle will exhaust all remedies in pursuit of power and a free lunch.

I learned long ago from the leader of my monthly book group about the difference between tragedy and comedy. To qualify as a tragedy the players must have high moral standing and character if their downfall is to qualify as tragic. Otherwise, it is comedy and farce. In the health care melodrama, none of the players are virgins in the matter. But the ‘them’ is ‘us’ and ‘you’ and ‘me’. We have all been drafted into this stage play by virtue of the fact that very few of us will die of natural causes in our sleep. Most of us are born in a hospital and we will die in a hospital. Men, who tend to check out first, get off the easiest, but women tend to spend the last five years of their life in a nursing home, chronically ill and spending down their meager savings so they qualify for the dole.

The historians will not focus their attention on health care reform for many years to come. That day will only arrive after the 18-wheeler hits the road runner and the vultures have had their day and the hyenas the night. Health care has yet to experience the big one-the pandemic or event of epic proportions. All of this debate about reform is mere foreplay. Yes a bill will be passed, but it will be a day late and dollar short.

Republicans: a dead party walking

We exited the Great Depression with the Republicans disoriented and unable to articulate any position but “NO”: not too much different from today. Back then, the Democrats, were supremely convinced of the merits of Keynesian social democratic approaches to the economy. It was not until after WWII that a renaissance emerged with the intellects of Kristol, Goldwater, Reagan and Buckley. Today, it appears that with regards to the critical issues of the day, leading conservatives either see a need to do little or nothing, or else  merely the opposite of what Obama, Pelosi, Reid, et al propose.

I assert that our founding fathers did not have a clear concept of government or corporate involvement in our affairs, based on the forthcoming industrial or information society, many years off in the distance.  Adam Smith had articulated some notion of an invisible hand at work, but, by and large, the economy was a landscape of yeoman farmers and small business in a village environment. Jefferson, in particular, disliked the mercantilism he witnessed in Europe and did not see it as desirable for our country.

Pan forward to today and the context is one of very large hegemonic enterprises, both government and corporate leaving their footprints on the ground wherever they choose to stomp. Huge financial institutions act as intermediaries between the printing of money by government and its rationing out to the lowest levels of society at usurous.  The naive notion that mere organic evolution in an economy, dominated by players lacking a moral ecology, would create the outcomes we desire runs counter to the reality of predatory behavior of players who treat everything as an extractives industry. Their size and influence allows them to make and enforce the rules that benefit themselves. The entire legal profession serves at the pleasure of these institutions and it carries their water. Attorneys cannot exist without clients and they do not give up these clients when they go to Congress.

The current Republican Party and its membership seems devoid of robust economic theories or an empirical sense of what makes the economy tick, what creates wealth, or what it takes to achieve the outcomes society seeks.(Democrats, of course, think redistribution of wealth creates wealth, for their constituency, of course) On the matter of health care, Republicans call for a private market, yet, they, along with the Democrats have been the perpetrators of systematic destruction of the health care market for over 50 years. Health care is now a brownfield and cannot be restored to some former paradise without years, if not decades, of remediation. In reality, the mercantilists, most of whom are Republicans, have wanted to cream the health insurance market, sell reinsurance that is pure profit and let government take care of that portion of the market they did not want. They did not want the poor or the elderly because they tended to be sick or unable to buy insurance. They gravitated market segment-by-segment, always focusing their divining rod on where the veins of gold existed; society and its problems be damned. Now, society has revolted by temporarily electing the Democrats. It is dangerous whenever a market gets turned over to the political establishment; rest assured the outcome will not be derived rationally or based on sound theory. Too many special interests can work their magic on the process and sausage is an apt metaphor. That’s why in this current health care debate,  the noble  notion of member-owned and governed cooperatives is being  bastardized and turned into something that looks more like state-run collectives that Marx and Engel would celebrate.

There are many who see the current situation as analogous to previous cycles where the pendulum swung back after a couple of years. Republican operatives are just biding their time to wrestle control back from the Democrats  in the next election. I do not see it that way at all.

We are going through structural change that means an irreversible transformation in most aspects of life. We have finally lost whatever was left of the manufacturing economy and it will never return. Even in computers and solar panels, the Chinese dominate. Indonesians tie 99% of the trout flies fly-fisherman use.  With this age of discontinuity comes the disintegration of hierarchy. And, we will  eventually replace most of our out-dated notions of economic development that had their roots in the 18th century. It will not be laizze-faire organic evolution, left to the whims of the money-changers, premium-takers, rent-seekers and brokers. It will eventually be determined by innovators and the entrepreneurs who exhibit courage and take the risks to invent new ways of creating wealth on a global playing field. The nation-state cannot protect us from this harsh reality. We will increasingly find that corporate entities are no longer loyal to their nation-state, but to their sources of capital. Since capital has been transferred en-masse overseas after years of import/export imbalances, we now must finance both our government and corporate life through the Saudis, Chinese and others. Once their internal markets are developed we will have served their purposes and be jettisoned like the booster rocket on the Space Shuttle; the fuel will have been spent.

At the heart of this problem is a suite of professionals that value process over substance.  Most of the professional sophisticates I know have little economics training and little theory base on which to operate. They truly believe that they can hold hearings and play judge and jury and figure these things out as they go. The dilemma in this of course is that they are a confederacy of dunces; yet to turn it all over to the economists or any professional specialist is also highly dangerous and terrifying. I don’t want to be in any plane being captained by Paul Krugman with Richard Friedman as his co-pilot.

Society does not have economic generalists and leaders the equivalent of General David Petraeus in the military. The U.S. military has a war college, conducts games and continually prepares for all scenarios. There is no equal in the social sciences, energy, transportation or the other important spheres of our life.

So, we are left in a milieu and we cannot anticipate but only respond to crisis. It is always a day-late and a dollar-short. But,  I assert the current crisis should be  particularly threatening to Republicans.

Society has always suspected, with justification, that Republicans care only about themselves and any notion of “compassionate-conservatism” is a marketing jingle. It was only when self-interests were somewhat aligned that the public jumped on the Republican bandwagon. Now that Republican motives have been revealed as fundamentally amoral;  and where everything is treated as an extractives industry; and a time when vast numbers of the public have become Independents. They are not crossing the street and becoming Democrats, but patiently waiting for a new politics to emerge. The precipitant that crystallizes this amorphous, super-saturated solution, will be a charismatic new leader, but one with substance, not just style. Above all, Independents will never trust the Republicans again; Republicans can never be counted on  to do what they say. We will never give the Republicans control of the system again.

The last time this happened was when the Whig Party self-destructed prior to the Civil War. The Whigs had controlled British politics and American politics as long as anyone could remember. It was when Lincoln and others bolted and became Republicans that the Whigs went bye-bye. That will happen in the next decade.

I have personally been conflicted for many years. I grew up in a Democratic family and my father was a member of a union. But, for the past thirty years I could not identify with the Democrats and generally hold them in contempt. But, I feel personally betrayed by the Republicans in a way that I cannot either forgive or forget. In every aspect of our life, they have comprised the common good for their own personal interests. Their rationalizations are typical of the drug dealer who says meth is ok if taken in moderation. Right!

If you are stupid enough to give Wall Street and its financial institutions your money ever again, you deserve what you get. And, if you elect a Republican Party operative, particularly if he or she is an attorney, political science or history major, ,journalist, you deserve what you get.

Shakespeare was right.

The public option in health care reform?

In general I am appalled at the lack of understanding of the hydraulics of the health market, being articulated by those charged with reform. One device being floated as a possibility is the public option, or its half-sister, the state-run co-operative.

Let’s start with a basic assertion that health care costs have been rising faster than the rate of other goods and services. This has priced millions of people out of the market, diverted precious capital from wealth creating export industries to health care. Assume for the time being that this cost trend is dangerous and unacceptable; also, put aside your pet theory on why costs have risen, whether it is malpractice suits or greedy anesthesiologists. What is is. The challenge is to do something about it.

By way of analogy, let’s say you are going out to buy a new car and find prices too high and quality too low. You can read consumer reports and jump ship and buy a foreign car. But, would you blame the current situation on Ford Credit or GMAC, the financing arm. These are mere financial intermediaries set up to grease the system and help manufacturers sell cars.

Let’s jump over to health care. What on God’s green Earth leads you to believe that you can solve the chronic problems of rising health care costs by focusing on the insurance companies? Do you really think they play any role in making hospitals or doctors more productive and higher quality.

Now, the most often cited reason for setting up a public option and putting the screws to the insurance industry is overhead. Admittedly overhead in most insurance companies is 25%, but overhead in the average hospital is at least 25% and for doctors offices it is 40%. A logical extension of the argument is that government could eliminate the overhead in every aspect of our lives. They could take over Walmart and GM and every private business with a chain of value added products from the extraction of raw materials, manufacturing, wholesaling and retailing. Each step in this process has both overhead and profit for the party charged with the activity.

We all know from experience that government is the last party you would turn to in these matters. Government is the reason very little of Katrina and stimulus funds have never been dispersed. But government wastes immense amount on everything it touches and has admitted the Medicare and Medicaid programs have massive fraud and inefficiency.

The harsh reality is that even if they could somehow run a public option insurance company, the entire effort is misdirected. It has to focus on the supply and demand actors in the market and not the financial intermediaries. Please understand, I think financial intermediaries such as insurance companies are parasitic; their executives need to be bound in duct tape, taken out behind the wood shed and taught a lesson.

But, to  be successful we must focus like a laser beam on select aspects of the health care system to be successful. Let me predict what will happen based on the path we seem destined to take.

The political/legal/media establishment will bring 30 million more people into the system at a cost of $1 trillion. This steroidal injection is inflationary and the slope of the health care trend lines will increase and we will soon be at 20% of GNP and 18% of our workers employed in the health sector. The overall economy will not recover and at some point someone is going to wake up and realize this is a recipe for disaster.  By then, a new batch of lawyers will be representing us in Congress and they will set about to tackle rising costs just about the same time as a tsunami of unfunded liabilities ($36 trillion) to take care of the baby boomers hit the beach. First, they will equalize private sector payments with Medicare fee schedules and then begin to ratchet down until providers scream bloody murder.

Providers will be given a false choice: they can either accept the reduced fee-for-service schedule or consent to capitated contracts. This will shift the risks onto the backs of the doctors and hospitals. It will be very painful and usher in an era of organizing to adapt, cope or resist on the provider side. In the end hospitals will go broke and some doctors will throw in the towel. There will be shortages and implicit rationing. Government is never going to explicitly ration, they are going to leave that dirty task to the doctors. The docs will know if they don’t pare back services, they won’t make their numbers. They will make it happen, no matter how painful to the patient.

I would like to tell you there is one big thing we could do that has been overlooked. But, it’s not that simple. In my book, Health Care 2050, I outline 13 strategies that work in concert to reform the system. It includes cooperatives, but real, member-owned co-ops, not state run collectives. And it does attack the problem of the insurance industry, not by white-wash, but by eventually replacing traditional insurance with health futures contracts.

I feel the approach being proposed right now is an instrument at the macro level which will only cause blunt force trauma. It totally lacks finesse and is designed to march us down the road towards serfdom.

What is needed is a nuanced set of disciplining forces applied to the health care that will be continuously applied over time and ,first, halt, then reverse, the current trends. It took us over 50 years to dig the hole we are in and I would be pleased if we halted the slide down the slippery slope in the next ten years. Then, we can reverse the cost curves and see how far we can get. Only if we are successful can health care become an export industry that creates wealth for the United States and helps the World. Otherwise it will continue to be societal overhead and a failed market six degrees from efficiency.

Should we be optimistic or pessimistic? Well, Americans tend to try everything before they do the right thing. We fight wars and go through a six-pack of generals before we finally hire that one Black Swan who can get the job done.

What is at the heart of this problem is the incapability of the people involved to understand how the system works and how to fix it. It’s like your car breaks down and you go into an office building and drag the receptionist out to repair it. Lawyers get almost no economics training in college and doctors and insurance agents are fundamentally illiterate on this matter, also. Yet, the people who lord over us and are given the power to make these determinations talk with great certainty that they know what needs to be done. They remind me of the Holiday Inn adds that suggest just sleeping in one of their hotels will allow you to do complex things. You and I know that running a Chinese restaurant is hard and the health care system is orders of magnitude greater. We’ll get there but it is going to be a forced march.

Obama’s Nobel Prize as a form of currency

Between the American Revolution and the Civil War, there were two commodities that functioned as a form of currency because they could be readily .exported into the international markets: cotton and animal furs. It was also the time of the Yeoman farmer and pigs, which were raised by the hundreds of thousands and herded to market in the Fall. Cattle did not ascend in importance until after the Civil War.  In fact, in the South, corn was primarily raised to feed pigs, generally  not consumed by humans directly. The value of pigs was pegged to the cotton mercantile exchange in Memphis using a formula.

I think the Nobel Prize awarded to Obama will be pegged to whether his administration accomplishes anything. If he succeeds its value will increase. If he fails,  its value will bottom out. So, the Committee has tied its own fate to the fate of Barrack Obama.

Its analogous to the situation where you get your degree from a college that subsequently goes broke and is closed in later years. What’s your degree worth coming from a defunct institution when cows are grazing on the campus.

In little ways we tie our own fates to others. The success of the corporation determines to some degree our marketability. GE executives have historically been highly valued.K-Mart–not so much.

The value of everything is  relative and conditional.

http://www.lonetreeconsulting.com

How socialized is health care already?

Like a mantra, the opposing forces within health care assert that reform will socialize the system. Well, I’m here to tell you that health care is already a highly socialized economic sector; it has been for years and is as much the fault of Republicans as Democrats. How so?

1. First, by its very nature health insurance socializes risk. The healthy pay for the sick. A large pool is better capable of dealing with the inevitable $1 million dollar claims than a small employer pool. Less than 15% of the population is truly at risk in a market based system and they will be billed 27% more for the freedom. Many will declare bankruptcy or fail to pay their medical bills, transferring the burden to someone else.
2. All of the ideas being bantied about, such as eliminating pre-existing conditions, guaranteed issue, prohibitions against raising rates, community rating and the like all socialize risk. When you force a health plan to take on risk, such as a pre-existing condition, you are transferring risk and costs from one person to the group.
3. The way we pay premiums is socialistic. You don’t just pay the premiums for you or your family’s health insurance. No, a tax of 2.9% is levied on your payroll to fund Medicare, which is under-funded by $36 trillion dollars. This is a transfer from the working young to the elderly. And, it is applied to illegal aliens with a phony SSN.
4. Approximately 5% of your income goes to State taxes and a large percentage of this flows into Medicaid, which is funded 50/50 by the state and the feds. So an equivalent chunk is paid for by the federal income taxes you pay–likely 10% of your income in total. This is to pay for the poor and reform means the threshholds will be increased. It is outright income transfer and socialization.
5. It is expected that anyone making up to 300% over the federal poverty rate (about $40,000) will be eligible for subsidies on their health insurance and that this will cost all of us at least $1 trillion dollars.Not to mention the penalties on your taxes if  you don’t buy insurance and the $6,000 to $8,000 of your annual income that you will have to shell out for health insurance if you don’t already buy. Forget that you are young and healthy; this is the group that will be expected to pay for the poor, chronically ill, older working adults and others. Its called wealth transfer and socialization.
6. The list goes on and on and on with veterans, and others whose insurance is paid for and the risk socialized through transfer payments.
7. When you go to buy an automobile $1,500 of the price is for health care for the guy who assembles it. But since many of the components come from downstream suppliers who also pay for their employee’s health costs it is likely double or triple that amount. Health care costs are imbedded in everything you buy and passed through to you.

If you were to do a statistical regression, I don’t know what you would find. We know health care is 16% of GNP, on its way to 20%. But, since the elderly, poor, and many others don’t pay at all, their portions are funded by transfers from the haves to the have-nots. So, by-and-large that 16% burden of the GNP is being transferred onto the backs of less than half the population, and that is the people who are gainfully employed at any given time. I would guess that it’s the old 80/20 rule where 20% of population, those who work, are funding 80% of the risk  and costs of the system. If you’ve got better numbers, I’m all ears.

Health care has been on a slippery slope down into a canyon of socialization since after WWII. It is the new implicit right and entitlement graciously handed out by a rich and indulgent society.  It has very little to do with the fact that doctors and hospitals are paid on a fee per service basis. If they were accepting capitated payments, like in an HMO, they would have more risk shifted on to them and that is, of course, where all this inevitably leads when the government runs out of money. It is not so much rationing care as rationing the money. The doctors and hospitals will have to take on capitated contracts and they will be expected to do that rationing quietly, in the course of their practice, without making waves.

The issue is not that we socialize risk but the degree of and who do we transfer the costs– from who to whom. Right now, before any so-called reform takes place the system is heavily socialized. And, the intent is to socialize it even further. Lack of market disciplining forces always leads to inefficiencies and largesse and health care has plenty of both. I don’t expect it to change but it would be nice if the people talking about this socialization issue would get past their denial and call a spade a spade.

Dealing with politicians on health reform

Watching the sausage-making process of health care reform in both the U.S. House and the Senate, brings into sharp relief the following:

1. When markets such as health care fail, rational economics is replaced by the donny-brook of politics. Whether during the times of depression, recessions or inflation in an economic sector, the champions of the free-market must understand this is the penalty  they will pay for letting organic natural evolution occur without early intervention and remediation.  You don’t hear a clarion call for a take-over of the market for I-Pods, do you?
2. The normal players in supply/demand, such as the consumer and doctor have been pushed aside as a mob of lobbyists and special interests clamor to influence the situation politically. It ranges from chiropractors who want to be on the provider list to insurance companies who want protection. The compromise will ultimately prevent health care from ever being an efficient market and will likely make things worse. You can expect health inflation to accelerate as $1 trillion is injected for the uninsured and $36 trillion of unfunded liabilities come due for the baby-boomers.
3. The very notion that we would make the health care system more efficient( so as to free up savings to take care of the uninsured) has been bastardized in the typical fashion you would expect from government and a bunch of lawyers. There is no talk of strategic cost management along the value chain the way business must do to compete. Instead we talk about fixing prices, rolling back reimbursement, eliminating insurance company overhead. This is why no matter how tough the times, government cannot become more efficient. In the end, health care will cost much more than $1 trillion dollars and inflation and unfunded liabilities will wash over the system like the waves of a tsunami. Being the chumps we are, we will once again turn to the perpetrators of the destruction of the market to save us. If we do, we will get what we deserve.
4. The very thought that we would turn to financial intermediaries such as the health insurers to create competition and save money is absurd. If you find the cost and quality of a GM car out of line, you don’t turn to GMAC to fix the problem. You either buy a car from another manufacturer like Honda or Toyota or walk. The health insurance companies are money-changers and have little or no ability to make the health care system more efficient and of higher quality. They never did and they never will. In the end, we will return to the need to reform the efficiency, quality and productivity of health providers on the supply side and to make the consumer more rational and sensitive.
5. The longer health reform waits the more painful the result will be. It’s easy to watch Blue Cross lay off a few hundred employees but you watch the political fall-out when hospitals are getting closed and doctors exit the field. The fact is that health care should be 7% to 9% of our economy and only employing 5% of our workforce, not 16% of GNP and employing 14% of the workforce. By the time we stop the out-of-control locomotive (assuming it doesn’t derail in the meantime) health care will be at 20% of GNP and health care employment will be 18% of the workforce.  After we transition unemployed autoworkers to become nurse assistants, health care employment and services will both be viewed as an entitlement like some socialistic country. It will be necessary to pare that back to a lower level. Even at 8% of the workforce, which I think is 3% points too high,  we will have to migrate 10% of our workforce into some other area. By then, disruptive technologies will be impacting school teachers, government workers and all manner of folks who occupy perches in the old economy and will no longer be needed. An unemployment rate of 25% will be the new normal and that won’t count the people feeding off government transfer payments, chronically unemployed and no longer looking.
6. We can always allow our denial to overtake us and pursue the Chinese strategy of Wu-Wei: Do-Nothing. Business-as-usual will result in the United States having no wealth creation capability and we will import our food, clothing, shelter, autos and Christmas decorations from third world countries orchestrated by corporations domiciled in Dubai. We will be arbitraged and aggregated into the poorhouse as our supposed loyal agents in government and big business sell us into de-facto slavery and we are marched down the road to serfdom. Work will not set you free in an environment without jobs! In an economy where we trade dollars with ourselves, the middle class disappears and the gap between wealthy and poor widens. We become a passive culture sitting around waiting for the “Big-One” or for a “Perfect-Storm” from the convergence of multiple events. Natural disasters, terrorism, pandemics, economic collapse, and other threats(if they were to converge) will have the power to take us down. You don’t need to re-read Gibbons to know this; we all  know it from high school history. The wealthiest, most powerful nation can be brought down by Black Swan events and our enemies are counting on it.

At this point in our discussion, you are probably looking for a bottle of Scotch or that box of razor blades you bought at Wal-Mart last week. Don’t do it! There is hope.

I believe that the promise of change will come, but not from some charismatic lawyer with a silver tongue. It will also not come from the emergence of some spiritual leader such as Ghandi or Martin Luther King. It will come from the bottom-up as people of Independent minds begin to communicate with each other using the Internet and other new forms of media. We will cast aside the journalists, politicians, communicators who have not truly been serving as our loyal agents. There will be an annealing and collective consciousness emerge that is practical and concrete and based on the principles first articulated by our founder.

Even if you love the words I write, it is your words, your expressions, even if it is giving someone the middle finger when you don’t like what they say that counts. But you don’t have to be vulgar or become violent.

Now, some would urge you to get involved, buy a CB radio, take on a moniker like a truck driver or biker and start broadcasting fire and brimestone. I say No, that what we should be doing is SHUNNING these people; turning our backs on them; refusing to shake their hands and generally being silent when  they speak. I guarantee you that if 300 people turned their backs on the politicians holding their phony-town hall meetings to sell their schemes; and it we walked out and got in our cars and drove away, the politicians would get the word in a way that no amount of shouting would impart. Try it. Shunning trumps Ghandi.