401K

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In a 5/6/09 WSJ “Fund Track” article, Jennifer Levitz reviewed proposed changes to 401K retirement plans, which are the primary savings for 60% of workers.

One proposal is a listing of 401K fees on investors’ statements. A second proposal is a more automatic access to retirement plan participation. Obama’s budget “calls for the future establishment of a program in which all workers would be automatically enrolled in employers’ retirement plans.” There would also be a mandate for those employers without retirement plans to “enroll their employees in a direct-deposit individual retirement account.” Employees will have the choice to opt out of these plans.

Some industry proposals would limit equity investments in target-date funds. These funds are supposed to change their investment mix to be more conservative as the current date approaches the target date, when an investor presumably needs income from the fund. These funds are used for retirement and for college savings. This bear market revealed that some funds with target dates of 2010 had 60% of the fund in stocks, an inappropriately aggessive mix that prompted large declines in value as the stock market sank.

Other industry proposals are greater tax incentives for workers and employers who participate in 401K plans, and the creation of government insured annuities that would provide a dependable source of income for retired workers.

Health of Health Care

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In a 4/23/09 WSJ article, Vanessa Fuhrmans reports on the health of the country’s health plans.

Wellpoint, the largest insurer, lost 2% of its subscribers since December. It ascribed the larger than expected 1/2 million subscriber loss both to layoffs and workers who are declining coverage under their employer’s plan. United Health Group, the second largest insurer, reported a subscriber loss of 900,000 in the first 3 months of 2009.

The Kaiser Family Foundation estimates that the U.S. Census Bureau figure of 45.7 million uninsured in 2007 has grown to about 50 million uninsured. In a nation of 300 million, that is a 1 in 6 ratio. Of the estimated 9M people who have lost coverage since December 2007, Kaiser calculates that 3.6M have enrolled in Medicaid and other public health programs.

A Kaiser Family Foundation study of Medicaid fees from 2003 – 2008 shows that Medicaid pays physicians only 72% of what Medicare pays. In 2008, the average Medicaid reimbursement for the most commonly billed procedure, a 15 minute office visit with an existing patient, was $38. If you have a stopped up toilet, it costs $75 – $100 for a plumber to run a snake through the toilet bowl.

As the boomer generation nears retirement, swelling the ranks of both Medicare and Medicaid patients, should we be encouraging young people to become plumbers instead of doctors?
The Association of American Medical Colleges reported that the average educational debt of indebted graduates of the class of 2007 was $139,517. The site link is a student doctor network with a message board that you can read, but not post or comment.

Energy Bill Rush

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In a 5/6/09 WSJ article, Stephen Power and Greg Hill report on the progress of the climate bill. Without specifying details, President Obama informed Democrats on the House Energy and Commerce Committee that he “wants a bill that eases costs imposed on consumers and businesses, creates a predicatable set of rules, and addresses concerns that some regions of the country could shoulder disproportionately heavy costs.”

Obama plans to auction off CO2 permits and use the proceeds to fund middle class tax cuts. Representatives from the Rust Belt and the coal states are pushing for free permits for some industries in their districts. Texas lawmakers want free permits for oil and gas refiners.

Democrats and Republicans are arguing with each other and among themselves over the provisions of this bill. Henry Waxman, the Chairman of the Committee, may bypass what will probably be a contentious subcommitte vote in order to meet the President’s request that the bill get to him by Memorial Day.

Part of the bill will be a “cash for clunkers” provision, offering up to a $4500 rebate for people who buy cars that get at least 10 mpg more than the older car they are driving now. Car dealerships, particularly GM dealerships, could use a big stimulus.

A 1/27/09 US News article reported that “General Motors has 6,375 dealerships in the United States. Its closest rival, Ford, boasts less than 3,800. Toyota, the world’s largest automaker, claims less than 2,000.”

In a 4/27/09 article, Bob Golfen at SpeedTV reports that “General Motors will close half its dealerships nationwide by 2014 and cease Pontiac production next year, according to an “undated viability plan” offered Monday by GM to the U.S. Treasury Department. “

If you are planning on using that rebate to get a new GM car this summer, call first to make sure the dealership is still in business.

Bird Cage Bedding

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USA Today, the most popular daily newspaper in the U.S., reported a 7.5% decline in paid circulation in the past 6 months. Only the Wall St. Journal (WSJ) has reported a subscriber increase, although it was a slight 0.6%. This put the WSJ at over 2M subscribers, just 30K less than USA today. The New York Post and the Atlanta Journal-Constitution both fell about 20%.

“The [New York] Post, like many newspapers, has increased newstand prices as publishers come under increasing pressure to ratchet up revenue as their ad sales drop.” This process, a cyclic self-destructive market mechanism, is contributing to the steep decline in the number of newspapers. Until the newspaper industry can construct a viable model for profitability, newspapers will continue to close.

Does the world need newspapers? No. Does the world need more opinion articles? No. Does the world need professional reporters? Yes. They are our watchdogs, our synthesizers of current events. They sit through interminable state and federal hearings and give us, the readers, the short version. They read pages of budget projections and state and federal agency rulings and give us the “Cliff Notes” version. They ferret out scandals brewing in government and industry and raise red flags. How will those reporters get paid if there are no newspapers?

Small Business Lending

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In a 5/5/09 WSJ article, Raymund Flandez focuses on the market for small business loans.

In February, 35% of new SBA loans of the most popular type were sold on the secondary market, up from 24% the previous month. Before the crisis in September 2008, 45% of these loans were sold on the secondary market.

At GovGex.com, where these loans are bundled and sold, bids for these loans have more than doubled since mid-March, when the Obama administration made a pledge to use $15B of taxpayer money to free up the secondary market in these loans. The government is guaranteeing as much as 90% of some loans. Before that pledge, the market for these loans had all but dried up, with volume totalling on $7.8M. Since then, volume has rocketed to over $67M.

Loan applications have more than tripled at Small Business Loan Exchange, an online marketplace which matches up borrowers with lenders.

Government Loan Solutions follows the SBA market closely and reports that the delinquency on the most popular SBA loan was 6.18%, the second highest rate in 10 years.

Peer To Peer Lending

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In a 4/28/09 WSJ article, Jane Kim reviews the market for peer to peer (P2P) lending. Several companies provide a platform to bring together those who need money and those who have some extra.

A borrower fills out an application, stating their financial information, the amount of money they need to borrow and why they want the money. The P2P company verifies the identity of the borrower and pulls a credit report but doesn’t verify employment. Most of the companies have some minimum FICO score, a commonly used credit grade, that all borrowers must meet. The company then posts the loan request and investors bid on it.

LendingClub.com, PertuityDirect.com and Prosper.com are three companies using this model. At an average interest rate of 13 – 17%, borrowers can often get a better rate than using a traditional credit card.

At LendingClub.com, the delinquency rate was 4 – 5%, about the same as for credit cards. For investors, this is a way to earn more interest on their money. As always, with higher return comes higher risk. The P2P company makes its money by taking a fee on the loans.

Lawyer Layoffs

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The legal practice has long been thought to be recession proof.

According to the Bureau of Labor Statistics “Lawyers held about 761,000 jobs in 2006. Approximately 27 percent of lawyers were self-employed, practicing either as partners in law firms or in solo practices.”

In a 4/14/09 AP article in the WSJ, “more than 3000 lawyers have been laid off in the first three months of 2009.” That figure is low, including only layoffs reported by the top law firms.

The Labor Department reported that, in 2008, the number of unemployed lawyers jumped to a 10 year high of 20,000. “Law students graduating with jobs this spring are being paid to delay their start date.”

Mortgage Mirage

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In a 4/14/09 WSJ article, Ellen Schultz recounts several heartbreaking tales of seniors losing their homes. Many lived on meager fixed incomes. Some had paid off their mortgages before unscrupulous mortgage brokers presented them with a “solution” to cope with higher medical expenses, taxes and other living expenses.

The American Bar Association puts out a free booklet of legal advice for families. In Chapter 9
they present some sage cautions regarding contracts:
“Fill in all the blanks! A contract with your original signature but containing blank spaces can be like a blank check if altered unscrupulously.” Some homeowners in the above article were bitten by this scam.

A homeowner taking out a mortgage whose payments escalate at a later date may not examine the contract closely after signing it, when the payments are affordable. A closer scrutiny at a later date may be too late.

“A contract produced by fraud is not automatically void. People who are victimized by fraud have the option of asking a court to declare that contract void, or to reform (rewrite) it. On the other hand, if they went along with the contract for a substantial period of time, they could lose their right to get out of it. This is called ratification, and is based on the idea that they have, by their actions, made it clear that they are able to live with the terms.”

“A contract can be canceled by a court because of fraud when one person knowingly made a material misrepresentation that the other person reasonably relied on and that disadvantaged that other person. A material misrepresentation is an important untruth. In many states, it doesn’t have to be made on purpose to make the contract voidable.”

Even if you know you were lied to, can you prove fraud? “Fraud requires an outright lie, or a substantial failure to state a material fact about an important part of the contract.” “Actual fraud that will invalidate a contract is a lot less common than people think.”

A well worn phrase may be more than just a rule of thumb but a legal precedent. “‘Caveat emptor’–‘let the buyer beware’–is a strict rule placing the risk in a transaction with the buyer.”

If all else fails, you may still have a chance of some legal remedy. “Courts have a powerful weapon called unconscionability . . at their disposal. Unconscionability means that the bargaining process or the contract’s provisions ‘shock the conscience of the court.'” However, “the courts are reluctant to use this weapon, but consumers have a better chance with it than anyone else.”

In handling my elderly parents’ affairs the past two years, I was surprised at the amount of mail solicitation they received that was targeted specifically to retired people. These included a variety of fixed income solutions from annuities to reverse mortgages. Some were legitimate, some smelled fishy. There were investment opportunities of many forms – in real estate, in stocks and bonds, in gold and other commodities. There were many offers for supplemental medical insurance.

The majority played on two real fears that older people have: what if I run out of money, and what if something bad happens? The marketing departments at companies large and small know these fears and cast their mail campaigns like large trawler nets. It’s up to us to be smart little fishies.

Medical Records

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In a 4/30/09 WSJ “Currents” feature, Laura Landro examines the state of medical records at the nations hospitals. Only 1.5% of 5000 U.S. hospitals have full electronic records. The most widespread adoption of electronic records are in lab results where 77% of hospitals show full adoption.

In every other category – medication lists, nursing assessments, doctors notes, diagnostic tests, drug allergy and dosages – adoption is less than 50% of hospitals. Approximately a third of hospitals have started to implement digitization of records.

The Federal Government has “earmarked nearly $20B in stimulus funds ..for hospitals to use electronic records by 2011.” Starting in 2015, the Feds will progressively reduce Medicare reimbursement to those hospitals who haven’t made the switch to digital. For a 500 bed hospital, that could mean a $3.2M yearly loss. By 2015, a hospital could get an additional $6M annually for a fully implemented system.

Part of the problem is the cost of implementing this shift to electronic records. “Hospitals say they haven’t been able to afford the cost of the systems, which range from $20M to $100M.” A disadvantage of these systems are that they are proprietary, making it difficult or impossible for one hospital to share information with another.

A solution is an open source software system, “VistA”, already in place at the Veterans Administration (VA). The downside of this system is that it accomplishes its task, recording and coordinating medical information, but does not have a billing or financial function, which must be added on. Software vendors who sell proprietary systems say that the cost of implementing the VA system with billing and financial add-on modules adds up to about the same cost as a fully integrated system from one of the software vendors.

Recent start up companies which specialize in adapting the VistA system for commercial use dispute that. Medsphere implemented a VistA modified system, “OpenVistA”, for Midland Memorial Hospital in Texas for less than $7M. It’s chairman, a former undersecretary at the VA, says that the OpenVistA system “can be installed in one-third of the time and at one-third the cost” of proprietary systems sold by McKesson and Cerner.

What is the benefit for patients? Lower medication errors and deaths, lower rates of bed sores, and a 88% drop in infection rates, Midland discovered after 18 months of using the new system.
I worked in a large NYC hospital for 6 years, in x-ray, medical records and the ER. Reading the handwriting of some doctors is a learned art, and a mis-reading of a word can be critical.

Some doctors and nurses will resist the change but change it must. As the “Boomer” generation matures, the load on the medical system will increase. Hospitals around the country are fighting a number of challenges to stay viable. Non-profit hospitals have long been a public/private partnership. Now is the time for a public investment in hospitals to achieve some long range goals.

Freddie Mac

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In a 5/1/09 WSJ article, James Hagerty reported that Freddie Mac, the quasi-governmental mortgage giant, has designated a $1.3M retention bonus for its human resources director, Paul George. This is equal to the bonus that Fannie Mae, the other mortgage giant, is paying its new CEO, Michael Williams. In 2008, Mr. George’s compensation package was $2.3M.

As I noted in an earlier blog, the majority of employees at Freddie Mac and Fannie Mae have been offered retention bonuses. Presumably, the Federal Housing Finance Administration (FHFA) regulator that oversees these two companies feels that such a retention policy is needed to keep many employees from abandoning ship. Why was Mr. George paid so highly?

“Freddie has had a spotty record of executive recruitment in the recent years,” Hagerty notes. Freddie tried for several years to find a replacement for their CEO and has been looking for a CFO since September of last year.

On April 22nd, David Kellerman (bio), the acting CFO, committed suicide. After working for 16 years at Freddie Mac and rising to the position of corporate controller, Mr. Kellerman became the 4th CFO at Freddie Mac in six years. He earned $1.2M last year and was scheduled for a retention bonus of $850K. Although Congress is conducting an investigation into the company, Mr. Kellerman was not the subject of any inquiry.

Freddie Mac is unable to recruit executive talent. A long time employee commits suicide for no obvious reason, leaving a wife and young daughter behind. The majority of employees are offered retention bonuses to stay with the company. Congress is conducting an investigation into the company’s finances. Taxpayer money continues to be shoveled into this hole.