United States of Insurance

Leave a comment

The United States government has become the largest insurance company in the world.
Its citizens are among the most heavily insured people in the world. We are insured for many aspects of our lives, from our life itself to other people’s mistakes.

Some insurance fees we pay directly. These include insurance against getting old, Social Security and Disability Insurance, insurance on our health, home, car and mortgage. Some insurance fees are indirect in that the cost of that insurance is passed on to us in the price of a product we buy or income to us is reduced by these fees.

Examples of the first type of indirect insurance are “mistake” insurance, malpractice and liability. A business pays a fee to protect themselves in case they make a mistake. Those fees are passed on to us in higher prices.

Unemployment and FDIC insurance are examples of the second type of indirect insurance.
Unemployment insurance is a based on a percentage of the wages paid by an employer to an employee. An employer typically reduces the wages that it can pay an employee by that amount. FDIC insurance is a fee charged to banks to protect savings against bank failure. The bank reduces the interest it can pay on a savings account to offset the fee. Like individuals, businesses pay for many types of insurance, passing the cost on to their customers in the form of higher prices.

There is another indirect form of insurance in the form of taxes paid into a general fund.
We are insured against poverty in the form of SSI and food stamp programs, whose payments come out of general Federal and State tax revenues.

How have Federal and State governments become so heavily involved in the insurance business? With the passage of the Social Security Act during the 1930s Depression, the Federal government entered the annuity insurance business – sort of. Annuities are a type of insurance where a person pays premiums over a period of time and, at the end of that period, begins collecting payments from the insurance company. Insurance companies invest the premiums paid in order to make the payments at a later time. The Federal government, on the other hand, spends the premiums received each year, relying on future premiums to make payments. If our Federal government did not spend the premiums each year, Social Security would be more like an annuity program. Since the premiums are spent, it is a Ponzi scheme.

With the introduction of the Medicare and Medicaid programs in the 1960s, the Federal government stepped into the health insurance business. Unlike private health insurers who charge higher premiums for those with higher risks, the government charges higher premiums based on a person’s ability to pay higher premiums. This premium pricing system is most often used by those in the protection racket.

Ponzi schemes and protection rackets eventually collapse. What can we do? Elect representatives who are willing to make a transition to a valid business model. Elect representatives who will support a new law giving them a legal fiduciary duty to the voters and taxpayers. Without that duty, our elected reps have no responsibility to the public or liability for their actions other than the prospect of losing their jobs. They can enact laws and make promises with impunity. We, the voters and taxpayers, pay the price.

Indicators

Leave a comment

We read of lagging, leading and coincident economic indicators like the unemployment rate, housing starts and retail sales. In a Congressional hearing, somber Fed Chairman Ben Bernanke recites a litany of indications as he looks into his murky crystal ball to hesitantly forecast the future. In a 5/19/09 WSJ “Currents” article, Justin Lahart explains what some of these indicators are. And there are cool pictures.

State Spending

Leave a comment

The downturn in the economy has spawned budget battles in many states. California’s budget woes have been getting a lot of press but other states face crises.

In Minnesota, Republican Gov. Pawlenty and the Democratic legislature have been at odds over measures to balance the budget. Here is a blow by blow account of warring budget priorities and resolutions.

Per capita state spending varies far more than the differences in the cost of living. We might expect New York’s per capita spending to be more than that of Colorado since it is more expensive to live in New York. Bank Rate’s cost of living calculator shows a 31% cost of living difference between Denver and New York City. But, as this Tax Foundation table of 2007 state spending shows, New York spent 78% more per person than Colorado.

Is it the density of the population that contributes to the increase? Apparently not. Florida, near the top of the list of states with the most population, spent less than Colorado.

18 states spent less than $5000 per capita in 2007. 17 states spent between $5 – $6,000. The remaining 15 states, Minnesota among them, spent more than $6000 per person. Minneapolis is only 7% more expensive to live in than Denver, but Minnesota’s per capita spending is 40% more than Colorado. Must be all that extra snow removal and lake maintenance in Minnesota.

Medicare Reimbursement

Leave a comment

In anticipation of the annual announcement of reimbursement rates for Medicare patients, pundits have been warning of a tsunami of hospital bankruptcies once the new rules were implemented. Last year marked a transition to a new cost coding system, one that some feared would significantly reduce reimbursements to hospitals.

On May 1st, CMS published the proposed reimbursement rules (NPRM) to take effect Oct. 1st of this year. Analysts at the independent Congressional agency, the Medicare Payment Assessment Commission, or MedPac, dug into the 1228 pages of data and found only minor changes, and a slight reduction in per patient case rates. Colorado hospitals will see a slight increase.

As Edward Berger reports at MassDevice.com, MedPac found that Medicare reimburses hospital 6 – 8% less than the cost of care. Higher private insurance reimbursements offset this negative impact. In the ongoing debate about public vs private insurance, this would seem to reinforce the opinions of those who say that a greater presence of public insurance and below cost reimbursement rates will close hospitals, force doctors out of business, and reduce the availability of medical care.

However, Berger writes “MedPAC research shows that the hospitals with the highest private insurance margins have the highest Medicare per-case costs; those that can’t achieve high private-payer margins have lower costs across all classes of payer – with no discernable impact on quality.” If this assessment is true, public insurance is achieving an efficiency normally associated with a competitive marketplace, causing hospitals to examine their operations and find cost efficiencies while maintaining the same level of care.

75% of nursing homes’ revenue comes from Medicare and Medicaid. When Medicare reduced their payments in the late nineties, a number of nursing homes went bankrupt. Due to the weak economy, many nursing homes were worried that there would be no annual reimbursement increase.

On May 12th, CMS published their 110 page set of proposed rules, specifying a 2.1% increase in Medicare reimbursement rates effective October 1st. While not as large as the 3+% increase of last year, it is an increase in an economy with a negative year over year CPI cost index.

Tight state budgets may impact Medicaid reimbursement to nursing homes. A more complete analysis of the Medicaid fiscal environment can be found here from a CPA at healthlawyers.org.

Health Care Reform

Leave a comment

In a 5/12/09 WSJ op-ed, Scott Gottlieb, M.D., a former official at the Centers for Medicare and Medicaid Services, criticized proposals for a health care system based on Medicare.

Medicare uses “its purchasing clout and political leverage to dictate low prices to doctors”, paying doctors 20 – 30% less than private plans pay. Although some advocate a public insurance option to cover the uninsured, Gottlieb (and others) predict that a public insurance plan will be less expensive and thus drive private insurers out of the market.

The lower reimbursement rates of a public health insurance plan will prompt doctors to take on fewer new patients with such a plan, a practice that is already occuring with Medicare patients.
Dr. Gottlieb writes “Government insurance programs also shift compliance costs directly onto doctors by encumbering them with rules requiring expensive staffing and documentation,” an onerous paperwork burden that adversely affects the 60% of doctors who are self-employed.

Medicare’s “fee for service” model is flawed, rewarding physicians for providing more care, not better outcomes.

This op-ed prompted a number of replies from other physicians. A California neurologist wrote that Gottlieb’s contention that Medicare pays 20 – 30% less than private insurance was “dead wrong.” He noted that “some insurance plans pay 5% to 10% more than Medicare rates” but the extra reimbursement is accompanied by “aggravation and overhead expense of dealing with private insurers and their patchwork of unfathomable private plan coverage, co-pays, deductibles, exclusions, required pre-authorizations and delays.”

At a high school reunion two years ago, I spoke with a classmate who had recently shut his practice down after 20 years to work for a company where he could spend his time seeing patients and doing research. “In my own practice, I was spending more of my time talking to case managers at insurance companies and managing the business that I was seeing patients” was his complaint.

A dentist wrote to the editor at WSJ saying that curtailing fraud, the introduction of electronic records and a single payer system would produce small gains. The biggest cost efficiencies would be the reduction of payments to doctors and hospitals, forcing many doctors to leave the field and hospitals to close. “Why should a bright, young, prospective medical student [spend] 10 to 15 years of additional education and training to do a job that pays piece-work wages, as an employee of the government.”

At my annual physical, my doctor at Kaiser enters a few salient facts, checks on a chronic condition, enters a few recommendations into the computer terminal in the exam room and he is done. My lab results are online. I may get an email from my doctor with a comment on a particular result.

When I got into an accident a few years back, there was no wasted time filling out a medical history. With little fuss and bother, I was able to get x-rayed and temporary treatment at one location, then get follow up care at another location. X-rays were digital and both they and my medical history were available to any practitioner at Kaiser. All of the people I came in contact with knew my history. Why can’t it be like that for everyone?

When we took our cat to the emergency room, we got a CD and an online link to test results and x-rays. We were given an access code to the data so that we could share the information with our regular veterinarian. Why can’t we treat people like we do our pets?

Unemployment

Leave a comment

Chris Wilson at Slate.com has produced a county by county animation of employment gains and losses over the past two years. You can play the two year animation or click on a month in the series, then click on your county and look at the year over year gains or losses for that month.

Age Discrimination

Leave a comment

In a 3/11/09 WSJ article, Jennifer Levitz and Philip Shishkin reported on an Equal Employment Opportunity Commission release showing that “age-discrimination allegations by employees are at a record high, jumping 29%” from year ending Sept 2007 to year ending Sept. 2008.

To avoid these lawsuits, companies have been adopting a tactic they don’t like, one which unions have long endorsed – layoffs by seniority. Last one hired is the first one fired.

In a 5/19/09 WSJ article, Dana Mattioli reports on this new age discrimination against younger workers, who often have little recourse under the law. Seniority based layoffs are easier to defend against age discrimination allegations.

Younger workers usually cost a company less money and can help their case by losing any “high maintenance attitudes typical of younger workers.” Make yourself more valuable to the company by expressing a willingness to crosstrain in another department.

Health Care Tax

Leave a comment

In a 5/19/09 WSJ article, Janet Adamy reviewed various schemes that the Senate Finance Committee is considering to pay for changes to the health care system.

In 2008, the “government gave up $194.2B in revenue due to health care tax breaks.” This tax subsidy was the largest single group of subsidies, 8% of total government revenues of $2.5T. Companies can deduct health insurance premiums for their employees and, in many cases, employees pay their share of the premiums in after-tax dollars. Max Baucus, Committee chairman, said repeal of the exclusion is not being considered.

Several proposals, however, aim to eat away at the exclusion. One proposal eliminates tax breaks for the cost of health plans above a certain value, with the health plan for federal employees serving as a benchmark. A second proposal cuts tax breaks for high income earners making more than $200K, if single, and $400K, for couples. A third proposal is a combination of the first two. Other proposals being considered are various taxes which would promote a healthier lifestyle, including higher alcohol taxes and a new tax on drinks with sugar.

The cost of the rebuilding the health care system has been estimated at $1.2T over ten years. The money has to come from somewhere.

Leveraged ETFs

Leave a comment

In this blog I focus on economic trends and data that will have an impact on our lives, and in a broader way on our investments. As such, I don’t usually go into the particulars of investing in stocks or bonds. However, I will give a word of caution on a particular type of investment – leveraged ETFs. I recently read that some financial advisors are including these in the portfolios of their clients. These products are suitable short term strategies but be cautious before using them as a core holding.

What is a leveraged ETF? For that matter, what is an ETF? It is a basket of stocks, much like a mutual fund, except that it trades like a stock. Typically, one buys an ETF like you would a stock, in whole lot multiples of 100 through a broker. Like stocks, one pays a commission every time one buys or sells.

What is a leveraged ETF? A basket of trading instruments, lets call them, that seeks to either double or triple the return of a particular index of stocks. You can bet with the index or against it. Since ProShares introduced these ETFs a few years ago, they have become quite popular.

The Ultra series of shares seeks to capture 200% of the upward movement of an index. If an index goes up 5%, an Ultra ETF will go up 10%.The UltraShort shares seek to capture 200% of the inverse movement of an index. If an index goes up 5%, an UltraShort ETF will go down 10%.

Sounds simple but, over time, the percentages can work against you. Let’s look at an example. SPY, or Spdr S&P 500, is a popular ETF that is a basket of stocks that closely tracks the movement of the S&P 500, an index that comprises the market weighted prices of the 500 biggest companies in the U.S. I will compare SPY, the PowerShares UltraShort S&P500 (SDS), and the PowerShares Ultra S&P 500 (SSO).

For simplicity sake, I will round to the nearest dollar. On Jan. 5th, 2009, SPY was at $93, SSO was at $28, and SDS was at $67. Fast forward to 3/9/09, a low point in the market not seen in over a decade, when SPY was at $68. That is a 26% decline from the $93 price at the beginning of January. Let’s look at SSO, which should have gone down twice as much as SPY. On that same day, it closed below $15, an approx 48% decline. That is not exactly twice, but close enough. SDS, the short or inverse ETF, should be up twice the 26% loss suffered by SPY, or 52%. On that day, SDS closed at $115, a gain of almost 60%, more than what we expected. If you had bought SDS on Jan. 5th, you would be singing the “greens” on March 9th.

Let’s continue on. The stock market rallied from that low. On this past Friday, SPY was at $89, gaining back all but 2% of what it had lost since Jan. 5th. SSO should be down about twice that, or 4%, but we find that it closed at $24, a 14% decrease from its Jan. 5th price of $28. If SPY has decreased 2% since Jan. 5th, then SDS should be up 4% since then. But SDS closed at $61, a 9% decline from its Jan. 5th price of $67.

What happened? As long as there is a consistent market direction, up or down, these leveraged ETFs work for an investor. If the market seesaws, the percentages work against the investor.

Due to the popularity of 2x leveraged ETFs from PowerShares, a company called Direxion came out with 3x leveraged ETFs late last year.

Underwater

Leave a comment

In a 5/6/09 WSJ article, Ruth Simon and James Hagerty report on current housing values after the release of industry results for the first quarter of 2009.

Across the U.S. 19% of mortgage holders are “underwater” or “upside down” – they owe more than their house is worth in today’s market. This is more than a 50% increase in the number of underwater borrowers since the end of 2008. According to one company that tracks this data, “more than one in 10 borrowers … owed 110% or more of their home’s value at the the end of last year.” Las Vegas homeowners have been hit the worst. Zillow.com estimates that over 67% of mortgage holders there are upside down.

Why wouldn’t a bank holding a mortgage agree to write down some of the principal on the mortgage? Let’s say a homeowner with a job is struggling to stay current on a $300K mortage on a house that is now valued at $240K. If the bank forecloses, they will probably sell for closer to $200K and will have expenses for legal fees, maintenance, fix-up and taxes. Wouldn’t it make sense for the bank to at least write down half of the $60K principal difference if that would mean the bank could avoid foreclosure?

The answer is – wait, sit down first. The loss on a foreclosure is a long term loss on the bank’s loan portfolio that can be spread out over several years. A write down in principal on the mortgage is an immediate loss that affects the bank’s bottom line this year. John and Mary Homeowner may have lost their chance to avoid foreclosure because of an accounting rule.