A Simple Health Care Plan

HR 3200 is everything and the kitchen sink. Thus I thought I would present a simple Health Care Plan in just seven slides. It does not include any Governmental Panels, Agencies or the like. Yes, it does include a Government Insurance Management Board, to set the minimum coverages and make certain the Insurers are following the rules, you can't trust anyone, especially Insurance Companies.

Well here goes:

Step 1, Principles: The plan has the following core principles. It is a plan that covers everyone and has no exclusions and is purchased by every person and is thus portable. It is a national plan and has no state control. It is akin to life insurance but it has aspects of auto and house insurance. I know my left wing adversaries will yell foul as only they can but this can work.



















Step 2, It has a Minimum Plan and it Allows Anyone to Buy Up: The plan has a minimum Core Package. The Core Plan has both catastrophic coverage and has a primary care element. We want to keep the costs low so this Core Plan follows a CCE, Comparative Clinical Effectiveness, set of guidelines. You sign up for this Core Package and you then have to go generic and follow CCE. This is the lowest cost option. You also have an out of pocket and a deductible. Thus there is some modicum of financial incentive. Of course if you cannot pay then it gets subsidized. Then if you want more you can buy up.



















Step 3, How do we Get the Costs Down? Well we follow the steps we proposed a week ago and the costs are reduced for the 2008 numbers as follows.



















The percent numbers are shown below so that they are scalable.



















This is a 30% cost reduction. The view below assist in seeing it by target area.



















Step 4, Applying the Target Cost Reductions we see we can reduce the cost per person from what it is today of some $7,200 per year to just over $5,100 which is a 30% cost reduction. This we show below by cost area.



















We have applied our plan to the costs as they were in 2008 and we have achieved the cost reductions by areas as shown.

Step 5, the Revenue from the subscribers is as shown below and it matches penny for penny what the costs are.



















Thus we have a simple straightforward plan which has no overt costs other than what the Government decides its wants to reimburse people for. The plan costs total out of pocket what it costs for auto insurance per car in New Jersey. Since every person has a car the costs per person out of pocket is that amount. The other amounts for the insurance payments are additional and would have to come from their own resources and that may mean from their employer. I have avoided the tax issue but frankly the money should be taxable based solely on a fairness principle, but we avoid the discussion here.

So why cannot our wonderful Congress come up with something this simple?

Some Medicare Comps

The following two charts are some useful medicare comps. The first shows the change in Medicare Pars A, B, and D from 2006 to 2007 looking at the annual rates of increase net of inflation in the expenditures. Notice that the total shows a great increase since the drug plan was introduced and cost $47 Billion! Clearly this was a massive increase in benefits and one that was never anticipated in the original plan and one never planned for with contributions to the insurance plan itself.

The addition of Part D was not carefully analyzed and has caused the greatest rate of increase in Medicare. The Physician increase is larger than the hospital part and this is substantial. One can look at later years and see the projected increases in Physician payments would be reduced net of inflation and population growth. The hospital rates are still a concern however.



















The second chart shows the rate of increase on 2007 alone for these same three areas but now comparing Medicare and Non Medicare. The comparison between these two is interesting since Medicare in this period paid Physicians more than did non Medicare plans.



















All of this begs the question we have been asking which is how does one control costs. We believe that just capping rates is like putting a bandage over a melanoma! It still will kill you. You must understand the problem and remove it in its totality. The removal demands an understanding of the root cause which has not yer been addressed.

Money Isn't Everything

I am a reader of Prof Mankiw's blog and there are times I agree and times I disagree. But today there was a comment that I just down right disagree with, for it is classic elitist. He says:

"the above graph, showing that kids from higher income families get higher average SAT scores. Of course! But so what? This fact tells us nothing about the causal impact of income on test scores...The key omitted variable here is parents' IQ. Smart parents make more money and pass those good genes on to their offspring...."

As to the above statement I disagree, I strongly disagree. Having been involved in the early days of the MIT Minority Student program, "MITES", in the summer of 1974, and having taken on many of the students from that program over the years, having seen their careers, grow and succeed. having gone to their weddings, attended the funerals of their parents, I saw in them the same challenges that I had going to school in New York City fifty years ago where I was denied admission to Columbia University because I was a Catholic. These minority students came from poor homes, and their parent were poor not because as Professor Mankiw alleges they were dumb. They were poor because of circumstance. When I was at MIT, not Harvard, we had many first generation students, and the typical SAT score was 1500 or higher. That was when 1500 was a real hard number to get. And yest they were 800 Math and 700 Verbal.

Thus Prof Mankiw's allegation that only smart people make money and thus that is why there is a correlation, one misses the point that many smart people have dumb offspring, the list is too long to even mention, and many more poor people have very smart children! If Professor Mankiw had a little experience in genetics, alas my day job, he would better understand the emptiness of his allegation.

As to my students, many were immigrants, many from single parent families, and where are they today. Physicians, running their own international businesses, and major investment bankers in South Africa, a real challenge. I am proud of those students, and we stay close. What characterizes all of them is that they went into business, with the exception of the physicians, and they created jobs for many thousands of others. They did not hide in the halls of academia. According to Prof Mankiw they should never had even had the chance. Pity they went to MIT, did get the chance, and are giving back to many by creating jobs, the only way to truly create value.

Health Care Costs: Look at the Facts

As we look at health care costs they are just like the costs in any other business enterprise. You can see them growing and the issue is why. Regrettably politicians and Congress specifically just are incapable of digging down deep and ascertaining what the problems and and how to fix them. First a general observation may be of some value.

The two segments of our economy which have costs growing well beyond inflation are health care and education. All of our other segments, the private ones, have increasing productivity. Someone should ask why. The general answer is increased regulation. In higher education there are more and more administrators whereas the faculty to student ratio is constant. In fact there are frequently fewer faculty. There are just more staff, and to do what, fill out forms and meet Government mandates. We know that health care administration is the fastest growing sector as well.

Now to several facts. First the expenses. We show these below for 2007.



















Here we see hospitals have 31% of the total and physicians have 21%, and these are the top two totalling 52%. Drugs are just 7% despite the cry that they are a major factor. Nursing home care and home health care currently represent 10% of the total.

Second, the rate of growth of these expenses is large. We show this in the following Figure.



















Presented this way these rates look frightening. Home health care and administration stand out. This should be a concern. Administration is 7% of the total costs and frankly they may be greater since there are administrative costs hidden in physician costs.

Fact 3 is that if we subtract inflation and population growth numbers some areas are showing productivity gains and others stand out. We show these below.


















Presented in this manner we see that home health care. hospital care and physicians still stand out above the norm. The reasons must still be determined. One must remember that hospitals get almost half of their income from Medicare and Medicaid and these are highly controlled to DRGs, diagnostic related groups, and thus it is generally more difficult to have inflation if the Government is directly controlling costs. In addition and on the negative side there is an increase in uninsured which does drive up ER costs.

Fourth, physician costs are dominated by specialists as we show in the following Figure.



















Fifth the specialists costs a greater deal, usually twice, what the internist does and there are many more of them as shown below.



















We show this also in the Figure below:



















But it still leaves us with the question regarding physicians; is it their salaries which are increasing, their overhead, the number of procedures, the cost per new procedure, the technology of the procedure, and so on. There is also the question of whether the costs have provided more benefit in terms of outcomes to the patient, the often heard cry for health care reformers. We argue that it will require digging down deeper into the details to determine this and the the following Figure presents a paradigm to do so:



















The total costs are readily broken down on a per person basis by disorder, its frequency, the medical service required, the processes per service and the costs per process. To date we have seen no such analysis from the Government and several private groups have done some preliminary work but not to the level required. This analysis is the necessary first step in both determining what is wrong in health care and what can be changed.

The problem is simply stated; reduce costs while maintaining or increasing the positive outcomes. This is unachievable until we first solve the above simple problem. It is just data gathering and the ultimate responsibility is the Governments, but they seem to have no ability to address this issue. As an aside, even getting the data from the Government web sites is near impossible. In contrast we have the financial data from the St Louis Fed site being sine qua non in ease of access and ease of use. The St Louis Fed is somewhat of a Government entity but then again it is in St Louis and not Washington.

The Following Show the Problem

There are two graphs that show what the problem is and will be.

First the ratio of Debt Held by the Public to GDP from 2000 thru 2009. This is below:



















Second is the ratio of Debt Held by the Public to GDP from 2007 thru 2018. This is shown below:



















Now despite the 9/11 attack, the two wars, the tax cuts and every thing that the economists have bemoaned about Bush II we have a ratio kept around 30%. It does not grow until the financial or banking crisis hits. Then in the current Administrations proposals it explodes to almost 70% which is more than 2 time what it has been. Why is this happening. We have already paid out the financial funds, Medicare and SSI is NOT included in this debt since that is Intragovernmental and is another set of numbers. So why!

In addition once you get started there is no way given the economics brainpower in Washington that they ever can put a stop at even 70%. Things always overshoot. One must read the CBO report to better understand, but I feel the CBO is optimistic at best.

The CBO states:

"The dramatic expansion of the deficit in 2009 (up from 3.2 percent of GDP in 2008) results from a projected rise in outlays of 24 percent (the largest percentage increase since 1952) and a drop in revenues of 17 percent from last year’s levels (the largest percentage drop since 1932).

Those changes have largely been the result of the severe economic downturn and the fiscal impact of federal policies enacted in response. On the basis of tax collections through July 2009, CBO expects federal revenues to decline by more than $400 billion from last year’s total. Revenues are projected to be 14.9 percent of GDP, nearly 3 percentage points below the 2008 level (see Summary Table 1).

Although CBO anticipates declines in almost all sources of revenue, the decrease is largely attributable to the drop in receipts from individual income taxes (which are expected to fall from 8.1 percent of GDP to 6.5 percent) and corporate income taxes (which are estimated to decline from 2.1 percent of GDP to 1.0 percent).

Outlays will rise by about $700 billion this year, in CBO’s estimation. Much of that increase results from legislation enacted in calendar year 2008 in response to turmoil in the housing and financial markets—in particular, $133 billion for the Troubled Asset Relief Program (TARP) and $291 billion for the estimated costs of placing Fannie Mae and Freddie Mac into conservatorship.

CBO expects that total spending in 2009 from funding provided by the American Recovery and Reinvestment Act (ARRA, Public Law 111-5) will reach about $115 billion."

Thus we have decreasing revenue and increasing financial commitments to Government programs that went south. This is NOT a problem from banks, nor is it a Medicare/SSI problem, it is a problem resulting from legislation.

The CBO echos our concern:

"Both in dollar terms and in relation to the size of the economy, the imbalance in the budget projected for 2009 is significantly larger than at any time since World War II. At $1.6 trillion, the expected deficit for this year will be nearly three and a half times the size of last year’s deficit of $459 billion. As a percentage of GDP, the 2009 deficit will be almost twice as large as any deficit in the past 60 years."

One of the major problem areas is the GSE, the Fannie and Freddie problems. The CBO states:

" Beginning in 2009, CBO is accounting for the GSEs’ operations in its budget projections by computing the present value of anticipated cash flows using an appropriate discount factor that recognizes the riskiness of those cash flows. On the basis of projections of the entities’ assets and liabilities over the long term, CBO estimates that including their operations in the budget will increase the federal deficit by $291 billion this year and by about $100 billion cumulatively between 2010 and 2019."

The second major drain is the Stimulus package which the CBO says:

"In February 2009, the Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT) estimated that the American Recovery and Reinvestment Act of 2009 (ARRA, Public Law 111-5) would increase deficits by $787 billion over the 2009–2019 period. About $575 billion of that 11-year total would stem from increased outlays and $212 billion from reduced revenues.1 For fiscal year 2009, which ends on September 30, CBO estimated that the net impact on the deficit would be $185 billion—a reduction of $65 billion in revenues and an increase of $120 billion in outlays. CBO has not completed a comprehensive update of its original estimate of the stimulus package. Indications to date are that, in total, the budgetary effects have occurred at about the pace CBO anticipated when it prepared its initial estimates."

The CBO then seaks of Medicare and SSI:

"Spending for Social Security, Medicare, and Medicaid will have to be controlled to achieve a sustainable fiscal situation in future decades. Last year, outlays for those three programs combined (not including offsetting receipts) accounted for about 9 percent of GDP. Spending for those programs is expected to rise rapidly over the next 10 years, outstripping the growth of GDP. By 2019, such spending is projected to total nearly 12 percent of GDP. Under long-term projections recently published by CBO, spending for those programs would continue to rise and could total almost 17 percent of GDP by 2035 if no changes are made to current law."

The dominant driver is the assumed explosion in Medicare due to organic health care costs increases. Again we remind the reader that as of now Medicare has been over funded by the recipient and SSI exorbitantly overfunded. The problem is Medicare organic unit health care cost increases. The real problem is that the Intragovernmental accounts will be exploding on top of these Debt in Public Hands accounts as well.

The real set of problems is the Stimulus and the GSE support. The remaining stimulus should be withdrawn, it is essential since it will drag down the economy. We have argued this since day one. Second the GSEs should be privatized, slowly but they must be taken off the books of the Government and kept off. These two simple steps will dramatically reduce the debt to GDP ratio.

Broadband in Massachusetts

In the Boston Globe today it was announced that the Commonwealth submitted a request for $105 million of Federal Funds. The Globe states:

"The Massachusetts Broadband Institute filed its request for the funds on Aug. 14....The agency wants to spend $100 million to create a fiber-optic data network that would reach into 43 western Massachusetts communities .......the network would be used by municipal governments and would sell access to private companies.....which in turn could sell broadband services to households and businesses.... state estimates the project could ....... bring high-speed Internet service to more than 20,000 households..."

We had performed several feasibility studies in this area and reading what is published raises several issues:

1. We estimated that the all in costs per HH exclusive of franchise costs was $3500. That means for 20,000 HH one would expect the all in costs as $70 million. Thus what is the other $30 million for?

2. What about a franchise. The state seems to be providing a backbone. But once you put something on a pole you need a franchise, the major barrier to entry for Verizon, especially with Comcast. So is the State exempt, nice try.

3. One should remember the Big Dig, starting at $2 billion and going to $20 billion and still not done. So why think this will ever get completed.

4. Also think Mass Port Authority or Mass Turnpike. If a business wants transport from the Mass Broadband what do they think the Mass Broadband will do any differently from any other Mass agency.

5. The comments indicate that Verizon may sell off the western Mass properties. As we have argued for seven years that is their strategy. Why keep copper if you are no longer in the business. Mass has just done Verizon a favor, they gave them the excuse to leave.

6. If you are building a commerical real estate property the first thing you better do is get an anchor tenant. Who is going to do that function?

7. If Mass is doing the backbone who puts all the other stuff there like drops, installs etc and what are the terms of the transport agreement and what remedy does a seller have. Most likely none.

So if you liked the Big Dig you will love this one as well.

CBO and the Exploding Debt

The CBO issued its report today regarding the Government's debt problems. Here are some highlights and comments.



















First the estimates of the GDP and Publicly Held Debt as shown above. There is an assumption of substantial GDP growth and the Public Debt just continues. There is not word about the Intragovernmental Debt which is Social Security and the like. One must remember that the Government takes those funds, spends them, and then owes itself. There is at this time 40% of the total debt being intragovernmental, almost half. If we assume that that ratio continues one must remember that this debt held by the public is only 60% of the total debt!



















Now the above shows the annual change. The Debt change is explosive for the next three years and on an ongoing basis stays above the rate of growth of the GDP. That is an UNSTABLE process. Clearly the White House is not focusing on solving the long term problem.



















The above chart shows the debt held by the Public to the GDP and it is growing to almost 70%. Also remember that when you add the Intragovernmental Debt it raises this another 60% to a total of 130%! That will cause a collapse of the system. No one seems to be paying attention. This will destroy the economy.

There are several assumptions here which are worrisome:

1. The growth rates of the GDP may be overestimated. Given the money taken from the economy it is highly questionable if any entrepreneurial creation of value will occur. Between the taxes and the funds flowing into Government programs it will tend to wipe out the private sector.

2. There is not accounting for inflation. The only good news is the reappointment of Bernake but the Democrats in the Senate will have at him for reasons which I cannot fathom other than its Washington.

3. Who is to finance this debt and under what conditions. There could be private calls coming into to Treasury saying that the sovereign wealth funds are just not interested.

There are also a plethora of other concerns but this is a start.

Epictetus, Barney Frank, Health Care and the Stoics

As one sees the debate on health care proceed, one is reminded of Epictetus and the Discourses. There is an interesting discussion in the Discourses II.121-17 where Epictetus tells his followers how to debate the layperson. It may help in today's debate. I was reminded of this when I viewed the Representative Frank debate. He and I may not agree on may things, yet I have found him to be one of the best legislators for his people, exceeded only by Senator Robert Byrd. He is from Bayonne, NJ, just over the Bayonne Bridge from my birth place, a place I cycled to many times.

He has that New York edge which seems to do him well in politics but perhaps Epictetus would help him in his debates:

Epictetus says:

"Our Stoic authorities have been quite precise in specifying the knowledge necessary for engaging in discussion; but we are quite untrained in our proper application of it. Give us a layman as our interlocutor and we are at a loss in dealing with the person. Having stirred him a little…we are unable to handle him further, and either we abuse him or mock him, saying:
"He's a layman; it is impossible to deal with him."

Yet, when a real guide finds someone going astray, he leads him to the right path instead of mocking or abusing him and going away. You yourself then should show him the truth, and you will see that he does follow; but as long as you don't show him, don't mock him, but rather be aware of your own capacity.

How did Socrates Act?

He made a habit of compelling his interlocutor to be his witness, and did not need another witness…because he exposed the implications of that person's concepts so clearly that whoever it was became aware of his inconsistencies and gave it up…

Socrates did not say:

"Define malice for me."

and then when it had been defined respond with words;

"A bad definition, for the definition is not extensionally equivalent with the thing to be defined."
Laymen find such technical jargon tiresome and difficult. But we can't give up. Yet, we are quite unable to stir them when we do use terms that enable them, by focusing on their own impressions, to respond yes or no. Understandably, then, at least those of us who are cautious recognize our inability and give up the matter. But when the impatient ones, who are more numerous, are involved in it, they get flustered and cause fluster, and finally walk away, after an exchange of abuse.

The first chief thing about Socrates was that he never got worked up at a discussion, never uttered anything abusive or aggressive, but put up with others abuse…What then? Well the thing isn't very safe, especially in Rome…"

Just switch Washington for Rome.

Medicare Facts in Anticipation of CBO Report

The CBO is to issue its report on August 25th on the increased deficit of some $2,000 Billion. In anticipation we want to state a few facts about Medicare and SSI.

In a recent Trustee Report from Medicare SSI the authors Trustees first state the definition of the funds:

"There are four separate trust funds. For Social Security, the Old-Age and Survivors Insurance (OASI) Trust Fund pays retirement and survivors benefits, and the Disability Insurance (DI) Trust Fund pays disability benefits. (The two trust funds are often considered on a combined basis designated OASDI.) For Medicare, the Hospital Insurance (HI) Trust Fund pays for inpatient hospital and related care. The Supplementary Medical Insurance (SMI) Trust Fund comprises two separate accounts: Part B, which pays for physician and outpatient services, and Part D, which covers the prescription drug benefit."

Now the report presents the following chart:

The issue is the concern regarding the explosion of Medicare, the HI and SMI terms. In a recent CBO Report on SSI they show a chart on SSI alone which is even more dire as shown below.

Here they are showing an even more explosive growth of SSI. These two will meet in the report to be issue on the morrow and all together these will set the scene for a battle on the exploding Government debt.

We wish to provides a few statistics regarding Medicare herein so that people can deal with the facts and not the politically motivated scare tactics.

Fact 1: What is Contribute to What by Whom? The following is the table which represents what we currently contribute from our salaries to SSI and Medicare. The following are percentages of gross income contributed by the employer and employee.

Employees: OASI-5.30 DI-0.90 OASDI-6.20 HI-1.45 Total-7.65
Employers: OASI-5.30 DI-0.90 OASDI-6.20 HI-1.45 Total-7.65
Combined Total: OASI-10.60 DI-1.80 OASDI-12.40 HI-2.90 Total-15.30

The total is 15.3% of the gross salary is contributed to these programs. 12.4% to SSI and 2.9% to Medicare. It is clear that SSI is substantially higher than Medicare and since Medicare is increasing due to health care costs one would suspect that this amount should increase. But by how much.

Fact 2: The over 654 population is growing as a percent of the total. This is shown below.



















We will grow from 12% to just over 20% and almost two fold increase. This is less a longevity issue and more a demographic issue. We just are not having enough births and not enough immigration. There are several ways to address this. One is to move the age limits up to keep the percentages below say 15%. The other is to double the taxes.

Yet is must be remembered that people have contributed and as to SSI their contributions have already paid for their SSI. Thus either solution only addresses a problem created by Congress who already spent the money. Getting more money will never solve the problem of an entity which will spend whatever it can get its hands on.

We have already begun increasing the SSI age yet we have not addressed the Medicare age. This is the main issue.

Fact 3: In SSI only 78% of the payment go to contributors. The following chart depicts the SSI payouts.



















And SSI payments have remained at or below inflation, about 3% per annum. SSI payments are controlled by the Government and there are no exogenous factors such as are the case in Medicare. We show this below.



















Fact 4: SSI has no exogenous drivers whereas Medicare does. Medicare has been increasing as a percent of GDP whereas SSI has not. We show this below.



















This is the curve which the Trustee report is concerned about. This is data up to 2008. Note that Medicare is approaching the same percent GDP as is SSI and it is increasing faster. In addition note that we as employees contribute only 25% to HI as we contribute to SSI. Thus SSI is well funded going forward if one looks at the demographics, not the Trust fund which has already been raided, but on a going forward basis HI has a problem.

Fact 5: The Medicare Funds are fine for the next ten years but the long term demographics will cause problems. The drivers of the problems are twofold. First the slow growth of GDP as compared to health care. Second the lowering of the employee bases in terms of value added. Namely there will be more service and government employees and fewer people creating value, such as entrepreneurs. The following chart depicts the next ten years of Medicare.



















Thus the concern is not just one of lowering health care costs, nor one of moving age limits upward, but one of creating a growing economy.

H1N1 and CDC Guidelines

The CDC issued guidelines for H1N1 immunizations. They state that the following should be the first to be immunized:

"When vaccine is first available, ACIP recommends that programs and providers administer vaccine to persons in the following five target groups (order of target groups does not indicate priority):

• pregnant women,
• persons who live with or provide care for infants aged <6>
• health-care and emergency medical services personnel,§
• persons aged 6 months--24 years, and
• persons aged 25--64 years who have medical conditions that put them at higher risk for influenza-related complications.¶

These five target groups comprise an estimated 159 million persons in the United States. This estimate does not accurately account for persons who might be included in more than one category (e.g., a health-care worker with a high-risk condition). Vaccination programs and providers should begin vaccination of persons in all these groups as soon as vaccine is available."

Then in their data analysis they show the following chart:


One should note that the highest incidence is the over 65 group. This is also highest mortality. Is this perhaps the new Medicare Plan, just let them get H1N1?

China's GDP Growth

The newspaper China Daily announced today an anticipated GDP growth of 8.5% for Q3 2009. The article continues:

"China's gross domestic product will grow about 8.5 percent in the third quarter from a year earlier, picking up from the second quarter's 7.9 percent pace, a government think-tank said on Friday.

The bullish forecast comes against a background of anxiety in world markets that Chinese growth might falter as a boom in fiscal spending and bank lending peters out.

The State Information Center (SIC) said growth in bank credit would "normalize" in coming months but warned that any abrupt slowdown in lending would leave many State-backed projects unfinished and result in a new crop of non-performing loans.

New lending will rebound to about 500 billion yuan ($73 billion) in August after shrinking to 356 billion yuan in July, the official China Securities Journal reported."

This is in a manner good for the US allowing China to continue to finance its customers but bad for the US because soon China will be able to stand alone. This growth is despite the US downturn.

Comparative Effectivness and The President's Weekly Address

In the President's weekly address today he said:

"And we’ve all heard the charge that reform will somehow bring about a government takeover of health care. I know that sounds scary to many folks. It sounds scary to me, too. But here’s the thing: it’s not true. I no sooner want government to get between you and your doctor than I want insurance companies to make arbitrary decisions about what medical care is best for you, as they do today. As I’ve said from the beginning, under the reform we seek, if you like your doctor, you can keep your doctor. If you like your private health insurance plan, you can keep your plan. Period."

The problem is that the section on Comparative Clinical Effectiveness in the bills is really establishing and institutionalizing a Government entity to specify what procedures to perform when. There is a great deal of benefit from CCE studies. As I have written before this process goes on in the medical profession on continuing basis. For years I have taken the semi-annual tests from the NEJM/Massachusetts Medical Society reviewing hundreds of paper for annual CME credit. It forces you to remain current in terms of what you may not see on a day to day basis. It looks at one study after another yet from year to year they change and from physician to physician they have varying levels of acceptance. The existing CCE process is the publishing of reports, looking at at hand clinical data and responses, and interacting with peers.

I have just read the book by Dr. Newman at Columbia P&S entitles Hippocrates Shadow and it is both well done and enlightening. It is a treatise if you will on what can go wrong with CCE especially if done by the Government. Newman gives a multiple of examples where physicians differ amongst themselves when diagnosing a disorder as well as what the best way to proceed is. Most physicians recognize this from the beginning.

The President most likely does not understand the details here and those proposing this fall it appears in two camps.The first camp are those who see this as a way to control costs, getting the "best" procedure and having everyone avoid spending money on procedures which have no benefit. The second camp are the academic physicians who have abstracted an ideal, the Platonic physicians if you will, and they feel that they can apply that ideal to all.

The reality is that the ideal just does not exist for very many reasons. I list a few:

1. No patient is like any other patient. People are different and as a physician you must understand and work around the differences.

2. Diseases are different even the same diseases. Pneumonia may not be the same in every patient and what one physician sees as pneumonia another may see as a pulmonary embolism, as Newman recounts.

3. Physicians make mistakes. True fact, they do. They most likely are not deliberate or due to incompetence but most likely due to some predisposition or lack of time to reflect. In a pressured environment of an office or an ER there is a continual flow of patients and the physician may just misinterpret or not see or hear a key element.

4. Patients never tell the same story twice. Patients are notorious for not telling all and telling too much of what is not relevant. They are scared and they are not trained observers. Even a physician as a patient does not get it right. Thus as a physician you are trying to get the trajectory of a moving target which is sending out chaff, a difficult task.

Thus the CCE model as proposed in the health care bills is in my opinion one of the worst elements. As the President has said, "...I no sooner want government to get between you and your doctor than I want insurance companies to make arbitrary decisions about what medical care is best for you, as they do today..." the only way this can be accomplished is to leave CCE in the hands of the Medical profession and NOT move it to the Government.

The President seems not to understand that people are reading the words of the bills and as they do so they see a disconnect from what he says and what is in writing. I am not saying that he is in any way misrepresenting the intent, he rightly seems to mean what he says, but someone should read what HR 3200 says and inform him, it does NOT say what he does.

Russia and Its View By The Rest of the World

Professor Richard Pipes has written a compelling article in today's WSJ. Before commenting on Pipes article I would like to make a few points on my perspective. I worked with Professor Pipes in the early 1970s when he was at Harvard and I at MIT and the both of us were Democrats, Massachusetts Democrats at that.

He is a brilliant man and brings to the perspective he has the experience from central and eastern Europe. He knows the world. Then in the late 1970s when I was part of the Comprehensive Test Ban Treaty negotiations with the Russians as part of the Carter Administration I got a close up view of the Russian mind. It is not the west, it is not Europe, it is not even central Europe. Finally in the mid 90s to 2004 I had developed and ran my company in Russia as well as other central European companies. I opened the market with a few credit cards and a bunch of plane tickets in my pocket, no big corporate names behind me, yet I did have knowledge of the Russian and a few Russian friends, good friends.

As part of that in the late 1990s I presented a paper to a meeting of the Russian Duma members suggesting that they put fiber along their pipelines and double dip on the revenue stream. Create what I called a Russian hub for world communications. This was the Russian Transit Switch proposal. Their response at the time was consistent with Pipes' perception. I spoke as an American, sensitive as I was, yet an American. They rebelled and I was castigated for telling the Russians what they should do, for they would make their own decisions and they did not want any one else, especially and American, telling them. Once that blunt fact came to me I knew how to move forward and henceforth had no problems.

The Russians are a proud and brilliant people. They are open and friendly and just want respect. They will tolerate a great deal, for they have long suffered from many things, yet they have a willingness to deal with strangers on a par much better than say the French or English. My broken Russian is much better received than my well phrased French, and God forbid my Irish name in London.

Thus the point that Pipes makes about the current Vice President is telling. He says:

"......the recent remarks about Russia by Vice President Joe Biden in an interview with this newspaper were both gratuitous and harmful. "Russia has to make some very difficult calculated decisions," he said. "They have a shrinking population base, they have a withering economy, they have a banking sector that is not likely to be able to withstand the next 15 years."...

These remarks are not inaccurate but stating them publicly serves no purpose other than to humiliate Russia. The trends the vice president described will likely make Russia more open to cooperating with the West, Mr. Biden suggested. It is significant that when our secretary of state tried promptly to repair the damage which Mr. Biden's words had caused, Izvestiia, a leading Russian daily, proudly announced in a headline, "Hillary Clinton acknowledges Russia as a Great Power."

Indeed this is how the Russians respond and react. For example the US push to have NATO move east is in the Russian mind a threat and in reality it lends no value to NATO. NATO is a vestige of the Cold War and its members, other than the UK, are weak and have focused more inward to their own economic interests rather than security threats from Russia. The deployment of missiles in the Czech Republic and Poland is another example of sticking it to Russia.

In a 1996 NY Times article the famous George Kennan wrote regarding the expansion of NATO:

"Such a decision may be expected to inflame the nationalistic, anti-Western and militaristic tendencies in Russian opinion; to have an adverse effect on the development of Russian democracy; to restore the atmosphere of the cold war to East-West relations, and to impel Russian foreign policy in directions decidedly not to our liking. And, last but not least, it might make it much more difficult, if not impossible, to secure the Russian Duma's ratification of the Start II agreement and to achieve further reductions of nuclear weaponry."

Pipes then makes a very telling observation:

"The solution of the puzzle lies in the fact that during their 1,000-year old history of statehood, the Russians have virtually never been given the opportunity to elect their government or to influence its actions. As a result of this experience, they have become thoroughly depoliticized. They do not see what positive influence the government can have on their lives: They believe that they have to fend for themselves."

In my experience the Russian problem is also in their use of words. As we speak of the Mexican use of Manana, portraying the sense of disregard for immediacy, the Russian phrase, Nyet problemi, no problem, portrays an even greater insight. The Russian phrase when used means the proverbial has hit the fan. It take the British tendency for understatement and moves it a mile or so forward. It is in my experience the embodiment of the Russian's disconnection from the system.

Thus Pipes has brilliantly captured the Russian mind and the continuing US diplomatic blundering in dealing with the Russians, in this Administration and even more so in the last. We just seem to have no understanding of the Russians, their importance, their culture and their future.

Pipes final comment is:

"For this reason, it is incumbent on the Western powers patiently to convince Russians that they belong to the West and should adopt Western institutions and values..... This will be a painful process, especially if the Russian government refuses to cooperate.... in the long run, it is the only way to curb Russia's aggressiveness and integrate her into the global community."

He is spot on with this recommendation. Russia must be integrated into the west. It will never be the democracy as we know it but it has all the elements of a major contributor to society and the economy. It must be respected and treated as an equal.

Now to the disappointment, not with Pipes but with how we have progressed as a society, namely American in the Internet age. One need just read the comments on the article to see where the American mindset is. First comments are raw, blunt, crass, and contain no thought. This seems to be the Internet world. They are anonymous, which engenders almost twelve year old bathroom humor. The comments also bring out another facet of the anonymous commentator, the ad hominem attacks, the viscous content free attacks. The Russians may have more concern about the comments than about Professor Pipes.

Focusing on Cost Savings

One of the tricks you learn when running and business and in seeking financing for new projects is that you must know the details of your projects and most importantly you must know your costs and how you will make money. Furthermore you must distill all of this down to one piece of paper which you can use as a "stage prop" in your pitches and guidance. The single paper must distill facts, numbers, strategy and execution all in one piece. It takes time but it is worth the effort. You can communicate with this result.

The current President has not yet reached that level. He appears to be still campaigning. As stated in a recent Financial Times article by Mort Zuckerman who states:

"We must learn from our history, specifically the birth pains of Medicaid and Medicare under Lyndon B. Johnson. His former policy aide, Joseph Califano, wrote about that experience. “No one had discovered MRIs, PETs, CAT scans, organ transplants, and exotic and expensive cancer chemotherapy. None of us anticipated the extraordinary leap in life expectancy that would lead Medicare to spend a third of its budget during the last year of a beneficiary’s life and Medicaid to pump an even larger proportion of its dollars into nursing homes. Now we are in the early days of a revolution in neurology, genetics, molecular biology, stem cell research, mechanical hearts and lungs, and domino transplants that promise all sorts of [costly] cures that don’t exist today.” In other words, we must be aware of the potential expense of medical discoveries and be cautious about congressional clairvoyance that claims it can project healthcare costs 10 years into the future."

Zuckerman criticizes the current President yet he targets Medicare as doe the current President. Why has no one detailed the specifics and then from the specifics laid out an action plan. The truth of the matter is that there are areas well outside Medicare that costs can be saved.

I have prepared a report detailing many of these areas. The attached Table is a summary of 12 target areas for almost $700B cost reductions and almost 30% of the current expenditures. Medicare is $400 B and only 17%. The last here is a summary, it is that one page statement of what can be done now.

Medicare and Some Data

Here are a few numbers regarding Medicare and the totality of health care costs. We use 2008 as a base year and round up all costs to $2.5 trillion.

Metric (2008)

Total Pop (000) ......304,000
Medicare PoP (000) ......45,221
Total Costs $000,000.000 ...... $2,500
Medicare Costs $000,000,000 ...... $454
Percent Medicare PoP ......14.9%
Percent Medicare Costs ......18.2%
$ per Medicare ......$10,046
$ per Others ...... $7,905
Lifetime Non Medicare ...... $513,838
Lifetime Medicare ......$120,555

Now some observations:

1. The Medicare patient costs on average $10,046 per year and since they live on average at most 12 years their total burden with 2008 care levels is $120,555.

2. In contrast the non medicare patient costs $7,905 per year and has a total burden till Medicare kicks in of $513, 838. This is five times the Medicare burden.

3. 15% of the population are on Medicare and 18% of the health care costs go to Medicare. Considering that Medicare patients are much older, by definition, this is not an unreasonable spread.

4. 40 million of the people who should have insurance do not, so as a back of the envelope calculation they cost about $320 billion per year, whereas Medicare costs $454 billion. However the Medicare patient has for the most part contributed to Medicare but the uninsured has made no contribution. In fact it is reasonable to assume that this pool of uninsured, due to desire or inability, may very well be more costly than Medicare. They are the ones with morbid obesity and they are the ones driving up the health care costs per GDP and they are the one hanging around in a chronic state of health. If choices should and must be made let us look there as well if not first perhaps. We truly need the wisdom of a Jonathan Swift to make things clear.

On the basic principle of fairness and equity, the person who contributed should receive before the person who has not. It is not at all clear if Congress and the Press have the slightest insight into the facts.

Medicare as the Punching Bag

In today's NY Times there were two op-ed pieces on Medicare. One from their erstwhile conservative voice and one from an author of a book.

Let me start by stating two facts:

1. Medicare is an entitlement because the people entitled to it paid for it. As we have demonstrated several times, the average worker in the US puts 65% more into Medicare than they will ever get out! Where does the money go, well Congress takes it and spends it. Medicare funding is NOT the problem, Congress is! On average a Medicare beneficiary lives 12 years and costs $12,000 per year. Then they die! So all of you young folks who cannot deal with facts get over your complaining about grandma! Yet as Douthat states:

"In this future, somebody will need to stand for the principle that Medicare can’t pay every bill and bless every procedure. Somebody will need to defend the younger generation’s promise (and its pocketbooks). Somebody will need to say “no” to retirees...That’s supposed to be the Republicans’ job. They should stick to doing it."

I guess Douthat wants to Republicans then to Kill Grandma! Well Mr. Douthat, the Medicare recipient just wants some portion of their contribution back! One could argue looking at Mr. Douthat that his BMI being a bit over the mandatory 25.0 should himself be paying those of us who are not there for the care he will require for his aberrant lifestyle. That old saying of people in "glass houses" and their "stones".

On the left side of the Times spectrum, well more likely in their center, a Mr. Dooling states:

"With so much evidence of wasteful and even harmful treatment, shouldn’t we instantly cut some of the money spent on exorbitant intensive-care medicine for dying, elderly people and redirect it to pediatricians and obstetricians offering preventive care for children and mothers? Sadly, we are very far from this goal. A cynic would argue that this can’t happen because children can’t vote (even if their parents can), whereas members of AARP and the American Medical Association not only vote but can also hire lobbyists to keep the money flowing."

Again, excuse me Mr. Dooling it is not your money but it was the money of the patient getting the care. I agree with the principles of advance directives and I have seen all too frequently the death of a loved one from a debilitating disease, cancer, and the like, and one recognizes that reasonable care is required. You cannot "save" a person with multiple brain mets from a malignant melanoma, or a colon cancer patient with massive ascites from the met to the liver or a prostate patient with hundreds of bone mets. You can hopefully minimize their pain. The question is what basis does Dooling have for the massive amount of "exorbitant intensive care". As I look at the data and examine the processes the evidence for such explosive costs of the elderly are not there.

2. The Dominant Costs in Health care are from Lifestyle Disease States

As Mackey from Whole Foods stated:

"Unfortunately many of our health-care problems are self-inflicted: two-thirds of Americans are now overweight and one-third are obese. Most of the diseases that kill us and account for about 70% of all health-care spending —heart disease, cancer, stroke, diabetes and obesity—are mostly preventable through proper diet, exercise, not smoking, minimal alcohol consumption and other healthy lifestyle choices."

Also Leonhardt states:

"The promise of that system is undeniably alluring: whatever your ailment, a pill or a procedure will fix it. Yet the promise hasn’t been kept. For all the miracles that modern medicine really does perform, it is not the primary determinant of most people’s health. J. Michael McGinnis, a senior scholar at the Institute of Medicine, has estimated that only 10 percent of early deaths are the result of substandard medical care. About 20 percent stem from social and physical environments, and 30 percent from genetics. The biggest contributor, at 40 percent, is behavior."

In the analysis of my recent Book I clearly make this point using data and projecting forward. The problem is not the old folks who have contributed to their Medicare twofold but the young fat folks who will have lifestyle disease well ahead of any 70 year old who has at best 7 more years of life.

The Press, on both left and right, seem to be at war with the old folks, their parents, those in Medicare. This is not going to end well.

US Telecom and the Business Press

In a recent article in the Economist the author states:

"Telecoms operators are seeing customers abandon landlines at a rate of 700,000 per month. Some analysts now estimate that 25% of households in America rely entirely on mobile phones (or cellphones, as Americans call them)—a share that could double within the next three years. If the decline of the landline continues at its current rate, the last cord will be cut sometime in 2025."

Well, so what! Verizon has a brilliant strategy with FIOS and its selling of its unprofitable properties. Let us briefly re-examine this strategy. We had presented it in 2002 in a paper we delivered to the White House staff. At that time we called it "The Imminent Collapse of Telecom" but it was the collapse of copper. It was not the collapse of the business.

The Verizon Strategy is simply three steps"

Step 1, Get Rid of the Junk:

Verizon is focusing on fiber and mobile, not copper. Thus in all markets which are not amenable to fiber, economically or otherwise, they sell it off. Look at Fairpoint, Frontier, Hawaii. Why keep something which is not consistent with the strategy.

Step 2, Build the Mobile Franchise

The mobile franchise is a valuable and growing franchise. When I was COO of NYNEX Mobile, a predecessor to Verizon Wireless, I saw and stressed the fact that mobile was not just a replacement for a wire but was a continual contact point with the customer. The management at the time wanted to keep the minute rate up and ensure a high ARPU. I, on the other hand, argued for penetration, even at lower ARPU because we could then expand services on the platform.

Step 3, Migrate to Low Cost Fiber

This is a simple step. Focus on markets that are profitable in fiber and build it out. Pay for this by selling central offices and have cash left over. Move to the multimedia business. Brilliant! Now instead of thousands of Central Offices and inefficient union technicians they move to two IP based hubs and use outsourced fiber optic techs. Their costs drop through the ground. Copper is higly unreliable in the long term. Fiber is glass, it lasts forever, unless cut, say by the unions as they are wont to do frequently in New York!

The critics on one I really do not get. Take for example the quote from the same article:

"Nonetheless Verizon and AT&T, its main competitor, are still mostly “wireline”, says Craig Moffett, an analyst with Bernstein Research. According to his calculations, both firms’ landline businesses generate more than 50% of revenues, and an even higher share of costs. The two firms and Qwest, America’s third-biggest landline operator, have already shed thousands of jobs and announced further lay-offs to cut costs. But the accelerating loss of landlines will put increasing pressure on profit margins, argues Mr Moffett, as the high fixed cost of running the network is spread over an ever smaller number of customers. It is also likely to lead to higher bills for captive customers such as businesses with switchboards, which cannot do away with their landlines so easily."

Moffett just does not get it. Verizon is dumping bad markets, rebuilding good markets, and using fiber to drive down long term costs while providing a platform which will control the electronic marketing and distribution channels of the future. They will be the only electronic shopping mall operator in their regions! Brilliant. Does Moffett not think that Seidenberg, who started his career as a craftsperson does not understand the costs of copper! He is a genius in strategy and Moffett appears just not to understand!

He continues:

"Even if Verizon and AT&T can overcome their “wireline problem”, says Mr Moffett, it will not go away. Most telecoms operators do not have a mobile business to fall back on. Fairpoint, a firm which took over some of Verizon’s landline business, is struggling. Hawaiian Telcom filed for bankruptcy in December, not least because it was losing landline customers at a rapid clip. Such a fate raises the question of what will happen to the industry’s huge unfunded pension liabilities. Taken together, the future obligations of AT&T and Verizon are as big as those of General Motors before its recent bankruptcy."

Two quick observations.

First, Verizon has dumped its junk on Fairpoint, Fronteir and Hawaii. The Hawaii case was one where it was purchase by Carlyle Group with Bill Kennard the former FCC Chair running it. So much for Washington insiders. Before it was taken over it was always a goldmine. New Management sent it down the tubes.

Second, the balance sheets, well if anyone looked they would see as we wrote a couple of years ago that Verizon for one is sitting on hundreds of billions of real estate! It is on the books at cost. They sell it off as they need it. Take 60 State Street in Boston. That alone could pay off the build out of fiber for the suburbs! Then there is the Back Bay CO and on and on! The real estate Mr. Moffett is not chopped liver, even in today's market.

Moffett is finally quoted as:

"The danger, says Mr Moffett, is that regulators will introduce new taxes on wireless and broadband services. Revenues from new services would then be used to keep an obsolete infrastructure alive—a recipe for lower growth. At that point, he says, the “wireline problem” really will be everyone’s problem."

Why in God's name would Verizon want to keep the copper! They are selling it off as quickly as they can and overbuilding at a similar pace. This makes absolutely no sense! Verizon, when it builds a FIOS system, closes down the copper. It is a quid pro quo!

Preventive Care: What Does It Mean

The CBO issued a report on the ineffectiveness of preventive care. The report states:

" Preventive medical care includes services such as cancer screening, cholesterol management, and vaccines. In making its estimates of the budgetary effects of expanded governmental support for preventive care, CBO takes into account any estimated savings that would result from greater use of such care as well as the estimated costs of that additional care. Although different types of preventive care have different effects on spending, the evidence suggests that for most preventiveservices, expanded utilization leads to higher, not lower, medical spending overall."

The NEJM article used as a reference by Cohen et al states:

"Indeed, some evidence does suggest that there are opportunities to save money and improve
health through prevention. Preventable causes of death, such as tobacco smoking, poor diet andphysical inactivity, and misuse of alcohol have been estimated to be responsible for 900,000 deaths annually — nearly 40% of total yearly mortality in the United States. Moreover, some of the measures identified by the U.S. Preventive Services Task Force, such as counseling adults to quit smoking, screening for colorectal cancer, and providing influenza vaccination, reduce mortality either at low cost or at a cost savings."

As they say, 40% is not chopped liver. Thus the outright dismissal of screening is a bit much. Let us continue to my favorite topic, Type 2 Diabetes. In the paper by Hu et al on Type 2 Diabetes in women the authors state:

"Our findings support the hypothesis that the majority of cases of type 2 diabetes could be prevented by the adoption of a healthier lifestyle."

In our analysis we have determined that Type 2 Diabetes results in a cost of about 12% of the total health care budget and furthermore the growth in health care costs as a percent of GDP is correlated to the increase in obesity and overweight with 99%+ correlation. This is a lifestyle issue and a prevention issue. Take the 40% mentioned above, add 12% from Type 2 Diabetes and if my arithmetic is correct we have 52% (I apologize if I have added apples and oranges but I seek to make the point". That is quite a large number.

Yet Krauthammer states:

"That's a hypothetical case. What's the real-life actuality? In Obamaworld, as explained by the president in his Tuesday town hall, if we pour money into primary care for diabetics instead of giving surgeons "$30,000, $40,000, $50,000" for a later amputation -- a whopper that misrepresents the surgeon's fee by a factor of at least 30 -- "that will save us money." Back on Earth, a rigorous study in the journal Circulation found that for cardiovascular diseases and diabetes, "if all the recommended prevention activities were applied with 100 percent success," the prevention would cost almost 10 times as much as the savings, increasing the country's total medical bill by 162 percent. That's because prevention applied to large populations is very expensive, as shown by another report Elmendorf cites, a definitive review in the New England Journal of Medicine of hundreds of studies that found that more than 80 percent of preventive measures added to medical costs. "

The data appears to reject this conclusion. Prevention, albeit requiring patient cooperation, does prevent disease and save money. Just measuring HbA1c does nothing. To paraphrase Osler, if all else fails, look and listen to the patient. Obesity is the primary cause of Type 2 Diabetes as is smoking on lung diseases, and much of cardiovascular diseases. The devil is in the details and perhaps the naysayers should look a bit more in the details.

Yet this still posits the question as how does one get obese people to reduce their burden. One can look at a Pigou type approach and tax the consumption chain, namely carbs, tax the effect change, namely weighing people as part of their tax return, or just bearing an exploding, pardon the pun, burden on all of us. Prevention in many areas is the beginning of the process, not the end, and one should not abandon the beginning. Selecting the way to get to the end may be politically more difficult.