Value or Quality: Still Confused?

There is the ever growing use of terms, value and quality are my favorites, in health care that are euphemisms for cost containment. Why not just make patients pay across the board so that they personally see what the costs are, pay some amount not necessarily all.

Take a recent article in Kaiser about value. It starts with:

What if, instead of making a $10 insurance copayment for your cholesterol lowering drug, your employer provided it and other drugs to manage chronic conditions for free? What if your company also paid for weight management and smoking cessation classes? You'd probably give your employer high marks for looking out for your health.

Now, what if your employer said that if you want certain procedures that it's determined are overused, like an MRI or knee surgery, you'll have to pay up to $500 extra, on top of your other coinsurance charges? Those employer decisions might not be nearly as welcome.

Frankly the patient should be penalized for obesity and smoking, they should be taxed to pay for their added burden, which smokers are already. As for procedures, it depends, and yes some payment should be made. Now enter value, perhaps it takes the place of quality. The article states:

Mercer, a benefits consulting company, found in a 2008 survey that 19 percent of employers with at least 500 employees were charging workers less for services the companies considered to have a higher value for workers' health.

Well what is value and who determines it? The problem is that as we have argued again and again that each patient is different and thus value is a personal calculation, and then we enter the realm of valuing the individual, by some person or persons who have little if any expertise or value themselves. That is how we get denial. That is how we start rationing.

They continue:

Indeed, experts agree that eliminating financial barriers alone isn’t enough to ensure that people stick with their medication regimens, get necessary preventive screenings and high-value medical care. Health coaching and other support services are also critical, says Eric Grossman, a senior partner at Mercer.Nearly all employers and insurers who have adopted value-based insurance benefits to date have done so by dangling the promise of free or reduced-cost benefits, often medications, before consumers.

There is also the role of individual responsibility. The question is value for whom and at what cost. How does this value approach compare to the quality approaches we have been seeing. Is this a "Nudge" approach to medicine?

Comparative Effectiveness Research

In a recent JAMA article there is a status discussion of CER, CCE, or whatever they call it now. As the authors state:

According to the act, the purpose of the institute is "to assist patients, clinicians, purchasers, and policy-makers in making informed health decisions." Institute staff are to apply research and evidence to improve methods for preventing, diagnosing, treating, monitoring, and managing health conditions. The institute is also charged with disseminating research findings on health outcomes, clinical effectiveness, and the appropriateness of medical treatments, services, and items.

To achieve these goals, the institute will create a standing methodology committee to develop and update scientifically based standards for research conducted through the institute. In addition, the institute will ensure peer review and make research findings publicly available within 90 days. The institute will also allow for public comment periods prior to such actions as the adoption of national priorities, the research project agenda, the methodological standards, and the peer review process, and after the release of draft findings of reviews of existing research and evidence.

This is a difficult if not impossible task. Recall that medicine is based in science but is determined clinically. Further clinical progress is made by trials and as we learn more we do more trials. Thus the classic example which I have used again and again is the use of PSA and subsequent biopsy procedures. We know that PSA has positives and negatives and furthermore that the biopsy itself is prone to errors. Foe example the figure below depicts the probability of not seeing a cancer in the prostate, where one exists, depending on the size of the prostate and the number of cores used to sample.


















This shows that despite using the gold test of biopsy, we can all too often not conclude there is a cancer when indeed there is. If this is an aggressive type then more than likely it will met before a subsequent biopsy and the result or outcome is death. How doe we treat this?

They continue:

As clear as these expectations are, the institute must still navigate political waters roiled with charges that comparative effectiveness research is a tool for the continued takeover of health care by the federal government and a way to justify health care rationing. Such attitudes among certain members of Congress resulted in the passage of a law that severely restricts one of the perceived benefits of comparative effectiveness research: the possibility of cost savings in health care.

Savings would presumably follow from the identification of proven therapies that are less expensive than those in common use, although such research could also identify more effective treatments that are more expensive. The law stipulates that the institute "shall not develop or employ a dollars-per-quality adjusted life year (or similar measure that discounts the value of a life because of an individual's disability) as a threshold to establish what type of health care is cost effective or recommended"

With such restrictions, little wonder that researchers and economists are looking at other ways to bring cost into the comparative effectiveness research conversation. Some of those approaches are discussed in Health Affairs, which dedicated its October issue to a variety of articles exploring issues surrounding comparative effectiveness research.

Not only is cost a factor, but the Government entity will control how the physician practices. Rationing is less the issue than treating each patient the same or as an individual. Medicine requires the physician to treat each patient as an individual. The CER approach is to diverge from this, namely to develop and proscribe common treatments, independent of the patient.

They continue:

"According to the letter of the law, the institute could actually commission cost-effective analysis where you use quality-adjusted life-years," said Sox in an interview. "What it forbids is using that information to set a threshold below which something is cost-effective and above which it is not cost-effective."

Sox said the law's ambiguity regarding cost considerations reflects the debate seen across the nation.

"Comparative effectiveness research has gotten so much support because the cost of health care is affecting the country's economy, and yet there is a peculiar attitude from the federal government about considering cost-effectiveness," Sox said. "People are concerned about having the government say that it will pay for this and not pay for that. Patients and doctors do not want to have their hands tied by government rules about which health resources would be paid for under Medicare."

But Sox and Garber, after discussing the loophole allowing for cost analysis, do not call for the institute to commission such study. "Doing so might lead to the appearance, if not the reality, that the institute was attempting to define care standards for federal health insurance programs in the United States, which the Affordable Care Act discouraged," they wrote.

Instead, they recommend that the institute insist that studies it sponsors provide enough information to enable others to perform the analyses. That would allow analysts who are free of sanctions to develop cost-effectiveness information.

"It seems like a pretty obvious idea that research sponsors would require authors to gather data that can be useful to people, but not necessarily those doing the original research," Sox said. "The [National Institutes of Health has been requiring authors to get cost data on randomized clinical trials it sponsors, and the trialists may not be the ones who use that information."

They are back-dooring the costs via data.

On Books

Yes, I read volumes on line, they are stored and then read, sometimes printed. But this brief note is a short commentary on the book, the real physical entity. You see I just received from ABEBooks a 2nd Edition of Compton's X-Rays, printed in 1936 and initially purchased and stored in the University Library at Hilo, Hawaii. Looking at its well worn but still sturdy cover I can see that it survived Pearl Harbor, managed to persevere through the humidity and warmth on the islands and was used and reused by most likely thousands. And here some 74 years later it arrived in my hands, another user, who will read through it pages but more so, wonder what travels it had in its long lifetime.

As a writer I have thousands of books but as a collector I have a few dozen that reach this level of interest. So here sits Compton and his words, despite the red stamp of WITHDRAWAL on the inside, it has found a new home, alongside Darwin, Watson, Osler, Schrodinger, Wiener and a few select others whose journeys have brought them to the same shelves.

Somehow one can separate the content from the human artifact, the book, its journey secretly hidden from the current reader. Perhaps the journey may be as exciting as the contents. Who had this book enlightened, what did they do with that insight, how had it changed the world we know. With electronic books we lose the patina of provenance. A pdf file has no history, it is reusable without a history of users. The discolorations of generations of readers marks the book as useful. Unlike literature, scientific and technical books have multiple impacts, the reader learns from the ideas contained therein, and that learning changes the world, for better or worse. My first edition of Watson's genetics from 1964 started a trail leading today to many branches, Osler was a window to medicine practiced by a master, Schrodinger was also the impetus to Watson, and like Watson I read it in the 1950s as a young student, and from there to Watson. Wiener is at times painful but brilliant!

I wonder where it will go after me, but for the time being it has a warm dry home with 10,000 plus others. Welcome Compton!

The TSA Issue and Cancer

About a year ago I wrote a piece on backscatter x-rays and the potential for cancer. Our argument related to melanoma amongst a subset of people with an existing predisposition. Our argument was simply that there exists a small subset of people, Celtic in origin, who have dysplatic nevus syndrome, and thus when exposed to backscatter which penetrates to the melanocyte layer may induce additional genetic changes setting in motion a melanoma. The issue is that backscatter is lower dose but administered to frequent travellers often, and since the danger is most likely during mitotic change or possibly during transcription that it is the frequent low dose that may set off a problem.

We then argued that the TSA is in essence performing a substantial experiment that the FDA would never approve of. In fact we argue that since the x-ray is controlled by the FDA that before TSA can use this it must demonstrate no harm. But alas this is not the issue.

Today Rep King of New York, states that if one objects to this screening that they have "blood on their hands". Perhaps the good Congressman would think of those of us with such predispositions and their blood. One does not object to security that does not endanger the innocent, but the unchecked use of potentially harmful x-rays may endanger a small subset of humans who have done harm to no one.

According to The Hill:

Speaking on Fox News, the ranking Republican also sharply criticized talk of slowing the security system down in a Wednesday "Opt-Out Day," which never materialized.

"I think some of the hysteria that was generated, of people actually saying that they would try and slow the system down yesterday, well then, if you have a plane that had gone down the blood would have been on their hands," he said.

King said there would always be trial-and-error in the TSA evolving and trying to come up with the best systems, but "right now I think the body scanners are the best we think we have."

The problem is simple, use Bayesian statistics. That means profiling. On 12 September 2001 I took a flight from Prague to Paris. The Air France pilot went down the aisle and sent people packing he felt uncomfortable with. Extreme, but it was Bayesian at the time. In my flights on El Al the questions are always penetrating and to the point. Yet with TSA one seems to see that there is a collection of folks going through the routine who were selected on a lowest bidder contract. El Al gets the best, TSA gets the cheapest. What would one expect.

Now I wonder how this would have worked if FDR had been President. He would have had a Fireside Chat saying:

"My fellow Americans, I want to talk with you today about a serious concern we all have, a concern about our safety. I want to ask your help in this problem. We all need to be careful as to our safety and security in the air, and as I am certain you all understand, we need to work together to be certain of that safety. So I am coming to you today to ask you for your help and cooperation, we really need it at this critical time....."

It would be in a tone of leadership, respect, and asking for cooperation and participation in time of a national need. So where is the leadership .... I grew up in a family of New York City police officers, they are not known for their tact...nor is the FBI. This is when leadership is demanded.

Cancer and Evolution

Now I really think highly of Nick Rowe of Worthwhile Canadian Initiative but one of his co-bloggers may have gone a bit off the edge. I just read a blog by Frances Woolley in the same blog and I beg to differ. Like my Harvard friends, the economists who step with limited if any knowledge into medicine and genetics, they off, to quote a friend from Cape Cod, "go shingling their roof in the fog", always a bit of a risk task.

So what is the issue. Woolley remarks on a Nature article which talks of cancer as some evolutionary new event. The Nature article states:

In industrialized societies, cancer is second only to cardiovascular disease as a cause of death. The history of this disorder has the potential to improve our understanding of disease prevention, aetiology, pathogenesis and treatment. A striking rarity of malignancies in ancient physical remains might indicate that cancer was rare in antiquity, and so poses questions about the role of carcinogenic environmental factors in modern societies. Although the rarity of cancer in antiquity remains undisputed, the first published histological diagnosis of cancer in an Egyptian mummy demonstrates that new evidence is still forthcoming.

One is driven to make two immediate observations:

First, trees get cancer, yes indeed they do, those large knobs on old trees are cancerous if we use the well accepted definition. The cells have lost their ability to die, apoptosis, they loose the ability to differentiate, and the cells look like cancer cells. Yet plants somehow do not allow the cancer to metastasize, perhaps because of lack of lymphatics and a different circulatory system.

Second, cancers as we know understand it (see Weinberg) is the result of pathways controlling cell growth breaking down due to errors in cell cycle replication or from exogenous factors change growth regulation. Also there is the genetic predisposition that causes several familial cancers. We now know enough about many cancers to have a good understanding of what causes it.

Woolley states:

Without disputing the authors' basic premise or conclusions, I wish to posit an alternative explanation: old people are useless...Women typically finish child bearing by 40 and child raising by 60 - sometimes much earlier. Sure, every so often someone tries to make middle-aged ladies feel good by writing some nice paper about the evolutionary value of grandmothers, but basically living past middle age contributes minimally to the number of surviving children and grandchildren one has, and from an evolutionary point of view, that's all that matters.

How in God's name one can state this without any basis goes beyond reason. It is nice to state that when a reproductive entity reaches the time at which it can no longer reproduce it should be expendable, and even more so expended, then we males may just keep going till our 90s and somehow extending Woolley's argument just rid the world of postmenopausal women! This is akin to the Modest Proposal suggesting the use of Irish children for food! Do the English really think this way. Perhaps we are focusing on the wrong border, I am after all some 75 miles south of the Canadian border, and I shudder to think of the fine women in my family, they after all made it to the 90s! What would the Queen think! And my wife is of Canadian ancestry, Nova Scotia! Yikes again, perhaps this is the Canadian Health Care plan, get rid of old women! We were never told of such. Perhaps those brains in Washington should have advised us or perhaps it is really in the health care plan after all.

She continues:

Moreover, I have offered no empirical support whatsoever for the hypothesis that cancer has evolutionary value...Indeed, this is the fatal attraction of socio-biology - it's too easy to come up with untestable explanations for just about anything.

Here again I am aghast! She offers no evidence, self admitted. No evidence indeed, since the evidence to the contrary is all over if only one would engage a book. Then an attack on Wilson. You see, socio-biology is based on facts, and again, having somewhat lived through those attack, see the merit of the final remark baseless and in line with many of the others.

So, perhaps we should build that fence to the north, let the moose through, they are rather friendly folks, but beware those Canadians, those wild ideas, why just think where they may lead!

Failure of Muni Broadband

Almost a year ago we wrote about Burlington Telecom and as we sit here on the other side of the Connecticut River, no I can't see Burlington from my home in New Hampshire, I see that it is having its property repossessed.

A recent news note states:

Wednesday, Kiss announced CitiCapital plans to repossess Telecom equipment to recoup its $33 million debt from the city. Ward 4 councilor Kurt Wright says the administration failed to notify other city leaders of how severe the BT problems were in time for them to avoid this.

"I think it's tough, actually, to put a good spin on this," said Wright, R-Burlington City Council. "This is not the desired result we were hoping for out of these negotiations. And I think it's an unfortunate day for Burlington and Burlington Telecom and, I think, somewhat of an embarrassment for the city."

Wright expects the Vermont Public Service Board will protect BT customers from having their service yanked while the financial problems are being resolved.

The Burlington Free Press states:

CitiCapital demanded that BT make minimum monthly payments of $311,000 for the continued use of leased telecommunications equipment — money BT doesn’t have and can’t legally raise from non-BT sources, according to a letter from Burlington to the Vermont Public Service Board requesting a status conference on the situation.

“We’re saying that that’s an unreasonable amount,” Mayor Bob Kiss said. “There probably is an amount that we would pay, but it would be more like $40,000.”

So what now?

Ö Kiss said the collapse of negotiations will not lead to any significant changes in service to BT’s thousands of customers in the near future. CitiCapital cannot simply pull out the system hardware immediately, he said. Burlington will “obtain replacement equipment either through a partnership or other means,” a city news release said.

Simply they are financially defunct and their operating equipment is gone. We anticipated this long ago. This is another demonstration in our opinion that broadband is really difficult and that newcomers will face great problems which they are all too often not capable of solving.

This will raise the question of the Broadband gifts from RUS and NTIA. As we have said for years they will most likely be wasted. Hopefully the new Congress will find ways to redirect the funds away from any expenditure of any kind.

These programs were just another example of the poor thinking of macro economists who have no idea of real business. Stay tuned.

Knowledge, Science and Technique: Looking at Economics as a Science

Edward Dougherty in his many papers (On the Epistemological Crisis in Genomics) has addressed this issue in considerable detail, namely he looks at what he calls the epistemological crisis in genomics. Dougherty has written a brilliant set of papers which set the path for those in genomics but it should also be a warning for economists.

Let us look at Dougherty from the aspect of the genomist. Keep in the back of our minds the same issues for the economist.

Dougherty begins his paper by stating:

There is an epistemological crisis in genomics. At issue is what constitutes scientific knowledge in genomic science, or systems biology in general. Does this crisis require a new perspective on knowledge heretofore absent from science or is it merely a matter of interpreting new scientific developments in an existing epistemological framework? This paper discusses the manner in which the experimental method, as developed and understood over recent centuries, leads naturally to a scientific epistemology grounded in an experimental-mathematical duality.

He continues:

The change brought about by the “new science” of the Sixteenth and Seventeenth Centuries is based on the integration of two principles: (1) design of experiments under constrained circumstances to extract specifically desired information; and (2) mathematical formulation of knowledge. The two principles arise from the two sides of the scientific problem, the source of knowledge and the representation of knowledge in the knower. Perhaps the greater revolution in knowledge is the design of experiments. One need only think of Archimedes’ mathematical analyses of fluidics and mechanics to see that the ancients recognized the central role of mathematics, even if they did not understand that role in the modern sense. But the modern concept of experiment is a different matter altogether.

Dougherty then proceeds to emphasize the need and usefulness of the mathematical model, namely the ability to predict. He specifically states:

A mathematical model alone does not constitute a scientific theory. The model must be predictive. Mathematics is intrinsic because science is grounded in measurements; however, a model’s formal structure must lead to experimental predictions in the sense that there are relations between model variables and observable phenomena such that experimental observations are in accord with the predicted values of corresponding variables.

These predictive relations characterize model validity and are necessary for the existence of scientific knowledge.

The predictive ability of a model is essential. Frankly the ability to go from experiments to prediction, albeit with uncertain but projective results, is at the heart of a scientific approach and it is essential to the engineering approach that we aim for herein. Just having the experimental data is necessary but not sufficient. One must be able to link the data in some mathematical models which in turn is in itself predictive of alternative and future results. Dougherty continues:

The fundamental requirement of a scientific validation procedure is that it must be predictive. A scientific theory is not complete without the specification of achievable measurements that can be compared to predictions derived from the conceptual theory. Moreover, it depends on the choice of validity criteria and the mathematical properties of those criteria as applied in different circumstances.

Again in genomics we have collections of data, and as we shall demonstrate herein for prostate cancer, that data is enlightening and descriptive but is not predictive and the mathematical models of what is transpiring is missing. It is not that we cannot construct a model, and indeed such a construct would itself be subject to continuing change as we learn more, but the intent must be there to construct such a model, and a framework, a paradigm, must be ever present.

Dougherty makes another interesting observation as follows:

Consider the following statement of Steven Jay Gould: “Science tries to document the factual character of the natural world, and to develop theories that coordinate and explain these facts”. Perhaps this statement would have been accurate during medieval times, but not today. While it is true that theories coordinate measurements (facts), it is not the documented measurements that are crucial, but rather the yet to be obtained measurements. Gould’s statement is prima fascia off the mark because it does not mention prediction.

The point that Dougherty is making is that science, the science of systems particularly, which we will discuss herein, focuses on not the facts, but the process, and the predictability of the models we develop from facts, connected and ordered facts, facts which are quantified. In Gould’s world view, that of a botanist or zoologist of the early 20th century, he is a collector and organizer of facts. He is not the builder of models which can be used to predict forward based on prior data. True systems approaches are valid if and only if they have the predictability capability.

As Dougherty states after this, the true nature of systems science and engineering is not the fitting of data, it is not the clustering of data points in some microarray. As Dougherty quotes Norbert Wiener from Wiener’s classic, Cybernetics, the true nature of systems is a combination of models, predictability and uncertainty.

Finally Dougherty comments on the use and abuse of logistic analysis. Simply put he demonstrates via the arguments of others, especially William Feller, that frankly one can get a logistic fit to anything. It does not demonstrate any physical causality. In physics we have the relationship between mass and momentum, through the variable velocity.

We have rate equations for reactions demonstrable by experiment and validatable by predictive use. We understand forces and torques so that we can analyze and design a bridge, and we understand the multi body problem so that we can predict what trajectory a rocket may take as it traverses the galaxy. For genomic analysis and especially for cancer can we develop such a methodology.

Now the epistemology of Dougherty for genomics applies in spades for economics. The ability to predict anything with unanimity of agreement is lacking. That should be the aim, the goal. Until then perhaps they should remain quiet!

Economists Bemoan the People

I once had a dealing with a company which became a flop. At the end, the CEO said to the investors, I fortunately was not one, "If only someone would buy the product, I could have made millions of them." The point being that the "dogs did not eat the dog food" but he was a great manufacturer. The end game is the acceptance by the consumer, the voter, the public.

The Tea Party as I see it from afar has rejected the "dog food" from the economists who have advised Washington. They use their own sense of what works and given that Romer and her ilk have made projections which have led us deeper into the hole, they say a pox on their house.

The problem is that the people have not understood the economists and the economists regard the public as below them. I come back to my engineer metaphor and the bridge, and well if the bridges kept collapsing I would suspect that the public would have a similar view of the engineer.

The Berkeley crowd now says:

It is now clear that the right-wing opponents to the Obama administration’s policies are not objecting to the use of fiscal measures to stabilize nominal spending. They are, instead, objecting to the very idea that government should try to serve a stabilizing macroeconomic role....

Yet America’s right wing objects to this, for reasons that largely remain mysterious: what, at the level of economic theory, is the objection to quantitative easing? Blather about Federal Reserve currency manipulation and excessive risk-taking is not worthy of an answer.

Still, here we are. The working classes can vote, economists understand and publicly discuss nominal income determination, and no influential group stands to benefit from a deeper and more prolonged depression. But the monetarist-Keynesian post-WWII near-consensus, which played such a huge part in making the 60 years from 1945-2005 the most successful period for the global economy ever, may unravel nonetheless.

Yet they bemoan what they cannot either explain, predict, or even have any way of explaining the validity of their theories. As the author of the piece bemoans some right wing conspiracy, as we have shown many times, if one listens to a group such as these macro economists time after time and their predictions are wrong then soon one learns to distrust them and trust ones visceral instinct. The failure of this group to see their own persistent shortcomings is the problem.

If a physician prescribed some remedy time after time and the patients died soon thereafter one soon would seek other advice. The same for the crowd of economists. They disagree, they fail to predict, and they then have the blatant arrogance of those whose advice should be honored because of who they are!

Treasury Spreads: November 2010

The Treasury spreads are always informative in terms of understanding the future trends in inflation expectations. There may be changes as we see QE2 in that Treasury can manipulate spreads via the FED. We leave that analysis to a later time.



















The above shows a set of yield curves. The curve has gotten steeper from its August flat point showing an increase in long term yield.



















The above depicts the yield curve by duration for more points of the tracking period, indeed from the beginning of the current administration. We see the curve coming back to where it was except that short term yields have risen.



















The spread is increasing again and we see it returning to more reasonable norms. This is driven by the increasing long term yields.



















The above shows the spread and its elements and clearly depicts the short term flatness and the long term increase. We expect that this is a sensing of inflation yet depressed by FED control in anticipation of Q2.



















This depicts the spreads again. They should be watched in anticipation of QE2 impact.

The Entrepreneur: They can Learn Better on Their Own!

I was reading an Esther Dyson piece this morning as I awaited the preparation of the turkey. It is the one day on which I am not permitted near the kitchen and I suspect it is some remnant of the Pilgrims and their way of dealing with large birds.

Back to Dyson. She states:

All over the world, little boys study math and science in the hope of becoming the next Bill Gates. But having your own local Gates is much more compelling. I'll always remember what a Russian friend said to me back in 1991 at a conference I organized in Hungary: “Of course we all know about Bill Gates in Russia. But he’s not relevant to us: he lives in the US; he went to Harvard. But seeing what the Hungarians have done – that means something to us. It lets us dream of what we could do ourselves.”

Frankly many times they start out wanting to be Feynmanns or Baltimores or Watsons and Cricks, and the last thing in their minds is another Bill Gates.

She then continues:

Both in the US and elsewhere, most education systems aren’t churning out the kinds of people start-ups need to hire. The problem is not just a lack of engineers, but also of people with the necessary business, financial, and communication skills.

Here is where I truly differ. I once had a student who as an engineer took a semester at Sloan and studied accounting. He then took the CPA exam and passed. I remember reading my first finance book over a weekend, there is not much there. Accounting is another weekend. The rules of accounting can be acquired readily. What Dyson fails to see is that any intelligent and well educated Engineer, say from MIT not Harvard, can pick up the business, financial, and communications skills on weekend, and just a few of them. Yet it is this type of misguided talk which often weighs down on the young engineer before they even start.

I am reminded that after one of my dinners with my students at MIT, the dinner was with a MIT PhD entrepreneur, that one of the students in the group said to me as we walked back to campus:

"I did not know that engineers could start and run their own company, I thought we needed to get a Harvard MBA to do that."

I turned to them, all Chinese, and said:

"What do I look like, chopped liver?"

Well my New York upbringing met Shanghai. I guess we are still more aggressive than them but it did raise a point. It is people like Dyson, who apparently never herself started a real company, I think, that make statements like this, that result in just the opposite. You do not need to "take a course" or "be trained" in finance. You can really rad a book! Really. It works. Discounted cash flow is junior high school stuff and Black Scholes is freshman calculus!

Thus Dyson misses several points:

First, we oftentimes start wanting to be original contributors and then become the entrepreneur. HP (the original one) and Qualcomm were engineer driven. Those companies has true innovative technology. Compare them to say Cisco which is a sales company which buys technology and you can see the difference.

Second, the assumption that you can only learn something by being taught by someone else is absurd! There are books, there are resources everywhere today. You can learns in a variety of ways. When doing a PhD one has to create, and that is learning for the first time when there is no path! How stupid to assume one must be taught. The logic would thus seem to state that all knowledge is fixed and just conveyed. Nonsense!

I believe that the comments by my students were chilling and that in many ways they were reflective of the types of remarks I have just referred to. I'd rather listen to an engineer.

Medicaid, Medicare, and the Mess

From a recent NEJM article there is an analysis of the upcoming health care plan implementation and the crisis which may likely result. As the article states:

Expanding health insurance to cover Americans who are currently uninsured, with the ultimate goal of improving access to care, is arguably the most critical objective of the recently enacted health care reform legislation. In large part, the success or failure of health care reform will hinge on the achievement of this goal.

The Patient Protection and Affordable Care Act (ACA) incorporates two strategies for expanding coverage. First is a mandate for all individuals to purchase insurance, coupled with the creation of state-based insurance “exchanges” and subsidies to help individuals whose incomes are below 400% of the federal poverty level to purchase coverage from private companies. Second is an expansion of Medicaid, underwritten by the federal government, to cover all adults whose family income is below 133% of the federal poverty level; children of families with incomes below this cutoff are already eligible for public coverage.

The chart above is from the article and depicts the percent enrolled versus the percent of the total population which is eligible under this new rule. This raises two key questions:

First, who is to pay for this and how? This adds a new and immediate burden on states which are already under one of the most severe budgetary states ever.

Second, and this is not trivial, what medical practitioners will handle this group? Physicians generally shy away from medicaid since the reimbursement is so low. Also there are just not enough physicians.

One need do just one simple calculation. If we see that now 20% of the population is eligible for Medicaid, and 18% is eligible for Medicare, then we have 38% of the population under a Government single payer plan already. With the 25% reduction in Medicare kicking in what are physicians to do. Add to that the demand for EMR technology which frankly does not meet the needs of almost any of the regular physicians, excluding the partisan enthusiasts dragged out to support the administration, we have the recipie for total disaster.

The short term growth from the same article is shown above. This is what should be of concern. The administration has implemented something which most likely will result in the collapse of the system as we know it.

The NEJM article concludes:

The impending Medicaid expansion will be the single biggest change in the program since its inception in 1965. The success of health care reform in improving access to care will largely depend on whether newly eligible individuals enroll in Medicaid and remain enrolled. Though the details of enrollment outreach, application processes, and renewal procedures may not be glamorous, they hold the key to success in expanding health insurance coverage to millions of needy Americans.

I disagree, the success is the ability to retain quality care and keep physicians in practice who are now well below any reasonable break even ratio.

Korea, November 1950

From Tolland, In Mortal Combat, pp 258-259:

The (North Korean) major flipped up the back of ( US Army Lieutenant) Thornton's fur cap, then pulled the trigger. Thornton collapsed to the ground. A sixteen year old girl screamed. "Stop" shouted the major, "or I'll kill you too." He surveyed the shocked crowd. "Now" he said in dead calm "you see what can happen to you. It was the first death eight year old Shaucat Salahutdin, son of a Tartar businessman, ad ever seen. His legs wobbles and he had to pull down his pants to defecate. He had seen the brains actually blown out of a man.

As the Chinese supported and drove the North Korean barbarians sixty years ago, one might readily suspect that they have a strong hand again today. Truman responded with an aircraft carrier as is somewhat reminiscent of today. Yet Truman's response was firm and yet MacArthur's over reach resulted in a near collapse. It will be interesting to see how the current administration will deal with a long festering immoral entity ready to blow the brains out of any and all Americans.

China is playing a very risky game allowing its crazed puppet in North Korea to act as it does. As Japan dramatically underestimated the United States in 1941, China may think the crrent administration is the United States. It is not, it is an extreme corner at best and when pushed to the tipping point this may dramatically change what they see as the United States, and a change in its government. Yamamoto saw the US for what it was having been educated in this country. The Chinese leaders must understand that the US can flip on a dime, and change direction in response to threats. North Korea is a clear and present danger, and its continuing efforts are no longer allowable. China can solve the problem now or live with the results later.

Inflation: Just Look at the Tax Software

Since our current Treasury Secretary used TurboTax, I thought it would be interesting to see how that price of this product has inflated recently. I went to Amazon and looked at some past and recent purchase. This year the early combined price for Business and Personal is just over $185. Then I plotted the past few years and looked at the annual increases. It is over 15% inflation with this years being almost 20% inflation. Is QE2 hitting first in software? Is TurbooTax the canary in the mine shaft? It is our projection of inflation resulting from an effective QE2.

Stay tuned.

Brilliant! This Is QE2!

In Honor of Veterans Day

November 1943, me and dad, just before he went on board the USS Albert W Grant. To all men and women in the military, our heartfelt thanks to you.

And to those of today:

The Fiscal Commission

The Fiscal Commission Report has been issued in draft. Interesting reading. Simply it says:

1. Government must trim back. Well I think the taxpayers said that also.

2. Fix Medicare by semi market driven methods. Yes, we agree, but you may also want to slide it up to 70 over say 10 years. Also some means testing and increasing deductibles. I suggest retaining the no cap number, that is a catastrophic coverage plan, never know.

3. Slip SSI with age, up to 70 and thereafter set by demographic survival rates. Also add a means test.

4. Simplify taxes. I would drop 35% to 25% but that is me. Corporate tax should be 15%. To make up the difference cut Government by 15-18% not 10%.

Otherwise not too bad. And Krugman is screaming so something must be right here.

Which Deadly Cycle is the FED Trying For?

The FED is planning to print a ton of money in its QE2. Perhaps we should name it the Andrea Doria. We show two options above which can be effected. The first we discussed several time already. It assumes that China and others will no longer be so generous so we just print money and have banks buy Treasuries. But what of inflation here? Probably low since the Government is spending what s printed and as we know from Romer and her ilk the Government multiple is probably negative, a joke but close. Thus we fear little from this one.

However the Keynesians in us seem to like the second. We show that in some detail below:



















This shows how inflation might occur. It however assumes a great deal. First that banks will lend. Not quite likely in the current regulatory tightening as well as the demand for cash by the Government. It assumes companies will expand. Based upon what one might ask? There is so much slack in the economy that there would be little demand. The old aggregate demand stuff just seems to not work here. Finally, if indeed all this does happen, then and apparently only then do we see 20% inflation.

The question truly is, what does the FED really intend and what is their vision. In a strange way our economy is in the hands of these folks, the current administration can just foul things up, not fix it. Oh, yes, also in China's hands as well.

Gold and Housing: an Interesting Thought

An interesting question: What do house prices really tell us? Let's take a look at average house prices, gold and their ratio.

First the average house price. We see this below:



















We are back to where we were at the beginning. We always saw this as a bubble, or was it, was there something else going on, in the world of open economies are home prices relative or reflective of bigger things?

Let us look at gold. We show this below:



















Generally no surprise here, it has exploded. It was flat for a long while then up it went. Again what does this mean in an open economy?

Now let us look at the ratio:



















For a long while the ratio was flat or growing but over the past few years the ration has gone down by a factor of three. This seems to imply more than just a housing bubble, The home was to the American what gold was to others a hedge against inflation. House prices reflected the net present value of an inflating asset. One would assume that the ratio would be equally reflective, unless of course the underlying national economy is considered more risky that the international one. Houses reflect the US qua a stand alone economy whereas gold is reflective of a global economy. This observation seems to state that one sees the US faltering in the long run despite everyone else's position.

An interesting metric, and interesting speculation.

Employment Stats: Does Anyone Read the Data?

I am continually amazed when the news folks and even most economists report the great news and I would suspect that they never looked at the data. So let's all together look at the facts. They stink!

First we always look at the population and the percent in the labor pool. Remember that they calculate the stats on the pool numbers not what should be in the pool. We use Jan 2005 as the baseline date for our calculation of what should be in the pool. We show that below:



















Based upon that we see the 9.6% and the actual number based on baseline well in excess of 12% and holding. Ms Romer where are when we need you, I forgot you are teaching this out in California!




















To see the details we have included the stats for the baseline.



















Now to the details, just one layer down to the per industry numbers. The following is the employment change month over month.



















Note the Government increase, which is dominated by Ed and Health! Also look at the drop in core manufacturing. This is certainly NOT an improvement! We have less people really working for those on the dole.

The percent in each category from 2005 baseline is shown below. This depicts the slow but relentless change in our economy.



















We further depict this as a percent change over the period as below. This highlights in some detail what we have been speaking about:



















The total change per month for the year we depict below and highlight the dole jobs, those real workers pay taxes for.




















Finally we depict the breakout for October:




















In conclusion we believe the data shows we are gloomier than ever!

CAT Scans, Lung Cancer, Heavy Smokers and Who Pays?

The NCI issued a report on a trial it performed regarding the use of period CAT scans on heavy smokers. They report:

"... researchers found 20 percent fewer lung cancer deaths among trial participants screened with low-dose helical CT relative to chest X-ray. This finding was highly significant from a statistical viewpoint."

On the down side the report states:

Are there radiation exposure risks associated with repeat CT scans? The radiation exposures from the screening done in the NLST will be modeled to see how exposure to three low-dose CT scans changed a person’s risk for cancer over the remainder of his or her life, but that analysis will take a while to conduct. Previous studies show that there can be an increased lifetime risk of cancer due to ionizing radiation exposure. It is important to recognize that the low-dose CT used for screening in the NLST delivers a much lower dose of radiation than a regular diagnostic CT. Additionally, the benefit of potentially finding a treatable cancer in current or former heavy smokers, ages 55 to 74, using helical CT appear to outweigh the risk from receiving a low dose of radiation.

Yes indeed there are risks. Thyroid, melanoma, breast, ocular, and other tumors are possible.

They then stated how this was paid for. Namely:

• People participating in the trial were screened free of charge with either low-dose helical CT or chest X-ray.

• Costs for any diagnostic evaluation or treatment for lung cancer or other medical conditions were charged to the participants in the same way as if they were not part of the trial. A participant’s medical insurance plan paid for diagnosis and treatment according to the plan’s policies. Participants who had no insurance were referred to local community resources to receive needed evaluations.

• In addition to the low-dose helical CT scans and chest X-rays that all of the centers performed, some NLST centers also collected samples of blood, urine, or sputum for future lung cancer studies. These procedures were performed without charge.

Now the key question going forward is: given that we now have a CER study showing efficacy of a testing procedure, yet the whole reason for the test is a personal life style choice, should this procedure be paid for by the Government. Better yet, since I have never smoked cigarettes in my life, why should I be taxed to pay for the heavy smoker who deliberately places his life at risk?

What about the surgery necessary for a tight rope walker, they have taken on the risk and they should personally take on the costs.

I believe that this is a clear example of CER which can go wild. The usefulness of the procedure is most likely high but the procedure is necessary only because of a personal choice.

M2, GDP, Inflation Q3 2010

M2 continues to grow but not at a great rate. The FED as we have shown is throwing money into the system but it is recirculating on Treasuries.



















The M2 rate of change is remaining positive as funds leak out slowly into the economy. As we have shown last month the Reserves at the banks remain high and loans are still at an all time low.



















Inflation and its components are shown above. We see the low inflation rate driven by the low leakage of M2 and of course the excess capacity in the existing economy. The concern is that those with jobs may keep them, less a slight more shedding, but that we will see a bifurcation of those with and those without jobs and this may very well continue into 2010.



















The above is the calculated inflation rate and the yearly running average. We are at about 2% and slightly increasing and this is well above the dip at the beginning of the year. The FED is concerned as to the 2% which is why they are doing QE2. We disagree and believe that 2% should be on top of a potential 4% growth. Thus the FED is not only giving free money but free money plus a profit.

The FED, QE2, and M2, Again

In the Washington Post today the FED Chair tells his side of the QE2 approach he takes. He states:

Although asset purchases are relatively unfamiliar as a tool of monetary policy, some concerns about this approach are overstated. Critics have, for example, worried that it will lead to excessive increases in the money supply and ultimately to significant increases in inflation.

In our analysis yesterday we showed that under the following circumstances there could be 20% or more inflation. Let us review those assumptions:

First, we assumed that the banks would return to aggressive lending sending the M2 to FED BS ratio back from 3 to over 8. That would mean a low bank reserve and high leverage. We have seen that such was not the case. Indeed the banks who are getting the new buyouts will most likely be the same ones which got the old ones and they just turned around and bought new Treasuries and the cycle continued. Indeed the ration may drop further and thus M2 would not increase that much.

Second, we assumed the FED not just doing $600 B but a total of $1.5 Trillion over the next two years. That is less of a problem if it does not leak. It is a great problem if it leaks.

Third, we assumed that there were still markets for Treasuries, long and short term. Indeed if we continue the deficits this may not be the case and the $1.5 T may be low!

He also states:

Even absent such risks, low and falling inflation indicate that the economy has considerable spare capacity, implying that there is scope for monetary policy to support further gains in employment without risking economic overheating. The FOMC decided this week that, with unemployment high and inflation very low, further support to the economy is needed. With short-term interest rates already about as low as they can go, the FOMC agreed to deliver that support by purchasing additional longer-term securities, as it did in 2008 and 2009.

Yes there is spare capacity, but the core changes are often related to globalization, increased productivity, and fungible intellectual property markets. China is just one of the new economic threats and we have not look at India. The other problem is that many older people have moved what little they now have from 401K plans to fixed return instruments and the returns are near zero, so they will eat into principal. Then when inflation hits, and it will we believe, because this current administration needs and wants it, the older fixed income folks will be wiped out.

Money is tight but not because of the FED or because of economic principles studied back at MIT. It is tight due to the abject uncertainty of the economy engendered by the current administration. The irony is that the Republicans may now cause so much lockup that things may improve and the administration may even take credit, credit for nothing.

If Elephants Had Wings

The NY Times has a piece today by one of the former White House Economics brains and it states:

Sure, the health care law is not perfect, but it would cut the nation’s long-term fiscal imbalance by a quarter and reduce the projected deficit within Medicare by three-quarters. That may seem fanciful, given how distorted the public discussion has become. But that’s what the projections show, as long as Congress sticks to its guns and the Obama administration does a good job carrying out the provisions of the law.

Not perfect indeed, it creates a massive new Government infrastructure and command and control system and destroys what was left of the system which may have worked. The chance that the current administration does a good job is zero.

He continues:

Why do so many people assume that the act does almost nothing to save money? One explanation is that people’s first impressions of health care reform were formed during the summer of 2009, when the debate was dominated by the House bill. In health care reform, there’s always an underlying tension between those who are more concerned about expanding coverage and those who are more concerned about containing costs and improving quality. The House bill tilted toward coverage; the Senate bill, toward cost-effectiveness and quality.

The House bill was legitimately criticized for not doing enough to reduce costs. And that became the prism through which the legislation was and is viewed, even after improvements were later made in the Senate version and in the final law.

The reason is the Bill does nothing to reduce costs as we spent all of last year stating. Costs are reduced by demand reduction not supply control. Demand reduction means getting number one the fattys to stop eating, plain and simple, stop smoking, drop STDs and the list goes on. That is a 20-25% drop! That id demand management and not supply management. We wrote a book on that and we prepared a plan along those lines. Overall it costs less doing demand management. But alas this was not in the cards for these folks. They do not think that way, the deny the market and its forces.

So here is what the wunderkind suggests:

There are four ways to contain health care costs: by reducing payments to providers and suppliers; by rationing services; by having consumers pay a greater share; and by giving providers incentives to be more efficient.

Any comment on demand reduction? No, he clearly seems in my opinion to me to be clueless on such factors. This is particularly disturbing since I believe that this young man was in the same nursery school class as my children when his father was at MIT with me. Perhaps it will still take a bit longer .... get out the Tonka trucks again ... more Legos ... how about some cookies and milk ... nap time kids!

There is a note which also must be made. As regards the Health Care Bill, I would guess that there are more citizens outside of Washington who read the bills than there were members of Congress who even tried, by a factor well exceeding a thousand. I remember last year reading draft after draft and page after page and shaking my head as I wrote up the findings. This was I believe a first in citizen participation. As the left wing advocates of deliberative democracy often say that the people should have less to say about such complex issues because they just do not understand, well in this case it was those very "ignorant" simple people who read the garbage which was produced in Congress, and even PBS seems to have gotten most of the tale correct. This last election was democracy, representative democracy, in action. My compliments to the citizens who read and understood ... and to the young man from Washington, remember there is a demand curve as well...