Monday, January 26, 2015

Third Party Payers

"Moral hazard is when someone takes your money, and is not responsible with it."
--Gordon Gekko (Wall Street: Money Never Sleeps)

In the early 1990s I was involved in a corporate quality improvement project tasked with reducing annual increases in company health care costs. We were self-insured and paid 100% (!) of employee health expenses. We had few preventive programs or group deals. Employees submitted claims and the company simply paid them with few questions asked. Not surprisingly, company health care costs were increasing 15%+ annually.

This was also the era of Hillarycare, when the Clinton administration was making noise about more government intervention in healthcare markets. Laughable, of course, because Medicare, Medicaid, and other government-centric health care programs were already busting federal budgets to the tune of double digit annual percentage increases.

An early focus of our quality improvement team was getting more control over drug costs. In one initiative, we worked out a deal with a local grocery chain to get discounts on drugs mixed in their in-store pharmacies. Employees would show their ID card and drug costs would be billed directly to the company at the discounted rate. I do not recall a co-pay requirement. Instead, incentive to participate was that employees would be required to pay the difference for drugs purchased outside the special network.

The  team issued a report that explained the pharma proposal, and it circulated among senior management. After reading the report, a disappointed senior VP sat me down in his office and told me that the plan wouldn't work. Although there was a penalty for employees who went outside the network, there was little direct incentive for them to shop for value. As long as there was someone else picking up the majority of the tab, said the VP, then cost will not be substantially curbed.

Today, the arrangement where someone else picks up the healthcare tab is called the third party payer system. Although it has been exacerbated by Obamacare, it has been around much longer. One could argue that it had roots in 1930s health insurance plans that garnered government favor, and then escalated with the advent of Medicare in the 1960s.

Stated differently, hampered healthcare markets that shift costs to others have been with us for a long time.

Until costs are shifted back to those who consume the goods and services, then health care markets are destined to remain inefficient. Third party payment systems enable conditions of moral hazard. Moral hazard is the separation of risk from consequence. People will do less due diligence as consumers because they know someone else will pay.

Higher cost, lower quality, overuse, shortages are certain.

Sunday, January 25, 2015

Why Hoard a Barbarous Relic?

"Sell it all. Today."
--Jared Cohen (Margin Call)

This editorial raises a good point. Central banks around the world constantly smash gold as a 'barbarous relic.' Why, then, don't they just sell their gold?

If European central banks currently hold more than 10,000 tons of gold, they could sell their hoard and fund more than half of the bond purchases proposed by the ECB over the next 18 months. Why print money out of thin air with all those nasty consequences when you have a worthless rock with no utility sitting around that someone is willing to purchase from you for $1300/oz?

Because like you and I, central bankers know better than to part with their gold.

position in gold

Saturday, January 24, 2015

Ernie Banks

Here come bad news talking this and that
Yeah, give me all you got, don't hold back
Yeah, well I should probably warn you I'll be just fine
Yeah, no offense to you don't waste your time
--Pharrell Williams

Ernie Banks passed away yesterday at the age of 83.

By the time I saw him play, Mr Cub was wrapping up his Hall of Fame career (first ballot) at first base. I remember watching the Wrigley Field highlights of the 39 year old Banks circling the bases after hitting his 500th home run in 1970.

 In his earlier days, however, he was a superb shortstop. In fact, Banks won back-to-back MVP awards in 1958 and 59 as a SS.

Beyond his superb on-field credentials, Banks was one the the all time great ambassadors for the game. He was famous for his smile and for his expression "Let's play two."

Consummate positivity.

Friday, January 23, 2015


I'll move myself and my family aside
If we happen to be left half alive
I'll get all my papers and smile at the sky
Though I know that the hypnotized never lie
--The Who

Policymakers + learning disability

= bubble deja vu

Thursday, January 22, 2015


Jason Bourne: You're acting like I'm trying to burn you here. I'm just trying to do the right thing.
Marie Kreutz: Nobody does the right thing.
--The Bourne Identity

The European Central Bank has announced their brand of Quantitative Easing. Essentially it amounts to the ECB buying 60 billion euros worth of bonds per month from EU countries. Those bonds will be purchsed with euros created out of thin air.

How the ECB will decide on which country's bonds to buy is unclear from the statement.

ECB QE will last until at least Fall 2016.

Wednesday, January 21, 2015

Strong State?

Someday soon we'll stop to ponder
What on earth's this spell we're under

One question that should nag even the most partisan of supporters of this administration. If the state of the union is strong, then why are so many monetary and fiscal policies here and throughout the world pegged at epic disaster control levels? NIRP, monetization of debt (a.k.a. QE), massive borrowing and deficit spending, et al are policies previously articulated as appropriate only for extremely negative contexts.

Why is the pedal to the metal? Why are we employing tools designed for extremely negative contexts if things are not extremely negative?

PTSD or Guilt?

"A king may move a man. A father may claim a son. But even if the men who move you be kings or men of great power, your soul is in your keeping alone. When you stand before God you cannot say 'But I was told to do thus' or that 'Virtue was not convenient at the time.' That will not suffice. Remember that."
--King Baldwin IV (Kingdom of Heaven)

In his review of the recently released film American Sniper, Jacob Hornberger wonders whether soldiers returning from armed combat truly suffer from post traumatic stress syndrome (PTSD) as commonly diagnosed. Or is it simply guilt?

God's law against wrongful killing is clear.  There are no exceptions for "following orders."

Individuals who kill others in wars of aggression must forever battle their consciences that they have done the supreme wrong. They have applied offensive, not defensive, force in lethal measures.

Despite the volumes of propaganda or rationalization that might stream through it, consciences are difficult to fool.

Tuesday, January 20, 2015


Prince Feisal: Well, General, I will leave you. Major Lawrence doubtless has reports to make upon my people and their weakness, and the need to keep them weak in the British interest. And the French interest, of course. We must not forget the French now.
General Allenby: I've told you, sir, no such treaty exists.
Prince Feisal: Yes, General, you have lied most bravely, but not convincingly. I know this treaty does exist.
T.E. Lawrence: Treaty, sir?
Prince Feisal: He does it better than you, General. But then, of course, he is almost an Arab.
--Lawrence of Arabia

The Sykes-Picot Agreement of 1916 was a secret arrangement between Great Britain, France, and Russia about how to divide 'Asia Minor' and portions of the Middle East. The area at the time was controlled by the Ottoman Empire. Part of the thinking of the agreement was that the Ottoman Empire had to be neutralized, lest key resources for trade (shipping routes, oil, etc) would be jeopardized.

Great Britain et al then spent decades trying to make it happen via regime support and other forms of 'nation building,' instigating war (e.g., Ottomans vs Arabs), biased trade policy, and other nefarious action. The US, never shy about meddling in the affairs of others as the 20th century progressed, gradually became involved as well.

Of course, this constitutes more than just awkward intervention. It is outsiders with an interest instigating violence in someone else's territory. A form of war.

It is easy to understand the resentment that native inhabitants have toward outsiders meddling in their affairs. Today's upheaval in the Middle East, and spillover violence elsewhere, can be attributed to the arrangement put in motion nearly 100 years ago.

Monday, January 19, 2015

Homeward Gold

Take that look of worry
I'm an ordinary man
They don't tell me nothing
So I find out all I can
--Phil Collins

Based on recent NY Fed data, ZeroHedge reports that gold once again appears to by flying out of Fed vaults toward its rightful owners in Europe. In addition to the Netherlands, it appears that Germany wants more of its gold back.

Seems a natural action given Germany's position in pending QE actions by the ECB (summarized nicely by John Hussman here).

Am beginning to wonder whether this massive bond buying program sanctioned by the ECB will be the straw the breaks the flawed EU's back.

If I were Germany, I'd want my gold back too ahead of such prospective craziness.

position in gold

Sunday, January 18, 2015

Master of Persistence

No one can take away your right
To fight and to never surrender
--Corey Hart

Derek Jeter has spoken about it: "There may be people with more talent than you, but there's no excuse for anyone to work harder than you do."

Stuart Scott showed us how to live it.

Indomitable spirit. Never giving in. Don't worry about the other guy. Stay focused on your process and how to improve.

Become a master of persistence.