BAC Price / Book Value Chart

Too Big to Trust?

Dana Blankenhorn of offered some interesting observations made on why reinstating the Glass-Steagall Act Act would be good for investors.

Since Gramm-Leach-Bliley repealed the act in 1999, allowing banks, security companies and insurers to merge, we have seen the unparalleled economic dominance of a few money center banks, primarily JP Morgan Chase (JPM), Bank of America (BAC), Citicorp (C) and Goldman Sachs (GS), which was forced to become a bank holding company in the 2008 economic collapse.

Although the banks and the regulators appear to see massive size as a virtue, Moody’s continues to downgrade the paper of Bank of America and Citicorp, the two weakest of these banks, while fears loom of another wave of job cuts.

The problem, according to Seeking Alpha, is that no one knows what these banks are really worth:

How many bad mortgages do the deposit-taking banks still hold? What kinds of derivative contracts do the investment banks still carry? Can this mess really be untangled?

This is why investors have been fleeing these banks. The chart above confirms that none of these banks are currently trading close to their book value. Citigroup and Bank of America, which haven’t traded at book value since the economic collapse, are now trading at 60% discounts. Dana Blankenhorn puts it this way:

Too big to fail has become, in the minds of investors, too big to trust. And too big to succeed. Imagine the value that could be unlocked if these banks were now broken up. It’s certainly possible that more financial sludge could be uncovered in that process. But the fear of that sludge has now become more powerful than the sludge itself, and knowing would provide a financial benefit.

It Doesn’t Take an Act of Congress – Just Brains and Guts

You’re probably saying that it seems unlikely that Washington would have the political will to do what’s right, and just reinstate Glass-Steagall.

So Blankenhorn’s suggestion is for the banks’ board of directors to show some guts and brains, and act in the best interests of investors. They need to understand that the best way to realize the full value of the bank’s assets would be to separate what is backed by deposits from what is backed by the institution itself – in other words, re-erect the Chinese Walls that Glass-Steagall had put up between investment banking and consumer banking. Remember that Glass-Steagall’s Chinese Wall is what prevented thes meltdowns since the Great Depression, and that dismantling it resulted rather reliably in the subprime mortgage crisis and brought on the Great Recession. Breaking up the big banks in this way would benefit the investor in two ways:

  1. It would unlock value.
  2. It would increase trust in the banks, on the part of investors and depositors.

“And without trust a bank is worthless. Or, at least, worth less than it is worth.”

Addressing the cynics who believe that break ups would result in economic confusion, Blankenhorn points out that the big banks are already slowly withering away. Smaller banks are already growing stronger, and smaller brokerages stealing the industry’s best talents.


Troubling Questions

As a follow up to my recent posts on the trading loss at the nation’s biggest bank,  JPMorgan Chase – JPMorgan Chase And The Problem With Self Regulation and JPMorgan Execs Voiced Concerns Over CIO Bets in 2oo7, it’s clear that many of the facts are still not known and there are troubling questions that need to be answered.

Now that the Securities and Exchange Commission and the Federal Bureau of Investigation are looking into ’s JPMorgan Chase’s huge trading loss, serious questions of wrongdoing need to be asked.  And perhaps they will now that shareholders have filed two lawsuits against the bank accusing it and its leaders of taking excessive risk The lawsuits filed in New York charge that JPMorgan changed its risk model without telling investors which led to the losses, and that company leaders misled investors. One suit was filed by California shareholder James Baker. A second was filed by shareholder Arizona-based Saratoga Advantage Trust’s financial services portfolio.

Dealbook implies that there are troubling suspicions of wrongdoing:

The first lesson [of the financial crisis] is that when they are in trouble, banks will mislead the world about their financials. And some will lie. Richard S. Fuld Jr. of Lehman BrothersE. Stanley O’Neal and Charles O. Prince of Citigroup all played down their banks’ exposures before their institutions took vast losses. Were they deliberately misleading? Because of the failures to investigate the financial crisis adequately, we still don’t know.  But we do know that when banks hide their problems, they metastasize and can hurt the economy.

What Did They Really Know?

Questions that will need to be answered include these:

  • What did Jamie Dimon, the bank’s chief executive, and Doug Braunstein, the chief financial officer, know and when did they know it?
  • Were JPMorgan’s first-quarter earnings accurate?
  • Were top JPMorgan officials misleading when they discussed the chief investment office’s investments?
  • Why did JPMorgan change a crucial measure of risk during the first quarter. Was that adequately disclosed?

In other words, before discussing reform, the first question should be whether any existing laws were broken. According to Dealbook:

That it hasn’t been asked shows how little true accountability there has been since the financial crisis. No top-tier banker has gone to prison for the many bank failures, the deceptive sales practices or the misrepresentations of the books. As a society, we have thrown up our hands at Too Big to Prosecute financial fraud.

What Were They Hiding?

Although JPMorgan fired the three top executives responsible for the trading loss, we still don’t know much about the timing of these losses. The  trades first came to pubilc awareness in early April, 2012, when Bloomberg News and The Wall Street Journal wrote about the “London Whale.” When JPMorgan reported its first-quarter earnings on April 13, Dimon and Braunstein downplayed problem, which Jamie Dimon called  “complete tempest in a teapot.” Really?

The inconsistency here is that, while he dismissed concerns then, now the bank says that the big losses in fact happened after the first quarter, in late April and early May. They were clearly executing a damage control strategy worried that, had they admitted the extent of the problem, the losses could have multiplied as investors might have forced JPMorgan to give up its positions at “fire-sale prices.” The bluff didn’t work.

Answers Needed

From the losses that have been reported so far, the underlying value of the derivatives contracts was likely $250 billion to $300 billion, and we still don’t know what were these trades were, when the losses occurred and whether the positions were being marked correctly.  The one big “London Whale Trade” — buying and selling credit default swaps on the same index but at different expiration dates — appears to amount to only $50 billion or $70 billion, and likely accounts for only $600 million to $1 billion of the $2 – $5 billion loss.

The trades had been initiated months ago and were widely known, and, as Dealbook points out, earlier in 2012, bank insiders reported that

“Mr. Iksil was ‘defending his positions,’ implying that he was doubling down to force the market in the opposite direction. That’s a rookie trading mistake, one presumably approved by his bosses.”

Still No Accountability for Dimon?

So far CEO and Chairman Jamie Dimon has somehow managed to sweet talk his way through the debacle, trading in on his charm.  He spent all of four minutes talking about the trading loss and steps the company has taken to address it, and two more talking about accomplishments of the company over the past year. After offering a quick apology to shareholders, he survived a push to strip him of the title of chairman of the board, which he simultaneously holds with the CEO title. The vote to strip him of the chairman’s title won only 40% support. Experts in corporate governance believe that the dual role is abusive.

Also passed was a shareholder endorsement of his pay package from last year, totaling $23 million,  with 91% of the vote, according to an Associated Press analysis of regulatory filings.  Of course, most of the shareholder ballots were cast in the weeks before Dimon revealed the trading loss.  He has received the same amount, in addition to a $17 million bonus,  for two years straight.

When confronted at the meeting by shareholders upset about the trading loss, he was not very expansive in his answers. Reportedly, to some questions, he offered a simple, “OK, thank you.” According to the Register Guard:

The Rev. Seamus Finn, representing shareholders from the Catholic organization Missionary Oblates of Mary Immaculate, said that investors had heard Dimon apologize before for the foreclosure crisis and other problems.

“We heard the same refrain: We have learned from our mistakes. This will never be allowed to happen again,” Finn said. “I can’t help wondering if you are listening.”

One wonders: are answers like these worth $23 million dollars? And just what does it take for a powerful CEO to be held accountable these days?  Even the president’s response to these risky derivative trades that Dimon himself admits should never have been made was muted. On  the television show The View, all he said was: “JPMorgan is one of the best-managed banks there is. Jamie Dimon, the head of it, is one of the smartest bankers we got and they still lost $2 billion.”

As Robert Reich points out:

Not a word about Jamie Dimon’s tireless campaign to eviscerate the Dodd-Frank financial reform bill; his loud and repeated charge that the Street’s near meltdown in 2008 didn’t warrant more financial regulation; his leadership of Wall Street’s brazen lobbying campaign to delay the Volcker Rule under Dodd-Frank, which is still delayed; and his efforts to make that rule meaningless by widening a loophole allowing banks to use commercial deposits to “hedge” (that is, make offsetting bets) their derivative trades.

Nor any mention of Dimon’s outrageous flaunting of Dodd-Frank and of the Volcker Rule by setting up a special division in the bank to make huge (and hugely profitable, when the bets paid off) derivative trades disguised as hedges.

Nor Dimon’s dual role as both chairman and CEO of JPMorgan (frowned on by experts in corporate governance) for which he collected a whopping $23 million this year, and $23 million in 2010 and 2011 in addition to a $17 million bonus.

Wall Street’s biggest banks were too big to fail before the bailout. Now, led by JPMorgan Chase, they’re even bigger. Twenty years ago, the 10 largest banks on the Street held 10 percent of America’s total bank assets. Now they hold over 70 percent.

Regulatory Conflicts of Interest

In the meantime,  the loss of at least $2 billion in trading practices similar to those that caused the 2008 financial meltdown again illustrates the need for meaningful financial reform.  Jamie Dimon is a director at the Federal Reserve Bank of New York, and has used this position to become the leading voice against regulation of Wall Street. As the Federal Reserve is currently working on crafting and implementing some of the most important aspects of the 2010 financial reform bill, voices are calling for  Jamie Dimon to resign from the Federal Reserve Bank of New York.

You can sign the petition here.

Related Links

Snap! principle of corporate accountability:
Accountability is for little people.

In previous posts, I have shown that, while insurers have taken the brunt of public blame for rising U.S. health care costs, they are not in fact the source of the problem and have done much to help bring costs under control.  The above chart illustrates that insurance company profits account for only 3 cents per health care dollar, and 14 cents can be attributed to insurance services, vs. 86 cents to providers.  Consistent with my analysis that it is the upstream providers who are responsible for rising costs, an April 23, 2012 AP article by Lindsey Tanner featured in Bangor Daily News provides an example of some of the problems.

Appendix Treatments Vary by Tens of Thousands of Dollars

What do hospitals charge to remove an appendix? The startling answer is that it could be the same as the price of a refrigerator — or a house.

It’s a common, straightforward operation, so you might expect charges to be similar no matter where the surgery takes place. Yet a California study published in the journal Archives of Internal Medicine found huge disparities in patients’ bills — $1,500 to $180,000, with an average of $33,000.

Inexplicable Cost Differences

The researchers and other experts say the results aren’t unique to California and illustrate a broken system.

“There’s no method to the madness,” said lead author Dr. Renee Hsia, an emergency room physician and researcher at the University of California, San Francisco. “There’s no system at all to determine what is a rational price for this condition or this procedure.”

The disparities are partly explained by differences among patients and where they were treated. For example, some had more costly procedures, including multiple imaging scans, or longer hospital stays. A very small number were treated without surgery, though most had appendectomies. Some were sicker and needed more intensive care.

But the researchers could find no explanation for about one-third of the cost differences.

The researchers examined 2009 data that hospitals were required to submit to the state on 19,368 patients with appendicitis. To get the fairest comparisons, the researchers included only uncomplicated cases with hospital stays of less than four days. Patients were 18 to 59 years old.

The study looked at what patients were billed, before contributions from their health insurance — if they had any. The figures don’t reflect what hospitals were actually paid. Insurance companies often negotiate to pay less than what they are billed, and what patients pay depends on their health plans. Those least able to pay — the uninsured — could be socked with the full bill. Still, even those with good health insurance may end up paying a portion of the cost, so price matters, Hsia said.

Uninsured and Medicaid patients had slightly higher bills than those with private insurance. Charges were highest at for-profit hospitals, followed by nonprofits. County hospitals, typically safety-net hospitals, had the lowest charges.

The costliest bill, totaling $182,955, involved a woman who also had cancer. She was treated at a hospital in California’s Silicon Valley. Her bill didn’t show any cancer-related treatment. The smallest bill, $1,529, involved a patient who had her appendix removed in rural Northern California. Otherwise, the cases were similar: Both patients were hospitalized for one day, had minimally invasive surgery, and had similar numbers of procedures and tests on their bills.  Data from the federal Agency of Healthcare Research and Quality and the International Federation of Health Plans suggest the nationwide average price for an appendectomy is almost $28,000. Many cases involved charges well over $100,000 and under $2,000, Hsia said. Also, within geographic regions, the lowest and highest charges differed by tens of thousands of dollars.

Itemized bills for appendix removal can include fees for staying overnight in the hospital, the surgery and surgical supplies, operating room expenses, anesthesia, imaging tests, medicine and lab tests.

The analysis echoes other reports, including a study of 66 hospitals in the U.S. and Canada that found charges for the same services varied widely in both countries. Other studies have found big geographic disparities in health care costs.

Dr. David Goodman, director of Dartmouth College’s Center for Health Policy Research, said the differences found in the study are credible and “very concerning.”

Caroline Steinberg, a vice president at the American Hospital Association, said hospitals partly set charges based on their costs of providing services, which vary by community. Steinberg said if two patients with the exact same condition received exactly the same services in the same hospital, the charges would be similar.  But Hsia said the problem is that most hospitals don’t advertise charges, and sick patients generally don’t get to choose the exact drugs or surgical techniques that are used on them. The study was paid for by the Robert Wood Johnson Foundation, which funds health research and programs.

Can Government Do Anything?

Other developed countries have more government regulation that prevents these wild disparities. U.S. critics of that kind of system favor more market competition, yet the study illustrates that “the laws of supply and demand simply do not work well in health care,” said Dr. Howard Brody, director of the Institute for the Medical Humanities at the University of Texas Medical Branch in Galveston and a frequent critic of skyrocketing medical costs.

President Barack Obama’s health care overhaul, now in the hands of the U.S. Supreme Court, would have little effect on the kinds of disparities seen in the study, policy experts say. One section of the law bars tax-exempt hospitals from charging uninsured people more than the rates insured patients end up paying because of discounts negotiated by insurance companies. The government has not said how the reductions for uninsured people would be calculated, said health care consultant Keith Hearle.

As noted above, for-profit hospitals have the highest charges.  With consolidations occurring, with huge growth in for-profit hospitals’ share of the market,  there has still been little political will to tackle the problem of the growing clout of large hospital groups.

Snap! principle of rising health care costs:

The upstream providers need increased scrutiny and responsibility.

The Massachusetts Experiment Continues

  • The reform model instituted in2006 succeeded in expanding access.
  • With 90 cents of every health care dollar goes toward medical care, driving health insurance premiums.
  • In 2010, Gov. Deval Patrick implemented cost containment legislation to  encourage providers to coordinate care and accept “global payments” instead of fee-for-service, and “accountable care organizations,” integrated systems.
  • Initial results show that providers with market clout are still able to negotiate high payments, with consolidation of hospitals and doctors groups exacerbating the problem.

In Part 1, I presented the perspective of Massachussets Gov. Patrick  regarding legislation designed to bring the cost of care down by reforming the payment system by moving to “global payments.” Here are three other differing perspectives on controlling health care costs, featured by Kaiser Health News.

Prominent Voices #2: Physician

By Dr. Lynda M. Young, M.D., a pediatrician from Worcester, Mass., and president of the Massachusetts Medical Society, the state’s professional association of physicians.

For six years, my fellow physicians in Massachusetts have been working under a health reform law that, for better or worse, bears a strong resemblance to the national law that is two years old…The numbers are well known. Many more people are insured. While we struggle with a primary care physician shortage like the rest of the states, significantly more people, especially those in disadvantaged communities, have a regular health care provider.

We also continue to struggle with rising costs – which is not a new phenomenon. Massachusetts has been a high-cost state for a long time, and it has nothing to do with our health reform law. But with many more people in the system, it’s more important than ever to do something about it.

Upsurge in New Patients

But aside from the numbers, what has it been like to experience the Massachusetts health care system since 2006? At first, we saw an upsurge in new patients — people we had never seen before. We were concerned these new patients would overwhelm practices, especially those in urban areas, but it wasn’t as huge a problem as some feared. It was very helpful that the state promised to close the gap between Medicaidand commercial insurer rates, because most of these new patients were covered by Medicaid.

These new patients frequently presented with complex, chronic health conditions such as hypertension, and many hadn’t received the regular treatment they needed. So with these patients, we had some catching up to do, but this catch-up period didn’t last forever. To meet the new level of demand, many practices found it very helpful to hire physician assistants, nurse practitioners and other allied health professionals to help them improve the daily operations of the practice. Most patient visits require relatively simple interventions, while others are more complex. These health professionals can help physicians focus more of their time on the most complex and demanding visits.

Cost Conscious Consumers

Meanwhile, we initially thought that once everyone (or almost everyone) was insured, we would never have to talk about money with our patients again. In fact, these conversations are still happening, but they are of a different nature. More of our patients have high-deductible plans, high co-payments or limited network plans. These realities have prompted many of them to ask pointed questions about the cost of a procedure or a test, because they’re on the hook for more of the cost. This trend can go too far in the other direction, but it’s not always a bad conversation for a physician to have with a patient. These conversations often lead patients to ask about the effectiveness and value of our interventions. Fewer patients are now willing to accept a physician’s advice at face value. We often must provide evidence for why going to a different hospital, undergoing a simpler procedure, or getting a less expensive test, will produce the same or even better results.

Even if the Supreme Court overturns the federal health law, health care delivery in the United States will never be the same. Accountable care organizations are here to stay. Electronic health records won’t go away, and they will get better and better. Hospitals, physicians and other health care providers are working together more, and market consolidation is occurring under our feet. The Affordable Care Act merely hastened the process, and added momentum to the changes we’ve been seeing in Massachusetts, too.

Will our experiences in Massachusetts be the same as physicians in other states? Maybe not. Health care delivery can be a local phenomenon, so experiences are bound to vary. But for us in Massachusetts, we are keenly aware that while health reform still presents many challenges, its benefits are very tangible.

Prominent Voices #3: Hospital Care Provider

By Lynn Nicholas, president & CEO of the Massachusetts Hospital Association, Apr 12, 2012

s the country awaits the Supreme Court’s decision regarding the Affordable Care Act, we in Massachusetts can reflect on how much our state healthcare reform efforts have achieved.

We have the highest level of healthcare coverage in the country – more than 98 percent. Hospitals have taken billions of dollars out of their expense trend over the last three years. Public opinion surveys demonstrate that our reform efforts have broad public support. Employers continue to offer insurance even as we have expanded coverage for public programs. And when one compares the cost of health insurance premiums based on median household income, Massachusetts ranks as the 48th lowest state.

The challenge is to build on our success and make it sustainable over the long haul. We have to find ways to maintain our great access to care while improving both quality and efficiency. We also have to be concerned about the impact of reform on our economy as we struggle to climb out of the “great recession.” Healthcare is the economic engine of our state thanks to our hospitals, universities, and biomedical and life sciences industries. Fortunately in Massachusetts we have a history of key stakeholders finding ways to collaborate to reach the right balance, and have three suggestions for how to achieve these goals.

Better Coordinated Care

The first involves transforming the health care delivery system from a disjointed system reacting to illness into one that provides well-coordinated care and that is focused on keeping people healthy. The Massachusetts market is already shifting from a fee-for-service framework to one in which caregivers are organized to provide comprehensive patient care, and are rewarded for providing access, quality and efficiency. In such a system providers not only accept increased responsibility for care, they also accept financial risk that was once the responsibility of insurers. Recently the Boston Globe reported that more than 1.2 million people in the Bay State are now covered by such plans. And five of the 32 “Pioneer ACOs” the federal government awarded are now operating in Massachusetts. We are heading in the right direction, but it’s important that insurers continue to develop products that promote this transition, and for employers and consumers to support this trend as they decide which insurance products to purchase.

Share the Burden

The next suggestion is that we keep our eyes on lowering the total health care spending trend over several years. The health care spending trend is not the result of the actions (or inactions) of any single player. It’s affected by those who provide care, who design insurance coverage, who buy insurance and seek health care services, who control state and federal government health care programs, who produce medical technologies, and others. You can’t target just one participant in the system and hope to achieve sustainable success. Government should lead the way and set a goal to lower total health care spending by a reasonable amount in a reasonable time frame. That will motivate everyone to get involved, find solutions and achieve success.

Finally, the strategies we pursue also must harness the ability of the private market to innovate and adapt quickly. At the same time, the government should work to improve its own programs by ensuring transparency, measuring success and helping to shape decisions among stakeholders about what to do if success isn’t realized.

The Massachusetts legislature has found numerous ways to promote health care progress, from requiring small business purchasing pools to the creation of a critically important All Payer Claims Data Base, which will be a unique claims-based data source that will ultimately provide timely, valid and reliable data to help shape reform, improve quality and reduce cost. But government shouldn’t move to regulate provider rates — that would go too far.

Government is a Vital Stakeholder

State and federal governments already dictate more than half of the reimbursements that hospitals receive – and government substantially underpays for those hospital services. This is particularly problematic for hospitals that serve the financially needy and have little private insurance business. It is also a glaring weakness in the mental health care system.  Moreover, when government – whether state or federal – underpays, some of its costs are shifted to private payers and that leads to higher insurance premiums. Empowering government to rule over private market rates will make matters worse. The market is making substantial progress and it should be given a fair chance to work.  We are on the path to sustainable success. Maintaining a collaborative and balanced approach will keep us on that course.

Prominent Voices #4:  Payment Reformer

By Paul Williams, the payment reform policy coordinator for Health Care For All in Massachusetts.APR 12, 2012

Massachusetts is once again on the cusp of leading the United States in health care reform…Massachusetts leaders are working on a groundbreaking attempt to show the nation that almost universal health care can be achieved while also maximizing cost effectiveness and increasing the quality of care.

We at Health Care For All have organized a consumer-based coalition, called the Massachusetts Campaign for Better Care, focused on payment and delivery reform. The coalition formulated 10 principles expressing our priorities for patient-centered payment reform. These principles need to be embedded in any successful payment reform effort to ensure that as we lower the cost of our health care, patients experience higher quality and that the most vulnerable are protected.

Proposals, building on legislation filed in February 2011 by Gov. Deval Patrick, will seek to remake our health care system to reward value and quality, rather than volume and quantity. Re-orienting the way doctors, hospitals and other providers are paid can align incentives to promote patient-centered care that focuses on health and disease prevention, ultimately lowering health care costs.

In the upcoming debate, the Campaign for Better Care will advocate for a number of policies we believe are crucial to effective reform.

Address Special Needs

For starters, we believe that, in shifting payment methodologies away from the fee-for-service model, steps must be taken to address the particular requirements of those with special needs, people with disabilities and chronic illness, immigrants, the homeless, people with low and moderate income, seniors, and children. In order to avoid the pitfalls of capitated arrangements like those experienced in the 1990s, payment policies should take into account the higher costs incurred by patients who experience barriers to care due to socio-economic status, language and other social and cultural factors. To this end, we must develop and use risk adjustment factors to the rates being paid in order to protect patients with high medical utilization.

Consumer and Community Outreach

In addition, health care system reforms must be accompanied by a renewed commitment to funding public health and community-based prevention. Expanded investment in prevention and public health will lead to a reduction in overall health care costs.

Also, the patient needs to be a partner in their health care and must be given the proper tools to be engaged. Patients and providers should collaborate in care plans that provide patients with the necessary skills, confidence and knowledge. Programs like chronic disease self-management and shared decision-making have demonstrated that increased patient confidence and engagement improves care and lowers health care costs.

More Provider Accountability

Finally, our health care system is overly complex and fragmented. Tests get repeated, records go missing and no one is paid to look out for our overall health. We can achieve cost reduction and quality improvement by rewarding coordinated care. Providers with higher rates of preventable events, like preventable readmissions, inappropriate hospital admissions, or preventable complications, should face financial consequences.

Massachusetts is proud to have provided a template and test bed for reforms that became part of the Affordable Care Act. As the state is poised to continue down the health reform road, consumers will be active to make sure reforms lead to better, more affordable care.

Commentary: Health Insurance Isn’t the Problem

Unfortunately, up to now, most of the discussion on health care costs has focused on the insurers, whose profits account for perhaps 3% of the cost of rising health care (14% when you factor in administration and support), while the providers account for some 76%.It is important to remember that insurance is the basic principle behind risk management in any financial delivery system in any healthcare model.

If people were capable of paying for catastrophic services, they would, and there would be no need for insurance of any kind. If people could sock put away enough money to provide $ 1million to their beneficiaries at their death, they wouldn’t need to purchase life insurance. If they could afford to pay $1 million in liability for injuring another party in an accident, they wouldn’t need to purchase automobile insurance. And if people could afford the costs of healthcare for serious illnesses, they wouldn’t need health insurance either.

Insurance is part of the solution, and not the problem.  Managed care programs, for instance, place a great deal of emphasis keeping  costs down. Such programs typically include explicit standards for selecting providers, formal utilization review and quality improvement programs, an emphasis on preventive care; and financial incentives to encourage enrollees to use care efficiently. An example of how health insurers are keeping costs down is explained by a friend who writes:

I have insurance with a huge deductible, so i basically just pay for everything. The thing is though, if I did not have insurance, I would have to pay the “regular” rates instead of the “insurance negotiated” rates. “Regular” rates are much higher; on lab tests, it’s about double.

When insurance, as the most visible part of the picture, tends to take the brunt of the blame, this allows the real upstream drivers of cost to evade scrutiny. Recent political rhetoric about vouchers as a proposed solution for rising costs is an interesting study in how health insurers are falsely blamed for cost increases. The argument is that because insurers foot the bill, the consumer has no incentive to shop around for cheaper care, and that this is why costs are rising. Let’s examine this canard:

Vouchers Won’t Solve Our Health Care Cost Problem

Recently, politicians have been floating rather simplistic rhetoric about health care vouchers, as they often do in an election cycle. Vouchers are a go-to political strategy that are often recommended for education, housing and so forth. The concept is that introducing competition into healthcare will provide make patients more cost sensitive and that this will drive down care costs via the dynamics of the free market . Economists agree that vouchers won’t work in healthcare, and the public also senses that they are an unfair way to ration care. A Pew Research/National Journal poll conducted in September 2010 found that 69 percent of people over age 65 — Democrats and Republicans — oppose replacing Medicare with vouchers, which the Ryan Plan recommends.

Economic principles inform us that markets work best in circumstance where there are 1) a large number of buyers and sellers, 2) consumers have full information about the product, 3) the good or service is nearly identical across producers, 4) there are no barriers to entry or exit, and 5) the conditions are such that prices provide the correct signal to consumers and producers in order to encourage optimal behavior.

However, in health insurance markets, these conditions do not hold. While purchasers of health insurance are numerous, providers are much fewer in number. And in some case, as with pharmaceuticals, there may be only one or a very few suppliers of a particular drug. And, although regulation attempts to ensure that the alternative plans are transparent, easy to understand, and easy to compare, consumers have trouble comparison shopping for health care.

Consumers themselves are in no position to make informed decisions about health care, especially with the stress, worry, and need for instant decisions that an illness can present. If a doctor says you need a costly emergency procedure at 3 a.m. to save your life, will you be inclined to shop around for the best deal?”

A prime example of circumstances in which competition works is the automobile industry, where potential buyers test drive and then review car ratings from consumer reports. The individual can effectively compare the specifications, price and reliability of similarly desired models, with the guarantee that all products are standardized. Unfortunately, the consumer reports approach will not work for health care. Hospitals offer too large of a range of services with various complications and medical jargon. Today, it is exceedingly difficult to pick the right professionals outside one’s area of expertise. Being a good attorney does not mean you can pick a good hematologist. And hospital report cards can be misleading. For example, mortality rates cannot be considered a strong indication of medical performance unless patient age, “do not resuscitate” orders, and health complexity issues are taken into consideration. According to Blue Cottage Blog:

Health care services just follow a different set of rules. Coronary bypass surgery or limb amputations are huge decisions with irreversible consequences if the “wrong” purchase is made, which is much different than switching your internet provider. The risk of no trial runs, coupled with high emotion from the patient and sphere of influence, sometimes cloud best judgment.

The argument put forth by supporters of a voucher program are based on the fallacy that consumers don’t really care what they pay for health care. In fact, the statistics show clearly that, even though increasing numbers of American families are responsible for a greater share of their healthcare costs, provider costs still just continue to increase.


The report by Massachusetts Attorney General Martha Coakley, of what the six largest Massachusetts insurers paid providers in 2009, concluded that despite the global payment system, which puts doctors and hospitals on a budget, providers with market clout are still able to negotiate high payments.

“Our investigation shows that a move to global payments is not the panacea to controlling costs without first addressing provider price disparities that are not related to the quality or complexity of the services being provided.” Coakley blamed the dysfunctional nature of the healthcare market, which allows for wide variety in providers’ negotiating leverage. She said that a shift to global payments without fundamental market changes “may not only fail to control cost, but may exacerbate market dysfunction.”

Translation into plain English: the institutions that own the hospitals and their suppliers are not being held accountable enough.  Hospitals and doctors groups are consolidating, and using their clout to squeeze the insurance companies for larger payments, passing off the financial
risk to the easiest and most highly regulated target – the insurance companies, while pushing back against attempts to scale back costs. What
incentive do they have to do so, healthcare being a fixed demand product?

Although the perspectives of the various stakeholders shown above represent different, often competing interests, the Massachusetts dialogue has at least brought them to the table, which is an important first step toward a more rigorous discussion.

Of course, there is room for improvement and innovation all around. And there is opportunity for profit and appropriate margins if well earned.  When insurance systems add 3% to the cost and providers 76%, it becomes fairly clear why everybody’s goes after the 3% and ignores the rest. It’s called market clout, and it originates in inefficient doctors groups and hospital corporations that are consolidating and setting prices,  pharmaceutical companies and medical supply companies. To achieve meaningful cost control, all parties must be brought to the table and the cards must be laid out for all to see.

Information above is partly provided by Kaiser Health News at

Snap! principle of health care cost control:

All eyes on Massachusetts as stakeholders try to control the upstream drivers of health care costs.

Massachusetts Does the Math

Six years ago Massachusetts implemented sweeping reforms that have succeeded in their purpose of expanding access to health care, and the Affordable Health Care Act is now applying this model on a national scale. Now, once again, Massachusetts is at the forefront of  reform with a new plan designed to lower escalating care costs.

Health insurance premiums are driven by health care costs.  Since 90 cents of every health care dollar goes toward medical care in Massachusetts, keeping care affordable means acting to lower upstream provider costs.

The Global Payments Experiment

Major stakeholders in Massachusetts — hospitals, insurers, doctors and consumer advocates — are debating the best ways to control rising health care costs and insurance premiums.  Kaiser Health News highlighted the perspectives of key stakeholders. I will provide the perspectives these prominent voices, starting with Gov. Deval Patrick.

Gov. Deval Patrick unveiled health care cost containment legislation designed to radically change how health care is paid for and provided over a year ago. The recommendation: instead of the prevalent fee-for-service system in which providers bill separately for each and every service they provide, the governor’s plan would encourage them to coordinate care and accept “global payments” — a set amount of money to tend to all of a patient’s needs.  The plan also calls for the formation of “accountable care organizations,” integrated systems that the federal health overhaul law also is promoting in the Medicare program.  Getting all stakeholders to agree has been difficult. Insurers are enthusiastic about containing the health care costs that help drive up premiums, but hospitals say they don’t control all the drivers of rising prices and should not be held responsible for all of the burden.  Consumer advocates want to ensure that the new payment and delivery system considers the special problems and costs of people with disabilities and chronic illness.

Prominent Voices: #1

“Like President Barack Obama’s Affordable Care Act, we took a hybrid approach, relying mainly on private insurance provided through the workplace, and added varying degrees of public subsidy depending on a person’s ability to afford private insurance. It’s working. Today, more than 98 percent of Massachusetts’ residents have health care coverage, including 99.8 percent of children. No other state in America can touch that. More companies offer their employees insurance today than before the bill was passed.

In addition, more than 90 percent of our residents have a primary care physician, and four out of five respondents to a recent survey have seen their primary care doctor in the last year. Emergency room visits for primary care are down, and spending on the uninsured and underinsured has dropped by nearly half. We’re healthier, too. For example, because of access to screenings, we’ve seen a 36 percent decrease in cervical cancer in women. All this while adding about 1 percent to state spending on health care.

Our next challenge is slowing the growth in health care premiums.  Spending on health care makes up 18 percent of all spending in the United States, and it is projected to reach 34 percent by 2040. As health spending continues to grow at this historic rate, it weakens our ability to compete and slows job growth. Two years ago, I directed the state’s insurance commissioner to disapprove excessive premium hikes. While an admittedly blunt tactic, and not in and of itself a long-term solution, it was a necessary step to galvanize the market to act.

Since then, hospitals and insurance carriers have reopened their contracts and cut rate increases, in some cases by more than half. We’ve created limited network health plans to give consumers opportunities to get great care in neighborhood settings at lower cost. Certain plans tailored for small businesses promise to be as much as 20 percent cheaper than current rates. We are also ending administrative duplication by requiring common codes and forms from insurers and providers. And, with the help of the Affordable Care Act, more providers are piloting medical home or accountable care models that manage wellness for the whole person, and promise to deliver better and more cost-effective care. These tactics are making a difference. In the last two years, average premium increases for small businesses and individuals have dropped from more than 16 percent to less than 2 percent today. Our focus now is on making these gains last.

There are a number of strategies we are pursuing, including putting an end to the “fee-for-service” model wherever practicable — to stop paying for the amount of care and start paying instead for the quality of care. We are working with our health care community to accelerate this transition to innovative, sustainable models in which incentives are realigned to reward integrated care that emphasizes wellness and lowers costs for everyone. Our goal is for integrated, cost-efficient caregiving to predominate throughout Massachusetts by 2015.

Initial Results

new report featured on Fierce Healthcare by Attorney General Martha Coakley, who conducted a yearlong review of what the six largest Massachusetts insurers paid providers in 2009, concludes that the global payment system, which puts doctors and hospitals on a budget, hasn’t saved money. In fact, the globally paid providers didn’t have less medical expenses than doctors paid the standard way, and some large doctor groups, such as Atrius Health and Mount Auburn Cambridge, were far more expensive than physicians paid under the traditional fee-for-service system. It appears that providers with market clout are still able to negotiate high payments, according to the report.

“Our investigation shows that a move to global payments is not the panacea to controlling costs without first addressing provider price disparities that are not related to the quality or complexity of the services being provided.” Coakley said, reports WBUR . But Coakley stopped short of calling global payment reform unwise, instead blaming the dysfunctional nature of the healthcare market, which allows for wide variety in providers’ negotiating leverage. Therefore, she said, a shift to global payments without fundamental market changes “may not only fail to control cost, but may exacerbate market dysfunction.”

Blue Cross took issue with Coakley’s report, saying that its alternative quality contract, which gives doctors a set amount each year to spend on each patient, “is achieving our twin goals to both improve the quality of patient care and reduce the historical rate of increase in healthcare costs.” The insurer said its plan is “a five-year strategy, not one year,” and Coakley’s report focused only on data from 2009, which was the first year it implemented the contract, according to the Boston Herald.

“Our goal was not just to limit the disparities, it was to reduce the trend,” Patrick Gilligan, Blue Cross senior vice president for health care services, told the Globe. “We do push harder on those providers who start high and ask them to come down over the life of the agreement.” But, he said, “there will be some providers who will have leverage. We are watching the consolidation [of hospitals and doctors groups]. We have concerns about that too. Market clout could be an issue even in a global payment environment.”


Part 2 explores other perspectives on the next wave of policy challenges from:

  • Physician: Massachusetts Hospital Association President Lynn Nicholas
  • Payment Reformer: Massachusetts’ Health Care For All’s Paul Williams
  • Hospital Care Provider: Massachusetts Medical Society’s Lynda Young

Information above is largely provided by Kaiser Health News at

Snap! principle of health care cost control:

All eyes on Massachusetts as stakeholders try to control the upstream drivers of health care costs.

Debunking the Myth

We’ve heard it before:

  • “Health insurers are gouging the consumer.”
  • “Free market principles will reduce healthcare prices if people have to pay for it out of their own pocket.”
  • The Affordable Care Act is a Machiavellian scheme by insurance companies to make a windfall profit.

Americans spend more per capita and the highest percentage of GDP on healthcare than any other OECD country. Why are healthcare costs rising at a rate that is higher than anywhere in the world? Are the insurance companies price gouging?

A Brief Primer on Risk management and Health Insurance

Insurance is a form of risk management used to hedge against the risk of a contingent, uncertain loss through the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment.

The insurance transaction involves the insured assuming a guaranteed and known relatively small loss in the form of a premium payment to the insurer in exchange for the insurer’s promise to compensate the insured in the case of a personal financial  loss. In health insurance, morbidity risk and historical costs are averaged and apportioned among subscribers. Subscribers pay a premium each month even when they don’t avail themselves of the services, because when they finally do need medical services, the costs can be financially devastating.

Why are Health Care Premiums Rising?

Health insurance premiums have nearly doubled since 2000, growing 3 times faster than wages. Are insurers are gauging consumers? Insurance profits account for just 3% of health care costs, while providers and suppliers are responsible for 76%.

Insurance companies provide shared risk services by  apportioning the costs of health care services among the subscriber pool.  They are responding to increasing  costs, not setting them.  Forced to respond to rising costs in the health care market, they find themselves at the forefront of the battle, implementing strategies to reduce costs and keep the premiums affordable. Strategies include negotiating better rates with providers, working to provide better outcomes, audits of physician group standards and practices, and piloting alternatives to fee-for-service payment.  However, it seems that, as fast as the insurers get a handle on costs, providers respond by raising their own costs to pass the upstream costs to the consumer and it’s representative, the insurers.

Myth: Making Americans Pay More Will Bring Down Health Care Costs

A recent market response to increasing health care provider costs is that employers are increasingly purchasing plans that allow for greater employer-employee cost sharing, purchasing plans under which the employees’ share of the costs higher. They are also opting for more affordable plans with increased out-of-pocket deductibles and coinsurance payable by insureds.

A shrinking market doesn’t make insurance companies more profitable, but places greater pressures on them to stay afloat and remain profitable, and one problem is that increasing premiums and decreasing benefit payments pressure healthier individuals to opt out of the premium pool, causing adverse selection risk which raises premiums for everyone.

And the statistics show that, although increasing numbers of American families are responsible for a greater share of their health care costs, provider costs still just continue to increase.

Given the rising costs of health care services, with each passing year, families face increasing deductibles, copayments, and other out-of-pocket expenses, requiring them to make difficult decisions to make ends meet. Today, middle class American families with high out-of-pocket expenses spend 21 percent of their income on health care services – not including premiums.

One recent survey estimated that 72 million, or 41 percent of nonelderly adults have accumulated medical debt or had difficulty paying medical bills in the past year, even though a 61 percent majority had health insurance. These high-cost households pay an average of 18 percent of their household income on health care expenses, not including premiums, vs. an average of 1 percent for the other households. High-cost households shoulder 43 percent their total health care expenditure burden on their own, compared to an average of 17 percent for other households.

Those who experience the highest levels of out-of-pocket costs are more likely to be women and the older. They are also significantly more likely to suffer from common diseases such as diabetes, heart disease, and cancer – they are three times as likely to have cancer, diabetes, or heart disease, and twice as likely to have high blood pressure as people in lower-cost households. 71 percent of individuals in high-cost households had one or more chronic conditions compared to 44 percent of individuals in lower-cost households. 33 percent in high-cost households have three or more chronic conditions, compared to 10 percent in lower-cost households.

Upstream Costs Continue to Rise

An article at the Huffington Post titled Typical Hospital Wastes Up To $3.8 Million A Year On Readmissions: Study identifies some of the cost issues perpetrated by provider groups.

A typical hospital with 200 to 300 beds wastes up to $3.8 million a year, or 9.6 percent of its total budget, on readmissions of patients who shouldn’t have had to come back, says Premier, a health care company that advises hospitals on improving efficiency and safety. The company analyzed the records of 5.8 million incidents in which a patient went back to a hospital to be re-treated and found they added $8.7 billion a year, or 15.7 percent, to the cost of caring for those people…Hospitals are ground zero for health care cost-containment efforts because they are the biggest recipients of America’s health care spending, having taken in $814 billion in 2010, according to a federal government report.

According to the article, wasteful spending in the U.S. health care system has been estimated to be as high as $850 billion each year, according to a 2009 Thomson Reuters report. Overall health care spending rose by a factor of 10 between 1980 and 2010, when it reached $2.6 trillion.

The health care reform law enacted two years ago expands on efforts begun three years ago to link how much Medicare pays hospitals to how well they reduce medical errors, readmissions, and other inefficiencies. Starting next year, hospitals will see their Medicare payments docked by 1 percent if they don’t cut back on these readmissions. The penalty increases to 3 percent in 2015.

Premier’s message to hospitals feeling squeezed: The money you need to save is already in the system. The company has identified 15 steps hospitals can take to improve the care they provide while also saving money, such as making sure patients are treated right the first time and don’t need to be “readmitted” for more care. By analyzing information culled from its hospital partners, Premier recommends other targets for savings, such as performing fewer blood transfusions and limiting costly tests.

A  report by Robert Kelley, vice president of healthcare analytics at Thomson Reuters, found.shows that the U.S. healthcare system wastes between $505 billion and $850 billion every year.

“America’s healthcare system is indeed hemorrhaging billions of dollars, and the opportunities to slow the fiscal bleeding are substantial,” the report reads. “The bad news is that an estimated $700 billion is wasted annually. That’s one-third of the nation’s healthcare bill,” Kelley said in a statement. “The good news is that by attacking waste we can reduce healthcare costs without adversely affecting the quality of care or access to care.”One example — a paper-based system that discourages sharing of medical records accounts for 6 percent of annual overspending. “It is waste when caregivers duplicate tests because results recorded in a patient’s record with one provider are not available to another or when medical staff provides inappropriate treatment because relevant history of previous treatment cannot be accessed…The average U.S. hospital spends one-quarter of its budget on billing and administration, nearly twice the average in Canada,” reads the report, citing dozens of other research papers.

Some other findings in the report from Thomson Reuters (the parent company of Reuters):

  • Unnecessary care such as the overuse of antibiotics and lab tests to protect against malpractice exposure makes up 37 percent of healthcare waste or $200 to $300 billion a year.
  • Fraud makes up 22 percent of healthcare waste, or up to $200 billion a year in fraudulentMedicare claims, kickbacks for referrals for unnecessary services and other scams.
  • Administrative inefficiency and redundant paperwork account for 18 percent of healthcare waste.
  • Medical mistakes account for $50 billion to $100 billion in unnecessary spending each year, or 11 percent of the total.
  • Preventable conditions such as uncontrolled diabetes cost $30 billion to $50 billion a year.
  • American physicians spend nearly eight hours per week on paperwork and employ 1.66 clerical workers per doctor, far more than in Canada,” (quoting a 2003 New England Journal of Medicine paper by Harvard University researcher Dr. Steffie Woolhandler.)

All this could help explain why Americans spend more per capita and the highest percentage of GDP on healthcare than any other OECD country, yet has an unhealthier population with more diabetes, obesity and heart disease and higher rates of neonatal deaths than other developed nations.

Blaming the Victim?

The solutions that we see publicized in the national health care debate ignore the upstream forces that push costs up. Insurance companies aren’t the problem. They’re the ones who make care procedures affordable, using sound principles of risk management. They are heavily regulated both at the federal and state levels, and are doing what they can to attempt to keep the health costs from rolling higher.  The threat isn’t the insurers but the lack of accountability at the provider level.

For example,the Affordable Care Act requires new medical loss ratio regulations make insurance marketplace more transparent and requiring insurers to spend premium dollars on care. These new regulations issued by the Department of Health and Human Services (HHS) require health insurers to spend 80 to 85 percent of consumers’ premiums on direct care for patients and efforts to improve care quality.  If they don’t, the insurance companies will be required to provide a rebate to their customers starting in 2012.

“Thanks to the Affordable Care Act, millions of Americans will get better value for their health insurance premium dollar,” said HHS Secretary Kathleen Sebelius.  “These new rules are an important step to hold insurance companies accountable and increase value for consumers.”

Yet, with all the regulation directed at insurers, and government providing insurance-based healthcare solutions like Medicare and Medicaid, it seems that little attention is being paid to the upstream providers who set the costs.

While  some argue that the market should prevail and providers should continue to set their pricing at whatever levels they see fit, some providers provide a sliding scale based on need, which is a recognition of the problem closer to its causes. Somehow government solutions don’t address the causes and simply aim to regulate the consumer and his/her representative – the insurer, kicking the can and passing the buck without reforming the problem area.

In this blog, I will continue to explore the healthcare system, highlighting the innovative solutions that the health insurance industry continues to implement to contain costs, while also examining the upstream sources of the problem.

Snap principle of the rising consumer health care costs:

Insurers are at the forefront of containing consumer costs, but the upstream providers need sweeping reforms. 

The Dilemma of Employer Sponsored Healthcare

As a follow up to my discussion of the Supreme Court’s deliberation on Affordable Health Care Act here, I would like to point to an article by Wendell Potter, who has held a variety of positions at Humana Inc. and CIGNA Corporation, including CIGNA’s head of corporate communications and chief corporate spokesperson.  Mr. Potter points out that:

If there is a group of people more anxious about how the Supreme Court will rule on the health care reform law than President Obama and the millions of Americans who are already benefiting from it, it is health [insurers.]

This provides an invaluable opportunity to reflect on the principles of insurance and how insurance companies can continue to profit and grow in the U.S. One of the dilemmas health insurers face is that some of the primary principles by which businesses become more profitable are not available to them – expansion of services and control of costs.  They have been unable to appreciably bring down the skyrocketing costs of U.S. healthcare and expand coverage. The current model, which excludes certain consumers from coverage only shifts more of the cost of care  to policyholders, increasing the cost burden on both businesses and consumers while reducing the incentive for businesses to purchase employer-sponsored healthcare. And the costs to individuals and small businesses are prohibitive.

Why The Industry Needs The Mandate

Large insurers like Cigna and Aetna grew in the 1990s and 2000s by acquiring smaller competitors. Because of the rising costs and danger of adverse selection in a shrinking pool of consumers, an acquisition strategy is not sufficient to provide increasing quarterly profits to shareholders.  Consequently health insurers are now diversifying by buying data and care management businesses as well as hospitals and physician groups.  The fact is that, without government support, the health insurance business cannot rely solely on free market dynamics to fix the very inefficient U.S. healthcare delivery system.

This is why the industry initially supported President Clinton’s healthcare reform program in the 1990s. Karen Igagni, head of the industry’s largest PR and lobbying group, Health Insurance Plans, testified to a Congressional panel in 1993:

The need for national health care reform has been well documented… Universal coverage at broadly affordable cost becomes possible only when insurance risks are spread across a large community. Currently, most health coverage is priced using “experience rating,” where high premiums are set for high cost groups and low premiums are set for low cost groups. Experience rating financially discriminates against populations that experience high costs: the very young, the very old, the chronically ill, and those with pre-existing conditions, such as diabetes.

Larry English, the former president of Cigna HealthCare, also testified to the committee that he embraced universal coverage and other reforms.  The reforms only lost their support when some of the regulations proposed by the Clintons appeared to have the potential to curtail profits, and the industry endorced “the invisible hand of the market” as the means to bring costs down.

The free-market solution meant that insurers had to keep increasing  premiums and deductibles to keep meeting profit expectations. More restrictive high-deductible plans proved unpopular, an it did not prove a sustainable strategy.

Not a Question of If  – but When and How

Without the individual mandate, the pool of buyers and insurers’ profit margins will continue to shrink. As insureds become increasingly older and morbidity risks increase, premiums will become less affordable. Wendell Potter points out that insurers will have to transform their companies even more rapidly and get out of the risk business sooner rather than later.

The examples of other developed economies illustrate that the basic economics of health care demand government intervention of one kind or another. The questions are simply when and how.

Snap principle of health insurance delivery:

Prepare for sweeping changes

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