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August 6, 2010

A-Rod and the Game of Shadows

On Monday, April 8, 1974, Hank Aaron was 40 years old and returning home to Atlanta where his Braves would face the Los Angeles Dodgers.  I was 9 years old and all I could think about was baseball.  Four days prior Aaron hit career home run number 714 at Riverfront Stadium in Cincinnati, matching the mark of the legendary Babe Ruth and creating immediate anticipation of a new home run record.   The Braves were selfish, giving Aaron sparse playing time while on the road, with the hopes that he would break Ruth’s record in front of his hometown fans.

Young Hank

I was allowed to stay up late that night to watch the Braves vs. the Dodgers on NBC’s Monday Night Baseball, with announcers Curt Gowdy and Joe Garagiola.  Sure enough, in the fourth inning, with a 1-0 count, Aaron hit 715 off of Dodgers pitcher Al Downing, one of the great moments in sports history, and I got to see it.  Today, few doubt Hank Aaron’s credentials as a bona-fide sports hero, a legend.  For me it was a moment that cemented my life-long love for baseball.

Not that my love hasn’t been tested…

In the early summer of 2007 it became pretty clear that Barry Bonds was going to break Hank Aaron’s 33 year-old home run record, it was just a matter of time.  I remembered Aaron as beloved (I met him once, an autographed photo from his playing days with the Milwaukee Braves sits in the window sill of my office).  Bonds, on the other hand, seemed to be despised by everyone, save the diehard San Francisco Giant fans.  Bonds was both personally difficult and an accused doper, a focal point of a steroids scandal that was discrediting many baseball All-Stars of his era.

Barry Before and After

As Bonds honed in on the record I became more and more interested in understanding the controversy, reading an absolutely fascinating book called Game of Shadows, by Mark Fainaru-Wada and Lance Williams, reporters for the San Francisco Chronicle.  The book, subtitled Barry Bonds, BALCO, and the Steroids Scandal that Rocked Professional Sports, is unrelenting in its presentation of facts and evidence supporting Bonds’ obsessive steroid use, much of which was reportedly documented in the files of BALCO’s Victor Conte (1), the Performance Enhancing Drug (PED) kingpin, and Bonds’ trainer, Greg Anderson.  In 2001, the year Bonds broke Mark McGwire’s single-season home run record with 73, the book alleges that Bonds used the following PEDs: (a) “The cream and the clear,” two designer steroids distributed by BALCO; (b) Human growth hormone; (c) Insulin; (d) Testosterone decanoate; (e) Trenbolone; and (f) Stanozolol.  The value-added BALCO brought to the table was access to the goods and the knowledge of how to mix and match them in a way that would be virtually undetectable by the blood and urine tests available at the time (2).    The authors make it pretty clear that we should be suspicious of the performance of most of the top performing athletes, particularly from the period of around 1995 (post the last baseball players strike) through 2003, and particularly baseball players and track stars, areas of sporting where Conte had the greatest influence.(3) Today Bonds is scheduled to go to trial on March 11, 2011, when he will face 11 felony charges of perjury and obstruction of justice for his 2003 testimony to the grand jury that was investigating BALCO.  In that testimony Bonds claimed, among other things, that he did not know that the substances Greg Anderson injected him with were PEDs.  Meanwhile, Anderson spent a year in prison for contempt of court as a result of his refusal to testify in Bonds’ trial.

To this day Bonds refuses to admit to PED use, maintaining his claim of innocence and ignorance and making him one of the biggest overt liars of our time.

This is the tragedy of baseball, and its newest Home Run King, an anti-hero and a near-destroyer of the legitimacy of our national sport.

Game of Shadows is not the only source to the claim that PEDs marred baseball from around 1995 through at least 2004.  This position is further supported by The Mitchell Report, released on December 13, 2007, which named 89 baseball players that were believed to have taken PEDs primarily through their relationships with either Kirk Radomski or Brian McNamee, the latter being famous for his testimony in front of Congress regarding his provision of Steroids and Human Growth Hormone to Roger Clemens, one of baseball’s greatest pitchers.  Also, during the 2003 season baseball conducted anonymous PED testing of 1200 randomly selected players with the support of the Players Association.  Of the 1200 tested, 104 tested positive, a rate of nearly 9%, providing enough evidence to move major league baseball toward mandatory testing of all players beginning in 2004, with penalties for discovered violations.

Young A-Rod

Although the 2003 testing was intended to be anonymous, the names of several of the players that tested positive ultimately leaked to the press in February 2009.  One of them was the great Yankee, Alex Rodriguez, A-Rod, perhaps the best all around player in baseball history, who had been, up to that point, an adamant denier of any PED use.

On August 3, 2010 (2 days ago) Alex Rodriguez hit his 600th career home run at the very young age of 35, expanding the List (see below ) to seven players that have hit over 600 career home runs, that’s 7 of the 16,000+ players in major league history, or 0.04%, quite an elite club.  Four of these players, Bonds, Griffey, Sosa and Rodriguez are from the “Steroids Era,” with only Griffey escaping accusation or admission of PED use.

Player HRs
Barry Bonds 762
Henry Aaron 755
Babe Ruth 714
Willie Mays 660
Ken Griffey Jr. 630
Sammy Sosa 609
Alex Rodriguez 600

W/r/t  A-Rod’s 600 HRs, 578 were hit over the past 14 seasons, a mean and median of about 41 HRs per year, with a standard deviation of 9, meaning A-Rod inevitably hits between 30 and 50 HRs a year, although his current 17 HRs appear to be behind pace for his reaching 30 this year(4).  Nonetheless, assuming A-Rod stays somewhat healthy through the remaining 7 years of his contract with the Yankees, he should hit close to 800, maybe more, and surpass Barry Bonds’ record of 762 HRs by the age of 40 (Bonds hit his 762nd home run in 2007 at the age of 44), somewhere around 2014-2015.

There is little doubt A-Rod will be the Next Home Run King.

But will he be the next Barry Bonds?  A hated icon perceived as a self-interested cheat?

Who among us have not sought redemption?

Unlike Hank Aaron, Alex Rodriguez is not adored, not even before his implication as a steroid user.  Many perceive him as selfish, being all about statistical achievements and money.

“All my years in New York have been clean.  Back then (the 2001-2003 seasons he played with the Texas Rangers), [baseball] was a different culture.  It was very loose. I was young.  I was stupid.  I was naïve. And I wanted to prove to everyone that I was worth being one of the greatest players of all time. I did take a banned substance. And for that, I am very sorry and deeply regretful.”

That’s what Alex had to say, a pretty tough moment for him I am sure.

This summer Yankee owner George Steinbrenner died.  In the late 80’s and early 90’s many Yankee fans hated George.  He was getting into a lot of trouble and screwing up the team.  He was banned from baseball from 1990-1993 for unethical behavior.  He came back a different man.  He made amends with his detractors and went on to become loved and respected by players and fans.  And he won 5 more World Series.

Perhaps A-Rod will follow similarly.  He definitely feels different recently.

I hope the 9 year-olds that see Alex hit number 763 have the opportunity to feel the way I felt about Hank.

Baseball is truly great when the hero and the record go hand in hand.


(1) BALCO =  Bay Area Laboratory Cooperative, its legitimate business was blood and urine analysis and selling legal training supplements, most notably ZMA (Zinc monomethionine aspartate and Magnesium Aspartate) which BALCO’s founder Victor Conte claims helps increase strength levels in athletes.  Conte served four months in jail in 2007 as part of his pleading guilty to one count of conspiracy to distribute steroids and a second count of money laundering.  Today Conte claims that he has reformulated BALCO into a legitimate sports training lab where he continues to advise professional athletes such as Marlon Byrd of the Chicago Cubs on strength training and conditioning.  Over the years Conte has turned into a major whistle-blower in PED investigations and is expected to release his own book, BALCO: The Straight Dope on Barry Bonds, Marion Jones and What We Can Do to Save Sports, in the near future.

(2) The jealousy of another doper/trainer ultimately led officials to the key to developing a test that could capture Conte’s regimen.

(3) Olympic gold medal track star and current WNBA player Marion Jones was a client of Victor Conte and eventually plead guilty to lying to federal agents.  She was ultimately stripped of her gold medals and served 6 months in federal prison in 2008.  She currently plays Guard for the WNBA Tulsa Shock.

(4) There has been all sorts of speculation as to why A-Rod’s HR pace lags this year, especially when his RBI totals are right on track.  One theory relates to the hip injury A-Rod has been suffering from since early last season.  He is expected to undergo surgery on his ailing hip this off season.


August 4, 2010

PPACA and the Medical Loss Ratio


The role of the health insurance company is changing rapidly, accelerated by many of the provisions in PPACA, including new regulations regarding Medical Loss Ratio.

What is Medical Loss Ratio?

One of the key tenets to healthcare reform is the requirement that health insurers maintain a minimum Medical Loss Ratio, which historically has been defined as the ratio of medical expenses to total insurance premiums (it should be called the medical expense ratio, but claims expenses in the insurance industry have been called “loses” since, well,  forever, and hence the convention sticks).  Insurers that fail to achieve a minimum MLR, expected to be somewhere in the range of 80-85% depending on whether the plan is large group (85%) or small group/individual (80%), will be required to provide a refund to policy holders.

Some numbers, please…

Suppose that in a given year a health insurer has 20,000 members that are charged an average premium of $4,800 per year ($400 per member per month or PMPM in industry parlance), equating to Annual Premium Revenue of $96 million per year.

If the regulated MLR is 85% the amount of money this health plan is required spend on medical expenses equals $81.6 million per year (85% of $96 million).

Suppose it turns out that medical claims actually equal $74.8 million or 78% of premium for that year.  Prior to healthcare reform the excess $6.8 million would be considered profit for the health insurance company.  Under reform the $6.8 million must be refunded ratably to the policy holders for that year, resulting in an average rebate of  $340 per member ($6.8 million divided by 20,000).

If the opposite occurs and medical claims are $88.4 million (92% of premium), the insurance company covers the $6.8 million shortfall out of its capital (profits).

This brief, simplified example illustrates an important aspect of MLR regulation, it effectively eliminates any potential for unexpected upside to the health insurer for underwriting the risk.  If the insurer does better than expected, i.e., the MLR is low, the excess profits inure back to the policy holders.  This has similarities to the model of a mutual company, wherein the policy holders are actually owners of the company, without the downside of unexpected losses accruing to policyholders.


The purpose of Minimum MLR is to regulate the “value” provided by health insurance companies.  The theory is an insurance company provides greater value to its policyholders when a higher percentage of premiums is used for healthcare costs, versus, say administrative expenses or profits.  By demanding a minimum MLR legislators and regulators believe they are protecting consumers from potentially uncompetitive or collusive insurance markets, among other things.

Issues Arise

This regulation presents a myriad of issues, some of which are actuarial, but most of which derive from the definition of Medical Expense.  The exact components of Medical Expense are left to HHS to decide, but PPACA (specifically Sec.2718. BRINGING DOWN THE COST OF HEALTH CARE COVERAGE) does provide some guidance, declaring Medical Expense to be equal to (paraphrased): (i) reimbursement for clinical services provided to enrollees plus (ii) costs for activities that improve health care quality.  It is very clear what (i) above means, i.e., the money paid for medical claims.  It is in (ii) where the debate begins.

Defining “Costs for Activities that Improve Health Care Quality” will be left to the bureaucrats, and from what I can tell they are taking an open minded approach to the types of services that will be included.  Over the weekend the Wall Street Journal published an Op-Ed piece by Newt Gingrich and David Merritt titled Who Decides on Health-Care Value? (New rules to micromanage insurance companies could cost patients).  I present it to you not as a position that I support but rather as an introduction to the debate on this subject.  Please give it a read (along with some of the comments, pro and con) and I will come back to this subject soon to take a look at some of its ramifications for investors in the healthcare sector.

August 3, 2010

Update: Health Insurance Exchanges – A Solution for VEBAs


What’s a VEBA?

VEBA stands for voluntary employees’ beneficiary association, a trust fund established solely to manage and provide employee benefits, including healthcare coverage.  While VEBAs have been around since the 1920’s, they have been used sparingly, until recently, when several large, long-lasting industrial corporations have used them in employment negotiations with their unions as a way of fixing the value of future retiree healthcare benefits.


In past decades most unions negotiated a compelling set of retiree healthcare benefits to cover many of the healthcare expenses excluded from Medicare.  Over time the life expectancy of retirees has expanded beyond initial actuarial expectations and healthcare costs have grown at a rate in excess of overall inflation, resulting in enormous and unexpected costs for retiree medical, so much so that in the case of the US automotive industry these costs began to erode global competitiveness.

Over the past few years corporations including the large autos have been able to work with their unions to renegotiate the form of retiree benefits, converting from a “defined benefit” structure, where benefits are fixed and the costs vary depending on utilization and market prices, to a “defined contribution” structure, requiring the benefits to vary based on a fixed funding budget.

In the case of the United Auto Workers Union (UAW) this led the auto companies to establish and fund the UAW Retiree Medical Benefits Trust, which is, to my knowledge, the largest VEBA in the US, with a reported asset value of over $45 billion including large equity stakes in General Motors, Ford and Chrysler.  According to press reports this VEBA is now responsible for providing life-long healthcare benefits for 800,000 retired auto workers and their spouses.  This deal was cut in the face of a potential collapse of the US auto industry and it remains to be seen as to whether the VEBA has enough assets to fund its potential obligations to the union’s retirees.

Some numbers, please…

“We believe we’re saving our clients over $500 million each year while providing as good or better benefits for retirees. The group model is the evil here; it is a wildly inefficient way to deliver what is available via guaranteed issued coverage in the individual market” Bryce Williams, CEO, Extend Health

Back in May I posted The Coming Age of (Health Insurance) Exchanges about, in part, Bryce Williams’ company, Extend Health, an operator of the largest private Medicare insurance exchange.  The post provides a reasonable amount of detail on how an exchange works and why it should be expected to deliver more value for the healthcare dollar.

Recently, Employee Benefit News published Private Exchanges Have Potential to Breathe New Life Into VEBAs, an article that details the work of Extend Health in saving both corporations and its individual retirees healthcare costs through its exchange model where retirees over the age of 65 purchase individual Medicare Advantage and Medicare Supplemental insurance plans using funding provided by their prior employers.  This results in 25%-40% savings to the corporations, an average of 30% savings in out-of-pocket costs to the individual retirees (about $500 per year) and a 96% retiree satisfaction rate.

Implications for the VEBAs?

Given the savings that Extends’s Medicare exchange model has generated for corporations, it only makes sense that it would make a useful tool for a VEBA, with a goal to extend the life of its funding as long a possible by earning a return on unused capital and purchasing healthcare for its constituents as efficiently as possible.  Current data suggest that the exchange should create 20%-30% greater buying power for the VEBA’s over a typical Group Model.

You can read the Employee Benefit News article here and access my prior post on healthcare exchanges here.


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