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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.


July 30, 2010

Socially Responsible Investing 101

The first day of the RFK Compass Conference presented by the Robert F. Kennedy Center for Justice & Human Rights just ended.  The purpose of the conference is to explore expanding and modernizing the interpretation of fiduciary duty in a way that considers the sustainable long-term success of both corporations and pension funds.  This is a complex subject that spans the law and prudent financial practices.

As part of the discussion two progressive investment philosophies emerge, Sustainable Investing (SI) and Socially Responsible Investing (SRI).  The website provides this definition and distinction:

“SI vs. SRI


The desire to “do well by doing good” is common to both Sustainable Investing (SI) and Socially Responsible Investing (SRI). The key difference between the two approaches is that SI investors tend to give more weight and attention to environmental issues than do their SRI brethren.”

“Doing well” – means making an investment profit.

“Doing good” – means investing in companies that: (i) have a strong track record on environmental issues; (ii) offer their employees affordable health benefits; (iii) practice humane labor policies and nondiscriminatory employment; (iv) locate some of their operations in distressed communities; (v) have an established culture of product and workplace safety; (vi) promote ethical corporate governance and transparency; and/or (vii) establish fair and measurable standards for executive compensation, among other things, investment factors often given the “softer issues” label.

SRI theorizes that companies that possess these qualities will be more sustainable in the long-run because they will, as examples: (a) be less prone to industrial accidents, fines for environmental violations, and product recalls; (b) have a stronger, healthier, more productive and loyal workforce; (c) be supported and promoted by their communities; and (d) be less likely to commit corporate malfeasance.

It is not weird to be contemporaneously supportive and suspicious of these ideas.  SRI standards make sense as a model for business behavior, but as investment criteria do they require sacrificing some amount of risk-adjusted return to “do good,” i.e., social work at the financial expense of the investor?

David Blood used to run Goldman Sachs Asset Management.  Today he runs Generation Investment Management, a firm dedicated to SI investment and research.  Steve Strongin is the current Head of Goldman Sachs Investment Research, a group that publishes research called the GS Sustain, an analysis of 35 leading global corporations recommended for long-term investment based on an investment framework designed to evaluate sustainable competitive advantage.

Blood and Strongin argue that the principals of SI and SRI should not be used alone, but as additional criteria to investment selection.  Investors should seek out corporations that first and foremost have superior risk-adjusted returns, great management and a compelling strategic direction.  When these traditional metrics are contained within an enterprise that consistently acts as a solid corporate citizen, i.e., demonstrates the “doing good” characteristics of an SRI, you have the basis for earning superior returns over the long run.  This makes sense – along with great returns and a great strategic position, great behavior provides a risk umbrella, a hedge to social, environmental and health issues within and around the enterprise that should brace performance over the long run.

July 27, 2010

Government Innovation?

Filed under: Healthcare,Venture Capital — Steve Krupa @ 5:26 pm

Once again Lisa Suennen is generating discussion on the Health Care Blog, this time regarding the government’s role in stimulating innovation in the US healthcare system.  Please check it out here, they’re talking about some interesting stuff.

In the meantime, the phrase “Government Innovation” reminded me of the late-great George Carlin, and so I thought you might get a laugh out of the following list of Carlin’s odd expressions and the accompanying video of GC taking our modern vocabulary to task.       

  1. authentic reproduction
  2. business ethics
  3. death benefits
  4. forward lateral
  5. friendly fire
  6. genuine veneer
  7. highly depressed
  8. holy war
  9. jumbo shrimp
  10. lethal assistance
  11. limited lifetime guarantee
  12. live recording
  13. mandatory options
  14. mercy killing
  15. military intelligence
  16. mutual differences
  17. new tradition
  18. nondairy creamer
  19. open secret
  20. original copy
  21. partial cease-fire
  22. plastic glass
  23. resident alien
  24. silent alarm
  25. standard options
  26. true replica
  27. uninvited guest
  28. wireless cable

July 16, 2010

Strung Out in Heaven

My last Casual Fridays post featured my favorite neo-psychedelic artist of the last decade, Animal Collective, coming in at number 7 in my Favorite Albums of the Decade list (FAD) with 2009’s Merriweather Post Pavilion.   That put me more than halfway through the list, with Number 8 on its way – soon – once I get through a recent distraction.

I often consume music through serial obsessions which have certainly served as a filter for putting together my FAD list, a recollection of all the new records and artists I could not get enough of at some point during the last decade.  I also get re-obsessed with older music, often in regular cycles.  There’s a yearly all-out Beatles orgy.  I remember listening to nothing but Bob Dylan for about three months after seeing Todd Haynes’ 2007 Dylan fetish film I’m Not There, a pass I repeated recently after reading Greil Marcus’ Old, Weird America: The World of Bob Dylan’s Basement Tapes.

File:Album Cover Strung Out In Heaven.jpgThe absence of a FAD post in previous weeks is a result of just such a re-binge.  I have been Strung Out in Heaven, if you will, with the Brian Jonestown Massacre (BJM), a band I suspect many of you have not heard, but one I really want you to hear.

It all started about five weeks ago, on June 5, at the Music Hall of Williamsburg in Brooklyn.

This was not the first time…

Indie Music – a technical definition – from Wikipedia  – “a term used to describe independence from major commercial record labels and an autonomous, Do-It-Yourself approach (DIY) to recording and publishing.”

Indie Music – a working definition – music most people have never heard made by artists most people have never heard of.

Indie Music – a reality – often great music made by artists that fail to achieve mainstream notoriety during the most active portion of their careers, either because of their avant-garde nature or because of a deep flaw in their actions or temperament that leaves them incompatible with the uncompromising workings of scaled commerce, a/k/a the music business.

The Brian Jonestown Massacre is Indie Music, complies with each of these definitions, and is a complete mess, in some ways a real massacre, of itself.  It’s an Indie band for life, featuring throughout its history over 40 different musicians, most leaving the band as a result of impossible differences, or a violent exchange, or both, with BJM’s founder, the sole constant over the band’s history, and apparently a complete and utter psychopath, Anton Newcombe.

There is always wonder surrounding a BJM live show.  Will Anton blow-up on stage, resulting in a completely ridiculous gig, probably cut short by his and the band’s inability to resume peacefully, or will the band be tight and musical.  In either case it is entertaining, but if you are lucky enough to see a show where all goes well, as I was on June 5, you’re likely to see and hear some of the best 60’s-influenced psychedelic-pop music in the world.  The band is really that good, particularly its catalogue of music created from the Mid-1990’s through around 2004.

It turns out there’s a lot in a name if there is enough thought put into it, and Anton is a purposeful and revealing namer of his band, its songs and its albums.  The name Brian Jonestown Massacre tells us a lot about the sound, a wacky tribute to: (i) one Brian Jones, the long-dead founder of the Rolling Stones and one of rock’s first multi-instrumentalists, (ii) cultism, (iii) violence and (iv) hypnotics.  Not surprisingly, Anton, an American from California, is: (1) a devoted anglophile, (2) a lover of late-sixties-early-seventies trip music, a la Sgt. Pepper-era Beatles, Jones-era Stones, Syd Barrett-era Pink Floyd, (3) a shoegazer (think My Bloody Valentine and Jesus and Mary Chain), (4) underground, and (5) obsessed with the sound of 1960’s guitars underneath the beat of maracas and tambourines.  BJM picks up these classic sounds and movements, revitalizing them in a contemporary context, combining candor, abstraction, irony, love, and, oh, some damn catchy hooks.

This band should have been ample competition for Oasis and Blur in the 1990s, but even as messed up as both those Brit-rock 90’s favorites were, BJM had them beat.  BJM just could not be counted on; they were a bad investment, blowing every opportunity for mainstream exposure.  Today they exist primarily as an influence on many current, highly successful revivalist bands like the White Stripes, the Black Keys and the Strokes.  They still play to small clubs and ballroom audiences that learned of them primarily through indie rags and their starring role in the 2004 award-winning documentary  DIG!, a terrific film that presents the absurdity, comedy, violence and occasional genius of Newcombe and his ever-changing band of followers over a seven-year period where they regress from leaders of the Indie Music scene to also-rans to their major-label-neo-psychedelic contemporaries The Dandy Warhols.

Despite all of its flaws BJM is not lazy.  Anton is an obsessive worker and a super-prolific songwriter with a discography that includes at least 19 available EP/LPs made mostly by the band themselves.  Most BJM’s records are of the DIY variety, made on low budgets and pretty much anywhere the band could find recording equipment.  From 1993-2004 the songwriting quality is outstanding and consistent, but some of the recordings are not.  The one major label record (for TVT Records in 1998) is the herein referenced Strung Out in Heaven, a higher budget affair and the perfect entry point for BJM newbies.  If you like the Beatles, the Byrds, the Animals, the Velvet Underground and/or early Rolling Stones, I believe you will adore this album.  If that’s not enough, and for me it wasn’t, try Their Satanic Majesties’ Second Request followed by a greatest hit compilation of sorts, Tepid Peppermint Wonderland.  The good news is that if you get hooked, and you might, there is plenty more great material to explore.



Dig! is a fantastic film – check out the trailer below – see it.

Whoever this drfostersmith is, he’s got some great footage of the new BJM line up on youtube.  Here’s one of my favorites, Anemone, from the BJM album Their Satanic Majesty’s Second Request, a two chord hypnotic that my wife plays along with at home on her lefty guitar.  This version was performed during BJM’s recent 2010 tour, featuring Anton’s reunion with founding member Matt Hollywood.  Check out all those gorgeous 60’s guitars.  How many are there?  Too many to count, man!

I – I think I know how I feel
cause I – I only play it for-real
you should be picking me up
instead you’re dragging me down
flying over my head
you’re landing all over town

you – you know that I try
try to tell you the truth
oh baby don’t make me lie
you should be picking me up
instead you’re dragging me down
now I’m missing you more
cause baby you’re not around
now that you’re not around
I – I want to know how it feels
cause I – I only play act for-real
you should be picking me up
instead your dragging me down
I could be giving you love
but you’re not around
now that you’re not around
now that you’re not around
glad that you’re not around
If your curious about BJM’s personality, check out this interview with “Anton the Vessel,” which speaks for itself.

July 6, 2010

Inside Value-Based Healthcare – Part 2: Who Pays for Health(care) Insurance

In my previous post, Value-Based Healthcare Part 1, I talked about the two primary business risks faced by insurers, Moral Hazard and Adverse Selection.  Recall that for health insurance markets to work effectively they must be structured to mitigate Adverse Selection (i.e., the reality that the very fact that someone is seeking insurance might make them uninsurable in the first place).  This means that the healthiest people must stay in the market as part of the risk pool, otherwise the underwriting will not work at affordable premium rates.  As such, employer-based Group Model health insurance has evolved as the prevalent distribution method.

So who pays for employer-based health insurance?

Today health insurance costs average about $4,800 per person per year.  While this expense is paid for by employers, it is essentially part of salary costs, and so it is really money that would otherwise be paid to employees were it not for the mandatory participation required in most Group Model plans.

Employers offer to buy the coverage on behalf of employees because they believe that having their employees insured improves productivity and it is viewed by prospective employees as a competitive perk.  This works out well from a risk pooling perspective, making Group Model insurance less expensive on average.  But what really drives the Group Model is its income tax subsidy.  The federal government does not assess income taxes on the value of Group Model health insurance (this subsidy does not exist for individual purchases of health insurance).

This tax subsidy is massive.  The average employee is in the 25% federal income tax bracket, making the subsidy worth about $1,200 per year (25% of the $4,800 average annual premium).  Approximately 180 million people participate in Group Model plans, meaning the total amount of this annual subsidy is about $216 billion per year.

So who pays for employer-based health insurance?

According to these calculations 180 million employees cost a total of approximately $864 billion, $648 billion is paid for by employees through payroll deductions and about $216 billion is paid for by the federal government through income tax subsidies.  These amounts exclude out-of-pocket expenses, which are by enlarge paid for by employees.


Let’s get back to Moral Hazard.

Have you ever noticed that people are very hesitant to make claims on their automobile and property insurance?  Rarely do the costs of minor fender benders result in an insurance claim.  Why?  Because people fear that claims on their auto policies will result in either their premium increasing or their policy getting cancelled.  People tend to reserve that type of insurance for major catastrophes, paying the cost of minor accidents out of their own pockets.

Most people do not behave this way when it comes to health insurance.  A very high percentage of healthcare expenses become insurance claims.

Few people lose their insurance because of high insurance claims.  As claims increase, the burden of the higher premium is shared among the risk pool.  As a result, Moral Hazard (changing your ethics because you don’t pay for the consequences of your bad behavior) in Group Model plans is severe, and many believe it contributes significantly to the 8-12% average annual healthcare inflation rate.  Despite the reality that employees pay for more than 75% of the cost of their health insurance, they are fearless when making insurance claims.


So, returning to the thread that ended Value-Based Healthcare Part 1.

Employer-based health insurance suffers from Moral Hazard.  Despite the fact that it seems obvious that employees pay the most of the tab, the cost is not individualized and the consequences of bad behavior are not perceived as even remotely severe.

Research backs the notion that when an insured party pays a higher percentage of the total cost of the service Moral Hazard reduces.

So the question becomes, if we are looking for an employer-based health insurance model that will counter increased healthcare consumption why not just increase the out-of-pocket payments and reduce Moral Hazard?

In some cases higher out-of-pocket costs can lead to Unintended Consequences, namely people forgoing necessary treatment.  For example, the medicines necessary to treat Type-2 diabetes are much less expensive than the costs associated with the side-effects of untreated diabetes like heart attack, stroke, amputations, blindness, etc.  A health insurer wants Type 2 diabetics to take their medications, however high out-of-pocket charges often impose barriers to compliance.

Medications like Glucophage, a treatment for Type 2 diabetes, have a high value.  The treatment costs about $400 per year, real money for an individual, but a small investment for a health insurer given that compliance with the drug should mitigate a number of side effects of Type 2 diabetes, saving money on hospitalizations and other forms of expensive healthcare.  Further, Type 2 diabetics should see podiatrists and ophthalmologists regularly.  Again, high co-pays for these services could mitigate compliance and increase adverse events within an insured diabetic population.

Value-Based Healthcare: Definition #2:

Value-Based Healthcare involves designing insurance benefits with economics that encourage (or remove the barriers to) the utilization of high-value healthcare services.

So why is Value-Based so new?  What are the barriers to implementing Value-Based?

These questions will be covered in future posts.

To leave you with something to think about, it was only until recently that the information technology necessary to begin experimenting with the implementation of Value-Based Healthcare became available.

June 29, 2010

My Bodyguard: Bullying, Cyber-bullying and CSEE – The Center for Social and Emotional Education


The movie My Bodyguard was a pretty big hit when I was a teenager in the 1980’s, and I remember seeing it and cheering for Clifford (Chris Makepeace) in his battle with the incessant bullying dished out by Moody (Matt Dillon).  It’s a pretty good movie.  Sure, the kids get their revenge on the bullies, something I doubt many bullying victims actually seek, but it does a great job of capturing the eeriness of bullying.  I remember wondering whether the bullies I grew up with rooted for Matt Dillon, who plays the bully with an absolutely perfect creepy heartlessness, and who, of course, gets his in the end. 

My Bodyguard (Adam Baldwin), Moody (Matt Dillon), Clifford (Chris Makepeace)

I might be all grown-up but bullying continues, in both direct and virtual form; yes, today’s kids bully online too.  Yesterday the New York Times launched the first article of an ongoing series called Poisoned Web, with an expose’ covering “cyber-bullying” – a newly coined term that covers all sorts of creative abuse that takes place through texting and on social networking platforms like Facebook.  

Bullying has also gained national notice because of the case of Phoebe Prince (see the April 15, 2010 People Magazine’s cover story: Bullied to Death? Phoebe Prince: Her Final Days) who committed suicide on January 14, 2010 after months of being bullied by her classmates in the western Massachusetts town of South Hadley (near Springfield).  Phoebe faced both direct confrontation and cyber-bullying, through negative Facebook messages and texts.  

Phoebe Prince’s suicide has spawned a wave of anti-bullying legislation through the US, including a new Massachusetts statute passed on May 3, 2010, and another passed in New York just yesterday.  The New York Times article does a good job of exposing some of the legal boundaries, many of them free speech related, to combatting forms of bullying that stop short of physical violence.    

Over the years we have come to learn that there are long-lasting social effects to incidences of bullying.  Its existence severely subverts the social atmosphere in schools and the emotional development of kids, regardless of whether they’re the ones doing the bullying, getting bullied, or just passively watching.  Today we know that nearly 9 out of 10 kids say they have seen someone bullied and at least 10% of all kids are bullied on a regular basis.  The National Crime Prevention Council reports cyber-bullying is a problem that affects more than 40% of all American teens and that, of those affected, almost 60% do not tell their parents or another adult (teacher) about the incident.  We also know that bullies are 4 times more likely to evolve into criminals and that being bullied can cause children to experience fear, depression, loneliness, anxiety, low self-esteem, physical illness, and in some cases, even, as noted in the Phoebe Prince case and others, suicidal thoughts or even suicide. 

We also know that bullying can be reduced by up to 50% when there’s a school-wide commitment to end it.  

One organization committed to working to reduce bullying in schools is New York-based CSEE (The Center for Social and Emotional Education).  George Igel, MD, psychiatrist, fellow healthcare investor and Chairman of the Board of Trustees for CSEE first introduced me and my partners at Psilos to CSEE a few years ago and we have been supporting its work ever since. 

CSEE was founded in 1996 at Teachers College, Columbia University and their mission today “is to measure and improve the climate for learning in schools to help children realize their fullest potential as individuals and as engaged members of society.”  One of these initiatives is to develop the tools and resources to create a school-wide climate intolerant of bullying.    

CSEE’s bellwether program is called BullyBust, an awareness campaign designed to reduce bullying in schools by teaching students and adults how to stand up to bullying and promote Upstander Behavior including:  helping others who have been bullied, stopping untrue or harmful messages from spreading, making friends outside of current cliques, and befriending new students, to name a few (See the 10 ways to become an Upstander here.  Also see a library of student produced “Upstander Videos” here).


The BullyBust program has recently teamed up with the hit Broadway musical Wicked to bring the Witches of Oz (Elphaba, the Wicked Witch of the West, faced discrimination when she was young because of her green skin and strange mannerisms) to classrooms across the country to teach important bully prevention strategies.

If you are intested in seeing Wicked please use the code “CSEE” when purchasing tickets and a portion of the sales proceeds goes to support BullyBust. 

Meanwhile, in case you’ve forgotten what it feels like to face the wrath of the bully, check out My Bodyguard

June 25, 2010

Inside Value-Based Healthcare – Part 1: Moral Hazard

Value-Based Healthcare.  There, I said it…

I had fun on Wednesday sitting on the healthcare reform panel at the Dow Jones Limited Partners Summit.   The conversation centered on investment trends in healthcare as updated for the passage of PPACA, during which I blurted out the concept of value-based healthcare, a pretty complex and to some extent novel concept, and a cornerstone to many of Psilos’ VC investment strategies.  This was subsequently reported, and to Jennifer Rossa’s credit, she provided enough detail around my comment to correctly convey the concept.

There are important nuances, however.  This post is the beginning of a series that will explore the ins-and-outs of Value-Based Healthcare.

Value-Based Healthcare: Definition #1:

Value-Based Healthcare, or more specifically, Value-Based Health Insurance Design, its sobriquet being simply, Value-Based, intends to mitigate the Moral Hazard inherent in low cost-sharing health insurance coverage.

If we were to take an insurance or advanced finance class together we would spend a lot of time talking about Moral Hazard and Adverse Selection, the two primary business risks that underpin managing financial institutions, insurance companies and banks included.  Failure to manage these risks properly can lead to disaster (in fact, recently Moral Hazard and Adverse Selection got the better of the mortgage banking business, a primary cause of the financial crisis).

Moral Hazard reflects the reality that a party insulated from a risk (like an insured or a borrower) will behave differently than if it were fully exposed to the risk.

Adverse Selection reflects the reality that the very nature of a party’s desire to seek insulation from risk reflects a greater risk of loss.  For example, parties that are either sick or expect to get sick have a higher demand for health insurance.  Similarly, parties in the market for a mortgage that have a concern that they may default are more attracted to low-down-payment mortgages.

Underwriting models are designed in part to set prices to countervail the risks of Moral Hazard and Adverse Selection.  This is more easily accomplished in an underwriting model where each policy gets priced individually, like automobile insurance.  In this model individuals are placed in broad price cohorts based on age, gender, style of car, etc., and then adjustments to the policy price are made based on individual attributes like historical driving record.  Moral Hazard and Adverse Selection are less prevalent in insurance markets where policies are individually underwritten and where the underwriter will be the party that ultimately pays the claims on any policy.  Absent these conditions the risks of Moral Hazard and Adverse Selection will always be lurking.

Such is the case in the current market for employer-based health insurance (also called Group Model health insurance).

Let’s start with Moral Hazard.  Today many employer-based health insurance models feature low cost-sharing, meaning that patients pay a very small amount of the health resources they consume.  Here the economic question is whether the value of a healthcare service exceeds the out-of-pocket cost to the patient, which is a small fraction of the actual costs.  Moral Hazard comes into play because the insurance insulates the patient from full payment, thus altering behavior toward increased healthcare consumption, a phenomenon some believe is encouraged by the fact that providers (doctors and hospitals) are generally not at risk either and are paid on a fee-for-service basis.

Consider what might happen if the out-of-pocket costs to the patient were raised.  In insurance markets where patients could opt out and choose not to buy insurance, an increase in out-of-pocket costs would certainly result in some people, probably the healthiest, declining coverage.  This would cause premiums to rise, because the insured pool would be sicker on average, causing more of the healthiest people to decline, increasing the risk of the pool, increasing the premiums, and so on, into an Adverse Selection spiral.

In health insurance markets we need the healthiest people to stay in the market in order for the underwriting to work at reasonable levels of insurance premium.  This is one of the reasons why health insurance is provided by employers.  Employers, or coalitions of employers, are able to deliver large enough populations of sick and healthy people for the underwriting to work.  The participation of large numbers of employees mitigates Adverse Selection and as a result many large employers choose to self-insure (tax incentives is another reason employer-based health insurance dominates – more on this another time).

Nonetheless, in employer-based health insurance we are still left with Moral Hazard, and research seems to back the notion that its degree is inversely correlated with the percentage out-of-pocket paid by patients (low out-of-pocket = high Moral Hazard = high healthcare consumption).

So the question becomes, if we are looking for an employer-based health insurance model that will counter increased healthcare consumption (and believe me, we are), why not just increase the out-of-pocket payments and reduce Moral Hazard?

It turns out not to be that simple.  Please give this some thought and we’ll dig a little deeper next time…

June 15, 2010

President Bill Clinton at AHIP

Filed under: Healthcare — Steve Krupa @ 4:02 pm
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This was my third time seeing Citizen Bill Clinton speak publicly. The first was at the American Red Cross Centennial Ball in October, 2005, a few months after the disaster that was/is Hurricane Katrina; the second was on-site in New Orleans, along with Bush Sr., in May of 2006.(1)  Over the past four years, and much to his credit, Clinton has honed a consistent message, one he is assured to deliver, regardless of his audience’s predilections.

AHIP (America’s Health Insurance Plans) is a collective voice for almost 1,300 health insurance companies, a lobbying group that holds an annual convention and trade show designed to address the pressing issues of and the new technologies/businesses in the health insurance market.  AHIP states that one of their major policy goals is to expand access to high quality, affordable coverage to all Americans, yet it is clear that the AHIP collective was one of the many losers in the recent policy debate regarding PPACA (re: our new healthcare reform law), with their only major policy win being, in my view, the elimination (delay) of the “public option” from the enacted law.

It’s a nice position in life to get paid handsomely to address former foes.  No doubt many members of the AHIP collective had much to do with President Clinton’s own form of healthcare reform failing in the first half of his first term (1992-94).  Putting its primary content aside for just a moment, Clinton’s speech was peppered with two wheedling, audience-specific themes: the first, an invocation of thanks to the AHIP collective for supporting healthcare reform, or the rhetorical equivalent of praising someone for handing over their wallet while being held at gunpoint; and the second, a win-one-for-the-Gipper pep talk praising AHIP’s members as the chosen few who know that improved healthcare quality and lower healthcare costs can coexist, a sentiment that I know from first hand experience many of the AHIP collective struggle to affirm.(2)(3)  By injecting these two themes into what was essentially a speech outlining Clinton’s view of the world’s humanitarian challenges, the ex-president succeeded, brilliantly I believe, in conveying the following message, like it or not: we are committed to making things more equal in the world (the US included); healthcare reform is one step in that direction; and, as part of the process, we are offering you a second chance to re-build your industry around the needs inherent to this objective.  There was no gloating, just a warm embrace and a subtle nod or two – folks please get with the program and get it together – all this for the standard public appearance fee of the popular ex-President, which sources state range in the area of $150,000.

It’s also a nice position in life to do what you want to do and talk about what you want to talk about.  In terms of air time, Clinton’s cajoling served as mere tasting notes to a speech primarily concerned with his current world view and its alignment with the work of his William J. Clinton Foundation (a nongovernmental organization with over 1,100 staff and volunteers in over 40 countries).  A few notable points from his speech, titled Embracing Our Common Humanity, include:

  • The belief that the past decade of crises and changes in the US economic system, up and to the recent (current) recession, has alienated white non-college educated males in the US, who as a group are struggling for hope and optimism and are one of the primary sufferers of the massive unemployment trend.
  • That there is an underlying fear that America, a historical underdog turned post-WWII perennial favorite, may not be winning anymore, as developing countries like Brazil, Russia, India and China challenge our economic supremacy and terrorism challenges the capabilities of our military.
  • That the world is an incredibly interesting place where we continue to advance beyond our imaginations, noting in the years since his first taking office as President: the evolution of cell phones from a 5 lb device to today’s smart-phones accessing a pervasive Internet; and the advancement in genetic engineering to our current realization of synthetic organisms (to list just a few).
  • That despite the world’s being an incredibly interesting place, we still have trouble dealing with three major problems: (a) instability; (b) inequality and (c) climate change (and here I note that these three challenges line-up with many of the Clinton Foundation’s programs including his work to rebuild (or build) Haiti and to reduce global greenhouse gas emissions, the latter of which he believes is a cause to the current climate change).

With respect to healthcare reform specifically, Clinton acknowledged that the law is a vague beginning that is reliant on a second phase of specific programs.  These programs will have to address the real issues of cost and quality that he knows AHIP’s members understand, but that are not clearly understood by the public at large.  According to Clinton, making the new healthcare law work requires innovation, an American specialty that will bridge the gap between “what the government can provide and what the private sector can [currently] produce.”


(1) For a transcript of Clinton’s May 2006 speech in New Orleans, click here, and for a transcript of George H.W. Bush’s speech at that same event, click here. Both are short, sweet and excellent, with Bush Sr. winning over the day despite Clinton’s rock star status with the Tulane student body.

(2) The belief that quality healthcare can be delivered at a lower cost is one that many people, not just insurance executives and underwriters, struggle with, especially consumers (patients). Generally, many patients find evidence-based medicine terms like “quality guidelines” and “quality standards” confusing and continue to believe that more and newer care is best. Patients are also reluctant to believe that their doctor could provide anything but sound medical advice.

(3) The vast majority of the new businesses exhibiting at AHIP have as their very purpose improved quality and lower cost.  Our insurers’ skepticism resides in a history of failed attempts at accomplishing this objective on a broad scale.  As I have noted many times in this blog, this objective can be met within subsets of the healthcare economy today. Broader deployment is the challenge and necessity presented by PPACA, a law that will financially bankrupt the US without massive improvements to the cost-quality relationship in healthcare.

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