Follow the Money: Healthcare

Americans spend a lot of time hating about how much other people make.  Throughout the financial crisis there was considerable scrutiny on banker's pay.  I get it.  The word "bonus" became a 4-letter word. "How can bankers get paid so much when they ruined the economy..." - we all remember the anger. 

There is a new crisis in America and its the healthcare industry. However, the tone is very different. 

There are many similarities between finance and healthcare.  They both require licenses, or degrees, or some form of expensive higher education.  They both require a massive amount of regulation and government oversight. They create highly lucrative jobs.  And my favorite: people will persistently overpay for advice, or services, related to both of them. People generally don't skimp on decent medical care or financial advice...am i right or am i right?

America loves to hate on the fat cat bankers (myself included) but as mad as everyone is about the healthcare gridlock our nation faces, you never hear about the fat cat doctors. 

I was browsing the website of the BLS (Bureau of Labor Statistics), cuz that's how I roll, and came across this table on average mean wages for all occupational groups in the US and it really got me thinking.

You can view the full list here: http://www.bls.gov/oes/current/oes_nat.htm#13-0000

  

See any themes here?  The highest paying jobs in America are healthcare jobs.  Is it a coincidence that health insurance and medical care is so expensive and the people in the industry are the highest paid earners in the US?  I'm no expert but I have to imagine there is a relationship there.

Here is the funny part: there isn't a finance related job in the top 25 (a "Financial Manager" was #29 on the list), though Wall St wages and bonuses are still (5 years later) volatile topics of discussion.  

No one ever says "this Doctor made $X and they should have to give it back because so many patients died along the way." It's part of the job. 

We are happy to blindly pay whatever cost a doctor or an insurer says because our health...our lives, our children's lives, are on the line.

Well, I think we are getting duped here.  The cost of medical care in the US is many times more than anywhere else in the world.  The system is riddled with middlemen and friction. Not to mention doctors have little incentive to keep people healthy.  Instead we over medicate, over treat, and over charge.

I know a guy who started a consulting business to help doctors "optimize" the numerical codes they submit on insurance claim forms to earn more money.  He basically finds similar procedures and treatments that the insurance company accepts to get the biggest bang for the buck.  I'd like to punch this guy in the face. 

The system sucks. It needs to change. Will there be a day when the doctors who have the fewest sick patients get paid the most?  Maybe.  i like that incentive system.   

Detroit v Brooklyn

This could have easily been a post about why Eminem is a superior rapper to Jay-Z but I will save that for when the new Eminem album comes out and buries Jay-Z's newest tribute to his royal holiness himself.

The other night, I had dinner in NYC with some Detroiter buddies and the conversation steered toward Detroit real estate (a minor obsession of mine for the moment). I did a little search for comparable properties in Detroit and Brooklyn. Brooklyn, being the edgier crustier sister borough to Manhattan where prices have gone parabolic, had more similar characteristics to the D. I found a couple 4,000 sq ft homes and here is what came back.

I thought the crime statistics were particularly interesting. Of course there are reasons why this analysis is flawed, chiefly because Brooklyn has 2.5 million people and Detroit has 700,000. Detroit covers an area of 150 sq. miles and Brooklyn is only 90 sq mi. That is a lot of less congested space to run away from stray bullets.   

Kidding aside, I did bias my search to Indian Village in Detroit and Bedford-Stuyvesant in Brooklyn so I guess this proves that the right kind of data mining can prove any thesis.  My point is that even the most dangerous parts of NYC still trade at a silly premium relative to the safe parts of Detroit. I guess it all depends on how you define "value".  

Hat tip to Larry Chen!

SOURCES:

BROOKLYN

http://spotcrime.com/#40.684766%2C%20-73.94201

http://streeteasy.com/nyc/sale/927343-multi-364-jefferson-ave-bedford-stuyvesant-brooklyn

DETROIT

http://spotcrime.com/#indian%20village%2C%20detroit

http://www.zillow.com/homedetails/2532-Seminole-St-Detroit-MI-48214/88291661_zpid/

    

I'll bet you $1 million you'll live until you're 100 years old

This bet is not valid for anyone who is already above the age of 60 or left-handed. 

Seriously though.  I will bet you a million bucks that barring you take your own life, or die in a drone strike, you will live to be 100.  In case you are wondering, the current American life expectancy is 79 years -- about 76 years for men and 81 years for women.  By the way, left-handed people supposedly have an average life expectancy about 9 years shorter.

Why would I make such a bet? First, I am convinced that by the time most of us are 100 years old $1 million will not be such a great sum. Extrapolating another 70 years of inflation at 5% and we get about $32,000 in today's greenbacks. 

More importantly, I think life expectancy is going to shoot up. If we believe in exponential growth we cannot discredit the possibility that advancements in medicine and technology can make lifespan go parabolic.

Here is the wiki timeline of medicine and medical technology (link):

Around 1900:  The X-ray gets invented as does aspirin...

50 years later we are using chemotherapy to fight cancer and curing polio...

25 years later we get insulin pumps, LASIK surgery, CT scans...

A few decades more and we have cracked DNA sequencing, created artificial muscles and today there are firms working on 3D bio-printing, which is like printing a new liver after you spend your life drinking bourbon...nice!!! (check out ticker: ONVO...the stock is up about 300% in the past 7 months)

It took us 75 years to go from X-rays to CT scans but only 10 years to go from robotic surgeries to bionic limbs controlled by brain waves. 

Think about what will happen in the next 50-100 years. It is going to be bigger than we can imagine.

The aide of technology and innovation in the medical field will result in the ability to keep our bodies around a lot longer.  Whether you end up looking like RoboCop or Tony Stark you better find something fun to do with all that time you have left on the clock.        

A Trillion in Tuition

With an overwhelming number of topics for discussion these days, I find myself running into information overload on what to write about (a form of writer's block= too much out there!).  I have a new simplistic way of organizing whether an issue is newsworthy:  pay attention when the number associated with the issue has a "T" next to it..."T" like TRILLION. In 2002, I worked for Deutsche Bank and I remember we celebrated being the first European bank to have assets over $1 Trillion Euros. Back then it was a huge deal. 

Today, it is the prioritization "line in the sand" for politicians, economists, and journalists trying to deal with issues that matter. Numbers that have a "T" next to them include:  bailouts, Federal Reserve money printing, US National Debt owned by foreigners, pension shortfalls, municipal liabilities, household debt, etc.  The item I would like to discuss today, however, is college debt.  This number, according to Alan Collinge from StudentLoanJustice.org, is nearing the $1 Trillion mark.  While Americans have tightened their belts, reduced some frivolous spending, and gone back to school to help their candidacy for employment, college debt has surpassed credit card debt! No small feat!  

I have seen tons of articles about the topic of higher education recently and wrote a little note about it a few months ago (Creative Economy).  There are a couple things I would like to share about why people should be paying attention.  Why is the government pushing us so hard to go to college and offering us financing at terms that appear too good to be true?  Well, it is one of the ways to get people under the proverbial "thumb" of Uncle Sam. These loans do not go away, the interest rates will go up, and the government is behind 90% of them.  "Take out a loan, go back to school...help our collective brain trust get smarter...lets show countries around the world that our education standards are the highest...Asians go to school 8 days a week, we have to step it up!" It seems logical to me.  After the housing bust, the government needs to somewhat modify the American dream.  What is the 2nd most expensive asset we buy, something we are told we cannot live without, and something the government can easily offer to us?  A COLLEGE DEGREE.



The competition is fierce.

 

No wonder this debt is piling up and the cost of college is rising at its fastest pace ever.  It is a way to balance the debtor-creditor relationship – if the students owe the government a trillion and the government owes China and Japan a trillion…hmmm.  Get the students to owe us more and then our national debts will not look so bad.  Follow me?  Some public universities are seeing double digit increases in tuition each year (LINK).  As you extrapolate those increases you will see why new parents have to start paying attention…TODAY!  Here is a helpful website (College Tuition Calculator) for all of the parents out there who plan on seeing their children go to 4 year universities.  If you want to be spared from doing the work, here is a theoretical scenario of a newborn:

-Current school tuition/room and board annual cost:  $20,000
-Years until college: 17
-Number of years attending the university: 4
-Expected annual tuition increases over the next 17 years:  6%
-Expected annual returns on investment for savings account: 2%

TOTAL COLLEGE COST:  $235,597

-Monthly savings required today in order to pay this amount once college begins: $939 (based on the 2% savings rate of return) (the math on these numbers)

Add a couple kids to the equation and you can see how this is becomes a monstrous problem quickly.  The sheer notional size of the numbers is staggering; that is not the only shocking part.  I found some other interesting "features" about student loans that I am willing to bet not everyone was aware of.  Student loan debts are precluded from the following protections that apply to traditional consumer debt (mortgage, credit card):

1.)  Bankruptcy protection (you go bankrupt and your student debts are NOT erased)
2.)  The right to refinance (government loans cannot be refinanced though private loans can)
3.)  Fair debt & collection practices (they can garnish disability and call you at odd hours)
4.)  Adherence to usury laws (interest rates have no limit)
5.)  Truth in lending requirements (disclosures can be vague)
6.)  Statutes of limitations (time does not run out on how long they can come after you)

(Source: Default-Student Loan Documentary)

I was surprised to find this was the case for college loans...then I thought about it for a second… then I was not surprised.  Either college will have to become more affordable or we better start saving now.  Either way the government is incentivized to make college more expensive.  You owe them more and they get to tip the terms on the debt in their favor.  At the end of the day, we do not want every kid in America trying to become the next Lebron James. Of course bailing out on college wasn't the worst bet for Henry Ford, Michael Dell, Bill Gates, and Mark Zuckerberg, but they may be the exception.  Is meritocracy and mentorship the answer?  If someone can get the job done without the degree, then they should not be viewed any differently.  For example, I am spending a year traveling, getting my version of a post-graduate degree in global entrepreneurship from the college of “the world.”  Should that not count as legitimate education?

Livin' off the Fatta the Land

If you take a look at the right hand side of this blog you will notice a few sites that I like to follow.  One of them is Sovereignman.com (introduced to me by @Shamrock5000).  Yesterday, Sovereignman posted a link to a Stansberry Research video that sounded like a doomsday "public service announcement."  The video took about an hour to get through and contains important information about the devaluation of the dollar, piling US government debt, and a lengthy teaser advertisement for you to become a Stansberry client (boring).  If you want to take an hour to watch this click here (LINK TO VIDEO), or you can just keep reading and I will sum it up for you.  

The main point is that the US has no way out of its deficit spending and federal debt load - the interest payments on the debt will become too great, thus, the liabilities will grow in such a way that the only solution is for the dollar to be devalued even further (it fell 8% in 2010).  What does devalued really mean?  In a nutshell: your savings will be worth less because the prices of goods and services will become much much higher in the future (see my post below on "The Frog").  Stansberry suggests we can take action to protect ourselves from such events by doing some or all of the following:

-Own physical gold (buy a gold coin or buy stock in PHYS)
-Own physical silver (buy a silver coin or buy stock in PSLV)
-Have access to a rural place (call Aunt Ida on the farm and tell her you have dibs on the extra bedroom)
-Own money in a foreign currency outside the US (this is trickier)
-Own stored food in your basement (twinkies can withstand nuclear holocaust)
-Own land

I want to focus on the last one for a second.  Land.  Maybe Lenny and George from Of Mice and Men had the right idea? I recently contacted a land broker because I am curious about the idea of owning land as a hedge to the aforementioned travesty that some the doomsayers are predicting.  The investment properties of owning land appear to be multifaceted.  First, if real assets appreciate (real assets meaning things you can touch, live on, or drop on your foot and they hurt) due to inflation, then the value of the land should rise.  Second, if you are growing crops on this land and the prices of those crops rise, you stand to gain by selling those crops to the people without land (this can also be achieved by leasing parts of the land to farmers).  Third, you can eat the food grown on the land so the "personal survival" box is checked as well.  If you think about alternative investments, few cover all of these bases.  Sure you can buy food with gold and silver but what happens when you eat all your food and spend all of your gold?  Land appears to be the better hedge.   

Rather than go out and borrow money to buy a massive tract of land, I think the idea of a land collective makes total sense - pool a group of people together to buy a piece of land. There really is power in numbers here.  If you ever NEED this land (and I say this because clearly we all see that the grocery stores are still fully functional and our money still works), you have a group of people that will be farming it with you and protecting it with you.  I will take it a step further.  You want land that has access to freshwater. You need water to grow food no?  If you live in Michigan you are in a great position because you are surrounded by the equivalent of a fresh water ocean.    

I am not saying commit your entire life savings to an idea like this but why not spend 5% of it on a share of farmland that is within 2-3 hours drive from your house.  This should not break the bank.  Others are jumping on the land grab as well.  George Bush just bought 100k acres in South America.  John Malone (telecom magnate) bought an $83million piece of land in New Mexico at around $300/acre.  Bill Gates bought a 500 acre ranch in Wyoming.  Of course these are not small purchases and they have the luxury of private jet escape pods to get them to wherever they need to go, but you can see that the "smart" money is involved in this.

I am curious what people think about this topic.  It is seldom talked about and is clearly not as sexy as investing in AAPL or some high yield bond fund.  But if you were to commit some of the money going into your IRA or 401k (which the government may have some influence on in the near future) to something like this, I think you get closer to whatever a "well rounded investment portfolio" should look like.  If anyone is interested in exploring some kind of land collective/partnership/mutual fund, please let me know.  We already have a few people on board.  Something to ponder for 2011.    

A Frog Inquires: "is it hot in here or is it just me?"

The old adage says that if you throw a frog in boiling water he will quickly jump out. But if you place the frog in cold water and raise the heat ever so slightly to boiling, he will lay still and cook to death.  Replace the frog with “the American taxpayer” and make the water temperature the “level of prices” and you have a metaphor for the current US monetary policy.  It would most certainly not be in the best interests of politicians, or central bankers alike, to turn the inflation switch on overnight.  That would result in nothing short of riots.  In light of that, it is becoming increasingly obvious that the only way out from under the mountainous pile of government debt is through moderate price inflation and erosion of purchasing power over time.  The other alternatives would result in a US government default or debt restructuring and we can be sure that no President, Democrat or Republican, would concede to that under his or her watch.

Some economists will contest claims of higher price levels and lower purchasing power with the sagging level of the Consumer Price Index (CPI) relative to historical inflationary periods.  Contrary to some beliefs, one can argue that CPI is a manufactured index that is used as a benchmark for keeping wages, benefits, and cost of living indices in check, and fails to depict an accurate basket of goods.  While deflationists are constantly pointing toward the multitude of retail discounts and dollar menu offerings they come across during trips to the mall, they fail to mention rising prices in things like beverages, clothing, pharmaceutical drugs, utilities, transportation, college tuition, and most importantly, inputs like metals (hard commodities) and agriculture (soft commodities).

There appears to be a disconnect between where actual commodity prices are going, and where consumers expect the prices of goods made from these commodities are going.  Is it reasonable to think that the things we need to buy (food, clothes, cars, etc.) will miraculously become cheaper even though the inputs used to produce them are skyrocketing?  NO!  Some simple facts: corn is up 43% this year, soybeans are up 30%, wheat is up 34%, coffee is up 52%, cotton is up 100%.  Food and clothes will become more expensive unless the labor to make these items becomes much cheaper. Fortunately, East Asia is already under pressure to improve working conditions so do not expect labor to become less costly.  On the metal front: copper is up 18% year-to-date, silver is up 62%, platinum is up 20%, palladium is up 77%, and gold is up 28%.  ‘Nuff said? 

The laymen frequently combat these statistics with the “wealth” they are accumulating in their stock portfolios and retirement accounts.  “If the stock market is up, my portfolio rises, and I am getting richer,” they quip. It appears as if American taxpayers forget that they will lose if the dollar wins the race to zero.  After applauding the recent strong performance in the stock market, most Americans show no angst from the 13% decline in the dollar over the past 4 months.  “So we won’t go to Europe for vacation this year!” some might crack.  Unfortunately it is not that simple.  The US operates at a trade deficit and we consume many goods from other countries so cutting out vacations abroad will only alleviate part of the pain caused by the weaker purchasing power of the dollar.

To my fellow frogs I fear we must be realistic and face the facts that life will become more expensive. It could get a lot pricier should the Government and the Fed not perfectly thread the needle of igniting an economic recovery while giving our foreign lenders some semblance of confidence in the dollar.  We should prepare for higher prices domestically or find a way to denominate our assets in other stores of value to avoid getting cooked (buy some land or some Chinese yuan…or take my grandpa’s advice and buy 4 boxes of cereal before the price goes up!).