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Controlling Health Care Costs November 18, 2011

Posted by The Armchair Economist in Economics, Fix Health Care, Health, Health Care, Medicine, Technology.
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I cam across an Op Ed on controlling health care costs through bundling.  I’ve read about novel health systems that focus on high risk/frequent fliers that take daily vital signs via telemedicine and other ways to prevent costly admissions (ie: daily weights for CHF patients, daily in person clinic visits to monitor healing wounds in diabetics).    With the enormous cost of admissions, and inefficient management of patients as inpatients (ie: often working up problems that can be worked up/treated as outpatients)  I see this as a potential way to reduce the cost on our health system.

One particularly interesting statement:

Half the population — mostly young people and healthy adults — consumes just 3 percent of costs, while the sickest 10 percent consumes 64 percent

It would be interesting to see where this information comes from – and to compare insurance company statistics to see what percentage of health care costs are consumed by the sickest 10%.   Although I am a proponent of capitalism and the free market, there are areas (health insurance being one of them) where I feel that the free market cannot work.  Too many inefficiencies – administration/marketing/overhead amounting to as much as 25% of costs being directed to non healthcare related costs, too much incentive to game the system (your legal obligation is to minimize payouts to the insurees and to maximize profits).    I’ll elaborate on all of this in a future post (hopefully)

The Fed just doesn’t get it.. February 9, 2009

Posted by The Armchair Economist in Business, Commentary, Consumerism, Economics, Politics.
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Late 2008, the the Fed gave out ~$350b, about half of the $700b ‘bailout’  Congressional hearings showed that  there was very poor accountability towards how banks spent that money.  Rather than  loan it out, banks just hoarded it.  When asked why they weren’t loaning the money, they said that they are increasing loan requirements due to the poor economic outlook.  In other words, the banks are doing what they should be doing… assessing the risk of nonpayment to potential borrowers.

Today, the Fed announced an overhaul in how the rest of the bailout money will be used: it will be used to buy back the ‘toxic assets’ that are supposedly weighing down the banks balance sheets.  How does this change the fundamental problem of banks not loaning the money out?  (more…)

Some quick points.. September 30, 2008

Posted by The Armchair Economist in Commentary, Economics, Politics.
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I’ve been studying for my board exams so haven’t been able to post.. but some quick points:

I’m glad to see the bailout fail in the house yesterday.  Unfortunately rather than scratching the current plan, they are merely adding more clauses to it to gain more votes.  While the stock market reaction was expected, I am also disgusted that politicians are using the market losses to justify passing the bailout.  In case people weren’t aware, investing in the stock market means inherent risk.  Using the bailout to prop up stock prices seems a tad short sighted, doesn’t it?  Perhaps our problem has nothing to do with decreasing housing prices.. and the root lies in our systemic aversion to accountability?

An Overlooked Solution: Some lessons from Sweden September 23, 2008

Posted by The Armchair Economist in Business, Commentary, Economics.
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It seems as if Paulson’s plans aren’t getting through Capitol Hill as easily as easily as Paulson and the Bush administration would like it to. Rather than blindly react to a calamity (as they did after 9/11), cooler heads are prevailing. In a way, the quick announcement by the Fed for a ‘Bailout’ last Friday fulfilled its main goal.. of stabilizing a market that was running on fear. While the Senate Banking Committee is busy fleshing out the details of the bailout, I wonder why no one has brought up a strategy that was utilized by the Swedish Government in the 1990s to stabilize their own economy after a similar housing bust. (more…)

Open Letter to Senator Charles Schumer September 20, 2008

Posted by The Armchair Economist in Business, Commentary, Economics, Politics.
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The Honorable Charles Schumer,

I am writing to you, as a constituent and resident of New York State, to share with you my thoughts and concerns regarding the Federal Reserve’s action in response to this week’s financial upheaval on Wall Street.

While I understand the necessity for swift and decisive action in order to stabilize financial markets, the actions outlined by the Federal Reserve do nothing to address the root cause of the sub-prime lending debacle. It is of my opinion that our problems derive from monetary policy driven by our exclusive reliance on continual economic expansion to fund increasingly large government programs (and an unpopular war), a policy that favors growth over stability. (more…)

Fed bailout of Wall Street: Reverse Redistribution of Wealth September 19, 2008

Posted by The Armchair Economist in Business, Commentary, Economics.
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Fiscal conservatives (and the rich) have always cried foul over progressive tax policies and socialist policies(or as they see it, the redistribution of wealth from the rich to the poor). Today, we are witnessing perhaps history’s greatest reverse redistribution of wealth.. from the lowly taxpayer/common man to those who gambled on risky bets (and lost).

While this bailout was necessary to stem the fear running in on the Street and risking catastrophic damage to the US/world economy (think: companies going bankrupt, people losing jobs, less tax revenue, less social services.. depression perhaps), there is no debate that this is basically a free ‘put’ option to gamblers who were caught holding the bag. (more…)

Accountability and the Mortgage bailout May 17, 2008

Posted by The Armchair Economist in Commentary, Economics, Politics.
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Five years ago, I was three years out of college and had just written the check for the final payment of my college loans (hurray). My thrifty ways had led to a slowly growing pile of cash in my money market account. I considered purchasing a home since I was gainfully employed, had little expenses and had enough cash for a nice down payment. A little more research into the housing market showed that many of the newest mortgage loans were Adjustable Rate Mortgages, mortgages that had low teaser rates that were to reset in a few years (usually 3-5 years) at the prevailing interest rates. The historically low interest rates, coupled with the stratospheric (not yet ionospheric, as I was soon to see) housing market, and number of ARM mortgages was enough to put a slight pause into my own dreams of owning a home. I reckoned that by the time the interest rates rose in the next few years,  many people who bought in hoping for a quick buck will head towards the exit – all expecting to  cash out before their loans reset, leading a possible downturn in the housing market possibly creating some buying opportunities. By the way, this was before mortgage lenders found a way to mediate the perfect storm of less knowledgeable (subprime) borrowers , increasingly greedy banks willing to accept an amazing new form of seemingly low risk, high return mortgage products , and an increasing number mortgage brokers with surprisingly absent scruples that finally caused the housing market to crash and burn.

Last week, the House has passed a $300 billion in federal insurance to refinance troubled mortgages. While I feel some sympathy for some families that will lose their homes, I question the wisdom of not letting the market work out the kinks of the housing bubble. In the true American (read litigous) fashion, we’ll likely be arguing about who lied to who, who knew what when, and who is truly a victim for the next decade, the truth is that everyone involved in the entire chain of events is partially responsible and should be held financially and criminally (if warranted) liable. Why should bystanders and taxpayers be held financially responsible for other peoples actions? 

Subprime borrowers were giddy at the prospect of finally owning a home, but did they ever wonder WHY even though they didn’t have enough credit to buy a used car, people were now giving them hundreds of thousands of dollars without even checking their income (or even requiring a down payment!)? Did borrowers using ARM mortgages ever consider what would happen if the interest rates ever increased from historic lows (did they really think rates would stay there, or even go lower?!?). While I can see the excitement of owning your own home, as well as the prospect of watching it go up in value 100% every 3 years, did these borrowers ever consider that housing prices might not continue appreciating exponentially in perpetuity? Sure, I understand that that some of these folks might claim that mortgage brokers lied to them or misrepresented some aspects of the loans, but didn’t these borrowers have a duty to try to figure out ‘whats missing’ in this picture rather than blindly sign on the dotted line and hope that they wouldn’t need to consider the ‘what ifs’ should things go sour? In the end, sure, it sucks to lose your home, but should you have been able to purchase this home in the first place (ie: did you really lose it if it was never meant to be yours?). I won’t even get into borrowers who can afford to pay their loans but decided to walk away because their loans are now upside down (ie: they owe more on the house than the house is worth).

Mortgage brokers represent another one of the responsible parties. Enticed by hefty commissions on subprime mortgages, brokers did everything and anything to write loans to innappropriate borrowers.  Mortgage brokers first lowered the credit standard of the borrowers (ie; subprime borrowers, who never should have been able to borrow in the first place),  they lent money without even proof of the borrowers income via ‘Stated Income’ loans, they lent money with ‘No Money Down’ removing the borrowers stake in the gamble, and they underwrote loans for amounts greater than the collateral was worth (ie: money for your house AND renovations).  All of these tactics served to increase the pool of borrowers and ensure that the hefty commissions kept on rolling in.  Brokers may argue that their managers told them to lend money via these standards, while managers may argue that the brokers acted on their own but one cannot deny that as professionals, both parties should have enough understanding that basic mortgage underwriting principles were being violated. 

What enabled the mortgage companies to underwrite such risky loans?  Weren’t they concerned about the fact that they wouldn’t be able to collect on their mortgage payments when the borrowers hit upon hard times?  The beauty of this scam lies in their ability to sell these mortgages to other investors, thus absolving them of the riskiness of these loans and yet keep the fees and commissions from writing these mortgages. 

Banks and Investors, in blind pursuit of ever increasing returns,  was the likely party that enabled the house of cards framework of the mortgage crises.  Companies such as Fannie Mae existed that bought mortgages from the primary mortgage market and bundled these mortgages together to sell as a portfolio product that promised high returns with limited risk (with favorable ratings by credit rating agencies).   The basic rule of finance and investment is high returns come with high risk, and there are VERY little opportunity to get high returns with low risk (free market economics states that there are no free lunches).  Securitidized mortgage products (a portfolio of thousands of mortgages bundled together reduces the risk of individual defaults much like the protection you receive when you buy a mutual fund and one of these companies goes bankrupt) have always held a dear place in investors hearts due to their predictable (and relatively safe) income stream.  With the increasing number of subprime loans, loans offered to risky borrowers and thus had higher interest rates, the rate of return of these packaged mortgage products rose accordingly.  For some reason that I don’t understand, credit rating agencies failed to see the risk inherent in these loans and gave them credit worthy scores.  These credit ratings encouraged investment banks to blindly invest in these products creating a cycle of more demand for risky mortgages.  At some point, why didn’t someone at the investment banks question WHAT had fundamentally changed to enable the once modest mortgage market to offer such an increased rate of return in exchange for minimal change in risk? 

One can argue how borrowers were coerced to borrow money by mortgage brokers; Mortgage brokers are just writing the loans that ‘help people own homes’ and to fulfill the demand of the securitidized mortgage products, and Investors were misled about the riskiness of the mortgage products. However each party likes to play victim, each should be responsible for their actions and the resulting consequences without burdening the rest of the population. 

Disclosure: I still don’t own a home.. maybe in a few years. digg story

The costs of the “Free Shipping” option at Amazon November 29, 2007

Posted by The Armchair Economist in Business, Economics, shopping, Technology.
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This morning, I caved and bought the Nikon D40 D-SLR that I’ve been fantasizing about on and off for 6 months. In any case, I ordered the camera with an extra 55-200mm VR zoom lens in addition to several other accessories (which came to almost free taking advantage of various promotions). Being the cheapass that I am, of course I opted for the ‘Free Shipping’ option.

I wouldn’t call myself a frequent buyer from Amazon, for one, I feel that their prices aren’t all that much better than elsewhere (especially on textbooks and review books, where there is often a 0% discount, go figure.. they have less overhead but charge full price?). But on occasion, a deal crops up where I’ll bite the bullet and buy from them, always using the free shipping option. I noticed that up until maybe 2 or 3 years ago, anytime I used the free shipping option, it would ship within a few hours. However, within the past 3 years, my “free shipping” items would often be delayed a few days before it shipped. This coincided with the “Amazon Prime” offering, where you could get free 2nd day air if you pay them 79$/year. I figured the delayed shipping on the “Free” option was just their strategy to artificially inflate the ‘value’ of Amazon Prime. This time is probably a record, the ship date is 5 days AFTER i placed the order.. and all of my items are in stock and are available for 1 day shipping. This got me curious enough to do a quick google search and I info (posted below)… apparently its from an insider and provides some details into the free shipping/ estimated date of shipment algorithms.. [source: techdirt.com]

I used to work at Amazon, in fact I was responsible for a lot of the algorithms used in Amazon’s logistics network in use today. I’ve read a lot of FUD about Amazon order fulfillment so I have to try to add some facts to these discussions.

Amazon’s order fulfillment process is insanely complex and involves hundreds of different variables which impact customer satisfaction and costs. Since keeping costs (and thus prices) as low as possible is also a major factor of customer satisfaction, it’s important to understand that the underlying principle for all of the algorithms used is to maximize the customer experience. But that’s very complicated. Without disclosing any trade secrets, here are a few of the types of parameters which go into the order fulfillment decisions:

* What has the customer paid for? If they’ve paid for next-day delivery, Amazon assumes they want their order as quickly as possible. Likewise, if they’ve chosen super-saver free shipping, they assume it’s not needed that quickly.

* Where is the inventory? Amazon has many distribution centers scattered across the U.S.A. and not all items are available at each center. It obviously costs less to quickly get an item to a customer from a nearby warehouse. But it might be necessary to ship from further away.

* Are inventory levels as low as possible? To maximize cash flow and utilization of its warehouse space, Amazon is very aggressive about managing its inventory levels. This may mean that rarely ordered items are not kept in inventory and may require time to source from a supplier. It also means that Amazon tries to move inventory out to customers as quickly as possible. Usually, delaying shipments has inventory costs. Believe me, Amazon has no desire to own inventory one minute more than it has to.

* Where is there space for inventory? Related to the above point, space can get very very tight in the Amazon warehouses, especially before the holidays. They just may not have room for dozens of 60″ plasma TVs in every distribution center.

* Does the item need to be ordered from a distributor or manufacturer? If an item is not in Amazon’s inventory it may already be on order and due on a future date supplied by the source or it may need to be ordered. Obviously it’s cheaper to buy large volumes directly from a manufacturer, but those items may not be available quickly. If a customer has paid for next-day delivery though, Amazon will pay to get that item to them.

* Which distribution center has enough people working today? To help keep employees happy, Amazon tries to smooth work loads. Employees prefer to know when and how many hours they will be working next week. When there are high volumes of orders, this may mean delaying some low-priority orders.

* Which distribution center has capacity in their automated systems? It’s much cheaper to fulfill an order using Amazon’s automated facilities than to do it using manual labor. But only so many orders can go through these automated systems a day. Orders may be routed to a different fulfillment center, or delayed to minimize the handling costs.

* Are there any automated fulfillment lines? For big ticket items (think new Harry Potter book) Amazon will often dedicate mechanized packaging and shipping hardware to just that product. It may be much cheaper to wait a couple days until one of these mechanized production lines is in place before fulfilling an order.

* Which shipping company is cheapest? Amazon utilizes just about every common carrier in the U.S. and can even use them together to minimize shipping costs and reduce delivery times. These rates change regularly and service levels can vary from day to day. It may cost 50% less to get a non-next day order to a customer by waiting a day or two before shipping it.

* Do the shipping companies have capacity? Many of Amazon’s distribution centers are in low-cost rural areas. It’s not uncommon for Amazon to max-out the capacity of UPS, DHL, USPS, FedEx, or other shipping companies from one of these centers. If that happens, an order for New York City may end up coming from Nevada rather than near-by Pennsylvania.

* How quickly can Amazon be paid for an order? Legally, Amazon can’t charge you for an order until that order has shipped. To maximize cash flow, Amazon normally tries to get orders out as quickly as possible so they can be paid as quickly as possible.

* How good of a customer is this? And yes, if you’re a good customer, Amazon will spend more to keep you happy. In extreme cases, I’ve seen Amazon send employees to local Walmarts or other retailers to buy an item which is then couriered to a great customer. Believe me, this isn’t cheap. This cost and effort doesn’t go into a first-time buyer’s Super Saver order.

These are just a handful of the types of decisions which have to be made for every order. During peak periods Amazon handles over a million orders a day; trying to balance and optimize all of these constantly changing variables is a difficult job but I believe the company does a pretty good job of it. And yes, I believe there is intellectual property in the software created by Amazon to make this happen.

In general, I think Amazon’s customer service is great. But when I hear that some individual customer service rep, who is probably sitting in West Virginia or India and has never seen the algorithms used for fulfillment or even been to one of Amazon’s fulfillment centers explains how free shipping works, I just have to giggle. They really have no idea.

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Fixing health care in the US? Part I November 16, 2007

Posted by The Armchair Economist in Business, Commentary, Economics, Fix Health Care, Health, Medicine.

Huge task… I know. I realize that I always come up with ideas to ponder but I’m discouraged in pencilling it down because it means taking hours away from my day to flush out my ideas that will likely be a unintelligible tome. Rather, I will post short segments/thoughts (open to discussion if you feel like commenting) of problems I’ve identified.. as well as possible solutions. Search under the category ‘fix health care’ for future installments.

Problem: The oft cited ‘America spends XX% of their GDP and health care still sucks’
The reason for our high costs are obviously multifaceted…

  • We have the newest technologies, newest procedures, newest pharmaceuticals.. All of this costs money. If I was deathly ill, I definitely want to be in the US with all of its resources at its disposal to cure my illness, over any other country.
  • We subsidize the rest of the world’s health care. The cost of most new technologies are not regulated in the US (ie: manufacturers can charge whatever they want) while prices are heavily regulated by all other nations (ie: thats why drug prices are so much cheaper in socialized systems than in the US), otherwise these nationalized systems would be bankrupt. (likewise, allowing competitive pricing in other countries would likely drive down the prices in the US)
  • Preventative health care is not a priority in the US: Since there are so many insurance companies out there (all focusing on the bottom line) there is no guarantee that the expenditures they lay out today (for a disease you do not have and may not get), would benefit them in the future, since you can always go to another insurance company thus negating their investment in your health. Their solution? Reduce emphasis on ‘low return’ preventative health care, and try to ‘manage risks’ (ie: minimize sick patients on their rosters.. even to the point of canceling policies in the middle of expensive chemotherapy as elucidated by Health Net recently)

Yet for all of our costs, our health doesn’t seem to be any better..

  • Our health isn’t a failure of our health care system, it is a failure of priority and accountability. With a cultural priority on wealth accumulation, work, and leisure time becomes a valuable commodity. Increase in middle class and disposable income means more money to spend on dining out and convenience foods. A cultural focus on higher education is migrating our workforce to a more sedentary service oriented economy. Health care is a means for us to enjoy those steak dinners and burgers yet maintain a ripe old age. (ie: 1 surgery to make up for 30 years of culinary indiscretion, hit me)
  • Our infant mortality rate sucks (#17 according to Michael Moore’s Sicko) Two key reasons that come to mind: the definition of ‘infant’ is different. In the US, infant mortality counts an infant exhibiting any signs of life, regardless of gestational age or size. (ie: high risk, premature babies <28 weeks or less than 1000gr would not be counted as infants in some countries). Additionally, the technology allows us to birth high risk babies that would likely not be carried to term elsewhere. Basically this is a numbers game.. the question is, if you were going to have a high risk baby, what country would you want to be in?
  • Lies, damn lies, and statistics: Statistics can be massaged to support any statement. Lets look at objective statistics.. for exampling by match risk factors (ie: obesity) with outcomes by country.. (I’m not suggesting that US would come out on top)


  • Use our political and economic leverage to allow less restricted pricing by socialized nations This will obviously face substantial resistance. Arguably, we are suggesting to raise the health care costs of other nations so that we won’t have to pay as much (although rightfully, we have been subsidizing R&D for the rest of the world)… probably not the most popular proposal.
  • Increase the accountability of health to the individual: With the exception of genetics, your health is your decision. Your decisions can influence your health in 50 years. Each cigarette you smoke increases your risk for emphysema, lung cancer, coronary artery disease, etc.. why should your decision affect my financial wellbeing (in terms of higher insurance premiums.. to take care of your sick ass in 30 years). Each bag of fries, canister of pringles, slab of filet mignon, and can of soda will increase your chance of obesity, diabetes, hyperlipidemia. How can we influence peoples decisions and make them financially accountable for their decisions? Consumption tax… or Fat and Sugar tax if you will. Taxes collected can be used to subsidize healthcare costs as well as fresh fruits and vegetables (not necessarily to pay for farm subsidies though).
  • Prohibit health insurance companies from being for profit entities: There is an inherent conflict of interest in making money in the insurance industry. While the industry argues that it increases competition and reduces costs to the consumers, all it does is reduce corporate accountability. Ideally insurance works by pooling risk, in a profit motivated world insurance works by reducing costs. By becoming mutual companies where profits are distributed to the policy holders, there is a form of checks and balance.. money saved goes back to people who payed the premiums, and any policy changes that might reduce benefits affects only policy holders.
    • Shift the responsibility of verifying information accuracy on applications to the insurance companies: In response to the Health Net fiasco, insurance companies shall be prevented from changing coverage once they begin accepting premiums. Insurance companies argue that this will foster fraud (ie: people will underreport existing conditions).. I’m not sure why no one has thought of this before, but rather than sitting back and collecting premiums, insurance companies should be responsible for doing due diligence on the health of a prospective client BEFORE they begin accepting premiums rather than while they are undergoing expensive and lifesaving therapy. (I would classify this responsibility as ‘risk management’) This is not as much of a hardship on insurance companies as you would think, insurance companies can protect themselves by easily sharing patient information with each other to verify the accuracy of applications.

Thats all I have for now. I reserve the right to continuing updating this entry for additional points, accuracy, and hopefully citations. I welcome your thoughts to fixing the system.

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Making Recycling Work November 15, 2007

Posted by The Armchair Economist in Business, Consumerism, Economics, Environment.
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I’m probably not the only one to wonder where the bins of plastic bottles and newspapers I painstakingly separate out are indeed recycled. Here’s an interesting article from The Economist that elaborates on the inner workings of how recycling works.

This article got me thinking.. how the hell do Americans generate almost 800kg’s of municipal waste a year? One reason that comes to mind is the underhanded practice of raising prices by selling a decreased amount of product in similar packaging. In one example, after years of stagnant sales, coke tried (unsuccessfully) to raise their prices, but came to realize that 0.99 was a mental barrier to their 2L bottles of soda, thus reduced their bottle size to 1.5L, retaining the same pricing point). Another recent example is soap manufacturers cutting ‘grooves’ into their bars to ‘make it easier to handle’, but at the same time you have ~7-8% less soap per bar, while the size of the packaging remains the same. Perhaps the US should adopt a rule from the Germans, ie: shifting the responsibility for the entire life cycle of packaging to producers… but oh lord.. that means corporate responsibility!! god no.