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Economics of trading in an SUV May 29, 2008

Posted by The Armchair Economist in Commentary.
Tags: , , , , ,
5 comments

With oil futures at $130/barrel and gas prices topping $4.00 a gallon in many areas, SUV owners are feeling the pinch at the pump where fill ups often cost between $80-100. While it is easy to villify SUV owners for their largess and lack of forsight, the question remains: Is it worth it to trade the SUV in for a smaller, more efficient car?

Many consumer finance organizations (1,2) argue that it isn’t economic to trade in an SUV while the SUV market is depressed and trade in values are low. The argument is that since everyone else is trading in their SUVs and no one is looking to buy them, the market is flooded with these vehicles. The trade in value you will get is thousands of dollars less than what these vehicles ought to be worth, and the hit you will be taking on trade-in value is not justified from the savings recouped by $30 per fillup. You would need hundreds of fillups to make the trade-in worthwhile and the smarter strategy is just to wait until the market improves before trading in your SUV.

This argument is predicated on two facts: 1) Gas prices will improve.. or atleast not continue to get worse 2) Demand of SUVs will improve in the future. Without a crystal ball, there is no guarantee that gas prices will improve (infact, Ford predicts gas prices will remain in the 3.75-4.25 range through 2009). While I don’t know if gas prices will be 3.00 or 5.00 one year from now, I’m willing to bet that it won’t go to the price levels in the 90s-early 2000s ($1-2/gallon) that enabled consumers to waste gas without a second thought. (To put that into some perspective, oil prices need to drop from the current $130/barrel level down to the $30-50/barrel level!) Without a significant drop in oil prices, we will likely not see any increased demand for gas guzzling vehicles. The only way we’d work through the current backlog of SUVs is for people who actually NEED the carrying capacity of these vehicles…

A RATIONAL decision to purchase an SUV? Thats a new one..

The Fallacy of Carbon Offsets May 18, 2008

Posted by The Armchair Economist in Commentary.
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Have you ever noticed the options to purchase ‘Carbon Offsets’ from travel sites when you buy airline tickets? My first thought when I saw these start popping up several years ago were that these were a scam (how do you know they really plant trees or pass the money to organizations that do.. and what is their ‘commission’?). Eventually, I started hearing about people calculating their carbon footprints and then buying the appropriate carbon offsets so that they are ‘carbon neutral’.

While, I can’t imagine that it is bad to plant more trees and to be more aware of your impact on the environment via your ‘carbon footprint’, the whole idea of ‘carbon offsets’ is at odds with an environmental friendly way of life. When we hear about greenhouse gases and global warming, most of us probably feel alittle bit guilty about our individual contributions.. however the idea of being able to ‘buy’ our way out of our guilt only serves to divert our attention from where it really should lie: Conservation.

When you calculate how much electricity/oil your 4000 sq ft home consumes during the summer/winter, as well as how much gas your V12 SUV consumes, its easy to feel responsible. While buying carbon offsets may help you feel that you did something for the environment, it isn’t the answer. If paying for the appropriate carbon offsets is all you did, you are ultimately consuming the same number of resources (ie: and contributing to the rise of price of natural resources). Similarly, when you purchase carbon credits from airlines to offset the carbon footprint of your trip, you are giving the airline a free pass to keep on using an aging, fuel inefficient fleet. Put your wallet where your mouth is and do alittle research into the airline that flies your route and uses the most efficient aircraft (I wonder if a site exists that does this automatically?)

Besides selling your house or trading in your SUV for a Prius (kudos to you if you are that invested in our environment), there are simple and effective (yet not very obvious) things we can do to reduce our carbon footprint, all of it revolving around conservation and reuse. Figuring out the amount of trash that you throw away is a good gauge of your impact on the environment. Reuse those plastic bags (stop getting them from the grocery stores, do you know how much energy and oil based products it takes to make plastic bags, not to mention their uncanny ability to resist biodegradation). Minimize the amount of water you use (Fix those leaks and turn off those faucets when brushing your teeth). Buy bigger sized products (Speaking directly to those manufacturers that try to hide price increases by decreasing the amount of product while using the same sized container.. I’d rather you just raise the price and give me the same amount of product, since the product:waste ratio only gets worse). Walk/Bike/Skate/Use Public Transportation.. and STOP DRIVING to the next store within the same shopping complex! Refuse to purchase convenience foods (ie: packaged salads, ‘lunch sized’ package of foods).

The ways you can minimize your carbon footprint are endless.. and none of these require you to spend an extra cent! digg story

Accountability and the Mortgage bailout May 17, 2008

Posted by The Armchair Economist in Commentary, Economics, Politics.
Tags: , , , , , , ,
6 comments

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

A look at the reality of Universal health care December 23, 2007

Posted by The Armchair Economist in 2008 Election, Health Care, Medicine, Politics, Ron Paul.
7 comments

When it comes down to a persons life, it is easy to make a knee jerk reaction and blame it on the insurance company. If you’ve read some of my older posts, you should be familiar with my stance on why for profit insurance companies are a inherently flawed concept. However, the recent case of Nataline Sarkisyan illustrates the reality of resource management that would be necessary under a universal payer system of health care.

A 17-year-old died just hours after her health insurance company reversed its decision not to pay for a liver transplant that doctors said the girl needed.

Nataline Sarkisyan died Thursday night at about 6 p.m. at University of California, Los Angeles, Medical Center. She had been in a vegetative state for weeks, said her mother, Hilda.

“She passed away, and the insurance (company) is responsible for this,” she said.

“They took my daughter away from me,” said Nataline’s father, Krikor, who appeared at a news conference Friday with his 21-year-old son, Bedros. more on this case here

It is easy to automatically point the finger at the insurance company and blame them for the death of the girl. However, there are several considerations we need to think about. The primary issue being, would a liver transplant have saved her life? I do not have access to her medical records so the only thing I can do is postulate. In this case, the patient had leukemia and complications arose from a bone marrow transplant. She was already in a vegetative state for several weeks prior to the surgery. Would a new liver have improved her life in any significant manner? The insurance company originally denied her liver transplant based on the absence of any evidence that a liver transplant would improve her condition (The current trend in health care is something called “Evidence Based Medicine”, where treatment is only rendered if it is shown in clinical studies to therpeutic). In the absence of any evidence that this would prove therapeutic, should insurance companies be forced to pay? The alternative view is that the patient’s doctor felt that the liver transplant was necessary, so the question arises, is the doctor or the insurance company responsible for making medical decisions? One argument can be made that although the insurance company refused to pay for the operation, the doctors had a responsibility to give the transplant to the patient regardless if they will be reimbursed (this is consistent with how medical malpractice decisions have been rendered in recent cases). I would not be surprised if the patients family or insurance company brought up point in the ensuing lawsuit, but this is a whole other blog.

As a response,


John Edwards tonight cited the case of a 17-year-old California girl who died after her insurance company refused coverage on a liver transplant to save her life as a call to action to change the current system of healthcare in America.
“Are you telling me that we’re gonna sit at a table and negotiate with those people?” asked a visibly angered Edwards, challenging the health care companies. “We’re gonna take their power away and we’re not gonna have this kind of problem again.” More here

Why is this case relevant to national health care? John Edward’s platform on health care (as with the other Dems) is to transform America’s health care system and provide universal health care for every man, woman and child in America (cited directly from his candidacy webpage).

In any type of universal health care, there are limited resources and tough decisions need to be made on who deserves to use these resources. For all the ills of insurance companies, there is still one thing that they do well: manage resources. In this case, Cigna (the insurance company in this case) is a perfect metaphor for a national payer in universal health care. For example, should more money be devoted to treatment of cancer in a 65 year old patient who has smoked 2 packs of cigarettes a day for 40 years, or for preventative health care for a 6 month old infant? Consider the fact that one major limitation of organ donation is the dearth in supply of organs relative to demand of organs. According to the OPTN, there are 16,679 patients on the Liver Transplant waiting list (Source). Where a liver is so highly valued, should the liver be used on this particular patient where the outcome is uncertain.. or should the liver be used in someone with a diagnosis that is expected to have a more proven outcome?

These might seem like preposterously extreme decisions, but in universal health care rules will need to be made to clearly delineate who should and should not receive care. In this case I am confident enough to bet my degree that in a universal health care setting, that this patient would NOT have gotten her liver transplant.

While it is noble to want to give everyone in the country free health care, one needs to understand the ramifications of universal health care on an individuals choice and true effect on quality of health care. digg story

Why Ron Paul? December 15, 2007

Posted by The Armchair Economist in 2008 Election, Politics, Ron Paul.
2 comments

Ok. I’m coming out of the closet to officially endorse Ron Paul for the GOP nomination.

Why Ron Paul?

This man is the epitome of integrity, he votes exactly what he believes in (not what is the flavor of the month).
I challenge you to the following:
a) Understand his platform, its quite revolutionary (and you may disagree with some or all of it, and even if you disagree you will have a better understanding of our constitution and how it relates to our country) In brief.. its noninterventionalist, constitutionalist, personal freedom (not bush’s version of freedom which requires war mongering and nation bankrupting tactics to achieve) http://www.ronpaul2008.com/, http://en.wikipedia.org/wiki/Political_positions_of_Ron_Paul

b) Look at his voting record (http://www.vote-smart.org/voting_category.php?can_id=296). (He’s actually known as ‘Dr. No’ on the hill.) I challenge you to find ONE other candidate that votes as consistently with his beliefs and I’ll recant my support for Ron Paul immediately.

2) This man has good judgment . He is the only GOP candidate that voted against the Iraq war, and believes that we don’t belong. And don’t tell me you are not COMPLETELY dissappointed in the little the Dems have done in ending the war/funding since they have taken control of the senate and house? Ron Paul is the sole candidate that is a man of his word.

3) Don’t be scared by his party affiliation. I’m a (former) Democrat, and Ron Paul actually ran for the presidency as an Independent in 88, but I feel out of all of the candidates (of any election in recent history) he has the firmest grasp on what our nation SHOULD be (ie: as defined by the constitution). *depending on what state you are from you NEED TO CHANGE YOUR PARTY AFFILIATION TO REPUBLICAN BY SPECIFIC DATES TO VOTE IN THE GOP PRIMARIES*.. otherwise a crook like Giuliani will get into office and will make bush and cheney look like mother teresa and gandhi.

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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13 comments

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.
3 comments

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)

Solution:

  • 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.

Further evidence that Health Insurance companies should not be private, for profit entities November 12, 2007

Posted by The Armchair Economist in Business, Ethics, Health Care, Medicine.
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Woodland Hills-based Health Net Inc. avoided paying $35.5 million in medical expenses by rescinding about 1,600 policies between 2000 and 2006. During that period, it paid its senior analyst in charge of cancellations more than $20,000 in bonuses based in part on her meeting or exceeding annual targets for revoking policies, documents disclosed Thursday showed.

The simple view is that corporations exist to make money for their shareholders (ie: their fiduciary duty), insurance companies make money by paying out less money than they collect in premiums, thus it would make sense that companies would try to reduce their risk by eliminating clients that need paying out… which is contrary to the whole idea of insurance. All the more galling is that these companies can collect premiums for years, but when they are called to pay out claims (ie: their customer gets sick), only then do they do a careful review of the customers application to see if the customer is ‘eligible for care’ (shouldnt this be something they figured out before they started collecting premiums?).

The question is how can we fix this conflict of interest? Perhaps requiring insurance companies to be mutual companies rather than for profit entities, so that all balances (if there are any) at the end of the year are returned to policy holders (ie: there is no ‘for profit’ motive, and money are returned to the people who paid out the premiums in the first place). Another idea might be to place the burden of ensuring accuracy of medical information on application the insurance companies responsibility, thus once they accept premiums from a customer, they are on the hook for their care as long as the patient continues to pay their premium (ie: they cannot walk away from a contract). Additionally, even IF the patient neglected to mention a preexisting condition, claim payout denials should only be restricted to those relating to the omitted condition (ie: the article discusses a woman whose insurance company who denied coverage for breast cancer surgery and chemotherapy claiming she omitted having a heart condition). Or perhaps, we can do without health insurance companies all together, or have one quasi-governmental, non profit insuring agency.. having all policies under one roof would aid in information sharing (ie: no need to verify ‘preexisting conditions’), reduce overhead (ie: $$ spent on marketing), and likely improve medical care (easy access by medical professionals to the patients past medical care).

Any thoughts on whether these solutions would work? How other solutions to this problem?

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One problem (of many) with our system of health care August 21, 2007

Posted by The Armchair Economist in Commentary, Health, Health Care, Politics, Technology.
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Its 1am. I have to be at the hospital in 5 hrs. These mid afternoon naps are killin me I tell ya.

What better way to spend my time than to write about the new developments going on at our favorite health care buyer – Medicare. Medicare announced over the weekend that they will stop paying for procedures that stem from medical errors, ranging from instruments left in surgical patients to patient falls to infections acquired while in the hospital (specifically UTIs from cathed patients). Basically they are only going to pay for treatment relating to what the patient originally presented with… (makes sense right?).. however the reality is that being in a hospital brings a whole host of risks that arent always preventable (not really ‘medical errors’) which brings up another issue.. in order to accurately diagnose a patient, lots of tests need to be run (no, it isnt supposed to be this way..).. but medicare only reimburses a flat rate for each case… (btw. i’m not going to talk about the inexcusable cases where the wrong leg is amputated or where a scalpel is left in the body.. these things happen.. but its so rare that the news media actually decide to write about it.. more of the financial impact to health institutions will come through ‘errors’ such as patient falls and nosocomial infections)

Unfortunately, whatever Medicare does, the private insurance industry will adapt and pervert to their will. It will be interesting to see how things shake out.. for example, how exactly do you minimize the number of times that a 75 year old patient needs to go to the bathroom (ie:to prevent falls)? You can give them a bed pan (very dignified eh?).. or maybe make them ring the nurse everytime they need to go (uh.. good luck with that.. might as well keep a bed pan handy)… or maybe you can just put them on a catheter… wait.. that increases the chance of infection.. for which treatment is no longer covered. Also, regarding preventable infections.. unfortunately until we know how to eliminate bacteria there is no such thing as ‘preventable infections’.. no matter where you are, even in the sterile surgical field, there are bound to be bacteria.. the question is whether the antibiotics and your immune system are up to snuff in dealing with it. The main point is that there are always complications (almost ‘expected’ if you will).. and it is alittle rediculous to say that no complications will ever happen. (it kind of provides indirect validation to people who sue due to bad outcomes rather than bad decision making or medical errors).

What we need is to close the liability gap between the payer and the care provider. The problem stands in that the liability for error falls in the health care providers hands.. while the purse strings are being controlled by another party who has no liability whatsoever. For example, if a 10y/o kid presents with recurrent headache with nausea and vomiting, the diagnostician has to consider brain tumor (no matter how remote the idea). The physician will order an MRI, the insurance company will come back with ‘we won’t reimburse for an MRI in this case (basically the chances of an brain tumor is very low, while the number of people who have recurrent headaches with nausea and vomiting are very high.. so it is a business decision not to do reimburse for the MRI.. otherwise they would go bankrupt)… but note: they didnt say don’t get it, they just say they won’t reimburse for it, so now, they’ve thrown te ball back into the doctors court. its up to the doctor to decide what to do.. either make the hospital foot the bill or make the patient foot the bill (btw: its very expensive).. If the doctor thinks that its REALLY low on the differential, perhaps they will tell the patient its most likely nothing (or they could be a real bastard and leave it up to the patient to decide if they want it or not ie: not give them any guidance)… but 5 years down the line, if it really happened to be a brain tumor, guess who gets sued? (by the way, doctors have been sued (and lost) by telling patients time and again to get specific tests.. (ie: writing prescriptions time and again).. but the patients never got it.. and when their disease progressed to an advanced stage, they sued the doctor because the doctor never stressed how important it was for them to get the test!! Its actually progressed to the point in which doctors can call CPS (ie: child protective services.. the same people who come if you are caught abusing your children) if parents don’t get necessary tests for their kids (ie: lead screenings)… now if that isn’t an adversarial/defensive relationship, I’m not sure what is. To be fair, I don’t really know how often this is invoked or how accurate it is.. the anecdote was just passed on to me by another doc)

If the insurance companies want to make decisions on what to reimburse for (ie: they think they know enough to make the decision of what is important and what isnt), they need to share some of the liability.

(btw: regardless of how good you think a hospital is or how good the doctors are, you never want to be in a hospital any longer than you need to be.. consider it a risk benefit decision.. )

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