armchair pundit

In my last post I attempted to list the things I found especially resonant last year in media, entertainment, art and journalism. I say “attempted” because I didn’t keep track of this stuff very well during 2010. In lieu of keeping track, I retroactively scoured my bookmarks in places like delicious, Instapaper and Evernote, and as a result I probably favored things I consumed toward the end of the year and forgot things I encountered in January and February.

In the spirit of trying to do better in 2011, I’ll mention over my next two posts a couple of articles I’ve read recently that are bound to make my greatest hits list at the end of the year.

In the first, Dr. Atul Gawande who writes perhaps better than anyone about healthcare had a recent piece in the New Yorker about the burden of addressing “super-utilizers,” or the most expensive patients. He examines some pioneering new initiatives which show, counter-intuitively, that hospitals can significantly lower costs by giving even more attention to these neediest patients.

He follows a doctor named Jeff Brenner in Camden, NJ who was inspired by the way urban police departments study crime statistics – clustering crimes block by block into hot spots, then targeting law enforcement to get the biggest bang for the buck. He applied a similar strategy to zero in on healthcare hotspots and found, for example that:

…a single building in central Camden sent more people to the hospital with serious falls—fifty-seven elderly in two years—than any other in the city, resulting in almost three million dollars in health-care bills.

And in one low-income housing tower:

…between January of 2002 and June of 2008 some nine hundred people in the two buildings accounted for more than four thousand hospital visits and about two hundred million dollars in health-care bills. One patient had three hundred and twenty-four admissions in five years. The most expensive patient cost insurers $3.5 million.

Armed with this information, Dr. Brenner reaches out to numerous doctors in several hospitals and offers to take on their “worst-of-the-worst” patients, and with the help of his small staff he starts to give these patients the highest degree of personal attention he can. He sees some patients every day. He nags social workers on behalf of patients and escorts them to AA meetings. With this kind of care, these patients who used to visit the emergency room half a dozen times a year, racking up tens of thousands of dollars in bills (paid for by taxpayers), suddenly don’t need the hospital at all. Daily maintenance costs much less.

Gawande visits a company called Verisk Health that specializes in “medical intelligence” for organizations that pay for health insurance. A doctor analyst named Nathan Gunn drills into patient claims and shows Gawande a typical example of the kind of patient who stands out:

All these claims here are migraine, migraine, migraine, migraine, headache, headache, headache.” For a twenty-five-year-old with her profile, he said, medical payments for the previous ten months would be expected to total twenty-eight hundred dollars. Her actual payments came to more than fifty-two thousand dollars—for “headaches.”

Was she a drug seeker? He pulled up her prescription profile, looking for narcotic prescriptions. Instead, he found prescriptions for insulin (she was apparently diabetic) and imipramine, an anti-migraine treatment. Gunn was struck by how faithfully she filled her prescriptions. She hadn’t missed a single renewal—“which is actually interesting,” he said. That’s not what you usually find at the extreme of the cost curve.

The story now became clear to him. She suffered from terrible migraines. She took her medicine, but it wasn’t working. When the headaches got bad, she’d go to the emergency room or to urgent care. The doctors would do CT and MRI scans, satisfy themselves that she didn’t have a brain tumor or an aneurysm, give her a narcotic injection to stop the headache temporarily, maybe renew her imipramine prescription, and send her home, only to have her return a couple of weeks later and see whoever the next doctor on duty was. She wasn’t getting what she needed for adequate migraine care—a primary physician taking her in hand, trying different medications in a systematic way, and figuring out how to better keep her headaches at bay.

A typical strategy companies employ to lower their healthcare costs is to require employees to pay higher premiums. Employees respond by decreasing the frequency of their doctor visits. Unfortunately, even the sickest employees put off visiting the doctor, which winds up generating higher costs in the end. Dr. Gunn and Verisk Health use this kind of information to persuade companies that better, more-focused care is a more effective strategy than higher premiums.

Finally, Gawande spends time at a clinic in Atlantic City run by a doctor named Rushika Fernandopulle who invented a role he calls “health coach” and hired eight of them to work on his staff – outnumbering his doctors, nurses and nurse practitioners. His approach is a more formalized version of what Dr. Brenner is doing, where each staff member is tasked with meeting very specific goals. One nurse practitioner for example is in charge of getting all the patients to quit smoking.

Gawande is not a political writer, and this isn’t a political article. It’s a delight to read a piece on healthcare that is completely devoid of demagoguery. It’s almost unfortunate that Gawande notes in passing at one point that the Affordable Care Act (I refuse to call it “Obamacare”) makes some money available for the kinds of pilot projects highlighted in the article, and Dr. Fernandopulle’s clinic has made use of that money. I say unfortunate because the mere mention of the healthcare bill will be read as endorsement, and for some readers this will cast a dark shadow across the whole article.

My own feeling is that conservatives who decry the healthcare bill because of its failure to address costs should perhaps appreciate the way the bill encourages private sector solutions, and the way it requires many super-utilizer patients to be insured and thereby help pay for the kind of high-touch ongoing care that keeps them healthier and ultimately saves taxpayers money.

The House recently passed a major financial reform bill, and the Senate will vote on it as soon as there’s enough Republican support to push it through. By most accounts, the Republicans are mostly on board, which is probably why we’re not hearing a whole lot about it from the media. There’s not enough conflict and hysteria to make it television fodder.

18 months ago we were told we were teetering at a precipice. We felt anxiety, which subsided into anger as we learned more about how the firms we paid to rescue had precipitated the crisis. Now we’re no longer feeling the acute fear, and the anger at Wall Street has fizzled somewhat, so I’ve been a bit worried that the final reform bill won’t have any teeth.

This inspired me to do some digging. I’m not a financial whiz, but having devoured many accounts of the crisis, I feel like I have a pretty good handle on what needs to change.

Too Big To Fail is a maddening phrase we heard a lot, and we’ll never know what would have happened if the federal government had rejected the premise outright – meaning we’ll never know what would have happened if the government didn’t bail out the banks. There are lots of smart people on both sides of the debate around the bailouts, but ultimately hindsight is blind.

Given this fact, too big to fail is one of the key things that Congress has vowed to fix in the financial reform bill. Specifically, they want to be empowered to break up companies before they become too big to fail. I for one have little confidence in the government’s ability to define big in a way that would lead to action down the road. The truth is, the government will never be able to know exactly when or how they should intervene, so I don’t think this will really be a meaningful part of the final reform bill.

Another piece of needed financial reform has to do with incentives. Up and down the whole chain of cause and effect, from home buyers in the suburbs to folks on Wall Street assembling mortgage-backed securities – people had good incentives to make really bad decisions. But this is something the companies themselves need to fix.

That makes one thing the government can’t fix, and one thing they shouldn’t fix, so what should we expect from a reform bill? I think there are three obvious things:

1. Create independent ratings agencies – Agencies like Moody’s and S & P are paid by the firms whose bonds they are responsible for rating. This is the only reason a CDO made up of hundreds of garbage loans put together by Goldman Sachs was able to get a triple-A rating, and it’s obviously insane. Either the government should put together its own truly independent ratings entity, or it should require the existing agencies to operate independently. Either way this is easier said than done, but it’s pure common sense.

2. Eliminate huge private transactions – Wall Street firms routinely make multi-billion-dollar deals with each other that are not reported on anyone’s balance sheet or visible on any index. If the larger financial market is exposed to the risk inherent in these transactions – which it obviously is – then the larger market needs to know about them. The financial industry will fight this tooth and nail, and we’ll certainly hear lots of manufactured reasons why it’s a bad idea. Look for the “trickle-down” attack – you know, the one that says that any restraint imposed on big business is bad for the economy because that’s where the jobs come from.

3. Regulate “hedging” – This is a tough one, because it’s subjective. A few firms made a lot of money from the deals that led to the financial crisis by aggressively touting certain investments to customers while simultaneously making big bets that those same investments would fail. Executives from Goldman Sachs were questioned about this by Congress, and a series of deals engineered by a firm called Magnetar makes a perfect case study. Companies call this “hedging” and claim it’s just a prudent part of doing business – you make a bet, and you “hedge” it with a side bet, as insurance.

There are two problems with this argument. First, the side bets they refer to as hedging were mostly secret, back-channel deals, whereas the affected investments they promoted were very much the opposite. In other words, they aggressively sold certain investments that they secretly bet would fail, and the more of these bad investments they sold, the more money they stood to make from their failure. Secondly, many indications suggest the so-called hedges were often bigger than the bets (which means they’re the real bets and not hedges at all). This is hard to prove, given the secrecy around these “hedges,” which is its own problem.

Again, this is something the financial industry will fight tooth and nail, but we should all demand transparency. We have the right to know about both the hedges and the bets, so we – meaning not only ourselves, but our banks, mutual funds, etc. – can make informed investment decisions

One proposal put forward in the financial reform bill is to establish a new government entity called the Consumer Financial Protection Agency to alert us to red flags in potential investments (like giant side bets), and this is what the Republicans are opposed to, because they see it as unnecessary government bureaucracy. This is a valid point, but I’m not sure what else they’re offering. Alternatives suggested by Democrats in an effort to gain Republican support include beefing up  the consumer protection power within one or more existing agencies.

In any case, consumer protection should give us more freedom, serving to illuminate risks in complicated financial products without prohibiting those products. It’s transparency we need, and that’s what we should look for in the financial reform bill.

[UPDATE] The good news is that items 1 and 2 are in the bill that passed the House. Item 3 is fuzzier, although there are a number of provisions in the bill that might have some impact on the way that firms will be allowed to make bets vs. side bets. Maybe worthy of another post.

Americans, it’s well known, aren’t interested in soccer. Americans prefer the other football. We don’t like hockey either, which isn’t surprising, since it’s a lot like soccer played on skates. It’s hard to find definitive rankings of U.S. sports by popularity, but every source I’ve found lists the top three as:

1. Football
2. Baseball
3. Basketball

Hockey is always fourth or fifth, or even lower, and soccer barely makes the list. UFC, NASCAR and WWE (which isn’t even a sport) are way more popular.

Soccer, of course, is the world’s most popular sport, so this yet another way the U.S. is an outlier on this earth. But why is it so?

Here’s a theory:

Soccer and hockey go for long stretches where there’s no clear winner. You see lots of players running (or skating) around in a beautiful exhibition of athleticism, but the scoreboard is the only thing that tells you what team is on top.

This is not the case with football, baseball and basketball.

Football is split up into four downs and ten yard spans. The team with the ball gets four chances to go ten yards. The game completely stops between each down. A down lasts for maybe five to ten seconds, and during those few seconds the team with the ball either moves forward or they get pushed back. If they don’t move at least ten yards forward in four tries (really, three), they have to give the ball to the other team.

So for every down – and every set of four downs – there’s a clear winner and loser. That’s a winner every five to ten seconds.

Baseball is even more atomic. Baseball is broken down into pitches, outs and innings. Every pitch results in a ball, strike, foul, hit or out. In other words, every pitch has a winner and a loser. Every inning too.

In basketball, it’s possessions. You get the idea.

Americans like things we can win, and the more opportunities there are to win, the more we like it. If a sporting event is a metaphor for life, then Americans don’t want to wait til the end to know whether they won or not. We want the opportunity to win over and over again; we want another shot after losing a down, or a pitch or a possession.

This is how we do everything in America. Look at our financial industry or our healthcare system. We seem to prefer a healthcare system with clear winners and losers, over one where everyone is protected. We prefer to an arguably corrupt financial system that we can game, over one that would guarantee prosperity for all. Not only do we like to win, we like there to be losers.

The chance to win once every few seconds  is more enticing than the idea of running around for 90 minutes having fun.

[image above via juiceanalytics.com]

I have a somewhat irrational affection for Costco. The selection is good, the prices are low. They have a generous return policy (my friend just returned a printer he bought there four years ago and exchanged it for a new one). The folks who work at the one in San Francisco always seem to be enjoying themselves.

But many of my green-minded friends see Costco as a perfect embodiment of modern-day consumer culture and all that is wrong with America.

When you think about it though, one giant jug of laundry detergent requires significantly less plastic than the same amount of detergent sold in six smaller bottles. And buying a mega-bundle of toilet paper means fewer trips to the store than buying six rolls at a time. Plus, they sell recycled paper products and phosphate-free detergent.

I’m just sayin’

In the tradition of The Giant Pool of Money, its spinoff Planet Money and this fine piece of writing by Henry Blodget in the Atlantic Monthly, here’s a nice piece of animation that explains how we blew up the economy:

The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.

There are a lot of people lining up for stimulus dollars, a lot of ambitious and long-dormant projects being dusted off by governors and mayors across the country.

But there’s another group of opportunists taking advantage of the debate. I’m talking about the G.O.P. who are stonewalling and stalling in the name of prudent spending. At least that’s what they’d like us to think. They’re going through the proposed bill line by line and collectively decrying as wasteful almost everything in it.

I suspect something else is behind the political theater.

It’s possible the Republicans think they have nothing to lose by delaying or even derailing the President’s plan. It’s reasonable for them to believe they won’t be blamed if the final plan they approve ultimately fails to fix the economy. If it fails, the Republicans can be pretty sure that the president and not congress will bear the blame. Likewise if it succeeds, he will get most of the credit. Congress will share very little of either.

I’m not sure I’m so cynical as to suspect the Republicans of trying to engineer a failure, but looking at it as a purely political opportunity, they have much more to gain from failure than they do from success.

Here’s a remarkably simple formula for personal finance. It’s genius, and I wish someone had told us this sooner.