For-Profit Healthcare & Debt: A Bad Combination "A hospital bed is a taxi standing still with the meter running."

--Groucho Marx

Since when did the term "free" come to be associated with "affordability"? It happened formally when then Presidential candidate Romney tried to link the term "affordability" with "free-loader."

Years ago when Tenant, Columbia, HCA and others were building out their networks, they purchased hundreds of local community hospitals, which were viewed as undervalued assets. These large health conglomerates issued bonds to finance their acquisitions, and the first post-acquisition step was to sell the land the community hospital was on to one of their (Real Estate Investment Trusts) REIT. The community hospital then began paying rent to the REIT, and that in turn ultimately financed the acquisition. Community hospitals were effectively refinanced and mortgaged, instead of being free and clear of debt burden. No longer did the community hospital operate as an entity standing on fully paid for/self-owned land. This, in turn, introduced unit-based pricing for each hospital bed (which also became alligned with Medicare Part A & B reimbursement rates). Historically, before the massive re-consolidation by Wall Street's Financialization push, Community Hospitals paid no rent, were Community owned and run, and were not for-profit, generally. Why is the Graham Leach Bliley Act (and De-Mutualization) so important to understanding current financialization?

It turns out the biggest beneficiaries of Medicare (and Affordable Care Act-ACA) are Tenant, HCA, private hospital owners, physician groups, et al. How can it be--with vacancy rates so high in hospitals--that healthcare costs also remain extremely high? It seems that the rules of supply and demand do not work when it comes to hospitals. What's behind this?

Consider 'capacity utilization.' Without debt, excess capacity poses no problem. Indeed, only with the addition of debt is capacity commoditized. Example: Consider a local fire department. Paid staff resides at stations 100% of the time, regardless of emergency conditions. 100% state of readiness. Payroll and basic operating expenses are ongoing, as a relatively minor percentage of total tax revenues collected. Now imagine if local tax revenues diminished and the fire station had to pay a mortgage: it would then be forced to convert it's unused (excess) capacity to a cost, and in turn focus on raising revenues to support its excess capacity, in addition to these other basic costs. This is exactly the case with hospitals (and many other large U.S. businesses). Also, consider the corollary to "excess capacity," which is under utilization. Basically, there are costs whether or not the system is accessed. In a wartime scenario a field hospital at times is fully utilized. Other times, it's dormant. We really should not treat these assets in the same way that we treat typically operating plant and equipment.

Over the past 50 years nearly all Wall Street wealth has resulted from leveraged debt and tax loopholes: paying for corporate re-financings using interest deductions and phantom loss carry forwards. In addition to the mortgage securitization debacle, we soon may realize--from a greater, long-term public good standpoint--how misguided Wall Street's use of securitized debt has been. Despite various rationales about "unleashing pent-up equity" and applying it to good uses, the public policy implications of Wall Street's actions are in many respects criminal. We've mortgaged our basic infrastructure, and it has become a real national security issue.

Consolidation in virtually all industries was financed by securitized debt. And indeed, without such debt many businesses are profitable and cashflow positive--they're able to generate a profit in excess of operating and payroll expenses. (Debt-free health, by the way, should no longer be a pass to pirate a company's equity.) All of our industries are and have long been suffering from too much debt and unfortunately, there currently exists no mechanism to put entire industries into Chapter 11 restructuring. (Even if California or the Big Three U.S. Auto Makers should require restructuring, there's currently no "easy" way to do this.)

Much of said restructuring would have been unnecessary had Wall Street not squandered/risked valuable equity. (Perhaps a Council of Financial Reconciliation should seek return of ill-gotten gains?) Which leads us back--from predatory lending--to hospitals and health care in general. The rationale that drove consolidation were scale efficiencies...the ringing out of redundancies via mergers and acquisitions. Such "efficiencies" have not been without problems. Yet, diminishing redundancies via merger/acquisition still leads to reduced competition. Should for-profit be allowed when such competitive narrowing ensues?

We have two interesting extreme cost points with regard to capacity utilization; (1) insureds that never use the system (yet pay premiums); and (2) uninsureds that never use the system. Between these two extremes we have a system that has varying degrees of utilization. How rational are pricing systems for services throughout the system? How is pricing set? (A practical example: a few years back my wife was in hospital for three days. Our bill was $22,000. Our insurer paid $9000, and we paid $1500, which was our deductible amount. The participating provider hospital charged off the balance and my guess is the hospital could also apply this write off against its taxes. The hospital took its aggregate cost--including its debt payment, and divided it by its total number of beds and applied that daily sum multiplied by 3 days. Yet consider all the empty beds. Absent the debt service, no way the charges would be so high.)

Consider the analogy of a small town fire department. Since it cannot afford to pay full-time salaries to a staff of firefighters, many towns resort to part-time volunteer staffs. This is one way of dealing with excess capacity. This would not work in the health care field, but if we look at towns and cities throughout the state of California, many have too many "professional" full-time police and fire fighters...more than the economy can support (especially CalPers pension contributions, which is making may cities virtually bankrupt). How to transition these excess workers to part-time, on-call, as-needed? With respect to health care, reorganization can both bring down costs and unveil the current waste (as excess capacity) within the current system. A team approach may require fewer workers or better dispersed distribution.

The Health Care system overall needs find more rational ways to make the prepayment for care--which to a large degree insurance is--affordable. As it stands, medical costs include too much debt service--not just charges for basic labor and materials. Not everyone uses the system all the time. So, what exactly determines fees for service rates? How much of it is debt service? Competition hasn't worked well due to over-consolidation--which is why now a public option is needed. Also, in terms of ethical justification, the U.S. must invest in its people, for national security, dominion, and sovereignty. Extreme individualism and laissez-faire market-determinism have harmed our industrial base. China's Industrial Policy has sent America a vital message.

Prescription: Health care for all is a moral ought. It's because demand for health care, like for housing, is inelastic. Practically, it's about society's committed investment into each of its members. We do this with public education, not as moral imperative, but as practical guidance. Social wealth is enriched by contributions of its individual members, and public investment is key. Health care is no different.

Finally, when healthy people pay insurance premiums they are not accessing the system but are paying for future capacity that will be there if and when needed. A good place to start would be $100 per month for each adult, and $50 per month for those under 21. Add to this small co-pays and a small annual deductible. Make it a baseline mandatory coverage and add in subsidies for those unable to pay. (Note: prior to Anthem's purchase of Blue Cross from Well Point, we were paying $4800/yr.--family of 4--with a $5000/yr. annual deductible. Now, the rate is $7200/yr. with a $12,000 annual deductible. 2009)

Alas, we require a system designed around wellness, with incentives to patients only to use the system when necessary. Massive debt restructuring must be part of any economic stimulus package (and health care reform bill)... massive debt write down and/or conversion of debt to equity. A stimulus should focus on technology infrastructure, debt elimination and possibly downsizing or eliminating insurance carriers from the equation. Also, given the nature of medical capacity, fee for service may not be the optimal approach. Do we need to reduce/remove much of the [institutional] debt service from health care, and place a moratorium on debt financings pertaining to expanding health care capacity? If we limit the private profit from the issuance of public debt, will we be taking a step to slow corporate welfare for institutions (and the folks that run them)? The answer is unclear. Yet considering the serious impact of debt default by large institutions it's time for society [and heretofore sleepy regulators] to take an interest in these private business behaviors. The Corker proposal for the automakers [back in November] turned out to be prescient and may have broader applications in the future. Will specialists be forced to join groups? We'll see.

The bottom line is...5% of patients use 95% of capacity. Hence, build ample capacity to cover growing demand, and get rid of fee for service. Operating costs, less debt service equals affordable health care. Today, laissez-faire has resulted on a virtual monopoly with 5-6 major providers nationally.

Also, hospitals are open 24/7 regardless of traffic. My two kids do--at most--a couple of well-visits a year. Why must our family pay $12,000 per year for this? Makes no sense. Yet this is exactly how the system now works. Not-for-profit vertical integration could change this. The private for-profit system--a result of milking Medicare--now incorrectly charges for capacity distribution, and actually penalizes those who are well. They can only profit by building in systemic short-term memory loss and billing for new procedures all the time, many of which are unnecessary. This for-profit system caters to the total basket cases. The fact is, there is currently excess capacity in the U.S. Health Care system due to gross inefficiencies (having to do with too many specialized discoordinate private practice physicians) that must excessively outsource for too many of the services that should be able to be offered in-house...and could be offered in house were they in a group. So many atomized doctors, each paying rent, a staff, etc. Why? Why not more consolidation? Indeed, absent Medicare the private practice would have long ago become extinct.

The Gramm-Leach-Bliley Act ended Glass-Steagle, which ushered in a new era of demutualization. Premiums ultimately skyrocketed. This ultimately made the Affordable Care Act necessary. Medicare For All: Healthcare demand is inelastic: growing demographics mean that demand will always outpace capacity. Medicare is not free. It carries deductibles such that Medigap coverage is needed. Insurers like Humana, United Healthcare, Blue Shield, etc...occupy this space. How would Medicare for All be funded? Well, Medicare operates as a public insurer within a for-profit and non-profit environment. The key is, how to ween the private sector from a for-profit model, both insurers and hospital systems? The process, of necessity, must be gradual, which means a good first step is to expand the public option through the Affordable Care Act. Also, oddly enough a big chunk of healthcare costs have to do with debt service on real estate. How to reduce this? How to move large for-profit hedge funds out of the healthcare facility business? We know the necessity of profit for businesses: profit lets them retool and upgrade capacity and technology. But to what degree? This is what the real debate should be all about.
Nov. 2019

Orig. 9/2009

Is America Bankrupt?

(FYI: America is bankrupt...but is unable to acknowledge it yet, and has no systemic way to address this fact. Chapter 9 of the Bankruptcy Code is not appropriate for the scale. It will occur in pieces.)

Following Enron's [and Worldcom's] demise Congress enacted Sarbanes-Oxley (SOX) to ensure the transparency of management practices for public companies. Enron's financial engineers had created off-book derivatives that worked just like an off-shore toilet: they would dump all their "phantom" debt there, but unfortunate for Enron's executives, the flusher didn't work. The debt was actually real. Enron was able to hide its debt so long as its energy revenues were growing. Once that stopped the house fell down.

Whether it be SOX, GAAP or FASB, many if not most mortgage-backed securities have not been reported or posted through any central clearing, so that no one knows for sure how much of this debt there is, actually. Also, their valuations carry heavy future value and discounting to net present value is not a clear exercise. There's no central regulatory clearing for much of this paper. Which in large part has led us to this current crisis. And so we ask whether such unregistered securitizations amount to "fractional reserve banking." Fact is, "money" is only created when there's an interest rate yield...I loan you $1, you repay me $1 ten cents. When short terms rates are 0%, as they are right around now, no money's being created, and most importantly...no one's making any real money. It's high time we question the practice of mortgage securitization itself.

The global system, as exceedingly nuanced and complex as it is, could do with more accountability rules and transparancies. The very nature of securitization itself is to create "off balance sheet" leverage. Hence, many of these securities never found themselves registered on any publicly accessible balance sheet anywhere, hence by some estimates there's an estimated $62 trillion of CDOs, CDSs, SIVs and other variants of such securities floating around the globe's pensions and in other institutional portfolios (thanks to the Gaussian copula formula). Indeed, subprime mortgages showed the highest rate of default (followed by the Alt-As), and these were largely made by non-traditional lenders that entered the market just after 9/11 and practiced asset-based (versus income-based) lending. They were able to do so when the Fed lowered interest rates dramatically after 9/11. The result was a now infamous asset bubble...cheap dollars flowing into highly demanded/short supply assets. (Absent the asset bubble thanks to cheap dollars, might Iraq never have happened?) The Fed in essence simply post-poned the day of reckoning, which is now upon us. (One wonders if securitization itself is the problem, and needs to be reconsidered and its process redesigned.)

Now, many mortgage banks and lending institutions are reluctant to "take the hit" and seriously write-down these over-priced assets still on their books. California Congressman Darrell Issa believes such institutions should be forced to write down the values of these over-priced assets, albeit gradually. This is one variant of "mark to market," which with behemoth institutions is likely a better policy than relying on yield curve determinations made by private investors. He suggests that servicers and mortgage holders be compelled to allow short sales to the current default borrowers now living in those homes, perhaps by amending current bankruptcy law. FDIC head, Sheila Bair agrees. "Modify and issue 1099's for the difference," she suggests. Obama appointee, Professor Elizabeth Warren concurs with Issa that "there be a change in the bankruptcy code--it will force a wake up call," she says. One in 7 mortgages are soon to be in default, according a recent GAO Report. The bottomline is, carrying non-performing overvalued assets on the books--hoping for a market rebound--is denial, wishful thinking, and delaying any recovery.

Opponents say such steps will pose a moral hazard and give incentive for good mortgagees to default. They say default borrowers shouldn't be rewarded, no matter what. Yet is there really any intelligent alternative? We are living in 'Chi-merica' (Chindifying America). America's manufacturing supply chain for many industries is now in China. And many services are now being outsourced to India. Here, all the tax dollars spent on public roads and bridges over many years don't show up as off-sets on any grand balance sheet--instead, they've been expensed. (Which explains why conservatives over the years have been so eager to 'privatize' public assets.) Our global capitalist system has over-relied on asset appreciation--not real net earnings--to support inflated pension schemes and current levels of debt service. Hedge funds and unrestricted foreign ownership of U.S. assets have exposed vulnerabilities. Debt issuance rationales have typically relied on future earnings projections, which in a flattening earnings global scenario cannot and will not pan out. In China, all businesses must have a domestic partner--and only citizens can own real estate, which even so operates on a 100 year land lease. Mexico has a similar policy.

Yet, in the final analysis, America's paper is not worthless so long as willing ambitious American workers have steady jobs (to repay U.S. treasuries...IOUs). The real wages of U.S. workers, I submit, have been "Chinafied." In other words, a well-trained knowledge worker in China earns the equivalent of about $300 U.S. dollars (8 RMB/yuan = $1 U.S. dollar) per month. Why should a business analyst in China earn $300/mo., while a business analyst in the U.S. earns $5,500/mo.? (Indeed, it is an apples-to-oranges comparison given the many government subsidies in China that allow for the payment of lower real wages to workers, and also their near zero legacy/benefits costs.) In the U.S. many once privately held liabilities have been transferred to the public sector (i.e. Pension Guarantee...). For the most part, there's no real qualitative or productivity discrepancy, but rather "distortions" in the earning/price indices, which are now being "played out" and will continue until assets values (and overall debt) adjust to real net wage levels (resulting from globalization). Is there a global bottom, in this high volume, low margin world? Is there such a 'reality' as global equilibrium? The oceans have their tidal schedules...how about global capital flows? The distortions, largely, are a function of credit and excessive cost of money.

Two of 5 jobs until recently were connected to the real estate industry. This explains in part high recent unemployment figures. Many workers wonder: How does the stock market impact present and future employment? Many employees of public companies are just now realizing that as share prices of their companies drop, the debt-to-equity ratios of their companies goes up. In other words, leverage increases as share prices drop. Companies tend to borrow in relation to their net worth, not unlike home borrowers that refinance. Equity [and value] tend to be market-driven. (Home prices--like shares--are a function of demand, which equals cost/ availability of money and credit, job security--which is a global phenomenon nowadays--and comparative factors, i.e. supply of qualified buyers, inventories, etc.). Hence, diminishing share prices increases the likelihood of lay-offs. Indeed, as the equity side of companies drifts downward, proportionally more dollars are required to service existing debt. Which is another reason why consumers lack confidence to go out and spend. They're concerned about pink slips in January of next year. Globalization and outsourcing have indeed brought downward pressure on wages of U.S. workers. And the current account deficit (another all-time record high) affirms the fact that America as a service economy must re-examine its ability to generate real wealth. Many services have been reduced to commodity status. How about design and innovation?

If a large chunk of America's treasuries--held by China--were to end up near worthless paper (never mind the small amount of remaining gold in Fort Knox), China is in deep trouble. In fact, the entire global fiat money system is based on faith. Given China's diminishing surplus it's able to buy less U.S. paper. The fundamental question, given our excessive debt, is: what, really, is 'money' nowadays...in our era of fiat money? (The Economics 101 definition of M1, M2, M3, M4 no longer seem to be entirely accurate.) Is money a function of 'time,' i.e. $300=x/hrs. of labor? Think about it, after a $700+ billion bail-out (with more on the way) what is 'money'? What is 'securitized debt,' really? (It's an entirely different question than...what is the nature of money/securitized debt...? The CBO estimates that interest on the national debt will soon reach $750 billion per year by 2019. We're now in what amounts to a "liquidity trap," without sufficient real earnings, hence demand. The corollary of our debt debacle is...the very credit system itself. Are there viable alternatives to a credit-based system (and our global credit issuing institutions)? For years many analysts have pointed to "interest" as the root of all imbalance...the interest charged by the Fed to the Treasury in exchange for issuing currency. Is this a rational point? And, finally, to account for the asset base of public sector: how much, say, is a federal highway worth...on some balance sheet, when it's not revenue producing? (We haven't really valued these public assets as offsets.)

One thing's for sure: the "Laffer Curve" of supply side economics--once hailed as "voodoo economics"--has proven itself to be fundamentally flawed. It postulated that markets self-equilibrate. But they don't. And there's an additional, serious question: are neoclassic economic models up to addressing our current woes? A market is simply a clearing: it reconciles supply with demand. It does this based on various rule sets, as perameters. The deregulation that began in the Reagan-era gave rise to laissez-faire and Enterprise Zones, and they really haven't worked. Why? Because they're "top-down," disconnected big business approaches. People dream of becoming rich, but they must eat and feed their families first. Altitude has a way of blinding the elite, just as too much wealth can dull one's sense of urgency needed for entrepreneurship. These approaches generally don't properly seed things, and instead rely on various "magical" mis-conceptions of entrepreneurship, as though wealth is created from ideas alone. Recall monetarism and the Chicago School in Argentina? It didn't work there because it suggested that incentives alone motivate, which is not entirely correct. Wealth and capital formation have tended to stay at the top with these approaches, benefitting large and mid-cap enterprises. (Perhaps micro credit will become part of the solution, even in wealthier states where there are huge wealth disparities.)

Should today's policy solution be more in line with addressing Keynes (aka "Liquidity Trap") or Fisher (aka "debt deflation" or now stag-deflation)? Goal: to restore purchasing power (aggregate demand)--to create both jobs and community reinvestment pools to create local "bottom-up" capital formations--by reducing dollars now going toward debt service is one method to be considered. The community credit union model--not just a redevelopment agency--would be another innovative approach. Extreme conservatives will view this as "socialism," but in fact, markets like people are imperfect and prone to disequilibria and require periodic major recalibrations. America should likely have implemented an industrial policy years ago, like China, Japan and Europe did. Such strategies have not exempted them from business cycles, but many of their industries now require less retooling than ours do. (Let's not forget Vice President Cheney's infamous secret "Energy Policy Meeting" with Ken Lay and others back in 2002. Some of such policy--or lack thereof--is responsible for Detroit's woes today.) And also, America's current account deficit is proof that outsourcing, NAFTA, and WTO cause system-wide problems when "fair" trade is not in fact "fair"--indeed, America needs reciprocity in terms of honoring and abiding by "fair" trade agreements. Hyman Minsky and Irving Fisher come to mind, in their analyses.

Extreme conservatives, like former U.S. Senator Phil Gramm, have long thought that private managements of publicly traded companies "knew better." Now taxpayers are faced with serious consequences of these "private" mis-managements, accountable only to their shareholders. Serious consequences such as a looming inflationary depression. "Too big to fail," has too often meant "unable to coordinate an entire industry for radical restructuring." By the way, where is Big Oil in terms of the auto industry? Silent, to be sure. At the 2008 World Economic Forum in Davos, Switzerland, George Soros called for a "Global Sheriff" (aka a Currency Board) to monitor various inefficiencies in financial markets. He was laughed at for suggesting such--never mind the IMF's bleak performance record in recent years. As it turns out, however, he was prescient, and correct in his analyses starting as long ago as 12 years. In reference to re-examining assumptions, he says, "I contend that financial markets are always reflexive and on occasion they can veer quite far away from the so-called equilibrium. In other words, financial markets are prone to producing bubbles."

In his book "Financial Darwinism," Leo Tilman suggests we need "greater risk transparencies." Will any of us be surprised if the State of California is the next "shoe to drop"? A pre-packaged repudiation /bankruptcy-like scheme [managed by the Feds] may be the only way to mitigate its huge CalPers and Ballot Initiative legacy costs. That, or a referendum to renegotiate with more realistic actuarials in mind. Some huge major bankruptcies loom...due to unfunded pension liabilities and excessively high debt service requirements. And tough choices will be made...between funding for schools and other present services, versus excessive public pensions.
As Hyman Minsky noted, not all debt is equal. Hence, it may make sense, as the treasury issues new debt, to refinance and replace some of the older legacy debt. Debt, unlike dividends, is tax deductible. Still, a major debt-to-equity conversion is needed (which China must help with) if any stimulus package is to work. Once again, we need to restructure debt, seriously, even if it means discharging and repudiating a great deal of it. Debt holders will need to be willing to accept equity in replacement of their debt, no matter how painful. This, in order to avoid total default.

We rely on debt financing for everything, and FMV usually determines ratios. Example; 80/20 mortgage financing, but 80/20...of what? Perhaps FMV-based ratios are not prudential enough.
Perhaps "Cost-plus" methods should replace FMV-based ratios?

(We've proven that as a civilian socius, we are unable to run ourselves. Perhaps the military will be needed to run things. Or else, perhaps we'll descend into a Balkanization rules by gangs, not unlike a prison hierarchy.)