Risk Pools and Healthcare Reform
Posted on March 18, 2010
Filed Under Uncategorized |
The fundamental challenge the health insurance, or any insurance business for that matter, faces is how to blend risk pools so that the customers who consume few services pay for those who consume many services.
In other words, my premiums will go down because healthy young people who currently get by without insurance will be forced to buy policies they may not even want. (When I was young and healthy, I got by quite happily with a bare bones Blue Cross policy that only covered catastrophic expenses). It’s a wealth transfer from the young and uninsured to the old and insured.
[From Making us old farts better off by screwing the young 'uns - ProfessorBainbridge.com]
This concept is at the core of why health insurance has been linked to employment, it forces a blending of risk pools for what otherwise would diverge if left to market forces alone. Personally I am an advocate of decoupling employment and health insurance but am opposed to the so-called “public option” because it would fail to remedy the basic problem facing our society when it comes to health care, which is that we have removed market incentives for healthy lifestyle choices and the restrained use of health care services.
If I am a consumer of insurance for my family health care needs and my premium costs are directly related to the risk pool I can position myself in, there is great incentive to eat healthy, avoid known risk factors like excessive drinking and/or drug use and smoking, and to establish a long term relationship with an insurance provider (like life insurance… get it early and the premiums stay low).
If I can self-select the risk pools that I want to join for insurance needs I will have a great incentive to improve my risk profile. For catastrophic coverage, which is a fact of life as we get diseases and have medical emergencies that defy our risk profile, the market could offer a separate catastrophic coverage plan that spans multiple pools. If I am a young person and relatively healthy this is exactly what I would want to buy if forced to buy anything, and spanning multiple pools evens out the distortion that would occur if restrained to individual risk pools.
Americans are living longer and consume more health care services as a function of increasing longevity but also because more services are available for us to consume. We have all been sold a bill of goods with regard to the value of preventative care services, that they both make us healthier and save us money.
None other than the CBO itself has pointed out the fallacy of the cost savings argument, in an Aug. 7, 2009 letter to Rep. Nathan Deal, CBO Director Doug Elmendorf writes: “Researchers who have examined the effects of preventive care generally find that the added costs of widespread use of preventive services tend to exceed the savings from averted illness.”
More medicine isn’t necessarily better but it certainly more expensive.
In 1960 it was estimated that 47% of medical expenses were paid out of pocket while today that number is only 12% and like in any market where the consumer is not responsible for the financial payments (remember these are largely obscured by the linkage to employment as well) the consumption of services as well as the pricing of services behave in a manner far different than when the actual consumer is also responsible for the payment.
Whole Foods CEO Mackey was much maligned for his op-ed detailing how Whole Foods manages health care insurance options for it’s employees. At the core of their strategy is linking the economics of consumption to how their employees consume covered services by offering a plan with a high deductible, $2,500, but 100% of the premium covered by Whole Foods, and in addition to that they kick in dollars to personal accounts. What was lost in the ensuing brouhaha following Mackey’s op-ed piece is that Whole Foods has lower health care costs than the average employer and higher satisfaction with the plans offered… and critics also ignored that Whole Foods only offered plans that were voted on by the employees so rather than criticizing Mackey they should focused on the employees who decided what plans to offer.
IT Expansion in China
Posted on March 17, 2010
Filed Under Uncategorized |
Last week I wrote a post that covered many of the observation I made on my recent trip to mainland China. Given my background in IT, a natural area of interest for me was the build out of IT in China businesses that are not directly aligned with U.S. or European counterparts… in other words, what are the independent businesses doing when left on their own.
I don’t believe it is surprising to assert that growth in China to date has come independent of any investments in technology made by the government or business. Cheap labor has made possible productivity gains that would require substantial technology investment in developed countries, but as a I pointed out in my last post, wage inflation is no longer a hypothetical, it is happening as we speak therefore it is timely to consider what the IT implications are in China.
I’m tempted to write about telephony solutions but will resist the urge because irrespective of any other factor this is a given growth area, it simply has to be and growth estimates for 3G network expansion over the next couple of years are in mid-double digit rates. Consumers will be the primary beneficiary of 3G network expansion with businesses lagging as mobile applications are dependent upon a centralized IT methodology that does not currently exist in small and mid sized China businesses.
That last point was the key takeaway I learned in my site visits, the enterprise application market in China for everything but the very large and multinational businesses does not exist. When you visit a mid sized manufacturer, say 1-2k employees, what you will find is a networked PC environment rather than a server based environment. White collar workers use personal productivity applications, email, and file sharing to conduct business.
I did see some rudimentary data center buildout, mostly focused on networking and file storage, and interestingly the rack-based equipment I saw was predominately coming from U.S. based secondary markets rather than purchased new in China. The expansion of data center capability could foretell a scenario where server based applications expand but I believe that is still remote given the lack of local support and consultancy options and significant expenditures for the acquisition and support of such applications.
If on premise server applications are an unlikely growth area then does that mean SaaS and other hosted applications have an advantage? I think that this is unlikely because regional data networks are spotty in terms of robustness and the trust issue related to data storage.
Salesforce.com has been hosting a China edition for several years but in reviewing their materials it is evident that their successes are coming in the Hong Kong region which might as well be a separate country from Mainland (you still have to go through a border crossing when entering Mainland from Hong Kong and the internet in HK is far different from Mainland). You simply cannot run a Mainland focused business from Hong Kong… different language, cultures, governmental controls, etc.
In reviewing the current and near term IT capabilities I believe it is plausible that workgroup solutions will expand that enable better project management and collaboration with near-network and far-network resources. Centralized financial management solutions are less likely given the cost and specialization required for such applications, and server based solutions that control factory shop floor resources are so far off that I wouldn’t even try to predict what the future holds for them.
Shop floor automation will develop over time, and point in fact I did see an expansion of CNC equipment in operation from my last visit. Labor cost inflation is also causing manufacturers to expand CNC investments in areas beyond core milling and machining; I saw a pretty cool CNC carving machine that produced wax moulds for lost-wax bronze casting, a process previously done with a small staff of highly experienced craftsman.
So what would I do if I were running a mid-sized enterprise software company targeting manufacturing sectors? For starters I would establish a base of operations in Mainland with strong local or Taiwanese partnership (never underestimate the influence of Taiwan in businesses operation in China). I would also focus on offering low cost and quick to implement solutions that target workgroup constituencies with business benefits firmly rooted in team efficiency and workflows. Lastly, on pricing you have to start from scratch… whatever you are selling your products and services for in other markets won’t apply in Mainland China, whether on a per user or per server basis.
The Business Climate in China
Posted on March 12, 2010
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I just spent a week and a half in southern China visiting a range of manufacturing facilities and meeting with senior executives, and the learnings were significant, some of which I want to share with you today. This is the kind of information that is really challenging to get from analysts and journalists simply because analysts and journalists tend to hang out in Shanghai or Hong Kong and get their information in filtered form and they focus on large multi-national companies that are not affected by the same dynamics that smaller companies in the area are.
Here’s the setup: Guangdong Province is the industrial heartland of China, responsible for the single largest slice of GDP for all of China. In fact the GDP of Guangdong alone is greater than the entire country of Taiwan (the word “country” in reference to Taiwan being subject to definition if you are Chinese!). The reasons for Guangdong’s economic prominence are really pretty easy to understand, a moderate climate, stable infrastructure, and a naturally formed network of waterways make the region easy for manufacturing businesses to set themselves up in, and the close proximity to the port in Hong Kong make it a natural location. The electronics industry, automobiles, consumer packaged goods, and textiles are all based here (to name just a few) and their attendant supply chains have developed here as a result.
I spent my time in the Dongguan area, specifically in Chang’an, Foshan, Guangzhou, and Shenzhen. These areas are robust in terms of business activity yet at the same time are subject to a great wave of pending changes as a result of population patterns, among other factors.
Guangdong Province has a population of roughly 100 million people and, enviably, has full employment for those able and willing to work. The key learning I observed was that the employment picture is foisting upon these businesses the greatest degree of future uncertainty… although unlike the U.S. where we have a sideways employment picture, the situation in Guangdong is a lack of workers. Without exception, every business executive that I spoke with stated that they were experiencing a shortage of workers that on average ran 30% but was as high as 50% in some places. There was consensus among the executives that I spoke with that the area was short 2 million workers.
The reasons for this shortage are complex but also understood. Beijing has in recent years invested heavily in improving living conditions in the rural areas of China, which has been a primary source for workers in the industrial areas. As education, water, health and safety, and transportation in the rural areas has improved the locals have fewer reasons to leave and it is evident that they are not. The near term consequence of the worker shortage is that wage inflation is already a reality, as well as worker perks and benefits.
I want to take a moment to explain how worker compensation works in China. There is a base salary, which is the norm as opposed to piecemeal work which I think most Americans assume how China works, housing and meals, and lastly there is health insurance. All of the factories I visited had dormitories and cafeterias attached to the primary production complex, as well as full time security… the complexes are really fully equipped and while the worker population can come and go as they wish, while in the complex they have housing, meals, and recreation (basketball is very popular, apparently). Interestingly, the work/housing arrangement applies whether you work in a factory or at Kentucky Fried Chicken (also very popular)… how many fast food employees in the U.S. get housing, meals, and health insurance?
To put some numbers to this, a typical entry level factory worker can expect a monthly salary of about ¥2,000 Renminbi (RMB), a housing and meal component that is valued at approximately ¥1,500 RMB, and health insurance that costs the employer about ¥150 RMB a month. I’m hesitant to convert this to USD because that conversion is pretty meaningless when faced with living expenses that are far different in China than the U.S.
The reason why the wage inflation issue is significant is because the manufacturing economy is really a pretty low margin business and wage increases for workers translate into higher product prices, just like here in the U.S. Compounding matters is that wages are not the only issue putting pressure on these business, raw materials are also getting more expensive. Copper is a great example, doubling in price over the last year in spite of the ongoing global economic slowdown in construction industries (which is a primary consumer of copper). Wage and commodity inflation in China will certainly result in product price inflation in the U.S. and/or pressure on financial results for U.S. companies if they are unable to increase end user pricing for their products.
The second issue driving the shortage of workers is the One Child Policy that has been in force in China for decades now. The results, and the Chinese realize this as well, is that the population has gotten older as 2 parents have been replaced by 1 child in the workforce. I wrote about this a few months ago and what I heard in China just last week confirmed the view that policies that encourage low birth rates are economic suicide… China recognizes this and has been taking some very public moves to change the policy.
The other big issue driving business uncertainty in China is the declining influence of United States and the declining value of the dollar. The consensus view in China is that the U.S. has lost influence in global matters over the last year and the Obama administration is weak relative to Beijing. Whether or not you believe this is not relevant, the Chinese business community believes it and they are forming strategies to accommodate this risk that will affect how relationships with U.S. companies evolve.
The currency risk is very real because Chinese companies are paid in USD, which has a fixed exchange rate against the RMB but commodity and raw material purchases, as well as transportation costs, are paid in USD so the currency risk for these businesses is very real. I heard a number of executives talking about “patches” they would buy every month to deal with the currency issue.
It took me a little while to figure out what they were talking about but after some pointed questions I realized they were doing currency swaps with Hong Kong banks whereby a principal amount is swapped with a counterparty at a predetermined rate, the effect being that it locks in forward currency valuation like a forward contract. This is actually a pretty clever way to get around the fixed exchange rate risks that the RMB presents… you swap the risk with Hong Kong Dollars, one of the most traded currencies globally.
The last issue that I want to cover is one that quite frankly caused me to do a double take and it involved Walmart but is really much broader than just Walmart. As Chinese manufacturers have moved up the food chain from being simple offshore manufacturing to high value design and engineering, the appreciation for intellectual property has risen to a front burner issue. Every company I talked with told me of their distrust for Walmart, telling me of examples where “hot” products they were supplying to Walmart were then white labeled by the company using different manufacturers. These companies are well aware that Walmart has over 1,000 purchasing agents in the Shenzhen area that do product sourcing and oversee manufacturing for the company.
The larger issue is that the rise of China manufacturing IQ is mimicking what we saw happen in South Korea where raw manufacturing escalated into global brand prominence, in that case eclipsing the Japanese brands in many cases. I think it is an absolute certainty that we will see Chinese companies exert marketing influence in western consumer markets and this will put increasing pressure on American and European brands.
That’s all for today but I do want to write in detail about the implications of all of this for the IT industry in a future post next week… stay tuned.
PA School Webcam Lawsuit
Posted on February 20, 2010
Filed Under Uncategorized |
The Pennsylvania case shows how even well-intentioned plans can go awry if officials fail to understand the technology and its potential consequences, privacy experts said. Compromising images from inside a student’s bedroom could fall into the hands of rogue school staff or otherwise be spread across the Internet, they said.
[From Pa. school official defended in webcam spy case - San Jose Mercury News]
It also demonstrates how well-intentioned plans can go awry when officials fail to exercise any, you know, common sense.
I also found this revelation rather amusing…
No one had complained before Harriton High School student Blake Robbins and his parents, Michael and Holly Robbins, filed their lawsuit Tuesday, he said.
No one complained because it’s appears that no one outside of the officials who authorized this system and the IT people, who should have been the first to object, knew about the remote capability. It is incomprehensible to suggest that if parents were made aware of this remote capability that they would have permitted it in their homes. It was only the overreach of school officials that revealed the existence of the remote webcam that is at the center of this lawsuit.
People Putting an Extra 50k Miles Or More On Their Cars
Posted on February 19, 2010
Filed Under Uncategorized |
Read this an it immediately resonated with me.
According to a study by Auto MD, which is owned by the US Auto Parts Network, Inc. (i.e. people who have a vested interest in making parts for used cars) 77% of people are, on average, planning on driving their current cars at least 50,000 miles more than their previous cars.
[From People Putting an Extra 50,000 Miles Or More On Their Cars : Gas 2.0]
There are some obvious reasons for this phenomena, namely the uncertainty of the economy causes consumers to put off large durable goods purchases, of which a car is certainly second only to houses for most people. Credit is also a problem with lenders tightening standards even for consumers with good credit, and Americans are saving more and paying down debt… so drive your car 4 years longer (averaging out miles driven per year).
There is another factor, one that I have written about many times here, sales tax and registration fees are putting an enormous burden on car sales. Here in California you can expect sales tax, registration, and licensing to add over 10% to the cost of a new car. Here’s an example of the fees for a new car purchased for $50,000 (just a representative number for easy math).
California and other states need to revisit the Laffer Curve and apply it to consumer purchases… taxation (whether direct taxes like sales tax or fees) is exacerbating an already difficult consumer marketplace.
Links
Posted on February 18, 2010
Filed Under Uncategorized |
- UK newspapers lash out against the BBC iPhone app, saying it undermines the commercial sector. I totally agree, when will people accept that a taxpayer financed entity providing a service that competes with the private sector is unfair? It’s be like the U.S. government, which owns GM, launching a series of safety investigations against Toyota… oh never mind.
- Stanford finds a rise is cheating is especially prevalent among computer science students… does the tech industry have an ethics problem? Maybe when you consider the many examples of things like options backdating and intellectual property theft. Just sayin…
- iPad hype drives away potential customers… maybe also the fact that Apple has already come out and said that price cuts are in the wings.
- Google Calendar to get a face lift.
- Spray on liquid glass promises to revolutionize “everything”.
- Fizziolo.gy is a service that measures the intensity and sentiment of online opinion on Twitter and Facebook for the entertainment industry. Amplicate is another one but I think all of these services suffer from a human behavior reality, which is that most people are prone to broadcasting a negative opinion rather than a positive one. There is also a herd mentality that causes many people to buy into negative group sentiment (e.g. walmart sucks) as a social statement about themselves, which distorts the overall sentiment.
- Here’s an interesting perspective on class warfare and populism.
- The White House is making a claim that images on it’s Flickr site can only be used by news organizations… on what basis that they are making that claim is beyond me because this is in direct conflict with government policy and the fact that these images are produced with taxpayer money.
- Jeremiah Owyang’s piece on the evolution on branded support communities is really good.
- Professor Lessig is focusing his attention on remaking Congress (good luck with that) but underlying his persuasive argument is the idea that controlling political speech is a necessary step. The Cato Institute argues, and I agree with them, that reducing the role of government in the People’s everyday life is a better way to reduce the influence of money in politics… a government that has less influence is less likely to be influenced.
Air Refueling
Posted on February 10, 2010
Filed Under Uncategorized |
this is a pretty cool video, air refueling an F-18 over Iraq:
Wind Power Does Not Equal Job Power
Posted on February 10, 2010
Filed Under Uncategorized |
“Most of the jobs are going overseas,” said Russ Choma at the Investigative Reporting Workshop. He analyzed which foreign firms had accepted the most stimulus money. “According to our estimates, about 6,000 jobs have been created overseas, and maybe a couple hundred have been created in the U.S.”
[From Wind Power Does Not Equal Job Power - ABC News]
It is estimated that about 85,000 people work in the wind power industry in the United States… that’s 85k when you add up direct investment and related supply chain employment. (will find the link reference but it’s from the American Wind Energy Association).
Even if we quadruple the size of wind power in the U.S. it will not result in meaningful employment, or even treading water for that matter. A dramatic expansion of the wind power industry would also come at the expense of existing power segments so the employment effect would be further muted.
I am not singling out wind power for the purpose of criticizing wind power but rather to point out that when people who responsible for doling out billions of your dollars start lecturing you on how green energy will reinvigorate the U.S. economy you should simply call bullshit on them.
Irrational Populism
Posted on February 10, 2010
Filed Under Uncategorized |
I’ve been reading about some of the troubles that the Las Vegas hospitality industry is going through (as well as getting a lot of promo email for $40 a night suites at Mandalay Bay) and it again reminds me that populist uproar is neither rational nor constructive.
Luxury hotels have also suffered from the backlash from the so-called “AIG effect,” referring to the uproar caused by American International Group’s decision to fly top brokers and executives to a resort shortly after receiving a bailout check from the U.S. government.
“The whole demonization of luxury meetings and companies’ pulling back on having their high-end meetings in luxury hotels — this has had a tremendous impact on Las Vegas,” Deuschl said. “I can’t think of another destination that has had to defend itself more against comments from politicians.”
[From Ritz-Carlton to close 5-diamond Las Vegas hotel in May]
Companies are pulling back on travel expenses in a significant way, there is nothing populist about that, but it’s equally obvious that few companies want to be seen throwing large events in Vegas despite the fact that if you are holding a large event Las Vegas is probably one of the most cost effective places to do it.
It is a city built for large influxes of non-residents which means hotel rooms are plentiful and when purchased in blocks they are cheap, transportation is efficient because the airport is relatively close to the Strip, taxi service is abundant, and walking is an option, and lastly, the primary entertainment (gambling) can’t be expensed.
Orlando features similar cost dynamics but the problem with Orlando is getting there if you are not already on the east coast and that drives up air fare significantly.
I can guarantee you this, try hosting 250 guests and support staff in New York, Washington D.C., or San Francisco and then compare the fully loaded cost to Las Vegas, the result will be eye popping. So I ask you are we really being served by demonizing companies for daring to hold their events in Las Vegas or is it a cheap and convenient ploy by politicians to “feel our pain”?
Buyers Remorse
Posted on February 4, 2010
Filed Under Uncategorized |
In 2008 the sight of a Toyota Prius sporting an Obama hopey changey bumper sticker rose to the level of being a cliche and the Prius itself became a social statement, outselling other hybrids based on existing gasoline powered models. Well the former hasn’t exactly turned out like everyone thought and now Toyota is launching yet another recall, this time for 270,000 Prius cars with faulty brakes. There’s some poetic irony in there somewhere, but in each case there is little humor to be found as the consequences are quite dire.
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About
My name is Jeff Nolan and I write Venture Chronicles. These are my thoughts on technology, innovation, management, public policy and pretty much anything else that I find interesting.
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