Thursday, August 25, 2016

Will bundled payments change health?

CMS is changing the way that Medicare and Medicaid pay providers:

The CMS announced a proposal last week to put three new episodes of care under mandatory experiments with bundled payments, potentially compelling hundreds of additional hospitals into becoming financially accountable for what happens to Medicare patients long after they leave the hospital. 

In theory this is supposed to align hospital incentives more closely to the health goals of a patient.

“All those involved in healthcare have always wanted the best for their patients. Providers now have a greater amount of skin in the game and risk in the outcome.”

What could go wrong?

Why do we spend so much on health care?

Its the incentives, stupid!  The Atlantic has a nice summary of the problem.
Ten days after my father’s death, the hospital sent my mother a copy of the bill for his five-week stay: $636,687.75. ... but why should my mother care? Her share of the bill was only $992; the balance, undoubtedly at some huge discount, was paid by Medicare.

And what about President Obama's Affordable Care Act?
Like its predecessors, the Obama administration treats additional government funding as a solution to unaffordable health care, rather than its cause. The current reform will likely expand our government’s already massive role in health-care decision-making—all just to continue the illusion that someone else is paying for our care.

A better solution would limit the government's role to catastrophic insurance:
...a threshold of $50,000 or more ... (Chronic conditions with expected annual costs above some lower threshold would also be covered.) ... But the real key would be to restrict the coverage to true catastrophes—if this approach is to work, only a minority of us should ever be beneficiaries.

But what about poor people who cannot afford catastrophic insurance?
...the government should fill the gap—in some cases, providing all the funding. ... If we abolished Medicaid, we could spend the same money to make a roughly $3,000 HSA contribution and a $2,000 catastrophic-premium payment for 60 million Americans every year. That’s a $12,000 annual HSA plus catastrophic coverage for a low-income family of four. Do we really believe most of them wouldn’t be better off?

Are we too risk averse?

Yes.  At least according to a clever natural experiment run by Freakanomics author, Steven Leavitt.
He made a website and asked listeners of his podcast, readers of the Financial Times and Forbes, and Reddit users to help him out by visiting it. They were invited to give details of a big decision they were struggling with, then witness a coin toss to help them make up their mind. Mr Levitt then followed up with them twice, after two months and after six months, to ask whether they had made the change, and how happy they were.
Those who made the change, away from the status quo, were happier.
For policymakers, the lesson is that the status quo is a powerful thing. And for those tired of hearing their friend obsess over whether to dump a disastrous boyfriend, they have a new weapon in their armoury—in their wallet.

Pension train wreck accelerating due to low yields

We will keep blogging, until the republic falls, about our under-funded pensions.  Falling investment returns are accelerating the train wreck:

Société Générale’s Andrew Lapthorne illustrates the problem a different way. If someone today invested $100,000 in a balanced portfolio of stocks and bonds, they could expect a return of $21,800 over the next two decades after costs. Ten years ago, that same investor might have expected to make $60,000, and three decades ago $150,000.

Kudos to the Financial Times for picking up on this story.  Unfortunately, if past is prologue, few will read it and nothing will change.  

There are ways to avert a true social crisis. Mass poverty in old age can be avoided. But the options are unpalatable. “We will have to save more, work longer and simply lower our expectations,” says Joachim Fels, a global economic adviser at Pimco, the bond fund manager. “That’s the sad truth.”

Sunday, August 21, 2016

When turnover is a good thing

 In 2008, Kimberly-Clark changed the way it evaluates and rewards employees:
...away from backward-looking, once-a-year reviews framed largely as compliance requirements—a paper trail for potential job cuts and salary decisions—to a process that is real-time, continuous and focused on helping people meet ambitious goals, or move out of the company faster.

Turnover increased to 10% annually, and stock price doubled.
Holding workers close through good times and bad is “not sustainable” any more, said Liz Gottung, the company’s human-resources chief. “If you look at when we started implementing the big pieces of the company’s people strategy, when you map that to our stock price and our business results, you can see the clear correlation.”

Incentive pay will encourage low performers to leave, and good performers to stay.

Saturday, August 20, 2016

"Wage segregation" is causing inequality

Interesting article that explains wage inequality
We’ve all heard that median wages are stagnating, but that’s not all that is happening. Wages are also becoming increasingly segregated by firm—meaning, high wage employees are increasingly working in high wage firms and low wage employees work in low wage firms, rather than in firms with a mix of both.

by analogy to adverse selection in insurance markets.
Once a technological or organizational innovation has made it easier to screen or observe productivity difference, inter-firm competition drives the “pooling” wage equilibrium to unravel in a way that’s very hard to reverse since the separating equilibrium is self-reinforcing.

The consequences of this are big.
If this theory is right, it means reducing wage segregation is a lot harder than it looks, and comes with extremely ambiguous welfare gains. If inequality were really only a matter of elites appropriating rents, then a few tweaks to marginal tax rates and a one-time income redistribution would have a chance at being stable. In contrast, the separating wage equilibrium theory means income redistribution is ... like trying to pour an even level of water across a convex surface that invariably draws the water to its edges. 

Thursday, August 18, 2016

Why are kidneys more likely to discarded on weekends?

New study shows that usable kidneys are discarded at 29% higher rates on Friday and at 25% higher rates on Saturday, holding kidney quality constant.  Furthermore the discarded kidneys were of higher quality than those discarded during the week.

Since 5000 people die waiting for kidneys each year, it is probably not due to lack of demand.

I will award an autographed copy of the fourth edition textbook to anyone who can solve this puzzle.  To enter, post your solution in the comment section. (I don't know the answer).

Thursday, August 11, 2016

What can Nashville learn from Palo Alto?

How not to use zoning policy.

In the past 15 years, increases in demand combined with restrictive zoning policies that prevent new supply have caused the median price of a  house in Palo Alto to increase four-fold, to $2.5 million.
At root, the failure of wealthy coastal areas like Palo Alto to address their housing shortages may be a symptom of broader cultural illness—in particular, the tendency of elites to prioritize their own enrichment at the expense of the public interest, and the decline in appreciation for the importance of community, and the young and middle-class families that are required to sustain it. Public policy can’t directly treat this disease. But it can treat the symptoms. And a modest shift in the state-local balance of power for setting land use regulations may be the best medicine for the short term.

Jerry Brown, who famously vetoed zoning mandates in the past, may have his eyes on something similar at the state level:
California Governor Jerry Brown, to his great credit, is pushing legislation that would “sidestep the endless layers of local approvals that bog down badly needed housing construction,” according to the San Francisco Chronicle.
UPDATE:  Palo Alto Planning Commission member resigns to protest no-growth zoning plans:

The people who bought their homes a long time ago lucked into a windfall and they resentfully lash out at anyone trying to cut in on that windfall. But notice how un-American these claims are. The current residents want to protect their gains by telling other people how they can use their property. When a new restaurant starts to take patrons from an old restaurant we generally don’t think that the old restaurant–the long-term resident–has the right to prevent the new restaurant from opening. The same is true, by and large, for new technologies and ways of doing business. Yet when it comes to residential land we give the old residents a veto on the new.

Wednesday, August 10, 2016

Ethanol, Cattle, and Steak

Thomas Landstreet is bearish on cattle and bullish on steak.  The reason:  government ethanol mandates are under political pressure.  In 2007, the head of the EPA announced a freeze on the ethanol mandate, and corn prices fell from $8 to $4.

The thing that makes this an interesting application of supply and demand is the notorious 12-year cattle cycle.  The only way to increase supply in the long run is to hold female cows off the market, thus decreasing supply in the short run, and driving up price.  With corn prices falling, farmers saw increasing profit in cattle, so they initially held female cattle off the market, driving up price and profit.  But eventually, prices (of cattle) follow costs (of corn) down.  As cattle become less profitable, farmers reduce the size of their herds by slaughtering more heifers.  This further decreases price.

It looks as if Landstreet's bet has paid off:
Just yesterday, expecting sharply lower beef costs (COGS) to benefit earnings, I bought stock in Carrol’s Restaurant Group (TAST) and it’s up 12% today. The same thing happened to Restaurant Brands International (QSR), owner of Burger King and Jack in the Box (JACK). Restaurant earnings continue this week with, Fogo de Chao reporting after the close today, Wendy’s (WEN) tomorrow morning and Shake Shak (SHAK) reporting Wednesday after the close.
And what can we expect in the future?
I expect cattle futures to suffer another leg down while next earnings season will be another good one for protein heavy restaurant stocks.