Wednesday, June 17, 2009

Healthcare Reform

Healthcare reform is needed and there will very probably be reform legislation approved by the Congress and signed into law by President Obama by the end of the year. The big question is what will be incorporated into the legislation. Hopefully it will be the product of genuine bipartisan debate and consensus.

While a significant percentage of Americans are apparently reasonably happy or at least satisfied with their current personal healthcare providers and the relative costs, there is no question that there are substantial weaknesses in our overall healthcare system when looked at from an objective and national basis. I don't see how any informed American can honestly disagree with President Obama that healthcare status quo is "untenable." That's really a no-brainer. However, clearly one can disagree with what changes should be made, what it would cost, and how the changes should be financed.

Probably the biggest weakness, as almost everyone knows, is the fact that healthcare is quite expensive for most Americans on an absolute and relative basis and its costs are growing unsustainably fast, with serious consequences for the majority of American families, businesses providing healthcare benefits, the healthcare industry and the nation as a whole, reflected in the troubling outlook for Medicare and Medicaid, the federal budget, and the national debt. What's the evidence? Healthcare costs in the U. S. were at 9% of GDP (Gross Domestic Product) in 1980 and doubled to 18% of GDP in 2008, compared to an average for OECD countries (30 higher income, developed countries) of just 8.5%, less than half of our rate! It is widely considered unsustainable, because if we don't make major changes to correct the trend, the projections indicate that costs will rise approximately 2.5% faster than GDP each year and grow to as much as 50% of GDP by 2080! It doesn't take a rocket scientist to understand that's not going to work.

No matter what else is included in our reform legislation, unless government, businesses, the healthcare industry, and individual Americans all take effective actions to seriously contain costs, we will be in big trouble.

Another major weakness is the fact that more than 15% of our population, about 46 million people, have no health insurance, and, very importantly, millions of other who have some insurance are underinsured, are not covered for pre-existing conditions, are vulnerable to losing it they lose their job or leave their job voluntarily, or are having trouble paying healthcare costs without cutting their tight budgets for other vital needs such as housing, college education for children or savings for retirement. A critical related factor is that a great many families have had to experience personal bankruptcy, or are fearful of going bankrupt, due to highly expensive and critical unforeseen medical operations or treatments that to a large extent may be outside of their control.

On this subject I must say very frankly that I don't think we should feel obligated to find viable solutions and finance healthcare costs for our 12-15 million illegal immigrants, except basic care for their children under, say, 18 years old. Although most of them come here to find work at higher wages, so they can help their poor families living in the countries they came from, providing free or subsidized healthcare is another incentive for many of them. We need more disincentives. If this is adhered to, we will very materially reduce the number of uninsured we need to account for to less than 34 million.

Healthcare reform is a complicated subject and I certainly don't have all the answers, but I feel strongly that components of legislation and actions by stakeholders, meaning all of us, should prioritize: a system characterized by more widespread coverage, high quality care, simplicity, efficiency, fairness and affordability; individual choice of insurance providers and doctors and dentists; and individual accountability with meaningful financial incentives for good healthy behavior within one's own control. By the latter I'm talking about fitness, diet, and exercise to optimize personal health and thereby limiting healthcare expenses.

On the subject of behavior I was impressed by an article written by the CEO of Safeway, Inc., the large supermarket chain, that was printed in the Opinion section of the Wall Street Journal on o6/12/09. He indicated that they have a healthcare plan for their non-union employees where the combined costs for the company and the employees have not increased on a per capita basis for the last four years, compared to a reported 38% increase for most American companies. The key for them, he indicated, is that their plan rewards healthy behavior, influenced heavily by their striking finding that 70% of all healthcare costs are the direct result of behavior! With their particular plan they have determined that the rewards have reduced average annual premiums for individuals by up to $780 and for families by up to $1,560. That's substantial.

In terms of solutions, the most contentious political issue seems to be President Obama's proposal for a government insurance option for Americans unhappy with private insurers' policies currently available. Many Republican leaders, including Newt Gingrich, strongly oppose a government option, claiming it would drive private insurers out of business and fairly quickly lead to an undesirable and unsatisfactory one option universal healthcare situation run by the government. I don't buy that at all, but of course it would depend on how the government option is set up and financed. It also obviously depends on how private insurers would react and adjust.

Not everyone will be entirely happy with the final outcome of the federal reform legislation and the associated resultant actions taken by private insurers, businesses, and state governments. But the outcome should hopefully provide access to an acceptable level of affordable quality healthcare for every American and put Medicare and Medicaid on a well thought-out path towards financial viability over the long term. It's also important that the outcome helps to contribute to a) healthcare costs not growing more than GDP on a consistent basis; b) balance in our federal budgets and sustainable national debt levels; and c) a competitive, healthy, efficient, and innovative healthcare industry over the longer term.

Friday, June 12, 2009

Executive Compensation Revisited

In a lead article in yesterday's Los Angeles Times Business section, "Plans to Rein in Exec Pay Announced," we read about President Obama's latest plans to clamp down on executive pay. As expected, they have generated support from most Democrats and vocal opposition from many leading Republicans. None of this is surprising. Why write about this and what's going to happen?

My regular readers may remember that I posted two blogs on this subject in past months. On 1/31/09 I commented that the strong and widespread criticism of substantial and inappropriate bonuses paid Wall Street executives were in most cases highly justified. My conclusion then was that meaningful actions to deal with this will most probably be taken by the Congress, the Obama Administration, the regulators, some boards of directors and many shareholder groups. On 8/29/08 my blog commented on the then recent historical trend of excessive compensation, defining what was excessive, who's responsible and what possible actions might be taken.

In my view it's still appropriate to write about executive compensation, because it has a bearing on what's going on in our poor though hopefully slowly improving economy, on a likely changing corporate culture, as well as the pluses and minuses of the federal government's growing influence and control over our overall economy and our vital business community. Executive compensation has had a very significant bearing on our economy because it has in too many cases, through its structuring, led to imprudent high risk taking, which in turn has led to corporate failures, needs for federal taxpayer funded rescues, massive layoffs, and huge adverse impacts on federal and state financial budgets affecting all of us. Furthermore, all of this has been instrumental in contributing greatly to the world-wide recession and clearly been a major factor in falling stock and bond markets, eroding the values of savings and retirement portfolios of tens of millions of American families.

One prominent and controversial part of the Administration's plan is to appoint a "pay czar" to approve compensation for the highest paid employees of major companies, like Bank of America, Citigroup and AIG, as well as others who have received bailout funds from the federal government. Another part involves support for legislation to give shareholders a larger voice in compensation issues. Treasury Secretary Geithner also laid out broad principles on executive compensation, such as tying incentives more to long-term performance to contain short-term risk-taking, particularly by bond, currency and commodities traders. The various restrictions would likely last until the companies repay their bailout moneys and other financial obligations. Geithner stressed that the government does not intend to cap how much executives would be paid.

Ideally, executive compensations should be decided by an effective, independent company board of directors or its compensation committee, guided by experienced compensation consultants, often supported by recommendations of the CEO for compensations for those who report to him or her. The problem has been that to many directors and CEO's didn't do their jobs well, and too many directors were not really independent. Another contributing, but less important weakness has been that company auditors and rating agencies have not generally commented critically on compensation practices.

I think an executive compensation bill will pass, but it will probably require some concessions on both sides. I'd expect it to include more power for shareholder groups to vote, perhaps non-binding, on compensation for the top 4-5 executives and also pressure from regulators and the SEC to enforce more independence of the board directors. I'd expect more companies to expedite repayment of bailout moneys to generate some more freedom in compensation matters. I'm also sure that most company directors in future will be more sensitive to imprudent compensation structures and act more responsibly. Finally, I'd hope the "pay czar" position would be eliminated as the economy gets solidly back on its feet and the several stakeholders have learned their lessons on how best to deal with this.