Medical Pricing

Steve Cohen’s article on hip replacement prices in the WSJ struck a chord for several reasons.  We had a family member just get a new hip.  Transparent prices are critical to have effective markets.  Medical prices have always seemed very odd, especially for procedures that are pretty standard.

We often talk about expertise here and we plead guilty to lack of expertise on medical pricing.  Part of this post is to remind ourselves to find out more.

We want to discuss the oddity of medical prices.  In Steve’s article he says that he had both hips replaced and

[T]he hospital had charged $175,000 for my right hip and $180,000 for the left. The insurance company had paid discounted rates of $75,000 and $77,000.

The physicians and other professionals involved in these surgeries have amazing skills but the procedures are pretty standard with a variety of specialists making sure that the surgeon can be efficient.  We saw it in person for eye surgery and we were impressed by the capitalism at work in all the specialization.  Because of part of the specialization was to administer drugs we don’t remember all of the details but we were queued up like planes on a runway and rolled down to operating room for take-off.

The point is they need a full queue to maximize profits with all these specialists.  How does it benefit them to announce a price that is more than double the actual price?  We are sure that there is a reason for the difference but we don’t know what it is.  Our assumption is that essentially all of these procedures are covered, in large part, by insurance.  Perhaps it is a faulty assumption.  When we went in for our procedure we met with the financial person who looked at our insurance and said we don’t need to talk about prices other than this small blue bag you need to bring (we are not making this up).  It cost us a few bucks.  Perhaps the high list price is actually used but our priors are that there is a bureaucratic explanation.  We are open to suggestions and plan to look ourselves.

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Gatekeeping: A Theory

We are supportive of Bari Weiss and her efforts on free speech but we recently took issue with her comment that she wanted to have gatekeepers.  When she was summarizing the Intellectual Dark Web (I.D.W.) she said:

I get the appeal of the I.D.W. I share the belief that our institutional gatekeepers need to crack the gates open much more. I don’t, however, want to live in a culture where there are no gatekeepers at all. Given how influential this group is becoming, I can’t be alone in hoping the I.D.W. finds a way to eschew the cranks, grifters and bigots and sticks to the truth-seeking.

We think that this paragraph could be interpreted in several different ways but Bari seems explicit on supporting the need for gatekeepers.  Before we propose a theory we have some information on Bari, some current examples, and some information about us.

David French at NRO provides information about how Bari got started in the opinion business around 2004.  She was a student at Columbia and David was president of FIRE (consider donating).  There was a dustup at Columbia between the professors and the students.  Read the whole thing but David’s summary is:

In other words, Bari is doing exactly what she did in 2004 and 2005. She perceived intolerance and called it out. She decried an unwillingness to debate and a university that seemed closed off to dissenting ideas. It is not censorship to critique censorship. It’s not bullying to criticize bullying. And it’s most definitely not “racism” to raise credible concerns about anti-Semitism.

She has dealt with bullies before.  It has long been a goal of folks on the left to limit the speech of others.  There are some recent examples.  The WSJ covers the trashing of George Mason University.  Here is part of it:

All of this UnKoch nonsense is part of the left’s attempt to stifle conservative ideas in the guise of an attack on “dark money.” The Kochs are so “dark” that the progressives decided to use their name. And speaking of dark money, UnKoch My Campus isn’t a nonprofit and doesn’t file regular financial disclosures.

In addition, several of the folks in Bari’s story on the I.D.W. are attempts by the left to silence dissent.  We worry about meeting our standards in putting forth a theory on gatekeepers.  Expertise is important and we can’t be expert in all the areas necessary for our theory.  Still, that is the nature of theories.  They can be falsified or supported by empirical evidence.  Let’s give it a try.

Our theory is that we can compare political information to economic information.  No individual can deal with the either set of information but somehow the market can distill it.  We doubt that the market for political information is as efficient as the market for economic information but we think it is a reasonable description.  Let’s call it the Nearly Efficient Market for Political Information (NEMPI).

Thus, there are an extraordinarily large number of gatekeepers in NEMPI.  Some have large influence and others have close to no influence but enough folks are aware of their history and most of the gatekeepers worry about their history.  Their history causes their influence to wax and wane.  The I.D.W. is waxing in the NEMPI.

Free speech is the key attribute of the NEMPI.  With reasonably free speech we get NEMPI.  Folks want to reduce free speech or designate gatekeepers in order to eliminate the NEMPI.

The one difference we see between financial markets and NEMPI is timing.  Financial markets react quickly while the NEMPI takes more time.  We think that is OK because elections only happen every so often.

So our NEMPI theory is that everybody is a gatekeeper and the influence of each gatekeeper varies over time.  No individual can evaluate all the gatekeepers but free speech allows different individuals with different talents and points of view to provide information over time.  Bari, the I.D.W., legacy media, and all the others contribute information that informs politics.  NEMPI, let’s test it.

Baseball, Conservatism, Expertise

Baseball and conservatism are at least loosely tied together.  George Will is the classic, but not only, example.  We read all sorts of blogs and other communication devices to take advantage of gathering expertise.  Unfortunately, everyone that puts out these communications is going to say something that he shouldn’t.  The reason that it gets said is we can’t help ourselves.  There was an NRO article that asserted that the NFL undervalued black quarterbacks.  Perhaps only because we were busy, we just managed to refrain from commenting.  We are convinced that neither the author nor MWG is an expert on the qualities of an NFL quarterback.

We all want to go beyond our expertise.  Although we sometimes refrain, it is a problem for everyone who opines for fun or profit.  In his newsletter, Jonah Goldberg, who admits to being not much of a sports guy says:

Baseball, as Al Capone explains in The Untouchables, is a game that marries team effort with individual achievement. But the team effort is only on defense. On offense, the player stands alone.

The last bolded sentence is false.  If you are the hitter do you want Rickey Henderson (1406 stolen bases) or Harmon Killebrew (19 stolen bases in 23 years) on first?  If you are the hitter do you want Babe Ruth or Mario Mendoza coming up next?  If you are trying to score from third do you want to stand alone or do you want the on-deck hitter to tell you how to slide?  Yes, the batter does literally stand alone at the plate versus the pitcher but it is more complicated than that.  We are sure that like Jonah we will be equally guilty of opining beyond our expertise soon.  It is a danger and we should welcome the feedback.

Taxes, Expertise, And Information

Kevin Williamson in the NRO Corner is upset about part of the Senate tax bill.  The Senate GOP is planning to tax stock options at the at the date of vesting.  Stock options is shorthand for a variety of equity instruments that are used as compensation.  What is not clear is how exactly the employee’s income would be measured in the proposed bill.

Sidebar: We account (recognize the expense for financial reporting purposes) by recognizing the fair value as the employee earns compensation.  Earning might coincide with vesting.  We don’t think that the Senate intends to use fair value measurement but we are not entirely sure.  Because financial accounting and tax accounting have different goals they are often different.  End Sidebar.

Kevin says:

You can award the options at a lower price than the current price of the stock: If you give the employee the option to pay $90 a share for 1,000 shares of stock currently priced at $100 a share, then you have given that employee $10,000, notionally.

The relevant definition of notionally would seem to be: not real or actual; ideal or imaginary.  We see that you have really given the employee more that $10,000 unless the option expires immediately.  The employee may end up with more or less than $10,000 but the value of that option is almost surely more than $10,000 because the best possible final value can easily be $40,000 but the worst possible final value can only be zero.  That’s why folks are willing to take options where the current price of the security is below the strike price in the option.  The fair value of Kevin’s option is surely more than $10,000.  Even so, we think if the Senate went in that direction it would be the worst possible incentive.

The information problem is knowing what the bill actually says.  We haven’t found anyone who cites the bill so we don’t know what it says.  We agree with Kevin but we want to know how income is measured and what would happen to old options.  Kevin reports and comments that:

The Senate estimates that the measure would produce an extra $13.4 billion in revenue over ten years, but that’s either moving forward revenue that eventually would be collected by taxing the options when the options are exercised or, worse, by taxing people on gains that aren’t actually realized—most startups fail, after all, but they may fail after employees’ shares are vested.

We agree that the Senate proposal is moving the revenue forward.  It is probably creating less total revenue since the startups that succeed do so in a big way.  Even an aging star like Apple has gone from 107 to 174 in the last year.  That surely produced income for the Feds and the state of California this year.

We support Kevin’s position because it is consistent with most tax rules.  You pay taxes on what you were paid in 2017 rather than what you earned.  We need more data to make a stronger position.  How is income measured under the Senate proposal?  What would be the total take keeping the old rules?  What would be the total take if we relaxed the rules as the House suggests?  The tax bill is not going to be perfect but let’s try to limit the number of stupid things in the tax bill.  We think Kevin has identified one of the stupid things but we need a variety of expertise to make a really compelling case.

 

Theater Three-For-Three

We spent the weekend at various forms of the theater with the Lady deGloves and went three-for-three.  We went to Madison and saw the touring version of Beautiful- the Carol King Musical.  It is interesting because it is not just about Carol King.  It is about the music industry of the 50s, 60s, and early 70s.  They have great music (and The Loco-motion) to create a story around and they do it well.  The singing and dancing is the quality you expect from a national tour.

Sidebar: We sat near a number of young folks and there was laughing when The Drifters first came on.  We are not positive but we think they we reacting to the groups choreographed moves.  It was a generational thing.  End Sidebar.

Beautiful is a beautiful show.  It starts with interesting songs but adds characters, sets, and presentations to make it a quality show.  We completely enjoyed it.

Our second stop was at American Players Theatre for The Unexpected Man.  This visit had the challenge of high expectations as it was a two person play with Brian Mani and Sarah Day, two of our favorite actors.  The show still far exceeded our high expectations. It is a wonderful story about characters of roughly our age dealing with opportunities to connect as well as the experiences of death and disappointment that come with being past the midpoint of your life..  Brian and Sarah are perfect and the simple set becomes a bit more with lighting and sound.  It is worth the trip to Spring Green.

Our third stop was to see Wonder Woman at the local cinema.  It was worthy of its positive reviews.  It introduced characters worthy of a franchise.  We hope they get back to them.  It, almost surprisingly for a summer blockbuster, had an interesting story.  And it did have enough action to be an action flick.  For us, one of the most interesting parts is the training of Diana (Wonder Woman).  Often in movies characters become expert warriors in too short of a time.  Diana, on the other hand, wants to become a  warrior at a very early age and begins training then despite her mother’s disapproval.  It is not epiphany that leads to her lethal skills.  It is mostly hard work.  You need to see the movie to fill in the missing piece.

It was a great weekend.  Our next experience will suffer from comparison.

Envy And Altruism

Kevin Williamson has a fun article on the joy of stardom and the joy many see when stars like Tiger Woods and Allen Iverson fall from grace.  As a Patriot fan we would add Aaron Hernandez as the one who fell the lowest because just couldn’t stop killing people.  Kevin concludes:

And that may be why we love the ritual public denunciation of fallen idols. If we convince ourselves that they are monsters and moral outliers, then we do not have to face the much more terrifying possibility that they are schmucks like us — and that we are schmucks like them.

We have a different take on it.  We do agree that stars are often schmucks like us.  Failure to prepare for retirement hits all classes of folks.  Any individual’s expertise is limited to a very small area.  Being a great retirement planner is unlikely to make you a great basketball player and vice versa.  On the positive side, the failure of retirement planning provides us with a steady stream of live classic rock.  Yet we think our joy in failure of these stars is more about envy.  And envy connects to politics as the left largely practices the politics of envy although the right is not envy free.  Anytime you hear about press bias from the right there is an element of envy in it.  Envy sells.  We admit to envy about our opponents ability to kill the ball in handball.  We hope they envy some part of our game.

Sidebar: The local lawn care company sells envy too.  The truck says, in big, bright, and bold letters: Kick your neighbor’s … grass.  We understand and expect it is well received.  End Sidebar

First, let’s talk about altruism.  Kevin writes about Allen:

Some guardian angel at Reebok saved him from the very worst of it, persuading him to take a modest $800,000-a-year stipend and leave $32 million in a trust fund that he cannot access until he is 55 years old. So he just has to eke out a living on the better part of a million bucks per annum until he gets paid for real.

Without being privy to the transaction we are pretty sure that Allen wanted the money up front.  We also highly doubt that Allen outfoxed the Reebok folks in determining the discount rate for the annuity.  In fact, it looks like he is getting an unimpressive 2.5% ($800,000/$32,000,000) on his investment.  We also think it is safe to say that Allen is way better off with an assured return and not being able touch the trust fund.  So some folks, like the guy at Reebok, do good.

But most of have a combined awe and envy of folks like Tiger, Allen, Aaron and many others.  We saw Jason Day hit a 260 yard, uphill, three wood absolutely on the pin when he won the PGA.  It was awe inspiring and he didn’t look like he swung hard.  We have a strange combination of envy and worship of these amazing beings that when they fail many of us feel good about ourselves.  As we said previously, (you can look it up) the only time Jordan Speith understood our golf game was when he hit the second shot (third including the penalty) at the 12th at The Masters and had the passing hope that he had hit so bad that it wouldn’t make it to the water.  We have had that joy he missed.

So we envy their talent as much as we love it.  When they fail somehow we succeed and that’s why the stories of abuse and failure are so popular.  We enjoy their epic accomplishment and we might enjoy their epic failures even more.  It works in politics, advertising, and the media.  It doesn’t mean that everyone is consumed with envy as Reebok guy showed but betting against envy is like betting against the market.  It doesn’t work very often.

 

Ending Slavery

Richard Brookhiser has a history lesson for The Donald on avoiding the Civil War in the current (5/29/17) NRODT.  One part, ending slavery by buying them, fits into our expertise from almost 40 years ago.  We believe there was a financial opportunity to avoid the Civil Was that politics failed to find.  Here we only consider the financial cost but the human cost of the Civil War, like slavery, is huge.

Sidebar One: We wrote this paper for a grad class in economic history almost 40 years ago.  We don’t have the references or the exact details anymore so we are painting with a broad brush.  End Sidebar One.

It seems simple because the Civil War was extraordinarily expensive that the government could buy out the slaves and avoid the Civil War and everybody would be at least as well off.  For example, here is an estimate of the actual cost that comes in at over $6 billion.  So when Richard quotes estimates from $600 to $900 million it is easy to wonder why there was a war.

Sidebar Two: There is strong evidence of an efficient market in slaves.  Given the pertinent characteristics like age and gender, the value of a slave can be reasonably estimated based on prices of actual sales.  According to the census there were almost 4 million slaves in the US in 1860 so Richard is estimating an average cost of $150 to $225.  Of course, individual prices would depend on pertinent characteristics.  A 20 year-old male will be worth more than a 60 year-old female.  End Sidebar Two

The problem with this analysis is that it is after the fact or ex-post.  Nobody expected that the Civil War would be as long or costly as it was and both sides thought they would win.  The analysis needs to be ex-ante.  What did folks think the Civil War would cost before it started?  They, see Sidebar, expected it to last a few months and cost a small number of millions.  The financial solution, and this was discussed, was to free the slaves at birth and death (B&D).  The  B&D solution reduces the costs in two ways.  First, babies are cheap because they are not productive for several years.  Second, it reduces the present value of the expenditures because the amounts are paid later.  It also provides a plausible way out for both sides because it doesn’t end slavery immediately.  For the same reason, it will have negative reactions too.

The bottom line is that it would have worked.  The present value of B&D expenditures was less than the expected cost of the Civil War.  It was not easily avoidable but it was avoidable.    James Buchanan might have been worse that our Immediate Past President.