Health care solution by one reader

Last week’s health care column triggered a flood of e-mail from readers. Most agreed that something needed to change, and they cited their specific frustrating examples in dealing with the prevailing system.

Those few happy with the status quo don’t have much sympathy for the 45 million uninsured, but they are forgetting one thing: It’s not the same 45 million from year to year.

If you asked the question, “How many Americans went without insurance for at least six months over the past 10 years?” I think that the answer would be closer to 100 million thanks to the revolving door of job tenure. The average American changes jobs every seven years.

Common sense would indicate that there’s more heartache to that 45-million statistic than just the raw number. Of this group, a higher percentage than the national average must have pre-existing conditions that make them uninsurable. After all, someone with a health problem is probably having a harder time getting a job — a condition exacerbated by the fact that insurance plans for small businesses (where a majority of Americans work) often require that new employees prove insurability to get coverage.

For a final insult to our intelligence, imagine what an employer thinks about hiring an older employee when the annual insurance cost for that 50-plus age applicant could easily be $5,000 more than that of a younger person. We can safely bet that a lot of those 45 million are older former employees.

One of the most comprehensive e-mails came from a friend and former senior vice president of a major insurance company who also serves in a key leadership role today for a hospital chain. He confirms the fact that only 75 percent of a premium dollar goes to fund medical costs. The missing 25 percent is for overhead and profit.

Between 25 and 40 percent of health care dollars are spent in the last year of a person’s life. There is duplication and over capacity of facilities because communities all believe that they need everything. What allows all of these inefficiencies to persist is the fundamental disconnect between the patient receiving the benefit and the source of revenue for paying the bill. Despite the public’s dismay at a 131 percent increase in costs over five years, nobody anywhere in the transaction has any incentive to control costs.

The answer, according to this experienced and “connected” executive is as follows: First, he recommends a single-payer system with premiums paid at varying rates depending on an insured’s gross taxable income. Next, there should be large deductibles and co-insurance which would, again, be variable and tied to taxable income. Preventive care would be paid on a first-dollar (no-deductible) basis.

A key ingredient of this proposal would be an independent agency, similar to the one in Maryland, that would determine prices to be paid to providers. The amount paid would reflect what it cost to attract people to the roles of primary-care physicians, to meet the capital needs of hospitals, and to cover quantifiable research and development costs of drug companies.

Insurance companies would be confined to administering claims. A parallel, presumably higher-cost, option would be available for anyone not satisfied with the services provided by the model outlined above. And finally, illegal aliens presenting themselves to emergency rooms for care would be stabilized and returned to their country of origin — something that should be happening now anyway.

How can anyone argue with this well-constructed approach?

Health care costs fuel reform call

I was stunned last week to learn that the health insurance premium my company pays for my wife and me (we’re in our 60s) is $1,827 per month. What am I getting for $22,000 per year? Not even a death panel. It’s a $2,200 deductible plan with a stop-loss of $4,400 for the two of us combined. This is through Blue Shield, which is still operated as a nonprofit.

Like most of the 85 percent of the population who are supposedly “happy with their insurance,” I was blissfully ignorant of what it was actually costing. They paid the bill for me over in accounting, but the current focus on health insurance prompted me to ask what my own portion was costing. I’m the owner of a company with about 30 employees, so I bear the entire burden for my own coverage.

If I were to lose my job, my COBRA cost to continue the coverage would be 35 percent of the $1,827 until November, and then the end of the temporary government subsidy would raise my cost to the full annualized rate of $22,000 — a laughable amount for someone unemployed.

Then, there are those huge deductibles if I actually got sick — plus the cost of drugs not covered and disputes over bills that may be more than “usual and customary.”

Moreover, some treatments I thought I needed would have to be pre-approved by someone in a cubicle while I struggle with their voice mail.

Looking at my bill, I notice that I’m paying less for younger employees.

However, it would be about $1,000 for a couple in their 50’s and $600 for a couple in their 40’s, so it’s never cheap by any stretch. The only good news is that it is all tax-deductible, as long as I’m employed, but COBRA premiums, if I ever had to pay while between jobs, would not be tax-deductible. How twisted is that?

All of us who are “happy with our current coverage” have probably not stopped to think about the fact that we change jobs on average about once every seven years — which means that we’re probably candidates for COBRA coverage or we go uninsured for significant portions of a career.

Even those steadily employed are paying indirectly, because companies like mine that have to pay these premiums have less money available for spendable employee compensation.

Because an employer is paying the bill doesn’t mean it costs employees nothing. We’re paying every dime with hidden compensation we never see.

Meanwhile, of the $22,000 a year I currently pay, about $7,000 or 35 percent goes to cover the cost of administration, marketing, profits and costs not directly related to health care itself.

Of the amount that actually gets to doctors and hospitals, about a third represents a mark-up to cover the costs of those who can’t pay.

Doing simple math, it appears that only $10,000 of my $22,000 is devoted to actually paying for my potential health problems.

It will get worse. The Center for Disease Control estimates that one out of three children born since 2000 will have type-2 diabetes — basically from a diet of government-subsidized junk food.

Ninety-two gallons of soft drink per year on average now exceeds the amount of milk that kids drink.

In most industrialized countries, I’d be paying just $11,000 a year for comparable coverage. Let’s give change a chance.

Bonds could be a better bet

“Wall of Worry” is said to be the old bugaboo upon which the market rises. In a nation of too much communication, there’s no end to a worry wart’s source of supply.

If the stock market has exhausted what has been a spectacular climb from the depths of despair, then I’m inclined to pay more attention to the case that bonds, over many periods, have actually performed better than stocks. Of course, we can expect this Internet chatter after a rare 10-year period whereby the market has made essentially no progress.

What this theory ignores, of course, are compounding dividends paid by public companies and little or no inflation during the period. Almost all other 10-year periods with rising markets had the rising tide of inflation raising all the ships. I’m always stunned at how much obvious information is left out of these comparisons by responsible academics or money managers.

Recovery

Over the long term, with the challenges ahead of us, it may be safest to make decisions based on the prediction that markets won’t recover to 2007 highs until as late as 2020. If this is the case, then bonds could, in fact, be a better bet than stocks. Inflation takes a toll on longer term bonds, but people betting real money right now are buying 10-year bonds that fluctuate between 3- and 4-percent interest. These are people betting trillions of dollars who believe that inflation is not going to happen.

If bonds do make sense, my favorite categories today continue to be funds of high-yield bonds, GNMA’s, short-term corporate, and lately, emerging market bond funds like that offered by T. Rowe Price.

High-yield bond funds were pummeled over the past year, but as a percentage of total assets, the defaults on bond investments were minimal and most continued to pay out at their stated coupon rate. For anyone willing to stomach the decline in capital value that occurred during the panic, the rewards since have been reassuring. For the year, junk bond funds have risen a total of about 40 percent and the current average yield is about 12 percent. A “toe in the water” is one way to consider Vanguard’s High Yield corporate bond fund which invests in bonds that are just barely considered junk. Its yield is about 8 percent currently, but this fund represents the oxymoron of “safe” junk bonds.

Inflation

International bond funds like T. Rowe Price Emerging Markets Bond fund offer some of the same higher returns as domestic high yield, but there is the additional advantage of debt in foreign denominations. If we do, in fact, have high inflation in the United States relative to other countries, then sinking dollar values will not impact these foreign bond assets. They will become worth more in dollars. At the moment, the annualized yield on the above-mentioned fund is 8 percent.

So much for bonds. There are still plenty of money managers out there who think the market has room for further advancement. Norman Fosback applies his own “Stock Market Logic” to more than just the title of his book, and he recently declared that the market had room to rise 21 percent over the coming year and a total of 79 percent over the next five years. Floyd Norris, in The New York Times, points out that the seemingly huge deficit into the future makes no assumption for course-correcting. For example, it assumes that we will be spending $100 billion per year fighting wars indefinitely. It ignores the fact that taxes, especially the estate tax, will “snap back” to their 2000 levels which was the deal we cut with our self-indulgent selves when we temporarily suspended them In the first place.

What too much information and the wall of worry should mean to us as individuals is that we are like snowflakes — no two of us are in the same situation when it comes to meeting financial obligations. None of us can predict what will happen in financial markets, but we can decide what is important and make decisions that relate. Older investors should understand how bond funds can improve results regardless of what the market does. Younger investors should never freak out and retreat into money market funds (as many have.) Forget about predicting what the future holds. Assume that it will fluctuate and invest accordingly.

Investing during stagflation

Anyone lining up historical facts and then peering into the future can reasonably guess that inflation will define the economy for the coming generation. Under these circumstances, some investment shifts can make some sense, but first a look at the fundamentals.

Congress has three choices. They can raise taxes. They can cut programs and spending. Or, they can allow inflation to effectively reduce the value of the dollars that we owe to our own citizens and foreign governments that have bought U.S. Treasury bonds. The inconvenient truth about taking the inflation route is that no politician needs to take responsibility for a specific tax increase or spending cut. Inflation just creeps like fog onto the economic scene, allowing a “my hands are clean” approach to dealing with the problem. Meanwhile, just as the fog slows down sea traffic here at my Maine coast vacation site, inflation caused by rising interest rates slows down the economy like throwing out an anchor.

We’re talking “stagflation” which is inflation coupled with a struggling economy.

It doesn’t take much cynicism to conclude that inflation will be the path of minimum regret for Congress in the years ahead. The economic prognosticators at the highly-respected Institute of Trend Research have predicted inflation ramping up to 8 percent within three years.

When it comes to investing in an inflationary environment, housing comes immediately to mind.  This was confirmed in a personal discussion with a Bay Area homebuilder hit especially hard by the housing implosion.

He said, “Inflation has always been great for the housing industry.”

With the housing market having hit bottom, coupled with the fact that we have historically low, fixed-mortgage rates, an investment in housing can make great sense today. Vacation homes with views or on the water, and residences in urban areas, tend to benefit the most from long-term inflationary conditions.

With respect to fixed-income investments, bond mutual funds with longer average maturities will always be trying to catch up with inflation. Capital values of existing bonds in the fund will drop until they begin to approach maturity. If the majority of the bonds in the fund are several years away from maturity, the entire mutual fund’s value will be depressed for awhile.

A short-term bond fund, by comparison, has bonds that mature in two or three years on average, and this is too short a time period for much drop in value. Another approach is to invest in individual bonds themselves instead of investing through a mutual fund. This enables you to control the maturity of each bond and hold them to maturity if they drop in value in the interim.

The stock market, during an inflationary period, tends to “whipsaw” investors. On the one hand, rising interest rates are bad for corporations that are paying for borrowed money. Interest rates, in general, are the single most important determinant of corporate profits. Meanwhile, companies typically own assets that can increase in dollar value and they can raise prices during an inflationary period. Buy-and-hold investors who are dollar-cost averaging, investing steadily, are served well in a whipsawing market. Those trying to time the market, without exception, will miss opportunity as the market climbs on its “wall of worry.”

We went through this in the ’70s, of course, but back then we didn’t have any money. This time it’s different, and we have to think about what inflation might mean to us.