We don't have a clue about our kids' finances.

We're not done with our discussion of Brill's Time article about medical costs, but I want to share something amazing with you.

Retirees have a lot of life experiences. We grew up, received an education, spent decades in the workforce and along the way learned how to handle our family finances.

We would like to pass that experience along to our children in hopes of making their financial lives a little easier. Here's the problem: Much of what we know about family finances doesn't apply to the "mom, dad and two kids" families of today.

How can that be? Like the proverbial frog in the slowly warming water, things have changed so gradually that we never noticed.

This was driven home to me by a piece of video I recently ran across. I was stunned by how much my financial thinking was out of date. I watched the video, then got my wife and sat down with her and watched it again.

In March of 2007, Elizabeth Warren was invited to Berkley to give the Jefferson Memorial Lecture. Note to conservatives: Although Warren is now a U.S. Senator, there is nothing even close to a partisan remark in this video. Warren was invited to lecture because she was becoming recognized for her work on bankruptcy and the conditions leading American families into financial peril.

Warren is to financial information what the late Carl Sagan was to science. She can make her topic interesting and easily understandable. Once I got past the dean of the graduate school who introduced Warren, I couldn't stop watching.

The video runs 57 minutes, but you can stop it and come back to it later if desired. (Just remember the time you stopped, then use the "scrubber" bar to fast forward back to that point.)

Warren contrasts the financial situation facing a typical family in 1970 with one in 2005. You will be amazed at the differences you did not understand. Educators will be particularly struck by the difference in educational costs to a family wanting their children to enter the middle class. This occurs around 48 minutes into the video.

Here is the video, Trust me, it is worth your time:

We're asking the wrong healthcare question: Part 3

In part 1 and part 2 we began digesting Steve Brill's recent Time magazine cover story in which he says that we should be asking why our healthcare bills are so high as opposed to who will pay those bills.

In part 2 we learned some things about nonprofit hospitals, including the fact that the average nonprofit hospital makes a greater profit than the average for-profit hospital. "In hundreds of small and midsize cities across the country...the American health care market has transformed tax-exempt "nonprofit" hospitals into the towns' most profitable businesses and largest employers, often presided over by the regions' most richly compensated executives." With a profit margin averaging about 12%, what do "nonprofit" hospitals do with their profits?

They start by buying up medical practices. The doctors in these practices will send their patients to the hospital lab for tests, X-rays, CAT scans, etc. When sending patients for inpatient or outpatient care, the doctors will recommend the hospital "affiliated" with their practice.

"In a trend similar to what we've seen in nonprofit colleges and universities--where there has been an arms race of sorts to use rising tuition to construct buildings and add courses of study--the hospitals improve and expand facilities (despite the fact that the U.S. has more hospital beds than it can fill), buy more equipment, hire more people, offer more services, buy rival hospitals and then raise executive salaries because their operations have gotten so much larger. They keep the upward spiral going by marketing for more patients, raising prices and pushing harder to collect bill payments. Only with health care, the upward spiral is easier to sustain. Health care is seen as even more of a necessity than higher education. And unlike in higher education, in health care there is little price transparency--and far less competition in any given locale even if there were transparency. Besides, a hospital is typically one of the community's larger employers if not the largest, so there is unlikely to be much local complaining about its burgeoning economic fortunes."

 "Nonetheless, hospitals...are able to use their sympathetic nonprofit status to push their interests. As the debate over deficit-cutting ideas related to health care has heated up, the American Hospital Association has run ads on Mike Allen's Playbook, a popular Washington tip sheet, urging that Congress not be allowed to cut hospital payments because that would endanger the '$39.3 billion' in care for the poor that hospitals now provide. But that $39.3 billion figure is calculated on the basis of the chargemaster prices. Judging from the difference I saw in the bills examined between a typical chargemaster price and what Medicare says the item costs, this would mean that the $39.3 billion in charity care costs the hospitals less than $3 billion to provide. That's less than half of 1% of U.S. hospitals annual revenue and includes bad debt that the hospitals did not give away willingly in any event."

And let's not forget lobbying costs. You probably thought that the defense and aerospace industries were big spenders in Washington. Or maybe you would have guessed in would be the oil companies. "According to the Center for Responsive Politics, the pharmaceutical and health-care-product industries, combined with organizations representing doctors, hospitals,nursing homes, health services and HMOs, have spent $5.36 billion since 1998 on lobbying in Washington. That dwarfs the $1.53 billion spent by the defense and aerospace industries and the $1.3 billion spent by oil and gas interests over the same period. That's right: the health-care-industrial complex spends more than three times what the military-industrial complex spends in Washington."

That lobbying is done because there is a lot of money to be made in healthcare. "We may be shocked at the $60 billion price tag for cleaning up after Hurricane Sandy. We spent almost that much last week on health care. We spend more every year on artificial knees and hips than what Hollywood collects at the box office. We spend two or three times that much on durable medical devices like canes and wheelchairs, in part because a heavily lobbied Congress forces Medicare to pay 25% to 75% more for this equipment than it would cost at Walmart."

That's coming up in the next post.

We're asking the wrong healthcare question: Part 2

In Part 1, we began to break Steven Brill's Time cover story into smaller pieces. Brill says that we're arguing about who should pay for our healthcare instead of the more important question of why are our healthcare bills so high.

We were using 64-year-old Janice S. as an example. She spent a few hours in her local hospital one morning learning that her chest pains were simply indigestion. Those few hours brought $21,000 in medical bills, $17,000 from the hospital itself.

Brill points out that while in the hospital Janice had three "TROPONIN I" tests at $199.50 each. These are blood tests conducted in the hospital lab looking for substances in the blood which are good indicators of a heart attack.

If Janice had been 65--instead of 64--and covered by Medicare, Medicare would have paid the hospital $13.94 for each of those tests. And now you are about to learn something that I'll bet you didn't know.

"...Medicare collects troves of data on what every type of treatment, test and other service costs hospitals to deliver. Medicare takes seriously the notion that nonprofit hospitals should be paid for all their costs but actually be nonprofit after their calculation. Thus, under the law, Medicare is supposed to reimburse hospitals for any given service, factoring in not only direct costs but also allocated expenses such as overhead, capital expenses, executive salaries, insurance, differences in regional costs of living and even the education of medical students."

You may want to read the above paragraph again. Then a few more times until it sinks in. I read and think a lot about American healthcare, but this was news to me.

My doctor periodically sends me to the local hospital lab for routine blood tests. Medicare eventually sends me a notice that the hospital charged $139 for the tests and Medicare paid the hospital less than $20. I used to think that this was a terrible abuse of the hospital by the government. Now I understand that the hospital will do just fine with Medicare rates.

Janice, however, was too young for Medicare and she did not have health insurance and so she was billed the full rate as stated in the hospital's "chargemaster." According to Brill, "The chargemaster, I learned, is every hospital's internal price list. Decades ago it was a document the size of a phone book; now it's a massive computer file, thousands of items long, maintained by every hospital."

If Janice had been privately insured, her insurance company would have been able to negotiate a discount from the chargemaster rates. Janice might have received a notice from the company that they had obtained a "discount" of 50% from the $199.50 figure and Janice would have thought that the company did a great service for her. With no insurance, Janice was billed the full $199.50 for each of the three tests.

But wait, a repayment of $13.94 would have covered all the hospitals expenses, both direct and indirect. If other insurers pay more than $13.94 for these same tests--or the uninsured pay the full chargemaster amount of $199.50--the hospital is making a profit. Isn't this supposed to be a nonprofit hospital?

Ready for another revelation? "Under Internal Revenue Service rules, nonprofits are not prohibited from taking in more money than they spend. They just can't distribute the overage to shareholders--because they don't have any shareholders."

If everyone paid Medicare rates, these hospitals would break even and be truly nonprofit. But patients with private insurance will pay about 35-50% of the chargemaster rates and the uninsured will be asked to pay the full rate, resulting in large profits. Only in American healthcare are those with the least ability to pay charged the highest rates!

The hospital that Janice visited made a 12.7% profit last year. The famous MD Anderson Cancer Center in Texas--also nonprofit--has a 26% profit margin, about 10 times that of your local supermarket. These are profit margins which would delight most for-profit businesses.

"Yet hospitals are beloved local charities. The result is that in small towns and cities across the country, the local nonprofit hospital may be the community's strongest business, typically making tens of millions of dollars a year and paying its nondoctor administrators six or seven figures....the 2900 nonprofit hospitals across the country, which are exempt from income taxes, actually end up averaging higher operating profit margins than the 1000 for-profit hospitals after the for-profits' income-tax obligations are deducted. In health care, being nonprofit produces more profit."

What happens to these profits? That's for the next post.

We're asking the wrong healthcare question: Part 1

"One night last summer at her home near Stamford, Conn., a 64-year-old sales clerk whom I'll call Janice S. felt chest pains. She was taken four miles by ambulance to the emergency room at Stamford Hospital, a nonprofit institution. After about three hours of tests and some brief encounters with a doctor, she was told she had indigestion and sent home. That was the good news."

"The bad news was the bill: $995 for the ambulance ride, $3000 for the doctors and $17,000 for the hospital--in sum, $21,000 for a false alarm."

The above is a quote from a remarkable cover story by Steven Brill in Time magazine this week. Its title is "Bitter Pill: Why Medical Bills are Killing Us." At 26,000 words and 36 pages it is the longest feature story Time has ever published, and probably one of the most important.

I'd like to think that every reader of this blog will take the 2-1/2 hours or so required to read the entire article, but I doubt that will be the case so I will hit the important points for you over the course of several posts.

Unfortunately, situations like that of Janice S. are the norm. A WNY retiree recently appeared at a nearby hospital for his angiogram appointment at 6 AM. (Angiograms check for the amount of blockage in blood vessels feeding the heart.) By 1 PM he was eating lunch at a local restaurant. The bill for the morning's activities: $18,000.

Brill posits that we have been arguing about the wrong healthcare question: Who should pay our healthcare bills? Instead, he addresses a more important question: Why are our healthcare bills so high?

"What are the reasons, good or bad, that cancer means a half-million-or million-dollar tab? Why should a trip to the emergency room for chest pains that turn out to be indigestion bring a bill that can exceed the cost of a semester of college? What makes a single dose of even the most wonderful wonder drug cost thousands of dollars? Why does simple lab work done during a few days in a hospital cost more than a car? And what is so different about the medical ecosystem that causes technology advances to drive bills up instead of down?"

Long-time readers of this blog know that I think a lot about healthcare and have devoted many posts to the American system and others around the world.

Personally, I have wondered why it is that 10 ml (about 2/3 of a tablespoon) of an eyedrop I use every day costs almost $300 if purchased without insurance at the Walmart pharmacy. Do these drops contain the tears of real angels?

Ten years ago, my father spent the last month of his life in a Buffalo hospital. The bill for the month came to almost $40,000. Medicare would pay a little less than $10,000 and the hospital was happy to receive that amount. A hospital happy with getting 25-cents on the dollar of its bill--what's happening here?

It turns out that the healthcare marketplace is not a marketplace at all. What I learned from Brill astounded me and gave me a totally new picture of healthcare costs. You may be surprised to find that while you are powerless in what Brill describes as "the ultimate sellers' market," health insurance companies are increasingly finding themselves in the same position.

I'll share some of what I learned over the next few posts, but I urge you to get ahead of me and read the article. You can get it by clicking on its title above. Let me warn those of you with high blood pressure that what you learn will make you mad enough to make your medication necessary!

We're two weeks away from killing the kids.

Imagine that your family has a dispute with a neighboring family that has gone on for years. In order to force a settlement of this dispute, both families agree to do something so stupid as to be beyond belief if the dispute hasn't been settled by a certain date: One child from each family will be killed. How could this not force a settlement?

We're about to play out this scenario on a national scale. Welcome to the "sequester." We're two weeks away from killing the kids!

If you've lost track of the history of this little gem, here's a quick refresher: The last fight over authorizing an increase in the debt ceiling ended with an agreement to turn deficit reduction over to a congressional "supercommittee." If this group could not reach a deficit-reduction solution, a set of cuts to both defense and non-defense spending would automatically go into effect.

These cuts--known as the "sequester"--were purposely designed to be so insanely stupid that neither left nor right would ever let them happen. The supercommittee could not reach an agreement so the cuts are due to go into effect on March 1.

How stupid are these cuts? This morning's NY Times, in an editorial titled The real cost of shrinking government, deals in specifics:

" About $85 billion will be cut from discretionary spending over the next seven months, reducing defense programs by about 8 percent and domestic programs by about 5 percent. Only a few things will be spared, including some basic safety-net benefits like Social Security, as well as pay for enlisted military personnel."

"The sequester will not stop to contemplate whether these are the right programs to cut; it is entirely indiscriminate, slashing programs whether they are bloated or essential. "

"NATIONAL SECURITY: Two-week furloughs for most law-enforcement personnel will reduce Coast Guard operations, including drug interdictions and aid to navigation, by 25 percent. Cutbacks in Customs agents and airport security checkpoints will “substantially increase passenger wait times,” the Homeland Security Department said, creating delays of as much as an hour at busy airports. The Border Patrol will have to reduce work hours by the equivalent of 5,000 agents a year."

"AIR TRAFFIC: About 10 percent of the Federal Aviation Administration’s work force of 47,000 employees will be on furlough each day, including air traffic controllers, to meet a $600 million cut. The agency says it will be forced to reduce air traffic across the country, resulting in delays and disruptions, particularly at peak travel times."

"CRIMINAL JUSTICE: Every F.B.I. employee will be furloughed for nearly three weeks over the course of the year, the equivalent of 7,000 employees not working each day. "

Looking for something specific to teachers and education? "EARLY CHILDHOOD EDUCATION: About 70,000 children will lose access to Head Start, and 14,000 teachers and workers will be laid off, because of a $424 million cut. Parents of about 30,000 low-income children will lose child-care assistance."

"DEFENSE PERSONNEL: Enlisted personnel are exempt from sequester reductions this year, but furloughs lasting up to 22 days will be imposed for civilian employees, who do jobs like guarding military bases, handle budgets and teach the children of service members. More than 40 percent of those employees are veterans."

"MILITARY OPERATIONS: The Navy plans to shut down four air wings on March 1. After 90 days, the pilots in those air wings lose their certifications, and it will take six to nine months, and much money, to retrain them."

"TRAINING AND MAINTENANCE: ....Air Force pilots expect to lose more than 200,000 flying hours. Beginning in March, roughly two-thirds of the Air Force’s active-duty combat units will curtail training at their home bases, and by July will no longer be capable of carrying out their missions."

These are just a few examples of cuts which are expected to cost the economy more than one million jobs.

To paraphrase Thomas Friedman--NY Times columnist and Pulitzer-prize winning author--"You can grow an economy without a plan, but cutting it without a plan by indiscriminate hacking risks cutting not only fat but muscle, bone and nerves as well."

If we kill our kids in two weeks, everyone will feel the effects. 

And where is Congress? They took a vacation and will return to work when there is only one week left to avoid what was originally designed to be an insanely stupid action that nobody would ever dream of allowing. 

Democracy as a yacht race revisited.

Last Dec. 13 I did a blog post titled "Has democracy turned into a yacht race?" In a yacht race, you can win by having the fastest boat, or the most skilled skipper and crew, or by manipulating the rules.

I pointed out that there seemed to be a lot of rule manipulation going on in politics and used Michigan as an example. If you recall, Michigan's governor announced at an 11 AM news conference that he was in favor of a right-to-work law for his state. A strange turn of events since during the election season he had said that he opposed such legislation as being too "divisive."

The Michigan right-to-work law was introduced in both houses of the legislature later that day and passed by 8 PM that evening with no hearings or real chance to debate the issue. And just to be certain that the people of Michigan couldn't overturn the law at the polls, the legislature attached it to the one type of law not subject to voter referendum: a budget bill.

And we thought that was breathtaking. But wait, it turns out that Michigan could do better!

Last November, Michigan voters turned thumbs down on a law which allowed the governor to appoint an "emergency manager" for any governmental unit (village, town, county, school district) within Michigan. This manager would wield absolute dictatorial power over the affairs of that unit. He could nullify contracts with workers, spend or not spend money, etc. all without the approval of the democratically-elected officials of that governmental unit.

Benton Harbor, Michigan was a good example. Think of Benton Harbor as a smaller version of Detroit. One of the actions of Benton Harbor's emergency manager was to sell a piece of land which had been deeded in perpetuity to the city as a park to a private developer to create a country club and golf course, even though there are not many golfers among the citizens of Benton Harbor and even fewer citizens who could afford country club dues.

The citizens of Michigan apparently did not like the idea of some appointed overseer substituting for their elected officials. So they collected signatures on petitions and got enough to put the law on the November ballot where it was defeated.

End of story? Hardly. The legislature passed what was essentially the same law--but this time attaching it to a budget bill so it would not be subject to referendum--and the governor signed it.

It's difficult to imagine a bigger middle-finger salute to the people of Michigan and to democracy!

There's a great example happening of politics as yacht racing on a national scale, but we'll leave that to another post. Here's a question to consider though: Since there are so many more people living in urban areas than rural areas, should we balance things out by giving urban voters only 3/5 of a vote per person in national elections?

America's foam finger problem.

Sometimes I feel as if I'm living inside a giant pep rally for America. Politicians love to tell us how we are the greatest country on the face of the Earth, the "land of opportunity" a "shining city on a hill." We're told that God especially loves America, so much so that there was a painting making the rounds recently in conservative circles showing Jesus delivering the Constitution to our founding fathers.

Maybe we should set aside a day each year when we all wear those giant "We're Number 1" foam fingers and chant "USA, USA" for a full 24 hours just to get it out of our systems.

Now don't get me wrong. I love this country and have no plans to move anywhere else. But, we have some pretty large failings. Tuesday's NY Times Editorial Page Editor's blog references a list of a few of our shortcomings compiled by Gus Speth:

"To our great shame, among the 20 major advanced countries America now has

• the highest poverty rate, both generally and for children;
• the greatest inequality of incomes;
• the lowest government spending as a percentage of GDP on social programs for the disadvantaged;
• the lowest number of paid holiday, annual, and maternity leaves;
• the lowest score on the United Nations’ index of “material well-being of children”;
• the worst score on the United Nations’ gender inequality index;
• the lowest social mobility;
• the highest public and private expenditure on health care as a portion of GDP,

yet accompanied by the highest

• infant mortality rate;
• prevalence of mental health problems;
• obesity rate;
• portion of people going without health care due to cost;
• low-birth-weight children per capita (except for Japan);
• consumption of antidepressants per capita;

along with the shortest life expectancy at birth (except for Denmark and Portugal);

• the highest carbon dioxide emissions and water consumption per capita;
• the lowest score on the World Economic Forum’s environmental performance index (except for Belgium), and the largest ecological footprint per capita (except for Belgium and Denmark);
• the highest rate of failing to ratify international agreements;
• the lowest spending on international development and humanitarian assistance as a percentage of GDP;
• the highest military spending as a portion of GDP;
• the largest international arms sales;
• the most negative balance of payments (except New Zealand, Spain, and Portugal);
• the lowest scores for student performance in math (except for Portugal and Italy) (and far from the top in both science and reading);
• the highest high school dropout rate (except for Spain);
• the highest homicide rate;
• and the largest prison population per capita."

The author concludes that "...in a 20-country group of America’s peer countries in the OECD, the U.S. is now worst, or almost worst, on nearly 30 leading indicators of social, environmental, and economic well-being."

So what I would like to see is a politician with the courage to say "We can learn some things from our competitors."

Want to run government like a business? Google "learn from your competitors" and you'll find a raft of articles from business journals like one from Business Week saying " The quickest way to learn how to be successful is to check the playbook of your competitors. By taking the time to investigate what has made their businesses work, you’ll be able to learn their best methods and improve upon their model."

That's precisely what our international competitors did to us. We were once number one in education, manufacturing, etc. They studied what we did and improved upon it. Yet we are now too arrogant to admit that we could learn a thing or two from their innovations.

As an example, we mouth platitudes about wanting equality of opportunity for our children. Finland has put that idea into practice in its first-in-the-world education system. Nobody puts their kids into a private school in Finland. Regardless of the wealth of the community, every school has exactly the same resources and draws from the same pool of teachers. If a child does well it's because they had talent and worked hard, not because they got to start the inning by standing on third base.

That's very different from America. Nicholas Kristoff points this out in his NY Times column this morning:

"Point to a group of toddlers in an upper-middle-class neighborhood in America, and it’s a good bet that they will go to college, buy nice houses and enjoy white-collar careers."

"Point to a group of toddlers in a low-income neighborhood, and — especially if they’re boys — they’re much more likely to end up dropping out of school, struggling in dead-end jobs and having trouble with the law."

"Something is profoundly wrong when we can point to 2-year-olds in this country and make a plausible bet about their long-term outcomes — not based on their brains and capabilities, but on their ZIP codes. "

So how about we give the foam fingers a rest, admit that we have some problems and adopt Inc. Magazine's suggestion:" Spend some time studying the guy who wants to eat your lunch. You might learn something."