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 I was stunned by how much my financial thinking was out of date.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.