Archive for October, 2010

Why Medical Insurance is a Major Contributor to Healthcare Costs

Health Insurance (Medical Insurance) is one of the major contributors to high healthcare costs.  If it weren’t for insurance, many of our medical costs would be much less.

There are three categories of insurance:  property and casualty insurance, life insurance, and health insurance.

Property and casualty (P&C) insurance pays you when some specified unlikely event happens.  Some of these unlikely events are:  your house burns down, your car crashes, a neighbor slips on your icy front steps.  This is good insurance because its costs are relatively low, and if the unlikely event happens, you could be severely financially impacted without insurance.  By making small monthly payments, you insure against a large, although unlikely, loss.  You do not want to collect on P&C insurance.  You would rather not experience the unlikely event.

Life insurance, on the other hand, pays when you die – an event that is guaranteed to happen.  Although it is eventually certain, the date on which it happens is uncertain.  Insurance companies calculate the premiums you need to pay based on their calculations of when you will likely die.  You have no choice about dying, but you hope that it will be a long time before you collect on life insurance.  Life insurance is good for replacing lost income or adding liquidity to your estate.  If you can afford it, and need it, it is good insurance.

Health insurance, on the third hand, insures against things that are guaranteed to happen and happen frequently.  It pays for regular doctor visits, prescriptions, major and minor surgeries, etc.  You know that you will collect benefits from health insurance.  In fact, if you have health insurance, you make sure that you collect as many benefits as you can without risking pain or loss of life.  It is the only class of insurance that the insured wants to collect on.

Health insurance companies charge the same premium to everybody in the same class.  If you have group coverage with your employer, you pay the same premium as all your coworkers.  Naturally, you want to get the most for your fixed premium, so you get that annual checkup, take the kids to the doctor at the onset of a cold, have an x-ray if you stub your toe, etc.  If you actually had to pay out-of-pocket for these expenses, you might decide that some of them weren’t worth it.

Health insurance is bad insurance because the people who receive the services don’t pay for the services.  Health insurance companies pay for your doctor visit at very little extra cost to you.

Let’s look at two research-intensive industries:  consumer electronics and pharmaceuticals.  Although both invest in lots of research and have relatively inexpensive costs of manufacturing, electronics keep getting cheaper and drugs keep getting more expensive.  Why?  Because the users of electronics have to pay for the products themselves.

When you buy a television, you have to decide just how fancy a TV you can afford.  You shop around for a good price.  Stores who sell TVs have to compete for your business and keep their prices down and their costs under control.

When you go to the pharmacy to fill a prescription, you don’t ask what it will cost.  It doesn’t matter what the drug company charges, because you will pay the same small amount regardless of the price.  You choose your pharmacy for convenience, not because of their prescription prices.

When you have the flu, you don’t say “I know I will eventually get over it, and the doctor charges $250 per visit, so I’ll just stay in bed and drink water.”  No, you go to the urgent care clinic and see a doctor.  You don’t shop around.  You don’t even know what the doctor will be paid.  You don’t care; it’s taken care of.

Now the evil of insurance is spreading to veterinary medicine.  Both veterinarians and insurance companies are pushing the idea.  A pet owner might balk at paying $700 for a pet’s operation, but they will willingly pay $30/month.  Now pet healthcare costs can increase because the owners of healthy pets will pay the bills for the owners of sick pets, just as in human healthcare.

Veterinarians will charge more and make more.  Insurance companies will make profits, and pet owners will get the infrequent expensive operation paid for by insurance.  What a deal!  Just wait fifteen years.

Without health insurance neither doctors nor drug companies could charge as much as they do now.

What about the high cost of medical school?  Don’t doctors have to charge more to pay for that?  My answer is, if doctors want to see you more often than in life-and-death situations, they will have to charge less.  Maybe there will be more nurse practitioners than doctors.  Maybe pharmacies will keep a doctor on salary to attract customers and charge a small examination fee.  In any case, the market would work it out.

An engineer with a PhD requires about as much education as a general practitioner doctor.  You don’t have to be any smarter to be a doctor than an engineer.  However that engineer thinks that $100,000 per year is an adequate salary.  A doctor would probably make about the same.

You might have fewer doctors or lower-cost education.  You might have fewer drugs or more natural remedies.  Patients might go to nurses rather than doctors.  You don’t know all the possibilities that could happen if market forces were at play.

I do think that catastrophic health insurance is good.  This insurance only pays for events that are less likely to happen, but would be a big financial burden.  Examples are open heart surgery, cancer treatment, car crash injuries.  This is insurance that nobody wants to use.  It is good insurance, and it could be affordable.

People I know in the healthcare field tell me that insurance companies don’t pay them enough.  They say that insurance companies, in their evil pursuit of profits, are paying them a pittance.  They bill $195 for a visit and only get paid $175 by the insurance company.  They should be glad that the patient isn’t charged $175, or they would have fewer visits.

So what can we do about this problem now?  Unfortunately, I don’t have the answer.  In the case of veterinary medicine, the insurance scam is just beginning, and we can refuse to buy it.  In human healthcare, the disease may be too advanced to cure.  The payments doctors expect for service have been carved into stone.  Drug companies are entitled to high prices for new drugs.  The whole cost structure of healthcare has been built based upon the costs being paid for by healthy people rather than the people actually receiving the care.

Here is where you, dear reader, can contribute.  What do you think can be done?  I may not post every comment, but I will post the best ones.

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Wednesday, October 27th, 2010 Healthcare 4 Comments

Why Gold Isn’t Money

Although I am a big believer in the prudence of owning gold, I’m tired of hearing gold bugs claim that gold is the only real money.  It truth, gold isn’t money at all.

The gold bugs claim that the dollar is “fiat money” – that is, the dollar is proclaimed to be money without any basis in fact.  Well just what do they think money is?

The Merriam-Webster dictionary defines “money” as “something generally accepted as a medium of exchange, a measure of value or a means of payment.”

In the USA, gold is none of these things.  Most importantly, it is not generally accepted as a medium of exchange or a means of payment.  You can’t go to the grocery store and pay for your food with gold.  You can’t fill up your car’s tank with gasoline and pay for it with gold.  You can’t pay your electric bill with gold.  Gold is nothing like money.  You might just as well carry around molybdenum in your pocket.  If you have gold and need food, you have to convert your gold into dollars to buy food.  Dollars are money.

Neither is gold a measure of value.  In the USA, everything is valued in dollars; even gold is valued in dollars.  When you ask someone what their home is worth, nobody replies “185 ounces of gold.”

Now, gold IS a store of value.  This is the area where it is validly likened to the dollar.  When someone is accused of being so afraid of losing their wealth that they “put their money under the mattress” or “bury their money in the back yard,” they are referring to dollars as a store of value.  By hiding his dollars under the mattress or burying them, the fearful investor thinks he is preserving the value of his wealth.

Just because dollars are real money and gold is not real money, doesn’t mean that preserving dollars preserves your wealth.  The purchasing power of dollars, as well as the value of gold, goes up and down.  Dollars may not be a good store of value.

Gold bugs deride “fiat money” because it isn’t backed by anything of intrinsic value.  Because of this lack of intrinsic value, dollars may not be a good store of wealth and the gold bugs may be right.  You can make a case for gold being a much better store of value than the dollar.  I will have more to say about this in future posts.  As long as gold is convertible into money (e.g. into dollars), gold can be a good store of value.

Although gold is a good store of value and a good investment, gold isn’t money.

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Friday, October 22nd, 2010 Currencies, Gold 2 Comments

What does “The Dollar is Falling” mean?

Your hear excited talking heads on TV proclaiming “The dollar is collapsing” or “The dollar is getting crushed” or maybe “The dollar is falling.”  But what does this mean?

Does it mean that tomorrow a loaf of bread will cost $5?  Does it mean that if you go to France you will have to pay $1.50 for every euro?  Does it mean that gold costs $2,500 per ounce?  Well, generally it means different things depending on who says it.

When a currency trader says “The dollar is falling,” he means that the value of a dollar is declining relative to some other currency, such as the yen, or to a basket of currencies, such as euros, pounds, yen, etc.

When a gold bug says “The dollar is falling,” he means that gold is getting more expensive if you buy it with dollars.

When a consumer expert says “The dollar is falling,” he means that inflation is increasing in the USA and goods and services cost more.

The chart below shows the value of the dollar over the past three years.  The straight lines just connect the starting and ending points of each graph.

The Value of the Dollar

The green line shows how inflation has affected the buying power of the dollar.  We haven’t had much inflation (as measured by the CPI), so the dollar’s purchasing power hasn’t fallen very much.

The black line shows the value of a dollar relative to a standard basket of other currencies.  Although this value has gone up and down, it is now at about the same level as it was three years ago.

The red line shows the value of the dollar relative to the price of an ounce of gold.  The red line makes it look like “The dollar is getting crushed.”

Now, when you hear that “The dollar is falling,” you’ll know to question the pundit’s motives.

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Tuesday, October 19th, 2010 Currencies Comments Off on What does “The Dollar is Falling” mean?

How Much Do We Spend on Social Security?

For Fiscal Year 2009, Social Security, Medicare and Medicaid accounted for 39% of all Federal spending.

US Federal Spending

Here is a chart of the US population by age:

Age of US Population

Notice the number of people currently over age 65 relative to the number of people under age 65.

Something has gotta give.

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Monday, October 18th, 2010 Social Security 1 Comment

All the Gold Ever Mined

If you stacked all the gold ever mined throughout history on an NFL football field, goal to goal and sideline to sideline, the stack would only be two yards high.

But it would weigh over 360 million pounds.

And it would be worth about $6.9 trillion (at $1,300 per troy ounce).  That’s about 5.3 billion troy ounces.

If the USA backed its money with gold, the price of gold would have to be $8,250 per ounce.

This shadow price is derived from the “Bretton Woods formula for valuing money  in a gold-exchange regime (i.e., the fixed value of a currency equals its monetary base divided by official gold holdings).  Under this formula the exchange rate of the U.S. dollar to an ounce of gold would be about $8,250 presently, a figure that reflects the amount of monetary base inflation already engineered by the Fed.  (The U.S. monetary base approximated $2.15 trillion in September, 2010 and reported official U.S. gold holdings have remained relatively constant at about 8,133.5 metric tons or about 261.5 million ounces.

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Saturday, October 9th, 2010 Gold 1 Comment

Why Social Security is Welfare and Not a Retirement Savings Program

Americans have been led to believe that the Social Security program is a government mandated retirement savings program. Most Americans believe this, because that is what they have been taught by government information services and by their fellow citizens.

First, let me say that I am not claiming that Social Security is bad. I know that it has been extremely beneficial for many, many people. In this article, I will not even address the debate of whether Social Security is a bad idea or a good idea. I will simply argue that it isn’t what you think it is.

Since I claim that Social Security is Welfare, let me point out a few reasons why it doesn’t look like Welfare:

1. The government holds the Social Security taxes in a separate account which is used to pay benefits. This looks like a national retirement account.

2. The amount retirees receive in benefits varies according the amount of Social Security taxes they paid during their working careers. This looks like a “defined benefit” retirement plan.

3. Retirees can receive Social Security even if they don’t need it.

Let me address these points.

1. There isn’t really a separate account or “lockbox” holding the money that workers have paid as Social Security taxes. This “account” is merely a bookkeeping fiction that keeps a tally of all Social Security taxes collected and all benefits paid. The government has actually spent all the money collected and replaced the money with Treasury bonds. I have another blog post that talks about this.

You don’t have an individual “account” with Social Security. The taxes you have paid are not held in your name for future disbursement. Not even a specified percentage of your taxes is guaranteed to be paid to you in future benefits.

2. The government calculates your benefits based on your earnings the last thirty-five years you worked (approximately), not based on your total contributions. This calculation is complex and changes from time to time depending on the priorities of the current administration. Your contributions are not credited to an individual account as in a 401K or an IRA.

If you die, the government may pay some benefits to your surviving spouse, but there is no retirement account that can be inherited. The money you pay in Social Security taxes is no longer your money; as soon as it is collected, it is the government’s money. The government has promised to pay you something when you retire, but you won’t know for sure how much benefit you will receive until you apply for benefits.

3. It is true that you don’t have to prove that you need Social Security to receive benefits, but I believe that will change.

So, why do I claim that Social Security is Welfare? Because working people are taxed and the tax money is given to people who aren’t working. Unless you are a senator, a congressman, a preacher, Amish or a member of one a few exempt groups, you don’t have any choice but to pay the tax. Actually, this is logical, because the government can’t hand out Welfare benefits without forcing workers to pay for them via taxes.

Since the beginning of the Social Security program, we have been over-taxed. What do I mean “over-taxed?” Well, each year, the government has collected a lot more Social Security taxes than it has paid out in benefits. We have been led to believe that this is a good thing and that reserves have been accumulating. In fact, the money has just been spent on other government programs, and we have been grossly over-taxed.

Today, we are fairly taxed. Social Security pays out in annual benefits just about the same amount as it receives in Social Security taxes. Hurray! We are no longer over-taxed.

In the future, Social Security benefits will exceed the taxes collected. We will then be under-taxed. I sure hope the government doesn’t realize that it is not taxing us enough, but I won’t hold my breath.

The government admits that Medicare is Welfare, but claims that Social Security is not Welfare. However, they look almost identical. You have to reach retirement age to collect either benefit. You have to pay the tax whether you want to or not. The taxes you pay while working are used to pay benefits to people who are not working.

What’s the difference between Medicare and Social Security. Well, Medicare taxes aren’t capped whereas Social Security taxes are only paid on the first $106,800 of your earnings. Let me point out that Medicare taxes used to be capped just like Social Security, but the government changed the rules. You can bet that there will be more rule changes in the future.

Another difference is that the benefits you can collect from Medicare can be nothing or almost unlimited, depending on what you can prove you need. Social Security benefits are fixed at a specified amount per month. To me, this just sounds like Social Security is Bad Welfare. Retirees who need Social Security benefits are probably receiving less than the retirees who don’t need the benefits.

Looked at objectively, Social Security is a Welfare program where the government taxes your earnings, but instead of paying benefits to needy people today, the government promises to pay benefits to you in the future when presumably you will be needy.

Unlike a retirement program, the government changes the rules on how much you have to contribute as taxes. They have also changed the rules on what you have to do to qualify for benefits. To receive benefits, you have to accumulate 40 “points” during your working career and you have to reach “retirement age.” The government has changed the retirement age from 65 to 66 or 67 depending on your birth date.

I think we all can see that the retirement age will need to be increased even more for the government to afford to pay the benefits. I believe that sooner or later, the government will admit that Social Security is Welfare, and retirees will have to prove financial need to receive benefits. It won’t be hard to convince the voters that this is the right thing to do. Why should the government give retirement benefits to Bill Gates or other rich retirees? It’s just a waste of money. That money is better used by giving it to poor retirees.

The next step will be that the benefits will not be computed based on the wages you have earned. Once we decide that the benefits are based on need, why should your contributions have anything to do with it. At this point, everyone will see that Social Security is Welfare.

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Saturday, October 9th, 2010 Social Security 1 Comment

Why I Think It’s OK That The Government Has Borrowed And Spent All of Social Security’s Money

You may be surprised that I don’t object to the government “borrowing” Social Security’s funds and replacing it with IOUs.  Here’s why:

Imagine a cartoon where a man sits at a desk in front of a wall marked “Social Security Vault.”  Consider it to be a big lockbox.  The Treasury Dept./Tax Collector brings this clerk an envelope every month marked “Social Security Payroll Taxes.”  The clerk takes the money out of the envelope and puts it into a slot in the Vault.

Social Security Vault

Also, every month, a Social Security agent comes to the clerk and tells him how much money is needed that month to make the payments to old people and disabled people.  The man goes over to the Vault, opens a drawer and takes out enough money to make the payments.

This goes on for decades.  Everyone assumes that the Vault is holding money for future payments.  Then, a curious reporter under the Freedom of Information Act, demands to look inside the Vault.  There he finds a furnace and a printing press.

When money is put into the slot, the money is burned in the furnace.  When money is needed, it is printed and put in the drawer.  The reporter is outraged and confronts the man at the desk demanding why this is done.  The man replies “What does it matter?  You can’t tell the difference from outside the Vault.”

Behind the Vault

“But, as time goes on and payments go up,” the reporter says, “This printing of money, will cause future inflation!”

“Same as if I handed out the original bills from the Vault,” says the clerk.

“But what if someday you end up printing more money than you have burned?” asks the reporter.

“Hey, I’ve promised to pay these benefits regardless of how much money I’ve burned.  I would eventually need the printing press anyway.”

“But,” says the reporter, “Just printing new money makes Social Security benefits look like welfare instead of returning savings.”

The man replies, “When you tax people who are working and give the money to people who aren’t working, it IS welfare.”  (I have another blog post about this.)

“OK, I see that,” says the reporter, “But for all these decades you have been taking money out of circulation.  The economy could have used that money.  You’ve been destroying the money that we worked so hard to earn and contribute to Social Security.”

“You’re right,” the man replies.  “It would have been better if, instead of burning the money, I had put it back into circulation.”

Well, that’s what the government has really done.  They’ve put this money back into circulation thus avoiding deflationary pressure for all these decades.  The government has spent the money as it was collected.

You see, the government can’t just keep money in a vault.  It has the same effect as just burning the money.

Now, the remaining controversy is:  How should the government put the money back into circulation?

What the government has actually done (we’ll call it Method 1) is spend the money, as soon as it is collected, on all the things that government does.  Liberals will generally favor this method.  Why tax people if you aren’t going to use the money?  If payments will exceed taxes, either raise taxes or it’s back to the printing press.

The other alternative (Method 2) would be to buy some assets that could be sold later to raise money for payments.

Using Method 2, money also stays circulating.  Tax money collected is immediately spent to buy assets.  When benefit money is needed, assets are immediately sold and the money is put back into the economy via benefits paid to pensioners.  Conservatives will favor this method.  If asset values go up, good for us.  If asset values go down, well it’s back to the printing press.

From a social perspective, Method 1 has advantages over Method 2.  Under Method 2, the government can’t do as much today as it could under Method 1.  Under Method 2, more taxes would have to be imposed today to have the same level of government services, or services would have to be reduced.  Also, under Method 2, rich people (who have assets to sell) would get the re-circulating money, whereas under Method 1, presumably, less affluent people might get the money.

Now, you may claim, the government actually has “invested” the money by giving Treasury Bonds as IOUs to the Social Security Vault.  Treasury Bonds are considered safe investments.

For individuals, Treasury Bonds ARE investments.  But for the government, it is the same as promising to print more money (e.g. about 3% more – the bond’s yield) in the future than they have spent today.  Selling yourself your own IOU is not investing.

Let’s say that you have a checking account and a savings account with $1,000 in it.  You want to spend more money than you have in your checking account, so you move $500 from your savings account into your checking account and put an IOU for $500 in your savings account.  Nobody would claim that you still have $1,000 in your savings account, but that’s what the government claims about Social Security.

The government is right to either buy gold, stocks or real estate, or spend the money on welfare and war.  Just don’t burn the money.

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Saturday, October 2nd, 2010 Social Security 14 Comments

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I am not a registered financial advisor. I only offer opinions, and sometimes these opinions veer off at weird angles from conventional wisdom (That's probably why you are here). My advice is, "Don't take my advice." Read my sidelong glances at economic issues and form your own conclusions.

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