Health Care Reform, Part 2

In an earlier post, I highlighted a column discussing some details of proposed health care legislation.  As I said, it is a very complicated area.

One very important (and highly contentious) issue in health care reform is whether the health insurance industry needs more regulation and/or more competition, i.e. “a public option.”  For a special view of an insider, I recommend the July 10th episode of Bill Moyers Journal.  This TV program had an extended interview with Wendell Potter, who is the former head of Public Relations for CIGNA, one of the nation’s largest insurance companies.

In a change of heart, Potter decided to speak out against the insurance industry. Here is a salient quote from the program’s description.

Looking back over his long career, Potter sees an industry corrupted by Wall Street expectations and greed. According to Potter, insurers have every incentive to deny coverage — every dollar they don’t pay out to a claim is a dollar they can add to their profits, and Wall Street investors demand they pay out less every year.  Under these conditions, Potter says, “You don’t think about individual people.  You think about the numbers, and whether or not you’re going to meet Wall Street’s expectations.”

Conclusion

I am all in favor of corporations making a profit.  That judgment assumes that a competitive market exists and that consumers have real choice.  In general, if companies have an incentive to provide a better product or service, shareholders can prosper and consumers will benefit.

But there is very little competition in the health insurance marketplace.  If insurance companies have perverse incentives to deny coverage and to game the system, consumers are obviously harmed.  The insurance that you thought you had may be a costly illusion.

Watch the video or read the transcript, and decide for yourself.

Inspiration from Warren Buffett

There are many reasons why people listen to Warren Buffett.  Besides being the second richest American (right after Bill Gates of Microsoft), Buffett is widely considered the most respected (i.e. best) investor there has ever been.

But there are other compelling reasons for listening to him; simply put, he speaks in a way that anyone can understand.  It’s a Midwestern common sense, seasoned with well-earned and certainly, much deserved, confidence. He’s cheerful, loves what he does, and apparently cares very little about consumption.  He is extremely grateful for the opportunity he has had in the United States and the life that he has lived.  He has already given away billions and plans to give away still more to charitable foundations.

Buffett was a guest on the November 13th episode of the Charlie Rose TV show.  Unfortunately, only excerpts of that show are available for online viewing. Go to the Charlie Rose website and search for Warren Buffett. What you’ll find are his ideas on financial regulation, his reasons why he bought the Burlington Northern Santa Fe Railroad, and his assessment of the global economy. There is also a “Web Exclusive” interview.

A full written transcript is available here.

I’d like to focus on his basic optimism about the future of the United States, because in my opinion, you need three things to be a successful long-term investor.

• Faith in the future.
• Patience.
• Discipline.

Here are some relevant quotes from the November 13th program.

(Regarding consumer demand)  Well, it will come back eventually. … Our system will still work. … We talked last year about the patient, you know, being on the floor with a cardiac arrest … and we’re not out of the hospital yet.   But we will come out of the hospital.  This — the things that made America what it is have not disappeared, and they will — they will assert themselves with time.

The American economy will come back.  It won’t be tomorrow, and, you know, it won’t be exactly the same.  But in the end, we have not — we’ve not changed the American people in their capacity to innovate or their excitement about — about becoming more prosperous, and coming up with new ideas.  Businesses will be formed.  Businesses will expand.  But not much tomorrow.

If you look back a couple of hundred years, we’ve gotten where we are not because we’ve gotten smarter or not because we work harder.  We’ve got it because we found ways to unleash more of the human potential.   And what does that?  Well, a rule of law helps.  A market system helps.   Equality of opportunity helps.  All of these things that are still a fundamental part of the American system. As a matter of fact, the American system is now better than it was a couple of hundred years ago, because until the 19th Amendment, you know, we’ve had half the talent in the United States that wasn’t entitled to do much. So we’ve got a great system.  (Emphasis added.)

Well, I have everything I want in life, so there’s nothing to spend it on.  I mean, I could have 10 houses instead of one, would I be happier?  No way.  I could have 10 cars instead of, you know, two in the house.   I wouldn’t be happier.  You know, it would drive me crazy.  I could have a 400-foot boat, you know, and then I’ve got to have a crew of 50 or 60, and some of them (inaudible), sleeping together — I mean, who knows what would be going on. So I don’t — if I wanted to be a ship’s captain, you know, I’d have gone into a different profession.  I have everything in life I want.

I love working — I love working with the people I work with.   I love just viewing the human scene, but I mean, I have an ideal life.  I get to do what I want to do every day.  So, you know, and money can’t — can’t buy any more than that.

As I said earlier, you need three things to be a successful investor:

Faith in the future. Optimism is the only realistic attitude; you cannot be fearful and succeed as an investor.

Patience. Moving in and out of the market or among various investments does not accomplish anything.

Discipline. Do not be driven by headlines or events.  Ask not, “What’s working now?”  Ask, “What always works?”

I believe Warren Buffett to be instructive and inspirational on all three counts.

Health Care Reform, Part 1

I have shied away from a discussion of health care reform, because I felt that the issue is too complicated.  And once I’ve started down the road to try to make some sense of the debate, I’d probably have to make a full-time job of it – it would suck me right in.

And, in truth, the topics that interest me most are quite contentious.  Why is the United States the only developed country that does not provide universal health care?  How can we change the incentives of citizens and medical care providers so that we reduce costs and improve outcomes?  Do we have a health care system now, or is it a “sick care” industry?  Why are we not paying more attention to prevention?

I’m sure that very smart people are thinking and writing about these issues, but I have just not taken the time to identify them and sort everything out.

However, there is one columnist who is readily available and discusses some practical issues that are worth mentioning, and that is David Leonhardt.  His weekly column, Economic Scene, appears on Wednesdays in the New York Times. He is also a contributor to the Times Magazine on Sundays.  I’ve been a fan of his for a long time, and in a previous post I discussed an article he wrote on President Obama’s Economic Agenda.

Wednesday’s column, Falling Far Short of Reform, discusses some very practical issues reflected in the two different health-care bills currently working their way through the House of Representatives and the Senate.

If you’ve been following the health care debate and are interested in a sensible discussion, I can recommend this column.  And if you’ve not been following the debate, but would like to catch up on what all the hoopla has been about, I can still recommend this column.

Request

I would love to hear from others on recommendations of articles that appeal to them.  I’m specifically not interested in articles that rail against “a government takeover of health care” or call efforts at reform “socialized medicine.”  I am interested in articles that discuss what works in improving health care and/or in reducing costs – priorities, both, for the majority of Americans, I should think.

More About Ric Edelman

When in my last post, I criticized some of Ric Edelman’s practices and fees, I felt a bit queasy.  Was I being unfair?

I reached my conclusions by reading the handout material and by what he said in a seminar.  I also studied his web site, which disclosed his fees.  But I did not have direct access to a client’s portfolio, so I felt somewhat tentative in my judgments.  But today’s post by Allan Roth An Interview with Ric Edelman – Is High Cost Indexing an Oxymoron? confirmed my suspicions.

Roth analyzed an Edeleman client’s portfolio, and he also spoke to Edeleman. Roth reached the same conclusions I had about the high fees, and he also questioned Edelman’s recommendation of not paying off a mortgage.  Finally he confirmed my belief that Edelman was not paying attention to asset location, since he found the same allocations in the IRA accounts as in the client’s taxable accounts.

But enough criticism.  The rest of this post is about Edelman’s book The Lies About Money, which I can recommend.  In the first two chapters he persuasively lays out the case for diversification and for not trying to time the market.  This is a very important message which many investors still do not get.  Then he explains the advantages of mutual funds.

But it in his fourth chapter, The Demise of the Retail Mutual Fund Industry, that he shines.  He essentially demolishes (active) retail mutual funds.  For starters, he discusses the frequent manager changes, the costs of active management, and the dangers of style drift.  And this is just the beginning; he discusses 25 reasons why you should not use a typical (active) retail mutual fund.

Not satisfied with that, Edelman actually put together A Mutual Fund Scandal Timeline outlining the abuses that have been alleged or proven from 2003 to 2007.  It takes him a “mere” 40 pages to summarize the questionnable practices and allegations of abuse.  If that is not enough to make you question whether your mutual fund or stockbroker is actually your friend, then nothing will.  So buy the book or get it out of the library simply for Chapter 4.

Conclusion

The financial services business is fraught with conflicts of interest, high fees, misleading ads, and general confusion for the typical investor.  Sorting through this mess is not easy.  As William Bernstein says, “Both mutual fund companies and brokerage houses know more ways than you can count of fleecing you without your knowing it.”

To be continued.