Thursday, March 31, 2011

Philanthropy, Sustainable Investing and a Private Journey

Careers don't often unfold in straight lines, entering a company or industry as a trainee and finishing as CEO. For most folks, careers shift—often crossing industries and job titles. Just the same, these different tracks create success, though maybe not in the sense of the traditional corporate ladder.

John Schaetzl is a shifter. Over the course of his career, he's been an educator, consultant, and, most recently, investor. A few years ago, John transitioned to non-profit investing, vacating his position as a highly-regarded analyst and portfolio manager at GE Asset Management.

He explores this transition and the opportunity of 'sustainable investing' in Perspectives.

"I was an investor," writes John, "from what many folks in the philanthropic community and elsewhere might label the 'dark side', the straightforward, for-profit professional investment community.

"I wasn't a bad person or an irresponsible investor. It is just that, like the large number of institutional investment managers, sustainability concerns were not part of my mandate—my legal and fiduciary responsibility—to my investors."

Demographics, globalization and the dynamics of wealth creation have contributed to a well-organized and substantial philanthropic community. John advises some of the largest organizations in the world on how best to allocate capital.

Much of the protocol, and many of the lessons learned, in for-profit investing apply to philanthropy—but not everything, John cautions.

The non-profit and for-profit communities could in several cases function alongside each other, where appropriate jointly target the same investments.

For his effort at a point in time where philanthropy is ascendant, John contributes a rich and, most important, varied background.

Read John's article "Sustainable Investing Made Simple" here.

Monday, March 28, 2011

Drug Product Pricing 101

What happens when a drug that once cost ten to 20 dollars per dose, now cost $1500? Outrage, of course.

KV Pharmaceuticals, the manufacturer of Makena a drug used to prevent premature labor for high-risk pregnancies, now confronts tough Congressional scrutiny, most notably from Sen. Sherrod Brown (D-OH) who fears the making of another Medicaid cost lever.

Steve Grossman writes in Perspectives that the Makena case provides yet another example of a drug company not bothering "to undertake a sophisticated [pricing] analysis ahead of time". He goes on to explain three approaches a consultancy—or, in the case of a large company, an internal team—might utilize to establish an effective price: value-added pricing, cost plus pricing and comparable value pricing.

For anyone looking to understand more about some of the techniques used in setting drug prices, read Steve's article.

"No one can completely avoid controversy," he notes, "but shareholders, patients, and payers are always going to respond more favorably to companies which use sound reasoning to back up their pricing."

Steven Grossman is president of HPS Group, LLC, a solution-oriented health policy and public affairs company.

Friday, March 25, 2011

The End of Work

So it's Friday afternoon and everyone's thinking about the weekend. Well, not everyone. And, in fact, fewer and fewer folks as time goes by.

The unemployment rate may be receding but so is the number of folks in a job or actively seeking one. At 64.2 percent, the labor force participation rate is the lowest it's been in a generation.

According to the CBO, the participation rate may continue to decline, due to aging, women opting out, and young people choosing school instead. (Read: "More Americans Dropping Out of the Labor Force")

Hmm—aren't retirement savings still depleted? And if young people are prolonging—or creating—academic careers, how do they reconcile their mounting debt burden, especially if the economy adjusts to a lower employment rate?

Tyler Cowen submits a few questions and thoughts of his own:

1. What is the political economy of a world where so few people work?

2. What kind of low-rent areas will evolve to accommodate some of these people?

3. Will we in fact move to some form of a guaranteed annual income?

Note that the answer to #2 will affect the feasibility of #3. And our current notion of “protecting all the old people” against major health care catastrophes may someday be seen as an anachronism. The more progress medicine makes, the harder this will be to achieve and afford. Feasible future equilibria all seem to involve death panels, which actually may make #3 seem more attractive, relatively speaking, than spending so much money on Medicare. Rationally or not, once the moral principle is admitted of not giving everyone absolute protection against every extreme health care event, this may encourage a shift toward cash transfers.

At least we can expect easier traffic Fridays after five.

Wednesday, March 23, 2011

How to Define and Implement Accountability in Health Care

Writing in the Lyceum newsletter Perspectives, Bruce Cutter cautions: "Before implementing accountability we need to define it first. This begins by understanding and addressing value: the provider's—and health care organization's—most important deliverable. Value constitutes that critical 'something' necessary to the process of becoming accountable."

His latest article, "Accountability in Health Care: Definition and Implementation", tackles perhaps the most discussed and least understood aspect of medical system reform.

If, for example, the health care system and its various actors cannot agree to a workable definition, then one of the Affordable Care Act's primary vehicles, the accountable care organization (or ACO), simply cannot function effectively.

Dr. Cutter introduces and answers three questions:
  1. How should we define accountability?
  2. How do accountability and value intersect?
  3. Who should be accountable to whom?
"Ultimately," he notes, "health care organizations, and in particular their leaders, must become accountable for the care of a population of patients. This focus on populations, along with the role of the health care delivery organization (and its leadership), is a profound change from our current health care delivery model and culture."
After many years of both patient care and leadership, Dr. Cutter is now a health care consultant. Key leadership accomplishments over the past ten years have included design and implementation of a community-based, integrated oncology delivery system, together with development, in close collaboration with a health plan, of a comprehensive quality initiative combined with a pay-for-quality contractual arrangement.

Friday, March 18, 2011

Book Review: 'The Social Animal'

Want a job at Goldman Sachs? Well, make sure you plan ahead. Way ahead, like in high school. Because if you're applying as an undergrad and don't go to Harvard, Yale, Princeton or Stanford, Goldman won't even consider you.

Okay, maybe you're a little behind the curve, and you attended Berkeley, Michigan, Dartmouth or some other second tier elite school. There's always business school, right? That depends. Unless you go to Harvard, Wharton or Stanford, you won't have a chance. MIT, the University of Chicago, and Columbia simply don't cut it anymore.

As harsh as this seems, academic research now proves this über-selection to be increasingly prevalent. "The portrait that emerges is of a culture that’s insanely obsessed with pedigree," notes one commentator.

If you're Goldman Sachs, Morgan Stanley or McKinsey, why not simply outsource your corporate recruiting to a college admissions officer? After all, most of your corporate leaders attended these schools anyway, and it saves time and money to narrow your source pool.

Entry to big banks, big consultancies and big, well, anything is nothing more than an intellectual achievement game. By not attending a super-elite university, the candidate has already failed.

How did we get to this point? Our big institutions were never this big, and, once, a long time ago, social frameworks determined success, not college admissions officers. David Brooks' new book, The Social Animal, helps us to formulate some answers.

According to Mr. Brooks, who is a New York Times columnist, we live in a bifurcated world. On the one hand, we promote high-achieving cognitive skills, and, on the other hand, we ignore intuition and valuable "soft skills".  In his fascinating book, Mr. Brooks describes this great social fissure from the perspective of two characters, Harold and Erica.

As a child, Harold enjoys two loving, married parents. He plays with imaginary friends, his stories end happily, and he cries when his parents go out to dinner on Saturdays. In high school, he comes across an English teacher who imparts a new way of learning. Her method turns Harold from a professional student zeroing in on the right college into a knowledge acquirer, a person who understands the details because he understands the context.

Erica, in contrast, grows up in a broken home, mostly in poverty. She is the child of Mexican and Chinese immigrants. At age ten, she almost gets arrested. Erica is an ambitious person, which we observe when she gains admission to the Academy, a new school built to break its students of poverty's vicious circle by surrounding them with an entirely new culture and a web of new relationships.

Circumstances eventually bring Harold and Erica together. They wed, and we follow their lives and careers, from adulthood to old age and death.

An illustrative writer, Mr. Brooks delivers a powerful narrative. His book assimilates studies in neuroscience, psychology, sociology, and behavioral economics to paint a composite picture of the world in which we live. He often interweaves these studies to explain his characters' comments and actions.

Mr. Brooks' multidisciplinary study works because he creates empathic characters, which he needs to achieve because his subject matter is complex. His characters anchor the book, keeping Mr. Brooks' wide-ranging commentary and multiple scientific citations from drifting and dissipating.

Most important, they succeed in drawing the reader into the story. They resemble people we know. In many ways, they are ourselves.

Towards the end of the book, when Erica's career takes her to Washington, Harold joins a think tank and espouses the Hamiltonian tradition.

Harold found himself in a nation with two dominant political movements. There was a liberal movement that believed in using government to enhance quality. There was a conservative movement that believed in limited government to enhance freedom. But historically, there once had been another movement that believed in limited but energetic government to enhance social mobility.

Alexander Hamilton, a destitute orphan by age 12, became the "most successful treasury secretary in American history". He created a political tradition that inspired Henry Clay, Abraham Lincoln and Teddy Roosevelt and survived until the twentieth century, when it promptly died.

Subsequent government policy, Harold observes, has tried to "fortify material development but weakened social and emotional development that underpins it".

For Harold (and Mr. Brooks), Hamilton embodies a social construct where local communities matter and social fabrics form to allow people to improve their lives as individuals. It emphasizes intuition over IQ, recognizing that what we unconsciously know is more substantial and more powerful than what we consciously know.

Appearing thematically throughout the book, this construct makes for better decision making and more effective organizations, whether business or social structures. Reason and emotion aren't separate or opposite, as Mr. Brooks notes. In fact, they intertwine. The unconscious mind (emotion) assigns a value to a choice; the conscious mind (reason) makes decisions based on those values.

The ten largest financial institutions in 1990 controlled ten percent of U.S. assets. Today, they control 70 percent. At the same time that fewer organizations—whether in finance, health or the retail trades—dominate larger portions of the economy, the leadership pool is narrowing. Social mobility, Mr. Brooks would argue, has become more difficult, and entrepreneurship more incestuous, a consequence of the right schools rather than the right skills.

For an individual to matriculate at the nation's most elite schools, he must demonstrate high scores in various aptitude and achievement tests, none of which measure his total social performance simply because reductive reasoning, which the tests measure, cannot explain dynamic complexity, which characterizes the world in which he will live.

The pity of today's big banks and big institutions, then, is their narrow definition of human capital and inability to achieve a value-aware culture, with the 2008 financial crisis the starkest manifestation of this weakness.

Mr. Brooks expertly addresses a societal problem that continues to worsen. He writes of his book, "This is the happiest story you'll ever read. It's about two people who lead wonderfully fulfilling lives."

His characters are not flawless. We see them as ourselves. And yet, they observe and navigate the world differently. They are happy because they understand how the human mind works, and, together and separately, make the most of this understanding.

Wednesday, March 9, 2011

What Happens to Employer-Based Insurance?

The latest Health Affairs Policy Brief addresses the question of what happens to employer-based insurance by considering opposing viewpoints. While there's no clear answer, the likelihood of an employer not maintaining coverage does appear to decrease with the size of the organization.

Beginning in 2014, the Affordable Care Act requires employers with more than 50 full-time employees to offer qualified health insurance coverage, or pay penalties. A qualified plan must be comprehensive (pay at least 60 percent of health care expenses) and affordable (cost less than 9.5 percent of employees' household incomes).

According to the CBO, 6-7 million people would acquire employer coverage for the first time because the requirement would increase workers' demand for coverage through their jobs. Another 1-2 million, who currently have employment-based coverage, would instead move to the exchanges because the coverage would be more affordable. About 8-9 million others covered under an employer plan under current law would lose employer coverage because firms would choose to no longer offer coverage. Employers, the CBO adds, will pay about $52 billion in additional assessments between 2014 and 2019.

In contrast, Market Strategies International shows in a recent survey that the number of workers offered employer-sponsored health benefits would decline by 10 percent by January 2014. 13 percent of workers would lose access to employer-sponsored health benefits and 3 percent would gain benefits.

According to another survey by Fidelity Investments, 65 percent of large employers said they're not seriously considering eliminating health care benefits. But when asked what they would do if others dropped coverage, 36 percent said they too would consider eliminating coverage.

When compared with the cost of covering an employer and beneficiaries, the penalties an employer must pay for not meeting quality standards—or offering coverage—are light. And since these penalties are static and medical inflation is not, they become even lighter over time.

These facts we know:

1. Congress cannot impose stiffer enforcement rules due to Republican opposition.
2. Congress cannot loosen enforcement rules due to Democratic and White House opposition.
3. Large employers will likely maintain coverage, while small employers won't.
4. State insurance exchanges would pick up most of the non-covered individuals, even though few exchanges will likely be prepared for high volumes by 2014.

Keep in mind a wild card not often discussed: the strength of the overall economy, and what shape it will be in leading up to the 2014 deadline.

Should the economy strengthen relative to medical cost inflation, then employers would likely maintain health benefits as an additional form of compensation to lure employees.

Should it worsen or not improve, then an exit strategy seems highly plausible.