This is the second of a four-part blog devoted to the wealth management concept of AARP (accumulate, allocate, react and protect). In AARP, we advocate for the strength of a four-cornered approach to financial independence that is gained through the personal actions of informed individuals. In these troubling economic and financial times, we encourage  the development of personal wealth management insights  and awareness and less reliance and dependence upon mass merchandised financial information.

ALLOCATE

As a wealth management strategy, the allocate component aims to balance risk and reward by apportioning assets according to an individual’s goals, risk tolerance and investment horizon. While we have observed that many individuals acknowledge this general notion, a far smaller population will have actually implemented a sound allocation strategy. Oftentimes, it seems that the vast amounts of information (or misinformation) will push people into making choices based on the herd, rather than on personal insights. A good example of that is taking place right now – witness the massive investor flight into bonds and bond funds due to the fear/uncertainty surrounding equity markets. This has given rise to significant concerns that the next bubble may be in bonds.

There is no simple formula to define the right asset allocation for every individual. It is individual and it is situational. At the same time, the consensus among most financial professionals is that the allocation of assets to satisfy given objectives (e.g., retirement) is one of the most important decisions that individuals must make, and each must devote sufficient time to maintaining watch over asset allocations in order to maintain a course that can be buffeted by changing headwinds. Asset allocation surveillance should play a critical role during uncertain times, and being nimble in response to economic and investment market changes has become an important part of wealth management

Allocation involves the dual dimensions of time and money.

It goes without saying that the allocation of time is a persistent juggling act. Given the demands of work, family and continuing education, it is a challenge to keep one’s personal affairs in order and one’s financial plans on track. Yet, failing to allocate time to these tasks can result in an eventual disconnect between expectations and reality. You owe it to yourself, your family and your employees to keep a financial road map close at hand and it is OK to stop every once in awhile and ask for directions. In other words, seek planning help if you can’t get there on your own. Neglect in this area will cost you many a night’s sleep.

If you do not properly account for and allocate your financial assets and liabilities, you are tempting fate. Every form of investment involves a level of risk. A proactive diversification of assets and liabilities will compensate you in ways that you may never fully appreciate. There is no shortage of people, laws and potential catastrophes that are trying to separate you from your money. One needs a systematic way to assess risk and control asset and liability exposure.

To wisely allocate time and money is a thinking person’s exercise. Like a game of chess, it involves moving pieces into strategic locations on the board, minimizing losses along the way and avoiding checkmate. It is a game that needs to be replayed at frequent intervals. Your best opponent is the devil’s advocate himself. To play the game well, it helps to be a student of politics, economics and history. If you can’t find the time to keep up with the dynamics of our rapidly changing environment, seek out discussion groups, plug into an independent think tank or hire someone to keep you informed.

In order to allocate wisely, here are what we consider to be the key elements:

1. INVENTORY YOUR ASSETS AND LIABILITIES. This generally is known as preparing a balance sheet. You wouldn’t attempt a home remodeling project without a formal or informal blueprint. The balance sheet is your financial blueprint.

2. INVENTORY YOUR INSURANCE COVERAGES. Include death protection, disability, healthcare, property & casualty and business interruption. This is neither a plug nor a subtle hint to purchase more insurance. Simply, you need to know what you and your family members are worth alive or dead, healthy or sick, employed or unemployed.

3. GET A HANDLE ON INVESTMENT RISK. The essence of allocation is risk management, and you need to know if you are standing directly or indirectly in the path of harm’s way. The odds are substantial that you have either a modest or extensive exposure to investment risk that you are not in a position to gauge due to personal biases, lack of awareness or not having the tools to separate fact from fiction.

4. UNDERSTAND YOUR CASH FLOW RISK. This is more than scribbling numbers on the back of an envelope. It entails constructing a range of possible incomes and determining what it will take to pay your living expenses, service your debts and save for the day when there is little or no income. How much do you really understand about your business and household spending? Most people don’t know…and some don’t want to know. If you are one of these people, you had better call 911!

The allocation exercise is the natural progression of accumulation. One cannot allocate what one does not have. First you make the pie. Then you cut it and serve it. Allocation is a key determinant of how much capital will be available to you at certain points of your life. We’ll never grow tired of repeating that many of our readers have an excellent chance at living a healthy life into their 80s and 90s. Some will even hit triple digits. However, the financial capital must be there or at some point the quality of life will deteriorate. The allocation choices that you make today will greatly influence your future standard of living.

Do not underestimate the degree of difficulty involved in allocation. It is both an art and a science and plays off of one’s basic survival instincts. Failure to allocate wisely and failure to be well-informed means placing a great amount of faith in the status quo. This means trusting American politicians, status quo Wall Street pundits, large corporations and Middle Eastern oil exporters to act in your best interest. We do not believe in White Knights any more than we believe in balanced Congressional budgets, the Tooth Fairy and the solvency of Social Security and Medicare.

As one of the four legs in a wealth management plan, allocation is a viable path to self-sufficiency. We encourage you to roll up your sleeves (or someone else’s sleeves) and adopt a program of informed allocations.

Next, we will examine the react concept in our AARP strategy.

A worthwhile health care event occurred in the Dallas, Texas press today, and I wanted to write about it because it will do good thanks to the vision of Dallas physician Dr. Guy Culpepper and the great writing of Dallas Morning News columnist Jim Landers.

To this DocOnomics writer and blogger, an important mission is to contribute something meaningful in the campaign to control  the mind-boggling costs of health care and the wasting of billions and billions of dollars each year on excesses, waste and fraud. Our current system has been sorely lacking in  the proper oversight needed to make cost-effective and truly evidence-based medicine a reality. For too long, runaway fee-for-service medicine, completely lacking in transparency and accountability has made health care an economic villain. In the words of Peterson Foundation CEO David Walker, “if there’s one thing that could bankrupt America, it’s out-of-control health care costs” . And to make matters worse, our numb-skull government is trying to intervene with more bureaucracy that will create an even greater morass (we defy you to try to understand this Hydra legislation).

People need quality health care. People have lost health insurance, people are losing health insurance and employees are being increasingly saddled with health insurance with up-front deductibles that are so onerous, the insured persons are essentially self-insuring for everything but the most catastrophic events. I invite anyone who has the least bit of interest in what is going on in health care to read books like “The Innovator’s Prescription” by  Harvard’s Clayton Christensen, “Overtreated” by Shannon Brownlee of the New America Foundation and “Comeback America” by David Walker (especially the chapter on health care). What these distinguished writers are all saying is that we cannot afford the upkeep of the system we have. Yet doctors keep over-treating, over-testing and over-prescribing because the system is inefficient.

What is the urgent prescription for cost-effective, evidence-based health care? Precisely, it is a hale, hearty and viable primary care-based medical system, where family physicians, internists and pediatricians are the front-line soldiers in the war against waste and excesses that are going to impoverish us all. We need to ensure that at all times, the primary care doctor with whom we have a doctor-patient relationship is informed and the point person in our health care. The primary care doctor should be the intake, assessment, treatment, and referral source in our delivery matrix. They know us, they understand our issues and they are without a doubt, the doctors who should be the quarterback of our health care teams.

Dr. Culpepper, a family practice physician in Dallas has seen the enemy, and the enemy is the system itself – all the players. He  formulated a mission statement that he was kind enough to share with me, that  says that the ever-increasing numbers of people who are without health insurance, or who have to pay most of the costs even though they are insured, should not avoid treatment because they are afraid of potentially being wiped out when they get the bill(s). Dr Culpepper has built a network of like-minded, business-savvy physicians who will slash their costs when people pay at the door. If the concern is “how much will it cost?”, the JeffersoniCard (no cost to enroll) publishes the costs of the numerous services provided. Dr Culpepper believes those who are least able should not have to pay the most. This will work folks – the numbers will prove it out, and Dr. Culpepper and his independent physician colleagues should be congratulated for being both smart businesspeople and compassionate doctors.

Thank you to Jim Landers, a Dallas Morning News journalist who has done some outstanding reporting on the rampant costs of health care in our own back yard of Dallas, Texas. If there is a Pulitzer Prize for this sort of reporting, he’d get my vote because people need to have their eyes opened about the condition of the healthcare system in their own back yards. When I asked Jim to consider a story on Dr. Culpepper’s group of physicians and the JeffersoniCard, he became the can-do person, wrote a great article and now hopefully thousands more people will know about this primary care medicine engine for affordable good health.

It’s good to see this happening in our own back yard. We need this everywhere, and we need our primary care medicine corps to stop shrinking because we are not paying rightly for their good medicine.

The acronym AARP helps us to easily remember the ongoing action steps involved in building and maintaining long-term wealth -  Accumulate, Allocate, React and Protect. If you envision living to a ripe old age, you will need financial resources. Aligning the pursuit of long-term health with the pursuit of long-term wealth makes excellent sense because one is not very effective without the other.

We have published a series of commentaries illustrating what we mean by accumulate, allocate, react and protect. Our aim is to inform about the steps to ensure a comfortable lifestyle well into the future. For physicians, this endeavor will be influenced in varying degrees by health industry economics, government healthcare policies and procedures, quality of practice management, attitudes toward retirement and longevity, perception of risk, exposure to risk, inflation rates, government tax policies and events that are occurring halfway around the world.

Traditional mantras and strategies (e.g., long-term holds) have of necessity been modified by the need to remain nimble in response to shifting headwinds in the economy, in the investment markets and in response to government actions and uncertainties in areas such as taxation. This requires not only money, but also the time needed to hold the tiller steady and to alter courses when it is appropriate. Today, awareness of economic and market conditions is a critical component of the accumulation process. Government actions such as eventual tax policies will be revealed in time, and it remains important to keep planning options and responses flexible.

ACCUMULATE

Accumulate is a call to action. It begins in the workplace and continues in the home. It is the discipline of spending less than what one earns and acquiring the skills and resources to grow the surplus. In practice, the ability to successfully accumulate is a challenging series of tasks that often requires outside resources and assistance.

For physicians, we consider the following to be the key elements of accumulate:

1. MAXIMIZING BUSINESS REVENUE. Have you performed an in-house or independent audit of your contracts, billing software and procedures, collection methodology and accounts receivable write-offs?

2. MINIMIZING BUSINESS EXPENSES. Have you done an in-house or independent audit of your high overhead items, e.g., insurance, equipment, travel, telecommunications, EHR and employee benefits?

3. CONTROLLING PERSONAL EXPENSES. Have you established a personal wealth management plan, methods for wealth management surveillance and the tools to track where your money goes? Are your plan components cohesively integrated or are they inefficient because they are fragmented?

4. DEVELOPING AN INVESTMENT ACUMEN. Have you acquired an understanding of key investing concepts, the myriad of global trends that are driving portfolio returns and knowledge of the investment tools and vehicles at your disposal? Have you defined your tolerance(s) for risks and are you able to remain within your personal comfort zone? Do you maintain a watch over your various categories of wealth assets and are you aware of the prevailing trends that have developed, e.g., “bubbles” in various asset classes?

There is an end game to this exercise of accumulation. We all desire a pleasant longevity and many of our readers have a good chance at living a healthy life into their 80s and 90s. Some will even hit the century mark. However, the requisite capital must be there or at some point the quality of life will deteriorate. We are obligated to the healthcare-wealthcare matrix if financial independence is a true objective. The choices that you make today will determine whether your future years will be a walk through the park or a walk through the briar patch. Accumulate translates into building sufficient capital to meet predicted mileposts, subject to the other challenges in the AARP equation and conditioned on the time which is necessary to maintain a watch over those appointed assets . Living a chosen lifestyle for the next 20, 30 or 40 years will depend on having sufficient accumulated wealth.

In our next blog, we will address the concept of Allocate.

A number of readers have asked where we are headed amid the confusion, continuing indicators of economic deterioration and persistent talk about a double dip recession (or worse).

[At the end of this blog, we will introduce an approach to survival, but first please read on.]

Let’s get some facts out. Consider the following:

• Inevitably (and for our physician readers), there will be a substantial contraction in financial resources available for healthcare. It is pure and simple economics – we will not have the money to pay for all of this healthcare because we are spending lavishly and wastefully, with neither reasonable oversight nor management of dwindling resources in the face of rising costs. Consider the financial horizons of Medicare with 75 million Baby Boomers coming, Medicaid in increasingly cash starved states, and profit-driven commercial insurers devising strategies to further restrict provider networks using the carrot & stick of more affordable premiums. Many  more physicians have become disillusioned and disheartened and are feeling disenfranchised by the bureaucracy of healthcare.
• Much press has been devoted to the news that U.S. companies have  emerged from financial devastation, are in robust health and have paid down their debts, rebuilt their balance sheets and have stored enormous piles cash they are ready to invest in the economy. The fact is, American companies are not in robust financial shape. Federal Reserve data show that their debts have been rising, not falling. By some measures, they are now more leveraged than at any time since the Great Depression.

• The economic recovery appears to be stalling as companies cut back on their investments in equipment and machines and Americans bought new homes at the weakest pace in decades.

• The Investment Company Institute reports that equity mutual funds suffered net withdrawals totaling over $33 billion in the first seven months of 2010. Myriad reasons were cited for the trend, including a mistrust of stocks, the flash crash and an aging population fearful of running out of money.

• Perhaps equally disturbing is the massive flight to debt securities – we categorize debt securities as the four classes of bonds (treasuries and government agencies, municipal bonds, high grade corporate bonds and corporate junk bonds) . Whenever there are such huge shifts, the concern becomes “is this the next bubble?’
• Yesterday, an executive director at Morgan Stanley’s London office wrote the following in a research report about government debts (government bonds):  “governments will impose a loss on some of their stakeholders. The question is not whether they will renege on their promises, but rather upon which of their promises they will renege, and what form this default will take. The sovereign-debt crisis is global and it is not over” he wrote.

• U.S. debts and deficits continue unchecked, with Congress simply increasing the ceiling and kicking the can down the road. At a time when reason and foresight are of paramount importance, our leadership has become largely mindless amid the morass of partisanship and special interests.
• Americans are making do with less and don’t have the money to invest into stock funds. Many are taking money out of their investments to pay for basic necessities like food, clothing and shelter.  Our middle class, the massive central and supporting core of society, is being decimated. With wages stagnant for those who still have a job, a lot of people are having to tap into their nest egg to maintain their living standards. Fidelity has recently reported a sharp increase in the number of 401(k) participants seeking loans or hardship withdrawals in the second quarter -  further evidence of the financial stress cracks appearing.

• Uncertainties about tax increases, and the effect on all taxpayers as income and estate taxes increase and deductions are lost as a result of the expiration of the 2001 and 2003 Bush cuts.
• Bad news for savers: The national average rate on checking, savings and other deposit accounts has dipped below the 1% mark for the first time in at least 10 years — and doesn’t appear headed higher anytime soon, according to an analysis by Market Rates Insight.

Is there a publishable solution?

Those who write books, commentaries or blogs purporting to have “solutions du jour” are frequently delusional. Those who simply regale us with litanies of bad news without suggesting worthwhile solutions remain mired in the problems. We need solutions.

For solutions about personal wealth management, the question is – where to begin?

DocOnomics blogs and commentaries will not render specific investment advice and predict on the economy. Given the host of special interests and shadow forces operating in both government and private sectors, those are mostly futile pursuits. However, we are committed to the belief that the rational, prudent way for each individual to approach survival is through a commitment of time to the basic understanding and/or development of personal objectives and recognition of existing circumstances. Then, with the personal investment of time, ongoing surveillance (nimble responses) and input from reliable resources and advisors, strategies can and should be developed around what we consider to be the building blocks of wealth management. For many, wealth management is a matter of “safe harbor” strategies designed to protect the purchasing power of currencies during cycles of inflation and deflation.

AARP

The four-cornered central core of wealth management is:

• Accumulate
• Allocate
• React
• Protect

In coming blogs, we will explain how each of these principles work.

Physicians, patients, legislators – we can all simply bury our heads and pretend not to see what is coming. As far as future health care goes, there are reasoned observers (we hope to count ourselves among those) who foresee the coming specter of a draconian, totalitarian healthcare system run by the government – if we don’t do something about the free-wheeling, undisciplined system we have now. Far too many fail to recognize that the current health care system is economic public enemy #1, if you believe David Walker of the Peterson Foundation. There are 75 million Baby Boomers in transition to a system totally incapable of meeting the promises that have been paid for by many for a long time. We can all thank our hapless, shell game playing politicians for the predicament that lies ahead.

Health-care reform has receded from the headlines since President Obama signed the new law in March, but the inescapable question of how to pay for coverage and keep costs down remains unanswered. If you have seen the news reports and prognostications, employers will simply be laying off more costs and less accessible coverages on employees. The downward spiral will become more pronounced.

“There is a panel that’s supposed to oversee Medicare expenditures, but there is no  credible mechanism for doing this,” writes Boston University economics professor Laurence Kotlikoff. “In the law, some group of people are supposed to try and keep the lid on expenditures. But there’s no there there; no real mechanism to make this happen.”

Rather than bending the proverbial cost curve, Obama-care could end up costing the government far more than projected, says Kotlikoff. If employers stop providing benefits and start sending employees to the health exchange(s) en masse, “we could see a huge unraveling of employer-based health care and huge bills ending up in the lap of Uncle Sam and the taxpayer,” he says.

If insurance companies continue to experiment with lower premium health plans that force participants into more restrictive provider networks, the Obama promise that we can keep our doctors will be eroded.

Today, so much of what is written about the health care dilemma focuses on the problems. We have to stop talking about problems – we need to take action and come up with solutions. If you have been following DocOnomics, you know we have increasingly  advocated innovative disruption oriented around a sound primary care system that follows a coordinated, evidence based approach. Some have labeled this the patient-centered medical home concept.

Professor Kotlikoff proposes a “simple, straightforward” solution that will both cap health-care costs and provide basic care to all Americans.

Simply, he proposes the government expand Medicare Part C to all citizens and then cap federal expenditures at 10% of GDP, which is about what the government currently spends. We don’t see this as a capitulation to the above-mentioned totalitarian system, but rather making the best choice among many bad defaults.

Currently, federal government health-care expenses are projected to rise to 16%-17% of GDP due to demographic trends and the rising cost of services. That’s a big reason why Kotlikoff argues the U.S. is already bankrupt.

Care for All — For Less

Kotlikoff says his “very competitive, streamlined, standardized system” would work like this:

• Everyone would get a voucher for “basic” health care. Preexisting conditions would be taken into account so someone with diabetes would get a larger voucher than someone with a clean history.
• Insurers would have to accept the vouchers and would have an incentive to take people with preexisting conditions because they would have more government dollars to spend.
• A government oversight panel would determine what gets covered under a “basic” health-care plan and would be “obligated to keep total expenditures at 10% of GDP through time,” he says. “This will shave a off huge amount off the fiscal gap.” (Opponents of Obama-care protested against such “death panels,” but Kotlikoff correctly notes that decisions about who gets what coverage are already being made all the time by private insurers and government programs alike. “You can call them ‘life panels’ too,” he says.)

But the choice is between “simple, straightforward and efficient or hyperinflation – you take your pick,” the professor says. “If you’re going to end up with the entire population covered by the federal government, let’s do it right. Let’s do it from scratch. Clean the plate [and] set this up simply.”

And allow the primary care system to fulfill the role for which it is so well-suited.

Regarding the income taxation issues before us, your DocOnomics authors would like to thank Ken Holden, CPA for providing us with an excellent reference on the continuing saga of the expiring tax cuts.

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The 2001 and 2003 Bush tax cuts will expire at the end of 2010. Those cuts included setting the top tax rate of 15% on capital gains and qualified dividends and the reduction of the top income tax rate from 38.5% to 35%, all of which benefit upper-income taxpayers. However, there was also the 10% income tax bracket, marriage penalty relief, and increases in the standard deduction, all of which benefited lower- and middle- income taxpayers.

If Congress ends up in a political gridlock, the end result could be one of the largest income tax increases in history, and it will happen – not because of something Congress does – but because of what it doesn’t do.

BACKGROUND

The income tax cuts that were proposed by then-President George W. Bush and enacted as part of the 2001 and 2003 tax laws were passed by the Republican majority in the Senate, without any possibility of a filibuster by the Democrats who were then in the minority.

However, under what is known as the “Byrd rule” tax reductions could not affect federal budgets for more than 10 years.  So both acts had provisions that declared that the tax reductions would “sunset” (go away) after 2010.

Analytics software allows users to choose what tax laws to apply after 2010. Selecting and de-selecting the “sunset” option shows the incredible impact of the changes that will occur on January 1, 2011, if Congress does not act.

For the wealthiest Americans, allowing the Bush tax cuts to “sunset” will be quite a shock

• A family of four with $500,000 of income filing a joint return with no itemized deductions would pay $136,208 in federal income tax in 2011 if the tax cuts continue to apply and there is no inflation for 2010.

• The same family will have to pay $158,801 in 2011, a $22,607 increase, if Congress does not act and the tax cuts expire.

If that $500,000 of income includes qualified dividend income, which is taxed at the capital gain rate of 15% instead of the maximum rate of 35% on ordinary income, the results are even more dramatic.

• In 2010, $500,000 of income with $250,000 of qualified dividends would result in $89,201 of federal tax.

• In 2011 the tax jumps up to $158,801, an increase of $69,600, or almost 80%, in only one year.

• For a family of four with $250,000 of income, their tax bill is $51,701 under current law.

• That same family will pay tax of  $59,341 in 2011, a $7,640 increase.

Reducing the family’s income reduces the impact, but the impact is still there.

• For a family earning $50,000, the tax bill would be $2,763 under current law.

• The bill jumps to $3,878, more than $1,000 more, in 2011.

Even a family earning as little as $30,000 would be affected.

• That family would owe $400 in federal income tax in 2010.

• But if the 10% tax bracket and marriage penalty relief both expire, that family’s tax bill more than doubles, going from $400 to $878.

HERE IS WHERE THE SENATE WILL JUMP – INTO INACTION:

As we have seen very clearly in the attempt at health care reform, it takes only 41 Republican votes in the Senate (which the Republicans now have with the election of Scott Brown to fill the seat of the late Ted Kennedy from Massachusetts) to block any attempt to raise income tax rates for the wealthy.

But these tax increases are already enacted and will happen if Congress does nothing.

It also takes only 41 Democratic votes in the Senate (or a Democratic majority in the more progressive House) to block any extension of the tax cuts for the wealthy.

So it’s going to be like health care, only worse.  With increasing pressure from “Tea Partiers” and the extreme right, and facing election battles at the end of 2010, Republicans have no reason to do anything but draw a hard line and insist on making the Bush tax cuts permanent.

ELECTIONS ONLY MAKE THINGS MORE CONTENTIOUS:

And as the elections in November get closer, there could be more acrimony and more fear of voter backlash, making compromise more and more difficult.

So until the November elections are over, political gridlock seems virtually certain.

There is every reason to believe that we’ll go into January of 2011 looking down the barrel of one of the largest tax increases in history, which may be “enacted” by inaction.

That is why DocOnomics has recommended the consideration of strategies to defer income recognition, e.g., qualified retirement plans, tax-deferred annuities and nonqualified deferred compensation plans using life insurance for those who are conservatively-minded retirement asset accumulators.

Nero keeps fiddling, regarding one of the gargantuan liabilities we face as a nation……………

The 2010 Medicare Trustees Report continues to sound a warning that is getting more and more strident all the time. If we don’t do something better than continually kicking this can down the road, the fallout will be immense. We at DocOnomics would once again like to put forth a premise for health care reform that can achieve positive results. That premise requires disruption of the present system which is fraught with overutilization, waste and mismanagement. What is needed is a restructured system in which a central intuitive core of primary care, evidence-based medicine exists where patients and physicians make informed decisions together and where patients have financial incentives to live healthier lifestyles and utilize health care resources wisely. Far too many cooks are currently stirring the pot and billions are getting wasted. Consider a study last year that showed that the management of Type II diabetes in Dallas, Texas costs an average of just under $7,000 per year, while the cost of management in Fort Worth, Texas – just 35 miles away, is just under $1,600 per year? If you think that’s too localized, then look at the works of Wennberg and Fisher at Dartmouth, and the Dartmouth Atlas of Health Costs that shows huge regional differences in the costs of care delivery.

Health care must become more efficient and better systematized.

We’re not an intentionally gullible citizenry – far from it. Our challenges in creating a workable health care system stem from our being complacent when it comes to understanding and accepting the bureaucratic language in government reports. Maybe a solution would be Cliffs Notes.

One of our favorite financial observers recently pushed the Medicare alarm button again, and  we think it is important to pursue the subject. This is not editorializing, this is fact. We want to draw your attention to a few areas in the 2010 Medicare Trustees Report. Feel free to draw your own conclusions.

If the projected savings in the next 75 years as reported by the Trustees for Medicare are accurate,  the big changes will occur in Medicare hospital insurance and Medicare Part B, the coverage for doctors and other medical expenses. The unfunded liabilities for those programs are projected to be cut in half, thanks to the recently passed legislation overhauling health care.

The following is an excerpt from the Report Introduction, page 2:

“The release of this report has been delayed from its normal schedule to allow incorporation of the effects of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010. This legislation, referred to collectively as the “Affordable Care Act” or ACA, contains roughly 165 provisions affecting the Medicare program by reducing costs, increasing revenues, improving certain benefits, combating fraud and abuse, and initiating a major program of research and development for alternative provider payment mechanisms, health care delivery systems, and other changes intended to improve the quality of health care and/or reduce its costs to Medicare.” (italics added).

In fact, actuaries for Medicare express their own doubts about whether the enormous cost reduction dictated by the law can be achieved.

“Over time, the productivity adjustments mean that the prices paid for health services by Medicare will grow about 1.1 percent per year more slowly than the increase in prices that providers must pay to purchase the goods and services they use to provide health care services. Unless providers could reduce their cost per service correspondingly, through productivity improvements or other steps, they would eventually become unwilling or unable to treat Medicare beneficiaries.” (italics added)

So one perspective on this is that care for Medicare patients may come to resemble what was once called the Soviet Department Store Syndrome – where the prices on everything were incredibly low but the store had nothing to sell (thank you Scott Burns).

On page 282, the Chief Medicare Actuary makes a  jarring statement:

“For these reasons, the financial projections shown in this report for Medicare do not represent a reasonable expectation for actual program operations in either the short range (as a result of the unsustainable reductions in physician payment rates) or the long range (because of the strong likelihood that the statutory reductions in price updates for most categories of Medicare provider services will not be viable)”.

How does this translate into a sustainable healthcare payment system for 75 million Baby Boomers queuing up for Medicare? How does this translate into the accessibility of care from physicians who cannot afford to deliver it?

One approach to this is to swiftly and purposefully resolve the costly inefficiencies that are rampant in our healthcare system. For insights, we once again encourage those who must address these issues to read The Innovator’s Prescription by Harvard’s Clayton Christensen, especially when it comes to the three major areas of disruption that are prescribed.

Draw your own conclusions. For physicians, this once again calls for active preparation by way of intelligent wealth management planning. While we all hope for sanity to guide our decisions on health care, we’d better have a good contingency plan.

For many of our readers, the question “where are we headed?” is where the rubber meets the road. We have been asked this in reference to investment decisions and, most frequently, regarding decisions to be made about retirement plans.

Making predictions is a sucker’s game. Even the most cautious economists, asset managers and wealth advisers with the best batting averages will admit that the fundamentals have been skewed by events occurring off the radar screens, mostly from the spin doctors in Washington and on Wall Street.

In his most recent quarterly update, Randy Flink of Championship Financial Advisors  observed that in recent months, “complacency has slipped back into the markets, prompted by official pronouncements that the U.S. economy has bottomed – particularly the residential housing sector”. He continues “While nobody really knows what is going on in the broad economy due to constant fudging of government statistics, the powers of observation combined with objective analysis indicates that the U.S. economy remains in a very protracted slump with virtually no job creation”. We continue to insist that the lifeblood of a real recovery will hinge on the resurgence of private sectors jobs that pay decent salaries and wages. Right now, without a healthy population of American consumers at work, earning incomes and spending, the engine of our economy sputters along. Pumping in more money is like adding gas to the tank of a car with no working engine.

Here’s a top ten list of indicators to keep our collective eyes on.

1. The market is already expensive. Stocks are about 20 times cyclically-adjusted earnings, according to data compiled by Yale University economics professor Robert Shiller. That’s well above average, which, historically, has been about 16. This ratio has been a powerful predictor of long-term returns. Valuation is an important issue for investors. If you’re getting paid well to take risks, they may make sense. But what if you’re not?

2. The Fed is nervous. This week it warned that the economy had weakened, and it unveiled its latest weapon in the war against deflation: using the proceeds from the sale of mortgages to buy Treasury bonds. That should drive down long-term interest rates. Great news for mortgage borrowers. But hardly something one wants to hear when the Dow Jones Industrial Average is already north of 10000.

3. Too many people are too bullish. Active money managers are expecting the market to go higher, according to the latest survey by the National Association of Active Investment Managers. So are financial advisers, reports the weekly survey by Investors Intelligence. And that’s reason to be cautious. The time to buy is when everyone else is gloomy. The reverse may also be true.

4. Deflation debate – is it already here? Consumer prices have fallen for three months in a row. And, most ominously, it’s affecting wages too. The Bureau of Labor Statistics reports that, last quarter, workers earned 0.7% less in real terms per hour than they did a year ago. No wonder the Fed is worried. In deflation, wages, company revenues, and the value of your home and your investments may shrink in dollar terms. But your debts stay the same size. That makes deflation a vicious trap, especially if people owe way too much money.

5. Way too much money is owed. Households, corporations, states, local governments and, of course, the U.S. government are deeply in debt. According to the Federal Reserve, total U.S. debt — even excluding the financial sector — is basically twice what it was 10 years ago. Households have barely made a dent in their debt burden; it’s fallen a mere 3% from last year’s all-time peak, leaving it twice the level of a decade ago.

6. The jobs picture is much worse than you’re being told. Forget the “official” unemployment rate of 9.5%. Alternative measures? Try this: Just 61% of the adult population, age 20 or over, has any kind of job right now. That’s the lowest since the early 1980s. And many of those still working right now can only find part-time work, so just 59% of men age 20 or over currently have a full-time job. This is bullish?

7. Housing remains a disaster. Foreclosures rose again last month. Banks took over another 93,000 homes in July, says foreclosure specialist RealtyTrac. That’s a rise of 9% from June and just shy of May’s record. We’re heading for 1 million foreclosures this year, RealtyTrac says. And naturally the ripple effects hurt all those homeowners not in foreclosure, by driving down prices.

8. Labor Day is approaching. Ouch. It always seems to be in September-October when the wheels come off Wall Street. Think 2008. Think 1987. Think 1929. Statistically, there actually is a “September effect.” The market, on average, has done worse in that month than any other. No one really knows why. Some have even blamed the psychological effect of shortening days. But it becomes self-reinforcing: People fear it, so they sell.

9. We’re looking at gridlock in Washington. Election season has already begun. And the Democrats are expected to lose seats in both houses in November.  As our political dialogue seems to have collapsed beyond all possible hope of repair, let’s not hope for any “bipartisan” agreements on anything of substance. Do you think this is a good thing? As Davis Rosenberg at investment firm Gluskin Sheff pointed out this week, gridlock is only a good thing for investors “when nothing needs fixing.” Today, he notes, we need strong leadership. Not going to happen.

10. All sorts of other indicators are flashing amber. The Institute for Supply Management’s manufacturing index, while still positive, weakened again in July. So did ISM’s new-orders indicator. The trade deficit has widened, and second-quarter GDP growth was much lower than first thought. The Economic Cycle Research Institute (ECRI) Weekly Leading Index has been flashing warning lights for weeks. Europe’s industrial production in June turned out considerably worse than expected. Even China’s steamroller economy is slowing down. Tech bellwether Cisco Systems signaled caution ahead. Individually, each of these might mean little. Collectively, they ought to make us all wonder.

Bottom line? In this environment, we might be happy to be able to buy shares if they were cheap. But not so much if they’re expensive.

Ayn Rand’s masterpiece novel Atlas Shrugged told of economic carnage created by rampant big government. To our way of thinking, if every member of Congress was required to read this book, perhaps we’d work out of our economic mess a lot faster.

Those who know Rand’s work believe that with each successive bailout plan and economic-stimulus scheme hatched in Washington, our  politicians are committing the very acts of economic lunacy that Atlas Shrugged parodied in 1957.

Here is an interesting fact. In a 1991 survey by the Library of Congress and the Book of the Month Club, readers rated “Atlas” as the second-most influential book in their lives, behind only the Bible.

This book tells about the price society pays for politics. In response to crises that in most cases government itself has created – politicians spawn new government programs, laws and regulations. These, in turn, generate more havoc and economic adversity, which inspires the politicians to create more programs. The downward spiral repeats itself until productive sectors of the economy collapse under the oppressive weight of economic and other bureaucratic burdens imposed in the name of fairness, equality and do-goodism. Consider the new health care reform law that looks more and more like the mythical hydra with all of the new heads appearing. [If you need a reminder, read our July 31^st blog]. Will it reform or destroy the system, and will we ultimately collapse into a totally totalitarian health care system like the ones that have been cast as the bogeyman by anti-reformists? Who will save our health care system ….  physicians who finally say “enough!”? Are there physicians who are doing something about the inequities and lack of access to health care? [See our previous blog].

In Atlas Shrugged, the relentless wealth redistributors and their programs are displayed as “looters and their laws.” Every new act of government futility and stupidity carries with it a kindly-sounding title like the “Anti-Greed Act”, the “Equalization of Opportunity Act”  and the “Anti Dog-Eat-Dog Act”, intended to restrict cut-throat competition between firms and thus slow the wave of business bankruptcies. (Why didn’t Hank Paulson think of that?)

These acts and edicts sound comical, but no more so than the actual events in Washington, circa 2008 and after. We already have been served up the $700 billion “Emergency Economic Stabilization Act” and the “Auto Industry Financing and Restructuring Act.” Then came the “American Recovery and Reinvestment Plan”, which is the Hail Mary pass that increases the federal budget by an additional $1 trillion (on top of the $1.5 trillion in eight years under George Bush).

And now, in real time, we can witness the “Patient Protection and Affordable Care Act”

What we are seeing in our never-ending Keynesian addiction is right out of this book. The more incompetent you are in business, the more handouts the politicians will bestow on you. That’s the justification for the $2 trillion of subsidies doled out already to keep afloat distressed insurance companies, banks, Wall Street investment houses, and auto companies. Standing next in line for their share of the booty are real-estate developers, the steel industry, chemical companies, airlines, ethanol producers, construction firms and even catfish farmers. With each successive bailout to “calm the markets,” another trillion of national wealth is subsequently lost. Yet, as “Atlas” grimly foretold, we now treat the incompetent who wreck their companies as victims, while those resourceful business owners who manage to make a profit are portrayed as recipients of illegitimate “windfalls.”

Abolishing the income tax? Now that really would be a genuine economic stimulus. But Mr. Obama and the Democrats in Washington want to do the opposite: to raise the income tax “for purposes of fairness”.

David Kelley, president of the Atlas Society, which is dedicated to promoting Rand’s ideas, explains that “the older the book gets, the more timely its message.” He says that there are plans to make Atlas Shrugged into a major motion picture — it is the only classic novel of recent decades that was never made into a movie.

Maybe we really don’t need to make a movie out of the book because we’re living it right now.

That’s why DocOnomics has been committed to helping our audience prepare for the price to be paid for all of our government foibles.

Yesterday, I drove my adult son to his doctor’s office. Over his protests that he could take himself, I knew he was not in the best shape to drive. I’m glad I did go with him because it pointed the way to this blog.

As I sat in the waiting room, I happened to pick up a brochure for the Jefferson Independence Card, operated by the Jefferson Physician Group.

Go look at their website.    www.jeffersonicard.com.

I have been writing about and advocating for a strong, viable primary care system for years. Not just me alone, but many, happen to believe that the most vital and fundamental cog in the healthcare delivery system is primary care. In the very best sense of the word, they are the gatekeepers of our health. They are the doctors who are philosophically committed to knowing us both as persons and as patients. Harvard’s Christensen, in his  landmark book The Innovator’s Prescription, placed primary care at the intuitive critical core of medicine.

Please do not construe these and following comments to imply a criticism or a judgment of physicians who practice specialty medicine. They are the skilled practitioners who so often deliver the wondrous cures they bring to our lives. They are valued and they are respected.

The challenge we face in our American healthcare system is a problem of demand, supply, economics and doctoring in the most fundamental sense of the word. We desperately need those doctors who come to know us as their patients and as persons with whom a relationship is developed and shared – often for many years. Their patients can  take comfort in that. In specialty medicine, specialist physicians have cases as opposed to patients/ people they’ve known for many years. It’s the doctor who has known us for years – the family doctor we seek whenever there’s a problem, and who knows us stem to stern. It’s the pediatrician who sings happy birthday to us when we are born who knows us as we grow from infancy into young adulthood. These are the front-line doctors who  have put in the time with us, and that makes them the best possible quarterback of our medical team.

Yet, primary care docs are being placed on the endangered species list because they are being squeezed. They are under continuing threat of Medicare cuts – a physician cannot survive by giving $1 dollar of care for 60-70 cents of reimbursement. This so-called “doc-fix” delay of reimbursement cuts is just the ridiculous kicking the can down the road by politicians. States are desperately looking for ways to cut Medicaid expenditures – just when the needs of so many are so great. The insurance companies are always breathing down their necks and now more major insurers will be trying to offer cheaper, more highly restricted networks – that sounds like managed care all over again. But now the difference is that people who cannot afford high premiums may be forced to do the insurance companies’ bidding by signing up for the cheaper premium plans.

If we don’t re-commit to a healthy primary care system, we are in danger of having chaos instead of order and that will cost us terribly because inefficiencies are expensive.

Our health care management must commence in the offices of our primary care system physicians. They ought to be reimbursed fairly – and part of that reimbursement needs to recognize that it is not just money, but also the adequate amounts of time they can spend with patients that makes medicine cost-effective.

Good for this group of smart, business-savvy doctors and the affiliated providers who are intelligently positioning themselves to do it right and are also delivering a wonderful  service to our (growing) population of fellow citizens who might otherwise not have access to care they need.