Some Thoughts on the Affordable Care Act

(This post is my opinion only and in no way constitutes the views of my employer or clients. It’s also written with an assumption the goal of a healthcare system is to provide quality care at the lowest price possible without disincentivizing providers. If you don’t start there, the rest doesn’t matter.)

Price elasticity of demand

Let’s go back to Economics 101. One of the foundational concepts of that class is price elasticity of demand. The purpose of this metric is to measure how much demand changes for a product based on a corresponding change in its price. If a change in price causes a large change in demand, the good or service is said to be “price elastic.” If there is little change the good or service is “price inelastic.”

Great, you’re thinking. How does this relate to healthcare?

Let’s apply that concept. A person is buying toothpaste. The local drugstore has brand-name toothpaste for $3, then one day for no reason, they decide to rise the price to $30! Some people might still buy it, a number might opt for a cheaper store brand, and some will simply forgo brushing their teeth altogether.

Now that same person is driving home from the store and suddenly starts experiencing chest pains. He drives to the local emergency room. He isn’t given a price for the care he is about to receive, nor would he likely care. A reasonable person under normal circumstances will pay whatever it takes to save their life.

Economics is all about power and incentives. Who has the power is these two scenarios? In the toothpaste scenario, the customer has most of the power. He has two good options besides buying the expensive store brand. He can look for a less expensive option or opt-out of personal hygiene completely with very little lost (except maybe some friends). In the second scenario, the local hospital is holding all the cards.

This last year, there have been numerous articles explaining the fantasy world that is hospital pricing. This one is probably the best. But, do you really want to know why providers charges so much? It’s really simple. Because they can. 

That’s it. Hospitals are expensive because they sell an inelastic service, and there’s very little incentive to behave otherwise. In fact, if there are complications after surgery and patients return, they actually make more money instead of less. The inflated gross charge and related contractual write-off on the EOB you get the mail is a carefully negotiated figure based on the balance of power between payor and provider.

For all the Affordable Care Acts flaws and the terrible rollout of the federal exchange, it actually does a few interesting things to address these issues.

Insurance exchanges and the individual mandate

The federal and state exchanges are designed to assist citizens in enrolling in some sort of insurance plan. The idea behind health insurance is not only to address risk, but also consolidate pricing power on behalf of patients. An entity representing thousands of patients has much greater power than any single person. It’s in the government’s interest that all citizens participate in some sort of insurance program. However, insurance companies, rightly, want the ability to control who can and cannot enroll in their plans. The only way any insurance company would give up that right is for the government to enact a corresponding disincentive for healthy people to delay enrollment until they’re sick. That’s where the individual mandate came from. It’s a trade-off. The insurance companies gave up the right to deny coverage, but gained a tax that incentivizes citizens to buy their product.

There’s been a lot of talk about this one and we’ll see how it plays out. The bottom line is more people are participating in consolidated risk pools means less pricing power for providers at the negotiating table. This serves to lower costs.

Bundled payments

CMS’s new program to test the bundling of payments is probably one of the most under-reported but interesting parts of the ACA. Under the current system, almost every provider in the US bills per procedure. This creates backwards incentives where hospitals can actually make more money when surgeries go bad.

Bundled payments are an attempt to incentivize quality and efficiency rather than the opposite. By enrolling, the provider opts to receive a lump payment that covers an entire case rather than billing the individual components. If things go well, the provider could actually make more money. However, if there is poor quality of care, subsequent readmissions would eat straight into profits. This is where the uncomfortable conversations start between doctors and administrators that can lead to change.

We’ll see…

If you are still reading this, you have my pity. I almost put myself to sleep writing it. The details of this law are arcane, and frankly no one really knows if it’s going to work. There are too many variables in play .

However, there are some concepts in the law that in my estimation are worth an experiment. We’ll just have to wait and see.

Can you teach ethics?

CPAs across the country are required to sit through various amounts of ethics training every two years. I sat thought mine on Friday. Inevitably during these sessions, the question comes up, “Can ethics be taught?” My own answer to this question has fluctuated since it was first posed to me as a graduate student. Could more effective ethics training have prevented the major accounting failures of the last 10 years?

I am, by nature and temperament, somewhat melancholic and a realist. (That probably also describes 80% of the accounting profession). If you need an upbeat pep talk, I’m probably not the guy you want to call. This tendency in my own makeup caused me in the past to answer the title question with a resounding “No.” If people are going to lie, cheat and steal, it’s in their nature and all we can do is work to limit opportunity.

You remember the fraud triangle.

If you have never seen this chart, it’s really useful when thinking about the elements that drive people to commit fraud. Individuals have external and internal events (divorce, gambling problems, greed, sick child, etc.) that create pressure. This pressure, when strong enough, leads to rationalization: “They won’t really miss the money. I’m underpaid anyway. In fact, I deserve it. I’m just borrowing it, and I’ll pay it back.” The last step, opportunity, is the only one that management can control. If the three are present together, misappropriation of assets or fraudulent financial statements are soon to follow.

I have always been pessimistic of individuals’ ability to resist these temptations. Will a single mother with a mountain of debt really not take the cash when it’s sitting right there? Will a controller facing earnings pressure really be able to say no to backdating a journal when the company’s future is on the line?

When the question of whether ethics can be taught was posed on Friday, a participate gave such a good answer that I think he may have actually succeeded in changing my mind. (A small miracle, no doubt). I’m paraphrasing but they said something to the following effect.

“Ethics is the framework by which individuals make decisions. Frameworks and situations can be taught, so that when they are encountered in real life, individuals have already had a chance to decide what they would do in advance. This increases the likelihood they will act ethically.”

I liked this so much, that a colleague and I looked at each other, surprised, and she said, “That’s the best answer to that question I’ve ever heard.” So ethics training, when done correctly, is really a role playing game in your mind. You get to visualize yourself as the criminal without committing the act and resolve not to make the same mistakes. So, kudos to that participant, whoever he was, for wording his answer so well that he changed my mind on an issue that is ever present in our profession.

Everybody stay calm

You may have noticed the blog posts have been in short supply since last year. Well, frankly, it’s because I’ve been a lot busier and the nature of my work has changed significantly. Instead of spending hours debugging code and writing the perfect formula in Excel, I’m now delegating responsibilities and managing people. This has been an exciting and different world for me.

As far as my plans for this blog, I’m still going to post the odd technical tip as projects come up, but I may shift some focus to current accounting news and people management since that’s where I am spending my time these days. (Write about what you know?) Thanks for hanging with me and continuing to visit.

Stanford International Bank Fraud Conviction: 110 Year Prison Sentence

Two years ago, I wrote a long post about the Stanford International Bank Fraud. I recently thought about the story and realized I never followed up to see what happened. After a quick Google search, I was pleased to see that Allen Stanford was convicted and sentenced to 110 years in prison.

The most amazing part is even after his conviction Stanford still claims he wasn’t running a Ponzi scheme and the government is responsible for his victims’ losses. Incredible.

Excel “Pull” Function: Creating dynamic links to closed workbooks

I was working on a project this week that required aggregation of data from many, many different Excel workbooks (and various tabs within those workbooks) into one unified dashboard. Now, this can be accomplished with traditional linking, but anyone who has tried to link more than a few workbooks together will tell you this is a pain to maintain and often not very reliable.

One useful function for creating dynamic links within the same workbook is INDIRECT. Instead of hardcoding cell and worksheet references into a formula, INDIRECT allows pieces of a formula to be dynamically updated using variables. Sounds pretty good right? Well, INDIRECT has an Achilles’ heel. It only works if you are linking within the same workbook.

Need dynamic links to a closed workbook? Bill Gates says, “You’re out of luck.”

Fortunately, after searching around, I found an old Usenet post from 2004 by a fellow named Harlan Grove. He wrote an Excel function in VB called PULL which essentially fixes INDIRECT’s fatal flaw and allows the user to create links to closed workbooks. Just copy the code below into a Module within the workbook of your choice. Then you can use the PULL function just like any other.

Example:
A1 =C:\work\
B1 = data\
C1 = [ClosedBook.xls]Sheet1′!$A1
E1 = PULL(“‘”&A1&B1&C1)

'----- begin VBA -----
Function pull(xref As String) As Variant
'inspired by Bob Phillips and Laurent Longre
'but written by Harlan Grove
'-----------------------------------------------------------------
'Copyright (c) 2003 Harlan Grove.
'
'This code is free software; you can redistribute it and/or modify
'it under the terms of the GNU General Public License as published
'by the Free Software Foundation; either version 2 of the License,
'or (at your option) any later version.
'-----------------------------------------------------------------
'2004-05-30
'still more fixes, this time to address apparent differences between
'XL8/97 and later versions. Specifically, fixed the InStrRev call,
'which is fubar in later versions and was using my own hacked version
'under XL8/97 which was using the wrong argument syntax. Also either
'XL8/97 didn't choke on CStr(pull) called when pull referred to an
'array while later versions do, or I never tested the 2004-03-25 fix
'against multiple cell references.
'-----------------------------------------------------------------

'2004-05-28
'fixed the previous fix - replaced all instances of 'expr' with 'xref'
'also now checking for initial single quote in xref, and if found
'advancing past it to get the full pathname [dumb, really dumb!]
'-----------------------------------------------------------------
'2004-03-25
'revised to check if filename in xref exists - if it does, proceed;
'otherwise, return a #REF! error immediately - this avoids Excel
'displaying dialogs when the referenced file doesn't exist
'-----------------------------------------------------------------
Dim xlapp As Object, xlwb As Workbook
Dim b As String, r As Range, C As Range, n As Long
'** begin 2004-05-30 changes **

'** begin 2004-05-28 changes **
'** begin 2004-03-25 changes **
n = InStrRev(xref, "\")
If n > 0 Then
If Mid(xref, n, 2) = "\[" Then
b = Left(xref, n)
n = InStr(n + 2, xref, "]") - n - 2
If n > 0 Then b = b & Mid(xref, Len(b) + 2, n)
Else
n = InStrRev(Len(xref), xref, "!")
If n > 0 Then b = Left(xref, n - 1)
End If

'** key 2004-05-28 addition **
If Left(b, 1) = "'" Then b = Mid(b, 2)
On Error Resume Next
If n > 0 Then If Dir(b) = "" Then n = 0
Err.Clear
On Error GoTo 0
End If

If n <= 0 Then
pull = CVErr(xlErrRef)
Exit Function
End If
'** end 2004-03-25 changes **
'** end 2004-05-28 changes **
pull = Evaluate(xref)

'** key 2004-05-30 addition **
If IsArray(pull) Then Exit Function
'** end 2004-05-30 changes **

If CStr(pull) = CStr(CVErr(xlErrRef)) Then
On Error GoTo CleanUp 'immediate clean-up at this point

Set xlapp = CreateObject("Excel.Application")
Set xlwb = xlapp.Workbooks.Add 'needed by .ExecuteExcel4Macro

On Error Resume Next 'now clean-up can wait

n = InStr(InStr(1, xref, "]") + 1, xref, "!")
b = Mid(xref, 1, n)

Set r = xlwb.Sheets(1).Range(Mid(xref, n + 1))

If r Is Nothing Then
pull = xlapp.ExecuteExcel4Macro(xref)

Else
For Each C In r
C.Value = xlapp.ExecuteExcel4Macro(b & C.Address(1, 1, xlR1C1))
Next C

pull = r.Value

End If

CleanUp:
If Not xlwb Is Nothing Then xlwb.Close 0
If Not xlapp Is Nothing Then xlapp.Quit
Set xlapp = Nothing

End If

End Function
'----- end VBA -----

The problem with college

Much of the discussion surrounding the Occupy Wall Street protest movement has turned towards the rising costs of higher education. This is likely because many of the protesters are young, college educated and saddled with enormous federal debt.

The Los Angeles Times had a piece this weekend discussing the issue. It was good article, but I’ve noticed something missing in all the coverage. Something that colleges, students and even parents don’t seem to want to talk about.

Not all college degrees are created equal.

Have you noticed that almost all of the protesters interviewed have undefined liberal arts degrees? Where are the chemical engineers or the nurses or the accountants? Working, that’s where. The stark reality is there are more college majors than fields with actual paying jobs.

I never heard this when I was 18. Like most, I was led to believe that just having a college degree was enough. But it’s not. I had to figure it out on my own through a series of missteps and major changes. However, I was fortunate to see the reality before it was too late.

I’m not saying it’s the protesters’ fault.

The higher education system is primarily run by people with liberal arts degrees so it’s natural they give high regard to these fields. However, colleges are doing students a disservice by leading them to believe that simply by graduating with any degree, employers will be knocking at their door. Employers are looking for marketable skills. They don’t care what you know; they care what you can do.

Colleges need to do a better job of informing students about job prospects in their chosen fields. “Oh, you chose electrical engineering. The next four years are going to stink, but you can afford to live on your own when you graduate. Oh, you chose Irish literature. Hope your parents have a spare bedroom.” It sounds harsh, but I wish someone had been that frank with me as an 18 year old. It would have saved me from stumbling around until I found a field I liked AND actually paid a salary.

A friend recently shared this career planning Venn Diagram. It’s funny, but also wise in its simplicity. I think the protesters angry about their student loan debt are well-intentioned but misinformed. As students, we are are told to follow our passions and find our calling, but we are told to ignore money. As these protesters are finding out, that is bad advice. College is an investment, with returns that can be measured. It’s time we started doing a better job informing students about life after graduation.

The Tulip Bubble of 1636

With all the news coverage on the recent “Great Recession”, you might think bursts of speculation and the subsequent collapse in prices are unique to the modern age. They’re not.

During the latter half of 1636 Tulip prices in Holland skyrocketed. By the peak of the bubble in February 1637, a single tulip bulb was selling for more than the average laborer made in an entire year. There was a strong belief that tulip prices would only continue to rise. Then, just as suddenly, the tulip market collapsed. Those who had bought in at the top were left destitute wondering where their fortunes had gone.

Sound familiar?

As much as economists would like to explain markets with clean, mathematical formulas, there is a human element that can never be fully predicted. The cycle of booms and busts is linked to human psychology as much as actual macroeconomic conditions. The older I get the more I think the efficient-market hypothesis is a pipe dream and real markets are far more complex and unpredictable than its creators would have envisioned.