Domino Theory And The Health Care Industry

Have you ever heard of a concept known as domino theory? It was once cited by U.S. Presidents Eisenhower, Kennedy, and Johnson to justify America’s catastrophic military intervention in Vietnam.

The presidents argued that, if the South Vietnamese government was overthrown by communist forces, all of the other nations in Southeast Asia would fall to the communists in sequence like a row of dominoes. Eventually, of course, South Vietnam was indeed overrun by the communist military forces of North Vietnam. But no other nation in Southeast Asia ever followed suit.

In other situations, though, the domino effect has indeed generated a cascading series of events. When the United States government failed to save Lehman Brothers in late 2008, for instance, many political commentators warned that the failure of the Wall Street firm would trigger a domino effect that would lead to global economic collapse. Indeed, firms like AIG, Fannie Mae, General Motors, and Merrill Lynch disintegrated soon afterwards.

The domino effect appears to be impacting today’s health care industry as well. Over the past few decades, many cities have witnessed the consolidation of multiple hospitals into one or two dominant institutions, and then the absorption of physician groups and outpatient providers into hospital based “health systems.” The federal government has encouraged such activities by recognizing Accountable Care Organizations and other legal entities that require closer ties between provider units.

By and large, though, the health insurance sector has remained in a somewhat fragmented state. Some insurers have focused on certain types of insurance contracts, such as Humana and its Medicare plans. And others have operated within certain geographic areas, such as Kaiser Permanente in the western United States.

Last week, however, Aetna announced the acquisition of Humana in a multi-billion dollar deal, following Anthem Blue Cross Blue Shield’s offer to acquire Cigna last month. Why are these insurers suddenly taking an interest in acquiring their rivals?

Their interest can be attributed to the domino effect. When hospitals and other health providers consolidated into a small number of dominant organizations, they developed a significant negotiation advantage over the health insurers that sign payor contracts with them. The insurers are now deciding that they need to grow too, in order to neutralize their size disadvantage.

Of course, had the federal government maintained a rigorous antitrust policy, it might have prevented the consolidation of the provider market. But for many years, in industries ranging from health care to airline travel, the federal government has permitted many mergers and acquisitions that eliminate free market competition.

So it now appears that the health care industry is evolving towards a structure that will feature a small oligopoly of insurers across the nation and a small oligopoly (or monopoly) of providers in each regional market. The entire industry will be regulated under the Affordable Care Act and other federal and state laws.

This emerging structure shifts the American health care industry further and further away from the ideal principle of a free market capitalist economy with many competitors vying for business volume. Nevertheless, because so many dominoes have already fallen in this direction, it may be far too late to reverse course and adopt any other viable industry structure.

America’s Economy: A Backlash Avoidance Policy

For the past several years, American economists and government officials have been justifying the great financial bailout of 2008/09 in terms of its backlash avoidance effect.

Why backlash avoidance? Well, they explain that excessive consumer and corporate debt represented a primary cause of the 2008/09 crash. And they acknowledge that such overleveraging of debt should usually be rectified by shifting funds from consuming goods and services (i.e. current spending) to repaying debt.

But here’s the rub: if we all decide to stop spending at the same time in order to repay debt, the decline in economic activity could actually worsen the slump that was triggered by the excessive debt. Thus, the economy would experience a backlash effect.

The solution? At the very moment when consumers and corporations feel compelled to “do the right thing” and focus on repaying debt, the government should encourage them to do what is customarily the “wrong thing” and consume more products and services instead. Supplemental government spending (i.e. economic stimulus) may be necessary as well.

Several backlash avoidance policies appear to apply to the American economy of 2014 as well. But today, ironically, government officials may find it advisable to sit back and passively allow the free market to heal the economy.

For instance, the sharp contraction of Gross Domestic Product during the recent winter has been attributed in part to an unexpected decline in health care spending. So should the government rush to stimulate more spending on health care services? Well, no, the Affordable Care Act (i.e. Obama Care) is explicitly designed to reduce the bloated cost structure of the American medical system.

In addition, the home construction market continues to lag below normal historical levels, thus weighing down economic growth. So should the government encourage banks to relax their mortgage lending standards to encourage new residential construction? Of course not; sub prime mortgage loans, also known as “toxic debt,” represented a primary cause of the 2008/09 collapse of the global economy.

Furthermore, the economy continues to be plagued by the unusually harmful effects of long term unemployment among mature workers. So should the government develop new programs to explicitly encourage the hiring of mature workers? Regrettably, such programs may discourage the hiring of recent college graduates, who are struggling with unprecedented levels of student loans.

To be sure, government officials are finding it difficult to passively permit health care spending to slump, home construction to lag, and mature workers to remain unemployed when assistance can be justified on economic (and perhaps even moral) grounds. And yet it was also difficult for officials to authorize the bailout of 2008/09, a decision that may have prevented a second Great Depression.

There is a difference, though, between the situation in 2008/09 and the one that exists today. In 2008/09, an activist government was needed to authorize a bailout. Today, though, by simply allowing economic trends to run their course, the government may be able to ensure a beneficial outcome.

Oddly enough, the much derided paralysis of America’s federal government may help it remain passive in the face of public pressure to take action. In other words, the government’s very dysfunctionality may allow the health care, home construction, and mature worker employment sectors to generate the short term pain that is required to ensure long term prosperity.

The Perils Of Measuring, And Rewarding, Performance

It’s important to measure employee performance, isn’t it? By measuring success, and by rewarding it, we can identify superior performers and encourage others to strive for excellence.

Indeed, the logic of this philosophy appears to be self-evident. And yet, in a number of recent cases, measurement and compensation systems appear to have backfired in a dramatic fashion.

Just two days ago, for instance, General Eric Shinseki of the United States Department of Veterans Affairs resigned from his leadership role in the wake of an exploding health care scandal. Apparently, many military veterans have died while waiting for appointments to receive care, although Department employees recorded that they weren’t waiting at all.

And why did those employees falsify their records? Apparently, they knew that the Department did not possess the primary care resources to serve the needs of the veterans. But they also knew that the Department was collecting wait time metrics, and that lower waiting times would be rewarded by higher compensation.

So, lacking the resources to improve the system’s performance, the employees falsified the measurements and collected the compensation. It was a simple, yet effective, scheme.

The case is reminiscent of many other situations in the education sector. Recent laws and programs such as No Child Left Behind and Common Core have heavily emphasized standardized tests. A school with students who produce low scores may lose its funding, and individual teachers who teach low scoring students may be penalized and even publicly shamed.

But public school funding levels have been slashed in the wake of the Great Recession, leaving fewer resources to invest in scholastic activities. So, lacking the means to improve their students’ test scores, many educators have resorted to falsifying those measurements.

An explanation, of course, is not an excuse. There is truly no excuse for falsifying measurements, certainly not with the intention of masking situations where veterans die awaiting care and children fail to receive a satisfactory education.

Nevertheless, when measurements are utilized to determine employee compensation during a period of scarce or inadequate resources, it isn’t difficult to explain why individuals will feel compelled to falsify records. In other words, these recent scandals certainly weren’t unforeseeable events.

How would you establish the right “mix” of performance measurement, compensation, and oversight activities at your organization?

Dow Hits 11,000! Why Aren’t We Celebrating?

American investors, happy days are here again! The Dow Jones Industrial Average (DJIA), the landmark statistical index of large corporate stock values in the United States, just nudged over the 11,000 level for the first time since May.

American firms are clearly recovering from the Great Recession, and their shareholders are benefitting as well. But the latest American unemployment figures are grim, with limited private sector hiring overwhelmed by government sector lay-offs.

How is this possible? How can American companies (and their investors) be growing stronger while their employees lose their jobs? And how long can these trends continue until employment finally strengthens …

… or, conversely, until American firms again weaken?

Gunning For Growth

The primary reason for this “disconnect” between American firms and their employees is that, to put it simply, American companies aren’t wholly American any more. Quintessential red, white, and blue firms like Coca-Cola, Disney, and General Motors are experiencing far more growth in global markets than in domestic markets, and thus they are inevitably hiring new employees in regions that are generating more business. Why would Coca-Cola, for instance, build its work force in the United States instead of Asia when its North American sales volume is dropping by 1% while its Chinese sales volume is soaring by 29%?

Other United States firms claim that they would prefer to hire more American workers, but immigration laws prevent them from doing so. Technology firms like Microsoft and Google note that many foreign nationals are attracted to American universities, where they are trained to perform highly sophisticated value-added functions. However, even though many of these individuals would prefer to remain in the United States and become American citizens, our immigration laws make it easier and cheaper (and, in fact, often legally necessary) for American firms to establish new locations in foreign nations and then to employ these graduates overseas.

The bottom line is that, for a variety of reasons, companies inevitably hire employees in locations where sales volume is growing and talented employees are eager to work at relatively affordable salaries. That’s why American firms are increasingly building their work forces overseas instead of in the United States. And, in the process, the companies are becoming less American themselves.

The Investor Class

This divergence of fortune between United States corporations and the American work force also impacts the differing circumstances of domestic investors and workers. Last month, for instance, the DJIA jumped by over 7%, while the Nasdaq stock index soared by over 12%. A 68 year old retiree with a fully guaranteed pension and a 401(k) investment “nest egg” worth $1 million would thus have seen his 401(k) savings soar by over $70,000 in just one month if he had invested all of his funds in a relatively conservative DJIA stock fund. Of course, he would have received his monthly pension payment and government funded social security and health care benefits as well.

Meanwhile, a lower middle class supermarket clerk scraping by on minimum wage would not have felt any benefit from the stock market surge; such individuals generally own few or no investment funds. He may well have felt the burden of soaring health care service costs, though. Many working Americans who possess no health insurance coverage, after all, are employed in clerical positions that offer no benefits.

Furthermore, the American income tax system places higher rate burdens on lower middle class supermarket clerks than on wealthy retirees. Most retirees are paying a long term capital gains tax rate of 15% on their retirement fund withdrawals, whereas employee wages are subjected to higher rates in total by the income tax, social security tax, and Medicare tax systems of revenue collection.

Valid Arguments, But No Solution

There are, quite naturally, perfectly valid arguments in favor of maintaining these status quo policies in the United States. After all, the United States does indeed maintain a mature economy and cannot possibly match the explosive economic growth rates of emerging nations. American firms are thus far better off pursuing explosive growth opportunities in emerging nations than not pursuing them at all.

Furthermore, the immigration laws have indeed been developed to protect the American labor market from being overrun by immigrants seeking better lives. And senior citizens don’t perceive their government financed retirement benefits to be wealth transfers from working adults; instead, they assert that they paid into the retirement system during their own decades of employment, and they are now simply receiving equivalent value during their retirement years.

These are all valid arguments, and yet they offer no solution to the problem that is now confronting American society. Namely, an economic recovery is clearly underway for corporations and their investors, but an end to massive unemployment is not yet in sight for the work force. And eventually, if America’s employee pool collapses entirely, it may pull all of the other American stakeholders down with it.