Andy Kessler

Technology Review: A Pound of Cure

http://www.technologyreview.com/computing/22852

The federal government is about to spend big on health-care IT. Too bad the medical industry has a vested interest in inefficiency.

Technology is once again being touted as a cure-all, this time for what ails the American health-care industry. The Obama administration's $787 billion stimulus plan includes $19 billion for health-care IT spending that provides incentives for doctors and hospitals to adopt electronic health records. Starting in 2011, stimulus funds will provide additional Medicare and Medicaid reimbursements for health-care providers using such systems.

These federal funding programs assume that the critical hurdle to widespread adoption of electronic medical records is cost. Indeed, hospitals surveyed in a study published last year in the Journal of the American Medical Association reported cost as the major barrier. Yet compared with other businesses, the health-care industry has been unmoved by the logic of lowering costs to increase profits. The truth is that these folks could have digitized the whole industry ages ago. The technology has been around for a long time: Wall Street began phasing out physical stock certificates over 35 years ago. Even the cash-strapped airline industry has gone ticketless, removing huge labor and overhead costs. These industries started using electronic records because they believed it would save money. The health-care industry simply has not followed suit.

The reason lies neither with cost nor with inadequate technology. Rather, the health-care industry's reluctance to digitize its records is rooted in a desire to keep medicine's lucrative business model hidden. Dangling $19 billion in front of a $2.4 trillion industry is not nearly enough to get it to reveal the financial secrets that electronic health records are likely to uncover--and upon which its huge profits depend. In those medical records lie the ugly truth about the business of medicine: sickness is profitable. The greater the number of treatments, procedures, and hospital stays, the larger the profit. There is little incentive for doctors and hospitals to identify or reduce wasteful spending in medicine.

The amount of unnecessary spending is huge. In a project that analyzed 4,000 hospitals, the Dartmouth College Institute for Health Policy and Clinical Practice estimated that eliminating 30 percent of Medicare spending would not change either access to health care or the quality of the care itself. The Congressional Budget Office then suggested that $700 billion of the approximately $2.3 trillion spent on health care in 2008 was wasted on treatments that did not improve health outcomes. This excessive spending has kept the entire health-care industry growing faster than the population, and faster than inflation, for decades.

While electronic medical records do have sizable up-front costs, they also have the potential to save big, in part by streamlining administrative costs. According to a 2003 article by Dr. Steffie Woolhandler in the New England Journal of Medicine, administration accounts for 31 percent of expenses in the U.S. health-care industry, or more than $500 billion per year. (To put that in perspective, Google has spent well under 10 percent of that on all its R&D.) Richard Hillestad of the Rand Corporation wrote in Health Affairs, in 2005, that health-care information technology could save physicians' offices and hospitals more than $500 billion over 15 years thanks to improvements in safety and efficiency.

Electronic medical records would make it much easier to conduct the studies needed to track down this wasteful spending. According to one estimate, only about 4 percent of U.S. hospitals use comprehensive electronic record systems; most rely on paper records. As a result, analyzing the effectiveness of specific treatments--for example, spinal-fusion surgery versus physical therapy for back pain caused by a herniated disc--is unnecessarily expensive and time consuming. Physicians must compile data for a significant number of patients undergoing each treatment and correlate that information with each patient's outcome.

Using electronic health records, in combination with data mining and search technology, would make this kind of analysis much easier. Patients who fit specific criteria could be identified and tracked automatically, for example. Researchers would be able to analyze larger numbers of patients and a wider variety of treatments. With easy access to this kind of information, wasteful spending could be identified more readily, allowing payers, whether Medicare or private insurers, to stop reimbursing for expensive but unnecessary tests and procedures.

An even bigger threat to the sickness industry's business model is that by allowing automated tracking of patients over time, electronic health records would set the stage for early detection and preventive medicine. Currently, the entire industry is organized around treating sickness, rather than keeping people healthy in the first place. Three-quarters of health-care spending is devoted to chronic care, but the National Cancer Institute and the Centers for Disease Control and Prevention allot just 12 percent of their budgets to research on early detection. Moreover, the payment system is structured around reimbursement for treatment rather than prevention.

With widespread use of electronic health records, it would be easier to expand preventive medicine, not only by educating patients about lifestyle changes but also by conducting mass screenings. A recent American Cancer Society study concludes that prevention, early detection, and better treatment decreased cancer death rates between 1990 and 2005 by 19 percent for men and 11 percent for women. I would like to see funding for technologies that could ultimately improve early detection. Studies are now being launched on CT scans that can evaluate a patient's heart in less than one heartbeat. They produce finer resolution than existing technologies and return fewer false positives. These tests cost $1,000 now, but within five years, thanks to expected advances in computing power, we should see a $200 CT scan to detect heart disease before a heart attack.

The ability to detect cancer early enough and cheaply enough for effective treatment would prove much more cost effective than the current approach, which involves spending hundreds of thousands of dollars to extend the life of a cancer patient for a few months--generally, with low quality of life.

As valuable as electronic health records are for streamlining costs, their biggest contribution will lie in moving medicine toward early detection. Let's hope that the adoption of this screening technology is not postponed as long as electronic medical records have been, in a misplaced desire to protect the lucrative status quo. Like all good technology, it's probably going to get off the ground on the grassroots level. Expect your local Walgreens to promote these tests sooner than your doctor does.

Forbes.com - The Inevitability Of Internet Pirates

Pirates are all over the news this year. They were off the coast of Somalia … and now they're in Sweden? In April, a Stockholm court handed down a guilty verdict for "accessory and conspiracy to break copyright law" to the four owners of the Web site Pirate Bay, who now each face up to one year in prison.

Their crime? Setting up a site that allows 22 million users--and that number is growing--to search for and find pointers to (mostly) copyrighted material on the Internet. These so-called torrents are easily downloadable, perfect digital copies of music, TV shows, movies and, as it's known on the Web, pr0n. Outraged at their courts, Swedish citizens got the last laugh when the three-year-old Pirate Party received 7.1% of the vote in the early June European Union elections, guaranteeing it a seat in the European Parliament. Argh.

The funny thing is, Pirate Bay doesn't even host any copyrighted material for download, only directions to find it. If I were Google CEO Eric Schmidt, I'd hold off on that trip to Europe this summer. Because type "The Climb lyrics" into Google and you get pages of links to other Web sites with copyrighted lyrics to this Miley Cyrus song. Type in "Hannah Montana the Movie torrent," and you have a choice of download sites for a copy of the movie, all one click away. That's "accessory and conspiracy," if you ask me.

Fortunately, we in the U.S. rarely pay attention to Swedish laws. Did you know it's illegal in Sweden to repaint a house without a license and the government's permission? But along the lines of Supreme Court Justice Ruth Bader Ginsburg's remark--"Why shouldn't we look to the wisdom of a judge from abroad with at least as much ease as we would read a law review article written by a professor?"--I say bring on the Pirate Party!

Copyright law and its interpretations have been a mess for years. I'm always amused by pay-per-use Xerox machines in libraries bearing a warning label not to copy copyrighted material--as if there was any other reason for the copier to be there. In 1998 Congress was happy to pass an extension to existing regulation, practically written by Disney, that extends artist's copyrights well beyond their deaths. Google has inflamed the anger of book authors, a dangerous group who can type faster than most, by claiming it is allowed to put the complete text of books on its site unless individual authors opt out.

Furious that Internet news sites are using Associated Press content without paying fees, the AP announced tougher enforcement of their copyrights. In an attempt to show how twisted this has become, I (illegally?) copied the following from an AP story I found on Google: "'We can no longer stand by and watch others walk off with our work under misguided legal theories,' said Dean Singleton, the AP's chairman and the chief executive of newspaper publisher MediaNews Group Inc. 'We are mad as hell, and we are not going to take it any more.'"

No matter what laws are passed, copyright infringement is going to happen.

For the most part, Google and others hide behind a simple concept, that they are in the "link serving" business. Ingenious, actually. Others may violate copyrights, their argument goes, but we just serve up links to Web sites that are doing supposedly illegal things, like hosting downloads. Google's implicit claim is that they are not the police of the Internet, which would be quite an expensive task to undertake. And if the Web were strictly regulated, search wouldn't be as lucrative a business. But are they in the same business as Pirate Bay? Will they soon fund the Google Party?

And who are the Web's police? In the end, it's courtrooms in places like Sweden. They're not very efficient; they don't fit the Internet model of scalability. So really, it's no one. Like it or not, the Web is and will remain the Wild West.

Hand out as many guilty verdicts as you like, but folks on the Internet will copy away--because, really, who can stop them? Google won't do it, Internet providers like Comcast and AT&T, who can block a lot of this stuff, can't do it without Network Neutrality proponents squawking, "Interference!"

Even authoritarian regimes fail. (The Great Firewall of China is quite leaky.) Plus, it is so easy to create a Web service to download copyrighted material that, like that arcade game Whac-A-Mole, if you take one culprit down with your mallet another five pop up in the next few nanoseconds. Sad but true, there is not much anyone can do.

If you want to understand how impossible it is to shut this stuff down, here's an example. I've noticed that Pirate Bay's servers go down every once in a while, for as long as a day. A note is put up that they have to travel to reset their servers, which are in an undisclosed location. My bet is Estonia. Or maybe Tuvula.

So make all the legal arguments you want. No matter what court decisions are rendered and no matter what laws are passed, copyright infringement is going to happen. So these folks should stop suing their customers and lobbying for more laws and instead come up with new business models that pirates can't follow them into.

Rock groups Aerosmith and Metallica have had most of their library of songs stolen, so they have incorporated them into the videogame "Guitar Hero." In that format, they sell them again to millions of fans who want to do more than listen. High-definition movies are too big to download (for now), so Blu-ray disc sales continue to grow. The fact that iTunes is tightly linked to iPods legitimized digital music sales. The Amazon Kindle is kick-starting a protectable platform for electronic books. And newspapers and magazines need to create more than just a free display tablet to properly Webify their printed words.

New services--in areas from alerts to social networks to finance to interactive sports-fan participation--need to do things paper versions can't do. These organizations aren't in the railroad/media business anymore; they're in the transportation/communications business. The distinction makes a difference. And in the meantime, expect digital pirates to remain a menace to the old way of doing things.

CNBC: Fast Money - Bull Market or BS?

18:00 minute mark...

WSJ: Was It A Sucker's Rally?

The Dow Jones Industrial Average has bounced an astounding 30% from its March 9 low of 6547. Is this the dawn of a new era? Are we off to the races again?

Only a fool predicts the stock market, so here I go.

I'm not so sure. Only a fool predicts the stock market, so here I go. This sure smells to me like a sucker's rally. That's because there aren't sustainable, fundamental reasons for the market's continued rise. Here are three explanations for the short-term upswing:

1) Armageddon is off the table. It has been clear for some time that the funds available from the federal government's Troubled Asset Relief Program (TARP) were not going to be enough to shore up bank balance sheets laced with toxic assets.

On Feb. 10, Treasury Secretary Timothy Geithner rolled out another, much hyped bank rescue plan. It was judged incomplete -- and the market sold off 382 points in disgust.

Citigroup stock flirted with $1 on March 9. Nationalizations seemed inevitable as bears had their day.

Still, the Treasury bought time by announcing on the same day as Mr. Geithner's underwhelming rescue plan that it would conduct "stress tests" of 19 large U.S. banks. It also implied, over time, that no bank would fail the test (which was more a negotiation than an audit). And when White House Chief of Staff Rahm Emanuel clearly stated on April 19 that nationalization was "not the goal" of the administration, it became safe to own financial stocks again.

It doesn't matter if financial institution losses are $2 trillion or the pessimists' $3.6 trillion. "No more failures" is policy. While the U.S. government may end up owning maybe a third of the equity of Citi and Bank of America and a few others, none will be nationalized. And even though future bank profits will be held back by constant write downs of "legacy" assets (we don't call them toxic anymore), the bears have backed off and the market rallied -- Citi is now $4.

2) Zero yields. The Federal Reserve, by driving short-term rates to almost zero, has messed up asset allocation formulas. Money always seeks its highest risk-adjusted return. Thus in normal markets if bond yields rise they become more attractive than risky stocks, so money shifts. And vice versa. Well, have you looked at your bank statement lately?

Savings accounts pay a whopping 0.2% interest rate -- 20 basis points. Even seven-day commercial paper money-market funds are paying under 50 basis points. So money has shifted to stocks, some of it automatically, as bond returns are puny compared to potential stock returns. Meanwhile, both mutual funds and hedge funds that missed the market pop are playing catch-up -- rushing to buy stocks.

3) Bernanke's printing press. On March 18, the Federal Reserve announced it would purchase up to $300 billion of long-term bonds as well as $750 billion of mortgage-backed securities. Of all the Fed's moves, this "quantitative easing" gets money into the economy the fastest -- basically by cranking the handle of the printing press and flooding the market with dollars (in reality, with additional bank credit). Since these dollars are not going into home building, coal-fired electric plants or auto factories, they end up in the stock market.

A rising market means that banks are able to raise much-needed equity from private money funds instead of from the feds. And last Thursday, accompanying this flood of new money, came the reassuring results of the bank stress tests.

The next day Morgan Stanley raised $4 billion by selling stock at $24 in an oversubscribed deal. Wells Fargo also raised $8.6 billion that day by selling stock at $22 a share, up from $8 two months ago. And Bank of America registered 1.25 billion shares to sell this week. Citi is next. It's almost as if someone engineered a stock-market rally to entice private investors to fund the banks rather than taxpayers.

Can you see why I believe this is a sucker's rally?

The stock market still has big hurdles to clear. You can have a jobless recovery, but you can't have a profitless recovery. Consider: Earnings are subpar, Treasury's last auction was a bust because of weak demand, the dollar is suspect, the stimulus is pork, the latest budget projects a $1.84 trillion deficit, the administration is berating investment firms and hedge funds saying "I don't stand with them," California is dead broke, health care may be nationalized, cap and trade will bump electric bills by 30% . . . Shall I go on?

Until these issues are resolved, I don't see the stock market going much higher. I'm not disagreeing with the Fed's policies -- but I won't buy into a rising stock market based on them. I'm bullish when I see productivity driving wealth.

For now, the market appears dependent on a hand cranking out dollars to help fund banks. I'd rather see rising expectations for corporate profits.

Weekly Standard: Putting the Toothpaste Back into the Tube

Federal Reserve chairman Ben Bernanke needs to spell out how he plans to head off hyperinflation.

So how is Fed chairman Ben Bernanke going to get all that toothpaste back into the tube? The Fed has been cranking money out like water over Niagara Falls. The monetary base has increased by a trillion dollars in just the last six months. And he's not done, furiously printing dollars (bank credits, really) and buying Treasuries in an attempt to flood the economy with dollars. When will it end? $3 trillion? $4 trillion? And then what? A functioning economy doesn't need all that cash sloshing around. Is runaway inflation our next crisis?

Let's go back to fundamentals for a second. Money is a placeholder of value--the price of a cold Heineken or the value of work already done, a hole dug, a piece of software written, whatever. When things work just right, prices seek the right level and we get a match between that cold beer and the sweat from working for it.

WSJ: Have We Seen the Last of the Bear Raids?

So is that it? Is the downturn over? After bouncing off of 6500, or more than half its peak value, and with Citigroup briefly breaking $1, the Dow Jones Industrial Average has rallied back more than 1200 points. So, is it safe to go back in the water? Best to figure out what went wrong first -- what I like to call a bear-raid extraordinaire.

The Dow clearly got a boost from Treasury Secretary Tim Geithner's new and improved plan, announced on Monday, to rid our banks of those nasty toxic assets. The idea is to form a "Public-Private Investment Fund" to buy up $500 billion to $1 trillion worth of bad assets -- mostly mortgage backed securities (MBSs) and collateralized debt obligations (CDOs).

While it's true that private interests can conceptually help establish the right market price for these assets, the reality is Mr. Geithner's public-private scheme won't work. Why? Because the pricing paradox remains -- private parties won't overpay, yet banks believe these assets are extremely undervalued by the market. As Edward Yingling, president of the American Bankers Association, said recently on CNBC, "You have to go into the securities, examine the securities, examine the cash flow. I've seen it done, and the market is so far below what they're really worth."

NPR: Zombie Banks

NPR Morning Edition February 17, 2009
Click here to play

Zombie Banks Feed Off Bailout Money by Chris Arnold

• “A zombie bank is not quite dead, but it’s certainly not alive and is not doing any good for the economy.”
• “It’s not lending, but it won’t die so that you can restructure it and have a healthy bank again.”
• “I always liken zombie banks to Night of the Living Dead where you get these creatures walking around with their arms out ripping at the flesh of humans and turning them into the living dead as well."
• “Zombie banks eat the fabric of the economy, they’re just awful. This is what happened to the Japanese, they had banks that were overstuffed with non-performing loans so they had a decade-plus of just an awful economy.”
• “I’ve watched every single one of those zombie movies and you can’t cure zombie-ism, everyone knows that. You gotta shoot them, you gotta get rid of them, cut their heads off, put a silver bullet through their hearts, and get some healthy banks."
• “We have a situation where there’s zombies roaming around and government programs so far are an aspirin, when instead you’ve got to chop its head off to get the economy growing again.”

Of course, that's not quite right:
Spokesman: "The body should be disposed of at once - preferably, by cremation.
Reporter: "Well, how long after death, then, does the body become reactivated?"
Spokesman: "It's only a matter of minutes."
Reporter: "Minutes? Well, that doesn't give people time to make any arrangements."
Spokesman: "Oh, you're right, it doesn't give 'em time to make funeral arrangements. The bodies must be carried to the street, and...and...and burned. Ah, they must be burned immediately! Soak them with gasoline and burn them! The bereaved will have to forgo the dubious comforts that a funeral service will give. Ah, they're just dead flesh - and dangerous!"

WSJ: Why Markets Dissed the Geithner Plan

One of the cool things about being Treasury Secretary is that you get your signature on dollar bills, giving them authority, defending their honor. Timothy Geithner's plan to save the struggling banking system probably does the opposite, throwing good money after bad to a banking system struggling under the weight of its own mistakes. The markets don't like it. The Dow dropped 382 points while bonds rallied as a port in a continuing storm.

Politics will kill a nationalized bank. So spin them out immediately. Send out those shares of each bank to taxpayers. They (will have) paid for the recapitalization

Mr. Geithner announced a three-point plan yesterday to "clean up and strengthen the nation's banks," and made a vague declaration to use "the full resources of the government to help bring down mortgage payments and to help reduce mortgage interest rates." Unfortunately, those are conflicting plans. Hence the markets' skepticism.

The Treasury secretary seems stuck on keeping the banks we have in place. But we don't need zombie banks overstuffed with nonperforming loans -- ask the Japanese.

Forbes.com - Chicago Cubs Economy

The Tribune Company is to announce the buyer of the Chicago Cubs baseball team this week. The short list is Chicago businessman Tom Ricketts, Chicago real estate investor Hersch Klaff and New York private-equity investor Marc Utay, according to a reporter at the Chicago Tribune, who must have, um, pretty good sources. Hope (or is it a goat) springs eternal for Cubs fans, now 100 years since a championship.

The only reason I bring this up is that Mark Cuban, famous hedger of Yahoo! shares after selling his company, owner of the Dallas Mavericks basketball team, frequent finee by NBA commissioner David Stern (another $25,000 last week!) explained a couple of weeks ago on his terrific site blogmaverick.com, why he wasn't a finalist for the Cubs. Inadvertently, or maybe blatantly, he gives the greatest explanation of today's asset values and what has gone wrong with the U.S. economy.

Crazy like a fox, that Cuban. It's just that without financing, the same identical underlying asset is worth much less!

"I never thought it conceivable that it would be hard to spend a billion dollars on a sports team. In this case it was. Add me to the list of people who never want to participate in this type of sales process again. I tried every trick I knew to try to get them to commit to me. ... You name the trial close, I went for it. But I couldn't close them." Like that bigger house down the block you got outbid on.

WSJ: The End of Citi's Financial Supermarket

The great unwind of Citigroup's financial supermarket has begun. In the face of $10 billion in losses in the latest quarter, and with its stock at a 16-year low, Citi struck a deal on Tuesday to effectively sell control of its Smith Barney brokerage unit to Morgan Stanley.

A slimmed down Citi is long overdue. The rationale for a financial supermarket always stuck me as odd. Why would anyone stick all their bank/brokerage/insurance eggs in one basket?

It wasn't the repeal in 1999 of the Depression-era Glass-Steagall Act that killed Citi. It was bad management.

Citibank, founded as City Bank of New York in 1812, has been beat up before. Overextended in mostly bad real-estate loans in the downturn of 1990, losses mounted and the stock got killed, hitting the equivalent of $1 after stock splits. Wall Street was abuzz, debating if the U.S. government had a "too big to fail" doctrine. The bank didn't wait around to find out. It cut its dividend and took a $590 million investment from Saudi Arabia's billionaire Prince Alwaleed bin Talal.