Microfinance (a.k.a., microcredit or microlending) has been highly touted among many development folks and people interested in helping to alleviate poverty in developing countries (and communities in the US). For instance, Opportunity International claims:
Microfinance is the provision of financial services such as loans, savings, insurance, and training to people living in poverty. It is one of the great success stories in the developing world in the last 30 years and is widely recognized as a just and sustainable solution in alleviating global poverty.
Suppose you want to make an investment in a long-term asset that pays off over the next 45 years. You go to the bank and ask for a loan to pay the up-front cost of the investment with the promise to pay the funds back once the asset begins paying returns. The bank offers to loan you the funds at an interest rate of X% that reflects the risk-adjusted cost of making the loan based on the riskiness of the asset and your likelihood of repayment.
In any normal context, you would look at the interest rate, look at the expected payoff of the investment, and determine whether or not the investment still made sense given the cost of borrowing the money. If the cost of the loan to make the investment was higher than the expected payoff, then you would either seek a cheaper loan or you would forgo the investment.
Kudos to the Obama Administration for taking the first step toward “reforms” that could actually have a helpful effect on health care costs in the U.S. No, it has nothing to do with the so-called Affordable Care Act. Rather, the Center for Medicare and Medicaid Services has, for the first time, released data not only on the amounts hospitals bill for Medicare-covered services, but the amounts the hospitals were paid as well.
One of the biggest hindrances to cost savings and efficiency in the health care sector is the lack of transparent pricing information. (The other is the fact that consumers of health care typically don’t pay the bills directly, so they generally don’t take cost into account when deciding whether to consumer health care services. But that’s another can of worms.) An article in the March 10, 2011, issue of The New England Journal of Medicine explains the important role price transparency could have in reducing the upward trend in health care costs. Likewise, the November 2008 issue of Health Affairs includes articles explaining how a lack of transparency in the price of medical devices increases hospitals’ costs (and hence, insurers’ and patients’ costs).
Price transparency, if nothing else, allows researchers, insurers, patients and (almost unfortunately) policy makers to identify high- and low-cost providers. And the variance can be very large, even within local markets. For instance, where I live (Columbia, MO), there are two major hospitals (or hospital systems): University of Missouri Health Care and Boone Hospital. A quick review of the Medicare data shows that University Hospital charges prices that are, on average across DRGs, 42.6% higher than Boone Hospital–with charges for some codes more than 100% and as much as 150% higher.
Of course, what a hospital charges and what it receives under Medicare agreements are different things. In every case, even when the price UMHC charges is lower than Boone’s, UMHC receives more money for each DRG paid, and on average receives 49% more in payments than does Boone. For no diagnosis category listed does UMHC receive less than 9% more than Boone (and the top DRG is 99% more).
Now, UMHC is a teaching hospital, part of the University of Missouri School of Medicine. Medicare guidelines recognize the additional cost and value of training new doctors and allows for higher reimbursement rates. However, one should ask the question of whether–on average–a 49% cost premium is appropriate. UMHC is also a Level 1 trauma center, which may be associated with higher costs–or higher cost treatments. However, the data are reported based on DRGs, which should control for much of the variation in the types (and costs) of medical services being reimbursed.
There are undoubtedly explanations for some of these observed differences. But without the data available, the questions cannot even be asked. And until such questions are asked, there is a lower likelihood of meaningful reform in the actual cost of healthcare. Perhaps this initial glimpse behind the curtain of healthcare costs will lead to even greater transparency in the future; not just after the fact (these data are for 2011), but for consumers who may be deciding how to spend their healthcare dollars.
As I wrote this, I couldn’t help but think of this movie clip. Enjoy!
There’s a nice article in the WSJ Online today reporting on recent research by Betsey Stevenson and Justin Wolfers at the University of Michigan. Their article takes to the task a popular assertion that, above some level of income, more money doesn’t really lead to greater happiness. Of course, that would violate on the basic assumptions underlying this blog. They write:
The income–well-being link that one finds when examining only the poor, is similar to that found when examining only the rich. We show that this finding is robust across a variety of datasets, for various measures of subjective well-being, at various thresholds, and that it holds in roughly equal measure when making cross-national comparisons between rich and poor countries as when making comparisons between rich and poor people within a country.
Moreover, Stevenson and Wolfers also find that the third rule of the blog is also substantiated; namely, more more is less better. Or, to use their terms, “while each additional dollar of income yields a greater increment to measured happiness for the poor than for the rich, there is no satiation point.” That is, someone earning $10,000 may get more sense of happiness from an additional $1,000 than does someone earning $1,000,000, but both experience an increase in well-being in a consistently proportional way.
So who cares? Well, I do for one. Hey, if you’re going to build a blog on a pretty basic concept, it’s nice to have the research back it up (unlike, say, some Keynesian economists).
You should too. Some government policies seem to assume (conveniently so) that once a person has a certain amount of income (call them “rich”), they do not value additional money anymore. Therefore, you can take money away from them and give it to people who do value the additional money (call them “poor”) and make society better off by creating a greater sense of well-being. This utilitarian approach would seem to justify redistributive social policies. The only problem is, it isn’t accurate–or at least it isn’t as simple as that (as the research above shows). And that’s even before taking into account the costly nature (both direct and indirect) of the mechanisms for redistributing the wealth.
So there you have it. No matter how much you make, no matter what country you’re in, more is better than less.
Economics has few “laws”. The most notable is the Law of Demand, which simply states that there is an inverse relationship between the price of a thing and how many units people are willing to buy (i.e., when the price goes down (up), people buy more (less)). The Law of Demand is basically just the culmination of the most basic observations of human behavior; specifically, The Basics with which I started this blog.
There are a few other things that sometimes get labelled as “laws” in economics textbooks. The “law of supply” only applies to things still actively produced, for which the necessary inputs are available; but in general, the more people are willing to pay for something, the more of it producers will try to produce. The “law of diminishing returns”–typically applied in the context of production–assumes there is at least one fixed input that constrains the marginal productivity of the rest. It’s more a rule of thumb than a “law.” But it is also analogous to Rule #3 in The Basics: More more is less better.
Whether we consider them “laws” or not, one thing is for certain: when we ignore these basic principles, we do so at our own peril. And that brings me to the motivation for this post; namely a recent blog post by “The Edgy Optimist” (aka Zachary Karabell) at Reuters.com titled “The ‘laws of economics’ don’t exist.” Continue reading “The "Laws" of Economics”
A student in my contracts course asked today about Dish’s hostile bid for Sprint and the implication for Sprint’s existing deal with Softbank. Great question! If only Dish had held off on their bid another couple weeks until when we are scheduled to talk about termination fees in M&A deals.
Turns out the Softbank-Sprint deal does have a break-up fee, to the tune of $600 million (as reported in the WSJ Online and confirmed in the actual deal). But Softbank went one step further than just including a termination fee. Concurrent with the original M&A agreement, Softbank also purchased a $3.1 billion convertible bond from Sprint. The conversion rate implies a price of $5.25 per share. That’s close to 600 million shares that Softbank can convert and sell back to any hostile bidder, capturing the additional value of the hostile tender offer. In the case of Dish’s $7/share bid, that’s roughly a $1 billion pay-off for losing the bidding war…in addition to the $600 million termination fee.
That’s a pretty sweet deal for sour grapes. It also illustrates that there are multiple ways bidders can protect their interests in an M&A deal.
Side note: the WSJ headlines report a potential $4 billion benefit to Softbank if Sprint bolts to Dish, but most of that is a windfall resulting from devaluation of the yen and it’s effect on the cash Softbank had set aside to effect the deal. It’s a nice windfall, but it’s not directly related to the terms of the deal itself.
It’s that time of year. No, not tax time (though it is that, too). It’s birthday season in my family. And with birthday season comes the annual renewal of life insurance policies–specifically, for two of my kids. When I opened the bill yesterday I realized I once again had lost the bet, and was now faced with ante-ing up for another round of the game.
Sounds crass, doesn’t it? But that’s the reality of life insurance (any insurance for that matter). Insurance is intended to cover the cost associated with a particular (bad) event–like your home burning down or your car being damaged. In the case of life insurance, the insurance purpose is to replace the economic value (i.e., present and future earning capacity) to the beneficiary of the person who dies. Taking out life insurance is effectively putting money down on a bet that the insured person is going to die in the next year (assuming annual premiums). If the insurance company loses the bet (the insured person dies), they pay the contracted benefits. If the person who owns the policy loses the bet (the insured person doesn’t die), then they are faced with re-upping the bet for the next round.