Category Archives: Business and economics

Priorities and the Hogs

Football on tee - transparentBy Steve Brawner
© 2016 by Steve Brawner Communications, Inc.

Merriam-Webster’s online dictionary defines “juxtaposition” as “the act or an instance of placing two or more things side by side.” On January 27, an interesting one occurred at a University of Arkansas System Board of Trustees meeting.

The trustees were led on a tour of the University of Arkansas for Medical Sciences hospital campus in Little Rock. While parts are new and gleaming, what once was the main hospital needs $13 million just to become fire code-compliant, and even then it would be badly outdated and inefficient. UAMS would like $97 million to spruce up that building and other facilities, all for administrative space. Tearing the building down and replacing it would cost $250 million.

Board members later heard from the University of Arkansas at Pine Bluff. Students there enjoy a new science and technology building and a new fitness center, but in the middle of campus is an unused old multistory facility with weeds growing from the roof, and not as part of a science experiment. The campus security headquarters is an aging house, which can’t be reassuring to parents, and after a good rain, parts of the campus are underwater. UAPB would like money, too.

Then came the University of Arkansas Athletic Department, which seeks a $160 million expansion of its football stadium that would include 3,200 premium seats along with other amenities, such as a video board. The project would be funded through $40 million in donations and a $120 million bond issue repaid through higher ticket prices, paid mostly by fans not sitting in those 3,200 premium seats.

The trustees gave Athletic Director Jeff Long their blessing to continue gathering information, but not before former Sen. David Pryor had questions and abstained from voting. He said he was not necessarily opposed, but priorities should be discussed. This would be, he said, “the largest single bond issue in the history of higher education in the state of Arkansas.” He asked who would benefit, and how much of the costs students would bear.

“A bond issue is a debt of the University of Arkansas,” he said. “It is a debt of the people of Arkansas, and ultimately if something goes wrong, who’s responsible? And that’s the people.”

This is where the columnist perches in his ivory white tower and wags his finger at the trustees, right? Well, not necessarily. Pryor had it right. A discussion is needed.

True, it was quite a juxtaposition to see the state’s teaching hospital and one of its universities asking for money that’s currently not available for boring but necessary stuff like medical administration and drainage, which was then followed by a mostly celebrated $160 million request for football seats used six or seven times a year by rich people, along with other amenities.

However, the needs UAMS and UAPB are seeking to fill would be met partly by tax dollars that haven’t yet come from the Legislature. Moreover, it should never be assumed that public entities are spending the money they already have as efficiently as can be expected (or that they’re not).

Long, in contrast, was asking to pursue money paid voluntarily by donors and fans who, if they don’t like the higher ticket prices, could choose to watch the games on TV, which is what I do. The UA Athletic Department is one of the nation’s few big time college programs that turns a profit and is self-sustaining. In fact, it’s given money back to the university for academics for the newly built Champions Hall.

Finally, at what point do the Razorbacks add to the university, and at what point do they distract from it? The head football coach, Bret Bielema, is by far the highest paid state employee, including the doctors saving lives at UAMS. That seems like a misplaced priority. On the other hand, the Razorbacks are the university’s best marketing tool and a tie that binds the state together. And on the third hand, does all this send a message to young people that while we adults tell them to hit the books hard so they can become doctors, what we really value is how hard the Razorbacks hit the opposing players in the SEC?

It’s a complicated discussion, and it’s worth having before letting people spend $160 million of their own money on a football stadium, and making taxpayers responsible if something goes wrong.

Arkansans of the year

arkansasFlagBy Steve Brawner
© 2015 by Steve Brawner Communications, Inc.

Time magazine names a “Person of the Year.” Sports Illustrated has a “Sportsperson of the Year.” Who are the Arkansans of the year?

In politics, it’s not even close. On issue after issue, Gov. Asa Hutchinson either achieved his objectives or appointed a study commission to buy time to achieve his objectives. He wants to continue but change the private option, the controversial program that uses Medicaid dollars to buy insurance for lower-income Arkansans, so he asked the Legislature to fund it two years while a replacement can be found. That’s what’s happened – so far. He and the State Board of Education butted heads over the Common Core-related PARCC exam. He wanted to replace it; the Board wanted to keep it. It’s gone. In the debate over the Religious Freedom Restoration Act, Hutchinson was perhaps the only elected official who pleased (too strong a word?) both sides. His signature education issue, requiring high schools to teach computer coding, has resulted in 4,000 students taking a class. The only downside to Hutchinson’s year is that next year can’t be this good.

Honorable mention: Baker Kurrus, superintendent, Little Rock School District. A non-educator in one of the state’s most high-profile education jobs, he’s trying to smooth ruffled feathers while telling hard truths. Does the Little Rock school superintendent belong in the “politics” category? He certainly does at the moment.

In business, I’m going with Donnie Smith, president and CEO of Tyson Foods. He and his company were questioned last year when Tyson bought Hillshire Brands for $7.7 billion. That was a lot of money, but buying the makers of Jimmy Dean Sausage and Ball Park Franks expanded Tyson’s already considerable reach. Tyson’s operating income rose 37 percent this year to $2.25 billion, and its sales of $40.6 billion are an increase of 9 percent over last year. That’s not chicken feed.

Honorable mention: George Gleason, CEO of Bank of the Ozarks. The $800 million purchase of Georgia-based Community & Southern Bank was the largest bank buy in Arkansas history and made Bank of the Ozarks an instant major player in Georgia. Full disclosure: I own a journalist-sized amount of stock in the company – meaning, not much.

In health care, I’m making New Hampshirite John Stephen an honorary Arkansan. Hired by the Health Reform Legislative Task Force to consult on reforming Medicaid, he and his firm, The Stephen Group, have offered information, insight and solutions, and as a result have much influence over Arkansas policymakers. They’ve argued the state shouldn’t completely ditch the private option while also shining a light on Medicaid’s problems. When he speaks, lawmakers listen, and he’s been speaking a lot.

Honorable mention: Hospital CEOs Troy Wells (Baptist Health), Dan Rahn (UAMS) and Chad Aduddell (CHI St. Vincent) are leading three of the state’s big institutions in a consolidating industry. You know how other areas of the economy such as banking and retail are increasingly dominated by a few players? It’s happening in health care, too.

In sports, it’s Brandon Allen, Arkansas Razorbacks quarterback. Has an athlete ever made such a quick turnaround from supposed “choker” to “clutch”? After missing late-game passes early in the season, he’s become one of the SEC’s most reliable quarterbacks and was one of the main reasons the Razorbacks won five of their last six games.

Honorable mention: Bret Bielema, Razorbacks football coach. He stuck with Allen and never lost faith in the team even when some were losing faith in his coaching ability. The Hogs have improved every year since he was hired.

In charities and nonprofits, The CALL and Project Zero are finding foster and adoptive homes for kids who really need them. The issue attracted attention this year when a report detailed problems with the state’s foster care system, and when Hutchinson spotlighted those children’s needs at his faith-based summit. Since 2007, The Call has brought 758 foster and adoptive families into the system, its website says, with more on the way. Project Zero, meanwhile, raises awareness through its Heart Gallery photos of waiting children.

Honorable mention: Too many great ones to name.

So who is the Arkansan of the year? There’s no way for me to know. What seems noteworthy today will be forgotten tomorrow, while seemingly minor events will have lasting consequences. (“Baby born in manger” probably didn’t make many headlines.) Maybe the names I’ve listed were important, or maybe they were just important to me.

At any rate, that’s my list. What’s yours?

Free market requires moral core

By Steve Brawner
© 2015 by Steve Brawner Communications, Inc.

Life, the pope is telling us, is about more than the bottom line. This past week has given two examples of why people should listen to his big economic message even if they disagree with some of his little ones. One involves a giant automaker. The other manufactures a little pill.

The automaker, Volkswagen, doctored its diesel engines so they would temporarily meet EPA emissions regulations while they were being tested, and then they would emit much higher levels when actually driven by car buyers. As a result, those cars performed better on the highways while releasing up to 40 times more pollution than the legal amount. Volkswagen did this in 11 million vehicles sold worldwide.

Environmental considerations aside, the company lied and cheated its competitors and its customers. People thought they were buying a clean vehicle that ran great. Rule-abiding competitors were selling products that had a disadvantage against Volkswagen in the marketplace.

The pill manufacturer is Turing Pharmaceuticals, which bought the rights to Daraprim, a niche drug that fights deadly parasitic infections. The drug has been on the market for 62 years and has no generic equivalent. Shortly after buying the rights, the company raised the price – from $13.50 per tablet to $750 each.

This is not the first time a drug has been purchased and then inflated recently. But the company’s owner, a 32-year-old former hedge fund manager, seemed particularly proud of himself. He said the price needed to be raised to make the drug profitable (which would mean the previous rights holder must have been losing a ton of money at $13.50). Frankly, the drug would be cheap at $750, he said.

If your only guiding principle is the bottom line, then those arguments make sense. Guy’s just charging what the market will bear, right? Everything he’s done is legal. Under traditional laissez-faire economics, the free market’s unseen hand will correct all wrongs, and somebody eventually will produce a generic version if they can make money doing it.

But humans are more than economic beings. We’re also spiritual, moral and social ones. In fact, we must be for the free market to function.

The free market is the greatest anti-poverty mechanism ever created by humanity. It allows entrepreneurs to produce goods and services valued by the marketplace, thereby creating jobs and raising a society’s standard of living. Those who do this exceptionally well – people like Steve Jobs and Warren Buffett – are celebrated and richly rewarded, as they should be.

But the free market is only as good as the values of its practitioners. It can be perverted by those who, instead of producing goods and services, merely play games with money and take advantage of others. While Jobs created world-changing products, Turing’s hedge fund manager produced nothing new. He just bought the rights to a pill and then jacked up the price knowing people had to pay or die, and knowing there probably won’t be a generic competitor soon, if ever.

I watched a brief cable “news” segment where the host and a couple of his guests either defended the hedge fund manager or expressed ambivalence about his actions. The host said this kind of situation is preferable to having the government in charge of health care.

Which is ironic, because if the free market isn’t governed by both the unseen hand and a moral core, then bigger government is unfortunately what we’ll get. Two days after Turing Pharmaceutical’s price hike came to light, Hillary Clinton announced a plan to limit drug price gouging. Supporters of a single-payer government health system can use this episode to bolster their arguments. Meanwhile, Volkswagen’s actions likely will add to the regulatory burden faced by all automakers. They’ll have to do more to prove they’re not cheating.

In these two cases, it’s all ending as it should. Volkswagen stock has tumbled, it faces huge fines, and its CEO, who said he knew nothing about the cheating, has resigned. Meanwhile, overwhelming public condemnation wiped the smirk off the young hedge fund manager’s face, and he announced he would reduce the price hike.

That happened because humans are still spiritual, moral and social beings, instead of merely economic ones. Most of us know it’s wrong to cheat, and we know it’s wrong to take advantage of the vulnerable, or to use the vulnerable as a tool to take advantage of society.

We’re going to be governed by something. Preferably, it’s a conscience.

In Greece and the U.S., economies are based on trust

By Steve Brawner
© 2015 by Steve Brawner Communications, Inc.

Remember the bank run scene in the movie “It’s a Wonderful Life”? George and Mary are traveling to their honeymoon when they see a crowd gathering outside the bank. George runs to the Bailey Bros. Building and Loan to find a crowd of worried customers wanting to withdraw their savings. He explains to them how financial institutions work. (“The money’s not here. Why, your money’s in Joe’s house … and in a hundred others.”) Then he begs them not to panic and starts handing out his own $2,000 in honeymoon savings to tide them over. Meanwhile, across town, Mr. Potter, the richest (monetarily) and most powerful man in town has just become richer and more powerful by taking control of the bank, which would be shut down for a week.

That scene is unfolding on a national scale in Greece.

In a nutshell, Greece’s debt has reached 180 percent of its gross domestic product, it’s not paying its bills, and the patience of its European creditors is wearing thin. Previous loan terms have required the Greek government to impose higher taxes and cut government spending, but the country is still mired in debt. The economy is collapsing. Unemployment is 28 percent. The banks have been closed, and Greeks have been limited to withdrawing the equivalent of $67 per day from their ATMs. On July 5, the Greek people defiantly voted not to accept the terms of a previous bailout proposal. It accomplished little but to strain the tolerance of their creditors, who forced Greek’s prime minister to accept an even worse deal.

Bankrupt debtors don’t get to set the rules.

International economics is above my pay grade. If you’ll pardon the pun, it’s mostly Greek to me.

Here’s what I know: Economies are based on trust. You and I work because we trust we’ll be paid. We deposit our money in banks trusting it will be there if we need it – without considering what would happen if everyone needed it at once. Trust is the basis for loans, investments and insurance. With it, an economy has a strong foundation. Without it, an economy becomes a house of cards.

The United States can’t yet be compared to Greece. America’s debt-to-GDP ratio is 103 percent. It’s still the world’s most dynamic economic engine, with abundant and untapped resources.

But let’s go there anyway. America’s national debt is now $18.2 trillion, or $57,000 for every American man, woman and child. In 1981, just 34 years ago, it was less than $1 trillion. Because of currently unfunded liabilities, that $18.2 trillion is projected to grow much larger. Meanwhile, the political system – long an inspiration to other parts of the world – has become incapable of doing anything about all this.

This behavior should be hurting the United States much worse than it is. One reason it’s not is because American taxpayers are paying very little interest on the debt. Why? Because investors see the United States government as one of the world’s safest places to store their money.

And that should concern us. If economies are based on trust, then what does it say about a global economy when one of the world’s most trustworthy investments is the one described two paragraphs ago?

It’s not just Greece or the United States that have issues. China’s stock market has been in a free fall lately, and Puerto Rico is practically bankrupt. In a global economy, what happens in these places matters, because, metaphorically speaking, our money isn’t just in Joe’s house. It’s also in Qiao’s.

In “It’s a Wonderful Life,” George Bailey prevented a panic by talking sense into his depositors and by handing out his own money. The building and loan survived that day because of the trust he had built.

But there are two realities that can’t be ignored. One is that trust can be lost very quickly. Had George failed to keep his institution open in the coming days, his customers would have pledged their loyalty to Mr. Potter, the powerful autocrat down the road who offered a little temporary security in exchange for some of their wealth and freedom.

The other reality is this: George Bailey was a fictional character. If trust in the real economy – domestic or global, there’s not much difference now – is lost, it’s going to take a lot more than an impassioned speech and $2,000 to calm people’s fears.

Changing health care’s business model

By Steve Brawner
© 2015 by Steve Brawner Communications, Inc.

On Tuesday, the CEO of a major Arkansas employer announced a new offering that could cost it a lot of business someday.

Troy Wells, president and CEO of Baptist Health, announced his hospital system had received a grant from Verizon Wireless for a yearlong diabetes study. The study will provide 125 Pulaski County patients with tech tools such as wireless glucometers that will transmit glucose levels to medical staff when patients test themselves at home. The patients also will be given cell phones so health professionals can coach them up on taking care of their health. Another group will be given more old-fashioned equipment, and the results will be compared.

The technology will help medical staff keep an eye on their patients to spot problems early and help them stay healthy. All of the patients will be “medically underserved,” meaning they face barriers to health care. In other words, they’re probably poor, they’re often aged, and they need help managing their diabetes.

This kind of preventive telemedicine holds great promise for society. Aside from the human factor, it costs the health care system much less to keep a patient’s blood sugar levels stable than it does to intervene after the disease has begun to take its toll.

The problem is, what’s good for patients, and for their families, and for the health care system, and for society, is not necessarily good for Baptist Health’s bottom line.

Of all the problems with health care reform, the biggest is that not nearly enough has been done to address the system’s perverse financial incentives. Baptist Health, like most medical providers, makes its money by treating patients, not by curing them and not by helping them stay healthy in the first place. About the only time health care providers have a meaningful financial incentive to promote good health is when they’ll otherwise have to provide uncompensated or inadequately compensated care – which is probably the case with some of the patients in this study.

The health care payment system operates under a “fee for service” model. Medical providers bill insurance companies or the government for each procedure, regardless of the results and regardless of how efficiently they perform. Therefore, promoting a healthy population cost-efficiently is about the worst thing a medical provider can do for itself, financially speaking.

That’s not to say that doctors and hospitals don’t try to cure us. Frankly, they deserve credit for acting against their self-interest. But, like all humans, they respond to incentives. As a writer, when I’m paid by the word, I’m not going to cut the story short – and no, I’m not paid by the word for this column. Likewise, incentives shape how medical providers decide priorities, in how they invest resources, and in what interventions they recommend. The reason there’s no cure for the common cold is because it hasn’t been financially viable to invent one. For cold medicine, it has been, which is why pharmacies and grocery store aisles are stocked full of multiple varieties.

Reforms are occurring. For example, the state has been engaged in a years long effort, the Arkansas Payment Improvement Initiative, which is replacing the fee for service model with one based on “episodes of care” in some situations. Medical providers, state agencies and insurance companies together have determined appropriate costs for various health events. If medical providers’ costs over time are lower than that range, they receive a financial reward. If costs are higher, they’re penalized. The federal Medicare system is doing something similar.

After the Arkansas initiative began and the incentives changed, unnecessary antibiotic prescriptions for unspecified respiratory infections dropped 19 percent. As former Arkansas Surgeon General Dr. Joe Thompson, a pediatrician, told me, it had been easier for him to prescribe the medication than it had been to spend 10 minutes telling a mother why it wouldn’t help her child. Now that those unnecessary prescriptions could cut into doctors’ bottom lines, they might take the time to explain.

To create a healthier society and save on health care costs, the system must provide a higher profit for the good folks at Baptist Health when they prevent disease, or quickly cure it, or cheaply manage it, than it does when they treat it or operate on it. Doctors and hospitals often nobly act against their own financial self-interest, and thank goodness they do. But it’s hard to build a lasting business model that way.