medicine « Citizen Economists

Doug Casey Predicts Day of Economic Reckoning Is Near

By The Gold Report, on August 29th, 2012

It is a deal with the devil: Governments churn out more and more cash for the promise of continued prosperity. But the day of reckoning is near, according to Doug Casey, chairman of Casey Research and an expert on crisis investing. As the epic battle between inflation and deflation continues, Casey discusses his predictions for the new world market in this exclusive interview with The Gold Report.

The Gold Report: There will be a Casey Research Summit on “Navigating the Politicized Economy” in Carlsbad, Calif., in September. The thesis behind the summit is that governments have made a Faustian bargain, a pact with the devil, that saves the empire with overspending, but drives it to the brink of collapse by creating fiat currencies. Doug, where in that story is the economy currently?

Doug Casey: It’s extremely late in the day. Since World War II, and especially since 1971 when the link between the dollar and gold was broken, governments around the world have accepted the Keynesian theory of economics, which boils down to a belief that printing money can stimulate the economy and create prosperity. The result has been to create huge amounts of individual and government debt. It’s become insupportable. All it has done is purchase a few extra years of artificial prosperity, and we’re heading deeper into a very real depression as a result.

“We have been consuming more than we have been producing and living above our means.”

Let me define the word depression. It’s a period of time when most peoples’ standard of living declines significantly. It can also be defined as a time when distortions and misallocations of capital—things usually caused by government intervention—are liquidated.

We have been consuming more than we have been producing and living above our means. This has been made possible by 1) borrowing against projected future revenues and 2) using the savings of other people. The whole thing is going to fall apart. A new monetary system of some type is going to have to necessarily rise from the ashes. That’s a major theme in the conference that’s coming up.

TGR: Will more quantitative easing (QE) give us another couple years of artificial prosperity?

DC: Most unlikely. We’re at the end of the story, not the beginning. More QE—I hate to call it that because it’s really just printing money. I hate euphemisms, words that are intended to make something sound better than it really is. Euphemisms, like exaggerations, are the realm of politicians and comedians. Anyway, the next round of money printing is going to result in radical and rapid retail price rises. There is no prosperity possible from this, rather the opposite.

TGR: Last time we spoke, you said that we are entering into a depression greater than in 1933. Can you describe how it might be different?

DC: What we experienced in the 1930s was a deflationary depression where billions of dollars were wiped out with a stock market collapse, bond defaults and bank failures. Inflationary money that was created since the formation of the Federal Reserve in 1913 was wiped out. Prices went down. This depression will be different because governments have much more power. They’ll try to keep uneconomic operations from collapse, they’ll prop them up, as we saw with Fannie Mae and General Motors. They’ll create more money to keep the dead men walking. They won’t allow the defaults of money market instruments. They will make efforts to maintain the dollar mark on money market funds. They’ll attempt to keep building the pyramid higher. It’s foolish, indeed idiotic. But that’s what they’ll do.

TGR: Which they’ve been doing by printing money. The first rounds of money printing have gone into the banking system, but the banking system has not allowed it to trickle back out into bank loans. Does that open the possibility of deflation if money is not moving out into the general economy?

DC: That’s right. The government created trillions in currency to bail out the banks. The banks have taken it in to shore up their balance sheets, but they haven’t lent it out because they’re afraid to lend and many people are afraid to borrow. That currency is basically in Treasury securities at this point. Although money has been created, it’s not circulating.

“I believe that governments have the power to create enough new currency to keep prices from going down.”

At some point, it’s going to move out. One consequence of this is that interest rates have been artificially suppressed so that retail inflation is running much higher than interest rates are compensating for it. At some point, rather than sitting on hundreds of billions of dollars that are going to be inflated from under them, the banks are going to do something with that money. It will go out into the economy. Retail prices will start rising.

TGR: Do we need to see another round of money printing to put us over the brink into a collapse? Or will it happen even if they don’t print more, because it’s currently sitting in the banks?

DC: They actually don’t have to create more money. It’s just a question of whether the banks start lending it and people start borrowing it. Another possibility is that the foreigners holding about $7 trillion outside the U.S. get panicked and start dumping them. I don’t see any way around much higher levels of inflation unless, of course, we have a catastrophic deflation, which we almost had with the real estate collapse.

TGR: How much will Europe play into this? It seems its governments are, at least according to the popular press, more exposed to bankruptcy than the U.S. government.

DC: Europe is a full cycle ahead of the U.S. Its governments and its banks are both bankrupt. It’s a couple of drunks standing on the street corner holding each other up at this point. Europe is in much worse shape than the U.S. It’s highly regulated, highly taxed and much more socially unstable.

Europe is going to be the epicenter of the coming storm. Japan is waiting in the wings, as is China. This is going to be a worldwide phenomenon. Of course, the U.S. will be in it, too. We’re going to see this all over the world.

TGR: If Europe finally does go over the brink, where it’s been headed for more than a year, would that also cause inflation in the U.S. or would you expect to get catastrophic deflation?

DC: This is an argument that’s been going on for at least 40 years. How is this all going to end: catastrophic deflation or runaway inflation? The issue is still in doubt, although I definitely lean toward the inflationary scenario. But will it start in Europe? How will it start? These things only become obvious after they happen.

TGR: When you say “lean,” are you pretty convinced it’s going to be inflationary?

DC: I think it’s going to be inflationary; in the 1930s, it was a deflationary collapse. Governments are vastly more powerful and much more involved in the economy now than they were then. I believe that they have the power to create enough new currency to keep prices from going down. Somehow, moronically, they’ve conflated higher prices with prosperity.

“Investors need to look for real, productive wealth and consistent growth.”

If we had a completely free market economy, prices would constantly be dropping. That’s a good thing, because as prices constantly drop, it means money becomes more valuable. That induces people to save money. When people save, it means that they are producing more than they are consuming—that’s a good thing. The way governments have it structured today, however, prices are always going up. That discourages people from saving because their money is constantly worth less, which encourages them to borrow. Inflation induces people to try to consume more than they produce, which is unsustainable over the long run.

TGR: You are saying that if the current value of your money is higher than the future value, that encourages borrowing.

DC: Exactly. I don’t see any possible happy ending to this. We’re approaching the hour of reckoning.

TGR: You have said that the titanic forces of inflation and deflation are fighting an epic battle that leads to extreme market volatility. But I am looking out there this summer and thinking it’s pretty calm. It seems like a very slow recovery. Gold is settling around $1,600/ounce. The S&P 500 index is testing the 1,400 mark. Is this just a pause in the epic battle?

DC: Nothing goes straight up or straight down. I just took a cross-country car trip from Florida, up the East Coast to New York, and then out to Colorado. It was actually rather shocking that many times I had trouble getting a motel room—even in the middle of nowhere. The restaurants were full. The highways were full of cars. It looked more like a boom than a depression. At the same time, our real unemployment, figured the way they used to figure it in the early 1980s, is about 16–20%. People are living off their credit cards. I believe it’s the same in Europe.

TGR: It seems as if we haven’t had much market volatility other than the technical glitch at Knight Capital this month. Do you expect market volatility to come back into play?

DC: On the one hand, some people are going to go into the stock market when inflation reasserts itself because at least it represents real value. They can invest in companies that actually produce things and have real assets. On the other hand, the stock market itself by any historic parameter is overvalued right now in terms of dividend yields, price-to-book value and price-to-earnings ratio.

I have no interest in being in the broad stock market. I feel very confident that the bond market, especially, is going to be very volatile. That’s the one place where it seems that there’s a real bubble, and it’s one of the biggest bubbles in history. It’s the worst possible place for capital right now. It’s a triple threat—higher interest rates, default risk, and currency risk.

Even reading the popular press, you can see investors in a desperate reach for yield. They’re only getting a fraction of a percent in their bank accounts. So, to get some income, they are buying all kinds of bonds, even those of low quality, just to get 2, 3, 4 or 5% in yield. The bond market is trading at insane levels as a result of the government having driven interest rates down close to zero in a vain effort to stimulate the economy.

The bond market is much bigger than the stock market. When interest rates start heading up, trillions in bond values will be wiped out, in addition to causing a lot of corporate bankruptcies—that’s why deflation isn’t completely out of the question. In addition, higher rates could really further devastate the real estate market, which has been making a mild recovery. And, of course, higher interest rates are the enemy of high stock prices.

TGR: One of the keynote speakers at the upcoming summit is Thomas Barnett, author of “The Pentagon’s New Map: War and Peace in the Twenty-First Century.” He’s going to be talking about geopolitics today and tomorrow. From your viewpoint, in today’s age of nationalism and conflicts among nations, is it important for investors to know about geopolitics in order to pick junior mining stocks?

DC: Most certainly. Very few investors are putting any money into the junior mining stocks right now, which tells me that it’s a good time to start looking at them. However, investors need to have a grip on geopolitics in order to intelligently assess which companies to buy. There are 200 nation states in the world and they all have different policies. Investors have to avoid putting money into a location where a company will never be able to develop a mine even if it’s lucky enough to find an economic deposit.

TGR: You developed the concept of the “8 Ps” for stock evaluation. Typically, you say that the people are the No. 1 thing that you look at. Is politics starting to move up in importance as a determining factor?

DC: People are still the most important because good people who are running a company will choose an intelligent jurisdiction to develop. It’s also a question of whether the world at large is becoming more stable or less stable. I think it’s becoming less stable, because all the governments in the Western world are really bankrupt and are, therefore, going to be looking for more tax revenue. Mining companies are going to be in its sights because mining companies can’t move their assets; they are the easiest thing in the world to tax. The good news is that makes mining stocks very volatile, and sometimes extremely cheap. Volatility can be your best friend.

But economically, as things get tougher in the Western world, that will hurt the developing world, too, because it depends on marketing its raw materials. If the Western world is using fewer raw materials, it’s going to put pressure on those developing countries.

TGR: Doug, you’re talking a lot about geopolitical unrest. The world is becoming less stable. In 2010, I heard a lot of discussion about gold going into a mania stage, specifically for many of the reasons we’re talking about now. As we approach 2013, will we run into that discussion of gold mania again?

DC: It’s not likely to happen until we reach much higher levels of inflation and we have something approaching financial chaos—but that’s exactly where we’re headed, and soon. The mania is likely to be fear-driven much more than greed-driven. Gold is still in the climbing-the-wall-of-worry stage. Mania is still in the future. It’s going to happen. I feel confident of that. There’s going to be a rush to gold.

TGR: One of the people you like to quote quite often is Richard Russell. There’s a specific quote I’ve heard you say a couple of times: “In a depression, everybody loses. The winner is the guy who loses the least.” In order to be that guy who loses the least, is it a viable strategy to stay out of the markets?

DC: It’s almost impossible to stay out of the markets because almost everybody has a pension program, an investment retirement account or something of that nature. You have to put the assets of that pension into something—the stock market, the bond market or cash. Most people own real estate or their home. If the real estate market gets hurt, you get hurt there. If you have wealth, what are you going to do with it? It’s not a good option to put $100 bills under your bed. Even then, you’re in the market for currency. That’s one of the biggest problems with inflation: It forces people to direct their attention to gambling in the markets, as opposed to productive business.

There has been way too much concentration on the financial markets over the last 50 years. This is shown by the fact that roughly 22% of the U.S. economy is in financial services, which is basically just moving money around. The financial services business doesn’t weave, spin or sew; it doesn’t produce anything. In a sound economy, the financial services sector would be tiny, just big enough to facilitate transactions. It wouldn’t be the mammoth that it is today. It seems as if everybody is in the business of moving money around, but the money they’re moving around is just paper currency. It’s quite non-productive.

TGR: They are producing new financial instruments. In a way, financial services companies are coming up with alternative methods to build wealth.

DC: I question that. Financial services don’t actually build wealth. Real wealth is created by the production of new technologies, food, metal or products. Financial services serve a purpose, of course, but it isn’t a real wealth creator. Today the sector is more of a moving-paper fantasy.

Even what I do, which is advising people on where to allocate their wealth, has always made me feel a little bit sheepish because I’m not actually building a bridge or creating a new engine or technology. I’m just telling people how to move things around. If the economy were sound, 90% of the people in my line of work would be doing something else. A speculator, basically, is someone who capitalizes on politically caused distortions in the market. If we had a sound economy, the government wouldn’t be causing these distortions—and it would be much harder to be a speculator.

Anyway, the whole financial sector is bloated. By the time the bottom hits, the last thing that people are going to want to hear about is the stock market, the bond market or where to put their money. They’re not going to want to read financial newsletters because they’re going to be so sick at the very thought of those things. People won’t ask how the markets are doing; they won’t even care if they exist. They’re going to get back to the basics. That is the foundation for the next boom. But that time is a good many years in the future.

TGR: But you are still in the business of helping investors move around assets. What would you say to investors now on how they can protect or grow their wealth through the next phase of volatility?

DC: First, it’s very hard to be an investor in a highly politicized environment. Investors need to look for real, productive wealth and consistent growth. Speculators, on the other hand, try to capitalize on the chaos that is caused by the myriad of destructive government regulations, taxes, and, of course, currency inflation. That’s why I look at all markets, in all countries. But right now there are very few bargains. At some point, for instance, real estate is going to be of interest again. Not right now because governments everywhere are going to raise taxes on it.

TGR: Would you put things like technology, pharmaceuticals and healthcare in the category of real wealth?

DC: Very definitely. That’s why we have a technology letter. I’ve always been kind of a boy scientist; technology interests me from an intellectual, as well as a financial, point of view. Technology is the real mainspring of human progress. No question about that.

The problem with the medical industry is that it’s being nationalized. It’s very hard to do anything with the U.S. Food and Drug Administration (FDA) as it is. It costs $1 billion to develop a new drug today. Developing medical devices can be almost as expensive. Even if something is approved by the FDA, if something goes wrong, count on being sued by the plaintiff bar. It’s a very high-risk business, which is a pity. Living longer and better physically is one of the most important things there is; medical businesses should be encouraged, not pilloried. I’ve always said that the FDA kills more people every year than the Defense Department does in the typical decade. But Boobus americanus still thinks it’s protecting him… (Editor’s note: Read more about investing in The Life Sciences Report.)

TGR: Are there other areas for real or productive wealth?

DC: I read science magazines all the time. There are more scientists and engineers alive today than in all the history of the world put together. Hopefully, with the continued blossoming of India and China—where students are generally going into science and engineering as opposed to things like gender studies, political science and English literature, which students idiotically are doing in the West—there will be even more scientists and engineers 20 years from now.

What areas are they going into? Nanotechnology, microbiology, robotics—these things will blossom the way computers have over the last few decades. The problem when it comes to investing in them is that they’re increasingly highly specialized. Investors need at least a sound layman’s knowledge in order to know if they’re barking up the right tree or not, and that’s hard. There’s just not enough time in the day to gain enough expertise for this type of thing. Of course, that’s the value of magazines and newsletters. The editors condense information for readers to give them an intelligent layman’s opinion.

TGR: Now we’re back to the importance of people. You do have to have some sense of the person who is doing that analysis for you. It needs to be someone who’s credible.

DC: Absolutely. That’s the advantage of having a newsletter over a magazine. In a magazine, you don’t always know what’s going into the sausage that that writer of an article is making. When you’re dealing with a newsletter, you can get to know the editor, what he’s thinking, how expert he really is and what is his psychology. You can learn if you can trust his opinion. Although I read both magazines and newsletters, newsletters are much more valuable.

TGR: To bring this full circle, I would imagine attending conferences where you meet these newsletter writers or analysts face to face is also beneficial.

DC: Yes, it gives you a smorgasbord of views. It’s helpful in assessing the validity of the views to be able to assess the personality of the writer and have a better understanding of whether his views are actually credible. And it’s a great opportunity to ask questions.

TGR: Doug, you’ve given us quite a bit of your time. I greatly appreciate it.

Read Doug Casey’s thoughts on the energy sector in The Energy Report exclusive, “Doug Casey Uncovers the Real Price of Peak Oil.”

Even if you can’t attend the “Navigating the Politicized Economy Summit,” you can still benefit from the information the 28 experts have to impart in the Audio Collection. Right now you can save $100 when you pre-order the 20+ hours of audio.

Doug Casey, chairman of Casey Research LLC, is the international investor personified. He’s spent substantial time in more than 175 different countries so far in his lifetime, residing in 12 of them. And Casey literally wrote the book on crisis investing. In fact, he’s done it twice. After “The International Man: The Complete Guidebook to the World’s Last Frontiers” in 1976, he came out with “Crisis Investing: Opportunities and Profits in the Coming Great Depression” in 1979. His sequel to this groundbreaking book, which anticipated the collapse of the savings-and-loan industry and rewarded readers who followed his recommendations with spectacular returns, came in 1993, with “Crisis Investing for the Rest of the Nineties.” In between, Casey’s “Strategic Investing: How to Profit from the Coming Inflationary Depression” broke records for the largest advance ever paid for a financial book.

Casey has appeared on NBC News, CNN and National Public Radio. He’s been a guest of David Letterman, Larry King, Merv Griffin, Charlie Rose, Phil Donahue, Regis Philbin and Maury Povich. He’s been featured in periodicals such as Time, Forbes, People, US, Barron’s and the Washington Post—not to mention countless articles he’s written for his own websites, publications and subscribers. Casey Research currently produces 11 publications on a variety of investment sectors and maintains two websites.

American Medicine is Sick

By Simon Grey, on August 15th, 2012

First, here’s this:

Cancer-busting chemotherapy can cause damage to healthy cells which triggers them to secrete a protein that sustains tumour growth and resistance to further treatment, a study said Sunday.

Researchers in the United States made the “completely unexpected” finding while seeking to explain why cancer cells are so resilient inside the human body when they are easy to kill in the lab.

They tested the effects of a type of chemotherapy on tissue collected from men with prostate cancer, and found “evidence of DNA damage” in healthy cells after treatment, the scientists wrote in Nature Medicine.

Of course, it should be fairly obvious in the first place that chemotherapy is going to have rather toxic effects on the body since it is rather toxic. Thus, it should surprise no one that its effects are toxic. This then begs the question of why Chemotherapy is so widely used in combatting cancer. The answer, unsurprisingly, is that chemotherapy is incredibly profitable to doctors (specifically, oncologists). As to why, this is the case, consider:

This unique payment system started years ago because Medicare and insurers wanted to save money by moving cancer treatments out of the hospital. But it has come under increasing scrutiny as prices for some cancer drugs skyrocketed to tens of thousands of dollars a year.

Consider also this story:

A tuberculosis vaccine in use for 90 years may help reverse Type 1 diabetes and eliminate the life- long need for insulin injections, say Harvard University researchers raising money to conduct large, human studies.
…
The vaccine, a weakened form of the tuberculosis bacteria, stimulates production of TNF, a cell-signaling protein that plays a role in cell death. With more TNF, the body can attack those harmful immune cells while leaving the rest of the body’s defenses intact. The vaccine is approved by the U.S. Food and Drug Administration for tuberculosis though it isn’t generally recommended for use in the U.S. The vaccine also is approved to fight bladder cancer. [Emphasis added.]
…
Faustman and her colleagues at Massachusetts General in Boston are working to get the vaccine to market. After their early findings in studies with mice, she said they tried to interest every major drugmaker in developing the vaccine as a possible cure for diabetes. All told her there wasn’t enough money to be made in a cure that used an inexpensive, generically available vaccine, Faustman said.

So now, she is trying to raise money to pay for the expensive larger human trials. Her lab so far has received $11 million of the $25 million needed to pay for the next stage of testing. All of the money is coming from private donors, the largest of which is the Iacocca Family Foundation.

Notice how, in both cases, government intervention creates perverse incentives that are harmful to those who are suffering from illnesses. In the case of chemotherapy, Medicare wanted to control cancer treatment costs, and so urged doctors to administer medicine directly, which encouraged doctors to mark up drug costs and, in order to increase profitability, overprescribe, with apparently little concern for their patients. In the latter case, the FDA has not yet approved a drug for use in combatting diabetes, even though that same drug is approved for other uses.

Furthermore, this doesn’t even begin to consider how farming subsidies impact what food is brought to market, nor does it consider how corporate law encourages the production of highly processed frankenfood, nor does it consider the myriad regulations governing (and in some cases outlawing) unprocessed food. And there are even more interventions beyond this that encourage people to eat unhealthy food, which makes them sick and unhealthy, which is then treated with expensive poison drugs that tend to mask symptoms rather than address the underlying pathologies.

Anyway, it’s no wonder Americans are so sick and unhealthy. Their government is trying to poison them.

Correcting Markets

By Simon Grey, on March 2nd, 2012

From the Mises Institute:

And so began the downward trend in America’s free market in medicine. With fewer medical schools — and thus fewer doctors — wages can be kept higher than would exist in a market dominated by free enterprise and the unobstructed entry into practice. Consumers, who ordinarily determine the success of producers, have lost out as they face higher costs on top of being deemed too ignorant to choose an adequate doctor without the aid of the state. Rent seeking becomes ingrained in an industry that must devote increasing amounts of financial resources to appease public officials.

At first, the problem was presumably that doctors weren’t getting paid as much as they truly deserved because they had to compete with hacks. Therefore, the government had to step in to ensure that doctors got paid the proper amount of money. This led, unsurprisingly, to increasing health care costs, and so the government was asked to step in again to reduce the costs of medical care, this time in the form of subsidy. And so the government obliged.

The lesson to be learned from this is that once the government interferes in the market, it must continue and increase its interference in the market so as to preserve equity. What’s interesting, though, is that governmental interference, when all is said and done, is only intended to produce a minor tweak. That is, the result of governmental interference is only supposed to lead to a result that is only slightly different from the market result. What actually happens is that the government’s result is different by an order of magnitude, which leads to more and increasing “corrections.”

At some point, though, it has to be asked of whether the slight market modification is worth the massive cost, for government interference has a tendency to spiral out of control and become very costly. As the costs of modifying the market increase while the benefits for doing so remain small, it becomes increasingly reasonable to ask whether it is better to accept the market’s perceived imperfections so as to save money and scarce resources, especially since the market is self-adjusting and will likely solve the problem more equitably anyway.

A Broken Market

By Doug Gentry, on December 5th, 2011

The pharmaceutical giant, Pfizer, watched its main source of revenue and profits, Lipitor, lose its patent protection this week, and now faces competition from generic equivalents. In 2010 Lipitor was the second highest selling prescription drug with $5.2 billion in sales in the U.S. alone. (source: Drugs.com). Now, in the next year, prices of the generic drug, Atorvastatin, should drop dramatically. The Lipitor saga gives us an opportunity to see market forces in action, but it also points out the problems when insurance coverage is involved.

Lipitor Brand

Generic Lipitor

Like most first world countries, the United States uses the patent system to encourage research and development. If a pharmaceutical company can develop a new drug, they can maintain a government approved monopoly on the sale of that drug for up to 17 years. Monopolies drive higher prices, which helps the inventor, Pfizer in this case, recoup their research costs, and return a handsome income to their shareholders. Once the patent runs out, other manufacturers can apply to produce the drug. This increased competition then quickly drives down prices. So far, this is a classic example of market forces at work.

Pfizer has been planning for this day for a number of years, and with annual sales figures like those in 2010, this is vital to the company’s fortunes. The company has triggered a number of legal and regulatory efforts to delay the arrival of generic equivalents. For a compilation of news articles on Lipitor, see this page in The New York Times.

Two particular strategies twist prescription drug coverage in favor of the brand name. Many prescription drug plans have incentives to encourage patients and their physicians to use generic drugs. Often this is done with a lower co-payment on the part of the patient. The lower co-payment provides an incentive for the patient to accept a generic equivalent, and the insurance plan saves money by paying the lower, generic price. Pfizer (and other drug companies facing similar out-of-patent challenges) is trying to subvert this incentive. Here’s a hypothetical example.

These figures are illustrative – made up – but make the point.

Typical Brand vs. Generic Comparison for a Drug Plan

Brand: Patient Copay: $30 – Total Cost of Drug: $200 – Insurance Pays: $170

Generic: Patient Copay: $10 – Total Cost of Drug: $50 – Insurance Pays: $40

Now Pharmaceutical Company Offers a Copay Discount
(Pfizer discounts its price of the brand drug to cover reduced copay)

Discount Brand: Patient Copay: $8 – Total Cost of Drug: $178 – Insurance Pays $170

With this discount arrangement the patient is happy, the drug store doesn’t lose any money, but the insurance company still pays the larger cost. This puts upward pressure on insurance premiums.

Another strategy – Pfizer offers a significant discount on the price of brand name Lipitor to pharmacy chains as long as they agree to not provide generic equivalents. The chains save money, and can pass some of that on to patients, but the insurance plans that pay for the drugs don’t enjoy any savings.

Is this legal? The second, discounting strategy with pharmacies, smells a lot like restraint of trade/anti-trust concerns to me. The earlier example, offering a discount on copays, seems legal. Are either of these good social policies? Not a chance.

These creative approaches illustrate one of the problems that insurance introduces into a market. In healthcare, patients have enough discretion that they can alter their buying behavior, based on prices they face. Yet the patients don’t see or feel the full price of their purchase decision. In a regular market the patient balances the benefit of the purchase against the price, and makes a good decision on allocating resources. That good decision helps society. With insurance the patient sees only a small fraction of the total price, and may make a decision that is not socially optimal. This breakdown in market forces is one of the challenges our healthcare reform goals face. Ideally we would like patients to be full partners in the decisions made about their care. Insurance blunts that participation.

No Room for Medicare Patients

By Dr. Jane Orient, on October 21st, 2011

When I went into solo practice of internal medicine in 1981, it was very easy to get a doctor to see a Medicare patient. All I had to do was make a phone call. A courteous receptionist answered. If the doctor couldn’t come to the phone right away, I could count on a prompt callback.

Consultants saw patients quickly, and generally called me to discuss their findings and advice. And very often there would also be a letter in the mail: “Thank you for referring this delightful patient to me.”

How things have changed! Now a doctor gets the phone menu, just as the patients do, and it often ends in voice mail. It might be a few days before a staff member calls back—usually with the news that “we are not accepting any new Medicare patients.” At best, my patient might be offered an appointment in several months.

One very fine gentleman, who had recently moved to a rural area, found it easier to fly to Tucson to see me than to get in to see a local internist. That was in 2009. Recently, he has become unable to travel, so I needed to find him a local doctor.

I tried to expedite matters by ordering him an immediate diagnostic test: an abdominal CT scan. I don’t think anyone could argue that it wasn’t indicated under the circumstances. One little problem: I am not enrolled in Medicare and don’t have the proper government-issued number to enter into the computer. A license to practice medicine is not enough. This National Provider Identifier (NPI) is supposed to protect the system against being defrauded. Without that number, the imaging facility could not get paid by Medicare.

“Why not use the radiologist’s number?” I asked. After all, he was the one who would get paid. Nope, a referral was required. How about a self-referral from the patient? Nope, we can’t allow patients to decide what tests they need. “The patient is willing to pay for his own test,” I said. Nope, if he’s on Medicare, they aren’t allowed to take his money.

They gave the patient 24 hours to find a properly enumerated doctor to countersign my order. Fortunately, he found a specialist willing to do so, and assume potential criminal liability for committing “waste, fraud, and abuse” by ordering a “medically unnecessary” study. (Fortunately for the patient, he turned out not to have cancer, but that could be bad news for the doctor.)

So this is the status of retired Americans. They can’t just walk into a facility and request a medical test, and pay for it with their very own money.

A man may be qualified to pilot a 747 across the Pacific, but once he’s on Medicare, he is unfit to make an unsupervised decision about his own medical care.

I did find my patient a doctor. None of the internists within a 150-mile radius who “take Medicare” are willing to take on a new Medicare patient. But through the website of the Association of American Physicians and Surgeons (www.aapsonline.org), I found a link to the Medicare carrier’s list of opted out physicians. They don’t “take Medicare,” but many are pleased to see older patients, for a reasonable fee. There was one internist on the list, 150 miles from my patient. She has a courteous and helpful assistant who actually answers the phone, and told me the charge for a new patient visit: $300.
Things could be worse—and already are much worse in Canada. The “soul-destroying search for a family doctor” is described in the Globe and Mail on Aug 21. The Ontario government’s program called Health Care Connect manages to link only 60 percent of patients with a doctor—although you might find a concierge doctor for $3,000 a year.

That’s the cost of medicine when it’s “free”—if you can find it at all. If ObamaCare is implemented, all Americans will be in the same boat. And guess who will get thrown overboard first.

Unhappy Dependence Day

By TamzinRosenwasser, on July 5th, 2011

In my childhood and teen years, going to the mall meant going to the grand expanse stretching from the United States Capitol building to the Lincoln Memorial, with the Washington Monument in the center, bordered by the Smithsonian Institutions museums and by federal government buildings along Constitution Avenue on the north, and Independence Avenue on the south. The best event there took place every 4th of July, when we heard reflections on freedom and our Revolution, and then witnessed a stunning fireworks display, complete with booming explosions that shook the ground.

We are no longer free. Now, we are much less free than Washington, Jefferson, Madison, and Franklin, and all the other colonists were before the American Revolution.

Need to see a physician because of illness or injury? Now it is between you, your physician, and the government. The government will decide whether you are worth treating. You lucky dog! has taken on new meaning, because for your lucky dog, it is still between you and the veterinarian how to take care of your sick or injured pet. You have been made as dependent on the government as
your pet is on you, but I bet you love your pet. Your government does not love you.

Want to start a business? Youll need to go through wearying red tape, comply with a noose of regulations, buy a bunch of Occupational Safety and Health Administration posters, and worry about whether there is something you’ve overlooked, whether it makes sense or not, that could land you in violation. Also, for occupations from physician to simply braiding hair, or decorating a house, you may need a license, and be forced to take a couple of years worth of courses before you can compete with someone in deciding what kind of sofa pillow to recommend.

Want to move into your own house? You may need permission from the local government to occupy it, and they may insist that you alter the banister on the basement steps so nobody could possibly fall through between the banister and steps. Rain stain on the wallpaper? It must be fixed, and then be re-inspected to make sure it has been done to some government functionarys satisfaction. And so on and on and on. Think you own the house? Think again. In some locales, you use it only at their sufferance.

Think you are ever going to retire? The government has forcibly taken the fruits of your labor from you, and claimed they are in some trust fund and will be paid back to you in due course. For people in the early part of their Ponzi scheme, it worked in spades; they got much more back than they ever paid into the scheme. For those of us reduced to serfdom to pay the way of others, we are likely never to get back what was taken from us. The government, especially since World War Two, has become more daring and brazen in stealing from us and bullying us. There is no legal enforcement at any citizens disposal to compel government to give us what was taken. It is said to be a compact between generations, but I never signed on to it. The same goes for Medicare and Medicaid.

People who die before getting Social Security, many of whom are poor, cannot leave it to their children, so are doubly robbed.

Stalin is said to have taken a bird and slowly plucked off its feathers, and then disgustingly boasted that not only was the bird now totally at his mercy, but was also grateful for the slight bodily warmth of his hand. We are similarly at the mercy of an irresponsible, bullying government, which has partially plucked us and has as its goal to reduce us to subjects under a despotism much more absolute than that of King George the Third.

As we enter the third bleak year of an unconstitutional and alien regime, there is no cause for celebration this July the Fourth. When we have restored Constitutional government, limited only to its delegated powers, and are teaching our children how to be ever vigilant in preserving it, that will be the time to celebrate.

Health Care Consumers

By Russ Nelson, on April 27th, 2011

People are bringing up the point that people simply don’t shop for health care. That we’re not consumers. Usually that people are non-economists, like some ER doc who thinks that he had to study for 8 years to become a doc, but that economists are just people with opinions. Or like Paul Krugman, who gave up any claim to be an economist years ago.

To these people, I say: just *try* to be a consumer. Presume that somebody actually could act as a consumer, and go buy their health care. An honest seeker after the truth will quickly realize that so few people pay for their own health care that prices aren’t available. Go into a doctor’s office and say “I’d like a 20 minute visit with the doc — how much will that cost?” and the staff will be flabbergasted. Chances are very good that they won’t know what to tell you. This could make the point that people who consume health care aren’t consumers (although it’s hard to state that relationship without using the “C” word). I think, instead, that it makes the point that people are consumers, but they’re not purchasers.

Interesting Readings for December 29, 2010

By Ajay Shah, on December 29th, 2010

Since most of us in India can talk about little else other than corruption, do read this article by Nauro F. Campos and Ralitza Dimova on voxEU which is an interesting meta-analysis about papers which analyze the impact of corruption on growth. I have long heard about meta-analysis, but this one made me sit up and notice.

Anand Giridharadas in the New York Times on Arthur Bunder Road in Bombay.

Roger Bate and Tom Woods, in The American, point to a new dimension in India’s crisis of fake medicines.

II Sc will now use the IIT JEE as their entrance examination for the new Bachelor in Science course. Given that the IIT JEE is a well managed and difficult examination, it would make sense to have more and more schools plugging into it in order to filter their intake. But as you move away from the top .01% of the distribution, the statistical precision of the score on a very difficult exam as a measure of student capability tends to decline. The managers of the IIT JEE will need to shift towards adaptive testing, where the questions are dynamically modified based on student characteristics, in order to retain efficiency across the distribution. Once this is done, the IIT JEE would be useful for sifting through millions of students, and exert a beneficial effect of all of them facing a more demanding high-stakes examination.

Shobhana Subramanian in the Financial Express on C. B. Bhave.

A fascinating article by Nicolai Ourussoff in the New York Times about the attempt to reinvent Saudi Arabia.

Sadness about Europe by Orhan Pamuk in the New York Review of Books, and a tragic perspective on Istanbul by Claire Berlinski in City Journal.

A dystopian future for the world: a story of ageing and depopulation from Amakusa in Japan.

Liu Xiaobo’s beautiful acceptance speech for the Nobel Prize for Peace. A lot of countries of the world, including India, have much to do in order to achieve freedom.

Philippines?

Tourism in Afghanistan by Damon Tabor.

Steven Johnson in the Financial Times on the future of linking to information sources on the web.

With 75% of world GDP in service, trade liberalisation in agriculture or manufacturing is not that important. The really big story is trade liberalisation in services, and there the picture is quite bad. Read this article on voxEU by Bernard Hoekman and Aaditya Matoo on how to obtain progress.

Understanding the rise in currency turnover by Michael R. King and Dagfinn Rime on voxEU.

Anders Aslund, on Project Syndicate, on the remarkable story of the global crisis as it played out in East Europe. Also see this
story in The Economist on the same subject, which is a bit less optimistic. The recovery in East Europe matters for recovery in Europe and elsewhere. It also illuminates our thinking on some of the grand policy questions.

David Alexander points out how Australia is the role model for the world.

Barry Eichengreen, Daniel Gros and Ila Patnaik on the resolution of Europe’s problems.

Devin Friedman in GQ on the strange world of social networking.

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Mobile phones and economic development

By Ajay Shah, on November 10th, 2009

The CMIE Consumer Pyramids data shows that in all their income categories, more than 50% of households have a mobile phone. It is only in their bottom category `Lower Middle Income – II’ that only 37.5% of households have mobile phones. From `Higher Middle Income – III’ upwards, the incidence is above 80%. If you had asked anyone in 1999 or 1989 whether this could be done by 2009, the answer would have been in the negative.

With broadband Internet, in contrast, India has not got such breakthroughs.

The September 2009 issue of Finance & Development has a story on the impact of mobile phones for development. In India, there is a lot of merit in using new technologies and players to break with the comfortable stagnation that’s enveloped finance.

The Economist has a beautiful section on mobile phones and development: on Chinese progress on network hardware, broadband, on the impact on development, a retrospective, looking forward, and an enthralling piece on the cost reductions by firms in developing countries. Now all we need is for Indian finance to go the way of Indian telecom (and airlines).

Anand Giridharadas, writing in New York Times, describes new developments in distance education. India is the place in the world which would be the biggest beneficiary from distance education, given the combination of lots of young people and a dismal education system. This does require broadband to go the way mobile phones have. I often joke that the task of an economics undergraduate education in India should be to get a person to the point where he or she can read my blog (and cynics respond saying that most of the teachers of economics in India can’t parse my blog).

Anne Eisenberg has an article in New York Times about researchers at UCLA trying to use cell phones to do medical diagnosis. Given the ubiquity of cell phones in India, these could be useful lines of attack for us.

Simple Blood Test May Soon Be Able to Diagnose Brain Tumors

By R. O., on July 29th, 2009

In the U.S. today, approximately 360,000 people have brain cancer. In 2002, 40% of the 40,000 patients diagnosed with this disease died within one year. Brain tumors are the second leading cause of cancer-related deaths in children under the age of 20 as well as men under the age of 39. In women between 20 and 39, it ranks fifth in cancer-related deaths. In 2007, this meant 3,750 children under 20 were diagnosed with either a benign or malignant brain tumor and 70% of those were under the age of 15. In 2008, over 52,000 new cases are expected to be found. Additionally, of those with cancer elsewhere in their body, 100,000 patients are expected to see the cancer spread to their brain. Of those that survived their initial diagnosis in 1996, only 34% lived at least five years. Luckily, the survival rate has been steadily increasing from 21% in the 1970s to 31% in the 1990s. This is still abysmally low, however.

Patients Lose More than Their Health

The cost of this disease to its victims can be unrelenting. According to a study by the National Brian Tumor Foundation, of patients with brain cancer, 59% said their medical expenses were a financial hardship. Many families felt financially drained and had to borrow money (42%), increase their credit card debt (47%), accept a second or third mortgage (15%) or went completely bankrupt (7%). The cost of prescriptions, deductibles, increased insurance premiums and delayed disability funding exacerbated their medical costs and made expenses more difficult to pay. In fact, 15% of the patients assessed paid more than $1,000 each month for treatment. Making things more difficult, while 91% of patients were able to work before their diagnosis, only 33% were able to work afterwards. Furthermore, the disability insurance which was intended to help patients only makes things worse due to long, complicated forms that usually assure an initial denial. Even after acceptance, patients were required to wait two years before any benefits would take effect. During this interlude, patients were left to scrape by as best they could. Of the patients interviewed, 62% lacked disability insurance. The medical debt never failed to grow however, as it was found that a significant correlation existed between the time since diagnosis and the patient’s credit card debt.

Hope for Help in the Near Future

Brain cancer is notoriously difficult to diagnose and treat due to its location in the body. Usually, patients are forced to undergo invasive biopsy procedures for doctors to assess which type of cancer the patient has. This increases medical costs by increasing the time spent in the hospital during the operation and recovery, the drugs used for sedation and pain afterwards, and of course, the number of doctors required for such a procedure. However, it may soon be possible to find the same answers through a simple blood test.

Cancer cells, like other cells, “talk” to each other. Often a cell will accomplish this by secreting a protein that is recognized and acted upon by another cell. Cancer cells, for example, can send signals in this way to cause blood vessels to alter their normal route and instead, grow near the cancer cell. This redirection of blood vessels is what feeds the cell and allows it to grow. In cancer cells, these signaling factors are called microvesicles.

After the discovery of these signals as imperative for breast cancer cell growth, Dr. Johan Skog of Harvard Medical School began studying the microvesicles secreted by brain tumor cells. What turned this into a potential diagnostic method were the small bits of RNA found in the microvesicles. Previously, neither DNA nor RNA had been observed which made any diagnosis based on these signaling secretions impossible. However, when RNA was found, it opened the door to a blood-based genetic test. Skog and Dr. Xandra Breakefied, a neurologist also at Harvard Medical School, hypothesized that if the brain tumors were releasing signaling factors with RNA, they might be found in the blood where sensitive tests could detect them and distinguish between the types of brain cancers.

To test their idea, Skog and Breakefield collected the secretions from 30 tumors that had been frozen for long-term storage. They also examined blood samples from the same patients the tumors had been extracted from. In 28% of the blood samples, RNA from the microvesicles was found. In the tumors, RNA was found in almost 50%. Although this may seem to leave a lot of room for misdiagnosis, it is significant since RNA is very fragile and unstable and can degrade very quickly. The fact that RNA was found at all is rather amazing. It is believed that if these same tests were run on fresh samples, rather than those that had been frozen, a much higher number would test positive for the tumor-specific RNA. The RNA released from these tumors could even help doctors determine the genetic abnormalities of the cancer, allowing for a more tumor-specific therapy.

Although doctors do not expect this new method to completely replace the need for other diagnostic procedures, it could lend a way to extract valuable information in a relatively non-painful and inexpensive way.