Thursday, October 31, 2013

Kathleen Sebelius - Don't Do This To Me

I stumbled on this interesting exchange between Secretary of Health and Human Services Kathleen Sebelius and Reps. Henry Waxman (D-California) and William Long (R-Missouri) near the end of her testimony at the House Energy and Commerce Committee on October 30, 2013 about the failures of the implementation of the Affordable Care Act:

While Ms. Sebelius was being asked for a yes or no answer by Rep. Billy Long (R-Missouri) to whether or not she would give up her government health coverage for coverage that was available on the exchange and Rep. Waxman stepped in once Rep. Long's time expired, to find out whether or not she would be able to find a plan on the exchange that would protect her from "cheap shots",  she comments to the unidentified person beside her "Don't do this to me", a phrase that was clearly picked up by her microphone.

It would be interesting to know what her comment was directed toward.  In case you wondered, here is her testimony, defending the Affordable Care Act and here is the entire 3 hour and 34 minute hearing:

The first excerpt is found at 3 hours 25 minutes so you can put Ms. Sebelius' comment into context.  It takes place after a heated questioning from Rep. Long.  To me, it quite clearly looks like the Secretary is quite uncomfortable with the line of Rep. Long's questioning.

Explaining the High Cost of Health Care Spending in the United States

With Obamacare making the news cycle on a daily basis since its launch, I wanted to examine America's health care situation from another vantage point, that of health care spending, prices and quality and see how the U.S. health care situation compares to its OECD peers.

A 2012 study by David Squires of The Commonwealth Fund, a private foundation that aims to promote high performing health care systems, analyzes data from 13 industrialized nations including Australia, Canada, France, Germany, Japan, New Zealand, the United Kingdom and the United States among others.  As you can see on this graph, the United States (black line) spends far more on a per capita basis on health care than any other OECD nation:

An important issue to note from this graph is the fact that per capita spending on U.S. health care is rising far faster than all other OECD nations in the study, a prospect that is not healthy for consumers.

On a per capita basis, health spending in the United States (in 2009) came in at $7960 annually, more that double the OECD median of $3182 and nearly three times Japan's $2878.  The author of the report further break down spending on health by the source of funding (i.e. whether it is private or public).  Private funding of U.S. health spending is the largest among its OECD peers by a huge margin, coming in at $3189 per capita per year.  The second highest national private health spending was found in Canada with $646, less than one-fifth of the U.S. level.  Norway comes in last place in private spending on health with per capita private spending of only $43.

Moving on, here is a graph that shows the total expenditures on health as a percentage of GDP, again, with the U.S. data in black:

In total, health spending in the United States was 17.4 percent of GDP, well above second place Netherlands which came in at 12.0 percent of GDP.  In last place was Japan which spends only 8.5 percent of GDP on health care.  Interestingly, Japan's low cost of health spending is closely related to its cost control through aggressive price regulation through the imposition of a nation-wide fee schedule.  While this may appear to be a solution to extremely high costs, some health care economists suggest that price regulation can create shortages of service, reduce the quality of service and stunt innovation.  As well, Japanese doctors work an average of 71 hours per week compared to 51 hours per week in the United States because they are forced to prioritize quantity of service as opposed to quality of service for patients.  Japan's policies may also have created a severe shortage of some specialists since there is more money to be made in general practice than in money-losing specialities like surgery and obstetrics.

Why is American spending on health care so much higher than other developed economies?  One potential explanation suggests that the high level of spending on health care in the U.S. is related to the aging population, however, this is not borne out statistically.  While the U.S. population is aging, thanks in no small part to the hordes of baby boomers, the United States has a very low percentage of elderly (over 65 years of age) compared to its OECD counterparts and, at 13.0 percent, comes in well below the OECD median of 15.8 percent, as shown on this chart:

In fact, only New Zealand has a lower percentage of citizens over the age of 65 than the United States, coming in at 12.8 percent.  The nation with the highest percentage of older citizens is Japan which, oddly enough, has the lowest per capita and overall spending on health care.

Obviously, there are other factors at play that explain the high overall spending on health care in the United States.  Here are five of them:

1.) Obesity:  When obesity is defined as having a body mass index of 30 or more, 33.8 percent of Americans were considered obese in 2009.  This is the highest rate among all thirteen OECD nations in the study; New Zealand came in second place at 26.5 percent and Australia came in third place at 24.6 percent.  Coming in last place was Japan at only 3.9 percent.  Since there is a connection between obesity and health issues, a higher level of health service utilization accompanies a population that is obese.

2.) Hospital Costs:  The United States has fewer hospital beds at 2.7 per thousand population than the OECD median of 3.2 beds per thousand.  The duration of hospital stays in the United States is shorter than the OECD median coming in at 5.4 days compared to the median of 5.9 across the OECD study group.  This is well below Canada's 7.7 days and the 7.5 days in both Germany and Switzerland but above Sweden's 4.5 days.  All that said, the cost of individual hospital stays in the United States is, by a very wide margin, the highest among the 13 nations as shown on this graph:

3.) Prescription Costs:  As shown on this chart, the cost of most commonly prescribed drugs varies greatly among the OECD nations (the cost of the drugs is set a 1.00 for the United States):

While the cost of generic drugs is relatively low in the United States (second lowest after New Zealand), the cost of brand name drugs is the highest among all thirteen nations and is between two and three times more costly than in every other nation except Canada.  As a result, overall drug costs in the United States are nearly twice as high as the OECD median.

4.) Physicians' Fees:  The cost of a visit to a primary care physician in the United States is the highest in the study, coming in at $133 for private payer compared to the median of $104.  These higher fees for physician services have resulted in this:

...and this:

5.) The Penetration and Usage of Diagnostic Equipment:  The United States has among the highest number of MRI machines per million population among the nations in the study at 25.9, coming in second place to Japan at 43.1 per million population.  The OECD median is 8.9 MRI machines per million population.  This compares to 8 machines per million for Canada and 5.9 per million for Australia.  Physicians in the U.S. are also more likely to recommend the use of MRI for their patients; 91.2 exams per population population, the highest among its OECD peers and more than twice the median of 43 per thousand population.  The number of CT scanners per million population in the United States (34.3 scanners per million) is also more than twice the OECD median of 15.1 per million and the number of CT scans (227.9 scans per thousand) is also nearly twice the OECD median of 122.8 exams per thousand.

Now, you might say that all of the money spent on health care in the United States leads to better outcomes and better overall health.  As shown on this graph which shows the five year survival rate for three common cancers, outcomes in the United States are not markedly better than its peers:

While this is just a partial measure of health care efficacy, it is symptomatic of the problems facing the American health care system.

While the introduction of Obamacare will help millions of uninsured Americans, this analysis by the Commonwealth Fund shows that there are underlying issues in the U.S. health care system that the implementation of universal health insurance will not be able to cure.  Until there is some way of controlling costs, Americans will find themselves laying out more than their OECD counterparts for health care either through out-of-pocket spending or through rising health care premiums and taxes.

Wednesday, October 30, 2013

America's Real Employment Situation

America's job market is sluggish.  Of that, there is no doubt and this issue is one of the things that keeps central bankers awake at night, particularly those who have set an unemployment target of 6.5 percent.  Unfortunately, many of us get distracted with the monthly headline U-3 unemployment statistic which, as you will see, is hardly an accurate reflection of the true employment situation in the United States.

Here are some of the things that are worrisome:

1.) The average duration of unemployment is not far below its post-recession peak of 40.4 percent and currently sits at 36.9 weeks, more than double the normal inter-recessional rate since the mid-1970s as shown here:

Here is a closeup showing what has happened to the duration of unemployment since the Great Recession officially ended in June 2009:

When the recession ended, the average duration of unemployment was 23.9 weeks.  This rose to 40.4 weeks in July and September 2011 and fell back to its post-Great Recession low of 35.3 weeks in January 2013.  Since then, it has risen back to its current 36.9 week level.  The trend in this lagging indicator can hardly be called positive and its current elevated level compared to historical levels shows that the employment situation in the U.S. is far from healthy.

2.) The number of long-term unemployed Americans is obviously at an elevated level.  Currently, 4.146 million Americans have been unemployed for 27 weeks or more, again, well more than double the normal inter-recessional number looking back several recessions as shown here:

The number of long-term unemployed now stands at 36.7 percent of all unemployed (U-3).  In the year before the Great Recession, there were between 1.09 and 1.37 million long-term unemployed.  This peaked at 6.704 million in April 2010, an increase of 389 percent from the beginning of the Great Recession.  Since then, the number of long-term unemployed has only dropped 38 percent, hardly a significant dent.

3.) The civilian employment-to-population ratio is still stubbornly low and its current level of 58.6 percent is right around its post-Great Recession low of 58.2 percent as shown on this graph:

The population is simply growing faster than the growth in the number of employment opportunities available.  We have to go all the way back to 1983 to see a ratio lower than what we have today and that low occurred after the crushing twin recessions of the early 1980s.

4.) The number workers that are employed part-time for economic reasons is also elevated and just below record levels as shown on this graph:

We keep hearing about this which has been the one saving grace of the monthly unemployment numbers:

The Labor Force Participation Rate is defined as the percentage of working-age persons in the economy who are employed or who want to be employed (i.e. are searching for work).  As you can see on the graph, the decline in the labor force participation rate is unprecedented except for a very short stretch in the early 1960s.  As people withdraw from the labor force, it pushes the unemployment rate down.  The causes of the decline in labor force participation are generally believed to be related to the changing demographic in the United States; as the population ages (thanks to the hordes of baby boomers that live among us), older workers retire and remove themselves from the pool of those that are employed or want to be employed.  Here is a graph from the American Institute of Economic Research that refutes that notion:

The labour force participation rate for older adults between the ages of 55 and 64 has actually steadily risen since the late 1980s, from just under 55 percent to around 65 percent today.  In contrast, the labour force participation rate for younger adults between the ages of 20 and 24 has dropped steadily from an annual average of around 80 percent in the late-1980s and early 1990s to its current average level of around 72 percent.  Interestingly, baby boomers made up about 11.9 percent of the labour force in 1990 and 19.5 percent of the total labour force in 2010 with projections showing that this will reach 25.2 percent in 2020.  That's probably not going to help employment statistics down the road.

When you put all of this data into the context of the Herculean monetary efforts made by the Federal Reserve since QE1 began in November 2008, it is sobering.  The fact that the employment side of the economy (save the headline unemployment rate which is still elevated compared to past inter-recessional periods) has performed so poorly since the end of the Great Recession makes it apparent that it is unlikely that further intervention by the Fed will make one bit of difference to the over 11 million Americans that find themselves part of the U-3 statistic and the additional 6.2 million Americans who find themselves part of the U-6 statistic.  While Mr. Bernanke's much-dreamed of 6.5 percent headline unemployment rate may be reached sometime in 2014, the fact is that his Grand Experiment has had relatively little impact on employment compared to past recoveries.

Monday, October 28, 2013

The Future of Apple's iPad

Let me open with a disclaimer:  I am an iPad owner.  I use it everyday and yes, I am very happy with its performance.  I used to travel for both pleasure and business with a laptop and have definitely found the iPad to be a breath of fresh air.  While it doesn't do everything, it does enough to make me happy.

A lot of naysayers out are predicting the end of the Apple era or at the very least the end of the Apple growth era.  While most analysts focus on the iPhone , I wanted to take a look at Apple's  other flagship product; the iPad.  Let's start by looking at the iPad United States unveiling dates by version so that you can match the release dates with the sales numbers:

iPad 1 - April 3, 2010
iPad 2 - March 2, 2011
iPad 3 - March 7, 2012
iPad 4 - October 23, 2012 - introduced iPad Mini
iPad 5 - October 22, 2013

Now, let's look at a graph that shows iPad sales by quarter since its introduction in the second quarter of 2010:

The climb in sales has been pretty steady, however, what is worrying is the decline over the second and third quarters of 2013 where sales dropped from 22.9 million in Q1 2013 to 14.6 million in Q3 2013, a total drop of 8.3 million units.  With today's release, we find that sales dropped even further to 14.1 million units in Q4 2013 for a total drop of 8.8 million units on the year.

Here's a graph that shows the quarter-over-quarter sales volume gains and losses:

The best quarter-over-quarter gain was back in Q2 to Q3 2011 when sales rose by 97.2 percent, just after iPad 2 was introduced.  Notice that from Q2 to Q3 2013, there has been a substantial  cumulative drop in sales; with the release of fiscal 2013 data, there are now three quarters with  quarter-over-quarter sales drops, the longest losing streak since the iPad was introduced three and a half years ago.  Since unit sales peaked in the first quarter of 2013, volumes have dropped by 38.4 percent, a not insignificant amount and a trend that one would hope (if they were Apple) would be reversed soon.

Lastly, let's put the sales of iPads into corporate-wide perspective.  In 2012, Apple's total net sales were $156,508 billion.  Net sales of iPads was $32.424 billion or 20.7 percent of the total, the second largest net seller in Apple's relatively narrow slate of products.  By way of comparison, iPhone sales were $80.477 billion or 41.5 percent of total net sales.

It will be interesting to watch the sales trends for Apple's tablet.  With the product making up a substantial portion of Apple's overall net sales, a continuing drop in sales will definitely put a damper on earnings growth in the future, particularly if Apple does not have an innovative replacement product in its stable.