Leadership & Business

The Healthcare Elephant

As the debate rages regarding how to revamp our (US) healthcare system, there are some plain and simple truths that everyone had better start acknowledging (these are the elephants currently being ignored).

Healthcare rationing is a fact.  We rationed healthcare in the past.  We do it today.  And we’ll do it in the future.  The question is HOW it’s rationed, not IF it’s rationed.  We ration food.  We ration shelter.  Capitalists ration.  Socialists ration.  Communists ration.  It’s the “how,” not the “if,” that differs.

Today, healthcare in the United States is rationed on the basis of economics, using the capitalist system for the most part.  People that can’t afford healthcare coverage don’t get it (not strictly true because we already have many government programs like Medicaid to fill gaps).  Whether that’s fair—or right—is an entirely different question.  It’s essentially the same way we decide who gets a BMW and who doesn’t.  What the healthcare debate is really about is whether capitalism is the best way to ration healthcare or whether we should use a more socialistic approach.  No one wants to come right out and say that rationing is—and until we achieve immortality, will be—the essence of the debate.  It is a BIG elephant.

So when the question arises, “Are we moving toward socialized medicine?” the answer is plain and simple—“yes we are.”  Is that good or bad?  I don’t know.  Anytime one is more in favor of less capitalism, the direction ends up being towards more socialism.

It’s also important to understand that rationing is absolutely necessary and inevitable.  We simply cannot consume unlimited healthcare at will. And until we achieve immortality, our demand for more—and better—healthcare will be endless.  You see, unlike other things, we’re not willing to wait for healthcare costs to come down.  If a new generation of televisions (say, plasmas or LCDs) is out of our reach, we save our money until we can afford it, or we decide to forego it altogether, at least until prices come down.  With healthcare, we don’t want to wait (and often can’t).  The demand for healthcare drives the ultimate need for instant gratification.  Our desire for the television may ultimately fade, or it can be satisfied at a later date. If you’re dying, the demand for a cure has a time limit on it—and only fades when you have faded out of existence.  It can’t wait for you to save your money and you can’t wait for prices to come down.

The solutions to our healthcare challenges will not feel like solutions—because the problem we all WANT solved, can’t be solved.  What we’re looking for is an end to the “want” for more and better healthcare and until we achieve immortality, that’s not going to happen.  The real solutions are going to be real compromises. And when it comes to politically and emotionally sensitive issues, compromise is never easy.  Until we kill the elephant, we can’t even begin the process of real and meaningful compromise.

A Secretary of Innovation? Great Idea!

In a recent article, Thomas D. Kuczmarskiwrites that he thinks President Obama could use a Secretary of Innovation.  I agree with him.

Kuczmarski writes that our current approach to stimulus is not likely to get the job done.  Again, I agree with him.

It strikes me that there is still a fundamental misunderstanding on the part of most people, including economists.  And that is that the global economy is not slowing down.  It has essentially stalled.  And the attempts at recovery are kind of like pulling the cord on a lawn mower.  You can pull, and pull, and pull, but if you’re not pulling really hard and fast at least once, all you do is use up your energy without the engine starting.  Well, all the relief and stimulus programs around the world—from China to Germany to the US—are basically just like using up energy, only instead we’re using up money.  That’s because it appears that no one has the courage to “jolt” the engine of the economy back into a growth mode.  We’re going to pour money into this problem for years before we see real growth again.  The lost decade is becoming a more likely scenario every day.  It’s very sad—and very frightening. 

Capitalism rules!

While the old saying, “when the US catches a cold, the rest of the world gets the flu,” can certainly serve to make us Americans feel a little guilty about our role in a global depression, at least we can take solace in knowing that it is our system of capitalism that actually should lead to us recovering faster than the rest of the world.

The reasons are simple.  Our employer friendly environment in the US—the very system that has allowed companies to quickly downsize—is precisely what is going to lead to our faster recovery.  Consider what would happen if, as in the cases of China and Germany, the government slowed the pace of layoffs.  That would force companies to continue to pay unneeded employees instead of investing in their recovery efforts.  In China, the government has ordered state owned businesses not to lay-off people and in Germany, the government has reached an agreement with the largest companies to refrain from layoffs for six months.  That all but assures that the time it will take for those companies—and those economies—to hit bottom will be extended, thereby extending the time it takes for recovery.  In the US, companies are finally starting to react and in a big way.  Were we to mitigate that reaction, we would simply lengthen the bottom of the bathtub curve that is going to define our depression.  Fortunately, as I’ve noted over the past few days, the government stimulus plan is going to take a lot of time, so we don’t have to worry too much about that elongating the tub, either.

It’s ironic that while capitalism is clearly the cause of our problems, it will be capitalism that saves us, too.

The Doomsday Scenario

On January 2nd, 2008, I didn’t predict that we’d enter a recession.  I went on the record and said the recession had started.  Despite another eleven months of denials by economists and politicians, at the end of November 08, the National Bureau of Economic Research (NBER) declared that the recession had in fact started back in December 07. Vindication!

In an earlier blog on November 26th, before the NBER had even declared that we were in a recession I went on record as saying that the depression HAD started.  Vindication again?  We’ll know soon enough.

Some in my company have asked why I’m such a pessimist.  Why can’t I be more positive about things, they ask? The answer is simple.  Whenever my company has gone through a tough spot for one reason or another—inevitable in any young company—I could be the visionary optimist, boost people’s spirits, and they’d fight through it.  We always turned things around.  Unfortunately, my optimism can’t turn around our economy.  And I don’t think a new President can turn a structurally wounded, globally intertwined economy around, either.  So the much more responsible thing for me to do is to be a realist.  I promise everyone—when I believe things are starting to turn around, I will be the biggest economic cheerleader you’ve ever met. 

Now, what should you be doing about all this uncertainty? Managing risk is certainly the job of every CEO, but it may sound more like a black belt’s topic to dive into the nitty gritty of mathematically defining different statistical interpretations of risk and the difference between downside risk and upside risk.  There are several algorithms that can be used, but here’s a layman’s interpretation of what I’m talking about.

I’ve had quite a few clients recently explain to me how they are working to:

“Avoid cutting so deep that we’re unprepared to reap the benefits of recovery.”

My reaction:  absurd!  I think that’s an irresponsible mindset for most companies.  Here are two examples of the difference between upside and downside risk:

1. In the American system of justice, we consider the risk of sending an innocent person to prison much more severe than the risk of freeing an innocent person. Hence, the requirement to be “convinced beyond a reasonable doubt” and for conviction by a unanimous jury.
   
   
2. In the casino, if you only have $100 and lose it, you go home.  You’re out of money so you can’t gamble more to win it back.  If you win $1,000, you can keep playing until you lose it all, including your $100, so you still go home.  You could quit, but many don’t.

What’s the point? The point is that making excuses not to cut as deep as you can has almost become a part time job for many executive teams. Which risk would you rather come to fruition: the risk of not making as much money in 2010 and 2011 as you otherwise might, or the risk of not being around in 2010 in the first place?

 To help you think it through, here are all the reasons you SHOULD be cutting deeper:

1. How do you know what you’re really capable of until you cross that limit by taking a chance on cutting too deep?
   
   
2. With skyrocketing unemployment, you can always hire someone if you need to.
   
   
3. In fact in many cases, you might be able to hire back the same person you let go given that the time to find new work has been growing fast.
   
   
4. You can tell your people you expect them to work longer hours and weekends to survive the depression, but until you actually push them to do it, many won’t.
   
   
5. When you have enough people to do things that no longer matter, they keep doing them.  Only after you cut deeper are people forced to truly prioritize.

Here are some additional considerations that many are still avoiding:

1. Start reducing salaries and do it fast.  Do it on an individual by individual basis.  In good times, we are perfectly happy paying someone inside a “band” and as long as they are in the band we pay them 5%, 10% or more to get them to move from another company.  We wind up with two people doing the same job but one makes more money than the other.  The “market rate” for people becomes less the driver than the desire or need to get them on board as long as they are in the band.  In tough times, their market value means everything.  So assess market value and start renegotiating salaries down to the bottom of the range for everyone.
   
   
2. Make it clear that salary cuts are not temporary. They’re indefinite.  If and when the economy turns around and you or your employee feel they are underpaid because their market rate has risen, a raise is always negotiable.  But do not set an expectation that you’re giving automatic raises back to the “old” salary when the economists declare the depression is over.
   
   
3. Treat someone making $150,000 a year differently than someone making $30,000.  A ten percent hit to someone making $30,000 a year might mean they can’t pay their mortgage.  For the person making $150,000, it means they can’t contribute as much to their 401K.  One can take it—the other can’t.  You need to cut AS MUCH AS YOU CAN, but no further than each person’s personal financial limit.
   
   
4. Stop making excuses for not doing the things above.  There is no massive defection happening at companies that are more aggressively cutting headcount and wages.  In fact, there’s substantial anecdotal data that says:

• When you layoff a big group of people, but then you only cut my salary, you’re actually signaling that I’m valued and you want to keep me.  You’re cutting other people and costs so you CAN keep me. That actually gives me a sense of job security.
  
  
• I know that if you do lay me off, you’re going to give me a decent severance package.  If I go to another company and a week later they shut down my business unit unexpectedly, I’m the last hired and my severance is next to nothing.
  
  
• The unknown is very frightening.  If you’ve been keeping people in the loop on what’s going on and how the layoffs and cuts are going to stabilize things, that’s a psychologically safer place for me to be than a new company where I know nothing but the propaganda I got in the interview.

The bottom line is that when faced with situations we’ve never had to deal with before, bold action is something we avoid because we don’t want to get it wrong.  In this particular case, however, the risk of inaction or insufficient action is MUCH greater than the risk of overreacting.  Everyone knows that old saying, “plan for the worst, hope for the best.”  Well, we’re all hoping for the best. It’s time for those in charge to do their jobs and start planning for the worst.