Why Today is not Brexit USA

Update: Well I get to eat crow on this one! While demographic shifts did aid Clinton, it looks like she may win the popular vote but lose the electoral college, as Al Gore did in 2000. But while I (and many) were surprised by this result, at HiddenLevers we made sure to prepare our audience for the possibilites by looking at the election through the lens of risk parity. Whatever you were hoping for in Election 2016, it helps to be prepared for all the contingencies! Watch our pre-election webinar and scenario forecasts here.

Original Post Below:

It’s become fashionable in the media to compare today’s election to Brexit, and to forecast that the result may play out similarly. Markets and the mainstream will be shocked when the silent majority rises up and defies the global elites! But is this analogy really apt for the US? What’s surprising is the lack of demographic comparisons – the simple fact is that the US looks nothing like the UK, and voter demographics matter even more in an election like 2016.

The UK’s population was 87% white at the 2011 census, and its voting population is whiter and older since many minorities are relatively recent immigrants. The US, by way of contrast, is 61% white, with the voting population estimated to be roughly 69% white in the 2016 election. A 26 percentage point difference between the US and UK mean that the two are worlds apart – the Brexit comparison simply falls down in this light. Mr. Trump may be losing minorities by as many as 50 percentage points, helping to explain the early voting results in places like Nevada. Demographics pose another challenge for Mr. Trump – his voters are on average already more likely than minority voters to turn out, and so the surge he may have whipped up could hurt him as much as it helps him.

While a Clinton victory today isn’t guaranteed, those making simplistic comparisons to Brexit are ignoring the world of difference between the population voting today, and the population in the UK that voted back in June.

What Can Be Done About Skyrocketing Drug Prices?

The American government and even major insurers actually have a lot of levers they can pull to lower drug costs – but do politicians, insurers, and employers have the courage to try?

The drumbeat of overpriced-drug stories has been continuous in America of late, from Martin Shkreli’s 5400% price hike last year, to the recent price hike and subsequent backpedaling of Mylan with respect to the EpiPen. With growing outrage over skyrocketing drug prices, it’s worth asking – what can be done about it? Drug pricing is not subject to typical market forces since a new drug often has exactly 0 direct competitors – enabling a drug company to set virtually any price. New cancer drugs often start list pricing at $300,000 per year, while groundbreaking new Hepatitis-C treatments like Gilead’s Sovaldi started out at $84,000 for a short term (curative) course of treatment. Insurance companies (and major employers) have been unwilling to say no, swallowing each hike and passing it on in higher premiums. Medicare, Medicaid, the VA, and other public entities have been banned from negotiating prices, leaving them powerless to get a better deal for those receiving care through their programs. Here are a few ideas on how to break the logjam, in order of increasing potential savings:

1. The Anti-Monopoly Approach

Making drugs, and in particular so-called small molecule drugs, is actually both inexpensive and easy. The primary protection that drug makers use to enforce their monopoly position on new drugs is the patent system. While this arguably makes sense for new drugs, what about long-generic drugs? In recent years certain drug companies (e.g. Valeant) began specializing in buying up the manufacturers of old drugs and immediately hiking prices. After gaining a monopoly position it became easy to hike prices by 50-100% per year and extract huge profits, while new entrants were stymied by
the FDA approval process required to certify the efficacy of their drug version. Why not streamline the FDA approval rules for generic drug manufacture? If a drug is tested and shown to be chemically identical, how much further testing is really necessary?

Alternately, the Department of Justice or FTC could bring suit to halt acquisitions which would leave zero competitors in the market for a generic drug. Special pharmacies called compounding pharmacies are also capable of making many drug compounds. Why not
allow compounding pharmacies to compete across all generic drugs, or specifically contract with them to make generic equivalents for the VA system or Medicaid system?

2. The “Title IX” Approach

Private American colleges and universities are not actually required by law to provide equity in women’s sports, or to follow any of a wide range of Department of Education edicts. The catch? In order to receive federal funding, institutions of higher education must comply with these rules. Since virtually all colleges make use of varying forms of federal assistance, they fall into line.

The American pharmaceutical industry does very little original research – most innovations originate in the university system, and most of the research funding (over $21B per year) comes from the National Institutes of Health [1]. The American government could utilize this lever to strongly influence drug pricing. Pharmaceutical companies might be required to adhere to certain pricing guidelines if they wished to license research originating from NIH funding.

Those guidelines might require drug makers to release drugs into the generic market on an accelerated timeline, for instance. Or the rules might require that drug makers adhere to a value-based pricing approach, as described further below. Drug makers could be required to pay a tiered tax on drug sales to fund NIH research – a tax of 25% on prices above $1000/patient/month and 50% above $4000/patient/month could simultaneously fund future research and encourage drug makers to keep pricing down. The advantage of the “Title IX” approach is that it preserves the liberty of drug companies – if they don’t want to conform with the rules, they can simply do their own basic research. Fiscal conservatives might find this approach palatable as it directly charges users (drug companies) for the government programs they use, and lowers the deficit in the process.

3. The Value-Based Approach

If insurers and government buyers (Medicare/Medicaid/VA) all insisted on paying for value, pharmaceutical companies might be compelled to go along. How do you define value? The UK’s NICE measures the efficacy of medical treatments by attempting to measure the number of “quality-adjusted life years” provided by that treatment. If a cancer drug postpones death by 2 years on average, and has mild side effects, then it can be said to provide 2 years of QALY. The NIH takes this a step further by quantifying how much it will pay per QALY (currently around 25,000 pounds per year), and it sets prices
on drugs using this approach.

American buyers could emulate this approach by offering to pay for measured improvements in outcomes. If a new cancer drug extends life by 2 years, but existing cancer drugs extend life by 1.5 years, then the value of the new drug is an additional half-year of life. Drug buyers could offer to pay a premium for the new drug based on this degree of improvement, and no more. Buyers could also use this as a way to foster competition between older and newer generations of drugs. The older drug is 75% as effective, so it can be placed into competition with the new drug, but at a discount. Express Scripts took this approach in the Hepatitis-C market and was among the first buyers to find a way to push back against Gilead’s $1000 per-pill asking price for Sovaldi.

Conclusion

As long insurers are happy to pass rising costs along in the form of higher premiums, and American politicians remain beholden to the pharmaceutical lobby, nothing will change. But the ideas outlined above show that America doesn’t need European style price controls to break the drug price spiral – a combination of relatively small policy changes and insurers’ willingness to negotiate are all that is required.

 

[1] This article investigates the breakdown of basic pharmaceutical research in detail, and concludes that big pharma companies contribute less than 25% of research dollars in the US, with most of the balance coming from the NIH.

Police account for 20% of Random Homicides in US

Recent statistics indicate that American police commit 1 in 5 homicides in which the victim is unknown to the assailant.

According to the DOJ, 14,200 Americans died as a result of homicide in 2013 (the most recent year with complete data). This represents a huge drop in the US murder rate, as it has fallen by half from 1994 to 2013, from 9 homicides per 100,000 Americans to 4.5 homicides per 100,000.

Of the 14,200 murders in 2013, we can estimate that roughly 4700 were random homicides, those committed by strangers unknown to the victim. FBI research has shown that almost 80% of murders involve some sort of acquaintance between the victim and assailant – we use a factor of 2/3 here to be more conservative [1]. These 4700 random homicides are of particular interest because they invoke the greatest fear in the public – the fears of home invasion and carjacking murders, of murder-robberies on the street, and so on.

In reality these crimes have become rarer as the overall crime rate in the US has dropped. But while the crime rate has dropped, news over the past year of police homicides has exploded into the public eye. This raises a question – what percentage of random homicides are committed by police? FiveThirtyEight.com has covered this issue and reports that police likely commit at least 1240 homicides per year in the Unites States today. Since police interact with different members of the public every day, virtually every one of these homicides counts as a random homicide – the individual officer responsible for a given homicide doesn’t generally know the victim. This implies that US police officers commit roughly 20% of random homicides, even when justifiable homicides are taken into account [2]!

If police are indeed committing 1 in 5 random homicides, that is deeply troubling. Perhaps it is justified by America’s overall murder rate? The Economist reports that German police killed 8 civilians last year (0 in the UK and Japan), versus 685 homicides in Germany. This leads to a ratio of 11.7 police homides per 1000 murders in Germany, versus 87 police homicides per 1000 murders in the US [3]. American police kill civilians at 8 times the rate of their German counterparts, even after adjusting for country-specific murder rates. American police work is also safer as an occupation than it’s ever been – but the evidence shows that American police have failed to adapt to safer conditions, and appear to now be part of the homicide problem in the United States.

[1] The Bureau of Justice Statistics Homicide Trends in the US Report indicates (on page 16) that the victim had some acquaintance with the assailant in 78.1% of cases. This metric excludes the 44% of cases where data was unavailable (often because the crime remains unsolved). If we conservatively assume that the victim was known to the assailant in 50% of these cases, we get a blended rate of roughly 2/3 – therefore only 1/3 of all murders are random, in which the victim and assailant had no acquaintance.

[2] Taking the 1240 police homicides and dividing by 4700 random homicides yields a rate of 26%. Police departments reported 461 justifiable homicides in 2013, which would lower the police share of random homicides to 17%. But some percentage of police homicides claimed as justifiable may not be, and the 1240 police homicides per year may itself be an underestimate. If we assume that over 2/3 of all reported justifiable homicides were in fact justified, then this reduces the police share of random homicides to 20%.

[3] German police killed 8 civilians last year, divided by 685 homicides = 0.0117. Multiplying by 1000 makes this 11.7 police homicides / 1000 murders. In the US we have 1240 police homicides divided by 14200 murders, or 0.087, which equals 87 police homicides / 1000 murders. This metric shows that US police kill at 8 times the rate of German police, even after adjusted for the overall country-specific violence rate.

Cost Differences in Diabetes Care, and American Health Care

This morning’s New York Times’ piece on diabetes care annoyed me, and highlights the vast differences in costs for caring for the same kind of illness:

In the article, a type I diabetic incurs over $26,000 for her routine diabetes care annually. She uses much of the latest technology, and it costs a fortune.

I use syringes (bought wholesale online), generic insulin (WalMart’s Relion brand), generic test strips (also Relion), and see my endocrinologist once a year:

I pay around $750 a year to manage my type I diabetes. [1]

I don’t say this to brag, and every patient is different – some may genuinely require insulin pumps and the like. But my doctors pushed the insulin pump idea on me from day one, without considering other options. I could afford a pump, out-of-pocket if need be. So why did I refuse one and opt to try the “old-fashioned” way? Here are a few simple reasons:

  • I desired the simplest and least intrusive treatment that would work. No machines strapped to me 24/7, no intrusive wires.
  • New treatments are not time-tested, and are later found to have serious flaws. Note Avandia, a popular diabetes drug until it was pulled from the market for elevating heart risks.
  • Why not try a simple solution, and only escalate to a complex (and expensive) solution if it fails?

My treatment plan is working, as my A1C is low (generally under 6). While my approach wouldn’t work for every patient, shouldn’t doctors start simple and work up from there? Of course not – there’s no financial incentive to do so. But converting, say, 1 million diabetics (there are tens of millions in the US) from 25k/year to 1k/year treatment would save $24 Billion per year. At some point insurance companies, payors, and the government are going to have to wake up, and make cost-effectiveness a metric in health care decision-making.

[1] Since I use mostly generics, all of my expenses are out of pocket save my annual doctor’s appointment. Including the doctor’s appointment, associated tests, and both out-of-pockent and insurance reimbursements, the total cost of care is still less than $1000/year.

[2] I virtually never link to commercial interests in my posts, and I have never received compensation for doing so. I linked to Relion and American Wholesale Diabetes in this post simply to inform those who might benefit from the information.

Fix Healthcare.gov by turning it into Turbotax

Go to www.irs.gov. Look for the File Now button to file your taxes. You’ll find a list of options for filing, including software companies providing tax filing web sites and software. The IRS makes fillable online tax forms, and the instructions for completing them – so why not cut out the middleman and deliver a free irs.gov tax filing portal? Healthcare.gov is just the latest answer to that question – the government has a poor track record of delivering technology solutions, with IRS, FBI, and DHS systems as just a few examples of failure [1].

The department (Health & Human Services) managing the Obamacare rollout should take a lesson from the IRS: if you set the rules, and let the private market deliver the software, you can offload the expense and risk of technology development while still receiving the benefits of automation. Turbotax and its competitors receive not one dime from the IRS, and yet have taken a huge share in the multi-billion dollar tax filing preparation market. In addition, these companies have agreed to give their software away for free to low-income individuals, eliminating any criticism on fairness or access grounds.

Healthcare.gov could easily move to the same model, and here’s the crazy part – several companies, including eHealthInsurance.com and GetInsured.com, already have healthcare exchanges certified to sell ACA plans WITH subsidies! While any licensed insurance agent (including websites) can sell ACA-compliant policies, a handful have built out their technology to work with the federal government and provide access to subsidized ACA insurance. Rather than competing with these firms, Healthcare.gov could terminate many of its bloated IT contracts and simply list certified private exchanges on its site. These exchanges would provide a free shopping experience for consumers, and earn a commission on policies sold in a manner similar to the financing system for healthcare.gov itself [2]. Let HHS & CMS employees set and administer the rules of the ACA, and leave the exchanges themselves to the private sector – leading to benefits for taxpayers and health insurance shoppers alike.

[1] This paper found that 70% of government-run software projects failed to meet stated objectives. Government contract reform has become a hot topic as a result of healthcare.gov’s failure, but these problems have been going on for years.

[2] The ACA exchanges will charge insurers 3.5% of each policy premium sold on exchanges to finance the marketplace. While this “user fee” is lower than the commissions many private insurance brokers receive, many would likely still jump at the opportunity given the size of the new market on offer (perhaps 7 million individual policies through 2014).

Gasoline vs Electric ROI: Tesla Model S

The Tesla Model S saves owners roughly 15k over an 8 year ownership period when compared to similar luxury sedans – this analysis excludes government subsidies.

I’ll be taking delivery of a Tesla Model S in a few weeks, making it a great time for me to revisit the cost-benefit of purchasing an electric vehicle. Ignoring externalities [1] (pollution), and range limitations for a moment [2], an electric vehicle is a cost-effective purchase only if the total present value of gasoline savings equals the price premium paid for the technology. A number of factors impact the calculation:

  • Price of gasoline and price of electricity
  • Annual mileage driven
  • Comparable gasoline care MPG and electric vehicle MPGe
  • Risk-free discount rate
  • Projected annual increase in gasoline prices
  • Electric car price premium / discount
  • Length of car ownership
  • Time savings from elimination of gas station stops

Here’s a spreadsheet model analyzing the Tesla versus traditional competitors.

It’s possible to come up with a quick best-case estimate without a whole lot of math. Assume that premium gasoline costs $4 a gallon, that we drive 12,000 miles per year, that a comparable non-electric vehicle gets 20 MPG, and that the risk-free discount rate (currently in the 1-2% range) and gas price inflation roughly cancel out. Driving the non-electric vehicle for a year would require 600 gallons of gas for $2400. If we owned the Tesla for eight years, that makes $19,200 in maximum possible gas savings – if the Model S were to cost nothing to charge! The spreadsheet analysis shows that owning a Tesla for eight years might actually produce $15,000 in savings.

Does this make the Tesla a good deal? It depends on the frame of reference – what conventional vehicles are its competitors? Mid-sized and large sedans from Mercedes, BMW, and similar would seem to be appropriate benchmarks. The average base MSRP across a range of luxury sedans is around $71,000 [3], while the Model S starts at $69,900. When fuel savings are included, this makes the Tesla over $16,000 cheaper than its competitors!

Key Conclusions:

  • If owned for eight years, a Tesla saves owners $15,000 when compared to a comparable ICE-powered luxury car – without counting government tax credits
  • The Model S already has superior ROI when compared to competitors like BMW, Mercedes, Lexus, and Audi
  • The Model S (and all electric vehicles) do not yet possess the rapid refill capability of traditional vehicles, which limits their market appeal for single-car households [2]

[1] Why leave out externalities like pollution from the analysis? True externalities are outside the traditional economic transaction, and so a car buyer doesn’t take them into account when making a purchasing decision. In reality, many Tesla buyers purchase the vehicles in part because they value the environmental benefits of the vehicle. But in order to scale past the early adopters, electric vehicles will have to be cost-effective for the rest of consumers – so it makes sense to leave out environmental benefits here.

[2] Range limitation is the principle downside to electric vehicle ownership at the moment. While Tesla is quickly building a network of high speed charging stations, these stations provide only 150 miles of range per half hour, while a traditional vehicle can add 300+ miles of range in less than five minutes at a gas station. For households with one electric vehicle and one conventional vehicle, this limitation may not be of concern, making this a good target market for electric vehicle makers.

[3] The Tesla seems to compete with a broad range of luxury sedans from mid-level vehicles like the A6 and 5 series to upper-end vehicles like the Mercedes S class. Based on its size and performance characteristics, however, it seems that the larger vehicles are a more appropriate comparison. The average base MSRP of the BMW 5 series, 7 series, Mercedes E class, S class, Audi A8, Porsche Panamera, Lexus LS460, and Jaguar XJ is $71,000. Since this number is quite close to the Tesla’s starting MSRP, and since this calculation varies based on the comparison list, a price premium of $0 was used in all calculations.

Disclosure: The author has a paid reservation for a Tesla Model S