Koch Industries, Chicago Tribune, and Market Based Journalism?

So for some reason the Koch Industries can’t seem to stay out of the news. The story was first broke here by the New York Times (I still can’t believe Paul Krugman is on that payroll). As you may know I have covered the Koch brothers extensively as I did a historical net worth analysis from 1984-2013 here, an extensive three part series on them here, here, and here. I always find it mysterious when people say that the Koch brothers are secretive when they agreed to this 37 pages profile in the Wichita Eagle from 1994 and this recent extensive series from the Wichita Eagle from last year, and this Forbes cover story last year. Charles and David Koch are American heroes in my book for building a company that employees 60,000 people, preaching how the free market can help people, and becoming billionaires by offering people products and services at high quality, and low prices. 

Basically as the story goes the Tribune Company which owns papers such as the Los Angeles Times, the Chicago Tribune, and other newspapers is expected to release their financial data. There are rumors that Koch Industries is interested. The total value of all the papers is $623 million (the Tribune itself is an $7 billion company). Daniel Fisher of Forbes estimated that Koch Industries has around $11 billion per year in cash flow (before taxes and depreciation). Koch Industries has revenue of $115 billion per year. Clearly, Koch Industries could purchase the Tribune Company. The question is what would Koch Industries do with it?

Koch Industries recently provided $240 million to American Greeting to take the company private. The investment was made by a subsidiary of Koch Industries which actually tends to invest companies (however they don’t operate them).

I honestly don’t believe Charles and David Koch will buy the Tribune Company and turn it into some Fox News themed newspaper. Koch Industries has a history of investing in companies for the long term as was pointed out in the December 2012 Forbes article. It may actually surprise people that Koch Industries doesn’t just milk companies for profits and turn them around to resell them. The company often invests for growth and profits over the long term (which one could make the argument is the morally right thing to do). Market Based Journalism would be interesting though. 

Dr. Devi Shetty: Higher Quality Heart Surgery, Low Prices, and Making a Profit

I was thrilled to see this article showing for only $800 you could get heart surgery in India. However, the article is a little misleading since the average price people pay is $2,000. The average cost for doing a heart bypass operation varies around the world. In the United States the cost is $144,000, while in Mexico the cost is $27,000, and just $14,000 for the same procedure in Colombia.  You might be surprised to know that an actual individual entrepreneur doctor is able to do this. His name is Dr. Devi Shetty. Dr. Shetty runs a hospital named Narayana Hrudayalaya in India. The hospital has 5,000 beds and Shetty wants to expand this to 30,000 beds.  What is interesting is that the hospital performs more surgeries than first rate hospitals in the United States and still maintains high quality. For instance Narayana performs twice as many surgeries as the Cleveland Clinic. The mortality rate is very low at 1.4% which is less than the United States rate of 1.9% (and even less since the hospital doesn’t adjust for risk factors like the United States does). The heart facility in Bangalore does 30 cardiac surgeries a day (more than any place else). The same place also handles 1,000 walk in patient per day.

What is really interesting is that the hospital is for profit. The company has a profit margin of 7.7% profit after tax which is higher than the average profit margin in the United States of 6.6%. It always amazes me that people claim hospitals are greedy. If hospitals are so greedy why are they only making profit on less than 7 cents out of every $1? Dr. Shetty finds ways of reducing his costs like using cheaper sutures which saved him $50,000. He points out that you have to find many different things to cut.  He pays nurses to watch over patients in 8 hour shifts but doesn’t allow them to sit down. He claims that nursing efficiency decreases 30% if a nurse is provided a chair. He even hires people with a college degree to read radiology charts. What is fascinating is that Shetty has real time performance measures. Every day doctors can see the profit and loss statement from the prior day which would be unheard of in an American hospital. Not only can Shetty see the profit and loss statement he can also see how many surgeries were done the prior day in addition to how many surgeries were done for the month. If earnings fall below a certain amount they tell the people with free surgeries to come back until they get more paying customers.

It is too bad that Dr. Shetty couldn’t set up shop in the United States. For one his hospitals don’t have air conditioning in most parts of the hospital which would not even be allowed in the United States. Shetty plans on building a hospital in the Cayman Islands.  The United States would greatly benefit from hundreds of hospitals like the one Dr. Shetty has created. The cost of heart bypass in the Cayman Islands will only be $10,000 in the Cayman Islands.

The United States should recruit Dr. Shetty on how to reduce healthcare costs. I actually think many people would be open to business model of charging people with money for surgery and using that money to provide for those that can’t don’t have the means to pay for surgery. While at the same time on the whole the hospital would be making money which would allow them to grow and provide care to even more people in the future. I have feeling some people would still object to this.

Bill Koch CommonWealth Interview: Fat Contracts, Global Warming, and Economics of Alternative Energy

It seems as if Bill Koch can’t stay out of the news. He recently did this lengthy interview with CommonWealth news which led to this story. One thing I did notice was that Koch used the phrase “fat contracts”. In fact he used that phrase ten times. It makes more sense if you read the story first before the interview. I have did a lengthy profile of Bill Koch here, talked about his battle with brothers Charles and David here, even his school days here. I also did a three part series on all the Koch brothers: here, here, and here.

    

Bill Koch for years has opposed a wind farm known as Cape Wind. Koch himself put in $5 million to stop the project. On the other side of the debate is Jim Gordon who spent $65 million to try to bring wind power to Cape Wind. Gordon is worth around $150 million while Bill Koch is worth around $4 billion. Koch invited Gordon over to this place for dinner and Gordon was able to pitch the idea of wind farming. One quote that Koch has for Gordon is “He’s done a masterful job and he’s sold a great line of BS”. Another problem that Koch had with the project was the amount of “visual pollution” he would see from the wind mills. I can attest to this as I have driven through west Texas and seen hundreds of windmills only to learn later that it only supplied 1% of all the energy needed. Koch was honest with Gordon and said that the project wouldn’t work without the help of a government subsidy. What is interesting is that Bill Koch then published this op-ed in the Wall-Street Journal on May 22, 2006. In the op-ed Koch discusses the economics of the project and explains the subsides would actually increase the cost of energy to Cape Code residents by having by seeing a $1,300 increase because of subsidies. Koch calculated the return on the project to be 3% (with government subsidies) and negative (without the subsidies). When Gordon told Koch that the environmentalists were coming after him Koch responded by saying he had the IRS after him, a $50 billion a year company after him, and the Turkish mafia after him so bring it on. Bill Koch also understands that no one should relying on the government for contracts saying “Don’t rely on the federal government, except with taxes. They’ll tax you to death but relying on government to help you make a lot of money is a fool-hardy thing unless you’re a politician and take graft”. Koch himself got into a tax lawsuit with Governor Michael Dukakis (that he won) when Dukakis was trying to retroactively tax him when Koch used subchapter S laws to reduce his tax bill. This caused Koch to move out of Massachusetts in the late 1980’s and move to Florida (which doesn’t have a state income tax).

Bill Koch is a businessman. In the past 15 years he says he has sold zero green energy. He makes the interesting yet true point of how people in California want green energy yet people don’t want to pay for it (given people want something for the lowest price possible). In order to answer environment fears Koch suggests that we just plant a bunch of trees that will take CO2 and convert it into oxygen.  People often say other people are not qualified to offer their views on global warming because they are not scientists. However, Bill Koch is a scientist by nature. He has a PhD from MIT in chemical engineering. When shown a presentation of how global warming was going to impact the earth Koch raised some questions about what their models took into account. Koch also discusses the Wood’s Hole theory of global warming which I won’t even try to explain. In addition to this he also talks about Gaia which just basically says the earth is always in a mode of self adjusting (similar to homeostasis in the human body). The economics of trying to do something about “climate change” (interesting how it use to be global warming” show that sequestering CO2 would cost $60/ton of CO2 while planting a tree would cost 10 cents/ton of CO2.

Koch wraps up the interview talking about his own western town in Colorado. I wasn’t aware of this by Koch’s wife has 43 immediate family members. Koch also wants to use the town for entertaining customers and suppliers. The main purpose of the town is for his family though. Koch does have a lot going on with running Oxbow Energy, fighting wind mills, having lawsuits over fake wine, building his own city, and having six kids. He says he wants to allocate his time to where he gets an economic and emotional return.

As I have mentioned before on my blog. Bill Koch is interesting, fascinating, and quite a character. I find it amazing that age 72 is is able to recall the economics details of all these deals that he has done in the past. Koch seems to have a photographic memory as he was able to recite a poem to Mitt Romney (even though he probably hadn't looked at it in over 50 years. Although, he has a PhD in chemical engineering it is rare to find someone with a PhD in anything who is also a decent business person, who is also a character, and interesting. 

Milton Friedman on Tax Reform 1978

Bloomberg Article: Medical School $278,000 Debt (Because Lack of Free Markets)

This recent story from Bloomberg got me somewhat irritated today. The story discusses how medical school students are burdened with medical school debt. Going to a private medical school for 2012-2013 is over $50,000 according to the AAMC. What is really shocking is that 79% of medical school students will have more than $100,000 in debt. Note this is just for going to medical school this doesn’t even begin to look at overall debt (mortgage, car payments, credit card debt, etc).

I examined the 2012 physician compensation report (by Medscape) which can be found here. Salaries range on the low end of $156,000 for pediatrics to $315,000 for radiology. Specialties like gastroenterology can make over $300,000 while plastic surgeons make $270,000 and internal medicine doctors make $165,000. What I found it interesting that 9% of doctors don’t discuss the cost of treatments considering they don’t even know what the costs are. In the business world you would be out of business if you had no idea what the costs were.

The question is why is medical school become so expensive? Medical knowledge has only grown exponentially over time and you could argue doctors know actually face competition because patients can often Google their symptoms and figure out what they have (doctors also use Google as well). This surgeon discusses what practicing surgery was like in the 1970’s.

Supercomputer Watson (made by IBM) can analyzed 1.5 million records in seconds, attend medical school under a minute, in just two years researchers at the for-profit IBM have reduced the size of Watson from a master bedroom to a pizza box while increasing the speed by 240%. Conventional medicine can get diagnoses right only 50% of the time while Watson can get around 90% of cases correct (less for cancer given how complex they are). Of course, these percentages will only improve over time.

What is interesting is that the average MCAT and GPA scores of the people who get accepted into medical school has steadily risen since 2001. According to this medical journal from 1911 there were 129 medical schools which is roughly the same number of medical schools in 2013! Granted since 1911 the population has exponentially grown exponentially so by definition there are fewer people per doctors.  This may be why so many doctors don’t spend much time with patients.

A no-brainer would be to allow more medical schools to open to allow let more people become physicians. Starting a medical school is no easy task either. Another no brainer is allowing nurse

practitioners and physicians assistants as I mentioned in this post. The empirical evidence I have seen shows nurse practitioners and physician assistants as just as effective as doctors and cost a fraction of what doctors cost.  The cost of medical education falls is yet another example of the Peter Rule. The Peter Rule which states that: over time if prices rise and qualify suffers look to government intervention as the culprit. 

Blog Roll

So I read many different things on a daily basis. However there are only 24 hours in a day and only so much can be done. Sometimes researching one thing leads to learning about a whole new subject you never even knew about.

Drudge Report-changes every hour

CARPE DIEM-because things are better than people tell us

Café Hayek-A blog by Donald Boudreaux who writes fantastic letters to editors (who are usually economically ignorant)

Grumpy Economist-University of Chicago’s John Cochrane on what irritates him

Richard Epstein’s at Hoover Institution Defining Ideas-this man is a genius!

EconLib-Various bloggers David Henderson, Bryan Caplan, Garett Jones

Greg Mankiw-probably one of the first blogs I ever read

Marginal Revolution-done by blogger Tyler Cowen and Alex Tabarrok (although I am curious how Cowen teaches at George Mason..however Walter Williams says he is keeping his eye on Cowen…

EconTalk-hour long podcast that is released every Monday morning at 6:30 A.M. (archives go back to 2006 and there are literally hundreds of episodes on a wide range of topics)

Supply and Demand-blog by University of Chicago professor Casey Mulligan-focuses on labor economics/subsidies/welfare

Economics One-Stanford economist/monetary guru John Taylor

John  R. Lott-serious academic who has done great empirical work on gun control

OverLawyered-pointing out how ridiculous regulation has become

Walter E. Williams- one of the few people who can explain economics clearly (every article since 1995)

Thomas Sowell -smartest person of any color (every article since 1998)

CATO Blog-good policy analysis on variety of subjects

John Goodman Health Policy-great info on free market health policy

Wealth Report-Robert Frank from CNBC covers the 1%, what they do, how they invest, studies on them

Avik Roy-former Romney adviser, Yale trained doctor,

Houston Clear Thinkers-use to have great analysis on libertarian ideas (now has YouTube videos of interesting ideas)

Professor Bainbridge-perhaps the only law professor who makes a good case for insider trading.  

Skeptical Scalpel-a surgeon skeptical on robotic surgery and feel good health data  

TaxProf Blog-good resource for tax information/tax related studies  

Daniel Fisher-amazing writer at Forbes who covers law and finance 

David Koch $100 Million To New York Presbyterian and $600 Million to Charity

It seems as if David Koch is getting greedy with his charity giving. It was announced recently that Koch would donate $100 million to New York Presbyterian Hospital.  This is still a lot given his net worth (1984-2013 net worth here). As I pointed out here David Koch so far has given away $435 million. This donation would mean he has given away $600 million (including the $65 million given away in January to The Metropolitan Museum of Art) during his lifetime. This gift was the largest gift the hospital ever received. The donation will help build a 450,000 square foot ambulatory care center. As a result of the generous donation nine floors will have ambulatory surgery, cancer infusion services, radiation and oncology, along with a floor for gastroenterology. In addition to all of this, treatment rooms will be large and allow family members to stay together during a procedure. David Koch himself said he would rather give his money to “outstanding institutions” than give purchase a “bigger house or $150 million painting or things of that nature”.  Koch also said he will continue to give his money to great institutions as long as he is living.

What is interesting is that people decades from now will claim David Koch was a modern day robber barron. He and his brother Charles Koch expanded Koch Industries as I mentioned here. What people don’t realize is that David Koch help create jobs, helped employees put their children through college, helped employees put food on the table, and help employees purchase cars. In addition to this Koch Industries creates products that people use on an everyday basis (toilet paper, water, fabrics, etc) by selling those products at a lower price and higher quality than the competition.  People always seem to think that wealthy people owe something to society. The people who got rich only got rich by figuring out the wants and needs of society and giving it to them at a reasonable price.  One criticism you also might here is that David Koch is trying to buy good publicity. This is utter nonsense as David Koch has been giving to charities (hospitals, theater, arts for many years). One perfectly good reason he might give money to medical institutions is because he himself was is a prostate cancer survivor. The odd thing is because David Koch is self interested in his own health and gives money to these medical institutions he is not only benefiting himself but anyone else who uses these medical institutions.  

Koch Update: Daycare Facility, David H. Koch Plaza, Newspapers, and New Wild Bill Koch Interview

So while I have been away it seems as if the Koch brothers have been making the headlines. One I forgot last year was David Koch made it finally possible for MIT researchers to have a daycare center that would double the size of the daycare facility population (providing daycare for 126 children) and will open in August 2013. Actually the whole idea came about when a post-doc woman was sitting next to David Koch at dinner one night and talked about the state of the daycare at MIT.

In another Koch related news David Koch donated $65 million to the groundbreaking ceremony video can be seen here (Koch makes some remarks at around the 1:26 mark). Construction won’t be done until the fall of 2014. I always wonder why liberals hate David and Charles Koch so much when they give to causes like the arts that liberals and the general public tend to enjoy.

Bill Koch has been in the news as well. Bloomberg had a story a few weeks ago discussing the false imprisonment suit. In probably one of the most bizarre Koch lawsuits to date former Oxbow employee Kirby Martensen claims he was held against his will. Judge Jacqueline Scott Corley dismissed the lawsuit Martensen brought however claimed that she didn’t buy Koch’s arguments. The case is being retried and the name is Martensen v. Koch.

In somewhat Koch Industries related news Daniel Fisher of Forbes had an excellent story (his writing is superb) on the Marshall family (who are still to this day part owners of Koch Industries) describing how J. Howard Marshall II (the guy married to Anna Nichole Smith) and his family are having a fight not between family members but also the IRS for gift taxes owed. Last year Bloomberg discovered through tax documents that Elaine Marshall owned 15% of Koch Industries which gave her a net worth of $12.7 billion. It is somewhat interesting that if a few court decisions had gone a certain way Anna Nichole Smith could have ended up with ownership of Koch Industries. Fisher discovered some great primary documents like this tax court document for J. Howard Marshall II.

The most recent news that has been talked about is Koch Industries maybe purchasing the L.A. Times. It would be interesting to see market based management journalism. First I really don’t know how true this rumor really is. Also newspapers have been a dying breed as revenue is at an all-time low (even after adjusting for inflation).  The Koch’s grandfather Frederick Koch did run a news paper in Quanah, Texas.  Speaking of Koch Industries I forgot to point out this article (again by superb journalist Daniel Fisher) which describes how Koch Industries reinvests 90% of their earnings into the company while correctly pointing out that both Charles and David may have issues down the road in terms of succession planning. With a net worth of $34 billion each and 84% ownership in Koch Industries it makes estate planning difficult even though Charles claims they have been doing estate planning for years. Actually the serious estate tax bill will come not when Charles and David pass on but when their wives pass on.

Lastly and maybe one of my favorite parts is that Bill Koch actually granted an interview (7 pages worth) to 5280 (a Denver magazine). It seems like Wild Bill is spending a lot of time on the ranch working out details. Koch seems to be putting forth a lot of effort in getting the history correct and everything historically accurate. The town will be intended to be a private getaway for him and his family. The goal of his town is to all have a place to come to as they grow older and have their own families. After decades of battles between Charles, David, and Bill I guess Bill has come to realize that fighting between family members really doesn’t lead to anything good.  Bill Koch’s twin brother David Koch apparently was interviewed too and admitted in his younger days he was more interested in the popular people on campus, the girls, and the athletes. David also said that Bill was the more serious student. Bill like his brothers David and Charles had to work on the ranch (beginning at age 13 and worked 12 hours a day, seven days a week). Bill in the interview also discusses the incident with Martensen and said Oxbow became aware in 2011 of possible misconduct by Martensen and through an internal investigation (e-mails, recordings, and over 4 million items in total) Martensen was planning a scheme. When confronted about the wrongdoings Martensen admitted to some of it. The whole ordeal sounds bizarre about detaining an employee and a trial, judge, and jury will have to decide the outcome. Toward the end of the interview Bill mentions he wants to live the rest of his life in peace, spend more time with his family, and hang out in his own town. The governor of Colorado would like Koch to open the town to high paying visitors and school children (Koch is unsure if this is the right move however how often will his family even “use” the city”?”

Bill Koch is probably one of the most interesting people I have ever read about. The Koch brothers are fascinating as well. Whatever side of the political spectrum one is on I think people can agree they are interesting, controversial, and I have learned so much from studying the history of the family. I can say one thing is for sure there probably will never be a family as interesting as this. 

The Case For A Simpler Tax Code

After studying the personal income tax code for a couple of years now I believe that the U.S. tax code is insanely inefficient, gives benefits to people that don’t need it, and ends costing taxpayers not only money but countless hours.

If you look at the tax code and just look at the deductions it is pretty easy to tell what things are deductions. Nearly everything that is a deduction is only a deduction because the government has made it expensive. Take for instance education costs and medical expenses (which are deductible). You never see deductions for things like cell phones, computers, or areas where the free market is involved. People can deduct interest on their home (which leads to bigger houses than we would otherwise have without the deduction).  The charitable deduction leads to people to give to charity, however as Dan Mitchell points out here that history shows that the deduction itself does not lead people to give more to charity since giving has historically been the same (even before the deduction was put into place). The charitable deduction generally benefits people with high income as they can deduct up to 50% of their (Adjusted Gross income). Also if property is donated to a charity over a certain amount it has to be appraised which requires more forms and paperwork.

What is really sad is that Social Security benefits are taxable. So essentially people are paying taxes Social Security taxes when they work and when they collect their benefits (double taxation).

Currently the tax code is 3.8 million words long (2010). Since 2001 there have been 4,428 changes to the tax law in addition to filling out 893 forms to fill out. The complexity of the tax code can be found in this Forbes article. According to this Laffer Center report the cost of tax compliance is $431.1 billion. I would think both parties would agree this is a waste of both time and money. The biggest problem I see is that the tax code makes it hard for even honest and decent people to figure how to file out their taxes. Many of the tax laws exist to benefit certain people while disadvantaging others. Did you know for instance if you rental out a home less than 14 days per year you don’t have to report it as income. This actually came about because during the Masters Golf tournament and Atlanta summer Olympics politicians and others would rent their homes out to people and didn’t want to have to pay tax on it so they created a tax law saying you didn’t have to. 

What is strange is that let's say you invest in a stock and when you sell the stock it is worth less than you paid for it. This loss can be used to reduce your taxes. It seems troubling/odd that the government is giving investors a benefit for investing unwisely. However, the maximum amount is only $3,000 per year.

 The IRS seems to be proud of answering 68% of calls in 2012 (average wait time was 17 minutes). If a private business took 17 minutes to answer phone calls they would be out of business. Part of the reason why so many people call the IRS is because the tax code is pretty darn complicated.

Many people have an interest in the tax code being complicated. Upon a little research I discovered that there are around 1.2 million accountants (this includes auditors as well). 68,000 professional financial planners, tax accountants, and other professionals that have a direct interest in the complexity of the tax law. Also there are other indirect professions that are related to the tax code such as home relators (mortgage interest deduction), insurance industry, and others.

The opportunity costs is not only 6.1 billion hours for the people that do taxes but the amount of useless knowledge accountants, financial planners, and tax attorneys are required to know adds little value. If we had a flat tax they wouldn't be required to remember so much nonsense and could be free to add value in other ways. 

The Case For More Nurses and Physician Assistants

With much people still talking about healthcare reform I thought there was one area thing people were not talking about: nurse practitioners (NPs) and physician assistants (PAs). I see both of these professions doing mountains of paperwork and it seems as if they are not being put to their highest valued use: helping and serving patients. States like Texas nurses practitioners are required to have a doctor sign off on 10% of the charts. However, 34 states don’t have this requirement. Not only does this waste time for the nurse practitioner but also takes time away from the doctor who is trying to help patients. There is an expected shortage of doctors (expected to grow to 130,000 by 2025) however there are some issues with this.  Why not add 155,000 nurse practitioners and over 83,000 physician assistants? So let’s assume that only 90% of nurse practitioners and physicians assistants are working with patients. If they on average see 8 patients a day that means 1.7 million more people per day could see a medical professional! Every week that would be close to 11.99 million who would have access to someone who could help them.

Much of the criticism comes from people who say things like “Nurse practitioners and physicians are not as qualified as doctors”. Sometimes things that seem true are not true once you look at the evidence. What is fascinating is this article in The Journal of the American Medical Association from January 2000 entitled “Primary Care Outcomes in Patients Treated by Nurse Practitioners or Physicians a Randomized Trial” the study concluded that even when patients were randomly assigned to either a nurse practitioner or doctor the outcomes were comparable. What is even more fascinating is that the patients with hypertension did better under the care of the nurse practitioners than doctors.

Perhaps the real icing on the cake is that the American Medical Association would publish this considering it has a vested interest no one other than doctors see patients. A 2000 RAND study found no evidence that nurses provided lower quality care than their counterparts and actually could reduce office visits by 35%. This case study showed that in the late 1990's when nurse practitioners were introduced to Loyola University for their cardiovascular program the mortality rate decrease from 3% to .9% in only 4 years, complication rates decreased, and the costs also decreased. This study in a 2 year follow up found that there was no difference between the care physicians provided and that of nurses. This study showed that nurses and PAs provided similar care as HIV experts and even better care than non-HIV experts.

Women’s right activists should embrace more this since nurses make up 92% of all nurses. By giving the women in this field more responsibilities it will increase their pay which I see as positive. The elitist view view that only doctors can help people is such utter nonsense.  Medical information is more dispersed now than ever before. States and the AMA should allow nurse practitioners and physician assistants to provide care. As I mentioned the level of care is similar to that of a physician, healthcare costs would be reduced, statistically speaking women would be given more responsibilities and in turn make more money. I see all of these things as positive. The only people who wouldn’t like this are people who would have to compete with these “new” medical professionals.