Koch vs. Koch Lawsuit: Pine Bend Refinery Case Study

One of the first major deals that Charles Koch performed that grew Koch Industries dramatically was the acquisition of Great Northern Oil Company. Great Northern Oil Company owned a 36,000 barrel per day refinery known as Pine Bend Refinery that is located near Minnesota. Fred Koch in 1959 purchased a 35% interest for $5 million from Sinclair Oil. In order to purchase the refinery Koch Industries owned 35% and 15% was owned by J Howard Marshall (the one who married Anna Nicole Smith). This 50% interest was placed into a holding company that would later exchange J. Howard's interest for Koch Industries stock. Charles Koch set up the deal this way because if he offered J Howard Marshall Koch Industries stock the transaction would have been taxable to J Howard Marshall. With this combination Koch and Marshall were able to buyout the remainder interest owned by Union Oil for $25 million in 1969. J Howard Marshall would later write in his autobiography "Done in Oil" it would be the best deal he ever did. Also being a Koch Industries shareholder would make J Howard Marshall incredibly wealthy which I blogged about here.

When the Pine Bend refinery started in the 1950's it only had a capacity to refine 25,000 barrels of oil per day. Recently in 2016, the plant had the capacity to process 339,000 barrels of oil per day. The plant has grown in capacity due to serious investments from Koch Industries over the years (Koch Industries routinely invests 90% of their earnings back into the company). Recently in February 2016 it was announced that Koch would invest $750 million to upgrade major equipment and add advanced emission controls into the Pine Bend Refinery Plant.

As part of the Koch vs. Koch lawsuit it was alleged that Koch Industries deceived Bill and Fred Koch as well as other shareholders and cheated them out of more money. There were a total of 25 different claims brought forth. The claims included Koch Industries engaged in racketeering, undervaluing a real estate asset deal, keeping hidden Swiss bank accounts, hiding information about a proposed refinery expansion of Pine Bend Refinery, and accounting practices. 23 of the 25 claims were dismissed. The only claims that went to trial were the Pine Bend Refinery expansion and the accounting practices.  

One of the allegations was the withholding of information regarding the Pine Bend Refinery expansion plans. Typically refineries are measured by their capacity in barrels of oil per day.  Koch Industries took a 100% interest in Pine Bend in 1970. Around this time the Oil and Gas Journal reported that Pine Bend had a capacity of close to 80,000 barrels per day of stream capacity. In 1976 the refinery was able to run a certified capacity of 127,000 barrels per day. In 1977, Bernard Paulson who was president of Koch Refining believed that the refinery could increase the refinery from 127,300 barrels to day to 160,000 barrels per day by making improvements. Bernard in November 1977 proposed to increase the capacity of the plant to 200,000 barrels per day (proposed cost would be $270 million). The board of directors ended up not accepting the proposal since the board felt the plans were too much expansion and grandiose. Nearly every Koch board meeting in the 1970's involved expanding Pine Bend Refinery. William Koch was present at the board of directors meetings and often took copious notes. During the trial when David Koch was testifying he said that the 200,000 barrel goal had been a long term objective that had been talked about for years.

In the early 1980's the Pine Bend refinery would process heavy, high sulfur crude from Canada, Mexico, and other countries. By the fourth quarter of 1978 the plant ran an average of 128,000 barrels per day. In 1979 production of the plant fell to 126,000 barrels  Average crude of Pine Bend then decreased in 1980 and 1981. By 1982, the number of barrels increased to 133,000 barrels per day. The next year (1983) production fell to 131,000. By 1984 the average barrels of day increased to 158,000 and then by 1985 they decreased to roughly 152,000. Koch used a computer program that would take the inputs of feed stock prices, expected product, and capacity and calculate which crudes were the most profitable. The historical evidence shows that the capacity of the Pine Bend refinery although increased over time there were some years were production did actually decrease which casts some doubts in terms of Bill Koch and other shareholders not being aware of expansion plans for the Pine Bend refinery.

The annual stockholders meeting in March 1983 would be the last that Bill Koch would attend before he sold his stock to brothers Charles and David Koch. It was proposed to the board that the budget for Pine Bend in 1983 be $75 million. The $75 million would be used to increased efficiency, save energy, and increase the amount of crude oil that could be handled by the refinery. Any deal at Koch Industries back in the 1980's that were over $1 million would have to be personally approved by Charles Koch. Around this same time in 1983 brothers Bill, Fredrick Koch, along with other shareholders wanted to cash out their Koch Industries stock because of differences in how Koch Industries should have been run. Koch Industries (Charles and David) bought out their brothers and other shareholders for roughly $1.3 billion. William Koch received $470 million and brother Frederick received $345 million (for their 5.5 million shares of Koch Industries) . However, even after the buyout William realized that Koch Industries was quick to pay off the stock that they purchased which lead to the lawsuit.

In the last statement that Bill Koch received Pine Bend showed a profit of $7 million profit (it was expected to earn only $5 million).  During this time period Koch Industries was doing well also. Koch Industries in the first quarter of 1983 made $89 million.  In 1982 Koch Industries earned $309 million (after-tax) which had been a record year for the company (in 1981 the company earned $273.5 million after-tax).Koch was also pouring plenty of money into maintaining and upgrading the plant. In 1982, the company spent $45 million on the Pine Bend refinery plant ($19 million for repairs and $26 million for capital improvements).

Finally on June 19, 1998 at 9:46 A.M. Judge Sam Crow read the verdict reached by the jury after spending the Koch brothers spent 10 weeks in court, with two days of deliberations (jurors only earned $50 per day (personally I would have done it for free-just to watch the trial), from a lawsuit that started in June 1985. The trial has over 10,000 pages of documents that were shown on overhead projectors and TV screens with 800 exhibits. The jury found Koch Industries not guilty of having a material misrepresentation of facts (including the output of the Pine Bend refinery) during the negotiations. Bill Koch during the trial had run up a legal bill of $200,000 per week (at a cost of about $5,000 per hour).

What is clear is that Pine Bend refinery was steadily increasing their output over the years (this was mostly due to Koch Industries putting tens of millions of dollars in capital back into the plant in addition to finding improvements). It should be pointed out that the output of the Pine Bend refinery fluctuated and in some years did actually decrease. Although, even with these facts people can sue for anything. In fact, as I write this Bill Koch himself is involved in another lawsuit with current company Oxbow Energy from shareholders who invested in his company. 

Free Market Way To Fix Social Security: Sell Government Assets to Cover Unfunded Liabilities

For years I have read on ways to "save" or "fix" Social Security. I honestly never came across many exceptional proposals. At best a decent solution would be taking various aspects of certain solutions and mixing them with other solutions. As someone who is only 30 years old I honestly don't believe I will get Social Security. Also I don't believe I should be responsible for other people and they save for retirement.

Social Security was created back in August 14, 1935. Social Security was created as a means tested program for the elderly that was designed to help the victims of the Depression. It also provided support to the unemployed. However, history shows that even when people didn't have the means to support themselves individuals would reach out to their fellow man through charitable actions. Back in the early 1900's there were hundreds of charities listed in local directories that would assist people during rough times.

 The total unfunded liabilities of Social Security is $26 trillion according to a 2015 Senate Trustees report. What this figure represents is if you had to pay off all the liabilities for Social Security today you would need $26 trillion in the bank account to cover the liabilities. It is important to point out that over time this figure will continually increase as more people are entering the Social Security system. 

The question is how to pay for the unfunded liability of Social Security. Does the government have assets it could sell to fund this? The answer is the government has plenty of assets it could easily sell to pay off the unfunded liability.  A study done in 2015 shows that the approximate land of the United States is worth $23 trillion and $1.8 trillion of the value is held by the federal government. One idea could be to swap government land for Social Security benefits. Say the present value of your Social Security benefits are worth $100,000 the government could offer you an equal amount worth of land (preferably land that is in the state you live in). This would reduce future liability of current retirees off the books. Recipients  of the land could sell the land to others if they wanted to and put the land to better use.

The Institute for Energy estimates that the government has roughly 1,194 billion barrels of oil and 2,150 trillion cubic feet of natural gas. Currently, a barrel of crude oil is worth  ~$43/barrel would yield ~$51 trillion in value.  Natural gas is worth ~$2.92/thousand cubic feet would be worth about ~$6 trillion of value. In total between the crude oil and natural gas would be worth almost $57 trillion (note I did these calculations based on recent crude oil and natural gas prices). Of course the government could wait until crude oil hit a high in order to sell (doubt this will happen as we can't give the government credit for understanding how markets work). A combination of land, oil, and natural gas can be sold either to individuals, public corporations, private corporations, and even internationals companies and investors. This would not only raise revenue but would be more productive since the assets would be put to work.

The unfunded liability for Social Security of $26 trillion could be met by selling a portion of the $57 trillion in assets in oil/gas assets. After we paid off the unfunded liability of Social Security with government assets I would make some changes to Social Security (this would be phased in over a period of 5 years). The first would be to increase the age in which you can take Social Security to 70 years old. Currently individuals who wait every year past full retirement age (FRA) receive an additional 8% of retirement benefits. I would end this additional increase of 8% in benefits as well. Only the government is generous/foolish enough to offer an increase in benefits of 8% when even public equity markets can't guarantee this.  However, I would keep the cost of living adjustment that Social Security offers. The maximum you would be able to collect is the amount you are eligible for at full retirement age.  With advances in medical technology life expectancy will continue to increase allowing people to live comfortably into their 80's and 90's.

Also I would allow younger people to opt out of Social Security and have the opportunity to save and invest that money for their retirement. Currently, the government taxes 6.2% on the employee and 6.2% for the employer for a total tax of 12.4%.  A Reason poll from 2013 shows that 62% of Americans favor the opt out of Social Security.  There should still be an option for people that want to stay in Social Security. Currently, Social Security benefits are either taxed at 0%, 50%, or 85% depending on the income of the individual or couple. One possible fix is increasing the taxation of Social Security to 100%.

The bottom line is that Social Security that can be fixed with a combination of selling government assets. The unfunded liability of $26 trillion can be solved by: swapping government owned land for Social Security benefits selling a portion of $57  trillion of natural gas and oil that the government owns. Also over a 5 year period I would increasing the minimum age to collect Social Security to age 70, increase the taxation on Social Security to 100% (up from a maximum of 85%). Once the unfunded liability of Social Security is paid off young people should be allowed to opt out of Social Security. These steps listed would allow Social Security to wind down in a method that wouldn't burden future generations.

Review of Financial Advisor Success Podcast with Michael Kitces

For my regular day job I work in the financial planning industry helping clients reach their financial goals. One person that has been a big influence on me is Michael Kitces. Kitces is a technical whiz within the financial planning world and seems to write with two hands and always posts useful articles for those in the industry on his blog. Full disclosure: I have listened to every episode of the podcast so far.

Michael recently debuted a podcast after having the idea for it for some time. The podcast interviews different people in the financial planning industry who have made a difference. Michael has an in depth conversation with the guest about their career path, how that individual defines success for the advisor, and has the individual tell their own story. Some of the initial guests like Ron Carson, Deena Katz, and Bob Veres are well known throughout the industry. What is interesting is that if you had asked people 10 years ago "Hey would you like to listen to a podcast about two people talking about the financial planning industry?" I wonder how many people would have said "Heck yes!". What is fascinating is that these days people can listen to a podcast on nearly anything! Michael is very good at asking the right questions and it doesn't feel like there is any time wasted on the podcast. The podcast range over an hour but just the right amount of time. I often listen to the podcasts as soon as they come out on Tuesday morning on my way to and then later in the day when I am working out.

What is fascinating is learning about how people in the industry had to pay their dues and often go through ups and down before having success. One concept that Kitces points out is that there is an iceberg illusion of success of what people see (top of the ice berg, however what they don't see is what is below the iceberg (working hard, failure, disappointment). It would be nice to hear more questions difficult time or a time where the person had an "oh crap" moment that they thought could change their career.

The guests so far on the show have been fun listening to. Here are some guests I would love to see on the podcast.
Peter Mallouk, Harold Evensky, Ric Edelman, Nick Murray, Wade Pfau, Tom Gau, Michael Nathanson, Andy Berg, David Blanchett, Jason Zweig, J. Richard Joyner, Elaine Bedel Fred Fern, Erin Botsford, Jeffrey Zlot, Thomas Langdon, Larry Swedroe, Ken Moraif, Jeffrey Thomasson, Vickie Hampton,

Also it would be interesting to see academics who may have a a financial planning practice as well, With the fiduciary rule it would be interesting to talk to former brokers who were very successful and making a transition to becoming a fiduciary.

I really enjoy how Michael sometimes gets into the financials of a practice and breaks down revenues, AUM, and profit margins. The additional resources in the show notes are helpful for anything discussed on the podcast.The show highlights are also helpful as well. Also I enjoy the ability to read the transcript of the show. What is also interesting is hearing how other practitioners create value for clients whether it is doing estate planning or going the extra mile. The story telling from some advisors is really interesting. One question I wish Michael would ask would be "What is a typical day like in your firm?"

Overall the podcast is great, fun, and informative. I have really enjoyed listening to each episode and hope the podcast can remain on the air for many years to come!  

Free Market Alternative To Repealing and Replacing Obamacare

Recently Republicans tried to repeal and replace Obamacare but were unsuccessful in doing so. Honestly, what the Republicans offered in terms of an alternative was very weak with very little introduction of free markets and focused more on credits/expanding Medicaid. Legislation was blocked by the so called "freedom-caucus" which felt that there were no free market goodies in the repeal and replace bill. Of course President Donald Trump called out the "freedom-caucus" and the repeal and replace bill was dead.

The only politician who has offered a reasonable solution to repealing Obamacare is Rand Paul who authored "The Obamacare Replacement Act (S.222) which can be found here. Paul's bill gets rid of the individual mandates, community rates laws, medical loss ratio rules and insurance mandates which all increase the cost of insurance. To cover the issue of pre-existing conditions there would be a 2 year open enrollment period for those with preexisting conditions. The HIPPA rules before Obamacare said that if you had continuous coverage of health insurance for 18 months you couldn't be denied coverage.

I agree with the proposal that Rand offered in terms of covering people with preexisting conditions. That along with the 10 steps I describe below would significantly reduce health insurance premiums which would make health insurance available to more individuals.

1) Do away with the maximum lifetime limits/allow for even higher deductibles-Currently there are no maximum lifetime limits in terms of the cumulative amount an insurance company can spend on the insured. This puts pressure on the insurance companies since they essentially have an endless liability to pick up the tab for insurance expenses. One solution would be for  health insurance companies to offer you different lifetime maximums which would dramatically decrease the premiums. Why not allow customers the opportunity to select a health insurance policy with a a lifetime limit of $500,000, $1 million, or $20 million? Adding this option would create downward pressure on premiums and would make health insurance more affordable. If the cost of insurance was decreased to an affordable rate you would see younger people enroll for health insurance which would strengthen the risk pools. Also if we had true innovation in health insurance individuals could purchase health insurance policies that are above and beyond what is offered in the market place today. Imagine if a policy had a $30,000 deductible (meaning you are on the hook for everything below $30,000 and the insurance company picks up everything after $30,000). If you wanted to be extreme you could have health insurance companies offer policies with $100,000 deductibles. Premiums would drastically decrease (deductibles and premiums are inversely related) and allow individuals flexibility and choice regarding their own healthcare.

2) Repeal the essential needs of health insurance plans-Under the Obamacare rules health insurance plans must cover things like mental health, laboratory services, birth control, and even breast feeding. Why not allow individuals to customize which plans they want and not force them to pay for services that they will never use? I am okay when people sign up for health insurance to check off what services they would like (more like an al la carte menu). It is foolish to force people to pay higher premiums because of what the government thinks is good for them.

3) Allow individuals to form mutual aid societies-Actually health insurance used to be through mutual aid societies or fraternal organizations. Mutual aid allowed individuals to help each other out when it came to medical expenses (without government intervention). In the 1920's at least 33% of males belonged to one of these organizations. Members paid $2 for a doctor's visit (about a day's worth of a wage). Also it is important to point out that the mortality of members of mutual aid societies was about 28% lower than that of the general population. The government of course stepped in and passed the Mobile Law which increased the amount of insurance reserves (cash on hand) that mutual aid societies needed. The government through regulation destroyed voluntary groups. If a group of engineers want to get together and pool their own assets to form their self fund their health insurance why is should the government say no?

4) Reign in the FDA-The cost and time to get a drug approved has increased. In the 1970's the number of patients required was only 1,600 and by the 1990's that increased to 4,200. To cost to enroll just one patient into a phase III drug trial is $26,000. The cost to approve a drug increased from $437 million (in 2010 dollars) to $1 billion in 2000 (in 2010 dollars). Currently the FDA requires drugs to go through 3 phases before a drug can be sold. Actually it gets worse because after a drug's patent expires and becomes a generic the drug then must go through yet another approval process. The solution would be to just require one phase and only evaluate a drug to make sure it was safe (and let the market determine if the drug is effective). It is hard to evaluate drugs because by definition everyone is different. If a drug works for someone it may not work for someone else. Why not let doctors/patients determine if a drug can improve their medical condition? If drugs only required to complete one phase there would be more options for patients which would increase the competition and the alternatives patients would have and prices of drugs would decrease.

5) Repeal CON laws-Certificate of need (CON) laws restrict the access of healthcare. CON laws require approval from a local/state governments to expand medical facilities. On average there are about 14 procedures or services that are regulated from states that have CON laws. As a result there are 131 beds per 100,000 people, a 37% reduction in the number of hospitals offering CT scans. CON laws restrict the access of healthcare and drive up healthcare costs. It would be obvious to repeal these laws to allow more access to healthcare.

6) Repeal medical loss ratios-Medical loss ratios mandate the percent of the premium that the insurance must spend on claims. The government believes insurance make too much (let's remember the profit margin of insurance companies is only 4%).  This medical loss ratio is required to be 80%-85%. If a insurance takes in $100,000 in premiums between $80,000-$85,000 have to be spent on claims. Health insurance companies have to submit their data to the government to review. If the health insurance fails in any given year to meet this ratio the company has to offer a rebate to customers. The government should have no role in deciding how insurance companies allocate monies between paying premiums/administrative expenses. Medical loss ratios cause health insurance companies to spend more since the monies have to be spent within a year. If medical loss ratios were repealed you could have health insurance companies investing those monies over the long-term. This would change health insurance to model similar to life insurance companies (were companies often have monies for years and sometimes decades) and not force insurance companies to spend all their monies in the year.

7) Repeal the need for prescriptions for many drugs-In 2015 there were over 4.3 billion prescriptions that were filled. Now I would argue for a move to "deprescriptionize" or make many of these drugs available over the counter. The process would be to start by allowing stores like CVS, Target, Walgreens, etc. to sell drugs that had minimal side effects that honestly shouldn't require you to go to a doctor to obtain. The biggest benefit would be the amount of time saved for patients/doctors/pharmacists. Patients have to get in their car, drive to the doctor's office, wait, and then wait even longer just to have their prescription filled (assuming there are no issues with the pharmacy or doctor's office). Making more drugs available over the counter would create more competition, save doctors/patients/pharmacists many thousands of hours and greatly reduce the bottleneck at pharmacies (what a site that would be!).

8) Abolish CPT codes-Whenever you go to the doctor the doctor will essentially try to figure out how to explain to the insurance company what condition you have/what service you had performed. Complex coding terminology was created in 1966 (created by the American Medical Association to get fees-they actually own the copyright protection). Over the years new codes have been added and currently as I write this there are over 16,000 codes (prices). Of course there is the game of doctors trying to figure out which code will earn them the most money. If we abolished CPT codes doctors would have to figure out what value they bring and then charge accordingly which would create competition and varying prices for different services/procedures. 16,000 different codes to describe medical procedures reminds me of the former Soviet Union. It would be nice for doctors to have to figure out what their value is and charge based on that (oh wait plastic surgeons and psychiatrists already do this).

9) Repeal the National Organ Transplant Act of 1984-You would think you have ownership of your own body-but according to the government you don't. This act that was signed in 1984 after Dr. H. Barry Jones formed an organization to purchase and market kidneys. In the mid 1980's 70,000 Americans were on dialysis machines (dialysis is used for people who are waiting for a kidney transplant).  Every year more than 100,000 people will start dialysis. Within one year about 25% of those on dialysis will pass on. Medicare spends $10 billion on dialysis every year. About 5,000 pass away every year waiting for a kidney. Allowing people to sell their own organs would save the expenses associated with dialysis (since kidneys would be transplanted) and allow other organs like hearts, intestines, lungs, bones, and other body parts and tissues to be transplanted. Allowing people to exchange their organs for money would save lives, save money, and most importantly improve the quality of life for so many individuals and families.

10) Reform Medicare-Of course I saved the best for last. Medicare was enacted in 1966 to cover the health insurance of individuals over the age of 65. If you don't sign up for Medicare you could pay a 10% penalty/year for not signing up (talk about government force). The issue with Medicare is the unfunded liabilities. Currently the unfunded liabilities of Medicare run about $48 trillion. The Medicare budget is $600 billion a year (with improper payments from Medicare exceeding $17 billion/year). Now there are roughly 55 million Medicare beneficiaries. Now if you distributed that $600 billion to 55 million beneficiaries that would be roughly $10,000 voucher which could be used to purchase private insurance in any state and the efficiency (improper payments would be brought down to zero).  Of course you could have some type of means testing as well (so for example if your income was $250,000 you wouldn't earn as much of a voucher as someone who made $25,000). For the younger people who are not Medicare age you could allow them to place current Medicare tax they pay (1.45%) into a Health Savings Account (HSA). Over time with each paycheck the amount of funds that could be used for medical expenses in retirement would grow and be there at age 65. Also it is worth pointing out that Medicare aged individuals have the highest net worth compared with any other age group.

These steps I believe would dramatically free up the competitive nature of healthcare and increase quality while reducing the cost which would be a win win for everyone except lobbyists in the healthcare and insurance industry.

A True Trump Free Market Healthcare Plan in 10 Steps

Donald Trump was recently elected President of the United States. One of his campaign promises is to repeal Obamacare. Although, anyone can say anything the actual details/execution are vague and sketchy. What I wanted to discuss was some details that Donald Trump could use to get us to a true free market healthcare plan.

I agree with Trump that allowing states to cross state lines to health insurance would improve things somewhat. State insurance plans are regulated by the state and different states require health insurance to cover different things and states insurance plans are subject to solvency and capital ratios. If you had state competition would allow people to figure out what features they would like in their healthcare plan (should my plan cover this or that).

1) Do away with the maximum lifetime limits/allow for even higher deductibles-Currently there are no maximum lifetime limits in terms of the cumulative amount an insurance company can spend on the insured. This puts pressure on the insurance companies since they essentially have an endless liability to pick up the tab for insurance expenses. One solution would be for  health insurance companies to offer you different lifetime maximums which would dramatically decrease the premiums. Why not allow customers the opportunity to select a health insurance policy with a a lifetime limit of $500,000, $1 million, or $20 million? Adding this option would create downward pressure on premiums and would make health insurance more affordable. If the cost of insurance was decreased to an affordable rate you would see younger people enroll for health insurance which would strengthen the risk pools. Also if we had true innovation in health insurance individuals could purchase health insurance policies that are above and beyond what is offered in the market place today. Imagine if a policy had a $30,000 deductible (meaning you are on the hook for everything below $30,000 and the insurance company picks up everything after $30,000). If you wanted to be extreme you could have health insurance companies offer policies with $100,000 deductibles. Premiums would drastically decrease (deductibles and premiums are inversely related) and allow individuals flexibility and choice regarding their own healthcare.

2) Repeal the essential needs of health insurance plans-Under the Obamacare rules health insurance plans must cover things like mental health, laboratory services, birth control, and even breast feeding. Why not allow individuals to customize which plans they want and not force them to pay for services that they will never use? I am okay when people sign up for health insurance to check off what services they would like (more like an al la carte menu). It is foolish to force people to pay higher premiums because of what the government thinks is good for them.

3) Allow individuals to form mutual aid societies-Actually health insurance used to be through mutual aid societies or fraternal organizations. Mutual aid allowed individuals to help each other out when it came to medical expenses (without government intervention). In the 1920's at least 33% of males belonged to one of these organizations. Members paid $2 for a doctor's visit (about a day's worth of a wage). Also it is important to point out that the mortality of members of mutual aid societies was about 28% lower than that of the general population. The government of course stepped in and passed the Mobile Law which increased the amount of insurance reserves (cash on hand) that mutual aid societies needed. The government through regulation destroyed voluntary groups. If a group of engineers want to get together and pool their own assets to form their self fund their health insurance why is should the government say no?

4) Reign in the FDA-The cost and time to get a drug approved has increased. In the 1970's the number of patients required was only 1,600 and by the 1990's that increased to 4,200. To cost to enroll just one patient into a phase III drug trial is $26,000. The cost to approve a drug increased from $437 million (in 2010 dollars) to $1 billion in 2000 (in 2010 dollars). Currently the FDA requires drugs to go through 3 phases before a drug can be sold. Actually it gets worse because after a drug's patent expires and becomes a generic the drug then must go through yet another approval process. The solution would be to just require one phase and only evaluate a drug to make sure it was safe (and let the market determine if the drug is effective). It is hard to evaluate drugs because by definition everyone is different. If a drug works for someone it may not work for someone else. Why not let doctors/patients determine if a drug can improve their medical condition? If drugs only required to complete one phase there would be more options for patients which would increase the competition and the alternatives patients would have and prices of drugs would decrease. Most importantly it would provide much more access for individuals to treat their conditions, symptoms, and improve quality of life.

5) Repeal CON laws-Certificate of need (CON) laws restrict the access of healthcare. CON laws require approval from a local/state governments to expand medical facilities. On average there are about 14 procedures or services that are regulated from states that have CON laws. As a result there are 131 beds per 100,000 people, a 37% reduction in the number of hospitals offering CT scans. CON laws restrict the access of healthcare and drive up healthcare costs. It would be obvious to repeal these laws to allow more access to healthcare.

6) Repeal medical loss ratios-Medical loss ratios mandate the percent of the premium that the insurance must spend on claims. The government believes insurance make too much (let's remember the profit margin of insurance companies is only 4%).  This medical loss ratio is required to be 80%-85%. If a insurance takes in $100,000 in premiums between $80,000-$85,000 have to be spent on claims. Health insurance companies have to submit their data to the government to review. If the health insurance fails in any given year to meet this ratio the company has to offer a rebate to customers. The government should have no role in deciding how insurance companies allocate monies between paying premiums/administrative expenses. Medical loss ratios cause health insurance companies to spend more since the monies have to be spent within a year. If medical loss ratios were repealed you could have health insurance companies investing those monies over the long-term. This would change health insurance to model similar to life insurance companies (were companies often have monies for years and sometimes decades) and not force insurance companies to spend all their monies in the year.

7) Repeal the need for prescriptions for many drugs-In 2015 there were over 4.3 billion prescriptions that were filled. Now I would argue for a move to "deprescriptionize" or make many of these drugs available over the counter. The process would be to start by allowing stores like CVS, Target, Walgreens, etc. to sell drugs that had minimal side effects that honestly shouldn't require you to go to a doctor to obtain. The biggest benefit would be the amount of time saved for patients/doctors/pharmacists. Patients have to get in their car, drive to the doctor's office, wait, and then wait even longer just to have their prescription filled (assuming there are no issues with the pharmacy or doctor's office). Making more drugs available over the counter would create more competition, save doctors/patients/pharmacists many thousands of hours and greatly reduce the bottleneck at pharmacies (what a site that would be!).

8) Abolish CPT codes-Whenever you go to the doctor the doctor will essentially try to figure out how to explain to the insurance company what condition you have/what service you had performed. Complex coding terminology was created in 1966 (created by the American Medical Association to get fees-they actually own the copyright protection). Over the years new codes have been added and currently as I write this there are over 16,000 codes (prices). Of course there is the game of doctors trying to figure out which code will earn them the most money. If we abolished CPT codes doctors would have to figure out what value they bring and then charge accordingly which would create competition and varying prices for different services/procedures. 16,000 different codes to describe medical procedures reminds me of the former Soviet Union. It would be nice for doctors to have to figure out what their value is and charge based on that (oh wait plastic surgeons and psychiatrists already do this).

9) Repeal the National Organ Transplant Act of 1984-You would think you have ownership of your own body-but according to the government you don't. This act that was signed in 1984 after Dr. H. Barry Jones formed an organization to purchase and market kidneys. In the mid 1980's 70,000 Americans were on dialysis machines (dialysis is used for people who are waiting for a kidney transplant).  Every year more than 100,000 people will start dialysis. Within one year about 25% of those on dialysis will pass on. Medicare spends $10 billion on dialysis every year. About 5,000 pass away every year waiting for a kidney. Allowing people to sell their own organs would save the expenses associated with dialysis (since kidneys would be transplanted) and allow other organs like hearts, intestines, lungs, bones, and other body parts and tissues to be transplanted. Allowing people to exchange their organs for money would save lives, save money, and most importantly improve the quality of life for so many individuals and families.

10) Reform Medicare-Of course I saved the best for last. Medicare was enacted in 1966 to cover the health insurance of individuals over the age of 65. If you don't sign up for Medicare you could pay a 10% penalty/year for not signing up (talk about government force). The issue with Medicare is the unfunded liabilities. Currently the unfunded liabilities of Medicare run about $48 trillion. The Medicare budget is $600 billion a year (with improper payments from Medicare exceeding $17 billion/year). Now there are roughly 55 million Medicare beneficiaries. Now if you distributed that $600 billion to 55 million beneficiaries that would be roughly $10,000 voucher which could be used to purchase private insurance in any state and the efficiency (improper payments would be brought down to zero).  Of course you could have some type of means testing as well (so for example if your income was $250,000 you wouldn't earn as much of a voucher as someone who made $25,000). For the younger people who are not Medicare age you could allow them to place current Medicare tax they pay (1.45%) into a Health Savings Account (HSA). Over time with each paycheck the amount of funds that could be used for medical expenses in retirement would grow and be there at age 65. Also it is worth pointing out that Medicare aged individuals have the highest net worth compared with any other age group.

The changes I listed above would greatly reduce healthcare costs, improve the quality of life, extend life, and help prevent the nation from going broke. Most importantly it will give individuals more freedom in terms of how they make their healthcare decisions and reduce the force and power of the government.

10 Questions For Charles Koch (After Many Years of Research)

My blog has covered Koch Industries and Charles Koch for many years. To my knowledge I don't know of any other blog that has covered the company as much or as in depth. Often reporters ask similar questions to Charles Koch. So I went ahead and wrote 10 questions I have never seen publicly answered.

1. Considering that Koch Industries reinvests 90% of their earnings back into the company how does the company ensure that it doesn't allocate resources to projects that are unprofitable or overpay for acquisitions just to meet the 90% reinvestment mark?

2. Given that Koch Industries has grown roughly on average 12% per year won't the company in order to continue this growth rate have to continue to purchase larger and larger companies?

3. What will happen to your ownership after you pass and how will the estate tax be paid? 

4. Tell me more about the meeting in August 1968 you had that began at 4 P.M. and ended at midnight

5. Favorite dessert? 

6. Where did you learn/get education on deal making and structuring? 

7. What does he think of work/life balance? 

8. Why should shareholders of Koch Industries get rewarded by dividends if they don't work at the company? 

9. What does he think of public companies buying back their own shares?

10. Have you ever felt you worked too much? 

EpiPen Price Increase: Blame the FDA Not Mylan

Well everyone this week everyone was up in a big roar about the generic drug company Mylan increasing the price for their flagship drug EpiPen. The company is alleged to have "gouged" customers as it increased the price of the drug (a pack of 2-EpiPens) from $94 in 2007 to $608 in 2016 (a 550% increase). Even the liberal Los Angeles Times believes that there should be more competition for generic forms in this space. EpiPen is an autoinjector pen that is used when people having allergic reactions. A reaction can occur from a bee sting, food, allergy, insect bite, etc. It is important to note that you need a prescription to obtain EpiPen (regulation numero uno). Full disclosure my father actually had to take an EpiPen when he had an allergic reaction to a prescription drug he was taking. It is worth noting that if patients who have an allergic reaction could possibly die/life altering complications if they don't take the EpiPen. The one issue with the EpiPen is that it only has a shelf life of 12-18 months. After this period of time the medication no longer works.

Politicians like Presidential nominee Hillary Clinton labeled the price hikes as "outrageous, and just the latest example of a company taking advantage of consumers". Of course charging hundreds of thousands of speaking fees is not outrageous. Most likely there will be congressional hearings over the price increase of the drug. Mylan CEO Heather Bresch explained told the New York Times that "I am running a business. I am a for-profit company. I am not hiding from that".

As I wrote in this blog post it takes considerable time/money to bring a drug from development to the market (roughly $2.5 billion and 10-20 years from the research stage to being available for patients). After a drug is approved and has been on the market for a number of years generic drug companies can come in and make the drug and try to sell it at a cheaper cost to consumers. The rules for generics can be quite complicated as seen here (generics have to have the same chemistry, manufacturing, labeling, inspections, and bio equivalence just like FDA approved drugs have). All the steps for a drug to be approved as a generic drug can be found here. The drug companies have to go through a whole new process with generic drugs with the FDA even though the drug was already approved! The FDA has a backlog of 3,000 generic drug applications as recent as 2014. Perhaps one of those backlogs could be a competitor to EpiPen in the future. The time to approve a generic drug can take up to 89 months. Remember the 89 months is after a drug company spent 10-20 years researching and developing a drug.

Sales of EpiPen have increased in the past decade from $200 million to $1 billion which is creating shareholder value when you have a a pen that literally can save lives-is $600 a lot if it can save your life?. In 2014 the company hit $1 billion in sales with EpiPen. The media will perhaps cite the fact that Mylan brought in $9.4 billion in revenue (the media is economically illiterate and doesn't understand the difference between revenue and profit).

In 2015 Mylan made a net income (the money the firm has after all the bills are paid) of $847 million. So when you divide $847 million by $9.4 billion means that for every $1 of sales Mylan was only making 9 cents. Another way of looking at it is saying that if there are 365 days in the year Mylan only made money 37 days out of the entire year! Mylan only receives $247 of the $608 list price it charges. The remainder goes to insurers, pharmacy benefit managers, wholesalers, and retail pharmacists (middle men). The company recently said that it would offer up to a $300 coupon. The company also said it would give free EpiPens to uninsured patients if their incomes were below 400% of the poverty level. One idea might be to cut out the middle man and sell it directly to the consumer. Well this won't happen given EpiPen requires a prescription from a doctor (another barrier to entry).

In 2014 Mylan reached $1 billion in revenue for EpiPen. Around this time the cost for EpiPen was $380. Now considering Mylan only receives 48% of this (pays rest to insurers, wholesalers, etc) you could estimate that Mylan sold roughly 5.4 million EpiPen packs in 2014 (this looks close if we look at the quarterly sale data here). CEO Heather Bresch earned $25 million in 2014 (although most of this compensation is in the form of stock securities which can't be accessed for many years but still counted as compensation). Now if the CEO was paid $0 it would only in a price reduction of EpiPen by $5!

With all this however there is good news. There is actually an alternative to the EpiPen called Adrenaclick which sells currently for about $142 (a 77% discount from what EpiPen is selling for). What is even more interesting is no one has talked about this. Some other no brainers would be to not to require a prescription for EpiPen which would allow the company to sell directly to consumers. Also the FDA needs to speed up the approval process for generics of the drug which will create more competition. Generic drug maker Teva tried to get their drug that was similar to EpiPen approved however the FDA didn't approve it citing deficiencies. Although the drug could be out as early as 2017. In addition to this Adamis Pharmaceuticals is working on a possible alternative too which could be 40% less than the price of the EpiPen. Also add in Windgap who is trying to get a EiPen alternative approved too (a product called Abiliject). Windgap hopes to have the drug out by 2018. Although, my hunch is the FDA will tell these companies they have deficiencies of one kind or the other and need more data and studied to be conducted.

What is quite clear is that the FDA continues to harm consumers by not being quick enough to approve new drugs, forcing companies to spend decades and billions of dollars to bring a drug to market and then the public/politicians get upset when the companies raise their prices. If we allowed true free markets more people would have access to EpiPens at a cheaper price which is a win-win for everyone (except politicians because they would have less power).

Koch 2016 Seminar Reading List

So this past week the Koch Brothers had their one of the semi-annual seminar in Colorado this past week (Koch has been holding these seminars since 2003-back then hardly anyone would show up). In previous posts I covered what Charles Koch reads in his bathroom and a list of books that Koch Industries recommends to company employees through their quarterly newsletter Discovery.

Well at the seminar this year a list was obtained of books that Freedom Partners believes their donors should read. Membership to the organization is $100,000 per year. If you are a member you can select which books you want sent to you as well. Below are the books listed along with their links.

A Conflict of Visions Thomas Sowell
A Letter Concerning Toleration John Locke
Abundance Peter Diamandis 
After War Christopher Coyne
America's War for the Greater Middle East Andrew Bacevich
Beyond Politics Randy Simmons 
Bourgeois Equality Deidre McCloskey 
Comandante: Hugo Chavez's Venezuela Rory Carroll
Coming Apart Charles Murray
Crisis and Leviathan Robert Higgs
Free to Choose Milton Friedman
Fueling Freedom: Exposing the Mad War on Energy by Stephen Moore and Kathleen Hartnett White
Going for Broke Michael Tanner
Good Profit Charles Koch
Government Against Itself: Public Union Power and Its Consequences Daniel DiSalvo
Heaven on Earth: The Rise and Fall of Socialism Joshua Muravchik
How Adam Smith Can Change Your Life Russ Roberts (he hosts a weekly podcast called EconTalk)
Human Action Ludwig von Mises
In Pursuit of Happiness and Good Government Charles Murray 
Individualism and Economic Order Friedrich Hayek
Kindly Inquisitors Jonathan Rauch
Knowledge and Decisions Thomas Sowell
Law, Legislation, and Liberty Friedrich Hayek
Man's Search for Meaning Viktor Frankl-this book is currently number one in popular pyschology counseling on Amazon right now as I write this
Meditations for Financial Freedom DeForest Soaries
My Bondage and My Freedom Fredrick Douglas 
On Liberty John Stuart Mill
Our Republican Constitution Randy Barnett
Overruled: The Long War for Control of the U.S. Supreme Court Damon Root
Passing on the Right: Conservative Professors in the Progressive University Jon Shields and Joshua Dunn Sr
Permissionless Innovation Adam Thierer
Red Notice Bill Browder
Restraint Barry Posen
Rise of the Warrior Cop Radley Balko
Superpower:Three Choices for America's Rule in the World Ian Bremmer
The Cultural Revolution Frank Dikotter
The Evolution of Everything Matt Ridley 
The Fatal Conceit Friedrich Hayek
The Intimidation Game Kimberly Strassel
The Law Fredric Bastiat 
The Mystery of Capital Hernando De Soto 
The Myth of the Robber Barrons Burt Folsom Jr
The State of the Union: Essays in Social Criticism Albert Jay Nock
The Tragedy of Liberation Frank Dikotter
The Tyranny of Experts William Easterly
The Voluntaryist Creed Auberon Herbert
Why Wages Rise F.A. Harper

Bill Koch Thrown Out of Oxbow?/Is Bill Koch Running Out Of Money?

Update: Recently in February 2018 a court decision on Oxbow could lead Bill Koch into a forced sale of the company. The post can be read here.

Bill Koch who is usually not the Koch brother that the media follows however is one of the most interesting has recently been in the news for multiple reasons (he is for sure the most flamboyant). The most recent news story from Bloomberg is discusses how Bill Koch actually might be ousted from his own company Oxbow Energy. Bill Koch formed Oxbow in 1983 after he had an all out war with his brothers Charles and David Koch in controlling Koch Industries. Charles Koch and David essentially bought out Bill Koch, Frederick Koch, and other Koch Shareholders at $200/share. The deal after much negotiating was finalized at midnight of June 4, 1983 as I previously covered here. When the whole thing was said and done Bill Koch walked away with $470 million and Frederick Koch walked away with $330 million (Frederick never worked a day at Koch Industries!). As I write this post Forbes has Bill Koch's worth pegged at a little over $2 billion which actually seems a lot however on a compounded basis really is okay. Over a 33 year period this is only a 4% return which is about half of the return the stock market provides. Had Bill Koch stayed a shareholder of Koch Industries he could have done quite well. It should be noted that Koch Industries does have shareholders who are not active members in the day to day business of running Koch Industries (Marshall family).

The latest story from Bloomberg claims that Crestview Partners (private equity firm) is trying to get rid of Bill Koch who is CEO of Oxbow Carbon and Minerals Company. This almost seems like a reversal of history considering Bill Koch tried to get rid of his brother Charles Koch in the 1980's from Koch Industries. Crestview Partners invested some capital and took a minority ownership in Oxbow back in 2007. Under the agreement Crestview had the right for Koch to cash out his position of Oxbow. Bill Koch refused to do this and this would cause all of Oxbow to be placed on the market. When Koch opposed the quick sale it was claimed that Crestview tried to scoop up information on Koch that was not only personal but also tried to leak his business affairs to potential buyers to obviously reduce the value of the business. It should be interesting to see if anything happens with Oxbow Energy.

This leads to the question is Bill Koch running out of money? His net worth as I mentioned above is around $2 billion, however he has been selling assets the past couple of years. Bill Koch has recently been selling assets off perhaps to increase his liquidity/build his haunted town in Colorado. Currently Bill has one of his many homes listed for sale in Colorado. However, it seems as if Mr. Koch is asking too much for it as the original price was $100 million and as I write this article the price has been reduced to $80 million (20% reduction). The home is currently the most expensive home in America. The home sits on 55 acres and the actual home itself is 14,000 square feet (28 bedrooms). Not only is the whole property for sale but you can buy individual pieces of the property (the main parcels can be purchased for between $4 million and $60 million). Brothers David Koch and Charles Koch each purchased homes in Aspen, Colorado for $2.5 million each back in 1992.

Recently also Mr. Koch sold 20,000 bottles of wine for roughly $22 million. Last year Koch put up one of his Gulf Stream Florida properties homes for sale for $3.4 million. The home located at 578 Palm Way was originally on sale for $4.2 million but then had the price reduced 3 times. The home was sold for $2.75 million on February 9, 2016.  The home was only roughly 3,700 square feet with 4 beds and 5 bathrooms. Koch had his teenage daughter Charlotte Koch living in the property (she was one of the children that Koch had during an affair). Bill has not only been selling homes, wine, but has also been selling some of his artwork as well. Last year he sold 2 paintings (a Picasso and Monet) through Sothebys that fetched $100 million. Also late last year Christie's was going auction off some artwork that Bill had with the general theme being the American West. According to Christie's Koch received roughly $17 million for all his lots of artwork.

In 2013, he listed his Cape Cod property for a cool $15 million. The property located at 177 Seapult River Road as over 8,000 square feet. According to Zillow the property was sold for $8.5 million on September 14, 2014 so much less than Bill Koch was asking for. During the negotiations of Koch vs. Koch Bill always seem to put an extremely large premium on his shares.

Speaking of business Bill Koch is in the petroleum coke business which recently has been suffering due to rules from the EPA regulating coal. In this video Koch mentions that he sold 7 power plants businesses in 2000. Also he describes what Oxbow does as gas drilling, buy and resell petroleum coke (a byproduct of refining), process petroleum coke, do business in 100 different countries. Oxbow's sales are about $3-$4 billion compound growth rate 26% per year since 1984 but profits in 2014 were down 40%. Pet coke is used in coal burning power generators, either in power plants, or in the cement, iron, or steel businesses. What is interesting is that Koch Industries is a direct competitor of Oxbow Energy with their own division Koch Carbon (which Bill Koch worked for in the late 1970's however brother Charles Koch kept the file of Koch Carbon which showed it was an erratic money loser in this article).

Bill Koch in the past couple of years has raised a substantial amount of money. He announced years ago that he plans to build a haunted ghost town in Colorado which is covered in great detail here. The town is suppose to be a 19th century for a 10 acre town filled with salons, firehouse, bank, church, theater, a library, even a brothel. Koch intends for the town to be a private getaway for his friends/family (this strikes me as odd since a 19th century town would be one of the last places most people would want to visit).  The cost of the town is unknown but I would imagine Bill Koch is building liquidity to pay for the operating expenses/staff to run a whole town. When I add up the recent art, home, and wine sales of Bill Koch (I estimate he will get around $65 million for the home to be conservative) that this will bring in roughly $215 million total. If his net worth is around $2 billion this would be roughly 10% of his assets are transforming into cash. If Bill Koch has to sell part of his company that would increase his liquidity however reduce his control for Oxbow. Time will tell if Bill Koch is facing a cash shortage. However, there is no question whatever happens will be interesting as there is nothing that is boring that happens to Bill Koch.

What Charles Koch Reads on The Toilet?

Johnathon Karl of ABC News who recently did an interview with Charles Koch took this picture of the books that are locate in Charles Koch's bathroom at his Koch Industries office at the headquarters in Wichita, Kansas. I covered the readings from the Koch Industries own publication of Discovery here. I know Charles Koch is big into innovation so why doesn't he have all of those books on an iPad or Kindle!!

Big Money by Ken Vogel
Scaling Up by Verne Harnish
1920 : The Year That Made The Decade Roar by Eric Burns
The Greatest Hoax by James Inhofe
Coolidge, An American Enigma by Robert Sobel
When Markets Collide by Mohamed El-Erian
Game Changer: How You Can Drive Revenue and Profit Growth with Innovation by A.G. Lafley
Tap Dancing to Work Warren Buffett on Practically Everything by Carol Loomis
Knowledge and Decisions by Thomas Sowell
No Apology by Mitt Romney
Inflated by R. Christopher Whalen
Beirut to Jerusalem by Thomas Friedman
Jack: Straight from the Gut by Jack Welch
Scared to Death from BSE to Global Warming why Scares are Costing Us the Earth by Christopher Booker
Cool It: The Skeptical Environment's Guide to Global Warming by Bjorn Lomborg
Moneyball by Michael Lewis
The Quest Energy, Security, and the Remaking of the Modern World by Daniel Yergin
Against The Gods: The Remarkarkable Story of Risk: By Peter Bernstein
The Amateur by Edward Klein
Up From History: The Life of Booker T. Washington
I Am John Galt by Don Luskin 
The Art of What Works: How Success Really Happens by William Duggan
Ayn Rand Box Set by And Rand
Capitalism at Work by Robert Bradley
The Right to Try: How the Federal Government Prevents Americans from Getting Lifesaving Treatments They Need by Darcy Olsen
The Great Deformation by David Stockman