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

J Howard Marshall, Anna Nicole Smith, and Koch Industries: The Estate Planning Nightmare

A while back a reporter that talked about a woman who owned the rest of Koch Industries. Right now Charles Koch and David Koch own 84% between them of Koch Industries. I always thought the rest of the ownership was owned by Koch Industries employees (board of directors/employees). However, it looks like Elaine Marshall owns around 15% of Koch Industries which puts her net worth at close to $13 billion as Koch Industries generates roughly $115 billion in revenue (according to Forbes).

Elaine Marshall was married to E. Pierce Marshall who was the son of J.Howard Marshall II (the one married to Anna Nicole Smith). J.Howard Marshall had been a shareholder for 20 years of Koch Industries. According to J. Howard Marshall’s autobiography “Done in Oil” Marshall and Fred Koch (father of Charles and David Koch) had an interest in Great Northern Oil Company which was created in 1954. Fred had founded Wood River Oil and Refining Company in 1940 which was a mid-continent oil company. In 1959 Fred Koch purchased a 35% interest in Great Northern for $5 million. According to Marshall, Fred Koch didn’t have the cash and called up First Chicago bank and Koch asked for a note in order to pay it. Koch must have had a great financial reputation to pull that off in the 1950’s.

Marshall had a 12% interest in Great Northern.  In 1959 Wood River changed its name to Rock Island (which later became Koch Industries after Charles Koch took over). Fred Koch passed away in 1966. Charles Koch had worked at Great Northern in his 20’s and knew the refinery business very well. In 1969 Koch Industries purchased a controlling interest in Great Northern Oil Company. Charles was going to purchase a 40% interest in Great Northern Oil Company but they are asking too much for it. Charles then got the idea to pool his interest along with the interest of Marshall into the holding company of Koch Financial. Charles Koch promised J. Howard Marshall a 30% interest in Koch Financial for Koch Industries. They then purchased Union Oil’s Great Northern Oil Company.

In 1974 Marshall II gave his two sons 4% of Koch Industries stock J.Howard Marshall for estate planning purposes.  He gave his sons the Koch Industries stock claiming they "are the crown jewels, take care of them". By 1980 there was a board room coup for control at Koch Industries. Bill Koch and Fredrick  (brothers of Charles and David Koch) wanted to take the company public. At the time Bill and Fredrick had a 48% ownership in the company and needed more than 50% for control. Freddie and Bill tried to purchase a 4% interest from Pierce Marshall to gain more than a 50% interest. Bill and Fredrick then approached J. Howard Marshall III to purchase his shares.

J. Howard Marshall II sided with Charles and David Koch while Marshall III was aligned with Bill and Freddy Koch. To fight off a corporate takeover by Bill Koch Charles Koch flew to California to convince J. Howard Marshall II to purchase Marshall III’s interest. Marshall II bought his son’s share for $8 million- $208/share (the shares had been gifted to Marshall III over the years). This was a large premium for Koch Industries stock considering the highest previous transaction was $80 per share. Charles Koch had urged the buyout of remaining shareholders. The buyout then lead to a lawsuit from Bill, Fred, and the other shareholders who were bought out.

In 1982 to reduce the cost of probate Marshall put all of his interests in Marshall Associates (a family partnership that held Koch Industries of which he owned 862,535 shares of Koch Industries stock). Marshall liked to use leverage though as he used 505,885 shares of Koch Industries stock as collateral. At the time Koch Industries had 5,850,908 total shares outstanding (Marshall had about a 15% interest in Koch Industries. Marshall was using the dividend income from Koch Industries stock to pay off debt and mostly to finance his lifestyle of giving generously to the ladies in his life. In 1994 Marshall earned about $8 million in dividends from his 15% interest in Koch Industries stock (1995 was a little bit less at only $7 million). This would say that Koch Industries was only paying out a little more than $53 million total in dividends in the mid 1990's when looking at ownership interests which was probably a small payout ratio as Charles Koch directed roughly 90% of the earnings back into the company for expansion.

Marshall had met Lady Walker in 1982 who worked at a strip club. J Howard Marshall would shower Lady Walker with gifts and purchased $1 million of jewels from Harry Winston and Nieman Marcus. He ended up spending $2 million a year on Lady Walker (he would spend $2 million a year on Anna Nicole Smith 10 years later). He tried to pay Lady Walker $1 million a year to handle his public relations (he tried to write this off as a business expense and the IRS said no). To impress her with his wealth J Howard Marshall showed Lady Walker a prospectus of Koch Industries with the front page reading "For Lady/The Crown Jewels". Since Marshall had purchased all these gifts for Lady Walker they are subject to what is known as gift tax (tax Form 709 has to be filed every year with this if the gift is over a certain amount). Marshall had given Lady Walker $12-$14 million in gifts without paying any gift tax on it (Marshall fired his accountant for not being aggressive enough with the IRS).  Failure to file gift tax would cost millions in penalties and fees. Marshall tried to disregard the tax code at all cost (even though he was a Yale trained lawyer).

Marshall had cut out his son Marshall III as a potential beneficiary. The stock was held in a revocable living trust (basically this type of trust avoids probate costs and also is not made public). In 1989, Marshall's first wife Eleanor decided she wanted to increase her charitable giving so she set up a charitable remainder trust. Typically this works by giving a human beneficiary income with the remainder of what is left over going to a charity.

 J. Howard Marshall retained the right to income of the living trust. In October 1991 J. Howard Marshall (who was in his 80’s at the time) met a 24 year old blond haired single divorced mother named Vickie Lynn Smith (Anna Nichole Smith). Anna Nicole Smith who was only 24 (she was a dancer at Gigi's strip club in Houston). What is interesting is because of J Howard Marshall's age he would often go to the strip club during the day and he met Anna Nicole Smith when was working the day shift. Anna Nicole talked about her job so Marshall gave her an envelope with $1,000 cash and told her she didn't need to work. Marshall would then give Anna Nicole Smith $4,000 a month for "consulting fees". Over time he increased these checks to $5,500 per month.  Of course Marshall was contemplating marriage and on Christmas Eve of 1993 a Neiman Marcus employee showed up to the home of Anna Nicole Smith to review jewelry. Over time Marshall purchased a ranch, a home, places in New York, Los Angeles, a Mercedes Benz, and jewelry for Anna Nicole Smith. Not only would these gifts be subject to gift tax but generation skipping tax (GST) due to the age difference (generally if there is more than a 37.5 year age difference in the parties and they are not related then they are subject to generational skipping tax). J Howard Marshall had a creative idea to try to adopt Anna Nicole Smith but his lawyer said that the state of Texas might frown upon that. Marshall and Anna Nicole Smith married on June 27, 1994 (son Pierce Marshall didn't know about the meeting until the day after). At the time of the marriage Marshall was estimated to be worth $500 million. What is interesting is Marshall knew that Anna Nicole had limited intelligence and called her "unteachable". Marshall created a pre-nuptial agreement giving Anna Nicole Smith $100,000 per month for each month married and $5 million if they had a child together (the agreement was 58 pages and Marshall believed that legal documents should be no more than 1 to 2 page). To his credit Marshall never planned on giving Anna Nicole Smith Koch Industries stock. I am sure Charles and David Koch were happy about this. Could you really see a former Playmate being a shareholder of Koch Industries and at board of directors meetings? Although, Marshall didn't want to give Anna Nicole Smith the "crown jewels" he did want to make sure she was financially secure which explains why he would give her monthly payments of $5,500.

Even Charles Koch noticed that Marshall showed strange tendencies during this time period. According to Koch in a 1997 deposition Marshall "tended to get drunk a lot, passed out at one of the shareholder meetings". Charles went on to say that when Marshall got drunk he tended to be pretty foolish.

Marshall however passed on August 4, 1995 at the age of 90. From 1994 to 1995 Koch shares appreciated from $664 million to $780 million. J. Howard Marshall in 1994 transferred $6 million of gifts (including ranch, several houses, cars, jewelry, and a substantial amount of cash) to Anna Nichole Smith. While Marshall and Anna Nicole Smith were dating he would pay her a $4,000-$5,500 per month consulting fee. Because they were not married this amount would be subject to gift tax (if you are married you can give an infinite amount under the marital deduction). When Marshall and Anna Nicole Smith were getting close son Pierce Marshall attempted to shift ownership of Koch Industries around from. This 1999 New York Times article speculated that Anna Nicole Smith (who was only 31 who was a high school drop out) "could become one of the richest women in America". At the time the Marshall family owned 8% of the voting stock for Koch Industries and 16% of the non voting stock. Anna Nichole Smith had issues handling money as in 1996 she filed for bankruptcy (she listed the inheritance from Marshall-who died in the year prior as an asset). Smith had claimed that Marshall promised her half of his $1.6 billion estate. In 1999, a California court awarded Anna Nicole Smith $400 million but then in 2002 a federal court reversed that award. Daniel Fisher of Forbes wrote a good article and timeline of the court cases here. In 2014, a court rule that one of Anna Nicole's children Dannielynn would not inherit the $49 million of the Marshall estate. In essence Koch Industries will not transfer to any new beneficiaries.

The whole J Howard Marshall estate is a very good case study for estate planning. The Marshall family is still one of 9 shareholders of Koch Industries stock. Elaine Marshall and her family still owns about 15% of Koch Industries stock. Bloomberg uncovered Marshall as a billionaire. Bloomberg pegged Marshall's net worth at $13 billion however according to this article a spokesperson said the valuation is inflated. They actually do have a point since Koch Industries is privately owned the valuation is the same as valuing a public company such as Google or Microsoft. Elaine Marshall is 73 years old (younger than Charles Koch). She has two sons one named Preston Marshall (grandsons of J Howard Marshall) who is an oil executive for MarOpCo in Houston. It is said that Preston Marshall is the largest shareholder of Koch Industries outside of Charles and David Koch. Why isn't he on the billionaire list? The other son is E. Pierce Marshall Jr. who works as a Vice President for MarOpCo with his brother and also runs a family office called Elevage Capital Management in Dallas. J. Howard Marshall would be proud as E. Pierce Marshall Jr graduated from Yale Law School in 1995 and received a business degree from Tulane (where he sits on the board)

What is quite interesting is that J. Howard Marshall and Anna Nicole Smith were only married for 14 months and the battle for his estate extended for a mere 20 years. 

Economic Basket Case of Venezuela

For some time I have been fascinated with the economic/political situation in Venezuela. The country for years has lived under a socialist regime which I believe has lead to a major decline in the standard of living (and unfortunately the death of many people). Recent stories about the situation in Venezuela made me want to write this blog post.  If you examine the history of Venezuela you will find that the country has never embraced capitalism or free markets. This mindset will continue to drive the country off a financial cliff and ultimately will have disastrous consequences.

Venezuela has a history of not having its act together. In 1875, the finance minister said "Venezuela does not know to whom it owes money and how much. Our books are 20 years behind". During the 1970's Venezuela saw a large increase in the revenue from oil. It was at this time that President Carlos Perez instituted the "The Great Venezuela". The program spent $2 billion and lead to corruption and the state ended up owning 300 companies (none of which made any money). By 1997, it was estimated that Venezuela had blown through $100 billion in oil revenue in the previous 25 years (this makes trust fund kids look frugal). In December 1998 Hugo Chavez was elected president of Venezuela. The economic freedom after Chavez took office declined dramatically as can be seen in this graph. However, this is despite the fact that the country under Chavez brought in $700 billion of revenue (most of this was redistributed to social programs) Like any politician he promised to improve the current situation (fighting poverty, eliminate corruption, and keep the country safe). As Chavez took over the debt increased from $22 billion to $70 billion. The debt situation now is so bad that the country is shipping gold instead of paying cash for debt payments. In 2016, the country will have to pay back $10 billion in debt. Venezuela also became one of the most dangerous countries as well with a murder rate of 82 homicides per 100,000 inhabitants (for comparison U.S. is about 5 per 100,000). No one with a brain even goes out at night in Venezuela. What is even worse is 98% of the crimes in Venezuela don't result in prosecution.  After Chavez passed away in 2013 Nicolas Maduro took over. The country recently ranked #1 on the Misery Index. The country also has a low Freedom Index score as well.

The modern day situation of Venezuela is pretty grim. Price controls of many goods have led to shortages nationwide. The country has had shortages of food, medicine, power (the country tried to have their own day light savings time to reduce the amount of energy consumed-I doubt this will work), dirty water, even shortage of tampons! Currently 80% of the people of Venezuela are below the poverty line. As you can see in the pictures there are stores with empty and bare shelves (symptom of price controls). Some people have used cooking oil to pay doctors. Food shortages have reached 85% and medicine 96%. This YouTube video shows how social media is used to basic goods (the same goods are available at any small convenience store in the United States). What would Americans do if this happened?

The government of course blames "greedy companies" for all its problems. The country typically takes private property from large companies and uses it to build its own social purposes. However, anyone who has taken basic economics knows that price controls create shortages. The past week people can't even find toilet paper and phone companies are suspending long distance phone calls. The healthcare system is also crumbling. Hugo Chavez promised that healthcare was a right and should be free. Simple drugs like aspirin, antibiotics, and insulin are scarce. Only 36% of the beds in Venezuela hospitals are in operation. People go on to Twitter and Facebook and try to see who has what drugs. Around 70% of people in Venezuela stopped buying basic food because it took too long to find or was too expensive.

The country has seen a step decline in oil revenue from $37 billion in 2014 to only $12 billion in 2015. The country has seen rapid inflation too. The country is expected to have inflation of over 700% this year! Last year the economy shrank almost 6% .The debt rating is CCC from Standard and Poor's  (this means the country has a good chance of defaulting on debt in short period of time). This means that if something were to cost $1 in January by the end of the year it would cost over $8.

The solution for Venezuela is a multi step one that won't happen overnight. The first step would be for the people to throw out who is currently in office (currently trying to take place here) and elect people who will not jail political opponents or anyone else who disagrees with them. Current President Maudro claims that "no one is going to kick [him] out". The next step to reform is to enforce property rights and to privatize all the industries that the country owns. Privatization will lead to efficiency, accountability, and more peace (as trade involves the act of voluntarily cooperation). Companies don't want to do business in countries that are run by dictators who can seize their property at any given moment. If property rights were honored companies around the world would come back to Venezuela to do business. The next step would be to end the price controls of nearly every product which would eliminate the shortages of nearly every product. The mix of private property rights, privatization, and eliminating price controls will create competition, more products, and no waiting lines. The country relies on the oil revenue for about 40% of their government revenue. The oil price that Venezuela needs to balance their budget is about $117/barrel (currently as I write this oil is below $40/barrel). Massive trade liberalization (remove trading tariffs/barriers) would invite more trading partners around the world. The country has revenues of about $143 billion (2014 estimate) but spends $204 billion. This path of overspending can't continue forever. Venezuela needs substantial reforms soon before it falls off the cliff. The country is a perfect case of how socialism does not work.

The Case Against the Department of Labor (DOL) Fiduciary Rule

In my regular day job I work for a registered investment advisory firm (RIA) and provide comprehensive financial planning advice to clients. So most people don't know but the Department of Labor has proposed a new fiduciary rule that would put even more restrictions on an industry that is already highly regulated. Let me explain the current regulatory state of the financial industry before getting into the current proposed rule.

Currently, people in the financial industry are subject to various rules and regulators (depend on where they operate/size of the firm). An overview of the rules can be found here (60 pages worth-just a summary remember). The actual Securities Act of 1933 is 93 pages which can be found here. The Securities Act of 1934 can be found here which is only 371 pages. ERISA is another law that governs investment advice as well (especially for retirement plans). A summary of ERISA can be found here which is 76 pages (this is just the summary too). The actual ERISA law can be found here which is 460 pages! Clearly, people who claim the securities industry isn't regulated need to look at the data. Let's point out really what the rules are trying to protect against is fraud which can be dealt by contract law (breach of contract).

Right now there are two type of business models in the financial planning world. The first is the brokerage model which essentially is a company like Morgan Stanley/Goldman Sachs/UBS etc. These companies are under what is known as a suitability standard which just looks at a client's situation and looks at their unique characteristics and a product is recommended (i.e.-in practical terms this could be anything). The way people may money under this model is by selling a product with a commission. The commission can vary by the type of investment the broker recommends. Typically a brokerage firm will recommend Fund XYZ and then get a cut of the action from the fund company for marketing the fund (this is known as a 12b-1 fee). Let's not forget other professions like car sales people, real estate brokers, and insurance agents are compensated in similar ways. Also it is important to point out that the general public is aware this.

Brokers are required to take the Series 7 exam which is about 260 questions and a 6 hour exam. Also what is even more interesting is that let's say you are in college and want to get a head start on the Series 7 exam, you can't take it unless you have a brokerage company sponsor you (barriers to entry). If you want to provide any type of financial advice you have to take the Series 65 (I actually took this exam a few years ago) and the test is a 155 questions, takes 3 hours, and is $155 (again you can't take this exam unless a firm sponsors you-which makes very little sense).

The other type of model is the fiduciary model (I work in this realm). The fiduciary model is were the financial advisor places the interests of client ahead of their own.  Typically these firms seem to be more comprehensive and will look at the whole financial picture (investments, taxes, insurance, retirement planning) as opposed to just investing a brokerage firms do of just buying and selling securities for clients. On average RIA's charge a fee for the amount of assets they manage (which can range from about 2% to .4% depending on how much a client has under management). People are not paying for just investment advice but for comprehensive planning to try to integrate everything. Some firms charge hourly rates or project rates for certain things. In recent years there have been complaints that RIA firms only cater to high net worth clients (typically these firms have minimums they require to become a client). RIA firms still have compliance requirements such as filing an annual ADV form (from personal experience these are time consuming and provide little to no value as clients never look at them and if they have a question contact the advisor anyways). However, recently a network called XY Planning Network that targets younger people who may not have enough assets to work with other advisers and some in the network just charge a monthly fee/per hour fee for planning (market forces working).

The fiduciary rule (actual rule from the Department of Labor can be found here and the over 3,000 comments can be found here would ban investment advisors from charging commissions or charge a higher fee (percentage of assets under management) if a client rolled their 401k plan over to an IRA. Typically once clients retire they have assets in their company 401k. These assets are rolled over into a separate IRA (as this retains creditor protection). Advisors can charge a higher fee or commission if they get a client to sign a best interests (contract). If the contract is signed then the advisor can charge the higher fee. The idea is to get advisors from recommending products with high commissions (such as variable annuities/non-traded REITS) which can generate a good income for an advisor who recommends them but may not be best for the client. Of course, anyone with any common sense could ask the question of how the advisor is getting compensated. Clients always should ask questions about the products they are purchasing. As a result advisors will have to disclose how much they are making which of course will cause clients to leave and go elsewhere. Of course these clients won't have enough to join many RIA firms (most of these firms usually have minimums before they can take on clients). However, even I was surprised to learn that Edelman Financial services will work with clients who have as little as $5,000 (again market forces at work). Although, I would be curious to see if this amount increases if the fiduciary rule is passed.

RIA (registered investment advisors) firms have grown in the past number of years (again the free market at work). Between 2013 and 2014 over 2,000 RIA firms were started.  There are roughly 32,000 RIA firms in the United States. There is no surprise that RIA firms have been taking assets away from brokers (also known as wirehouses). RIA firms held about 23% of the assets under management which grew after the financial crisis. Median assets for RIA firms increased 67% from 2009-2013. Consumers are voting with their assets and have been migrating to RIA firms even before any type of legislation was passed (legislators are you listening?

Also with the use of technology many advisors can meet with clients virtually it doesn't always have to be in person. A technology known as robo-advisors have come online the past few years. Robo-advisors will rebalance investments to get clients to were they should be by automatically trade for the client (takes human emotion out of it). Also robo advisors typically invest in low cost index funds (which for young people who are trying to accumulate wealth are perfectly fine). As of December 2014 robo-advisors had about $19 billion in assets (this figure is continuing to grow). Companies such as Betterment and Wealthfront can manage your money for very small fee and does the trading for the client (taking the broker out of the picture). Although, robor-advisors haven't had type of serious market correction (like in 2008) to test themselves.

The problem with the fiduciary bill is it will add additional paperwork for clients (there is already of plenty of paperwork that clients have to sign/agree to on a regular basis). Brokers who usually get paid on commission will switch to a fee-based model which will end up costing even more than the commission based model on a percentage meaning consumers will pay more and try to seek out a registered investment advisor (many of whom probably won't take unless they have a minimum amount of money), or even worse consumers will try to invest money themselves which is probably the worst scenario. For example if someone has a $100,000 account and they purchase something that has a commission of $100 that represents only .1% cost. Now if the advisor after the fidicuary rule moves to a fee based model and charges 1% the client would have to pay $1,000 (10 times the amount of the product they purchased!). When Great Britain banned commissions smaller investors/general investing population were forced out. I would predict the same will occur after the passing of the fiduciary rule.

Regulation isn't needed for a fiduciary rule when consumers are already voluntarily moving money from broker dealers to registered investment advisors/robo-advisors without the force of government. If anything there should be a reduction in regulation in the financial sector. The Securities and Exchange Commission, FINRA, Securities Act of 1933 and 1934, ERISA, and state regulators all play a major role in the current regulatory state. People forget that stock brokers and financial advisors can't lie about the products they sell (this is known as fraud and we have laws against that). My prediction is the fiduciary rule will add substantial compliance costs, reduce people access to financial advice, and make the average person worse off. Economist Robert Litman did a study showing that the cost of the fiduciary rule would be $80 billion. These costs will be passed on customers. Add to this, Litman estimating that about 7 million will be shut out of advice with the fiduciary rule. I would ask the creators of this rule what are they trying to correct when many people and billions of people have gone from brokers to registered investment advisors (RIAs) and robo advisors?

A True Free Market Libertarian Approach to Health Insurance/Medical Care

Many people have lamented over Obamacare (even some Democrats). Republicans in a way to counter Obamacare have offered very sparse and generic reforms such as "allow people to buy insurance across states" and "health savings accounts". I divided the post into a few parts: the problem and go on to discuss what causes the problem of high medical prices and then offer some solutions that could be used to reduce the cost of medicine, allow more access, and improve the quality.

The Problem
The reason healthcare is more expensive is because individuals are not directly paying for the services rendered. People have little incentive to shop if the government or an insurance company is paying most of the bill. Between 1960-2009 the percentage of consumers who directly paid for healthcare expenses dropped from 48% to 12%  while the percentage that government paid increased from 24%-48%. The government in this report seems happy that improper Medicare payments are only 10% of the budget. During the same year (2013) Medicaid only made improper payments of $14 billion of improper payments. Why would any one trust the government when it comes to healthcare when the government misappropriated payments from Medicare, Medicaid, and other tax credits that totaled roughly $125 billion.

When you go to Wal-Mart, Amazon, or McDonald's you see a price posted and you can either purchase the item or leave. As University of Chicago professor John Cochrane points out in this excellent essay "the Cheesecake Factory delivers a complex service oriented business product with remarkable quality, efficiency, and cost. Why can't hospitals do the same?"

What Did We Do Before Health Insurance?
Before insurance companies ever existed there were such things as mutual aid societies were individuals essentially form their own insurance company by getting groups of people together and each contributing about $2/day (which was the wage for a day of work). Let's not forget people in the early 20th century worked more hours than people do these days. During the 1920's the value of these societies was $9 billion. Mutual aid societies could limit who was in their group (insurance companies have to take on anyone who applies). What is even more interesting is that the mutual aid societies had a 30% lower mortality rate than the general population!  The government of course didn't approve of this and in 1919 passed the Mobile Law which increased the reserves that mutual aids had to keep, required a doctor to examine all lodge members, and the lodge couldn't extent credit to members. Slowly over time the government increased the regulations which reduced the importance of a voluntary market for health insurance. If me and a couple of friends want to form an insurance pool why should the government stop us?

Health Insurance Problems-Deregulate this market
With Obamacare health insurance companies are subjected to medical loss ratios. This ratio essentially dictates how much health insurance companies can spend on medical care from the premiums they collect. Currently the ratio is 85% which means that if there is $100,000 paid in medical premiums at least $85,000 has to be for medical care. Essentially this rule came about because people believed that insurance companies were greedy (remember insurance companies make less than a 4% profit margin) and that insurance companies will only spend their money on advertising and marketing to try to lure customers in. However, the flaw with a medical loss ratio is requiring a health insurance company to spend 85% of the medical premiums on health care it creates incentives for health insurance companies to overspend since the insurance company is required to spend the money within a one year time frame. This incentive leads health insurance companies to spend more on the latest technology (MRI machines, CT scans, etc.)

Community rating laws are another form of regulation that essentially say that everyone that buys health insurance even though people vary in: age, sex, height, weight, lifestyle. The only thing that health insurance companies can charge different prices for is whether or not a customer is a smoker Community rating laws only exist in health insurance. Car insurance companies can increase your rates if you are younger and more reckless but not health insurance companies. If you look at what insurance at companies are required to cover this also drives up the cost of health insurance. For instance, health insurance plans must cover things (a list of 10 things here)  mental illness, lab tests, preventive and wellness service, maternity care, and many other things. Why can't we customize our health care plan to our own needs? Speaking of that under Obamacare policies have unlimited lifetime limits (meaning there is no maximum dollar amount your policy can cover). Why not allow there to be a market to allow people different amounts of lifetime coverage ranging from $50,000 to a couple million?

Looking at the health insurance market the market itself is not itself competitive. All insurance companies (whether it be health, auto, life) are first regulated at the state level. Usually every state has their own insurance commission. Health insurance companies have to abide by risk based capital requirements which looks at the assets of the insurance company to make sure they have enough of a surplus. Also another thing that state regulators look at are the insurance financial statements to make sure the insurance are financial solvent. On a regular basis state insurance department audit health insurance companies. There are also rules regarding how much health insurance can increase premiums at the state level. I looked up the rules for how to incorporate an insurance company in Texas and realized that it is a long 14 step process. First there is a filing fee of $1,500. Also you need $700,000 of a capital surplus ($1.4 million capital and surplus combined). You also have to make an SEC filing and file GAAP financial statements which take time and are costly. Also the insurance company must have 5 board of directors as well (oh the state of Texas doesn't allow anyone with a felony conviction involving moral turpitude to serve on the board of directors too).

Another no brainer is to allow customers to purchase health insurance across state lines. States have their own rules and regulations in regards to what has to be offered inside a health insurance plan. The state is not only in charge of what contained in the plan but also how much the health insurance plan can charge (health insurance companies must get approval before they even offered to consumers-nothing close to a free market!). While we are at it why don't make it easier to start a health insurance company. How many health insurance company IPO's have you heard of in the last 15 years? I actually did find one company called Oscar in this article that is trying to provide a cheaper model for health insurance (the company of course had to get state regulatory approval before it opened up shop-the company was the first new health insurance company to open in New York in more than a decade!). .

FDA Drives Up Drug Cost and Prevents Patients From Accessing Drugs-Limit Their Scope
There are many things that increase the cost of health care. One organization that increases the price of drugs is the FDA. The Tufts Center Study of Drug Development estimates that the cost of developing only one drug has increased from $100 million in 1975 to $1.3 billion (both in 2000 inflated dollars). Avik Roy from Forbes here points out there 90% of the costs associated with a clinical trial is in last phase of the clinical trial-Phase III). Not only did it become more expensive to develop a drug it also took longer (from 1999-2005 the length of the clinical trial time increased by 70%) and the number of patients required to enroll has more than doubled from 1,600 in the late 1970's to 4,200 in the 1990's) but the number of procedures that patients had to receive (blood work, x-ray, etc.) from 1999-2005 increased 59%. Also the chances of a drug getting approve have also been decreasing. The trend of approval of new drugs which can be found here has been on the downtrend since 1996.

When was the last time you  heard of a large drug company going public? No one in their right mind would want to start a large drug business given the burdens of the FDA. The FDA also doesn't factor in that everyone has different biology and if two patients take the same treatment they will have different outcomes. However, in practice what the FDA does if a drug doesn't show a statistically significant benefit in a trial then a company isn't allowed to sell that drug-even though some patients in the trial benefited from the drug. The FDA should only have one phase for drug development (to see if a drug is safe) to reduce the time and cost of developing a drug which would allow more patients access to treatments at a lower price and allow patients/doctors/researchers to see if a drug can benefit people who take it.

Speaking of medical tests what is bizarre is that if you want to get any type of medical test you usually need to have a doctor tell you that you need it. You can't yourself show up to Quest or Labcorp and say you want a blood test. Arizona this year passed a law that allowed patients to get a blood test without the prescription of a doctor. According to this article from Bloomberg companies are now being more open to offer customers testing for different things like cholesterol and thyroid. It is silly and crazy to not allow people to get tests performed on their own bodies! Theranos is a company trying to work on providing patients with access to medical test for affordable prices, however the FDA recently questioned some of the equipment that the company was using.

Government Regulations in Healthcare
According to this article about 51% of healthcare professionals say HIPPA compliance gets in the way of providing care to patients. Healthcare professionals waste about 46 minutes a day using outdated technology due to HIPPA regulations. This is 46 minutes that could be used with patients not filling out paperwork. Doctors very rarely use e-mail/smartphones/computer or other forms of communication to talk to patients due the restrictive nature of HIPPA which requires burdensome rules and requirements in terms of maintaining patient privacy. In a survey 65% of doctors said that secure text messaging could cut discharge time by 50 minutes. Why would doctors have any incentive to e-mail or text a patient when insurance companies pay $0 for that.

Certificate of need laws also restrict access to medical care. If someone wants to bring a medical facility to a city they must get approval from the city and state before they do so. These laws results in fewer hospitals beds, fewer CT scans, and fewer MRI services according to this study. For instance in South Carolina Policy Council reports requires that 20 different medical services and pieces of medical equipment currently require certificate of need laws. Also in South Carolina the government has to approve any new medical services (i.e. expanding the size of a healthcare facility or purchasing medical equipment costing more than $600,000) according to this report.

The government has created an arcane code system that determines how doctors charge. This system is called CPT codes. Nearly every medical procedure that can be performed has some code associated with it. The government is up to CPT coding version ICD-10 which features more than 14,000 codes "prices". The American Medical Association (AMA) is for CPT coding (of course they collect a fee every time a CPT code is used).  This surgeon explained the problems with CPT coding here. The problem is that doctors have to figure what a bureaucrat wants instead of using common sense and simply just charging a cash price. Is it a bad thing to get doctors to determine what value they provide and charge for it instead of using a bureaucratic table to see how much they can collect from a code? I am all for turning doctors into business people. Why don't we ever see hospitals have commercials for patients to have there next back surgery for only $599? CPT codes should be abolished as they are just another form of price controls and central planning.

Speaking of restrictions why have historically there are fewer medical schools now than in the early 1900's? As I mentioned in this post  in 1903 there were 154 medical schools. As I write this there are 141 accredited medical schools in the country. The knowledge of medical data has greatly expanded in the past few decades.Why don't we have more medical schools given that the population has greatly expanded?

Some Solutions
Doctors have gotten tired of dealing with insurance companies and the establishment of medicine and have decided that they will stop taking insurance altogether and deal with patient directly (what is known as direct primary care or concerning medicine). About 6,000 doctors (from 2014) contract directly with patients. Currently about 7% of doctors are currently using direct primary care and about 13% plan to transition to it. Patients still retain their insurance in case they have to be hospitalized or have something serious like cancer (which is the concept of insurance). The average membership fee is $135/month which provides 24/7 care and lets patients e-mail, call, even text their doctor. According to the this New York Times article doctors typically spend 8 minutes with a patient. patients get 30, 60, or even 90 minutes with a doctor for a more comprehensive review of their health situation. Not only are these type of practices popping up in major cities but also in cities like Waco, Texas (less than 130,000).

People these days can look up the quality of a doctor in a matter of seconds through Yelp, RateMDs. HealthGrades, Vitals and many more sites to assess whether a doctor is providing quality or not. If we take this one step further to a true free market a company called Medibid allows patients to bid on their medical care. The Surgery Center of Oklahoma offers its cash prices online. Why don't we ever see advertisements for the cash price of a hip replacement?

Making profit in medicine is not a bad thing. As I pointed out in this blog post Dr. Devi Shetty in India not only has an actual business in medicine were there are cash paying customers who pay and he is still to provide medical care to lower income individuals while also turning a profit (pre-tax profit margin is around 8%. In 2015 the company made a profit of $2 million. Also Dr. Shetty performs double the number of surgeries as the Cleveland Clinic and has a lower mortality rate of 1.4% vs. 1.9% for the United States). The company performs an average of 150 surgeries per day  It is important to note Dr. Shetty figures out what supplies are necessary to perform surgery and he closely examines the cost of everything to see if it makes sense, His company Narayana in India recently filed with the Indian version of the SEC trying to raise $100 million. In 2015 the company served more than 2 million people. We have to understand that profit in medicine is not a bad thing. If a doctor can improve our quality of life, make us feel better, and help us enjoy our time on this earth they should be compensated. Why we can't have hundreds of these set up in America?

Conclusion
It is no coincidence that as the percentage of people paying for their medical expenses out of pocket has decreased while the cost of medicine has increased. What we need to do is return to a system were anyone can create a mutual aid group or their own insurance pool without being subject to the regulations of insurance companies (this would actually increase coverage and reduce premiums). Speaking of regulations repealing the laws and rules surrounding insurance companies and create more companies which would reduce the premiums and increase quality. Also reducing the number of phases for a drug trial from 3 to 1 (safety should just be evaluated) drug approved would reduce the cost to develop a drug (which drug companies would pass on to consumers) and also give consumers years earlier which is crucial when some people have life threatening/chronic illnesses. Abolishing CPT codes and allowing patients to negotiate prices for medical services would put downward pressure on prices and doctors would be forced to think about how much their services are worth. Repealing medical loss ratios rules would also not force insurance companies to blow through the premiums they receive in a year and give insurance companies incentives to hold on to their premiums for longer than one year. Restricting certificate of need laws would also allow more  Also severely reducing HIPPA rules could perhaps get us in 21st century medicine (it is bizarre that my doctors still have to fax things!). Massive deregulation in one of the most regulated industries would greatly free up the medical industry to innovate while providing people with more access to health insurance and health care at much more affordable prices.