Koch Industries is A C Corporation (Not An S Corporation)

For many years I have wondered if Koch Industries was established as a C Corporation or an S Corporation. At one time I believed they were an S Corporation due to this article discussing Bill Koch and his fight with Massachusetts when he reported a $275 million capital gain on his 1983 tax return (when he sold his Koch shares back to Charles and David Koch for $470 million) and placed the proceeds into S Corporations. Bill Koch would go on to start Oxbow Carbon LLC. Even the S Corporation organization links to an article in which a Forbes reporter believes Koch Industries is an S Corp. The most famous deceleration of this was back in 2010 when economic advisor Austan Goolsbee made the remark that Koch Industries didn't pay much in corporate income tax. The concern was Austan had access to confidential tax filings Koch Industries. However, it turns out Austan had the incorrect information and was referring to Bill Koch in an article he read from a Florida newspaper (see even economic advisors get the Koch brothers confused!).

Through searching business filings with the state of Kansas I came across filings that Koch Industries had filed with the state (going back to the original article of incorporation in 1940). Wood River Oil and Refining Company (predecessor to Koch Industries) back in 1940 (started by Fred Koch and partners) was funded with $15 million of capital and only had common stock of 16,000 shares. Then on July 20, 1959 Wood River Oil and Rock Island Oil and Refining merged together. After the merger the company had a total capital amount of $10 million. Charles Koch would grow the company year in and out by reinvesting 90% of the earnings back into the company. As the company grew all the number of common shares would grow but the company would also offer preferred stock as well. S Corporations are not able to have multiple classes of shares (preferred and common stock). Having different classes of stock would revoke the S Corporation and cause a large tax bill as well. C Corps are able to have multiple classes of shares. Since Koch industries offers different share classes (preferred and common) they would most likely be a C-Corp. 

The last report in 2004 breaks out the the preferred/common stock amounts. The company has 57,922,925.623 common non voting shares along with 276,524.2 voting shares which puts the total common shares at ~58.2 million shares. Koch Industries has authorized (or the capacity) to issue close to 133 million common shares. The company also has the capacity to issue 251,000 preferred shares as well (non-voting as well as cumulative voting shares as well). Charles and David Koch each own 42% of Koch Industries which would mean they would together own roughly 49 million common shares of Koch Industries.

This finally puts to rest the notion that Koch Industries is some type of pass through entity (LLC or S Corporation) to Charles and David Koch. Also remember that a C-Corp faces double taxation as well since the corporation is taxed first at the company level and then any dividends that are paid out are taxed to the shareholder. I do wonder though if Charles Koch started the company from scratch if he would still choose a C-Corp or want to set up Koch Industries LLC (as an S-Corp). 

Republican Tax Cut: What Does This Mean for Koch Industries Inc. and "Koch Brothers"

Recently, I have heard all sorts of claims in terms of how the recent Republican tax bill will affect the "Koch brothers". Senator Bernie Sanders remarked "Congratulations to the Koch brothers, massive, corporations, and billionaire campaign contributions on looting the Treasury and working families".  I decided to look deep to see how the tax bill would impact Koch Industries and the "Koch brothers" by doing some back of the envelope calculations.

For many years I have published many blog posting on Koch Industries and Charles and David Koch and still am not sure how Koch Industries is structured (whether it is formed as an S Corporation or C Corporation). Well my blog is the first to break this but Koch Industries is actually a C Corporation. The company filled articles of incorporation with the state of Kansas here and the articles of incorporation date back to 1949 when Fred Koch originally founded the company. If you look under the 2004 Koch Annual Report on page 3 the number of common and preferred shares are shown. This is important because a S Corporation (pass through entity) can't have multiple classes of stock . If an S Corp does have multiple classes of stock the company would terminate the S Corp status and subject the corporate tax on the net income to shareholders on the net income and the shareholders would also be taxed on the distributions of income. Due to the multiple share classes Koch Industries would only be able to be classified as a C-Corporation (also the Inc. in Koch Industries Inc. is a giveaway too). Also given the company was formed in the 1940's and the S Corporation election wasn't even available until 1958. 

With regard to the impact for Koch Industries Inc. the company would see possibly a reduction in their corporate tax rates. Koch has many different subsidiaries that are around the world. Some of these subsidiaries pay a very low tax rate. One European subsidiary paid a 4% tax rate on $269 million in profits. Some of these structures get very complicated Invista (subsidiary of Koch) went through 26 step process to reduce their taxes. Although, this is a subsidiary Koch is unable to do this on all their subsidiaries. The newly passed tax bill would cut corporate rates from 35% to 21% of course this is the Federal rate and corporations do pay state states as well (which can range from 0%-12%) . According to MarketWatch the energy industry has median tax rate of 37% (over the last 11 years). The tax rate for S&P 500 companies is 30%. Let's assume we take the lower tax rate for S&P 500 companies. The next question is how much will Koch Industries Inc. save in taxes?

Koch Industries from recent estimate and generally accepted figures has revenue $100 billion . I estimated that Koch earns $6-$10 billion per year before taxes. Let's assume $8 billion of earnings with the same tax rate for S&P 500 companies (30%). This would reduce the net profit to $5.6 billion. Now if the rate is cut to 21% the net profit would be $6.3 billion. This would be $720 million more in earnings for Koch Industries. Since David and Charles Koch each own 42% of the company and the dividend rate is 6%  would mean roughly $18 million more in dividends ($720 million x 42% ownership x .06 dividend rate) each for Charles and David Koch which would mean the government would also get an additional $8.5 million ($36 million x 23.8% tax rate on dividends) in revenue. 

Also there are implications for estate tax too. The estate exemption amount (only pay estate taxes on the amount above the exemption) was raised from roughly $11 million per couple to $22 million per couple. As I write this Bloomberg Billionaires value each of the Koch brothers at $48 billion each which would be a total net worth of $96 billion. $22 million in an exemption amount is a rounding error for covering the estate taxes on $96 billion! The estate tax rate would be ~$38 billion in estate taxes when Charles and David Koch pass. Although, Charles Koch has said that he has been doing estate planning for a number of years.  David Koch mentioned that his estate planning consists of his shares going to his children (I would imagine it is similar for Charles Koch as well). Also it should be noted that since the exemption amount is raised their will be fewer taxable estates which means the IRS will spend time and resources auditing those over the amount. I wouldn't be surprised to see a tax case in the future with the Koch family. 

Overall the recently passed Republican tax bill will help Koch Industries and Charles and David Koch. However, the degree to which it will help Koch Industries and Charles and David Koch has been overstated. From my back of the envelope calculations Koch Industries will save roughly $720 million in taxes at the corporate level and save essentially a rounding error in estate taxes and most likely be a audit target once they pass given the amount of money the government could collect. 

Why Koch Industries Will Not Control TIME Magazine

Recently it was rumored that Koch Industries would provide $500 million to Meredith Corporation in a pursuit to take over TIME Magazine. The Meredith Corporation is a media conglomerate that owns various magazines (Shape Magazine, Better Home and Gardens, and even Fit Pregnancy). The Meredith Corporation also owns 17 T.V. stations as well. It has been rumored that Meredith Corporation secured $600 million from a private equity subsidiary of Koch Industries. My guess would be this would originate from the folks at the Koch Equity Development division. According to an article from Chris Leonard the Koch Equity Development group "reports directly to Charles and other senior executives and which operates like a high level think tank, evaluating potential deals, sometimes on a 10 to 15 year horizon".

Historical investments of Koch Equity Development can be seen here. Koch according to a Wall Street Journal article is also in the business of financing small leverage buyouts. Koch even divides out what types of deals they will perform. The company divides acquisitions into four categories. The first is a tuck-in acquisition which allows Koch to purchase a company that will complement an existing Koch company product/platform. The next type of acquisition is the new platform acquisition which targets companies with EBITDA (earnings before income taxes, depreciation, and amortization) of $250 million. Next would be a partnered acquisition where Koch provides equity with other partners (up to a 50% ownership with joint control). The last type of acquisition that Koch will provide is structured investments. In this type of acquisition Koch will will invest $100 million for a minority position (Koch did this with American Greetings back in 2013). American Greetings is the second largest greeting card company in the United States (Hallmark is number one). The company wanted to transition from a publicly traded company to a privately traded company. The deal was funded from contributions of stock from the Weiss family (owners of American Greetings Stock), cash from $240 million of non-voting preferred stock from Koch AG Investment LLC (subsidiary of Koch) along with $600 million of debt financing.

Of course the media has had outcries for Koch Industries from Vanity Fair, the LA Times, The New York Times, and The Nation. What people worry about is that Koch Industries will turn Time Magazine into vehicle for "the Koch brothers" to share their vision of limited government and free markets. People forget that Koch Industries back in 2013 made a run for the Chicago Tribune but then lost interest. What is interesting is that Charles and David Koch appeared in the Time 100 multiple years (2011, 2014, 2015). Vanity Fair points out when Time had a gala David Koch would be dancing and having a good time (the gala was filled with mostly people of different political viewpoints).

Personally I don't believe Koch Industries will take an active role in TIME magazine. To me the $500 million of financing is Koch lending Meredith monies to purchase Time magazine but Koch most likely wouldn't want to get involved with the day to day management. Also given too that Koch has no experience in this area I view the deal has a way to provide financing for a deal while earning a rate of return for Koch.

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.