Memo to Ben Bernanke: Listen to a Conference Call Once in a While

The September employment report “is simply a signal, a strong, strong signal for Fed QE2,” Gross said….

—Arne Sorenson, President & COO, Marriott International, Earnings Call, October 7, 2010

There’s something about Washington DC that saps people’s brains of all reason, sense and intellectual honesty.

How else to explain the process by which Congress and the Administration undertook to restructure the entire healthcare system of the United States without asking a single insurance company for advice on how to improve the system?



Before you spit out your coffee and scream, in the manner of our President and any random Congressperson running for reelection, “hey, the insurance companies are the bad guys of healthcare,” sit back and think what insurance companies really are: they’re the canaries in the healthcare coal mine.

They gather cost data, put a mark-up on it, and negotiate with their customers the delivery of their services—i.e. the parsing and paying of healthcare claims. As a result, no part of the healthcare chain knows more about the actual costs of trial lawyer abuse, hospital waste, insurance fraud, drug company price hikes, and the staggering inefficiency of a Balkanized, paper-based delivery system than the insurers.

And if anybody had bothered to ask where to find and how to prevent inefficiencies, fraud, abuse, and inflation exist, the so-called healthcare “reform” act might have managed to do a thing or two to reform our healthcare delivery system.

But, of course, Congresspersons don’t like to be confused by the facts.

Neither, apparently, does the White House. Bloomberg recently reported that IBM offered to analyze the healthcare system, free of charge. You might think the offer would have been snapped up—but, then, you would be a rational human being:

IBM said it would analyze health-care spending, at no cost to the government, to hunt out fraud, Sam Palmisano, the company’s CEO, said at a conference in New York on Sept. 14. The White House wouldn’t sign on to the plan.



“We offered to do it for free to prove a point, and they turned us down,” Palmisano said. “Our recommendations weren’t aligned with the priorities of the administration. Their priority was not to reduce fraud and improve productivity. It was to increase coverage.”

— ‘Obama May Try to Woo Business as P&G, Blackstone Blister Moves,’ Bloomberg, October 8, 2010

Sure, nobody likes the cost increases insurance companies pass on, and nobody likes the impersonal, bureaucratic decisions they make when it comes to healthcare coverage, or when they make mistakes. Indeed, some people find it offensive that many insurance companies are for-profit enterprises.

But taking out anger at the lousy healthcare delivery system in the US on the insurance companies the way Congress and the Administration did was more like shooting the mailman who delivers the eviction notice than dealing with the actual problem that caused the eviction notice to be sent by the bank.

Consider for ten seconds the mark-up on an insurance company’s services versus that of one of the drug companies on whose behalf the insurers collect much of our hard-earned premiums: United Healthcare’s gross markup (i.e. before administrative and selling costs as well as taxes) on its services is 23%; its net after-tax margin is 4%.

Pfizer’s gross markup on its products is 85%; its net margin 17%.

How, exactly, are the insurance companies the bad guys here?

Of course, people in Washington DC consider nothing for ten seconds unless it involves the prospect of getting reelected, or getting reappointed.

Look at Ben Bernanke and the panic-stricken reaction of the Federal Reserve to the recent employment data. So freaked out is the Fed by the lackluster hiring that it is preparing something called “QE2”—Quantitative Easing, Round 2—by which the Fed will buy government debt (at record, all-time high prices…hardly the time to buy anything) in order to keep the economy from stalling.

The Fed’s reaction to unemployment data, unfortunately, ignores a simple fact: nobody hires new employees because interest rates go down.

They hire when they are confident of their future.

Thus, the weak employment data are not telling the Fed that business stinks—in fact, business is actually fairly healthy. Indeed, if Bernanke listened to an actual company talk about business, he’d hear some interesting stuff.

Take the above-quoted commentary from Marriott International, and think about what it means that both business and leisure travel are “strong.”

It means companies see deals that can be done, so they’re sending people on the road. And if hotels are filling up, it means that airplanes are flying full, rental cars are being rented, restaurants are being booked and cabs are being hailed.

It also means that city hotel room taxes and airport gate fees and sales taxes are being paid, and waiters and waitresses and cabbies and bellmen are being tipped.

Travel is one very important canary in the economic coal mine, and it’s telling us that business really is getting better.

So we have a suggestion for Ben Bernanke, and, for that matter, Bill Gross, ace bond king of PIMCO who seems to manage PIMCO from within a CNBC studio, so frequently do his musings on the state of the economy appear on that TV channel, and a cheerleader of the Fed’s impending QE2 campaign: listen to a few conference calls some time.

If they listened, they’d know that companies aren’t holding back on hiring because business stinks: they’re holding back because they see tax hikes and healthcare cost increases coming, and they’re not sure adding a new FTE is a smart thing to do.

And no amount of “QE2” or QE3, 4, 5 or 6 will change that.

Ah, but who in Washington needs facts to make up their minds?

Jeff Matthews

I Am Not Making This Up

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