In my last article I elaborated on the four led forces at work in our modern day healthcare system – Physicians, Pharmaceuticals, Payers, and Patients.  I also strongly recommended a two-part podcast series presented by This American Life, which explores and explains the inter-workings of these forces with great color and high entertainment value.  If you have not yet taken the time to give listen, then I encourage you to do so.

More Is Less

Someone Else’s Money

But today we change course, I want to demonstrate a tactic I learned early in my career as a management consultant – do not present a problem unless you are prepared to offer a solution.  And so offer I will, but with the caveat, that the ailments maligning our healthcare system are complex and entrenched.  My ideas are just that, ideas.  But they are not merely band-aid solutions.  They dig deep to the root of a 100 year old model and deploy tactics counter to our equally entrenched bureaucratic system.  That said, I make no claim to have it all figured out, but some of my suggestions are already proven… and others could be.

I hope you’ll engage the discussion in the comment section below.

To get started, let’s lay the ground work.  Admittedly it is impossible to address every nuance likely to evolve during such a restructuring process, a limitation enhanced when confined to a 2400 word article.  Nevertheless, I’ll give it my best effort. 

My approach is designed around a handful of guiding principles:

• Market Competition trumps a Universal option
• Sustained, authoritative, and flexible change makers
• Models that work vs. those that do not
• Applied Regulation

Market trumps Universal

From the jump let’s address and then set aside perhaps the most polarizing of gatekeepers.  Too often debate rages no further than who will own and deliver the solution – the free market or the government.

To me, the argument is simple.  I am a fan of a vibrant and competitive market place.  I can visit the offices of a locally owned business provider and then offices of the DMV and quickly see efficiencies and inefficiencies at work.  I can tour a new home development and a government housing project and quickly decide where I’d prefer to live.  I can observe those aspiring to the betterment of their household, as well as those, content to suckle at the teat of governmental entitlement programs and I easily discern the path I’d chose for a child.

In this same vein, I believe a properly incented and motivated free and competitive market will drive results.  Industries built on efficiency when loosed to excel will innovate and inspire, while a regiment of self righteous government lifers will become bogged down in so much red tape and common denominators.

But for the purposes of a grander solution, I believe this argument should temporarily be rendered moot.  The free market vs. government debate alone could, and does, fill volumes and pointlessly so.  At the end of the day, good ideas and the delivery of valued solutions are the objectives, regardless of their genesis.  Besides, given the size and scope of the problem, there is enough room for both the private and public to participate in the solution.  So for the sake of advancing the true issue, let us agree to set this ideal aside and explore the remaining tenants of my plan.  Then we can debate who gets to claim ownership of its delivery.

Sustained, Authoritative, and Flexible Change Makers

I believe we need to charter a national healthcare committee comprised of both public and private leaders chaired by a Healthcare Czar – a Czar with Czar-like authority rather than one with little more than a clever sounding title.

I love the spirit and intent of our democratic system.  I love “of the people and for the people”.  However, the efficiency of our modern day legislative system is crushed under its own weight.  Lobbyists and PACs and campaign contributors nestled too closely with our lawmakers have spawned a bastardized system limited mostly to the grinding out of compromised, diluted, ineffective, and overly porked legislation. 

Healthcare reform requires and deserves a reformed model of democracy.  One that is thoughtful and diligent and nimble without being subverted or myopic.

This committee would have the ability to architect intersecting layers of legislation which would then be fast tracked – intact – to Congress for approval.  The committee would be charged to explore the long term implications of their proposals while remaining nimble to respond to unforeseen reactions or fallouts across the populace.

The committee’s charter would span only 10 years with its original chair serving a single 6 year term, at which time he/she is replaced for the remaining duration.  Every two years 10% of the participants would be replaced by committee vote and participant compensation would span well into the future according to the continued success of their outcomes.

Of course this description asks as many questions as it answers, but the spirit is to create a free standing body whose lone accountability is the future of the American Healthcare system.

Models At Work

The Employer Model

Imagine a world in which your employer provided a grocery plan.  This plan could dictate where you could shop for groceries, the availability of preferred menu items, and the prices you would then be required to pay for the right to shop for nearly unlimited quantities of goods.  The catch is that if you lose your job, you may well lose access to food.

Sounds ridiculous, right?  Well, replace grocery plan with health plan and that is what we have in place today.

Much is made today about the fear of the “profit motive” in our healthcare model undermining access and care quality.  I agree that this is a valid fear, but find that it is tragically misplaced.  Rather than lament the greed of drug manufactures, insurance companies, and physicians, we need to question the profit motive, and its impact relative to healthcare, of our employers.

Spirally healthcare costs have caused many employers to question the cost of providing this important benefit.  Cost sharing, co-pay vs. co-insurance, and spending caps are all nuances and price levers of which we need to be intimately aware if our boss holds the key to our coverage.

The reasoning is simple, American businesses compete for share in a global market place.  Business costs unique to a region will impact the ability of those participants to complete.  Consider that prior to GM’s bankruptcy and bailout, nearly $2,500 off the top of each new car purchases went to fund benefits for retirees.  Given this outlandish cost structure, is there any surprise that foreign manufactures were able to offer a much lower price point?

Employers continually seeking to compete are increasingly looking to their benefit costs as an obvious source of potential savings.  And as employee-customers, in this model, we may feel powerless to protest.

Further, this reality says nothing of the millions of Americans currently living without coverage due to unemployment or limited coverage options afforded by small businesses.

The employer based model has long ago served and outgrown its original purpose.  It is time to evolve the leading national source of coverage.

Massachusetts Model

Mandatory coverage is one of the provisions Massachusetts has rolled out as a means of lowering the previously uncontrolled costs of the state funded healthcare safety net.  My plan builds from this basis. 

Many states are starting to require auto insurance as a prerequisite for obtaining and maintaining a driver’s license and registration.  In Georgia, where I live, it is against the law to operate a vehicle without coverage.  It is a classic example of a law intended to protect ourselves from ourselves and each other.

I believe a similar plan should be installed relative to health insurance.  As a part of my recommendation, a minimum level of catastrophic coverage must be held by everyone.  The net result when coupled with a release from the employer as insurer model would be a higher rate of coverage with a lowered per person cost, as insurers are forced to redefine actuarial tables and identify a more competitive price point.

Compliance may be tricky to manage at first, but insurance companies could produce a sort of coverage w-2 which would be a required part of the tax filing process.  Higher taxes could then be assessed to those showing coverage gaps during the year.  As additional incentive, certain medical costs (those most likely to be included as part of a minimum catastrophic care program) would be non-bankrupt-able. 

Medical service and drug costs would be impacted by the higher utilization resulting from required coverage, but that alone is not enough.  A clever component of the Massachusetts model is a “one contracted cost” provision.  In nearly every state outside of Massachusetts each insurance company negotiates pricing with its own provider network.  Just as every passenger on a plane may pay a different price for flight, patients receiving matching service may incur varying costs for their insurers and may recognize unique impacts to their personal bottom line depending upon the quality of coverage provided… by their employer.

A single pricing contract across the nation would only establish the maximum price for a service or procedure which serves the dual purpose of inspiring competition while enabling a logical and available pricing menu, not so novel an idea in the broader scheme of things.

To further drive down costs, the incentives for Health Savings Accounts would be enhanced to encourage more individuals now responsible for their own insurance to select a high deductable plan with an attached savings vehicle.  This would significantly increase the transparency of pricing and contribute to a rarity in today’s medical community, competitive pricing.

Minnesota Model

Simple ideas which are revolutionary to the healthcare debate bring a sort of mid-western sensibility to Minnesota’s successful healthcare programs.  Physicians within the state sponsored Medicare program are compensated primarily on the outcome they are able to achieve with their patients rather than the number of procedures they can perform.  Rather than creating a patient lab rat-cum-cash machine, patients are treated with dignity and with appropriate value-add services.

The outcome of this approach, based on 2006 figures, was a 30% reduction in per patient Medicare spent versus the national average while producing better than average medical results.

Continuing the obvious yet trendsetting pace, Minnesota has recently launched a Health Scores website wherein prices for over 100 common medical procedures are available for comparison across facilities.  Common logic suggests that we would not pay $100 for the same shoes available down the block for $50, why not apply the same logic for planned medical procedures?  Assuming the HSA template which is also a part of my plan, the impact of transparent quality scores and pricing options is easy to envision.

Applied Regulation

Thus far a key player in our healthcare model has largely escaped my reform.  Sorry pharmaceuticals, that is about to change.

But first some quick context setting:  Pharmaceuticals spend millions and millions of dollars in the research and development of new drug compounds.  Once a viable compound is identified, it is subject to rigorous FDA testing and may take years before it is approved for consumer use.  Public products are patent protected for 7 years during which time the manufacturer has a virtual monopoly in the market.  This is an incredibly profitable time and will lead the manufacturer to go to great lengths to extend the life of the patent.  This is commonly achieved in one of two ways – modify the product slightly or identify a new indication for the drug to treats.

In practice, these strategies work like this.  Consider a pill for acid reflux that is highly effective and commands a high price as a patent protected product but must be take 3 times per day to maintain is efficacy.  As the patent expiration is coming due, the manufacturer can introduce a time released version of the pill, requiring only a single daily pill, and restart the 7 year window for this modified product.  Want an even more simplified example?  Consider a fresh 7 year patent for every new flavor of ice cream.

The second method is to introduce a new use for the drug.  A blood agent used to combat cholesterol may later be found to prevent strokes.  As the new indication is approved, the patent window resets for the new ailment.  Go to the doctor for cholesterol and you’ll have the generic option, but go for the stroke prevention and you are subject to the name brand even though a perfectly equivalent generic exists.  Again, imagine a $1 aspirin for your headache, and a $200 aspirin for your sore back.

So armed with this knowledge, allow me to outline my pharmaceutical targeted regulatory reforms:

• Reduce time to market – the approval process within the US is longer than in nearly every other country.  Efforts must be made to reduce the cost and administrative burden resulting from this process.
• Extend the 7 year patent window to 10 years but install a profitability ratio designed to minimize price gouging.  Allow Pharma to profit from their good work, but ensure the pricing does not limit access.
• Reduce to 2-3 years the patent protection afforded to “spin-off” products such as the time release modification outlined above.  Enhancements should not be treated as patent gaming opportunities.
• Enforce patent protections – success within the pharmaceutical industry is often a ‘first to market’ game, and this is true even within the generic market where these manufactures will sometimes subvert the last 6-12 months (or more) of a product patent solely for the sake of being the first generic on the market – the benefits of this tactic far outweigh the punishments.  This practice should be eradicated via stiff fines and withheld approvals.
• Limit (if not eliminate) pharmaceutical advertising.  In many respects pharma companies have become marketing companies.  Ads instill a name brand product so that we’ll ask for it by name and continue to ask for it as it loses its patent or is slightly modified.
• Clearly communicate all product prices 

And so the Dave Plan takes shape.  Though little more than an outline at this stage, it represents multi-faceted approach for addressing this most pressing of issues confronting our economy and future way of life.  The idea is that change is not simply a band aid but rather a complicated and layered set of reforms each engineered in concert to rework the haphazard and evolved model we currently suffer.

I appreciate you indulging me this lengthy offering and trust that you’ll take a moment now to let me know your thoughts in the comment field below.  Thanks!

Photo By: nickandnessies

Your Turn – If you enjoyed this article, I would personally appreciate it if you would consider commenting below and/or subscribing to our Free Updates via email or RSS updates.  Thanks!

Healthcare reform is perhaps as complex an issue as we are facing in our society today – and the recent bill passed in Congress promises to further murky the waters.  On one hand, the diversity of the intertwined issues that constitute the fabric of our system may simply be too impossible to unravel.  But on the other hand, solving this dilemma may well hold the key to preserving life as we know it today.

For an introduction, I figure that’s pretty dramatic and intentionally so because I think the shoe fits.  The issues are circular and I honestly can’t imagine a more significant domestic issue both requiring and demanding our attention.

So buckle up as I attempt so share some information, resources and opinions on this dynamic topic.

Typically, I like to simplify complex issues into their component parts.  This does not remove the complexity per se, but it affords me a greater appreciation for the dynamics at play while increasing my grasp on each.

This American Life – one of my favorite podcasts – perfect illustrates this principle in a recent two-part series on the dynamics driving healthcare.  If I’ve established any credibility with some of you guys, then I want to invest it in a strong encouragement for you to grab the free downloads and give listen to these wildly informative and thought provoking stories.

More Is Less

Someone Else’s Money

At least listen to one and then make your call on the second.

In these podcasts, the diverse issues driving the healthcare debate are explored via storylines in which, for example, they colorfully explore an amazing series of events that led to today’s employer based system, which is the answer to the question asking what Texas school teachers, the depression, WWI, and committee tax rulings have in common – for those unwilling to wait.  The episodes also elaborate on how often those affecting the most good on and within the system are also the most vilified.  Ironically, as is demonstrated in the show, we as consumers are often our own worst enemy – sometimes knowingly but mostly not – when it comes to running the system off the rails.

Here is how these seemingly impossible statements are manifest as fact.

The American health system as it exists today is comprised of 4 primary players – Physicians, Pharmaceuticals, Payers (Insurers), and Patients.  Each publically embraces an egalitarian agenda but each also maintains objectives relative to their personal preservation.  At times, these duel pursuits abide in harmony but frequently they collide, leading to less collaborative and more manipulative behaviors.

Physicians

Our physicians have a mandate, an oath, to work on our behalf to protect and heal us.  They dedicate huge portions of their lives to the study and training to perform against their objective as well as humanly possible.  But at times the system seems designed perpendicular to this outcome. 

A myriad of impossible and ever evolving codes assigned to the granular specifics of our ailments must meticulously and perfectly be registered in order for physicians to be paid for the services they render on our behalf.  The complexity drives increased staffing requirements and mistakes and rework and corruption potential and widget-cranking-like patient care.  Drug manufactures dispatch product reps to promote their latest wares and in this charge they enjoy the unprecedented luxury of not having to disclose their product pricing.  Value is easy to both sell and perceive when no price tag is attached, and this quirk is made possible because the system is designed to pass the bulk of the, not insignificant, cost burden to the insurance companies.  Besides, exact pricing is nearly impossible to know due to the vast array of products, dosage options, indications, and payer-specific pricing contracts and it is often not a consideration for the treatment providing doctor.

Pharmaceuticals

Big Pharma is the research industry driving tremendous advances in medicines.  As our life expectancies continue to increase, we have modern medicine to thank.  When we find a cure for cancer, it will be the end result of billions and billions of Big Pharma dollars spent in search of this medicinal Holy Grail.

Having worked for years with pharmaceutical manufactures, I have a keen appreciation for the mantra that the first pill or dosage unit of a publically consumable medication costs roughly $1 billion to produce while the second might cost only a dime.  Accounting principles treat the cost distribution differently, but the truth remains.  Huge investments are made in this boom or bust industry where a company’s stock value is a clear function of the depth and maturity of its product pipeline.  In fact, much of the consolidation this industry group has experienced over the last 10 years has been mostly about pipeline takeover.

In my estimation, the darkest of the gray areas exists in this arena and justifiably so.  Inventing a new and viable medical compound is not as precise as updating a vehicle model year over year.  It is a mystery and profits must be wrung from the process to ensure the ability to conduct future research.  But how much profit is too much and how are research budgets allocated?

Further complicating the question is the harsh reality that rare but medically advance-able ailments are sometimes evaluated against their profit potential rather than the localized good that may be brought.  It is easy to characterize the situation as a classic ‘greater good’ dilemma with research budgets allocated against ailments impacting a larger population.  It is equally valid to question the politics of medicine today if felled by a rare and less researched malady.

Payers

Insurance providers are the easiest to paint as villain.  Doctors treat and drugs medicate but insurance companies push paper and too often, so it seems, draw tight the purse strings.  But this is a simple and unfair characterization.  In a mega industry like healthcare, the simplified role of our payers is to manage the flow of data and oversee the exchange of dollars.  And that’s not to mention that insurers are staffed deep with good people that genuinely care for their “covered lives”.  Again, knowledge gained from my years working with several name brand coverage providers.

As the cash flow conduit – they collect our premiums and pay our claims – they are uniquely positioned to help drive down, or at least manage, costs.  They ensure correct medical coding, incent low cost medical and drug alternatives, and staff more MDs and registered nurses than you might imagine in an effort to help manage our care and assess the medical necessity of a prescribed course of treatment. 

For example, drug co-pays were for years used to incentivize patients to select a perfectly equivalent generic in place of a name brand product slightly modified to extend its patent protected high prices.  But this tactic designed to benefit the collective, has been subverted by, among others, a pseudo informed patient base trained to clamor for name brands and eschew generics as if comparing Oreo’s and Hydrox.

Patients

Enter the most vexing factor in the equation – us.  We have the most vested interest, not in healthcare as a whole, but in our healthcare as a being.  Yet, often our actions (think diets and exercise regiments), do not lend themselves as evidence to our own cause.

We have historically unprecedented access to medical information, which often does us more harm than good.  Consider the illustration offered by The American Life of “Medical Student Syndrome”.  It is a registered, certifiable, defense-able syndrome whereby medical students, after investing countless hours in the study of disease and sickness will begin self diagnosing all sorts of rare ailments and maladies simply as a result of their proximity to the data.  How much more then, do you think the general public will cultivate phantom symptoms and diagnosis when they are doing a medical word search on a phrase like “flu-like symptoms”?  Or, even more precarious, are bombarded with marketing campaigns designed to illicit fear and consumer actions.

That this access to knowledge drives us to the healthcare provider community for either treatment or validation is itself a good thing.  Illnesses are being found earlier which affords a greater array of treatment options, which in turn, drives more positive outcomes.  However, it is the attitudes we now carry with us to the doctors’ office that wrecks the most damage to the global cause.

Having spent an hour, or day, or even week investigating my case, I am prone to question my doctor’s judgment, never mind his years of study and experience.  In this instance, we are talking about MY healthcare, not that of the anonymous collective.

In this moment, in our society, I, as the patient-consumer, hold the ultimate trump card – legal action.  Run this expensive battery of tests I learned of on the internet, I demand, meanwhile, ignoring my doctor’s 99.99% confidence rate that it is unnecessary.  Flush with my own sources of knowledge, I know I am unique, I am an exception, I am me., and me (I) will sue as hard as the day is long.  So this leaves our physician with a decision that is at once impossible and obvious – short sell my experience and knowledge and oath to heal, or order another battery of tests that, rather than simply costing me nothing, will provide me with more complex codes to log, ensuring me a fatter check from your insurance company.

And so our modern day system continues to spiral off its axis.  Factions forced into coexistence fighting against each other and sated only by the flow of money – other people’s money.  But the system is failing us.  The richest economy and most advanced medical capabilities in the world support a healthcare system that has feasted on itself for so long that it is beginning to implode.

The reality is that in America, we spend 50% more on healthcare than anyone else in the world but our results are substandard.  Infant mortality ranks 45^th (behind Cuba) and life expectancy ranks 50^th (behind Bosnia).  At our current growth rate, within the next decade, it is projected that the average household will spend more than half of its income on healthcare.  It is an untenable outcome desperately within our grasp.

Which circles us back to my now not so over the top introduction; we are faced with an impossible issue which we must solve immediately.

Stay tuned, as next time I’ll share my thoughts on how we might begin addressing the issue.

Photo By: 96dpi

Your Turn – If you enjoyed this article, I would personally appreciate it if you would consider commenting below and/or subscribing to our Free Updates via email or RSS updates.  Thanks!

Several weeks ago I debated the notion of writing an article on the Cash for Clunkers program.  With a flair for the dramatic, I was going to title the piece “Subsidized Death Spiral”. 

I trust, given the prospective titling, my position relative to the program is clear even sans a 750 word exposition. 

But alas the program came and went and no article materialized.  That’s mostly ok, as I don’t feel beholden to headlines to inspire my regular writing unless it frames a unique angle or otherwise motivates my thinking.  On Sunday morning while surfing the web, I was struck with just such a story – thanks CNN.com!

It seems that our government, a player in the auto industry since way back in the days of March 2009 has mastered the nuance of the industry and its trends such that it feels justified in publically chastising an auto industry veteran, and leader, and consumer advocate, Edmunds.com.

In what presents as a form of democratic censorship, the U.S Government blogged – just think about that for a moment – an article attempting to debunk a researched study released by the 43 year auto industry veteran decrying the effectiveness of the program.

While the Edmunds.com article seemed to suggest that the overall health of the industry was improving, surely a welcome development for those dependant on its well-being, our government seemed more interested in preserving or propagating good will towards its flawed environmental program.

Interesting, and disgusting, and our tax dollars at work.

Photo By: rejuvesite’s photostream

Your Turn – If you enjoyed this article, I would personally appreciate it if you would consider commenting below and/or subscribing to our Free Updates via email or RSS updates.  Thanks!

Related Articles I enjoyed:

Cash For Clunkers, RIP

If you’ve been reading here long, you might guess that I am no fan of social programs.  However, I am a fan of taking advantage of opportunities as they are provided… provided your use of such  offerings is moving you in a positive direction.  A personal example I’ll share related to Obama’s spending plan or stimulus attempt back in the first of the year. 

Part of this program allowed for the government sudsidy of COBRA payments and as I was between jobs at the time, a 60+% reduction in our monthly insurance payments was a nice benefit.  To have refused would have been foolish… it was offered, it was legal, it was helpful.

Similarly, the tax credit offered to first time home buyers is a unique opportunity for those who both qualify for the program and who can actually afford to purchase a new home.  Prices are low and rates are low and a home is a fantastic investment over the long haul.  It is not the right time for everyone, but for some it is a great time.

For this reason, I want to pass along some information about this program.  Enjoy!

If you have been waiting to take advantage of the low mortgage rates currently available, now may be the time. The economic stimulus package currently being pushed by the Obama administration includes an $8,000 first-time homebuyer refundable tax credit for qualifying buyers who purchase a home between Jan. 1, 2009 and Nov. 30, 2009.

Homebuyers cannot have owned a primary home within the past three years in order to qualify as a first-time buyer and you must make less than $75,000 if single, $150,000 if married. The house that you purchase must also serve as your primary residence for at least 36 months or you will be obligated to pay back the credit. Applying for the credit is very easy- all you have to do is claim it on your tax return and no additional papers or forms are necessary. You don’t have to wait until the 2009 tax season comes around in order to get your $8,000 credit. Once you complete the purchase of your home you can get it sooner by filing an amended 2008 return.

Time is beginning to run out (the deadline is November 30th) and whether congress will extend the credit is still very much up in the air. The program so far has had a tremendous impact on new home sales and housing prices throughout the country as evident in the latest Case-Shiller index. The index showed the first increase in national home prices in three years with the National Home Price Index rising 1.4%. It will be interesting to see what direction housing prices will take in the months ahead, especially if congress decides to extend the program.

Thanks for readng along.  I hope you’re take  minute to leave me a comment below or click over to the site (if you’re reading from email) and let me know what you think of this content as compared to my typical materials.

Photo By:  LessAllan

“The Biggest Recession since the Great Depression” seems to be a favored storyline and the media has certainly had its fun with the premise.  Yet so much of it is tired and breathless drivel.

But featured in the May issue of Smart Money is a smartly correlated discussion of the then and now.

The idea is simple and elegant and seemingly impossible:  Find former brokers that actually worked on Wall Street during the Great Depression and report their opinions on the realities of today.

But this is no simple task.  Shameless pun notwithstanding, this is a dying breed.

Nonetheless, three such experts were identified and in age they ranged from 92 to 103.

Now my intent is not to rob your enjoyment in reading the full article so I’ll simply share some of my favorite points.

• All 3 are still actively managing funds today – albeit with lighter schedules
• 2 of the 3 worked with Benjamin Graham, known as the father of value investing and author of Security Analysis. (if you require further endorsement of Graham and his work then consider that Warren Buffet is also a Graham disciple)
• All 3 favor running numbers and churning through annual reports rather than summarized analysis and computer models which fuel many of today’s market experts
• A bargain does not equal a sure thing
• Stock Market news in the Great Depression was not widely reported because only 10% of the population was invested in the market – or only the wealthy… hmm – my commentary…what does this say about the long term viability of current trends of taxing or punishing the rich?
• Today’s economy doesn’t compare to the 20’s and 30’s due to its diversity… back then the economy relied on only a handful of industries – banks, railroads, utilities, and oil companies, whereas today our economy is additionally fueled by giants in the technology, healthcare, and services arena… hmm – more of my commentary… how might we expect solutions of yesteryear to save us today?
• “If investors today were a little less emotional they would see that this could be a good opportunity” claimed one of the experts heralded by Warren Buffet as a “Super Investor”
• One contributor railed against consumer debt and “the deteriorating caliber of our political leaders” in the early 2000’s – when he was in his late 80’s

So what do you think?  Are these old guys on to something or are they past their time?

Photo By: onohoku

There’s a new rash of bad behavior streaking across the American landscape – Voluntary Repos… people are willingly allowing their cars to be repossessed and some are actually walking away from their homes, and mortgages, simply leaving the keys on the kitchen counter.

The irony should be lost on no one that this wave of bad behavior comes on the heels of previous bad behaviors – namely buying crap that could not be afforded in the first place, but that’s another story.

Instead, my intent here is to share my perspective on why a voluntary repossession is a bad idea on the basis of both personal accountability and simple mathematics.

Personal Accountability

This one should be easy, but I suppose if that were truly the case the larger topic would be moot.  Today folks are walking away from purchases because they are no longer convenient.  I think this should be a crime.  Folks are walking away from homes not because the payments are suddenly too high, but because the house is no longer worth what it once was.  Are you kidding me?  Is there a better example of gutless, irresponsibility in our society today?

Where has accountability gone?  I sign-up for the deal, I have an obligation to see it through.  I’ve never seen a mortgage with an “inconvenience clause”.

The decline in the housing market is exposing the inner selfish idiot in many folks.  Yes, housing values are down today, but they’ll be back.  There is simply too much history to think otherwise.  For generations these same folks have been comfortable with the idea that new cars drop at least 40% of their value in the first 2 years of ownership – with no hope of that value ever being recovered.  Why react so haphazardly when the housing market takes an odd, but correctable, turn down such a familiar and well worn path?

Intersection of Accountability and Financial Mathematics

In the gap between personal accountability and the simple budgetary math of inflows and outflows there exists an odd formulaic model originally designed to assign a value to our fiscal intelligence.  Yes, I’m talking about the good ole Credit Score.

So there is no surprise that walking away from debt – defaults, foreclosures, repos, or the like are crater-making events to your score.  Simply put, you have behaved badly in your financial dealings and now your credit score will reflect those misdeeds at least 7 years into the future.  Or well into the next boom period during which the pockmarked face of your credit score will severely limit your ability to enjoy the ride.

Check the Math

Voluntary Repos are simply bad math.  If I owe $20,000 on a car but can only sell it for $15,000, I find myself $5,000 in the hole.  In reality, I have a $15,000 asset and a $5,000 unsecured debt.  But this arrangement, as self induced as it may be, isn’t working for me so I’ll just return the car.

All is good, now I have a clean slate and can start over.  Until the court summons arrives and I find the dealer or finance company has sold the car for only $10,000 and sued me for the $10,000 difference.   Hmm, now I have no car and a $10,000 judgment against me.  Exactly how was this supposed to be better?

Alternative Solutions

Are there alternatives?  Well of course there are.  The very premise of this article is on Voluntary Repos.  Why not grow a backbone and opt for an Involuntary Repo.  Sometimes you’ll fight and still lose, but never as badly or with the same certainly as rolling over and not fighting. 

Be an adult and make the payments if you are bailing simply due to an inconvenience factor.

If you want or need out bad enough try to sell the asset, then lower your price until you find an interested buyer.  If you’re dealing with a house, attempt to score a short sell with or without recourse.  Similarly with the car, try an offer in compromise or sign an unsecured loan for the outstanding balance.  Borrowing from my previous example: every time I’d rather owe $5,000 than $20,000.

Take on extra jobs and call your debt holders daily trying to negotiate better terms.  Basically you need to fight, fight , fight to improve your situation… and isn’t working hard to better your status something of a theme in this life?  What happened to grit and the American way?

Interesting News Item

As something of a bonus, I also want to share an interesting news piece that was recently reported on NPR’s Story of the Day.  It seems that a new trend is emerging in the world of bankruptcies.  Some banks are simply refusing to accept homes abandoned by the owner.  In this cases, the bankruptcy is incomplete leaving both the owner and mortgage in place.  In extreme cases, owners are being fined by local municipalities for upkeep violations due to the decay of the abandoned property.

I personally think this approach, in cases of abandonment, is genius.  Banks should not have an obligation to clean up someone’s mess when that individual is not also involved in the clean-up process.  If I’m working extra and trying to arrange short sells then I’m trying to do everything possible to mitigate the situation.  I am at least trying to partner with the bank to resolve my issue.  Alternatively, if I just walk away I’ve essentially asked the bank to clean my dirty diaper.

I don’ think the banks should be required to perform such duty in these cases and I would love to see stronger legislation in this area.  

Photo By: akashgoyal

Your Turn – If you enjoyed this article, I would personally appreciate it if you would consider commenting below and/or subscribing to our Free Updates via email or RSS updates.  Thanks!

Much has been written about the recent stimulus package.  At first I committed to not writing about it because I did not have much more to offer.  I have since changed my mind and offer small doses of my perspective in this exciting installment.

Stimulus Musings , in bite size offerings

When you consider that debt played such a critical role in the genesis of this financial debacle, is it not worth 15 seconds to consider that heaping mounds of new debt on top of the problem is perhaps not the best solution?  This is not a hole we can dig out of.

Huge bushels of the bailout dollars are going to state and local governments to help stimulate the economy.  …wait for it… yes there it is.  Local governments are not exactly pictures of efficiency.  When was the last time you visited the DMV?  And can you even look at a fat, puffed up, red-faced local politician and NOT envision at least some level of whitewashed corruption?  Yes, it is a stereotype but for a reason.

Even when state and local governments spend money on infrastructure they often get it wrong.  A perfect and recent example is in Atlanta where I-75 north was under construction for over a year so an extra lane could be added, and it was needed.  When the new lane opened it was quickly obvious that the math was wrong.  The roadway noticeably slanted towards the median and the guardrails appeared to lurch into the roadway.  Within days the number of wrecks increased and within weeks the new lane closed.  Now we have an extra large shoulder on the left side of the highway.  Untold millions spent for a new shoulder on the highway?  And these guys are charged with rebuilding our infrastructure AND stimulating the economy.  Moma mia is right.

Are you hearing the manner in which the media is boasting how the stimulus funds will be used by state and local authorities?  The money will be used to cover existing deficits.  That tells us that we are borrowing from the inefficiencies of the federal government to pay for the inefficiencies of state governments.  It also tells us that a vast majority of these dollars will be spent on pre-existing budget initiatives.  In many instances the number of true dollars being spent or projects being funded will not increase but rather the ineptitude of local government will be paved over by the great infrastructure plan of 2009.  Yes, the pun is intentional.

Alas, my favorite, the tax deduction for new car buyers.  This is so rich I hardly know where to begin.  I suppose the obvious nod goes to politics-as-usual, something in which this leadership group vowed not to participate.  So obvious is the stench from this glad-hand to the Michigan delegates.  But even more transparent is how this piece of legislation assumes, is counting on for its very success, the idiocy of the electorate.  Real people across the economy are struggling and the pick-me-up the government offers is a tax credit on the purchase of a new car.  Is that supposed to be punch line?  A tax credit on, next to time shares, the worst purchase a person can make?  Really, that’s what you have.  A tax credit for a horrible purchase (new cars lose roughly 40% of their values within the first 2 years) to help prop-up an industry running a failed business model, which, by the way, we are also bailing out too?!?

This is wired to fail AND make the government look good.  Screen writers have never been so creative.

In the end, we appear to not comprehend that the true nature of a bailout is to get the water OUT of the boat.  Rather we have a centralized government borrowing money from our future to cover the inefficient debt-riddled local governments meanwhile we offer incentives for the citizenry to take on more debt in a effort to prop up car manufactures.  All the while no one has an interest in actually plugging the hole in the hull.

To be sure, this ‘plan’ will generate jobs.  There’s simply too much money been tossed around for that not to happen.  But drug use, forest fires, and liquor store robberies create jobs too, just not the kind that help to propel society forward.

Photo By: AgitPropDevices

Your Turn – If you enjoyed this article, I would personally appreciate it if you would consider commenting below and/or subscribing to our Free Updates via email or RSS updates.  Thanks!