Category Archives: Essay

Value and Choice

When I think of all of the businesses that I might want to be involved with, the airline industry is down near the bottom of my list.  Massive government intervention, public ownership, reliance on a wildly fluctuating fuel cost, overcrowded marketplace, customer service nightmares, unionized unhappy employees throughout the organization.  Wow! But it still amazes me that the executives in charge of the majors take their eye off the ball so often.

Doug Parker, president of US Airways, crowed that the carrier was making $400 million per year on ancillary fees.  Never mind that the industry continues to lose money.  Never mind that US Airways lost $100 million in a recent quarter and saw its revenue drop over 13%. United Airlines makes $14 per passenger in ancillary charges, but lost $382 million in Q1 2009.

Never mind that the average consumer is tired of being nickled and dimed – window seat, head set, cut in front of the line, extra 5 inches of legroom, snack, soda, more miles, checked bag, overweight bag, travel on a busy day, talk to a ticket agent, redeem a frequent flyer award – all of these cost extra on at least one major airline (excepting Southwest). The whole travel experience is now so convoluted that some people have decided that the hassle of air travel is just not worth it.  I have had 4 opportunities this year to travel that in years past I would have chosen to fly. Not this year… my rule has become only fly if necessary.

From a customer service perspective it is a disaster.  Every time you need to talk to the company, they want your credit card.  Their eagle eyed bean counters (and remember that I usually love bean counters) are crowing about the new revenue, but aren’t looking at how many people have stopped flying.  That seems to be to be a bigger issue.

I mentioned earlier that Southwest has not moved to a la carte pricing.  They haven’t had a losing quarter this year.  Maybe that should tell the bean counters something.

Even in areas outside of the airlines, we see the same “logic”.  I tried to buy college football tickets online last week.  The website gave me two options for delivery. Print them out at home for $6 or pick them up at Will Call for $3.  In neither case, did the college incur any significant additional cost, but there was that ancillary charge.  Guess what, I didn’t purchase the tickets over the internet.  Oh well.

For those of you out there looking to break down your pricing to provide a more a la carte menu solution, I would recommend really investigating whether you will achieve the goals that you hoped by doing so.  You may be much better off by playing the Southwest to the majors.

Go for the close

Recently, as part of some non-profit work I have been doing, I have been to two banks.  The purpose was to redeem CD’s that have matured.  These are not small accounts.  One was for low 5 digits and the other low 6 digits. Small community bank and mega-bank.  From the outside, not a whole lot of similarity here.

What was amazing to me was that no one at either bank asked if they could do anything to keep our account? Can I tell you about our new CD rates?  I would be happy to match the rate for any local bank. Nothing.  Just typed up the cashier’s check and handed it to us. I know that the banking business is in such a difficult place these days that I was floored that no one tried to keep an existing customer from leaving.

But hey, what do I know, I am not making the huge bucks running a bank.  I am sure that they know way better than me.

So, if you don’t run a bank, take my advice.  Ask people who are leaving “Is there anything that I can do to keep you as a customer?”.  Fix the problem or make a better offer.  It has to be cheaper than signing up a new customer and you have the possibility of someone like me writing a very different blog post about you.

Health Care Solutions: Insurance Companies

The biggest issue in the health care debate is the effect of the insurance companies on delivering health care to the American public. The challenge is that the insurance companies are not interested in facilitating the delivery of quality health care.  They are interested in delivering profits to their stockholders and high compensation to their leaders.

I am a capitalist.  I believe that companies should make profits and distribute the earnings to their shareholders.  However, most companies have the requirement of competing in the marketplace.  If customers don’t like their product, sales will decline and so will profits.  There will always be a small upstart to provide the nudge to make products better, cost efficient or more universal.  Even in the supposedly “too difficult to break into” automobile manufacturing industry, we see upstarts like Hyundai and Tesla pushing the big guys to do better. Currently the insurance companies average around 30% of their sales in administrative, marketing and lobbying, commissions and profit.  With a clear competitor in this space we would see that 30% decrease pretty quickly.

Now, when is the last time you heard of a new insurance company?  The insurance business is all about aggregating the risks of many people to lower the overall risk to an individual.  It is impossible to start a new insurance company, because you need a sufficient base to spread the risk. So, we have a situation where there is no real competition in the insurance marketplace. This has led to insurance companies taking advantage of their customers. In fact, in some ways, it would be irresponsible for them to do otherwise.  By not allowing customers with pre-existing conditions, they are increasing profitability for their shareholders.

So what is high-risk? I’m sure that you would consider cancer, insulin dependent diabetes and severe heart disease high-risk and subject to increased premiums or denial under our current system.  But what about bunions or being an expectant father or a firefighter? These are all reasons taken from underwriting standards to deny coverage. Doesn’t make a whole lot of sense to me.

How about this situation? Person signs up for health insurance.  Insurance company accepts insured.  Insurance company takes premiums. Person gets diagnosed with aggressive breast cancer in June.  Insurance company is called and authorizes double mastectomy and hospital stay.  Then the insurance company starts to review her original application.  Oops.  She has a notation on an old medical record that talks about an acne issue that wasn’t mentioned on her insurance application.  Three days before surgery insurance company calls back and rescinds authorization. Hospital needs $30,000 deposit to do surgery. Person doesn’t have $30,000.  She requests review by insurance company. Denied.  She then went to her congressman who intervened with the president of the insurance company (talk about government intervention into health care) and in October, finally the company relented and approved the surgery.  The tumor had grown from 2-3 centimeters to 7 centimeters and moved into the lymph nodes. Yikes.

It doesn’t matter if you are penniless or a venture capitalist or a doctor. You can still get slammed by the insurance companies.

The real question is “Is this the type of policy that we want our country to support?” There are those on the right who believe that what we have right now is the best that we can do.  (Sarcastic Videos) There are those on the left who are looking for a solution that will help cover the uninsurable. I am with those that believe that health care (not health insurance) is a basic human right.  But I also believe that we as a nation have to stand up and take control of our health care needs.  Health insurance needs to be used as as insurance against large claims, just as we look at car insurance.  It should not be used for small things like checkups or doctor visits.  I favor a high deductible plan that is incorporated with a health care savings program that is tax advantaged.  These products are out there today. I favor the abolishment of pre-existing conditions clauses and recission (the cancelling of policies after a serious illness). I favor the moving of health insurance from the employer to the citizen to make it entirely portable. I favor the creation of a list of conditions, drugs and procedures that will be covered as a mandatory part of the contract, so that the consumer is clear as to their coverage. And I favor the creation of an entity that will provide competition to the existing health insurance industry to lower costs and to provide accountability.  It would have to be non-profit as to not be caught under the same standards as the for-profit companies, but it doesn’t have to be government run.

Look, we don’t have to reinvent the wheel here.  Most other industrialized nations have faced this problem and developed systems that work.  They provide universal coverage and have better medical outcomes than we in the US do.  It is time to solve this mess.

Health Care Solutions: Hospitals

Hospitals are in the toughest position of all in the health care debate.  Anyone showing up in their emergency rooms are required to get health care, whether they have insurance or not.  Many people without insurance coverage use the emergency room for all of their health care needs, which strains the ability of the hospitals to provide a high level of service to their paying customers.

In addition, hospitals are at sharp end of the stick when it comes to dealing with insurance companies.  Even if a patient has insurance, if the insurance company denies authorization for a treatment or procedure, the hospital must jump through hoops to try to reverse the denial. A friend of mine manages a group of 6 people who work for a company that is contracted by a single hospital chain just to reverse these denials.  They make a very good living just adjudicating the differences of opinion between the insurance companies and the hospitals.

Hospitals do not do themselves any favors, however, when it comes to managing their own businesses.  Because most of their funding comes from insurance companies and Medicare/Medicaid, they negotiate with these companies for standard reimbursment rates, which in many cases have no basis in the actual costs to provide the service or procedure.  They do not post the prices of their services, so that the average consumer can make informed decisions.  And of course, if you are uninsured, you will pay the highest price.

Hospitals are always looking to grow, to take market share away from the other guy.  There is a strong sense that they need to buy the flashiest newest technology, the multi-slice MRI or the gamma knife.  And I think that we need to have access to these technologies as they can significantly improve the quality of diagnosis and treatment provided.  But I don’t think that every hospital in the county or state needs to have the same technology.  Heck, run the MRI 24/7.  If my doctor requires that I need to get an MRI to diagnose a serious condition, I would go in at 2am to get it done.

The technology that will make the hospital work better and provide significant patient care overall is EMR – Electronic Medical Records.  It is not flashy, but it provides the framework to allow doctors to work together and have a unified view of the patient’s status from anywhere.  This is not being implemented at anywhere near the pace that it needs to be.  President Obama is wise to have included significant incentives to its implementation.

Hospitals are in the crosshairs.  They need to maintain good relationships with physicians, insurance companies and big pharma.  They are mandated to serve the public, whether they can pay or not.  They have significant unfunded mandates from the government, accreditation organizations and insurance companies. Now is the time for hospitals to take the initiative to step out from the “Woe is me” persona and propose needed reforms to the entire health care  debate.

Facets of Entrepreneurship

There is an interesting article in BusinessWeek this week talking about the differences between entrepreneurs.  The question is whether every small business owner is an entrepreneur.  Some say yes, other definitions require significant innovation.  I think that the conclusion of two classes of entrepreneurs, replicative entrepreneurs and innovative entrepreneurs provides the most clarity and understanding.

Lately, I have been thinking along another path related to the practice of entrepreneurship.  There are a lot of entrepreneurs who are totally invested (monetarily and in all other ways) in their great idea.  They nurture it and grow it and get others to get excited by the idea.  It is all about the idea.  Now, over time, the idea might grow and become something more, but the key is the idea.  We think of Henry Ford, Jeff Bezos, Steve Jobs and Sam Walton. All successes, but focused on the grand innovative idea. These entrepreneurs typically are thought of as evangelists for the idea.

Another group of entrepreneurs are excited by the chase.  Sure the idea has to be reasonable, but the fun is to grow a business, in whatever field currently is interesting.  More times than not, the big thing here is the team.  The team is why the entrepreneur gets up in the morning and makes that extra effort to sell the customer on the deal.  People who are excited by this typically have a strong skill set in a particular area and need to rely on others to work on areas that they are not particularly well suited to. It surely matters less to these entrepreneurs what the specific “idea” is, as long as it is interesting and they have a strong, committed team to work with.

Either way, we have entrepreneurs who are building businesses. The key thing for the entrepreneur to figure out is whether they are the “idea guy” or the team builder.  Both can be successful given the right environment. However, if you try to work in an environment that is not suited for you, you are asking for trouble; trouble for the business and trouble for your professional growth.

Find out where your strengths lie and focus on finding the right opportunities on which to concentrate.

Health Care Solutions: Lawyers

OK, folks.  Let’s tackle an easy one with only one topic.

In this country, the saying goes, anyone can sue anyone else for any reason (and sometimes for no reason at all).  But medical malpractice is a specific type of tort, a civil lawsuit that has had intended consequences and unintended consequences for all of us.  So let us look at tort reform.

First, the intended consequences.  Attorneys who specialize in medical malpractice present their cases to a jury made up of regular citizens who are tasked with the job of determining the dollar value of the particular injury (and pain, suffering, loss of consortium, future salary, etc.).  Because these lay juries do not have any particular medical training (and they are dealing with OPM – Other People’s Money, i.e. the insurance company’s), they tend to deliver awards that are lottery like.  Their thinking is that if I were in that position (and it didn’t cost me extra), I would want to be as generous as possible.  The lawyers, as in most personal injury cases, collect a third of the award.  It can be pretty lucrative.

Now the unintended.  Because of the increase in medical malpractice lawsuits, doctors have been practicing defensive medicine.  According to this Massachusetts Medical Society report, 12% of all health care expenditures are for defensive medicine and costs involved are well over $100 billion annually. The costs for those x-rays, ekgs, stress tests, MRIs and blood work add up quickly.  But the doctors think, “I sure don’t want to be that guy who gets asked ‘Why didn’t you order an MRI to determine for sure the extent of the problem?’ on the witness stand.”.

So, how do we change the system?  First, we must look to tort reform, specifically for the medical malpractice arena.  Instead of using a regular civil trial with judge and jury, change all medical claims to an arbitration model with medical experts as the arbitrators.  Under this type of a program, there would be limits on non-medical claim reimbursement.

Second, we change the method of reimbursement from a medical malpractice insurance model to a model that has worked well for the banking industry, the FDIC.  In this case, each health care provider pays a fee into a pool that the arbitration panel can use to pay claims.

Doctors and hospitals don’t get off scott free here, though.  I would expect that as a part of this program, reporting on the number of successful claims will be made available for quality checking by interested patients.  This will be another area where transparency will allow health care consumers to have more information on which to make provider decisions. In addition, if physicians were incompetent, the arbitrators could (and should) take away medical licenses.

Health Care Solutions: Pharmaceuticals

Lately, I have been hearing this awful commercial on the radio:  “Have you been prescribed Lipitor for your high cholesterol?  Know that there is no alternative and that your doctor prescribed it for a reason.”  More FUD on the Health Care front.  Really, if there was no alternative, why would Pfizer spend money scaring you about changing?  What Pfizer is really worried about is that they maintain the high profit levels of Lipitor based on the high price of this drug (over $100 per month per patient in the US). The fact is that people are looking for other statins (yes, there are generics out there that do much the same as Lipitor for significantly lower prices). My bigger point is that Lipitor provides an astonishing amount of profit to Pfizer — by this account $2.86 billion dollars in 2008 that would not be generated if Lipitor lost patent protection.  Good news for the Pfizer investors, but bad news for all of the patients who are taking the drug and the health care system as a whole.

My vision is that we reduce the amount of time a drug can remain proprietary, in order to allow cheaper alternatives to come into the marketplace.  Drug companies can develop “plus” products if they want (and get proprietary timing on those), but each version of the drug should move into the generic phase faster to allow more patients to be served in a cost effective manner. Certainly some patients will benefit from the newest iteration of the drug, but a considerable number of patients would have some value from the older stuff.  I liken it to the PC marketplace.  There are some of us who need to the get the latest, greatest, hottest new products the day they come out.  Others are well served by utilizing the previous version.

Pfizer’s contention is that they work on a number of research projects that don’t work out and the profits from the big win cover some of these, but we can do better to hold down the cost of drugs.

According to this filing, Pfizer (as an example) spent 15.4% of revenue on R&D and 30.5% on selling, informational and administrative expenses.  Doesn’t sound like an R&D company as much as a marketing company to me. Lest you think I am out to get Pfizer, we can look at their competitor, Novartis.  According to this filing Novartis spent 16.9% of revenue on R&D and 35.1% on selling, general and administrative.  Again, about a 2 to 1 ratio.

So, I have another problem with the consumer advertising that Big Pharma utilizes.  These drugs are all prescription drugs that cannot be utilized without a physician’s authorization.  Why should Big Pharma advertise to consumers?  All it does is provides a way for consumers to demand that their physicians prescribe the name brand, whether or not it is the best solution for their condition.  In order to provide more profit to the pharmaceuticals, they should stop all consumer marketing and use those profits to devote to more R&D.  Think of it, no more goofy commercials with folks in bathtubs talking about ED or the advantages of Advair or birth control via patch, ring, pill or injection.  The result would be something like $10 million a day back to Big Pharma for R&D. Sounds like a winner to me.

Please start the discussion in the comments if you agree or disagree.  I’m sure there are other approaches that I have yet to think about.

Note that I am not a physician and certainly don’t take any medical advice from me.

Health Care Solutions: Physicians

It’s good to be back.  Too many distractions in the summer that just make it difficult to generate great ideas.

Today, I want to start to think about some ways that we can view the health care crisis in this country.  One problem that I have mentioned before is that the consumer is the only constituency in this fight without a lobbyist.  The hospitals, insurers, doctors, pharmaceuticals, lawyers and software companies all are paying huge sums to the legislators to push a bill one way or another.  The only way to get to a solution on health care will be to compromise. What I thought might be helpful (and sometimes controversial) would be to look at each of these constituencies and see what changes might be beneficial to the health care consumer. I would love to hear your opinions on these rantings in the comments.

Today’s topic is doctors.

We all know that they are the personal face of the health care crisis.  As the main deliverers of our health care, they are there to see the failures in our current system as we see them.  But there are lots of issues relative to this last link in our health care delivery system that can be fixed.

Today’s doctor is overworked and underpaid, at least according to her.  They spend a lot of time working to convince insurance companies to pay them for services.  They are forced to rush patients in and out in order to see as many patients as possible.  In many cases, there is not the time to get to know the patient other than as a combination of diagnoses and test results.  Is this what we really want? It obviously is not what the doctors want.

On the other hand, doctors in all specialties spend at least 4 years in post graduate study and 3 years in residency, racking up hundreds of thousands of dollars in loans.  Is this a bit of overkill for the majority of the health related needs we have?  Yes, we will still need neurosurgeons, but do we really need this level of medical experience to diagnose ear infections and perform sports physicals? We have started to see a retail physician service, brought to us by Walgreen’s and CVS, who can perform these types of low impact evaluations on a much lower cost per procedure.  I would vote to see more of these as part of our continuing care.  Even better would be if they were coordinated by the same family physician we are comfortable seeing to insure continuity of care. I understand that people are loathe to change their vision of health care provided by physicians, but this is one compromise that we as consumers need to make.

The primary care physicians are hit the hardest.  They are the ones who have to fight with the insurance companies over every decision.  In many cases, they are fighting for the authorization for procedures that they get no financial benefit from, e.g. colonoscopies, stress tests, MRIs, specific drug regimens.  Instead of being the doctor with all of the responsibility for coordinating our care and little of the revenue potential, I would vote to change the role of primary care physician to that of a project manager for each patient.  They would call in the troops necessary to fulfill the patient’s requirements, whether that was a Physician’s Assistant for that ear infection or a Cardiac Surgeon to insert stents.  The primary care physicians would get paid for the coordination and project management of each patient and the doctors that were called in for ancillary services would get paid by the procedure.

Rather than a residency program where the new doctor works in a hospital for little money and no sleep, I would propose that the residency program actually become more like an apprentice role.  Newly minted doctors could work with established physicians in their specialty and learn the business from the ground up.  One initial benefit would be that the new folks would be given the opportunity to see how a practice works, the ins and outs of insurance, billing, scheduling and all of the other myriad details of a modern physician’s world.  Sure, the aspiring cardiac surgeon would scrub in on surgeries, like they do now, but they will do it under the tutelage of a teaching physician with whom they will have the opportunity to grow.  The doctor, rather than the hospital, takes on the role of teaching the physician.

Lastly, we tend to venerate doctors in our culture, from Marcus Welby to Dr. Kildare to Dr. McDreamy.  And doctors have done a ton of good, no question. But, the doctors have read their press clippings. Especially the specialists. My friend Sandra reminds me that one of the big issues with physicians is that they are simply greedy.  Fast Company had an article that claimed new primary care physicians make an average of $186,000 per year and orthopedic surgeons make triple that.  Yes, they have college loans, but these are not minimum wage jobs.  This is not practice income; this is salary, after insurance and office help and tongue depressors are paid for. Unfortunately, this problem will take time to fix, if we are strong enough to try, as a whole new generation of physicians will need to be introduced to these changes.  But it is critical that we as consumers understand the economics behind our health care and this is an area of concern.

Banking Etiquette

Banks have gotten a bad rap over the past year or so.  But in truth, they are the linchpin of our financial livelihood as entrepreneurs.  If you accept credit cards, you need a bank.  If you pay payroll taxes, you need a bank.  If you want to pay your employees using direct deposit (or even the quaint paycheck), you need a bank.  Most vendors still require that you pay them using a check.

Banks also can provide loans for businesses.  These can be asset based loans, lines of credit, mortgages, long and short term.  And this is where businesses can get into trouble.

While most business owners think of their checking accounts and loan accounts as separate entities, the banks do not.  So if you have missed a couple of payments or have just exceeded your loan covenants, the bank can, without warning, clear out your accounts to fulfill the terms of your loan agreements.  And if you have a personal guarantee, they can tap into any personal accounts you might have at the same institution.  Talk about a kick to the head…

I have a few suggestions to try to make this less of a potential issue for you:

  1. Build a good relationship with your banker.  Meet quarterly with him or her.  Take them into your business and explain what goes on.  For sure, tell them the good news when you sign a big deal, but just as critically, let them know when things aren’t going so well.  The more you communicate with them the better you will be.
  2. Don’t put all your eggs in one basket.  Keep your personal accounts at a separate bank.  Keep transactional money at the primary bank, but keep other long term cash somewhere else.
  3. Understand your loan covenants.
  4. If you don’t hear from your banker, or they don’t return your calls, don’t consider this a good thing.  The last time I heard about the money transferring process was 2 weeks after hearing “Oh yeah, I haven’t heard from my banker at BigBank in 6 months.  I’m guessing that they have forgotten about us.  They must have bigger fish to fry.”

When this happens, everyone gets upset at the bank.  How could they do this?  In reality, the bank is just trying to forestall the worst outcome for the bank, a complete loss of the capital that they have provided to the customer. They figure something is better than nothing.  And the entrepreneur needs to understand that that is a potential outcome of the deal that they made when they accepted the cash.

Idea Risk

Sorry for the time between posts, but summer intruded and must take precedence.  I will try to get back on a better schedule, but can make no promises since I still have another month or so of summer.  But on to more meaty topics…

So many entrepreneurs (me included sometimes) have said that they would love to start up a new venture if only they had a great idea.  But is that really the case?

While I was researching a new venture idea, I came upon the thought that there were really two kinds of risk in the entrepreneurial world.  The first is Idea Risk.  That is, is the idea good enough to base a viable business upon?  The second is Management Risk, or can the team that the entrepreneur has assembled pull it off?  Of these, Management Risk seemed to be the most likely to be able to be ameliorated through judicious use of mentors, incubators and trusted service providers.  The Idea Risk seemed to be a binary decision – either it was a good idea or not.  But the more that I have thought about it, the more that I find that Idea Risk has more facets.

I have a friend who, over the past year, has met with various people and has generated at least 7 or 8 actionable ideas.  Not just “Oh you should start up a new-age car dealership” kind of wacky ideas.  But full blown creative ideas, ideally suited to the person that he was talking with, with some sense of market potential, revenue sources… the real deal. In only one of those cases, has the person taken the idea and run with it.  And she didn’t do it until she was goaded into it and provided some incentives that reduced her risk.

And therein lies the real rub.  It is not the lack of ideas.  There are tons of ideas out there. If you are looking for a great idea, check out this list of 999. It may not even be the quality of the idea, although the new age car dealership doesn’t rock my boat. The real reason that people don’t start ventures is the risk factor.  They are worried that they will not make enough money.  They are worried that their mother-in-law will not like them.  They are worried that they will lose the house.  They are worried that their friends will think them crazy for leaving a perfectly good job as a manager at IBM.

My advice to you is that if you want to be an entrepreneur, you have to get over the fear of what everyone else has to say.  If you find an idea that you are passionate about, think Bill Gates “A computer on every desktop running Windows” or Anita Roddick‘s “To dedicate our business to the pursuit of social and environmental change.” at the Body Shop, go for it with all your heart and all your soul.

I truly believe that the key word in Idea Risk is Risk, not Idea.