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Why Health Care Is So Expensive
August 07, 2007

On July 20, I wrote about the U.S. health care system that "...there's something cold and wrong with 'good luck, this is America, you're on your own' to pay $500 for a bottle of medicine that's sold for $5 elsewhere. What's un-American is a caste system that offers health care to some, but not others; a slap in the face of the once self-evident truth that all are created equal."

Rich in Lima, Ohio replied:
You are misreading "self-evident truth that all are created equal." This simply meant no one should be entitled to be king by right of birth. Our forefathers never intended nor thought possible equality of life. Equality and happiness were not guaranteed as a right in the Constitution; only the freedom to pursue them was guaranteed.

No matter what ism, there will always be those who get better doctors, better treatment, and the best technology available. If you want the best health care here in the USA, become President.

The only problem with health care here in the USA is the socialism already mandated by the federal government. And, I believe you will find the reason for the $5 prescription is because we are with our $500 prescription subsidizing the socialist health care system.

The Constitution just might be the most well thought out document ever written. I firmly believe the genius found in those few pages will never be equaled.

Sadly, it was annulled by the founders' descendants with what was supposed to be a temporary federal income tax for the funding of WWI. It is still with us 90 years hence. A review of history will show the Constitution was read with original intent until that time.

With this new found power of the purse, it became convenient for politicians to argue and expand the meaning of the Constitution for the sole purpose of satisfying their desires and the wants and wishes of their favorite constituents. Thus, we now have cradle-to-grave politicians.

Our forefathers not only feared such a centralized government but they feared any large institution with unchecked power. They would be the first to nix the idea of a federalized education system, a federalized health care system, etc. They intentionally saw the role of the federal government as very limited and via the Constitution tried to assure it remained limited.

Their genius was knowing a free people and a free market system would in itself -- with no directed funding or mandates from a government -- make the best use of resources in the most efficient manner.

Bottom line: there was no problem with health care here in the USA until politicians mandated there be a problem. Doctors in all communities charged according to the means of the patient, and a majority of the hospitals were non-profit institutions to which the wealthy contributed money for lavish buildings and the latest technology (provided a plaque was attached with their name).
Brent in California agrees:
The more the government is involved, the less we have to be involved with one another. Lose your job? The government has your check. Need daycare? Ask Uncle Sam. Hollywood elites and their ilk are nearly all lefties because it assuages their guilt. Power to the government liberates them from having to get personally involved.

The Founding Fathers knew full well the evils of government. The Bill of Rights, in fact, was never meant to have any sway over state and local governments. None. It was entirely aimed at the Federal Government. They knew well the corrupting influence of power and wanted power over our lives to be as close to the governed as possible.

The health care system could be healed by getting lawyers out of the system, by reducing governmental involvement to the absolute minimum, and by ending illegal entry to the country. What's happened is that the government has broken both our legs and is now offering a wheelchair. If we take it, we will never walk again.
Chiropractor Robert J. Manna in Rome, Georgia has some ideas on why health care in America is so expensive:
There are more pharmaceutical lobbyists in Washington than there are Congresspersons. These Big Pharma companies have tons of money to contribute to the campaigns of our elected officials.

If you put all the 100,000 pharmaceutical reps in the United States in one place, they'd make a medium-sized city. Their job is to influence the prescription writing habits of medical doctors by "educating" them while supplying them and their staffs lunches (and pens, and pads of paper, and other office supplies) for free.

One of three commercials on TV in the U.S. is a drug ad.

This country has well trained doctors, and takes more medications than anyone, yet we rank 37th among industrialized countries in health care. Why? Because we focus on sickness instead of health. The system is geared towards pouring vasts sums of money into crisis care, and very little into prevention and true health care.

Nearly a quarter of the Medicare budget is for diabetes, a disease that is often preventable and manageable through diet and lifestyle changes, especially "early" changes (when folks are younger).

Half of the bankruptcies in the United States are due to medical bills.
That's quite a claim at the end, and I decided to verify before running it. You know what? He's right.

The story broke in February 2005 when a study came out of Harvard. The Associated Press reported, "Costly illnesses trigger about half of all personal bankruptcies, and most of those who go bankrupt because of medical problems have health insurance, according to findings from a Harvard University study to be released Wednesday. . . . 'Unless you're Bill Gates, you're just one serious illness away from bankruptcy," said Dr. David Himmelstein, the study's lead author and an associate professor of medicine. 'Most of the medically bankrupt were average Americans who happened to get sick.'" I found the story archived at MSNBC.

Whether you think America needs socialized medicine or that the socialization of America's medicine is what brought us here, the bottom line is that it's downright hard to pay the bottom line.

Don't smoke, exercise three times a week, eat a carrot now and then, and hope that you did all right in the genetic dice roll.


Look inside The Kelly Letter

Apple, Health Care, and Starbucks
July 20, 2007

It's been a week since I spent much time discussing the iPhone and Apple, but the comments keep rolling in.

Here's subscriber Rory Sprouse on why the iPhone might have a chance in corporate America:
I graduated college back in 2000 and went to work for a software company, one of the products that I worked more with was a PIM and e-mail synchronization tool for handheld devices. It was manufacturer agnostic, meaning that it could sync any Palm, Windows Mobile, or WAP device to the information on any Exchange, Domino, or standardized mail server.

I was talking with a friend of mine who works for a large storage company and was intrigued to hear that he's looking for a device to replace his BlackBerry. Turns out that corporate policy is changing and his company will no longer be allowing new users to purchase and use a BlackBerry on the corporate server.

A BlackBerry is a staple in most corporations these days. It is a fairly versatile device, but it does one thing really well and that is get push e-mail: when a message arrives on the server, it is pushed to the device instantly. So if you are at your desk or sitting on the beach, a message arrives on your device right when it hits the server.

BlackBerry Enterprise Server is a middleware product. You have to have a dedicated server to handle all of the BlackBerry traffic. The server communicates with the Exchange or Domino Mail server. So, for example, I send this e-mail to your corporate account. It travels across the net and gets to your corporate server. The BES (BlackBerry Enterprise Server) has monitoring on your mail server, which intercepts the message and triggers a copy to be sent to RIM's headquarters in Canada and then it is sent over the cellular networks to your device where you get it instantly if you are within a coverage area.

So, the total cost of ownership for this service is expensive. You have to purchase the BES, a moderately powerful server to handle the software, whatever costs you incur to have an extra server on the network, and then you must purchase a license for every device, buy the devices themselves, and subscribe to a data plan for each device.

Microsoft announced Direct Push technology for Exchange some time last year. Basically the Exchange Mail server has the functionality built in to talk to phones and/or hand-held devices over a network (wireless or cellular). When mail hits the Exchange box, there is no middleware. But the Exchange box has network connections that make it just like you are on the local network, and pushes the message instantly to the device where you get it.

When I was working with this technology, we had a trigger if the device was offline to send an encrypted text message to the device to synchronize and securely download the message over the data network. I'm not sure about the specifics on how Direct Push Active Sync works these days, but it is similar.

The key point here is that the push capability is built-in to MS Exchange. It supposedly offers very robust functionality. You can send a command to "kill" the device if it is lost or stolen. It will wipe all data from the device with the command. I assume RIM has this, too, but am not sure. But the interface is 100% Microsoft so it is familiar to people. And any Exchange administrator can handle it as it is basic functionality built-in to the software that they are supposed to be experts on.

Using Microsoft Exchange instead of BlackBerry's middleware dramatically reduces the cost of ownership. You need no additional box or software for it and no additional licenses for clients. You can purchase any Windows Mobile or Palm device to use. They have the ability to wirelessly sync in real time built-in to their default mail clients. You don't have to purchase any software other than the device. The other key here is that a Palm or Windows Mobile device has additional functionality and the ability to run other third-party applications such as CRM for sales forces, native opening and editing of office documents, and so on.

Plus, most people carry a BlackBerry in addition to a mobile phone, so there's no need for the extra data service on the BlackBerry if they already have it on their phone. Most U.S. cell carriers charge less per month for device data than for BlackBerry data.

As companies discover that they can save money while getting the same functionality, we may see a trend away from BlackBerry.

There are rumors that the iPhone will have Active Sync technology built into the mail client in a near-term firmware update. People are always impressed by some of the things I can do with my Treo. The unbelievable screen on the iPhone has got to be even better. And don't discount Jobs's vision to the future to go after business users or come out with a more reasonably and competitively priced device.

Since at least one leading large Technology company appears to be moving away from BlackBerry, others might be thinking about it as well.
The iPhone could be just the device to fill the hands of people seeking a replacement for their forbidden BlackBerry. Something tells me that if such a trend got underway, RIM would adjust its pricing and methodology in order to retain its appeal, but upsets happen in business all the time so maybe Rory has identified the bridge over RIM's moat that Apple will use to break into the market.

In my July 10 article, I doubted the conclusion from Scot's Newsletter that Macs are cheaper than PCs. I wrote:
I'm not sure what to make of Scot's piece. He compares a "tricked out" Dell model to one of the Macs and comes away with the Dell costing some $650 more than the Mac, due to it needing a faster processor. Scot's analysis is good and he has the data right, I'm just not sure that most people would consider needing the top-end processor at Dell to be equivalent to the Mac in question. Technically, yes, the specs didn't line up without Dell's top choice, but I've never met anybody who needed the $3,500 Dell M170.

Most people are probably like me in that they look at the hands-on stuff more than the internals of a new machine. I wanted a 17-inch screen, separate 10-key number pad because I do so much with numbers in the stock market, and a general coolness and appeal. These days, nearly any computer can do what you want it to do as far as the internals go. None come with tiny hard drives anymore, for instance, and the slowdown in my work happens more often in my brain than in the computer's processor. So far, I haven't been able to upgrade that!

So, my own quick analysis of paying $1,400 for my HP Pavilion dv9000 17-inch when the MacBook Pro 17-inch costs $2,800 seems to support the idea that Macs cost twice as much by the way most people approach it. Also, had I taken the time to gather a few rebates from electronics stores, I could have paid less than $1,400 for the HP. That's never an option for Macs, as far as I know. Do they ever go on sale?
To that, Scot replied:
I think you missed the point that I was making. I didn't address just the very top of the Mac line-up. I addressed several parts of it, including the low end.

It's true that if the PC you have to have or can afford to have fits in between the market positions of Apple's models, then you'll be able to find something that costs only a little less (or a little more) than the corresponding Apple model -- and that flexibility may hold extra value for you. But that extra value is not transferrable to everyone. It's about your personal preference. And it also works in both directions.

It's also not an apples to apples comparison about absolute, or intrinsic, value. Most Mac users have no trouble at all picking out a model that suits them. It's not like Apple has too few models (though I do wish they had a few more). The point is that to get at the true value question you have to review comparable hardware on both sides. Otherwise, all you're comparing is price.

The only way to get at value is to level the playing field. When computer experts dissect the level of hardware in comparable products, what you find is that sometimes the Apple hardware has more value, and sometimes PC hardware does.

There is another important factor. When you look at this over time, the value fluctuates again. Computer value is always changing. So any one snapshot in time is only one data point. That's all my story delivered. Were I to do it again now, the results might change. The point is this: It used to be true that Macs were more expensive than PCs. It's just not true any longer.

By the way, my article was just about the hardware vs. the hardware. I have more coming up about the software and the real world experiences of using both Windows and Mac hardware. As a long-time Windows expert, I think I have a far more objective viewpoint on this than most people writing about it. The honest truth is that Macs have picked up a good deal of steam on the software front.

And, you won't want to believe this, but Macs are far, far less problematic than Windows PCs -- even the best Windows PCs. Literally, this is true: If you count up the number of times that your Windows PC won't play the DVD, gives you an error message, freezes, requires a reboot, won't connect to the Internet, and so forth -- things that Windows users have learned to endure as if they're just the cost of using a computer -- and compare those same types of maladies on the Mac, the results are surprising:

You are three or four times more likely to experience a stop-everything-and-fix-it-or-give-up-on-it problem on a Windows PC than you are on a Mac.

I'm not saying Macs don't have issues. They do. It just happens a lot less frequently. I was surprised by how less frequently. OS X in particular has made the Mac far more reliable.
Shortly after sending me that note, Scot posted his July issue which included Mac vs. PC Cost Analysis, Part II.

He'll get no argument from me about Macs being more reliable than PCs, and I agree that it's a factor to consider when comparing the cost of ownership. I've written here before that I estimate I lose about 10% to 15% of productivity in my office due to chasing down mysterious PC blow-ups. And good luck anytime you have to network or connect anything new. Somehow, there's always a piece missing.

Perhaps Scot's right that an apples-to-apples comparison of hardware and software on PCs and Macs will show that Macs no longer cost more. I hope so, because I'm planning to switch my office on our next upgrade cycle. I've already had my fill of calls to support centers in India (which never have the answer), useless FAQ-style websites that prove none of my issues are frequent enough to be worth solving, and all the DLL registry blue screen fatal error runaround garbage to which Scott refers. My favorite recent trend is pointing frustrated users to message board systems where issues are supposed to be answered by...other frustrated users! A brilliant cost-cutting measure.

PCs have been an adventure, but I'm a switcher in the making. I just want to get my work done and never think about what happened inside the computer to make it possible. The slogan has bewitched me: Macs just work.

U.S. Health Care
Readers keep commenting on my series on health care in the U.S., spurred by Michael Moore's new film, SiCKO.

Brent Bradley in Felton, California wrote:
Michael Moore is a certified nutball, right up there with Al Gore. Please do not put any stock in anything the man says. Of course our health care system is broken. The deterioration started in the Lyndon Johnson era, with the implementation of his "Great Society." Any idea how people were cared for in the pre-Medicare era? It was called charity and all doctors practiced it. In fact, before LBJ, a medical doctor was an upper middleclass profession. With the "Great Society" came an infusion of government money, along with all the bureaucratic redtape. It's been downhill ever since, made even worse with Bush's Prescription Drug Plan.

I also refute the claim from one of your readers [Robert J. Manna in Rome, Georgia, whose comments appeared on Wednesday] who says there is no emphasis on "health care," only crisis and treatment. Every day there is news about the benefits of eating right, exercising, forgoing processed foods, etc. There are constant reminders to have one's breasts or prostate examined. Mostly we ignore it and then look for a scapegoat when something goes wrong.

I'm very sorry about your mother's horseback riding accident, but even that was preventable and shouldn't be a burden on taxpayers. Hopefully people that love your mother will do all they can to help. Beyond that, hopefully her church, horseback-riding friends, etc., will step up. Sucking on the teat of the government is anti-American and anathema to freedom.
America is indeed blessed with a strong spirit of charity. The mountain communities of Allenspark and Estes Park, Colorado, did come forth to help my family during my mother's time in the hospital. The refrigerator was always filled with homemade food, a church established a paid account at a local gas station for members of our family to make the long drive to Denver without worrying about the price of filling up the tank, and people organized fundraisers that we all attended.

But, is it really a wise national policy to expect such efforts to happen every time a person is involved in a catastrophic accident? Can little Allenspark and Estes Park be expected to raise $2 million at a chili cook-off sponsored by the Caring Allenspark Committee and held at the fire station? Of course not.

The price of health care has reached a point where ordinary folks simply can't afford it. That happened long ago. We're quickly reaching a point where even insurance companies are balking, and that means that prices are just unreasonable. The market is not working properly because external forces have intervened: lobbyists. Take them and their price fixing out of the equation, and simple supply and demand would have hospitals scrambling to offer plans that work for people. Otherwise, they'd have no patients.

As for whether it's the goverment's job to care for a person injured in a horseback riding accident or other risky activity, not per se. However, horseback riding is not the same as using intravenous drugs. Riding horses is not irresponsible any more than driving a car is irresponsible. Accidents happen no matter what. When they do, is it wrong for people to expect a safety net to catch them?

Call it socialism, call it communism, call it un-American, but it can also be called compassionate and the way of the future. What Michael Moore points out in SiCKO is that socialized health care is working in other countries, and that maybe we should think of some parts of it that might work in the U.S.

When it comes right down to it, most people probably don't think in lofty terms of free markets vs. socialism. They just want to get well. In Japan, getting well involves merely going to the local clinic with a complimentary postcard from the city where you live. The postcard thanks you for paying your taxes and suggests getting a check-up. In America, good luck.

That's the difference, and there's something cold and wrong with "good luck, this is America, you're on your own" to pay $500 for a bottle of medicine that's sold for $5 elsewhere. What's un-American is a caste system that offers health care to some, but not others; a slap in the face of the once self-evident truth that all are created equal.

Someone who's closer to Brent's way of thinking than mine is Lorraine R. in Atlanta, who wrote:
There are a few things everyone should keep in mind.

First, former Colorado Governor Dick Lamb caused a huge controversy when he said "Old people must realize they have an obligation to die." In his review of medical costs he found that the greatest percentage of medical dollars are spent on old people within six months of their death. Does an 85-year-old with a pacemaker really need a new hip? Should a 70-year-old with a catastrophic stroke really be put on a ventilator in ICU for 3 weeks?

Second, we should all own up to our responsibility to carry health insurance. I hear about the excessive cost but for most people it's about the monthly cost of a new car. There are an awful lot of luxury cars on the road. Am I to believe someone can afford a Porsche but not health insurance?

Third, malpractice suits need to be limited. [Bad stuff] happens. Sometimes babies are born unhealthy through no fault of the doctor. Sometimes operations go wrong. And, yes, sometimes doctors make mistakes. Unless it's something egregious, the doctor shouldn't have to pay for an act of God.

We've become a nation of moaners and groaners. It's always someone else's responsibility, someone else's fault. We think there's a free lunch out there somewhere and we're missing it.

Why do the wealthy and powerful come to the U.S. when they're sick if they have such great health care in their socialized medicine country? Castro was almost killed by his Cuban doctors -- they had to bring in one from Spain to correct the damage.

Michael Moore tells stories from his personal viewpoint, the truth be damned.

The fact is free competition provides the best quality at the best price for every product, including health care. Doctors should develop a "patient outcome" index that shows how well they diagnose and treat diseases and a "patient satisfaction" index that shows what patients think of the care they've gotten, and compete on those. They don't want to be judged but they do want to be free to charge whatever they think is fair. I say, let the market decide.
Next, here's Dr. Eric Chu from Canada:
I'm a physician practicing medicine in Canada who recently returned to Canada after four years of critical care medicine fellowship at Boston's Harvard Medical School.

When I first went to Boston six years ago I (and many of my peers) had a "grass is greener" perception of medicine in the U.S. But after four years of taking care of patients and seeing how other physicians practice medicine in several of the top U.S. hospitals, I have come to the conclusion that the quality of the medical care that patients receive in the U.S. and Canada are very, very similar.

About 1-2% of U.S. patients do get better necessary care, about 20-30% of U.S. patients believe they are getting better care when it is more or less the same, and 5-10% of U.S. patients don't get the care they should because they are uninsured.

Similarly, about 20% of Canadian patients believe they would get better quality of care in the U.S. than in Canada, but I think this is just a perception. Some patients do get better treatments in the U.S. through access to certain innovative treatments that are not yet accepted as standard of care and may not yet be available in Canada. Also there is better access to elective non-urgent treatments in the U.S. But the vast majority of patients in Canada get the basic medical care they need.

Both the U.S. and Canadian systems are far from perfect and both have areas in which they excel. Both suffer from the problem that health care in not cheap and patients want the best possible care for the least amount of money. The major problem with the Canadian system is that a lot resources are spent on acute care (emergency room patients, urgent surgeries, critically ill patients) and there is less left over for elective non-urgent cases.

Thus, a patient will get his chopped-off fingers reattached "for free" (there's no wait because you can't afford to wait), but the patient who needs that same operating room for his cataract surgery might wait nine months because it is not urgent.

By the way, I have read in comments about SiCKO that people wait nine months in Canada for bypass surgery. I have to say that that is absolutely not true. In Toronto, if someone needs cardiac bypass surgery they will get it ASAP -- within a few weeks. In Canada, everyone has medical coverage, in the U.S. that's not the case. In the U.S., if you have good insurance you will get the treatment you need, especially elective non-urgent treatments in a more timely manner.

There are two areas that compound the cost of health care in the U.S:

⇒ The existence of for-profit HMOs and,

⇒ The prevalence and threat of lawsuits

The Canadian healthcare system is administered by the government. It is not the most efficient system, but it is far, far less expensive. Furthermore, it is efficient for patients in that they do not have to think about getting health care, deciding what kind of health care coverage (deductible, cap, in-network/out-of-network, etc.), or worrying about whether they have coverage when they need treatment.

An article in the New England Journal of Medicine showed that health care administration is more than three times more expensive in the U.S. than in Canada:

"In 1999, health administration costs totaled at least $294.3 billion in the United States, or $1,059 per capita, as compared with $307 per capita in Canada."

The reason for this difference as outlined in SiCKO is that HMOs must make a profit and you, the consumer, are paying for your health care and for the profit of HMOs.

The threat of lawsuits is actually more damaging to medicine than the prevalence of lawsuits in the U.S. One reader [Hans Burkholder, whose comments appeared on Wednesday] mentioned a malpractice premium of $300,000 in Florida.

This year I will pay about $5,000 Canadian dollars for malpractice coverage for practicing critical care medicine and I never have to worry about my premiums going up because of any malpractice claims brought against me. But the biggest reason I chose to return to Canada to practice medicine is because of how the threat of lawsuits has negatively impacted the way physicians practice medicine in the U.S.

As your surgery resident contributor mentioned, doctors in the U.S., out of an unnecessary fear, order "reams of unnecessary tests." The system is plagued by frivolous lawsuits which have actually changed the way physicians practice. Extra tests mean extra time and effort wasted for the patient and add significantly to the cost of delivering health care in the U.S. There is something wrong when after 11 years of medical training, against your better judgment, you spend your days compelled by fear to order a test that you know is not necessary and which you wouldn't even order on your own mother.

Years ago an economics major friend argued with me that health care dictated by a free market system would be more efficient and cheaper. HMO's are the U.S. health care system's free market and the courts of law are the system of checks and balance. Because of their own self interests, neither of these systems has helped to reduce costs or improve efficiency.

Finally, I am very glad to hear that the health care system worked for you and your mother. I'm sure it makes the exorbitant bill much easier to swallow.
Very well-written, and gets to the point of the free market system being the answer. People think that because we're talking about America, we're talking about a free market. We're not. It's a controlled health care system where the laws of supply and demand don't apply anyway, so who are we kidding?

It's clear from the doctors writing in that frivolous lawsuits have to go. Litigious America is killing itself by driving the costs of health care to levels beyond reason. Any lawyers out there care to comment?

I wrote yesterday that Starbucks looks like a good value to me based on its dominant brand, good partnerships, and growth plans, and that I would look to pick up shares at or below $25. The stock gained 4.6% yesterday, thanks to my article and the market-moving power of my massive readership.

Well, it probably wasn't just because of my article. It could also have had something to do with rumors that it would strengthen its partnership with PepsiCo and develop a premium hot chocolate drink with Hershey, as reported by Forbes.

One reader, Eric, called me to task for failing to justify my target buy price:
You say wouldn't buy it above $25/share yet you make no reasoning for 25. Jim Cramer makes these claims all the time, "don't buy company X under 100." But Jim Cramer is more suited as an entertainer than an intelligent and rational investor. My question is why $25? Why not $30? Why not $23? Do you see my point? Your $25 seems like an arbitrary number, there's really no real analysis behind it. I mean, I have no idea if you think this is a 50-cent dollar, a 30-cent dollar, or an 80-cent dollar. If I'm buying a shipping company for half of its ship's scrap value, it's clearly a 50-cent dollar or cheaper, but I have no idea about your reasoning behind Starbucks. Any explanation would be quite helpful.
Ah, just when I thought I could sail into the weekend.

Actually, Eric raises a valid point. I did toss $25 out there at the end of the article without explaining it.

The stock bounced off $25 and change twice in the past month. Throughout its history, SBUX has traded at a 1.25 to 1.5 multiple to its growth rate. It's trying to hit an 18% earnings growth rate this year, but looks ripe for a disappointment. That makes me leery to jump right in, knowing full well that big pops like yesterday's are always a possibility.

Run an 18% growth rate times a multiple of 1.25 and you get $22.50. Run it against 1.5 and you get $27. Take the average and you get $24.75, slightly less than the $25 I mentioned as my target.

Longtime subscribers know how I feel about targets. They're flexible until I place an active order. I think Starbucks is ripe for a disappointment and that the stock could well get to the low-$20s before rebounding solidly and convincingly.

A chart-watcher wrote to tell me that the stock's double bottom off the $25-ish range suggests that it won't ever get to my sub-$25 target area. Funny thing is, that same chart-watcher told me the same thing about SBUX when it bounced twice off the $29-ish range back in March. Double bottoms don't always hold, and it's frequently worth looking beyond chart patterns.

I don't think there's a need to rush to buy Starbucks yet.

This weekend to subscribers: What the Fed said, why we're sitting pretty in semiconductors, how we're closing in on the stocks we've been watching so patiently, and more.

Next Week on this free site: Alternatives to my long- recommended Power Investor software, swing trading versus buying and holding, the accusation that my permanent portfolio strategies are "beyond ludicrous," weaknesses in Google's advertising platform, and more.

It's all part of what one reader called "the best bargain in the business." Tell your friends.

Have a great weekend!

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Look inside The Kelly Letter

Thoughts On U.S. Health Care
July 18, 2007

My Monday comments on Michael Moore's new film, SiCKO, and the $2 million tab that my mother's horseback riding accident cost our family last fall elicited excellent material from readers.

Robert J. Manna in Rome, Georgia:
I'm a chiropractor and I know the health care system in the U.S. needs help. In fact, it's not "health care" at all....it's sickness and crisis care. There's little emphasis on research into true health care and wellness.

Well over of 75% of the problems that plague Americans today are preventable. However, little is done to teach people the lifestyle changes that will promote wellness. There's big money in crisis care, and chronic disease, but we need to make the system less about money, and more about what's best for people. We need to end the medical monopoly that clearly isn't working.

A recent study showed that people who chose D.C.s (chiropractors) as opposed to M.D.s (medical doctors) as their primary care providers had 85% lower medication costs, had 60% fewer hospital admissions, and 62% fewer outpatient surgeries and procedures.

A major answer to decreasing medical costs in the United States is looking towards the diet and lifestyle of cultures that know best...the Okinawans, for one. They live long, prosperous, healthy lives with little need for drugs or major medical interventions.
I agree that an ounce of prevention is worth a pound of cure. In my mother's case, however, it was a traumatic event that put her in the hospital and no amount of prevention would have worked, aside from refraining from horseback riding. No matter what, though, accidents happen.

That's not meant to downplay Bob's point. A doctor friend of mine once told me that in his thirty years of practice he'd come to realize the two tenets of basic health:
  • Don't smoke
  • Excercise three times a week
That's it. He said none of the elixirs, vitamins, supplements, herbs, or other products do any better than those two bits of advice. Oh, and drink lots of water.

Longtime Kelly Letter subscriber Hans Burkholder is a surgery resident, and he sent this:
The general trend is for hospitals to get more, and physicians to get less. As a surgery resident, I follow the surgical literature. Reimbursements for many surgical procedures are now half of what they were in the late 1980s, and that is in real dollars, not adjusted for inflation. In the late 1980s, Medicare paid a surgeon about $4,000 for doing a CABG (Coronary Artery Bypass Graft), now it pays about $2,000. The same is true for many other surgical procedures as well. Even though the pay for surgeons has been cut, things such as office costs and malpractice costs have skyrocketed.

Malpractice costs vary enormously from state to state. For surgeons, Florida is the most expensive with annual malpractice costs of $300,000 per year. Minnesota, on the other hand, has a malpractice rate of $10,000 per year for surgeons.

All of this has led to several trends in surgery. Surgeons are retiring at a younger age than they used to. If you were working back in the 1980s and now you're doing the same procedures but for less money, retirement looks appealing. The other trend is that surgeons are demanding money from hospitals for being on call for their ERs. Doctors cannot unionize to stop pay cuts from medicare/insurance. However, hospitals have a strong well-funded lobby, and have been able to secure pay increases from medicare. Since an increasing proportion of ER patients seen by surgeons are self-pay (i.e. no-pay -- or a liability since they may sue you) they are trying to obtain reimbursement for being on call.

The medical system in this country is broken. Everyone expects to get a Cadillac but only wants to pay for a Buick. All the doctors are afraid of the lawyers, and therefore order reams of unnecessary tests.

I'm not sure that socialized health care is the answer. I lived in Canada until I was in my early 20s. The health care system there has problems and is not the panacea that folks like Michael Moore would have us believe.

If I were installed as dictator for life, I would make several changes to the American health care system:
  • I would modify the legal system in the following ways:
    • Cap pain and suffering pay-outs
    • Make the suing lawyer and client responsible for the defendant's legal costs and missed working time if the lawsuit is deemed to have been frivolous
    • Limit who is allowed to testify as an expert witness to true experts in the field
  • I would limit the insurance companies' ability to deny claims or disenroll patients.
  • I would institute a single central claims assessing agency to which all hospitals and physicians would submit claims. This claim would then be evaluated and approved or denied. If approved, the insurance company would have a strict timetable to make payment. As things now stand, they send you endless forms or denials. This way they keep the money in the bank longer and therefore have a higher working capital.
  • Every citizen would have a magnetized card with their entire medical history on it in a centralized database. Every hospital would use the same software and would log every patient visit into the database. There a large number of drug seeking patients in the system. They go from hospital to hospital complaining of things like back pain. An expensive battery of labs and radiographic studies are performed -- mostly to keep the lawyers at bay. The patient is then sent home with the narcotic they were looking for to begin with. With a centralized system, you could look in the computer and see that those tests had all been done a week ago at the hospital down the street. You would then save the system the costs of repeating all those tests.
This is quite a proposal. I imagine many would balk at the idea of their medical history being encoded on a magnetic card to prevent druggies from pulling a fast one, but there seem to be other benefits, such as avoiding the runaround from primary physician to specialized care people in the event of an emergency. Slip the card into the medical file reader and -- voila! -- everything the ER team needs pops up on screen where it could be viewed or printed for the rounds binder.

Paul Nixon in Houston, Texas:
I don't exactly consider Michael Moore an expert on health care but rather a film producer whose only goal is to make money. I congratulate him for his ability to make money but do not for an instant believe any of the messages he tries to deliver in any of his entertaining films. Singers should sing, actors should act, politicians should politic, environmental experts should be environmental experts, investors should invest and each needs to understand that their stage is not the other.

That stated, I pray for your personal situation with medical challenges. Medical insurance is important to have and hopefully your family will find assistance in dealing with such a large bill.
I should point out that my family is fine on the financial front -- one benefit of having a son and brother in the money business. Other families, however, don't enjoy that benefit and that's the point Michael Moore is spotlighting in SiCKO. He may not be an expert on the medical system in the sense that he's not a doctor or president of an HMO, but he's a heck of a researcher and his facts seem to be correct. That makes him expert enough for the purpose of his film.

Note, however, that CNN and Mr. Moore disagree on some of the facts used in SiCKO, according to this article, link provided by Brian Donnelly.

According to yesterday's posting on Michael Moore's site, on the other hand, is this:
CNN confirmed that all of our statistics in "Sicko" are the correct numbers from the sources we cited. Although CNN still prefers to use older World Health Organization statistics, we will stick to using this year's Bush administration stats and more recent U.N. data.
Paul wrote that the real goal of Mr. Moore's films is to make money. True, he's a for-profit entity, but there are lots of ways to turn a profit and he chose one that makes a compelling case for health care reform. I sell books for a living and I expect to make a profit doing so, but I also believe what I write and hope that the books do more than just pay me. I assume that Mr. Moore has a similar stance with his films. He expects them to turn a profit, but he also believes in their messages and hopes to see them make a difference.

John Gontarz:
I feel there are aspects of the U.S. medical system that need changing. For one thing we do need a system where the rates insurers pay for medical procedures and medications is available to all. I bet the $2 million you refer to regarding your mother is an uninsured cost. I suspect the insured costs would be closer to $200K or $300K. This is still a lot but a lot less and more manageable to many. I recently had surgery where the doctor's bill was over $5,000 but where the price paid by the insurance company was about $500.

On the other hand, I lived in England and used the U.K. medical system, have had a number of experiences while traveling in other foreign countries, and have friends who have been assigned to jobs in Canada. In all these experiences the level and speed of medical service available in the U.S. is far superior to that available abroad.

I was in Norway last week with my wife and we both had bad head colds. I tried to buy simple cold medications like Coricidin HBP, Sudafed, Dextromethorphan (Robitussin DM) and we were told at the apothecary that we needed a doctor's prescription for each of these U.S. over-the- counter medications. Likewise when I lived in the U.K. and got the flu, it took three visits to my assigned doctor along with a threat to do physical harm to the doctor on my last visit before I got medication which worked to suppress my cough and allow me to sleep and win my battle with the virus.

My friend Jim moved to Toronto, Canada with his wife and two children. The care there for his ill son was so poor and his condition was deteriorating so rapidly that he drove his family to Buffalo to get proper care for his child. His child's health was so poor that he was admitted and in intensive care for two days before he was released from the hospital. Jim feels that if he had stayed in Canada that his son would have died. From that point on, Jim drove to Buffalo for medical care.

I suspect in other countries the following saying fits well: "A person who doesn't know, doesn't know what he doesn't know." My experiences say socialized medicine stinks and I want no part of it.

In his film, Moore mentions that Cuban medical care compares favorably to U.S. medical care. I bet if there is a non-biased body out there that it would say the level of care in the U.S. is much higher than in Cuba.
The only non-U.S. health care I've experienced is Japan's, and it's been a mixed bag. Japan believes that U.S. drugs are too powerful for the "Japanese physique," so the doses are weak to the point of being ineffective.

I once broke out in hives in Japan, as I've done at various times in the U.S. as well, and I knew exactly the medication I needed. I told the doctor, and he supposedly gave it to me. In the U.S., the hives disappeared within an hour of receiving the shot. In Japan, after 30 minutes on an IV, I still had them and three hours later I thought I would die from the itchiness and returned to the doctor to complain.

Ultimately, I needed to have a doctor friend of mine sneak into the hospital pharmacy to get a bottle of the medicine I needed in pill form. She came to my home in the middle of the night with the illicitly-gotten medication, and warned me to take the pills "very slowly, just one or two at a time." I promised I would, then proceeded to imbibe half the bottle after she left. Two hours later, I slept soundly, hive free, and wondered what I would have done without the inside connection.

So, I agree with John that nowhere is perfect, but that doesn't mean we shouldn't try to fix the egregiously broken parts of the U.S. system.

For all the complaining that has gone on in my family and all the grousing about U.S. health care that SiCKO has created, one fact stands out in my mind:

The fine doctors at St. Anthony Central Hospital in Denver saved my mother's life.

Tomorrow: At last I'll get to Starbucks, the iPhone, and Power Investor software.


Look inside The Kelly Letter

Google, SiCKO, and Japan's Free Trains
July 16, 2007

Last month, eBay pulled its ads from Google for one week when Google threw a Google Checkout party at the same time eBay held its eBay Live conference. It seemed that Google was trying to siphon off some of the attention being focused on PayPal, eBay's online payment service. eBay later said that during the week it ran no ads on Google, it suffered a 0% loss in traffic on its site.

That was an eye opener not only to eBay, but also to the rest of the online ad industry. A full 99% of Google's revenue is from advertising. Everything else Google -- Documents, Gears, Gmail, Earth, YouTube, and so on -- is for show. Remember this the next time you read a gushing report saying that Google's YouTube now commands 60% of the online video market in the U.S. Amazing, but so what? People with nothing to do go there to watch videos...for free. The trick is that those videos are surrounded by ads. Right now, ads are the whole profit story at Google. Any vulnerability there is a major chink in Google's armor.

I pointed out to Kelly Letter subscribers a few weeks ago that I stopped advertising on Google because its keywords became too expensive and the results unimpressive.

Come to find out, it wasn't just me. Search users are six times more likely to click the first few organic results than any of the paid results. Organic results are the ones found naturally by the search engine. An eye-tracking study found that half of all users start their search by scanning the top organic results. Another study found that only 30% of search engine users click on paid listings. Yet, between October 2004 and December 2005, average keyword prices rose from $25 to $55. Yet another study found that 57% of U.S. advertisers considered their desired keywords to be "too expensive."

So far, Google has held onto its lead in search and still commands the lion's share of online advertising. But advertisers are not stupid. If getting better placement on a search engine produces better results for less money, that's where the trend will go. Then, Google's revenue source will be in trouble as advertisers discover -- as I already have -- that other search engines turn up better results than Google's.

For instance, if you haven't tried InterActiveCorp's Ask.com recently, you should. I've written about it before and it's only gotten better in the last few months. It's faster than Google, more accurate, less cluttered, and is chock full of features that will make you say "Wow!" as you click along and use it. You can even choose your own skin for the background of the engine's home page, and it expands or contracts to fit beautifully inside your browser's current size. Google looks rusty by comparison.

Bottom line: I'm happy to own in The Kelly Letter a different online search and media company over Google for the medium term. Shares in the company we own haven't moved much since we bought, and that's a good opportunity for new subscribers. Usually, newcomers complain that all our existing positions are up too much, but that's not the case with this one.

I'll keep watching Google for a better entry price because I think the company's real story is not its advertising acumen, but its unique chance to unseat Microsoft. That potential is building and I think one day we'll look back and see the advertising phase as just the first revenue stream that enabled Google to gather resources to build a viable alternative to Microsoft Office, and ultimately Windows. That's the story I want to own, but not yet, because I think Google will get cheaper from turmoil in the ad business.

You've surely heard or read about Michael Moore's new film, SiCKO, by now. It shows that we need to take the profit out of U.S. health care. I haven't seen it yet, but I will as soon as it comes to Japan.

Longtime readers know that my mother was severely injured in a horseback riding accident last fall and spent more than three months comatose at St. Anthony Central Hospital in Denver. I flew from Japan within 48 hours of the accident to join my family at her bedside, and was in Colorado for four months straight.

My sister and I divided family responsibilities with her staying home to care for our younger siblings while I stayed near the hospital to meet with doctors, pay bills, and such. What an eye opener.

Can you guess the cost of the entire ordeal? Almost $2 million. The stack of invoices was delivered to me across the billing counter with a straight face. "OK, Mr. Kelly," the secretary said as her fingers flew across the ten-key by her side, "that comes to a total of one million nine hundred and eighty-four thousand dollars, please."

"I see," I replied. "Good thing I brought both of my check books."

Then she said, "Next time you should just say your last name is 'Enriquez' and that you're from Juarez. We have a special stamp for that. Nullifies the charges. You just walk out the door."

I just walked out the door, anyway, wondering how surreal the situation could become. When will the healthcare industry understand that nobody can afford its prices anymore? The situation is to the point that hospitals don't even expect to be paid. Hospital charges are in an entirely separate currency, "hospital dollars" instead of the "street dollars" that people use every day. Unfortunately, there's no way of exchanging one for the other. Currently, a hospital dollar is worth about 1/100 of a street dollar. Hence, what should have cost my family $20,000 ended up costing $2 million.

Apparently, SiCKO is waking a lot of people up to the idea of there being other ways to care for ourselves. Insurance companies and medical development groups need to find some way besides surreal pricing to make their profits. Michael Moore is correct that the profit motive is destroying American health care, and it's embarrassing.

Here in Japan, by contrast, the city where I live sent me a postcard thanking me for paying my taxes and offering me a complimentary physical exam. All I had to do was go to any certified health provider, present the postcard, and receive my check-up. Even as a foreigner, I received that care.

Isn't it time that America took care of its people in similar style? To hell with the lobbyists and insurance fat cats. Put the health back in health care. The current system is best described as "Wealth Care," and it's obvious whose wealth is being cared for.

Here are two good reviews of SiCKO: The first talks about how it's changing the minds of even staunch conservatives. The second suggests that it doesn't offer the best solution.

Japan's Free Trains
Today's common Japan question: "Is it true that foreigners can ride Japan's trains for free?"


This myth began because some dishonest foreigners do ride the trains for free. Even people who've been here a long time, know Japan well, and speak the language will sometimes feign ignorance at the train station. The Japanese station worker almost never speaks English, and is simply eager to get rid of the problem.

He asks, "Where from?" as in, "Where did you ride from?" The foreigner then says the name of a train station that's one or two stops back instead of the thirty stops and three train changes back where he actually started. The station worker charges a dollar or two for the short hop, and the foreigner exits the station with a nearly free train ride.

That's not possible on some express trains nor any bullet train because a conductor comes through the cars and checks tickets, but it's easy to do on local trains.

Sometimes, foreigners won't even bother with the ignorance game. They'll just walk through the exit gates to the sound of the alarm bells and keep walking, knowing full well that few station workers will stop a foreigner because of the language barrier.

Tomorrow: A little more on Apple, the state of Starbucks, and Power Investor software.

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