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What Health Insurance Is and Isn’t

March 4, 2010 4 comments

I’m not going to use this blog to stump for any particular side of the health care debate, but I want to clear up a misconception that’s been bothering me since the debate began.

Many of the arguments made for reform include comments about insurance companies denying coverage to individuals with pre-existing conditions. This has been represented as a greedy and heartless practice by insurance companies to avoid having to pay claims. This argument is being made by many who (in my opinion) do not understand the basic concept of what insurance is.

Insurance is the management of risk. Each of us lives in risk of suffering harm or illness at any point in our lives; health insurance helps us manage that risk by allowing us to pay (comparatively) small amounts of money over our lifetimes with the promise that funds will be provided for our care should such harm or illness befall us. We enter into this agreement with an insurance company knowing full well that we may never need those funds — we may pay out our entire lives and never get back. On the other hand, we may end up needing far more than we ever pay in. Several people doing the same allow the risks of these outcomes to be spread out over a larger group so that no one person bears the entire burden.

Insurance is not a discount program. It is not a way to get medical services for less than their market value. The money for insurance coverage has to come from somewhere, and there has to be enough of it available to cover any needs that may arise.

A person with a pre-existing medical condition who has to see a doctor or have procedures performed regularly will draw out more than he or she puts in. They are not managing risk, but receiving discounted care. They are denied coverage because there is no chance that their premium payments will ever equal or exceed the benefits they receive, so there is no risk to manage.

To borrow an analogy from a popular (if misinformed) YouTube video, imagine that maintaining a fire department was not one of the normally responsibilities of government. Instead, imagine that you had to pay $6,000 each time a fire needed to be put out at your home. You may never need fire service during your lifetime, or you may need it several times.

To help manage the risk, you and 9 other people in your neighborhood decide to pool your resources. You research statistics on home fires and determine that it is likely that one of your homes will catch fire in any 10-year period1. To manage this risk, each of will pay $5 per month (10 people × $5 per month × 120 months = $6,000). Your expectation is that any one of you may need to draw out this money at any time in a 10-year period. You may go 10 years with no fires, or there may be 2 fires, but at least this way the risk (and the charge) are spread out among the 10 of you so no one bears the burden by themselves.

One day a neighbor comes to you who is not part of your pool. His house is on fire and he wants to pay his $5 to become part of your pool. There is no risk to spread out here; you know that if he enters the pool you will have to immediately pay out the $6,000 to cover his bill, for which he will pay only $5. He is under no obligation to continue in your pool after he receives his money. This is what it is like when someone who has a pre-existing condition is applying for health insurance. He is asking you to pay his costs — which is not insurance, it is a subsidy.

Now I’m not saying that we shouldn’t have ways for everyone to have affordable access to health care. I’m not defending any other practices that insurance companies may or may not engage in. I am simply saying let’s stop using coverage denials due to pre-existing conditions to demonize insurers. Insurance is not a subsidy or discount program, it is risk management. If there is not a chance that you may not need your benefits, then it defeats the entire purpose and function of insurance.

Now let’s get back to debating.


1. This is of course not a real statistic and is only being used for illustrative purposes.


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How Measure 67 Will Hurt Me

January 15, 2010 Comments off

I’m a little late joining this conversation, but here is the bottom line (for me, anyway):

I was laid off in February of 2009, and my friend Scott was laid off in April that same year. Unable to find new jobs, we started a new business designing websites. We made a grand total of $1,050 for the entire year — about $300 after expenses. As an LLC, our minimum tax on that $300 that we have to split will be $150.1

I was denied my unemployment, my savings are dwindling and I have a brand new baby in the house. I don’t need this problem too. Vote no on Measure 67.

Update: Scott tells me that we did not collect that $1,050 until after the the beginning of the new year, so those revenues will be taxed in 2010. That makes our income for 2009 about -$700, and we will still have to pay $150 in taxes simply for being an LLC.




1. “2009 Corporate Tax Law Changes.” Business Taxes Home Page. Oregon Department of Revenue. 14 Dec 2009. Web. 15 Jan 2010. <http://www.oregon.gov/DOR/BUS/corp_tax_changes_2009.shtml>

Oregon Small Business Boost

June 29, 2009 Comments off

Palo Alto software is giving away free copies of its Business Plan Pro software to Oregon businesses on Wednesday, July 1st.  You have to physically walk into one of the giveaway locations to get the certificate for the free copy, but I think it’s worth it to any business that wants to write or maintain its business plan.

More details are available at http://www.paloalto.com/boost/ and http://www.paloalto.com/boost/details.cfm.

Giveaway locations in Portland:

  • African American Chamber of Commerce of Oregon & SW Washington
    4300 NE Fremont St. 3220, Portland OR 97213-1100
  • Oregon Business Network
    City Hall
    1221 SW 4th Ave, Portland, OR 97204
  • OEN
    309 SW Sixth Avenue, Suite 212, Portland, OR 97204
    503-222-2270 x13
  • PABA (Portland Area Business Association)
    Urban Grind Coffee House
    2214 NE Oregon, Portland, OR
  • PCC Small Business Development Center
    2025 Lloyd Center, Portland, OR 97232
    503-978-5088
  • Clackamas SBDC
    7736 SE Harmony Rd, Portland, OR 97222
    503-594-0738

H/T Silicon Florist



Value Meal

February 26, 2009 Comments off

I’m working with a team of three other students to perform a financial analysis of McDonald’s Corporation for a Valuation class this term.  We’re getting toward the end of the term, which means that for the next three weeks I’ll have to eat, sleep and breathe McDonald’s (kind of like Morgan Spurlock without the weight gain, or any of his numerous imitators without the weight loss).

It also means that I’m really excited that McDonald’s finally filed it’s 10-K for 2008.  I have a lot of reading to do.

The Mark Cuban Stimulus Plan

February 18, 2009 2 comments

For those of you who don’t know, Mark Cuban is a billionaire, and he has his own idea about how stimulate the economy:

Rather than trying to be a Venture Capitalist, I was looking for an idea that hopefully could inspire people to create businesses that could quickly become self funding. Businesses that just needed a jump start to get the ball rolling and create jobs. I’m a big believer that entrepreneurs will lead us out of this mess. I just needed a way to help.

…I will invest money in businesses presented here on this blog. No minimum, no maximum, but a very specific set of rules.

Mark calls his plan “open source funding,” because in order to seek funding from him, a business owner has to present their business plan on his blog with the intent that others may (and should) copy the plan in establishing their own businesses.

So far, Mark reports that he is considering funding 12 of the businesses that have been submitted on his blog, and appears to be open to more.

Can I just say that I love this idea!  Mark is actually stimulating the economy by helping build business and he’s doing it by investing, which will do much more for the economy, the businesses, and the people involved in both the long and short runs than any multi-billion dollar government boondoggle ever will.

Categories: Finance & Economy Tags: ,

The Bailout Game

January 27, 2009 Comments off

An interesting little time-waster.

H/T Greg Mankiw

Buy Low, Sell High

October 17, 2008 Comments off

Good luck trying to find anyone in the United States who hasn’t heard the advice to “buy low, sell high,” yet it’s becoming more and more difficult to find people who are actually willing to follow that advice.  That’s why I appreciate this editorial by Warren Buffet.  Read it — there’s a reason why Berkshire-Hathaway stock sells for over $100,000 per share and Buffet is considered to be the wealthiest man in the world.

An excerpt:

I’ve been buying American stocks…

Why?

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors…But most major companies will be setting new profit records 5, 10 and 20 years from now.

Something Buffet does not point out here that I will is another big reason to buy U.S. stock right now: it’s one thing that anyone can do to help the economy.  As you invest, the stock you buy becomes more scarce, and therefore more valuable.  The company you have invested in has more money for new projects and new products, which in turn generate more revenue which also increases the value of the stock.  As the value of the stock increases, other investors are attracted to buy it and the cycle repeats.  It’s what keeps the market healthy and gets you the earnings that Buffet forecasts in his opinion piece.

Once again, I can’t tell you what to do with your money and you should always seek out a financial advisor before investing.  If you want my opinion, however, it’s this: buy low, buy now, buy American.