Tuesday, October 13, 2015

Don't Die of F****** Pneumonia

One of my cousins was recently admitted to the hospital with pneumonia, and went straight into the ICU. People tend to ignore pneumonia, or minimize its seriousness. You might have even heard people talking about “walking pneumonia”. That, in technical terms, is BS. Pneumonia is a badass illness. According to Centers for Disease Control, 53,000 people died of pneumonia last year.
For those of us over 65, vaccinations are recommended, with the usual exceptions for certain conditions. And it is recommended for many under 65 with certain conditions. There are two different vaccines that cover different strains. You need both shots. Of course it isn’t foolproof. The vaccines aren’t 100% effective, and new strains emerge. Still, there is no reason to get seriously ill from a strain that a vax would have likely prevented.

If you are over 65 and haven’t had the shots, go see your doc. Don’t screw around. And if you are younger, check with your parents, other relatives and friends to make sure they’ve gotten the shots.

It’s likely that a lot of those 53,000 didn’t have to die.

Friday, June 05, 2015

Ten Reasons Stock Buybacks Are The Tool of Lazy Management

Stock buybacks are all the rage. There is even an investing newsletter called Total Yield that adds dividends and stock repurchases and uses that measure as a key criterion for investment decisions.
Despite its widespread popularity, I’m not crazy about stock buybacks. In fact, they are increasingly signs of dumb, lazy or incompetent management. Here’s why:

1.       They are frequently used as a palliative to offset bad news.  About to issue an earnings release with a sales decline and a miss to analyst estimates? Throw in a stock buyback to see if it will relieve some investor pain, or even better, moderate a certain stock price decline.

2.       It doesn’t return money to shareholders; it gives money to people who no longer want to be shareholders. Real believers in a company’s story want to hold the stock. Who sells into a buyback? People who no longer believe.

3.       It raises questions about management motives. The proxy report, with all those new government-required compensation disclosures, is now as long as or longer than the financial statements. Is management somehow incented on earnings per share growth? Even if revenue doesn’t grow? Even if earnings don’t increase- just shares decrease? Easy to bury that in those endless proxy statements.
4.       It raises this question-is this the best that management can do?  Aside from Apple and perhaps Microsoft, what company has more cash than it can readily deploy above its cost of capital? Now, I know that plenty of managers have wasted a lot of shareholders’ money on bad acquisitions (Time Warner/AOL), failed products (New Coke), and poorly executed international expansions (Target). If there is simply no place a company can find in its market space to put money to work with a reasonable expectation that it will return its cost of capital, then it is right to return it to shareholders. Otherwise, long-term holders want to see the money put to work.
5.       Special dividends are better. OK, there may be some minor personal tax rate differences. But companies like The Buckle [BKE: NYSE] and RLI Corp [RLI: NYSE] have a history of issuing special dividends when management believes they’ve accumulated excess cash. Since that really is returning cash to shareholders, isn’t that better?
6.       It indicates a lack of confidence in the future. A company sitting on a pile of cash that spends it on a buyback rather than increasing its dividend is signaling a lack of confidence in its future. It’s simple: they are afraid that they’ll have to cut the dividend in the future. Cutting dividends is always seen as a bad sign. As a result, companies hold back on dividend increases even when projections indicate the dividend can be supported. Instead, they execute a stock repurchase.
7.       Companies are horrible market timers. There is a lot of stock repurchasing going on at market tops; not so much at market bottoms. If a Board is just totally committed to buying back shares, it would be wise to use some simple timing criteria. If a company’s average PE over the last ten years is fifteen, and it is currently trading at a twenty-five multiple, it probably isn’t a good time to repurchase. But if it is trading at a price-to-earnings ratio of ten, it might indeed be an excellent time.
8.       Companies repurchase stock while sitting on other obligations. I find this one particularly troublesome. Further, elected and regulatory officials are actively aiding and abetting this behavior.  Some background: The Financial Accounting Standards Board (FASB), The Securities and Exchange Commission (SEC), the American Institute of Certified Public Accountants (AICPA) and the Public Company Accounting Oversight Board (PCAOB) share ruling-making authority for accounting principles.  Full disclosure (confession?) I’m a member of the AICPA. Collectively, those bodies have made a complete mess of pension accounting and reporting. I will wager that ninety percent of sell-side analysts have little or no understanding of companies’ pension footnotes, or what pension liabilities really are. If, however, one parses through the recondite disclosures of a company’s pension assets and liabilities and concludes that the company is including a liability on its balance sheet, one may nevertheless find that company is repurchasing some of its outstanding stock. That is, rather than fully funding a liability that reduces the future value of the business and thereby increases shareholder wealth, it gives money to folks who no longer want to hold the stock. [An example: in the 2014 GE annual report, it states that “The GE Pension Plan was underfunded by $15.8 billion….at December 31, 2014”.  It also states: “We did not make contributions to the GE Pension Plan in 2014 and 2013. The ERISA minimum funding requirements do not require a contribution in 2015”. In the letter to shareholders, GE’s describes its plans to dispose of more of its financial services business. The proceeds of that disposition will be returned to shareholders in the form of stock repurchases. In other words, while sitting with a $15.8 billion problem, it is going to further reduce equity.] Now, why would I say that officials are actively abetting this activity? Because legislation allows companies to fund to a level found satisfactory under ERISA, even though actuaries find that amount insufficient. Skeptical of my point of view? Grab a few annual reports and spend some time actually trying to interpret the abstruse FASB/SEC mandated pension disclosures. Notice how optimistic some firms are about the long-term rate of return they expect on pension assets, even though interest rates on fixed income investments-a pension fund mainstay-bump along at record lows. Finally, the Federal Reserve, by manipulating interest rates rather than let markets determine rates, has become the enabler of the borrow-to-pay-dividends movement.
9.       Shareholders can borrow on their own.  Companies are now borrowing to pay dividends and buy back stock. If I want to pay myself a dividend, I can margin my shareholdings; I don’t need a company to do it. And I control the timing. And I can sell my stock in the market anytime I like. Saddling my equity position with future interest and principal obligations to fund a stock purchase doesn’t create any value.
10.   Reflect for a moment on why corporations exist. While they predate the mercantilist period, they began to be more widely used then, as a collection of individual investors could bear more risk than single investors. That is, corporations were formed to take risks. While one might not suspect that as consultants hustle “Enterprise Risk Mangement” programs, and companies hire more risk and compliance staff than sales and marketing folks, that nonetheless is their purpose. To take risks that individuals can’t afford.
Boards and CEOs, here’s what I believe is more appropriate:
Invest in the business. Search for growth opportunities. Look for productivity-enhancing investments. Energy reduction. Supply chain improvements. New product introduction.  

Cash burning a hole in your pocket? Lousy earnings release in your immediate future and you’d like to dilute its effect on your option value? Announce an increase in the dividend. Distribute a special dividend. But true up other obligations first. Clean up any old accounts payable. Fund your retirement liabilities like grown-ups. Settle outstanding litigation.  All those things will provide us owners with real value over the long term. 

Take some risks. Like these guys: Tesla. Google. Gilead. Chipotle. Whole Foods. Celgene. Continental Resources.  Give us more of that.

-          Gene Morphis

Saturday, May 09, 2015

As happens this time of year, publishers list their most important/influential/etc. youngsters.  As an example, the May issue of Wired has “20 Unsung Geniuses”.  We think mature adults deserve recognition just as much as 20-something billionaires.  Here is our Sixty Over Sixty list of the most influential, annoying, important or folks we just find interesting.  Here then, sorted by age, is The Sixty Most Important Leaders Over Sixty.

Henry Kissinger.  Still the U.S. best thinker on foreign policy and diplomacy. His recently published book (at age 91) World Order is not only a best seller, it is extraorinary.
Jimmy Carter.  Better as an ex-President than President.  His work for Habitat for Humanity is a lesson for all of us.
T. Boone Pickens.  Oilman, energy expert.  Creator of The Pickens Plan for energy independence.
Frank Gehry.  Showing the world what new materials and CAD design can do to architecture.
Warren Bufett. Best investor in history.  Becoming one of the best philanthropists in history.
Alan Simpson.  Former Senator who, along with Bowles (below) is trying to get U.S. to fiscal sanity.
Diane Feinstein.  Influential Sr. Senator from CA.
Jack Welch. Executive, author, educator
Carl Icahn.  Activist investor.
Anthony Kennedy.  Supreme Court Justice
Jack Nicholson.  Actor
Freeman Morgan.  Actor.  “Through the Wormhole” commentator.
Yvon Chouinard. Founder of Patagonia, environmental activist and enemy of dams.
Ralph Lauren.  Fashion industry titan.
Harry Reid.  Senate Minority Leader.
Toby Cosgrove.  MD and President of The Cleveland Clinic.
Nancy Pelosi.  House Minority Leader.
William Koch.  Billionaire businessman and Libertarian.
Roger Ailes.  Founder of Fox News.
Don Imus. Radio personality, philanthropist, professional curmudgeon.
Martha Stewart.  Fashion arbiter, CEO of Martha Stewart Omnimedia.
Michael Bloomberg.  Former Mayor of NYC; eponymous founder of Bloomberg.
Mitch McConnell.  Senate Majority Leader.
Aretha Franklin.  Soul and R&B singer.
Joe Biden.  VP of the U.S.
Jerry Bruckheimer.  Co-creator of CSI, Cold Case, many others.
Joyce Meyer. Evangelist and author.
George Lucas. Motion picture producer and director; world builder.
Larry Ellison.  Founder of Oracle.
Lorne Michaels.  Founder of Saturday Night Live.
Erskine Bowles.  Co-leader of Simpson Bowles Committee. Prophet.
Harold Hamm.  Founder & CEO of Continental Resources, shale/fracking leader.
Dolly Parton.  Singer, songwriter, entrepreneur
Roger Altman. Founder-Evercore. Democratic kingmaker.
Cher Sarkisian.  Singer and entertainer.
Janet Yellen.  President-Federal Reserve Bank; arguably the world’s most powerful woman.
Bill Clinton.  Former President.  Co-founder of Clinton Global Initiative.
Stephen Spielberg.  Motion picture producer and director.
Dick Wolfe.  Co-creator of Law & Order franchise.
James Rothman.  Yale Professor of Biomedical Science; Nobel Prize Winner.
Mike Krzyzewski. Aruguably the finest men’s college basketball coach ever.
Hillary Clinton.  Former Senator, former Secretary of State, Presidential candidate.
Dick Parsons. Former CEO of Citibank, former CEO of Time-Warner, advisor to Providence Equity.
Randy Schekman. California University Cell Biologist; Nobel Prize Winner.
David Rubenstein.  CEO of private equity firm Carlyle.
Bruce Springsteen.  Singer and songwriter.
Timothy Dolan.  Cardinal of NY.
Francis Collins.  Director, National Institute of Health.
Chuck Schumer.  Sr. Senator from NY.
Rush Limbaugh. Talk show host; most influential conservative.
Bob Iger.  Chairman & CEO: Disney.
John Noseworthy.  CEO of The Mayo Clinic.
Danielle Steele.  Top ten best-selling author of all time.
Maureen Dowd.  Influential NY Times editorialist.
Martin Dempsey.  General-U.S. Army. Chairman, Joint Chiefs of Staff
Bill Belichick. New England Patriots head coach. Probably the best pro football coach ever.
Howard Schultz.  Founder and CEO of Starbucks
John Mackey. Co-founder and CEO of Whole Foods Market
Oprah Winfrey. Talk show host and most powerful woman in media
Carly Fiorina. Presidential Candidate

There were many other excellent choices, and my selection is largely arbitrary.  But I welcome your suggestions for additions (please don’t bother with deletions) and will consider them for my next update.  Post your comment here, or email gene@jobsoverfifty.

Gene Morphis

Thursday, May 07, 2015

Is Retirement Over?

Has the concept of retirement come to an end?

Retirement, in human terms, is a new concept.  Until the industrial age and the massive shift from farms to factories, there really wasn’t retirement.  One worked the family farm or ranch until unable to work.  At that point one hoped that his children would take care of him during his short remaining life.  Industrialization changed much of that.  While manual farm work was back-breaking labor (and, even with today’s highly mechanized farms, remains so), coal miners, steel-mill-hands, textile plant employees, slaughterhouse and meatpacking plant workers and millions of others had it even tougher, with serious workplace injuries and fatalities common.

Bismarck is credited with the first old-age pension in 1889. The industrial age was dawning, and Germany needed an incentive to convince young workers to leave the farm for factory jobs in the cities.  This was a part of that plan. It became widely copied in form and substance.  It is generally agreed that the qualifying age of 70 was set above the average lifespan at the time, making it more of a lottery than a retirement guarantee.  When the Roosevelt administration came up with Federal Insurance Contributions Act - e.g. Social Security – in 1935, it too set the retirement age above the average lifespan at 65.  At that point in time, the expected lifespan was 61.7 years.

Living to 80 and Beyond
Today, life expectancy in the U.S. is pushing 80.  I would project that to climb steeply and remarkably.  While there are a couple of negative factors for longevity in the U.S. , e.g.- obesity and an increasing number of antibiotic-resistant infections- there are far more positives: a general awareness of the benefits of exercise, a decline in smoking, a variety of engineering improvements in cars (air bags, seat restraints, crumple zones) and roads (replacement of anchored light posts and highway signs with breakaway posts; light reflectors), statin drugs, widespread availability of food for even the most indigent, hip replacement surgery, cancer treatments, stents, pacemakers and much more.

Dr. Aubrey de Grey believes aging is a disease and can be treated as such.  Resulting in lives that are really long.  Really, really long.  If he’s correct, some readers of this might live far beyond 100.  If there is a return to the Biblical age of Methuselah, you are going to work for a long time.  Very, very long.

Equally important, much of the most physically destructive work has been eliminated by automation and engineering changes.  Fewer bodies are being worn out by  lifetimes of strenuous labor compared to seventy-five years ago.

Household Net Worth
As someone who has been let go after a business sale, fired after a hostile takeover, and fired in a restructuring, I understand the difficulty in accumulating sufficient financial assets for a comfortable retirement.  Having said that, I’m appalled at just how little many of my generation have saved.  According to the analysis of household wealth in the most recent U.S. Census Bureau report, the median household financial assets for 55-64 year olds is a meager $41,000, a long way from funding a comfortable retirement.  Some of those households of course have traditional corporate pension plans, and others may have military or government pensions, making retirement much more attractive. And that report was prepared shortly after the recession reduced the value of most financial assets including balances in 401(k)s.  It is reasonable to assume that the long market rally would have increased these values.  Nonetheless, for many that is a bleak outlook.  But only if they stop working.

U. S. Fiscal Challenges
With the accumulated debt of the U.S. approaching $18 trillion, and ongoing budget deficits, the key social safety net programs of Medicare, Medicaid and Social Security will remain under pressure.  It is very unlikely that benefits will become richer in the future. 

Concluding Thoughts
At Jobs Over Fifty, we’ve been recommending that everyone develop a plan for the “2nd 50”, that is, a plan that assumes that individuals turning fifty today have a real probability of living to 100.  Given that, we suggest that the retirement that most envisioned in the 1960’s and 1970’s is unlikely to materialize.  Instead, we predict that many, if not most, will work into their seventies (given that some of that  might be part-time).  The evidence is strong that the most important determinant of whether or not one outlives savings is how long one works.

www.jobsoverfifty.com supports experienced workers seeking new employment or ideas to assist in maintaining their current employment.

For action-oriented ideas to achieve and maintain work performance at a peak level so that employers beg you to not retire, may we recommend Survive And Prosper, Fifty Steps to Job And Career Security?

Thursday, March 05, 2015

Amazon vs. Wal-Mart - My Annual Comparison

Here is a high-level comparison of Amazon to Wal-Mart. Note that Amazon uses a calendar year, while Wal-Mart uses a traditional retail fiscal calendar ending January 31st. I’ve compiled some numbers and ratios from each company for their respective fiscal year periods that include most or all of 2014. Therefore this comparison is slightly off. However, the comparison does include the traditional peak seasons of back-to-school and Christmas in both.
To make my job easier, I’m listing Wal-Mart first each time in the following comparisons.

Revenue: (in billions)
Absolute:  $485.6 vs. $89.0
Revenue Growth $:  $9.4 vs. $14.5
Revenue Growth %:  2.0% vs. 19.5%

There is no question that the clear growth winner is Amazon – adding $5.1 bil more in revenue in the last twelve months despite Wal-Mart’s base size advantage.  And the rate of growth is indeed impressive at almost 10X Wal-Mart’s.

Operating income: (in billions)
Absolute: $27.1 vs. $0.2
Operating income growth $: 0.3 vs. $(0.5)
Operating income growth %: 1.0% vs. negative
Operating income as a percentage of total revenue:  5.6% vs. 0.2%

While Amazon exceeded Wal-Mart’s revenue growth, Amazon managed to add $14.5 billion in revenue and not have any of that flow to operating income.

Net income: (in billions)
Absolute: $16.4 vs. $(0.2)
Net income growth $: $0.3 vs. $(0.5)
Net income growth %: 2.1% vs. negative
Net income as a percentage of sales: 3.4% vs. (0.3)%

Amazon has no income.

Cash Flow: (in billions)
Note: cash flow as presented here is: cash flow provided by (used in) operating activities. That is, net income plus depreciation, amortization and stock comp plus changes in working capital. These are taken directly from the financial statements filed with the SEC for Amazon and the earnings release for Wal-Mart.

Absolute: WMT $24.4 vs.  AMZN$ 6.8
Cash flow as a percentage of revenue: WMT 5.2% vs. AMZN 7.7%

I’ll admit that I found this percentage was particularly surprising. Given that Wal-Mart starts with a 3.7 percentage point advantage from net income, how does Amazon end up with a higher percentage?  The details point to two factors: depreciation and amortization (non-cash) account for a far larger share of revenue for Amazon [5.33%  than for Wal-Mart [1.88%] and stock compensation (again non-cash) is a much larger percentage of revenue for AMZN than WMT. (Note that Wal-Mart did not show stock comp as a separate component in its earnings release. Therefore I’m concluding that it is less material. WMT certainly has stock comp expense. I may find time to update this when it files its 10K). Given the physical store presence of WMT, AMZN’s higher depreciation and amortization is also somewhat surprising. Does AMZN have a more conservative depreciation policy?

ROIC: WMT 13.3% vs. AMZN (0.7)%
ROE: WMT 19.6% vs. AMZN  (2.4)%

ROIC defined as net income plus tax-affected interest expense divided by equity capital plus interest bearing debt. Equity plus interest bearing debt is calculated with a two point average of beginning and ending balances.

ROE is a simple net income divided by a two point average of beginning and ending equity.

Price to sales: WMT 54.9%; AMZN 200%
Price to book: WMT 3.1X; AMZN 16.6X
Enterprise value to EBITDA: WMT: 8.7; AMZN: 38.

I own $WMT. I’ve owned it for a very long time. I don’t own AMZN. 
I shop both regularly, particularly the Sam’s Club division of WMT for numerous products, and principally books and music from AMZN.  I’m a loyal customer of each. I’m also a published author on Amazon Kindle. Two titles: Jobs Over Fifty: The Guide to Finding New Employment for The Experienced Worker and Survive And Prosper Fifty Steps to Job And Career Security.

Clearly holders of Amazon are being rewarded for stellar revenue growth and industry disruption.  And one could argue that those factors require some non-traditional valuation techniques.  I would argue to the counter: Amazon is no longer a new business; it has been around now for a generation.   I assume that there is little further efficiency gain for Amazon–i t operates highly efficiently today–or that any productivity gains it achieves are likely to be matched by similar gains by Wal-Mart. Therefore, it is difficult to see how Amazon produces an attractive return on capital without price increases-which would, in turn, reduce its advantage.

There are claims that Amazon’s real value lies in its cash flow. And clearly it is higher as a percentage of revenue.  But WMT’s absolute cash flow dwarfs AMZN, albeit that much of that is consumed by dividends which AMZN doesn’t pay.

WMT’s ROE benefits nicely from years of stock buybacks thinning the equity as well as a decent level of leverage.  The resultant ROE (using an average of beginning and ending equity) is a very respectable  19.6% and ROIC, helped by very low interest rates, is a little better than average at 13.3%.  Conversely, I would argue that, while Wal-Mart can clearly handle its debt load, the amount of leverage may be hurting the share price some.

Finally, the returns on capital speak for themselves. If you have essentially no income, you have no return to capital.  If shareholders never demand a return of their capital, then I suppose there is no reason to provide a return.  A unique business model indeed.

My Position

I’ll continue to hold Wal-Mart, collect my increasingly rich dividend, and shop at both.  I predict that Amazon’s share price will come to earth at some point, but I don’t have a sufficient conviction to short it – and shorting against a billionaire CEO is too risky a strategy for me.

Thursday, January 29, 2015

Review: The Second Machine Age Work Progress And Prosperity In A Time Of Brilliant Technologies

From time to time one reads a book that is important. The Second Machine Age Work Progress And Prosperity In A Time of Brilliant Technologies by Erik Brynjolfsson and Andrew McAfee is important. In the authors’ view, the confluence of falling technology costs, increased computer processing power, cheap sensors and the quality and ubiquity of networks, are ushering in a revolution equally as potent and far-reaching as the Industrial Revolution.
Drawing parallels to the effect on civilization of the Industrial evolution, and how long its subsequent impact has continued, they see brilliant technologies in the early stage of changing about everything. They provide a historical context on the growth in living standards, starting with the domestication of the horse, development of agriculture, which led to cities, afforded great armies and so on.  Things really didn’t advance much from there until the steam engine was perfected, which created factories, mass transit, electrification and essentially modern life.
They support the case that while innovation drives productivity, it takes time for innovation to be adopted, widespread and then subsequent advancements to leverage combinations of innovations.
The authors identify how those new combinations are occurring. The new revolution starts with the difference in digital goods to traditional goods.  Digital goods can be endlessly copied at a cost that is nearly zero. And falling costs combined with improving power is enabling machines to do things now that researchers weren’t projecting to happen until far into the future – e.g.-Watson beating anyone at chess; driverless cars and Siri. 
And like the Industrial Revolution, there will be sharp winners and losers. Just as motorized looms destroyed jobs in textiles; robots, speech-activated call processing, and tax software replace factory and warehouse workers, call center agents and accountants. Digital downloads replace the CD and reduce musicians income. The authors are concerned that the job loss affect may be longer lasting and more far reaching with this revolution than the Industrial. In the Industrial Revolution, farmworkers displaced by tractors, threshers and combines found work in factories. They make an interesting argument that digitalization makes it possible for everyone to have the best. An example they use is that if one bricklayer can lay X bricks per hour, that doesn’t mean that someone won’t hire the second best bricklayer who can only achieve .9X; perhaps at a slightly lower wage. In the world of digital goods, in some fields everyone worldwide has access to the single best, eliminating work for second and third place. Expanding that argument, in many fields one only had access to providers in one’s area-town, city etc., but in the digital realm one has instant global access. While they foresee a variety of new jobs being created, they find it difficult to envision where an equivalent number of jobs will be created.  Indeed, they pin some of the failure of total employment to return to pre-2008 levels on the widespread adoption of technology reducing staffing requirements.
They cover the types of jobs they see at most and least risk in the race against the machine. More importantly they cover skills and education needed to compete in the future. I hesitate to call out any chapter as particularly informative or intellectually challenging; they are all impressive.  The authors conclude with policy recommendations. Part of the discussion made me nervous; I feared they were heading for a policy recommendation of guaranteed income, or extremely high tax rates on the successful. Instead, they rallied to a defense of work and its importance [They provide a good example of two communities, one where employment was high even if wages were low vs. same income levels from welfare-type programs but low employment. The latter area was blighted].
They conclude with a series of policy recommendations and, as they label it, wild idea s. One is a national mutual fund to make sure everyone has, as one of my bosses used to say, a piece of the rock.  Let me provide my twist to their national mutual fund wild idea. The U.S. needs to invest the funds that come into Social Security. Now, before someone’s hair catches on fire, I didn’t say “privatize”.  (I agree in some small way with Presidential candidate Al Gore’s “lock box” hypothesis). Many states have excellently run pension funds for state employees. (Some of those pension funds may be underfunded, but that isn’t the managers’ fault). Leading examples include Calpers in CA, Wisconsin Teachers and Texas Teachers. What I am talking about is funding Social Security, not privatizing it. It will take a very long term view – fifty or more years. If two percent of the incoming funds into Social Security were invested in the first year, and then increased by an additional two percent each subsequent year, in fifty years the trust would be backed by actual assets.
As with any investment program, diversification would be important.  Our funds should go in to timberland, oil and gas, stocks, bonds, apartment houses, raw land, shopping centers and the like. At that point, every American would be a capitalist, and an owner of the capital deployed in these new technologies.
This is an important book, highlighting topics that affect business, government, education, labor, and personal skills development.

Highly recommended.

Monday, January 26, 2015

Four Reasons to Be Optimistic About Medicare

The most recent trustees’ report forecasts that the Medicare trust fund will be exhausted in 2030. While that is a financially frightening prospect, there was good news buried in the report: the previous forecast indicated the funds would be gone in 2026.
I believe there are reasons to be far more optimistic. Here’s why:
1.       There are cheaper medical services on the way. Theranos has a totally new approach to blood analysis as an example. Founded by Elizabeth Holmes, and backed by a who’s who, Theranos has micro labs that can be installed anywhere and only require a few drops of blood. Millions of us troop to a Quest Diagnostics center, or one of its competitors, to have our blood chemistry tested for any of thousands of things like cholesterol levels, hepatitis presence, insulin and blood sugar and so on. Quest, of course, bills the patient, and/or the patient’s insurer, including Medicare. Theranos is an example of a better, cheaper, faster option. While its new process must make it through the FDA approval minefield, I expect it will eventually become a real alternative, certainly before 2030. And, due to FDA leadership, the Obama administration or both, the FDA has actually shown some needed speed and flexibility recently.
2.       There are new ways to clean hospital rooms. There are a number of life-threatening illnesses that, from a practical point of view, can only be caught in a hospital or a nursing home. Nasty strains of pneumonia. The debilitating clostrium difficile. In its April 2013 report, Antibiotic Resistant Threats in the United States, the CDC estimates 23,000 Americans die each year from microbes that are resistant to current treatments. It states “The estimates are based on conservative assumptions and are likely minimum estimates”.  Many, if not most, of these deaths are a result of infections acquired in a hospital. Patients are treated with a series of more and more toxic (and expensive) antibiotics in hopes of curing the infection. Xenex Healthcare now provides robots that disinfect hospital rooms with high-intensity bursts of light. Savings to patients (copays and out-of-pockets), insurers and underwriters including Medicare should run into the billions.
3.       There are new antibiotics on the way. Again, treatment of patients infected with superbugs is expensive. Patients may be in high-cost intensive care units. Better antibiotics can prevent or reduce most of those costs. Most pharmaceutical companies have walked away from antibiotic research. From an investment viewpoint, that decision makes a lot of sense. FDA approval is gigantically expensive. If approved, an antibiotic may only be used for a few doses. And if patients are sickened, have reactions or die as a result of an antibiotic treatment, lawsuits are certain to follow. Therefore pharma has moved research to the treatment of chronic illnesses like diabetes, where they may have a customer for twenty years, thirty or even longer. But there are some firms that are investing in antibiotics. Northeastern University, in conjunction with NovoBiotic, have announced isolating Teixobactin, a soil-dwelling bacteria that doesn’t get along with MRSA (methicillin-resistant Staphylococcus aureus), one of the most evil superbugs. Testing so far indicates that Teixobactin is well-tolerated in mice and kills a variety of bad actors.
4.       Eventually, we hope that auditing will catch up with the bad guys. Years ago, some Medicare official stated that as much as ten percent of Medicare billings are fraudulent. Apparently that was based on pretty flimsy analysis. However, there is at least anecdotal reason to believe it could be more than ten percent – actually a lot more. Some future Congress and Administration will likely chose to apply the same data techniques that Visa, Mastercard and American Express apply to spot fraudulent card activity in seconds. That alone might be enough to add several more years of life to the trust fund.

While I’ve shown four reasons, in reality they boil down to fewer. Science and technology underlie all. That makes me optimistic that people will live longer and healthier, and Medicare won’t run out of money as fast as feared.