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April 30, 2004

The Rocket leads Stros over Reds

Roger Clemens showed one of the reasons tonight why he is a certain first ballot Hall of Famer and one of the three or four best pitchers in baseball history.

Not blessed with his best stuff and unable to throw any of his breaking pitches consistently for strikes, Clemens threw almost 35 pitches, walked four, and walked in a run in the first inning of the Stros' game tonight against the Cincinnati Reds. However, Clemens then settled down, began spotting his fastball effectively, did not walk another batter, and scattered five hits over six innings. He left the game without giving up another run.

In short, 41 year old Clemens without his best stuff could still shut down the Reds. He is an incredible pitcher.

The Stros cruised behind Clemens to a 6-1 win over the Reds in front of an SRO crowd of over 41,000 at the Juice Box. Wade Miller pitches on Saturday evening in the second game of the series against the Reds.

Posted by Tom at 10:59 PM | Comments (0) | TrackBack (0)

Sidley Austin tax shelter clients lose another round

This NY Times article reports that U.S. District Judge Matthew F. Kennelly of the Northern District of Illinois upheld a government order for Sidley Austin Brown & Wood to turn over a list of client names involved in tax shelters that the firm allegedly promoted, and then approved a request from the group of about 50 clients to stay the order pending an appeal. The I.R.S. and the Justice Department filed pleadings late last year demanding that the firm produce the names of more than 600 clients that the government suspects bought abusive tax shelters from 1996 through mid-October 2003. Although Sidley Austin has turned the names of clients who did not object, the group of 50 clients sued to prevent the disclosure on the grounds that their dealings with the law firm are subject to rules governing confidentiality between lawyers and their clients.

In the meantime, U.S. District Judge James B. Moran of the Northern District of Illinois denied a Jenkens & Gilchrist motion to dismiss a government lawsuit seeking to force it to turn over the names of hundreds of clients who bought certain tax shelters. In his decision, Judge Moran concluded that the names of the clients were not protected by attorney-client privilege.

Sidley Austin and Jenkens & Gilchrist are among the targets of the government's tax shelter inquiry because the firms wrote opinions attesting to the legitimacy of shelters that the U.S. Justice Department contends were questionable or illegal.

Posted by Tom at 6:25 AM | Comments (0) | TrackBack (0)

April 29, 2004

Baylor faculty members go public with criticism of move from Methodist to St. Luke's

This Chronicle story reports on a recent letter from seven Baylor College of Medicine faculty members to the Baylor Board of Trustees that predicted "a crisis of major proportions" if the Baylor Board followed through with its decision to sever Baylor's 50 year relationship with Methodist Hospital. The Baylor Board announced the decision to sever its ties with Methodist and commence a relationship with St. Luke's Episcopal Hospital on April 21, as reported earlier here.

Apparently, a group of prominent Baylor physicians tried to prevent last week's breakup between the medical school and Methodist by warning of "a crisis of major proportions" that could cause the school to "implode financially." On April 18, seven Baylor faculty members -- who are apparently either department chairs or division chiefs -- wrote the letter to the Baylor Board and the Methodist Board pleading that their affiliation not be terminated. The Chronicle reports that the letter says the following in part:

"If the St. Luke's affiliation proposal is adopted, a crisis of major proportions for Baylor will develop, and we will struggle to avoid devastating consequences. With (St. Luke's), the college will be burdened by more debt and, in fact, may implode financially."

The letter went on to say that Baylor had never "faced such an alarming crisis over its future." The letter also predicted that many Baylor's faculty members would "undoubtedly" keep their clinical practices at Methodist because Baylor and Methodist over the years have established so-called "centers of excellence" in various medical fields, including cardiovascular surgery, neurosurgery, psychiatry, ophthalmology and gene therapy. The letter contends that St. Luke's does not have the financial ability or facilities to build such programs in the near future, and also does not have sufficient operating rooms or bed space to meet Baylor's needs.

Finally, the letter predicts that some Baylor faculty members would become "voluntary faculty" to avoid moving to St. Luke's and that others would "leave Baylor and Methodist altogether." Replacing these faculty members, states the letter, would be costly and a blow to Baylor's academic prestige.

Dr. Richard Stasney, a long-time ear, nose and throat specialist at Methodist and a Baylor faculty member, was quoted in the Chronicle as saying: "It's very upsetting that a 50-year marriage ended. It's going to hurt Baylor a lot more than Methodist." Dr. Stasney was not one of the seven faculty members who signed the April 18 letter.

Read the entire article. More than a few ears are going to be burning in the Medical Center over this public disclosure.

Posted by Tom at 8:40 PM | Comments (0) | TrackBack (0)

Enron Task Force blinks, enters into new plea deal with Lea Fastow

This Chronicle article reports that Lea Fastow, wife of ex-Enron CFO Andrew Fastow, was charged with a misdemeanor tax count today and is scheduled to plead guilty at a new arraignment next Thursday. Previouwly subject to a six counts of felony tax fraud charges, the Enron Task Force superseded Mrs. Fastow's indictment today with one count of willfully delivering a fraudulent 2000 tax form to the IRS. Although this action was widely anticipated after U.S. District Judge David Hittner declined to approve a prior plea bargain, it is nevertheless an unusual step for prosecutors and greatly reduces Mrs. Fastow's exposure to a long prison term. The maximum prison sentence for the misdemeanor is 12 months, although it is expected that the Task Force will ask Judge Hittner to sentence Mrs. Fastow to a lesser sentence than the maximum.

With Mr. Fastow already having agreed to a plea deal and cooperating with them, the Enron Task Force had no desire wasting time on Mrs. Fastow 's trial when they have bigger cases pending, particularly the six-defendant Nigerian barge trial starting June 7 in front of U.S. District Judge Ewing Werlein.

Posted by Tom at 4:46 PM | Comments (0) | TrackBack (0)

Stros roll behind Pettitte

In his first game off the disabled list, Andy Pettitte threw six innings of one hit ball as the Astros took the second and final game of their weathered shortened series against the Pittsburgh Pirates, 2-0. Dan Miceli, Brad Lidge, and Octavio Dotel followed Pettitte and secured the win, facing a total of 11 batters over the final three innings and striking out six of them.

The Stros return to Houston this afternoon to begin a seven game homestand at 12-9 and a game back of the Cubs in the NL Central. My prediction about this team is proving correct as, despite several games in which they have scored over 10 runs, the club struggles mightily at the plate at times. For example, in Roy O's last three starts, the Stros have scored a total of five runs. In the last three games of this road trip, the club scored a total of five runs. Bags, Kent and Bidg all cooled off considerably on the road trip.

The Rocket pitches the first game of the series at the Juice Box on Friday evening.

Posted by Tom at 2:47 PM | Comments (0) | TrackBack (0)

Breaking news - Texas Supreme Court Chief Justice Tom Phillips to step down

Chief Justice Thomas R. Phillips announced Thursday that he will resign on September 3, 2004.

Chief Justice Phillips, the 29th chief justice of the Texas Supreme Court, will have served almost 17 years by the time he leaves the Court. He was appointed by Gov. William P. Clements to replace former Chief Justice John L. Hill, who resigned, and took office January 4, 1988. Chief Justice Phillips was elected in 1988 to finish the remainder of Hill’s term and won re-election in 1990, 1996 and 2002.

He will assume the Spurgeon Bell Distinguished Visiting Chair this fall at South Texas College of Law in Houston. The following is Chief Justice Phillips' statement:

This morning I visited with the Governor and delivered to him a letter advising that I intend to resign the office of Chief Justice of the Supreme Court of Texas, effective September 3, 2004.

I believe that no secular calling is higher than to sit in judgment over disputes brought by the people to their public courts for resolution. I am most grateful for the rare opportunity to serve this great state as both a district judge and as Chief Justice of the Supreme Court of Texas. I hope that my tenure as Chief Justice has been worthy of the high standards set by my predecessors, most notably my friends and mentors John Hill, Jack Pope, Joe Greenhill and the late Robert W. Calvert. I hope that my performance in office has to some extent justified the confidence placed in me by Governor William P. Clements, who appointed me in 1988, and by the voters of Texas, who four times have returned me to office.

I am one of those truly lucky persons who reached their ultimate career goal at age 38, when I became the youngest Chief Justice since Texas joined the Union. Now, more than sixteen years later, I have the opportunity to pursue new goals, some of which I have set already, some yet to be discovered.

I will always be proud of the Supreme Court of Texas and its accomplishments during my tenure. For instance, the Court has amended the rules of procedure, evidence and court administration to reduce delay, confusion and abuse in our legal system. We have enhanced both judicial and legal ethics through new conduct rules and disciplinary procedures. We have adopted procedures to make both court case files and administrative records more open to the public. And we have taken bold steps to make civil legal services more accessible to the poor. But beyond these important administrative reforms, I am proud of this Court’s commitment to the rule of law. Today, our opinions are respected across the nation for their scholarship and fairness. Our justices respect the Court’s proper role of interpreting and applying the law, not inventing it. The justices I leave on the Court are men and women of the highest intellect and integrity, and it has been a privilege to work with and learn from each of them.

Of course, the Texas judiciary is still far from perfect. Many of its problems may be traced to the structure of our judicial system, which is essentially a relic of the nineteenth century. I sought a fourth term in 2002 because I believed that this Legislature would make real changes in the way we select our judges and organize our courts. Some progress was made, but not enough. Perhaps new leadership can rally public support for comprehensive reform that will give our great state the court system our people deserve.

While I pursue future career opportunities, I will spend the next academic year as the Spurgeon Bell Distinguished Visiting Chair at the South Texas College of Law in Houston. While I am leaving public office, I am not renouncing my interest in public affairs. I will speak out on judicial and other issues if and when I have something useful to contribute. Finally, I must take a moment to thank those who have made my service possible. First and foremost, I acknowledge with deep gratitude my family’s sacrifices and their help. My wife Lyn left an important career at Rice University and my stepson Thomas Kirkham left his family, his friends and his school to move from Houston to Austin. They and my son Daniel, who was born since I became Chief Justice, have had to share me with boxes of petitions for review on evenings and weekends and with judicial conferences and commencement addresses on family vacations. Second, I appreciate the dedicated service of my Supreme Court staff, including my administrative assistant, staff attorneys, and law clerks, who have worked so hard to make me look good. Finally, I sincerely thank all those who supported my appointment, election, or reelection to this position.

I leave with the sure knowledge that Governor Perry will choose an excellent choice successor, just as he has chosen four excellent justices to previous vacancies on our Court. I hope that my successor finds this position as challenging and rewarding as I have.

Chief Justice Phillips is a class act and a fine jurist. He will be missed and difficult to replace. I wish him the best in his new professional undertakings.

Posted by Tom at 11:49 AM | Comments (0) | TrackBack (0)

This fellow should not apply for a job in the Phoenix area

This is dispositive proof that some newspapers confuse poor judgment with First Amendment rights.

Posted by Tom at 9:20 AM | Comments (0) | TrackBack (0)

Icahn profits on Martha's travails

In a world where reality is often more intriguing than fiction, this Wall Street Journal ($) article reports that Carl Icahn needs no stinkin' stock tips:

By now, everyone knows how Martha Stewart was alerted by a Merrill Lynch & Co. brokerage assistant that Sam Waksal, her friend and founder of ImClone Systems, was trying to sell the biotech company's shares.

Less well known, however, is the story of how financier Carl Icahn was buying ImClone shares that very day, possibly even snapping up the same shares that Ms. Stewart was unloading.

Mr. Icahn recently disclosed in a filing with the Securities and Exchange Commission that he owns 5.24 million shares of ImClone, a stake he first began accumulating with a purchase of 10,000 shares on Dec. 27, 2001, people close to the situation say.

After his purchase on Dec. 27, Mr. Icahn stopped buying ImClone for a few months. As the scandal unfolded and the share price fell to below $10 in the summer of 2002, Mr. Icahn began buying ImClone shares again, adding 3.6 million shares to his holdings. He bought the stock again earlier this year, picking up 1.63 million shares. That purchase brought his average purchase price to $19.58, according to the SEC filing.

His profit, with ImClone shares now at $70 each, the level where they were before the scandal hit would be a cool $250 million.

Shaking his head from it all, Professor Ribstein places this latest development in appropriate perspective with earlier events in this saga:

So let's take inventory. The stockbroker's tip that Martha supposedly relied on, which as I have written likely was not illegal inside information, may not even have been material. But that's ok, because she was not convicted of this non-crime, but of covering it up. The person she would have defrauded had she committed a crime has made a quarter billion dollars on the stock. The guy who invented the drug that produced these profits is already in jail.

Posted by Tom at 8:54 AM | Comments (0) | TrackBack (2)

Nortel's developing scandal

With Nortel Network Corporation's announcement yesterday of its firing of three top executives "for cause" (i.e., "we're not paying you nuttin' further"), another corporate accounting scandal appears to be warming up quickly. Nortel is North America's largest telecommunications manufacturer.

Nortel's board fired President and Chief Executive Officer Frank Dunn and two other senior officials, Douglas Beatty (former CFO) and Michael Gollogly (former controller). Moreover, the company announced that there would be a sharp downward revision of its profit for last year.

The move drove the Brampton, Ontario-based company's shares down 28% on the stock market yesterday, and raises questions about how severe the telecommunications-equipment maker's problems really are. After restating results in November, Nortel announced last month that it would restate its past results again and delay filing its 2003 financial statements with securities regulators. The Securities and Exchange Commission and the Ontario Securities Commission, Canada's main regulator, are currently investigating Nortel's accounting.

Nortel named William Owens, 63, as its new president and chief executive. Mr. Owens, who has been a Nortel director since 2002, was previously the chairman and chief executive of Teledesic LLC, a satellite communications company. He was also vice chairman of the U.S. Joint Chiefs of Staff and Commander of the U.S. Sixth Fleet during Operation Desert Storm.

Nortel said yesterday that while its audit committee "has not yet determined the full extent of the adjustments that will be required, it expects "no material impact to prior period revenues" and "no material impact" to its Dec. 31 cash balance of $4 billion. In its first restatement filed last November, Nortel said $952 million of liabilities, mainly accruals and provisions, recorded on its June 30, 2003, balance sheet should have been recorded in earlier financial statements. A spokeswoman for Nortel's longtime auditor, Deloitte & Touche, said it is "a speculative question" whether the firm should have caught Nortel's accounting problems at an earlier stage.

Here's betting that Deloitte representatives will have an opportunity to answer that "speculative question" in the various securities fraud class action lawsuits that will result from the foregoing events.

Posted by Tom at 8:16 AM | Comments (0) | TrackBack (0)

Comcast-Disney post-mortem

As reported yesterday, Comcast Corp. dropped its $48.7 billion unsolicited bid for Walt Disney Co., which put an end to a takeover battle that was in trouble from the start.

The bottom line on this saga is that Comcast's management misjudged its the market and the Disney Board's reaction to its offer. The former is reflected by the fact that, even though most stock prices fell yesterday, Comcast's stock price rose, although not much (1%). Comcast's shares are still 11% below where they were before the company's Feb. 11 offer for Disney.

The theory behind Comcast's bid was that years of poor performance at Disney and shareholder disenchantment over the leadership of Disney CEO Michael Eisner would make Disney an easy target. Initially, the bid looked interesting, but it became apparent quickly that the strategy had backfired when Disney's Board refused to discuss the offer and hired poison pill expert Martin Lipton to advise it on the bid.

Moreover, when the value of the bid fell almost immediately below the value of Disney's stock, the Disney Board could not be forced to act. Comcast's offer of 0.78 share of Comcast for every share of Disney lost its premium of $2.38 a share immediately after it was announced, reflecting that Comcast shareholders and the market generally were not bullish on the deal. That gave the Disney Board a valid reason to ignore the bid. Before the bid was dropped, the offer was worth $23.77 a share, while Disney's share price was $24.18. Inasmuch as increasing its offer for Disney in either stock or cash would have driven Comcast's own stock price down, such a bid would have made it necessary to raise its bid yet again. So, with Comcast shareholders showing no enthusiasm for the deal, Comcast essentially could not raise its initial bid, which is almost always how unsolicited takeover offers ultimately are resolved.

Despite (or perhaps because of) the failed bid for Disney, Comcast continues to do quite well financially. The revenue of its cable systems rose $4.65 billion, or 9.8%, from the first quarter of 2003, and Comcast reported a profit of $65 million, or three cents a share (compared with a loss of $297 million, or 13 cents a share a year earlier). Comcast also announced resumption of its $1 billion stock-repurchase program. With the distraction of the Disney bid gone, Comcast management can now concentrate on less sexy but more productive acquisition targets, such as Adelphia Communications Corp., the country's fifth-largest cable company, which is currently mired in bankruptcy.

Meanwhile, with Comcast's withdrawal of its offer, Disney will shift the focus back to Mr. Eisner and whether he should be retained beyond the September 2006 expiration of his personal services contract with the company. Given Disney's lackluster performance over the past decade, real questions remain whether Mr. Eisner is capable of sustaining a long-term turnaround and repairing glaring problems within the company, such as Disney's reeling ABC television network.

The Disney Board still faces angry shareholders, 45% of whom attended the Disney annual meeting last month voted to oust Mr. Eisner. Next month, a committee of Disney executives and board members will meet with representatives of several public pension fund-investors in Disney, including the California Public Employees' Retirement System, which have called on the Board to remove Mr. Eisner. The Disney Board also faces the continued public criticism of ex-directors Roy E. Disney and Stanley Gold, who issued a statement yesterday criticizing the board's "complete indifference to the will and interests of its shareholders" and the appearance that "the only 'succession plan' is to keep Eisner as CEO for as long as he wants."

Disney has projected earnings growth of more than 40% for the fiscal year that ends on Sept. 30, and it has predicted double-digit earnings growth through 2007. The company's 2004 forecast has remained steady, despite such high profile mistakes as the movie "The Alamo," which cost more than $100 million to make and has taken in only about $20 million in the U.S. since its release in early April. However, Disney's theme-park business is making a solid comeback after being hammered by the 2001 recession and the travel slump resulting from the 9/11 attacks.

The most insightful commentator on the Comcast-Disney dance has been Professor Bainbridge, who is a bit under the weather and has not yet posted his views on the withdrawn bid. Meanwhile, Professor Ribstein over at IdeaBlog notes perceptively that "the price of acquisitions is so high now that it takes a near-delusional synergy theory to make ousting management of a major company even look plausible."

Posted by Tom at 7:48 AM | Comments (0) | TrackBack (1)

More on Skilling's New York Adventure

As noted earlier here, the Enron Task Force has requested that the Court in its criminal case against former Enron CEO Jeff Skilling impose additional conditions on Skilling's pre-trial release because of Skilling's well-publicized bender in New York City on April 9 that resulted in Skilling's brief hospitalization in New York.

Now, Skilling's lawyers on Wednesday filed pleadings in the criminal case that basically assert that Skilling's New York adventure was no big deal and accuses the government of prejudicing the jury pool by improperly releasing Skilling's high blood alcohol level in the Task Force's pleadings. The Task Force is asking that Skilling be placed under a midnight curfew, restricted more in his travel, report weekly to probation department officials, and post an additional $2 million bond as a result of the New York incident.

Interestingly, Skilling's pleading does not contest that Skilling's blood alcohol content was measured at .19 during his brief hospitalization, but notes that hospital workers said that he appeared "only mildly intoxicated."

New York City hospital workers obviously have high standards for concluding that someone is "very intoxicated."

Posted by Tom at 6:31 AM | Comments (0) | TrackBack (0)

April 28, 2004

Stros lose to Pirates

After being nasty weathered out last night, the Stros wasted another strong pitching performance from Roy O and lost to the Pittsburgh Pirates on Wednesday night, 4-2. The loss was the Astros' fifth in their last seven games. Andy Pettitte comes off the disabled list on Thursday afternoon to pitch the final game of the series in Pittsburgh before the Stros come back to Minute Maid Park on Friday night behind the Rocket to begin a four game set with the Cincinnati Reds. Ricky Stone was sent down to AAA New Orleans to make room for Pettitte on the 25 man roster.

Posted by Tom at 8:44 PM | Comments (0) | TrackBack (0)

On the ground in Baghdad

Yass Alkafaji is a Northeastern Illinois University accounting professor and an émigré from Iraq. Professor Alkafaji went to Baghdad in January as the director of finance for the Ministry of Higher Education of the Coalition Provisional Authority. In this Chicago Tribune (free subscription required) interview, he relates what it's like on the ground in Baghdad. Read the entire interview, but here are a few highlights:

Alkafaji recently left Baghdad during one of the bloodiest months of the U.S. occupation. We shared chai lattes at a Starbucks in Sauganash to discuss what he saw and heard while he was there. We thought he would be full of tales of violence in Sadr City, mutilations in Fallujah and bombings in Basra. But, oddly enough, he said that while he was there, he hardly noticed these events that made headlines all over the world.

Q. You were in Iraq during some of the worst anti-American violence of the occupation. How did that affect your work?

A. I did not notice it. Even though I was in the middle of it, I was apart from it. It was not something we thought about on a daily basis. We got briefings, and we'd hear people saying things here and there. Sometimes I would receive calls from my wife, and she was telling me what was happening in the green zone, where I was living, but I didn't know it. Or we would be working in the middle of the day at our computers and we would hear explosions, boom boom, and we would simply look up and go back to work.

Q. What is your take on the mood of the Iraqi people?

A. They are thankful to the U.S. for getting rid of Saddam Hussein, and they are content that the military needs to be there. But after that, they are divided between how long should the U.S. military stay and whether they are doing a good job or not. The U.S. military presence is very visible, and they [the soldiers] are really scared, so their posture is very offensive. They see Iraqis, and they put guns in your face. They move in convoys, and they tell people to get away from them. When the convoys are in a traffic jam in the middle of Baghdad, that is the most dangerous thing. So they shout at people to get out of the way, and they drive up on the sidewalk of some stores. That creates a lot of hard feelings for the Iraqis.

Q. What about the economic and employment situation with ordinary Iraqis?

A. Most of the people are not informed of what the U.S. is doing because they don't see the visible improvement of their livelihood, especially those who don't have a government job . . . I think there is still a lot of confusion about who is the good Iraqi and who is the bad Iraqi. I think [the U.S.] has shown to the rest of the world that we are really ignorant when it comes to dealing with other cultures. We have a great military power, but when it comes to building nations we have no idea. You can see the tension in the clashes between the British and Americans in the palace. The Americans will say `do this or do that' and the British will just be shaking their head. But the British have a much longer history in the Middle East, and they know how to deal with the Arab mentality. They feel very marginalized.

Q. Depending on how people want to spin it, they characterize the recent violence as a few bad apples or a popular uprising. How do you see it?

A. Surveys show about 70 percent of the Iraqi people accept that there is a need for the American military to be in Iraq, otherwise it will be chaotic and there will be no security on the ground. Of course, if you talk to someone in Sadr City with a first-grade education, they will say otherwise. One day I was waiting seven hours to try to leave the compound to try to see my sister. We had some thugs from the Sadr group demonstrating 15 feet away saying, "We want the U.S. out." So I said, "OK, the U.S. is out and then what next? Who is going to control the country?" They don't think about the implications of what they say.

Hat tip to Daniel Drezner for the link to this interesting interview.

Posted by Tom at 8:36 PM | Comments (0) | TrackBack (0)

Comcast bid for Disney is dead

Comcast announced this morning that it is dropping its stagnating bid for Disney.

Not surprisingly, Comcast shares rose 51 cents to $30.48 in mid-morning trading on Nasdaq.

Posted by Tom at 12:26 PM | Comments (0) | TrackBack (0)

Wyeth gets hammered in Beaumont

Brilliant Houston trial lawyer John O'Quinn strikes again.

Update: Dylan over at Slithery D observes that Mr. O'Quinn's formidable talents are often misdirected.

Posted by Tom at 7:18 AM | Comments (8) | TrackBack (0)

America's health care finance mentality

Holman Jenkins of the Wall Street Journal ($) has some interesting observations about America's health care finance mentality today in his weekly Business World column. The subject of the column is the rather inane political issue involved in the importation of government subsidized prescription drugs from Canada, but Mr. Jenkins uses the subject to clear up some common misconceptions regarding how American drug companies finance development of drugs and how America's health care finance mentality affects such development.

Inasmuch as American drug company profit margins are relatively high, some politicians who are in favor of imports from Canada suggest that American drug prices are too high and that the companies are greedy, which Mr. Jenkins quickly debunks:

What can it possibly mean to call an industry "greedy"? Drug companies are said to be an unconscionable exception because their profits are comparatively high, 15.4%, when measured as a percentage of sales. But here's a question: Grocery stores have a measly return on sales of 1.4%, and liquor stores an even measlier 1%. So why does anybody invest in these businesses rather than the drug business? Last time we looked, the grocery industry and liquor stores still existed.

Such indictments of the drug industry overlook the fact that profits are a cost -- the cost of a company's capital. Nobody pays back their investors more than they are obligated to. By the same token, if your capital costs are 15.4% of your total costs, profits had better be 15.4% of your revenues or you won't be in business long. Measures of profitability, in short, tell you a lot more about an industry's need for capital than about its "greed."

And how about the demagogues' allegation that the excessive amount of money that drug companies spend on advertising is proof that they make too much money? Mr. Jenkins explains:

Wrong. Companies spend money on advertising because it generates profits, not because it consumes them. You've spent 10 years and $500 million to develop a new product and haven't rung up your first sale yet. What could be a smarter investment than spending a few dollars more to let the world know the product exists? Advertising actually makes companies more willing to invest in R&D. Capital can be earned back faster; fixed costs can be spread over a larger number of customers, allowing each to be charged a lower price.

But then Mr. Jenkins bears down on the real problem relating to financing of prescription drug development -- America's health care finance mentality:

America's real problem is that drugs have been roped into the same perverse incentives that govern most health care spending. Consumers don't weigh cost vs. benefit; drug companies focus their development efforts on drugs aimed at large populations of price-insensitive, insured patients. At the same time, consumers who don't have drug insurance and pay out of their own pockets scream bloody murder because drugs seem like a violation of a natural order in which medical care is increasingly perceived as a costless entitlement.

Think we exaggerate? Everybody noticed when HCA, the big hospital chain, earlier this month put aside $700 million to cover the bad debts of uninsured patients, who are typically good for only seven cents on the dollar. Little noticed was the fact the company also has to cover the bad debts of insured patients, who routinely skip out on their co-payments and deductibles. Nowadays these people are good for only 45 cents on the dollar on average.

Medical bills seem to have become optional to Americans when deciding which envelopes to toss in the trash unopened at the end of the month. "Hospitals are ninth" on the payment list, HCA's Chief Jack Bovender told Reuters in February, well behind mortgages, car payments and cable-TV bills. "The only thing people pay worse is the student loan program."

Read the entire column. Good stuff again from Mr. Jenkins.

Posted by Tom at 6:52 AM | Comments (0) | TrackBack (1)

April 27, 2004

Texas public school finance reform

Marc Levin is associate editor of The Austin Review, a conservative monthly journal, and President of the American Freedom Center. He writes this op-ed today in the Chronicle proposing an alternative to the rather mundane public school finance proposals currently being floated in the special session of the Texas Legislature:

One almost universal assumption in the school finance debate is that everyone must pay the same type of tax. While no tax is pleasant, what if Texans could choose how they want to pay their share of the cost of public education? The Legislature should consider completely replacing the property tax for education with an increased statewide sales tax coupled with an opt-out for Texans who choose to pay a flat income-based assessment instead.

Such a system would have many benefits. First, it would allow for the complete elimination of highly unpopular school property taxes, which are subject to the vagaries of the appraisal process. As our society has become increasingly mobile and driven by technology, real property has become a less reliable measure of a person's wealth.

The business property tax for education, which this proposal would also eliminate, is even more antiquated. Today, many highly profitable businesses have little physical property.

Furthermore, to encourage businesses to locate in Texas as opposed to the other 49 states, most economists agree that ideally there should be no state taxes on business. The current business property and franchise taxes, a gross receipts tax, or any other business tax make Texas less attractive for business investment and undermine the competitiveness of Texas businesses in exporting goods and services.

In addition to abolishing the residential and business school property tax, this proposal would also allow for full statewide equity in school funding without recapture. No longer would school districts be dependent on the taxable value of the property within their boundaries.

On the other side of the ledger, such a system would also provide greater revenue stability for the state. The drawback of a sales tax is that revenues can decline in absolute terms during a recession. However, average income tends to increase, or at least remain constant, during all economic periods. Therefore, those who choose an income assessment would provide a buffer that would help even out state revenues over time.

Read the entire op-ed, which is quite well-reasoned and, as a result, probably has a zero chance of being noticed in the current legislative session. I don't know about you, but it seems to me rather pathetic that Texas legislators are considering basing something as important as public school finance on notoriously unreliable revenue generated from taxes on use of slot machines, consumption of cigarettes, and viewing of exotic dancers.

Posted by Tom at 8:51 AM | Comments (0) | TrackBack (0)

The Bush Administration and scientific research

Randall Parker over at FuturePundit has this excellent post that analyzes the Bush Administration's proposed funding of research in the 2005 budget, to which he concludes:

The Bush Administation's plans for research and development spending are short-sighted. Scientific advances can solve problems in ways that pay back orders of magnitude more than the original research will cost to fund. Budget deficits and huge unfunded liabilities for those who are going to become elderly in the coming decades combined with the threat of terrorism and the greater global competition for a limited supply of oil call for mammoth attempts to research and innovate our way to solutions.

Posted by Tom at 8:10 AM | Comments (0) | TrackBack (0)

The consequences of inadequate security

Daniel Drezner points to this San Francisco Chronicle article about the Iraq experience of Larry Diamond, a senior fellow of the Hoover Institute who was an advisor to the Coalition Provisional Authority in Iraq and a promoter of democratic principles in government. As Mr. Drezner's post points out, Diamond is still a promoter of democracy, but is not optimistic about Iraq, primarily because of the United States' failure to provide adequate security for the Iraqi people willing to risk commitment to democratic principles. As the Chronicle article notes:

We just bungled this so badly," said Diamond, a 52-year-old senior fellow at Stanford University's Hoover Institution. "We just weren't honest with ourselves or with the American people about what was going to be needed to secure the country."

"You can't develop democracy without security," he said. "In Iraq, it's really a security nightmare that did not have to be. If you don't get that right, nothing else is possible. Everything else is connected to that."

Diamond relates that his realization of the deficiencies in the American security force came to him while speaking to a woman's group in Baghdad:

"I had one of those moments when you cut through all the bull," he said. "I was speaking to this women's group, and one woman got up and asked, 'If we do all these things, who's going to protect us?' " Diamond recalled. "That was the moment when I said to myself, 'Oh my God, some of these women are going to be assassinated because they are here listening to me.' It just struck me between the eyes."

As the violence spread, Diamond said, he felt ever more painfully the mistake the United States had made by not sending in more troops to keep the insurgents at bay.

The American policies basically encouraged Iraqis to stand up -- only to face the threat of being mowed down for doing so, he said.

"It was totally hypocritical of us to do one and not the other," Diamond said of the lack of security.

The entire article is interesting and thought provoking, so read it all.

Posted by Tom at 8:00 AM | Comments (0) | TrackBack (0)

Analyzing mediocre intelligence

Robert Baer is a former CIA intelligence field officer who has written extensively ("Sleeping With the Devil: How Washington Sold Our Soul for Saudi Crude"; "See No Evil: The True Story of a Ground Soldier in the CIA's War on Terrorism") about how political wrangling in Washington over the past 30 years has badly damaged the ability of the CIA and other intelligence gathering agencies to generate an effective product for our nation's leaders for use in evaluating and implementing foreign policy.

In this Wall Street Journal ($) op-ed, Mr. Baer uses his extensive experience in intelligence matters to evaluate the recently declassified and now famous August 6, 2001 Presidential Daily Briefing ("PDB") that President Bush and his advisors reviewed a little more than a month before the attacks of September 11, 2001. Mr. Baer begins by explaining the nature of a PDB:

. . . PDBs are the crown jewels. They meld the best information from the CIA's clandestine sources, our embassies all over the world, the National Security Agency, the Federal Bureau of Investigation, and every other federal agency with a possible input. Like crown jewels, too, they are protected to within an inch of their lives. In all my years in the CIA, I never once was given access to a PDB, and I was by far the rule, not the exception. Compartmentation rules forbid it. Sources and methods are too valuable.

The Aug. 6, 2001, PDB, in short, represents the very best intelligence we then had on Osama bin Laden and his plans.

So, Mr. Baer asks, how good was the August 6, 2001 PDB?:

In fact, pretty awful. The first item in the PDB refers the president to two interviews that Osama bin Laden gave to American TV in 1997 and 1998. In the interviews, bin Laden promises to "bring the fighting to America," following "the example of World Trade Center bomber Ramzi Yousef." As it turns out, bin Laden was telling the truth, but that's not the point. In intelligence documents as in corporate reports and the evening news, the best stuff goes up top, and in this case the best was cribbed straight from the boob tube.

How about items two and three? The information in both relates to bin Laden's intention to attack the U.S., but it is from "liaison services" -- i.e. foreign governments. We now know from leaks what those liaison services were, but we don't know the provenance of the information. Was our friendly liaison reading it in the local paper? Was it fabricating, as happened with the Italians and the Niger yellow cake that was supposedly going to Saddam Hussein? The CIA rule used to be that you never ever trust liaison reporting unless you can confirm it with your own sources. Imagine The Wall Street Journal relying on Mad magazine for its investigative sourcing, and you'll see just where such sloppy vetting can lead.

And what of the PDB's disclosure of a bin Laden cell in New York recruiting Muslim-American youth for attacks? Mr. Baer is not impressed:

Not until three-quarters of the way through the PDB do we finally get to our own intelligence: a clandestine source who reported directly to a U.S. official that "a bin Laden cell in New York was recruiting Muslim-American youth for attacks." Why bury this seemingly valuable nugget? Perhaps because our own source was dead wrong. Sept. 11 was planned and organized in Afghanistan and Germany. The 19 hijackers found their own way here and relied on their own funds. Support inside the U.S. came from unwitting contacts. No American Muslim was recruited to help the hijackers.

What's in the PDB is damning enough, but to me, maybe the most alarming part is what's not there. In the entire document -- this crown jewel of intelligence -- there isn't a single mention of Saudi Arabia, the real Ground Zero of 9/11. Apparently, we had no idea suicide bombers were being recruited there or that cash was being raised for an attack on America.

Mr. Baer closes with a cautious observation regarding the future of American intelligence gathering:

In his testimony before the 9/11 Commission, CIA director George Tenet -- the most candid of any of the witnesses, by the way -- said we need five more years to catch up. I think he's optimistic. It takes a generation to build an effective clandestine service. In the meantime, we have no choice but to rely on the Saudis to tell us whether we need to worry about all the killing going on in the Kingdom, whether it really has the petroleum reserves it claims to have, and a lot of other issues vital to our national security.

Personally, I would like to have my own source to tell me what's happening inside the Kingdom's fire-breathing mosques. That's the only way we're going to find out if more young Saudis are being recruited and money raised for another 9/11. Until then, we're flying blind not just on Osama bin Laden but on Islamic extremism throughout the Arab world and our own. That's the opposite of intelligence.

Over the past generation, each Democratic and Republican administration has contributed in varying degrees to the progressive evisceration of the American government's intelligence gathering capability. The government's failure to anticipate the 9/11 attacks was in large part the result of that gradual weakening of intelligence over the past 30 years. Consequently, during this political season, make sure that any politician who criticizes the present administration's production or use of intelligence is not one of the politicians who was contributed to the demise of such intelligence in the first place.

Posted by Tom at 7:40 AM | Comments (0) | TrackBack (0)

Doing business in Russia -- not for the fainthearted

On the heels of this announcement regarding Russian oil giant Yukos' default on $1 billion in bank debt, this Wall Street Journal ($) article provides an excellent overview of Exxon's travails in attempting to make a major investment in Yukos. The entire article is well worth reading, and here are several excerpts:

Exxon and many other Western oil companies had big ambitions when they flocked to Russia looking for deals after the collapse of communism in 1991. Once the world's largest oil producer, the former Soviet Union represented the biggest new opportunity for the world's oil companies in a generation.

But the story of Exxon's delicate dance with Russia shows that the opportunity has been much more elusive than the oil giants and the Western political leaders hoping for an alternative to Middle Eastern oil envisioned. Russian President Vladimir Putin, whose methodical strengthening of Kremlin authority has fueled fears he is undermining democracy, has increasingly sought to keep the state's hand in the oil industry, which was almost completely privatized in the 1990s.

U.S. officials privately acknowledge that highly publicized efforts to diversify energy sources by cooperating with Russia have largely turned out to be a dry hole. Exxon officials declined to comment on anything related to a possible Yukos pact. The Kremlin press office declined to respond to a detailed request for comment.

As Exxon pursued the investment with Yukos president, Mikhail Khodorkovsky, the following exchange and incident occurred after one negotiating session:

After the session, where the exchange about Russia's oil reserves took place, Mr. Khodorkovsky was asked if the Kremlin would allow him to sell a majority stake. "Political realities here change every day," he said.

Moments later, as most panelists and audience members crossed the hall for a speech by President Putin, Mr. Khodorkovsky got an urgent cellphone call from his wife. She told him their house was surrounded by police.

As Exxon pressed on for an investment in Yukos, Russian government control tightened:

In an interview published that day on the Kremlin's Web site, Mr. Putin was asked his view of Exxon buying 40% of Yukos. Mr. Putin said he would support Exxon's activities, but that "it would be right" for Exxon to consult in advance with the Russian government on such a large deal. Russian oil-industry executives detected a cautionary tone, but Exxon officials remained confident their deal was on track, according to people familiar with the situation.

Mr. Khodorkovsky held a defiant news conference at Yukos's new Moscow headquarters the Monday after the police searches. "If the goal is to drive me from the country or put me in jail," he told a room packed with TV cameras and reporters, "they'd better put me in jail."

On Oct. 25, they did. Heavily armed agents stormed onto his rented jet at a refueling stop in Siberia. He was flown back to Moscow.

The message from Exxon's experience is clear -- Russia will gladly accept foreign investment so long as Russian control of the assets and business is not disturbed. Frankly, Russia needs a few (maybe more) of dwindling foreign investment before its unrealistic position will change.

Posted by Tom at 6:46 AM | Comments (0) | TrackBack (0)

Making peace with pot

Eric Schlosser writes this interesting op-ed in the NY Times on the continued high costs associated with the criminalization of marijuana use, in which he observes:

This year the White House's national antidrug media campaign will spend $170 million, working closely with the nonprofit Partnership for a Drug-Free America. The idea of a "drug-free America" may seem appealing. But it's hard to believe that anyone seriously hopes to achieve that goal in a nation where millions of children are routinely given Ritalin, antidepressants are prescribed to cure shyness, and the pharmaceutical industry aggressively promotes pills to help middle-aged men have sex.

Posted by Tom at 4:55 AM | Comments (0) | TrackBack (0)

April 26, 2004

Vijay wins Shell Houston Open

Vijay Singh -- the second-ranked golfer in the World Rankings -- won the rain-delayed Shell Houston Open today by two strokes with a 72 hole total of 277, 11 under par. Singh shot a 69 in the final round to hold off 48 year old Scott Hoch, who shot a 68 and finished in second place at 279. Here is the final leaderboard.

Posted by Tom at 3:40 PM | Comments (0) | TrackBack (0)

Citgo moving to Houston

Citgo Petroleum Corporation. is expected to announce today that it plans to relocate its headquarters from Tulsa, Oklahoma to Houston. In addition to the economies of being located among Houston's many major energy companies, the move makes sense because most of Citgo's vendors, and the customers of Citgo's parent -- Petroleos de Venezuela SA -- are located in Houston. Update: Here is the Chronicle story on the move.

Citgo is the nation's fourth-largest retailer of gasoline, with 13,500 outlets. It also operates three oil refineries in the United States and owns a 42 percent interest in another refinery in Houston. The company will move approximately 700 jobs to Houston, leaving about 300 in Tulsa. As an inducement to make the move, Citgo will receive a $5 million grant from the state of Texas and $30 million in low-interest loans from the cities of Houston and Corpus Christi, where Citgo operates a major refinery.

Posted by Tom at 3:32 PM | Comments (0) | TrackBack (0)

The NFL as Lake Wobegon

John McClain, the Houston Chronicle's National Football League writer, apparently believes that the NFL is a bit like Garrison Keillor's fictional Minnesota town Lake Wobegon, where "all of the children are above-average." In today's Chronicle here and here, McClain rates 23 out of the 32 NFL teams as having better than average selections at this past weekend's NFL Draft.

Posted by Tom at 10:54 AM | Comments (1) | TrackBack (0)

SCI settles class action lawsuit

Houston-based Service Corporation International, the world's largest funeral and cemetery company, announced late last week that it had entered into a memorandum of understanding to settle the securities class action lawsuit that has been pending in U.S. District Court in Houston against SCI and certain of its current and former officers since January 1999. The suit alleges that SCI made misrepresentations concerning its prearranged funeral business and other financial matters. The settlement is for $65 million, with SCI's insurers ponying up $30 million of the settlement payment.

Posted by Tom at 7:39 AM | Comments (0) | TrackBack (0)

St. Augustine was right

Randall Parker over at FuturePundit points to an interesting Erin Anderssen and Anne McIlroy article in the Canadian Globe And Mail that summarizes recent research on child development and human violence. They report that Richard Tremblay has found that two year old babies are more physically aggressive than teenagers or adults but are simply too uncoordinated to do much damage to others:

Consequently, are human beings born pure, as Rousseau argued, and tainted by the world around them? Or do babies arrive bad, as St. Augustine wrote, and learn, for their own good, how to behave in society?

Richard Tremblay, an affable researcher at the University of Montreal who is considered one of the world leaders in aggression studies, sides with St. Augustine, whom he is fond of quoting.

Dr. Tremblay has thousands of research subjects, many studied over decades, to back him up: Aggressive behaviour, except in the rarest circumstances, is not acquired from life experience. It is a remnant of our evolutionary struggle to survive, a force we learn, with time and careful teaching, to master. And as if by some ideal plan, human beings are at their worst when they are at their weakest.

St. Augustine was obviously much closer to the truth.

Read the entire post, as Mr. Parker includes a number of interesting links relating to the subject of this research. Hat tip to Tyler Cowan at Marginal Revolutions for the link.

Posted by Tom at 7:24 AM | Comments (0) | TrackBack (0)

Fiddling while Rome burns

This NY Times article reports on a couple of remarkable public meetings just outside London last week in which radical Islamic fascist clerics suggested that Tony Blair should be killed and that an Islamic flag should be hanging outside No. 10 Downey Street. The article notes as follows:

Stoking that anger are some of the same fiery Islamic clerics who preached violence and martyrdom before the Sept. 11 attacks.

On Friday, Abu Hamza, the cleric accused of tutoring Richard Reid before he tried to blow up a Paris-to-Miami jetliner with explosives hidden in his shoe, urged a crowd of 200 outside his former Finsbury Park mosque to embrace death and the "culture of martyrdom."
* * *
On Thursday evening, at a tennis center community hall in Slough, west of London, their leader, Sheik Omar Bakri Mohammad, spoke of his adherence to Osama bin Laden. If Europe fails to heed Mr. bin Laden's offer of a truce — provided that all foreign troops are withdrawn from Iraq in three months — Muslims will no longer be restrained from attacking the Western countries that play host to them, the sheik said.

"All Muslims of the West will be obliged," he said, to "become his sword" in a new battle. Europeans take heed, he added, saying, "It is foolish to fight people who want death — that is what they are looking for."

One chapter in Sheik Omar's lectures these days is "The Psyche of Muslims for Suicide Bombing."

Call me old fashioned, but I am appalled that these clerics -- one of who is already under investigation for a serious crime -- could spew this type of subversion without apparent qualm. The reason they can get away with it is explained later in the article:

Though the British home secretary, David Blunkett, has sought to strip Abu Hamza of his British citizenship and deport him, the legal battle has dragged on for years while Abu Hamza keeps calling down the wrath of God.

Despite tougher antiterrorism laws, the police, prosecutors and intelligence chiefs across Europe say they are struggling to contain the openly seditious speech of Islamic extremists, some of whom, they say, have been inciting young men to suicidal violence since the 1990's.

The authorities say that laws to protect religious expression and civil liberties have the result of limiting what they can do to stop hateful speech. In the case of foreigners, they say they are often left to seek deportation, a lengthy and uncertain process subject to legal appeals, when the suspect can keep inciting attacks.

That leaves the authorities to resort to less effective means, such as mouse-trapping Islamic radicals with immigration violations in hopes of making a deportation case stick. "In many countries, the laws are liberal and it's not easy," an official said.

Posted by Tom at 6:44 AM | Comments (0) | TrackBack (0)

April 25, 2004

No joy in Mudville

Houston was Mudville on Sunday.

First, incessant rains since Friday afternoon in Houston have played havoc with the Shell Houston Open. Third round play in the golf tournament was suspended late Sunday morning, and the third and fourth rounds will now be completed on Monday.

Second, the Rockets blew a four point lead in the final minute and a half of overtime and lost to the Lakers 92-88 in their NBA Playoff game. The Rockets are now down 3-1 in the best of seven series, and almost certainly will be eliminated in the next game on Wednesday in L.A.

Finally, the Stros wasted a brilliant pitching performance from Wade Miller and lost to the Rockies in the final game of their series, 4-1. The Stros now move on to Pittsburgh for a three game set with the Pirates starting Tuesday before coming home for a weekend series with the Reds.

Posted by Tom at 10:13 PM | Comments (0) | TrackBack (0)

Rich Uncle of America

This David Brooks NY Times books review discusses Ron Chernow's new book, "Alexander Hamilton." Hamilton is the architect of American capitalism, and Mr. Brooks' review concludes that Mr. Chernow has written the best biography yet of this fascinating but underappreciated man. For example, Hamilton's youth was no picnic:

When Alexander Hamilton was 10, his father abandoned him. When he was around 12, his mother died of a fever in the bed next to his. He was adopted by a cousin, who promptly committed suicide. During those same years, his aunt, uncle and grandmother also died. A court in St. Croix seized all of his possessions, sold off his personal effects and gave the rest to his mother's first husband. By the time he was a young teenager, he and his brother were orphaned, alone and destitute.

Incredibly, however, Hamilton overcame his tortured youth quickly to excel in the American revolutionary society and government:

Within three years he was a successful businessman. Within a decade he was effectively George Washington's chief of staff, organizing the American revolutionary army and serving bravely in combat. Within two decades he was one of New York's most successful lawyers and had written major portions of The Federalist Papers. Within three decades he had served as Treasury secretary and forged the modern financial and economic systems that are the basis for American might today.

Finally, Mr. Brooks notes that the vicious political rhetoric of our day has its roots in Hamilton's legendary disputes with Thomas Jefferson:

Though they were historic, Hamilton couldn't have enjoyed his years at the Treasury Department. These days we think our politics are nasty and partisan. But our discourse looks like a Platonic symposium compared with the vicious fighting that marked the early Republic. While they were secretaries of treasury and state, Hamilton and Jefferson waged internecine warfare that was, as Chernow notes, of ''almost pathological intensity.'' Members of each man's camp wrote abusive newspaper essays against the other. The secretary of state proposed Congressional legislation censuring the secretary of the Treasury. The Jeffersonians fabricated crude lies about Hamiltonian embezzlement schemes.

This fight was about what sort of country America should be, and what sort of people should govern. Hamilton embraced the urban, enterprising virtues: vigor, drive, competition. Jefferson dreamed of a country that would be pastoral, egalitarian and decentralized. Hamilton won the battle, but not the affections of posterity.

Hamilton has always been one of the most fascinating and enigmatic of the Founding Fathers. In many ways, he is the most quintessential American of them all. As such, I am looking forward to reading this interesting new book.

Posted by Tom at 10:03 PM | Comments (0) | TrackBack (0)

Stros win; go for sweep today

Roger Clemens won his fourth straight National League game as the Stros beat the Colorado Rockies on Saturday for the second straight day, 8-5. The Astros are now 7-1 on the road in the young season, and they go for the series sweep behind Wade Miller on Sunday afternoon.

Posted by Tom at 1:21 PM | Comments (0) | TrackBack (0)

April 24, 2004

Texans beat Broncos, 13-7; er, make that 'Stros top Rockies

The 'Stros beat the Rockies 13-7 in a typical Coors Field game on Friday night or, as Astros' color man Jim DeShaies put it, "the Astros went on a 10 to 2 run to take control of the game."

Games at Coors Field are often quite strange. Yesterday, the grounds crew worked all day to remove four inches of snow from the field that had fallen on Thursday night. Because of the high altitude, the baseball flies further when hit. Pitchers are well aware of this, so they tend to pitch more defensively, which usually makes matters worse for them. Sometimes, a pitcher will look like he is dominating a hitter for several pitches and then suddenly, the hitter will whack the next pitch into the adjoining county. So, when watching games at Coors, you just have to get used to that type of thing.

Mike Lamb had a career game for the 'Stros with four hits and six RBIs, and Brandon Duckworth gave up five hits and four runs in five innings (that's like giving up three hits and a run in seven innings anywhere else) to pick up the win. Denver native Brad Lidge struck out the last four Rockies batters of the game, which is tantamount to striking out the entire lineup anywhere else.

The Rocket goes for his fourth win today in his second career start at Coors.

Posted by Tom at 6:46 AM | Comments (0) | TrackBack (0)

April 23, 2004

Uncorporations

Professor Ribstein over at IdeaBlog has assembled a bright and provocative program for his conference on "Uncorporations" at the University of Illinois College of Law this weekend. The ubiquitous Professor Bainbridge has a working paper and is giving a talk on whether courts should scrap veil-piercing theories, and there are nine other working papers on various topics relating to personal liability in the context of corporate and limited liability partnership law. All of the working papers that are being discussed at the conference are online and can be reviewed here. If you are involved in business law, I highly recommend that you take some time and review these creative and insightful papers.

Posted by Tom at 6:35 PM | Comments (0) | TrackBack (1)

The hidden costs of nationalized health insurance

Pierre Lemieux, who is an economist with the University of Quebec in Outaouais and with the Independent Institute in California, has written a revealing op-ed in today’s Wall Street Journal ($) regarding the hidden costs of Canada’s nationalized health care finance system and the devastating effect those costs are having on the quality and timeliness of Canadian health care:

The Canadian system is built around a compulsory public-insurance regime that provides most medical and hospital services free. Of course, it is not free for the taxpayer, who finances the system at a rate of 22% of all taxes raised in Canada. The Canadian government pays about 71% of total Canadian health care expenditures, compared to 44% paid by the government in the U.S. This translates into public health expenditures of 6% of GDP in Canada and 7% in the U.S. — a rather small difference. More than three-quarters of the difference in total expenditures is due to higher private expenditures in the U.S. Why are private health expenditures so low in Canada? The main reason is that they are illegal, which gets us to the heart of the system's hidden costs.

Canadian public health insurance is not only compulsory, it is also monopolistic. The system is administered by provincial governments under strict guidelines imposed by federal law and federal subsidies. Private insurance covering publicly insured services is illegal. Physicians are forbidden to accept private payments above the fees billed to the government. Hospitals are public or non-profit, and tightly regulated. Physicians' fees are determined -- or "negotiated" -- by provincial agencies. Prices of drugs are controlled. In short, the public supply of medical services is rationed, and there is little private alternative. Hence the apparent low cost of the system.

The hidden costs include the poor quality of services, and the costs imposed on customers (aptly called "patients" in this case) who have to wait in queues.

Quality is subjective and can only be evaluated through consumer choices, but the government won't let consumers make choices and vote with their feet if they are not satisfied. Anecdotal evidence of questionable quality is everywhere. In a recent piece in Montreal's Gazette, a Canadian related her own experience, and contrasted the "kindness, discretion and professionalism" of staff in U.S. hospitals, with the frequent rudeness of unionized personnel in the Canadian system.

Long waiting lines are a fixture of the system. The Fraser Institute, a Vancouver think tank, has calculated that in 2003, the average waiting time from referral by a general practitioner to actual treatment was more than four months. Waiting times vary among specialties (and, less wildly, among provinces), but remain high even for critical diseases: The shortest median wait is 6.1 weeks for oncology treatment; excluding radiation, which is longer. Extreme cases include more than a year's median wait for neurosurgery in New Brunswick. The median wait for an MRI is three months. Since 1993, waiting times have increased by 90%.

Waiting lines impose a real cost, which is approximated by what individuals would be willing to pay to avoid them. Waiting costs include health risk, lost time (especially for individuals whose time is most valuable), pain and anguish. Socialist systems are notoriously oblivious to anguish, discomfort, humiliation and other subjective factors which bureaucrats cannot measure or don't value the same way as the patient does.
* * *
Liberalization proposals are met by the "two-tier system" bogey man -- that if choice is allowed an unequal system will develop. But if directly paying a doctor is illegal, there are legal ways to jump the queues. As pointed out by Professor Livio Di Matteo of Lakehead University in Ontario, what now exists is a three-tier system. The very rich (like Robert Bourassa, the late Premier of Québec) go to the U.S. for rapid, personalized, high-tech treatments. The second tier is made of "the well informed and aggressive, who can push their way to the front of the treatment line." The poor and those with no connections get stuck in the queue.

At least two Indian groups are now considering building private clinics or hospitals on their land — just as other sorts of illegal-elsewhere trade thrive on Indian reserves. Yet, Canadians who patronized such clinics would still be prohibited from purchasing private insurance to cover the service, leaving the opportunity only to the wealthiest.

As noted by Harvard professor Patricia Dantzon, another hidden cost of the Canadian system comes "from forcing everyone to have the same level and type of insurance," whatever their individual preferences are.

One last cost should not be ignored: the loss of personal responsibility and the habit of dependence on the state. Opinion polls show that Canadians are generally proud of their public health insurance. Indeed, for most people, any basis for comparison has been made illegal. Auberon Herbert, a libertarian Member of Parliament in late 19th century England wrote, "If government half a century ago had provided us all with dinners and breakfasts, it would be the practice of our orators today to assume the impossibility of our providing for ourselves."

This insightful piece dovetails with a discussion that I have been having with fellow Houston blogger Milton over at Trivial Pursuits regarding the flaws in America’s health care finance system and how self-insurance could be deployed to improve competition between health insurance products currently in the marketplace. One example of self-insurance that is an attractive alternative to many current health insurance products is the woefully underpublicized Health Savings Account (“HSA”) concept that was enacted into law last year. To introduce the concept, it is helpful to review how American health care costs are currently financed.

Every dollar that an employer pays in employee health insurance premiums avoids income and payroll taxes. For the employee with average income, this generous tax subsidy means that government is effectively paying for almost half the cost of the employee’s health insurance.

On the other hand, if the same employer tries to deposit that same dollar into a savings account for the benefit of the employee from which the employee could control the payment of medical expenses, then the government taxes the dollar and grabs almost half of it before it reaches the savings account.

Accordingly, America’s tax laws provide a generous subsidy for third-party insurance and none for individual self-insurance. In so doing, our tax laws promote use of third-party bureaucracies to pay for even minor discretionary health care expenses despite the fact that such expenses would be managed much more efficiently if patients paid them on their own.

The new health savings accounts address this defect in the health care finance system, at least to an extent. The legislation gives deposits into HSAs the same tax advantages as those granted to an employer’s health-insurance premiums. In so doing, individual self-insurance can now compete with third-party insurance on the same financial basis and individuals can now control some of their financial investment in health-care without a tax penalty.

However, even more importantly, the HSA legislation addresses in a rational manner the knotty social issue -- that is, how do we allocate dollars between health care and other goods and services? Or stated another way, how do we decide which medical procedures are worthwhile and which ones are not? There are basically three ways:

● In countries such as Canada with nationalized health insurance, government makes the decisions (either directly or indirectly) in an arbitrary, inefficient, and often unfair manner;

● The second method is to restrain spending using the techniques of managed care. Over the past 15 years of increasing managed care in the American health care finance system, most of us have experienced, at best, the irritation, and, at worst, the capriciousness of having employers and large insurers ration health care for us; and

● Finally, the third option is to allow individuals to make their own choices between health care and other uses of their money through vehicles such as HSAs.

In that connection, the HSA is the most flexible health care finance product currently on the market. HSAs allow individuals and their employers to make deposits each year equal to their health insurance deductible (there is currently a limit on the size of the deductible and a supplemental insurance policy is required to cover catastrophic illness or injury expense in excess of the amounts deposited in the HSA). The funds in the HSA grow tax free and the funds may be used to pay such things as health care expenses that would not otherwise be covered by third party insurance, insurance premiums while the owner of the account is changing jobs, and health expenses during retirement.

However, the new law is not perfect. For example, as noted above, the maximum amount that can be deposited into an HSA in any year is currently somewhat limited. Consequently, the combined cost of depositing funds in the HSA and paying for the supplemental insurance that is required can turn out to be more expensive than simply buying a third party policy with a relatively high deductible.

Moreover, products such as HSAs are only part of the solution to the problems in America’s health care finance system. From my vantage point, some sort of nationalized insurance or federally-backed private insurance is still going to be necessary for people who simply cannot afford to fund HSAs or buy private insurance, and for people with severe medical problems who cannot afford the costs attendant to those problems. In regard to these groups, the tough issue is how do you ration the health care? Or, stated another way, there must eventually be a political consensus on the limitations of such federally-insured health care. Otherwise, we simply have created another federal program that balloons into yet another governmental financial debacle.

However, for those of us fortunate to be reasonably healthy and productive, the concept of HSAs is a viable alternative to higher cost private health insurance. I encourage you to examine the product as an alternative to your current health insurance policy.

Posted by Tom at 10:11 AM | Comments (0) | TrackBack (1)

The DeBakey-Cooley rift

One of the most well-known stories of Houston lore -- yet not discussed publicly much -- is the long-time rift th