NEW @ THCB PRESS: Surviving Workplace Wellness. Spring 2014. Al Lewis and Vik Khanna. e-book edition. # LIGHTHOUSE Healthcare. Illuminated.

….is that sometimes real weeds might sneak in and mess up the nice green carpeting you’re laying down.

To wit, here’s an exchange between an SEIU member and AHIP President Karen Ignagni at the AHIP astroturf meeting in Ohio. When asked why Wellpoint’s CEO is still talking about profitability (and going off message to the political world when going on message to Wall Street), Ignagni starts off about “No Margin, No Mission”. 

Err … Karen, that’s the line used by non-profits that (theoretically) have a mission to do some social good. The mission of investor-owned companies like Wellpoint, Healthnet, Aetna, United, et al is to make a profit. Your opponents can show you lots of “insurance companies” that do a pretty good job (or at least as good as your members and usually better) and don’t make a profit. Hint: one’s called Medicare, another is the VA.

And at another astroturf forum a different AHIP spokesman also showed a lack of comprehension of basic economics when he apparently said that it is necessary for the insurance industry to make profits to cover costs. Err no, you have  to cover your costs to cover your costs — profit is on top of that!

Then, Ignagni starts talking about the role of health plans in social
responsibility — as if it’s something that health insurers have had
anything to do with. I suggested a while back the options AHIP has,
and instead of doing anything real, they’ve clearly decided to play
defense all the way to try to run out the clock and hope no reform
happens.

But with that obfuscating answer in Ohio, I’m now sure Ignagni is
earning her $1.3 million salary. On the other hand given Wellpoint’s
recent stock performance and the $9m payday she’s on, by the standards
by which she wants to be measured (those of Wall Street not of “social
responsibility”) I’m not sure Angela Braly is earning hers.

Wlp

CODA: And on the topic of a social responsibility and government intervention, blogger Michael Steinberg on the stock pages of Yahoo may be the first to mention the words “Health Plans” and “Fannie & Freddie Mac” in the same sentence.

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5 Responses for “The problem with astroturf”

  1. I love this blog.
    Being a [large non-profit] healthcare finance guy, however, I do have to note that the AHIP spokesperson is not entirely incorrect to suggest that profits are needed to cover costs.
    GAAP accounting does not recognize the cost of capital, which is a real economic cost for both non-profit and for-profit entities.
    Perhaps I am giving the spokesperson too much credit by assuming this is the issue being alluded to, but I think that it is important to note that a GAAP accounting focus on the income statement can paint a misleading picture of a firm’s financial performance.

  2. Tom Leith says:

    Robert Ricketts writes:
    > GAAP accounting does not recognize the cost of capital
    Well, it does for non-profits — the cost of debt financing is recognized because interest payments are recognized as a cost under GAAP, and when non-profits don’t finance out of cash-flow, they use debt financing. So Mr. Ricketts feels this cost of capital quite acutely.
    For most of Ms. Ignagni’s constituents, the cost of equity financing is important, and this cost is not captured by GAAP. Senior management feels this cost when they issue new stock, or when the value of existing stock falls. This latter bit they feel very personally.
    When Matthew says “profit is on top of cost” he’s taking the accounting view at least this time. But he wavers: sometimes he seems to say “excessive executive compensation is profit too.” And he knows “excessive” when he sees it.
    Maybe we need a special THCB definition of “profit”. How about:
    THCB Profit = Operating Revenue – Operating Expenses + Other Revenue + Executive Compensation?
    This should be applied to for-profits as well as non-profits. We’ll sidestep the question of “excessive” — we want to know how much is left over to divvy up among equity, debt, and senior management. We will also sidestep the question of who counts as an executive. A Charge Nurse probably doesn’t. A Director of This or That Program might.
    This definition amounts to EBITDA + Executive Compensation. Then we can figure out the weighted average cost of debt-capital, equity-capital, and human-capital.
    Sounds like a new thread…
    t

  3. Tom,
    Good points.
    I agree a more robust look at EBITDA and the component costs of capital is appropriate.
    I’ll also clarify my view that the interest expense on a non-profit’s debt shown on the income statement can paint a very inappropriate picture of the current cost of capital. Doing so presents a rear-view mirror look, focused on historical borrowing costs.
    Imagine a non-profit with enormous A+ rated bond offerings financed during a period of historically low interest rates . . . . this company might have very low interest costs shown in the income statement for many years. If during this period, interest rates rise, or if income statement profitability did go to zero (making the firm more risky), the cost of capital for the market and/or the particular non-profit could rise dramatically and would not be reflected on the income statement until future periods.
    Stated another way, managers of a non-profit would not want to use interest expense rates taken from the income statement as a hurdle rate for projects or investments.
    As you suggest, using a capital asset pricing model or other approach to cost out capital would overcome this.
    -Rob

  4. Croke says:

    Excelent Article!

  5. Tiger Turf says:

    Really good article and some very in depth comments. I liked the analogy at the beginning about weeds, whether it be misconduct, poor financing or unpopular comments they always “sprout up” somewhere.

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