Monday, June 25, 2012


No matter what the Supreme Court decides this week on the constitutionality of the Affordable Health Care Act, the plan is still doomed to fail.

One of the first things I learned when I went into the insurance business almost 40 years ago was that insurance was simply the prepayment of claims. It is paying in advance to cover some future bill or expense. For example, if a young person purchases a $10000 life insurance policy, the insurance company calculates that by the time of death the insured will have paid in enough to cover the death benefit.

Medical insurance works the same way. In fact, medical insurance only had its origins in the 1930s during the Great Depression. At that time hospitals and physicians were finding it increasingly difficult to collect from their patients, many of whom were out of work. As a result we had the birth of the “Blues.” Both Blue Cross and Blue Shield were products of the depression. In short, people would enroll in these plans and pay a monthly or quarterly premium that over time would build up enough of a reserve to cover their future claims. This idea seemed to benefit everyone. Doctors and other health care providers would no longer have to go after their patients like collection agencies; and the patients would not have to come up with a large amount of cash to handle large, unexpected medical bills.

However, to avoid excessive or frivolous claims that raise the cost for everyone, most medical insurance policies included deductibles or co-insurance to reduce or eliminate small claims. This was right out of Insurance 101 since actuaries were well aware that the most cost effective strategy was to make the patient bear part of the cost out of pocket.

However, the use of medical insurance to cover future health care costs only took off after World War II. The war had finally taken the country out of the depression and the economy was booming. In a major change the Federal Government allowed corporations to purchase group medical insurance plans for their employees. Employers were not required to provide health insurance but the government altered the tax code to provide a great incentive.

Unlike other forms of compensation the cost of the medical insurance would not be considered taxable income to the employee. This was important especially to high salaried employees at a time when the highest tax rate was 70%. In other words, employees covered under such a group insurance plan could now have most of their medical expenses paid with tax-free income. It was a no-brainer. Instead of giving all employees a $1000 taxable salary increase, the employer could give them a $1000 tax-free benefit that would cover future health related costs.

The employer sponsored plans were incredibly attractive to all concerned and sparked a veritable revolution in health care in this country. Employers could deduct the cost of their plans as an ordinary business expense while employees could rely on their pre-tax medical insurance plan to cover major medical expenses. Since these were group insurance plans all employees had to be covered even if they had pre-existing medical conditions. Increasingly these group insurance plans came to dominate the market.
Nevertheless, the basic principle of insurance still governed these group plans. They all involved a pre-payment of claims most often through automatic payroll deductions.

No matter what the Supreme Court decides on the constitutionality of the Affordable Health Care, it is doomed to fail because almost half the people in the country will not have to pay premiums. Those who fall below various income thresholds will receive vouchers or tax credits that can be applied to the purchase of medical insurance policies. It is a welfare rather than an insurance plan.

Why did the Obama administration even bother with insurance and the potentially unconstitutional individual mandate? Why didn’t it just decide to pay all medical bills, and call it a social welfare rather than an insurance plan? Isn’t this what exists in Canada and Europe?

Actually, when I visited my cousins in Italy a few years ago, I found that rather than a single-payer plan, they had two plans. In the first place, they participated in the National health insurance system that would potentially pay all their medical expenses. However, I was surprised to discover that they all had bought private medical insurance as well.Why?

It seems that if you had a problem, you could go to the doctor who worked for the government. If you needed surgery or some major diagnostic test, he might tell you to come back in six months for the procedure. He would also tell you that he had a private practice and could do the procedure for you next week if you paid privately. When people talk about National of socialized medicine, they fail to mention this two-payer system. ###

Tuesday, June 19, 2012

Florida Gator Baseball Blunder

Kent State celebrates

While trolling through the channels last night I came upon the ending of the NCAA semifinal baseball game between the top ranked Florida Gators and unheralded Kent State. Surprisingly, Kent State held a slim 5-4 lead as Florida came to bat in the top of the ninth inning.

Even though Florida was behind, the announcers pointed out that they had the heart of the batting order coming up. Florida would send up their 2, 3, and 4 hitters who had already proven very productive in the tournament. The Kent State manager decided to play the percentages and bring in a left-handed relief pitcher since two of the Florida batters were lefties.

Unfortunately, the reliever was wild and couldn’t come near the plate as he walked the first batter on four straight pitches. Two more balls followed and the Kent State manager had had enough. He lifted the lefty and replaced him with a righty to face Florida’s best hitter. He quickly threw two more balls to place runners on first and second with no outs. Florida now had the tying run in scoring position, the lead run on first, and its cleanup hitter coming to the plate to face a pitcher who seemed to be really struggling.

At this point the Florida manager intervened. He took his clean up hitter out of the game and replaced him with a bunting specialist with an anemic batting average of .180. I suppose the manager was playing by the proverbial book. He was willing to give up an out to advance the two runners to second and third. In that case both could score on an outfield single, or at least one would score on a fly out.

What a blunder! It was tantamount to taking Babe Ruth, Joe Dimaggio, or Mickey Mantle out of the ninth inning of the seventh game of the World Series with the winning run on base and no one out.

What happened? The pitcher was still shaky and threw three straight balls to the batter who was obviously bunting. The umpire mercifully called the next pitch a strike, and then the batter fouled off a bunt attempt on the next pitch. Determined on his strategy, the manager called for another bunt attempt with two strikes. It was successful and now the manager had his wish. There were runners on second and third but now with one out.

The number five hitter came to the plate but the pitcher was still wild. But I guess by this point the umpire had had enough and widened his strike zone. The count went full on two pitches that looked way outside and then the batter couldn’t hold back his swing on a pitch even further outside. Now there were two outs and the Florida manager finally got his fly ball from the next batter but it was now the third out. The game was over. The Florida season was over. Defeat had been snatched from the jaws of victory.

Coincidentally, the Florida bunting specialist was the son of Bucky Dent, the former Yankee legend, whose home run in a classic playoff game between the Yanks and the Red Sox will probably never be forgotten by Red Sox fans. It will take a long time for Gator baseball fans to forget this defeat in the 2012 playoffs, or to forgive their manager for taking the game out of the hands of his players. ###

For vap.

Sunday, June 17, 2012

Father's Day

Today is Fathers Day. Is there any more difficult job than the one faced by fathers today? On this day our society pays lip service to fathers but on every other day they are mocked and vilified. Everywhere around us we see men abandoning, and abusing their children, and even urging that their children be aborted. Let's pray today that fathers will deny themselves, and take up their cross and do their work.

Here is a little prayer for fathers;

            Our Father in Heaven, we thank you for all the fathers on earth who,
            like St. Joseph, accept the responsibility to care for and love their children.
            May you strengthen them with the kindness, patience and wisdom they need
            to encourage and guide their children.
            May they be supported by a steadfast wife, a caring family and good friends.
            Most of all, may they know that you and you alone are the source of all that is
            good and truly valuable in this world.

 "For what does it profit a man, if he gain the whole world, but ruin or lose himself?


Saturday, June 9, 2012

An American Hero

Joseph Skrovanek passed away last week at the age of 93. He was a true American hero. Like many others of his generation he was a son of an immigrant family who originally settled in the coal mining country of Pennsylvania. He served in the Army during World War II and was in the fifth wave to hit the beaches of Normandy on D-day. I knew him as his financial advisor and friend for many years and like many other soldiers of his generation, he rarely talked about his military service. He was proud to be a veteran and marched with the VFW in the annual Memorial Day parade as long as he could, but that was it.

However, his real heroism came after the war. He came home to Fairfield, CT and married his sweetheart, Mary. He remained faithful to her through good times and bad for more than 70 years. They had two daughters who even after they had asserted their independence and did things that he could not understand, he continued to love them until the day he died.

He was by trade a plumber. I only met him after he retired but I cannot imagine that he ever cheated one of his customers or did shoddy work. Like many in his profession he was self-employed. He never worked for the government or a large corporation.  He had to buy his own insurance and fund his own retirement with regular monthly savings. Before he retired he made sure the house in Fairfield was free of any mortgage.

Joe and Mary always lived very frugally. He loved to garden and make his own wine. Mary was a skilled homemaker and cook. They would never let me visit them without offering something to eat and drink. We would sit around the table in their kitchen and spend more time discussing family than finances. They liked to talk about themselves but always showed a keen interest in me and my family.

Joe spent the last few months of his life in an assisted living facility. The day before he died Joe asked one of his daughters to drive him to visit his financial advisor and make sure all his affairs were in order.  They were.

Below find a video that in a way reminds me of the original Joe the Plumber, a true American hero. ###

Saturday, June 2, 2012

Tax the Rich?


Recently, I had an argument with a friend who claimed that the “rich” in America paid no taxes.  By the “rich” he meant the top 1%, a group that has been demonized by President Obama (although he is a member) as well as by the “Occupy” protestors. I recalled seeing somewhere that the top 1% actually paid almost 40% of all Federal income taxes but my friend could not believe it.

A quick check on the web showed that I was correct. Here are the figures. In 2009 the top 1%, those with Adjusted Gross Income (AGI) in excess of $343927, paid 36.73% of all Federal Income taxes that year. That was not an aberration for the 2008 figures were about the same. This calculation does not take into consideration the amount the 1% paid in other taxes, like state and local income taxes, sales taxes, or real estate taxes.

The top 5%, those with AGIs over $154643, paid almost 60% of all Federal income tax. The top 25% (AGI over $66193) account for 87% of all income tax. Finally, the bottom 50% (AGI below $32396) pay practically nothing (2.25%) of the Federal tax bill. This last group must include most of the Occupy protestors.

Typically, when people like President Obama say, “tax the rich”, they rarely provide any kind of realistic figure of how much revenue will actually be gained by their proposals. When studies show that the increased revenues will come nowhere near closing the ever-growing federal deficit, it becomes clear that “tax the rich” is a political ploy and not meaningful fiscal policy.

Instead of increasing taxes on the rich, government should focus on increasing incomes for everyone. Why does only 10% of the population make more than $112124 per year? Why does 50% of the population make less than $32396 per year? Government should exist to promote and protect wealth accumulation, and not to destroy it.

Even if advocates of higher taxation have their way and increase taxes on income, they will not be able to reduce the deficit. The Federal government will be forced to look for other sources of revenue. Eventually, in addition to taxing income, politicians will discover the tax gold mine of an asset tax.

In my career as a financial advisor I had many clients who had modest incomes and paid very little in Federal income tax, but who could be considered millionaires. I recall one elderly couple with a house worth about $600000 and investment assets of about $400000 from which they took an income of about $10000 per year to supplement their social security income. They lived modestly since their house was free of mortgage debt and paid no Income tax. However, like many senior citizens they did pay a substantial real estate tax on their suburban home.

A real estate tax is an asset tax. It is calculated on the basis not of your ability to pay but on the value of your home. It is the major source for local government funding in most states. It always increases and will eventually drive most seniors from their homes. It will not surprise me to see the Federal government propose some kind of asset tax in the near future. It wouldn't take much to see the government add a tax on mutual fund assets and have the fund companies collect it along with their management fees. An asset tax is a form of confiscation.

Anyone who is in favor of higher taxation should view the attached video from an Indiana newscast to see where his or her taxes actually go. ###