A couple of apparently unrelated things happened earlier this month. First, I went through the annual ritual called Open Enrollment, during which I reviewed all of the optional elements of my Sun benefits (health insurance, dental coverage, health spending accounts, life insurance, and so forth) and selected the coverage that I wanted for the next year. Secondly, Peter Drucker, the man that the Wall Street Journal called "the first philosopher of management", died at the age of 95.
So what's the connection? First, Drucker:
From "Is Executive Pay Excessive?" May 23, 1977: Economically, [the] few very large executive salaries are quite unimportant. Socially, they do enormous damage. They are highly visible and highly publicized. And they are therefore taken as typical, rather than as the extreme exceptions they are.
These few very large salaries are being explained by the "need" to pay the "market price" for executives. But this is nonsense. Every executive knows perfectly well that it is the internal logic of a hierarchical structure that explains them.... Money is a status symbol which defines an executive's place in the corporate hierarchy. And the more levels there are the more pay does the man at the top have to get. This rewards people for creating additional levels of management.... Yet levels of management should be kept to the minimum....If and when the attack on the "excessive compensation of executives" is launched--and I very much fear that it will come soon--business will complain about the public's "economic illiteracy" and will bemoan the public's "hostility to business." But business will have only itself to blame. It is a business responsibility, but also a business self-interest, to develop a sensible executive compensation structure that portrays economic reality and asserts and codifies the achievement of U.S. business in this century: the steady narrowing of the income gap between the "boss man" and the "working man."
Second, health insurance. One of the providers from which I get to choose is United Health. (It's probably a violation of some company policy for me to say this; on the other hand, the concentration of this industry is such that almost every large company offers something from everybody. And I imagine the information is publicly available.) On November 28th, Forbes reported that the salary of William McGuire, CEO of United Health Group last year was $124.8 million. (He cashed in stock options worth $115 million; he currently owns stock options worth $1 billion.) Just to take an area that I know well, a psychiatrist or clinical psychologist makes around $75 dollars per hour; William McGuire makes $115,384 dollars an hour. What on earth can justify this discrepancy? It certainly isn't "market forces"; I'm pretty sure that the board of UBH could find a perfectly competent CEO that would do the job for a mere $1 million.
As Robert Kuttner put it in today's Boston Globe:
Health insurance is the most vivid case of what political scientist Walter Dean Burnham calls a ''politics of excluded alternatives." Polls consistently show that over two-thirds of Americans want universal tax-supported health insurance. Gallup found that 79 percent of Americans want coverage for all, and 67 percent don't mind if taxes are raised to pay for it. Fully 78 percent are dissatisfied with the present system. Medicare, the one part of the system that is true national health insurance (for seniors) is overwhelmingly popular.
There is no hotter political issue, nor one that strikes closer to home. So, if Americans overwhelmingly want national health insurance, why don't we get it? Three huge reasons: political, fiscal, and jurisdictional.
Politically, the immensely powerful private insurance industry would be displaced by national health insurance. Nearly all corporations would rather suffer with the devil that they know (escalating premiums) than the devil they hate (an expanded role for government)....
Fiscally, a shift to national health insurance would require about $700 billion that currently goes through the private sector in charges to workers and consumers and shifted to the public sector in the form of taxes. The result would be a far more efficient and reliable system, but many voters would see the increased taxes but not appreciate the savings in premium costs, payroll deductions, or out-of-pocket charges.
Jurisdictionally, states like Massachusetts can perhaps make some piecemeal progress, but it's hard to do this right in one state without pushing the system toward further fragmentation. Medicare works because it's a national program.
But let's get back to McGuire's $124 million. Obviously the public wouldn't stand for a government official pulling in that kind of money. Instead, that sum would comfortably cover the premiums for all of the uninsured workers here in Massachusetts. As I blogged recently, it's amazing that so many in American business are opposed to single-payer government-administered health insurance, even though it is demonstrably in their best interests (and the interests of their shareholders and employees) that such a program be adopted. And it's a sad commentary on American politics that no political party is willing to stand up for a policy demanded by two-thirds of the people of the USA.
Posted by geoff2 at November 26, 2005 09:09 PMGeoff, do you count your stock options as part of your salary? If not, why count McGuire's?
Now, there's some question about the desirability of setting compensation to be so much driven by stock price; the history of StorageTek in the last years before the acquisition are a demonstration of this. But they're hardly salary --- and if the company doesn't perform, they aren't money either. UHC has been very successful over the years.
As far as government funded health care being "demonstrably" better, I'll believe that when I start hearing fewer stories of my Canadian and Brit friends waiting weeks or months for services that they'd get in days here.
Posted by: Charlie (Colorado) at November 27, 2005 06:50 PMCharlie,
I have Medicare and Medi-Cal (California's version of Medicaid)-and believe me-I wait. And wait. And sometimes wait a little more. I have prescriptions each and every month that are not covered by Medi-Cal. That being said, when I had Blue Cross/Blue Shield I waited and waited. I once fought for 14 months to get a drug covered. FOURTEEN MONTHS. Only I paid several hundred dollars a month for the privelige of being jerked around and passed around.
I know too many people without any coverage at all. People who would LOVE to have to even go through the waits and battles! Because they don't have ANY coverage. And can't afford covereage. Or have "pre-existing" conditions.
Personally, my parents and I have been trying to get "socialized" medicine in this country as long as Ted Kennedy has been fighting for it-since the 1970s at least. (My mum almost died because she didn't have coverage, and not the money to have a rare tumour removed-about 30 years ago-a family friend gave her the money at the last minute. I myself partially paid for Cancer treatments when I was diagnosed TWO days before my coverage went into effect at work. These are not unusual stories or rare or any but examples of what goes on in this country day in and day out.
You only get services in days here-if you are fortunate to have coverage &/or money. The rest of us have to muddle through somehow.
Posted by: Laura G. at November 27, 2005 09:24 PMp.s. to Charlie-don't even get me going on how shoddily my aunt's HMO treated her during her cancer treatment-denied her a CT scan because it wasn't "time" for another 6 months-and she ended up too far gone when the HMO FINALLY oked the CT...just one example of thousands out there...
Posted by: Laura G. at November 27, 2005 09:27 PMThe Forbes' article was imprecise: his salary was $9M (and I still maintain that they could find someone to do the same job as well for $1M); his total compensation was $124M. Do I count my options (and McGuire's) as salary? I certainly count the options as compensation at the original option price, and so does the IRS these days (because the company has to expense this).
In any case, Drucker's point stands. There is no economic justification for executive compensation at this level; it is hypocritical for a company to apply lowest-cost principles to operational decision-making and not to executive pay.
As to your anecdotal comments about Canadian and British friends, a fair comparison would include all Americans, whether or not covered by insurance. The uninsured over here don't get services done "in days", I assure you.
(And when I broke my arm in England a few years ago, I was seen much more promptly and efficiently than here in the US - mainly because in Oxford the ER wasn't a "provider of last resort" as it is in the US, and I didn't have to spend time in providing insurance and billing information.)
Finally, I guess you're not too exercised by the unrepresentative state of American politics....
Posted by: Geoff Arnold at November 27, 2005 09:33 PMFunny Geoff, that you should bring up the amount of money these CEOs are paid-I get so sick and tired of hearing how it's the un-insured who are driving the price of medical coverage up when it's plain that someone, somewhere is making a bundle of dough. (More than one someones...) Just like all the talk of how drugs are expensive because of research-phooey. My best friend's girl friend is a drug company rep-believe me-those guys could do without the meetings at $400 a night luxury hotels where the bar is open and the president comes out and tells them to drink more-"It's on me!" They can do without the prizes of Mercedes and all-expense trips to Hawaii. The bonuses, the money thrown about-and all the while, I cannot affor to pay my prilosec prescription and Medi-Cal won't pay because it's too expensive! (She was recommending it to me-among other drugs-I told her, these do work-but none are covered by Medi-Medi-and a few weren't even covered by Blue Cross! She hadn't realized! Oh my! That the rest of us live in the real world! Where we're paying for her trip to Hawaii and thouseands of dollars cash bonuses going out to how many people? I did a quick total-and figured given the price of the room, and how many people attended and even with a 15% discount-the rooms for those 3 days alone-WITHOUT bar and meanls must have been over $100,000!
No, healthcare prices aren't high because uninsured make the rest of pay higher premiums or because of law suits or because drugs are expensive to develop: They are high because of all the window dressing-all the fat. Period.
Thanks for letting me vent.
Posted by: Laura G. at November 27, 2005 09:37 PMLaura's comment reminds me. My 88-year old mother was treated for colon cancer last year: she had a large and complicated tumor. Against the odds, the surgeon at the Radcliff in Oxford managed to get it all out without the need for an ileostomy, which was a really big deal. My mother is blind, and an ileostomy would have meant full-time residential care.
The treatment that she received was at least as good as anything I've ever heard of in the US. And it didn't cost her a penny: she still owns her house, and she still has her savings. I'd call that "demonstrably better" than what happens to people in the US. (Yes, I've known elderly people who were bankrupted by that kind of medical catastrophe.)
Posted by: Geoff Arnold at November 27, 2005 09:44 PMGeoff,
I think your sal comparison is a valid point.
Finally if people with money make the rules, we may not see the change we want.
Over on Wang's House of pancakes, there were 2 interesting posts on medical price gouging:
http://wchop.blogspot.com/2005/11/price-gouging-reprise.html
The price difference from the full charge that an uninsured person person would pay, compared to one with Wang's insurance for the same treatment was about 1/4. In the US we are using our uninsured to subsidize the insured which is insane.
As to executive salaries, yes they are too high, but it is what the market is willing to pay. I doubt very much that they could find someone for less just because they would know the money on the job. Also it would mean that the search committee would probably have to be paid less which I am sure they would not like. Unless there was a legal mandate regarding health insurance CEO salaries I don't see how it is going to change.
Great blog I hope we can work to build a better health care system. Health insurance is a major aspect to many.
Posted by: Blue Cross of California at November 30, 2005 05:53 PM