International Health Care Expansion

It’s been silent for awhile on this blog!  The past several months have been crazy for me; trying to wrap up one job and moving to a new one, all while traveling excessively and finishing 2 classes at school.  But I’m back at it!

Following is an excerpt of a paper I’m planning to write in the next couple of weeks for my International Taxation class.  It is currently pending professor approval:

Medical tourism is a growing trend in health care, with millions of people traveling internationally every year to receive medical treatment.  A number of large international hospitals have taken note of this trend and are taking steps to expand internationally (such as India’s renowned Apollo Hospitals that have expanded throughout many countries in Asia and Europe).  The number of Americans going abroad for medical care has grown exponentially in recent years and shows no signs of slowing.  This directly impacts the bottom line of many US hospitals, particularly those offering specialty care and transplants.  Many health care executives acknowledge that in order to stay competitive, their industry must take steps to develop its global footprint as its patients become increasingly global.

This paper seeks to examine the various avenues upon which US hospitals could expand their international presence, and what barriers have impeded this type of growth to date.  The discussion will focus primarily on tax implications, comparing and contrasting the tax regimes of the US and India, as taxes are one of the key inhibitors of international health care provider expansion.

I’m not sure if I’m actually going to focus on India or not, but Apollo seems like a good example.  I could compare that with a US hospital such as Johns Hopkins or Methodist to compare/contrast their levels of international involvement.

We’ve got soil, and it’s all red

Debt: it’s on everyone’s mind right now, from the micro to macro level. I stumbled upon another excellent graphic by visualeconomics today, depicting national debt by country (as I’m sure you have seen from my posts – and performance in my economics courses in college – I can’t help but be a macro person).

A few initial observations:

Those countries “in the red” include some of the richest and some of the poorest countries in the world, GDP-wise.  But if we take a look at those countries that are resource rich (for example, Brazil, Russia, China, Chile, many southern African nations), we note that most of them are not very economically bad off at all.  In fact, most are growing.  India, for example, posted annualized GDP growth yesterday of nearly 9% through the quarter that ended on June 30th.  Australia posted 3%.

This then brings us to the US and Canada.  We are some of the most resource-rich of the debt-laden westernized countries, and yet we have some of the highest percentage of debt per GDP.  We are some of the only countries rich in resources, technology and talent that are seeing our economies continue to deflate.  Infrastructure is strong and political corruption is low.  Aren’t these typically the ingredients for success?  To me, the fact that we possess such abundant natural resources makes the current situation even more dire.  A country of this much natural wealth should not have to find itself in this position.

According to Mercer’s annual Quality of Living survey, none of these “in the black” countries even make it to the top 50 cities, whereas heavily indebted Italy, Spain, USA, and Portugal are all over the map.  Has our pursuit of life, liberty, happiness, and pensions, and quality health care, and more modes of transport, and disease eradication, and food and shelter for all, and support for poor countries, and military dominance, and debt forgiveness, and (you fill in the blank) eventually led us to a state where we can no longer live free and happy, as we are now ultimately bound by the gaping hole in our national checkbook?

A democracy cannot exist as a permanent form of government. It can only exist until a majority of voters discover that they can vote themselves largess out of the public treasury. – Alexander Tytler

Will the older generations of these countries, who enjoyed so many amenities that their countries could simply not pay for, look back in retirement and wish that they had not chosen the path that they did?  And more importantly, do the ideals that I currently stand for have the potential to inhibit the freedom and options of the generations that will come after me?

We must all live so that our children do not have to pay for our deeds. – Andrejs Upits

Crippling Terrorists – Via Their Balance Sheet

I attended a fascinating Webcast put on by Deloitte today on “The Money Trail –Solving Complex Government Problems Using Financial Intelligence”.  Slide deck available here.

One particular topic that caught my attention was the discussion on terrorist financing.  A quote from the presentation:

Rogue regimes, transnational criminals, illegal armed groups, violent extremists and terrorist organizations all have one common element -money: the need for, involvement in, and the importance of finances as the lifeblood of their operations and, consequently, the livelihood of their ideology. In the end, our Nation’s adversaries, both large and small, should be seen as organized businesses focused on raising, moving, safeguarding and expending money for the purposes of prosecuting their attacks on the US’s national security interests.

This is fascinating to me, and makes a lot of sense.  If we can discover who is supplying terrorist groups with capital, and cut off that money supply, then that will quickly ripple down the chain and disable their operations.  Certainly a much more effective strategy than hunting around in desert caves for three men, 10 guns and a laptop.  Although I’m sure that it’s not as simple as it sounds – what if the suppliers include governments, or individuals closely aligned with governments (which, in most cases, is likely the reality)?  Does this complication account for the fact that we haven’t crippled those enemies already?  What are some of the techniques that are used to follow the money in unsophisticated financial systems?

The forensic accounting field is growing everywhere – in the health care industry, especially with fraud/misuse of Medicare/Medicaid; in the government, relating to the need to better track appropriations…  I’m hoping to connect with more people in this area to understand more.

Final paper has been posted.  Grades aren’t in yet but I’m feeling hopeful!

Poverty in Africa and South Asia

Shanta Devarajan, Chief Economist for Africa (and formerly of Asia) for the World Bank visited our class last night to deliver an extremely interesting lecture on “Why are there so many poor people in Africa and South Asia?”.  His presentation boiled down to one key element: public policy.  He asserts that heavy governmental regulation and intervention in the economies of these impoverished nations are the sole reason why, while the economy is growing, poor people are staying poor and social indicators are not really going up.

A primary example given was water and other utilities.  The public policy in nations such as India is to provide water to its citizens free of charge, so it subsidizes the utility companies.  However, this aid becomes a “tool of political patronage” in practice, as politicians want to ensure that their own constituencies receive the bulk of the funding.  The result is that water availability (from a natural resource perspective) and actual water usage show no correlation in India, except that the natural resources are wholly underutilized in all areas, and no region in India enjoys 24/7 water.  To survive, citizens are forced to purchase water from private vendors, paying 5-6 times the normal rate.  He described the system as “well intentioned government policy, that backfires and ultimately discriminates”.  When asked about similar poor communities in China, Devarajan related that they do not experience the same problems because China charges for water usage.  The same goes for education.

I’m planning to follow Devarajan’s blogs; if they are anything like last night’s lecture, I’m sure they are interesting.  His blogs here:

• South Asia: http://blogs.worldbank.org/endpovertyinsouthasia/
• Africa: http://blogs.worldbank.org/africacan/

I’m hoping to start reading more about Africa and developing countries as I find it all fascinating.  A book recommended to me by a coworker was States and Power in Africa by Jeffrey Herbst.

“It is not sufficient to contrast the imperfect adjustments of unfettered private enterprise with the best adjustment that economists in their studies can imagine.  For we cannot expect that any public authority will attain, or will even whole heartedly seek, that ideal.  Such authorities are liable alike to ignorance, to sectional pressure, and to personal corruption by private interest.” – A.C. Pigou, “the father of welfare economics”

London Recap – Day 3

First stop – Citibank

Sagheer Mufti of Citibank London visited us in the morning to talk about the credit crisis and how it has affected global companies.  Mufti commented that global companies have many advantages, but the primary disadvantage is being affected by every world event.

Interestingly, he spoke about a topic that we touched upon during the EBRD visit yesterday – the practice of borrowing in another currency.  He described how citizens in countries such as Hungary would borrow in Swiss francs or other currencies because these types of loans carried low interest rates.  However, the economic crisis resulted in foreign exchange fluctuations, effectively resulting in an increase of these people’s debt by about 30%.

He then went on to describe a few examples of the crisis and how companies (and states) were over-leveraged.  Iceland, for example, was leveraged to 6 times GDP prior to its banking collapse.  He spoke about Northern Rock, and how it was a very small company, which is interesting because the government rushed in to save it.  A politician named Vince Cable was particularly influential in pushing for government takeover, and is now the Secretary of State for Business, Innovation and Skills, where he has begun lobbying for an increase in the capital gains tax.

The UK is different than the US, however, in that nationalization of banks requires EU approval.  European nations also must be granted EU approval to modify interest rates.  Therefore, when comparing EU and US response to the financial crisis, it may be said that the EU’s response was slowed due to complexity of the approval process, versus the US response was delayed by the initial thinking/decisions on what to do by the Obama Administration, according to Mufti.

Mufti believes that it will take another year or so to see the outcome of the current crisis, but that the US will be faster to rise out of it (he predicts, by the end of 2010).  Culprits in the crisis did include banks, but Mufti was adamant in his claim that “all are liable”.  Concentrated risk and governance were violated at large US firms, who claimed ignorance versus taking responsibility for their actions.  Ratings agencies were culpable as well, in that they were reactive instead of proactive.  And of course, consumers who took on risky mortgages comprise the root of the problem.  “We do live in a global village,” Mufti concluded.

Second Stop – The Office of Fair Trading

Bob Chauhan of the OFT delivered a very informative presentation on “State Intervention, Nationalization and Regulation”.  Bob took part in developing some of the initial PFI contracts for the UK and was quite candid with us which was much appreciated.  First he spoke about the term “too big to fail” and how it does not just apply to banks.  Even smaller operations such as the so-called “Christmas Clubs” come into question on this topic.  These clubs are essentially small savings accounts that poor people utilize in order to save for Christmas gifts, many of which failed.  The question becomes: is it cheaper to intervene in these operations, or just pay unemployment?  State aid can also be avoided simply by nationalizing an outfit.

The most powerful incentive for state intervention, he noted, is vengeance.  This is when the public becomes so fired up about something that something of an “off with his head” mentality emerges, and everyone develops a strong desire to see the person destroyed.  This gives the state clear incentive to appear as though it is doing something about it.

Chauhan also talked about the differences in mentality between the US and UK with regard to taxes vs. user fees.  Many UK citizens, once the government buys 80% or so of a bank, feel as though they own it and should not have to pay bank fees or penalties.

Unfortunately I forgot to capture Rule #1 and now it has escaped me, but Rule #2 of the public sector, as described by Chauhan, is to never allow more than 2 administrations.  The reason for this is that the first wave are typically very bright and motivated, the next wave tries to implement what the first wave did, and by the third wave typically nobody knows what they are doing and begin to engage in “dogwhistle politics”.

Rule #3 is that when budgets meet policy, budgets ALWAYS win.

PPPs follow an investment-risk-control slope.  Step 1: Advice.  Let me (the government) advise you (private company) on what you should do.  Step 2: Regulation.  Why don’t I (the government) lend you (company) some money?  Step 3: Ownership.  This lending investment has become risky for me (the government) and now I need to take control (nationalize the company).

The results of complete state ownership are the crowding out of competition and the increase of state intervention in the economy.  Upon nationalization, all of the company’s debt enters the state balance sheet and employees are subject to public sector pay and pensions.  When the state provides debt finance for infrastructure projects, the result is self-establishment of the government in that sector.  Operation of the business then becomes a question of commerce versus policy, on matters such as mergers/acquisitions/disposals, payment policies, and lending practices.  A shareholder executive is typically appointed in these situations, who is responsible for holding all the government’s shares and acting as an interface between the commercial and political interests, and resolves disputes between the two.  One key characteristic of state ownership (as we saw when speaking with KPMG) is that the state more often neglects to account for liabilities prior to nationalizing.  Even though a profit can be made, liabilities should still be analyzed (which could eventually negate the profit-making opportunity altogether).  An example he gave was the Forensic Service, and questions such as what if missed evidence puts the wrong person in prison – does the government want to assume responsibility for this?

Chauhan, self-described as a “free market fascist”, told us that he does not think anything is too big to fail.  The government’s role should be instead to be there to pick up the pieces afterward and protect the people from great harm.  The failure by the UK government to define “too big to fail” led to a steep slide down the ownership/control slope.

Regulation, by contrast, is typically viewed as much easier than nationalization.  It requires legislation only, not acquisition of assets and debts.

He briefly touched upon the “Green Bank” that the BCC told us a bit about.  The Green Bank was officially established yesterday 6/22 with the purpose of investing in green infrastructure projects, and will compete against banks for green infrastructure lending.  However, the Green Bank, being a government entity, can raise funds at government rates versus the commercial rate, which will result in competitive distortion.

Third Stop – Transport for London

The Corporate Finance team of TfL gave a presentation on transportation PPPs.  First we learned a bit of the background of TfL, which was created by an act of Parliament and is accountable to the mayor of London.  TfL covers pretty much everything, except local streets, national rail, and airports.  They are in charge of basically everything else, including trams, subways, trains, congestion charging, etc.  TfL is financed via a direct, 10 year grant from the central government, as well as from passenger fares.  Passenger fares make up about 2/5 of the necessary amount needed to run TfL, the grant comprises another 2/5, and the rest is obtained via borrowing efforts that are capped by the government.

TfL engages (or has engaged) in multiple PFI efforts, including “Prestige” (Oyster cards and ticketing, which was recently nationalized), Power (electricity for the trains), Northern Line (the physical train assets – the East London line was recently nationalized), and Connect (communications).  At one point in time TfL had 13 PPP/PFI projects, and has more PFIs on its balance sheet than it does off.

Interestingly, TfL is the only government organization that can borrow, and has its own bond program.  The central government does not guarantee the TfL bonds, but the bonds are on the central balance sheet.  The mayor makes the decision to increase fares.  Last year saw a 5% increase, but a 10-20% increase (which is likely politically inpalpable) is still needed.  Charles Doyle and Stephen Dadswell, our facilitators, related that few people in the UK understand the cost of providing transportation, “and frankly expect it to be provided free of charge”.  This certainly jives with what the other speakers have been telling us thus far.

Several of the tube lines were reacquired a few years ago from former PPP contracts gone sour.  The reasons cited for the need to establish PPPs in the tube in the first place were that the cycle of investment on these projects was too short, and that the projects were not costed to the deadline, resulting in several incremental costs.  So, TfL issued three major 30 year contracts, which provided the winners the ability to reprice every 7.5 years under an “extraordinary review”.  The result was catastrophic – the contractors requested far too much during these reviews and had to be nationalized.

I asked TfL about fines/penalties and whether they were effective and if they hampered innovation? (As we discussed with the ORR).  Their answer was interesting: the human element tends to be much more influential than a logical statistical fine.  The “man on the ground” running the trains isn’t going to care that his company will be fined, and the company is only concerned ultimately with losing the contract, because they have what TfL described as a “comfort letter”.  In the event that the company is unable to pay, the government “wouldn’t do nothing”, even though it did not outright guarantee payment.  There is also a potential moral hazard with fines.  The example he gave was with a surgery outpatient hospital – how can a fine be determined with regard to botching a surgery?  This gets into pricing out a life which is impossible.

We related how in the US, employers are often able to provide tax-free transportation benefits to employees.  TfL seemed to like this suggestion as a way to increase fares without making too many people upset.

That evening, we saw Henry IV performed at Shakespeare’s Globe Theatre.

London Recap – Day 2

First Stop – KPMG

Our first meeting of the day was with KPMG’s Corporate Finance group, who we remained with for the entire morning.  We heard a number of presentations, ranging from “The Theology of the PPP” to actual PPP projects with which KPMG is currently engaged.  KPMG stated that “purely from a numbers perspective, PFI seems to be working across the board”, due to a number of factors including risk transfer, output-based specification, task integration, long-term contracting, bidding competition, and contractual incentives.  We spoke about Special Purpose Vehicles (SPVs) and the positive role that banks have played.  The reason for this is that banks dictate that all risk must flow down through the supply chain.  The government has historically not had much incentive or time to fully investigate all risks, so the bank fills that gap, becoming a strong partner with the public sector by performing all due diligence on the project before authorizing a loan.

Similar to what the BCC spoke to us about, KPMG believes that PPPs will not disappear, but rather are set to undergo a rebranding of sorts, which they called Strategic Estate Development (“change the name and carry on”).  KPMG envisions this model as a private sector driven, 50/50 joint venture with the public sector in which the entire estate (including facilities management and property development) are manned by the private sector with some public sector oversight.  They specifically mentioned high speed rail and nuclear power plants as “a must-do for the UK”, but progress is tricky as there are very high risks involved.  Due to the high level of risk, a traditional PPP model is not appropriate for this type of venture.

Acknowledgement of the risks involved is a very important component to understanding the value for money in PPPs, particularly since the private sector values risk much differently than the public sector.  PPPs work best in fiscally contained environments (similar to the current budget deficit situation and the need to contain and restrict costs), because it allows the government to defer payment of assets via the PPP vehicle.  If other alternatives to a PPP exist, the goverment will usually use them (i.e., we have the cash, so we will just buy it).  KPMG is heavily involved with PPP consulting, typically starting on the government side and initial setup/strategy of the PPP and then eventually contracting with the private delivery vehicles.

KPMG’s perspective on the new coalition government under David Cameron is that the government is investigating whether it can get the same quality/level of service while paying less.  The emergence of user pay ideas (tolling, fees, etc) force consumers to recognize the costs of infrastructure.  They gave an example of a similar phenomenon that occurred in Stockholm, Sweden a few years ago.  Sweden is a similar society to Britain in that as a general rule the population is more adept to accept taxes over user fee pay structures.  The way that Stockholm managed this (I believe it was for highway tolls), was that they implemented a user toll charge, and then asked people if they liked it, or if they would rather have that fee added to their taxes.  As one can imagine, that quieted down the uproar rather quickly.

KPMG touched on congestion charging, using the city of Manchester as an example.  The theory behind congestion charging, they explained, is to acknowledge that congestion will slow economic growth.  Therefore, a congestion charge is implemented so that the economic slowdown is further postponed and additionally, revenue may be concurrently collected which in theory may be used to expand the current infrastructure.  These methods serve to stave off congestion and prolong growth.  The primary calculation used in determining feasibility of these schemes is Gross Value Added (GVA), which calculates benefits of the program based upon jobs x productivity.  Costs are calculated as the present value of all future income and expenditure.  These combined calculations give a prioritization metric used to capture the impact on jobs that the PPP will have and whether or not it will be hugely beneficial.

Finally, we reviewed a couple of the large PPP projects that KPMG is currently engaged in.  One project, the Military Flight Training System, involved the outsourcing of flight training for British fighter pilots.  This was hard for us Americans to relate to as we could not imagine letting a foreign company take control of training our defense services.  The other project was Building Schools for the Future, an initiative aimed at rebuilding the public schools which had fallen into dire disrepair.  They also left us with a healthcare infrastructure pamphlet which I am very interested in reading (deals primarily with the construction of hospitals for the NHS).

Second Stop – European Bank for Reconstruction and Development (EBRD)

In the afternoon, we met with some people from the EBRD that specialize in financing in former Soviet Union countries and other Eastern European countries.  This was a bit different than what we had experienced in past presentations, but nonetheless we found some recurring themes, particularly later when we met with private banks.  First Piroska Nagy spoke to us about central bank lending to private entities after the fall of the Berlin Wall.  Eastern European countries during this time were in dire need of loans but could not obtain them – the central banks were not lending (or did not yet exist) and private foreign banks were pulling out of the region in droves.  These private banks were mostly from Western Europe and were backed by their own countries, except not their foreign subsidiaries in Eastern European countries.  The EU was powerless over this phenomenon since it could not effectively issue mandates at the micro level.  So, the EBRD developed the Vienna Initiative which created a platform for coordination with all parties – home and host countries, 15 large banks, and International Finance Institutions (IFIs) such as the IMF.  The body came together to determine who would be responsible for providing liquidity and assurance for these Eastern European bank subsidiaries.  Some components of the agreement included clear burden-sharing.  Country bank guarantees (such as Germany) would cover these subsidiaries and provide liquidity.  In effect, taxpayer dollars in Germany went to fund subsidiary banks in Hungary and elsewhere.  Another component included the EBRD and other IFIs working together to construct a micro support package of about €25 billion.  The result of the Vienna Initiative was clear burden sharing and zero foreign bank failures.  As the CEO of Raiffeisen Romania bank put it:

“It created stability that has meant above all that IMF loans have gone to solve the balance of payments crisis and finance deficit spending rather than funding bank recapitalization. In fact, according to the results of the stress test we underwent, Raiffeisen Romania did not even require recapitalization in the end.”

The Vienna Initiative did not include any direct mandates, but rather operated in the form of financial incentives, putting peer pressure on banks and IFIs to follow through on their commitments.  The agreement was very public and transparent, though this was not a legal requirement and banks could withdraw if they wanted to (although nobody did).  The Vienna Initiative is still in place, as the crisis is not completely over, but the crisis is now taking on a new form – shifting from the private sector to the government (i.e. Greece’s recent default).

Today, the EBRD is heavily engaged in encouraging lending in different currencies in order to shift currency fluctuation risk.  Basically, this ensures that entities wishing to take out a loan in Hungary could take the loan out in Swiss francs instead of the local currency, under the assumption that the Swiss franc would be less susceptible to inflation.

Some of our ensuing discussion brought up some important topics.  First was that there was a potential unfair advantage for big foreign banks – small local banks would have to look to their own country for support and thus would not have the same credentials.  We also questioned whether the EU would like to put one central bank over all of Europe in place?  The EBRD told us that, while this is the European dream, sovereign interest is still very strong and would make this sort of initiative very difficult.  In addition, the EBRD holds the belief that privately run banks will run most efficiently.  “Quite frankly, governments cannot run banks”.

Next, we heard a bit about a small, locally owned bank in Latvia called Parex Banka.  Parex Banka saw a rapid loss of consumer confidence in 2008 which resulted in massive withdrawls.  The government responded by limiting the amount of money that could be withdrawn, and buying an 85% stake in the bank.  With the help of the EBRD, the IMF/EU created a €7.5 billion financing package, of which half went to banks like Parex.  Now, the goal is to create a new bank using some of the existing structure.

Lessons learned by the EBRD from the Parex situation (with regard to failing banks) include a need for:

• Good corporate governance, including a high level of transparency and independent risk management
• Early equity support by the national governments
• Communication to stakeholders, and what the nationalization of the bank will mean for depositors
• Talking to regulatory bodies, including IFIs, early on in the process
• Fast response by other involved parties, including the government and IFIs.

Third Stop – Kynikos Associates

Perhaps the most interesting (or at least the most different) presentation of our trip was with David Glaymon of Kynikos Associates’ presentation on “A View Through the Market Looking Class”.  Glaymon works for Kynikos (Greek for “cynic”) under Jim Chanos, the reputed short seller of Enron stock in the early 2000’s.  Glaymon gave us a very interesting presentation on the state of the world economy, citing facts such as GE being the largest subprime lender in the UK, and the German government paying 75% of citizen salaries in order to keep people in jobs.  While their business is primarily focused on short selling, they also buy things when they are otherwise “left for dead” – companies that recently included some newspapers.

It was refreshing for me to hear him speak, since aside from my father most everyone else seems to think that the economy is in recovery and the worst is over.  Glaymon seemed to also acknowledge that “traditional” logic such as buying US Treasuries was not an adequate hedge against what is to come, since it is not beyond the realm of possibility that the US will default on its debt.  Many of my classmates left that presentation a bit bewildered.

He recommended Michael Panzer’s Financial Armaggeddon which may be my next book.

We spent that evening watching the sun go down over the Thames.

Privatization… bring in the big bucks

As a part of my next class (yes, summer school has already started!) I will be doing a large project on privatization and public-private partnerships.  Our team has decided to do something on the transportation industry but haven’t decided on a specific topic yet.

I’d personally like to examine the shipping industry so that would be awesome if we could cover that… if not, postal services or airlines would be interesting as well.  Particularly in the current economic environment, there is a lot of buzz on this topic and I’m sure we will be seeing more major privatizations soon.  Russia announced that it is trying to plug its budget deficit this way.  Some interesting quotes from this article:

“The time has come for a large-scale mass privatization that can be both economically justified and socially fair”…  He said the state could cut its stake in these firms to below 50 percent, retaining control through “a golden share.”

I’d be interested in examining the management model of firms with public stakeholders holding these so-called golden shares.  Hopefully that can be incorporated into our research.  Also I’d like to examine how people define this concept of “socially fair”.