No Ordinary Human Being

Charlie Munger was visiting his hometown of Omaha, Nebraska, in the summer of 1959 when one of his childhood friends, Neil Davis, introduced him to a young man, twenty-nine at the time, who was managing a number of partnerships for several local investors, including himself. 

Munger, a lawyer in Los Angeles, was immediately captivated by the man, suspecting that he shared his own "considerable passion to get rich." (Schroeder, p. 226) A few nights later, accompanied by their wives, the two went to dinner, and when Munger returned to Los Angeles, they "began talking on the phone with increasing frequency." (Schroeder, p. 228) When his wife asked him why he was paying so much attention to Warren Buffett, Munger replied, "You don't understand. That is no ordinary human being." (Schroeder, p. 228) 

 

Fifty years later, Munger's assessment has been confirmed a billion times over as his inveterate partner has amassed a fortune which, depending on the vagaries of the stock market, has elevated him to first or second place in the pantheon of the world's richest men, all the while maintaining a lifestyle of elegant simplicity. In contrast to the profligance and hubris of Wall Street moguls like the recently-deposed Merrill Lynch CEO John Thain, the Internet's newest whipping boy, so labeled for his lavish expenditure of 1.2 million dollars to refurbish his Manhattan offices in the face of his company's looming insolvency, Warren Buffett still spends the majority of his time in Omaha, drives the one-and-a-half miles from the house he has inhabited for four decades to the office he has occupied almost as long, sits behind a desk owned by his father, answers first-time callers himself, and personally picks up visitors at the airport in his late-model Lincoln Town car. 

 

The soul of the exquisite machine called Berkshire-Hathaway, which he has built over a lifetime of rigorous adherence to his rationalist investment strategy, he is a CEO like no other. Twenty thousand acolytes and curiosity seekers swamp his annual shareholders meeting at the Qwest Center in Omaha, where a miniature "Berkyville" rises to greet them: neighborhoods of booths displaying his family of companies and the products they sell: awnings, air compressors, knives, encyclopedias, vacuum cleaners, picture frames, furniture, kitchenware, candy, insurance, shoes, and boots. After all, it is the fourteenth largest business in the United States (in 2004) with 172,000 employees, sixty-four billion dollars in revenues, and profits of eight billion dollars a year. (Schroeder, pp. 790-791)  

 

By eight-thirty Saturday morning every seat in the auditorium is filled. An introductory video rolls featuring Buffett as a super-hero in any number of guises, including a body builder gracing the cover of Muscle and Fitness Magazine, his face superimposed on the physique of Arnold Schwarzenegger. After a brief business meeting, Buffett, chomping on peanut brittle and a Dairy Queen dilly bar, launches into this year's lecture : "Why I'm down on the dollar and the perils of debt." (The dollar would decline in value against major currencies over the next four years, and the economy would collapse, overburdened by individual and corporate leverage.) He (with Munger as accompaniment) rambles on, talking and answering questions for six hours, doing what he has been doing since he was a little boy and "astonished his parents' friends with his precocity. . . As long as he can be teaching something to somebody, Buffett never stops talking." (Schroeder, p. 789) 

 

Which means he assuredly enjoyed the hours he spent during the last five years with his hand-picked biographer, Alice Schroeder, a former Wall Street analyst, who has produced an engrossing account of his career, The Snowball: Warren Buffett and the Business of Life. Not only is Buffett's predilection for the spoken word evident -- every ten or twenty pages the Oracle himself opines, his recorded words transcribed into italicized passages -- so is his prodigious memory. He recalls the details (and earnings) of every job he ever had: delivering newspapers, shoveling snow, unloading sacks of feed in his father's warehouse, as if they were the assets and liabilities of the hundreds, even thousands, of companies which are forever engraved in his consciousness.

 

Instead of blindly following the path of other political and business notables -- like Donald Trump, Jack Welch, and Rudi Giuliani -- capitalizing on his name and reputation and publishing a memoir or a how-to book with the assistance of a ghost writer (such as the journalist Carol Loomis, who edits his annual meeting reports to shareholders), Buffett chose a course of characteristic iconoclasm. How to interpret his story, who else to interview, what to write, he left up to Ms. Schroeder. "Whenever my voice is different from somebody else's," he advised her, "use the less flattering version." (Schroeder, p. 4) 

 

Aside from his current status as a cult figure, one, of course, is drawn to that story because it is so unique. Neither an industrialist, a technological pioneer, a real estate magnate, nor a financier, Buffett rose from modest origins to immense wealth solely on the wings of his investing acumen. Wall Street mutual fund managers, investment bankers, and hedge fund entrepreneurs have prospered through a similar track, yet Buffett dwarfs them all, in sheer numbers and in methodology. The author describes in workmanlike fashion how it was done: almost effortlessly, it seems, yet a feat unlikely ever to be repeated. 

 

Warren Buffett met Bill Gates on a Fourth of July holiday in 1991 at a gathering orchestrated by Kay Graham at the Bainbridge Island home of her Washington Post editorial page editor and friend, Meg Greenfield. As many of Seattle's best-known people circulated around them, Buffett and Gates struck up a conversation that went on all afternoon, to the palpable exclusion of the other guests. Buffett remembers: "At dinner, Bill Gates's father posed the question to the table: what factor did people feel was the most important in getting to where they've gotten in life. And I said, 'Focus.' And Bill said the same thing." (Schroeder, p. 623) 

 

Ms. Schroeder writes that few people understand "focus" as Buffett has lived that word. "This kind of innate focus can't be emulated. It means the intensity that is the price of excellence. It means discipline and passionate perfectionism . . . It means the single-minded obsession with an ideal." (Schroeder, p. 604) 

 

In 1940, when Warren was ten years old, his father took him to New York City and at his request to the New York Stock Exchange, where he watched a cigar made up by hand. That day "his future was planted." He saw "rivers, fountains, cascades, torrents of money gushing forth from the stock exchange, enough to hire a man for the frippery of rolling cigars, and he wanted some of that money." (Schroeder, p. 63) 

 

He stumbled across a book in the library entitled "One Thousand Ways To Make A Thousand Dollars" and was fascinated by pennyweight scales. " 'The weighing machine was easy to understand. I'd buy a weighing machine and use the profits to buy more weighing machines' . . . The concept of compounding struck him as critically important. If $1000 grew 10% a year, in five years it became $1600; in ten years $2600; in twenty-five years $10,800." He could picture the numbers compounding and growing like a snowball rolling across the lawn. He announced to a friend that he would be a millionaire by the time he reached thirty-five. He had already saved $120. (Schroeder, pp. 64-65.) 

 

Three years later earnings from his three newspaper routes had swelled his horde to $1000. By 1950, the year he entered Columbia University Graduate School to study at the knee of Ben Graham, he had increased his capital to $10,000. Graham's book, The Intelligent Investor, mesmerized Buffett. "It was like he had found a God," said a roommate. Graham "blew apart the conventions of Wall Street, overturning what had heretofore been largely uninformed speculation in stocks . . . Through examples of real stocks he illustrated a rational, mathematical approach to valuing stocks. Investing, he said, should be systematic." (Schroeder, pp. 126-127) 

 

From Graham, Buffett learned to analyze a company's intrinsic value -- its net worth after all assets were sold to pay liabilities -- regardless of how other buyers and sellers, or Mr. Market, priced it, and then to build in a margin of safety -- what the stock would be worth if the company were shut down and liquidated. Although Buffett became an enthusiastic follower of Graham, he disagreed with him about the need to own a large number of stocks. He sold three-quarters of his growing portfolio to buy 350 shares of the insurance company GEICO at $42 a share; he thought they would be worth $80 to $90 in five years. (Schroeder, p. 138) In 1951 he earned 75%, boosting his capital to $20,000.

 

After a brief stint at his father's brokerage firm in Omaha -- he didn't like selling stocks because it pitted his interests, garnering commissions, against those of his clients -- and three years at Graham's firm in New York City -- he didn't like riding the train everyday -- he returned home to start a partnership including friends and relatives, Buffett Associates Ltd., modeled on a Graham hedge fund. On May 1, 1956, six partners put in $105,000; Buffet put in $100. He guaranteed his partners a four percent return. "I got half the upside above a four percent threshold and I took a quarter of the downside myself. So if I broke even, I lost money. And my obligation to pay back losses was not limited to my capital. It was unlimited." (Schroeder, pp. 201-202) Within two years he was managing $1,000,000 and seven partnerships, plus his own money. 

 

The snowball had started rolling. The boy who had reveled in collecting license plate numbers, stamps, and bottle caps was now a man collecting investments, businesses, and human beings. 

 

He spent hours studying Moody's Industrial, Transportation, Banks, and Finance Manuals, looking for what Graham called "cigar butts -- cheap and unloved stocks that had been cast aside like the sticky mashed stub of a stogie, from which he could coax a light and suck out one last free puff." (Schroeder, pp. 184-185) He could speak from memory for five or ten minutes about any stock -- its financial data, its price/earnings ratio, the value of shares traded -- and he could do this for hundreds of stocks, as if he were quoting baseball statistics. (Schroeder, p.170) 

 

Those long conversations with his new friend, Charlie Munger, expanded his horizons. Munger bought cigar butts too, but he was as interested in a company's intangible qualities as he was in its balance sheet: the strength of its management, the durability of its brand, what gave it an enduring competitive advantage. Munger urged Buffett to define Graham's margin of safety in terms other than the purely statistical. (Schroeder, pp. 256-257) 

 

It was this kind of thinking that led him to place a huge bet on American Express in 1964. The company was rocked by a scandal in late 1963 which drove its stock down fifty percent; one of its subsidiaries had issued warehouse receipts guaranteeing tankfuls of soybean oil as collateral for speculative bank loans. When the oil turned out to be seawater, American Express was exposed to a $60 million loss. 

 

With one-half billion dollars in Traveler's Checques floating around the world and its five-year-old credit card a huge success, Buffett, after scouting banks, restaurants, hotels, and credit card usage, concluded that the company's value was its brand name and that customers were still happy to be associated with American Express. He began pouring money into the stock, $3,000,000 dollars in six months, $13,000,000 dollars by 1966. He urged the company's president to pay the $60,000,000 it owed to the banks, saying that if he did so, the company would "be worth substantially more than an American Express disclaiming responsibility for a subsidiary's acts." (Schroeder, p. 263) 

 

As the stock began to recover, Buffett was able to announce stupendous results to his partners at the end of 1965. American Express's goodwill had proved to be the competitive advantage Charlie Munger had meant when he spoke of "great businesses." 

 

Berkshire-Hathaway was not a great business when Buffett began buying its stock in 1962. It was a textile maker in New Bedford, Massachusetts, that was selling at a discount to the value of its assets: $7.50 per share versus $19.46. His idea was to buy and liquidate, or sell the stock back to current management, which was headed by Seabury Stanton, a self-proclaimed savior of the New England textile industry, who was spending millions trying to modernize his plants. When Stanton, who was himself accumulating Berkshire-Hathaway shares, reneged on a deal with Buffett to purchase his shares at an agreed-upon price -- he lowered his offer $0.125 per share -- Buffett decided that, instead of selling, he would buy this "failing, futile enterprise" -- because it was cheap and because he resented being chiseled. (Schroeder, p.273) 

 

Within a short period of time, propelled by the purchase of 2000 shares from Stanton's brother, Buffett pushed his ownership to forty-nine percent, which gave him effective control. Coincident with Buffett's being elected Chairman of the Board and tapping his own CEO, Seabury Stanton resigned. 

 

Although Buffett had bought Berkshire-Hathaway at a good price, its inherent business was doomed. "This was a soggy cigar butt with not even one puff left in it," Buffett admitted. "I would have been better off if I had never heard of Berkshire-Hathaway." (Schroeder, p. 277) 

 

After liquidating some of Berkshire-Hathaway's assets, Buffett put his capital to work by buying National Indemnity, an Ohio-based insurance company owned by local legend "Jet Jack" Ringwalt. Ringwalt had built his business and become a celebrity by pinching pennies and, for the right price, insuring the exotic: circus performers, lion tamers, the body parts of burlesque stars, the bank account of a missing, purportedly dead, bootlegger, and radio station treasure hunts. He coined the phrase often attributed to Buffett: "There is no such thing as a bad risk, only bad rates." By grafting National Indemnity onto Berkshire-Hathaway, Buffett could use the latter's capital to grow the insurance business, which could generate more capital to buy other businesses. (Schroeder, pp. 301-302) 

 

A similar motive led him to invest in Blue Chip Stamps, whose stock had been hammered by an antitrust suit filed against it by the Department of Justice for allegedly monopolizing the trading stamp business in California. (The lawsuit was later settled.) Buffett wanted Blue Chip, because, like an insurance company, it generated float. The retailers who distributed trading stamps paid for them in advance; the prizes awarded for the stamps were redeemed later. In the meantime, Buffett could invest the steadily growing stream of float. 

 

In 1966 Buffett's partnership (by then he had rolled all of them into one) beat the Dow by thirty-six points, the best record in its thirty-six year history. By 1968 it had amassed a 31% annualized return over the dozen years of its existence compared to the Dow's 9%. 

 

By 1969 with his investments worth over $100,000,000 and himself 25% of that, Buffett had become wary of an overheated stock market and discouraged by a dearth of buying opportunities. He turned down lucrative offers to sell the partnership and decided to unravel it instead. His partners had the option of redeeming their shares in cash or Berkshire-Hathaway stock; the wiser ones, of course, chose to retain ownership in Berkshire-Hathaway and the other companies that comprised the partnership's assets. 

 

One of those was the Omaha Sun, a purchase which reflected Buffett's youthful newspaper career, his growing awareness of the profitability and influence of media organizations, and his latent desire to be a publisher. He encouraged the Sun to investigate Boys Town, an Omaha refuge for homeless boys and a local sacred cow. In a story for which it won a Pulitzer Prize, the newspaper exposed the Home's egregious fundraising activities; it was sending out 40 million pieces of mail a year, taking in 10 million dollars annually, and had accumulated a net worth of over 200 million dollars, when it needed less then five million dollars to fund its annual operations. (Schroeder, pp. 358-359) 

 

The Sun's luster (it was only temporary; not long afterward, it started losing money) only whetted Buffett's appetite. Thwarted in his attempts to buy whole newspapers (the prices were too high) he began accumulating stock in the Washington Post -- fresh off its success reporting the Watergate cover-up. His notoriety piqued the interest of its publisher, Katherine (Kay) Graham, and sparked an unusual friendship that was to last until her death. Initially, the two could not have been more mismatched: the impeccably-dressed, powerful, patrician doyenne of Washington society and the rather seedy, corn-fed, Midwestern hick, who wore a suit that seemed tailored for some other man. (Schroeder, p. 381) When invited to a black tie dinner party at Graham's magnificent Georgetown mansion, Buffett had to scramble to find suitable attire. 

 

"He had never attended a gathering of such formality or grandeur." The waiters "offered him food he would never eat and wine he would never drink." When the hostess rose to read an original toast to him, her guest of honor, he was too intimidated to return the favor. All he wanted to do was escape -- especially since his wife Susie's dinner companion, Senator Edmund Muskie, had been fawning over her all night, even inviting her to his Senate office building as they were leaving. (Schroeder, pp. 385-386) 

 

And yet Buffett was enamored of all the glitter that surrounded Ms. Graham. Fascinated by her, he began a courtship. Soon she was calling him for advice on how to give a speech and inviting him to join her Board of Directors. 

 

He "became her personal Dale Carnegie instructor." (He had taken the course himself years ago to build self-confidence.) "He could sympathize with someone who tended to freeze in front of a crowd." (Schroeder, p. 400) I

 

In return Kay Graham tried to refine and polish Buffett, especially his dining habits, a hopeless task. "I follow a simple rule when it comes to food," said Buffett. "If a three-year-old doesn't eat it, I don't eat it." (Schroeder p. 603) "He ate his foods in sequence, one at a time, and did not like the individual foods to touch." Broccoli, asparagus, brussel sprouts, cauliflower, carrots, sweet potatoes -- he despised them all. He liked spaghetti and grilled cheese sandwiches, meatloaf, hamburgers. (Schroeder, p. 425) 

 

Meanwhile capital from Blue Chip and his insurance companies was pouring into Berkshire-Hathaway, at the same time the stock market was collapsing. Buffett was exuberant. "This is a time to start investing," he said in an interview." I feel like an oversexed man in a harem." (Schroeder, p. 406) 

 

One of the beauties was GEICO, whose stock had crashed to two dollars a share when it reported a loss of 190 million dollars in 1975. After Buffett interviewed and blessed its newly hired CEO, Jack Byrne -- whom he immediately recognized as the dynamic, energetic, obsessed personality the company needed -- and after John Gutfreund at Salomon Brothers agreed to underwrite a 76 million dollar convertible stock offering, Buffett jumped at the opportunity. Under Byrne's extraordinary leadership, GEICO turned into another American Express. (Schroeder, p. 437) 

 

In 1977 Buffett and Munger finally found the daily newspaper they had been coveting; they bought the Buffalo Evening News for 35 million dollars. It was Buffett's largest single investment up to that time and almost his worst. It survived poor management, a protracted anti-trust lawsuit filed by a competitor newspaper, a teamsters union strike, and ten million dollars in losses before new management was able to cut costs, the competitor folded, and the paper started churning out profits. (Schroeder, p. 473) 

 

 Buffett's business philosophy was spelled out in his 1983 letter to shareholders. "Although our form is corporate, our attitude is partnership. We do not view the company as the ultimate owner of our business assets, but, instead, view the company as a conduit through which our shareholders own the assets . . . We don't play accounting games. We don't like a lot of debt. We run the business to achieve the best long-term results." (Schroeder, p. 480) 

 

Another of Buffett's entrepreneurial collectibles was Rose Blumkin, whose Nebraska Furniture Mart he purchased in 1983. At age sixteen Rose boarded the trans-Siberian railroad and traveled nine thousand miles across the continent of Asia before securing steerage passage on a cargo boat bound for America carrying peanuts. She eventually landed in Omaha and opened a pawn shop with her husband, but soon expanded into furniture and carpet. When her customers demanded more furniture, she opened a store in a nearby basement. Her business grew rapidly because she swore by the maxim: "Sell cheap and tell the truth; don't cheat anybody; and don't take no kickbacks." When a carpet supplier filed a lawsuit to enforce its minimum pricing policies, which she was undercutting, the judge threw the case of out court, went to the Furniture Mart, and bought fourteen hundred dollars worth of carpet. 

 

After several futile passes, Buffett finally persuaded Rose, who was eighty-nine, and her son Louis to reject a more lucrative offer and sell the company to him, which by that time had become the largest furniture store in the United States, grossing 100 million dollars. That other buyer, he said, "will have his own way of doing things and will at some point believe his methods are better," a serious flaw for sellers whose "business represents the creative work of a lifetime and remains an integral part of their personality." It could only remain so if the owners sold to Buffett, who wanted them to stay on as his partners. (Schroeder, p. 497) 

 

In 1985 Berkshire earned 332 million dollars from a single transaction, when General Foods was taken over by Phillip Morris. Its shares were trading at $2000, and Buffett was a billionaire, one of only fourteen in the world, according to Forbes Magazine. He bought a jet airplane, which, he rationalized to a friend with great earnestness and obvious embarrassment, was going to save him money by getting him around faster. (Schroeder, p. 536) 

 

"Never in history had anyone climbed from the ranks of those who manage other people's money to join the celebrated few on top of the feeding chain of riches. For the first time ever, the money from a partnership of investors had been used to grow an enormous business enterprise through a chess game series of decisions to buy whole businesses and stocks . . . Buffett's first group of partners had reaped 1.1 million for each $1000 put into the partnership." (Schroeder, p. 537) 

 

It didn't happen without some cost -- a dysfunctional family life, which Ms. Schroeder depicts in excruciating detail -- perhaps too excruciating, since it was recently reported that, after a five-year collaboration, the author has been removed from the guest list for Buffett's traditional pre-Board-meeting dinner. 

 

From the earliest days of his marriage to Susie Thompson in 1952, Warren Buffett had depended on her to order his life. While he retreated to his study to read and think, she devoted herself to fulfilling his requirements and raising their three children. But she also developed a host of her own interests, surrounding herself with people, joining social service and civil rights organizations, and assuming the role of sounding board, counselor, and provider for friends and family members in times of trouble. As their wealth grew, she urged Buffett to be more generous and to indulge in a few luxuries, like the Laguna Beach home she finally convinced him to buy in 1972. Not long after that, she embarked upon her own career: singing at local night clubs. In 1977 her need to be separate, to realize her own ambitions, and "to find her own identity -- which she could not do if she were spending all her time taking care of him" -- led her to move to San Francisco. (Schroeder, p.453) 

 

The two never divorced, maintaining a cordial, even loving, relationship for the next twenty-seven years -- making public appearances, attending family gatherings, and vacationing together. Well aware of her husband's domestic helplessness, Susie encouraged Warren to take in a housekeeper, Astrid Menks. He married her in 2006, on his 76th birthday, two years after Susie's death. 

 

In 1987 Buffett switched from his favorite drink -- his own concoction of Pepsi-Cola combined with cherry syrup -- to the newly-introduced Cherry Coke. The price of the stock was also sweet, beaten down to a tasty $38 a share by a price war its bottlers were fighting with Pepsi. Within eighteen months he had acquired 1.2 billion dollars worth, six percent of the company. "In March 1989, when his position was revealed, it caused so much demand that the New York Stock Exchange had to stop trading the stock to keep the price from skyrocketing out of control." (Schroeder, p. 552) 

 

In the early 1990's Buffett burnished his reputation as a white knight -- which he had established by taking a fifteen percent stake in Cap Cities after its purchase of ABC at the request of CEO Tom Murphy -- when he rode to the rescue of the investment banking firm Salomon Brothers -- three times. First he invested 700 million dollars to prevent its takeover by corporate raider Ron Perelman. 

 

A year later one of its bond traders violated regulations regarding the sale of Treasury notes and cornered the market on an auction series. The company fell under an investigative cloud, and the stock dropped precipitously. Leveraged thirty-five to one, mostly in short-term debt, it was threatened with insolvency if its creditors decided to call their loans. When CEO Gutfreund, who apparently knew about the irregularities but had not reported or acted upon his information, resigned, company officials asked Buffett to step in as the interim Chairman. 

 

Buffett had told his children, "It takes a lifetime to build a reputation and five minutes to ruin it." His reputation as one of the most respected businessmen in the world was being undermined by executives whom he had endorsed, and he had to salvage that reputation. (Schroeder, p.582) With the company on the verge of bankruptcy, in a call which he said was the most important in his life, Buffett convinced Treasury Secretary Nick Brady to allow Salomon to bid in Treasury auctions and thus stay in business. 

 

Buffett implemented a new culture of openness at Salomon. Threatened with a criminal indictment, he waived the attorney-client privilege and pledged complete cooperation with congressional investigators and government regulators. When he testified before Congress, "the Red Sea parted and the Oracle appeared." (Schroeder, p. 603) 

 

"Huge markets attract people who measure themselves by money," Buffett said. "If someone goes through life and measures themselves solely by how much he has . . . sooner or later he's going to end up in trouble . . . Salomon was going to have different priorities from now on." (Schroeder, p. 603) 

 

In words that have been parsed and dissected in classrooms and case studies as a mantra of corporate responsibility, Buffett admonished his new managers: "Lose money for the firm and I will be understanding. Lose a shred of reputation for the firm and I will be ruthless." (Schroeder, p. 603) Transparency, integrity, honesty, all of the things Buffett stood for, he meant for Salomon to stand for them too. (Schroeder, p. 603) 

 

While Salomon, after paying a $190 million fine and a $100 million restitution, regained its footing, Buffett's testimony in Congress as its reformer and savior transformed him into a heroic figure. His star shone brightly. Berkshire-Hathaway stock burst through $10,000 a share. Buffett was now worth 4.4 billion dollars. 

 

In his spare time Buffett liked to play bridge. He pursued a "petite, sweet-faced brunette" in her mid-fifties, Sharon Osberg, a two-time world champion, until she became his regular partner. He even entered the World Bridge Championship with her, unheard of for a non-ranked amateur. 

 

In 1995 Buffett broke one of his hallowed rules. Desperately coveting the fifty percent of GEICO he didn't already own, he forked over $2.3 billion for it in Berkshire stock, not cash, fifty times more than he had paid for the other forty-eight percent. 

 

His mistakes were few -- he bought Dexter Shoes, thinking that the demand for imported shoes would wane -- and the home runs many. In early 1996 Berkshire stock rocketed to $34,000 a share, valuing the company at $41 billion. 

 

No matter how long he kept making money, sooner or later Buffett knew he would have a bad year or the momentum would slow down. By the end of 1999, with the Dow up 25% and the NASDAQ up 85%, Berkshire-Hathaway had fallen from a 1998 high of $80,900 a share to $56,100. 

 

Buffett's formerly "incredible cash machine," Coca-Cola, of which he owned two million shares, lost half of its value when declining sales growth, burgeoning expenses, and a revolt by its bottlers compelled Buffett and other Board members to engineer the resignation of its President. Buffett's biggest purchase ever, General Re, a huge reinsurer, which cost him $22 billion of Berkshire stock, was bilked out of $375 million in an elaborately designed fraud. Baron's Magazine put him on its cover with the headline: "What's Wrong Warren?" (Schroeder, p. 682) 

 

Technology gurus, flush with stocks trading at extravagant valuations, said Buffett had missed the boat, the dawning of the Internet age. Through it all, he remained faithful to the ideas that had made him famous and wealthy -- preserving the margin of safety, defending the circle of competence, abjuring the treacherous emotionalism of Mr. Market -- and to his Inner Scorecard. He had learned from his father not to care what other people thought. 

 

By March 2000 Berkshire-Hathaway stock had dropped 48% from its high. At his annual meeting that year, when asked about technology stocks, Buffett said, "I don't want to speculate about high-tech. Anytime there have been real bursts of speculation, it eventually gets corrected." (Schroeder, p. 697) He would not consider buying a technology stock at any price. 

 

In a matter of months Buffett was vindicated. When the Internet bubble burst, he was ready with "a huge stockpot of capital" to scoop up private companies, bankrupt companies, under-the-radar companies -- U.S. Liability, Shaw Carpets, Benjamin Moore Paints, Johns-Manville, Mitex. (Schroeder, p. 712) 

 

The 9/11 attacks -- although they cost Berkshire-Hathaway insurers $2.3 billion, much of it due to poor underwriting -- were another opportunity for Buffet. He bought junk bonds, Fruit of the Loom, the Pampered Chef, a children's clothing maker, a farm equipment manufacturer. He moved into the terrorism insurance business, insuring airlines, Rockefeller Center, the Chrysler Building, the Sears Tower, the summer and winter Olympics, the FIFA World Soccer Cup championship. 

 

In 2003 Buffett's prescience surfaced again. While negotiating to buy mobile home manufacturer Clayton Homes, he observed how the company had been able to transfer risk to Wall Street firms who were packaging mobile home loans and selling them to investors. Mobile home dealers lowered down payment requirements -- making it easier for buyers to get loans. Subsequently, as the real estate market boomed, home loans, commercial loans, and business loans were stripped and securitized through collaterized debt obligations and insured and speculated on through credit default swaps. 

 

In his 2002 shareholder letter, Buffett called derivatives "toxic," expanding time bombs that could cause a chain reaction of financial disaster. The next year he termed them "financial weapons of mass destruction." He warned that claims from derivatives could lead to the failure of financial institutions, a credit seizure -- in which lenders became afraid to make even reasonable loans -- and world-wide depression. (Schroeder, p. 735) 

 

In spite of his vast wealth, Warren Buffett did not believe in giving money away, either to his children or to non-profit organizations -- at least during his lifetime. He set up a foundation in 1964 which made small grants to educational causes -- by 1986 it had given away a token $725,000 -- but insisted that allowing his money to compound over time would produce more for charity in the end -- after he was gone. (Schroeder, p. 487) 

 

To requests from the United Way, universities, churches, heart disease, cancer, the homeless, the environment, the local zoo, the symphony, the Boy Scouts, the Red Cross, his answer was always the same: If I did it for you, I would have to do it for everybody. (Schroeder, p. 488) He did set up an innovative program in 1987 which allowed Berkshire shareholders to direct two dollars per share to the charity of their choice. 

 

To his three children he was equally tight-fisted. He wanted them to carve out their own place in the world. He called trust funds harmful, anti-social, "a lifetime of food stamps." (Schroeder, p. 489) He gave them a few thousand dollars for Christmas each year and promised them each half a million when he died. (He did fund foundations for them, and they did inherit substantial sums of money at their mother's death.) 

 

Such sentiments underlay Buffett's vocal and vigorous opposition to repealing the estate tax. He maintained that the wealthy owed some minimum amount to the society that had enabled them to become rich. 

 

"I don't believe in dynasties," he said. "Wealth is just a bunch of claim checks on the activities of others in the future. You can use that wealth in any way you want. You can cash it on or give it away, but the idea of passing wealth from generation to generation so that hundreds of your descendants can command the resources of other people simply because they came from the right womb flies in the face of a meritocratic society." (Schroeder. p. 723) 

 

On June 26, 2006, Buffett announced that he would give away 85% of his Berkshire-Hathaway stock -- worth $37 billion at the time -- to a group of foundations over a number of years, easily surpassing any previous gift ever made in the history of philanthropy. Five out of every six shares would go to the Bill and Melinda Gates Foundation, already the largest charity in the world. (Schroeder, p. 815) He requested that the money be spent as it was given, so that the foundations could not perpetuate themselves. 

 

No one had ever done such a thing before: donate money without naming something after himself, without controlling personally how it would be spent, to a foundation that he had selected for its competence and efficiency. (Schroeder, p. 816) 

 

Buffett protested that his wealth had snowballed from a fortuitous set of circumstances, which he termed the Ovarian Lottery. "The odds were fifty to one against me being born in the United States in 1930. I won the lottery the day I emerged from the womb by living in the United States instead of in some other country where my chances would have been different." (Schroeder, p. 643) "If I had been born long ago or in some other country my particular wiring would not have paid off in the way it has. But in a market system, when capital allocation wiring is important, it pays off like no other place." (Schroeder, p. 817) 

 

His wiring was fired by an insatiable hunger. "He ruled out paying attention to anything but business -- art, literature, science, travel, architecture -- so he could focus on his passion . . . He never stopped thinking about business: what made a good business, what made a bad business, how they competed, what made customers loyal to one versus another. . . In hard or easy times he never stopped thinking about ways to make money." (Schroeder, p. 821) 

 

And yet, in spite of his single-minded acquisitiveness, he continued to live according to the values instilled in him by his father Howard: the how mattered more than the how much. It helped that he was fundamentally honest -- and that he was possessed by the urge to preach. (Schroeder, p. 829) 

 

"He deliberately limited his money," says Charlie Munger. "He would have made a lot more if he hadn't been carrying all those shareholders and had maintained the partnerships longer, taking an override." He could have bought and sold the businesses inside Berkshire-Hathaway with a cold calculation of their financial return without considering how he felt about the people involved. He could have been a buyout king. He could have promoted and lent his name to all sorts of ventures. "In the end," says Munger, "he didn't want to do it. He was competitive, but he was never just rawly competitive with no ethics. He wanted to live life a certain way, and it gave him a public record and a public platform. And I would argue that Warren's life has worked out better this way." (Schroeder, p. 829)

Tour de Foschewel

From days long past when, seeking an activity in which a recently divorced single father and his three subteen offspring could joyfully immerse themselves, I chauffeured the four of us across the expanse of Smith Mountain Lake aboard a twenty-one-foot Baybreeze runabout (once almost foundering, as chronicled on this web site in September 2007), I knew my oldest, David, yearned for his own waterside retreat.

Boldly spurning the parental advice of one who shudders at the mere mention of dual residential responsibilities, he realized his dream in 2009 when he and a fellow film producer (who subsequently sold out his fifty percent share) purchased an aging but roomy two-story ranch house two hours from New York City in the Catskills community of Livingston Manor. Perched atop a ridge overlooking a semi-private lake, flanked by a broad deck and pool, the beneficiary of a decade of tender loving care and serious refurbishment, what was conceived as a modest weekend haven for family and friends metamorphosed into an attractive and valuable property. Even after a curmudgeonly neighbor disinterred a long-buried clause in his deed that forbade subleasing and forced him to terminate his lucrative Airbnb rentals, no one, least of all this humble scribe, could deny that my son had made a wise decision.

 

 

 

Fleeing the claustrophobic confines of an Upper West Side apartment and its surrounding clamor and commotion is de rigueur for Manhattans who can afford it -- and David engineered a permanent getaway in 2018 when he, spouse Mary, and three-year-old son Frank vaulted the Hudson River into the charming village of Montclair, NJ -- but when my daughter Sara announced five months ago that she and husband Nate were casting for their own Lake House, I began to wonder who had spawned these gay vacationers. There must be something in those placid waters besides, well, fish.

After all, they already lived in the prettiest town in New York State (according to Architectural Digest, July 2018), Ithaca, and only one-and-a-half miles (as measured by a slow jogger at an eleven minute pace) from the longest and fattest of the Finger Lakes, Cayuga. The area is a recreational paradise, flush with diversions for both tourists and residents: hiking, biking, and running trails to suit the exercise capacity of all ages and levels of fitness; one hundred fifty waterfalls cascading into steep rocky gorges, including the 165-ft Buttermilk Falls and the impressive Taughannock Falls, which rises thirty-three feet higher than Niagara; a favorite Saturday-Sunday brunch spot, the lakeside Farmer's Market, where the assortment of ethnic cuisines, homemade pastries and delicacies, and locally sourced fresh produce and protein is irresistible; the downtown pedestrian Commons, along which one casually explores a variety of cafes, restaurants, apparel stores, and gift boutiques, and, for bibliophiles like me, the endless aisles of the Autumn Leaves used book store; and for those with more discriminating taste buds, a host of breweries, whiskey and cider distilleries, and award-winning wineries, many scattered beside Lake Cayuga along America's oldest official wine trail dating back to 1983.

On the other hand, how many of my friends and acquaintances here in the most interesting spot of Lynchburg have planted secondary roots in places near and far, from Elon, Smith Mountain Lake, and the Homestead to Hilton Head, Bald Head Island, Arizona, Jamaica, and Italy (although at our age many have transitioned to the deaccession phase), and branded me a stubborn outlier? Compared to some of those leaps of faith, fortune, and distance, Nate's and Sara's acquisition is a mere dipping of the big toe -- not that there weren't a few slippery stones lurking below the surface.

These days it's a seller's market, and for desirable real estate the asking price is the baseline. Outbid on their first strike, they got more aggressive on the second, and assumed their offer had been accepted only to be thwarted when the owner reneged and allowed a previous player to up his ante. They reeled in their prize on the third try -- a two-story cottage forty-five minutes from Ithaca on Lake Owasco -- for less money than either of the other two but, by consensus, "not quite in as good condition," for confirmation of which scroll down.

Ithaca is home also to Ivy League outpost Cornell University, whose sprawling 745-acre campus, ranked among the most beautiful in the country, boasts historic Gothic and Neoclassical architecture planted amidst dense woodlands, a botanical garden, and stunning views of the city and lake. It's a jewel that most certainly would have escaped me had not my son-in-law alighted there as a professor of computer science and director of research after earning his undergraduate and graduate degrees at Williams and Penn. Or, if one wants to delve deeper into the mysteries that shape our experience, had not my daughter, a nursing student at the University of Pennsylvania at the time, initiated a conversation with him on a dating site while they were both living in Philadelphia.

 

If one couldn't deduce from his resume that Nate's really smart, a cursory glance at an impenetrable doctoral thesis confirmed it for me during an early visit to his and Sara's apartment. But unlike some other reputed intellectuals he possesses additional attributes that would categorize him as a Renaissance man: athleticism (holding down third base on his high school baseball team); the cooking skills of a gourmet chef (regularly preparing chopped salads, their dressings, and sauteed brussel sprouts at Thanksgiving gatherings); and the ability to repair numerous complex mechanisms ranging from a Nissan Leaf to a well water pressure regulator.

Among the many traits Nate and Sara had in common -- a love of the outdoors, a thirst for fitness, an appreciation for the culinary art, ambition tempered by frugality (no new cars for them), self-reliance (sometimes to a fault, requiring me to rebuff Sara's proposed loan to pay for nursing school), and innate authenticity -- was a legacy of divorce. Hoping to avoid the turmoil and repercussions of these nasty fractures, they deferred marriage and childbearing until they felt confident in the strength and longevity of their relationship, which was embodied in the conjoined surname they coined at their wedding: Foschewel, a contraction of Foster-Schewel. (To be fair, my two sons, David and Matt, have followed a similar pattern, acquiring very compatible spouses and forging what appear to be blissful, durable unions.)

Although their engagement announcement pictured them crossing the finish line of a half-marathon, it's their shared enthusiasm for cycling that mated their souls. If their first date was at a wine bar, I'm sure the second was two-wheeling along the Schuylkill River. No walk-up was ever too small to accommodate at least one, and sometimes two, bicycles, even if it had to be parked in the kitchen. The only deal breaker of a prospective home was the lack of a backyard shed large enough to store their collection of road, mountain, and hybrid riders and all of the necessary ancillary equipment. Not many couples would transport their bicycles (plus their two children's) five hundred miles in order to rise at 6:00 AM the morning of a family wedding and compete in the seventy-five-mile Storming of Thunder Ridge.

While by no means a zealot, I have done a fair amount of cycling myself in recent years, having been reintroduced to the sport in 2011 when my lovely partner Jacquie, whom I had been dating for ten months at the time, innocently inquired if I would like to escort her on a bike tour of northeast Italy and Slovenia. Little did I suspect that it would launch us into a whirlwind of adventure, periodically landing us in such exotic locales as Ireland, Scandinavia, New Zealand, Croatia, Chile, South Africa, and Provence, where a multitude of visual, gustatory, and cultural delights awaited us.

Once one learns to tolerate the vehicles speeding past him like he's a hapless turtle and the pain constantly reverberating through his nether parts, he can't deny that there's no better way to see the world -- nor the residual benefit of a little exercise.

With two bicycle beasts in the family and one aspirant, should I be surprised when a series of texts, emails, and live calls between Sara and Jacquie (with a few contributions from Nate) transforms a restful visit with the family at their new lakeside abode into an elaborate four-day riding exploration of upstate New York worthy of Backroads Active Travel -- a Tour de Foschewel, if you will? Who am I to be the spoiler? And if the forty-five-mile per day itinerary stretches the limits of one's conditioning, there's always the sag wagon to drive.

Once we're on board -- or in the saddle, so to speak -- the next steps, obtaining bicycles and transferring them (if necessary) and us from here to there, turn complicated. Sara scours all the bike shops within a fifty-mile radius for rentals with no success, which is hardly unexpected considering the abysmal shortage of everything from furniture to automobiles to bananas (I couldn't find any at Wal-Mart last week) currently roiling the economy. As Jacquie abhors driving herself and detests being a passenger beside me, it appears that she will have to suspend her anxieties and hand over the key to her Volvo Crossover (it has the bike rack attachment) for the nine-hour trip, which I will make solo while she avails herself of the recently installed daily flight from Charlotte to Ithaca (thanks to Cornell, no doubt). Then just days before our separate departures is birthed the deus ex machina: Sara finds two brave souls willing to risk their bicycles for the sake of friendship, her mother-in-law and a colleague, and enable me to join Jacquie in the friendly skies.

Nate is kind enough to pick us up Friday night at the Ithaca airport where we have been deposited right on time -- American Eagle commuter time, that is, 11:30 PM, which is ninety minutes past our our scheduled touchdown. And he's got to be up at 6:00 AM the next morning, since just about every Saturday, weather permitting (which is a relative term, obviously, depending on one's tolerance for wind, precipitation, and near-freezing temperatures), he, Sara, and some like-minded masochists mount up for a seventy-five-mile jaunt through the Tompkins County countryside.

Jacquie and I awake to an empty nest, as the routine is for the two children, Lia and Ari, to spend the night at Nate's mother's house. She's Maka to them, a delightful hostess (always prompt with a drink or snack for her guests, proclaims Lia) and an energetic grandmother, whose career as a preschool teacher guarantees that she is never at a loss for a useful activity; during my previous visit in April I sat at her dining table and helped the three of them hand craft a pinata for Ari's birthday party.

That gives us the morning to grab a cuppa joe at the neighborhood's favorite cafe, Gimme Coffee, then continue to the downtown mall, where Jacquie window shops and I search Autumn Leaves for a backup (Mohawk, by Richard Russo) should I manage to digest in the next five days the remaining half of Ken Follett's most recent nine-hundred-page opus, The Evening and the Morning, and be left, alas, with nothing to read. 

We're almost home when we receive an ominous text from Nate; he's broken a chain ten miles from town, which prompts the thought: "Let's get this out of the way now." We clamber aboard their Subaru Outback, set our GPS, and race toward Trumansburg. We circle the end point, the Americana winery and bar, looking fruitlessly for our stranded cyclist before Jacquie spots him on the third pass chilling in the shade of a backyard gazebo. Our rescue mission accomplished, we hasten to the Fosters', where Sara, Maka, Lia, and Ari are putting the finishing touches on a platter of grilled cheddar on Texas toast. After lunch we load the two vehicles with food and beverage containers, biking equipment, and our travel bags; hoist the two borrowed bicycles onto the rack; secure them; and head north to Fire Lane 23 off West Lake Road (Rt. 38) near Wyckoff.

"Abba [Hebrew for father although I'm the grandfather]," says Ari, "when we get to our house, the road is vewy, vewy, vewy steep," which he proceeds to demonstrate by dive bombing the open palm of his hand like a spent rocket falling to earth. Yet even after that descent, a walk through the top-floor garage, bedroom hallway, and spacious living and dining area leads one to a deck at least two hundred feet above the water level with a sweeping view of the lake and surrounding terrain. Ari is eager to show me the tiny beach and dock, but cautions me to follow him carefully along the circuitous path that avoids the muddy swamp impervious to all drainage. 

The place needs some work -- the brown shingle exterior could stand two coats of paint, or total replacement, and the recurring loss of water pressure is somewhat annoying (until Nate conceives the final fix) -- but they love it, and who am I to be a critic? Jacquie and I are allocated the entire lower level, which includes a bedroom, family room with television (which is only turned on once, to watch the animated film The Incredibles), a bathroom with shower, and plenty of outlets to recharge our devices.

While it's a little late to take out the kayak or motorboat (which came courtesy of Maka by way of her friend Bruce), Nate engages the kids in a constructive family activity: fishing. While it's never held much attraction for me -- probably the last time I fished was at summer camp sixty years ago -- their enthusiasm is palpable as they tie on the lures, swing their arms back, cast their lines, and reel in the occasional strike. Was there ever a more poignant validation of the (slightly revised) adage "Give a child a fish, and you feed him (or her) for day. Teach a child to fish, and you feed him (or her) for a lifetime." Since this is strictly a catch and release exercise, instead of a fat trout for dinner we feast on chicken breasts barbecued on the grill. As good as that sounds, verisimilitude compels me to report that it will be surpassed by tomorrow night's butterfly pasta smothered in sun-dried tomatoes and Nate's homemade sauce and finished off with Maka's biscuit-based strawberry shortcake.

 

It's risky to talk about one's grandchildren; not only is it well nigh impossible to maintain objectivity despite the best of intentions, but one also exposes himself to favoritism when he fails to include the entire set in his narrative. While undeniably guilty of the first charge, I plead innocent of the second, assuring my two sons, David and Matt, and their spouses, that I will spotlight their children in some future article.

I had almost despaired of ever seeing a next generation, since I was one month shy of sixty-five when its first member, Lia Elisabeth Foster, burst upon the scene. If, from the beginning, her resemblance to her father was so uncanny that her maternal parentage may have been doubted had he not witnessed the birth, it has become even more pronounced as she has grown long and lithe. While we won't allow him to take all the credit for her ability to enunciate clear and complete sentences before she breached the three-year milestone, her splits, handstands, round offs, and vaults are a type of acrobatics I've never seen from this side of the family.

From a spunky toddler with a tenacious attachment to a stuffed bunny, she has matured rapidly into a confident if at times reserved young lady who is very much at ease in the company of adults. She takes great pride in her job as family barista, serving up espressos and lattes every morning as requested. Of course the pictures her mother sends me of her lying in bed or stretched out on the couch with a book in her hand win my heart. Last year I was yanked into the twenty-first century when shopping for a birthday present I discovered that fifteen cent comic books had inflated to $10.99 graphic novels. She's progressed to chapter books, specifically female biographies (like Who Was Anne Frank? and Who Was Sacagawea?), but on this visit, which coincides with the Summer Olympics, we both get engrossed in The Story of Simone Biles, whose rise to prominence is an inspiration.

I got my own doppelganger on the fourth try (Matt's Ana and David's Frank were clearly their mothers' handiwork) with the arrival in 2016 of the appropriately named Ari Schewel Foster. He could have been my twin seventy years ago except for the blue eyes. As he lagged behind his cohort in language learning, his parents resorted to signing, and were considering therapy when the dam finally burst; the words flowed forth in torrents, and his precocity bloomed.

Physically and mentally, Ari's a boy in a hurry. Whether inside or outside, whatever the activity or destination, he's always running (sometimes a little too fast), as if, even at the tender age of five, time is slipping away. He reads like a second grader. He builds a nineteen-hundred piece Lego Saturn V Apollo launcher in six days, and doesn't rest. He jumps up behind me while I'm playing bridge on my Android, points to the screen (and the correct suit), and exclaims, "Play a spade!" While we're having lunch in a park, he's furiously taking photos on an old i-phone, and changing his home page three times faster than I can type this sentence. 

In psyche speak Maka says he's a "helper," a tag he justifies as we prepare to play the game "Guess Who." Each person's board has attached to it about two dozen plastic frames into which he slides the face cards of various characters. As characters fail to meet criteria established by a series of questions (face color, hair color, gender, e.g.) their frames are flipped down until a single card is left standing, presumably matching the one which was randomly drawn by the opponent and whose identity can now be deduced or "guessed." As I start to flip up each plastic holder one-by-one, Ari says, "Wait, Abba, you need to do it like this." He lifts his board, turns it upside down, shakes it once, and, presto, all frames rotate into their proper upright positions.

Monday morning, well fortified by Nate's paper-thin crepes rolled around strawberries or blueberries and dipped in syrup, we're ready for Day One. Lia and Ari will be riding tandem with Nate and Sara, respectively -- for the entire one-hundred-eighty miles, as there are no options for shuttling their bicycles -- while Jacquie and I will alternate driving the Subaru to a meeting place and then trading places. I've got the first driving assignment, so I avoid having to maneuver the bicycles up that "vewy steep" hill, which, Sara later confesses, was the hardest part of the trip. 

Considering the extra weight they're pulling, if Jacquie and I were contemplating keeping pace with Nate and Sara -- or possibly exceeding it -- we are swiftly disillusioned. Within fifteen minutes they are out of sight while we are out of breath. Or at least Jacquie is, since I'm ahead of the pack trying to mimic the tour guides I have followed across three continents. After stopping the car at the next two intersections to indicate where the cyclists are to turn, I am reprimanded by Lia as she and Nate go speeding by: "You don't have to wait for us, Abba. We know the way."

Well maybe they do, but I'm not sure I do. As instructed by Sara, I have downloaded the Strava app on my phone, on which I can see clearly a bold orange line traversing a digital map from our starting point to our destination: Sodus Point on Lake Ontario. Problem one is that the line completely obscures the name of the road we are supposedly traveling on. Problem two is that road signage is apparently not included in these New York counties' budgets. Problem three is when I enlarge the map to a readable size I keep outrunning the coverage, and must either stop every five minutes to reset or risk losing control of the car if I swipe while driving.

After one minor misstep, I enter the town of Montezuma (population 1,277 in 2010), and search in vain not only for the obligatory coffee shop and restrooms but in fact for any sign of human life. To relieve boredom, having parked at the post office, I wander inside, stare at the lock boxes, and peruse the legal notices, local announcements, and photos of missing persons (around 1,277) tacked to a bulletin board. If there was ever a place even a cyclist could miss with the blink of an eye, this is it. The family powers on through, and within minutes I'm back on the road.

It's a straight shot until I reach Evans Corner, where I swing north off Rt. 89 onto Hogback Road. From there, it's about ten miles to our lunch stop, Clyde, which belies its Scottish origins by harboring two alternative ethnic eateries, one Mandarin, the other Italian. Since the former is closed, our choice is an easy one. Papa's Place, named after its founder and the grandfather of the current owners, looks rather mediocre, but its oven-baked pepperoni pizza and turkey and provolone sub sandwich earn four stars from these ravenous riders. We carry our bounty across the street to the Village Park, and enjoy it in the shade of a stately maple tree under the stony gaze of a transplanted George Washington draped in full military regalia.

Tagged by Jacquie and now "it," I mount up for the duration, which is actually quite pleasant once I resign myself to watching the Foschewels drop below the horizon. The balmy eighty-degree temperature is moderated by a fifty percent humidity. Beneath an unspoiled cerulean canopy, a cloud is as rare as a car or truck on these deserted rural roadways. The rolling hills are no more strenuous a climb than the Kemper Street spur on Lynchburg's Blackwater Creek trail, and open up a panorama of the sunflower fields and apple orchards the area is known for. Pedaling past their isolated farms, we elicit curious stares from children and livestock.

Around 4:00 PM we cruise through a residential neighborhood towards the Sodus Point Harbor, three blocks from which we locate our lodgings for the evening: the Wickham House Inn. It's a converted fisherman's hostel and, with three or four twin beds per room, ideal for traveling families, although having to share each floor's single toilet and shower does require an attitude adjustment. Upon our checking in, a surprise awaits us: a package of tee shirts, courtesy of Nate, Amazon, and UPS, each one embroidered with Tour de Foschewel on the front panel and his or her name on the back above the abbreviated current year, 21, which presumes, I guess, that this is only the beginning.

There may be other restaurants around, but without a reservation we are limited to the capacious Captain Jack's, which covers an entire block and whose patio overlooks the bay. I am enticed by the Prime Rib Special ($14.99, regular $24.99), while Sara and Nate opt for the Haddock Fish Fry, Jacquie lights on the best quesadilla on the bay, and the kids split between a hot dog and chicken and chips. Jacquie recommends a local craft beer over the Yuengling I initially order, but truthfully my palate is too provincial to appreciate it.

After dinner we wander along the point past a small beach and onto a concrete pier extending a hundred yards into the bay, at the tip of which rises a fifty-foot cast iron lighthouse remarkable mostly for the vulgar graffiti scrawled on the seaward side. The spindly guard rail is more decoration than protection when two rambunctious children are prancing around the edges oblivious to the stiff breeze and a six-foot drop into the swirling waters; perhaps it's my own unsteadiness rather than theirs which worries me. All fears prove groundless as we trek safely back to the Inn.

Spotting us out in the yard the next morning, the proprietress is intrigued by the Foster adult-child tandems, and insists on memorializing them for the Wickham House Facebook page. As for the Schewel-Glanz teammates, we are canceled from the photo faster than we can say "Robert E. Lee," and gratefully expel a sigh a relief.

Day Two finds me again behind the wheel trying to keep my eyes on the road while Jacquie strains her neck to catch glimpses of the shimmering blue surface of Lake Ontario just to our north. With suppressed glee, I can attest that two persons with multiple devices can make a wrong turn as easily as one when, approaching Pultneyville, we bear left on Lake Avenue rather than continuing straight on Lake Drive. It's too bad, because our error, even after corrected, has detoured us around a roadside book exchange, an instant snapshot of which the cyclists following in our wake and knowing their "Abba" too well can't resist texting to me. Two can play that game, as we return the favor several miles later when we make a pit stop at the Webster Arboretum.

The plan is for Jacquie and me to park the car at the halfway point of the ride, the Lyndon Road trailhead on the outskirts of Fairport, unload the bikes, and begin cycling along the Erie Canal, which after all, is the most recognizable landmark in this part of the country, although from our current point of view we only catch a glimpse or two through the thick foliage. Nevertheless, because of its mythical status in American History, seeing it is like walking a Civil War battlefield: one is intoxicated by a sense of being transported to a bygone era.

Stretching 363 miles from Albany on the Hudson River to Buffalo on Lake Erie -- the second longest canal in the world -- it took eight years to build (1817 to 1825), cost $7 million (equivalent to $116 million today), included thirty-four numbered locks, and ascended east to west a total of 565 feet. More than half of the original canal was abandoned or destroyed, and replaced by the New York State Barge Canal in the early 1900's; sections of the remaining half were widened and improved.

The project was a marvel of contemporary engineering. The only sources of power were humans, animals, and the flow of water. In order to minimize lengthy delays, new techniques were developed for uprooting trees and removing excavated soil. One after another, each impassable obstacle was conquered: the Montezuma Marsh, where malaria struck and crews could only work when the swampland froze over; Irondequoit Creek, requiring the raising of the canal seventy-six feet over a "Great Embankment"; the Genesee River, spanned by an eight-hundred foot stone aqueduct standing on eleven arches; the imposing Niagara Escarpment, scaled by two sets of five locks; and the Onondaga Ridge, a mass of dolomite limestone blasted away by black powder.

Because the Canal reduced transportation costs ninety-five percent, the prices for food for Midwest agriculture products and Northeast manufactured goods fell dramatically. New York City -- in fact the entire state -- exploded in wealth and importance, and established itself as the nation's economic hub. Freight tolls exceeded the state's construction debt in its first year of operation, and enabled the loan to be paid off by 1837. Convenient and scenic, the Canal became not only a gateway to the West for migrants and business but also a popular mode of travel for peddlers, tourists, sightseers en route to Niagara Falls, and even escaped slaves traversing the last leg of the Underground Railroad.

Once we master the tricky traffic pattern through Fairport -- there's some road construction underway and the signage is not clear -- we are in for a beautiful ride reminiscent of the one we did a few years ago from Utrecht to Amsterdam in the Netherlands. Bisected by the canal, the picturesque village is sprinkled with charming waterside shops, restaurants, and pastel-hued cottages, and shelters a small harbor for recreational craft. Breaking into the countryside, we pass by forests, cornfields, flower beds, boat launches, three parks, and several crossings until we reach the village of Pittsford. At Lock 33 just shy of Rochester we call a halt, and retrace our ten-mile outbound course for a luncheon engagement with the Fosters.

On a deck overlooking the canal and lift bridge -- a treat for the kids when it creaks upwards -- they're waiting for us at Lulu Taqueria, which claims proprietary recipes handed down through three generations and serves up portions hefty enough to satiate the heartiest of appetites, of which at least four are seated at our table. Matching pairs of Mexican lagers and signature Margaritas are just a warm-up for burritos (vegetarian or Lulu) the size of footballs, a quesadilla grande that puts the Starbucks venti to shame, and a fish taco that should be named the Liberty Bell. And if the kid's plates are more appropriately sized, they've room to sample a couple of the savory gelatos on display at the Royal Cafe next door: green mint and peanut butter chocolate.

From there it's less than two miles to our next station, the Woodcliff Hotel and Spa; the final two hundred yards is, as Ari would say, a "vewy steep climb" for our four cyclists, duly noted by Jacquie and me from the comfort of the Subaru. Compared to the Wickham Inn, the accommodations are quite luxurious and the amenities abundant. After a brief nap beside the pool, Jacquie and I freshen up, then walk the property, which features a grand ballroom, a detached enclosed event pavilion, and a outdoor wedding venue backlit by lush green hillsides and the Rochester skyline. The Fosters head to a nearby Italian bistro for dinner, while Jacquie and I are content to amble downstairs and enjoy a quiet and modest meal of calamari and salad at the Horizons Restaurant and Lounge.

Upon awakening, another daunting challenge awaits me. My fellow travelers take off on their merry way, leaving me to navigate the tortuous route from Fairport to Lyons, thirty miles as the crow flies but almost an hour by car along a hilly, winding road made more frustrating by blind curves and confusing intersections. When I finally merge with the pulsating Strava dot at Abbey Park and unload my bike, I see a trail, but when I intuit -- or guess -- the proper direction, it appears either to terminate or be under repair. I decide to follow the road instead, and after about a mile (and one wrong turn into a manufacturing facility) discover another access point.

I'm heading west now, mostly through a heavily wooded area with the canal intermittently visible; if all goes according to plan, I should reconnect with the FoSchewel-Jacquie crew in about an hour not far from Palmyra. Little do I (or anyone else in our party) suspect that we are within shouting distance of the Sacred Grove, where transpired the founding event of the Church of Jesus Christ of Latter Day Saints: the appearance of Heavenly Father and his Son before young Joseph Smith on his family farm in 1820. Otherwise we would surely have detoured for our own visitation. After all, the plausibility of a miracle in the vicinity is substantiated by the occurrence today of another one: my actually showing up at the appointed time and place.

Newark, about ten miles back the way I came, is our desired lunch stop, and we settle on Grind-On Coffee, not only because of its alluring sign but also because of the bike parking lot in the rear. If the mixed berry smoothie falls short of expectations, the homemade chicken salad is better than advertised, and the toasted bagel, cup of broccoli soup, and grilled cheese sandwiches certainly adequate. Most enjoyable is the private area where we are seated and allowed to relax and dine at our leisure after a strenuous morning.

I surprise Sara by volunteering to ride with her, Nate, and the kids for the rest of the afternoon; it's twenty miles to Geneva, and I've already racked up an equivalent amount. In part, my boldness can be attributed to a refreshing lack of soreness, as my bicycle seat is the gentlest one I've ever known; if I could steal or order one like it, I wouldn't hesitate for a moment. In spite of a few pesky inclines, the miles roll by effortlessly, melting away in a gorgeous amalgam of blue, yellow, and green vistas.

Nate is eager to explain that we are traveling on Preemption Road, which divided competing territorial claims in the post-Revolutionary period between Massachusetts and New York. The two states agreed on a disposition in 1786 when Massachusetts ceded all the land in question to New York while reserving the prerogative to purchase some 2,600,000 acres owned by the native Iroquois. In 1788 Massachusetts sold those rights to two individuals who did indeed consummate the purchase shortly thereafter. A second dispute arose when it was discovered that the initial survey erroneously allocated additional acreage to New York. The new survey, accepted by all parties in 1796, moved the Preemption Line two miles east, effectively relegating Preemption Road to an historical oddity.

We are spending our last night out on the northwestern tip of Seneca Lake at the Wyndham 41 Lakefront Hotel, notable for the contoured contemporary chair sitting at the end of our bed, the likes of which I have never seen in forty years of Furniture Market attendance. It's also quite comfortable, although within minutes of sinking in I'm yanked to my feet and informed that the troops are restless and hungry.

If one would think that finding a place suitable for family dining in a former All-America City (2015) on a Wednesday night in August wouldn't be that difficult, he would quickly be proven wrong. As we explore the grid of Geneva's downtown -- to which we are confined by the passenger limitations of the Subaru -- we pass empty storefronts, a main street construction project all too familiar to Lynchburgers, and a handful of restaurants with the doors shuttered. Perhaps Covid has struck here harder -- and lingered longer -- than in other communities. Even in an era of instantaneous communication, a barrage of calls from at least two phones can't seem to lock down (pardon the expression) a reservation for the requisite number (six) without a one hour wait.

We decide to risk the Twisted Rail Brewing Company (even though two in our party can't partake), and are pleasantly rewarded with homegrown beverages and a menu that is diverse, tasty, and filling. Having determined by now that sharing is the prudent method of ordering, we are not intimidated when the Big Seneca Burger (one-half pound Angus beef, thick-cut Cherrywood bacon, smoked cheddar, onion ring, lettuce, tomato) and the three-person Farmers Depot Pizza (artichoke hearts, sauteed mushrooms, marinated olives, semi-dried cherry tomatoes, mozzarella) almost swamp our table. Upon exiting, we spot the Opus Coffee Shop across the street, where the next morning we will discover two more super-sized treats: buckwheat pancakes and the crossbred croissant doughnut (cro-nut for short). If that isn't enough to make the stomach grumble, after dinner Jacquie and I amble along the lake front to a food stand dishing out soft serve hot fudge sundaes.

The final day of our tour involves some complicated supply chain logistics, which, counter to the current global disruption, are carried off without a hitch. After all gear is packed and stowed, Nate drives fifteen miles to the Montezuma National Wildlife Refuge, where he will park the car, meet Maka (his mother), and return with her to the hotel. After a photo shoot on the boardwalk, she will accompany us on the first half of our ride before looping back to Geneva. (A true Foster, she owns at least two bicycles.)

Ten miles out, one more historical marker beckons: the town of Seneca Falls, where the first women's rights convention was held in 1848. From the porch of the coffee shop where we've stopped for a break, Nate points out a two-story brick building constructed atop the remnants of the Wesleyan Methodist Chapel, site of the convention. Built by a congregation of abolitionists, the church was a haven for antislavery activity, political rallies, and free speech events, and certainly well-known to the principal organizer of the convention and local resident, Elizabeth Cady Stanton.

On July 16th, three days prior to the convention, Stanton met with Mary Ann M'Clintock and her daughters at their home to draft a Declaration of Sentiments, which, modeled on the Declaration of Independence, consisted of ten resolutions demanding equality for women in education, religion, morals, job opportunities, property rights, and family matters followed by a list of grievances. Stanton added a controversial eleventh resolution stating that "it is the duty of the women of this country to secure to themselves the sacred right of the elective franchise," of which men had deprived them.

Stanton spoke for many in the audience when, at the opening session, she brazenly exhorted each woman to take responsibility for her own life and to recognize the "height, depth, length, and breadth of her own degradation." The only resolution which engendered serious debate was the one on suffrage; it was thought to be too radical and likely to undermine the credibility of the entire declaration. The issue remained in doubt until Frederick Douglass, the only member of his race in attendance, rose and spoke eloquently in its favor, asserting that he could not accept the right to vote himself as a black man if women could not also claim that right.

One hundred persons (sixty-eight women, thirty-two men) of three hundred present signed the Declaration of Sentiments. According to historian Judith Wellman, it was "the single most important factor in spreading news of the women's rights movement around the country in 1848 and into the future."

It's a brisk five miles to the refuge, where I am charged with retrieving the Subaru and figuring out how to get home. But I've only ridden fifteen miles, which is hardly enough to break a sweat on someone who is compelled to burn at least seven hundred fifty calories a day. After trailing the pack for a couple more miles, I bid farewell and, returning to the refuge, decide to see what it's all about. From the Visitors' Center I follow a dirt road that runs between a low-lying restored wetland and a landscape of scattered shrubbery. The all-encompassing silence, the absence of any sign of wild or human life -- other than two isolated vehicles and the occasional crunch of a sharp rock beneath my tires -- are slightly unnerving. The three bald eagles reputed to be nesting on the grounds are well camouflaged, as are, thankfully, any coyote, foxes, and bats known to roam the area. Concluding that I've pushed my luck far enough, I reluctantly surrender to nature, and make tracks to my own refuge: air-conditioned, gasoline-powered, and shielded from all the elements. 

I'm back at the Lake House an hour before the rest of the family -- just enough time to unlock the doors, dismount the bicycle, make a good-faith start at hauling a few bags into the house, and watch the riders swoop down the "vewy" steep hill and coast up the driveway: Nate and Lia in tandem, Sara and Ari in tandem, Jacquie finishing strong. Smiles, hugs, and high fives are passed around. Sara adds the fitting epigram: "We made It!" -- four days, three overnights, constant packing and unpacking, uncertain fare at unknown restaurants at unscheduled hours, one hundred eighty miles, with hardly a complaint, conflict, or time out from child or adult.

We've got twenty-four more hours of leisurely lakeside living. It's like unwinding and rewinding at the same time: another Foster feast, another game of "Guess Who," more fishing, a little kayaking, and, as the sun sets, a quick motorboat tour to scope out the homes of the rich, famous, and ordinary. 

Jacquie and I close out our visit with some kids' quality time. Sara dispatches us a few miles up the road to Auburn where an astute operator's triple threat/triple treat enterprise is a local hotspot: the Tom Thumb mini-golf, fast food, ice cream combo. It takes only a few errant strokes for me to realize why I gave up the real version (at least five times) years ago. The blind shots, strategically placed barriers, and annoying risers on every hole swiftly put par (forty-five) out of reach, while revealing aspects of each player's personality. For Ari, the putter becomes a hockey stick, as he runs beside the ball and tries to guide it into the hole. Lia thoughtfully inspects the layout, patiently waits her turn, takes careful aim, and accepts the result with equanimity. I expect to shoot the lowest score, and, beneath a pleasant demeanor, become increasingly exasperated when, despite two holes-in-one, it's clear I'm in for disappointment. And as victory looms ever closer, Jacquie's competitive juices flow faster and stronger, precluding any last-minute collapse.

Win, lose, or draw, there's no better nineteenth hole on a round of golf (when half the quartet is underage) than four double-scooped ice cream cones.

Sitting beside Lia, I tell her that one day many years in the future, when she has her own granddaughter, she needs to tell that granddaughter about the time her "Abba" rode with her, her parents, her brother, and their friend Jacquie for four days in upstate New York along the Erie Canal. She looks at me with a quizzical expression that says, "What in the world are you talking about?"

Undaunted, I continue. "And if you want to describe that trip in more detail, or refresh your own memory, because what's posted in cyberspace is there for eternity, just google 'myoccasionalpieces.blogspot.com/2021/10/tour-de-foschewel.html.'"

 

The Three Trillion Dollar Trough

Towards the end of his book The Price We Pay: What Broke American Health Care and How We Can Fix It, Dr. Marty Makary encounters Karen at a cancer fundraiser, and is curious when she declines a glass of wine.

She's taking antibiotics for a chronic sinus problem. "I had the balloon done and everything," she says, referring to the forty-five minute procedure in which her doctor inserted a small tube into her sinus and cleared it by inflating the material at the tip. It cost $21,000, of which $18,500 was covered by insurance.

Makary is hardly surprised to hear that Karen's sinuplasty hasn't really helped since, according to a focus group of Ear, Nose, and Throat specialists, "It's necessary for less than five percent of the patients who have it done." On the other hand, as evidenced by the invoice, it pays well. (Makary, pp. 239-239)

It's easy to get sucked into the quicksand of the United States Health Care System.

A RUNNER'S TALE 

I'm familiar with the case of a seventy-two-year-old man who, when the pandemic strikes in March 2020 and shuts down his YMCA, has to shift his daily workout from a fifty-minute ride on an elliptical machine to a six-mile run -- at an admittedly slow pace. The consequences after one hundred days are not unexpected.

He experiences a sharp, persistent pain on the outside of his left knee which hampers even a moderate walk. He arranges an appointment with an orthopedist who has cured him twice previously of arthritic inflammation with cortisone injections only to be told, after an x-ray and a palpation, "There's nothing wrong with your knee other than mild bursitis." He is prescribed a topical gel called diclofenac which miraculously vanquishes both his skepticism and his affliction after three weeks of four-times-a-day application.

"But there's something else I want to show you," says the good doctor. "Do you see these white lines in your lower leg?" Not really, thinks the patient while nodding affirmatively. "They look like calcium deposits. I would mention them to your internist on your next visit."

Which he does after researching atherosclerosis and resolving to reduce drastically his consumption of carbohydrates. "We could perform a CT scan to measure your coronary calcium score," says the internist, "but absent other symptoms I don't recommend it. Instead I suggest a carotid ultrasound." It's harmless, speedy, paid for by Medicare, and shows up normal, much to the fellow's relief, since it enables him to resume his occasional binges of chips and ice cream.

All's well until a few weeks later he comes across this statement in Elisabeth Rosenthal's book An American Sickness: "The scientific consensus is that many of the new high-tech screening techniques being promoted to healthy patients, such as checking for 'low T' or getting an ultrasound to see if you have some narrowing of the arteries, are not much more useful than snake oil." (Rosenthal, p. 323) The web site "Very Well Health" lists the following conditions as prompts for the latter procedure: an increased risk of stroke; a blockage due to plaque or a blood clot; a narrowing of the artery; an abnormal sound; or a transient ischemic attack. The patient -- none other than your faithful scribe -- exhibited none of the above.

Shortly afterward, however, I incur a more mysterious ailment: a severe, intermittent pain in my upper back that spasms and moves from side to side depending on my position or activity. Three consultations with my internist, a urinalysis, and a chest x-ray yield no diagnosis or treatment other than a second prescription for diclofenac (the oral variant this time) and, "if that doesn't work," a recommendation that I try physical therapy. Disdaining both, I agonize for six months until magically the pain abates, leaving me to deduce that it too was the result of my moronic marathon and the incessant shock waves to which I insisted on subjecting my aging body.

I applaud my internist for steering me away from an MRI and an orthopedist. There are five times as many MRI machines and spine surgeries per capita in the U.S. as there are in England. A nationally renowned back specialist says that three quarters of the patients who come to him for a second opinion don't need surgery at all. The $85.9 billion spent in this country to treat back pain is more than its combined state, city, county, and town police force budgets. (Brill, pp. 4-5, Rosenthal, p. 253)

While physical therapy is a better option than going under the knife, a previous experience made me reluctant to return. I'm glad I waited.

THE UTILIZATION TRAP

In the state of New York, from 1995 to 2015, the cost of a physical therapy session jumped from $100 to $600 for post-hip replacement "therapeutic exercise, neuromuscular education, gait training, and an ice pack," all of which, research has shown, are irrelevant to the patient's recovery. From 2004 to 2014 the physical therapy industry grew from $18 billion to $27 billion, a pace that has accelerated to 7% a year since. Some of that can be attributed to Congress, at the behest of lobbyists, annually nullifying previously legislated Medicare reimbursement caps. (Rosenthal, pp. 160-163)

Another therapy which has become more widespread in recent years is Mohs surgery, the process by which skin cancer is removed in slivers or small cubes of flesh rather than in larger cuts in order to preserve as much healthy tissue as possible. The excised portion is examined under a microscope to determine if any malignant cells remain around the edges, which would require a second cut. "On rare occasions, a third stage may be necessary," which, not surprisingly, generates a heftier invoice. Establishing a threshold of 2.2 stages per operation, a Johns Hopkins research team advised a thousand surgeons who were regularly exceeding this benchmark that, compared to their colleagues, their deviation could be considered inappropriate. This assessment was confirmed when, within a matter of months, 83% of the outliers altered their behavior for the better. (Makary, pp. 100-105)

U.S. health care operates in a system where patients are charged a fee for every unique service they receive, thus creating a perverse incentive for physicians and hospitals to conduct more procedures. Since providers are compensated for volume, it's in their economic interest to adopt and promote the position that "We might as well order an extra scan." Says Dr. Harlan Kromholz, professor of health policy at the Yale School of Medicine, "Almost everything is more expensive here [than in other countries] . . .We have a higher utilization of a lot of different services." (Hohman, today.com. September 22, 2020)

The consumer is hardly innocent of complicity in this dysfunctional universe. In his desperate search for diagnosis, medication, and cure, he readily submits himself to a battery of tests, punctures, scopes, and treatments, all the while blithely oblivious to their necessity, side effects, and fees, ninety percent of which are borne by Medicare, Medicaid, or his employer.

During the past ten years, reported David Goldhill in the Washington Post in 2013, "the number of CT and MRI scans [paid by Medicare] more than doubled; hip replacements increased by more than thirty-six percent. One out of three beneficiaries has at least one surgery in the year of his or her death. The average seventy-five-year-old takes five prescription drugs."

A 2017 study by H. Lyu et.al. revealed that a representative sample of doctors believe that 21% of all medical care delivered in the U.S. is unnecessary. That number rose to 45% in a report issued by the state of Washington Health Alliance; it found that in one year 600,000 patients in the state consumed services they didn't need at a cost of $282 million. The current high volumes of knee replacements, appendectomies, and thyroid surgeries have all been questioned by articles in the New England Journal of Medicine. (Makary, pp. 144-147)

Overtreating and overmedicating have other costs besides the profligate squandering of dollars. Opioid addiction and the ensuing tragic death toll are consequences of the uncontrolled and unwarranted distribution of the drug. The antibiotic and anti-microbial crises are the result of the overuse of antibiotics both in medicine and animal food production. (Makary, p. 146)

In 2018 the U.S. spent $3.65 trillion on health care, almost 18% of its Gross Domestic Product and more than $11,000 per person, which is two times higher than the amounts reported by high-income countries like the U.K., France, Canada, Australia, and New Zealand. The latter pair's 9.3% of GDP devoted to health care is about half that of the U.S.

Despite their inordinate spending, Americans experience worse health outcomes than their international peers. In 2017 life expectancy at birth in the U.S. -- 78.6 -- was more than two years less than the average of countries submitting data to the OECD (Organization for Economic Co-operation and Development) and five years lower than Switzerland, which has the longest lifespan. (Tikkanen and Abrams, The Commonwealth Fund, January 30, 2020, pp. 2-3)

The U.S. had the highest number of suicides per capita in the cohort. U.S. adults were diagnosed with two or more chronic conditions -- such as asthma, diabetes, heart disease, or hypertension -- at a level 15% higher than in the other countries. The incidence of obesity in the U.S. was twice the OECD average. Hospitalizations for diabetes and hypertension were 50% higher in the U.S., and among OECD countries the U.S. had the highest rate of amenable mortality (1.12 per 1000) -- that is, premature deaths from conditions which are considered preventable with timely access to quality care, such as diabetes, hypertensive disease, and some cancers. (Tikkanen and Abrams, The Commonwealth Fund, January 30, 2020, pp. 3-6)

Excessive utilization is the foundation upon which rises one departmental floor after another, each one piling on more exorbitant costs to support the bloated edifice housing the U.S. health care system.

HUNGRY HOSPITALS 

The fastest growing component has been hospital services. From 1997 to 2012 those costs increased 149% compared to 55% growth on the physician side. By 2013 the average hospital cost per day in the U.S. reached $4300, three times the charges in Australia and ten times those in Spain. (Rosenthal, p.23)

An aggressive campaign of revenue enhancement has yielded huge dividends.

Once it became evident to hospitals that private insurers and Medicare would reimburse them for goods and services like operating room time, oxygen therapy, and prescription drugs but not for items like gauze rolls, they adjusted their price lists -- called chargemasters -- accordingly. Such strategic billing assigns prices for pills, plastic surgery, transport, and tests that bear no relationship to their actual costs. (Rosenthal, pp. 34-35)

Hospitals offer financial incentives to physicians to encourage them to up code diagnoses -- that is, amplify their severity and complexity -- in order to generate higher insurance reimbursements. They employ specialists trained in anatomy, physiology, and pharmacology who are equipped to decipher the abstruse coding languages and system. Armed with their professional advice, physicians and nurses know that they can charge $1200 for a steroid injection by classifying it as surgery, that an "acute systolic heart failure" diagnosis is worth thousands more than simple "heart failure," and that administering a narcotic painkiller for a finger fracture or inserting two separate IVs for chemotherapy and dehydration makes a big difference in the patient's bill. (Rosenthal, pp. 37-37, 174-175)

Medical coding and coders like this essentially don't exist in any other healthcare system. A detailed itemized statement for hip replacement in Belgium consists of three pages and totals about 2500 Euros. The same operation in the U.S. will likely cost over $100,000, detailed in dozens of pages, each filled with medical terminology and numerical codes the unintiated could not possibly comprehend. (Rosenthal, pp. 172-173)

Another money maker for hospitals are facility fees -- charges imposed for the use of their rooms and equipment. Not reimbursable in Europe, they became widespread in the U.S. after improvements in anesthesia, pain medicine, minimally invasive surgery, and biopsy techniques greatly reduced the frequency of overnight stays. Imagine the outcry from their customers should other businesses -- like retailers -- brazenly attempt to pass on their rent and utility expenses in the form of surcharges. (Rosenthal, pp. 38-39) 

Hospitals have further driven revenue to their bottom lines by shedding perennial losing departments -- like dialysis and drug treatment -- and focusing on more lucrative ones -- like orthopedics and cardiac and cancer care -- often by purchasing existing practices or constructing grandiose new facilities. They have invested heavily in highly profitable services like bariatric surgery and proton beam therapy (for which the machines cost $100 million each) even though the latter offers "no long term benefit over traditional radiation therapy," according to a survey of thirty thousand prostate cancer patients. (Rosenthal, pp. 40-41)

Every year hospitals in aggregate pocket in excess of $15 billion in subsidies to support graduate medical education, or about $100,000 per resident physician, which covers 75% of his or her cost including salary.  These subsidies have a multiplier effect. Besides serving as the primary teachers of students assigned to their wards, residents supply much of the hospital's on-the-ground manpower -- seeing patients in the ER, assisting in the OR, drawing blood -- work which has been calculated to have a value of $233,000 annually. (Rosenthal, p. 43)

In recent years hospitals have latched on to a new profit generator: trauma center designation. Since 2008, when Medicare authorized reimbursements for trauma activation -- that is, the assembly of a skilled team of surgeons and nurses upon notification of severe injury from a rescue squad -- the number of Level I and Level II centers has grown from 305 to 567. Trauma fees can run anywhere from $9000 to $50,000, even when the patient is never admitted, which has become increasingly common. (Hancock, Jay, CNN health, July 17, 2021)

"The portion of Florida trauma activation cases without an admission rose from 22% in 2012 to 27% in 2020." At Broward Health Medical that number was almost 50%. Oregon Health and Science reported that 24% of patients treated under trauma alerts over a twelve-month period ending in April 2021 were not admitted. Unwarranted trauma alerts are costing health and auto insurers and their customers millions of dollars annually in expenses and higher premiums. (Hancock, Jay, CNN health, July 17, 2021)

In 1969 the IRS ruled that in order to maintain their not-for-profit status -- and their ability to avoid income and property taxes, issue tax-exempt bonds, and solicit deductible donations -- hospitals had to devote a portion of their resources to "charity care and community benefit." Abuses of this mandate are widespread. "A 2015 survey of 990 Forms conducted by the California Nurses Association concluded that 196 hospitals received '$3.3 billion state and federal tax exemptions and spent only $1.4 billion on charity care' . . . Three-quarters of the hospitals got more in tax breaks than they spent on benefiting the communities they serve." (Rosenthal, pp. 49-50)

One egregious example is the University of Pittsburgh Medical Center, one of the nation's biggest hospital systems, with 2020 revenues of $23 billion, earnings of $836 million, and a 60% market share. According to the Pittsburgh Post Gazette, UPMC is " 'Allegheny County's largest property owner, with 656 acres,' 86 percent of which is tax-exempt. If it were not classified as a nonprofit, 'UPMC would owe the city $20 million more in taxes every year.' On its 2014 IRS Form 990, UPMC claimed that about 11 percent of its costs went to charity care and community benefit." Some of those benefits were hardly credible, like boosting the economy through construction jobs, promoting diversity by hiring minority contractors, and improving the environment by creating a healing garden. (Rosenthal, p. 51)

DOCTORS' DILEMMA 

Alongside hospital revenues physician income has risen consistently since 2009. Doctors make more in the U.S. than in other countries. "The gap is particularly striking in the specialties." While primary care doctors in the U.S. make about 40% more than their peers in Germany, that figure rises to over 100% for orthopedic surgeons. Twenty-seven percent of U.S. physicians fall into the upper one percent of all wage earners, which exceeds the percent of attorneys and corporate executives in that category. (Rosenthal, pp. 56-57)

In 1986, attempting to curb escalating physician costs, Congress, in cooperation with the American Medical Association, developed a currency of measurement for a roster of services and procedures. These relative value units were based on (1) the time spent on the visit or intervention; (2) the overhead incurred in rendering the service; (3) the cost of training for the service; and (4) the related cost of malpractice insurance. (Rosenthal, p. 61)

Several poorly-conceived aspects of the plan ultimately undermined its good intentions.

In 1997 a ceiling was applied to overall Medicare payments. Consequently, in order to maintain budget neutrality, a higher valuation for one procedure had to be offset by a lower valuation elsewhere -- or reimbursements for all procedures would be adjusted downward. Medical groups spent hundreds of millions of dollars every year for two decades lobbying Congress to postpone any reductions until the law was rewritten in 2015. (Rosenthal, pp. 61, 65)

Further, because the concept more highly valued physician time and training, it tended to favor mechanical procedures over cognitive analysis and diagnosis. Radiologists, for example, would be rewarded while neurologists would be penalized. (Rosenthal, p. 62)

Finally, Medicare delegated the responsibility for annually reviewing the payment system to an arm of the AMA, the Relative Value Scale Update Committee. In "vituperative meetings," advocates for every specialty -- which had equal representation regardless of its actual percentage of the total universe of doctors -- fought bitterly for shares of the pie. The result, of course, was higher prices for insurers and premium payers. (Rosenthal, pp. 63-64)

Specialists have been contributory to and prospered from the spiraling costs of medications. For years oncologists have skimmed millions by "buying chemotherapy drugs from manufacturers and infusing them in the office, generally with a hefty markup, a practice known as 'buy and bill' . . . Drugs and biologicals make up 80% of all medical oncology charges submitted to Medicare each year." The general public is blind to the outrageous profit margins involved. Betty Glassman's insurers paid $23,000 (less her co-payment and deductible of $3564) for two rounds of three drugs to treat her breast cancer; the same cycle in Italy was estimated to cost $1500. (Rosenthal, pp. 78-80)

PHARMA'S FOLLIES

The outlandish volume of dollars rolling off the pharmaceutical industry's printing presses engulfs not just oncologists' practices.

Consider the case of Hope Marcus. To control her ulcerative colitis, she has spent much of her adult life on a decades-old drug called mesalamine. Unstable in the intestines, mesalamine is manufactured with a protective coating under the trade name Asacol. With its patent set to expire in 2013 and her Medicare Advantage plan committed to reimbursing the full cost of a generic, Ms. Marcus was anticipating a significant drop in her $750-a-month payment. (Rosenthal, pp. 87-88)

But the savings never materialized. Having acquired the rights to mesalamine from Warner Chilcutt in 2009, just prior to its date of expiration Procter and Gamble introduced two "new, improved products": Asacol HD, a once-a-day long-lasting variant, and Delzicol, a gel-coated version of the old 400mg pill, which it removed from the market. Both were covered by new patents, and carried a price tag of $800 per month. (Rosenthal, p. 88)

To make matters worse, by 2015 Ms. Marcus saw a 500% increase in the price of the rectal formulation of mesalamine, called Rowasa, after two companies ceased manufacture of its generic without warning. (Rosenthal, pp. 89-90)

"It is very hard for me to understand why these medicines are so expensive" in the United States, says Dr. John Mayberry, a professor of gastroenterology at the University of Leicester in England. In the United Kingdom, patients who get their mesalamine through the National Health Service pay about $12 a month, those with private prescriptions about $55 a month. Many versions of the drug are available, and pharmacists dispense them interchangeably. (Rosenthal, p. 89)

Perversely, despite their good intentions, numerous efforts to regulate the drug industry have only exacerbated the problem.

In 1962, in response to the thalidomide birth defect scare, the Kefauver-Harris Act invested the Food and Drug Administration with the authority to approve, postpone, or reject new drugs using a quantitative approach to evaluating new applications and clinical testing. However, while companies had to demonstrate that their products were safe and effective, the FDA standards of approval omitted any consideration of price and any measurements of cost-effectiveness and comparative utility, that is, whether the drug was more effective (and less costly) than other treatments already on the market. (Rosenthal, p. 93)

In 1984 the Hatch-Waxman Act expedited the rollout of generic drugs by allowing manufacturers to forgo fresh clinical trials and rely on prior studies. But in order to appease the brand makers, lawmakers introduced a number of lucrative patent extensions: six-months for pediatric trials; three years for trials to support a change in dosage; five years for time lost in regulatory review; and seven years for a drug whose usage was limited to 200,000 patients. (Rosenthal, p. 95)

In 1991, in order to accelerate the availability of HIV "miracle drugs," the FDA relaxed its rules for verifying the effectiveness of a drug. Instead of having to prove that the symptoms of an illness were actually cured, drug makers could utilize surrogate measures -- like blood markers -- which had been shown to correlate with such benefits. (Rosenthal, pp. 98-99)

Before long abuse was rampant. According to Thomas R. Fleming, professor of biostatistics at the University of Washington, "sponsors of drugs and biologics . . . are getting marketing approval much sooner and with much less research expenditure . . . for products that are likely biologically active but less likely to provide truly important effects." As evidence, "an in-depth investigation by the Milwaukee Journal Sentinel and MedPage Today in 2014 revealed that, thanks to surrogate endpoints, seventy-four percent of cancer drugs approved by the FDA during the previous decade ultimately did not extend life by even a single day." (Rosenthal, p. 99)

Manipulating patent law and FDA policies to extend their products' value has become a strategic objective of pharmaceutical companies.

When, in the early 2000's under the Montreal Protocol, CVC propellants were banned from aerosolized products, drug manufacturers leaped into the breach, obtaining new patents for redesigned asthma inhalers, removing generic ones from the shelf, and boosting the price from $10 to over $100. (Rosenthal, pp. 105-106)

In 2010 Purdue Pharma was able to "evergreen" -- extend the life of -- its patent on the its billion-dollar pain medicine OxyContin by introducing an "abuse-resistant" substitute. Unlike the original pills -- which, in order to unleash a mammoth hit, users would crush into a fine powder of pure oxycodene and then snort, ingest, or inject -- these were shatter-proof. It was a cruelly ironic ruse; having denied for years any culpability in the drug's trail of addiction and death, Purdue not only brazenly trumpeted the new version's more protective coating, it successfully lobbied the FDA to prohibit the manufacture and sale of a generic formulation of the original on the grounds that it was no longer safe. (Keefe, pp. 222, 306-308)

In 2014, when Sanofi Aventis's monopoly on its brand of insulin, Lantus, which carried a price tag of $300 a month, was threatened by a generic from Eli Lilly, it sued, claiming Lilly was violating four patents. The ensuing twenty-month waiting period invoked by law enabled Sanofi to siphon off two more years of exorbitant profits before the case was settled. (Rosenthal, pp. 106-107)

When Warner Chilcott's patent on its popular Loestrin 24 Fe contraceptive pill -- for which it was charging four times the international price of $20 -- was set to expire in 2011, it employed similar tactics, gaining thirty months protection by a lawsuit and then offering financial incentives to two drug makers, Watson and Lupin, to delay their applications for generics. Afterwards, it invented a chewable form of the pill, patented it, renamed it Minastrin Fe 24, upped the price to $140, and removed its predecessor from the market. (Rosenthal, p. 108)

U.S. law prevents a drug from being sold both by prescription and over-the-counter, and grants a company three years exclusivity on a prescription drug that it takes over-the-counter. When GlaxoSmithKline saw its profits on its popular allergy medication Flonase being undermined by a generic, it began selling Flonase off drugstore shelves for $40 a bottle; manufacturers of the generic -- which they had been offering for half that price -- had six months to deplete their inventory and cease production. At the same time Glaxo introduced a new, patented, branded, and higher-priced nasal spray -- Veromyst -- for sale by prescription to customers who didn't want to fork over $40 but who could get their insurance to pay for it. (Rosenthal, p. 112)

In 2008 Glaxo came under scrutiny when two generic anti-nausea drugs -- prochlorperzine and droperidol -- suddenly disappeared from the marketplace, enabling the company to reap lucrative profits from its branded product Zofran. Two disturbing occurrences were too timely to be dismissed as pure coincidence. The plant making all the prochloroperzine and droperidol had been purchased, and shut down. And a report surfaced linking droperidol to incidents of life-threatening arrhythmia. Conspiracy theorists were vindicated when it was revealed that the patients cited had received doses fifty to one hundred times higher than those typically prescribed in the U.S. (Rosenthal, pp. 120-121)

In 2011 Horizon Pharma, a start-up venture, invented a new painkiller, Duexis -- a combination of the anti-inflammatory ibuprofen and the stomach-lining protector famotidine -- and began selling it for $1600 a month, even though, says Patrick Crutcher of Chimera Research Group, "there is no benefit to using Duexis over the two generics." When another manufacturer, Par Pharmaceutical, sued to be allowed to make a generic of Duexis, claiming the drug was not really new, Horizon paid it an undisclosed amount to defer such action until 2023. (Rosenthal, pp. 112-113)

The number of such pay-for-delay agreements has increased dramatically over the past decade. The resulting scarcity of cheap alternative versions of brand-name drugs costs taxpayers and consumers $3.5 billion every year, according to the FTC. (Rosenthal, p. 113)

Aiding and abetting the pharmaceutical companies in their drug-pricing schemes is a second villain, the pharmacy benefit manager or PBM. Contracted directly by employers or through their insurers, these intermediaries purchase drugs from manufacturers, sell them to pharmacies, and then invoice the employer's health plan as prescriptions are filled. Those charges can run five to twenty times what the PBM is paying for the drug. Often the patient himself contributes to the bloated markup in the form of a co-pay. Should the drug maker offer a rebate to promote a specific medication or particular brand -- a common practice -- the PBM usually pockets most or all of it. (Makary, pp. 191-194)

PBM's take extreme measures to conceal their actual costs. Every month the health care manager in a typical mid-sized company will receive a list of medications numbering in the thousands, whose itemized names, generics, schedules, dosages, fees, rebates, and discounts are indecipherable to a layman. These managers have no recourse other than to authorize payment and file the invoice. (Makary, p. 194-195)

DEVICES AND DELIVERY 

Another contributor to the high cost of a hospital stay -- sometimes even exceeding the facility fee, physicians' invoices, and pharmacy charge -- is the piece of medical hardware that may have been inserted in the patient's body, either permanently or temporarily. (Rosenthal, p. 129)

Stretching between the implant manufacturer and a new hip is a chain of cash registers that includes a broker who tallies ten percent, a distributor who rings up thirty percent, a salesman who pockets fifteen percent, and the hospital which tacks on a one hundred percent mark-up. All of a sudden, what should rationally sell for a few hundred dollars, according to orthopedist Blair Rhodes, has been transformed into a $36,800 metal knee implant at NYU's Hospital for Joint Diseases, a $4000 set of screws at Lenox Hill Hospital in New York City, or a $33,000 stabilizing rod screwed into the fractured leg bone of a child hit by a car in Atlanta. (Rosenthal, p. 129)

A handful of device manufacturers monopolizes the global market. Stryker, Zimmer Biomet, DePuy Synthes, and Smith and Nephew make virtually all knee and hip implants available in the United States. (Rosenthal, p. 130) Medtronic is the primary supplier of insulin pumps, neurostimulators, coronary stents, and defibrillators. Its gross profit margin on these products is seventy-five percent, one reason it has delivered an annualized compound return of 15% to shareholders for over the past twenty years. (Brill, p. 109)

Favorable regulatory policies have enabled these giants to maintain their dominance and their profit margins. In 1976 amendments to the Food, Drug, and Cosmetics Act defined as Class Two any device which was deemed substantially equivalent in design and purpose to one currently in use, and allowed its introduction with a minimum of testing and red tape. Before long investigators determined that the average evaluation period for Class Two applications had fallen to twelve hours compared to twelve hundred for Class Three applications. When asserting "substantial equivalence," manufacturers were not required to conduct clinical trials nor prove their Class Two devices were safe and effective. Many weren't. (Rosenthal, pp. 132-133)

Boston Scientific's ProtoGen Sling -- a vaginal mesh used to support a "dropped" bladder or uterus -- was taken off the market in 2002 after a spate of internal injuries and lawsuits. Similar products remained available from other makers although by 2015 one hundred thousand claims had been filed. (Rosenthal, pp. 134, 146)

When first marketed in 2008, the Stryker Rejuvenate hip implant had been touted as more durable (and more expensive) than the decades-old model it was replacing, even though, says orthopedist Rory Wright, the latter "worked great. It has one percent failure . . . The majority of our patients should be getting tried-and-true method. We're not oncologists -- there's no benefit to the newest. In fact, it's often worse." (Rosenthal, pp. 137,139)

Dr. Wright's reservations were well-founded. When the Rejuvenate's "novel chromium, cobalt, and titanium components ground against each other, the metals leached into the surrounding muscle and blood, leading to joint failure, local tissue and bone death, and, potentially, to damage to other organs." (Rosenthal, p. 137)

Like drug makers, device manufacturers' disputes over intellectual property rights have fueled price escalation. In 2010 Edwards Lifesciences sued Medtronic over a new prosthetic aortic valve that is placed in the heart via catheter rather than by open heart surgery. Medtronic's CoreValve infringed on its patents, Edwards argued. When a jury ruled in Edwards's favor in 2014, in order to keep the product on the market, Medtronic agreed to pay Edwards $750 million plus ongoing royalties on its sales of CoreValve. (Rosenthal, p. 145)

An ancillary business raking in outrageous profits related to health care is transport. When Hugh Sparks of Plano, Texas, pulled off the road to snap some close-up photos of a rattlesnake, it sank its fangs in his wrist, and sent him speeding to the nearest hospital, where he was treated with antivenom. His doctor recommended an immediate transfer to an Abilene hospital fifty miles away -- by helicopter. After two days of observation, Hugh was released and feeling much better -- until he received an ambulance bill of $43,514, of which only $13,827 was paid by insurance. Owing $29,687 was more traumatic than being bitten by a poisonous snake, he reported. (Makary, p. 73)

In the 1980's private investors began buying air ambulance services from hospitals, moving into smaller markets across the country regardless of need, and driving up prices. The number of air ambulance companies and the number of helicopters they operate have both increased one thousand percent. Three companies control 75% of the market; one of them, Air Methods, now charges almost $50,000 compared to $13,000 in 2007. (Makary, pp. 71, 78)

THE INSURANCE CONUNDRUM 

The final and perhaps most gluttonous beast feeding at the three trillion dollar trough is the insurance industry. Invented over one hundred years ago at the Baylor University Medical Center in Dallas, Texas, to provide hospitalization coverage to a local teachers' union, the original Blue Cross Plans' "goal was not to make money but to protect patient savings and keep hospitals -- and the charitable religious groups that funded them -- afloat." (Rosenthal, p. 19)

During and after World War II, the concept swept across the country as a result of two dubious government policies. First, the National Labor Relations Board froze salaries, which motivated businesses to offer health insurance in order to attract workers. The IRS added a second incentive when it ruled that such insurance was both a tax-deductible expense to the employer and a non-taxable benefit to the employee, a ruling that was codified in the Revenue Act of 1954. (Hughes, Gareth, U.S. Policy Gateway, July 12, 2009)

As the demand for employer-funded health insurance exploded, for-profit companies like Aetna and Cigna aggressively moved into the market, underwriting risk, offering a variety of plans, and adversely selecting younger, healthier members. By 1993 Blue Cross and its physician component Blue Shield, burdened by an older, sicker population, were hemorrhaging money; they shed their non-profit status, went public, renamed themselves WellPoint, and, now answerable to shareholders and investors, began raising prices. (Rosenthal, p. 18)

Prior to that date the Blues' and most other insurers' "medical loss ratio" -- the percent of premiums spent on medical care as opposed to marketing and administration -- was about 95%. That number had fallen to 80% by 2010, when the Affordable Care Act mandated loss ratios no lower than 85%. While CEO's wailed in protest, their credibility was suspect in the face of Medicare's reported spending of 98% of its funding on medical services. In fact, when the cost of catastrophic stop-loss insurance is included, commercial carriers' overhead is close to 30% compared to Medicare's two percent. (Rosenthal, pp. 19-20)

Insurance is "the most complex and distorted method of financing any activity," writes David Goldhill in The Atlantic (September 2009). "Its use to fund nominal and routine as well as large and expected expenses is a major cause of health care's huge cost," and also the underlying reason "why innovation and technological advancements never generate efficiencies or savings." 

For every two doctors in the United States, there is one health insurance employee. In 2017, the U.S. spent $800 billion dollars on health care administration, or $2500 per person, compared to $550 per person in Canada; the insurer overhead alone (characterized as "useless bureaucracy" by Dr. David Himmelstein, a distinguished professor of public health) was $844 per person versus $146 in Canada. (Carroll, Linda, Reuters, January 6, 2020). Inefficient claims processing wastes $210 billion annually, according to Price Waterhouse Coopers Health Research Institute. Businesses large and small expend precious payroll dollars on human resource staffing to advise and assist employees in navigating plans and filing claims.

In cooperation with providers, health insurance doubly insulates the consumer from the high cost of his care: first, by relieving him of any responsibilities except his deductible and copay; and secondly, by serving as his agent and remitting hospitals and physicians directly, the only form of insurance that leapfrogs the beneficiary. With little of his own money at stake, moral hazard -- the tendency for people to make less careful decisions when risk has been minimized -- prevails.

But the sad truth about health care is that everybody foots the bill. While a worker may be discomfited by the annual announcement that his premium is rising, he is secure in the knowledge that should a severe illness strike him or a family member, much of the burden will be borne by someone else. Doesn't he realize that his employer may be stifling his wages to offset the high cost of insurance? Or that when he purchases a new sofa or refrigerator, embedded in the price is an amount allocated to the retailer's expense of insuring his own employees? Or that, if he is fortunate enough to avoid any hospitalizations, physician visits, or medications for an entire year, his premiums may be used to pay for a coworker's hip replacement?

Aside from his premiums, he's paying a Medicare tax, which is not for future insurance coverage on himself after he retires, but to pay the drug costs of someone like his elderly neighbor who may be undergoing chemotherapy. And probably neither he nor his employer understands how commercial insurance premiums are inflated in order to offset the discounted hospital and physician Medicare reimbursements that both claim are not sufficient to cover their operating costs; the industry-wide practice is nothing less than an insidious hidden tax known as cost-shifting.

The Centers for Medicare and Medicaid Services projects that health spending will grow at an average annual rate of 5.4 percent, and reach $6.2 trillion by 2028. Since this rate is 1.1 percentage points higher than the projected growth of gross domestic product, the health share of the economy will rise from 17.7 percent in 2018 to an almost unsustainable 19.7 percent in 2028.

With that bleak picture staring citizens and policymakers in the face, are there any potential strategies that might facilitate a bending of this daunting curve? With the Medicare Trust Fund expected to become insolvent by 2024, which would pile even more debt upon an already encumbered populace, it would seem imperative that key players set aside or at least be willing to compromise their self-interest and commit to a serious discussion about our nation's most pressing problem.

Unfortunately, that appears to be wishful thinking, considering the bitter political environment, the obscene amount of money at stake, and the inherent flaws of three approaches currently in vogue: capitation; regulation; and nationalization.

CAPITATION 

 

For a number of years Medicare had tested a strategy called "bundling," that is, paying hospitals a fixed amount for various therapies rather than a separate fee for each component of the therapy. The experiment demonstrated significant savings in the reimbursements for dialysis (mainly because the expensive drug Epogen was included in the bundle), for knee and hip replacements, and for the treatment of simple pneumonia. (Rosenthal, pp. 296-297)

Having witnessed success, some thoughtful people proposed building upon it: scrapping the fee-for-service template altogether and replacing it with a system called "capitation," whereby providers receive fixed lump-sum payments annually to manage population health and treat members for specific illnesses. Years ago, for example, the Mayo Clinic pooled its total revenues, put all its physicians on salary, and created one of "the highest-quality, lowest-cost" operations in the country. (Guwande, Atul, New Yorker, June 1, 2009) More recently, in 2015, the Boeing Company contracted to pay two Washington State hospitals a set yearly per capita fee for all the care for its 27,000 employees. (Rosenthal, p. 297)

The federal government has attempted to promote capitation by incentivizing the formation of Accountable Care Organizations: groups of doctors and hospitals that work together to coordinate and deliver high quality care for Medicare patients. Those that lower costs will share in the savings.

Capitation is unlikely to meet its objectives, write Clayton Christensen, Jeffrey Flier, and Vineeta Vijayaraghaven, in the Wall Street Journal (February 19, 2013) because it is based on flawed assumptions about personal and economic behavior.

First, doctors whose attitudes have been shaped by years of interactions with hospitals, insurance companies, and colleagues will find it difficult to reconcile what they consider appropriate medicine with cost reduction measures and evidence-based protocols. Second, the necessary cooperation and engagement of patients may not be forthcoming; their noncompliance with recommended treatments and lifestyle changes and their refusal to share claims or medical data will pose significant roadblocks. Finally, unless ACO's are able to build a clear wall around what's included in the bundled coverage and prevent providers from imposing additional charges, a problematic assumption, anticipated savings will not materialize. 

Early returns seem to have confirmed the experts' prognostications. The Congressional Budget Office estimated the impact of the largest ACO option, the Medicare Shared Savings Program, on total Medicare spending from 2013 to 2018 at less than one percent.

REGULATION 

As for any hope that skyrocketing health care costs might be curbed by regulation -- which in this context is defined as legislation past, present, and prospective and its attendant interpretation and application -- history suggests otherwise.

The well-documented missteps of Congress and the FDA in this effort date back fifty years. But perhaps the most blatant example of government's inability to effectuate meaningful reform is its most recent, when in 2010, during the deliberations that led to the passage of the Affordable Care Act, or Obamacare, it squandered a generational opportunity.

Medicaid expansion, the elimination of preexisting conditions as grounds for denial of coverage, and the subsidizing of policies for low income families were expected to create twenty million new consumers (from a total uninsured population of 45 million) for the four main sectors of the health care industry: device makers, hospitals, insurance companies, and pharmaceuticals. It was only reasonable for lawmakers to insist that each of them participate in an overall cost containment program and share a portion of its revenue windfall with the federal government, which would be spending an estimated $75 billion on expanded coverage in 2014 (rising to $100 billion in 2018).

Staffers working for the Senate Finance Committee, which was drafting the legislation, originally penciled in a 5% annual tax, equivalent to $6.5 billion a year, on medical device revenue. When the bill reached the Senate floor, pressure from Evan Bayh of Indiana and Amy Klobuchar and Al Franken of Minnesota, two states where major device manufacturers like Medtronic, Boston Scientific, and Zimmer Biomet are large employers, convinced Majority Leader Harry Reid to cut the tax in half. In 2014 the industry spent $32.8 million lobbying Congress to repeal the tax, which it did permanently in the 2019 bipartisan budget deal following a four-year suspension. (Brill, pp. 110, 175; Rosenthal, p. 130)

The most recent figures available to the Senate Finance Committee in 2009 indicated that the 4300 non-profit hospitals in the U.S. (75% of the total) were claiming $36 billion in uncompensated care, most of which would be paid going forward by expanded Medicaid coverage and by insurance policies subsidized by the government. Confronted by this argument, hospitals agreed to give back $155 billion over ten years, mostly through mechanisms designed to slow the increase in Medicare reimbursements. Not surprisingly, the purported savings never materialized. (Brill, pp. 102-103)

A provision to cut Medicaid's Disproportionate Share Hospital payments by $1.4 billion annually -- based on an assumption of fewer subsidies for the uninsured -- has been repeatedly postponed by Congress due to intense lobbying by states and hospitals. (Antos and Capretta, HealthAffairs, April 10, 2020)

An Independent Payment Advisory Board was constituted and invested with the authority to recommend and implement cost-cutting policies if Medicare spending exceeded a target growth rate. Political indifference and opposition from the health care industry left the Board in limbo, as no appointments were made, and Congress allowed it to disappear in 2018. (Antos and Capretta, HealthAffairs, April 10, 2020)

The bulk of the $155 billion was to accrue from tying Medicare payment updates to an economy wide productivity measurement. But the metric widened the disparity between Medicare and commercial reimbursements to such an extent that many institutions found themselves on the brink of bankruptcy. As a result, another linchpin of affordable care suffered a quiet death. (Antos and Capretta, HealthAffairs, April 10, 2020)

As controversy over the ACA swirled over the air waves and in public forums, advocates attempted to deflect ire away from "government bureaucrats taking over healthcare" towards "villainous insurance companies preying on the sick and helpless." 

Under the new law greed would be restrained, and discriminatory underwriting reformed. "The high profits reaped from administering certain Medicare programs would be cut." (Brill, p. 143) Insurers could no longer exclude persons with preexisting conditions, nor impose limitations on their lifetime coverage. Plans must include emergency, maternity, and mental health care, preventive services such as mammograms and colonoscopies, and prescription drugs. In order to minimize their premium costs, at least theoretically, older subscribers could be charged no more than three times their younger counterparts.

Once again, the reality fell far short of the rhetoric.

Hoping to raise $102 billion over ten years, legislators enacted a health insurance tax on each company's net premium revenue above $25 million. It managed to garner $30 billion from 2014 to 2016 before some astute analysts pointed out that the insurers weren't actually paying the tax; their customers were. And because the tax was not a deductible expense and any premium increase was subject to a 21% federal tax rate, one study determined that insurers were charging an extra $1.27 for every dollar in tax owed, or an average increase of 2.2%. After suspending the tax in 2017 and 2019 (it was allowed to return in 2018), Congress sunset it permanently effective January 1, 2021. (Center Forward Basics, March 2019)

The ACA established a medical loss ratio of 85% in the large group market (80% in the small group market), and required insurers who did not spend that percentage of their premium revenue on health care claims or quality improvement to rebate the difference to their enrollees either by credit or check. This initiative appears to have been successful; insurers returned $1.37 billion to consumers in 2018 and $2.46 billion in 2019. (Keith, Katie, HealthAffairs, November 17, 2020)

Naysayers have argued that these numbers are merely a reflection of the industry's extreme profitability. They have questioned whether insurers could be gaming the system by shifting expenses from the administrative category to the care or improvement categories. And they have alleged that the penalty has perversely incentivized carriers in noncompetitive markets to forgo deep discounts from providers in order to realize higher administrative revenue. (Brill, pp. 120-121)

The ACA's centerpiece, and the justification for its title, was the subsidy provided to lower-income families and individuals to enable them to purchase health insurance in the open market. Indeed, for anyone not covered by Medicare, Medicaid, or his employer and eligible for a subsidy, health insurance became very affordable. Depending on one's income, or lack of it, the federal government could be paying 70% of his premium. Surprisingly, even for shoppers not eligible for a subsidy, premiums seemed to be reasonably priced, as insurers were eager to entice new customers, especially the young and healthy, who might lower their risk. (Brill, pp. 316-317)

If the ACA can be deemed initially a success -- once the disastrous rollout of its web site was fixed -- the progress it made was unsustainable. By 2015, one year after the ACA's reforms went into effect, membership in the open market had grown from 13 million to 18.8 million, about half of whom were receiving government support. Four years later, however, after a steady decline, that number was back where it started, with the subsidized population unchanged at around nine million. The exodus was in full force well before the repeal of the individual mandate in 2019. (Antos and Capretta, HealthAffairs, April 10, 2020)

"The reason for the collapse is clear: high premiums and deductibles have made this market unattractive to consumers who do not qualify for federal assistance." Insurance companies are in business to make money, and they cannot provide the coverage mandated without the revenue to offset claims. In 2019 the average monthly premium per enrollee in the open market was $515, up from $217 in 2011. Deductibles have risen commensurately over the same period, from $2425 for a silver plan offered on healthcare.gov. in 2014 to $4500 in 2020. (Antos and Capretta, HealthAffairs, April 10, 2020)

As premiums have risen, so also has the cost to the taxpayer of subsidizing them. In 2018, according to the Congressional Budget Office, the government paid out an average of $6300 to every subsidized enrollee, up from $3000 in 2014, an increase of 114%. (Anton and Capretta, Health Care Blog, April 10, 2021) 

Over the same period federal expenditures increased from $21 billion to $45 billion per year. The recently passed American Rescue Plan Act will tack on another $22 billion in 2022 (and annually if renewed) by subsidizing 100% of the premiums of individuals/families below 150% of the poverty level and not on Medicaid and by capping all others' maximum outlay for health insurance at 8.5% of their adjusted gross income and subsidizing the rest. (Chang, Ellen, Forbes Advisor, March 26, 2021)

The consequences of all these generous handouts are distressingly predictable: costs will continue to escalate; insurance companies will get richer; and the government will sink deeper in debt.

Salivating the most at the prospect of instant enrichment -- $200 billion over ten years, as calculated by analysts working for the Senate Finance Committee -- was the fourth member of this exclusive club of trough feeders: the pharmaceutical companies. In their opening salvo, the Committee negotiators asked for $130 billion back in the form of price reductions on drugs paid through Medicare and a tax on revenues. (Brill, p. 98)

They were up against one of the shrewdest lobbyists in the business: Wilbert Joseph (Billy) Tauzin II. Elected to the House of Representatives in 1980 as a conservative Democrat from Chockbay, Louisiana, Tauzin employed his abundant charm and political savvy to elevate himself to majority whip and chair of the powerful Energy and Commerce Committee. He retained the position even after switching parties in 1994 following the Republican takeover. Voters didn't care; they continued to reelect him. (Brill, p. 49)

In 2003 Tauzin engineered the drug bill that funded Medicare's drug purchases for seniors but forbade the agency from negotiating discounts. Tauzin felt indebted to the industry: diagnosed with colorectal cancer the previous year and told he had a one percent chance of surviving, he claimed his life was saved by a newly developed drug. Within months he left Congress, and took over as CEO of the Pharmaceutical Manufacturers Association of America (PhRMA) for a salary of $2 million a year. (Brill, p. 50)

Not only was Tauzin faced with the $130 billion demand, a liberal caucus in the House of Representatives led by California Congressman Henry Waxman was clamoring for additional measures which were certain to impair his clients' profits. These consisted of (1) giving Medicare the authority to negotiate prescription drug prices; (2) allowing consumers to buy drugs from Canada; (3) funding research on the "comparative effectiveness" of various drugs so insurers could make more economical purchasing decisions; and (4) continuing the moratorium on any patent-like protection for biologics (medicines created by living organism rather than by chemicals). (Brill, pp. 98-99)

The Obama Administration had staked its credibility on getting health care (or health insurance) reform passed; it was not willing to let the Waxman faction or Senate Committee staffers stand in its way, regardless of any concessions it might have to make to Tauzin and his cabal. When PhRMA came to the table with $70 million to fund anonymously two political action committees which would buy television ads endorsing senators in favor of the bill and attacking those who were against it, the pressure was too intense for the opposition to persist. (Brill, pp. 100-101)

By the time the smoke cleared, Tauzin had orchestrated a complete sellout to his domestic cartel. "There would be no prescription drug importation. Medicare would not be set loose to negotiate drug prices. There would be no draconian cuts in Medicaid payments . . . There would be twelve years of protection for biologics." The givebacks had been whittled down to $8 billion a year in Medicaid discounts and in subsidies for senior citizens when their prescription drug bill exceeded their Medicare reimbursement. (Brill, p. 127)

The final coating of lipstick was splashed on the pig. Not only had the four pillars of the United States health care industry suffocated any and all attempts to address the cost issue, they had also avoided any impactful assumption of the obligations being borne by the government (or its taxpayers) in bringing them twenty million new customers through Medicaid expansion and a subsidized open market.

Also sliding into the trillion dollar trough as the process played out were the promises made by President Barack Obama. On April 30, 2009, his leading economic advisors said: "For every 5% we can reduce health care over the next ten years we will save families $2500." On May 11, acknowledging the industry executives standing beside him, he distributed a fact sheet to the press announcing that they "had agreed to two trillion in cost cuts over the next ten years." On June 15 he told the American Medical Association convention that he would honor his pledge to the American people: "If you like your doctor, you will be able to keep you doctor, period. If you like your health plan, you will be able to keep your health plan, period." (Brill, pp. 117, 123, 126)

It was The Audacity of Hope revisited. And it leaves me not sanguine about the future.

NATIONALIZATION

 

I can't help but think that the same toxins that undermined the good intentions of the Affordable Care Act -- corporatism and cowardice, plus a new one, complacency -- will ultimately reduce to an academic exercise any consideration of the last best hope of controlling this runaway spending: the nationalization not of hospitals and physician practices but of the instrument by which they are funded. Nevertheless, it's obligatory, because unless this titanic changes course and embraces Universal Health Insurance, Medicare for All, or whatever other label might be applied, calamity looms on the horizon.

The United States is the only one of thirty-three developed countries that does not have universal health care. Thus, models are already in place that, except for a few outliers, are saving these countries fifty percent of the U.S. per capita expenditures on health care. Granted it would take years, maybe decades, for the U.S. to realize similar savings, yet even a start down this path could begin to moderate the frightening trend.

If one rejects the British single-payer model whereby providers are government owned as too radical for the U.S., two viable options remain. Under the social insurance hybrid that was developed in Germany and has been copied by other European countries, workers pay a tax or premium through their employers into a national fund. Private insurers manage benefits, and private doctors and hospitals provide care, but prices are strictly monitored by the government. The Canadian system is similar except there is one government-operated insurance company, which pays for all private practice care. (Amadeo, Kimberly, The Balance, March 13, 2020)

Most of the arguments I hear dismissive of universal insurance are anachronistic, illogical, or ill-founded. 

Many folks are quick to denounce the evils of "socialized medicine" until one takes the time to explain to them that we are halfway there. Currently, about 42% of the U.S. is covered by Medicare, Medicaid, or the Veterans Administration. Since employee-funded health insurance is tax-deductible, the 56% of the population who fall in this category are being subsidized by the federal government in an amount equivalent to the corporate tax rate, not to mention another ten percent whose generous subsidies enable them to obtain insurance on the open market. 

Others bemoan the loss of freedom or lack of choice that might follow in the wake of expanded government control. Don't they realize that, if they are getting coverage through their employer, he is selecting their insurance company and designing their plans, and they have no other options? Nor is it practical for them because of the additional cost to seek care outside the network of hospitals and physicians under contract with their insurance company. Medicare and Medicaid patients are under no such restrictions.

The contention that "U.S. health care is superior to that offered by countries with universal care" is easily rebutted by the painful statistics that clearly show more favorable outcomes for the latter. Friends of mine who formerly lived in Canada recently informed me that Princess Margaret in Toronto is one of the top five cancer centers in the world.

They also refuted the frequently heard claim that patients have to wait longer for procedures in places like Canada than in the U.S. "That's only true for some elective surgeries," they said. Indeed, according to the Peterson-Kaiser Health Tracker, in some cases the wait times in the U.S. are longer, as insurance companies waste hours securing referrals and approvals for urgent treatments. On average, residents of Germany, France, the UK, Australia, and the Netherlands reported shorter waiting periods than those in the U.S. (Sousa, Lorie, et.al., U.S.News, May 13, 2020)

Even the staunchest defenders of the status quo seldom assert that universal care would cost more; the numbers clearly demonstrate otherwise. But they do raise a valid point when they question how a transformation could be financed.

I can't speak macro-economically, but I can pose an hypothesis based on my company's experience. Schewel Furniture Company offers coverage to its employees and their family members through a self-insured plan; that is, Schewel pays all claims and administrative expenses, while employees contribute about 20% of this amount as payroll-deducted premiums. Thus, in an average year, if Schewel's claims for it six hundred employees total $4 million, the employees are being charged $800,000 (about $110 per month per capita), leaving Schewel's expenditure at $3.2 million. Since health insurance is tax-deductible, Schewel's net cost at a 25% tax rate is $2.4 million.

Assume the federal government imposes a health insurance tax on my company equal to my after-tax costs: $4000 per employee, or $2.4 million. Assume also that each employee is assessed a premium equal to what he is paying Schewel: $110 per month, or $800,000. These two taxes together would generate enough revenue to pay all hospitals and physicians the sum of  $3.2 million, which is $800,000, or 20%, less than Schewel is paying its insurer. Anthem's administrative costs are closer to 30%, which would leave 10% available to cover a national insurance company's overhead (which is considerably higher than Medicare's current rate).

Once such a plan is in place, the national insurance company could begin negotiating larger discounts from providers and drug companies. Genuine system-wide savings would ensue.

Cost control, universal access, eliminating the middlemen, less paperwork, better outcomes: what's wrong with this scenario? Nothing except for the three immovable obstacles blocking the way forward.

The U.S. health care system is the only one in the world based on corporatism. Pharmaceutical manufacturers, insurance companies, hospital conglomerates, device makers, even some specialty practices, like dialysis, are big businesses. In most sectors, a few giants dominate the market. Profit-driven and publicly owned, they are primarily beholden to their shareholders, face weak competition, have little interest in a value proposition, and engage in cost-saving stratagems that often engender hardship and frustration among patients and caregivers. For them, the risks of reform are huge. In order to preserve their franchises, every year they spend millions of dollars to manipulate public opinion and influence legislators. (Arno and Caper, HealthAffairs, March 25, 2020)

When it comes to resisting the blandishments and deep pockets of the industry's powerful lobbies, it's clear that on Capitol Hill and in the White House, regardless of the occupants, cowardice trumps courage. Every four years or so, Bernie Sanders and his ilk manage to ramp up the rhetoric, but truthfully in the halls of government there's little appetite for meaningful change. Lawmakers are too intimidated by dire warnings of factory closings, job losses, hospital insolvencies, and thwarted research to look past the next election cycle. If they lacked the political will to enforce the industry's meager sharing of its ACA slush fund, how can one ever expect them to rise to a much higher level of disinterested statesmanship? 

That relegates any hope of reform to the two stakeholders who really have the most to gain but are too indifferent or complacent to advance the conversation: employers and employees. As for the latter, aside from sporadic complaints about rising premiums, deductibles, and co-pays, most seem content with the devil they know, one who competently manages their health care with minimal effort on their part. Restructuring the current system is far down on their hot-button list, which is headed by gun and abortion rights.

In my view, the only body that could thrust the conversation into the public arena and bring the power brokers to the table would be an alliance of major employers, the CEO's of companies like Google, Amazon, General Motors, Exxon, and Whole Foods. But apparently they are satisfied, even pleased, to be able to offer insurance to their thousands of workers and absorb most of the cost. They have the resources to manage their risk. For them, health insurance is a valuable benefit which can be used to attract and retain key executives. Most are reluctant to involve themselves in controversial political issues. Absent a dramatic event in the current environment, they are unlikely to champion a revolutionary movement.

We are left with no recourse other than to make the best of a bad situation. As a seventy-two-year old male who has been gifted with excellent health all his life and is now waiting for the inevitable shoe to drop, I have a few suggestions: get an annual physical; exercise every day; don't smoke anything; never drink alone; eat a peanut butter and jelly sandwich for lunch; be wary of elective surgery; observe the speed limit; always cycle with a helmet; don't take yourself too seriously; don't cross the street while looking at your phone; limit your consumption of coffee to one cup a day except on vacations; stay out of the sun; and, last but not least, inherit the genes of a ninety-five-year-old mother.

REFERENCES

Amadeo, Kimberly. The Balance. March 13, 2020.

Antos, Joseph and Capretta, James. HealthAffairs. April 10, 2020. 

Arno, Peter and Caper, Philip. HealthAffairs, March 25, 2020.

Brill, Steven. America's Bitter Pill: Money, Politics, Backroom Deals, and the Fight to Fix Our Broken Health Care System. New York: Random House, 2015.

Center Forward Basics. March 2019.

Chang, Ellen. Forbes Advisor. March 26, 2021. 

Carroll, Linda. Reuters. January 6, 2020.

Guwande, Atul. New Yorker. June 1, 2009. 

Hancock, Jay, CNN health, July 17, 2021.

Hohman, Maura. Today.com. February 20, 2020. 

Hughes, Gareth. U.S. Policy Gateway. July 12, 2009.

Keefe, Patrick Raddon. Empire of Pain: The Secret History of the Sackler Family. New York: Doubleday, 2021.

Keith, Katie. HealthAffairs. November 17, 2020.

Makary, Marty. The Price We Pay: What Broke American Health Care and How We Can Fix It. New York: Bloomsbury Publishing, 2019.

Rosenthal, Elisabeth. An American Sickness: How Healthcare Became Big Business and How You Can Take It Back. New York: Penguin Press, 2017.

Sousa, Lorie, et.al. U.S.News. May 13, 2020.

Tikkanen, Roosa and Abrams, Melinda. The Commonwealth Fund. January 30, 2020.