Market Bubble or Bull Market – You decide.

Posted on April 16th, 2014 in Uncategorized by Karl

Excerpted from Baupost Group’s Seth Klarman letter,

“Born Bulls”

In the face of mixed economic data and at a critical inflection point in Federal Reserve policy, the stock market, heading into 2014, resembles a Rorschach test. What investors see in the inkblots says considerably more about them than it does about the market.

If you were born bullish, if you’ve never met a market you didn’t like, if you have a consistently short memory, then stock probably look attractive, even compelling. Price-earnings ratios, while elevated, are not in the stratosphere. Deficits are shrinking at the federal and state levels. The consumer balance sheet is on the mend. U.S. housing is recovering, and in some markets, prices have surpassed the prior peak. The nation is on the road to energy independence. With bonds yielding so little, equities appear to be the only game in town. The Fed will continue to hold interest rates extremely low, leaving investors no choice but to buy stocks it doesn’t matter that the S&P has almost tripled from its spring 2009 lows, or that the Fed has begun to taper purchases and interest rates have spiked. Indeed, the stock rally on December’s taper announcement is, for this contingent, confirmation of the strength of this bull market. The picture is unmistakably favorable. QE has worked. If the economy or markets should backslide, the Fed undoubtedly stands ready to once again ride to the rescue. The Bernanke/Yellen put is intact. For now, there are no bubbles, either in sight or over the horizon.

But if you have the worry gene, if you’re more focused on downside than upside, if you’re more interested in return of capital than return on capital, if you have any sense of market history, then there’s more than enough to be concerned about. A policy of near-zero short-term interest rates continues to distort reality with unknown but worrisome long-term consequences. Even as the Fed begins to taper, the announced plan is so mild and contingent – one pundit called it “taper-lite” – that we can draw no legitimate conclusions about the Fed’s ability to end QE without severe consequences. Fiscal stimulus, in the form of sizable deficits, has propped up the consumer, thereby inflating corporate revenues and earnings. But what is the right multiple to pay on juiced corporate earnings? Pretty clearly, lower than otherwise. Yet Robert Schiller’s cyclically adjusted P/E valuation is over 25, a level exceeded only three times before – prior to the 1929, 2000 and 2007 market crashes. Indeed, on almost any metric, the U.S. equity market is historically quite expensive.

A skeptic would have to be blind not to see bubbles inflating in junk bond issuance, credit quality, and yields, not to mention the nosebleed stock market valuations of fashionable companies like Netflix and Tesla. The overall picture is one of growing risk and inadequate potential return almost everywhere one looks.

There is a growing gap between the financial markets and the real economy.

“Flash-Mob Speculation”

When it comes to stock market speculation, it’s never hard to build a “coalition of willing.” A flash mob of day traders, momentum investors, and the usual hot money crowd drove one of the best years in decades for U.S., Japanese, and European equities. Even with the ranks of the unemployed and underemployed still bloated and the economy barely improved from a year ago, the S&P 500, Dow Jones Industrial Average, and Russell 2000 regularly posted new record highs (45 for the S&P, 52 for the Dow, and 66 for the Russell) while gaining a remarkable 32.4%, 29.7%, and 38.8% including dividend reinvestment, respectively, in 2013. It was the best year for the S&P 500 since 1997… In the closing weeks of 2013, it was as if the strong gravitational pull of valuation had been temporarily suspended and stock prices had been launched by a booster rocket, allowing them to reach escape velocity. As with bull markets past, favored stocks started to become unmoored and unbounded.

“Speculative Froth” and Dot-Com 2.0

Whether you see today’s investment glass as half full or half empty depends on your age and personality type, as well as your “lifetime” of experiences in the markets and how you interpret them. Our assessment is that the Fed’s continuing stimulus and suppression of volatility has triggered a resurgence of speculative froth. Margin debt measured as a percentage of GDP recently neared an all-time high. IPO activity in 2013 was greater than it has been in years, with 230 offerings taking place, 59% more than last year and approaching 2007’s record of 288 transactions.

Twitter, for example, surged from $26 to almost $45 on day one, and closed the year around $64. It was priced, after all, at only twenty times its projected 2015 revenue. One analyst suggests the profitless company might achieve $50 million of “adjusted” cash earnings this year, giving it a P/E of over 500. Some hedge and mutual funds are again investing in late-stage, pre-IPO financing rounds for hot Internet companies at valuations that only seem reasonable if the companies go public, soon, and at astronomical prices., with a market cap of $180 billion, trades at about 15 times estimated 2013 earnings, Netflix at about 181 times. Tesla Motors’ P/E is about 279; LinkedIn’s is 145. Even though Netflix now carries some original programming, we’re pretty sure we’ve seen this movie before. Some 23-year-olds have sold their startup internet companies for hundreds of millions of dollars, while the profitless privately-held Snapchat has turned down a $3 billion buyout offer.

In Silicon Valley, it seems that business plans – a narrative of how one intends to make money – are once again far more valuable than many actual businesses engaged in real world commerce and whose revenues exceed expenses.

Ominous Signs

In an ominous sign, a recent survey of U.S. investment newsletters by Investors Intelligence found the lowest proportion of bears since the ill-fated year of 1987. A paucity of bears is one of the most reliable reverse indicators of market psychology. In the financial world, things are hunky dory; in the real world, not so much. Is the feel-good upward march of people’s 401(k)s, mutual fund balances, CNBC hype, and hedge fund bonuses eroding the objectivity of their assessments of the real world? We can say with some conviction that it almost always does.

Frankly, wouldn’t it be easier if the Fed would just announce the proper level for the S&P, and spare us all the policy announcements and market gyrations?

Europe Isn’t Fixed

Europe isn’t fixed either, but you wouldn’t be able to tell that from investor sentiment. One sell-side analyst recently declared that ‘the recovery is here,’ a sharp reversal from his view in July 2012 that Greece had a 90% chance of leaving the Euro by the end of 2013. Greek government bond prices have nearly quintupled in price from the mid-2012 lows. Yet, despite six years of painful structural adjustments, Greece’s government debt-to-GDP ratio currently stands at 157%, up from 105% in 2008. Germany’s own government debt-to-GDP ratio stands at 81%, up from 65% in 2008. That doesn’t look fixed to us. The EU credit rating was recently reduced by S&P. European unemployment remains stubbornly above 12%. Not fixed.

Various other risks lurk on the periphery: bank deposits remain frozen in Cyprus, Catalonia seems to be forging ahead with an independence referendum in 2014, and social unrest continues to escalate in Ukraine and Turkey. And all this in a region that remains saddled with deep structural imbalances. As Angela Merkel recently noted, Europe has 7% of the world’s population, 25% of its output, and 50% of its social spending. Again, not fixed.

Bitcoin And Gold

Only in a bull market could an online “currency” dubbed bitcoin surge 100-fold in one year, as it did in 2013. The phenomenon spurred The Wall Street Journal to call it a “cryptocurrency” craze, with dozens of entrants. Bitcoin now has an estimated market “value” in excess of $6 billion, leaving alphacoin, fastcoin, gridcoin, peercoin, and Zeuscoin in its wake. Now most sell-side firms are rushing to provide research on this latest fad, while “bitcoin funds” are being formed. Recent recruitment e-mails to staff such a platform reassure that even though experience is preferred, it is not required.

While bitcoin is yet another bandwagon we are happy to let pass us by, the thinking behind cryptocurrencies may contain a kernel of rationality.

If paper currencies – dollars and yen – can be printed in essentially unlimited volumes, and just as with all currencies are only worth what recipients on any given day will exchange in goods or services, then what makes them any better than the “crypto” kind of money? The dollars and yen are, of course, legal tender issued by governments, but in an era in which governments are neither popular nor trusted, that is not necessarily a big plus.

Gold, at least, has been regarded as “money,” for thousands of years, and it is relatively stable and widely accepted store of value and medium of exchange. It’s a well-known monetary “brand.” It doesn’t exist only (or at all) in cyberspace, and it cannot be printed on the whim of authorities.Ironically and perplexingly, while gold, the hard money alternative to the printing press kind of money, dropped 28% in 2013, the untested and highly speculative bitcoin went completely through the roof.

“The Truman Show” Market

Welcome to “The Truman Show” market. In the 1998 film by that name, actor Jim Carrey is ignorant of the fact that his life is a hugely popular reality show. His every action, unbeknownst to him, is manipulated while being broadcast to millions of TV viewers worldwide. He seemingly lives in an idyllic seaside community where the manicured lawns are always green and the citizens are always happy. These people are, of course, actors. The world Truman inhabits turns out to be phony: a gigantic sound stage created for a manufactured “reality.” As Truman starts to unravel the truth, his anger erupts and chaos ensues.

Ben Bernanke and Mario Draghi, as in the movie, are the “creators” who have manufactured a similarly idyllic, if artificial, environment for today’s investors. They were the executive producers of “The Truman Show” of 2013. A global audience sat in rapt attention before this wildly popular production. Given the U.S. stock market’s continuing upsurge, Bernanke is almost certain to snag yet another People’s Choice Award for this psychological “thriller.” Even in “The Truman Show,” life was not as good as this for investors.

But there is one fly in the ointment: in Bernanke’s production, all the Trumans – the economists, fund managers, traders, market pundits – know at some level that the environment in which they operate is not what it seems on the surface. The Fed and the Treasury openly discuss the aim of their policies: to manipulate financial markets higher and to generate reported economic “growth” and a “wealth effect.” Inside the giant Plexiglas dome of modern capital markets, just about everyone is happy, the few doubters are mocked and jeered, bad news is increasingly ignored, and markets go asymptotic. The longer QE continues, the more bloated the Fed balance sheet and the greater the risk from any unwinding. The artificiality of today’s markets is pure Truman Show. According to the Wall Street Journal (12/20/13), the Federal Reserve purchased about 90% of all the eligible mortgage bonds issued in November.

Like a few glasses of wine with dinner, the usual short-term performance pressures on most investors to keep up with the market serve to dull their senses, which makes it a bit easier to forget that they are being manipulated. But what is fake cannot be made real. As Jim Grant recently noted on CNBC, the problem is that “the Fed can change how things look, it cannot change what things are.” According to John Phelan, a fellow at the Cobden Centre in the U.K., “the Federal Reserve has become an enabler of the financial havoc it was designed (a century ago) to prevent.”

Every Truman under Bernanke’s dome knows the environment is phony. But the zeitgeist so so damn pleasant, the days so resplendent, the mood so euphoric, the returns so irresistible, that no one wants it to end, and no one wants to exit the dome until they’re sure everyone else won’t stay on forever.

A marketplace of knowing Trumans seems even more unstable than the movie sound stage character slowly awakening to reality. Can the clued-in Trumans be counted on to maintain their complicity or will they go off-script? Will Fed actions reliably be met with the desired response? Will the program remain popular? Could “The Truman Show” be running out of material? After all, even Seinfeld ended.

Someday, the Fed’s show will be off the air and new programming will take its place. And people will debate just how good it really was. When the show ends, those self-deluded Trumans will be mad as hell and probably broke as well. Hopefully there will be no sequels.


Someday, financial markets will again decline. Someday, rising stock and bond markets will no longer be government policy – maybe not today or tomorrow, but someday. Someday, QE will end and money won’t be free. Someday, corporate failure will be permitted. Someday, the economy will turn down again, and someday, somewhere, somehow, investors will lose money and once again come to favor capital preservation over speculation. Someday, interest rates will be higher, bond prices lower, and the prospective return from owning fixed-income instruments will again be roughly commensurate with the risk.

Someday, professional investors will come to work and fear will have come to the markets and that fear will spread like wildfire. The news flow will be bad, and the markets will be tumbling.

Six years ago, many investors were way out over their skis. Giant financial institutions were brought to their knees…

The survivors pledged to themselves that they would forever be more careful, less greedy, less short-term oriented.

But here we are again, mired in a euphoric environment in which some securities have risen in price beyond all reason, where leverage is returning to rainy markets and asset classes, and where caution seems radical and risk-taking the prudent course. Not surprisingly, lessons learned in 2008 were only learned temporarily. These are the inevitable cycles of greed and fear, of peaks and troughs.

Can we say when it will end? No. Can we say that it will end? Yes. And when it ends and the trend reverses, here is what we can say for sure. Few will be ready. Few will be prepared.

How much does your doctor actually make?

Posted on April 14th, 2014 in Uncategorized by Karl

CMS just released a bunch of data on Medicare and Medicare payments to virtually every doctor in America.   There now is a mad scramble to interpret this data. However, there are many problems with releasing data in this hurried approach.  The most obvious problems that come to mind are:

1) reimbursement data without accompanying quality metrics is not helpful and potentially misleading.

2) doctors were always reluctant to adopt Electronic Medical Records (or EMRs) because they were fearful of the “big brother” monitoring.  I guess they were right.


Mark Bertolini, Aetna CEO – highlights from his HIMSS keynote address

Posted on March 5th, 2014 in Uncategorized by Karl

Aetna CEO Mark Bertolini made some interesting comments during his keynote address at the Healthcare Information and Management Systems Society (HIMSS) annual conference.  A Forbes Magazine article by Dan Munro captures these comments very well.  Below are some key points.  You can read the full article here:

Mark Bertolini Quotes:

On Waste in Healthcare:

[Referencing the 2009 IOM study which calculated that about 30% of healthcare spending is wasted in the United States.] “The number is over $800 billion – and when you solve that problem – if you were to solve it all – the United States could pay back half its debt over the next 10 years. So this should be the focus of our efforts.

On Consumer Out-of-Pocket Costs:

“Healthcare premiums are growing at four-times the rate of inflation. Currently today – through both premium sharing and benefit costs – employees are paying 41% of the healthcare dollar. If the trend line continues over the next 3-5 years – employees will be paying more than 50%.How do we break this?

On Health Insurance Exchanges:

Not too far away from now – in the next 6-7 years – 75 million Americans will be retail buyers of healthcare. And they’ll come to the marketplace with their own money and either a subsidy from their employer or a subsidy from their government. And it doesn’t much matter – they’ll be spending their money.”

On the Future of Aetna:

“So Aetna’s going to have two businesses. One is going to be around ACO’s enabling the provider system and the other will be not only creating but driving a consumer healthcare experience because we’re that close. Connecting the two and [then] standing back and getting out of the way. [We are] creatively destroying the current business model to enable a new one that will have an impact on our healthcare costs.

So in summary, one of the major healthcare leaders in America thinks: (1) healthcare waste is the #1 priority, (2) the consumer’s cost-share is high and growing, (3) exchanges are here to stay and (4) Aetna is repositioning itself to service ACOs and consumers.

What does this mean to employee benefits professionals and healthcare consumers?

  • Mark Bertolini may very well be right, so it would behoove us to think about his perspective.
  • There is tremendous instability in healthcare that is causing even the largest players (e.g. Aetna) to change their business models—things will likely be very different 5 years from now than they currently are.
  • Mr. Bertolini uses the phrase “Creative Destruction” to describe the current state of healthcare.  The question is, are YOU going to be on the ‘Creative’ side or the ‘Destruction’ side?

Submitted by Eric Bricker at Compass Healthcare Blog.

Healthcare Trends to Watch in 2014

Posted on February 16th, 2014 in Uncategorized by Karl

The Changing Health Care World: Trends To Watch In 2014

While today’s news is bombarding us with headlines about, the Affordable Care Act isn’t just about insurance coverage. The legislation is also about transforming the way health care is provided.  Consequently, it has ushered in new competitors, services and business practices, which are in turn generating substantial industry shifts that affect all players along health care’s value chain. Following are some of the top trends that our alliance is preparing for in 2014:

Chronic Care, Everywhere. It’s no secret that providers are moving quickly to implement accountable care organizations (ACOs). Recently, the Premier healthcare alliance released a survey [1] of hospital executives projecting that ACO participation will nearly double in 2014. As providers work to improve their way to shared savings payments, look for a more intensive focus on the biggest health care consumers: those with multiple chronic conditions.

Since each chronic condition increases costs by a factor of three, managing this population is the sweet spot for the ACO, and the deepest pool from which to pull savings. To do it, an increasing number of providers will deploy Ambulatory Intensive Care Units (A-ICUs) or patient centered medical homes as part of their ACO, which will be charged with better managing chronic conditions exclusively within a clinically integrated, financially accountable primary care practice. As part of the approach, providers will develop care pathways for better managing chronic conditions and behavioral health needs, with an eye toward lowering hospital utilization, including inpatient bed days, length of stay, admissions, readmissions, and ED visits.

Put Me In, Coach. As an outgrowth of the need to manage chronic conditions, we expect new forms of health care employment in 2014. For instance, early adopters of the A-ICU care model report that their biggest asset in the effort to manage chronic conditions isn’t a nurse or a doctor, it’s a health coach.

Health coaches function like a personal trainer in a gym; they’re there to motivate, challenge, inspire, and listen. They complement medical professionals providing care; they get to know the patient one-on-one and keep clinical staff apprised of issues that wouldn’t come up in a doctor’s appointment, including financial struggles, problems with housing, family concerns, or any other obstacle that could stand in the way of someone following a prescribed care plan. And because the position does not necessarily require a medical degree, health coaches can be drawn from a diversity of settings.

Health Care at Home. We may have thought the days of the house call were over, but increasingly, they are coming back into fashion. Marketing firm BCC Research predicts that the market for remote monitoring and telemedicine [2] applications will double from $11.6 billion in 2011 to about $27.3 billion in 2016. Much of the interest is being fueled by the people expected to become insured through the Affordable Care Act, a surge of new consumers that our system simply can’t treat in person.

Also driving the growth is the need to make care more convenient, particularly for those with chronic conditions, so patients can be monitored and coached to health anytime, anywhere. And there’s a cost component to the trend as well. “Hospital at Home,” a program designed by Johns Hopkins that provides acute care services in the homes of patients who might otherwise be hospitalized, has been demonstrated to increase the quality of care patients receive, improve their satisfaction, and reduce costs by at least 30 percent.

Last, technology-enabled at-home health care is increasingly solving an access issue for patients. According to a recent survey, almost half of rural hospitals use virtual care or telemedicine to connect with patients who may be too far away for an in-person visit, allowing them to close the gaps in care that arise due to geography.

On-the-Job Health. If you don’t already work for a company that offers incentives for healthy behaviors or penalties for non-compliance, that’s likely to change in 2014. This trend is being driven by two forces, both spurred by the ACA: the ability for employers to increase the dollar value of wellness incentives from 20 to 30 percent of total coverage, and increased private insurance costs.

When considering the wellness incentives, employers are responding with both free health tools and financial incentives. On the tools front, this can include free pedometers or FitBits to monitor activity, or free subscriptions to wellness web sites such as iFit or HealthyRoads. In terms of incentives, these can take a variety of forms, too. Whole Foods, for instance, offers its healthiest employees deeper store discounts. Others provide gift cards or extra paid days off for wellness behaviors such as joining a gym or participating in health screenings.

To address the cost issues, employers are addressing lifestyle choices that lead to higher health care consumption and corresponding costs, including tobacco use and obesity. Some employers, including Alaska Airlines and Hollywood Casinos, have hiring bans for employees who test positive for nicotine use. Others charge higher premiums or impose financial penalties for employees that fail to meet minimum health standards, such as a 40-inch or less waist circumference or a body mass index under 35.

Changes in the Exchanges. Insurance exchanges aren’t just for the public markets. In fact, a growing number of employers are considering comparable, private exchanges for their employees. Private exchanges allow employers to contract with a benefits provider offering hundreds of competitive health plans from dozens of insurers. Individuals are given a defined contribution from their employer to purchase coverage, allowing them to select the form their benefits will take, including the amount devoted to health, dental, vision, life or disability insurance, as well as the risk they accept via co-pays and deductibles.

Our expectation is that private exchanges will continue to grow in popularity in 2014, as they give employees an opportunity to customize coverage and provide a predictable amount of spend for the employer.

War of the Words. Mid-term elections will have politicians out in full force trying to re-prosecute the case on health reform. But anyone anticipating big changes to the ACA before 2017 will be disappointed; although the bellyaching will be at fever pitch, there will be no viable pathway to repeal and replace the law this year.

However, there will be opportunities for health policy changes this year. A few areas we see getting traction include a permanent fix to the sustainable growth rate (SGR) method for calculating physician payments. There is an SGR fix on the table, and members of Congress could come to a compromise on the path forward, complete with “pay fors” to fund it, by March. A permanent SGR fix will put physicians on the value-based purchasing (VBP) track that hospitals adopted years ago, with a significant portion of their income tied to quality and cost improvement, as well as incentives to pursue alternative models such as bundled payment and shared savings.

Along with SGR, we expect to see CMS adjust their two-midnight rule (which has already been further delayed until after September 30). This would help ensure that medical decision making is left in the hands of the physicians and not an arbitrary timetable. And we expect there could be changes to the hospital-acquired conditions (HAC) policy, which today penalizes hospitals up to three times for the same conditions. Ultimately, we believe CMS will recognize this policy is in effect arbitrary and unfair and replace it by moving HACs into the VBP program.

Data Liberation. The big buzz in health care is Big Data. From electronic health records to clinical measures and decision support tools, providers are inundated with new technologies that enable them to automate processes and capture new types of clinical data. However, these systems are limited in their potential because they don’t “talk” to one another; they’re the equivalent of an email system that only allows you to send messages to people in your own company, or a phone plan that only allows you to make calls in your house.

As long as data remains captive behind proprietary walls, we won’t be able to unlock its true potential. Inherent in the Big Data revolution of 2014 will likely be a provider-led push to liberate data by making application programming interfaces open source tools that developers can use to design creative, new applications that make use of all the data, and turn it into something providers can truly leverage. It’s sort of the iPhone approach to health care technology — Apple owns the operating system, but anyone can design an app that leverages it to deliver programs and services that the user truly values.

Recognizing the trend, some EHR vendors and insurers are making more systems open for innovation. But industry players can look for 2014 to be the year that the push for transparent data assets reaches a boiling point.

Partners R Us. We’ve already started to see unusual partnerships across health care designed to deliver care in new ways. Some of the more interesting moves in 2013 involved drug chains partnering with physician groups to create ACOs based around retail clinics. But in 2014, look for the trend to include community-based groups, including social service agencies, area gyms, and other non-health care service providers.

To give an example, Mount Sinai Hospital in Chicago serves a highly indigent population, where the poorest residents have a diabetes rate that is three times the national average.  There, Sinai partnered with a local grocery store to offer healthy food and classes on how to prepare it. Encouraged by the success they had working with 300 patients, Sinai expanded the program to local schools, day-camps, and youth programs.

As more providers look to provide “whole person care,” we expect many more of these kinds of unconventional approaches, and anticipate more formal arrangements with community churches to provide group care sessions, nature centers to provide outdoor exercise opportunities, taxi services to provide free or reduced price health care transportation services, and many more.

Article printed from Health Affairs Blog:


As hospitals buy up independent physician practices -> Cost will rise

Posted on February 14th, 2014 in Uncategorized by Karl

Shift in markets pushes doctors to salaried jobs

By Elisabeth Rosenthal


FEBRUARY 14, 2014

NEW YORK — American physicians, worried about changes in the health care market, are streaming into salaried jobs with hospitals. Though the shift from private practice has been most pronounced in primary care, specialists are following.

Last year, 64 percent of job offers filled through Merritt Hawkins, one of the nation’s leading physician placement firms, involved hospital employment, compared with only 11 percent in 2004. The firm anticipates a rise to 75 percent in the next two years.

Today, about 60 percent of family doctors and pediatricians, 50 percent of surgeons, and 25 percent of surgical subspecialists — such as ophthalmologists and ear, nose, and throat surgeons — are employees rather than independent, according to the American Medical Association. “We’re seeing it changing fast,” said Mark E. Smith, president of Merritt Hawkins.

Health economists are nearly unanimous that the United States should move away from fee-for-service payments to doctors, the traditional system where private physicians are paid for each procedure and test, because it drives up the nation’s $2.7 trillion health care bill by rewarding overuse. But experts caution that the change from private practice to salaried jobs may not yield better or cheaper care for patients.

“In many places, the trend will almost certainly lead to more expensive care in the short run,” said Robert Mechanic, an economist who studies health care at Brandeis University’s Heller School for Social Policy and Management.

When hospitals gather the right mix of salaried front-line doctors and specialists under one roof, it can yield cost-efficient and coordinated patient care, like the Kaiser system in California and Intermountain Healthcare in Utah.

But many of the new salaried arrangements have evolved from hospitals looking for new revenues and could have the opposite effect. When doctors’ practices are bought by a hospital, a colonoscopy or stress test performed in the office can suddenly cost far more because a hospital “facility fee” is tacked on. Likewise, Smith said, many doctors on salary are offered bonuses tied to how much billing they generate, which could encourage physicians to order more X-rays and tests.

“The question now is how to shift the compensation from a focus on volume to a focus on quality,” said Smith. He said that 35 percent of the jobs he recruits for currently have such incentives, “but it’s pennies, not enough to really influence behavior.”

Creating a “Can Do” Culture

Posted on February 6th, 2014 in Uncategorized by Karl

(Adopted from Ben Horowitz’s blog:

The reasonable man adapts himself to the world; the unreasonable one persists in trying to adapt the world to himself. Therefore, all progress depends on the unreasonable man.
-George Bernard Shaw

Lately, it’s become in vogue to write articles, comments and tweets about everything that’s wrong with young technology companies. Hardly a day goes by where I don’t find something in my Twitter feed crowing about how a startup that’s hit a bump in the road is “fu&%@d” or what an as*h%le a successful founder is or what an utterly idiotic idea somebody’s company is. It seems like there is a movement to replace today’s startup culture of hope and curiosity with one of smug superiority.

Why does this matter? Why should we care that the tone is tilting in the wrong direction? Why is it more important to find out what’s right about somebody’s company than what’s wrong?

The word technology means “a better way of doing things.” This is easy to say, but extremely difficult to do. Making a better way of storing information, a better currency, or a better way of making friends means improving on thousands of years of human experience and is therefore extraordinarily difficult. At some level, it would seem logically impossible that anybody could ever improve anything. I mean if nobody from bible days until 2014 has thought of it, what makes you think you are so smart? From a psychological standpoint, in order to achieve a great breakthrough, you must be able to suspend disbelief indefinitely. The technology startup world is where brilliant people come to imagine the impossible.

As a Venture Capitalist, people often ask me why big companies have trouble innovating while small companies seem to be able to do it so easily. My answer is generally unexpected. Big companies have plenty of great ideas, but they do not innovate because they need a whole hierarchy of people to agree that a new idea is good in order to pursue it. If one smart person figures out something wrong with an idea–often to show off or to consolidate power–that’s usually enough to kill it. This leads to a Can’t Do Culture.

The trouble with innovation is that truly innovative ideas often look like bad ideas at the time. That’s why they are innovative – until now, nobody ever figured out that they were good ideas. Creative big companies like Amazon and Google tend to be run by their innovators. Larry Page will unilaterally fund a good idea that looks like a bad idea and dismiss the reasons why it can’t be done. In this way, he creates a Can Do Culture.

Some people would like to turn the technology startup world into one great big company with a degenerative Can’t Do Culture. This post attempts to answer that challenge and reverse that tragic trend.

Dismissive rhetoric with respect to technology is hardly new. Sometimes the criticism is valid in that the company or invention does not work, but even then it often misses the larger point. Here are two historical examples to help illustrate:

The Computer

In 1837, Charles Babbage set out to build something he called The Analytical Engine the world’s first general-purpose computer that could be described in modern times as Turing-complete. In other words, given enough resources the machine that Babbage was building could compute anything that the most powerful computer in the world today can compute. The computation might be slower and the computer might take up more space (OK, amazingly slow and incredibly huge), but his design matched today’s computational power.  Babbage did not succeed in building a working version as it was an amazingly ambitious task to build a computer in 1837 made out of wood and powered by steam. Ultimately, in 1842 English mathematician and astronomer George Biddel Airy advised the British Treasury that the Analytical Engine was “useless” and that Babbage’s project should be abandoned. The Government axed the project shortly after. It took the world until 1941 to catch up with Babbage’s original idea after it was killed by skeptics and forgotten by all.

171 years later, it’s easy to see that his vision was true and computers would not be useless. The most important thing about Babbage’s life was not that his timing was off by 100 years, but that he had a great vision and the determination to pursue it. He remains a wonderful inspiration to many of us to this day. Meanwhile, George Biddel Airy seems more like a short-sighted crank.

The Telephone

Alexander Graham Bell, inventor of the telephone, offered to sell his invention and patents to Western Union, the leading telegraph provider, for $100,000. Western Union refused based on a report from their internal committee. Here are some of the excerpts of that report:

“The Telephone purports to transmit the speaking voice over telegraph wires. We found that the voice is very weak and indistinct, and grows even weaker when long wires are used between the transmitter and receiver. Technically, we do not see that this device will be ever capable of sending recognizable speech over a distance of several miles.“Messer Hubbard and Bell want to install one of their “telephone devices” in every city. The idea is idiotic on the face of it. Furthermore, why would any person want to use this ungainly and impractical device when he can send a messenger to the telegraph office and have a clear written message sent to any large city in the United States?

“The electricians of our company have developed all the significant improvements in the telegraph art to date, and we see no reason why a group of outsiders, with extravagant and impractical ideas, should be entertained, when they have not the slightest idea of the true problems involved. Mr. G.G. Hubbard’s fanciful predictions, while they sound rosy, are based on wild-eyed imagination and lack of understanding of the technical and economic facts of the situation, and a posture of ignoring the obvious limitations of his device, which is hardly more than a toy… .

“In view of these facts, we feel that Mr. G.G. Hubbard’s request for $100,000 of the sale of this patent is utterly unreasonable, since this device is inherently of no use to us. We do not recommend its purchase.”

The Internet

Today most of us accept that the Internet is important, but this is a recent phenomenon. As late as 1995, Astronomer Clifford Stoll wrote the article entitled Why the Web Won’t Be Nirvana in Newsweek, which includes this unfortunate analysis:

Then there’s cyberbusiness. We’re promised instant catalog shopping—just point and click for great deals. We’ll order airline tickets over the network, make restaurant reservations and negotiate sales contracts. Stores will become obselete. So how come my local mall does more business in an afternoon than the entire Internet handles in a month? Even if there were a trustworthy way to send money over the Internet—which there isn’t—the network is missing a most essential ingredient of capitalism: salespeople.

What mistake did all these very smart men make in common? They focused on what the technology could not do at the time rather than what it could do and might be able to do in the future. This is the most common mistake that naysayers make.

Who does the Can’t Do Culture hurt the most? Ironically, it hurts the haters. The people who focus on what’s wrong with an idea or a company will be the ones too fearful to try something that other people find stupid. They will be too jealous to learn from the great innovators. They will be too pig headed to discover the brilliant young engineer who changes the world before she does. They will be too cynical to inspire anybody to do anything great. They will be the ones who history ridicules.

Don’t hate, create.

Summary of the Davos World Economic Forum by Duncan Niederauer (CEO NYSE)

Posted on February 6th, 2014 in Uncategorized by Karl

Last week I joined 196 top academics, 288 government officials, 48 representatives from non-profit organizations, and 2,101 business leaders & CEOs gathered in Davos, Switzerland for the World Economic Forum’s Annual Meeting. Typically, even the most upbeat thinkers can leave conversations at Davos feeling gloomy about the global economy. This year, however, among the 2,633 world leaders present, optimism was in the air in a way it had not been in the 6 previous times I attended.

That sense of optimism is well-grounded in all that’s happening around the world today. Just consider these facts, which were frequently cited in discussions at Davos:

  • Five years after the worst financial crisis since the Great Depression, the recovery has proven much faster and more resilient than almost anyone predicted;
  • Global GDP is projected to grow at 3.7 percent this year according to the IMF;
  • In addition to strong growth projected for countries like the U.S and Japan, Europe is showing signs that it has turned the corner and China’s economy – while slowing – has not had the “hard landing” some feared a year or two ago;
  • Africa was mentioned over and over again by CEOs – indicating that region is becoming an area of real opportunity for multinational companies;
  • Corporate balance sheets are healthy and companies are strong;
  • Despite some pull-back in recent weeks, U.S. markets remain near all-time highs and more than 130% higher than the March 2009 lows;
  • IPOs have returned – 2013 was the best year for IPOs since 2007 and the pipeline for 2014 looks strong.

But the sense of optimism that permeated Davos didn’t mean anyone expects the road ahead to be without difficulties. In fact, much of the formal agenda focused on remaining challenges and it is clear there is more work to do:

  • Global economic growth remains well below its potential, particularly as emerging countries – which accounted for 75% of global GDP growth the last five years – are slowing down.
  • Unemployment remains a real concern throughout the world with more than 200 million people globally needing jobs according to the World Bank. The U.S. labor participation rate is the lowest it’s been in 35 years, unemployment rates in Europe remain at or near record highs, and throughout the world the jobless rate among young people is worryingly high.
  • Income inequality is also a major concern. While wages for the top earners have grown, the median (inflation-adjusted) wage in the U.S. is the lowest it has been since 1998.
  • The percentage of Americans who own stocks is the lowest it has been in 15 years, dropping from 60 percent of Americans to 50 percent in the last five years. So, unfortunately, many retail investors missed the market rally, and that means those of us in the financial industry have a lot more work to do to restore investor confidence.

Among other things, these challenges all point to the need to remain focused on job creation, which is the only thing that will ensure the sustainability of this recovery. As I have said many times, jobs come from entrepreneurs who are able to turn ideas into growing businesses. That, of course, requires capital – so access to affordable capital for entrepreneurs and small businesses must remain at the top of policy agendas around the world.

That said, the private sector isn’t putting all the onus on policymakers. In fact, as risks and challenges were discussed at Davos it was clear that business leaders are not waiting around for government to provide all the solutions. In many cases, they are taking the lead themselves. For example, in my private meetings with CEOs we discussed topics like military hiring and better integrating young people with Autism and Asperger’s Syndrome into the workforce. Businesses are not just economic actors but social ones as well, and there is an increasing expectation among investors, customers, employees and business leaders themselves that their companies take an active role in improving the countries and communities in which they operate.

One area clearly requiring collaboration of the public and private sectors is cyber security. Cyber security received too little attention on the official Davos agenda this year but came up frequently in my private meetings. This is an area of real concern to many business leaders. One prominent bank CEO even said the biggest threat to our financial system is cyber security. Experts can debate what specific actions are required to better protect against this potential threat, but for now, our priority ought to be on simply ensuring the topic gets sufficient attention.

In summary, the future looks extremely positive but real challenges remain and they must be addressed. If public and private sector leaders approach these issues with a spirit of collaboration and solidarity, the outlook for the global economy, for jobs, for opportunity and our security will remain very bright.

Changing face of the JP Morgan Conference

Posted on January 27th, 2014 in Uncategorized by Karl

My friend Krishna Yeshwant, partner at Google Ventures, comments on the changing face of the JP Morgan Conference in San Francisco.  It the last five years it has transformed from a pharma centric conference to a comprehensive healthcare conference with a robust track in HCIT.  To read the interview, click here:


Breaking the sound barrier in genome sequencing

Posted on January 24th, 2014 in Uncategorized by Karl

Twelve months ago, the cost for genome sequencing was $10,000 – down from $100,000 three years ago.  Today, Illumina announced they can do it for under $1,000.  This breaks the “sound barrier” on genetic testing.  Read the attached for more information.

Healthcare Innovation Needs a New Business Model

Posted on January 23rd, 2014 in Uncategorized by Karl

Healthcare Innovation: It’s All About The Business Model

Forbes, 1/22/2014 by Henry Doss

I have been talking with Dr. Brad Stuart on the topic of innovation in healthcare.  This is the third installment in that series. Our topic in this conversation is “accountable care” and the implications this movement has for cost control, for quality of care, and for fostering innovation.  In the first part of this series,here, I set up the health care issue as one that is as much about paradigms and conversations as it is about medicine.  In the second, here, I talked with Dr. Stuart about what he sees as some of the more critical high-level challenges in health care and his views about what we as a country should focus on as we continue our work to improve health care delivery.

Henry Doss:     Let’s start at the beginning.  Just what is “accountable care”?

Dr. Brad Stuart:     At it’s very simplest, accountable care is bringing all of the parts of a health system into one carefully integrated delivery process, focused on outcomes, not treatments.  And even though that sounds so very simple in the saying, it is really revolutionary in medicine.  In fact, I believe very strongly that the change to the accountable care business model will be the biggest large-scale health system innovation in the United States since Medicare was created in 1964.  And it will drive some remarkable innovations.

Doss:     It does sound pretty simple, and long overdue.  And, in fact, kind of obvious in a way.  What exactly is so revolutionary and innovative about this change?  Our health care delivery system needs a 180 degree shift.

Dr. Stuart:    Our clinical and business models in health care are upside down and there is a growing sense that we need to change things — quickly and significantly.  As a consquence, all of healthcare in the U. S. is undergoing a revolutionary paradigm shift, on a number of fronts.  Accountable care strikes at a foundational, fundamental flaw in how we view medicine.    The way we deliver health care today is really a 19th century model, grounded in assembly line mentalities and piece work payment systems.   In a very real sense, we are not paid or evaluated on the basis of patient outcomes, but on how well we deliver bits and pieces of the health care model.  Think about it like this:   It doesn’t matter whether a patient lives or dies, gets better or worse, is helped or not:  As long as a test or a procedure is done, a payment follows.   So, naturally, we tend to focus on doing the “pieces” well, but not paying a lot of attention to the whole human being.

Doss:     All of this sounds a little insensitive to the patient.  Do you see health care as essentially not operating in the best interests of patients?

Dr. Stuart:     Absolutely not.  In fact, I strongly believe that the vast majority of health care practitioners, as well as all the great people involved in the business of delivering medical care, are conscientious, highly motivated, caring people.  The challenge is the delivery system, the business model, not the individuals operating inside that business model.  That’s why I think we need to focus on changing the business model more than anything else.  I think the medical community and the patient will be better served in this new model.   And I think both will find it liberating.

Doss:     What has to happen, structurally, for accountable care to have this kind of impact?

Dr. Stuart:     Again, this may sound a little oversimplified, but it’s really just a matter of changing your point of view.  In the accountable care model, we will move  from paying for volume to paying for value. Doctors will have to stop doing whatever procedures and tests they can think of, billing for them, and getting paid whatever they charge. Instead, they will be accountable for the health and well-being, as well as the healthcare costs, of the population they serve. Healthcare will no longer be about seeing one patient at a time and forgetting about the rest. Providers will have to think about their community. They will no longer get paid by the piece.  And if we change our outcomes from volume to value, from piecemeal to holistic, I’m convinced we will see revolutionary innovations in how we deliver care.

Doss:     It sounds to me like the critical piece of this change involves shared risk.  Accountable care will drive the health care system toward a more balanced, risk-sharing system.

Dr. Stuart:     Yes, it does.   Remember, outside of accountable care, almost all the financial risk is held by the health insurance companies, Medicare and Medicaid. They pay all the claims submitted by hospitals, doctors and everyone else who touches the patient. This hides the real costs from patients, who feel they’re entitled to all the treatment they want in return for their health insurance premium. Still, patients and families wind up paying for things that aren’t covered by insurance, which in turn causes  about 60 percent of all bankruptcies in the US. But, in the accountable care model, patient and provider (and patients and communities) agree to operate in a shared-risk model.  And the bottom line is that the further the system moves in the direction of risk sharing, the more important savings will become, and the more providers will invest in and support innovation.

Doss:     How is it that structural changes in the health care business model will drive innovation?

Dr. Stuart:      Well, for one thing, a business model change of this magnitude is highly disruptive.  It will force the health care community to realize that the way forward is very likely just the opposite of what they’re doing now. This creates huge opportunities for innovation in healthcare.  It will force us to do a complete 180 degree turn in our thinking about some of the most basic things in health care.  I’m pretty sure that a great deal of innovation will come from that level of disruption and volatiity.

Doss:   Can you give me an example of something that might be innovative coming out of this paradigm shift?

Dr. Stuart:     Let me give you an example of something that needs to be disrupted in this shift.  In my view,  thinking about people as patients is a loser. “Patient-centered care” has become a mantra of health care reform. It sounds like a great idea, but it’s got a fatal flaw. Whenever I hear reformers and planners talking about “patient-centered care” I know they’re not talking about patients at all. They’re really talking about providers. They’re talking about things like how to design a new medical office building so patients will have a nice experience when they come in to see their doctors. But the conversation is really about the office building. It’s not about people and their real-world needs.   If we are deploying accountable care thinking, this fundamentally flawed paradigm is going to be disrupted — to good ends, I think.

Doss:     Next week we are going to talk about your area of professional interest, advanced care.  How does the challenge of accountable care relate to the challenge of innovative delivery of advanced care?

Dr. Stuart:     Again, it’s about changing the way you think about delivery.  To provide accountable care and live to tell the story, doctors and hospitals have to radically change their approach. Providers are used to sitting still and waiting for patients to bring clinical problems to them to solve. We are passive. So as people with chronic illness get sicker, they have no choice but to call 911 and show up at the hospital. This is the costliest possible way to treat patients, and the closer people get to death, the more this “care” looks like cruel and unusual punishment.  The accountable care model will help us to fundamentally rethink and re-engineer the way we deliver all of medicine.  But I think the biggest potential impact is in how we deliver advanced care.

Next week Dr. Stuart will be talking about innovation in his field of advanced care. Dr. Stuart has more than thirty five years of experience in internal medicine, palliative care and hospice, and is a nationally recognized innovator in healthcare.  He is co-founder and CEO of ACIStrategies.

Henry Doss is a student, musician, venture capitalist and volunteer in higher education.  His firm, T2VC, builds startups and the ecosystems that grow them.  His university is UNC Charlotte.