You get what you pay for. That’s why I never shop at the “dollar store.” But when it comes to investing and insurance, what we get for the dollars we spend is much harder to evaluate.
When someone asks, “What’s the performance?” for an investment strategy, what they want to know is the topline number, the percent return.
When people see CNBC tout Bespoke and their animated gif with the chart going into the sky, few stop to ask elementary questions that a professional manager would such as i.) what’s the downside?, ii.) what’s the risk/reward ratio?, iii.) how many of those stocks even trade over a million shares a day?, and, iv.) when was the inception date?
All that seems to matter to the average person is +58% year-to-date! Woo-hoo! And if they are unlucky — because let’s face it, most people get on at the end of a trend — they experience the agony of dollar-weighted returns (DWRs):
Investor behavior created an investment gap of 4.7 percent. The table below shows the five largest gaps between fund returns and investor returns. It shows how costly investor behavior can be.
Larry Swedroe, Mutual Fund Returns: Worse than You Thought
And once you are down 30%, it’s game over, yet people never seem to learn. Or they learn too late.
Dollar Store Medical Insurance
Something like this just happened in the American health insurance market. This week’s big outrage started off at the L.A. Times which profiled Jennifer Harris, a three-months pregnant self-employed attorney:
Fullerton resident Jennifer Harris thought she had a great deal, paying $98 a month for an individual plan through Health Net Inc. She got a rude surprise this month when the company said it would cancel her policy at the end of this year. Her current plan does not conform with the new federal rules, which require more generous levels of coverage.
Now Harris, a self-employed lawyer, must shop for replacement insurance. The cheapest plan she has found will cost her $238 a month. She and her husband don’t qualify for federal premium subsidies because they earn too much money, about $80,000 a year combined.
“It doesn’t seem right to make the middle class pay so much more in order to give health insurance to everybody else,” said Harris, who is three months pregnant. “This increase is simply not affordable.”
Ms. Harris is one of potentially 7 million self-insured people (2.2% of the population) who received cancellation notices because their health insurance plan was inadequate, not by “Obamacare” standards, but by ANY standard.
Why? Here’s some simple math. I live in Vancouver, Canada. The Medical Services Plan premium for one person is $66.50 per month. It covers anything that happens to my body except for eye exams and dental.
The World Bank estimates that Canada spends 11.2% of GDP on healthcare vs. 17.9% for the United States. We then multiply $66.50 by 1.59821 to arrive at $106.28, so Ms. Harris would be paying at least $106.28 by U.S. levels, thanks to big pharma, trial lawyers, malpractice, for-profit insurance, hospital admin, etc. If you factor in all the extra taxes we pay in Canada, maybe it does all add up to $238, but the bottom line is there are no co-pays and no deductions, the “skin in the game” talked about by Fedex’s Fred Smith, fees that can financially cripple, bankrupt or even kill a patient in the U.S.
In other words, while Ms. Harris is under the impression she is covered for $98/month, in reality, what she bought is nothing more than a piece of paper from the insurance equivalent of a dollar store. Even worse, if the policy proves inadequate, she could end up a freeloader, you know one of the people she doesn’t want to pay for.
We “socialist” Canadians do it like Costco: everyone gets a card and pays the same membership fee. The premiums allow the system to buy bulk based on the needs of the group and streamline paperwork. That’s is the bottom line of how Costco works, how group life insurance works, how casinos work — by the law of large numbers.
As for Ms. Harris’ wrong assertion that it “doesn’t seem right to make the middle class pay so much more in order to give health insurance to everybody else,” we go back to math and probability. First, she is already paying for the uninsured through higher costs. Second, because it is easy for actuaries to calculate the percentage of people a given GROUP that will be hit by X illness, it is easy to estimate the medical costs for the GROUP, the larger the better. That’s how Canadians came to collectively pay for Ted Cruz to be born here, even though we didn’t need him and didn’t want him.
In contrast, it is very difficult to work the odds for all the potential illnesses that could strike a given INDIVIDUAL during a given year; therefore, the for-profit insurance company must reject anyone who has elevated risk based on the individual’s medical history, something that really ought to remain private between the patient and the doctor. And of course, anyone who was sick before is a no-touchie; anyone who gets sick after must be denied.
A decent health insurance policy uses the knowable probabilities of a large group and covers every eventuality. Can you imagine complaining to Costco to say, “I will never buy tires from you, so gimme a break on the membership fee.” Or telling the auto insurance company that, “I never drive at night, or in the rain.”
The bottom line is that no purchasing decision can be made based on just one number. In the case of investment performance, demand to know BOTH the risk AND the reward. As for the American health care system, Stein’s Law kicks in and defaults to single payer for the 99% when the money runs out.
Until then, the current system continues to feature legions of hogs at the trough, profiting from misery and suffering that is wrong for PATIENTS on so many levels. Lost in the noise, is the outrage coming from the insurance companies, but wait, they are not complaining, are they?
Fast forward to the 6:30 mark of the Bloomberg interview and watch Fred Smith, founder of Fedex, talk about why healthcare costs are going down in the U.S.. The system has become so perverse, that the only way to rein in spending is by discouraging 99% of the people from getting help while a $20,000 per year, gold-plated insurance policy from Goldman Sachs is essentially UNTAXED income.