Saving money, saving lives

In 1996, Duke Children's Hospital was in serious trouble. Its $11 million annual operating loss had forced administrators to make cutbacks. As a result, some caregivers felt that the quality of care had deteriorated. Parents' complaints were on the rise. Frustrated staff members were quitting. In this article, Jon Meliones, DCH's chief medical director, candidly describes how his debt-ridden hospital transformed itself into a vibrant and profitable one. The problem, he realized, was that each group in DCH was focusing only on its individual mission. Doctors and nurses wanted to restore their patients to health; they didn't want to have to think about costs. Hospital administrators, for their part, were focused only on controlling wildly escalating health care costs. To keep DCH afloat, clinicians and administrators needed to work together. By listening to staff concerns, turning reams of confusing data into useful information, taking a fresh approach to teamwork, and using the balanced scorecard method, Meliones and his colleagues brought DCH back to life. Developing and implementing the balanced scorecard approach wasn't easy: it took a pilot project, a top-down reorganization, development of a customized information system, and systematic work redesign. But their efforts paid off. Customer satisfaction ratings jumped 18%. Improvements to internal business processes reduced the average length of stay 21% while the readmission rate fell from 7% to 3%. The cost per patient dropped nearly $5,000. And DCH recorded profits of $4 million in 2000. This first-person account is required reading for any executive seeking to revitalize a sagging organization. Meliones shares the operating principles DCH followed to become a thriving business.     

The Relationship Among Market-Making Revenue, Payment for Order Flow, and Trading Costs for Market Orders

We study the division of market-making revenue among dealer, broker, and trader. When Knight Securities, a major Nasdaq dealer, interacts with market orders in actively traded stocks during the fourth quarter of 1996, we estimate that its revenue is $0.057 per share. Knight pays brokers at least $0.025 per share (44% of revenue) for orders. To examine whether brokers appear to share these payments with traders, we compare net trading costs (trade price net of commissions) for traders using brokers routing Knight orders with estimated net trading costs for traders using the only discount broker we can determine did not directly receive market-making revenue. We find that the net trading cost of the broker refusing order-flow payments does not dominate the net trading cost of all brokers selling order flow to Knight. This finding suggests that order-flow payments do not unambiguously harm traders and challenges the conclusions of extant studies using only trade prices to assess market quality.     

Particulate matter air pollution control programs in Japan — an analysis of health risks in the absence of future remediation

The objective of this case study was to assess potential health risks and productivity loss in the absence of future additional environmental control of particulate matter (PM) in Japan. Assuming a 10% decline in PM, the estimates of the numbers of possible cases of premature mortality and morbidity that could be prevented in the year 2010 were (1) 8700 long term deaths, (2) 12,000 cases of chronic bronchitis, (3) 24,000 cases of cardiovascular disease, (4) 10,000 cases of pneumonia, (5) 18,000 asthma attacks, and (6) 12,000 cases of acute bronchitis during a one year period. The best estimate of medical costs plus lost productivity in adults and children was $56 billion USD. When compared to a separately derived estimate of $31 billion USD in avoided pollution control costs, the health risk to no‐control benefit ratio of 1.8 suggests that additional future pollution control policies would successfully prevent a large expense to the society in medical care and lost productivity while imposing a lesser cost to the private sector in control equipment, to government in oversight expenses and to society in opportunity costs.     

How to solve the cost crisis in health care

U.S. health care costs currently exceed 17% of GDP and continue to rise. One fundamental reason that providers are unable to reverse the trend is that they don't understand what it costs to deliver patient care or how those costs compare with outcomes. To put it bluntly, few health care providers measure the actual costs for treating a given patient with a given medical condition over a full cycle of care, or compare the costs they incur with the outcomes they achieve. What isn't measured cannot be managed or improved, and this is all too true in health care, where poor costing systems mean that effective and efficient providers go unrewarded, and inefficient ones have little incentive to improve. But all this can be remedied by exploring the concept of value in health care and carefully measuring costs. This article describes a new way to analyze costs that uses patients and their conditions--not organizational units or narrow diagnostic treatment groups--as the fundamental unit of analysis for measuring costs and outcomes. The new approach, called time-driven activity-cased costing, is currently being implemented in pilots at the Head and Neck Center at MD Anderson, the Cleft Lip and Palate Program at Children's Hospital in Boston, and units performing knee replacements at Sch?n Klinik in Germany and Brigham & Women's Hospital in Boston. As providers and payors better understand costs, they will be positioned to achieve a true "bending of the cost curve" from within the system, not in response to top-down mandates. Accurate costing also unlocks a whole cascade of opportunities, such as process improvement, better organization of care, and new reimbursement approaches that will accelerate the pace of innovation and value creation.     

The Effect of SOX Section 404: Costs,Earnings Quality,and Stock Prices

This paper exploits a natural quasi‐experiment to isolate the effects that were uniquely due to the Sarbanes–Oxley Act (SOX): U.S. firms with a public float under $75 million could delay Section 404 compliance, and foreign firms under $700 million could delay the auditor's attestation requirement. As designed, Section 404 led to conservative reported earnings, but also imposed real costs. On net, SOX compliance reduced the market value of small firms.     

CEO Cash and Stock‐Based Compensation Changes,Layoff Decisions,and Shareholder Value

The chief executive officers (CEOs) of firms announcing layoffs receive 22.8% more total pay in the subsequent year than other CEOs. The pay increases result almost entirely from increases in stock‐based compensation and are found to persist. In addition, layoff announcements are accompanied by shareholder value increases averaging $40 million to $95 million. One‐time labor cost savings from layoffs average $65 million. We conclude that CEOs receive pay increases following layoffs as rewards for past decisions and to motivate value‐enhancing decisions in the future.     

The Effect of Eliminating Direct Payments to Farmers on Land Values

This study looks at the effects of the complete elimination of direct government payments to farmers on the U.S. economy in general and the effect on land values in particular. The analytical approach used consists of a computable general equilibrium model composed of 14 producing sectors, 14 consuming sectors, six household categories classified by income, and a government. The results suggest that, with a complete elimination of direct government payments to farmers, there will be a reduction in output by all producing sectors of 0.18% or about $14.5 billion, a decline in output in the agricultural sectors of 4.39% or about $12.0 billion, a fall in the consumption of goods and services by about 0.11% or $4.15 billion, a fall in total utility by 0.47% or $22.0 billion, and a net reduction in expenditures for the government of $13.4 billion. Land values will be adversely affected, falling an average of 14%.     

Folgekosten für Private Krankenversicherungen aus dem zivilrechtlichen Teil des AGG

The Anti-Discrimination Law (AGG) creates particular challenges for private health care insurers. In future, maternity and pregnancy costs will have to be included in the calculation of contributions made by both sexes. This will entail many adaptations for the insuring companies. Through the legal cost-impact model, the contributions are determined by means of a conceptual framework for determining the costs flowing from the law. For private health insurers, the internal costs from the civil law component of the AGG range from approximately €?4.2 million to €?7.7 million. In addition, in the first year, there will be consequential costs from labour laws of €?3.2 million. This very substantial level of bureaucratic cost clearly indicates the need to investigate new laws in the context of a differentiated evaluation process which focuses entirely on the impact of the laws and the consequential costs.     

Let's put consumers in charge of health care

Businesses spend billions on health insurance. And what do they get for their money? A lot of unhappy employees. Workers fret about the quality of the care they receive, the burden of their out-of-pocket expenses, and the gaps in their coverage. For businesses, health care has become a lose-lose proposition: They pay way too much, and they get way too little. The problem is that the health care industry has been shielded from consumer pressure--by employers, insurers, and the government. As a result, costs have exploded even as choices have narrowed. But if companies embrace a new model of health coverage--one that places control over both costs and care directly into the hands of employees--the competitive forces that spur productivity and innovation in consumer markets can be loosed upon the inefficient, tradition-bound health care system. Moving to consumer-driven health care requires that companies revamp their health benefits in six ways: Give employees incentives to shop intelligently; offer a real choice of insurance plans; charge employees prices that accurately reflect the company's costs; let providers set their own prices; adjust payments for each enrollee based on need; and provide relevant information. Putting consumers in charge of health care may seem like a radical approach. But individuals are highly motivated to educate themselves about their health, their insurance, and their care, and they want to seek the most value for their money. Promoting that economic dynamic--the same that fuels consumer markets everywhere--is the best way to enhance the health care industry's productivity and quality.     

The Check's in the Mail: Why the United States Lags in the Adoption of Cost-Saving Electronic Payments

The United States payment system costs around $225 billion annually and checks account for 75% of all noncash payments. Other electronic payment methods (debit cards, automated clearing house direct deposits, and debits) cost only around one third to one half as much as a check. This paper outlines the main reasons why the shift from checks to cheaper electronic payments has been slow, much slower here than in other countries. We also forecast the future use of checks and electronic payments and end by discussing policy initiatives that may speed up this substitution process.     

Quantifying search and switching costs in the US auto insurance industry

I estimate demand for auto insurance in the presence of two types of market frictions: search and switching costs. I develop an integrated utility‐maximizing model in which consumers decide over which and how many companies to search and from which company to purchase. My modelling approach rationalizes observed consideration sets as being the outcomes of consumers' search processes. I find search costs to range from $35 to $170 and average switching costs of $40. Search costs are the most important driver of customer retention and their elimination is the main lever to increase consumer welfare in the auto insurance industry.     

Will disruptive innovations cure health care?

It's no secret that health care delivery is convoluted, expensive, and often deeply dissatisfying to consumers. But what is less obvious is that a way out of this crisis exists. Simpler alternatives to expensive care are already here--everything from $5 eyeglasses that people can use to correct their own vision to angioplasty instead of open-heart surgery. Just as the PC replaced the mainframe and the telephone replaced the telegraph operator, disruptive innovations are changing the landscape of health care. Nurse practitioners, general practitioners, and even patients can do things in less-expensive, decentralized settings that could once be performed only by expensive specialists in centralized, inconvenient locations. But established institutions--teaching hospitals, medical schools, insurance companies, and managed care facilities--are fighting these innovations tooth and nail. Instead of embracing change, they're turning the thumbscrews on their old processes--laying off workers, delaying payments, merging, and adding layers of overhead workers. Not only is this at the root of consumer dissatisfaction with the present system, it sows the seeds of its own destruction. The history of disruptive innovations tells us that incumbent institutions will be replaced with ones whose business models are appropriate to the new technologies and markets. Instead of working to preserve the existing systems, regulators, physicians, and pharmaceutical companies need to ask how they can enable more disruptive innovations to emerge. If the natural process of disruption is allowed to proceed, the result will be higher quality, lower cost, more convenient health care for everyone.     

6 strategies for building bundled payments

With 25 years of proven success, bundled payments are a logical step away from a flawed fee-for-service payment system that has rewarded additional and sometimes unnecessary procedures and driven up costs. The use of bundled payments is paying off for a growing number of providers and payers through lower costs and improved quality of care. The keys to success in bundling payments are innovation, a good cost-plus financial model, a comprehensive team of caregivers, and commitment to continual improvement and collaboration.     

Particulate matter air pollution control programs in Japan — an analysis of cost savings in the absence of future remediation

The objectives of this study were to assess avoided economic costs (or anticipated ‘benefits’) of not implementing new environmental policies for particulate matter (PM) in Japan and compare these future benefits to estimates of future health risks developed in a separate analysis. The estimates for the benefits of avoided PM pollution control in the year 2010 were (1) $27 billion USD for stationary source controls, (2) $2.1 billion to $3.3 billion USD for diesel motor vehicle controls, (3) $41 million USD for governmental employee salaries, (4) $470 million USD for governmental financial assistance, (5) $510 million USD for special diesel vehicle control measures in Tokyo, and (6) $31 billion USD for total costs.

Using human health and productivity risks, calculated in a separate study to be $56 billion USD, the best net ratio of benefits to costs was 1.8 to 1. Inexpensive control options include road watering or paving for unpaved dirt roads and road vacuuming for paved roads. Intermediate options include differential road pricing, retrofitting diesel particulate filters, and reformulating diesel fuel. High cost options include adding particulate controls, such as wet scrubbers, baghouses, and electrostatic precipitators on uncontrolled stationary sources.     

How costly is the Sarbanes Oxley Act? Evidence on the effects of the Act on corporate profitability

The Sarbanes-Oxley Act (SOX) was intended to protect investors by improving the accuracy and reliability of corporate disclosures. However, critics have argued that the costs of SOX far outweigh its intended benefits. Prior studies based on stock-price reactions to SOX-related events document mixed evidence on the expected impact of SOX. In contrast, we provide evidence on the net realized costs of SOX by examining its impact on operating profitability. We find that average cash flows decline by 1.3% of total assets after SOX. These costs are more significant for smaller firms, for more complex firms, and for firms with lower-growth opportunities. Annually, these costs range from $6 million for smaller firms to $39 million for larger firms. Further, we document that net SOX-related costs are not limited to one-time expenses associated with internal-control design and implementation. In aggregate, for the 1428 firms in our sample, these costs amount to about $19 billion per year. Profitability is lower for up to four years post-SOX. To our knowledge, ours are the first estimates of the realized net costs imposed by SOX.     

Spatial differentiation and price discrimination in the cement industry: evidence from a structural model

We estimate a structural model of the cement industry that incorporates spatial differentiation and price discrimination, focusing on the US Southwest over 1983–2003. We leverage the structure of the model to obtain consistent estimates of the underlying parameters using data on market outcomes that are substantially aggregated. Our results indicate that transportation costs around $0.46 per tonne‐mile rationalize the data. This friction enables relatively isolated plants to obtain higher prices from nearby customers. We further find that disallowing price discrimination would create $30 million in consumer surplus annually and show how the model can identify suitable divestitures in merger analysis.     

Durables, nondurables, down payments and consumption excesses

We examine a model that generalizes the standard buffer-stock model of saving to accommodate durables, nondurables, down payment requirements, and adjustment costs in the durables market. We find that nondurable consumption becomes more volatile relative to income as down payments decrease at the individual and at the aggregate level. Moreover, for plausible parameter values, the model can explain the excess smoothness and excess sensitivity observed in U.S. aggregate data. The result follows from a gradual adjustment of consumption to permanent income shocks when agents attempt to spread out the burden of down payments over time, compounded by slow adjustment due to transaction costs.     

Benefits from a changing payment technology in European banking

An “output characteristics” cost function is used to identify payment sources of technical change in European banking and estimate associated benefits. As the share of electronic payments in 12 European countries rose from 0.43 in 1987 to 0.79 in 1999 and ATMs expanded while the number of branch offices was constant, bank operating costs are $32 billion lower than they otherwise might have been, saving 0.38% of the 12 nations’ GDP. Policies facilitating these changes (antitrust exemptions to weakly coordinate implementation of payment service pricing) would permit benefits to be more fully realized.     

THE MOTIVES AND CONSEQUENCES OF DEBT-EQUITY SWAPS AND DEFEASANCES: MORE EVIDENCE THAT IT DOES NOT PAY TO MANIPULATE EARNINGS

On February 9,1982, Hammermill Paper registered with the Securities and Exchange Commission to swap as many as 400,000 common shares for $13.4 million of the company's 8.07% promissory notes due February 1, 1997. The resulting swap increased Hammermill's 1st quarter earnings by $3.7 million, accounting for more than a third of its earnings for that period. Between February 9 and 10, the market value of Hammermill's equity fell by 4.5%.
On January 28, 1985, United Airlines announced that its preceding 4th quarter earnings included a $3 million extraordinary gain from the defeasance of $38 million of outstanding notes, and that earnings for all of 1984 included a defeasance gain of $21.5 million, representing 7.6% of UAL's 1984 net income. Between January 28 and 29, the market value of UAL's equity declined by 4.6%.     

Benefits analysis of particulate matter control programs – a case study of Tokyo

The objective of this case study was to assess economic benefits of past environmental policies of particulate matter (PM) in Tokyo by comparing observed pre‐control PM levels in 1975 and post‐control levels in 1998. The point estimates of the numbers of additional cases of avoided premature mortality and morbidity due to PM pollution control were (1) 3900 long‐term deaths in adults aged 30 years and older (population 5?098?000), (2) 4700 cases of chronic bronchitis in adults aged 30 years and older, (3) 7800 cases of in‐patient cardiovascular disease in adults aged 65 and older (population 1?281?942), (4) 3100 cases of in‐patient pneumonia in adults aged 65 and older, (5) 2500 cases of in‐patient chronic obstructive pulmonary disease in adults aged 65 and older, (6) 390?000 asthma attacks in asthmatics (population 450?000), and (7) 4500 cases of acute bronchitis in children aged 8–12 (population 300?300) during a one‐year period. The point estimate of medical costs in adults and children plus the cost of lost wages was a purchasing power parity‐adjusted $38 billion USD. Overall these results appear more likely to be underestimates than overestimates due to several unquantified benefits. The calculations of avoided health and productivity impacts suggest that pollution control policies successfully prevented a large expense to the society in extra medical care and lost work time.