This is the second installment of a Faculty Q&A with J.B. Silvers, PhD, John R. Mannix Medical Mutual of Ohio Professor in Health Care Finance.
W: You recently commented to WCPN’s David C. Barnett on 401K retirement plans. Like the “boomers” who are approaching retirement that you talked about, I ignore my plan.
JBS: I didn’t pay any attention either. The guy who started modern portfolio theory, Harry Markowitz? He got a Nobel prize for it, and even he admitted he didn’t invest his money very well!
The solution, most people would suggest, is drawn from behavioral economics, where you try to make it really easy for people to do the right thing. So the default, if you don’t make any choices at all, should be that your employer will enroll you in a 401K. Make it opt out, not opt in. Number two, the default position should be a diversified portfolio that hedges risk and gives you some protection over time. If we could do these two simple things, we could take care of a huge number of problems with 401Ks not working right. People don’t have enough money saved for retirement, but they don’t know it until they get there. That’s the sad part.
W: I think all my retirement funds are in a money market account.
JBS: That’s bad. You should diversify. A money market account isn’t going to get you anything, and as a young person, you should buy mostly equities, not bonds. The idea behind a money market account is that it is very liquid and very safe, but in today’s environment it basically gives you no income. It’s like sticking money under your mattress. We’re in for a huge bear market in bonds; it’s going to be terrible.
W: What does a bear market mean for bonds?
JBS: Interest rates are definitely going to be going up, and as interest rates go up, bond prices go down. The longer the term of the bond the more they’ll go down. We’ve had a huge bull market for the last five years at least, and for the last couple of years, it has been spectacular. As interest rates have gone down, bond prices have been going up. But that absolutely will turn around. It’s totally predictable, just a question of when. So in a year or two we’ll have weeping and wailing from people who thought they put all their money into safe investments, but they weren’t safe at all. That’s a problem.
W: So how can the average person be expected to invest wisely?
JBS: Unless you’ve got a degree in finance, it’s hard. The assumption is that people are rational investors with enough information and knowledge to look out for their own interests. Well, that’s not true; the average person does not have that.
W: Health insurance is another area where people like me may not feel equipped to make a decision.
JBS: That is an issue. We’ve gone from one extreme to the other. We went from defined pension plans, or on the healthcare side, my employer chooses the health care plan for me--a total daddy-knows-best approach--to a complete laissez-faire approach where you’re on your own. We throw you in the deep end and hope you do well.
With healthcare reform, the insurance exchanges are not as bad, but it’s a similar thought: They provide a framework for you with the whole idea of providing choices, but it’s not clear how people will make those choices. The analogy I heard recently was that it’ll look like Travelocity. Say I want to buy a bronze plan: full coverage, but I’m taking on more of the costs. I click on that, and up come all the bronze plans that are being offered, and then you look at the network, see what the prices are. People do that all the time with Travelocity. But can they do that with healthcare insurance? Booking a flight from Cleveland to New York is pretty straightforward: There’s one product. Buying one of 20 insurance offerings will be hard. The analogy I heard the other day, though, is we don’t need Travelocity, we need TurboTax. We put data in, and it leads us through the purchase.
W: Ohio and other states need to decide whether to expand Medicaid, which is part of the Affordable Care Act but is not required. Should Ohio expand Medicaid?
JBS: It’s a no-brainer. All states should expand--even conservative Arizona is expanding. A study recently showed the amount of money we’ll save. It’s open and shut in terms of money coming to the state and in terms of taking care of a lot of people who otherwise won’t have insurance, which is the goal. It’s obvious. We’re talking about 15 million people across the country who will be covered. It has to be done. In terms of the cost to the state budget, there’s no question. The federal government will pay all of it initially, then 95%, then 90%. It’s a great bargain.
From a financial point of view, in terms of the institutions involved, it’s critical. Hospitals bargained in good faith to give up part of what they’re now getting for Medicare in exchange for having more insured people show up at the door. For hospitals that depend more on Medicaid, it’s even more important. For example, MetroHealth is a major safety net. I’m on the board, so I’m concerned. They will lose a disproportionate amount of payments without Medicaid expansion; they’ll be a net loser and have major unpaid bills. So for many of our hospitals, we really want this to happen. And it has a secondary effect on jobs, too.
You have just read an installment of Weatherhead Faculty Q&A.
Learn the truth about our healthcare system and what J.B. actually stands in our first Q&A with J.B. Silvers.