What does it tell you about these plans when FINRA has doubts as to how they are being managed and sold to investors?

By the way, the Investment Company Institute has reported the total dollars in Massachusetss 529 Plans at the end of December 2008. If you don’t remember the statistics in prior years, they are below:

2008       $2,272.4 Million                               MEFA  commission (15 Bps) $3,408,600.00

2007       $2,820.0 Million                              MEFA commission (15 Bps) $4,230,000.00

2006       $2,349.0 Million                              MEFA commission (15 Bps) $3,523,500.00

So the Massachusetts Educational Financing Authority received over $10,000,000.00 in commissions from 529 plans for the years 2006, 2007, & 2008. According to the Fidelity Investments Mutual Fund Guide Special 2008 Year-End Issue (p.478), the 3-year return for 529 plans for the Commonwealth of Massachusetts Plan had the following returns:

3 Year Returns for Aged Based Portfolio:

2009       2012      2015      2018      2021     2024

-1.32      -2.43      -3.84      -5.88     -7.53     -8.90

Question: If MEFA, “a non-profit self financing state authority,” is receiving commissions from the sale of financial products, could they also be held accountable for the losses created by the sale of these products? After all, based upon the returns of the plan, the only entities to make money from these plans were MEFA and Fidelity Investments!

Question: If MEFA was created by the state legislature “at the request of Massachusetts colleges and universities,” are these same universities now culpable for losses? Or at the very least, are they planning to lower their tuition and fees to the paticipants of the plan based upon the FINRA stance?

The “age-based” portfolios obviously have not accomplished what they were designed to do.

The Commonwealth Care Health Insurance Program was designed to provide health insurance to those individuals that were not covered prior to its implementation, and who were at different levels of income below the poverty level. It was a bold and comprehensive plan to meet the growing needs of the citizens of the Commonwealth and it had an immediate effect on the number of citizens covered by health care in the Commonwealth.

However, the unintended consequences of the Program began to surface almost immediately. On January 11th, 2007, only 9 months after signing it into law, a meeting was held by the  Board of the Commonwealth Health Insurance Connector Authority. At this meeting the new Governor Patrick Deval, the Board’s chair Leslie Kirwan, and its Executive Director heard from Patrick Holland. It was Patrick Holland’s comments that at the time may not have set off alarms but were certainly the pre-cursor of the bloom coming off the rose.

From the minutes of the meeting, the following was noted:

1. I.            Commonwealth Care Trust Fund Projection: Patrick Holland reviewed the projected cost for state fiscal year 2007. Mr. Holland explained how some differences in the actual demographics of enrollees compared to initial assumptions, has resulted in a higher average composite capitation rate. The population enrolled is older and more are located in the Greater Boston area than expected. Each MCO receives a specific payment based on its demographics. BMC and Network Health, being lower priced, represent 81% of the enrolled population. Mr. Holland told the board that he will get back to them with more information on SFY 2008. (BMC is Boston Medical Center, MCO is Medical Center Operator)

The Boston Globe reported that in February 2008 the Commonwealth Care Program covered 169,000 citizens at a cost of $618 Million. Projections are that by 2011 342,000 citizens will be covered at a cost of $1.35 Billion. The original projections were for the program to cover 215,000 citizens at a cost of $725 Million.

An article by Alice Dembner in the Boston Globe of February 3rd, 2008 stated the following: “The state has asked the federal government to shoulder roughly half of the program’s cost from 2009 through 2011, but there is no guarantee of that funding.”

Which bring us to today.

An article from the New York Times by Abby Goodnough stated the following, “The new state budget in Massachusetts eliminates health care coverage for some 30,000 legal immigrants to help close a growing deficit, reversing progress toward universal coverage just as Congress looks to the state as a model for overhauling the nation’s health care system.”

And finally, this article also from the New York Times by Abby Goodnough, where the BMC (Boston Medical Center) is suing the Commonwealth of Massachusetts. The article states, “The hospital, Boston Medical Center, faces a $38 million deficit for the fiscal year ending in September, its first loss in five years. The suit says the hospital will lose more than $100 million next year because the state has lowered Medicaid reimbursement rates and stopped paying Boston Medical “reasonable costs” for treating other poor patients.”

So how did the state respond to the lawsuit, “State officials have suggested that Boston Medical could reduce costs by operating more efficiently. The state has also pointed out that the hospital has reserves of about $190 million, but Tom Traylor, the hospital’s vice president of federal and state programs, said the reserves could only sustain the hospital for about a year.”

If I read the comment above correctly, the Commonwealth of Massachusetts officials have basically stated that BMC should spend all of its own money to provide for the healthcare of the citizens, that the state has foisted upon BMC.

BMC is one of the finest Medical Centers in the country. Its research capabilities and medical school are second to none. Its inner city geography provides some of the most superior medical care found in Massachusetts for those who for the past upteen decades couldn’t afford health care insurance. BMC serves the inner-city unlike it’s cross town rival for foreign and domestic dignitaries MGH.

If the state of Massachusetts is a microcosm of what to expect from a national health care plan. How will the prescription heal the patient?

We believe that managing assets for individuals needs to provide a platform that places the clients needs first. Because of this we embrace the principles of a “fiduciary” responsibility to our clients.

How are we different:  Expertise, Empathy, and Access. The expertise derived from decades of investment management experience. The empathy brought about by working directly with individual investors for decades, and the access that clients desire when their needs require attention.

Please visit us at www.charlescarrollusa.com.

Costs versus Efficiency

Advocates of government-run health insurance like to point to Medicare’s low administrative costs (which, as I noted yesterday, is a controversial claim). But even if that factual claim were true, the argument would hardly be dispositive as to the greater efficiency of a publicly run system. As I put it in my recent Times article, “True, Medicare’s administrative costs are low, but it is easy to keep those costs contained when a system merely writes checks without expending the resources to control wasteful medical spending.”

A reader finds support for this position in some recent testimony by Malcolm K. Sparrow, Professor of the Practice of Public Management at Harvard’s Kennedy School of Government. Professor Sparrow suggests that greater administrative costs aimed at uncovering medical fraud might be money well spent. Here is an excerpt:
The units of measure for losses due to health care fraud and abuse in this country are hundreds of billions of dollars per year. We just don’t know the first digit. It might be as low as one hundred billion. More likely two or three. Possibly four or five. But whatever that first digit is, it has eleven zeroes after it. These are staggering sums of money to waste, and the task of controlling and reducing these losses warrants a great deal of serious attention….By taking the fraud and abuse problem seriously this administration might be able to save 10% or even 20% from Medicare and Medicaid budgets. But to do that, one would have to spend 1% or maybe 2% (as opposed to the prevailing 0.1%) in order to check that the other 98% or 99% of the funds were well spent. But please realize what a massive departure that would be from the status quo. This would mean increasing the budgets for control operations by a factor of 10 or 20. Not by 10% or 20%, but by a factor of 10 or 20.

The bottom line: Low administrative costs are not to be confused with high administrative efficiency. In other words, administrators are not necessarily a deadweight loss to the system.

Perhaps that’s why so much emphasis is being placed on upgrading the “systems capacity” of the Health Care system. If there can be a database available of “similar” outcomes based upon a specific course of treatment, perhaps this will help curtail the costs now currently incurred.However, what happens to those individuals with unique and unidentifiable illness. (Ever watch House?) Needless to say there will be those that don’t fit the model. What then?

The question that still remains is how do you upgrade the number of doctors within the system if it takes college, medical school, internship, and residency before one becomes available. More importantly, what happens to insure that you have a qualified specialist looking after your specific ailment? If it takes 10-12 years to get a student through this process, do we wait until 2021 before we allow an additional 15% of the population into the system?

All of this is predicated on the fact that this new system will reduce costs and provide greater numbers of Americans Health Care, no doubt worthy of inconveniences. The question that remains is how to pay for this system. The sites below reflect some of the opinions currently circulating.

Greg Mankiw’s Blog, The Healthcare-Competitiveness Fallacy

Greg Mankiw’s Blog, June 1st, 2009, It’s a Tie

Organizing for America, Healthcare

This is Wikipedia’s take.