According to the quoted report, there are only one fourth as many health savings accounts as high deductible health plans. This would only make economic sense if health plan members anticipated having no out of pocket health care expenditures. How could this be the case? Only if these members were significantly healthier than the population as a whole, or if those members were foregoing cost effective preventive care (though some disagree on the cost effectiveness of preventive medicine). Therefore, high deductible employer-sponsored health plans would be one means (and an economically inefficient one) for employers to shift the cost of health on to the overall society.

He quotes Brad DeLong indicating that between 1980 and 2004, the share of private national income earned by the top 1% of wage earners doubled from 8% to 16%. As usual, I have a few responses:

• After reading through the responses, I agree that single year rates can be misleading as many individuals may end up in the top 1% after cashing out an asset in which they had been investing earnings. For example, the small business owner who takes a smaller salary but sells for half a million dollars. A more interesting measure would look at lifetime earnings by some population cohort.
• Cost of living tends to have a more egalitarian distribution than earnings. Within a geography, health care, food, and transportation costs tend to be fairly equal. If anything, the wealthy tend to have better prices in the form of cheaper food, lower interest rates, and generally more choice (which may be offset through upscale brands, etc.).
• Finally, it’s worth noting that an increase in earning is very different from an increase in utility. In fact, those who make the most are best able to lose the most. I can’t spend $300k a year – therefore, it’s easy for me to set aside a third of that for a risky investment. Even if I make $100k per year–a very nice salary–I’ll be much less able to afford to lose any of that. My investments will be less risky and therefore, in general, less profitable.

Keeping in mind that I have absolutely no hard data to back me up, I think that Professor Cowen touches on one primary cause in mentioning, “[A]n increase in the ability of very smart and very wealthy people to buy up undervalued assets and turn them into greater value.” I’m not sure that smarts enters into the equation. What the wealthier have (and the wealthiest have lots of) is sufficient liquidity to take advantage of opportunities. Some of these opportunities will come in the form of real or financial assets, but others will take the form of moving cross country to follow job prospects, taking a few years off of school, or even deferring salary in the first place to start a company. See above with regard to risk and reward.

There’s also the nasty possibility of rent seeking behavior. Given the constant news of government bribery scandals and under performing firms getting generous government contracts we would expect that some amount of that excess income could be invested in bribery, graft, and lobbying.

Closely related is the principal-agent problem. Especially in an economy with rapidly advancing communications and information technologies, we would expect the cost (in terms of time as well as dollars) of identifying opportunities to increase. The “agents” in our economy: lawyers, realtors, other professionals and elected officials have pursued their own rent seeking behavior and those with the least excess are least well able to discern good advice from bad. Scandals with Ameriprise Financial, physician owned hospitals providing sub-par care, trial lawyers who take too large a share of a settlement, and graft-seeking congresspeople are some recent examples.

I see nothing inherently wrong with hard work and business success rewarded with wealth and I’m confident that most of the wealthy in this country have honestly earned that status. At the same time, concentration of wealth introduces and encourages some (economically) bad behaviors and it behooves us all to identify and correct them.

In reading the comments, it was interesting to note that almost all conversation seemed focused on whether it was appropriate for individual CEO compensation to be linked to market capitalization. My read was slightly different. The research makes an empirical observation about CEO salary in aggregate, and comparing that to aggregate market capitalization. It doesn’t surprise me that individual CEO pay would be more linked to market performance than individual performance–that’s the way other knowledge worker salaries are negotiated. My best developer and my worst developer earn roughly the same amount.

For those interested in examining the relationship between CEO compensation and company performance, I would like to suggest another test: If it’s expected that large firms are expected to a market driven salary for their CEO, and if it’s assumed that every large firm needs a CEO, there should be little relationship between a firm’s spending on CEO pay and the firms financial performance. Commenters seem agreed on this point. Instead, measuring a relationship between CEO performance and corporate performance would require measuring CEO pay from the CEO’s perspective, and this requires a cumulative measure. Something like average annual salary during period when active in CEO labor market would work. My hypothesis would be that while instantaneous employed CEO compensation is relatively flat, CEOs of more successful companies would spend a greater percentage of their time in the labor market actually employed. Assuming a strong positive relationship between time employed and total compensation (another testable hypothesis) we would have a better indication as to whether CEO pay is reflective of corporate performance.

UPDATE: One additional thought: as stock options and stock grants were considered CEO compensation in the research study, increases in market capitalization would directly increase CEO pay. As stock options become a larger percentage of CEO compensation the effect will increase. Seems like the same variable is being used in both sides of the equation.

Our clients understand that our rates are a good value for the work we provide. Our clients also run businesses and understand that they in turn must make a profit. Raising your prices does not mean scalping. Raising prices ensures stability, excellence-in-work, and profitability for the future.

Pricing isn’t just a tool for completing and invoice or estimate. Pricing is a marketing signal. Pricing yourself low signals that you don’t value your work or consider your product above average. Customers who choose you for your price signal that they care less about your quality. A while back, I stated that an IT project has only three requirements: cost, functionality, and schedule, and that only two of those may be specified. Choosing your business’ product based on price signals that your client doesn’t care either about schedule or functionality (and quality is a function). Price yourself right, and you get the clients you want.

1. Understand how their company “makes money”–their corporate strategy for success and metrics for determining progress towards that goal
2. Be able to evaluate requirements (i.e., cost, schedule, and features) in terms of the above metrics and goals
3. Be able to cost and price and understand the difference between the two

What is the difference between cost and price? Why would price be different than cost? Cost is a description of the impact on your resources of doing something–of meeting a set of requirements. Price is a means for communicating your priorities and preferences to those whose requirements you are asked to meet.

From the perspective of managing a project, there are only three requirement: Cost, schedule, and features, and it’s accepted project management practice that only two of them can be specified at a time (as engineers say: “Better, faster or cheaper–pick two”). If you understand your corporate strategy you can help your customers understand which two are the most important. For example, in the retail financial services world, IT costs are often only a small part of the budget for a new product launch. However, the IT portion of the project can still be on the critical path–if the IT part is delayed or doesn’t meet the feature and quality requirements the opportunity cost is great. It would then be reasonable to assume that the sponsoring business group would be willing to pay a high premium–possibly above estimated costs–to guarantee that their feature and schedule requirements are met.

It’s not enough to be willing to adjust prices to meet feature and schedule requirements. You need to be operationally prepared to accept the work. This is done by maintaining a level of staffing slack above your expected work level. Your level of slack bounds your capacity to meet new requirements and new projects. How much slack is required?

That’s a harder question than deciding how much slack to pay for. One way to calculate it would be to identify the corporate cost of missing features or delaying delivery. The cost to the company should approximate the price they’d be willing to pay to avoid it, which is to say, the price they’d be willing to pay for slack.

Interestingly, it’s likely that maintaining slack across the team and the IT organization will probably lower overall costs, but my theory that IT is just discrete manufacturing probably deserves its own post.

I think there are two general sets of requirements that would need to be met: a true market for health care coverage and high deductible benefit plans need to represent real savings over traditional insurance products.

For the market to be considered developed:

• A consumer should have a choice of healthcare providers and healthcare procedures.
• A consumer should have access to price and quality information. Price should be straightforward but quality is harder to define. It would have to include adverse outcomes, time for the procedure, time for recovery, etc.
• Consumers would also need a choice of high deductible coverage plans and HSA plans. Ideally, the two should be completely decoupled from each other. Consumer should be able to purchase lower deductible plans at a greater cost and have choices in how their HSA dollars are invested.

The high deductible plans will also need to be cheaper than insurance currently offered today:

• A relatively large amount of health plan costs (generally speaking) should accumulate below the higher deductible threshold. That is to say, the cost to insure all households spending less than $5000 or whatever per year needs to be a large portion of total healthcare spending.
• The growth rate in spending above the deductible threshold should be lower than that below the threshold.

I’m not sure if those conditions have been met in the US. Certainly, choice of providers, at least outside major cities, is poor. And price and quality information is extremely hard to come by. Moreover, I’m not yet convinced that high deductible plans will be so much less expensive: most healthcare is consumed by only a few of us and most care is delivered in the last few months of life.

Soaring costs mean that the financial health of Medicare is deteriorating quickly. Commentator and health policy expert Jonathan Weiner says major surgery may be in order.

Jonathan Weiner, professor at Johns Hopkins in the department of Health Policy and Management, singled out Medicare as an example of a healthcare payor in need of cost controls. I believe his choice was unfortunate for two reasons: When comparing commons benefits, Medicare spending has traditionally grown at a slower rate than private health insurance spending (cf: “Comparing Medicare and Private Insurers: Growth Rates in Spending Over Three Decades,” Cristina Boccuti and Marilyn Moon, Health Affairs 22, 2 (March 2003): 230–237). Furthermore, Medicare administrative costs are only a fraction of private payor administrative costs.

Weiner was correct to highlight the high cost of healthcare in the US as compared with other western countries. However, in singleing out Medicare, he implies that this federal program is a significant cause of such costs. Representing only about 20% of personal healthcare spending, he would do his audience a service to examine systemic problems across the entire healthcare industry rather than criticizing one of the few successful US programs.