The Progressive Ensign

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Category: Stock Buybacks

Amazon’s Growing Corporate Power In Washington – Threat to Capitalist Democracy

Source: e-brand.biz

An oligarchy is defined by Wikipedia as, “a form of power structure in which power rests with a small number of people”.  One of the Elite is corporate tycoon Jeff Bezos, Amazon founder, who is thought to be the wealthiest person in the world with net worth estimated at $141 billion.  He wields great corporate power leading an innovative company, pioneering e-retailing when many said it couldn’t be done building a $177 billion empire in e-Commerce, web services, grocery, and just about everything you can buy in a store you can get from Amazon.  Amazon owns 43 % of the e-Commerce market, and has been responsible for a complete transformation of brick-n-mortar retailing causing the loss  of thousands of jobs.  The company name is synonymous with going out of business as some store owners declare they have been ‘Amazoned’.

Amazon has one of the largest lobbying forces in Washington, 94 strong:

Sources: The Center for Responsible Politics, The Wall Street Journal, 6/20/18

Amazon spent $13 million on lobbying and is one of the top spenders on lobbying along with Google, AT & T and Oracle.

The Amazon corporate power juggernaut keeps rolling.  The e-Commerce giant owns 50 % of the book print sales market for publishers, with Barnes and Noble in the teens and independent book sellers about 6 – 8 percent. Ten years ago, independent book stores held a 30 % share of the book print sales market until Amazon drove them out of business, with convenience and not being required to pay sales taxes to states (though the Supreme Court just ruled last week that e-Commerce firms must pay sales taxes). Now, in an ironic twist the firm has 3 brick- n-mortar stores and is opening 5 more in 2017- so Amazon drives the competition out of business, with low cost prices and no taxes then starts opening brick n-mortar-stores.  Is that fair? In audio books Amazon owns Audible the No. 1 provider of audio books where last year listener – readers heard over 2 billion hours of programming.  The Kindle subscription business holds 14 % of the e-reader market and is the fastest growing segment increasing 4 % in 2016

Amazon is humongous compared to its competitors with brick-n-mortar stores:

Source: visualcapitalist.com – 12/30/16

Amazon is larger than the next 8 competitors and it is killing their businesses by amortizing its cut rate prices with profits from its Business to Business cloud enterprise – Amazon Web Services (AWS).

Source: Geekwire – 10/1/16

Without AWS Amazon would not be able to take profit from the B to B side of the business and fund the cut rate prices driving other stores out of business. While it may seem like this is capitalism ‘creative destruction’ at its best, this condition strikes us as unfair competition. Add a tax cut giveaway to corporations like Amazon, and the juggernaut keeps picking up speed at the expense of workers and democracy.

Next steps:

  1. One Lobbyist Limit – The Company is a citizen according to the Supreme Court in Citizens United, then good it has one lobbyist representative to Congress.
  2. Sunshine Contractor Monitoring – Amazon and the top 100 government contractors would have to contribute to a web site noting their business with the Federal Government, revenue from the contracts, agencies working with, number of government staff working with Amazon, Amazon staff size working on projects, where they are located, and all contacts with Congress, Executive branch staff – date, time, attends, discussion top, money involved, follow up. All these details would be available to the public on a web site 24/7.  These disclosure are a ‘annual report’ to the people of the US about what the top 100 contracts are doing for our federal government, and us and how they are contributing to our government and society goals.
  3. Campaign Contribution limits – $2700 per corporation if they are a person, that is all a citizen is allowed to contribute, and the Supreme Court found corporations were citizens, so Amazon has the same limit as a citizen.
  4. Corporate Reform – top 2 corporations in an industry sector must have a minority number of outside board members elected by all the shareholders. Employees can form ‘councils’ along the line of the German worker council models.  Salaries for executives would be limited to 50 times the average worker in the firm (consumer discretionary sector the average for CEOs is 350 times, Bloomberg, Feb 1 2018)., Stock buy backs need to end, or be phased out as they are artificially raising the price of stock on major exchanges by 20 – 15 % experts estimate just to line the pockets of executives and major shareholders, the funds are not going to wage increases, productivity investments or job training.
  5. Anti – trust – Amazon needs to be broken up into a corporate web business – Amazon Web Services, and grocery business (Whole Foods never should have been approved) spun off. The e-Commerce business needs to stand on its own, plus we need to look for other ways to create fair- play markets possibly separating services from distribution,

The Rich View Our Government as A Trusted Rule Keeper, The Common Man Not So Much

Image: Your Little Planet

Thomas Jefferson and James Madison saw the need to frame a government such that ‘forced compromises’ would push political leaders to focus on the Common Good.  The institutions that maintain our common good include the federal government three estates:  The Supreme Court, Congress and The Executive.  In addition, the Fourth Estate, a Free Press is crucial for our citizens to have access to fair and impartial reporting about the activity of government officials and their policies. We have spotlighted the key role Education, as the Fifth estate, plays in educating our people to make critical decisions and understand comprehensively the information they receive from a Free Press.

Trust in our federal government has been falling since the presidency of Lyndon Johnson in 1965.

Source: Pew Research Center – 12/14/17

We noted in our first post on the Common Good that there were two factors contributing to the decline in trust:

We see two major factors for the lack of trust.  One, is that economic inequality has been increasing over the last 60 years to the point where it is at the worst it has ever been since 1929.  Americans expect their government to be the rule keeper of a fair shot at economic opportunity not a bastion for the rich and powerful.  As wealthy donors have taken over control of both major parties, the influence of the average citizen has been reduced to nearly nothing except at the ballot box – but not in legislative policy.”

The second major factor is the change in information access and news viewing habits of our society.

In the 1950s and 1960s families gathered around the television set to watch Walter Cronkite or Huntley and Brinkley bring them the news for the day.  These news anchors had teams of trained journalists in how to gather news, provide airing of opposing views and investigation to reveal the facts of the story. As cable news programs became popular people drifted away from central network journalist supported news programs toward popular ‘viewpoint news’ programs like Fox News or CNN.  Then, from 1995 until today, the Internet was a catalyst for the growth of blogging, and ‘friend news’ on Facebook which had virtually no formally trained journalists and limited understanding of the difference between facts and opinions.  Opinions spread virally through the Internet often with no foundation in formal fact gathering or fact finding investigation techniques. Today, we even have presidential spokespersons talking about ‘alternative facts’ to justify their policies or opinions.

Trust gaps by income level are increasing around the world with many developed countries showing double digit gaps between the top income quartile and the bottom income quartile and the U.S. with the largest gap:

In the U.S. incomes for the lower 80 % have been largely stagnant for the past three decades since the Reagan years, higher education costs rising to levels never seen before with student loan debt at $1.5 trillion dollars. In short, lower and middle income parents expect their children to have fewer opportunities and to make less money over their lifetime. This growing sense of hopelessness is in part triggering the populist movements we see world-wide. The top quartile trust government institutions the most because they are getting the benefits, tax cuts, relaxed environmental policies to allow their businesses to make as much money as they can, and continued stock buy backs to make even more money instead of increasing worker wages.  Workers see their votes not making a difference as Congress is at the beck and call of Corporate Nation States who make multi-million dollar campaign contributions and the Executive Branch now run by billionaires.

Little wonder the Common Good is not embraced by all people, for the rich they are on top of the economic pyramid. The rich get the laws they want and aren’t interested in sharing their wealth or time to build the Common Good.

Here is what will likely happen, in the end the rich will need to see that it is in their interest to build the Common Good, by contributing to our institutions of government and common people or they will lose what they already have and probably a lot more.

14 % of Workers Have Not Received Wage Increases In the Last Year

 

Photo: theaustintimes.com

While CEOs at the top 100 corporations received a 5 %  raise in average compensation  of  $15.7 million last year,  14 % of all workers have received no raises at all, higher than before the Great Recession. The recovery has not come for many workers.

Sources: San Francisco Federal Reserve, National Bureau of Economic Research, Haver Analytics, Marketwatch – 5/29/18

Prior to the 2008 recession there were 11 % of all workers not receiving raises, still too high but much lower when considering the size in millions of the US workforce. After the recession companies were slow to give all workers raises as the rate rose to almost 17 % without raises.  Then, over time more workers are receiving raises as the economy recovered for the top 20 % in income. Still, 14 % is still too high.  The Federal Reserve economists note that the no raise rate would have to drop to 12.5 % or so for enough wage pressure to cause a move from the present stagnant 2.5 % to increase to 3 % and cause wage push inflation.  The fact the number of employees not receiving wages is actually going up is a concern that wage raises may actually fall or stay the same.

Next Steps:

We continue to see the extreme inequity of executives and professionals continuing to receive raises, for many twice the 2 % inflation rate versus workers. The reality is that employees just do not have the same wage power that they used to. We have previously discussed the combination of factors that contribute to extreme lack of wage power for workers including: lack of union representation, automation, fewer corporations due to mergers reducing the number of jobs,  low wage H1-B visas being approved,  using profits for stocky buybacks instead of investment in productivity increases, Internet recruiting nationwide and worldwide for some positions, and the shift to outsourcing jobs and the gig economy.

We recommend the following actions be taken by Congress and Corporate Leaders:

  1. Place Workers on Boards– as Germany has so effectively setup, engaging management with required representation of workers on Boards.
  2. End Outsourcing– corporations would pay 50 % tax on each job moved overseas making the move costly, encouraging corporations to move jobs to low cost or inland areas of the US, or innovation economic zones (special tax geographies) and to invest in worker training to receive training tax credits.
  3. End Low Cost H1-B Visas– the practice of importing inexpensive labor to drive down wages in US markets would be ended.
  4. Offer Lower Taxes on Repatriated Funds– only if the profits from overseas are invested in productivity actions, increasing wages of workers (not executives), reducing costs or innovation. Stock buybacks or dividends would be prohibited.
  5. End Stock buybacks– these funds are totally wasted, mislead investors on earnings reports and only serve to increase compensation for executives and shareholders. These funds are better allocated to increase worker wages or increase productivity so workers can receive higher wage increases.
  6. Breakup Oligopolies– breakup market concentrations in key sectors: information technology, banks and financial services, health insurers, airlines, hospitals and clinics, entertainment, media and distribution and others as deemed in the public interest.
  7. Balance Job Market Process– require companies over 100 employees to offer information on their website for contacts, phone numbers, job listings with identified contacts, and to let the candidate know the status of his consideration, and candidate introductions held monthly for F2F communication.
  8. Balance Worker and Executive Pay– tax corporations 25 % surcharge on any corporate income where any executive makes greater than 150 % than any the average worker wage – this would force executives to share their income with workers while not increasing costs. End federal tax deductions on corporate income taxes for executive stock compensation above $1 million. End golden parachute packages by taxing 50 % of every dollar received above $1 million. Severance packages for workers would have to be in proportion to the highest executive package ie, executive receives 10x of monthly salary a worker would receive 10x of his/her monthly salary.
  9. Fund Worker Training and Increase Wages – for each robot employed, the corporation would be required to offer training, skills development for the displaced worker to find a comparable job within the company or outside. Where automation software or technology is deployed 10 % of the realized cost benefit would be used to raise the wages of all workers in the company.

Bi-Partisan Support to Cut Drug Costs – Stalled by Brand Drug Companies

Image: freopp.org

In an unusual development in the Senate, senators from the Republican side like Sen. Ted Cruz – (R- TX) to Democrat Sen. Diane Feinstein (D – CA) agree that the process of converting brand name drugs to generics needs to be sped up and reduce drug costs.  With 23 co- sponsors the CREATES Act would require brand name drug companies to provide large enough quantities of samples of their drugs to generic manufacturers in a timely manner and that are safe.  At the present time brand name drug manufacturers often do not supply the quantities necessary or block access due to safety concerns – unnecessarily delaying the conversion of a brand name drug to a generic.  The bill provides a remedy for generic manufacturers by allowing them to sue the brand name manufacturers for not providing the necessary samples.

Sen. Patrick Leahy (D-VT) a bill sponsor, says the Congressional Budget Office estimates the bill would save the federal government about $3.8 billion over a decade in drug costs.  The Congressional Budget Office and the Generic Pharmaceutical Association estimate a total savings of $250 billion in 2013 by using generic drugs versus brand name drugs.

Source: CBO, GPha – 2014

As we have noted before drug companies are running their companies focused on making unreasonable levels of profit through $50 billion stock buy backs to increase executive and shareholder compensation and paying $1 billion a year in direct advertising to consumers for prescription medications. If the drug companies allocated these wasted funds toward price reduction we would see a dramatic reduction in drug prices.  The CREATES Act is a good bi-partisan way to at least begin to tack down agreement on drug price reductions in a fair way.

Health Insurers – Your Free Ride Is Over: Time for Single Payer Health Insurance

The View: 

The Health and Human Services administration just announced that the average premium for patients on the health insurance exchanges will increase by 25 % in 2017.  For those covered in employee insurance plans they are being squeezed between stagnant wages and increasing premiums and high deductibles.  The health insurers have a business model that creates profits for them, but creates gaps in coverage (as when a worker is unemployed) with high premiums and high deductibles.  Insurers spend billions of dollars on stock buybacks to drive share prices up to increase executive stock compensation.  Plus, they spend millions on lobbying Congress to keep their business model in place.  These monies could be better spent bringing costs down and reducing premiums.  In the final analysis as a country, we don’t need two accounts payable departments – private and Medicare. Let’s move to one single payer system, though it may take years to implement.  The Action: Cover the remaining 9 million uninsured with a public option on exchanges, end state by state plans and replace them with a national insurance pool of 360 million, create individual health accounts funded by payroll deductions from salaries for workers and for the uninsured federal basic health and drug insurance would be offered, end COBRA accounts by implementing national health insurance accounts available regardless of employment status, transition employer plans over to health accounts over a 4 year period similar to 401k rollovers into IRA accounts, end penalties for not having health insurance, use the Medicare drug formulary for the industry, end stock buy backs, require full disclosure on health and drug pricing.  To implement and guide development of the new health account program we should look at Affordable Care Act exchanges that work like California and those faced with challenges like Oregon.  Plus, let’s enlist our progressive investor partners to build new health insurance business models and organizations necessary to make this transition successful.

The Story:

Last week, this author received in the mail a notice from his drug insurer announcing rates for 2017 – a 38 % increase in a standard medication because it was moved to a non-plan brand tier from a generic (it is still generic) and premium increase of 33 %! Recently, my wife made an inquiry about coverage for one her medications where the insurer said her medication was covered was covered but she would have to pay 100 % of the cost because of the tier it was on. What kind of double talks is this? Related to health care, prior to the Affordable Care Act my son couldn’t afford doctor visits because he didn’t have insurance – he would have to pay $150 for a visit instead of a $10 copay. Fortunately, he didn’t have much income so MediCal helped out.  It seems that most families or someone you may know has had an issue with a health insurer.  Yet, this business model for insurers stays in place. Insurers have designed an inequitable structure to ensure they make money, while those with no insurance or high deductibles are paying exorbitant fees.

How big is the problem with drug and health insurance? According to the Kaiser Family Foundation insurance costs are going up for those under employer sponsored plans too –29 percent of all workers were enrolled in high deductible plans up from 20 percent in 2014. From 2006 to 2016 workers incurred a 58 % increase in premiums for employer sponsored plans. (click on image to enlarge)

increase-in-worker-health-insurance-premiums-kaiser-sep-2016

 

Under the Affordable Care Act (ACA) corporations can move insurance plan costs over to employees for their health insurance and not be penalized. High deductible plans can cause a barrier to care, because patients looking to reduce costs do not go to their doctor or purchase the medicine they need, resulting in more serious illnesses later. This means that while premium costs maybe held in check, high deductibles are dramatically increasing the costs to patients while middle class worker income has stagnated since the mid 1980s.  Middle class workers and their families are caught in a wage – health cost squeeze, while drug and health care provider executives make 290 % of an average worker income.  The Commonwealth Fund, reports that workers with employer plans spent an average of 6.5 % of their income in 2006 on premium fees and deductibles, this figure soared to 10.5 % by 2015.  The squeeze between wages and health care costs is felt most acutely in those states with lower wages.  For example, in Florida the average worker spent $16,000 in premiums and deductibles per year, in Massachusetts their health costs were $18,000.  Yet, the median income in Florida was $43,401, versus $73,015 in Massachusetts – highlighting the huge squeeze felt in lower income states where wages have not kept up with health costs

Finally, the federal government reports that while another 1 million people will be covered by the public exchanges in 2017 due to the major insurers dropping out, average premiums will be raised by 25 %!  For example, Aetna announced that it was dropping 11 states from its plans due to losses of $430M since January 2014. Aetna wants the game played by its rules.  Last summer, Aetna told the DOJ that it would bow out of state exchanges if it did not approve their merger with Humana, Aetna also spent $1 billion in stock repurchases in 2014 and approximately $750 million in 2015. Anthem has announced that while it is not repurchasing stock now with its pending merger with Cigna, it still has authorized $4.7 billion dollars! Stock repurchases manipulate the stock price (to drive up price); they do not reduce costs, innovate new services, or compensate employees. In 2014, Humana repurchased $500 million in stock driving the price up by one cent over their earnings target of $7.50 per share entitling CEO Bruce Broussard to a $1.68 million bonus.  Middle class workers are caught in squeeze as premiums rise while executives use billions of dollars to increase their compensation that could be used to reduce premium prices.

The success of the public insurance exchanges while contingent on insurer support requires strong state leadership. California supported the public exchange program where 92 % of patients can choose among three or more plans, with increases averaging 15 % for 2017.  Most Covered California plan consumers receive premium assistance and qualify for subsidies.  Other states like Texas, fought the public exchange plan, and did not accept $10 billion in subsidies over 10 years which left many low income Texans without coverage.

The ACA has been a success with 21 million people gaining coverage, while another 9 million remain uninsured, the lowest number on record. Yet, the pricing and coverage model is wholly inadequate for patients to hold premium costs down and health service providers to manage their businesses effectively while ensuring a high quality of health care.

So how does drug and health insurance work?  Drug companies set a price then negotiate an agreement with the health insurer for different tiers of pricing generic (lowest), preferred brand and so forth. The top tier is usually completely uncovered.  The insurers negotiate for rebates and discounts to drive patients to certain drugs that the drug manufacturer wants to increase sales, or where they have the highest profits margins.  Drug prices increased by 12 % last year, however the insurers saw drug costs increasing by only 2.8%, according to IMS Health. The drug store submits a claim under your plan when you want a prescription filled, the price they submit is high, and not what they receive (it looks big to have the consumer think the insurer is paying the drug store a lot) there are rebates and discount lists, then there is the cost to the consumer as a member.  Finally, the plan supposedly pays part of the net amount, but most drug plans make the net figure your out-of-pocket cost.  The pricing structure is completely opaque to the patient.

Health provider costs are negotiated as well.  On an Explanation of Benefits statement the patient sees the amount the service provider charges, which is not the price the insurer pays which is usually a much lower cost reimbursement.  If the patient has no insurance the ‘retail price’ of the service provided is due from the patient. Often these retail costs fall on those patients least able to pay – those with low income or without insurance. Retail costs can be exorbitant for example, an MRI may cost the insurer $1000, while the provider retail cost to the uninsured patient is listed at $10,000.  Incredibly, uninsured patients are forced to pay the most for the health services! There is an obvious message here – ‘we don’t care about uninsured patients and we are going to stick prices to them’.  For most unemployed patients private plans and private plans on the public exchanges have high premiums, high out-of-pocket or high deductibles.  This approach of high premiums, out of pocket and high deductibles don’t work for the consumer!

Insurers have worked hard to keep their business model in place with Congress, Aetna spent over 23 million dollars since 2010 lobbying Congress on legislation that impacted their business, according to the Center for Responsive Politics. Aetna employed 37 lobbyists, with 75 % enjoying a revolving door between government positions and lobbying on behalf of Aetna.  The health insurance industry has spent over 61 million dollars in lobbying efforts between 2010 and 2016.  These insurer lobbyists are not representing patients.

When the health insurers; Aetna, Cigna, Humana, Anthem threaten the DOJ with leaving the public exchanges and then leave as they did last month, they are clearly undermining the goals for the ACA. They were upset with DOJ for suing all four firms to stop their planned mergers.  We need an attitude shift here, how can they make insurance work for all of us.

We have come a long way with the ACA and concessions by the insurers, but they continue to focus on the healthiest patients, increases in deductibles, increasing profits and maintaining high executive salaries. This is all at the cost of patients – all citizens have a right to good, high quality healthcare throughout their life.

The Action

The core need is to provide low cost effective health insurance for people, so when illness strikes patients receive high quality care and become healthy again. Why do we need multiple insurance payers – private and the federal government?  If we were running a corporation we would not have two accounts payable departments?  We need to transition to individual health accounts that stay with the patient regardless of employment status beginning at birth.  Here are ideas on how this transition could work.

Complete Analysis of ACA – We need to learn from the public exchanges that work – California’s public exchange has been quite successful covering new patients, and keeping costs reasonable for low income patients.   Yet, we also need to look at why those exchanges like Oregon are not working well and expensive. Let’s summarize the analysis and publish the results so we can build a consensus around the solution, extending what works and recommendations for changes.

Priority One Cover the 9 Million Uninsured – those not covered by insurance need insurance now, we need to figure out how to cover 100 % of our citizens immediately. Offering a public option on the exchanges for basic health services and drug coverage would be a good start.

End State by State Coverage – state pools not large enough to make insurance work for all.  With 360 million people in the US we can make our health insurance pool work to reduce costs. Plus, legislation needs to be passed to reverse the Supreme Court decision to allow states to opt out of subsidies.  For example, Texas opted out on $10 billion subsidies leaving many low income families without insurance or very high premiums they cannot afford.  Interestingly, a few months ago I talked with a small business office manager in Texas, she complained that ACA was not working (her firm did not offer health insurance), for her hourly staff. Obviously, one reason is that Texas opted out of the subsidy program. Using a national pool would help to spread out the disparities between regions in terms of the rising cost of insurance versus stagnant wage increases.

Create Individual Health Accounts – funding can be setup via a payroll tax, accrued to a personal national health insurance account when working (if they don’t have employer options – to be transitioned later). For individuals or families below the regional poverty level they would pay no health payroll tax. For those individuals who are not contributing to their health account, the federal government would fund a basic health and drug account by progressive taxes on wealthy individuals over $250k and the increase taxes on corporate profits. Corporations can offset the increased tax, by offering lower cost insurance, medigap plans or encouraging their employees to move to the basic national health insurance program.

End COBRA – by setting up health accounts regardless of being employed, there is no need for COBRA plans.  Otherwise, for those unemployed to continue coverage often they have to pay soaring COBRA premiums up to 400 % of their employed premium rate.  For this author, two major illnesses occurred when I was unemployed, often with the stress of being unemployed is the time we need health insurance.  COBRA is another example where health insurers are charging outrageous rates to those who need the insurance badly but can least afford it. For the unemployed they could rely on basic health coverage in their individual health account.

Transition Employer Plans – convert employer plans over 4 years into a national personal health care account. Rollovers can be accomplished in a similar way to 401K to IRA rollovers (without the penalty for early withdrawal).  Ending employer programs will cut a layer of administration in benefits departments that more rightly belongs to the individual regardless of employment status.

End Penalties For No Insurance – we want to to tax behavior we don’t want and support or subsidize behavior we do want.  All Americans who have Social Security numbers should be able to enroll in a personal health insurance account, if they do not have a employer sponsored program.  Parents can apply for a SSN for their child to be covered.  A public insurance option should be offered to all those families not in employer sponsored programs. The public option run by Medicare is a basic health insurance program run similar to basic Medicare for seniors with medigap plans to cover the other 80 % of coverage needed.

Use the Medicare Drug Formulary – we don’t need multiple formularies and tiers of drug coverage. Medicare already provides one formulary which should be used as the industry formulary.  We need to empower Medicare to negotiate all drug prices and health procedures with providers with provision for regional differences on procedures.  A critical medication list can be created by Medicare for life threatening (Epipens) or serious chronic conditions (diabetes) capped at 5% profit for drug manufacturers.

End Stock Buybacks by Insurers – insurers need to end stock manipulation and the waste of stock buybacks. Companies like Aetna have spent billions of dollars on stock buybacks which would go a long way to reducing premiums and costs to patients.

Pricing needs to be transparent – similar to a mortgage disclosure statement. The explanation of benefits and drug claim form needs to be clear about the provider or drug price, any discounts and rebates, the price the insurer is paying, the price the provider is actually requiring, the price the pharmacy is paying and the exact out of pocket cost to the patient, with patient accruals in out of pocket and co pays toward insurance coverage.

Do it Without Waiting – let’s get progressive investors to back drug manufacturers that adhere to drug cost reasonable, critical med list, transparent pricing innovative insurance, publicize get more investors on board. Work with Wall Street to setup an ETF stock to focus on companies adhering to the progressive national health programs demonstrating good returns.

Awareness of What Works – A media campaign with surrogates, leadership in Congress, interest groups like the AMA, and the insurers to bring the American people along on the solution journey and to put pressure on Congress to pass the necessary legislation.

Health insurers would focus on medigap plans, taking risk out of innovative drugs to help speed them to market, vision and integrative medicine, personalized medicine, telemedicine – taking their layer out with reduce costs dramatically. They can be contractors to Medicare for transition to health accts. Or insurers can be contract administrators to Medicare, keeping costs low and utilizing their expertise.

Lets establish a lifetime health insurance program that provides good quality care, and low cost medications for all Americans.

(Editor Note: References for this article appear in the Research section of this site.)

 

Mylan’s Executives Go Too Far: Bring Down the Price of Epipens, End Executive Perks

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(Editor Note: August 29, 2016 – Mylan executives announced they would introduce a generic version of the two Epipen product for $300.  This move is a step in the right direction, but not nearly enough, the two pack was priced at $100 in 2007.  So, this price move is a 300 % increase instead of 578 %,  just not enough.  Particularly, when inflation has been on average 1.4 % since 2007,  or 11.2 %.  Our view is Mylan still needs to end stock buy backs in the amount of $1 billion, lower extremely high executive pay based on stock performance, plus, drugs like the Epipen which are life saving should be categorized as  ‘patient critical’. )

The View:

Mylan’s executives have raised the price of two Epipens, used to counteract allergic reactions, over 578 % since 2007.  They made this move because soon a generic alternative was coming on the market from Teva – however the FDA found deficiencies in their product.  So, Mylan has a virtual monopoly.  This gives them extreme pricing power to drive profits for the firm.  While, Mylan has been raising prices, for the last year they have been buying back stock – authorized up to $1 billion over the last year.  Stock buybacks are employed by companies to take stock off the open market, to try to move the stock price up – these funds are not invested in product innovation, worker salaries, or cost reduction.  Mylan’s executives have highly leveraged stock compensation plans, so stock buybacks can put money in their pocket – taking dollars from patients and parents who critically need the Epipen.  Epipen sales are estimated to be $1.7 billion per year, so $1 billion in stock buyback funds would go a long way to reduce the price of Epipens!  While Mylan has spent these funds over the last year ending Aug 27 of this year, they have been issuing corporate bonds for hundreds of millions of dollars. Instead of using debt funds for stock buybacks they could be used to reduce the price of Epipens. While, Mylan says they offer coupons to those with insurance and out of pocket copays it is not nearly enough – they still have not reduced the price of the product. By keeping the product price high they maintain their revenue stream via the drug insurers. Those families without insurance, are paying $608 for two Epipens, the full retail price.  This is an example of a indirect income transfer from the poor and middle class who can’t afford these sky high prices to the top 1 % in executive ranks.  The Action:

  1. End Stock Buy Backs – corporations are using stock buybacks to manipulate and control their stock price without immediate disclosure. Support Senator Tammy Baldwin’s request for disclosure and enforcement of existing laws and write to the SEC.
  1. Sign the MoveOn.org Petition – they are collecting signatures to be sent to Mylan CEO Heather Bresch
  1. Convince university and foundation endowment administrators to sell their holdings in Mylan shares until the firm ends stock buybacks and reduces the price of the Epipen product.
  1. Establish a list of ‘patient critical’ drugs, monitor their price, when it moves too high, release PR campaigns directed at the offending firms and demand price reductions (along with stock buybacks that are taking money right out of patient pockets).

The Story:

Mylan management employed a standard industry practice (which is debatable ethically) to raises prices of a drug just before the drug goes off patent and a generic competitor emerges.  The firm can milk this income stream before losing market share and price position.  In this case, the executive team went way to far raising prices on a product that is critical for patient health.   Most schools require that parents provide an Epipen for a student who may suffer a major allergenic reaction, thus creating critical demand for the drug.

Does Mylan have the ability to reduce the price by up to 50 %Yes!  a year ago Mylan’s board approved the buyback of Mylan stock in the open market up to $1 billion!   That $1 billion would go a long way toward reducing the price of the product to all patients.  Stock buybacks are used by corporations to drive their stock price up by reducing the number of shares to investors in the open market. By moving the stock price up, they will increase the value of the shares they hold thereby increasing their compensation. Mylan’s stock price hit a high of 76 dollars the summer of 2015, then concerns about the Epipen and other issues saw the stock price fall – which is why the board authorized the stock buy back for one year ending Aug 27 2016 (to make the chart large right click on the image, the bars below price are stock volume for the week):

MyL stock chart 8-26-16

Mylan executives receive the majority of their compensation from stock performance of shares they hold and options on additional shares.  Notice that the stock did move up some last year, but intelligent investors are beginning to question the viability of stock buybacks as they do nothing for the viability of the company in the future. There is no investment in worker salaries, worker development and education, research and development or systems to reduce costs. Please see my blog on Stock Buy Backs Spike Executive Pay for more background and details on this unethical practice.

Mylan says they are helping out with costs – but are they really?  while Mylan says they will help with coupons for out of pocket expenses or copays that is fine. Except, there are many patients and parents of children who need two pens (home and school) who do not have drug insurance and many others with high deductibles which Mylan’s offer does not cover.  Often arrangements between insurers and drug companies are setup where they negotiate the price lower than the list retail (ie two pens for $608), lowering the cost to the insurance firm, but giving the drug company an ongoing revenue stream and access to more patients.  When Mylan picks up the out of pocket expense it is in effect it is subsidizing Epipen’s high price.  Of course, the high prices fall hardest on those with no insurance who pay the full retail price.

Is our federal government indirectly supporting these actions by Mylan executives?  Yes! Federal government policies and tax laws contribute to this unacceptable corporate executive behavior. Corporations receive income tax deductions for corporate executive performance compensation (stock) above $1 million, During the Clinton administration in 1993 this tax provision was approved – in effect subsidizing these exorbitant executive compensation plans when companies are not paying their fair share of taxes, leaving us to pick up the tab.

In addition, Mylan, has purchased the development assets of Abbott Labs overseas and this is able to use a tax inversion (allowing favorable tax treatment for operations in lower tax countries) to move their tax rate on these operations from 25 – 35% to 12 – 15%. It seems if they enjoy this tax break the dollars saved in taxes could go to reducing the price of the drug.

The firm has employed financial engineering to dress up the balance sheet as well.  By using highly leveraged corporate debt used for stock buybacks (they have billions of dollars in debt offerings) these borrowed funds were used to perform the stock buybacks and possible future acquisitions. Instead of using the proceeds of these corporate debt offerings to finance stock buybacks, this money could be used to reduce the price of Epipens.

The Action:

It’s time to take action –

  1. End Stock Buy Backs – corporations are using stock buybacks to manipulate and control their stock price without disclosure. Support Senator Tammy Baldwin’s request for disclosure and enforcement of existing laws and write to the SEC.
  1. Sign the MoveOn.org Petition – they are collecting signatures to be sent to Mylan CEO Heather Bresch
  1. Convince university and foundation endowment administrators to sell their holdings in Mylan shares until the firm ends stock buybacks and reduces the price of the Epipen product.
  1. Establish a list of ‘patient critical’ drugs, monitor their price, when it moves too high, release PR campaigns directed at the offending firms and demand price reductions (along with stock buybacks that are taking money right out of patient pockets).
  1. Write to your senator or congressman to end corporate income tax deductions for executive performance compensation above $1 million, and the foreign tax escape of corporate inversions.

 

 

Stock Buybacks Spike Executive Pay at Expense of Workers & Economy: End Buybacks

Bank Run 1873 Frankfurt_1873

The View:

While CEO pay is at an all-time high at 290 times average worker pay (vs 20 times in the 1950s), CEOs are boosting their stock incentive base pay by offering corporate bonds (increasing corporate debt) to create cash to make stock purchases. By making stock purchases, they can artificially soak up shares in the stock market, manipulating an increase in share price and thus boost their pay.  Corporations are spending $391B year to date ($553B all of 2014) on these stock buyback programs according to Birinyi Associates. Since 2004, corporations have spent $6.9 trillion in stock buybacks and 54 % of their profits over the last decade, according to the Academic Research Industry Network.  Between 2006 and 2014, 500 of the highest paid corporate executives received 76 % of their income from stock based compensation. Finally, stock purchases correlate with the surge of the S & P 500 stocks over the past 7 years since the Great Recession, in analysis by Business Insider. Though, for the past few months stock buybacks have fallen off to 2012 levels, which may mean market share prices will fall without these corporate buying programs propping prices up.

What’s the problem with these buybacks?  First, executives are putting their corporate viability at risk by borrowing at low interest rates to build cash when at the same time over the past 6 quarters S & P 500 companies have seen a decline in earnings by an average of 3.5 %.  As earnings decline combined with debt servicing can cause a future cash flow crunch. Second, they are not spending this cash to make investments in employees, equipment or research and development to increase productivity – which would raise the standard of living and help bring employee pay back into line with the norms prior to the 1980s. Third, this practice is really a form of insider trading (timing not disclosed to average investors) of up to 25 % of daily trading volume. Executives are violating their fiduciary responsibility to shareholders to ensure investments are made for the future viability and growth of the enterprise versus their own financial gain. Fourth, in 1993 the Clinton administration gave companies permission to deduct from corporate taxable income executive pay over $1M if it was linked to corporate performance – stock price.  So, in effect we are all subsidizing corporate executive pay, when we pay our fair share of taxes and corporations do not. Fifth, these buybacks are artificially inflating stock share prices, making it difficult for average investors to know what the real price of stocks should be, and creating a market bubble that will eventually burst.

Let’s end corporate stock buybacks:

  1. Support Senator Tammy Baldwin’s request to SEC Chair Mary Jo  White     to tighten stock repurchases regulations and to gather stock repurchase information from corporations by writing to the SEC.
  1. Work with major university endowment administrators to stop purchasing stock of top stock buyback firms including: Apple, Microsoft, Pfizer, Gilead Sciences, Boeing and others, until they eliminate the stock buyback practice (sign a pledge too).
  1. Identify and develop plans with progressive corporate executives to not perform stock buybacks, and take a pledge not to in the future.
  1. Run a US financial community PR campaign highlighting the successes of non-stock buyback corporations, identify surrogate spokespersons, and run ‘events’ to keep the topic in the mainstream media to shift the public discourse on stock buybacks.

The Story:

Stock buybacks were viewed by the SEC from 1934 to 1982 as stock manipulation and fraud, with a limit of 15 percent of share volume on any given day, and required disclosure when buybacks were made. In 1982, John Shad, SEC Chairman, was previously the vice chairman of EF Hutton, and the first SEC Chair to be named from the industry in 20 years by President Ronald Reagan. Mr. Shad was a major contributor to Mr. Reagan’s New York campaign. Shad removed these stock buyback restrictions allowing CEOs to perform buybacks in secret, with disclosure only in hard to find filings at the end of the each quarter. In that year, the SEC adopted rule 10b-18 which holds corporations harmless from allegations of stock price manipulation due to stock repurchases. Plus, conformance is voluntary and does not require repurchase data reporting! Voluntary reporting was noted by the current SEC Chair Mary Jo White to Senator Tammy Baldwin in a reply to an earlier request for increased policy enforcement of stock purchase regulations.

There is a correlation with stock purchases by corporations and stock market performance.  This chart that appeared in Business Insider shows a correlation that is hard to miss (right click to enlarge image):

Stock buybacks correlate to Stock Market ride

While, it can be argued that stock buyback purchases are not the only factor driving the market (Federal Reserve keeping interest rates near zero is another), certainly to any reasonable observer the pumping of $6 trillion dollars into the stock market since 2004 and 54 % of corporate profits of S & P 500 corporations has to have some impact.

Earnings are fading, at an average of – 3.5% per quarter for the last 6 quarters.  So, where do corporations get the cash to do stock buybacks?  By issuing corporate bonds, which in the month of August have hit a new record high for just the first six days of the month at $70 billion, when an in an average month is $125 billion. Here is a chart on the just the month of August compared to past years ( right click to enlarge image):

Corp bond issuance hit new highs in Aug 16

So after getting the cash they need, CEOs perform stock buybacks and get well compensated for doing so. The pumping up of stock prices to increase executive pay is a standard executive compensation practice, some examples are particularly capricious.  Pfizer CEO, Ian Read between 2011 and 2015 enjoyed $76.8 million in compensation, of which 63 % was in stock shares. During this time Pfizer made $44.7 billion in stock buybacks.  For the same period Pfizer only paid $16 billion in US income taxes. This $44.7 billion is not invested in research, development, cost reductions in operations or employee pay – instead is used for stock price manipulation.  It is not hard to fathom given the magnitude of the miss application of investments that more effective and productive investments would benefit all patients, employees, stockholders and give us lower drug prices!  Plus, the US government would have more tax generated funds if a provision adopted in the Clinton administration in 1993 were eliminated to allow corporations to to deduct from corporate taxable income executive pay over $1M if it was linked to corporate performance (stock price).  Finally, when executives allocate resources that benefit only themselves and a few shark investors, they are acting in violation of their fiduciary responsibility to all shareholders, employees, customers and the public to focus on ensuring the future growth and development of the enterprise.

Some industry observers see the perils of stock buybacks to the stock market and economy.  Ben Silverman, VP of Research at Insider Score, that tracks buybacks says that buybacks mask managements’ inability to grow the business and be innovative thinkers.  Professor William Lazonick, University of Massachusetts, further observes that buybacks have the potential to push the economy into a recession, as companies are using stock buybacks to boost share prices instead of investing in their business for future stability and long term growth.

What should be done about stock buybacks by corporations?  Professor William Lazonick, recommends that we recognize that the ‘safe harbor’ provision 10b-18 is really a shelter for stock manipulation.  He suggests the provision be repealed.  Agreed.  Let’s take stock price manipulation by corporate executives out of the markets so we can have a fair stock market setting prices on real demand and supply, rather than price set by corporate manipulation. Since July of 2015, Senator Tammy Baldwin has been working on this issue with SEC Chair Mary Jo White.

The Action:

  1. Support Senator Tammy Baldwin’s request to SEC Chair Mary Jo  White     to tighten stock repurchases regulations and to gather stock repurchase information from corporations by writing to the SEC.
  1. Work with major university endowment administrators to stop purchasing stock of top stock buyback firms including: Apple, Microsoft, Pfizer, Gilead Sciences, Boeing and others, until they eliminate the stock buyback practice (sign a pledge too).
  1. Identify and develop plans with progressive corporate executives to not perform stock buybacks, and take a pledge not to in the future.
  1. Run a US financial community PR campaign highlighting the successes of non-stock buyback corporations, identify surrogate spokespersons, and run ‘events’ to keep the topic in the mainstream media to shift the public discourse on stock buybacks.

 

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