Dean Baker/Max Moran/CEPR: Google Is Like Facebook — But a Lot Smarter [feedly]

Interesting article by Dean Baker 's CEPR on lawsuits targeting the tech giants (or not, depending on political savvy).

Clearly, the emergence of the social media and search giants, and Amazon, raise serious challenges about the meaning of privacy, and of property itself, especially as regards "information" and ideas. Currently there is no way to guarantee the security of either on the Internet. And yet, information infrastructures have penetrated vast domains of human and social activity. Going online means your info is now in the possession, ff not yet technically 'owned', by owners of any network nodes or pipes through which the information was transported, including connected origin and destination. Recall the old law school maxim: Possession in 9/10 of the law.

The problems are obvious, and by no means new (although the scale keeps getting vaster). But the fix is not obvious. One difficulty is economic and the fundamental theory of what constitutes a commodity. Marx spent most of a volume of capital on this. Paul Samuelson (a century later) reduced it to a couple rules defining what was NOT a commodity, but instead a "public good". Knowledge is a perfect example of a (inherently) public good. (https://en.wikipedia.org/wiki/Public_good).

For information to be traded as a commodity in a marketplace requires tremendous and complex public (legal) protection, which is only marginally enforceable. Plus, information is a crappy, leaky store of value. Imagine you are a loan officer at a bank and Bill Gates approaches you for a loan, a big one. You ask, what collateral do you have. He puts a compact terabyte hard drive containing a 100 million lines of computer code for Microsoft Windows on your desk. Do you risk the banks money (belonging to other depositors) with that backing? Who else has the same kind of loaded device? or can create new ones at nearly zero cost? If the collateral is accepted, at what premium interest rate do you charge given the discounted value of the collateral? Compare that to land, real estate, a gold mine, etc.

Despite its inherent weakness as a commodity corporations have dived into it as if driven by necessity more than desire only to discover that their business models based on selling copyrighted software were not sustainable. They began transforming themselves into service companies, leaving the property rights associated with the information itself in limbo and clear as mud.

Then comes AI whose value raises accuracy and scope in prediction and automation by orders of magnitude, but which is powered by HUGE data stores. Those stores are being filled at massive rates as the Internet of Things added to the Internets of people and businesses and governments both profit and non profit expand and yield unimaginable concentrations of data. I doubt that breaking up these enterprises under antitrust law will work. I tend to favor changes in governance at the director level and the inclusion of both employee and public voices and access to private decision-making on issues that can result in immense and unsupportable public risks.

  

Dean Baker: Google Is Like Facebook — But a Lot Smarter
http://cepr.net/publications/op-eds-columns/google-is-like-facebook-but-a-lot-smarter

Max Moran
The American Prospect, September 10, 2019

See article on original site

Big Tech is facing an overdue crisis, but not all Big Tech companies are created equal. It's useful to compare and contrast two of the biggest players at the center of these investigations: Facebook and Google.

Both have received constant negative press for the last few years, ranging from the stories on the Cambridge Analytica bombshell to Google's non-stop internal chaos. Both received slaps on the wrist from the Federal Trade Commission, but both are now facing federal and state-level antitrust investigations.

Yet only one has become a full-blown bad guy to the Democratic party. In July, Ohio Senator Sherrod Brown declared that "Facebook is dangerous" when Congress rightly came down hard on its proposed cryptocurrency, Libra. Two weeks later, however, former President Barack Obama happily cavorted at a Google conference in Sicily. The Google-Obama romance is nothing new—he granted the company famously easy access to his White House—and there have been no audible Democratic criticisms of this latest Obama-Google shoulder-rubbing.

Why the double standard? Facebook and Google have similar, icky business models—mass online surveillance for the sake of advertising. Google has repeatedly, strategically, transgressed some of progressivism's cherished values: opposing war, worker's rights, free speech, free assembly, and more. Silicon Valley earned progressives' good graces for being early supporters of LGBTQ rights, yet YouTube—the same Google subsidiary at the center of the recent FTC settlement over illegally gathering data on children—faced biting criticism in June for inaction against homophobia on the platform.

Perhaps Google simply offers more valuable services than Facebook does. I am writing this essay in Google Docs right now, and hope that it performs well in Google Search results. But the company's dominance across multiple tech sub-sectors, to the point where its own name is a verb, ought to draw more scrutiny from lawmakers, not less.

Indeed, Democrats are rediscovering the power of anti-monopoly politics in no small part due to Google's own actions. When the company pressured the think tank New America to squash its nascent Open Markets unit, that small group of thinkers went independent and doubled down on their critique of Big Tech. They're now the most prominent voices in Washington calling for a new age of antitrust. 

But Open Markets' turbulent path is also indicative of why many Democratic institutions still seem fine with Google. The company is a steady backer of some of the most prominent liberal think tanks in Washington, from New America ($1,000,000+ per year) to the Center for American Progress ($50,000 to $99,999 per year), to the Brookings Institution ($100,000 to $249,999 so far this year).

Google executives have also made direct overtures to elites within the Democratic party establishment for years. Eric Schmidt, then-chairman of Google's parent company Alphabet, was such a major player in the Hillary Clinton campaign that he wore a "staff" badge to her would-be victory party in November 2016. He also turned a good profit off of the campaign, through his startup The Groundwork, which was Clinton's top tech vendor. (It's unclear whether any 2020 presidential candidates are currently using The Groundwork.) Clinton's Chief Technology Officer was a former Google executive. And to get the party's archaic data infrastructure up to par for 2020, the Democrats are naturally turning to Google's analytics tools.

Notice how none of these examples concern or reflect Google's lobbying or campaign contributions, the most commonly-cited metrics for influence in Washington. Sure, Google hires plenty of lobbyists and doles out plenty of campaign money. But where Google outshines Facebook is in its wielding of soft money and soft power—tools which aren't designed to directly coerce a lawmaker, but rather, to build that lawmaker's fondness for the company as a whole. Not a single writer or intellectual threw their weight behind Libra to provide Facebook with some cover on Capitol Hill. But Google has a whole network of allies it can draw on in academia and beyond. And all of those favors for the Democratic establishment over the years add up.

It's time that the public, and certainly Democratic elected officials, came to grips with the truth: Google isn't your friend. It isn't your research assistant. It isn't a bunch of quirky nerds tinkering in their dad's basement to create some techno-utopia. It's a multinational for-profit company, and it will fight hard to protect and build its profits, no matter what.

Democrats, if you're reading, here's a shot of reality: Google doesn't just donate to think tanks on the center-left of the political spectrum. It also funds libertarian and right-wing institutions like the American Enterprise Institute, the Cato Institute, and the Heritage Foundation. It's working more and more closely with the Koch network, which has taken a special interest in the new antitrust movement around Big Tech. (Koch Industries, after all, has its fingers in a lot of different economic sectors. Charles Koch's son Chase, the heir-apparent of the corporation, is also tiptoeing into Silicon Valley's venture capital game.)

You can see Google returning the favor in its donation disclosures, which reveal cash flowing to George Mason University, the Kochs' favorite breeding ground for libertarian ideology. Google has been a GMU donor since at least 2011. GMU also hosts an institute which evangelizes weak antitrust enforcement to foreign countries. It is run by Joshua Wright, a former FTC commissioner who has taken plenty of Google money to fund four of his own papers defending Google on antitrust issues.

Google also has ties to the top tech-focused think tanks. It gave at least $200,000 to the Center for Democracy and Technology last year, which has proposed a data privacy bill far feebler than the Californian law that Google is scrambling to weaken. It lists the Information Technology and Innovation Foundation as another funding recipient, but since that think tank doesn't disclose its donors, we don't know the size of the checks. Regardless, ITIF regularly publishes reports like "The Misguided 'Case Against Google'" or "The Costs of an Unnecessarily Stringent Federal Data Privacy Law," whose sourcing has been mocked by tech policy experts.

All of this—the academics, the think tanks, the work for Democratic campaigns—contributes to a strong ecosystem of Google defenders in Washington, and a strong Democratic inclination against acting too harshly. It's uncomfortable to bring the hammer down on a company which, objectively, did a lot to help them during the last administration.

But times have changed. The growing progressive base of the Democratic party needs to know that old friendships, elite cocktail parties, and the proverbial smoke-filled rooms which Google has so masterfully maneuvered won't prevent Democrats from doing what needs to be done: curbing this modern-day titan's abuses. If they don't, then we're likely to get the future Google is building: one with weak settlements when it violates the law, leaked data, and an even more broken political economy.

 -- via my feedly newsfeed

Jared Bernstein: Payrolls slow and the trade war is hurting manufacturing. But underlying job market still solid. [feedly]

Payrolls slow and the trade war is hurting manufacturing. But underlying job market still solid.
http://jaredbernsteinblog.com/payrolls-slow-and-the-trade-war-is-hurting-manufacturing-but-underlying-job-market-still-solid/

Payrolls rose by 130,000 last month and the unemployment rate held at 3.7 percent, close to a 50-year low and the same level as the past 3 months. Still, job growth is cooling (25,000 of this month's gains were temporary decennial Census workers), as the pace of monthly gains, while still strong enough to support low unemployment, has slowed. Wage growth also stayed parked at about where it has been in recent months, and there's some evidence that the trade war is taking a toll on factory jobs. However, the job market remains strong, real wages are growing, and consumer spending will continue to be supported by these dynamics.

The slowdown in payrolls

To get a clearer take on the underlying trend in job growth, our monthly smoother shows the average monthly gain over 3, 6, and 12-month periods. This month, however, we add an extra bar to our usual smoother, as we believe it is important to begin to incorporate a recent BLS revision, based on more accurate jobs data, into our assessment of the US job market. This preliminary benchmark revision estimates that employers added 500,000 fewer jobs to US payrolls between April of 2018 and March of 2019 (BLS will officially wedge their final estimate into the payroll data by Feb 2020). The second bar includes the result of this revision, showing that over the past year, payroll growth was likely closer to 150K per month than 175K per month.

To be sure, this is still solid payroll growth at this stage of the expansion and as noted below, in tandem with real wage growth, it's strong enough job growth to support the recovery and keep unemployment around where it is. However, using the preliminary revised data, the pace of payroll gains has slowed from 1.6% last year to 1.3% this year. Clearly, that's not a big deceleration, and it's also not unexpected in a job market closing in on full employment. But it is a slower trend which I expect to persist.

The trade war

The trade war that the Trump administration has been waging is clearly taking a toll on the global economy. While its impact is greater in countries more exposed to trade, like Germany, than the US, our manufacturers have been hit by these new taxes (tariffs) on their imported inputs and by retaliatory tariffs on their exports. To what extent is this showing up in factory employment, hours, and wages?

Manufacturing employment has slowed since the Trump administration began ramping up tariffs at the beginning of last year. Last month, factory jobs rose just 3K and durable manufacturing employment was unchanged. Thus far this year, the factory sector has added 5.5K jobs per month on average, compared to 22K for all of last year.

The product of manufacturing employment and weekly hours yields the aggregate hour index for the sector, a very good proxy for labor demand. The next figure looks at the year-over-year change in this index for blue collar and for all manufacturing workers. Starting about a year ago, a clear deceleration is evident, and for the non-managers—who comprise about 70 percent of the sector's employment—total hours worked have outright declined in recent months (relative to a year ago).

After slowing in 2018, manufacturing wages for blue-collar workers have picked up pace in recent months and are now growing at about the same rate of other mid-level workers.

In sum, at least in terms of jobs and hours, the trade war is hurting manufacturing workers. I'm sure some will push back that this near-term pain is worth the longer-term gains from a "victory" in the trade war. I find this totally unconvincing, as victory apparently means getting China to be more accommodating to US multinationals. That is, were China to stop insisting on tech transfers, or issue more licenses to our multinationals, we'll get more, not less, offshoring of US jobs.

Wages still stalled

Wage gains are still stalled, though at a level above inflation, so real paychecks are growing on average (see third figure below). The stalling is clear in the 6-months rolling average, and is not particularly surprising as the job market has not particularly tightened further over this period. That is, low unemployment is providing workers with more bargaining clout than they'd have in less tight job markets, but this force appears to be holding steady for now.

Stronger Household Survey

Participation ticked up and the closely watched employment rate for prime-age workers (25-54) hit a cyclical high of 80%, just 0.3 ppts below its 2007 peak. While we can't say much about one month's change, this important measure of core labor market capacity had previously been stalled. If it continues to rise, it will suggest there's still more room-to-run in the job market, and especially given low inflation, a strong rationale for the Federal Reserve to do what they can to extend the run.

Bottom line, the job market will handily support consumer spending in the near term, staving off any recessionary threats from the trade war and the global slowing to which it has contributed. However, payroll gains have slowed somewhat, especially in manufacturing, and, I suspect, in any other sectors with global connections (i.e., tradeable goods and services). We will continue to monitor this and any other fragilities related to the trade war or whatever other unforced policy errors are forthcoming.

 -- via my feedly newsfeed

Jared Bernstein: The 2018 Poverty, Income, and health coverage results: a tale of three forces. [feedly]

The 2018 Poverty, Income, and health coverage results: a tale of three forces.
http://jaredbernsteinblog.com/the-2018-poverty-income-and-health-coverage-results-a-tale-of-three-forces/

This morning, the Census Bureau released new data on health insurance coverage, poverty, and middle-class incomes. While the data are for last year, they shine an important light on key aspects of families' living standards that we don't get from the more up-to-date macro-indicators, like GDP and unemployment.

As the economic recovery that began over a decade ago persisted through 2018, poverty once again fell, by half-a-percentage point, from 12.3 percent to 11.8 percent. Other results from the report show that anti-poverty and income support programs lifted millions of people out of poverty, including 27 million through Social Security alone. Though the real median household income—the income of the household right in the middle of the income scale—increased slightly less than 1 percent last year, the increase was not statistically significant. Median earnings of full-time men and women workers both rose significantly, by over 3 percent for each (for reasons discussed below, sometimes earnings rise significantly but income does not).

Health coverage, however, significantly deteriorated last year, as the share of the uninsured rose for the first time since 2009, from 7.9 percent to 8.5 percent. In total, 27.5 million lacked coverage in 2018, an increase of 1.9 million over 2017. This result is partially driven by actions of the Trump administration to undermine the Affordable Care Act (note that Medicaid coverage was down by 0.7 percentage points), and in this regard, it should be taken as a powerful signal of the impact of conservative policy on U.S. health coverage.

Taken together, the poverty, income, and health coverage results tell a tale of three powerful forces: the strong economy, effective anti-poverty programs, and the Trump administration's ongoing attack on affordable health coverage. A strong labor market is an essential asset for working-age families, and the data are clear that poor people respond to the opportunities associated with a labor market closing in on full employment. Anti-poverty programs are lifting millions of economically vulnerable persons, including seniors and children, out of poverty. But while a strong labor market and a responsive safety net help to solve a lot of problems, the history of both U.S. and other countries shows that it takes national health care policy to ensure families have access to affordable coverage. The ACA was and is playing that role, but efforts to undermine its effectiveness are evident in the Census data.

Poverty, Income, Inequality

The Census provides two measures of poverty: the official poverty measure (OPM) and the Supplement Poverty Measure (SPM). The latter is a more accurate metric as it uses an updated and more realistic income threshold to determine poverty status, and it counts important benefits that the OPM leaves out. While the two measures often track each other, year-to-year, that wasn't the case last year, as the SPM rose an insignificant one-tenth of a percent, from 13.0 to 13.1 percent, while the OPM fell a significant half-a-percent, from 12.3 to 11.8 percent. Because the SPM has a higher income threshold than the OPM, 4.4 million more people were poor by that more accurate measure.

Because it counts anti-poverty policies that the official measure leaves out, one particularly useful characteristic of the SPM data is that it breaks out the millions of people lifted out of poverty by specific anti-poverty programs. For example, refundable tax credits, such as the Earned Income Tax Credit and the Child Tax Credit lifted about 8 million people out of poverty in 2018; SNAP (food stamps) lifted 3 million more out each, and Social Security was the most powerful poverty reducer, lifting 27 million out of poverty in 2018, 18 million of whom were elderly (65 and older).

As noted, median household income, inflation-adjusted, rose less than a percent last year, a statistically insignificant change (meaning a change that is statistically indistinguishable from no change at all). Yet, real median earnings of full-time, full-year workers rose more than 3 percent for both men and women. It is hard to square these results, but they are not that unusual and probably have something to do with the changing composition of households and the fact that the median male worker is different from the median female worker and neither are necessarily in the median household. Note, for example, that family households (basically, two or more related people) and non-family households (people living alone) both rose significantly last year. But when the Census smushes them together, we get an insignificant increase.

I conclude from this and other information in the report, like the fact that the number of full-year workers rose 2.3 million, or the evidence showing real wage gains last year for middle and low-wage worker, that the strong labor market helped to boost family incomes in 2018 (though as I show below, these gains are slowing over time). Another key factor pushing up wage growth at the low end of the pay scale were the minimum wage hikes that occurred in 18 states in 2018, affecting 4.5 million workers, according to EPI.

Here's one way to look at this relationship between labor markets and, in this case, poverty outcomes. It's a scatterplot of unemployment against the change in poverty rates (using the OPM for which we have a long, consistent time series). It shows how low unemployment correlates with declines in the poverty rate and vice-versa. Why? Because able-bodied, poor people respond to tight labor markets, an important fact that pushes back on the alleged need for work requirements.

Sources: Census, BLS

Unfortunately, over the past few decades, labor markets have not consistently provided the job and earnings opportunities that help to support income growth for families in the bottom half of the income scale and longer-term comparisons show real median income not too far above its pre-recession peaks in 2000 and 2007. Moreover, as inequality has increased, we cannot blithely extrapolate from positive macro-indicators, like unemployment and GDP, to indicators like poverty and median income that will often reflect less improvement in periods when growth disproportionately accrues higher up the income and wealth scale. Though these Census data are less comprehensive than some other sources of inequality data, they do show that in 2018, the highest fifth of households held more income (52 percent of it) than the bottom 80 percent. Though, as noted, the survey has changed over the years such that long-term comparisons should be made with care, in 1967, this share was 44 percent, meaning the bottom 80 percent controlled more income than the top fifth. This increase in inequality is solidly confirmed in much other data.

The table below brings the critical dimension of race into the analysis (note: none of the income changes shown for 2018 are statistically significant). Median household income growth was slower in 2018 relative to earlier years, particularly for Hispanic families. Note also how poverty rates for blacks and Hispanics are multiples of those of whites. The scatterplot shows that lower unemployment correlates with lower poverty, and the table shows this effect to be greater for non-whites, who, over this period, experienced larger declines in unemployment accompanied by bigger drops in poverty. For example, over this period both white unemployment and poverty fell about 1 percentage point. For blacks, the comparable declines are 3 points for both variables. Hispanic poverty was down almost 4 percentage points.

Sources: Census, BLS.

Health Coverage

As noted, as soon as the ACA passed, the expansion of Medicaid coverage and premium subsidies through the exchanges quickly reduced the share of people without coverage. The discussion above—the one noting the increase in the uninsured rate—focused on the main national survey featured by the Census today (the ASEC). But due to its many discontinuities, to compare changes over time it is better to use the other survey results released by Census today, from the American Community Survey (ACS).

This figure clearly shows the historical coverage gains made by the ACA, but it also shows those gains fading in 2017 and this year, in 2018 (the 0.2 point increase in the uninsured rate last year is statistically significant).

Source: ACS

In recent years, gridlock, dysfunction, government shutdowns, and the general unwillingness of Congress to deal with our fundamental challenges has led to a justified skepticism of our federal system. But it's worth remembering that not too far back, this system passed and implemented the largest and most consequential change in national health policy since the advent of Medicaid and Medicare in the 1960s. And the results, in terms of increased coverage, were equally dramatic.

This insight makes today's health coverage results extremely concerning, as they reveal the impact of policies to reverse those gains. This attack on affordable coverage, according to my CBPP colleagues, "began on President Trump's first day in office, with an executive order calling on federal agencies to waive and delay ACA provisions "to the maximum extent permitted by law."' They include repealing the individual mandate, anti-immigrant measures that are likely leading immigrants to avoid publicly-provided coverage, cuts in ACA outreach and enrollment assistance, work requirements that hassle people off of the Medicaid rolls, and a wide variety of waivers and eligibility barriers designed to shrink public coverage and shift medical costs onto consumers.

What's it all mean?

The Census report is a tale of three powerful forces. First, the momentum from the strong economy continues to boost work and wages for low- and middle-income people. Second, anti-poverty programs are reliably helping to lift millions out of poverty. Third, such gains can be reversed by policies hostile to them. It is thus extremely worrisome to consider actions the Trump administration is taking to reduce government support of poor households, especially those with immigrants. Such actions include work requirements that ramp-up administrative demand to hassle low-income people off of Medicaid and SNAP; the "public charge" changes that threaten to block legal immigrants from seeking support they and their children need, changes in poverty measurement designed to make it look like fewer people are poor (and thus reduce their eligibility for assistance), and changes to nutritional support also designed to kick currently eligible persons off the roles.

The economy and complementary work supports are helping many low- and moderate income get ahead. Significant gaps persist, especially with regard to race. But the underlying trends of poverty and income have been favorable. Health coverage tells a different story and we must be vigilant not to let these same political forces do to anti-poverty programs what they're doing to health programs.

 -- via my feedly newsfeed

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Is Stakeholder Capitalism Really Back? [feedly]

I post this not so much to ask the sincerity of the Biz Roundtable, but to note major progressive economists (like Stiglitz) strong interest in reforms in corporate governance over nationalizations or takeovers, or even antitrust action, in several economic sectors, esp, too big to fail firms.

Is Stakeholder Capitalism Really Back?
https://www.project-syndicate.org/commentary/how-sincere-is-business-roundtable-embrace-of-stakeholder-capitalism-by-joseph-e-stiglitz-2019-08

We will have to wait and see whether the US Business Roundtable's recent statement renouncing corporate governance based on shareholder primacy is merely a publicity stunt. If America's most powerful CEOs really mean what they say, they will support sweeping legislative reforms.

NEW YORK – For four decades, the prevailing doctrine in the United States has been that corporations should maximize shareholder value – meaning profits and share prices – here and now, come what may, regardless of the consequences to workers, customers, suppliers, and communities. So the statement endorsing stakeholder capitalism, signed earlier this month by virtually all the members of the US Business Roundtable, has caused quite a stir. After all, these are the CEOs of America's most powerful corporations, telling Americans and the world that business is about more than the bottom line. That is quite an about-face. Or is it?

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The free-market ideologue and Nobel laureate economist Milton Friedman was influential not only in spreading the doctrine of shareholder primacy, but also in getting it written into US legislation. He went so far as to say, "there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits."

The irony was that shortly after Friedman promulgated these ideas, and around the time they were popularized and then enshrined in corporate governance laws – as if they were based on sound economic theory – Sandy Grossman and I, in a series of papers in the late 1970s, showed that shareholder capitalism did not maximize societal welfare.

This is obviously true when there are important externalities such as climate change, or when corporations poison the air we breathe or the water we drink. And it is obviously true when they push unhealthy products like sugary drinks that contribute to childhood obesity, or painkillers that unleash an opioid crisis, or when they exploit the unwary and vulnerable, like Trump University and so many other American for-profit higher education institutions. And it is true when they profit by exercising market power, as many banks and technology companies do.

But it is even true more generally: the market can drive firms to be shortsighted and make insufficient investments in their workers and communities. So it is a relief that corporate leaders, who are supposed to have penetrating insight into the functioning of the economy, have finally seen the light and caught up with modern economics, even if it took them some 40 years to do so.

But do these corporate leaders really mean what they say, or is their statement just a rhetorical gesture in the face of a popular backlash against widespread misbehavior? There are reasons to believe that they are being more than a little disingenuous.

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The first responsibility of corporations is to pay their taxes, yet among the signatories of the new corporate vision are the country's leading tax avoiders, including Apple, which, according to all accounts, continues to use tax havens like Jersey. Others supported US President Donald Trump's 2017 tax bill, which slashes taxes for corporations and billionaires, but, when fully implemented, will raise taxes on most middle-class households and lead to millions more losing their health insurance. (This in a country with the highest level of inequality, the worst health-care outcomes, and the lowest life expectancy among major developed economies.) And while these business leaders championed the claim that the tax cuts would lead to more investment and higher wages, workers have received only a pittance. Most of the money has been used not for investment, but for share buybacks, which served merely to line the pockets of shareholders and the CEOs with stock-incentive schemes.

A genuine sense of broader responsibility would lead corporate leaders to welcome stronger regulations to protect the environment and enhance the health and safety of their employees. And a few auto companies (Honda, Ford, BMW, and Volkswagen) have done so, endorsing stronger regulations than those the Trump administration wants, as the president works to undo former President Barack Obama's environmental legacy. There are even soft-drink company executives who appear to feel bad about their role in childhood obesity, which they know often leads to diabetes.

But while many CEOs may want to do the right thing (or have family and friends who do), they know they have competitors who don't. There must be a level playing field, ensuring that firms with a conscience aren't undermined by those that don't. That's why many corporations want regulations against bribery, as well as rules protecting the environment and workplace health and safety.

Unfortunately, many of the mega-banks, whose irresponsible behavior brought on the 2008 global financial crisis, are not among them. No sooner was the ink dry on the 2010 Dodd-Frank financial reform legislation, which tightened regulations to make a recurrence of the crisis less likely, than the banks set to work to repeal key provisions. Among them was JPMorgan Chase, whose CEO is Jamie Dimon, the current president of the Business Roundtable. Not surprisingly, given America's money-driven politics, banks have had considerable success. And a decade after the crisis, some banks are still fighting lawsuits brought by those who were harmed by their irresponsible and fraudulent behavior. Their deep pockets, they hope, will enable them to outlast the claimants.

The new stance of America's most powerful CEOs is, of course, welcome. But we will have to wait and see whether it's another publicity stunt, or whether they really mean what they say. In the meantime, we need legislative reform. Friedman's thinking not only handed greedy CEOs a perfect excuse for doing what they wanted to do all along, but also led to corporate-governance laws that embedded shareholder capitalism in America's legal framework and that of many other countries. That must change, so that corporations are not just allowed but actually required to consider the effects of their behavior on other stakeholders.

JOSEPH E. STIGLITZ

Writing for PS since 2001 
264 Commentaries

Joseph E. Stiglitz, a Nobel laureate in economics, is University Professor at Columbia University and Chief Economist at the Roosevelt Institute. He is the author, most recently, of People, Power, and Profits: Progressive Capitalism for an Age of Discontent (W.W. Norton and Allen Lane).

 -- via my feedly newsfeed

Private Equity Tries to Protect Another Profit Center [feedly]

Private Equity Tries to Protect Another Profit Center
https://prospect.org/article/private-equity-tries-protect-another-profit-center

Eileen Appelbaum and Rosemary Batt
The American Prospect, September 9, 2016

See article on original site

Surprise medical billing has quickly become a small but critical flashpoint in health care reform. Because doctors and hospitals negotiate separately with insurance companies over reimbursement rates, it's possible for a patient's insurance to cover hospital charges while failing to cover the fees of some doctors in the hospital who are "out of network." Patients who visit an emergency room (ER) or are admitted to an in-network hospital by an in-network doctor may find that some of the professionals who treat them are not covered by their insurance. That is because hospitals have outsourced ER, anesthesiology, radiology, or other specialized services to outside physician practices or staffing firms. Patients often find themselves on the hook for thousands, or even tens of thousands of dollars in surprise medical bills.

Twenty-five states have passed laws with limited protection for patients from out-of-network bills, usually for emergency room or urgent-care services; 20 more states are considering legislation. But these laws do not cover self-insured employer plans, which can only be regulated by the federal government. These plans cover an estimated 61 percent of workerswho have private insurance, up from 44 percent 20 years ago. That means Congress must step in to protect insured patients from unfair and unexpected medical charges.

And that puts lawmakers up against the powerful and influential private equity industry, which plays a major role in supplying hospitals with physicians. They have aggressively bought up large national staffing firms or "physician practice management" (PPM) companies, as well as emergency providers that hospitals and other health organizations have outsourced, such as ground and air ambulance companies. And they are using the typical tools to protect their investments from a legislative onslaught: lobbying cash, dark-money front groups, and allies in Congress pushing loopholes and half measures.

The Role of Private Equity: Driving Market Concentration

Private equity funds use substantial debt to acquire doctors' practices through leveraged buyouts, and to finance mergers of practices into large staffing firms. Emergency medical and specialist practices are a prime buyout target, because patients who need emergency care cannot haggle over price, and third-party payers guarantee payment. This satisfies the private equity business model of promising "outsized returns" to investors.

Private equity firms buy up small specialty physician practices that have begun to consolidate and "roll them up" into umbrella organizations to gain local, regional, and ultimately national market power. Researchers at the Kellogg School of Management found that most individual acquisitions were below the dollar threshold that would have required the transaction to be reported to antitrust regulators.

The new private equity–owned companies evade state laws that prohibit nonmedical ownership of doctors' practices by setting up "physician management" or "management services" organizations, in which the physician group retains ownership of the practice itself and pays a fee to the private equity firm that owns the management company. But while doctors maintain autonomy over medical decisions, they also admit they are likely to be pressured to achieve higher patient volumes and revenues. They also give up any say over other management practices, such as the company's billing practices.

In a typical contract, physicians receive a large up-front cash payment, which is calculated based on a multiple of the group's EBITDA (earnings before interest, taxes, depreciation, and amortization)—with recent contracts reaching 12 times EBITDA. In addition, the doctors pay for an equity investment in the company by taking a large salary cut—up to 30 percent of their compensation. The payoff for the physicians is a "liquidity event" a few years later, with large payouts to the investors, including the doctors. The deal is particularly attractive to senior doctors who are nearing retirement, although that leaves the more junior doctors saddled with lower pay and greater uncertainty.

The Biggest in the Business

Private equity firms have accelerated buyouts of physician practices in the last decade. Leaders in this market include mega-PE companies Kohlberg Kravis Roberts (KKR) and the Blackstone Group, which own the two largest physician staffing firms in the country, Envision Healthcare and TeamHealth. These two firms have cornered 30 percent of the market for outsourced doctors, and collectively employ almost 80,000 health care professionals that staff hospitals and other facilities across the U.S.

Envision Healthcare, formed in 2005, went private in October 2018 in a leveraged buyout to KKR. Its sprawling organization supplies doctors in 774 physician practices to hospitals and ambulatory surgical centers throughout the United States. Its emergency physician staffing company, EmCare Holdings, provides ER doctors, anesthesiologists, radiologists, hospitalists, and other specialists covering intensive care, medical, neonatal, pediatrics, psychiatric, skilled nursing, rehabilitation, and other inpatient units. Its outpatient ambulatory surgical arm (AMSURG) provides trauma and acute care general surgery in 260 facilities in 35 states.

TeamHealth was established in 1999 by a consortium of private equity firms as a platform for a physician staffing company. The Blackstone Group acquired it in 2005 in a leveraged (secondary) buyout. Blackstone returned TeamHealth to the public market in 2009 via an IPO, but then took it private again for $6.1 billion in February 2017. With passage of the Affordable Care Act in 2010, TeamHealth anticipated revenue growth via bundled payments and started buying up a series of ER and physician specialist practices—51 companies between 2010 and 2016. It also bought IPC, a hospital management services company, allowing it to diversify across a wider range of care areas.

Two of the three air transport companies that together control two-thirds of this U.S. market are private equity–owned—Air Medical Group Holdings (AMGH) and Air Methods. KKR owns AMGH, a leading operator of medical helicopters, and merged it in 2017 with American Medical Response, the largest provider of ground ambulance services in the U.S. Air Methods, sold in 2017 to private equity firm American Securities, reported that it accounts for nearly 30 percent of total U.S. air ambulance revenue. Its profit increased sevenfold from 2004 to 2014.

Our recent paper at the Institute for New Economic Thinking goes into more detail on these companies.

How Private Equity Drives Surprise Billing

Surprise billing has increased substantially because hospitals, under financial pressure to reduce overall costs, have turned to outsourcing expensive and critical services to third-party providers as a cost-reduction strategy. In an April 2019 survey, 41 percent of Americans reported they or a family member received an unexpected medical bill, with half of them attributing that bill to out-of-network charges.

Rates of surprise billing are highest among patients treated in an emergency room. In a review of 12.6 million ER visits by insured patients between 2010 and 2016, Stanford University researchers found that by 2016, 42.8 percent of all ER trips resulted in a surprise medical bill.

A team of Yale University health economists examined what happened when private equity–owned companies EmCare (part of Envision) and TeamHealth—the two largest emergency room outsourcing companies—took over the emergency departments at hospitals. An EmCare takeover translated into an 82 percent increase in charges for caring for patients. EmCare's egregious surprise medical billing practices have resulted in a congressional investigation headed by former Missouri Senator Claire McCaskill, lawsuits from shareholders, and court actions involving Envision and UnitedHealth Group, the largest U.S. insurer.

Blackstone's TeamHealth has taken a different approach to billing that has nonetheless led to higher physician charges. It uses the threat of sending high out-of-network surprise bills for ER doctors' services to an insurance company's covered patients to gain high fees from the insurance companies as in-network doctors. TeamHealth emergency physicians typically would go out of network for a few months, then rejoin the network after bargaining for higher in-network payment rates—on average 68 percent higher than in-network rates received by the previous ER doctors. These practices contribute to higher health care costs—and ultimately higher insurance premiums for everyone—even if they do not directly lead to surprise medical bills. UnitedHealth, the nation's largest insurance company, is pushing back on this by reducing TeamHealth's higher in-network reimbursements by up to 50 percent.

Patients in a hospital may encounter out-of-network physicians among ER doctors, specialties such as radiologists and anesthesiologists, assistants to a procedure, or hospitalists who check in on a patient. In a case that drew media attention, the patient's own in-network surgeon billed $133,000 for his services, but accepted a fee of $6,200 negotiated with the insurance company. The out-of-network assistant surgeon, however, sent a bill for $117,000 and is seeking full payment of his charges.

Surprise ambulance bills are even more common, occurring 86 percent of the time when an ambulance took a patient to the ER. A patient in an emergency situation who requires an ambulance to get medical help doesn't get to choose the ambulance company. The result is another perfect opportunity for surprise medical bills, and a perfect target for unscrupulous investment funds.

In one study of air ambulance charges, Johns Hopkins University researchers found extremely large rate increases between 2012 and 2016. In 2016, these charges ranged from four to nine times higher than Medicare payments for air ambulance services. Some of the largest providers had among the highest charges. A 2019 study by the Government Accountability Office (GAO) found that the average cost of an air ambulance is over $36,000, and that 69 percent of the companies studied were out of network for the patient, who ended up being billed for most of the charge.

Congress Steps In—and Private Equity Fights Back

More than three-quarters of Americans want the federal government to protect them from surprise medical bills, with 90 percent of Democrats, 75 percent of independents, and 60 percent of Republicans supporting federal legislation. While everyone—physicians, corporate staffing firms, hospitals, insurance companies, and patient advocates—purports to agree that insured patients should not be required to pay more than their plan requires for in-network doctors, questions remain about how proposed solutions will affect doctors' pay, physician staffing firms' revenues and profits, insurance company payouts, health care costs, and patients' premiums.

At the beginning of the summer, it appeared that Congress would act to protect consumers from surprise medical bills, with the introduction in the Senate of the Lower Health Care Costs Act (S. 1895) by the Health, Education, Labor, and Pensions (HELP) Committee, and in the House, the No Surprises Act (H.R. 3630), by the House Energy and Commerce Committee. The main framework for these bills involves paying out-of-network doctors a rate "benchmarked" to rates negotiated with in-network doctors—the median in-network payment for this service or, alternatively, 125 percent of the Medicare payment.

Employers, patient advocates, and insurance companies favor this approach, which restricts how high an out-of-network doctor's fee can go, restrains the growth of health care costs, and limits payouts that insurers can be made to pay. Major insurance companies and associations have formed the Coalition Against Surprise Medical Billing, which includes the American Benefits Council, America's Health Insurance Plans, America's Physician Groups, Blue Cross and Blue Shield, and the ERISA Industry Committee to lobby for benchmarking out-of-network doctors' charges.

Not surprisingly, this solution is opposed by specialist physician practices, and by large physician staffing companies that want to continue to charge more than the in-network fees to patients. These companies, some backed by private equity firms, are lobbying intensively for a second option that would allow doctors to seek a fee higher than the benchmark via an arbitration process—in the belief that most settlements would ensure higher physician pay and higher company revenues and profits. Individual patients would no longer receive surprise medical bills, but arbitration awards would mean higher health care costs and would drive up premiums, deductibles, and co-pays for everyone.

Physicians for Fair Coverage, a private equity–backed group lobbying on behalf of large physician staffing firms, launched a $1.2 million national ad campaign in July to push for this second approach. Their argument is that insurance companies have created the problem of surprise medical bills by "forcing emergency room doctors, radiologists, anesthesiologists and other providers out of their networks." The reality is that hospitals are outsourcing ERs, anesthesiology and radiology departments, and specialized care units to cut costs. Large physician staffing firms have positioned themselves to supply doctors to fill these positions or take over these units altogether.

The opposing camps lobbied for their positions over the summer, as seen in the jockeying over the House Energy and Commerce Committee's No Surprises Act. It was supported by Committee Chair Frank Pallone (D-NJ) and ranking member Greg Walden (R-OR) and would have benchmarked fees paid to out-of-network doctors to the negotiated rates paid to in-network providers. But in July, Representatives Raul Ruiz (D-CA) and Phil Roe (R-TN) introduced the arbitration amendment, amid intense lobbying from large corporate and investor-owned physician staffing firms.

Pallone and Walden accepted the amendment because it allowed arbitration only in special cases, and required the arbitrator to use negotiated rates—not provider charges—when deciding on disputes over payment. Supporters of the original bill were unhappy. As Loren Adler, associate director of the USC-Brookings Schaeffer Initiative for Health Policy, noted, the amendment is a giveaway to private equity interests that will have adverse effects on patients, employers, and taxpayers—even if the arbitration option's limited scope would limit potential harm. As the bills move forward, compromise on including limited use of arbitration panels in the legislation may be necessary in order to win passage.

Wall Street analysts have been closely monitoring these debates, given the substantial debt funding that private equity firms rely on to create large physician staffing firms, such as KKR's Envision Healthcare. Investors fear that any congressional deal that limits what out-of-network doctors are paid will seriously jeopardize Envision's business model, which relies on collecting excessive fees from unsuspecting patients who are hit with surprise medical bills. Envision's creditors are concerned that without the ability to charge these high fees, the company will have difficulty repaying the debt it took on as part of the financing when KKR bought it out for $9.9 billion in 2018. The value of Envision's $5.4 billion loan due in 2025 tumbled to 87.8 cents on the dollar at the end of July 2019 and to 77.3 cents by the end of August. As Envision's creditors are well aware, the company's solvency and KKR's returns are threatened by legislation that protects patients.

By midsummer, an aggressive "dark money" campaign emerged that many believe is intended to derail any legislation. In July and August, Smart Media Group subsidiary Del Cielo Media poured $13 million into TV, social media, and radio ads on behalf of a mystery group, Doctor Patient Unity, in the home districts of 13 Republican and Democratic senators who are up for re-election. The ads oppose any limits on what doctors can charge and accuse insurance companies of not wanting to pay their fair share of doctors' fees.

Congressional staff are concerned that the big-money displays will intimidate legislators who may fear even larger expenditures to unseat them if they support any of the legislative proposals under consideration. This could thwart the passage of consumer protection measures altogether, leaving patients on the hook for large, unexpected medical bills—a continuation of current practices that have enriched PE-backed and other corporate physician staffing and management services firms.

The debate over surprise medical bills has been framed as doctors who only want to be paid for their lifesaving services and insurance companies that don't want to pay them fairly. Viewed that way, it's a debate that insurance companies are sure to lose. But these are not the true protagonists. Private equity firms are buying up specialty doctors' practices at an alarming rate because surprise medical bills allow them to extract high payments for medical care from patients and/or insurance companies. It's private equity whose interests are opposed to those of insurance companies. And insurance companies which, in defending themselves against exorbitant payments to these doctors, are also acting to hold down health care costs and health insurance premiums for consumers.

Now, even as compromise bills appear ready to advance, the question is whether politicians will stand up to the multimillion-dollar dark-money campaign launched in the summer. Will intense negative lobbying scuttle attempts to rein in surprise billing? Patients hit with these bills will be the biggest losers, but everyone will lose as health care costs and insurance premiums rise. Whoever is behind this campaign, private equity firms like Blackstone, KKR, and Welsh, Carson, Anderson & Stowe will be the big winners. PE's role is hidden from view, and the campaign may well succeed in diverting blame for unexpected and outrageous charges to the insurance companies.

 

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Eileen Appelbaum is co-director at the Center for Economic and Policy Research. Rosemary Batt is the Alice Cook Professor Women and Work at Cornell University. They are the co-authors of the book "Private Equity At Work: When Wall Street Manages Main Street," published by the Russell Sage Foundation.  

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