Profitable Charity

Fund manager, Monish Prabai, runs a charity for highly intelligent, but poor, kids in India. He pays for coaching for the entrance-exam of the Indian Institute of Technology (IIT).

The IIT entrance-exam is extremely competitive (GRE on steroids) . About 250,000 kids apply for about 4,000 openings. Basically, if you're not in the 98 percentile of applicants, you won't get in. Also, it's safe to assume that applicants have above-median school-grades compared to those who don't apply.

An IIT kid can go on to a well-paying career. With this charity, a successful kid who could not afford $5,000 up front, will probably end up going abroad and earning $100,000 a year.

But, there's a twist to this giving ...

Prabai asks the kids to promise that, if they are admitted to an IIT, they will donate 10% of all their future income back to his charity! It's not an enforceable contract... more of a gentleman's agreement. Nevertheless, assume the kid is honest and sticks to the deal. I calculate that -- effectively -- the kid is getting a loan with a rate of interest over 20%. That's high if one has friends and family who can help instead. Otherwise, that's not too bad a rate for a personal loan to a poor family with no collateral, in India. Also, a few of these kids will probably end up as rich entrepreneurs, paying back a huge return on Prabai's initial outlay.

If one digs deep, the real problem is not the kid's poverty. The real problem is the poor enforcement of property rights. In India's legal system, a bank would find it difficult to have a similar loan repaid. Further, the law might consider such an interest rate "usurious". (Aside: Things are changing for the better though.)

Given that background, I think Prabai has chosen a smart approach to charity.

(Ref. : http://www.gurufocus.com/news.php?id=10005 )

Heroes and Mentors

I love reading about heroes, and I admire people who are hero-worshippers. Warren Buffet writes about his college days (the first line made me think of Roark seeking out Cameron):

I attended Columbia University's business school in 1950-51, not because I cared about the degree it offered, but because I wanted to study under Ben Graham, then teaching there. The time I spent in Ben's classes was a personal high, and quickly induced me to learn all I could about my hero. I turned first to Who's Who in America, finding there, among other things, that Ben was Chairman of Government Employees Insurance Company, to me an unknown company in an unfamiliar industry.

A librarian next referred me to Best's Fire and Casualty insurance manual, where I learned that GEICO was based in Washington, DC. So on a Saturday in January, 1951, I took the train to Washington and headed for GEICO's downtown headquarters. To my dismay, the building was closed, but I pounded on the door until a custodian appeared. I asked this puzzled fellow if there was anyone in the office I could talk to, and he said he'd seen one man working on the sixth floor.

And thus I met Lorimer Davidson, Assistant to the President, who was later to become CEO. Though my only credentials were that I was a student of Graham's, "Davy" graciously spent four hours or so showering me with both kindness and instruction. No one has ever received a better half-day course in how the insurance industry functions nor in the factors that enable one company to excel over others.

... ... Davy has been one of my heroes for the 45 years I've known him, and he's never let me down. You should understand that Berkshire would not be where it is today if Davy had not been so generous with his time on a cold Saturday in 1951..

Of course Berkshire would be here regardless of Davy... Buffett is too goal-directed for that, and is just "being humble". Still, I love the way he admires the good.

Swinburne's Dolores

Swinburne poems are simply a delight to read, for the poems themselves, and in admiration of the poet's craftsmanship. They must be read out loud.

Check out his poem titled "Dolores".

Swinburne contemplates love and lust -- actually, mainly lust. To put it in Objectivist terms, he explores the positives of the "body" side of that mind-body duality. The poem reads like a hymn to lust and bodily pleasure. While worshipping Dolores, the courtesan, Swinburne labels her "Our Lady of Pain", possibly seeing that she is only half the story. Yet, he knows she's important and complains about the Platonic Christian ethic that has sought to ban her, asking "What ailed us, O gods, to desert you ... For creeds that refuse and restrain"

Here are selected portions:

Cold eyelids that hide like a jewel
Hard eyes that grow soft for an hour;
The heavy white limbs, and the cruel
Red mouth like a venomous flower;
When these are gone by with their glories,
What shall rest of thee then, what remain,
O mystic and sombre Dolores,
Our Lady of Pain?
... ... ...
There are sins it may be to discover,
There are deeds it may be to delight.
What new work wilt thou find for thy lover,
What new passions for daytime or night?
What spells that they know not a word of
Whose lives are as leaves overblown?
What tortures undreamt of, unheard of,
Unwritten, unknown? .
.. ... ...
Hast thou told all thy secrets the last time,
And bared all thy beauties to one?
Ah, where shall we go then for pastime,
If the worst that can be has been done?
...
... ... ...
In a twilight where virtues are vices,
In thy chapels, unknown of the sun,
To a tune that enthralls and entices,
They were wed, and the twain were as one.
For the tune from thine altar hath sounded
Since God bade the world's work begin,
And the fume of thine incense abounded,
To sweeten the sin.
... ... ...
Thou shalt bind his bright eyes though he wrestle,
Thou shalt chain his light limbs though he strive;
In his lips all thy serpents shall nestle,
In his hands all thy cruelties thrive.
In the daytime thy voice shall go through him,
In his dreams he shall feel thee and ache;
Thou shalt kindle by night and subdue him
Asleep and awake
.... ... ...
They shall pass and their places be taken,
The gods and the priests that are pure,
They shall pass, and shalt thou not be shaken?
They shall perish, and shalt thou endure?
... ... ...
We shall see whether hell be not heaven,
Find out whether tares be not grain,
And the joys of the seventy times seven,
Our Lady of Pain.

Private Healthcare in the US

Even though private employees are typically covered by private insurance, the key governmental interference here has been has been in allowing employer-paid health premiums to be excluded from personal income tax. While the health system is excellent, this has caused costs to rise.

Administrative costs: It has created a system where health insurance is not insurance alone. Instead, it is a complicated third-party administered bureaucracy. Consider the small and routine expenses, like a few doctors visits and drugs every year. The equivalent would be if your auto-insurance company paid for oil-changes, new tires, tire-rotation, and so on. What ends up happening is that a huge bureaucracy is created to administer and control these routine expenses: "sorry Mr. Nerd, we're denying your oil-change reimbursement because it was only due a week from today".

No cost-control incentive: In this type of system, the individual has little incentive to save. Since, the premiums cover all the routine expenses, this works like a buffet: you've paid, now it's all-you-can-eat. If your tires will last another month, but insurance will pay for new ones today, you have a string incentive to get new tires.

Pre-tax allows one to spend more: Spending pre-tax dollars costs employees less, so -- ceteris paribus -- they spend more on the tax-favored items. Imagine a system where the government allowed employee-cars and their maintenance to be a pre-tax perk. Clearly, in such a situation, the money spent on cars and their maintenance would rise because when you're spending pre-tax dollars, things are that much cheaper. This does not happen directly, because companies make the decision. However, if companies gave people the cash that they now spend on health care, and let the employees decide, chance are that employees will -- on average -- choose cheaper plans with less bells and whistles.

Egalitarianism: Most companies offer fairly uniform plan-options to all covered employees. Some bottom-heavy ones, like Wal*Mart, cannot afford to do so, and I'm not sure how far the tax-rules enforce the egalitarianism. [I know that in 401-K plans, the egalitarianism is enforced by law.] The tendency is for companies to offer plans that have more coverage than an employee would rationally buy, if buying individually. The whole ideology that has been bought by the public is that health-costs are something that people should share For instance, when one has a baby, the costs start around $10,000 and go up from there. The base (say $10,000) cannot be thought of as insurance. It was not something unexpected at all. So, the unmarried guy in one cubicle pays part of the cost for the three babies of the married guy in the next. It's a little bit of Starnesville.

HMOs etc: HMOs have got pretty bad press, but they arose as an attempt to reduce costs, while keeping the bad principles of egalitarianism unchanged. Taking the auto-example, it's as if the insurance company opened their own auto-repair shops and would do repairs there, and at their discretion. The problem is that while the previous system had incentives for individuals to spend more, the HMO-type system had just the opposite incentive: for HMOs to provide as little care as they needed to. [Both these incentive operate "on the margin", but that's detail I'm leaving out.]

Lower provider incentives: The "third-party administered" situation also reduces incentives for good doctors. Imagine a private system where there are two doctors: one charges $50 for an office visit and is very slap-dash; patients often have to wait because he overbooks time-slots, his office is a little out of the way. Another doctor charges $70 for an office visit, but he does not overbook, he spends more time exploring things a patient may have forgotten to mention, and so on. In a nutshell, the second doctors is somehow giving some type of extra value to his patients. Now, in a third-party system, the insurance company will not pay a different rate to the second doctor. (Today, some are trying to add some measures of quality... but it's still a small component, and it's some third-party judging the quality.) So, the "good" doctor has to accept the $50 insurance payment. The "good" doctor has one less economic incentive to deliver higher-quality service. Many doctors stayed out of HMOs -- in my experience, the HMOs have the worse doctors. Some confident ones have still stayed out of the PPOs, because they have loyal patients who will pay them over and above what the insurance pays. However, the HMO/PPO system is becoming more pervasive and the economic incentives do not favor such doctors.

Summary: The key change the government needs to make in private healthcare is to give exactly equivalent tax-treatment to employee health-care costs paid for by the employer, as it does to those paid for directly by individuals.

Other problems: There are other problems to the current U.S. system. A quick survey:

* The huge spending on Medicaid/Medicare
* Litigation rules, that raise costs
* FDA rules and drug-effect litigation that withhold options and raise costs
* Licensing rules that disallow cheaper treatment options
* Immigration rules that prevent many doctors from coming to the U.S.

Super-summary: Every problem with U.S. healthcare can be traced back to government controls.