By Paul Zipkin

Here we are in early fall, 2009. It was a fairly calm summer. There were no major financial disasters. The stock market revived somewhat. The economy is still troubled, but compared to the unremittingly awful news during the previous year, it’s been a good time. I believe some credit for this happy turn of events is due to the bank stress tests conducted by the government during the spring.

The tests calculated what would happen over the next couple of years under two scenarios, a base-case scenario and a bad scenario reflecting worse economic conditions. They considered each bank’s entire position, not just standard deposits and loans but also fancy mortgage-backed securities and swaps. The question was, how much capital would each bank need to continue operating normally under the bad scenario?

The method itself is not at all novel. Many businesses, military forces and other organizations do this sort of scenario planning all the time. No one knows exactly what will happen in the future, so it makes sense to simulate several possible futures, to estimate whether the organization’s plans are robust.

But, amazingly, this was the first time the government conducted such a test of our financial system. We do have elaborate financial regulations, but those specify procedures and check whether they have been followed. In other words, they look backwards, not forwards. To look ahead at several plausible scenarios, the exact same ones for all banks, and to include all the banks’ exposures – that was unprecedented. Of course, the inspiration for the stress tests was the sequence of ugly surprises in 2008. Nobody knew how dire the situation was at Lehman and the others until it was too late.

Banks are supposed to do this sort of thing for themselves, of course, but it’s not clear how seriously they take these “risk management” exercises. Anyway, they are not required to use the same methods and certainly not to make the results public.

Before the results were revealed, many observers criticized the tests. The tests were not rigorous enough, the bad scenario was too tame, they said. (The Treasury invited some of this carping by calling the bad scenario the “worst-case” scenario. It was not that.) But the criticism largely fell silent once the tests were complete and the results announced on May 7.
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Professor Paul Zipkin argues “regulation is a necessary element of the infrastructure of free enterprise,” in an op-ed published in the Sept. 24 edition of the Raleigh News & Observer.

Defective financial products can ruin lives just as surely as bad food and faulty electrical wires. Just ask the millions of borrowers who can never hope to pay their debts, the thousands of laid-off financial professionals and factory workers, and all of us taxpayers.

The Obama administration has proposed several initiatives to help our damaged financial system. One is the Consumer Financial Protection Agency. The CFPA aims to avoid some of the ill-conceived products, such as tricky subprime mortgages, that have played central roles in the financial crisis. It’s a good idea, and we should all support it.

Bankers too should support this idea, and some do, privately. Publicly, however, the banking industry has mobilized its considerable forces to oppose the CFPA. They argue that it will hamper financial innovation. Well, that’s sort of true – in a good way. Some innovations are valuable but some are not. Read the rest of this entry »

As manufacturers race to test and deliver the H1N1 influenza vaccine by October, public health officials are working equally feverishly to determine how scarce doses should be allocated, and the U.S. has announced plans to donate 10 percent of its vaccine supply to the WHO.

Research from Duke and the European School of Management and Technology (ESMT) demonstrates why, in some cases, countries would be best served by giving their drug supplies to another country.

Duke Professor Peng Sun, Duke PhD student Liu Yang, and Professor  Francis deVericourt  of ESMT created a model based on game theory  to test how countries with adequate drug supplies should react to an epidemic affecting a neighboring country with little or no supply of vaccine or treatments.  Their findings indicate that countries possessing treatments are sometimes best served by donating their treatments to the first country afflicted by an epidemic, instead of using the drugs on their own citizens.  In game theory, this situation is referred to as a Nash Equilibrium, the combination of actions by different players that results in the best outcome each player can expect, given the other players’ moves.
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Is it easier to lie when you’re hiding behind knockoff sunglasses?  Dan Ariely explains how small acts of dishonesty can lead to more serious changes in behavior.

DURHAM, N.C. — A group of leading research universities has launched Futurity (www.futurity.org), an online research channel covering the latest discoveries in science, engineering, the environment, health, and more.

The site offers direct access to research news posted by Duke University and 35 partners supporting the project.

Futurity cofounder Michael Schoenfeld, vice president for public affairs and government relations at Duke, says the site allows the public to see how federal, state, and private funds are being put to use by universities to address critical challenges.

“It’s not often you see high-powered universities working together in such a collaborative way,” says Schoenfeld. “That fact alone indicates the project’s significance. Universities are the world’s laboratories. They host the brightest minds working to answer some of today’s most urgent questions. The breadth and caliber—and the collective force—of the research featured on Futurity is truly extraordinary.”

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By Kevin Schulman, M.D.

Duke Medicine has just announced a $700 million expansion of its physical plant to add 847,000 square feet, including adding 16 operating rooms and renovating 160 beds (that’s over $800 per square foot if you’re doing the math).

This will add a new cancer hospital facility within the Duke campus, and expand the number of intensive care rooms at Duke Hospital. This is a significant investment in infrastructure for the health system, but how will this investment impact the care delivered to patients by Duke Medicine?

Duke Medicine is a fee-for-service hospital system and physician network. This is one of the oldest forms of a provider organizational structure in existence, and pre-dates the development of health insurance in the US. This model is managed to allow patients access to high-end specialty and hospital services. Within this model, hospitalization is not considered a failure, but rather a core service offering. Competition between Duke and other providers is on the basis of technology and specialty service offerings. This type of competition can lead to improvements in the performance of specialist physicians, but can also lead to a phenomena described as a “medical arms race” where hospitals “must” acquire certain technologies to remain attractive in these specific markets.

Hospitals like to point out that their high-tech facilities and services are better than those of competitors (see Robinson and Luft JAMA 1987). This type of competition has been criticized as driving to higher investment in technology, overcapacity, and higher health care costs. There’s some local evidence of this arms race concept with UNC’s investment in a similar cancer facility only nine miles from the Duke campus.

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By Kevin Schulman, M.D.

Ted Kennedy passed away this week at age 77 of glioblastoma (he was treated surgically here at Duke for his disease last year; Duke has the best program for this disease in the world, but the prognosis for people diagnosed with glioblastoma remains grim).

Kennedy spent more than 45 years in the US Senate, and during that time he championed both liberal causes and bipartisanship. Orrin Hatch, a conservative Senator from Utah, has said publicly that Senator Kennedy was the only Democrat he could work with in the Senate. That’s quite a statement.

In the politics of health care reform, there are two committees in the Senate with jurisdiction. Senator Kennedy was chairman of the Health Education Labor and Pensions Committee (HELP), which has passed a version of the health reform legislation. Democratic Senator Max Baucus is chairman of the Senate Finance Committee, which has jurisdiction over entitlement programs (including Medicare and Medicaid). The Senate Finance Committee has not passed a bill, as Senator Baucus and his committee appear to have some substantial disagreements with the House and HELP committee versions of the bill — as they work to craft a bipartisan piece of legislation.They have tentatively committed to reporting out a bill by mid-September.

I was on a panel earlier this week with a major health insurance executive. I was asked about the status of health reform. I suggested that there are three issues that need to be addressed as part of reform: 1) access to health insurance, 2) the costs of health care, and 3) the future solvency of Federal health programs.

Currently, the debate seems to be limited to access to insurance. The second and third issues are more problematic and look like they will remain despite health reform (or may even be exacerbated by the reform).

The insurance executive suggested that access was relatively easy to solve. In fact, he suggested that their trade association, AHIP, had agreed publicly with a reform plan that included market reforms including removal of underwriting from small group policies in return for a mandate for coverage (as we teach in health economics and strategy, in the absence of a large group or mandates, insurers would face adverse selection without underwriting since only the sick would be interested in an expensive insurance policy).

The executive suggested the debate was really over the public option. Here, the debate spills over from access to costs. Health insurance costs include medical loss (payments to doctors, hospitals and pharmacies), a sales charge, a “risk” premium, overhead, and margin.

United Healthcare, for example, reports a medical cost ratio of 82% for 2008. This leaves 18% for these other categories. An argument for the public plan is that Medicare’s medical cost ratio is 96-98%. Thus, a public plan would be cheaper. This is an apples-to-oranges comparison, since Medicare doesn’t have huge expenses for marketing, risk and administrative expense that a public plan would obviously have to bear.

There are other hidden costs of a public plan as well. While most seniors support Medicare, Medicare’s low payments for primary care physicians and the overpayment of specialty physicians has been acknowledged for 15 years, yet Medicare has been politically powerless to change its payment system even as physicians leave primary care in droves. A public plan could face the same risk.

Healthcare, however, is a local monopoly in many places. Hospitals or physicians that are required to be included in provider panels have the ability to set their own prices. The ability to use a public plan to set rates for providers with monopolistic market power is an attractive feature that private health insurance plans cannot match (and thus oppose).

So where does this leave us in the reform process (it’s not really a “debate” since all of the shouting means there is almost no discussion of the three core issues I raised)?

Senator’s Kennedy’s death is significant. Will it inspire a sympathy effort to have the “Kennedy reform bill” in his honor, or will his death remove the last hope for compromise in the Senate?
We’ll find out over the next few weeks.

Thin friends who eat a lot could put your waistline in danger. That’s the warning from researchers studying how other people’s weight and food choices influence how much we eat.

Researchers from Duke University, the University of British Columbia and Arizona State University used snack foods, an obesity prosthesis, and the ruse of a study related to movies to track how students’ food consumption was influenced by a companion. Their findings will appear online this week in the Journal of Consumer Research.

“Obesity is obviously a tremendous public health concern,” said Gavan Fitzsimons, F.M. Kirby Research Fellow and professor of marketing and psychology at Duke University’s Fuqua School of Business. “Because people often dine in social settings, we decided to investigate how someone’s size and food choices could influence how much the people around them order and eat.”

The research team recruited 210 college students to participate in a study ostensibly about movie watching. Upon arriving at a research lab, each student was informed that he or she would be paired with another student taking part in the same study. The other student was in fact a member of the research team whose size was manipulated to make her appear to be either size 0 and 105 pounds (her natural build), or size 16 and 180 pounds (when wearing the obesity prosthesis, a rubber suit that made her look much larger).

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The number of U.S. companies with an offshoring strategy has more than doubled from 2005 to 2008 and very few plan to relocate activities back to the United States, according to Duke Offshoring Research Network’s fifth annual report on offshoring trends, published in collaboration with The Conference Board.

Last year, more than 50 percent of companies had a corporate offshoring strategy in place, up from 22 percent in 2005. Sixty percent of companies currently offshoring say they have aggressive plans to expand existing activities.

The report also confirms the globalization of innovation — the major finding of last year’s report — is continuing at an increased rate in all areas of industry. Speed to market and the domestic shortage of science and engineering talent are two key drivers for offshoring projects.
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Professor Rick Larrick has become quite well known as an advocate for the gallons per mile standard of fuel efficiency.   He’s also been following the Cash for Clunkers program very closely, cautioning that the program’s success as an environmental initiative is contingent on its overall reduction of C02 emissions.

Now Larrick has crunched the numbers on the program’s sucess to date, and concludes in a new post on his MPGIllusion blog that the program has been effective in helping the auto industry and in reducing C02 emissions.