Wednesday, November 29, 2006

A report card on Bush's 2006 State of the Union Address agenda items

  • Renew USA Patriot Act. Bush succeeded in getting Congress to renew elements of the USA Patriot Act that empower law enforcement agencies in the hunt for terrorists.


  • American Competitiveness Initiative (ACI). Bush proposed a commission that would double research in physical sciences in the next decade, train 70,000 teachers to lead high school Advanced Placement math and science classes, hire 30,000 scientists and engineers to work as teachers, and make permanent current tax breaks for research and development. While the White House requested an increase in ACI's budget, Congress had not appropriated the requested funds as of October.
  • Alternative fuels. Bush called for a 22% increase in federal funding for research into alternative fuels, highlighting the prospect of cars running on hydrogen and ethanol fuel made from corn, wood chips, stalks or switch grass. Representative Jerry Moran (R-KS) introduced H.R. 5346: Alternative Energy Refueling System Act of 2006 in May 2006. It was referred to the Subcommittee on Environment and Hazardous Materials.
  • Katrina relief. Bush vowed to fulfill the $85 billion recovery effort for those hit by 2005's Hurricane Katrina. Progress is being made to clean up the damage but it is leaving environmental problems and some corruption in its wake.


  • Entitlements commission. Bush proposed a bi-partisan commission to figure out how to control costs of Social Security, Medicare and Medicaid. In June, Representative Frank Wolf (R-VA) introduced legislation (H.R. 5552) to establish such a commission The legislation was referred to the House Committee on the Budget.
  • Health Savings Accounts (HSA). To control health care expenses, Bush asked Congress to expand HSAs, which allow people to save money for medical expenses tax-free. Account holders then buy low-cost but high-deductible coverage for large medical outlays. In September a House Panel voted to expand HSAs and then Congress adjourned without considering the proposal in the full House or Senate.
  • Limit medical malpractice litigation. Bush asked Congress to pass legislation to limit medical malpractice litigation. On May 8, 2006 Congress voted against two measures to limit jury awards in medical malpractice lawsuits sponsored by Senate Republicans. No further progress on this agenda item has been achieved.
  • Guest worker program. Bush called for Congress to create a guest worker program for illegal immigrants. While many immigrant workers marched in support of the proposal, its House and Senate versions did not pass into law.
  • Line item veto. Bush asked Congress to give him a line-item veto. On June 22, 2006, the House passed a bill (H.R. 4890) that would call for a six-year line-item veto to cut down on the "pork barrel spending" associated with Congressional lawmaking. The bill stopped short of granting a full line-item veto like the one passed in the 1990s, and instead allows the President to send a bill back to Congress within 45 days for another vote to affirm rider bills. The bill passed 247-172 in the Republican-controlled House. In September the bill was placed on the Senate Legislative Calendar under General Orders.
  • AIDS funding. Bush also asked Congress to reform and reauthorize the Ryan White Act, and to provide new funding to states, to end the waiting lists for AIDS medicines in America. While the House voted 325 to 98 to change the funding formula under the act, the measure was blocked in the Senate. As of November 2006, Bush's call to re-authorize the act went unheeded.


  • Spread democracy and freedom around the world. On foreign affairs, Bush renewed his second-term promise to spread democracy and freedom around the world. The world has resisted, however. In January, Palestinians used a democratic process to elevate Hamas, which the United States has designated a terrorist organization. More importantly, US efforts in Iraq have spread civil war -- rather than democracy -- which the administration declines to acknowledge.
  • Permanent tax cuts. Bush repeated appeals to Congress to make his tax cuts permanent. His appeal did not pass into law. With a Democratic congress starting in January, this issue may not be considered until after the 2008 presidential election.
  • Medical insurance portability. Bush asked Congress to make it easier for people to keep medical insurance without extra cost if they change jobs or start a business. I could not discern any legislative progress on this initiative.
  • Ban human cloning. Bush called for Congress to pass a bill banning human cloning. While 15 states currently have laws pertaining to human cloning, there are no federal laws on this subject.

Thursday, November 16, 2006

Will Falco fix AOL?

Last night I found out that a new boss is headed my way. As Amey Stone posted, Randy Falco is replacing Jon Miller as CEO of AOL. And it's good news for Time Warner (NYSE: TWX) stockholders.

Falco ran General Electric Company's (NYSE: GE) NBC for years but he did not make the cut as successor to Robert Wright -- losing out to Jeff Zucker -- who himself
may or may not actually succeed Wright. In any case, according to the Wall Street Journal [subscription required], Falco is being touted for his "operational experience." To me this means, he will do a better job than Jon Miller of firing up the troops to sell advertising to companies trying to reach you and your fellow visitors to AOL's properties. And since Falco has experience managing a media company, like Time Warner Chief Operating Officer, Jeff Bewkes, my guess is that he'll be able to work more effectively with Bewkes and the rest of AOL.

A review of AOL's most recent financial performance suggests that Miller's strategy -- cutting back on AOL's subscription business while increasing its advertising revenues -- is getting results. According to Time Warner CEO Richard Parsons, third-quarter 2006 advertising revenue at AOL increased 46%, but subscription revenue fell 13%. AOL had 15 million paying subscribers total (10 million dial-up; 5 million broadband)--down from a high of 26 million in 2002.

Back in July I wondered whether AOL would be able to replace $2 billion in lost subscription revenues with new advertising. Since advertising represents a mere 24% of AOL's $1,983 million in third quarter revenue, Falco has a huge challenge ahead of him to achieve that goal. According to its quarterly report, AOL third quarter revenues fell 3% from 2005's third quarter, or $58 million, to $1,983 million, due to a 13% decrease -- $210 million -- in subscription revenues which totaled $1,405 million -- offset slightly by a 46% increase -- $151 million -- totaling $479 million in advertising revenues.

To close the subscription revenue gap, Falco would need to increase the number of people visiting AOL's sites and sell more advertising to companies seeking to reach those visitors. To put this into perspective, during the third quarter, AOL had 112 million average monthly domestic unique visitors and 49 billion domestic page views, according to comScore Media Metrix, which translates into 145 average monthly page views per unique visitor. This represents $4.28 worth of third quarter advertising revenue per average monthly unique visitor.

In September, Falco introduced a plan to start syndicating short video clips to Web sites via NBC's National Broadband Company (NBBC). With the right content coupled with an aggressive sales effort, Falco might be able to boost unique visitors and attract new advertisers -- adapting his NBBC concept to boost AOL advertising revenue.

Let's hope Falco fixes AOL. If he succeeds, TWX shareholders will be richer.

Saturday, November 11, 2006

Democrats better for the economy

Democrats are better for the economy based on the relative economic performance of the 11 post-World War II presidents along the following six dimensions:

  • Annual GDP growth
  • Annual growth in real disposable income
  • Annual growth in employment
  • Annual change in unemployment rate
  • Annual change in inflation rate
  • Annual change in Federal budget surplus

Here's how these 11 presidents rank (with their average ranks on the six dimensions):

  • 1. Bill Clinton (3.5)
  • 2. Lyndon Johnson (3.8)
  • 3. John Kennedy (4.2)
  • 4. Ronald Reagan (4.5)
  • 5. Gerald Ford (5.5)
  • 6. Jimmy Carter (6.3)
  • 7. George W. Bush (7.0)
  • 8. Harry Truman (7.2)
  • 8. Richard Nixon (7.2)
  • 9. George H. W. Bush (8.2)
  • 10. Dwight Eisenhower (8.3)

Based on this analysis, George W. Bush's economic performance is mixed. He is relatively strong in reducing the inflation and unemployment rates; whereas he is decidedly weaker in managing the Federal budget. While I don't want to muddy the waters of this analysis, my hunch is that inflation under the current president has been worse than reported. As Fed Chair Ben Bernanke recently commented, the inflation data are unreliable. And some believe that they don't seem to reflect the rising costs of health care, housing, and energy.

Let's look at how the current president ranks in each of these six areas compared to the top and worst performers.

Annual GDP growth

  • George W. Bush (7th): +2.71%
  • First: Lyndon Johnson +5.43%
  • Last: George H. W. Bush +1.90%

Annual growth in real disposable income

  • George W. Bush (10th): +2.81%
  • First: Lyndon Johnson +5.56%
  • Last: Harry Truman +2.38%

Annual growth in employment

  • George W. Bush (6th): +1,293,000
  • First: Jimmy Carter +2,506,000

Annual change in unemployment rate

  • George W. Bush (5th): -0.05%
  • First: John F. Kennedy -0.83%
  • Last: Gerald Ford +1.25%

Annual change in inflation rate

  • George W. Bush (3rd): -0.28%
  • First: Gerald Ford -1.42%
  • Last: Jimmy Carter +1.65%

Annual change in Federal budget surplus

  • George W. Bush (11th): -$65.0 million
  • First: Bill Clinton: +$47.7 million

Although Bill Clinton ranked first only on deficit reduction, his overall average rank on all six criteria was the highest of the lot.

Thursday, November 02, 2006

Botched PBM merger highlights health care industry challenges

The changes in the health care industry have led to botched mergers with PBMs in the past.

It's worth explaining the challenges facing drug companies, the emergence of PBMs and their impact on drugstores like CVS. The upshot? Companies are trying to cut the cost of health care for their employees to improve their profits. Up until the 1970s, there was a simple health care model: drug companies would invest hundreds of millions in research to developed patented products; their sales forces would offer doctors in private practice lots of goodies like all expense paid trips to Bermuda; if the drugs worked, the doctors would prescribe them regularly; and insurance companies would reimburse the companies who bought the drugs for their employees, regardless of price.

But with the emergence in the 1980s of Health Maintenance Organizations (HMOs) and PBMs, this profitable club began to collapse. HMOs, whose drug formularies saved money for their corporate clients by encouraging their doctors to prescribe the lowest cost drugs available to treat a disease, took market share from private physician practices. For example, between 1986 and 1992, HMOs share of drug sales rose from 7% to 22% while private physician practices' share declined from 60% to 43%.

In 1946, the Veterans Administration (VA) began to offer drugs to veterans on a mail order basis. Instead of paying a co-payment for a 30 day supply and picking up the drugs in a pharmacy, veterans got a 90-day supply through the mail. In 1983 Marty Wygod, an investment banker, started Medco with the idea of spreading this mail order concept to companies and HMOs. This did not sit well with the CVSs of the world because PBMs could buy drugs at a discount from the drug companies and ship them directly to the patient -- bypassing the wholesalers and drug stores altogether -- and passing the savings on to the companies, HMOs and patients. Medco also worked with companies and HMOs to find the cheapest drug that worked for a particular disease.

Merck's 2,200 person sales force with their trips to Bermuda was of no avail when it came to persuading HMOs to stock Merck's drugs. For example, in 1992 Medco negotiated a deal with Bristol Myers Squibb Co.'s (NYSE: BMY) to distribute its cholesterol drug Pravachol which slammed sales of Merck's cholesterol reducing drugs. In the next year, Merck's cholesterol drug sales rose a mere 2% while Bristol's spiked 205%.

Merck had heard rumors that Bristol was planning to buy Medco -- extending its power over Merck -- so Merck jumped at Medco. Unfortunately, Merck did not add value to Medco -- leaving it to operate independently and never merging the information flows that would have given Merck the ability to develop better and cheaper drugs. Merck also angered its retail pharmacy customers by buying one of their competitors -- causing them to substitute $400 million worth of Merck drugs for a competitors'. And Merck got into regulatory trouble when Medco failed to disclose its Merck connection when setting up drug formularies in 17 states -- leading to a $1.9 million settlement.