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FEBRUARY 16, 2004
Edited by James Mehring Health Care: How Good? The U.S. system may be weaker than you think The U.S. health-care system is in need of some strong medicine. The Health & Human Services Dept. said in January that the U.S. devoted 14.9% of real gross domestic product to health care in 2002. That is up from 14.1% of GDP in 2001 and 13.3% in 2000. Surprisingly, all that money doesn't make Americans healthier than citizens in Europe or Japan who spend far less on medical care. Like the U.S., other industrial nations face severe cost pressures, but they devote far less of total public and private spending to health care than the U.S. In dollar terms, Americans spend up to 100% more on health care per capita than do Europeans or the Japanese. The latest data through 2001 put out by the Organization for Economic Cooperation & Development showed only Germany and Switzerland also allocated over 10% of GDP to health expenditures.  Worse still, Americans may not be benefiting more from their hefty health-care outlays. U.S. life expectancy is a year to 2 1/2 years shorter than in Western Europe and Canada, and over three years shorter than in Japan. U.S. infant mortality is also appreciably higher -- 6.9 deaths per 1,000 births in 2000, vs. 4.4 to 4.6 in Italy, Germany, and France, and 3.2 in Japan.Why the gap? For starters, the rate of obesity in the U.S. is greater than in any other industrialized country. This increases the likelihood that Americans will face heart disease, diabetes, and cancer later on in life. Second, the U.S. lags in childhood immunization. In addition, the "use of expensive medical procedures explain[s] part of the differences in overall health-care spending," says the OECD. The health-care divide has widened even though the proportion of elderly Americans is still smaller than that of the other major industrial nations. That suggests further bad news by the end of this decade, when the first wave of baby boomers hits retirement age. Unless changes in lifestyle or medical funding are made, demands on U.S. health-care budgets will be even greater -- and without any progress in closing the gap between American health standards and those of other major nations. What's Behind The Buybacks Stock repurchases buoy prices -- in the short run When employee stock option awards took off in the late 1990s, investors and financial analysts quickly realized that they represented a big potential dilution of companies' per-share earnings. Corporate managers soon boosted stock repurchase programs to offset such dilution -- shelling out some $150 billion for buybacks in 1998 alone. In a recent study, Daniel A. Bens, M.H. Franco Wong, and Douglas Skinner of the University of Chicago business school and Venky Nagar of the University of Michigan's business school analyzed the link between stock options and buyback decisions at 357 Standard & Poor's 500-stock-index companies from 1996 to 1999. They found that managers weren't simply repurchasing shares on a regular basis but were adjusting their buyback activities to shore up per-share earnings. Specifically, companies increased repurchases -- thus lowering the number of shares outstanding -- whenever earnings growth slackened significantly. The apparent object was to keep per-share earnings growth (including potential shares in the form of options) on track and thus bolster stock prices. The rub: Tactics to manage earnings may buoy stock prices in the short run, but they add no real value in the long run. About the only folks who might benefit are those about to sell company stock -- including, of course, managers planning to cash in their options.   The Dollar's Downside A sliding greenback could hurt productivity The falling U.S. dollar is viewed as an economic balm. U.S. exports become more attractive, profits earned abroad increase when converted back into dollars, and U.S. producers can capture some pricing power as imports get more expensive. But there may be a nasty side effect: reduced productivity growth.  James Paulsen, chief investment strategist at Wells Capital Management, looked at the trade-weighted dollar over the past 30 years. He noticed that when the dollar has fallen below its long-run average, productivity growth also slips below its 30-year trend. The key is the link between the dollar and import prices. Foreign companies must raise prices to preserve profits. U.S. businesses, therefore, don't have to push their workers as hard to stay in the black. "Dollar weakness, since it reduces foreign price competition, makes productivity gains less important," says Paulsen.Since adjustments to currency shifts take time, Paulsen found that changes in productivity appeared about a year after the dollar moved. That means the trade-weighted dollar's 13% drop over the past year should cause productivity growth to ease in 2004. Indeed, Paulsen expects it will slow to below its 30-year average of 1.9%, far below economists' consensus view of about 4%.
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