The revenue miss, though narrow, raised questions about IBM’s ability to bring in enough new business to keep growing, even as it is able to squeeze out big profits from its software and services units.
In IBM's Global Services unit, IT outsourcing sales, which account for more than one-third of the company's revenue, were up just 2%, to $10 billion, partly offset by a 2% decline in sales of business operations and consulting services. ...
IBM's problem is that it has publicly committed to delivering earnings per share of $20 by 2015. To fulfill that promise it will have to grow EPS more than 11% annually over the next four years, in a slow-growth environment.
That means the company will have to continue to cut costs, but it has already plucked the low-hanging fruit. It has off-shored and automated considerable portions of its operations while trimming U.S. headcount to reduce expenses. Internally, CIO Jeanette Horan is moving key infrastructure, including testing, storage, and desktop, to the cloud, which should save additional cash.
But if its top line doesn't pick up, the question becomes whether the company can continue to cut in order to meet EPS targets without damaging customer relationships. "Investors sometimes question can you continue to grow EPS when revenue growth is so much lower," Sanford C. Bernstein & Co. analyst Toni Sacconaghi told Bloomberg. "At some point, you're going to run out of cost improvements."
There are signs that some of IBM's operations might already be redlining under the pressure to meet margin goals. Officials at Texas utility Austin Energy blamed IBM's failure to perform on a BPO contract in part on the company's margin hunt. IBM also reportedly lost a lucrative outsourcing deal with Disney earlier this year when the entertainment giant handed the engagement to India's HCL Technologies.
Work that stays onshore is mainly sent to what are called Global Delivery Facilities (GDF’s), two of which were created at heritage IBM locations (Poughkeepsie, NY and Boulder, CO) while starting new ones in Dubuque, IA and most recently Columbia, MO. IBM’s public position is they are creating jobs in smaller towns when in fact they are displacing workers from other parts of the US by moving jobs to these GDFs or to offshore locations.
In the case of Dubuque and Columbia, IBM secured heavy incentives from state and local governments to minimize their costs in these locations and are achieving further savings by paying the technical team members, most of whom are new hires or fresh college grads with no experience, a fraction of what experienced support personnel would require. ...
When IBM opened the Dubuque center the people of Iowa were expecting great things. The center was staffed by a small number of US IBMers in management positions. IBM then brought over people from India for “training,” then sent them back. Few H1B visas were even required.
Every time IBM sent a batch of trainees back to India from Iowa they laid off US workers. While Dubuque was led to believe they’d get an influx of highly-paid new residents, what the city actually received was a transient workforce of underpaid people — workers that may well be invisible to local government. It would be interesting to know how many permanent hires in Dubuque have been Iowa residents or graduates of Iowa universities? How many workers spend less than a year in Dubuque? Is Iowa seeing any benefit from the investment they made to open the IBM Dubuque center?
Whenever IBM has a big project they now have to bring in extra workers, usually from India. I have been told they plan the arrivals over several days to a few weeks. They route people through different airports. They make sure there are never more than two or three workers coming on the same flight, effectively avoiding notice by Homeland Security. ...
With hundreds of thousands of laid-off IT workers in the USA, why can’t American workers be hired for these positions? Because IBM doesn’t want US employees. Or, for that matter, European employees, though these are harder to jettison. ...
IBM’s goal appears to be to have as few employees in the US as possible, maximizing profit. But doing so clearly hurts customer satisfaction.
Major IBM customers such as Amgen, The State of Texas, and most recently the Walt Disney Company have cut ties with IBM in favor of other providers. Many other customers are scaling back the services they’re buying from IBM as the perceived value continues to drop. Customers are starting to realize that they can directly hire offshore companies such as TCS, Wipro, HCL and Satayam and book the savings directly instead of paying IBM top dollar for support and then seeing that support fulfilled from BRIC countries.
Selected reader comments follow:
A few years ago a significant Silicon Valley company I was a part of needed to outsource some of our Data Center ops, so of course IBM was a part of the RFP process, and the IBM team was one of the three invited to the final round before we made our decision.
However, when the final three presentations were complete, we were all nonplussed by the IBM proposal. Compared to the other two vendors, it was worse by a significant factor. Basic elements of the RFP were unanswered, the presenters from IBM sales and marketing gave non sequitur answers to some of our questions, and the air of comfortable ignorance on display was unnerving. The other vendors sent their A Teams, but we got the C Team from IBM. And this was no small contract.
Needless to say, we picked someone else. I have wondered since that time who the third vendor SHOULD have been, as IBM obviously received their invitation based on past reputation and not on current performance.
Well I better stop writing get to work, as I have to start early before the employees in the emerging countries that I have to work with end their day. For me I know it is just a matter of time before I get RA’d, but I am holding out for the compensation package as so many other IBMers are.
During that time our management was sincerely committed to quality and continuous improvement. It’s easy to forget that in the 80s, the Japanese ruled the business world. We had Juran and Deming quality training to understand how the Japanese model and processes worked. Over and over the consultants and commentators would decry American businesses and their short-sighted focus on quarterly earnings.
We applied for the Malcolm Baldrige Award every year and took it seriously, even won it in 1992, I think. There was a company-wide mandate that every employee take 40 hrs of training every year. We were early adopters of Six Sigma. There was a palpable corporate culture that truly reinforced the mantra that “employees are our number one asset.”
Sure I’m somewhat nostalgic, but Bob’s series on IBM serves as a marker for just how far American industry has devolved. We’ve gone in my lifetime from businesses actually earning their profits thanks to the ingenuity, productivity, and innovation of their employees, to the balance sheet and P/L manipulation of those “resources” for the enrichment of the powerful few with the mahogany desks. There are a lot of management sins covered by the mindless espousal of “shareholder value” and the accompanying stock options.
If everything Bob is revealing about IBM is true, and I don’t doubt it, I hope this portends the last gasp of this sweep of the pendulum, and not a new equilibrium.
The employee culture consists of infusing your dialogue (on whatever topic) with how hard you are working (to show you are a good corporate warrior). Then there’s the name dropping: “This is what Ginny mentioned in her meeting…”. Don’t get me started on the CYA mentality: some people are absolutely terrified to take a decision without running it by their bosses. And, finally, all IBMers are familiar with processes that start on some website, get sent to some guy in India who checks out the form you filled out, forwards it to Georgia (possibly a contractor), who then sends it to Brazil. There’s no way to talk to the Brazilian without shifting through the 3 (or more) layers of fat.
Many of us are waiting for the economy to turn around so that we can we can just give IBM the unwavering middle finger. Work for IBM in 2012 is way different than working for IBM in the previous century.
No one is safe from being raped by big blue. Sorry to be so blunt, but they take advantage of anyone and anything.
Here is the latest example: IBM is currently lobbying NY State to pass a law to exempt technical/computer workers from receiving overtime pay.
A few years ago, IBM re-banded many of the technical workers to lower band levels. In this process they took away 15% of their salary base and put them into non-exempt positions. They were told they would make up the difference in their loss of pay via any overtime pay they would now receive. 6 months later after a new change was made. IBM mgmt told the workers they were limited in the number of OT hours they could work. 6 months after that, they were told NO overtime unless it was approved by 2 levels of management).
Pretty soon, these very same workers (if this law is passed) will receive no overtime at all. I’m willing to bet that IBM will NOT give them back the 15% loss in salary they incurred several years ago. But their hours of work will be increased substantially.
SAD. I hope exposing this company for what it really is will help put them on notice to clean up their act.
If only IBM could harness the energy of the Watson’s spinning in their graves over what a bad place their company has become…
So we will continue to do more with less, be frustrated by our inability to create the sort of quality products we ‘really’ want to create, be amused as the execs fluster about when a customer threatens to throw us out, watch the suits get their bonuses while we wait for our seven shares to vest in 2015 (it may be a carrot but it’s a bloody small one) assuming we have not all be RA’d by then anyway.
We will continue to play the IBM version of Survivor called “the PBC Challenge” (losers get voted off the island) which makes you do stuff for the brownie points it garners towards your annual assessment rather than for any real benefit to the customer.
As far as can tell, it isn’t actually any better in all the places the work keeps going to either. Sure they may replace one US worked with 5 Indians or Chinese or Martians for all I care but they don’t have the 30 plus years of experience I have to fall back on and they are not getting any training either in the old stuff or the new stuff. How do you off shore, off-shored work? Where does it go?
The thing is, the people at the top of IBM are selling to the people at the top of big business and governments. They are selling a vision, an idea. Who cares if it does not work as well as expected. As song as it saves money, the target audience still come out ahead, their EPS goes up as well, their execs are happy. Sure, some like Disney see the light and walk but there’s enough people out there buying onto the vision for them to keep going. Who’s to say the competition is really any better at this level anyway?
In the end MONEY talks. IBM execs will only pay attention when the stock price and EPS drops through the floor, when the economy picks up and their sales and profits don’t. Fact is though, IBM can still sell a good story and that’s all it takes sometimes to keep going.
Me? I’ll be there until I find another job or I get RA’d at which point I will be gone. I shall not look back, I shall not miss it, I shall not shed a tear (but it does look good on the resume!)
During one of IBM’s 100th birthday celebrations this year I found myself at a table with a bunch of retirees listening to stories and sensing the pride they felt by being part of IBM’s history, the whole while I was thinking “it’s sure not like that today”.
I want IBM to be a better company which treats it’s employees with respect, innovates, and provides good products and services. Unfortunately IBM is following the rest of corporate America in the race to the bottom chasing profit no matter the cost.
But IBM is using another strategy. Ever heard about Generation Open or Project Liquid? I hope Cringely will also comment on these because if you watch the marketing video on the Facebook page of Project Liquid it sounds very convincing. But if you consider that basically every job can be moved to a freelancer with this platform …. Maybe if you can’t afford a local surgeon someone in Nigeria will do it from remote. OK, if he has the right skill but what if the connection is lost while he opens your chest …
There are so many important points in this dialog so I’ll pick just one for today. Gerstner turned IBM into a bean counting company, and the concept of creating value got tossed out the window along with 100,000s of dedicated employees. The executives and the sales teams have always made commitments to clients without a clue as to how they would deliver on the promise. IBM was a great company because they took care of their people, and the people somehow delivered on promises to customers.
Now that IBM no longer takes care of it’s employees, there isn’t anyone left with the skills or commitment to deliver on IBM’s promises (IBM has never had a culture of accountability, just annual reorganizations to shift responsibility).
Most people buy IBM because it’s a safe decision, i.e. everyone used to say “no one ever got fired for choosing IBM”. As corporate decision making shifts to younger people who grew up in a different world, the IBM buy decisions won’t be automatic … and IBM will win less business because of their poor fulfillment track record, i.e. loss of Texas, Disney, etc.
You’re right, Bob, about a lot of things in your articles. The only people left in IBM US in 2015 will be the ones who are directly contributing to the creation of intellectual capital. Everyone else will have very little value, and will be viewed as costly overhead. Read that to mean they will be separated.
I work in services, and was on one of the accounts you mention as having been lost by IBM. I saw how fragmented the technical team in India was. The number of systems in these accounts can be many thousands, so there needs to be large tech teams to support them. There are some very good people in India, but they all have their narrowly scoped work to do, and the integration between teams is poor. It’s up to the American PMs to tie all this together. IBM management is disconnected and doesn’t want to hear about the problems with the churn that goes on between teams, so it never gets fixed. The turnover is exceedingly high, and intentionally so. People commonly get rotated off accounts in less than a year. I’ve seen people go to 3 or 4 accounts in the same year, and their unfinished work gets turned over to someone new, who typically takes months to get up to speed. It’s no wonder clients have looked elsewhere. The environment on these accounts is toxic.
A key point you missed with the GDFs is how they were staffed originally. If you remember, people from across the US were told their jobs were being relocated to these GDFs, in some truly forsaken parts of the country, the intent being to keep wages low. They had to move to them on their own dime, and if they chose to not move, they were considered as having resigned from IBM, which meant no separation pay. That was an ugly, unethical, and frankly, immoral program. But it worked, for IBM.
It is a fallacy to think that IBM can survive in times of flat revenue by laying people off to reduce costs. That isn’t just offshoring. That also means former IBMers who have been brought back as contractors at half their salaries, and no benefits. This approach is rapidly reaching the point of diminished returns, and will soon be ineffective. The company needs to increase revenue! What ever happened to “Innovation”?
The senior execs in IBM are in this for the short-term only. It’s the year-to-year numbers which drive their compensation. There is very little focus put on true long-term investments. How many billions have been spent on stock buybacks, which only prop up the share price artificially so earnings per share (as a key component of executive compensation) is high? What else could have been done with that money to make IBM a more viable company?
But, when the implosion happens, which it will, these execs will have cashed out their options, and will be sunning themselves at their beach houses, enjoying their retirement. I hope they’re happy with the life they built by walking on the backs of the thousands of former employees whose lives they’ve ruined. I know Randy MacDonald, a man of absolutely no conscience, will be.
The truth is in order to stop this train wreck from happening it will take a lot more action than what is currently happening. Our own government enables this process by providing H1 and L1 visa’s when the truth of the matter is we have plenty of unemployed tech workers that can do the work in the US. I personally do not like comments from the government about how the US tech workers are not talented enough, so you have more push for additional visa’s. By the time people wake up to the reality, it will be too late for this company. They can only cut a finite amount of higher paid employees before they actually have to focus on the real factor and that is a lack of revenue. Thus, expenses can not be eliminated completely. Say goodbye USA employees your days are numbered.
Be happy all you want with the new IBM, but don’t so easily dismiss what was lost with this cultural revolution. A truly great icon of global ingenuity and success has been turned into a wasteland in the making. Mark my words – IBM stands for “I’m Bernie Madoff”. IBM’s economic model is unsustainable. When the udder is empty, this cash cow will be sent to the slaughter house to be turned into hamburger.
It's pretty bad when you have a company attempting to recruit top talent people and then treating them like crap. This type of cycle will only invite societal degradation.
IBM is doomed. All these smart engineers who are getting left behind should start another company and run IBM GS into the ground. Oughta take about 4 months, from what I saw. But IBMers can’t do that, because none of them can think, AFAICT, without 18 other people on the conference call.
As many have said, there are 2 distinct IBMs, and I would put the “tipping point” around 1993. Prior to it, IBM felt like a big family, and by and large we were committed to making good-to-excellent products, and really cared for our customers. When I came back into the company in 2001, I was surprised at the number of conference calls required for even the smallest decision. Equally mind-boggling was the number of attendees on those calls… Most of the time, I just put my phone on “mute” and surfed the net (on my own computer). Every now and then I’d grunt a few words into the call, just to make sure the others knew I was still there. I suspect all of my colleagues on that call did the same thing.
I was RAed in 2009, and never looked back. I now sleep like a baby, and actually look forward to getting up every day. I still follow news of IBM -after all, I gave them 15 years of my life- and I still take a look every now and then at the website of the Alliance. May be this is blasphemy, but I think the Alliance is completely useless. They have been around for how many years, and what have they accomplished? There are quite a few other websites about IBM (such as this one) as well as several Yahoo groups started and maintained by ex-IBMers. The information that the Alliance claims to gather is also available on those websites. This is a free country, so we have the right to do what we want. More power to those of you who have joined the Alliance. As for me, I think it’s a complete waste of time and money.
When some new idea gets floated it nearly always comes with a comment from our management (or from the consulting company that has their ear) that IBM was used as a Case Study.
I love my career. I respect my local colleagues. I used to feel like I made a difference. I hadn’t planned on retiring (36 years in so far) but they seem determined to create an environment where I have no other choice. Yet I know that only helps someone bury us that much faster.
For example a major government agency running an operating system that has an object code only module in it that’s been written in China… hmmm…. I think the word needs to get out here folks that IBM is making decisions based on short term greed which could in all seriousness detrimentally effect us all down the track (not being over-dramatic, we all use ATM’s, have bank accounts, use airlines etc. don’t we?).
The MBA’s are WAY to stupid to figure out that the offshore philosophy ONLY works for a low- to semi-skilled workforce (such as manufacturing, where the now-popular consultants made their names). But when you get into the skilled workforce, the equation changes and the workforce is not a replaceable cost item, but a difficult-to-replace asset. There are not enough highly-skilled people in the BRIC countries to replace the experienced Americans and Europeans at the rate they are being released. But MBAs who don’t know what they are doing shouldn’t be expected to figure it out. When the bottom line suddenly dips below positive, they’ll still be clueless.
When you see a clueless idiot managing your unit, find out where they got their MBA and how much “real” work they have actually done. I’ve been checking lately and I am finding out that the people I least respect for their total lack of skill and knowledge all have MBAs and absolutely no experience in anything. And it shows.
When I get pulled into operational issues, the pain of these stories is felt every single time. It blows my mind to consider how long it takes to deliver a simple project or to troubleshoot remedial issues with any intelligence.
Knowing these strategies are out in the open, it would be nice to time a new job with a nice severance package.
The problem is that this theory doesn’t really work. The first part is true: When company performance goes up, CEOs tend to do well. But all too often, poor performance does not equal similarly lower payouts for top management. Consider, for instance, the year 2008, when the S&P 500 stock index tumbled more than 37 percent. The median CEO pay package edged downward just 0.08 percent.
Even worse, stock-based compensation causes executives to focus on manipulating the market’s expectations about future performance rather than working to improve the actual performance of the company. That results in a track record of lower shareholder returns and higher volatility — but also higher executive compensation. Since the theory is viewed as so very sound, however, the reaction by boards and their compensation consultants is that the theory works but the implementation needs to be tweaked. These minor changes, however, are never big enough, as they leave the underlying theory in place.It is not as though no one has taken it on. When Robert Wood Johnson took Johnson & Johnson public in 1948, he made it clear in his credo that shareholder interests came after those of customers, employees and the communities in which J&J works, noting that investors would earn a ‘fair return’ if the company took care of the other three groups first. In Google’s IPO, Larry Page and Sergey Brin said the company would never give earnings guidance — and have stuck to their promise. Meanwhile, former Proctor & Gamble CEO A.G. Lafley showed leadership when he worked with his board to set up his stock-based compensation so that it vested in ten equal parts in each of the ten years following his retirement. That ensured that his incentive was tied to the long-term prosperity of the company.
Selected reader comments follow:
With the more recent news of the Liquid Employee pilot in Germany, I'd expect IBM will roll that out as part of what reduces the American employee count. IBM is continuing its fast pace to replace employee "staff" (non-executives) by contractors and foreigners. Then, the cost of benefits is also eliminated for non-executives. IBM will become the case of the 1% versus the 99%, locked in a class system.
I do not care what Management says because I have been lied to my face by a Site General Manager. When he said they had no plans to move my group from Boca to RTP. Right after that meeting went back to my desk and executed Cross Cal command for his and all immediate reporting mgrs. They had mtgs scheduled for 2 months before he stated to us in person "We have no plans at all to move this group" Those meeting were schedule out for 3 more months stating Move Group xxx from Boca to RTP. I told my manager he will be back within 2 months to announce they would be moving us. He said no way. So I said I will bet you drinks, but I am a nice guy and I had printed out the calendar entries. After I showed him he refused to take the bet. And poof they woke up and set security on their calendars so I could not view their calendars.
Yup I moved and got the Moving and living offer 2 1/2 months after his 1st visit. (Flatsflyer do you remember that. You were lucky one to offer me the M&L while Mike M was on vacation) As I keep telling my team when try say "theoretically" to a way to fix a problem. , I only answer with how it will happen because I have history on my side. The only way US will not go below 50k is if the Government keeps up visa enforcement which they starting doing about a year ago.
"I saw the struggles that my parents were dealing with, and I decided that this is the time to think about what is going to happen to me 30 to 40 years from now," Copenhaver says. "Especially people my age, we are more concentrated on benefits than ever."
Copenhaver, now 28, decided to take a job at TE Connectivity in Middletown, Pennsylvania. A communications analyst for the global electronics company, Copenhaver says she has been at the company for six years and plans to stay.
One of the reasons, she says, is because the company's defined contribution plan contributes $5 for every $1 employees contribute annually, up to 1 percent of pay. The company match increases with every 10 years of service. It also offers an employee stock purchase plan through which it matches 15 percent of employee contributions up to $6,000 annually. "I'm in no hurry to leave," Copenhaver says. "The longer you stay, the more they contribute." ...
"Retirement has risen higher in importance than we've seen in the past," says Laurie Bienstock, North America practice leader for rewards at Towers Watson in San Francisco. "This is a direct result of the financial crisis. Companies started freezing pension plans, cutting pay and laying off workers. The whole fabric of our workforce changed very quickly and it made people re-evaluate what is most important to them."
In Fort Collins and Boulder you hear so much about environmental sustainability that it almost becomes overwhelming. Using clean energy, recycling religiously, biking to work and otherwise living a sustainable lifestyle is the norm. So it’s no surprise that New Belgium has an impressive and aggressive commitment to maintaining a minimal carbon footprint, dealing responsibly with waste and water and lobbying for clean water and air and other environmental causes.
But the company extends its sustainability commitment to the well-being of workers, who co-own 43 percent of the company through an ESOP (employee stock ownership program) and have a collective say in nearly all company decisions, from strategic long-range planning to daily choices, according to sustainability manager Katie Wallace. ...
During a tour of New Belgium’s brewery earlier this month, Wallace pointed out artworks from tile mosaics to bike rim hanging sculptures to shadow boxes designed by employees and celebrating the company’s fun-loving, artsy and outdoorsy mentality. She noted that employees get one of the company’s signature red bikes (along with 13 paid personal/vacation days annually) after their first year on the job, and afterward they get an expenses-paid trip to Belgium, where co-founder Jeff Lebesch got the idea for the business on a mountain-biking trip in 1989.
Less flashily but more importantly, employees are also offered comprehensive and affordable health insurance—prescription, dental, vision and wellness coverage with no copay—and a matched 401(k) and flexible child care and schedule options.
All employees have access to the company books, and to financial literacy training to help them understand them. And they get one paid hour off for every two hours of volunteering in the community (up to a limit, presumably).
If you want to participate or have an information picket line at your site please contact: email@example.com
* Costs in excess of insurance coverage.
** No insurance coverage.
Our medical costs in 2010 were $18,636. The principal reason why our medical expenses in 2011 increased by such a large amount was because our insurance premiums increased from roughly $7,000 in 2010 to over $14,000 in 2011.
This same crappy, expensive health insurance will likely be cancelled because my wife's former employer has filed Chapter 11 bankruptcy and has filed a motion with the bankruptcy court to cancel all medical benefits for retirees and their families. My wife is classified as a retiree because she became disabled as the result of her pancreatic cancer, and the surgical chemotherapy and radiation treatments she received in 2006, and was unable to return to work. The story of her disability is described in detail at this link. Fortunately she is covered by Medicare, but we will lose even this crappy insurance coverage for myself, my daughter and my son. ...
Because the insurance exchanges required under the Affordable Care Act will not go into effect until 2014, it is unlikely that my son and I can find insurance until then, assuming that the Supreme Court doesn't find the ACA unconstitutional. I find this ironic, considering that the following information about "Romneycare," the health care program put in place in Massachusetts when Mitt Romney was its governor, and on which the ACA was based, has just released:
Massachusetts residents who participate in the state's healthcare program are seeing their insurance premiums going down by 5 percent, officials say. [...]
Currently, Massachusetts has the highest level of healthcare coverage in the country with more than 98 percent of its residents having healthcare insurance, but ranking as the 48th lowest state in the nation in healthcare expenditures.
Perhaps my family should move to Massachusetts. I know I will seriously consider it once my daughter graduates from high school next year, particularly if the Supreme Court strike down the ACA, or (assuming the Supreme Court upholds the ACA) Republicans manage to repeal or otherwise weaken it. I'm 55 years old and essentially uninsurable because of my existing health conditions. I can risk going without insurance for 2 years, perhaps, but it would be foolish for me to wait until I reach the age of 65 (or 67) for whatever benefits might remain under Medicare.
If ACA is repealed, or the Ryan/Republican budget is implemented, millions more will go without access to health coverage and care. That's millions of people who are more likely to die because of Republican and Conservative policies regarding health care. Our family can barely afford $26,000 in medical expenses now. How much will our medical expenses increase if the Affordable Care Act is voided by the Conservatives on the Supreme Court or repealed by the Republicans in the future? Perhaps more importantly, how long can I expect to live if the ACA is not in place?
Jobs are the most common source of health insurance for working-age Americans and provide 154 million people with coverage, according to the Congressional Budget Office. But the implementation in 2014 of new benefit requirements on employers and individuals, along with the creation of health insurance "exchanges" and federal subsidies for individuals, families, and small businesses, will change how many Americans get health plans, unless the Supreme Court strikes down the law on constitutional grounds. ...
Overall, 14 million fewer workers will get insurance from their jobs as a result of health care reform, and all but 2 million will find coverage elsewhere, thanks to the law's federal subsidies and insurance market reforms, according to the Congressional Budget Office. Economists also predict companies that drop insurance for some or all of their workers will boost their compensation by raising pay or strengthening other fringe benefits.
People earning between 133 percent and 400 percent of the federal poverty level -- $30,657 to $92,200 for a family of four this year -- would qualify for federal tax credits to defray the cost of health insurance, which could make it cheaper than the coverage available at work, said Tom Billet, a senior consultant at Towers Watson.
When insurance companies or government bodies try to control costs, they usually make across-the-board reimbursement cuts that ultimately are unsustainable because they have no connection to the true costs of delivering care. Providers themselves do not measure their costs correctly. They assign costs to patients based on what they charge, not on the actual costs of the resources, like personnel and equipment, used to care for the patient. The result is that attempts to cut costs fail, and total health care costs just keep rising. ...
Because health care charges and reimbursements have become disconnected from actual costs, some procedures are reimbursed very generously, while others are priced below their actual cost or not reimbursed at all. This leads many providers to expand into well-reimbursed procedures, like knee and hip replacements or high-end imaging, producing huge excess capacity for these at the same time that shortages persist in poorly reimbursed but critical services like primary and preventive care. ...
The lack of cost and outcome information also prevents the forces of competition from working: Hospitals and doctors are reimbursed for performing lots of procedures and tests regardless of whether they are necessary to make their patients get better. Providers who excel and achieve better outcomes with fewer visits, procedures and complications are penalized by being paid less.
Under a state law that took effect in 2006, hospitals must publish their average charges for the most common procedures on a state website. But relatively few take the extra step of listing prices on their own websites, where people are more likely to be looking for pricing information, according to healthcare experts.
David Dranitzke, 40, of San Francisco, recalled his frustration when he tried to get prices on a battery of blood tests for his 15-month-old daughter from three different hospitals and lab companies.
He gave up after spending more than 10 hours calling, waiting on hold and faxing information, all the while having to decipher arcane medical terminology and billing codes. "It's more difficult to get a price on blood work than remodeling your kitchen," said Dranitzke, a visual-effects producer. "At some point you just throw in the towel." ...
One hospital, Desert Regional Medical Center, didn't return calls. Contacted later, spokesman Richard Ramhoff apologized and said Desert Regional "strives to make sure everyone with a question about rates gets an answer." Another hospital said it would take 10 business days to get an estimate, and another required detailed insurance information before discussing prices. "This really highlights how impossible it is for consumers right now with high-deductible plans to effectively shop for care," said Ateev Mehrotra, a policy analyst for Santa Monica-based Rand Corp. and an assistant professor at the University of Pittsburgh School of Medicine.
Stopping what could be critical, life-saving medication was not what people hoped would happen when patients reached the gap. "Some policymakers have argued that sensitizing Part D consumers to drug costs through mechanisms like the coverage gap would encourage beneficiaries to use only essential and lower-priced medications," the researchers wrote. Part D is the name of the optional program that covers prescription drug costs for Medicare beneficiaries.
But using only necessary drugs and finding better deals hasn't been the case, either in this study or others like it. "Researchers have observed increased rates of drug discontinuation and adherence across both essential and potentially unnecessary drugs but have not observed higher rates of switching to generic drugs during the coverage gap," the study said. ...
The researchers also noted that the 2010 Affordable Care Act is gradually closing the doughnut hole, which would alleviate the problem. This year seniors get a 50 percent discount on brand-name drugs once they reach the coverage gap and a 14 percent discount for generic drugs.
But that could disappear if the Supreme Court rules the entire health care law unconstitutional.
President Obama paid 20.5 percent on earnings of $789,674. The President’s total income is the amount Romney raked in every two weeks last year, for a total of $21 million. Romney, the likely GOP presidential nominee, has estimated he’ll pay a tax rate of only 15.4 percent. Romney is among the millionaires and billionaires – the 1 percenters – enjoying the lowest levels in 50 years. Some pay nothing!
That shirking of civic duty contrasts starkly with the values of some of the richest men in the world who went down with the Titanic 100 years ago Sunday – John Jacob Astor IV, Benjamin Guggenheim, Isidor Straus. Abiding by social conventions of the day requiring deference to people perceived to be weaker or more vulnerable, men from first class stepped back and allowed women and children to climb into lifeboats. Men from first class died in higher proportions than did women and children booked in steerage.
A century later, the wealthy have warped such social norms. Now survival of the fittest is the favored philosophy of far too many who book first class seats. They’re certain that their wealth makes them the fittest in what they see as a jungle of human life. They believe they bear no responsibility to those they view as lesser beings; in fact, they think they’re free to savage them. ...
Currently, under the Bush tax cuts, the maximum marginal rate has dropped to 35 percent. Few millionaires pay it, however. The 400 richest Americans – all making more than $110 million – paid at an average rate of only 18 percent in 2008. In 2009, 22,000 millionaires paid a rate of less than 15 percent. Nearly 1,500 of them paid nothing, no income taxes at all! In 2010 Romney, whose estimated worth is as much as $250 million, paid an even smaller rate – 13.9 percent – than the 15.4 percent he estimated he’ll pay for 2011. ...
Over the years, however, lobbyists for those in first class convinced the politicians in Congress, 47 percent of whom are millionaires themselves, to cut the rates paid by the rich, to give them special deals and loopholes, and to tax the majority of their income – capital gains – at 15 percent instead of 35 percent. As a result, those who earn their money by sweat of the brow pay higher rates than those who get it from bets on Wall Street. ...
Romney doesn’t sweat it. Earlier this year when he released two year’s tax returns, he justified the low rates by saying: “I pay all the taxes that are legally required and not a dollar more.”
What he didn’t mention is that he’s among the Republicans who intend to make matters even worse. He and U.S. Rep. Paul Ryan are promoting a budget that would preserve the Bush tax cuts for the rich, then top them off with more breaks for the 1 percent. This would require slashing and burning programs the middle class holds dear including Medicare and Medicaid.
There’s one big problem, though. Markets cannot work when consumers and patients have almost no information about the prices they pay for health care.
Rep. Paul Ryan, R-Wis., chairman of the House Budget Committee, has resuscitated his proposal to turn Medicare over to insurance carriers. Future retirees would be offered financial help to pay for policies sold through public exchanges similar to the ones set up under the health care reform law, a.k.a. Obamacare. The subsidy would be limited to the value of the second-lowest cost plan offered on the market. The idea is that over-65 consumers, who would still have the option of remaining in traditional fee-for-service Medicare, would drive down costs by forcing the plans to compete for their business by offering lower-cost alternatives. ...
Employers are already moving in the direction of giving consumers “more skin in the game,” according to a recent survey by the Employee Benefits Research Institute. One in five Americans are already in high-deductible insurance plans, an all-time high, even though this approach is leading many to skimp on preventive services that could avoid higher health care costs down the road.
Unfortunately for the architects of such proposals, there’s a crucial element missing from their proposals, something that is necessary to make any market work: accurate and easily accessible price information for consumers. Have you ever walked into a doctor’s office and seen a price posted for all the tests, products or procedures that might be offered during your visit? At the hospital? Ever seen a price list at the local pharmacy?
The problem of price opacity in health care is not easily solved. Health care providers are more like airlines than the local Best Buy or Macy’s. They charge different patients different prices depending on who insures them. The uninsured pay the highest prices, the equivalent of a hotel rack rate.
But the 2010 health reform law is starting to help, most notably by allowing young adults to stay on their parents’ health insurance plans until age 26, the survey found. ...
“For people who lose employer-sponsored coverage, the individual market is often the only alternative, but it is a confusing and largely unaffordable option,” Commonwealth Fund vice president Sara Collins, who led the report, said in a statement. “As a result, people are going a year, two years, or more without health care coverage, and as a result going without needed care.” ...
More than 60 percent of those who tried to buy individual health insurance policies in the past three years said they found it very difficult or impossible to find affordable coverage and 31 percent said they were down, charged more or had a pre-existing condition excluded from coverage.
Among those who were uninsured at the time of the survey or who had experienced an insurance gap, 41 percent said they had previously had employer-sponsored coverage. Two-thirds (67%) of those who lost their employer-sponsored coverage cited a loss or change of a job as the primary reason for losing coverage.
For Americans, the attraction is obvious: medical care is a lot cheaper abroad. At CIMA Hospital, in Costa Rica, for instance, hip-replacement surgery costs around fifteen thousand dollars, roughly a sixth of the average here. So far, though, various factors have kept a lid on demand. Logistics can be challenging, and insurance companies have been leery about reimbursements for care overseas: they already get big discounts with U.S. hospitals, and they risk a public-relations disaster anytime something goes wrong abroad. Above all, patients have been wary. We trust the quality of foreign-made televisions and cars, but we haven’t taken that leap when it comes to foreign doctors. People worry about the lack of legal recourse, and the sheer unfamiliarity of medical tourism makes people hesitant to try it. A few years ago, the grocery-store chain Hannaford set up a partnership for the benefit of its employees with a well-accredited Singaporean hospital. Singapore is one of the most prosperous countries in the world, but medical care there is still significantly cheaper than in the U.S., so the arrangement looked like a model for how medical tourism might work. But none of Hannaford’s workers were interested in going to Singapore.
But that isn't the whole story. Many employers have been shifting more costs to retirees even as they receive billions of dollars in government subsidies to offset their own costs.
Knowing what's really driving up the amounts you pay can help you anticipate what's ahead. At the very least, you'll be more skeptical when you receive the next glossy notice announcing changes to your plan based on factors beyond the companies' control. ...
There are other reasons your costs might be rising, besides higher health-care costs. Most employers have set ceilings on what they will pay for retiree health care; when the caps are reached, all cost increases are passed along to retirees. This can explain why your premiums might suddenly jump by hundreds of dollars a month.
In addition, your employer may have shifted retirees into a separate risk pool, instead of including them in the group plan covering active workers. When there are fewer individuals in a plan, and they're older and have more health problems, the per capita costs rise quickly.
"But dependency on government has never been bad for the rich. The pretense of the laissez-faire people is that only the poor are dependent on government, while the rich take care of themselves. This argument manages to ignore all of modern history, which shows a consistent record of laissez-faire for the poor, but enormous government intervention for the rich." From Economic Justice: The American Class System, from the book Declarations of Independence by Howard Zinn.
And these vociferous demands for cuts to entitlements for America's senior citizens always come in tandem with heart-rending cries of "Single-payer healthcare is Socialism," and "Government must cut all pork from women's healthcare and the Veterans Administration," and "Unemployment benefits are government entitlements and government entitlements are WRONG!"
Cutting government entitlements to Americans appears to be the brave new order of the day in Washington DC right now.
Everyone in Congress and the White House and the Supreme Court seems to be obsessively intent on cutting back on all "Big Government" entitlements.
No one ever mentions cutting back on Pentagon entitlements. And the subject of entitlements for weapons manufacturers is never even brought up. Bank-bailout entitlements are sacred and can't be touched. The Federal Reserve is Big Government but no one in Washington is trying to drown the Fed in a bathtub. The filthy-rich are given entitlements in the form of huge tax breaks and concessions. Big Pharma, possibly the world's largest source of illegal drugs http://blog.buzzflash.com/node/13438, is supported by all kinds of government entitlements. And what about all the entitlements that agribusiness receives? And the so-called health insurance industry that never insures anyone's good health but their own?
They get their entitlements bigtime but we don't get ours? Where is the outrage in that?
And of course the month began with the announcement that the United States had officially surpassed Japan as having the highest statutory corporate tax rate in the world. Although conservative groups like the Heritage Foundation and the U.S. Chamber of Commerce made a point of bemoaning this news, they seem to have glossed over the key word "statutory," which refers to the amount corporations are supposed to pay. As the folks at ThinkProgress helpfully pointed out, the statutory rate makes little difference to rich corporations, because the average effective corporate tax rate -- i.e. the rate they actually pay -- sank to 12.1 percent in 2011, which is the average lowest rate in 40 years.
On Tax Day this year, billion-dollar corporations and their CEOs will likely celebrate another year of low (and, in many cases, negative) tax rates, thanks in large part to the millions they shell out to lobbyists to make sure the tax code contains loopholes in their favor. But for the 99 percent of Americans who don't use lobbyists to bend the tax rules, Tax Day is a day for reflecting on why we pay taxes. Schools, parks, bridges, roads, universities, services for children and the elderly, regulations that keep our air and water clean and our food safe -- this physical and social infrastructure that serves the common good would not exist if the 99 percent didn't recognize the importance of paying their fair share.
The SEC, the primary federal agency charged with overseeing the U.S. stock market, has launched new efforts to more closely monitor high-frequency trading -- the ultrafast, computerized buying and selling of stocks, bonds and derivatives that now comprise the majority of stock trading in the country. This has increasingly come to replace the loud trading-room floor haggling that many Americans still associate with Wall Street. ...
"It's inconceivable that they can regulate [high-frequency trading]," said Ralph Ferrara, a former SEC general counsel. "There are too many [high-frequency trading] systems; they're all idiosyncratic; they're all different. The SEC is starved for cash, starved for talent. A small-sized hedge fund can outperform the SEC," added Ferrara, who left the commission in 1982 and is now a vice chairman of Dewey & LeBoeuf who specializes in securities law. ...
High-frequency trading accounts for more than 50 percent of stock trading volume in the United States, according to a 2011 report by the Boston Consulting Group (that the SEC cites) and a 2012 estimate by market research and strategic advisory firm the Tabb Group. ...
High-frequency trading has been linked to market instability. In May 2010, the Dow Jones industrial average mysteriously plummeted 1,000 points and then recovered its losses in a few minutes -- an event later dubbed the "flash crash." A joint report published later that year by the SEC and the Commodity Futures Trading Commission, which also has jurisdiction over some high-frequency trading, held that this practice helped fuel the crash.
In addition, while Republicans say the plan would be a job killer, only a small proportion of businesses would potentially be subject to the tax, according to data from a 2011 Treasury Department study. These firms make disproportionately large amounts of money, but many of them don't employ any workers.
Mr. Romney, the presumptive Republican nominee for president, said he would eliminate or limit for high-earners the mortgage interest deduction for second homes, and likely would do the same for the state income tax deduction and state property tax deduction.
He also said he would look to the Department of Education and the Department of Housing and Urban Development for budget cuts. ...
He homed in on the issue of fairness as he offered a retort to Mr. Obama. The president has encouraged Congress to support the so-called "Buffett Rule," a minimum 30% tax on people earning $1 million or more, arguing that higher-income Americans have benefitted most in the recent economy and that passage of the rule is a matter of fairness.
"I hope we get to talk about fairness," a revved-up Mr. Romney said. "Is it very fair for government to pick winners and losers?" On the campaign trail, Mr. Romney regularly cites Solyndra, a solar panel-manufacturer that received government funds and subsequently went bankrupt, as an example of government manipulation of the private sector.
By now, you’ve read that Romney would get rid of the Department of Housing and Urban Development. He would reorganize the Department of Education. He would do away with tax deductions for second homes. And he would eliminate the deduction for state taxes and state property taxes. ...
When NBC News’s Matt Lauer pressed Romney on his “politics of envy” nonsense and asked if there were “no fair questions about the distribution of wealth,” Romney answered, “You know, I think it is about envy. I think it’s about class warfare. . . . I think it’s fine to talk about those things in quiet rooms and discussions about tax policy and the like.”
Quiet rooms. Like those populated by deep-pocketed donors on an exclusive estate in an exclusive town that might as well be nicknamed “Camp 0.1 Percent.” Pardon the pun, but, this is rich.
So, what to make of this? How will it affect the budget? Government services? Impossible to say, from the details we have now. These sorts of plans could mean any of three things, all of which were hinted at in Haake’s report. Reporters pursuing the story should be aware of the differences.
One possibility would be, essentially, rearranging the deck chairs. The government would still be doing the same thing, only attempting to be more efficient. The questions here are whether any supposed efficiencies are real, and if so whether they are worth the transaction costs of making the change. Warning: generally, anything that can be sold as “eliminating bureaucrats” will poll well. However, in real life such reforms may have only symbolic gains. As Ezra Klein said this morning, “while it sounds very tough to talk about closing agencies, it doesn’t save you much money unless you're also willing to cut the services they provide.” Or, in some cases, any money at all.
A second possibility is federalism: Some things will be moved from the federal to the state governments. This certainly can save federal budget dollars, but will not necessarily mean overall cuts in government spending. Will it be more efficient? Hard to say. It always reminds me of the only great federalism joke, which I always attribute to James Carville: Let’s get in our cars and race from Disneyland to Disney World. I get to take the federal roads. Moving things from the federal government to the states always polls extremely well, but that’s no guarantee that it achieves efficiencies.
The third possibility is the only one that really saves the government any money: having the government do fewer things. As House Republicans have discovered, however, there are very few expensive things that government does right now that the American people don’t want. Cutting spending is generally popular in the abstract, but quite unpopular when it comes down to specific cuts in things government actually does.
Levine has been following federal tax policy for most of his adult life. “My main job was to forecast the economy,” he shrugs. “So taxes are tremendously important to that. And tax policy changes are tremendously important.” And, to him, those changes mostly went the same way: cutting taxes on people, like Levine and his friends, who didn’t need tax cuts, as the working class struggled.
He brandishes a table that tells the whole story: John F. Kennedy brought the top tax rate down to 70 percent. Ronald Reagan brought it to 50 percent, and then to 28 percent. Levine still sounds offended. “I was making seven figures,” he says. “They lowered my marginal tax rate to 28 percent. And the median American, he was paying a 15 percent marginal tax plus his payroll taxes plus the employer’s share of his payroll taxes, which comes out of his income. So he was paying, all in all, about 27.9 percent. And I was paying 28 percent.”
“Under George H.W Bush and Bill Clinton it gets raised a bit more to 39.6 percent,” Levine continues. “But then George W. Bush comes in and cuts it to 35 percent and lowers the rate on qualified dividends to 15 percent. And by now I’ve retired. I’m living off investments. All my income is coming from qualified dividends. And so I’m sitting there in the 15 percent tax bracket. And I use the maximum charitable deduction every year. So my actual tax rate has been 7 percent every year since 2007!”
It would be one thing, Levine says, if the economy had performed so much better after taxes on the rich were cut. But it didn’t. Some of the fastest economic growth of the post-war period came in the 1950s, when the top tax rate was above 80 percent. The slowest growth came in the 2000s, when the top tax rate was 35 percent. So the fastest income growth for the top 1 percent has come under the low-tax regimes, while the fastest income growth for the median American came when taxes on the richest Americans rose.
In those days, U.S. companies exported goods rather than jobs, and a decent argument could be made that what was good for General Motors was in fact good for America. It wasn’t perfect. The “other America” lived lives of quiet desperation. Segregation still was brutally enforced. But the bipartisan consensus reflected an economy that was working for many, not just the few.
That is no longer true, and hasn’t been for years. Multinationals ship jobs abroad and park profits overseas to avoid taxes. Wall Street blew up the economy but got bailed out, with the bankers continuing to pocket the big bucks. Three-fourths of the country thinks the recession hasn’t ended. And no wonder: Wages are still falling and mass unemployment inflicts grinding misery. In 2010, the top 1 percent captured an obscene 93 percent of the rewards of “recovery.”
When she joined GE in 2000, Smith tried to convince co-workers a union would improve conditions in the shop. A former bargaining committee member, local union secretary, and steward in now-shuttered Steelworker and Auto Worker plants, she told them how vulnerable they were without a contract.
She didn’t get many bites, at a wage of $24 an hour. And the plant had a grievance-like “peer review” procedure to resolve disputes. “They said there was no way they could treat us better,” Smith remembered. “I said, ‘They can always treat you worse.’” ...
With unions at GE boxed in and shrinking, management began to dictate terms. Last summer’s contract ended defined-benefit pensions for new hires, escalated health care costs, and eased contracting out. “Once, we assured the wage and benefit pattern was broadly shared among the non-union universe,” Townsend said. “Now, of course, they’re more than happy to pass along our losses.”
But the wealthiest Americans, who haven’t raked in as much of America’s income and wealth since the 1920s, are today paying a lower tax rate than they have in over thirty years. Even though America faces a mammoth federal budget deficit. Even though public services at all levels of government continue to be slashed. Even though the median wage is still dropping, adjusted for inflation. Even though the typical American is paying more of his or her earnings in taxes – including payroll taxes, sales taxes, and property taxes – than ever before.
I’m not a class warrior. I’m a class worrier. And my worries go to why all this has happened.
I worry about the political power that comes with great wealth — such as the power of the wealthy to reduce their taxes, cut the public services most other Americans depend on, while at the same time garnering special subsidies and tax breaks for their businesses — big oil, big pharma, big agriculture, military contractors, big insurance, Wall Street.
I worry about the well-financed big lies that the very rich are the nation’s “job creators,” that the benefits from tax cuts on the rich “trickle down” to everyone else, that American corporations will create more jobs if only their taxes are lowered and if regulations protecting health, safety, and the environment were jettisoned.
I worry about the increasing dominance of Wall Street over our economy and democracy, and the near political impossibilities of closing the “carried interest” loophole that allows private-equity and hedge-fund managers to treat their income as capital gains subject to only 15% tax; of resurrecting the Glass-Steagall Act separating investment from commercial banking, and of breaking up the big banks to protect against another financial crash and bailout of the Street.
That’s because they receive incentive packages that were originally designed to reward entrepreneurs who generated revenue for cash-strapped enterprises. It’s hard to remember, especially now that high bonuses, large stock-option grants and restricted stock awards (on top of substantial base salaries, generous retirement plans, benefits and perquisites) are standard in every executive pay package, but rewarding entrepreneurs is what stock options were first created to do.
Put simply, it does not make sense to award stock options every year — they were never designed to be given out that way. The typical CEO of a large blue-chip corporation is managing the company for growth, but not entrepreneurial growth. Slow, steady value accretion is what shareholders expect, and why they invest in indices made up of these companies. But such gradual growth means that the only way for CEOs to earn a substantial amount through a stock-option grant is to award them with ever larger numbers of them. And this is what boards are doing.
The fact is that most CEOs are managers, not entrepreneurs, and should be paid like other managers. They are not stars. They are team leaders, and should be rewarded as part of the team. But according to an analysis by GMI Ratings, more than half of the S&P 500 pays its CEO more than three times the median pay received by the company’s other top executives. More than 50 CEOs are paid more than five times the median. This makes no sense.
The stations already have the data and are required by law to make it public to anyone who asks. But you can get it only by going to the station and asking for the actual paper documents -- what's known as "the public file." Stations don't want to put it online because -- you guessed it -- that would make it too easy for you to find out who's putting up the cash for all those ads polluting your hometown airwaves. ...
Whatever the result on the 27th, those negative attack ads already are cluttering the airwaves like so much unsolicited junk mail and it's only going to get much, much worse as the super PACs, political parties, the moguls and tycoons, many acting in secrecy, lavish perhaps as much as three billion dollars on local stations between now and November. ...
But now there's something new in the mix, especially appalling to anyone who truly cares about public broadcasting. On April 12, by a vote of 2-1, two of three judges on the 9th U.S. Circuit Court of Appeals found in favor of KMTP, a small public station in San Francisco, and struck down the federal ban against political and issue advertising on public TV and radio. For decades there's been a rule against turning those airwaves over to ads for political campaigns and causes. Now the court has ruled that the free speech rights of political advertisers take precedence.
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