Wednesday, September 28, 2011

How Companies Can Piss Off Shareholders

I thought this might be a provocative title for a blog post: "How Companies Can Piss Off Shareholders". Frankly, if you are expecting a full discourse on all the ways this can be done, you've come to the wrong place. The seminal piece on this is undoubtedly the ISS (Institutional Shareholder Services) 2011-2012 Policy Survey Summary of Results. And, for that matter, if you really want a more thoughtful analysis of the entire survey, I would direct you to Mike Melbinger's latest blog post on this topic.

ISS would never say anything like the title of this post. And, Mike Melbinger, while I love his blog, tends to be more politically correct than yours truly. If you came here to read about this, then you are looking to see someone fall. Knives in the back are fair game. So are sucker punches below the belt. Here, the only rules are the Truth According to Me (apologies to John Irving and T.S. Garp).

So, between the strategically chosen dates of July 6 and August 26 of 2011 (after people came back from celebrating our nation's birthday and before they left to celebrate labor (the kind that you get paid for, not the kind that causes expectant mothers to scream)), ISS asked a whole bunch of questions of both investors (institutional shareholders) and issuers (companies that issue proxies to their shareholders).

Before getting into the nitty gritty, though, I feel the need to digress. Has a body as educated and seemingly intelligent as ISS not made it through 3rd grade math? In their introductory remarks, ISS notes that "[M]ore than 335 total responses were received. A total of 138 institutions responded. ... 197 corporate issuers responded ... ." I got out my handy-dandy calculator which in my case sits somewhere north of my neck (traditional calculators have a tendency in my world to hide themselves under stacks of paper, but my calculator always seems to live in about the same place, covered with some hair in strategically chosen places) and added 138 to 197. Hmm? The total was 335. It was not more than 335. Come on, ISS, this is simple stuff. Editors, though, have a problem with starting sentences with a number, so they use silly terms like more than to mean exactly.

OK, enough on that rant ...

In any event, ISS does an outstanding job with their report. Right up front, they summarize key findings. And, for the upcoming proxy season, the #1 governance issue cited by 60% of investor respondents and 61% of issuer respondents is Executive Compensation. Said differently: if a company wants to piss off its shareholders, the #1 way is to compensate its executives in a manner or amount that does not align with shareholder goals. Other top issues for shareholders were Board independence, shareholder rights, and risk oversight, in that order. For companies, the only issue other than executive compensation receiving more than a 30% vote was risk oversight.

Later on, ISS drills down (I've never used that term in writing before, but I felt the need today). Some of the findings that I found interesting were these:

  • 62% of investors find it very relevant (negatively so) when executives are paid significantly higher than their peer group.
  • 88% of investors find it very relevant if pay levels have increased disproportionately to the company's performance.
  • While issuers generally do not feel compelled to respond to a say-on-pay vote until the dissenting vote has approached or reached 50%, nearly half (48%) of investors feel that an issuer should provide an explicit response when the no votes reach 20% or even less.
Institutional shareholders are very serious about say-on-pay. Companies that ignore this are seeing two phenomena -- contested elections of Directors and shareholder lawsuits against the Board of Directors. 

For companies that may be headed down a path of compensation that could get a lot of no votes, they need to do a lot of planning and explain their decisions up front. Right up there near the top of problematic pay practices are egregious SERPs. Sometimes, they are justifiable, and other times, ...

Caveat enditor!

Tuesday, September 27, 2011

The Numbers are Simple, But They Don't Add Up

We're in the early stages of open enrollment season. Workers are not happy. Is it 2011, or is it just a redux of 2010, 2009, 2008, 2007, etc? We're going to keep it short, but simple. A few of the numbers are made up, but they are not unreasonable.

Sneezy works for Snow White Company. He is married and a father of two children, Dopey and Bashful. In 2011, Sneezy's salary from Snow White was $100,000. As Snow White has not given raises for several years, it has promised Sneezy a 3% increase for 2012. Sneezy was happy about that until he saw what was going on with his health care premiums.

You see, Snow White provided some communication to its employees. In that communication, they used some fancy words like competitive pressures, margins, and cost-sharing. Sneezy had read something about cost-sharing increasing from 20% to 30% for employees and removing the subsidy for other family members that had been at 25%. Sneezy had heard on TV while he was waiting for his favorite show to come on that something called health care inflation was 10% for the year.

So many numbers! Sneezy didn't like math when he was in school and all these percentages boggle his mind.

He went to see his brother, Doc, to ask him how all this would affect Sneezy and his family. Let's look together.

Salary                                              100000
FICA Taxes @ 4.2%                         (4200)
Federal Income Taxes @20%           (20000)
State Income Taxes @5%                  (5000)
Health Care Premiums (see below)      (6360)
HI (Medicare) Taxes @1.45%            (1450)
Remaining Cash                                  62990

Health care premiums were $1000 per month (400 for the employee and 600 for the other family members). Snow White paid 80% of the amount for the employee and 25% of the amount for the rest of the family or $470 per month in total, leaving Sneezy with premiums of $530 per month or $6360 per year.

Salary (with 3% raise)                     103000
FICA taxes @ 6.2                            (6386)
Federal Income Taxes @ 20%        (20600)
State Income Taxes @ 5%                (5150)
Health Care Premiums (see below)    (9504)
HI (Medicare) Taxes                         (1493)
Remaining Cash                                59867

Health care premiums with the 10% health care inflation had increased to $1100 per month (440 for Sneezy and 660 for his additional family members). The change in cost-sharing has Snow White paying just 70% of that first $440 or $308 per month leaving Sneezy to pay $792 per month or $9504 per year.

Poor Sneezy. He got a $3000 raise and yet he has $3123 less in cash than he had the year before.

The numbers: they are simple, but to Sneezy, they don't add up.

Friday, September 23, 2011

It Makes Me Wonder -- Ramblings on our Financial Illiteracy

Were we better off in the years before television? How about cable TV? Do you wonder where I'm going with this? I do as well. But, sometimes that's the beauty and the beast of blogging. You just start your nimble little fingers pecking away at the keyboard and something comes out. Some days, your readers like it, some days they don't. And, some days, they ignore you entirely.

But, back to my original premise. I am not familiar with those days, but I understand that back in the days before the boob tube (which doesn't have tubes anymore), reporters on the radio and in the print media for that matter usually knew what they were talking about, or at least did the research to try to learn. You didn't get your job there because you had a pretty face. Nobody saw your face. You didn't get your job there because you wore short skirts or had sexy stubble on your face. Nobody saw those things either.

But today, it doesn't seem to matter what you know. And, it doesn't seem to matter if you do your research. If you have a TV voice and a TV face and fit the profile (demographic, appearance, political leanings) that your potential TV employer is looking for, you can be an anchor. And, if you seem somewhat intelligent among those who may not, you might even get to ask questions of potential candidates at a Presidential debate.

Last night, there were nine individuals who put themselves forth as Republicans, all of whom say that they want to become President of the United States on January 20, 2013. It looks like there is roughly a 50/50 chance that someone from that group of nine will succeed in that goal (if you think the polls are way off and that either President Obama will easily get re-elected or will easily be defeated, don't argue with me here). Last night, many of them got asked questions about Social Security by one of the chosen panelists.

I don't know who underwhelms me more -- the pretty faces who get to ask the questions or the politicians who attempt to answer them. Yes, there are candidates who appear to financially literate -- financially savvy -- but the bulk of them spew forth as if they understand things like present values and actuarial projections

So, how does this all relate to anything (unless I am changing this to a political or news media blog)? Well, people that Americans look to for information and leadership are not financially literate. If you're getting your information from these people, or scarier still, being led by these people, you are more likely than not to turn out financially illiterate as well. And, that makes me wonder (apologies to Led Zeppelin if you think I am plagiarizing from "Stairway to Heaven") ... It makes me wonder if our massive financial ignorance will bury us in the current financial downturn (or whatever you choose to call it) forever.

Let's consider some of the things that we know if we listen to the talking heads or the politicians:

  • The Patient Protection and Affordable Care Act (health care reform) will save the country money. Wait a second. If the CBO projections are correct, health care reform will save the country money in total over its first 10 years. By year 11, that savings is fairly likely to turn into a cost. But the CBO follows its rules (as it should) and politicians spew forth.
  • The Social Security Trust Fund will go broke by 2040. Yes, there are forecasts that show this to be the case, but there are all forecasts that show it to go broke sooner and those that say it will be later. These are long-range forecasts with many variables. If employment picks up, more money will be paid into the system, presumably by younger workers, and more older workers may postpone drawing their benefits. If it doesn't, then the Social Security system may be in bigger trouble.
  • Defined benefit plans are one of the primary reasons that we are in financial turmoil as they are far more expensive than 401(k) plans, but the actuaries hid that from us (yes, I heard that [paraphrased] on TV). Simplifying somewhat, a 3% of pay cash balance plan (adjusted for things like turnover) is not materially more or less expensive than, for example, a 3% of pay non-elective contribution to a 401(k) plan. A traditional final average pay defined benefit plan can be designed to have the same costs as either one of them. The fact is that the cost of a defined benefit plan may have more volatility and that there will be times when defined benefit plans will, generally speaking, be underfunded (or overfunded), but if Congress had better understood defined benefit plan funding when they enacted some of their silly laws, neither the volatility nor the underfunding would be as much of a problem.
  • Don't check your 401(k) account balance today, the markets are down too much. If you're checking your 401(k) account balance every day, you need to find something else to do with your time. A 401(k) plan is a retirement plan. The idea is to build up your account over time, more rapidly when investments are performing well, and conversely, at a slower pace when your investments are not performing as well. The markets will go up and they will go down. Deal with it.
I could go on. You could go on. But, I had my say, and now I feel much better (I usually feel better after blogging; it's my drug of choice.). What's your say?

Tuesday, September 20, 2011

It's Not Just Math

What is so special about $1 million? Is it that much more special than $999,999? Not to me. They would both represent a significant amount of income for one year -- more than I ever expect to see. What is so special about a defined benefit pension plan having a funded status (AFTAP) of 90% or 92% or 94% or 96% or 100% instead of 0.01% less than any of those magical percentages? Nothing that I can see.

Yet, much of public tax policy seems to revolve around hitting or missing these thresholds or cliffs as I think of them. Make the mark and all is well. Miss it by the smallest of margins and you fall off ... perhaps to your death.

I'm sorry. Cliffs may exist in the landscape, but putting them into tax policy is just plain stupid. I repeat, it's just plain stupid. You want to know what I really think about cliffs in tax policy? Let's move on.

I decided to read the President's version of the American Jobs Act of 2011 (AJA). If you want your own copy, you can get it at It's 199 pages and it's not a fun read. It doesn't have a real good plot; in fact, there is no mystery in this thriller.

I am going to focus on something specific here, and I am going to tie it back to 401(k) plans. According to the current version of AJA (not Steely Dan's version or Louie Gohmert's version), a married couple filing jointly becomes more fortunate when their combined earnings equal or exceed $250,000. By my quick reading, it would suck to have combined earnings of $250,000. $2,500,000 would work out just fine, but if my earnings (combined with those of my wife) were exactly $250,000, I would be looking to find a way to give up one of those dollars to get to $249,999.

Because of the cliff-like nature of tax policy, trust me, the couple earning $249,999 would be far more fortunate than the couple earning $250,000. Their deductions (also known these days as loopholes) wouldn't go away.

What is one of those deductions? How about the one that you get for deferrals to a 401(k) plan or the one that you get for pre-tax payments of health care premiums? At $249,999, you still seem to get them; at $250,000, to quote Phil Rizzuto (that is scary), those deductions will be gone, gone, goodbye. So, after figuring in the tax bill, earning one dollar more costs you a whole bunch. That is just plain stupid.

To quote President Obama, "[I]t's not class warfare; it's just math." President Obama is a very smart man. He taught constitutional law, and I presume that he knows far more about it than I do. However, I taught math and he didn't. This is not just math (I leave the proof that it is or is not class warfare to the reader as that's what authors do in math books).

When there is a literal incentive to earn less or a disincentive to earn more, that's not just math. It's stupid. When a cliff causes you to be worse off than if you had successfully begged for a $1 lower salary, that's stupid.

Some of my readers tend Democrat, some tend Republican, some do not tend at all. This is not about that, however. You can tax the high earners more or not as you choose, but as for the AJA, it's not just math!

Friday, September 16, 2011

A New Look at an Old Friend

About 10 years ago, they were all the rage for companies that had defined benefit (DB) plans. Lots of DB plans were still in surplus, or at least thought they were, and lots of companies still had ongoing DB plans. Something happened in the interim (OK, a few somethings happened), but that's not the point here. Roughly 10 years ago, lots of companies were looking for an ideal way to fund their DB Supplemental Executive Retirement Plans (SERPs), In my opinion, the most effective way to fund these nonqualified (NQ) benefits was through a qualified plan (QP). This strategy has gone by many names, but the most prevalent in the industry has been the QSERP.

On the surface, the QSERP is simple. An executive has a NQ accrued benefit which is usually composed of a gross benefit offset by a QP accrued benefit. The resultant net benefit is what the executive would get from the SERP. In a QSERP, the QP is amended to increase the QP benefit to include some or all of the SERP benefit, thus (because of the offset feature) decreasing the net SERP benefit by an equal amount.

What does this do for the executive? Here are some of the benefits.

  • It generally secures the benefit. Of course, if the plan sponsor goes bankrupt, such security is subject to PBGC limits on guaranteeable benefits.
  • It takes the benefit out from under the purview of Code Section 409A.
  • While the benefit is still in the plan, it does not fall prey to the doctrine of constructive receipt under Code Section 83.
  • If the benefit is payable in a lump sum, it can be rolled over into an IRA further deferring taxation.
  • The executive can wait until just before his benefit commencement date to make an election as to the timing and form of benefit distribution.
  • The benefit is exempt from FICA taxes.
  • The benefit is protected in the event of a change-in-control.
And, for the plan sponsor, here are some of the benefits.
  • To the extent that the benefit is funded immediately, the sponsor gets an immediate tax deduction.
  • Since the plan is qualified under Code Section 401(a), the trust will be exempt from taxes under Code Section 501(a), meaning that the plan assets grow tax-free.
  • Payment of the benefit comes from a trust that holds all of the plan assets, not from the corporate coffers, or a far smaller rabbi trust.
  • Qualified plans have better optics than do SERPs.
How about for the shareholder? How does a QSERP affect them?
  • In every case that I can think of, implementation of a QSERP has been either income-neutral or income-positive.
  • The company is less likely to have sudden cash flow requirements.
  • From a risk standpoint, it is far easier to use risk management techniques in a qualified plan than in a SERP.
So, why can companies put in these QSERPs? Generally, from a technical standpoint, it goes to two things in the Internal Revenue Code: 1) the nondiscrimination rules of Code Section 401(a)(4) are highly objective; and 2) the combined limits under Code Section 415(e) were repealed.

Yes, that's highly technical stuff. But, suffice to say that it works. For years, I had the extreme pleasure <cough, cough> of teaching nondiscrimination testing to generally younger and aspiring actuaries. One of the things about the testing that I drilled into their heads was this: if you don't pass, you're not trying hard enough. 

Sometimes benefits actually are discriminatory, and there is nothing that any of us can do to change that. But, I have seen some benefit formulas over time that are extremely discriminatory to the naked eye. So, what do we do? We take the employee data and put it in a big pot. We add in the benefit provisions. We stir a bit with the nondiscrimination rules (remember, they are objective; either you pass or you fail.) and out comes a nondiscriminatory plan.

We're late in 2011 now. The funding rules have changed. There are fewer large defined benefit plans, and of those that remain, many are in one state of freeze or another. 10 years ago, there was no 409A. There was no Dodd-Frank, 

There is still lots of merit to this approach. Consider it. Talk to us.

Thursday, September 15, 2011

Change. Change, Change. Change From Fools

A friend of mine changed jobs recently. You probably have a friend who has changed jobs recently as well, whether it be by choice, or by job elimination. In my case, I asked him about it. I wanted to understand the motivation. I learned that, at least in his situation, there were lots of motivating factors. Some are uncontrollable. For example, if your company is in an industry that is harder hit by the bad economy, well stuff happens. Others are controllable. In this post, I want to focus on them.

Can you imagine working for a firm where in your entire career there, you never receive a communication that is truly about your career development? Contrast that with a firm where after you accept an offer, but before you start, you are already getting career development e-mails. What is the marginal cost of doing this? I am going to guess that on a multi-billion dollar balance sheet, the cost doesn't even affect the rounding. What is the benefit of doing this? The improved morale that comes from this sort of corporate behavior will increase productivity to the point where the income statement is materially improved.

Can you imagine working for a firm where press releases are primarily about the organizations that you sponsor? Contrast that with a firm where press releases are about your clients' or customers' successes from the work that your firm does for them or the products that your firm produces for them. As an employee, which would make you feel more proud of the company you work for? Which would make you feel more proud of the work that you do?

Can you imagine working for a firm where during your entire career there, to your product line leader, you are nothing more than a name or a number, and they are not sure exactly who you are or what you do? Contrast that with a firm where your product line leader takes a personal interest in you during your first couple of weeks. And, at this firm, it's not because you are being treated differently, that's just the way she chooses to operate. Which firm will get more out of you?

So, at this point, I've discussed three issues. Between the three, I don't think there is enough there in hard costs to change the rounding in the balance sheet or the income statement. But, the benefits fo doing so, on the other hand, appear to be enormous.

The working world has changed. Management used to have far more intuition to it and perhaps fewer metrics. Before the computer age that we are in now, we just didn't have so many metrics at our fingertips. It was harder to measure the micro effect of each action that we took, to we didn't. We looked instead at macro effects of a pattern of behavior.

I remember, at my first real job (actually this happened in some of my consulting jobs, but my observation is that this behavior had stopped at lager firms by the mid-90s), each employee, on their first day on the job, got introduced around. It was part of a pattern of creating a team-oriented work environment. Sure, it took a little bit of productivity on that day away from both me and the person showing me around, but I think it was more than made up for. But, in today's world of micro metrics, there is a cost to an experienced person introducing a junior person around, so it just doesn't happen.

We used to celebrate successes together. But, the celebration, measured on a micro basis has a cost with no benefit. Now, at some firms, unless you are an executive, you don't even find out about the successes.

Perhaps I am the one who is wrong. I don't think so.

Washington, We Have a Problem

I reported last week on the American Jobs of 2011, President Obama's landmark jobs legislation introduced to the country during a joint session of Congress last Thursday night. In a stunning act of name-stealing, Representative Louie Gohmert (D-TX) has introduced HR 2911 -- The American Jobs Act of 2911.

Representative Gohmert's bill is not nearly as thick as President Obama's, but each, in its own way, purports that it will achieve the same goals.

The good news is that I can explain all of the provisions of Representative Gohmert's bill to you here in a clear and concise manner.

  1. Effective for taxable years beginning after December 31, 2011, the corporate income tax shall be zero percent of corporate income.
  2. Effective for taxable years beginning after December 31, 2011, the amount of the Corporate Alternative Minimum Tax shall be zero.
That's it. This is not an April Fool's joke.

Whose bill do you like better?

Wednesday, September 14, 2011

Public Enemy #1

Suppose I told you that I had a business idea for you that had profits (written as +) and costs (written as -) that went like this:

  • 2010: + 100 billion
  • 2011: + 200 billion
  • 2012 : + 250 billion
  • 2013: + 250 billion
  • 2014: + 250 billion
  • 2015: + 250 billion
  • 2016: + 150 billion
  • 2017: + 50 billion
  • 2018: - 50 billion
  • 2019: - 200 billion
  • 2020 --> : - 200 billion or more every year
How would you "score" this business? Personally, I would say that if we went in to that business, it would be time to get out by 2017. The Congressional Budget Office (CBO), not because they are stupid (they are, in fact, a bunch of very smart people), but because they have a set of rules given to them by Congress that they must follow, would tell you that this business (or law) actually saves the country lots of money.

How can that be? Look at their rules. Time value of money is not part of the rules. So, one dollar in 2010 is the same as one dollar in 2012 is the same as one dollar in 2019. And, the scoring for a bill ends after 10 years. So (and my intent here is not to be political, but instead to make a point) construction of bills and therefore laws becomes a jury-rigged process. Every major bill that goes to the House Ways and Means Committee seems to save money early on and not start to cost money until close to Year 10. Hmmm? Does that make such a bill a budget-neutral, or even budget-positive bill? I don't think so. But the author of the bill will tell you how it will save the country money while neglecting to tell you that the same bill will saddle future generations with mountains of debt.

Where did the numbers above come from? I made them up. Where could they have come from? They could have come from the Affordable Care Act (PPACA), or Health Care Reform, if you prefer. There is a law where the savings are front-loaded, but once the program starts to cost the country money, it never is projected to stop costing money. Yet, the authors of the law say it saves the country money. And, they use the non-partisan CBO as ammunition to prove it. 

The CBO says PPACA will save us money. And, by their estimates, which I believe to be as valid as any others, it is expected to save us money ... over a 10-year time horizon. But, what happens after 10 years? Hmmm! It costs money every year after Year 10. So, if instead of scoring over 10 years, CBO rules asked them to score over 20 years, then proponents of the law could not say that PPACA saves the country money.

Does the public know this? Generally not. Does Congress know this? I think that some in Congress do, and some probably do not. Now you do.

To my mind, these rules are lunacy. We are in the computer age. If the CBO can do a 10-year projection, it can also do a projection for 25 years, 50 years, 100 years. It's not the CBO's fault, though. They have rules. But, to my mind, those CBO rules, foist upon them by Congress are Public Enemy #1.

What do you think?

Friday, September 9, 2011

Everything You Should Know About the American Jobs Act

Ever needy for material to blog about, I eagerly awaited President Obama's address to a Joint Session of Congress where he would introduce his American Jobs Act (AJA). I listened carefully.

I did hear about cuts in FICA taxes. I did hear about small business tax credits. I really didn't hear much, though, that is relevant to what we discuss here.

So, I searched the internet. Google couldn't find text of AJA. Bing couldn't find AJA. Yahoo couldn't find AJA. Only Steely Dan could find AJA (if you get that one, you must either be old like me or old at heart).

We are supposed to learn in a week and a half how it is that the President plans to pay for this stimulus (my word, not his). Here are some things to look for (and everything on this list is 100% speculation on my part):

  • Reduction in the defined contribution 415 limit to $20,000. That is, workers who can afford to make large 401(k) deferrals will not be able to get much in the way of company contributions.
  • Limits on corporate tax deductions for so-called Cadillac health plans for non-union workers. That is, if your employer gives you "too" rich a health benefit, they can't get a tax deduction for all of it.
  • Further erosion of the $1 million limit on deductible compensation under Code Section 162(m). As the President seems to believe that "CEOs and CFOs" make too much money, and he can't stop companies from paying that much money, he will seek to limit the tax deductions that they get. My feeling is that if you limit the deduction much more, most companies will just ignore the deductibility issue and pay their executives however they like.
  • Means testing of Social Security (and perhaps Medicare) benefits so that those who are better financially prepared for retirement will not receive the full benefits to which they thought they were entitled.
  • Some sort of restriction on the tax deductibility of equity compensation.
Ultimately, if the first bullet [above] becomes reality, it may result in joblock. That is, employees currently in the workforce will have difficulty being able to retire and thus will not open up jobs to those not in the workforce. Of course, it's possible that all of my thoughts are incorrect and misguided.

Perhaps Donald Fagan and Walter Becker know.

Tuesday, September 6, 2011

A Good Idea Spoiled -- COBRA and the HDHP

Many would disagree with him, but Mark Twain, many years ago, said that "Golf is a good walk spoiled." I don't think as many will disagree with me when I say that COBRA is a good idea spoiled by high-deductible health plans or HDHPs. Why?

Suppose we consider a not atypical situation. Fred Stonematch was an employee with Rocky Roads Paving Company (RRPC). Fred was married to Wilma, and they had two children, Pebbles and Bam Bam (BB). As Fred had a good job with good benefits and the two children were young, Wilma chose to take a part-time job that gave her flexibility to be home when the kids got home from school, but her job provided no benefits. Recently, RRPC had changed the health care benefits that it offered to its employees to an HDHP. In April, RRPC lost one of its largest contracts in a bidding war and they felt compelled to lay off many of their employees. As the foreman on that contract, Fred was one of the first to be laid off.

When Fred was given his pink slip, the HR manager explained to him the benefits of COBRA coverage. Fred could still get health care coverage for his family and at group rates (plus a small administrative charge), Fred dutifully enrolled for COBRA coverage and began writing checks for $1400 per month. Fred didn't have a lot of savings, so this was a real hardship, but he did understand that he and his family needed to be covered against a health catastrophe.

In May, Pebbles was out riding her bicycle when she hit a small hole in the road that she hadn't noticed. As Pebbles' arm was scraped severely from the fall, Fred and Wilma took her to the doctor. The $700 charge was covered under the health plan, but they had not yet met their [high] deductible for the year. So, for May, the Stonematch family had health care costs of $2100. Despite paying their COBRA premiums, they received no real benefit for the month of May.

In mid-June, during his first year of Little League, BB got hit in the head by a pitch. Thankfully, he was wearing a helmet. Also, thankfully, the Stonematch family had health insurance that they paid $1400 per month for because withing minutes, BB was feeling woozy and seeing double. Since he had a head injury, the emergency room physician decided that BB needed a CT scan. Ouch! The charge for the scan in the hospital was $1200, but because the Stonematch family was in an HDHP, the insurance paid nothing.

Do you see the problem? Fred did. He knew that there was no way that he could afford not to get COBRA coverage for his family. On the other hand, he couldn't afford to get it. In the first two months of his coverage, he had paid $2800 in premiums, $1900 for medical expenses and received no benefits. Thinking back, he realized that this could be the case, but he still didn't see a way around having health insurance.

When an employee elects an HDHP (or has no other health care choice through their employer), he doesn't anticipate getting laid off during the year. But, if he does, he will often be left no reasonable alternative to paying for COBRA coverage that will likely provide no benefit. It's a triple whammy: 1) no source of income; 2) needing to pay for insurance that he cannot afford; and 3) receiving no actual benefit for the coverage that he pays for.

The system is broken. Some think that the Affordable Care Act was the right answer. Some don't. But I know that COBRA combined with an HDHP is not the right answer. Shame on whoever thought it might be.