The New Health Care Plan: The Importance of Branding

I had some apprehension in writing this blog post because of the proposed health care plan fiasco. It’s an inflammatory issue with misinformation, myths, and scare tactics permeating all conversations I hear on the bus, in the office, and even on television. One of the things I’ve always wondered is why don’t we have more entrepreneurs in leadership capacities in government? There are some, don’t get me wrong, but we all have to remember that the United States of America is built upon entrepreneurship and small businesses. We are a mom and pop shop, yet oftentimes it seems like we have this notion that the JPMorgan’s of the world are the primary employers. A 2006 Census report states that 99.9% of the businesses in America have under 500 employees and these small businesses provide over 54% of the jobs. I wonder what that number would be today with eBay stores, Etsy shops, the rise in home based businesses, and Corporate America trimming down their headcounts.

The reason I bring up the fact that America is a mom and pop shop is because I think the new administration should have taken an entrepreneurial-like approach when trying to push the proposed health care plan. In my opinion, there have been several failures in trying to push this new agenda, and they have been feeling the heat as a result. I wouldn’t go so far as to say that Obama is a failure as a leader as Umair Haque of Harvard Business stated, but I think that if they had a mulligan, they would (and should) have done some things differently. I am deeply in favor of changing one of the most inefficient industries in America. It’s needed through plans such as what I think Obama’s plan is proposing, but hey, I’m not sure I even understand it with all of the conflicting accounts.

Some things that entrepreneurs  are forced to develop when introducing a disruptive new product are:

1) Make it easy for everyone to understand what it is you’re doing. Where’s the value? And for who? And who’s going to be affected? And how much?

As an entrepreneur, you are constantly pitching your product, and you don’t have 10 minutes to explain all of the benefits you provide over the present way things are being done. It’s something I struggled with initially, but the sooner that I got to a crisp elevator pitch, the easier it has been to explain what it is I’m doing.

The biggest problem that I’ve had with this new health care plan for America is that I don’t understand what it is! I’ve read so many conflicting stories and the politicians themselves don’t seem to be on the same page. It’s complicated. It has so many layers. What is the public option? I think I understand, but the more information I get from multiple sources, the more confused I become. You hear many of politicians explain it and it becomes clear that they don’t really understand the nuances and in many ways contradict themselves. Please anchor the explanation in terms of something we already understand. Bill Mahr says that they should call it the Medicare for America.

2) Eat your own dog food. If the product is really that great, you better be using it too!

How confident would you feel about using a Macbook if everyone working for Apple used Microsoft products with Dells?

In many of the town hall clips that I’ve seen on CNN, many folks ask the politician if they’d be willing to switch to the proposed health care plan instead of the government plan which is the largest group health care policy in the country. The reason it is so beneficial to be under a group plan is that the group can better negotiate with the insurance company to get the best rates, in the same way that Wal-Mart has strong negotiating power with Proctor and Gamble. When the politician gets asked that question, I hear quite a bit of stammering and a very politically correct response that says neither yes or no. If it’s not good enough for your family, why is it good enough for the American people? Imagine how powerful it would have been to pre-empt these questions and a major part of the roll out of this proposal is to say that this plan is “Medicare for America, and the plan is so good that we’re giving up our plan to signing up with this new proposal”. I’m not saying that they should accept a plan that may be geared only towards the low-income, but if the goal is to provide a tiered group of packages, one package should reflect the fact that they are part of the program as well and figure out a way to do so.

3) Plan for how to address and pacify the needs of non-market participants.

Dealing with the non-market environment involves formulating a strategy to deal with special interest groups that are highly organized and easily mobilized. They don’t operate to your standard supply and demand market forces. In this case, we’ve seen the result of this with all of the highly publicized town hall meetings. They are very passionate about the issue and they have been given a platform for voicing their displeasure. What we must remember is that this is a very small minority of people that have been mobilized for this. The folks who have health insurance, don’t care about the issue, or in support of the new proposed health care plan are not highly organized and in my opinion, it doesn’t seem like the new administration did enough to prevent the non-market environment to take such a pivotal lead on how America feels about this issue. Why isn’t there a Twitter account to tweet fact after fact about the health care plan, so that we get a piecemeal approach to understanding such a complex issue? Why not a big social media approach that was effective for the Obama election? No 30-minute infomercial?

At the end of the day, this all comes down to branding. What probably is a perfectly good proposal was not well branded, distributed, and delivered. This isn’t just your ordinary proposal. This is something game-changing that could potentially help millions of people. Some may say that these town hall meetings are great because it’s stimulating all of this debate, but any expert strategist would tell you, you have to be the one leading those discussions, not responding to them. There are always going to be dissenters who are going to disagree with Obama for several factors, but a well executed branding strategy would have made their efforts less powerful than they were. Maybe the current administration is stretched thin, but this is too important of an opportunity to transform America and at the end of the day, I hope it does, for the better. The real thing that needs to be addressed is wellness. The most powerful medicine is preventative medicine. It doesn’t matter at the end of the day how much we spend or plan on spending on health care if we don’t attack our communities so they can be given the tools to stay out of the emergency rooms.

Come see our short film at the Gene Siskel Film Center!

As some of you may or may not know, I have joined forces with the talented Mr. Jason Camp with Metroworks Entertainment. We have had quite a bit of early successes, including the debut of a short film at the Cannes Film Festival in the Short Film Corner. It’s been fun to immerse myself in this environment and begin to learn a completely new industry that has quite a bit of nuances. Interestingly enough, all industries have its core principles, and once I get the nomenclature down, I’m looking forward to attacking this space, which is ripe for innovation. We are going to be shooting the full-length film of the short that debuted at Cannes in November of this year. We have a couple of interesting things in the works right now, and Mr. Camp is the creative side, so hopefully I am the “suit” in the operation and scale this opportunity. As I mentioned before, just one spot in the portfolio of opportunities, so I will be posting more about those things soon.

Next Tuesday, August 11th, another one of our short films will be shown at the Gene Siskel Film Center at 8:15pm.

The trailer is below and we hope to see you there! To buy the tickets on TicketMaster, go to this link

http://www.ticketmaster.com/Chicago-Connected-I-tickets/artist/1343077

Gene Siskel Film Center
164 North State Street
Chicago, IL 60601

Turning economic uncertainty into a competitive advantage: NonProfit Opportunities

In today’s economy, it doesn’t take much work to hear about another sad story about how the economy has transformed our everyday lives. We all know someone’s that’s been laid off, businesses who have struggled to raise funding, and existing businesses that have to restructure the way it does business. With economic uncertainty comes economic opportunity. Warren Buffet says it best with his famous line “Be fearful when others are greedy. Be greedy when others are fearful.” Mark Cuban goes on to say “The nature of our country’s business infrastructure is that it is destined to be boom and bust. Booms are when the smart people sell. Busts are when rich people started on their path to wealth.”

Nonprofits and community service organizations have been hit hard because of the recession. The corporate sponsors aren’t there like they used to be, and individual donors, the lifeblood of many nonprofits are less willing to put forth the money that make the business model work. It’s also a big risk to throw a major fundraising event by committing so much cash, knowing how potentially difficult it may be to cover costs. I have received far less invitations to galas, $500 a plate receptions, and other events than any time that I could remember. (One interesting thing to note is when watching CNN several months ago, they reported that several nonprofits are seeing surges in volunteers, people who have been laid off and don’t exactly want to stay at home staring at the television).

I have started to notice a trend where some employers are enabling their employees to work for various nonprofits and community service organization for several days. The employees are getting their normal salaries. It isn’t considered a vacation day or personal day off. For these institutions, this is a tremendous perk to the employees. The employees feel like they are working for an organization that cares about a balanced life, supports philanthropy, and enables them to be positive contributors to society.

There is always a shortage of top-flight talent, in any economic environment. It’s tough to keep the high achievers within your company, because in many cases other opportunities arise and often, they feel constrained by the company they work for. This is the reason why companies like Google enable 20% of their employees time to be focused on their own projects, and why some lawfirms enable their top employees to do special projects and pro bono assignments outside the scope of their core business. Enabling your workforce to volunteer, could be a competitive advantage for people, personnel, and employee well-being. Imagine coupling this effort with an initiative internally, within the company, to make a social community initiative for the volunteers to connect and organize online and offline.

Our new US government administration states that they want Americans to be more committed to public service. They launched USAService.org, a site where Americans can get together to plan and join campaigns for public service. It’s kind of like Meetup meets Causes meets ThePoint. One of the interesting things, and whether you are a Democrat or Republican, you see that the new administration is taking a very personal approach to attempt to engage and empower the American people. Whether it’s working, remains to be seen, but this is another extension of the plan to ensure that the administration maintains its grassroots appeal, and continues to push the movement.

Why not take that next step?

The next step for government to capatilize on this trend of employers giving employees paid volunteer time, is to enable a portion (or all) of the donated time to be a tax deduction. This would incentivize all employers to consider layering this into their benefit packages for their employees. These companies would look more attractive, which can help in recruiting and retention of top employees, and the tax deduction could be financially beneficial. The big company feel could create some self-selection (with volunteerism) that would create smaller communities within the company, potentially connecting employees at a higher level. Some may not feel like a small fish in a big pond, but a small fish in a small pond within a large organization.  On the flip side, this could be a significant shift in supply of eager volunteers that if organized, could have a profound effect on the missions of these nonprofits and community organizations.  They’d have a pipeline of people who have chosen the nonprofits that they’d like to volunteer for, and coupled with a site like USAService.org, the results could be extraordinary. Imagine the impact of creating 100 million+ people to volunteer a couple times a year for their favorite organization. More than likely, a majority of these people wouldn’t have had the time to volunteer otherwise. That’s what I call a stimulus.

How AT&T can be the backbone infrastructure for the mobile web

AT&T, the largest provider of local, long distance telephone services in the United States, is in a great position. They are the exclusive carrier of the hottest phone out in the market, the iPhone. The iPhone has redefined what a phone can do, and should do. It’s been a game changer, that has transformed an entire industry. The fascinating thing about it is that I think we’ve only begun to grasp the kind of power this device can be. It’s been common knowledge for quite a while that the mobile phone was going to be the central platform for running our lives. The biggest barrier that delayed the inevitable were that it was virtually impossible to create programs with all the different mobile web browsers for all of the various carriers out there. There were hoards of companies, including one that demoed at the Demo conference, Bling Mobile, that aimed at making it easier to program for the mobile phone. Well, Apple blew them out of the water, and the rest is history.

I think Apple is going to take over to Google-esque proportions very soon. In the past, everyone was saying Google was going to redefine our lives, but it appears that the throne will shortly be given to Apple. Apple has a higher market cap, but everyone assumed that planet Earth would be changed to Planet Google at some point. I think the latest set of iPhones with video is another example of a game changer. The Flip Video camcorder, recently purchased by Cisco, is the leader in inexpensive video cams that can fit in your pocket. Flip Video and their direct competitors are shaking in their boots, because an inexpensive Apple cam on every phone negates any need for two separate devices. And according to Techcrunch, Apple has recently purchased a boatload of these camera modules to be inserted in every iPhone sold in the future, at very, very low price points. What must be noted is that there are still a small percentage of people that own an iPhone, but it appears that the market share is rapidly increasing, and with additional features, iterations, and functionality upgrades, the iPhone is becoming more and more of a monster.

But what does this have to do with AT&T?

Basic microeconomics will tell you that AT&T’s wireless service is a complementary good for the iPhone. When demand increases for the iPhone, AT&T rides the wave and gets an additional benefit of increased demand. But this benefit can be short-lived if, AT&T doesn’t renew the exclusive contract. AT&T currently has a very spotty service, and must do more to ensure the coverage areas are better than what they currently are. If Verizon gets the iPhone, many people will defect over, myself included. Many others have complained about their wireless EVDO cards being subpar with restrictive data plans. The clock is ticking, and expansion/diversification of revenue is an important priority along with strengthening it’s infrastructure for better overall wireless service.

Here’s what AT&T should do to to become the backbone infrastructure to the wireless mobile web (inspired by this Businessweek article):

Remember the MNVO’s from 4-5 years ago that was supposed to transform the industry? ESPN Mobile, Disney Mobile, etc all had their own special cell phones. The problem with that model is that the pricing was bad from the major carrier, to the price of the phone, to the limited benefit to the consumer. It was an epic failure.

AT&T has a tremendous opportunity to leverage the fact that they do have an exclusive arrangement with Apple to open-source it’s wireless service to any and all devices out there, with some software integration and compatibility from the Apple SDK. . We’ve learned that with the iPhone platform, it has enabled endless use cases with a powerful distribution platform. Partner with any device that can distribute documents, data, pictures,  and videos. Make every device social, and every device interactive. Price it low, and like Amazon’s S3 and EC2 pricing scale, make it cost prohibitive for any competition with the per unit pricing. You can sell everyone on the fact that your competitive advantage is the exclusive arrangement with the iPhone and cement itself as the defacto wireless provider for all mobile devices, including navigation systems, eBooks, cameras, Netbooks, etc. It will enable entrepreneurs to get a chance to build something off of your backbone.  The additional revenue generated can be used as another vehicle to fund the exclusive partnership with Apple, and layer additional services and support that will increase economic rents and opportunity for the company to diversify, especially with rapidly declining profit margins in mobile calls.

I think the difference between what Businessweek is suggesting and what I am suggesting is that AT&T should make it as open as possible for everyone to build off the backbone, not just the major companies. The success of the iPhone is not from being open to just the major companies, but letting everyone compete, which will eventually increase innovation and increase switching costs. This will be better for building customer loyalty and brand equity, instead of charging exhoribant fees for basic services like text messaging.

Two things Apple could do right now to maximize revenue

One of the benefits of being on the outside of a major multinational corporation is that you can comment on what  needs to be done to make more money. You’re unaware of what is currently being worked on, what has been tried and shut down, or what just will not work with the current operational structure of the firm. One of the challenges of a large firm is implementing a new stream of revenue, which has to work across various lines of business, be localized, and be user friendly amongst many verticals. With all that being said, I look at Apple and it’s dominance in the iPod and now the iPhone, and to me, it appears that Apple can be the dominant technology company that everyone assumed Google would become.

Where is Apple now?

Apple is one of the few technology companies that can be in the software and hardware business at the same time. Google is primarily a web-based software company, with 99% of their revenue in the search business. Microsoft is primarily in the software space, with very little revenue being made over the web. Yahoo is a company looking for an identity, but despite everything is a web-based company. The Oracles, BEAs, and RedHats, and OEMs of the world are focused on one part of the value chain, whereas Apple is steadily increasing market share in multiple areas. Apple sells you computers, an operating system and software, and an ecosystem of applications and developers from the increasingly popular iPhone.

Over a billion iPhone apps have been downloaded. There are significant (and increasing) switching costs built on this platform! There is every use case imaginable, and from their recent commercials you can see that they are taking aim at a very potentially lucrative small business vertical. A recent Gartner report showed that Apple’s market share had risen from 5.3% of the smartphone market to 10.8% in the first quarter of 2009. In total unit sales, this is from 1.7 million total sales in the first quarter of 2008, to 3.9 million in the first quarter of 2009. These are staggering numbers considering the state of the U.S. economy in conjunction with the iPhone being restricted simply to a marginal carrier in AT&T, increased competition from competitors (i.e. Blackberry Bold), and limited international expansion. Nokia, the king of the hill in terms of being a cell phone producer, has seen their market share drop at a higher pace than the contraction in demand for cell phones because of the global economy.

Two areas that Apple can maximize revenue: An Apple Payment Gateway and the Amie Street model for the Apple Store.

The Payment Gateway

Recently, Facebook has been testing their own payment gateway for micropayments around their ecosystem of applications. Paypal is one of those companies that really missed the boat to become a massive, game changing company. Owned by eBay, they were more focused on generating revenue to make up for a flatlining (even declining) growth from their core business, auctions. Their Skype acquisition was a failure confirmed on their through a recent Skype charge off, and their StumpleUpon acquisition was a big time failure. So eBay kept raising fees for Paypal to try and smooth earnings to hide strategic business failures in their core business. They essentially priced themselves out of competing in other verticals, and could have made it an easy “build versus buy” decision for companies such as Facebook. It make much more sense to build your own payment gateway than utilizing Paypal and having to hand over the exorbitant fees.

Like Facebook, Apple should absolutely have its own payment gateway. With their apps and developer ecosystem, they could better integrate various payment options for consumers. Developers can play around with various business models, such as reoccurring billing. Although the apps are a guise for selling more handsets, which produces significantly more revenue, this should be a short-term priority.  By owning the gateway for these micropayments, they can earn or keep the fees that would have gone to another carrier. Although a billion apps have been downloaded, a majority are free apps, but as developers create more value with apps, these payments will be start to become more material and a long-term billion dollar opportunity. And you never know what other use cases can be created if it’s part of the Apple development toolkit.

Amie Street model for the Apple store

For those that aren’t familiar, Amie Street is one of those innovative companies that are using basic laws of economics to maximize revenue. Essentially, independent musicians post their tracks with a specified minimum price point. Based on the number of paid downloads, the price increases over time and fluctuates basically at the point for a particular demand and price point.

Why would this be important for Apple?

When reading the book The Long Tail, by Chris Anderson, which delves with the Power Law or “80-20” rule, Chris remarks about the fact [his research] that every song on iTunes is downloaded at least once over a year’s span. Recently, Apple has raised the prices of the more popular songs to $1.39 from the usual $0.99 mark for every song, delineating between a hit and an average song. But as I was looking for old music to put on my iPhone, I’d buy substantially more music for my phone if it was at a much lower price point for an old-school song, or a song that only I really liked that very few did. Will I pay 99 cents for it? Absolutely not. But would I at $0.39 or $0.19? I really would. My perception would change instantly.

If you look at the supply and demand curves to illustrate how this would work, it is essentially a shift upwards of the demand curve, with the revenue illustrated by the area below the line.

Essentially you are increasing the market opportunity by capturing the consumer surplus at all areas under the curve with third-degree price discrimination. Different consumer segments are purchasing at their maximum willingness to buy. Those that like getting the song as soon as it comes out are willing to pay a premium for access. Those that wait for the song to be mainstream pay a different price, and the Geoffrey Moore’s “laggards” will buy it after it’s been popular, but at a low price point because the song has lost it’s luster and are late to getting it (like my parents downloading a Kanye West track).

As a result, you are increasing the number of people that can and will download, by enabling them to reveal their preferences and price points, and let the market forces determine the price.

Apple is in the driver’s seat for being the major technology company out there catering to a strong, loyal installed base. It will be interesting to see how important it was for them to own the central platform that will operate our lives for many years to come: our phones.

KFC Grilled Chicken: Anatomy of a Marketing Disaster

I know that I am not the only one, but all the talk of KFC’s Grilled Chicken promotion was starting to irk me. You have to be living under a rock if you haven’t heard about Oprah’s partnership to give everyone in America who, during a two day period, could download a coupon for a free 2-piece grilled chicken meal. Every business’s dream is to make the Oprah show, because of the success stories, but there are just as many horror stories of brands that were unable to respond to the overwhelming demand for their products. There are countless stories of companies that went out of business because of being featured on Oprah. She is the Billy Mays of syndicated television, yet she remains shielded from mainstream negative sentiments over overt product placement, conflicts of interest, and any negative externalities of the products she promotes. Wasn’t Oprah honored by PETA not even a year ago? The same PETA that is aggressively against KFC’s treatment of animals?

I’ve read and heard myths, hearsay, urban legends, and conspiracy theories about this deal. I also never heard so much thanks and praise for Oprah, for enabling so many people to have two pieces of chicken, two sides, and a biscuit. For many, it’s like a dream come true: free food. Who doesn’t love free food? My older ex-colleagues at JPMorgan would remind me of the good ol’ days when the whole company received free Friday lunch. To me, standing in a line for over an hour for a market value of $3.99 doesn’t seem like the best use of time, but hey, I think my hour is worth more than four bucks. Maybe that’s the economist in me.

Initially, when KFC was rolling out their new product line, grilled chicken, they used the tag-line “Un-Think KFC”, to get consumers to forget that the F in KFC stood for fried, a tabu term in the days of low carb meals, eat fresh, organic/green food, and hydroxycut. From a brand standpoint, it is a stretch, a big stretch. It’s confusing and complicated to the consumer. The reason why this promotion was a brand crisis is that it strained relationships between consumers, the media, and the franchises themselves. In many ways, it reminded us of the McDonald’s Beanie Baby fiasco where mothers were buying the happy meals, throwing away the food, keeping the beanie babies, with McDonalds being unable to respond to the overwhelming demand for the toys.

KFC reported that over 10.5 million coupons were downloaded from the site, despite several site outages, slow response times, and crashes. I’d imagine that several orders of magnitude more were copied as well. KFC also reported that 4 million coupons were redeemed, but that would leave between 6-15 million more that weren’t redeemed! Talk about an inability to respond to market demand! KFC execs were forced to do additional commercials apologizing for the overwhelming market demand, and even prompted a visit on Oprah to apologize some more.

How could this all happen? Social media stepped in and showed a glimpse of it’s power.

Previously, e-mail chains would be used to send coupons, deals, and limited time offers. Now, I observed the URL being sent via Facebook and Twitter at a velocity I never thought was possible. This may have occurred with e-mail, but it was the fact that there were conversations built around the product, and shared conversations were taking place amongst friends, family, and strangers, amplifying the word of mouth. It is much more convenient and accessible to do it via these social media channels, and even if you’re not engaging in the conversation, you are reading the conversation, and passing that knowledge over to others.They were able to tap into new and infrequent customers, who may have never considered KFC as one of their options.

This is the era of the Real Time Web, and to me, this will be known as the crowning event that showcased the future of content, conversations, and corporate engagement. This can turn a successful media campaign to a crisis/disaster in a couple of hours. The one thing KFC did do well with this campaign is that everyone now knows KFC has grilled chicken. It will never be forgotten. Doing a Technorati search, over 447 blog posts have been written in regards to KFC grilled chicken and a Google Blog search yields over 62,375 results and a Twitter search yields new conversations about KFC grilled chicken every couple of minutes.

Here’s where they went wrong

Some KFC franchises didn’t participate in the promotion because they weren’t being reimbursed by the corporate headquarters. KFC’s corporate office said the franchises were reimbursed, but reports of the contrary are troubling. If this sounds familiar, it’s because Quizno’s failed with their franchises for the exact reason. For those that aren’t familiar, the franchises are encouraged to go along with promotions guided by the corporate offices and the challenges with the franchise model, is the sometimes turbulent relationship between the franchises and the franchisees. Most franchises, owned by individuals are under strict guidelines to be maintained as a franchise by the corporate offices. Much of the risk of owning a franchise is your ability to follow those guidelines, and be agile enough when promotions and special offers take place.

Consumers were confronted with long delays, frustrated with many KFCs inability to live up to market demand, and there are even some reports of riots and police involvement. Any time you don’t live up to the promises your promote, it’s a big time black eye for the brand.

What they could have done to turn the crisis into a competitive advantage

Any crisis management business school course will teach you that when you’re in a corporate crisis, not only do you have to provide transparency, and be honest about the shortcomings of the business, you have an opportunity to turn it into a competitive advantage. If it were me, as Monday morning quarterback, I’d let all customers get a raincheck, while we ramp up supply. In addition to that, to get a raincheck, everyone would have to fill out a quick online survey (optional) so that I can get some data on the demographics and psychographics of the consumers. Forget sending in your old coupon and hoping that many people don’t submit them (like companies expect with rebates). Give yourself a chance to get all the data you need, to better take over (or position yourself) within this market as a first-mover in the “fried chicken space”. You prevent others like Popeye’s from digging into your market share, and you know how to better target them in the future.

I don’t think anyone (especially the corporate guys) could have really anticipated this type of response. But with a  struggling economy, and everyone counting their dollars, and cents, you can create a great deal of demand by focusing on price. It appears that with the advent of the $5 dollar footlong at Subway and dollar meals at all your fast food spots, it appears that they are really going to bottom out their profit margins in hopes for volume of sales. It will be interesting to chart the net profit margins of franchises vs. franchisees in this economy on a month to month basis.

In my next blog post, I will try and do some back of the envelope math to try and figure out the cost and benefits of this type of promotion. One thing missing from this analysis is the social value created by this promotion such as from a health standpoint. I think if you evaluate the demographic of their core patrons, who frequent their locations many times, there are significant benefits to having the option of grilled chicken to replace fried chicken.

Where’s the Pareto efficiency in Illinois health care?

As a University of Chicago graduate in Economics, advocating increased regulation is almost a sin. You’re taught that free market economics trumps all, and the market will correct itself to some sort of homeostasis, which is better for everyone. Free markets produce Pareto efficiencies, in theory.  As we are seeing with the current financial crisis, extraordinary greed concentrated in the hands of a few people have made us all worse off. The same could be said about health care in Illinois.

I wrote previously about the need for non-profit hospitals, who gain significant benefits, mainly tax breaks from the state, to provide more programs and serve a  charitable mission to the surrounding community. What we’ve seen is that the charitable mission isn’t being served in many hospitals, especially Northwestern Memorial hospital. Many of these non-profit hospitals are serving very little charity care, while stockpiling significant cash reserves. In fact, Provena Covenant Medical Center, a Downstate nonprofit hospital, lost it’s non-profit status, because less than 1% of its total revenue went to charity care. This ruling is being challenged and headed to the Supreme Court of Illinois.

Looking at the charts of the charity care for each non-profit hospital in Illinois, you begin to see a consistency in the lack of quality charity care for the communities these non-profit hospitals are supposed to serve.  In the previous blog post I wrote about the topic, I proposed that there should be an organization set-up to be responsible for oversight over the non-profit hospitals, ensuring that services are being given to the local community, and serve as the innovative force to layer in some economies of scale by serving as an umbrella organization for bringing increased health care to the communities in the more destitute areas of the city.

Non-profits, like for-profits have to maximize revenue at some point to remain relevant and deliver services to their community. This is why I proposed something which is similar to a luxury tax agreement in professional sports, where the hospitals that are generating a great deal of cash after a finite point, are forced to contribute to the umbrella organization so that we can pool together those resources. No reason in having a struggling hospital, like Mount Sinai contribute the same amount as a Northwestern Memorial, if Mount Sinai has 4 days of cash on hand, and Northwestern Memorial has over 430 days of cash on hand.  The challenge in this mandate lies in how non-profit hospitals, like Northwestern Memorial hospital, will be incentivized to maximize revenue beyond that luxury tax strike point.

The current system isn’t working. In a recent article in the Chicago Tribune, hospitals like Stroger hospital are starting to get an influx of redirected patients, patients originally assigned for another hospital, but referred to another for one reason or another. This has contributed to why our state budget is hurting, and we are forced to make drastic moves, such as increase the sales tax, making taxpayers much worse off.  Non-profit hospitals in Cook County dedicated just 2 percent of total revenue to charity care in 2007, just one point higher than for profit hospitals! Some patients are referred from as far as Lake and Dupage counties, which can easily be an hour drive.

In an article today in the Chicago Tribune, over 32% of the redirected patients of the University of Chicago are poor. Over 7% of the patients that Mercy Hospital takes in from the University of Chicago Hospitals ( just the emergency room only) have no health insurance coverage. So what does any profit maximizing hospital do to outsource so many services to the poor? They create the Urban Health Initiative, which is essentially a partnership with about two dozen hospitals throughout the South Side. These patients go to these hospitals instead of the University of Chicago, and U of C gets to see less patients who are most likely not going to pay. The U of C states that it is a way to alleviate long waits and to give treatment at the appropriate location, but let’s call a spade for what it is, a spade. The U of C had to set up this partnership to ensure that everyone else takes on the burden of these patients, cutting into their profit margins. Let’s not mention the fact that the U of C has the best facilities and the best physicians.

What we need is more transparency behind why those patients were redirected from the University of Chicago Hospitals, with one in three being poor. What are the guidelines and policies? The public should be aware of this, because it’s their tax dollars that are making up for the difference. The minute we do this, the more we provide the Pareto improvements necessary to having a functioning state budget that isn’t nearly as wasteful as it is today.

Maybe the auto industry does need Steve Jobs

With the departure of General Motors CEO Rick Wagoner, and all the circus surrounding the Obama administration bailing out American car makers, it reminded me back to an open letter on Techcrunch, written by Todd Dagres. In his open letter, Todd contends that a new, innovative leadership needs to be installed, someone with the vision of a Steve Jobs. It is readily apparent to everyone that the U.S. auto industry needs an extreme makeover, and is not sustainable, long-term.

In his post, the comments thread went crazy saying everything from the fact that the article was ridiculous, Silicon Valley can’t fix everything and knows nothing, and that Todd has no concept of the macro-economic forces affecting the industry. The more I think about it, the more I realize that everyone is missing the point. Apple did not create the digital music player, they leveraged their strengths, created an ecosystem, and marketed the heck out of why it was superior, and continues to do so to this day. They made the digital music player sexy, and what’s lacking with U.S. autos? Being sexy. Does Apple have the cheapest phone or digital music player? Not even close. But they did create a more price inelastic product, in a space that is highly commoditized.

Doing my basic SWOT analysis, it appears that the U.S. has several strengths that has made itself a powerhouse: innovation, risk-taking culture, limitless access to capital (until recently), the American Dream, and every-present hype. Why shouldn’t the U.S. have sexy cars that the world demands? Let alone something that the American citizens want. Much of what’s being discussed to make the auto industry viable long-term is green this, green that, which is important. I’m afraid we don’t have that long to wait to perfect the system. We need to act now on short-term wins, while concurrently pursuing the long-term energy independence agenda.

Admittedly, I have a BMW, something I was attracted to because of the performance, prestige, and feature set. But more and more, I have come to realize how much better of an experience I could, and should have. In a post by Kristen Nicole, formerly of Mashable, now of AllFacebook, was able to experience Microsoft Sync in a test drive of the Ford Flex. In that experience, she noticed the deep integration between the car, the cell phone, and some compatibility with the Internet. In speaking with her about her experience, the car became just that, an experience. Some of the major barriers for having more Internet in your car include the potential distractions (public safety) and maintaining a consistent, strong signal while driving.

This is that opportunity for the auto industry to reinvent itself. Instead of minor attempts to integrate cars and social media, let’s open up the Apple development platform, allow the ecosystem of developers to create value, and let’s finally make the American car sexy again. Some of my current pet peeves is that if I am talking on the phone, enter the car, it doesn’t automatically shift to the bluetooth. If I look up something on Yelp, the directions don’t automatically pop up on my navigation system. I can’t assign addresses and locations on my car to specific people, and overall, there’s this big disjoint between the two systems. I need a more seamless experience.

Let’s integrate these platforms:the web, the car, the developer ecosystem, the home, and the mobile phone.  Let’s have the developer community contribute to a framework to create value for these cars as a platform that we use far more than we think. I don’t think that when the iPhone was about to be released, Apple had any idea of the magnitude of clever applications for so many different use cases. Imagine if we did that for the U.S. auto industry. Here, we’ve been talking about the connected home and the phone as the one platform that will be more important than the computer. Let’s connect them all. I think that with more access to capital for American consumers for American cars with a developmental platform, the American car may have a killer app to drive adoption and consumption in the near-term.

In many industries, new leadership that hasn’t had any experience in a particular space is brought in to shake things up, and lead the company in a new direction. With the auto industry against the ropes, in my opinion, this is the last chance. I think we need to give up on the idea of being one of the lowest cost providers. It doesn’t appear to be possible with our capital structure. Instead, let’s be the highest value provider.

Valuable companies come from companies that weren’t

One of the first-time entrepreneurial initiations is going around telling people about your new venture. You are filled with excitement, and hopeful that this is the opportunity that you’ve always dreamed about. This venture may make you financially independent one day, and you can retire your parents, long before they need to. You’ve been working secretly during odd hours of the day and night to build something of value, and you’re finally ready to tell the world.

Then comes reality.

You begin to encounter all the people who are chomping at the bits to tell you what you need to do, what you aren’t doing well, and why you won’t succeed. You hear about all the companies that are doing what you’re doing, and why the 800 lbs gorilla is just that. You meet the so-called “experts” who tell you the sad story about how they tried something like that a couple years ago and how there’s no market opportunity. Everyone quotes the latest BusinessWeek article, and points you to all the successful feel-good stories of someone’s magical ascent from bootstrapping entrepreneur, to mogul. The be like ______  chorus begins. What is never mentioned is that what makes you successful 3 years from now is completely different than what will make you successful today. Environments change, competition changes, and path to success changes.

The amazing part is very little of what you hear from others is reality. The only thing real is the precense of detractors.

I have recently had an opportunity to sit down and grab lunch with Mike Evans, co-founder of Grubhub. Grubhub just finished closing a $2 million Series B VC financing. If you read any of the sensational articles in BusinessWeek, you’d expect a company like GrubHub to have been founded eighteen months ago, and needed to raise $10 million, and burn through it in less than a year. The fact of the matter is that they grew the right way, with revenue, over five years ago, in the face of competition, without a huge bank account. This is the normal path of the entrepreneurial venture, not necessarily a made for TV story that the detractors like to quote when talking about building companies that matter.

Recently, Twitter just turned 3-years old. Media companies talk about it as if it was just recently conceived, but if you look at the first sketches, it is from 2000! There’s no way that Jack Dorsey knew that it was going to be one of the hottest distribution platforms created, but if you look at all of the comments about the launch, even from the pundits, you see that the initial reactions were much less than favorable.  If he would have stopped there and listened to the rants of the comments thread, Twitter would have never mattered. Instead, he created a valuable company from something that wasn’t valuable, which is the path of all start-ups.

If you’re starting a venture, stop listening to experts, and start evolving your strategy and continue to iterate your product or service. Nobody is going to know your market opportunity or how to attack it, and it’s not going to happen in day 1 or day 2000. I just finished reading Outliers by Malcolm Gladwell and one of the factors that he attributes to success is getting to the 10,000 hour mark. So get your startup to the 10,000 hour mark. Stop parading at every single conference listening to canned success stories, and instead, put your head down and do some real work. It takes time, patience, with very little fanfare.

In a good post on O’Reilly’s Radar,

Instead of focusing on hype and mega-growth, we can focus on building companies that serve customers in a fundamental way. That’s what matters.

Health Care 2.0: Where non-profit may mean no profit

In the Wall Street Journal today, there was an article today discussing the duality that exists in our health care system, maximizing revenue or serving the charitable mission. Interestingly enough, the article compares two non-profit hospitals in Chicago, Mount Sinai and Northwestern Memorial Hospital. This is especially important to me, because my parents began their medical careers at Mount Sinai, my mom working as a nurse in Recovery Room, and my father, as an Emergency Room resident physician. Additionally, when I have an ailment and need medical attention, outside of the care of my dad, I go to Northwestern Memorial hospital.

Mount Sinai, located on the west side of Chicago, is not in what most people would consider the best of areas. The Wall Street Journal says that Mount Sinai is “Located amid the blight of Chicago’s West Side“. In contrast, Northwestern Memorial hospital, located on the Gold Coast of Chicago, is in one of the wealthiest neighborhoods of Chicago. Both hospitals have the non-profit status, with one of the hospitals generating significant profits on a nice foundation of cash on hand and real estate assets, and the other hospital has barely over a week of cash on hand, with puny profits in comparison.

Guess which hospital is doing well?

Obviously, it’s Northwestern Memorial Hospital. To quote the figures, Northwestern Memorial hospital had a $140 million profit last year, whereas Mount Sinai had a $4.7 million profit last year. Given the size of these institutions, the Mount Sinai profit margin is much less than what you would think on first blush. Mount Sinai is sitting on $6.7 million of cash on hand, which amounts to about 8 days of operating income, with Northwestern Memorial hospital sitting on $1.8 billion amounting to 432 days of cash on hand!

I hope everyone is as shocked in the disparity as I am. One of the things I wish the article did was to show how many patients go through the doors of both facilities, making it more of an apples to apples comparison. Or even a comparison with the University of Chicago hospitals. Perhaps the facts are more skewed if Northwestern Memorial hospital takes on an order of magnitude more patients than Mount Sinai. Assuming that the patient throughput is approximately the same, as you’d imagine the reason for the disparity in profit margin is due to the fact that 70% of the patients at Northwestern Memorial have private insurance compared to 10% at Mount Sinai, 60% of patients at Mount Sinai are Medicaid compared to just 6% at Northwestern Memorial, and only 2% of patients at Northwestern Memorial have no insurance, compared to a staggering 12% at Mount Sinai.

Needless to say, this isn’t fair. Northwestern Memorial is a machine, and Illinois could sure use the tax dollars. The challenges with non-profits in general is that if you don’t run them like a profit-maximizing business, you significantly increase your chances of failing. At the same time, as a non-profit, there should be more initiatives to serve a charitable mission. With Northwestern Memorial hospital, according to the figures given by the WSJ, it appears as an outsider that they are doing very little to provide high quality medical care to those that may need it most. Perhaps they are doing quite a bit, but it would be better if the article addressed some of those initiatives. I look at the cash on hand, and I think of all the things that could be done to address the health care ills that Mount Sinai has a tough time fighting.

I know I am just starting my public policy Master’s degree program, but looking at this, there are some changes that need to be made. In my research on working on SavvyDoc, I’ve seen far too many non-profit hospitals with boatloads of cash, and no incentive to provide additional care and serve the charitable foundation they were founded upon.

Here’s what I propose for non-profit hospitals to retain their non-profit status:

Any hospital with over 180 (half of a year) days of cash on hand has to allocate the remaining amount to programming to serve the community and help with programs to provide health care services to blighted communities. They can also elect to do a luxury tax type of scenario that is used in professional sports, where the cash goes to the non-profit hospitals that aren’t making significant profit and are at risk of being eliminated by any external economic shock. Executive salaries can’t increase significantly from the previous year to prevent hospitals from giving higher salary and bonuses to their executives since they can’t keep the cash on hand.

The risk for this scenario is that you may have potentially removed all incentives for the hospital to see more patients, generate more revenue, etc. after the 180 mark has been reached. I’m not sure how to reconcile this fact.

What do you think? Does this seem reasonable?