Medical Insurance Subsidy

Exactly a year back my mother was in hospital. She was there for three weeks before she died. The bill for the three weeks came to close to four hundred thousand rupees. She was covered under my corporate medical insurance so I passed on the cost to the insurer, who paid most of it. I didn’t really complain, the insurer was obliged to pay, and the hospital was more than happy to receive the fee.

The hospital follows an interesting business model. On one hand it dons the garb of a corporate hospital while on the other it is a charitable hospital. A large section of the patients are treated at extremely low cost, or even for free. The rest of the patients have insurance coverage. Those that have coverage are fleeced, and this money effectively cross-subsidizes the treatment of the poor. All works out well for the hospital. Except..

Do you realize that when you (or, in most cases, your employer) pay your premium for medical insurance you’re not insuring just yourself? That because of hospitals like I just mentioned, your insurance is also effectively paying for the treatment of a larger population? That the cost of treating some random patient in the hospital you were admitted to is paid for by you, as part of your medical insurance premium?

Changing tracks, I think the best thing about India’s healthcare industry is the diversity. You have government hospitals. There are university hospitals. There are large corporate hospitals you wouldn’t think of stepping into unless you had insurance. There are charitable hospitals which treat you for next to no cost. There are the neighbourhood nursing homes which essentially cater to the uninsured middle class. Reasonable facilities but not too expensive. And so forth.

There is no formal system of medical insurance in the country. There is no single large government system. If the current state of healthcare in the country is one of not having evolved much, I really wouldn’t mind it remaining this way. I hope we never get into the kind of equilibria that the US and the UK have gotten themselves into, which appear efficient but which ultimately prove expensive for people.

It is the diversity in the system that keeps the healthcare industry here competitive, and keeps costs low. And of course, you pay for other people too when you pay your medical insurance premium.

Crowding out with public transport

This is an idea that’s been in my head for a while. About whether it is possible to nudge people who normally travel in cars to use public transport by simply flooding the roads with buses. The motivation for this comes from the hassles associated with marking and enforcing bus lanes, a form of public transport that is generally considered superior to subway trains in terms of cost of implementation and effectiveness.

So the idea is that as the number of buses on the road increases, the average speed of cars comes down. And after a point, the number of buses on the road means there’s enough supply that one can travel comfortably in them. And there will come a point when people will give up their cars in favour of buses since they can now spend the time more usefully rather than waste it by concentrating on the road.

Of course, this point is still far away for a city like Bangalore, though the BMTC has been making efforts, with initiatives such as the Bus Day. Still, now I’ve begun to have my doubts about it. About whether just increasing bus connectivity and frequency and quality will be enough to take cars off the road. I’ve begun to think if the comfort of not having to drive but travel at the same speed is enough to compensate for the cost of walking to and from bus stops and waiting for buses. The other cost of traveling by bus is that once you get into a bus you travel by a fixed route rather than adapting to daily traffic flows.

The important thing here is the distribution of waiting time for catching a bus. If a passenger is convinced that he is very likely to get a bus within a certain span of time with a very high probability (using vague words to avoid putting random numbers) he is likely to wait for a bus. However, if there are no such bounds, then the passenger might choose to travel by an alternate means of transport.

Still it needs to be seen. From what I know, all cities that currently boast of great public transport actually built a lot of the basic public transport infrastructure before the boom of cars in the place. I can’t recall off the top of my head any city that has actually nudged passengers from personal cars to public transport after cars had become default mode of transport (if you know of such cases, please let me know). In that sense, this nudging towards public transport is still a hard problem to solve. Nevertheless, I still think it might still be a good idea to try crowd out private transport by public transport.

Fools on the Hill

6th August 2010

We had returned to Leh that afternoon after spending the previous day at Nubra valley, some hundred and fifty kilometres to the north of Leh. On the way back to Leh, we had been informed by the driver of a car passing the other way that there had been a cloudburst in Leh and hundreds of people had died. There were hardly any armymen at Khardung-La; on the way to Nubra the previous day, the place had been teeming with armymen and tourists.

Everything in Leh was closed; we were told everyone had gone to help out with rescue operations. Thankfully we found we had a booking at a hotel and checked in and quickly booked a ticket on the first flight the following morning. The evening was spent playing cards and watching news on some horrible Hindi channels (the hotel didn’t have any English channels). I was on the terrace, talking to Pinky over the phone. And I saw people in the street walking down towards a nearby hill.

Soon there were more people. And even more. All of them carrying some sort of luggage, like they were running away from something. Soon the street was filled with people running towards the hill. It was as if the whole town was running towards the hill. I went in and informed the others, who checked up with the hotel staff who instructed us too to proceed to the hill.

A couple of hours earlier we had found out that our hotel building had been built of mud, like all other buildings in Leh. Leh is earthquake-prone but it hardly rains there so mud houses are the norm. Given the floods of the previous night we had already been apprehensive about spending the night at the hotel. And now when we heard stories that some canal had burst and the street where our hotel was would get flooded we panicked. Picking up our bare essential belongings (basically the “hand luggage”) we followed the town down the road and up the hill, and settled in a reasonably comfortable place there.

I must have spent some three hours on the hill. Some friends spent double the time there, apprehensive of getting back to the hotel. While I was there I got conflicting news. Some people were saying that the floods had not hit our part of Leh. Others said it was only a matter of time and the entire area would be flooded with water. At times we worried if we were high enough on the hill, at other times we contemplated descending. It was crazy.

While on the hill, frantically trying to calm myself down, I thought this was just like the global financial crisis of 2008. The problem in 2008 after Lehman crashed was that nobody trusted anybody any more (coincidence: Lehman’s ticker on NYSE was “LEH”). So if I don’t trust you I don’t trade with you. The lack of trustworthy sources of information meant that nobody knew which financial institutions were in what state of health. So everyone just assumed the worst and refused to trade. It was only after the government (some sort of credible player, essentially) stepped in (TARP, discount window, etc.) that people began trusting each other and the markets calmed down presently.

It was similar on the hill. There were no credible sources of info. Nobody knew what was happening, and given the extreme risks involved (in the worst case we could have been washed away, either by the rain on the hill (there wasn’t any when I was up there) or by floods on the street). People would go up the hill, and down the hill. Looking at them, others would try glean information (I decided it was safe enough to descend when most of the hill emptied; wisdom of crowds fundaes). But then there was distortion throughout the system. It was like all of us were playing one big game of Chinese Whispers.

It must be mentioned here that following the previous night’s cloudburst and floods there was a sense of panic all over town (just like there was in the financial markets back in 2008) so it was easy to spread rumours. The only way to have controlled damage was to have some credible sources (like say some armymen in uniform) to come and let us know what was happening. But then there were parts of town significantly worse affected compared to us so there was no help coming our way. And we continued to panic. And play chinese whispers.

The three hours I spent on the hill are probably the scariest of my life. Even now, thinking about that gives me the jitters. I’m happy I’m here, sitting at home at my ancient teak-wood desk in front of my laptop, telling you the story.

PS: the title of this post derives its name from a Beatles song of a similar name and has no other connotations

Successful IPOs

Check out this article in the Wall Street Journal. Read the headline. Does this sound right to you?

MakeMyTrip Opens Up 57% Post-IPO; May Be Year’s Best Deal

It doesn’t, to me. How in the world is the IPO successful if it has opened 57% higher in the first hour (it ended the first day 90% higher than the IPO price)? To rephrase, from whose point of view has the IPO been the “best deal”?

What this headline tells me is that makemytrip has been well and truly shafted. If the stock has nearly doubled on the first day, all it means is that MMYT raised just about half the cash from the IPO as it could have raised. If not anything else, the IPO has been a spectacular failure from the company’s point of view.

The US has a screwed up system for IPOs. Unlike in India where there is a 100% book-building process where there is effectively an auction to determine the IPO price (though within a band) in the US it is all the responsibility of the bank in charge of the IPO to distribute stock (as far as I understand). Which is why working in Equity Capital Markets groups in investment banks is so much more work there than it is here – you need to go around to potential investors hawking the stock and convincing them to invest, etc.

Now, the bank usually gets paid a percentage of the total money raised in the IPO so it is in their incentive to set the price as high as they can (and the fact that they are underwriting means they can’t get too greedy and set a price no one will buy at). Or so it is designed.

The problem arises because the firm that is IPOing is not the only client of the bank. Potential investors in the IPO are most likely to be clients of other divisions of the bank (say, sales and trading). By giving these investors a “good price” on the IPO (i.e. by setting the IPO price too low), the bank hopes to make up for the commission it loses by way of business that the investors give to other divisions of the bank. If most of the IPO buyers are clients of the bank’s sales and trading division (it’s almost always the case) then what all these clients together gain by a low IPO price far outweighs the bank’s lost commission.

It is probably because of this nexus that Google decided to not raise money in a conventional way but instead go through an auction (it made big news back then, but then that’s how things always happen in India so we have a reason to be proud). Unfortunately they were able to do it only because they are google and other companies have failed to successfully raise money by that process.

The nexus between investment banks and investors in IPOs remains and unless there are enough companies that want to do a Google, it won’t be a profitable option to IPO in the US. Which makes it even more intriguing that MMYT chose to raise funds in the US and not here in India.

Liquidity

We live in an era of unprecedented liquidity. Think about the difference from just about ten years ago. Back then, there was a much larger amount of cash reserve that one had to keep in one’s home, or on one’s person. There were no ATMs. There were no credit cards. All purchases needed to be meticulously planned, and budgeted for.

Now, because we don’t need to carry as much hard cash, there is so much more money in the banking system. While that gives depositors the nominal daily interest rate (at some obscenely low rate), there is much more money available with the banks to lend out, which increases the total amount of economic activity by nearly the same amount.

Just think about it. It’s fantastic, the effect of modern finance. And I don’t disagree with Paul Volcker when he says that the most important contribution of modern finance has been the ATM.

PS: My apologies for the break in blogging. I was in and around Ladakh for a week (yes, I was there when the cloudburst happened) and there were some problems with my laptop when I returned because of which I wasn’t able to blog. Hopefully I’ll be able to get back to my one-post-a-day commitment. And I have lots of stories to tell (from my Leh trip) so hope to keep you people busy.

Barista Update

The Barista at Barton Center on MG Road has suddenly become so much more bearable, as they have turned down the volume of their music to a level such that you can actually have conversation without shouting. On a related note, it seems much easier to find tables there compared to earlier (yesterday we walked in around 6 and found several tables empty; earlier there would be a long wait at that time).

On yet another related note, they seem to have done something about the pricing. It’s friggin’ expensive now (70 bucks for a small cappuccino?) but I think they’ve gotten it right. There is obvious value in the restaurant as shown by the long waiting lines that used to be there earlier, and the restaurant is now simply monetizing that value rather than using artificial means (loud music) to chase people away.

As a former revenue management professional (damn; that sounds so corporate whoreish) I’m happy they are doing what a coffee shop like them is supposed to do – providing excellent environment for long conversations and chilled out afternoons, and actually charging for what it’s worth.

The earlier method was so cheap and country – they were clearly underpriced because of which there was overcrowding and they weren’t able to meet demand and had to use other measures such as playing loud godawful music to keep the crowd rotating.

Two thumbs up to Barista’s new pricing and music policy!

Valuation of Parking Space

There’s a unique problem in my apartment building – the building has been built with provision for only seven parking slots in the basement but each of the nine houses here has been allotted a slot, which means there are two obstructing slots. Unfortunately, my slot is at a location where I get blocked by the car belonging to the guy upstairs and so I’m a directly affected party due to this problem.

Currently I’ve managed to get around this problem by parking my car in some corner of the basement but neighbours are cribbing saying it spoils the “look” of the building (as if the look of the basement matters! ).

Coming back to the problem, I was wondering if there exists a solution. Clearly, the shape and orientation of the basement means that not more than seven cars can be parked there in a non-obstructing manner. Now, since every houseowner here was allotted a slot when the building got built, they are entitled to a slot so it is not feasible to request/tell someone to rent their house to someone who doesn’t own a car (2 bedroom houses with parking slots cost some 2 kilorupees a month more than those without parking slots).

Thinking about it, the only solution I realized is by trading a parking slot among affected parties. For example, the slot of my house (B1) is obstructed by the slot belonging to the C2 house. Now, what if my owner tries to buy out C2’s parking space? He can either buy it out outright or he can pay the owner of C2 a monthly fee in exchange for C2 not letting out his house to someone with a car.

And he gets compensated for this by charging a higher rent from me (note that if my landlord buys out the c2 slot, I effectively get two slots, since both belong to me, there is no obstruction). The key to this, however, is the relative pricing of various parking slot combinations.

The key equation is this: if Pn is the monthly rent of a house in this building with 2 bedrooms and n parking slots, then there is a profitable trade between the owner of my house and the owner of C2 if and only if:

P0 + P2 >= 2 P1

If the above equation doesn’t hold, the amount by which my owner gets compensated (by me) for the second parking slot will not suffice to pay the owner of C2 to not let out his house to someone with a car, so the trade I described above cannot take place.

But then, according to Coase theorem, irrespective of initial allocations (here C2 has a parking slot that blocks B1’s slot) there exists a trade in which each party gets the desired outcome. Is there a contradiction with the equation I’ve written above?

Now, thinking about it, the value of both my house and C2 is not actually P1 but a number P1′ which is less than P1. P1′ takes into account the pain of having an obstructed parking slot (I get pained because I can’t take out my car when I want; C2 gets pained because I disturb him every time I want to take out my car), and so effectively both my house and C2 would be overvalued if we were paying a rent of P1.

And if we take P1′ into consideration rather than P1, I’m sure the following equation holds:

P0 + P2 >= P1′

The only other problem here is that when taking a flat on rent, you are unlikely to check for details such as if your parking space is blocked, so it is likely that the deal will take place at P1 rather than at P1′. However, once you move in, you figure out the pain and the owner of the apartment will feel the pinch when his tenants clear out at a rate faster than he would’ve expected which ends up reducing his long-term average rental income. And the deal I described above will take place if and only if he figures out why the fair value of this apartment is P1′ and not P1.

Division of Labour

Some six of us have planned for a vacation for next month. And so far, the “labour” of planning the vacation has been divided unevenly. So far, it has been three of us who have been doing a lot of the work – talking with tour operators, drawing up schedules, planning transport and accommodation, booking tickets, etc.

Now with a large part of the work having been done, the three of us who have been doing the work have decided to put NED and have left it to the other three “freeriders” to complete the rest of the work. As you might expect, the other three continue putting NED and in the last few days not much work has been done.

The question is this – what is the optimal strategy for the three of us who have been so far doing work? We think we’ve done more than enough of our share and so the others should take over now. On the other hand, the more we leave it to the other three, the more procrastination that will happen which might come back to hit all of us in terms of higher rates, etc.

It is dilemmas like this that allow freeriders to freeride – they know that by freeriding, they are not the only ones who are losing out, and that there are people who are more driven than them who will also end up losing out if these guys freeride. And the freeriders know that the driven guys won’t let things drift and will positively do something about it, and that encourages them to freeride further. And so forth.

Is there a solution to this problem? When there is a common objective, how should incentives be structured in order to make the freeriders work, while also not making it obvious that these are artificially tailored incentives?

Kabaddi and Jesus Navas

I’ve always talked about the Kabaddi style of solving a problem. In Kabaddi, when you are defending, six out of the seven players in the team form a chain in order to encircle the attacker. The seventh defender, however, strikes it alone, in a different direction, trying to draw the attacker into a position where he can be effectively surrounded.

Now there is a footballing analogy to this – the Jesus Navas style. Those of you who watched either Spain’s game with Honduras or the second half of their loss to Switzerland would’ve noticed that Spain effectively followed two lines of attack. The first was the traditional way – attack down the middle in a series of slow passes and build-up. Five of Spain’s front six players would get involved in this attack down the centre, almost rendering their game one-dimensional. And then there was Navas.

I haven’t confirmed this stat but in the game and half that he has played Navas has completed more crosses than anyone else in the tournament. He would strike it on his own down the Spanish right flank, hug the touchline, beat the full back and put in crosses. Minute in and minute out. Sometimes with a little help from full back Sergio Ramos, but mostly alone. It was fantastic to watch.

What this ended up doing was to divert the attention of the opposing defenders to cover Navas. If everyone were to have been attacking down the centre, the defending team could’ve just parked their bus in front of their centre and prevented any scoring. Spain letting free this one guy to take a different route meant that the opposition needed to cover that also leading to insufficient cover in the centre (it is another matter that Spain failed to score against Switzerland. But they did get so many more chances after Navas came on).

I’ve always been fascinated by such strategies at work, in business. You have a bunch of guys who try to attack the problem front-on, in the conventional way, working together, passing to each other frequently. And then there is this one guy who has been left out of this clique who attacks the problem “from the flank”. In his own way, without fear of failure. He knows that he is only an auxiliary solver, that he has nothing to lose (Navas lost his place in the XI after the Honduras match but I don’t think he had expected to ever play at all), and he can just go for it. The option value of letting one guy in the team loose in order to search for alternate solutions while everyone else is building up down the middle is immense, I think.

This is similar to Nassim Taleb’s “barbell investment strategy”. Acccording to that, he parks some 90% of his assets in ultra-risk government securities. They don’t give spectacular returns but his money is safe. And the rest of the 10% he uses to punt by buying stuff like out-of-the-money options. If they expire worthlessly, he hasn’t lost much of his wealth. The optionality (here, literally) of that additional 10% is, however, immense, and there is potential for spectacular returns from this strategy. with losses being capped.

Diminishing Value of a Red Card

Often when we see players being sent off AND penalty kick being awarded in the event of an illegal stop of a goal-bound ball, Baada and I have thought that the punishment is too harsh. That for stopping one goal, the team effectively gives away the goal (conversion rate of penalties is high) and also loses a player (sometimes the goalie) for the rest of the game.

Now, after last night’s strategic hand ball by Luis Suarez, people are complaining that the punishment is not enough. Though it was a split-second instinctive decision by Suarez to handball, even if he were to replay the incident in his head and analyze the costs and benefits, I’m sure he would’ve done what he did. This clearly contradicts what I mentioned in the first paragraph.

The main issue here is with the value of a red card at various stages of a game. The red card has intrinsic value – of being suspended for the next game. In addition to this, the red card leaves the team one short for the rest of the game, and so it is clear that the later a red card is given out, the lesser the disadvantage it causes the team because they’ve to play for lesser time with a man short.

What makes Suarez’s decision more logical is the time value of a one-goal lead. The lesser the time left in the game, the more the value of the one-goal lead since there is lesser time for which it needs to be protected. And in this case, the handball occurred on what might have been the last “kick” in the game, and so the value of the one-goal lead was really high.

The earlier this incident had occurred in the match, the less would’ve been Suarez’s incentive to handball – more time to win back the conceded goal and more time to play a man short if redcarded. At the time when it actually occurred, Suarez would’ve been a fool to NOT handball. The payoffs were heavily loaded in favour of handballing and he did it.

People on twitter are suggesting that rules be changed, that the goal should’ve been awarded anyway instead of the penalty and stuff, but considering that the same punishment costs much more if given out earlier in the game, I think the current punishment is appropriate. The excess of this punishment in earlier stages of the game is compensated by the punishment being too little in the latter stages, and on an average I think it is appropriate.

Let’s continue to keep football simple and not clutter it with Duckworth-Lewis kind of rules. And congrats to Suarez for taking the most logical decision at the moment. It is indeed as great a “sacrifice” as Ballack’s tactical yellow card against Korea in the 2002 semis.

And I feel sad for Asamoah Gyan. But then again, with Ghana being in the knockout stages solely on the merit of two Gyan penalties, it is only appropriate that they are going out nowon the demerit of Gyan’s missed penalty.