Learning some “Disaster Math” lessons

I would hope that the one major lesson that rich Americans and the business community learn from this coronavirus crisis is that all of the wealth you have ever earned and socked away is only as secure as the health and safety of ALL Americans, indeed the health of the entire world. Trillions of dollars of corporate value and retirement fund savings have literally disappeared because we were not prepared to confront one virus with exponential growth.

We have suffered through forty years of screwed-up political ideology regarding the key purpose of funding government. We have also suffered from bad math in failing to come to grips with how public goods are very different in cost structure from ordinary consumer goods. To make matters worse, the 2017 tax reform, rather than goosing tax revenues from a robust economy, sent the deficit spiraling out of control before this virus even hit, starving the government of the cashflow it now needs to keep its populace safe and secure.

Two years ago, I wrote two posts on this subject. The first was about the larger issue of the inescapable morality reflected in governmental budgets, this old idea of commonweal (the common good) which is expressed through those budgets. The second was instigated by frequent reports of charges in the range of $2000 for short ambulance rides. This is called the “fixed cost dilemma,” and it demonstrates the costs of our collective “punting” on paying for this commonweal. We will re-visit this math in a moment.

The math of the Global Health Security Panel

Governmental budget cutters hate agencies that spend money with little immediate measurable impact. In 2018, John Bolton, President Trump’s then-National Security Adviser, forced out the head of a group in his jurisdiction that focused on pandemics and other global threats to health. The panel was then basically dismantled. Budget cuts subsequently forced the Centers for Disease Control to pull out of disease prevention efforts in 39 at-risk countries.

Disease knows no borders, despite this administration’s misguided belief in walls. In the past months we have quickly lost in economic value many, many times the budgets of these governmental departments. They may not have been able to stop the novel coronavirus from entering the United States. However, science-believing and math-literate government officials would more likely have had better notice and more effective tools with which to lessen impacts. Other countries did.

It is indeed possible to waste money in disaster planning. The problem is that you often don’t know which expenditures paid off and which did not until well after the fact. But you can learn lessons, and hopefully we will learn here as well.

The fixed cost dilemma

Excess hospital capacity, under-used emergency facilities, and specialty equipment like respirators are often seen as profit-draining “fixed costs” by accountants (that is a confession as well as a statement of fact). Here is an easy example of what is called the fixed cost dilemma:

Imagine that you run a hospital with one “extra” high-tech ventilator to facilitate the care of critically ill patients. Its original cost was $20,000. Because of its technology, it has a useful life of only five years before it goes obsolete. And because it is a back-up machine, in some years it is used only once, and in some years never. If we have a major health emergency, however, it might be used 100 times in a short period. Here is the math question: How much should you, the hospital, charge the patient for the use of the machine?

That is a trick question, because there really is no good answer. If we are trying to recover the cost of this machine, we could justify a charge of $4000 for a once-per-year use ($20,000 divided by five), or likely much more if we need to show a profit. Alternatively, if this machine were used a lot, the price per patient could come down dramatically, to $200 or less, and you could still recover the cost of the machine.

This is that “bottom line number” world that healthcare facilities enter into when they willingly or unwillingly take on “public good” services like 24-hour emergency rooms, EMT services and disaster preparedness planning. These all have large fixed costs that must be “amortized” to recover their costs, but this is often done in very arbitrary and counter-productive ways.

If the fire department ran this way

So, think about what would happen if the fire department engaged in similar accounting practices. In this “bottom line world,” you and I would pay ZERO for fire services, unless we had a fire, in which case we would bear what is called the fully absorbed cost of that fire to the department. This cost would include not only all labor costs on that day, but also a 1/365th pro-rata share of all of the annual fixed costs of running the department, like the trucks, the firehouse, and the fire chief’s annual salary. The cost of that one fire to us would get very ugly indeed.

Or, alternatively, the fire department lets your home burn down if you don’t have a credit card handy at the scene or have not paid your annual assessment. This actually happens in some communities.

Or, for a third option, your fire insurance expands to cover the cost of the fire department in the case of this tragedy. Your premiums would obviously skyrocket and there would likely be huge “deductible” and “out-of-pocket” expenses billed to you, after a lot of dickering back and forth between the insurance company and the fire department.

We typically do not run the fire department that way, and for this one very good reason: “common goods” need to be funded by “the commons.” Which is all of us.

Disaster planning for communities is too critical to be left up to private corporations trying to optimize profits. And the smart countries have found that this applies to all of healthcare as well. Healthcare is not just a “fringe benefit” reserved for those lucky enough to work for large, profitable employers. The commonweal is only as strong as the health of my weakest neighbor. Has that not now become obvious?

If we get a Democratic president in 2021, you can be sure that Republicans in Congress, who are directly responsible for the fiscal disaster of the 2017 tax reform, will insist on extreme levels of austerity, just as they did in 2009 after the economic mess they made in 2008.  This after recently handing out billions of dollars to “socialize the losses” of huge corporations who had spent those massive 2017 tax savings on stock buybacks and executive bonuses. Perhaps it is time for some “claw-back.”


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