For the Common Good
Bone Marrow Part II
The Eighth Wonder of the World
One of the more common complaints about the United States’ present federal government is that states’ representatives act primarily for the welfare of their home states—bringing home the bacon (or pork)—and only secondarily for the benefit of the nation. Last week’s proposed federal budget, for example, included a whopping 6,000 earmarks … despite the fact that a majority of Americans now recognize that the country has eventually got to stop the runaway escalation of the national debt.
But it was not always so, and today marks the anniversary of an event of that nature.
I’m talking about the Northwest Territory, which back in the late 18th century referred to the land south and west of the Great Lakes, east of the Mississippi River and Northwest of the Ohio River.
The Northwest Territory was ceded by Great Britain in the Treaty of Paris at the end of the Revolutionary War, and legally claimed by the four “landed” states: Virginia, New York, Massachusetts and Connecticut. Other states argued that settlers would be drawn to this new territory and in the process enrich those four states, leaving the unlanded states poorer. So one by one, in an impressive display of concern for the greater good, those four states ceded their claims to the Northwest Territory to the federal government—New York in 1780, Virginia in 1784 (on this day), Massachusetts in 1785 and Connecticut in 1786.
Soon after, the Northwest Territory was divided into Ohio, Indiana, Illinois, Michigan, Wisconsin, and the part of Minnesota east of the Mississippi River. The United States of America thrived. And those four states that ceded their claims did just fine.
Would that the representatives of our individual states could once again show such concern for the greater good.
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Back on November 29, I wrote about the bone marrow registry business, inspired by my encounter at a shopping mall, and my subsequent research into the industry. You can read it all here, or just accept my conclusions. Roughly 1,000 people per year die from leukemia and other diseases because of a shortage of willing donors of bone marrow, but if it were legal to traffic in bone marrow—as it is for other renewables like blood, eggs and sperm—the annual deaths of many of those people could be avoided, and the market (such as it is) in the industry would function more smoothly.
Chapter 2 in the bone marrow story evolved last week.
First, I received the following results from the Caitlin Raymond International Registry regarding my HLA (human leukocyte antigen) typing. DNA-A: 02:FMJV, 23:FMKH DNA-B: 18:EKRW, 44:ENCM DRB1: 03:01, 07:01
Then a news headline appeared, saying, “Surge in marrow testing probed.”
Turns out the woman who attracted my attention at the mall was a model, paid to be there. That she was paid to be there, I’d already assumed. And I wasn’t surprised to learn that she was a model.
Furthermore, there was nothing illegal about her being a model.
But the effective sales tactics of the Caitlin Raymond International Registry, which is a division of UMass Memorial Medical Center, have resulted in a boom in marrow registrations, which is great for the needy, but not for the insurers paying the bills.
One insurer, Harvard Pilgrim Health Care, says claims for bone marrow testing at the center nearly tripled in 2009 to 2,922, costing the insurer $1.5 million (roughly $513 each), and this year they will balloon to 9,621!
Harvard Pilgrim negotiated a discount with the center after 2009 and I suppose it’s working to negotiate some more.
But less powerful parties cannot negotiate. The city of Manchester, New Hampshire, for example, is self-insured. It was hit with bills for bone marrow testing for two city employees, asking $4,300 for each person! Now the attorney general of New Hampshire is investigating.
The reason this saga is playing out in New England is that in the past decade, Massachusetts, New Hampshire and Rhode Island became the only states where legislators mandated that insurers pay for bone marrow testing.
Nationally, most hospitals and donor-recruitment organizations do not charge for testing. The biggest registry, the National Marrow Donor Program, pays about $100 for the service on a volume basis. Of course, as reported in my first column, the National Marrow Donor Program receives $23 million annually in federal funding, so we all pay for it.
Since the story broke, Caitlin Raymond says it has stopped hiring models and suspended recruitment in New Hampshire.
But Caitlin Raymond’s actions are but a symptom of the problem.
The real problem is the lack of a free market.
It’s not legal to sell your own (renewable) bone marrow, so supply is limited.
Yet the shortsighted mandate that insurers pay for marrow testing in three states created an artificially high demand for bone marrow testing services.
And the folks at Caitlin Raymond filled that demand by paying models (a total of $40,000 to $50,000 a week) to enlist volunteers, and then passing the cost on to insurers.
To me, it’s one more indication that politicians are incapable of constructing an effective health care system.
P.S. At the end of the week, I received from our company health insurer a statement of rates for 2011. Remember, Massachusetts was a leader in health care “reform” and now we have a national system, too. Yet our insurer tells me—no surprise— that in 2011 our rates are going up 10%!
Moving on to investing, today’s topic is the Eighth Wonder of the World. It’s the Magic of Compound Interest, and if you don’t know about it, you’ve absolutely got to keep reading.
Simple interest is what you get when the 10% increase in value in your $1,000 investment brings you $100. The increase in value can come from price appreciation, as with stocks, or it can come from dividends. It doesn’t matter. $1,000 brings you an additional $100 and that’s that.
Compound interest is what you get when that $100 increase in value is kept in your account (untaxed), so that it, too, can generate a 10% return. If you repeat this process year after year, you end up making serious money!
Consider five friends who graduate from college at the same time, Alan, Barry, Calvin, David and Eric.
Alan deposits $10,000 every year for 40 years, stopping when he’s 62. Since his account has appreciated at a rate of 10% per year, it’s then worth $4,868,518. His deposits of $400,000 have grown 1,117%.
Barry’s just not into saving after he graduates. He spends what he makes. But after 20 years, he sees retirement looming, so starts depositing $10,000 per year, just as Alan did. After 20 years, when he’s 62, he has $630,025. His deposits of $200,000 have grown 215%.
Calvin, like Alan, knows the wisdom of starting his savings program early, so he deposits $10,000 every year. But 20 years later, at age 42, he figures he’s saved enough. At age 62, his account, compounding at 10% per year, is worth $4,238,493, not much les than Alan’s account. Calvin’s $200,000 has increased in value 2,019%!
As for David, he went graduate school, so didn’t start his savings program until two years later than Alan. But he kept it up for 38 years. And at age 62, his $380,000 contribution was worth $4,004,478 (less than Calvin’s), having grown 954%.
Finally, there was Eric. Like Barry, he deferred the start of his investing contributions for 20 years, but once started, he tried to make up for lost time by doubling the contributions, thus depositing $400,000 over 20 years. But age 62, after appreciating 10% per year, his account was worth just $1,260,050, up (like Barry’s) just 215%.
Conclusion: The very most important aspect of retirement planning is to start early. Tell your kids. Tell your grandkids. Time is your ally.
Yours in pursuit of wisdom and wealth,
Cabot Wealth Advisory
Editor’s Note: Tim Lutts is the editor of Cabot Stock of the Month, which recommends the best stock each month selected from across the spectrum of Cabot’s newsletters. It may be a growth stock or a value stock, an emerging markets stock or a green stock, but you can rest assured that it’s always the best stock for right now. Subscribers currently have big profits in Baidu, Netflix and Google, among other top stocks. Don’t miss out on Tim’s upcoming recommendation next Tuesday!