Tuesday, July 31, 2012

The modern economy is nuts -- a case study

In the old days, a man wished to sell something. For the sake of argument, let's pretend it was apples.

In order for figure out what to charge, he had to calculate what it cost him to acquire the apples. Did he grow the apples on his own land or did he have to buy them? Either way, each apple cost him something -- say 10¢ apiece. In addition to the cost of his product, there would be some cost involved in selling. Does he rent a store or use a pushcart? Either costs something. In the real world, there'd be insurance and utilities and, perhaps, advertising. Let's say this adds amounts to another 10¢ per apple. Now our man wants to earn enough from his apple sales that he can buy food and pay his rent or mortgage, his auto, home and life insurance, his charge card bills, his income tax, his property tax -- all that kind of stuff.

We're pretending this hypothetical apple vendor was making these calculations back in the good old days, so let's pretend the old days were very good indeed: Let's pretend that, if he could sell his apples for 25¢ apiece, he'd meet his bills.

So we'd not be overly surprised if he offered his apples for sale to the public at 25¢ apiece.

But fast forward now to the idiotic present.

Apples still cost something and there's still overhead and these are identifiable, readily calculable numbers. Using dollar values from the good old days adjusted for inflation maybe these costs are still 20¢ apiece. But it costs so much more to live these days -- to meet his obligations, he needs to average 30¢ profit per apple.

But he doesn't stick a sign in the apples that says 50¢. Oh, no. That's way too old-fashioned.

His sign says $2.50 per apple. Incredulous customers approach.

"$2.50?" says the first. "That's robbery. I won't pay more than a dollar."

"A dollar? The shine on these apples is by itself worth more than a dollar. I can't part with any apple for less than $2."

"$1.50, then."


The second customer (who didn't show up until the first negotiation was ended) settles for $1.37.

A third customer (who didn't hear either of the other two transactions) agrees to $2.

The apple vendor is rubbing his hands with glee; at this rate he will soon hit his target profit on the entire crop and he has lots more apples to sell.

But this only works while our vendor has no competition -- or until the vendor's customers compare notes at the local Starbucks.

The Chicago Tribune has been in bankruptcy for some time now. The biggest reason for this is that the economy crashed after Sam Zell overpaid for the business, using borrowed money, and the ad revenues he was counting on to pay off the debt dried up when the Great Recession hit. But another reason for the Tribune's woes is that the newspaper would send outrageous renewal bills to long-standing customers, like the apple vendor asking for $2.50 for a 50¢ apple. Some people paid; these are called "suckers." Other people would complain; they'd haggle for a price, like people do now every day for cars, refrigerators and furniture. Some haggle better than others. Others -- like me -- finally figured this out and refused to pay anything.

But where in our economy does anything have a real price? A couple of weeks ago I saw a story on the news about the "best" days to buy different things. It's best to go to the hardware store or auto dealer on Monday; it's best to buy gas midweek. Technology allows prices to fluctuate so easily these days; no one has to go around putting new stickers on all the inventory. Hospitals have one price for Blue Cross, another for Unicare, and another, much higher, price for the uninsured. Medicare or Medicaid, who will eventually pick up the tab, pays only pennies on every dollar billed to the uninsured person. Thus, it behooves the hospital to bill an outrageous amount to the uninsured -- far more than it bills the person with the Blue Cross policy -- because Medicaid will eventually pay far less than Blue Cross will.

(When your head stops spinning, plunge on.)

Recently, I was contacted by an insurance company to handle some defense business. I suggested an hourly rate; the insurance company suggested a lower one. I grabbed at it.

But there was a catch. I had to register with some third party -- I won't name it, but it is a subsidiary of a company whose name rhymes with "Hexes." This outfit wedges itself between attorney and client and intercepts all communications back and forth -- including, of course, fee bills. This is all in the name of "cost containment." This third party approves the bills -- so they have an incentive (at least) to cut attorney bills before "approving" them. Otherwise, what have they contributed to the process?

In the 1990s I ran across similar packs of legal locusts. They'd descend on your files, matching billing entries to letters and motions, seeing if the costs were "justified." They got paid a percentage of what they "saved" for the insurer-client -- that is, a percentage of what they cut from the lawyers' fee bills. Of course, this only encouraged padding -- if you know someone is going to cut you no matter what you'd better offer up something worth cutting, so that you'd be left with at least as much as you should have gotten in the first place.

In other words, these parasites might have saved money the first time through, but after that they were inadvertently causing at least as much bill inflation as they were detecting.

And the whole idea is stupid when comparing time spent to length of documents. Quantity does not equal quantity. Edward Everett spoke at the Gettysburg Cemetery dedication for over two hours; Lincoln spoke for only two minutes. Whose speech is remembered today?

When asked to give a talk, my father always asked how long he'd be expected to speak: Assuming his familiarity with the topic, he could speak extemporaneously for an hour or even two. But if the event planners wanted him to speak for only 15 minutes, preparation time became a very real consideration. It was the short speech that took longer to prepare.

A two page motion may be tossed off in 10 minutes -- but it may take a full day, too. Yes, I know it's the hoariest lawyer cliche, but sometimes it really does depend.

But the people looking at a file for the first time, even though trained as lawyers and licensed in some jurisdiction, really had no way of discerning (except, of course, for the extreme examples).

You'd think that insurers would have caught on to this by now -- and maybe they have. I guess I'll find out if and when I get my first bill paid by this new client.

My first bill to the client is more than 30 days old. Although I registered as requested -- a half day of my life I'll never get back -- the client says it still can not "see" me in this wonderful system. The young lady with whom I've been dealing at this third party said this was because, even though I'd done everything I was supposed to do the first time through, I now needed to make a different fee offer on a different screen. (She admitted that the offer I agreed to make is there, but she says I need to put it somewhere else, too.) But the screen she to which she directed me was one for making a "flat fee" offer -- which is not what I've offered to do.

When I was done -- or thought I was done -- registering with this third party, there was some mention of $275. I honestly thought the third party was sending me $275 to compensate me for my time spent negotiating their turgid, stilted screens. I was pleasantly surprised; I had figured that I would just have to absorb this downtime in the hopes of someday expanding my business.

But in my exhaustion, it appears that I misunderstood: I received an email Friday suggesting that I owe them $275 for the privilege of registering for this system that is presumably designed to pick my pocket -- a registration that is, moreover, and for no obvious reason, still incomplete.

Why do I think that this third party is the only one who is going to make out well on this relationship between me and my new client? It's as if a third party interposes himself between our hypothetical apple vendor and each prospective buyer. He takes a percentage of every sales price and a bite from every apple, just for good measure -- and he thrives in the modern economy.

1 comment:

Empress Bee (of the high sea) said...

sigh... i do know this is true. my last boss, a wonderful brilliant real estate attorney, taught me that everything is negotiable. i had to negotiate anything i bought for the office including absolutely everything. he also taught me that wherever you go it's still negotiable. i learned that you can go into, say, macy's and ask for a manager and ask for a reduction in the price. i actually hated doing this but did it nonetheless. sometimes i still do.

smiles, bee