The nursing home system is predatory. It is designed for optimum extraction and exploitation without reinvestment for innovation and improvement in the quality of care.  Although federal and state regulators promote a veneer of protection for patients and the public, their primary mission is maintenance of government support for massive real estate and financial services industries.

    Here are some recent examples of how the system of profit and nonprofit corporations, elected official and regulators is designed to protect providers at the expense of patients, the public, and communities in which they operate:

The power of money in politics

    The New York Times reported on August 16, 2020[1] that large nursing home chains are hiring high powered lobbyists to scrounge around Washington and push for favors such as tax breaks, immunity, and cash infusions through COVID relief bills.  Genesis, the biggest operator of nursing homes is on the brink of bankruptcy due to mismanagement and sees the COVID crisis as a path to rescue – it has hired two former top White House aids to lobby on its behalf. 

    Life Care Centers, the third largest owner and operator of skilled nursing facilities has hired former top-level congressional staffers to lobby on its behalf.  This company – owned solely by billionaire Forrest Preston – has a record of not just poor care but horrible care.[2]

    Aside from nursing homes corporations hiring their own lobbyists, they are represented by two powerful trade associations: the American Hospital Association and the American Health Care Association. OpenSecrets.org indicates that the AHA disburses about $100 million per year for political campaigns, lobbying, and maintaining a lobbying army in Washington and the 50 states.[3]  These appear to be a productive expenditure.  According to the NYT article:

The industry has received about $7.6 billion in federal grants through the federal economic stimulus package, according to the American Health Care Association, an industry group, and will soon get another $5 billion. Nursing homes have also received an estimated $11 billion more in government loans and advance Medicare payments, according to an analysis of federal data by Good Jobs First, a progressive research group. Executives at Genesis, which has reported 1,500 deaths at its homes nationwide, told investors last week that the company had received nearly $190 million in federal grants and was looking for more.

The Industry is well protected, but patients and employees are neglected by regulators

    Regulators, whether they be CMS, state agencies such as the Kansas Department of Aging & Disability Services, or local health departments have circled their wagons around the industry and provide it with a veil of secrecy.  I began calling agencies and checking on websites for information about cases of COVID and deaths. 

    Nothing on websites. Using the ruse of finding a nursing home for a friend, I inquired about information regarding COVID cases and deaths in the facilities in the area.  Generally, I was referred to other agencies such as – believe it or not – an Area Agency on Agency, which has nothing to do with COVID or regulating nursing homes.

    Eventually, I was directed to public health departments such as the Kansas City, Missouri health department.  Amazingly, one public health director told me he did have that information but wouldn’t share it with the public.  One epidemiologist told me that her agency had the information but wouldn’t give me the phone number of the person I would need to talk to because that person was just too busy to talk to me.

    Seventy or one hundred thousand (who knows?) nursing home patients and workers who have died from COVID is an unnecessary, preventable tragedy of major proportions.  But due to deregulation and capture of government agencies and their employees, the tragedy continues.  The Wall Street Journal reported that 26 states are not bothering to even test inspectors entering skilled nursing facilities.[4]

In the final analysis:  A protective shield and largess for the industry.

    Government agencies and legislatures are enmeshed with the skilled nursing business in exploitation of private pay patients, workers, and taxpayers. Behind a veneer of state and federal regulatory activity is a mutually protective relationship between government and providers.

    The claim of a competitive market in which competition will improve service is mythical.  Prices are controlled – advantageously for the industry – through reimbursement rates while wages are allowed to float in an imaginary “labor market.” Huge amounts of largesse is funneled to the industry through tax expenditures, price controls, supplemental payments, and bailouts.

[1] https://www.nytimes.com/2020/08/16/business/nursing-home-safety-trump.html?searchResultPosition=1

[2] Having checked Nursing Home Compare ratings for Life Care Centers, I was struck by its extraordinary number of low ratings in Kansas and Missouri.  Also, I have noticed that this company appears frequently on the CMS “special focus facilities” list.  Its Wichita facility has been on the SFF list throughout the pandemic.  This means that the facility is so poorly operated that CMS won’t even rate it at the lowest level of 1.  Preston was caught because of whistleblower employees for overbilling Medicare for rehabilitation services.  He settled by returning $140 million to Medicare.  Who knows how much he got away with?

[3] https://www.opensecrets.org/orgs/summary?id=D000000116

[4] Anna Wilde Mathews, “Many Nursing-Home Inspectors Aren’t Tested,” Wall Street Journal, Saturday/Sunday, August 15-16, 2020, p. A3.

    PREDATORY ECONOMICS 101:  SUPPLEMENTS & NURSING HOME REFERRAL SERVICES

    Nursing home referral scam A Place for Mom is the topic of this second post in a series with the theme:  Predatory Economics (the other one calls out purveyors of the snake oil Prevagen, see last post August 11, 2020).  In this series we will be calling out businesses preying on the public – especially the elderly.  As a plutocracy has become more entrenched in the United States, predatory marketing and manipulation have become increasingly open and shameless. 

    Among other for-profit corporations that have been integrated into the assisted living and nursing home system, referral services now exist to guide prospective tenants and patients to assisted living and skilled nursing facilities.  We do not really need these services, the Center for Medicaid & Medicare Services rates nursing homes based on regular state inspections.[1]

    A Place for Mom, is the biggest and best known of these so-called services.  No doubt, many readers of this post remember Joan Lunden’s soothing assurances about how this service intends to be a guide to the best place for mom (her conscience must have bothered her, she’s gone).  The truth is that mom will be referred to whichever facility is willing to pay for the referral.

   It is important to note this:  A Place for Mom is owned mostly by predatory, private equity firms Warburg-Pincus.  There is no evidence that I’ve ever seen which suggests that this outfit is in the nursing home business for any other reason than to extract value for investors at the expense of care.

  A Place for Mom advertises itself as a “free service,” but the ads don’t tell the whole story. Indeed, mawkish, maudlin, phony-baloney television ads featuring Ms. Lunden and others would lead viewers to believe that the company is not even a company but rather just a free service that does nice things for moms (and dads or anyone else supposedly).

    Because a Place for Mom is a for-profit company, its revenue must come from somewhere.  In fact, nursing home and assisted living operations using the service pay a fee for referrals equivalent to one month of their monthly charge. This information is not present on the company’s website homepage. [2] However, it raises profound ethical issues that must be explored in some depth.

    Empirical evidence suggests that a Place for Mom revenue is driven more by the facilities willing to pay than by an objective evaluation of quality of care in those facilities.  For instance, exactly which skilled nursing facilities with which the company has a referral agreement in the Kansas City area is difficult to discern from its website.[3]  However, I did find Indian Creek Health Center of Overland Park listed as a Place for Mom’s referral. The CMS website on which the five-star rating for each facility can be found indicates a 1 – the lowest rating – for Indian Creek. 

  I called the company’s 1-800 number to see if they would disclose which facilities were customers. However, the salesperson was brand new and knew nothing about the nursing homes in the area. I could sense that her job was to capture me as a customer.  It was clear that if I didn’t tell them exactly for whom I wanted to find a facility I would not receive any information.

    These services exemplify the irrational nature of deregulated government funded systems. Neoliberals, conservative Democrats and Republicans, and libertarians promote the mistaken notion that government is inept and private businesses can provide services much more efficiently and effectively.  Contrary to the belief in the advantages of the free market over government in health care these privatized services tend to be opaque, predatory, and manipulate unsuspecting citizens into care that is far more costly than if it were provided by the government.

    It is important to consider the ethical concerns raised by operations like a Place for Mom:

• Individuals are lured into these services under the guise that quality of care is the main consideration in guiding customers to assisted living and nursing home facilities.
  
  
• Funds that could be dedicated to care are siphoned off into an unnecessary for-profit entity. 
  
  
• Evaluation of the service by social scientists is not possible due to a veil of secrecy.

[1] If you want to find out about a nursing home, go to this site and enter the city of the nursing home you are interested in and the name of the nursing home: https://www.medicare.gov/nursinghomecompare/search.html?  The facility to which A Place for Mom refers your mother/dad/friend/child/relative will pay for that referral.  This is money that comes out of care.  The people in the company’s boiler room operation will not have near as much information about the place as what you will find on the CMS website.

[2] https://aplaceformom.com

[3] https://www.aplaceformom.com/nursing-homes/kansas/kansas-city

EXPOSING SHAMS, SCAMS, AND PREDATORS

    This is the first in a series of blog posts with the theme:  Predatory Economics.  In this series we will be calling out businesses preying on the public – especially the elderly.  As a plutocracy has grown more powerful in the United States, predatory marketing and manipulation have become increasingly open and shameless. 

The Federal Trade Commission (FTC) and Food & Drug Administration (FDA) increasingly bend to the will of industry.  Because of saturation advertising on television, many people are suckered into believing that medical shams and phony products are legitimate.  We intend to expose them.  But we also believe that many aspects of Medicare, and Medicaid have been rigged to the advantage of providers and disadvantage of beneficiaries. So, those need to be exposed also.

    In the first posts, fraudulent sales pitches to the elderly and their families will be highlighted – “called out” if you will for these two scams:  (1) “Prevagen,” a snake oil which is sold as product for improving memory, and (2) “A Place for Mom,” a cubicle sales program (boiler room operation) for directing people to nursing homes by making victims think the company really cares about the quality of care they will receive.

    WE ARE NOT ANTI-CAPITALISTS.  We believe in a real, well-functioning capitalistic system in which both buyers and sellers have accurate and complete information.  However, we also believe that government must regulate business in the interest of the public good and provide the resources to people for full participation in a democratic society.

PREVAGEN, A PRODUCT FOR SAVING YOUR MEMORY. YOU MAY HAVE SEEN THE ADS.

    A supplement with the brand name “Prevagen” is sold nationwide and is marketed through a massive television advertising campaign. The claim is that this supplement will improve memory.  No evidence has ever been presented that it will do that – none, nada, zip, zero.  However, plenty of data exists that it will do nothing for brain health.[1]

    You might ask, “Why does the Federal Trade Commission or the Food & Drug Administration allow the purveyors making huge amounts from selling this phony, baloney product continue to blanket TV programming with false claims?” Although these agencies are unduly differential to industry (in my view), in the case of the Prevagen, they have attempted to stop false ads.  Both agencies have been attempting through litigation to end the fraud perpetrated by the manufacturers of the product but have been hung up through appeals.[2]

    Ads Preying on The Elderly

    You might have seen the ads.  An elderly lady is pondering over products at the pharmacy that could help her memory.  A kind pharmacist walks up and tells her that Prevagen is the best. Or you see 60+ people telling the viewing audience how much it has done for their minds.  One man even proclaims that all his friends say, “man you have a memory like an elephant.”   The content of the ads is clearly directed toward the elderly and preys on fears of memory loss – even dementia – during the later years of life.

Quackery Is Nothing New

    Medical quackery including worthless medicinals and the sales of snake oil have been part of U.S. history for centuries.  Prevagen is the latest iteration of a pill that will cost you a pretty penny but do absolutely nothing for you – unless you consider a placebo effect as doing something for you (much like Lydia E. Pinkham’s Little Pink Pills of yore).  The makers of this memory pill will charge you $70 on Amazon per bottle of 30 pills for which they have provided no scientific evidence that their curative will effective (check it out yourself on Amazon).

    What is in this magic pill?  The manufacturers are giving you ground up jelly fish. Robert H. Shmerling, MD Senior Faculty Editor, Harvard Health Publishing, had the following to say about Prevagen:

    “The bottle promises it “improves memory” and “supports healthy brain function, sharper mind, clearer thinking.” Never mind that the main ingredient in jellyfish (apoaequorin) has no known role in human memory, or that many experts believe supplements like this would most likely be digested in the stomach and never wind up anywhere near the brain.”[3]

    I asked the head pharmacist at the CVS pharmacy a few blocks from my home if her store sold Prevagen.  She said yes.  I asked her why they would sell a product that is obviously fraudulent.  She said that she didn’t have any choice in the matter, but stated that it was kept behind the counter because people were stealing it. “Why,” I asked. This pharmacist didn’t seem to know and didn’t seem to care about why people were stealing it. When you think about it, many people who are desperate about perceived loss of memory (or perhaps real loss of memory), but can’t afford the $70 bottle of 30 pills.

What Should We As Citizens Do?

    Elderly Americans remain deceived by the ubiquitous ads and waste of money on a memory pill that simply doesn’t work.  Leading retail outlets such as Amazon, CVS, Walgreen’s, and others peddling these over-the-counter supplements have no legal obligation to reveal the scientific truth about them.  The same is the case for television networks who are obviously earning a significant amount of advertising revenue from supplement frauds.  Moral obligation and corporate responsibility are another matter. 

    Please tell your nice friendly pharmacist that it is wrong to foist snake oil on the elderly.  Also, call your state attorney general and tell them to file an injunction against the company making Prevagen and the retail outlets selling it.

[1] See the discussion in the court referenced in endnote 2 regarding the Madison Study in which there was no significant difference in a double blind, placebo-experimental group design.  It took 30 post hoc analyses to find a subgroup with a significant difference on which the company (Quincy Biosciences) stakes it claim that it has been clinically tested.  The search for a significant p-value by repeatedly looking for subgroups in which a difference can be found is bogus.  Eventually such a difference will occur by random chance.

[2] https://www.ftc.gov/system/files/documents/cases/quincy_bioscience_complaint-filed_version.pdf; https://www.ftc.gov/enforcement/cases-proceedings/152-3206/quincy-bioscience-holding-company; https://www.lexology.com/library/detail.aspx?g=2f42c12e-180b-40f9-8597-e9371fc43324

[3] https://www.health.harvard.edu/blog/fda-curbs-unfounded-memory-supplement-claims-2019053116772

By

Dave Kingsley

    Like autocrats throughout history, Donald Trump considers no body count too high, no cruelty too outrageous, and no lie too big in preservation of power and propagation of a warped ideology.  Denial of “real reality” and creation of a “fake reality” is a typical maneuver of anti-democratic strongmen like Trump. 

    Science denialism, venal political calculations, and ideological considerations has led to the preventable deaths of well over 50,000 nursing home patients and employees.  In an attempt to promote an image of caring and concern, the Trump regime has set up a bogus commission to “study” the issue of COVID-19 in nursing homes.[1] Advocates and the public should have two major concerns: (1) this commission is conducting business in secrecy, which means anything critical of Donald Trump and his minions will never see the light of day, and (2) Some nursing home advocates and scholars have been willing to sign a nondisclosure agreement and serve on this sham “secretive commission.” 

    Why would otherwise respectable and respected professionals place their imprimatur on the nefarious attempts by an autocrat to cover up his malfeasance? Anne Applebaum answered that question this way in her article in the latest issue of The Atlantic: “Each violation of our Constitution and our civic peace gets absorbed, rationalized, and accepted by people who once upon a time knew better.” (“History Will Judge The Complicit,” page 60,  https://www.theatlantic.com/magazine/archive/2020/07/trumps-collaborators/612250/). 

    As Masha Gessen said about Trump: “He was probably the first major party nominee who ran not for president but for autocrat. And he won.” (Surviving Autocracy, p. 16).  No autocrat in history has ever referred evaluation of his performance to an objective panel of citizens with the expectation that he would accept blame for a major program failure.  Why would nursing home advocates and scholars expect America’s current autocrat to be an exception? 

    Calling it a hoax, the Trump administration initially denied the reality of a COVID-19 pandemic and has attempted to propagate that lie from the time the virus caused the death of a nursing home patient in Kirkland, Washington to the present time. This current science denialism is reminiscent of Stalin’s promotion of Trofim Lysenko’s agriculture and genetics pseudoscience.  Anyone who disagreed with Lysenko was purged, imprisoned, or killed.  Trump can’t at this stage imprison or execute dissenters from his warped ideology, but he can purge and smear credible scientists. 

   Due to Lysenkoism and, consequently, crop failures, millions of people starved under the Stalinist and Maoist Communist regimes.  Donald Trump is not Stalin or Hitler, nevertheless he operates as much as he can in accordance with the strongman paradigm.  Driven by an extreme ideology, his attack on science has resulted in the death of nearly 150,000 Americans at this point. 

   Someone quoted Jill Lapore as saying, “Commissions allow governments to appear to be doing something, while actually doing nothing.”  A list of members of this sham Trump commission to whitewash the cause of a massive number of deaths in nursing homes, can be found through the link on the endnote below.  They either know the nature of the regime they are enabling or are seriously naïve.  Either way:  shame on them.

[1] Independent Coronavirus Commission for Safety and Quality in Nursing Homes.  Members of the commission can be found at https://sites.mitre.org/nhcovidcomm/about-us/.

The recently passed “Chronic Care Act” provides for some additional benefits for seniors in Medicare Advantage.  Although it includes some seemingly fine items such as transportation to outpatient care, some home health care, and a few other enhancements of the program, America’s elderly should be very leery of this legislation.  Because the new benefits under this act are accorded only to beneficiaries in Medicare Advantage, it is another step toward privatization of Medicare, which will not be an advantage to seniors in long run.

Overt proposals to privatize Medicare through some form of voucher system have failed so far and are not likely to succeed in the immediate future.  So, dangling goodies in front of beneficiaries in attempts to move them into Medicare Advantage is one way to accomplish the goal of ending traditional Medicare (which is efficiently and effectively administered by the government) and turn every part of the program over to the insurance industry.

As it is now, Medicare Advantage has appeal to beneficiaries with fewer medical needs.  Insurance companies can “cherry pick” their customers.  This leaves beneficiaries with the greatest amount of illness in traditional Medicare, thereby weakening it.  Because of the Medicare Modernization Act in 2003 – a major move toward privatization – Medicare Advantage HMOs are paid a premium and thereby take more of our Medicare dollars than traditional Medicare.

So, who, other than insurance companies, have been pushing for this legislation?  It might surprise you to know that liberal Democrat Ron Wyden of Oregon and conservative Democrat Mark Warner of Virginia were major players in bringing it to fruition.  But Senator Wyden’s role in this privatization scheme doesn’t surprise me.  In the Fall of 2013, as a board member of the Gray Panthers, I was attending a meeting in Washington, D.C.  As chance would have it, the press reported during that time that Senator Wyden and Congressman Paul Ryan had floated a proposal for voucherizing Medicare.

The Gray Panthers and Senator Wyden had a close relationship.  Indeed, he was a friend of Maggie Kuhn and considered himself one of us.  Consequently, Judy Lear, president of the Gray Panthers at that time, and myself were able to immediately see the senator in his office.  It is rare for advocates in Washington, without lots of money, to have an opportunity to work directly with a senator.  We did work with him and his staff over the next few months and convinced him to drop the idea. However, we didn’t know then and don’t now know now what sort of Washington machinations led Senator Wyden down the privatization path.  But it appears as if he is still on it.

 Unfortunately, the Gray Panthers’ office in Washington, D.C. became defunct in 2015.  Consequently, seniors in the United States have no militant representative in Washington.
Some nonprofits holding themselves out as representatives and advocates of older people are ardent supporters of the Chronic Care Act. However, organizations such as the AARP, the SCAN Foundation, and LeadingAge have serious ethical conflicts.  They are vendors in the business of selling insurance, operating continuing care retirement communities, or lobbying for those who run enterprises marketing their goods and services to the elderly.  Furthermore, the powerful insurance industry and the ride share company Lyft have been potent forces behind the legislation.  

It may seem like congress, by passing the Chronic Care Act, did something nice for senior citizens.  However, it is important to pull the curtain back and look at all the gears and pulleys moving things about.  If traditional Medicare goes away, we will all be at the mercy of insurance companies, their purveyors in the nonprofit world, and lobbyists with gobs of cash to spread around.

The chained CPI is a statistically flawed and inequitable approach to determination of the cost of living.  It should be opposed as a means of indexing Social Security and other safety-net programs with all of the vigor advocates for the elderly can muster.  Nevertheless, the unfairness of the CPI enterprise in general should not be reduced to a discussion of its impact on the elderly.

One argument against the chained-CPI by my fellow progressives is that the elderly have a different purchasing pattern than the non-elderly.  This is a specious argument.  Goods and services purchased by upper income elderly households will be much different than the goods and services purchased by low income elderly households (say expenditures of the person living on the average monthly Social Security benefit of $1,230 versus a retiree with an income of $5 to $10 K per month).

Well-heeled retirees will devote more of their income to travel, entertainment, and other purchases unaffordable to the poor elderly.  Furthermore, regressive taxes, user fees, and other necessary services will consume a larger proportion of the budget of a poor household than that of an upper income household.  For instance, increases in charges for city services such as water, sewage, and trash pick-up* are amongst the largest increases we’re seeing in the CPI but these necessary services are weighted extremely low for the purposes of calculating the aggregate CPI.

Other current big increases in the CPI include state and local sales taxes, child care, and education.  Furthermore, food and clothing purchases are taxed at approximately 8% in most locales in the United States.  These are regressive taxes, which have increased over the past 30 years while income taxes have decreased.  Due to a shrinking (and already shrunk) tax base, the elderly in low income, distressed, inner-city neighborhoods pay a much higher property tax than their peers in affluent, suburban neighborhoods.

For instance, in Jackson County Missouri – the county in which a government-abandoned-neglected, African-American ghetto is located – the assessed valuation of a home is 19% of market value while it is only 11% in Johnson County Kanas – one of the most affluent suburbs in the United States.  The mill levy is 40 mills in Johnson County, Kansas and 80 mills in Jackson County, Missouri. If this isn’t bad enough, the equity of many home owners in Jackson County has been practically wiped out due to the subprime fiasco, foreclosures, flipping of houses, absentee owners, and neglect by city, state, and county government.

Cost of living is not a matter of old and young.  Rather it is a matter of poor and rich and everything in between.  The poorer you are, the more unfair the current methodology treats you.  Except for the brouhaha over the current chained-CPI gimmick proposed by the President and misguided congresspersons, the CPI is not a subject of much interest to the public.  Given the major impact of official measures of price fluctuations on the masses, this is rather unfortunate.  Goods and services reflecting the largest price increases constitute a major share of budgets for middle and low income households while they hardly impact an upper-income household.

*For example, the aggregated May 2012 – May 2013 CPI-U percent change increase was 1.4%.  The increase in water-sewer-trash collection services was 5.2%; intracity bus transportation was 3.4%; health insurance was 4.3%; tuition, other school fees, and child care was 3.6%.  No major category such as food in the aggregate (1.4%) and energy (2.4%), or shelter (2.3%) was less than the overall aggregated CPI of 1.4%.

We want to thank the New York Times for pointing out in an editorial today (January 13, 2013) that the “chained CPI” is a bad idea.†  As the editorial claimed, this attempt to lower Social Security benefits is based on bad math and bad logic.  Nevertheless, the flawed and unfair notion of suppressing cost of living increases with a “chained CPI,” is not the worst CPI problem facing retirees and workers. The way in which the CPI is calculated now and has been calculated for a considerable time in the past is a much bigger problem.

It is time that we have an honest conversation in this country about the statistically and scientifically flawed – absurdly flawed – methodology for determining the overall increase in the cost of living.  In this discussion, let’s not sugar coat the role of the Bureau of Labor Statistics – the agency responsible for the gargantuan task of measuring changes in prices of literally thousands of goods and services.  Inside the Washington beltway, it is not considered acceptable in polite company and polite conversation to tell the truth about such things as professional wankery on behalf of the rich and powerful.  But we are not in the Washington beltway.

Twelve Month Increase in the Overall Cost of Living: November 2011 to November 2012

The latest BLS report on the change in prices for commodities and services indicates that the overall cost of living between November 2011 and November 2012 rose 1.8%.*  The final report has not been released yet but it will not vary significantly from the most recent release.

If you are a senior on a relatively low, fixed income or a low wage worker, this will come as something of a surprise.  In fact, this news will probably make you angry because you are amongst the folks struggling to pay rapidly increasing inner-city bus fares, rapidly rising costs of child care, health insurance premiums – if you have health insurance at all – rapidly rising water, sewer, and trash pickup services, rapidly rising elementary and secondary tuition and fees, and rapidly rising higher education tuition for training that the power-elite says you need to become competitive in the labor market – to name a few inflationary aspects in the exchange of goods and services in today’s America.

The primary problem is this:  The BLS claims that many items with the largest price increases are not a big part of household budgets – even those household budgets in the lower income strata of society (I doubt if folks in the middle income strata would think the BLS understands their budgets very well either).  Professionals in the agency responsible for a fair measure of price increases can justify this statistically by simply considering overall averages for what surveys indicate is spent by households on a huge variety of goods and services.

Below is percentage price increase of a select set of items and the weight assigned to them by the BLS (the weights are the proportion or percentage of a theoretical household budget – all weights sum to 100):

 Imagine a single mother with one or more children or a senior citizen depending upon Social Security – think of any middle class family.  Does it seem likely that health insurance, school tuition and fees, child care/nursery school, and public utilities such water, sewer and trash collection services comprise only 3.872% of a household budget?  With rent and food, these items made up 49.436% of a household budget, on average, in the year between November 2011 and November 2012 – according to the BLS.

Overall inflation was low for the past year because of such items as energy (.3% increase, 10.184 weight), commodities less food and energy such as new vehicles (1.4% increase, 5.507 weight), household furnishing and supplies (-.1% increase, weight 3.292), food at home (1.8% increase, 14.175 weight) and rent (2.2% increase, weight 31.389).

In the real world, working people struggle with paying rent, accessing health care, paying for child care, school tuition, and food.  If only they would, after meeting all those needs plus others too numerous to mention in this short document, have half of their earning left over for entertainment, vacations, and other pieces of the American pie to which we all aspire.

Things Will be Getting Harder for the Masses

 Most certainly, readers of this bulletin noted the big increases in items related to city services.  As the Federal government cuts taxes and devolves an increasing number of services normally undertaken at the Federal level, local governments will be strapped for funds to provide essential services.  Regressive but increasing state and local user fees and sales taxes will consume ever larger portions of household budgets.

The relatively low increases in energy and food during the past year can be explained by the volatility in these commodities, which fluctuate due to speculation in the commodities markets, weather, and other factors.  It is unlikely that food prices will not spike in the near future.  Drought, an oligopolistic grain commodity industry,  rising demands in developing nations, and other issues will most certainly put upward pressure on food prices in the near future.

Due to a restructured production system in the United States – the shipping of jobs to cheaper labor markets and robotization –  fewer and fewer people have the income to buy new cars, new homes, and other large ticket items. This has created a negative feedback loop – fewer jobs, less income, less demand, and the cycle reiterates.  As worker income drops, government revenue drops, which is also due to the chutzpah of wacky, right wing, libertarian ideologues and their billionaire funders. Increasing costs of state and local government, education, and child care hit the lowest income groups the hardest but it’s not easy on the middle class either.

Artificially Low Inflation Benefits the Power-Elite

 It is not easy to adequately explain the CPI to most people who have little time in their busy lives to read about and think about something as complex as price economics in the largest economic system in the world.  This bulletin certainly doesn’t do justice to the issue.  But we must begin to work at communicating the basics of the BLS system and its unfairness to all but the very affluent.

Much more than suppression of Social Security benefits is at stake.  Measures of such phenomena as poverty and worker income growth are defined and measured in relation to the CPI.  Workers’ wages and salaries are impacted in significant ways by what the BLS publishes as the official CPI.  If the government – at the behest of the power-elite – can create a price change reality to the advantage of the power-elite, employers can much more easily justify stagnant wages/salaries and legislators have an easier time denying increases in the minimum wage.

In this series of posts, more will be written about the cooperation of the BLS with the power-elite in suppressing the CPI.  Evidence abounds that this one agency in charge of fairly and validly calculating prices and their impact on the cost of living is not acting in the peoples’ interest.  Look for several upcoming bulletins in the next few weeks, which will further explain flaws in BLS methodologies and the reason that agency is promoting these flawed practices.

†see: “Misguided Social Security Reform,” New York Times, The Opinion Page, January 13, 2013, page 10

*see report at:  http://www.bls.gov/news.release/pdf/cpi.pdf

My last post – January 9^th – generally explained some of the statistical gimmicks utilized by the Bureau of Labor Statistics to suppress the consumer price index and consequently reduce cost of living increases for a broad array of retirement programs.  Redefining how the CPI is calculated amounts to a cut in benefits for retirees – including veteran retirement, disability, and Social Security.  This is a big deal.  The cuts we are talking about are not small.

According to my fellow activists and good friends Nancy Altman and Eric Kingson of Social Security Works, the decrease resulting from a so-called “chained CPI” will impact Social Security beneficiaries thusly:  the typical beneficiary will lose $500 by age 75, $1,000 by age 85, and $1500 by age 90 (see their Huff Post article at http://www.huffingtonpost.com/eric-kingson/chained-cpi-social-security_b_2376108.html).  Nancy and Eric are both nationally recognized leaders in the field of Social Security.  Nancy has written one of the two leading histories of the Social Security system and is considered one of the three leading contenders for the Social Security Administrator position.  She will be guest on Sharon Lockhart’s KKFI program “Every Woman” at 3:00 PM on Saturday, January 12^th.

This post explains the current methodology for calculating the CPI.  Even without further unfair suppression of cost of living through the chained CPI gimmick, the working classes, poor, and seniors are now losing ground due to unfair and invalid methods for calculating price increases and their impacts on subgroups of the population.

The Current CPI:  Bad Math Foisted on the American Public by Statistical Bullies

I am not approaching the issue of the CPI from the vantage point of a “mainstream economist,” but rather as a statistician. It is obvious to me that the statistical approaches to calculation of the CPI are invalid and seriously disadvantage the elderly, the poor, and to a lesser, but still serious, extent middle income workers. I will explain how certain categories of goods are weighted and how this is one of the major reasons the CPI calculation is unfair to particular groups of Americans.

It seems as though BLS officials and a group of conservative economists have engaged in some “inside the beltway wankery” to snow the public with abstruse “hedonic regression models” and other forms of mathematical dissimulation.  This is in actuality a form of bullying.  Economists and public officials pushing their agenda with patently absurd pseudoscience know that only a very tiny proportion of the population will have the expertise and mathematical wherewithal to counter what seems to them (the public) to be illogical on its face.

People know what they are paying for housing, food, health care, utilities, and a broad array of other goods and services necessary for meeting basic needs.  A large segment of the U.S. population – especially those at the lower income levels – know that their costs of living increased more than the official 1.8% in 2012.

Statistical bullies use abstruse mathematical concepts to foist unfair public policy on the poor and middle income wage/salary classes and seniors.  Manipulating the CPI and keeping it artificially low works to the advantage of the super-rich and mega-corporations, i.e. the power elite. This is a much bigger deal for the economic well-being of the masses than is commonly understood by most people.

This blog post will discuss math that most everyone understands.  What I present below should be devastating to any argument for reducing Social Security benefits through manipulation of the CPI.  This type of material is a real “eye glazer” for most people.  However, as I said, it is a big deal and push back is critical for stopping the economic deterioration of the middle and low income classes and retirees.  Please let me know if you have any questions in the comments sections below.

The Market Basket & the Weight Given to Categories of Goods & Services by the BLS

For the most part, the BLS determines prices of goods and services through a massive data collection process (mainly through a survey of businesses).  Prices are collected on thousands of goods and services, which are grouped into categories such as “food,” “energy,” “apparel,” “shelter,” “medical care services,” “transportation services,” and “education” – to name a few.

Within each of these general categories are more specific goods and services.  For instance, within “transportation service,” one will find public transportation, within which one will find “intercity bus fare.” Each category is assigned a weight.  All weights must sum to 100.  For instance, food is weighted 14.175; energy is weighted 10.184.  The weight for “medical care services” is 5.387.  These weights also provide a clear idea of what the BLS thinks is the proportion of each good or service in a consumer’s budget.

As already mentioned, the BLS calculation of the overall increase in consumer prices between November 2011 and November 2012 was 1.8%.  Also, as already discussed, not all items in the market basket contributed equally to this “overall” increase in the CPI.  Here’s how it works:

“Medical care services” are weighted by the BLS at 5.378, which is .05378 or 5.378% of the total.  Health care services increased 3.7%.  The contribution of this 3.7% increase to the overall increase is (.05378 * 3.7)/1.8 = .12 or 12% of the overall increase.

How were the 5.378 weight and 3.7% increase in medical care services derived?  Within medical care services one will find three major subcategories: “professional services,” “hospital and related services,” and “health insurance,” weighted 2.987, 1.749, and .651 respectively.  These weightings sum to the overall weight for medical care services of 5.378.  The percentage price increases were as follows: professional services = 2.0, hospital and related services = 4.4, and health insurance = 11.2.

The 3.7% increase in medical services is derived as follows:

[(2.987/5.378) * 2.0] + [(1.749/5.378) * 4.2] + [(.651/5.378) * 11.2] = 3.7.

The problem with this methodology is this:  different subsets of a population have very different budgets, which do not reflect the BLS market basket based on an aggregated total.  A senior on Medicare must spend $300 per month on premiums for Part B, Medigap, and Part D or have co-pays and deductibles. The increase in the Part B deductible from Social Security checks has been practically double the rate of inflation for the past 10 years.  Furthermore, as discussed next in this post, some of the commodities and services such as city services, public transportation, child care, tuition, and others that have had the highest percentage increases are weighted low by the BLS but loom large in the budgets of the working classes and seniors.

Why Is the BLS CPI So Low When You Feel So Much Pain From Price Increases?

The low CPI of 1.8% for the past year was low for four reasons:

1. The BLS weights categories based on the ratio of purchases in each category to the quantity of purchases overall.  For instance, energy purchases accounted for 10.184% of all purchases but had a low percentage annual increase of .3 or three tenths of 1%
2. Goods and services with the highest percentage increases had the lowest weightings.  For instance, health insurance increased by 11% – the highest of any category (it is actually a subcategory of “medical care services) – but has been assigned a weight of .651% by the BLS.
3. The weights assigned to each category are based on aggregated data and do not consider subsets of the population.  A poor person’s budget (as well as a senior citizen’s on a fixed income) will reflect far different proportions (weights) for high percentage increase items such as bus fare, tuition, child care, and city services (sewer, water, and trash pickup).
4. In a down economy – which we have had in the past year – sales of apparel items, new vehicles, appliances, and other commodities are slow.  Retail outlets will be more likely to move these commodities through sales and other mechanisms for keeping prices low.Indeed prices for transportation commodities (less motor fuel) increased only .1% or one-tenth of one percent.  These mostly big ticket items are not as likely to be in the market basket of poorer Americans and retirees dependent upon Social Security.  And yet, these commodities comprise approximately 20% of the market basket weights.

Consider the following market basket categories:  “water, sewer, and trash collection,” “intercity bus fare,” “elementary and high school tuition & fees,” and “child care and nursery school,” which had price increases of 6.9%, 4.8%, 3.5%, and 2.6% respectively.  Along with medical care and health insurance mentioned above, these expenditures have a major impact on working family and retiree budgets.  However, they are weighted 1.187% (“water, sewer, and trash collection), .147% (intercity bus fare), .368% (tuition & fees), and .386% (child care).

Summary

The explanation of the CPI in this post focuses on only one facet of mathematical problems with calculation of the overall increase in prices.  However, the weighting of various commodities and services is a much bigger cause of unfairness of the CPI relative to poorer people and retirees on fairly low fixed incomes than the current brouhaha over the chained CPI – although that is a serious problem.

I was inspired to begin a discussion and explanation of the CPI by members of Jobs & Justice – a progressive activist group comprised of economic faculty, labor leaders, business persons, and other activists who have joined together to develop a strategy for economic justice.  At a meeting the other night, members of the group discussed a need for helping the public understand what the BLS methodologies are doing to their economic well-being.

Hopefully, this post will provide some clarity to the issue.  It is not easy to reduce the CPI to a short post.  The Tallgrass Activist will continue to explicate the basics of the CPI and their implications for working families and retirees.

*CPI data referenced in this post can be found at http://www.bls.gov/news.release/pdf/cpi.pdf