Executives have their say on issues facing business
On Nov. 8, Crain’s Detroit Business and Honigman Miller Schwartz and Cohn LLP convened a panel of executives for a wide-ranging discussion on issues of interest in the wake of the election. The following is an edited transcript. In some cases, comments have been reordered to preserve the conversational thread.
• David Parsigian, Ann Arbor office managing partner and private equity and venture capital practice group co-chair, Honigman.
• Barbara Whittaker, CEO of Diversity Connections LLC, a joint venture of Southfield-based BBK Ltd. and Whittaker’s Bloomfield Township-based BW Limited LLC, which offers financial and supply chain services to minority-owned businesses.
• Ina Fernandez, managing director, Liberty Capital Management Inc., Birmingham.
CRAIN’S DETROIT BUSINESS
“Most of the candidates we look at for investments are large conglomerates, so I’m very interested in international policy and how it affects the companies.” — Ina Fernandez, Liberty Capital Management Inc.
• Bret Jackson, president of the Novi-based Economic Alliance for Michigan, a nonprofit founded by companies and unions as a forum for working together on business and jobs issues on which they agree.
• Marina von Neumann Whitman, professor of business administration and public policy at the University of Michigan’s Ross School of Business as well as the Gerald R. Ford School of Public Policy. Whitman, the first woman to serve on the President’s Council of Economic Advisors, also is the author of the recently published The Martian’s Daughter: A Memoir.
• Neil De Koker, president and CEO, Original Equipment Suppliers Association.
• Patrick McGuire, CFO, St. John Providence Health System.
The discussion was moderated by Crain’s Executive Editor Cindy Goodaker.
Crain’s: What should business be acting on or thinking about in the wake of the election?
Patrick McGuire: I think we’re very cautious right now because the fiscal cliff is real and significant. I’m actually relatively hopeful that there is a window of opportunity here for the president to come together with the House and try to work out some kind of compromise. But I would be cautious until we see evidence that that is actually going to happen.
Election cycles start up a lot sooner than we think, and so you probably only have six months to try to work something out.
Marina von Neumann Whitman: I share Pat’s feeling that there’s a lot to be cautious about at the moment. Partly, of course, what looms biggest is the fiscal cliff. But in addition to that, the fact is Europe is in the dumps and it’s not at all clear when and how it’s going to emerge from it, China is slowing down somewhat, Japan has been stagnant for so long that it’s hard to know when they’re going to emerge, so the notion of having our exports pick up is also on somewhat thin ice.
David Parsigian: My practice is devoted almost entirely to representing technology-based companies and their funding sources. We also do a lot of M&A work for those kinds of companies. I can tell you that the clients I have from large to small are very concerned about the fiscal cliff.
Their reaction to it is, if they’re in a position to do this, hurrying to sell their businesses. There really is no confidence that before the end of the year Congress will take action sufficient to allay their fears that if they sell next year they’re going to be getting a lot less net of taxes than they would if they sold this year. So before the election I had seven transactions for dispositions, four of which all said in the term sheets that they were closing on Dec. 31, and as of yesterday I have three more, which were direct reactions to the election, and the assumption that the president and Mr. Boehner will not be able to reach a deal.
“From a statewide basis, the election didn’t change anything in Michigan.” — Bret Jackson, Economic Alliance for Michigan
So their caution is that they don’t trust that Congress will take action in time sufficient to protect their pocketbooks and allow these transactions to occur next year rather than this.
Bret Jackson: Of course I think our membership is concerned about the fiscal cliff, but I think there is some confidence that it will be addressed; but from a statewide basis, the election didn’t change anything in Michigan. For business, if you’re confident in the direction that the governor has set forth and has pursued, then you’re buoyed by his ability to have influence on the election by the fact that, you know, he has a Legislature that is intact to pursue his agenda.
Ina Fernandez: My interest is more global. We do follow a number of Michigan companies, but most of the candidates we look at for investments are large conglomerates, so I’m very interested in international policy and how it affects the companies. So I am very interested in the fiscal cliff because my clients for the most part are, as are the companies that we follow.
Neil De Koker: We’ve had a lot of concerns in the last few years, of course. The situation in our industry has been very, very difficult. The outcome has been positive, but we spent a tremendous amount of time in Washington, trying to get an understanding about the industry on the Hill, which was very challenging.
This past year we’ve had an increase in production of 2 million vehicles compared to last year, which is a very, very significant increase, and it has placed tremendous pressure on our suppliers because we cut back so much in order to survive the downturn in 2008 and ’09. We’re now quite profitable, but it’s very difficult to convince yourself to invest more capital in your company and expand and hire people if you don’t know for sure what the future holds.
“It’s very difficult to convince yourself to invest … if you don’t know for sure what the future holds.” — Neil De Koker, Original Equipment Suppliers Association
The uncertainty of the election outcome, that was an issue that held us back, as is the situation in Europe. China is slowing down, as Marina mentioned, there are a lot of issues on the table.
We’re very interested in having a manufacturing policy that is supportive of manufacturing. President Obama is proud of having saved the auto industry and all the jobs that it’s created. I hope that he also recognizes then that a cohesive manufacturing policy for this country that’s consistent for all industry sectors would be very, very useful and get great benefits for the country as a whole in terms of recovering.
I’ve been a strong advocate of a comprehensive national energy policy as well, which is a critical element for our industry and for our country.
Our current policy is called cheap gas, and we all have seen the influence when prices go up. The choices of vehicles that people buy change. If we were to have higher taxes on gasoline, I think that that would provide more consistency, less fluctuation, and it would be good for all of us in planning our investments in our homes, our investments in our transportation, mass transportation decisions and all kinds of things.
That’s one of the things I hope that in the next four years the president will take a serious look at these issues which have not been addressed effectively in our country for many years.
Focus for the president
Crain’s: A few of you have noted that a lame-duck presidency can offer some opportunities. What do you think the most important thing is for the president to focus on in his final term?
McGuire: I think that he has to address the federal budget deficit, but he’s got to do it in a way that doesn’t tip us into a recession. It’s a big challenge, but if we continue for the next four years with the kind of deficits that we’ve been running the last four years and the eight years before it, we are really going to be on an unsustainable path that is going to look at some point like Europe.
“The first year of the second term is going to be critical.” — Patrick McGuire, St. John Providence Health System
And so really putting the brakes on spending, you know, seven or eight years from now is going to be a lot more painful than if we do it in some reasonable fashion. I think there is a path to get there, but the first year of the second term is going to be critical.
Whitman: Yes, obviously we have to get the deficit under control, but the way we should do it is just the opposite of what would happen if we fell off the fiscal cliff.
In other words, if anything, we need to stimulate spending now and then the president really has to do what he wouldn’t do while he was running and that is tackle the long-term issues, which are entitlements. I think Social Security is relatively easy to tackle. Health care, I think, is much more a matter of experimentation because we really don’t know how to get health care costs down. We know a lot of things that are well worth trying, but we don’t know for sure.
One thing that gives me some hope is that in this term the president may be able to make more progress on these things, more so than he could before. I think one of his problems in his first term was he really didn’t understand how the Congress works. He’d been in the Senate a fairly short time, he didn’t have the kind of deep experience of what you have to do in order to get along with the Congress, and God knows this was not an easy Congress to get along with.
“There’s nothing … to hold (President Obama) back from doing something very bold in a policy sense.” — Barbara Whittaker, Diversity Connections LLC
Barbara Whittaker: To some extent I agree with the position that we’ve got to do something to stimulate the economy to produce jobs. I think it’s going to be along the lines of what Neil talked about, making sure you have policies that stimulate manufacturing growth and have things that come into play that allow people to enter the market.
There’s nothing, now that he’s in his last term, to hold him back from doing something very bold in a policy sense.
Parsigian: My concern, though, is if there’s an attempt to do something so bold that it’s going to be resisted by Congress, what you’ll do is perpetuate uncertainty, and what’s really causing problems for the business community is the uncertainty. We don’t know what the tax game is, we don’t know what the energy policy is going to be, we don’t know what the spending policy is going to be. You will see businesses continue to do very little.
There are a lot of businesses with a lot of cash that are doing almost nothing, and the reason they’re doing almost nothing is because they don’t know what the ramifications will be.
Even if some (policy initiatives) are viewed initially as adverse to business, as long as they know what they are, then they will take action and spend some of the money that they have on the sideline.
Fernandez: I want to pick up on what Barbara mentioned about creating jobs. I think that was the single-most issue raised through this election cycle, and one of the things that could potentially create a lot more jobs is the shale deposits we have that could make us more energy self-sufficient as well. I’m an environmentalist, but I think there’s a way to do it, and I’d rather see this current president do it than one who doesn’t have as much concern for the environment.
“(The U.S. is) producing as much stuff with about half as many people as we used to.” — Marina von Neumann Whitman, University of Michigan
Whitman: One of the tricky things to remember in the manufacturing sector is the United States is producing as much stuff as it ever did. The issue is that productivity has risen so much that we’re producing as much stuff with about half as many people as we used to, which means two things.
One is that we have to recognize that as countries grow, there is a tendency to shift more and more of private expenditure into services. And, secondly, in order to maintain a reasonable degree of employment in manufacturing, we need to encourage the growth of manufacturing.
That means the kinds of things that Neil was talking about, and by the way, when you said cheap gas, I thought you were saying we need to keep gasoline cheap, but I think you were saying the opposite.
Crain’s: It sounds like what you are saying, Neil, is that if you have consistently higher gas prices, as opposed to constantly ratcheting up and down, the demand for the type of vehicles that people want is more certain, so it’s not the biggest imaginable SUV one day and something much smaller the next.
De Koker: Cheap gas is what allows us to drive big vehicles with low fuel economy.
McGuire: How do you deal with the fact that a higher gas tax is a pretty regressive tax? A higher-income person may be willing to pay 50 cents more a gallon and it’s not a big deal, but someone who’s making minimum wage, paying 50 cents more a gallon is a big deal.
De Koker: They’re paying it now. When the price goes up, they’re paying the higher price. They end up, instead of the big old car, they’re going to the smaller older car that has better fuel economy. But if you want to have an excuse for poorer folks that can’t afford it or the person in the pickup truck in Utah that drives his daughter a hundred miles one way to school and all those kind of stories, let’s take care of them. That’s 2 to 3 percent of the population. We can solve that problem.
Fernandez: We need more public transportation.
Whittaker: The thought process that everybody in Michigan has a car and drives is just not true. You need to support folks in terms of infrastructure with transportation and public transportation to get them to the jobs. That’s another enabler to make job growth happen.
De Koker: One cent of gasoline tax per gallon generates a billion dollars approximately, so if we get that 20 cents a gallon increase, in five years we’ll be generating a hundred billion dollars of revenue that can be used to improve our infrastructure, our roads and bridges and potentially provide some direction for mass transportation in the right areas.
Fuel for innovation
Parsigian: There are all sorts of important governors for how you change behavior, but another thing that people should be encouraged by is that the innovation economy is very focused on this. As gas prices increase, whether by regulation or by market, that’s creating an incentive for innovation, which I think people are not hearing enough about.
We’ve heard about some of the failures — Solyndra, A123 — that have gotten huge government support. But the encouraging thing is there are a lot of much-smaller companies that see a huge incentive to innovate.
I happen to work with a corporate venture capital group that’s investing significantly in innovations to improve mileage, to lower the weight of cars, because the automakers have no choice. I mean, they’re being regulated by the CAFE standard, so that’s creating an entire innovation economy, and some of it includes, for example, very low energy use buses to create a more economical way to have public transportation that’s available to more people. They’re challenged by the fact that their customers in many cases are municipalities that are extremely cash poor, but even still, they are able to attract capital and innovate.
Crain’s: What kind of role do you think government can or should play in an innovation economy? I mean, I think it’s fair to expect that in any industry that’s rapidly changing there will be many companies that fail.
Parsigian: I don’t think the government is terribly good at picking winners and losers in a commercialization situation, and that really ought to be left to the private sector. But those private investors aren’t interested in science experiments. That’s the role that the government must play, and that’s one of the reasons why the innovation economy in this country works.
Certainly it’s because we’re entrepreneurial, but it’s because the government has taken on that burden using tax dollars to make sure the universities, the scientific institutes have the ability to generate new technologies which have the potential to become commercialized. The private sector will never do that.
Affordable Care Act
Crain’s: Let’s switch gears here and talk about health care. Is everyone ready for the Affordable Care Act?
McGuire: I would say that from a health care perspective, there is still a lot of uncertainty. What we don’t know is if the theory behind the Affordable Care Act is correct in that you can reduce the cost of health care in the future by focusing more on preventive medicine and chronic disease management. There’s a strong belief that it will, but there are also data points that are out there that it doesn’t work as well as you might think, so let’s say that’s still an unanswered question.
For us, a big unanswered question is what is going to be the impact of the exchanges. We’re a little slow to get off the ground on exchanges here. We know that there are going to be a number of individuals who are going to become insured that are going to buy their insurance through the exchanges.
What that’s going to do to the market is really unknown, whether it’s going to drive prices significantly down, whether employers are going to decide it’s better just to pay their employees a stipend and have them buy their insurance off of the exchange and take out the employer being the intermediary in the health care system.
From an employer’s standpoint, I would think there are a lot of benefits to getting out of that transaction and leaving it to your employees to deal with now that they have an organized system to do that, but how that’s all going to shake out is very much unknown now.
One thing is clear, that in the next five years, we’re probably going to see more changes from a health industry standpoint than any five-year period since Medicare was enacted in the mid-’60s. There are so many moving parts and they are so big, we’re in for some dramatic change.
Crain’s: Bret, is this something employers are talking about in your organization?
Jackson: Oh, absolutely. I think small businesses, fortunately or unfortunately — I think unfortunately — are going to let employees get health insurance on an individual basis and suffer the penalty. I was with a small-business owner last night who asked me, “Now, tell me, exactly what are the penalties?” After I told him, he said, “Well, why wouldn’t I make that change?” And I think that’s unfortunate.
Some of my larger employers tell me they’re going to continue to offer health insurance because they see it as a way of attracting good talent. Hopefully, small business doesn’t lose sight of that as well, because we don’t want all the good talent going to certain companies and not in small business.
Fernandez: So are penalties too low?
Jackson: I think, generally, yes. I think the Affordable Care Act sets up an incentive for businesses to forgo offering health care. I also think that there isn’t enough being done, from both a business and labor perspective, to address costs in the Affordable Care Act.
The act has a lot to do with the Medicare and Medicaid side, but not with the structure of how we pay for health care, especially.
Whitman: One of the things that I think that there’s the potential for the Affordable Care Act to do, although we’ll see how effectively it’s implemented, is to pay more for preventive care. I have a daughter who’s a general internal medicine person, and ever since she finished medical school she has been talking about the perversity of a system that won’t pay for foot care from podiatrists but will pay for amputations for diabetics’ feet. She says she just runs into this everywhere.
My impression is that the Affordable Care Act tries to create an incentive toward paying not just for procedures, which is the way the fee-for-service system works now, but to pay for ongoing health maintenance and preventive care, and if it does that successfully, I suspect that that will be one promising path to reducing the growth of health care costs.
Fernandez: Is there any way that we could systematically through Medicare, Medicaid, the big government programs, pay for wellness? And monitor for it?
McGuire: Within the Affordable Care Act there are entities called accountable care organizations, ACOs, and the concept is to say we’re going to look at the total cost of the population that you’re caring for and your compensation is going to be based on essentially keeping people well. It’s not going to be on how many things you do to them once they are not well.
We would much rather keep people well than have them need the foot amputation later on.
So that is part of the Affordable Care Act and that is a concept that is being tested to see whether that is actually going to be an effective way to change the cost dynamic.
Parsigian: You know, it’s all about the incentives, so if the incentives within the ACOs work the way they’re supposed to, you don’t have to micromanage at the task level.
McGuire: You need the right incentives for the physician and the right incentives for the health systems, but the patient also needs to be incented. If they are diabetic and they are not compliant, there needs to be some incentive, positive or negative, to get them to be compliant, because those are the people that we find are the hardest to manage. Someone who really wants to take control of their health, working with a physician who is looking after their health, that’s a great combination and that has great outcomes, but if you don’t have the patient being willing. … We’re actually seeing cases where physicians are now turning away patients because they’re noncompliant, because “if you are noncompliant, you are now messing up my quality scores because you’re not doing what I’m telling you to do, and so I can’t see you as a patient anymore.”
Whittaker: Do you see that incentive for the patient coming from their employer in terms of the kind of money they will put on the table for their health care, a wellness kind of plan?
McGuire: I think so. I know a number of employers do this. In our case, if you are someone who is a smoker, you’ll pay a higher premium. I think we’re going to have to start seeing that economic incentive to the individual patient because without the patient’s cooperation, participation in their own health, you’re not going to get to where you need to go.
De Koker: We discussed this topic in our HR Council, and it’s interesting the number of companies that have programs that incentivize their employees to lose weight, to quit smoking, to do all these things, and they do it through the co-pay portion. They pay less if they’re healthier.
Fernandez: David, are you seeing people interested in innovation in medical technology?
Parsigian: The more difficult category are things like medical devices and drug therapies, and the issues are regulation and the cost to bring them to market, so there’s actually more pressure on the innovation economy in those two areas, particularly in drug therapies, because the FDA process for both has become much more difficult, so the cost of getting those products to market is so significant that the private sector is starting to decline to invest in them.
In addition, in the Affordable Care Act there’s a tax now on medical devices that didn’t exist before, so that’s having a depressive effect on innovation on medical devices. That’s some of the bad news. Let me tell you some of the good news. Because of the Affordable Care Act and some of the incentives and the fact that the government is paying for some things, people are innovating around it.
“If you create a financial incentive, people will create a business around it.” — David Parsigian, Honigman
I’ll give you an example. There’s a company that one of my clients invested in very recently, Fidelis, which is about to open a clinic in the Detroit area.
Their sole focus is to serve dual-eligible patients, Medicare and Medicaid patients, who up to this point have done nothing but go to the emergency room. So what they are doing is they are providing clinical services to these populations who either could not get access to a private physician who won’t take a Medicaid patient or a Medicare patient, or both in this case, and they are finding that because that’s government-paid, there’s actually a fair margin for them to make. So here’s an example where a method of delivery has found a market niche based on the current reimbursement scheme to serve those kinds of patients who would otherwise not obtain service.
This particular company, they have a video where they’re talking to their patients, and some of them break down emotionally because this is the first time somebody has cared about delivering health care to them. They just couldn’t get access to the system. So it’s a great example of where, if you create a financial incentive, people will create a business around it.