By Sarah Montgomery 

Forever 21. Payless. Sears. Toys R Us. These are a few of the many titans who have declared bankruptcy in the wake of the “retail apocalypse.” As retail migrates from brick-and-mortar stores to the internet, it is essential to acknowledge the fundamentally negative impact this will have on America’s future. 

By 2022, analysts estimate that one out of every four American malls could be wiped out. That contradicts the narrative about the country’s economy— the economy is growing, unemployment is low, and consumers are confident. There are many reasons why traditional American retail is in a death spiral; the primary one being the rising popularity of online commerce, particularly brands dubbed as “e-tailers”. The losses of the brick and mortar market have been offset thus far by the success of online commerce— however, the honeymoon will not last forever. 

Year-to-date, Amazon has reported $117.1 billion in North America sales— and we have not even hit the busy holiday season yet— and has enjoyed an average 26% annual growth rate since 2016. For context, Target reported $75.36 billion in North American revenue for all of 2018 and an average 1.85% annual growth rate since 2016. E-commerce is outpacing traditional retail like a cheetah racing a housecat. 

Without a doubt, the popularity of online stores is eating at retail’s success. Gabriel Kahn, a journalism professor at USC, likens the situation to bringing a knife to a gunfight. Without the overhead costs of brick-and-mortar stores, online retailers can compete in ways that traditional retailers simply cannot. With the offers of next-day delivery, online price comparison tools, customer ratings, a larger inventory, less of the friction inherent in person-to-person interaction, and more, all accessible from the comfort of the buyers’ couch, there is no way physical retailers stand a chance. Though the e-tailer boom has meant increased convenience for the consumer, the cons certainly outweigh the pros. Convenience cannot be our god in this economy.

According to the Pew Research Center, America’s middle class is falling behind financially after spending four decades as the nation’s economic majority.  According to the study, “the nation’s aggregate household income has substantially shifted from middle-income to upper-income households;” the income held by the American middle earners has shrunk from 61% to 50%. As people work for less money and work more hours to try and overcome income shortfalls, the Average Joe and Average Jane have less time and money to spend in stores. 

Those who have disposable income are certainly not spending it on food court meals and trinkets from Macy’s, ultimately hurting the businesses that occupy the average mall. The malls that are surviving, like The Grove, cater to a more high-end, luxury market that is increasingly inaccessible to the middle class. The mall where grandmas and goths could all find something they wanted, where the rich and poor could spend time and not feel out of place, where teenagers got their first jobs, where families went to get some Sbarro’s before a showing at the AMC, where millions of Americans ambled away hours of free time— this modern suburban shopping mall will become a nostalgic memory. 

“Advances in technology, such as self-service checkout stands in retail stores and increasing online sales, will reduce the need for cashiers,” says the Bureau of Labor Statistics. 

The problem of retailers dying off is exacerbating the financial plight of the working class. Back in May 2015, retail salespersons and cashiers were the occupations with the highest employment. The Bureau of Labor Statistics estimates that cashier jobs will have a negative employment change of -138,700 people (4% decline), whereas retail sales workers will likely experience a negative change of -105,200 jobs (2% decline). Stragglers may be sucked into markets related to online commerce, like truck driving or warehouse jobs (which have appalling work conditions), but those jobs are at risk of being automated in the near future. We will lose jobs essential to the wellbeing of the middle class. As reported by NPR’s “Planet Money,” truck driving, retails sales clerks, cashiers, and customer service representatives— all currently impacted by the retail apocalypse— are popular jobs for middle- to lower-income brackets. 

For now, the loss of retail jobs has been offset by the increase in other job sectors, like the aforementioned warehousing, giving off the illusion of a bustling economy. That being said, it is important to keep in mind that those new jobs are not likely to be placed in the same suburbias where those malls once were. Department stores have an incentive to spread their products, and thus staff, throughout the country; e-tailers do not have such an incentive. The regions losing jobs are not seeing that problem mitigated by new jobs. Moreover, as posited by economy researchers Jason Bram and Nicole Gorton, non-retail jobs may demand a more sophisticated skill set than department stores; they liken salary as a proxy to skillset, noting that the average wage for non-store workers exceeded $59,000, whereas the average salary for department store jobs hovers at just $20,500. As obtaining a college education gets more and more expensive, there seems to be no way out for the middle class. Without access to low-skilled jobs, and without the education to secure skilled work, the middle class will be hollowed out. 

But wait: it gets worse. With less money being earned by its citizens, local governments will indubitably suffer. Sales tax and income tax comprise a large part of any city’s government. As malls and the correlated jobs die, so do two major sources of revenue that are nearly impossible to recuperate by other methods. Across the nation, sales tax comprises nearly 33% of state governments’ revenue and about 12% of the local government’s revenue. As malls and retail stores either collapse or flee to more prosperous regions, those localities also see a loss in commercial property taxes. 

I spoke with Jason Kruckeberg, the Assistant City Manager/ Development Services Director of Arcadia, Calif. The city has a thriving Westfield mall thanks to how deftly it serves the large Asian demographic. He says the city reaps many benefits from the mall, considering the sales tax, employment tax, property tax, introduction of money into the local economy, tourism, name-recognition and community events that the Westfield Santa Anita promotes. Just looking at sales tax alone, for the 2017-2018 fiscal year of Arcadia, sales taxes generated $10,670,332 dollars whereas next-door neighbor Monrovia collected $2,404,000 in sales tax that same fiscal year.

Facing reduced tax revenue, governments can provide less social services when relief is needed most, while concurrently raising taxes (further aggravating the problem). Some people, like Alana Semuels of The Atlantic, argue that a viable solution to this problem could be the requiring of online retailers to collect sales tax and redistribute it to the states. Though an interesting solution, it would require an act of Congress, a lengthy and difficult process. Things will get worse before they get better. 

Any competent economist knows that behavior and the economy are closely linked. Displaced workers, shrinking tax bases, widening economic inequality, and reduced money flow is a recipe for disaster. With less consumer confidence, especially in the consumer-driven American economy, the repercussions could be severe. Money is the blood that circulates through the economy, keeping the system alive; without that flowing, the consequences will be grave— economically, politically, and culturally.

When Stacey Li heard that her hourly wage would be increased from $10.5 to $15 from her manager, she couldn’t help texting the exciting news to her friends immediately. Walking out of the manager’s office, she rushed to and hugged her friends who were waiting out of the building she worked.

“I was really excited. At first, I thought I got it because I worked hard,” Lee said. “ But I was still very happy after I knew L.A. increased its new minimum wage.”

Stacey Li

Li, a student worker at USC FMS, received her first increased payroll in August. She said she had more extra money to buy clothes and bags. When asked her opinion of increasing minimum wages, she said: “It’s definitely good to minimum-wage earners, such as me. ” However, is it really good to artificially set an increased mandated minimum wage? Maybe not.

On July 1, the City of Los Angeles increased its minimum wage to $13.25 for large employers who have more than 25 employees, up from $12. Smaller employers with 25 and fewer employees saw a $1.5 increase to $12.

Wages will continue to rise incrementally over the next several years. By 2022, the minimum wage of Los Angeles will be heading toward $15 an hour. California is also heading towards $15, but won’t be there until 2023.

Source: wagesla.lacity.org

In passing the bill of higher wages, the well-intended government hoped that mandated higher wages could help the lowest-paid who are really struggling. However, the effects of increasing minimum wages are still under discussion. Two-side voices to debate about the wage floor have been appearing for decades years.

Early in the 1960s, the economist Milton Friedman pointed that the mandated minimum wage is “a monument to the power of superficial thinking”. He thought the low-paid and the unskilled would be hurt because the mandated minimum-wage law induced employers to dismiss a portion of employees.

Also, if you learned Introduction to Microeconomics, you would be familiar with a concept: price equilibrium, a center point where supply and demand are lines that cross at the same time. In a totally competitive market, the price equilibrium point is the wage where the number of workers matches the number of jobs at that price. When we artificially set a mandated minimum wage higher than the market-determined spot, the deadweight loss appears. Under the situation, some workers are out of work. All in all, minimum wages create unemployment: While they draw more people into the labor market, they reduce the number of labor companies wish to hire.

Source: The Effects of Minimum Wage

The Employment Policies Institute published a study in December 2017 about the statistically negative effects of California minimum wage increases on employment growth-particularly in low-wage industries, from 1990 to the present. The study shows that a 10% increase in the minimum wage would lead to a 4.5% reduction in employment in an industry if one-half of its workers earn low-wages. The study also estimates 400,000 jobs will be lost if California minimum wage is increased to $15 in 2022.

How does the higher minimum wage hurt the low-paid and the unskilled? For example, the wage increase of  $1.5 an hour in Los Angeles will translate to almost $60,000 in annual costs for a business with 20 minimum-wage employees. Businesses need to find ways to increase sales and generate profits to make up for the costs. When businesses cannot pay the costs with increased sales, they will choose other ways to control costs, for example, eliminate jobs, reduce work hours, or hire higher-skilled employees whose productivity can match their salaries.

For example, one of the recent breaking news would be that Amazon’s decision to raise its minimum wage to $15 apply to more than 250,000 Amazon employees and 100,000 seasonal workers, according to the company. However, in order to control the costs, Amazon also decided to end grants of valuable Amazon shares and monthly attendance and productivity bonuses. Some Amazon employees think their yearly total compensation, on the contrary, will shrink and they may end up making thousands of dollars less a year.

However, the other voice says mandated minimum wages don’t necessarily result in job losses; instead, they have little or no effects on employment. In 2017, two universities studied the effects of Seattle minimum wages and came to two different conclusions. The University of Washinton concluded that Seatle’s minimum wage is costing jobs, while the Univerisity of California, Berkeley pointed it hasn’t cut jobs. The University of California, Berkeley’s study focused on the Seattle food services industry, which is an intense user of minimum wage workers. They found no evidence of job loss in the city’s restaurant industry.

In 2013, Center for Economic and Policy Research released a report “Why Does the Minimum Wage Have No Discernible Effect on Employment?” studied by John Schmitt. The study’s conclusion is that little or no employment effects respond to modest increases in the minimum wage. But this doesn’t mean there is no deadweight loss in setting a mandated minimum wage. The study shows that businesses can make use of adjustments to decrease the effect in employment. These possible adjustments include “higher prices to consumers, reductions in non-wage benefits such as health insurance and retirement plans, reductions in training, and shifts in the composition of employment, improvements in business’s proficiency, cutting the earnings of higher-wage workers, and accepting reduction in profits”. In other words, if consumers, higher-paid employees, and businesses can help to pay the extra costs, the low-paid employment won’t be affected. But why do they have to help to pay?

When we discuss the effects of increasing minimum wages, we don’t only talk about the effects on employment but also on consumers, employees and employers. Based on John Schmitt’s report and Amazon’s actions to increase minimum wages, it’s hard to conclude that a wage hike is a really good thing. True, it can benefit a small portion of low-income employees. However, it a large group of people will suffer losses.

Before the first minimum wage came out, economists had predicted the negative effects of setting mandated minimum wages. Now that the governments already knew the possible consequences, why do they still persist the minimum wages?

One of the possible reasons is inflation. According to the interactive graphic, the buying power of minimum wage peaked in 1968, reaching almost $11, although the absolute minimum wage has been increasing over the past decades. If the governments don’t push the increase in minimum wage, the buying power may go down after taking inflation rate into account.

Source: CNN—Minimum Wage since 1938

Also, instead of considering the long-term suffering consequences brought by the minimum wage, the government may focus more on short-term benefits it can bring to low-income workers: from going hungry to having food. For governments, increasing the minimum wage is an easy way to gain support from people because the action shows their humanitarian. Possibly, when economists consider economic and social progress as a whole, the government pay more attention to the interests of certain groups and individuals only care about themselves. Thus, increasing the minimum wage becomes a correct action.

Millions are hungry, ill, and suffering from lack of food and basic necessities such as a police force to patrol the increasing crime in Caracas. In the capital, local residents are constantly rushing to supermarkets and gas stations, waiting in line for hours. Many are even resorting to eating rotten meat. The International Monetary Fund recently declared the lack of stability in the bolivar, predicting Venezuela’s projected inflation rate to be over 1 million percent by the end of 2018. Every day, the foundational pillars of Venezuela’s economy are rapidly changing: the prices of bread, the exchange rate between the US Dollar and the bolivar, and the trust of the Venezuelan people.

How did a prosperous country spiral out of control in less than two decades? It wasn’t always like this. Blessed with the largest oil reserves in the world, Venezuela has had a stable economy based on mostly oil revenue since the 1990s. In fact, they had such immense wealth, with the purchasing power parity (PPP) for  GDP per capita was placed just over $16,000 in the 1990s. The economic disaster can be traced back to 1998 when Hugo Chavez was elected President of Venezuela. As he came from a similar background of poverty from the small village of Los Rastrojos in Venezuela, Chavez appealed to the lower-income individuals of Venezuela. After securing these votes, President Chavez was hit with a stroke of luck: a decade-long rise in global oil prices followed his election.

With Chavez in power, Venezuela’s dependence on oil grew— oil accounts for 96% of Venezuela’s exports and over 40% of the government revenue and the rise in global oil prices felt like a jackpot. The flourishing government finances drove Chavez to make a series of economic decisions that tend to be appealing to politicians—good in the short run but disastrous in the long run. Chavez’s socialist regime began to increase spending but as oil revenues declined, they also increased their borrowing. According to the Financial Times, the figure was around $25 billion during 2004 and just last year, the best estimate is around $178 billion. To continue to appeal to the poor, Chavez then spent this new wealth on food subsidies, health care for the poor, and improved education. Although these social programs certainly raised the quality of life for lower-income families, they were unsustainably funded, relying heavily on one major industry—oil. In fact, Chavez did not actively attempt to lay off the dependence Venezuela placed on oil exports. Instead, he zeroed in on welfare programs to the point that his unrestrained spending led to a deficit.

After Chavez died in 2013 and Nicolás Maduro succeeded Chavez as President of Venezuela, the oil prices plummeted in 2014. The U.S. Energy Information Administration states that in June of 2014, crude oil cost $112 per barrel (bbl) and by December, it went down to $59 per barrel. The Venezuelan economy took the hit hard as the GDP shrunk by 30 percent during a four-year span between 2013 and 2017. As Venezuela’s government revenue decreased dramatically, the government slowly realized the gravity of their problem of heavy dependence on one resource. In the past, Venezuela’s wealth and focus on oil exports led them to import more of their food and consumer goods. In 2013, food accounted for 18.41 percent of all of its imports.

President Chavez’s previous overspending on welfare created large fiscal deficits and the economy kept shrinking due to cheap global oil prices. President Maduro decided to simply print more money to sustain the welfare programs and import more food and consumer goods, but that is an extremely short term solution to their problem. Venezuela was trapped: the more bolivars (VEF) it printed to fund imports, the more the currency depreciated. The increase in imports for everyday goods, in combination to years of added regulations from the Venezuelan government (such as price control) and inefficient operations of nationalized businesses, caused domestic production of food and goods to shrink. With greater reliance on the government for the distribution of goods and services, only a few US dollars to spend on imports, and a decrease in welfare funding, there was a sudden scarcity of products within Venezuela. As the bolivar (VEF) became worthless, no one wanted to buy Venezuela’s debt or lend them money.  President Maduro tried again to mitigate the bolivar’s decreasing value through various policy attempts that proved to be equally as disastrous; he raised the minimum wage by more than 3,000% and later hacked off 5 zeroes on the bolivar currency. But Venezuela fell short of achieving long term economic stability and these actions only elicited a deeper inflation crisis. Finally, the short term effects of Chavez’s policy to exchange welfare programs for popularity had worn off and the negative long term consequences began to emerge under Maduro.

Under Maduro, the normally subsidized medicine and food were not available to the poor because the government ran out of money and supplies. During this time, around 84 percent of the population identified as poor. To make matters worse, in the midst of this crisis, political corruption permeated the economy. Nicolás Maduro tweaked the political system to ensure that he could take advantage of the nation’s resources by using a complex currency system. While the bolivar became worthless and the demand for a more stable currency such as the US dollar arose, Maduro set the official government exchange rate at 10 bolivars per $1. However, only allies and elite friends of President Maduro could access this special rate, who then imported food and goods and sold them on the black market for a massive profit, to ultimately ensure that Maduro could maintain his power through near total control of goods and the cooperations of his allies. Most Venezuelans had no choice but to turn to the black market to access US dollars with exchange rates in the tens of thousands of bolivars.

Running out of options, Maduro turned to issuing local currency debt to raise money for Venezuela. However, the Trump administration responded by restricting Venezuela from selling their government debt in the US, making it more difficult to access foreign currencies and get out of their inflation. But most ambitious of all, Maduro is currently betting on a new type of currency to solve the economic crisis: the Venezuelan petro. It is an attempt at a virtual currency or cryptocurrency backed by commodities such as oil, gas, gold, and diamonds and intended to supplement the Venezuelan bolivar fuerte (VEF) while aiding in the mission of overcoming US sanctions. On the first pre-sale day, the petro raised $735 million and current prices are $62 for a barrel of oil. The Venezuelan government argues that this revenue could help pay part of the country’s obligations and is hopeful to one day use the petro as a daily currency.

Financial experts from the Washington Post find this ambitious plan incredibly risky. Though they are linked to oil reserves, the initiative can only be a superficial solution as long as the central bank continues to print money to cover government spending, which is what caused the inflation in the first place. More importantly, there is a lack of credibility. Implementing the petro is not the best policy because it circles back to the idea of trust—if no one believes in the cryptocurrency, no one is likely to use it. According to the Washington Post, “few Venezuelans appear to have faith in the fix (the petro), with many expressing broad fears that it may only make the situation worse.”

Often, economics are a self fulfilling prophecy and an economy’s state is rooted in social perceptions and belief. In fact, there is speculation of whether the petro is backed at all, as there is no evidence of active oil drilling or indication which reserves are used to back the currency. At the same time, because social perception influences economic actions, Venezuela is looking to legitimize the petro through active participation in using the petro as currency. An example is Venezuela’s expressed desire to pay for importsfrom Brazil with the petro. Another way Venezuela is implicitly forcing their citizens to partake in the petro initiative is in processing fees of one of the most important government issued items: the passport. The financial crisis has Venezuelans dwelling in social unrest. In fact, an estimated 2.3 million people have been fleeing the country since Nicolás Maduro’s ascendance to presidency in 2014 and is said to be the biggest migration of people in Latin America’s recent history. With large flocks of people emigrating, Ecuador and others are tightening immigration laws and requiring passports (reported to take up to two years to approve) to restrict access. Venezuela’s mandate that passport fees are to be paid in petro may be an economic policy move, but it is also a political decision from President Maduro. The past policy attempts to fix Venezuela’s economy from both Chavez and Maduro have been vast but short-sighted, yet one thing continues to ring true: in the root of Venezuela’s economic crisis lays political turmoil.

SOURCES:

https://www.economist.com/the-americas/2018/08/25/a-rude-reception-awaits-many-venezuelans-fleeing-their-country

https://www.reuters.com/article/us-venezuela-economy/venezuelas-annual-inflation-hits-488865-percent-in-september-congress-idUSKCN1MI1Y6

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https://www.forbes.com/sites/garthfriesen/2018/08/07/the-path-to-hyperinflation-what-happened-to-venezuela/#4c9a7a3215e4

https://cointelegraph.com/news/venezuela-mandates-passport-fees-must-be-paid-in-controversial-cryptocurrency-petro

https://www.scmp.com/tech/blockchain/article/2167274/want-passport-venezuela-tells-citizens-pay-travel-document-state

https://www.aljazeera.com/news/2018/02/venezuela-petro-cryptocurrency-180219065112440.html

https://www.theguardian.com/world/2018/aug/20/venezuela-bolivars-hyperinflation-banknotes

https://www.imf.org/external/datamapper/PPPPC@WEO/OEMDC/ADVEC/WEOWORLD/VEN?year=2017

https://tradingeconomics.com/venezuela/consumer-price-index-cpi

https://www.cato.org/research/troubled-currencies?tab=venezuela

https://www.economist.com/finance-and-economics/2017/04/06/how-chavez-and-maduro-have-impoverished-venezuela

https://ftalphaville.ft.com/2017/10/03/2194217/how-did-venezuela-get-to-this-point/https://www.eia.gov/todayinenergy/detail.php?id=19451https://www.nytimes.com/interactive/2017/07/16/world/americas/venezuela-shortages.html

A healthcare provider, an insurance payer, and a patient all walk into a bar. You already know how well this is going to go.

National Health Expenditure; that is, the amount the United States spends on healthcare each year, was $3.3 trillion dollars in 2016. That’s $10,348 per capita or 17.9% of GDP. The OECD average in the same year was $4,003 per capita or 9% of GDP.

We have a dataset showing that we spend more, disproportionately more, on healthcare services than our fellow OECD members; that’s clear. But spending money is not inherently bad. But in exchange for these expenditures, nearly $6,000 more per capita, we must expect superior results. We must expect our citizens to have less chronic disease, higher life expectancy, and lower infant mortality rates, but we do not see that realized. The Wall Street Journal published the following infographic in July, illustrating the failure of the American healthcare system in comparison to our fellow economically-developed nations.

This story, the story of why it is happening and how it can change is excessively complex, and conversations on all chapters of this story deserve to be had and heard. I’m going to discuss one element of this story, one that I believe sheds the most light on what is actually going on in our system—the payer-provider relationship that makes the patient, the payer, and the provider all worse off.

There are three main players in this game, the three walking into a bar—provider, payer, patient. What does each player want?

The patient wants to get treated, treated well, and treated well at a good price.

The payer (also known as the insurance company) wants to provide care at the cheapest level of care possible that will meet the patient’s minimum requirements.

The provider wants to treat the patient at the highest cost while maintaining exclusive relationships with the payers. The insurance companies are ultimately the ones to pay the bills.

The payer-provide relationship is a complex one to say the least. Let’s look at it through the lens of Mr. Edward Winchell. Mr. Winchell is a 65-year-old, California resident who was admitted to Mercy San Juan’s hospital facility for a right hip fracture in 2014—he had fallen down. Throughout his time at the hospital, Mr. Winchell began suffering from symptoms of C. difficile, or inflammation of the colon that can cause severe colon damage or even death. According to the public record complaint filed on Mr. Winchell’s behalf, Mercy San Juan attempted to discharge and relocate him to a skilled nursing facility once his Medicare coverage was due to expire; however, the hospital “consciously or reckless[ly] chose to omit the fact that Mr. Winchell had C. difficile from his records,” knowing that such a condition would make him an undesirable candidate for another facility—he was deemed too expensive to care for. “Mr. Winchell was unsafely discharged” to a skilled nursing facility with no knowledge of his presenting symptoms. This is a phenomenon called “patient dumping” where providers will essentially pawn off patients that are too expensive, or for whom their insurers won’t pay, to lower, cheaper care facilities. The end of the story? Mr. Winchell’s colon was removed and will be forced to use a colostomy bag for the remainder of his life.

This story is both devastating and disheartening, but let’s look at it from a business perspective. The hospital, Mercy San Juan, had an expensive patient. The insurance provider was nearing the end of its contractual agreement to pay and was refusing to pay any more. The hospital could not deliver care at a cheaper rate, but a skilled nursing facility could. Therefore, the logical option for the hospital is to transfer the patient to that cheaper facility. This cheaper facility also ends up delivering a lower level of care, precisely the opposite of what Mr. Winchell actually needed to be discharged more quickly and more safely.

Health care is an industry, though often forgotten, an industry with a vibrant economy. Each firm is competing against the other in an attempt to claim profits, just as firms in the automobile or CPG industry do. The only difference is the extreme amount of influence that the suppliers—in this case, insurance companies—command over the firms.

So what are the consequence of this payer-provider relationship, of this patient dumping, of this subprime care?

To examine these consequences, hospital readmission rates become a useful tool. Theoretically, if a patient is treated with poor levels of care before being discharged, they will have to return to the hospital again in order to receive the care they originally needed. This scenario is illustrated by hospital readmission rates. Though data are severely disjointed, one study published in the AAP Journal examining this rate among children with chronic complex conditions (CCCs) reveals that, among children with 1 or more CCC, 19% had at least 1 readmission within 30 days of discharge. In patients taking 8 or more medications, that number was 29%.

In 2011, The New Yorker ran a story following doctor Jeremy Brenner playing around with data in a New Jersey town. Brenner “found that between January of 2002 and June of 2008 some nine hundred people in […] two buildings accounted for more than four thousand hospital visits and about two hundred million dollars in health-care bills. One patient had three hundred and twenty-four admissions in five years. The most expensive patient cost insurers $3.5 million.”

Another wide-spread analysis found that 14.4% of 12.5 million discharged patients were readmitted. These readmissions resulted in annual costs of $50.7 billion.

Of these hospital readmissions, 26.9% are considered potentially preventable.

These hospital readmissions are discouraging and costly, but they also represent an impossible relationship between provider and payer. Due to pressures from insurance companies, hospitals are financially pressured into discharging, often prematurely, patients such as Mr. Winchell in order to cut costs down for the payer. Insurance companies, you recall, want the patient discharged as quickly as possible in order to cut down costs. However, when these patients are forced to return to the hospital to receive adequate levels of care, like those 26.9% are, these hospitals are hit with large fines (3% of total Medicare payments in 2015). This puts the providers in the ultimate Catch-22. Do they discharge the patients and risk readmission penalties or keep the patient longer despite the provider’s refusal to pay, which will naturally eat into the hospital’s bottom line and destroy relationships with insurance companies?

Herein lies the prisoner’s dilemma: with incomplete information, neither payer nor provider knows how to best treat a patient at the lowest cost. As a result, the dominant strategy for the payer will always be the lowest cost option that produces the lowest level of care, an option that will indeed result in increased costs for the provider as the patient is readmitted yet again.

Both readmission rates and the penalties slapped on these readmissions argue that poor care inevitably ends up costing everyone more in the long-run—more pressure and time for the provider, more money for the payer, more grief for the patient. Even more, these numbers tell a story, a powerful story that shows the careless costs within the American healthcare system that make the payer, the provider, and the patient all worse off. Can we shave $50.7 billion off the total National Health Expenditure by simply improving this relationship?

This is not even to speak of the effects that incentivizing proper nutrition and exercise, addressing the pharmaceutical market, and reforming regulations on price of care could have on this cost. If we analyze this situation from purely a financial standpoint, completely ignoring every humanitarian, moral, and ethical argument, our healthcare system is inefficient at best and damning at worst.

Healthcare spending affects more than just the chronically sick; it affects you, the taxpayer, whose dollars directly fund our national budget.

As data from CBPR shows, Medicare and Medicaid represent roughly 26% of our national budget—that 26% is part of our “mandatory” spending, the part of our budget that politicians claim we can’t touch.

I would argue that we can touch mandatory spending. We can shrink it through lowering hospital readmission rates, through raising the level of care, through changing policy to encourage collaborative behavior between provider and payer, not pitting them against one another.

A healthcare provider, an insurance payer, and a patient all walk into a bar. Let’s not let them get into a bar fight.

Luis Herrera lives with his 82-year-old father in a rented 1-bedroom apartment right opposite the Union Avenue Elementary School on South Burlington Avenue. Herrera works full-time at a credit union in downtown Los Angeles, around two miles from his home.

After moving from another apartment building nearby, the Herreras were settling into their new home. But that sense of comfort was short-lived. After a series of gradual rent increases every year, the owners of the property, the “1979 Ehrlich Investment Trust”, suddenly hiked the rent by nearly 25 percent.

The Herreras are not alone. Across the 192 housing units owned by the Trust in the Burlington Apartments, residents of every single unit have reported an increase in rent by 25 to 50 percent this year, according to activists from the local chapter of the Los Angeles Tenants Union.

Luis Herrera

According to real-estate website Zillow, the average rent in Los Angeles has steadily risen to nearly $3000 per month in the last five years. Nearly 2 million residents of the county spend more than half their monthly salary on rents.

Herrera moved into his Burlington apartment four years ago and remembers that the rent was initially $850 per month but the contract said that it would increase by $100 the next year.

“It was okay for me because we were moving from another building where the rent had gone up to $1200…So when we moved from that place, you know, $850 sounded a lot better,” said Herrera.

In 2015, Herrera’s rent increased to $950 and then to $1045 the next year. This year, the owners notified him of a further increase to $1300. Herrera earns a little more than $2500 every month. He said that he already spends half his salary on just the rent.

Herrera’s precarious financial position is compounded by the fact that his father needs regular dialysis. Although the dialysis is paid for by Medicaid, sometimes emergencies crop up which further add to Herrera’s financial burden.

“We have a limited amount of subsidies for housing in this country, which means that most people, even most poor people rent housing on the private market,” said Michael Lens, a professor of urban planning and public policy at UCLA. “Generally speaking, in Los Angeles, we do need more housing.”

What is the state of the private market when it comes to housing?

According to Zillow, the median rent for a 1-bedroom apartment in the neighborhood in which Herrera’s flat is located is $2,370. The last recorded monthly median household income in the council district was $3,647.

    Median Rent in South Burlington Avenue (Source: Zillow)

Even in 2015, when the incomes for the council district was surveyed, the rent was around two-thirds that of the household income.

“I know how to spend my money, but it’s really hard when even…if you make, you know, say $2500 a month, when $1300 out of that money is going to rent,” said Herrera.

Besides the rent, Herrera budgets $300-$400 for his food but he says that it usually exceeds the amount because on days that his father is hospitalized, he has to rush from his work to the hospital leaving him no time to cook his own food and forcing him to eat outside.

He also has to pay $300 more every month for his car. His monthly expenditure on gas is around $80. Herrera said that although he works nearby and can easily walk to work, having a car is essential because of his father’s medical condition.

Around $150 more goes on his phone and internet connection and some more on electricity and gas. The result? Herrera hardly has any money left as savings.

Herrera said that many of his neighbors have been forced to move out or have had to take up multiple jobs, sometimes working for 18-20 hours a day, just to be able to pay the rent. Many of his neighbors are old and on fixed incomes from retirement funds and they won’t be able to pay rent if it keeps increasing at the present rate, he said.

Families are also hesitant to move because their children study at the Union Avenue Elementary School right across the street. Herrera said that he knows people in the buildings who are looking for a third job or women who had been taking care of their kids at home and running the house now going out to look for jobs.

“If it comes to it, I can sleep in my car and then I rent a place just for him [Herrera’s father]. I can go to the place, take a nap and just sleep in my car at night…That’s how far I’m willing to go,” said Herrera. He said that his father’s illness has prevented him from moving somewhere else.

A similar situation is faced by Elyse Valenzuela, a resident of a cluster of rent stabilized apartments right opposite the new Banc of California Stadium on Exposition Park. The buildings have been bought by an Irvine-based real estate company, the Ventus Group, and are slated to be demolished to make way for a multi-use luxury residential-cum-commercial complex.

Elyse Valenzuela

What worries Valenzuela the most about her impending eviction is how her brother, who is disabled and suffers from cerebral palsy, will adapt to a new life in another neighborhood.

“It is going to be hard for him because he has his whole life established here…All of his programs are down the street. We have been going to the same doctor for years,” she said. If they are forced to move somewhere else Valenzuela’s family would also have to consider whether there are good programs for him and good doctors in the new neighborhood.

“The development will generate significant tax revenue for the City of Los Angeles, which will help to provide more city services,” said Alice Walton, a spokesperson for the group.

The developers also plan to set aside 82 of the 186 residential units in the project as “affordable housing” units, available for households making less than 80 percent of the area median income determined by the Department of Housing and Urban Development. Maria Ochoa, a local activist however pointed out that even if the project included housing units at lower prices, the demolition of the existing buildings still means that 32 units are off the market.

“[If] say the whole building was rent controlled and turned over into affordable housing, that would be super helpful to the community,” she said.

Valenzuela’s apartment falls under Council District 9, where the median household income is among the lowest in the county. The district has among the highest unemployment rates in the city (8.5 percent unemployed). More than a quarter of the households are also enrolled in the Supplemental Nutritional Assistance Program — the highest in the city.

                                                                                                               Made with Infogram

The planned commercial project is part of a surge in gentrification around the University of Southern California which adjoins Exposition Park. the university’s growing international cohort also show a willingness to pay more — a fact developers and property owners wish to cash in on. Last month, for instance, around 80 tenants at an apartment complex off Exposition Boulevard were evicted because the new owners plan to convert the units into student housing.