A Grim Fairy Tale

It`s the story of Slick, Tiny, Sleepy, Dopey, and a plan that goes horribly wrong. Don`t read this to your kids at bedtime!

It`s the story of Slick, Tiny, Sleepy, Dopey, and a plan that goes horribly wrong. Don`t read this to your kids at bedtime!

James C. Paladino, DMD

What if Slick, who happens to own the largest skyscrapers in the largest cities in the nation, has a plan (or scheme, if you think that`s more appropriate) to develop the ABC Capitation Auto Plan. Incidentally, Slick`s best friends are the owners/employers of all the major corporations that own the next-to-largest skyscrapers.

Slick`s plan is to contract with a limited number of auto dealers to provide cars to the people who purchase Slick`s "auto plan." The concept is to collect $20 per month from John Public and, in return, John is entitled to one free car each year from the car dealers listed on Slick`s plan. Slick intends to pay Tiny Tom`s Car Barn a portion of the $20 each month to enable Tiny to provide the free car to John.

If anyone actually has taken the time to do the math at this point, Slick`s plan might seem totally absurd. But wait! Slick has hired a complete army of men (and women) in suits - lobbyists, marketers, public relations, managers, accountants, and salespeople - to prove to anyone that the math works.

Slick`s first order of business is to study each state`s enabling legislation regulating his business plan. It turns out that not one state agency can define exactly what Slick`s business is. Is it a discount club like Sam`s Club, except with regulated contracts governing Slick, the dealers, and the public? Unfortunately there are no state agencies regulating "Contracts That Don`t Matter." Or is it a scheme? But again there are no state agencies for "Schemes and Cons." By default, the state`s department of insurance decides to regulate Slick`s business, even though his business has absolutely nothing to do with insurance.

This method of government regulation has several problems. First, bear in mind that the government owns all of the remaining buildings in the cities that Slick and his friends do not own. Second, this particular state agency happens to be run by two of Snow White`s erstwhile companions - Sleepy and Dopey - who are constantly dogged by Slick`s lobbyists. Third, and perhaps most significant, is that apparently there is not one working calculator in this agency! This means that, even if Sleepy and Dopey could do the math, their lack of calculators renders that completely impossible. Thus, the regulatory agency is totally dependent on Slick`s calculations to determine the plan`s equitability.

Imagine the following conversation among Slick, Sleepy, and Dopey:

Dopey: "How did you decide the monthly fee should be $20?"

Slick: "We determined that`s the maximum amount the public is willing to pay for such a plan."

Dopey: "So that amount bears no relationship to the actual cost of the car or to the cost of doing business?"

Slick: "Absolutely none."

Dopey: "What do you think, Sleepy?"

Sleepy: "ZZZZZ."

Dopey: "How much of the $20 will you give to the dealers?"

Slick: "That`s a complicated formula dependent on many factors, the most important of which is ensuring that I retain outrageous profits without risk. Let`s just say they`ll get half."

Dopey: "So you think you can give a dealer $120 per year and he`ll give away a car for that."

Slick: "Absolutely! Just let the dealers decide if they can do it."

Dopey: "So we`ll just leave it up to them, even if we know it`s impossible."

Slick: "Absolutely! If one says `yes,` he`ll have the burden of making sure it works. We don`t have to decide that now. It`s the dealer`s decision and burden. Besides, I have millions of buyers ready to pounce on this plan. Do you realize what we`re doing in the name of cost containment?"

Dopey: "What do think, Sleepy?"

Sleepy: "Cost containment? That`s my buZZZZ-word."

The next order of business is to get Tiny Tom`s Car Barn to sign the contract.

Slick: "Tiny, here`s what I`m going to do. I`m going to provide you with a steady source of monthly income, no more peaks and valleys, and all the customers you can imagine. How does that sound?"

Tiny: "I don`t know."

Slick: "Here`s how it works. I give you $10 a month for every person that gives me $20. At that point I do absolutely nothing, but you have to give every name on the list I send you a free car each year. How does that sound?"

Tiny: "I don`t know."

Slick: "We determined that only three out of 10 people will actually show up at your place to get a new car. Statistics show that people purchase cars only once every four years. That`s called `existing buying habits.` Plus some people will just forget they`re entitled to a new car. You know how people hate car salesmen! They`ll do anything to avoid you. They`d rather go to the dentist than haggle with a car salesman. We call this `non-utilization.` But you`ll get their $10 anyway. Does that sound good to you?"

Tiny: "I don`t know."

Slick: "Remember, you`ll start delivering five times as many cars as you deliver now. Due to higher volume, you will profit from economies of scale. Your cost per car delivered will decrease tremendously. In other words, you`ll become more cost-efficient."

Tiny: "Maybe I should talk to my colleagues."

Slick: "Sorry, Tiny, you can`t do that. The Feds say that if you and your colleagues get together and decide my plan can`t work and start telling each other not to join, you`ll go to jail. That`s anti-trust, you know."

Tiny: "What about my Auto Dealer`s Association ... the ADA?"

Slick: "Same thing, Tiny. You`re looking at anti-trust, jail, and stiff fines."

Tiny: "But the $120 you`re going to pay me won`t even cover one-fourth of my annual dues to the ADA."

Slick: "Tiny, I can tell from your comments that you are an astute businessman. I haven`t told you about the gravy yet. There are two key perks. One, the people on my list will send their friends and neighbors to you and you can sell them cars at your regular price. You`ll get referrals, Tiny. Two - and here`s the real kicker - you can sell more expensive cars to the people on my list and avoid even giving them your least expensive car for free. We call this `added value.` You`ll need a highly trained and competent sales staff to do this added-value thing. It`s all up to you, Tiny."

Tiny: "So you`re saying that all of your MBAs and CPAs say this will work. And they`ve met with the MBAs and CPAs in state government, who have given this their squeaky-clean `Seal of Approval,` stating this will work. And all of your people and the government people have met with the MBAs and CPAs of the Fortune 500 companies and this entire mix of people says this will work, but I`m not allowed to talk to my colleagues or association. So the only advice I can get is from you and my janitor?"

Slick: "Talk to her at your own risk, Tiny. If she`s your wife, she couldn`t, or hopefully wouldn`t, testify against you."

Tiny: "So you`re saying that your company, state government, and the Fortune 500 companies will not stop your plan from being sold, even if it doesn`t work, and the only way your plan can get stopped is if I say `no,` but I can`t tell my colleagues to say `no.` "

Slick: "That`s exactly it, but you can quit any time you want."

Tiny: "It sounds like your plan will get sold no matter what I say, since my colleagues are neither allowed to consult as a group nor allowed to say `no` as a group."

Slick: "I say again, Tiny, you are an astute businessman."

With despair and dismay, Tiny signs on to Slick`s plan.

One year later, Tiny realizes that non-utilization turned into adverse selection and over-utilization. Nine of 10 people wanted their new cars. It was a colossal absurdity to think that people would pay for a benefit in advance and then forget to use it.

Existing buying habits? Slick used buying statistics on people that don`t have his plan and leaped to the absurd conclusion that people with his plan would have the same buying habits as those without his plan. Worse yet, the state regulators didn`t even require Slick to provide exact purchasing demands from people with his plan. They allowed Slick to provide extrapolated statistics based on groups with entirely different plans or with no plans at all.

Referrals? Yes, but all the friends and neighbors were referred to Slick, not Tiny. So there were virtually no customers left to purchase Tiny`s cars at his regular price.

Economies of scale? Tiny paid a fortune to expand his business. Costs doubled, while revenues flattened. Tiny never could keep up with the demand. There were one-year waiting lists for cars and his phone was always busy. He had to quit taking new customers, thereby choking off future revenues.

A steady source of monthly income? Yes, but all of that was being used to pay yesterday`s expenses. Today`s expenses were slightly increasing every day and it increasingly took more and more tomorrows to pay today`s expenses. Unfortunately Tiny was completely dependent on this income to stay afloat. Quitting was impossible.

Added value? Tiny had varying degrees of success with this. It was highly dependent upon his staff`s ability to sell. It soon became evident this was the only way Slick`s plan could work. No cars could be given away. All cars had to be the more expensive ones not covered under Slick`s plan.

Eventually, Slick circumvented the dealer`s "Contract-That-Didn`t-Matter" by creating a network of dealers within his network. All dealers operated under the identical (and supposedly strictly regulated) contract but, to members of this select group, Slick secretly supplemented the monthly pay so they could afford to give away some free cars. In return, this special group of dealers were used as an example to other dealers, to employers, and to Sleepy and Dopey to prove that Slick`s plan actually worked. Of course, no one knew that their monthly pay was secretly being supplemented. There were also some dealers extremely skilled at selling only added-value cars, and Slick`s plan worked for these dealers.

As you can see, Slick`s plan evolved into a plan that was completely different from the plan that was presented to and approved by Sleepy and Dopey. In fact, nothing in this evolved plan resembled anything in the contracts with the dealers and the public. Not because of Tiny and not because Tiny signed the contract, but because Sleepy and Dopey, the Fortune 500 companies, and the state legislature refused to do the math, which was so obvious that it didn`t even require a calculator.

What if Slick originally proposed to Dopey that he intended to sell plans stating that all are entitled to a free car but, according to his calculations, only three out of 10 people at the most will actually get a new car (Slick will wrongly say that`s because only three will actually want it). But, in time due to rising costs, no one will get a new car unless Slick secretly supplements the payout to some dealers. Eventually, though, most of the people on Slick`s list would have to buy a more expensive car not covered under the plan, and the few free cars given away would have an unreasonably long waiting list for delivery.

Certainly, even Sleepy and Dopey would not have allowed Slick to sell such a plan to the public. Surely the state legislatures and the Fortune 500 companies would not endorse such a plan. Of course the Auto Dealers Association (ADA) would not have remained neutral to such a plan. Certainly this plan could not have gone through such scrutiny and still be presented to Tiny in such a way that the only remedy to preventing its implementation would be for Tiny to say "no!"

What if Tiny became an ex-dealer and demanded that Sleepy and Dopey wake up, get smart, and actually regulate the business? What if Tiny demanded they provide the statistics that actually show the correlation between the monthly payments and the cost of providing the benefits?

You see, there is nothing inherently wrong with Slick`s plan. It`s the numbers! What if Tiny realized that the monthly payment must be drastically increased to match the unlimited benefits, or the benefits must be drastically reduced to match the minimal monthly payments?

If Tiny could do this, maybe Slick could never invent a similar plan for dentistry. But a similar plan for dentistry could never be accepted ... could it? After all, if a dentist were to receive only $120 per year per patient the maximum annual benefit at most could only be maybe two free cleanings with absolutely no other benefits! Certainly any fool could see that! But what if the fools won`t listen?

For more information about this article, contact the author at (352) 331-7440.

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