Learning about Credit Card business models

One of my health care work colleagues came from the credit card business. This is probably indicative of the state of the credit card industry. However, we take great delight in asking him how credit card companies make money, why they send us all that mail, and if things like the Hello Kitty credit card on the left really worked as planned. Well, I haven't asked him about Hello Kitty yet but it's incredible what you find on a google image search.

I recently downgraded my Chase credit card to a no annual fee card with less rewards because I fly less and the $50 annual fee was a money loser for me. When I called to activate the card, I was transferred to a real person who wanted to tell me about my card's benefits with the goal of making the Chase card the primary credit card in my wallet. I told him that I understood the benefits perfectly well in a tone of voice that was in between telling your dog to stop eating the furniture and telling a salesperson that I'm "just looking" and he politely ended the call.

This got me thinking about how credit card companies make money. I've been using that card since 2004, it was my primary card, but I recently switched to another. I always paid on time and my credit rating is good. I didn't think that I was profitable enough customer to warrant a sales call about my habits?

My co-worker explained that the customers who rack up huge late fees, carry a balance, and look at their credit card like a roulette wheel are indeed more profitable. However, they often do not pay their bills in quantities large enough that it doubles the annual net income of the entire company. Customers like me are a steady and safe source of profit.

If anyone has any questions for my colleague about the credit card business (not your credit card in particular) send them to me and I'll harass them. Ever since Peace Corps, where I would receive endless questions about the United States ("Is everything concrete or is there any grass or trees? Do you shake hands there like we shake hands? Do people in the US know how to eat an orange?"), I take great delight in peppering someone with questions about topics where I have just enough knowledge to be dangerous. I think that it's a Peace Corps thing as we did that to an Australian traveler who came to a party with a group of us. He got 30 minutes of, "Name a famous Australian. Beside Mel Gibson. And not Elle McPhearson. And not Midnight Oil or AC/DC. Do you have dingos as pets? What about kangaroos?"

Last topic about Chase credit cards as I would be remiss not to mention how much I hate them for one thing that they did in the late 90's. It's made me hate them enough to fill any postage paid envelope they send me with junk and send it back to them or "mailing a brick". At the time, I had an REI credit card like any good backpacker. REI switched banks and sent us new cards. At the very same time, Chase sent me an Outdoors card that looked suspiciously like my REI visa card. I used it for a few months before REI sent me a letter to clarify. I called Chase to complain about their tactic and was told in the same exact tone of voice that you use when the dog is eating furniture that they did "Nothing unethical".
I grudingly kept the Chase card but whenever I talk with them on the phone, I tell them that I am still pissed about the REI card scam.

Striving towards Flavored Coffee drinks: the Individual Insurance journey

In a previous post, I described my path towards better understanding how individuals purchase health insurance. At my company, we launched an individual health plan just over 3 years ago. Our higher end plan makes up most of our business while our other plans would require an additional Y axis to show up on the same graph. We've done great with one segment but are struggling with the others.

Initially, we were using more of a consumer product approach and following the "long tail" philosophy of trying to develop a niche for each type of a consumer. There would be the Struggling Musician Plan that included additional benefits for Ear Nose and Throat doctors or the Home Gardener Plan with additional benefits for allergy medication. The main progress that we've made towards those efforts involves me using the term "long tail" in a blog. I've seen many other bloggers drop the term and my next step is to use it at a work meeting with a straight face. Nothing against the term "long tail" but just my natural backlack towards business jargon that uses oblique, imaginary words when a concise description is sufficient.

Actually, the biggest progress that I've made is realizing that the individual health insurance market is still in the basic segmentation platform that coffee was in the pre-Starbucks days. We have small, medium, and large as you can buy a little bit of health insurance for a lower price to occasionally taste or you can get a Big Gulp size and dive into the buffet. My company really only has a Big Gulp plan and my next step is to move into small, medium, and large.

Other companies, mainly the Blue Cross plans are getting into the flavored coffee part of the individual market and whip up some sugary goodness for $6 or a $1 herbal tea for those who like the natural stuff. This includes individual insurance plans that offer predictable costs such as having everything in the form of a copay such as you pay $50 rather than a co-insurance such asyou pay 20% (of what?). There's also the young adult plans which are marketed like Ipods with seizure-inducing graphics and offer a low cost with just the basics for that 25 year old guy who still needs his pediatrician to sign waiver forms since he hasn't seen any other kind of doctor.

One thing that I noticed is that the more affordable plans do not cover maternity care. My state of Oregon mandates maternity coverage and I can't decide if that is a good idea or not. I am typically a Big D-democrat with regulation. As a result of the mandatory maternity coverage, non-child bearing individuals subsidize those of us who bear children. The result of not subsidizing future mothers could be more affordable health insurance which could be answered by looking at the insurance rate in states that mandate maternity coverage. Oregon's uninsured rate is on the high side. Ultimately, I think that the ROI on pre-natal care and a healthy child birthing process (at least in terms of cost avoidance of a high risk pregnancy) is high enough to justify the subsidization.

Back to the topic on hand, my product work is now focused on making sure we have enough different size cups of coffee for our individual health plan and I can stay away from any flavored syrups. We'll make sufficient gains with a better developed small, medium, and large platform than we would by targeting niche segments (niche segments is just a clearer way of saying "long tail" in my opinion).

Speaking of size, coffee, and syrups, why do they only sell flavored syrups in liters? At home, we don't need enough syrup to feed the week's morning rush so why don't they sell smaller sizes of flavored syrup for those of who will get sick of it after a few cups? This segmentation by size may travel even farther than I thought.

Contingency Planning: keeping a Plan B ready for your career

Multiple bloggers on the Generation Y- led blogging community of the Brazen Careerist have written about creating multiple income streams or having a back-up plan if an intended career doesn't go well. The ideal situation is to be able to combine the two and earn money at a 2nd job. Another option is have a fall back career that you can start that will earn money quickly. That could be freelance or consulting contacts with reliable clients. Either way, using "stream" after a phrase like income stream or work stream or just plain streaming, make me think of someone urinating into a river.

I learned about contingency planning the hard way when a fellowship ended and the full-time opportunity fell through. As a result, I got good at always having an income-earning side job or a Plan B that I could quickly start. Here are those stories.

Knitting Instructor: I had been knitting since senior year in college and this was always the "Turn my hobby into a job" dream option. At the beginning of the holiday shopping season, I approached my local yarn store to see if I could work there and eventually become a knitting instructor. They were intrigued enough by a male knitter to hire me just for weekend work. I started out in the store, helping customers, running the cash register, and constantly searching for that one particular ball of yarn that the computer said that we still had in the back room. Eventually, they needed an instructor and I taught classes and did private lessons.

The great parts of the job were that having a employee discount for your hobby is like catnip as I would walk around the store in a euphoric haze. I also made up business cards with the motto, "Man enough to knit, strong enough to purl". Unfortunately, I learned that working in your hobby is different than working on your hobby. Teaching is hard work no matter if you're teaching knitting, calf-raising, or 17th century Russian poetry. The other draw back was that it would be hard to support yourself as a knitting instructor if I really needed to.

Spanish Medical Interpreter: In the definition of serendipity, I went into an acquaintance's birthday party and found this side job. While small talking with a guy, I found out that he sells insurance and does Spanish medical interpreting for a small local agency. With his reference and a Spanish Medical dictionary, I went to the agency and the next day was interpreting at a dentist's office. Later, I joined a larger agency so I could do phone interpreting at home. I would give them the hours when I was available. The phone would ring and I would either be helping with a lactation consult in Georgia or selecting a Medicare prescription drug plan with a senior in Florida. However, more often than not, I was talking with CommEdison in New York and explaining to someone why the electricity was shut off.

This replaced knitting as my side job. The good parts were that I was actually involved with patient care or at least talking about it. It was a little intense for a side job but it maintained my fluency in Spanish and this would always be a full-time option. Additionally, it would keep me in my field of health care so there was great networking potential.

MBA Admissions Consultant: This is my current side job where I subcontract with a company and help applicants with their MBA programs essays. I stopped the Spanish interpreting for this side job since it paid well, taught me a new skills that always had a market, and I enjoyed working with the applicants and keeping involved with the whole MBA scene.

My childhood dream career was to be a writer and this job is the closest thing to writing that I have done. It's more editing but I work with clients to tell their story. My previous posts here and here and here have described my experience with admission consulting. Admission consulting combines my social work skills (I spent a year in a Masters in Social Work program but did not finish the program), writing skills, and most importantly is something that I could see doing full-time that pays the bills. I do enjoy the work and the clients.

I also think that I can combine all three of these side jobs and become a knitting instructor for Spanish speaking MBA applicants. Or I could help knitters learn Spanish while they apply to business school. Or help MBA's fund a knitting cooperative in a Spanish speaking country. The options are truly endless.

Example of Health Care Reform from Insurance Companies

An insurance person, a union rep, and a doctor were all in a conference room together. I really wish that I actually had a punch line because it sounds like the beginning of a decent joke, especially if I had the doctor be a proctologist. However, has anyone actually met a proctologist?

Actually, the Washington State Blue Cross Insurance Company (Regence), the American Medical Association, and SEIU have united on a health care reform effort that is described in this article. Their reform effort can be summarized as following:

1. Standardize the insurance benefit plans so they all cover similar benefits and price them according to a community rating or the average price that everyone would pay.


2. Therefore, all employers would pay the same amount. With this plan, employers are still buying the insurance for their employees. However, under this plan, health of employees or utilization does not impact the price that an employer would pay. This is insurance in the classic definition where everyone is part of one big community pool.
   


3. Provide more information about the cost and quality of health care. For example, if you want to make sure you get the best colonoscopy possible, who should you go to when money is no object?

There is no mention of changing how providers are paid other than they should be paid based on their results. I am guessing that #3 will help with that as consumers can see who the best providers are and will stop going to the guy who does 2 for 1 endoscopy and colonoscopy deals.

Here's how all the players would benefit:

Health Insurance Companies: By eliminating underwriting and offering everyone the same rate and benefit packages, this does remove a layer of administration. It should also keep the same model intact of selling insurance to employers who distribute to employees. It also ends the constant positioning for those elusive healthy groups that everyone wants to attract. On a side note, I wonder if fitness clubs are great clients for insurance companies. In theory, the staff should all be really healthy and never use any medical services.

Results: It does make administration simpler but administrative costs are only 10% of the health insurance dollar. I think that the hope is that by spreading health care costs over a community rather than one employer, prices won't increase as much and more employers will continue to offer insurance. This should work well for smaller groups who tend to have higher rate increases than larger groups. That's probably the main benefit. Otherwise, it's a small change that make administration easier for insurance companies. The health care system won't fundamentally change and costs will continue to go up for everyone.

Unions: The unions like SEIU are a wild card in health care reform. They have political clout and their main role is ensuring that unions have incredible health insurance. Often their health insurance is so good, that going to the doctor is cheaper than going to a movie and can be more entertaining than some movies like "Forgetting Sara Marshall" (It had the same cast as Superbad but how it could it have been so lame?!). In theory, you would think that unions wanted to preserve their main strength of negotiating great health care. However, ultimately they are in favor of all workers having health care and have a lot of experiencing negotiating with employers.

Results: Union support will help any reform effort and unions appear to be engaged for the right reasons of ensuring workers have good health insurance. Its members will probably not have as incredible health insurance as a result but that should be outweighed by more workers having quality health insurance.

American Medical Association (AMA): This proposal does not really change how physicians are paid or overhaul the health care delivery system. Having better cost and quality information is the one effort towards giving consumers the information to pick providers and hospitals who have better outcomes. This passes quality enforcement to consumers which is fine for restaurants, harder to do with car shopping, and no matter how good the information, will be really difficult with deciding who is going to give you a hip replacement.

In general, the AMA will have difficulty pursuing a reform agenda because of the different ends of primary care and specialists, let alone all of the subspecialists. Most reform promotes primary care and looks to cut back on specialty care because the value has been demonstrated with primary care. The inability to easily satisfy all of their membership may keep the AMA on the sidelines whose only option is to endorse someone else's plan.

Results: Physicians will benefit if more of their patients have insurance and their lives will be even simpler if everyone has a similar comprehensive design. It will make billing and their office administration easier. This also does not force any tough decisions about the delivery of care.

Overall, the health insurance plan in this example are attempting to gain control of the reform process by putting together a plan that other players can endorse by offering them some gains and no large losses. I would like to see the unions and the AMA introduce proposals also in order to get the best ideas from a diverse range of stakeholders.

Fakermark: my first time on telemark skis

This weekend was a return trip to the Mt Hood area and the Summit Ski Area for my first time on telemark skis. A friend and I had wanted to learn how to telemark for a while because everyone had told us that telemark skis and skins were the best for back country skiing or ski mountineering. I had seen enough people ski right down Mt St Helens or Mt Adams while I had to slog it back down with an occasional glissade that I wanted to learn how to use telemark or randonee skis for climbs. However, I agree with the sticker that says "Randonee is French for 'I don't know how to tele.'" For those who are unfamiliar with telemark skis, it's like downhill skiing on cross country skis.

I was a bit afraid that this tele ski lesson was going to be similar to my first snowboarding lessons which I spent most of it finding a variety of painful ways to fall on my butt. However today's telemark skis are really nice parabolic shapes that I could just downhill ski techniques. It was really easy to get down the hill and I just had to concentrate on learning the tele turn by bending my downhill ski ankle and keeping the uphill ball of the foot planted.

At the beginning, I was mostly a Fakermark skiier. That means that I would really just slide out my downhill ski and do a token heel lift with my uphill ski. It looked like I was telemarking but I wasn't getting any benefit from the telemark turn. I worked on it and got a little better. My two friends did much better as one of them got the technique down while using 12 year old skis. I was surprised how logical the telemark style was which was described as "simultaneous knee" skiing. It was easy to pick up the technique of the telemark but I need more practice time on the mountain. Thanks to my dad falling in love with skiing in Colorado, I had been downhill skiing for 20 years which helped with today's learning curve. I had plateaued with downhill a while ago so I will be working on the telemark technique in the future.

Summit Ski Area has a nice long easy hill that's one notch up from a bunny hill. I had previously known the ski area for having the nastiest bathrooms in the Mt Hood area. However, it has a proud history as the first ski resort in Oregon and the slopes were great for learning a new technique since they are long with a consistent gradient. There were a lot of beginner snow boarders which caused me to remember my first years learning it and also some parents teaching their young children how to ski. I could see bringing my little one up there in a few years and see what piece of equipment and technique he wants to use to come down the hill.