for the Treasury based on 10/1/10 closing price. Including this potential gain, TARP ultimate cost to the Treasury would be $29B. 2) White House OMB estimates
ultimate cash cost of Fannie Mae / Freddie Mac at $165B while the CBO estimates the ultimate cash costs at $160B. Both estimates imply an average default rate of
5-10% on Fannie Mae + Freddie Mac’s $5T loan guarantee portfolio and a loss severity of 50%. The Federal Housing Finance Agency (FHFA) estimates ultimate
costs to range from $142B to $259B. 3) Net cash costs are limited to discretionary spending items in ARRA. Source: CBO, U.S. Dept of Treasury, White House
OMB, FHFA.
www.kpcb.com
USA Inc. | Income Statement Drilldown 179
Recipients of $ from USA One-Time Charges (F2008-2011YTD)
Total Net 2008-2011 One-Time Charges = $542 Billion (as of 2/11)
Other
Transportation + Energy + Other
Banks
700 Banks received funds,
100 repaid so far
Automakers
11%
5% 10%
30%
Consumers
Homeowners + Consumers
& Small Businesses +
Education + Nutrition + Tax
credits
Insurers / Other
Financial Institutions
AIG + Other Financial
Institutions
17%
28%
Government-
Sponsored
Enterprises
Fannie Mae + Freddie Mac
www.kpcb.com
Source: Dept. of Treasury, as of 2/11.
USA Inc. | Income Statement Drilldown 180
Drill Down on One-Time Charges
Most of USA Inc.’s recent one-time charges are directly or
indirectly related to America’s real estate bubble and
aggressive borrowing.
First we look at the drivers of the real estate bubble (we call it
‘anatomy of a real estate bubble’), then we drill down on the
past / present / future financial impact of the three types of
one-time charges and the recipients:
1) TARP (Troubled Asset Relief Program)
2) GSEs (Government-Sponsored Enterprises)
2) ARRA (American Recovery and Reinvestment Act)
www.kpcb.com
USA Inc. | Income Statement Drilldown
181
What created the
real estate bubble?
www.kpcb.com
USA Inc. | Income Statement Drilldown 182
Real Estate Bubble: Root Causes—Government Home Ownership Push +
Declining Interest & Savings Rates + Aggressive Borrowing and Lending
Led to 10+ Years of Rising Home Ownership
70%
USA Home Ownership Rates vs. Interest Rates vs. Personal Savings Rates, 1965 - 2010
June 2004: US home ownership = 73MM
20%
U.S. Home Ownership Rate
68%
66%
64%
62%
60%
January 1993: HUD began promoting
broader home ownership. US home
ownership = 62MM
16%
12%
8%
4%
U.S. Interest Rate & Personal Savings Rate
58%
1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010
0%
www.kpcb.com
U.S. Home Ownership Rate
U.S. Interest Rate
U.S. Home Ownership Rate 30-year (1965-1995) Trendline
U.S. Personal Savings Rate Note: HUD is Dept. of Housing & Urban Development. Interest rate is the overnight
federal funds rate. Data as of CQ1:10. Savings rate is amount of saving divided by income after taxes.
Data source: Federal Reserve, DOC Bureau of Economic Analysis.
USA Inc. | Income Statement Drilldown 183
Real Estate Bubble: Home Prices Rose Dramatically (7% Annually) for
10 Years – Up ~2x Over 10-Year Period Ending 2007
USA Real Home Price & Building Cost Indexes, % Change 1965 – 2008
% Change from 1965 Level
80%
60%
40%
20%
USA Real Home Price Index
USA Real Building Cost Index
0%
-20%
1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007
www.kpcb.com
Note: Real home prices & building costs are inflation-adjusted. Source: Robert Shiller, Yale University.
USA Inc. | Income Statement Drilldown 184
Banks & Other Mortgage Originators Helped Fuel Housing Bubble as They
Originated Lower Quality Mortgages –
Alt-A & Subprime Origination Volumes Up 374% & 94% in 2006 vs. 2003
USA Residential Mortgage Origination by Product Type, 2001 – 2010
Total Residential Mortgage Origination ($B)
4,000
3,000
2,000
1,000
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Conventional
Jumbo
Subprime
Alt-A
Home Equity
FHA / VA
Total Non-Conventional as % of Total
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
Subprime + Home Equity + Alt-A as % of Total
www.kpcb.com
Source: Inside Mortgage Finance.
USA Inc. | Income Statement Drilldown
185
Real Estate Bubble: Investors Helped Fuel It, Too, as They Reached For Yield
Without Questioning AAA Ratings of A Subprime-Backed Investments
Investors picked up 25-35bps over U.S. Treasuries with comparable maturity, typically levered
10:1 and generated 2.5-3.5% yield, meaningful against an 8% annual yield target
Illustrative AAA-Rated Subprime RMBS Yield Spread* with 10x Leverage, 2/05 – 2/07
4.0%
Subprime RMBS Yield Spread vs. 7-Year Swap Rate
3.6%
3.2%
2.8%
2.4%
2.0%
2/05 4/05 6/05 8/05 10/05 12/05 2/06 4/06 6/06 8/06 10/06 12/06
Note: Illustrative AAA-rated subprime RMBS spread represented as Mezzanine CDO spread vs. 7-year swap rate.
Source: Betsy Graseck, Morgan Stanley Research.
www.kpcb.com
USA Inc. | Income Statement Drilldown 186
Investors Struggle with Today’s Low ~4% Risk Free Rate
• Pension funds & other investors look for ~8% annual returns
in order to meet promised payouts.
• The challenge is far greater than before given:
• Rising obligations relative to income
• Lower interest rates
• Promises (e.g., pension, healthcare) made during an 8%
interest rate environment are much harder to meet when the
risk free rate has fallen from 8% to 3.6%. 1
• The choice is either to reduce obligations…
or
…Invest in riskier assets.
www.kpcb.com
Note: 10-year Treasury coupon rate as of 2/18/2010. Source: Betsy Graseck, Morgan Stanley Research.
USA Inc. | Income Statement Drilldown
187
1
Entitlement
Spending
Medicaid
(-$273B Net Loss*)
Medicare
(-$272B Net Loss* 1 )
Unemployment
Benefits
(-$115B Net Loss*)
Social Security
(-$75B Net Loss* 1 )
2
Rising Debt
Level & Interest
Payments
Debt Level
($9T Outstanding)
Effective Interest
Rates
(2.2%)
Debt Composition
3
Periodic Large
One-Time
Charges
TARP
($26B Net Profit* 2 )
Fannie Mae /
Freddie Mac
(-$41B Net Loss*)
ARRA
(-$137B Net Loss*)
Note: *denotes F2010 net income / net loss of respective programs, data per White House OMB. 1) Medicare and Social Security net loss
excludes Trust Fund interest income. 2) TARP net loss includes proceeds from sale of warrants. TARP is Troubled Asset Relief Program; ARRA
is American Recovery & Reinvestment Act programs.
www.kpcb.com
USA Inc. | Income Statement Drilldown 188
Troubled Asset Relief Program (TARP):
Recipient of 38% of Net Government (Taxpayer) Funding*
� In TARP, the financial rescue program (created in October, 2008),
USA Inc. purchased assets and equity from financial institutions to
provide the capital and liquidity needed during the 2008 financial
crisis (which followed the real estate bubble).
In 2009, TARP recipients were broadened to include automakers, an
insurance company (AIG), individual homeowners, small & mediumsized
businesses and other non-bank financial institutions.
To date, USA Inc. loaned these institutions $464 billion and received
$250 billion in repayment and warrant proceeds for a net outstanding
loan balance of $214 billion.
www.kpcb.com
Note: *As of 2/11, numbers are rounded. Source: Dept. of Treasury.
USA Inc. | Income Statement Drilldown
189
TARP Distribution –
Equally Distributed Among Financial Institutions / Automakers / Insurer / Individuals as of 2/11
Outstanding Troubled Asset Relief Program (TARP) Balance of $214B 1 as of 2/11
Insurance
Company
AIG 2
$69B
Homeowners
$38B
Individuals
Auto
Companies
Automakers
$58B
Banks
$23B
Consumers &
Small Businesses 4
$4B
Toxic Asset Holders 3
$22B
Financial
Institutions
SunTrust Banks - $5B
Regions Financial - $3.5B
….
Note: 1) #s are rounded, includes warrant proceeds of $10B from banks. 2) Total principal + accrued interest on AIG preferred stock purchased by U.S. Treasury prior
to 1/11 = $49B, on 1/14/11, AIG drew an additional $20B TARP funding to buy out Federal Reserve’s investment. 3) Including banks and other financial institutions;
done via Public-Private Investment Program (PPIP) under which Treasury provides equity and debt financing to newly formed public-private investment funds (PPIFs)
established by fund managers with investors for the purpose of purchasing legacy securities from financial institutions. These securities are commercial mortgagebacked
securities and non-agency residential mortgage-backed securities. 4) Consumers and small & medium-sized businesses that need loans would benefit from
the Term Asset-Backed Securities Loan Facility (TALF), through which the Fed provides loans to help support the issuance of asset-backed securities (which would in
turn fund a substantial portion of the consumer credit and small business loans). Source: Dept. of Treasury, AIG, data as of 2/14/10.
www.kpcb.com
USA Inc. | Income Statement Drilldown 190
TARP Repayments and Outstanding Loans: Most Large Banks Have Repaid
$222 Billion Paid Back 1 , $23 Billion Outstanding
TARP Repayments: Top 8 TARP Outstanding: Top 8
Citigroup*
Principal
SunTrust
Bank of
America
Wells Fargo
Warrant &
Other
Proceeds
Regions
Financial
Key Corp.
JPMorgan
CIT Group**
Goldman
Sachs
Morgan
Stanley
PNC
Financial
Marshall &
Ilsley
Zions
Synovus
US Bank
Popular
www.kpcb.com
$- $10 $20 $30 $40 $50 $60
$- $10 $20 $30 $40 $50 $60
Note: 1) Includes warrant proceeds from banks; *Citigroup’s repayments include $2.3B repayment on the Asset Guarantee
program and $6.9B additional proceeds from selling Treasury’s ownership. **Treasury’s preferred stock investment in CIT Group
was lost as a result of CIT’s bankruptcy filing. Source: Dept of Treasury, data as of 2/11.
USA Inc. | Income Statement Drilldown 191
TARP Repayments And Outstanding Loans:
Most Non-Bank TARP Recipients Have Not Repaid
$27 Billion Paid Back, $171 Billion Outstanding
TARP Repayments
TARP Outstanding
AIG
General
Motors
General Motors
PPIP*
GMAC
Chrysler
Chrysler
FHA*
TALF*
Chrysler
Financial
GM Suppliers
Chrysler Suppliers
$- $20 $40 $60
www.kpcb.com
$- $20 $40 $60
Note: * PPIP is Public-Private Investment Program, FHA represents the FHA Short Refinance Program, TALF is Term Asset-
Backed Securities Loan Facility.
Source: Dept of Treasury, data as of 1/11.
USA Inc. | Income Statement Drilldown 192
1
Entitlement
Spending
Medicaid
(-$273B Net Loss*)
Medicare
(-$272B Net Loss* 1 )
Unemployment
Benefits
(-$115B Net Loss*)
Social Security
(-$75B Net Loss* 1 )
2
Rising Debt
Level & Interest
Payments
Debt Level
($9T Outstanding)
Effective Interest
Rates
(2.2%)
Debt Composition
3
Periodic Large
One-Time
Charges
TARP
($26B Net Profit* 2 )
Fannie Mae /
Freddie Mac
(-$41B Net Loss*)
ARRA
(-$137B Net Loss*)
Note: *denotes F2010 net income / net loss of respective programs, data per White House OMB. 1) Medicare and Social Security net loss
excludes Trust Fund interest income. 2) TARP net loss includes proceeds from sale of warrants. TARP is Troubled Asset Relief Program; ARRA
is American Recovery & Reinvestment Act programs.
www.kpcb.com
USA Inc. | Income Statement Drilldown 193
Government-Sponsored Enterprises (GSEs):
Recipients of 28% of Net Government (Taxpayer) Funding
� GSEs Fannie Mae & Freddie Mac extended their guarantees on residential
mortgages from conventional loans into Alt-A, interest-only and subprime
loans.
� While technically not part of the federal government, Fannie Mae & Freddie Mac
have enjoyed an implicit government guarantee on their debt and RMBS
securities as investors believed (correctly, as it turned out) that the federal
government would support these entities if they failed. As a result, GSEs’ longterm
debt securities receive AAA/Aaa ratings from all rating agencies and are
classified by financial markets as “agency securities” with interest rates above
USA Treasuries but below AAA corporate debts.
� Post placing Fannie Mae & Freddie Mac into a government conservatorship,
USA Inc. has so far invested $152B 1 into these two GSEs with an estimated $8-
13B 2 more likely over the next 10 years, given the ongoing weakness in housing
market and the poor underwriting by Fannie Mae & Freddie Mac.
www.kpcb.com
Source: 1) U.S. Dept of Treasury, as of 12/10, 2) White House OMB / U.S. Congressional Budget Office.
USA Inc. | Income Statement Drilldown 194
Fannie Mae & Freddie Mac:
A Brief History of Government-Sponsored Enterprises
Fannie Mae established in
1938 to provide liquidity to
the primary and secondary
mortgage markets
Freddie Mac established in
1970 after the Emergency
Home Finance Act to
provide further liquidity to
the mortgage markets
Fannie Mae and Freddie Mac
placed into conservatorship
at a time when they
guaranteed 57% of the $12
trillion USA mortgage market
1938 1968 1970 1988 2008
Fannie Mae became a publicly traded company in
9/68, in part to reduce rising government debt
levels from the Vietnam War by taking Fannie Mae
debt off USA Inc.’s balance sheet
Freddie Mac became a
publicly traded company in
12/88 with an initial market
cap of $3 billion
Fannie Mae & Freddie Mac – What do they do?
They are insurance and investment companies. Both buy residential and
multifamily mortgages which conform to their underwriting standards from banks
and other originators. They either hold them in their portfolios or package them
into residential mortgage-backed securities (RMBS). These securities, which
carry Fannie and Freddie’s guarantee on them, are then sold to investors
(banks, insurance companies, bond funds, etc.).
www.kpcb.com
Source: Fannie Mae, Freddie Mac, Los Angeles Times.
USA Inc. | Income Statement Drilldown
195
Fannie Mae & Freddie Mac:
What Went Wrong?
Fannie Mae and Freddie Mac Public Market Capitalizations, 1990 – 2010
Market Cap ($B)
$100
$80
$60
$40
9/99 – Fannie Mae expanded mortgage
availability to low-income borrowers
under pressure from White House
1/93 – HUD began
promoting broader
home ownership
7/05 – Fannie Mae and Freddie
Mac agreed to restrictions on
growth of their retained
portfolios
9/08 – Fannie
Mae and Freddie
Mac placed into
conservatorship
$20
$0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Freddie Mac
Fannie Mae
www.kpcb.com
Note: HUD is Department of Housing and Urban Development. Source: FactSet.
USA Inc. | Income Statement Drilldown 196
Fannie Mae & Freddie Mac: Accounted for Majority of Total Residential
Mortgage-Backed Securities (RMBS) Issuance Since 1990s
2,000
Fannie Mae / Freddie Mac Residential Mortgage-Backed Securities Issuance
and as % of Total Market Volume, 1998-2010
80%
Mortgate-backed Security Volume (Bn)
1,800
1,600
1,400
1,200
1,000
800
600
400
200
72%
64%
56%
48%
40%
32%
24%
16%
8%
As % of Total MBS Marlet Volume
0
1988 1992 1996 2000 2004 2008
0%
Fannie Mae RMBS Freddie Mac RMBS Fannie + Freddie RMBS as % Total RMBS
www.kpcb.com
Sources: 1988-2006 data from Calculated Risk; Fannie Mae / Freddie Mac data from FHFA Annual Report to the
Congress 2009, 2009 / 2010 data per EMBS and Hybrid Weekly.
USA Inc. | Income Statement Drilldown
197
Fannie Mae & Freddie Mac:
Latest Estimated Ultimate Cost to Taxpayers Varies*
Base-Case
Estimated Ultimate
Net Loss**
$389 Billion
Source
Congressional
Budget Office
(CBO)
Comments / Assumptions
Net accrued loss to be borne by taxpayers, including
net cash infusions (with implied default rate of ~5-
10%) and risk premiums associated with federal
government’s implicit guarantee on GSEs’ credit.
Bulk of the net loss ($291B) occurred prior to and
during F2009.
On a cash basis, CBO’s estimate would have been in
line with White House OMB’s estimate.
$160 Billion
White House
Office of
Management and
Budget (OMB)
Net cash outlay to be borne by Treasury Dept. (and
ultimately taxpayers), including Treasury Dept.’s cash
outlays to purchase Fannie Mae & Freddie Mac
preferred stock (with implied default rate of ~5-10%),
minus cash received from dividends.
Bulk of the net cash outlay ($112B) occurred prior to
and during F2009.
www.kpcb.com
Note: *Latest estimated cost to taxpayers varies and continues to rise. **By F2019E. Source: CBO, OMB.
USA Inc. | Income Statement Drilldown 198
Fannie Mae & Freddie Mac: Scenario Math – What Various Default Rates
Could Mean for Taxpayer Ultimate Cash Cost
Fannie Mae / Freddie Mac
Outstanding Loan Guarantees
Default Rate
Loss Severity*
Ultimate Cash Cost
to Taxpayer
Outstanding
Loan Guarantees
Default
Rate
Loss Severity*
Ultimate Cash Cost
to Taxpayer
$5 Trillion 1
(before
government
conservatorship in
9/08)
2%
$50 Billion
5% $125 Billion
10% $250 Billion
50%
15% $375 Billion
20% $500 Billion
25% $625 Billion
$160 Billion
Current CBO /
OMB Forecasts
of Ultimate Cash
Cost of Fannie
Mae / Freddie
Mac
www.kpcb.com
Note: * Loss severity is liquidation value (foreclosure auction or other means) as a % of the loan amount adjusted for any
advances and fees. Source: 1) Fannie Mae, Freddie Mac.
USA Inc. | Income Statement Drilldown
199
1
Entitlement
Spending
Medicaid
(-$273B Net Loss*)
Medicare
(-$272B Net Loss* 1 )
Unemployment
Benefits
(-$115B Net Loss*)
Social Security
(-$75B Net Loss* 1 )
2
Rising Debt
Level & Interest
Payments
Debt Level
($9T Outstanding)
Effective Interest
Rates
(2.2%)
Debt Composition
3
Periodic Large
One-Time
Charges
TARP
($26B Net Profit* 2 )
Fannie Mae /
Freddie Mac
(-$41B Net Loss*)
ARRA
(-$137B Net Loss*)
Note: *denotes F2010 net income / net loss of respective programs, data per White House OMB. 1) Medicare and Social Security net loss
excludes Trust Fund interest income. 2) TARP net loss includes proceeds from sale of warrants. TARP is Troubled Asset Relief Program; ARRA
is American Recovery & Reinvestment Act programs.
www.kpcb.com
USA Inc. | Income Statement Drilldown 200
America Recovery & Reinvestment Act (ARRA):
Recipient of 34% of Net Government (Taxpayer) Funding
� In ARRA (the economic stimulus program created in February,
2009), USA Inc. aims to create jobs and promote investment and
consumer spending by cutting taxes, expanding unemployment
benefits, and increasing spending in education, healthcare,
infrastructure, and energy.
These measures are projected to increase federal spending by $500+
billion while reducing federal tax receipts by $275 billion over 10 years
($177 billion of which occurred in F2009 and F2010).
www.kpcb.com
Source: White House Office of Management & Budget.
USA Inc. | Income Statement Drilldown
201
ARRA*: Negative Effect on Discretionary Budgets Should Peak in F2010,
But Spending Commitments through F2019E Total $417 Billion
ARRA* Discretionary Items’ Net Effect on Federal Budgets, F2009 – F2019E
ARRA Discretionary Items' Net Effect on Federal Budget ($B)
F2009 F2011E F2013E F2015E F2017E F2019E
0
20
40
60
Education
Nutrition Assistance
80
100
120
140
Transportation
Energy
Tax Credits
Other
www.kpcb.com
Note: *ARRA is American Recovery and Reinvestment Act of 2009. US federal fiscal year ends in September. Net effects on
budgets are limited to discretionary spending items in ARRA. Source: Congressional Budget Office.
USA Inc. | Income Statement Drilldown 202
ARRA: Spending Examples
� Education – Used ARRA funding and saved education jobs, such as
teachers, principals, librarians, and counselors
� Tax Credits – Provided higher Earned Income Tax Credits
� Transportation – Repaired roads and bridges
� Energy – Provided additional funding for renewable energy and energy
efficiency projects
� Nutrition Assistance – Provided additional assistance for low-income
families to purchase food
� Other – Funding for various programs related to homeland security and
law enforcement…
www.kpcb.com
USA Inc. | Income Statement Drilldown
203
Longer-term taxpayer
impact of GSE Loans +
ARRA + TARP
varies…regardless,
it is material
www.kpcb.com
USA Inc. | Income Statement Drilldown 204
What ‘One-Time Charges’ from F2008-F2010
May Look Like on Net Basis Over Next 10 Years
One-Time Charges from the ‘Financial Crisis’ are Not Created Equal – While TARP Was the
Headliner, When All’s Said & Done, TARP may be Smallest Component, by a Long Shot
Current Cost
($B, as of 2/11)
Ultimate Cash Cost
($B, by F2020E)
Comments
TARP $214B <$51B 1 less 1 as banks continue to pay back their loans
and automakers / AIG seek IPOs / sales to
May fall from net $214 billion to $51 billion or
realize value of USA Inc.’s equity stake.
GSE $152 ~$160 2 (or higher) 2 as Fannie Mae and Freddie Mac
losses on loan guarantees stabilize and they
May grow from net $152 billion to ~$160 billion
continue to pay dividends on USA Inc.’s shares.
ARRA $177 $417
Should rise from $177 billion to $417 billion 3
based on commitments…and a payback plan
was never factored into these payments.
Note: 1) Latest Treasury estimate as of 12/10, includes net profits from banks of $16B, net costs from AIG ($5B) / Automakers ($17B) / Consumers & Housing
programs ($-46B) and other. AIG net costs excludes potential gains from selling AIG’s common shares held by the Treasury, which could turn out to be a $22B profit
for the Treasury based on 10/1/10 closing price. Including this potential gain, TARP ultimate cost to the Treasury would be $29B. 2) White House OMB estimates
ultimate cash cost of Fannie Mae / Freddie Mac at $165B while the CBO estimates the ultimate cash costs at $160B. Both estimates imply an average default rate of
5-10% on Fannie Mae + Freddie Mac’s $5T loan guarantee portfolio and a loss severity of 50%. The Federal Housing Finance Agency (FHFA) estimates ultimate
costs to range from $142B to $259B. 3) Net cash costs are limited to discretionary spending items in ARRA. Source: CBO, U.S. Dept of Treasury, White House
OMB, FHFA.
www.kpcb.com
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USA Inc. | Income Statement Drilldown 208
Balance Sheet Drilldown
www.kpcb.com
USA Inc. | Balance Sheet Drilldown
209
Balance Sheet: USA Inc. Federal Debt + Unfunded Entitlement
Liabilities (Social Security + Medicare…) Exceed Stated Assets
… … Comments
F1996 F2003 F2009 F2010
ASSETS ($B)
Cash & Other Monetary Assets $193 $120 $393 $429
Accounts / Loans / Taxes Receivable 206 278 626 783
Inventories 232 241 285 286
Property, Plant & Equipment 969 658 784 829
TARP + GSE Investments -- -- 304 254
Other assets 124 97 275 303
Total Assets ($B) 1,724 1,394 2,668 2,884
Y/Y Growth 33% 40% 35% 8%
LIABILITIES ($B)
Accounts Payable $162 $62 $73 $73
Accrued Payroll & Benefits -- 100 161 164
Federal Debt 3,730 3,945 7,583 9,060
Federal Employee & Veteran Benefits Payab 1,652 3,880 5,284 5,720
Liability to GSEs -- -- 92 360
Other Liabilities 530 512 932 979
Unfunded Net Entitlement Liabilities 5,415 20,825 45,878 30,857
Y/Y Growth -- 16% 7% -33%
NPV of Unfunded Social Security $3,600 $4,927 $7,677 $7,947
NPV of Unfunded Medicare 1,815 15,819 38,107 22,813
NPV of Unfunded Other Benefits 79 94 97
Total Liabilities ($B) 11,488 29,324 60,002 47,214
Y/Y Growth -- 14% 9% -21%
NET WORTH ($B) -$9,764 -$27,930 -$57,334 -$44,330
Y/Y Growth -- 13% 8% -23%
$200B cash balance owing to
temporary Fed market stabilization
initiatives
Includes $145B TARP direct loans &
equity investment + $109B in GSEs
Growth primarily owing to TARP
capitalization + Fed liquidity program
Significant rise in debt owing to ongoing
budget deficits + stimulus
spending
Federal employee & veteran benefits
rose 3x owing to scheduled annual
pay raises + rising benefit costs
Unfunded entitlement liabilities up 6x
between F1996 and F2010.
Medicare NPV down sharply Y/Y
owing to new assumptions from the
Healthcare reform legislation
Significant increase from rising levels
of debt + unfunded future benefits
-$44T of net worth for USA Inc. more
than tripled, from -$10T in 1996
Note: USA Inc.’s balance sheet presented here does not include the financial value of the Government’s sovereign powers to tax, regulate commerce, and set monetary
policy. It also excludes its control over nonoperational resources, including national and natural resources, for which the Government is a steward. Total liabilities include the
net present value (NPV) of unfunded entitlement liabilities like Social Security / Medicare / other payments, which the Treasury Dept. considers ‘off-balance sheet’
responsibilities. U.S. government fiscal year ends in September. Source: U.S. Department of the Treasury, Financial Report on the U.S. Government, 1996 – 2010.
www.kpcb.com
USA Inc. | Balance Sheet Drilldown 210
USA Inc. Net Worth:
-$44 Trillion in Perspective
There are doubts about the accuracy of such a big negative number, especially when the value
of USA Inc.’s assets is so hard to calculate. The value of natural resources, the power to tax,
the ability to print the world’s reserve currency, the human capital in our educational system –
these and other assets would clearly reduce that number, if they could be accurately
calculated.
Given the differences between government and corporate accounting, what matters is not the
exact number, but the trend – which is clearly moving in the wrong direction. Liabilities have
been growing faster than assets. Just to put that $57 trillion into context…
-$44 Trillion = $142,999 per Person in USA 1
$370,961 per Household 1
20x USA Inc. Annual Revenue 2
3.8x S&P500 Total Market Capitalization 3
3.0x USA Annual GDP 4
0.9x Global Stock Market Capitalization 5
0.8x Total USA Household Wealth 6
Source: 1) Population & household data as of 1/10, per Census Bureau estimates; 2) annual federal income in F2010, per Dept. of Treasury; 3) as of 1/11, per S&P;
4) GDP is 2010 nominal figure, per BEA; 5) as of 1/10, per World Federation of Exchanges; 6) as of CQ3:10, calculated as total net worth of households &
nonprofit organizations, per Federal Reserve (12/10 data).
www.kpcb.com
USA Inc. | Balance Sheet Drilldown 211
We Believe Citizens Should Consider These ‘Off-Balance Sheet’ Liabilities
For A ‘More Complete’ Understanding of USA Inc.’s Finances
� “…the Government’s responsibilities to make future
payments for social insurance and certain other programs
are not shown as liabilities according to Federal accounting
standards…These programmatic commitments remain
Federal responsibilities and as currently structured will have
a significant claim on budgetary resources in the
future…The reader needs to understand these
responsibilities to get a more complete understanding of the
Government’s finances.”
� Department of the Treasury,
� “2004 Financial Report of the United States Government”
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USA Inc. | Balance Sheet Drilldown 212
Balance Sheet: USA Inc. Total Liabilities*: $47 Trillion in F2010,
or $395,093 per Household Owing Largely to Entitlement Spending
USA Inc. Total Assets / Liabilities / Networth ($T)
$10
$
-$10
-$20
-$30
-$40
-$50
-$60
-$70
F1996
Total Assets / Liabilities / Net Worth of USA Federal Government,
Using Corporate GAAP Accounting, F1996-F2010
Unfunded Entitlement Benefits
Current Liabilities
Total Assets
Net Worth
F1997
F1998
F1999
F2000
F2001
F2002
F2003
Medicare liabilities down sharply owing to slower
healthcare cost growth assumptions associated
with 2010 Healthcare reform
F2004
F2005
F2006
F2007
F2008
F2009
F2010
Note: USA Inc.’s balance sheet presented here does not include the financial value of the Government’s sovereign powers to tax, regulate commerce, and set
monetary policy. It also excludes its control over nonoperational resources, including national and natural resources, for which the Government is a steward. Total
liabilities include the net present value (NPV) of unfunded entitlement liabilities like Social Security / Medicare / other payments, which the Treasury Dept. considers
‘off-balance sheet’ responsibilities. U.S. government fiscal year ends in September. Source: U.S. Department of the Treasury, Financial Report on the U.S.
Government, 1996 – 2009.
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USA Inc. | Balance Sheet Drilldown 213
Balance Sheet: USA Inc. Total Liabilities: $47 Trillion in F2010
Up 5x From 1996, Driven by Medicare Liabilities
Total Liabilities of USA Federal Government, Using Corporate GAAP
Accounting, F1996-F2009
$
F1996 F1998 F2000 F2002 F2004 F2006 F2008 F2010
$10
USA Inc. Total Liabilities ($T)
$20
$30
$40
$50
Net Medicare (Part D) Liabilities
Net Medicare (Part A & B) Liabilities
Net Social Security Liabilities
Federal Employee & Veteran Benefits Payable
$60
$70
Federal Debt
All Other
Medicare liabilities down sharply owing to slower
healthcare cost growth assumptions associated
with the 2010 Healthcare reform
Note: USA Inc.’s balance sheet presented here does not include the financial value of the Government’s sovereign powers to tax, regulate commerce, and set
monetary policy. It also excludes its control over nonoperational resources, including national and natural resources, for which the Government is a steward. Total
liabilities include the net present value (NPV) of unfunded entitlement liabilities like Social Security / Medicare / other payments, which the Treasury Dept. considers
‘off-balance sheet’ responsibilities. U.S. government fiscal year ends in September. Source: U.S. Department of the Treasury, Financial Report on the U.S
.Government, 1996 – 2009.
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USA Inc. | Balance Sheet Drilldown 214

Important Caveats on F2010 Medicare Liability Improvement
�
�
�
Medicare Part A and Part B unfunded liability improved to -$16 trillion in F2010, up 47% from -$31 trillion in
F2009, per the Board of Medicare Trustees.
The improvement was driven primarily by downward revisions of future cost growth assumptions following
enactment of healthcare reform in 2010.
However, Medicare’s Chief Actuary Richard Foster noted that “while the Patient Protection and Affordable
Care Act, as amended, makes important changes to the Medicare program and substantially improves its
financial outlook, there is a strong likelihood that certain of these changes will not be viable in the
long range…Without major changes in health care delivery systems, the prices paid by Medicare for health
services [as scheduled by current law] are very likely to fall increasingly short of the costs of providing these
services…Congress would have to intervene to prevent the withdrawal of providers from the Medicare
market and the severe problems with beneficiary access to care that would result. Overriding the productivity
adjustments, as Congress has done repeatedly in the case of physician payment rates, would lead to far
higher costs for Medicare in the long range than those projected under current law…For these
reasons, the financial projections shown [here] for Medicare do not represent a reasonable
expectation for actual program operations in either the short range (as a result of the unsustainable
reductions in physician payment rates) or the long range (because of the strong likelihood that the statutory
reductions in price updates for most categories of Medicare provider services will not be viable).”
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Note: Emphasis added. Source: Statement of Actuarial Opinion, 2010 Annual Report of the Boards of Trustees of the Federal
Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds.
USA Inc. | Balance Sheet Drilldown 215
Balance Sheet: Even Excluding Unfunded Entitlement Benefits,
USA Inc.’s Net Worth = -$13 Trillion in F2010, Owing to $9 Trillion of Debt
Total Assets / Liabilities / Net Worth of USA Federal Government,
Using Government GAAP Accounting, F1996-F2010
USA Inc. Total Assets / Liabilities / Networth ($T)
$5
$
-$5
-$10
-$15
-$20
Liabilities (ex. Unfunded Entitlement Benefits)
Total Assets
Net Worth (ex. Unfunded Entitlement Benefits)
F1996
F1997
F1998
F1999
F2000
F2001
F2002
F2003
F2004
F2005
F2006
F2007
F2008
F2009
F2010
Note: USA Inc.’s balance sheet presented here does not include the financial value of the Government’s sovereign powers to tax, regulate commerce, and set monetary
policy. It also excludes its control over nonoperational resources, including national and natural resources, for which the Government is a steward. Total liabilities exclude
the net present value (NPV) of unfunded entitlement liabilities like Social Security / Medicare / other payments, which the Treasury Dept. considers ‘off-balance sheet’
responsibilities. U.S. government fiscal year ends in September. Source: U.S. Department of the Treasury, Financial Report on the U.S. Government, 1996 – 2010.
www.kpcb.com
USA Inc. | Balance Sheet Drilldown 216

Balance Sheet: Observations of Last Ten Years
� Unfunded promise of future entitlement spending grew 6x to -$31
trillion, owing to rapidly rising healthcare cost + new Medicare Part D
program + aging population in the medium-future.
� Federal net debt outstanding more than doubled to $9 trillion on the
back of chronic budget deficits, two major recessions in 2001 and 2008,
and growing entitlement spending.
� Federal employee & veteran benefits outstanding also more than
doubled, to $5.7 trillion, thanks to rising healthcare costs and ongoing
war on terror.
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USA Inc. | Balance Sheet Drilldown 220
What Might a Turnaround Expert—
Empowered to Improve USA Inc.’s
Financials—Consider?
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USA Inc. | What Might a Turnaround Expert Consider?
221
First, Examine USA Inc. Key Drivers of Revenue & Expenses…
� USA Inc.'s Revenue = Highly Correlated (83%) with GDP Growth*
� 90% of USA Inc.'s 2010 revenue derived from taxing individual and corporate
income, which depends on GDP growth and changes to tax rates / composition.
� USA Inc.'s Expenses = Less (73%) Correlated with GDP Growth*
� Entitlement Programs = 57% of USA Inc.'s expenses in 2010
� driven by government policy + demographic changes
� Defense Programs = 20% of expenses
� driven by external threat levels and policy
� Net Interest Payments = 6% of expenses
� driven by net debt level + interest rates + composition of debt maturity
Observation: while revenue is highly correlated with GDP growth, expenses
are less so.
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Note: *Historical inflation-adjusted correlation between GDP and revenue / expense Y/Y growth rates from 1940 to 2010, GDP / revenue
adjusted using GDP deflator; expenses adjusted using White House OMB’s composite outlay deflator. Nominal revenue / GDP correlation
over the same period is 84%; expense / GDP correlation is 71%. Data source: White House Office of Management & Budget, CBO.
USA Inc. | What Might a Turnaround Expert Consider? 222
Then, Aim to Determine What ‘Normal’ Is…
� We review 40-year income statement patterns and focus on
‘average’ / ‘normal’ levels of USA Inc.’s revenue drivers
(primarily related to taxes) and expense drivers (by category)
as a percent of revenue, as a starting point to help define
‘average’ / ‘normal.’
� Established businesses typically determine their expense
levels based on their revenue trend / outlook.
� In a perfect world, the government (and its citizens) would
continually review the multiple variables in the income
statement of USA Inc. (in a bipartisan way) and would
work hard to foster compromise, in order to optimize
revenue and expenses for the long term AND the short term.
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USA Inc. | What Might a Turnaround Expert Consider?
223
Considering USA Inc.
‘Normal’ / Average Financial Metrics / Ratios For…
1) 1) Revenue Growth
2) 2) Revenue Drivers as Percent of Revenue
3) 3) Expense Growth by Category
4) 4) Category Expenses as Percent of Expenses
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USA Inc. | What Might a Turnaround Expert Consider? 224
Revenue Growth: Average Federal Revenue (Driven by Taxes)
In-Line With GDP Growth
1965 – 2005 USA Real Federal Income Growth by Category vs. Real GDP Growth
Revenue Growth
1965 Y/Y 2005 Y/Y 40-yr CAGR
'05 vs 40-yr
Variance
Comments
Individual Income Taxes 11% 11% 3% 8%
Corporate Income Taxes 15 43 2 41
Social Insurance Taxes 12 5 5 1
Other Taxes & Fees -5 1 1 0
Individual & corporate income
taxes are cyclical; 2005 Y/Y
growth were significantly
affected by economic recovery
post 2001 recession.
Social insurance taxes & other
fees are less cyclical.
Social insurance taxes grew
significantly faster than GDP.
Total Federal Revenue 9% 11% 3% 8%
Real GDP 7% 3% 3% 0%
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“Normal”
Note: All data are inflation adjusted using GDP price index from BEA; ’05 vs. 40-yr variance is rounded.
Data source: White House Office of Management & Budget.
USA Inc. | What Might a Turnaround Expert Consider? 225
Revenue Growth: Observations from Previous Slide
� We chose a 40-year period from 1965 to 2005 to examine ‘normal’ levels of
revenue and expenses. We did not choose the most recent 40-year period (1969
to 2009) as USA was in deep recession in 2008 / 2009 and underwent significant
tax policy fluctuations in 1968 /1969 and subsequently many metrics (like individual
income and corporate profit) varied significantly from ‘normal’ levels.
� Total USA Inc. revenue (collected via taxes) has grown at an average 3%
annual rate, in-line with 40-year GDP growth rate. Corporate taxes have – on
average – grown at 2% annually over 40 years. Social insurance taxes (for
Social Security and Medicare) have grown at an average 5% annual rate,
above the 3% GDP growth.
Questions:
1) How crucial is the role played by lower relative tax rates – especially for
corporations – in stimulating job and GDP growth and helping American maintain /
gain / constrain loss of global competitive advantage?
� 2) Should social insurance tax growth be more closely aligned with GDP growth?
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Note: All data are inflation adjusted using GDP price index from BEA; ’05 vs. 40-yr variance is rounded.
Data source: White House Office of Management & Budget.
USA Inc. | What Might a Turnaround Expert Consider? 226
Revenue Drivers as Percent of Total Revenue: Average Federal Revenue
Are Skewed to Social Insurance (Entitlement) Taxes and
Away from Corporate Income Taxes
1965 – 2005 USA Real Federal Income Mix by Category
Share of Total Revenue
40-yr
1965 2005 Average
'05 vs 40-yr
Variance
Individual Income Taxes 42% 43% 46% -3%
Corporate Income Taxes 22 13 12 1
Social Insurance Taxes 19 37 33 4
Other Taxes & Fees 17 7 10 -3
Total Federal Revenue 100% 100% 100% 0%
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“Normal”
Note: All data are inflation adjusted using GDP price index from BEA; ’05 vs. 40-yr variance is rounded.
Data source: White House Office of Management & Budget.
USA Inc. | What Might a Turnaround Expert Consider?
227
Revenue Drivers as Percent of Revenue:
Observations from Previous Slide
� Social Insurance taxes (for entitlement programs) have risen materially
to 37% of revenue (vs. 33% 40-year average), and have risen
aggressively from 19% in 1965, owing to introduction of Medicare in
1965 and the 1983 reform of social security taxes.
� Questions:
1) What level of social insurance / entitlement ‘tax’ can USA Inc. support on
an on-going basis? Rising from 19% of revenue in 1965 to 33% of revenue
in 2005 – of which 75% was spent on healthcare – takes its toll on other
areas of spending / growth. There are serious tradeoffs - every dollar that
goes to entitlement programs is not spent on education, infrastructure, and
defense.
� 2) Why have corporate income taxes fallen to 13% of revenue in 2009 from
22% in 1965 aside from recession? How crucial has this been to maintain
global competitive advantage and stimulating American job and GDP
growth?
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Note: All data are inflation adjusted using GDP price index from BEA; ’05 vs. 40-yr variance is rounded.
Data source: White House Office of Management & Budget.
USA Inc. | What Might a Turnaround Expert Consider? 228
Expense Growth by Category: Entitlement Spending Growing Much Faster than
Other Expenses and 2% Higher than GDP Growth
1965 – 2005 USA Real Federal Expenses Growth by Category vs. Real GDP Growth
Expenses Growth
1965 Y/Y 2005 Y/Y 40-yr CAGR
'05 vs. 40-yr
Variance
Comments
Entitlement Expenses 12% 3% 6% -3%
Defense 12 6 1 4
Non-Defense Discretionary* 10 6 2 4
Entitlement expenses grew 2
percentage points faster than
GDP and overall expenses
Defense spending grew 2
percentage points below overall
expenses
Net Interest Payments 7 12 3 8
Total Federal Expenses 11% 5% 3% 2%
Real GDP 7% 3% 3% 0%
Normal
www.kpcb.com
Note: All data are inflation adjusted using GDP price index from BEA; ’05 vs. 40-yr variance is rounded. *Non-defense discretionary
spending includes education, infrastructure, agriculture, housing, etc. Data source: White House Office of Management & Budget.
USA Inc. | What Might a Turnaround Expert Consider?
229
Expense Growth by Category:
Observations from Previous Slide
� While GDP and USA Inc. tax revenue have grown at a 3% annual rate
for 40 years, entitlement spending has grown 5%, net interest
payments have risen 3%, and defense plus non-defense discretionary
spending (including education, infrastructure, law enforcement and
judiciary) have risen by 1%. These different growth rates have become
even more pronounced in recent years.
� Questions:
1) Isn’t it time for a re-set and acknowledgment of trade-offs? Should taxes,
non-defense discretionary spending, and defense spending grow in line with
GDP over time? Should entitlement spending be restructured to be more
efficient and supportable by the ongoing financial dynamics of USA, Inc. and
also grow in line with or below GDP?
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Note: All data are inflation adjusted using GDP price index from BEA; ’05 vs. 40-yr variance is rounded.
Data source: White House Office of Management & Budget.
USA Inc. | What Might a Turnaround Expert Consider? 230
Expense Drivers as Percent of Total Expenses:
Entitlement + One-Time Items Are Crowding Out Other Federal Spending
1965 – 2005 USA Real Federal Expenses Mix by Category
Share of Total Expenses
40-yr
1965 2005 Average
'05 vs. 40-yr
Variance
Entitlement Expenses 21% 51% 42% 9%
Defense 43 20 24 -4
Non-Defense Discretionary* 29 22 23 -1
Net Interest Payments 7 7 11 -4
Total Federal Expenses 100% 100% 100% 0%
Normal
www.kpcb.com
Note: All data are inflation adjusted using GDP price index from BEA; ’05 vs. 40-yr variance is rounded. *Non-defense discretionary
spending includes education, infrastructure, agriculture, housing, etc. Data source: White House Office of Management & Budget.
USA Inc. | What Might a Turnaround Expert Consider?
231
Category Expenses as Percent of Expenses:
Observations from Previous Slide
� Entitlement spending has risen to 51% of total spending, higher than 40-
year average of 42% (and much higher than the 21% in 1965), defense
spending has fallen to 20% from 24% average, non-defense discretionary
spending (including education, infrastructure, energy, law enforcement
and veteran services) has fallen to 22% from 23%, and net interest
payments have fallen to 7% from 11%, despite higher debt (largely because
of declining interest rates). These trends have become more pronounced
in recent years.
� Questions:
1) Should entitlement spending account for 51% (and rising) share of total USA
Inc.’s spending, while other key areas (such as education, infrastructure, energy,
law enforcement…) account for only 22% (and falling) of spending?
www.kpcb.com
Note: All data are inflation adjusted using GDP price index from BEA; ’05 vs. 40-yr variance is rounded.
Data source: White House Office of Management & Budget.
USA Inc. | What Might a Turnaround Expert Consider? 232
Bottom Line, as Data in This Presentation Indicate…
� USA Inc.’s expenses far exceed revenue – and government
projections imply this trend will get worse, not better.
�
In addition - while not addressed in depth in this presentation - USA Inc.
(while still a global powerhouse), at the margin, is losing competitive
advantage to many other countries.
� Instead of ignoring the problems, we simply ask the question…
How would a financial / turnaround expert look at USA Inc.’s financials,
business model, strategic plans, efficiency and aim to drive the
‘business’ to break-even (or a modest profit) over the next
5-10 years?
www.kpcb.com
USA Inc. | What Might a Turnaround Expert Consider?
233
Matching Expenses & Revenue:
Imperatives & Constraints
There are many reasons to make changes
� USA Inc. is losing money, and forecasts imply it will continue to lose money.
� Net debt levels (62% in F2010) are expected to surpass 90% threshold* – above
which real GDP growth could slow by more than one percentage point – by 2021E.
� Spending (primarily related to entitlement programs) is at unsustainable levels
based on USA Inc.’s ability to fund the spending (without increasing debt levels).
� Americans rank ‘reducing America’s debt’ as one of country’s top priorities,
according to a national survey by Peter G. Peterson Foundation in 11/09.
� We are now in the midst of a major generational baton-passing (from the Baby
Boomers to Generation X) which requires preparation for policy change.
� Foreigners own 46% (and rising) of USA Inc.’s debt, per Treasury Department –
Are they going to keep funding USA Inc.’s spending?
Note: *Carmen Reinhart and Kenneth Rogoff observed from 3,700 historical annual data points from 44 countries that the relationship between government debt
and real GDP growth is weak for debt/GDP ratios below a threshold of 90 percent of GDP. Above 90 percent, median growth rates fall by one percent, and average
growth falls considerably more. We note that while Reinhart and Rogoff’s observations are based on ‘gross debt’ data, in the U.S., debt held by the public is closer
to the European countries’ definition of government gross debt. For more information, see Reinhart and Rogoff, “Growth in a Time of Debt,” 1/10.
www.kpcb.com
USA Inc. | What Might a Turnaround Expert Consider? 234

Matching Expenses & Revenue:
Imperatives & Constraints
There are many constraints to making changes
� ~90 million citizens (29% of Americans) 1 have grown accustomed to entitlement
programs - 47MM on Medicaid, 45MM on Medicare, and 51MM on Social
Security, and many of them vote.
� Politicians depend on re-election campaigns, which can create conflicts,
especially given that only 12% of the population are willing to cut Social Security
and Medicare benefits, per Pew survey in 2/11.
� Low personal savings rates (near 6% of disposable income in CQ2:10), high
unemployment (near 10%) and economic uncertainty, which can limit ability to
make radical change.
� 14 million healthcare-related workers 2 have grown accustomed to relatively high
healthcare spending.
www.kpcb.com
Note: 1) as of 2008, excludes double counting of beneficiaries of multiple entitlement programs; 2) as of 2008, per BEA. Source:
Social Security Administration, Dept. of Health & Human Services, BEA.
USA Inc. | What Might a Turnaround Expert Consider?
235
And Then There’s the Constraint of
USA Inc.’s Weak Economy
� [The] typical error most countries make coming out of a
financial crisis is they shift too quickly to premature restraint.
You saw that in the United States in the 30s, you saw that in
Japan in the 90s. It is very important for us to avoid that
mistake. If the government does nothing going forward, then
the impact of policy in Washington will shift from supporting
economic growth to hurting economic growth.
� Timothy Geithner, Secretary of US Treasury
� The Wall Street Journal, September 12, 2010
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USA Inc. | What Might a Turnaround Expert Consider? 236
�High-Level Thoughts on How to
Turn Around USA Inc.’s Financial Outlook
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USA Inc. | What Might a Turnaround Expert Consider?
237
Negative Cash Flow =
USA Inc.'s Fundamental Financial Problem
� Negative cash flow implies that USA Inc. can't afford the
services it is providing to 'customers' (citizens).
� USA Inc. needs to re-prioritize its services and offer
them in a more cost-effective way to stop losing (and
borrowing) money.
� The financial data imply that USA Inc.'s operations must
be restructured.
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USA Inc. | What Might a Turnaround Expert Consider? 238
The First Step to a 'Turnaround' is Acknowledging
There is a Problem
� A turnaround situation is first recognized when there is serious concern
or dissatisfaction with the firm's [organization's] performance, results,
and/or near-term forecasts of [financial] performance and results.
�
- Richard Sloma, The Turnaround Manager's Handbook
� If your organization is in trouble, be honest. Make it absolutely clear to
everyone in the company that survival [long-term viability] depends on
cost management.
�
- Jon Meliones, “Saving Money, Saving Lives,” Harvard Business Review on Turnarounds
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USA Inc. | What Might a Turnaround Expert Consider?
239
How Might a 'Turnaround Expert' Look at an Organization that
Needs to be 'Turned Around?'
� The recovery of a [challenged] company [or country]…depends on the
implementation of an appropriate rescue plan or turnaround prescription.
Characteristics of the appropriate remedy are that it must: 1) address the
fundamental problems; 2) tackle the underlying causes (rather than the
symptoms) and 3) be broad and deep enough in scope to resolve all the
key issues.
�
- Stuart Slatter, David Lovett, Laura Barlow, Leading Corporate Turnaround
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USA Inc. | What Might a Turnaround Expert Consider? 240
Aim to Answer Questions Like These About USA Inc.…
Strategy / Financial Model
�
�
�
�
�
�
�
�
�
�
Which countries (or states) have ‘best practices’ (based on productivity and outcomes) in key areas of
operations (like healthcare, retirement plans, welfare, defense, education, infrastructure) – which of
these best practices can / should be implemented by USA Inc.?
What is the organization trying to solve for - what is USA Inc.'s mission? / Who are USA Inc.'s
customers?
Is USA Inc. providing its customers an optimized mix of services, based, in part, on ability to fund the
services?
Are there ‘business lines’ that USA Inc. should exit / scale back / expand?
Why is USA Inc. spending more money than it brings in (and borrowing more money) – what are the
checks and balances?
What do USA Inc.'s financials tell us about the health of the business?
Should USA Inc. consider a capital budget separated from the operating budget to ensure sufficient
levels of investment in education, technology and infrastructure?
What are the best attributes / biggest problems of USA Inc.'s business?
Does USA Inc. have a path to profitability (or break-even)?
How should the government improve transparency in long-term budgeting and projections? How can
USA Inc. engage the public in this process?
www.kpcb.com
Source: KPCB and Alvarez & Marsal Public Sector Services, LLC.
USA Inc. | What Might a Turnaround Expert Consider?
241
…Aim to Answer Questions Like These About USA Inc….
People / Organizational Structure
� Has management effectively articulated a sound mission to its employees and constituents
- is USA Inc. properly organized to effectively achieve its mission?
� Does the organization have the right people, in the right places, at the right time?
� Does the business have a best-in-class leadership team and are they empowered to make
change?
� Are employees motivated / empowered / accountable for maximum performance?
� Are employees properly trained and compensated?
� Has the organization 'run the numbers' and effectively quantified the things that are
quantifiable?
� Do leading performance measures exist that support proactive management?
� How do you change the culture to be one that is steeped with focus on costs savings and
operating efficiency?
www.kpcb.com
Source: KPCB and Alvarez & Marsal Public Sector Services, LLC.
USA Inc. | What Might a Turnaround Expert Consider? 242
…Aim to Answer Questions Like These About USA Inc.
Productivity / Operations
�
�
�
�
�
�
�
�
�
�
�
�
How does USA Inc. measure performance and progress – are tools in place to measure success / failure?
Should USA Inc. empower an independent / 3rd party auditor with expertise in government operations
around the world AND corporate turnarounds to conduct a broad-ranging audit of USA Inc.’s operations to
measure efficiency and productivity of each business lines?
Does USA Inc. have tight management and financial controls?
What is the best way to measure and improve individual program performance? Can Congress, the
administration and the agencies agree on common metrics?
Are there operations that should be centralized (like procurement, human resources, employee payroll and
benefits) and decentralized?
Are there operations that USA Inc. can outsource to local private companies to improve efficiency and
reduce costs?
Where should USA Inc. increase and or decrease investment?
Is USA Inc. investing for the future in a responsible way?
Should USA Inc. drive public / private partnership in infrastructure investment with collective ‘skin in the
game?’
Is the organization leveraging technology to improve productivity and connect with customers and suppliers?
How can USA Inc. improve business process related to time, cost and quality?
Does USA Inc. own assets it doesn't need that it can sell at attractive prices?
www.kpcb.com
Source: KPCB and Alvarez & Marsal Public Sector Services, LLC.
USA Inc. | What Might a Turnaround Expert Consider? 243
Three Principles for a USA Inc. ‘Turnaround’
from Louis Gerstner
�
Do not impose "across-the-board" cost reductions
�
This is a simple and tempting remedy for an organization in fiscal trouble. But it is almost always
unproductive. A truly effective organization needs incremental investments in programs that drive
innovation and higher productivity. Moreover, across-the-board cuts are almost guaranteed to reduce
morale, promote short-sighted choices, and encourage accounting gimmicks that send people looking for
loopholes instead of creative solutions.
�
Focus on programs, not costs
�
The greatest productivity gains come from asking questions such as: What things are we doing now that
we do not need as much in the future? Can we eliminate them? Reduce their size? Provide them in a
totally restructured fashion?
�
Allow no exceptions
�
To drive a truly effective restructuring program, everything must be on the table. There can be no sacred
cows—no part of the organization that is exempt from scrutiny. Every unit of the organization may not
face a cut, but every unit needs to be rethought.
www.kpcb.com
Source: Louis V. Gerstner Jr. “Don’t Just Cut Government, Reinvent It,” Opinion in The Wall Street Journal, 2/1/2011.
USA Inc. | What Might a Turnaround Expert Consider? 244
Financial Experts Tend to ‘Assume What Can Go Wrong,
Will Go Wrong,’ and Usually Manage Expenses in that Way
�
In projecting scenarios, financial experts would note that USA Inc.’s revenue and expenses are highly
correlated to economic changes – for example, a 0.1 percentage point slowdown in real GDP annual
growth rate could worsen USA Inc.’s F2011-F2020E budget deficit by $288B, or 5% owing to lower tax
revenue and higher welfare spending.
F2011-F2020E Impact on USA Inc.’s
Key
Economic
Variables
CBO Base-Case
Assumption
What if…
Revenue
($B / % of Base-
Case)
Spending
($B / % of Base-
Case)
Deficit
($B / % of Base-
Case)
Real GDP
Y/Y Growth
Rate
2.1% F2011E
4.4% F2012-14E
2.4% F2015-20E
Real GDP growth
rates are 0.1
percentage point
lower per year
-$247B
(-1%)
+$41B
(--%)
-$288B
(-5%)
Interest
Rates
4.6% on 3-month T-
bills
5.5% on 10-year T-
notes
Interest rates are 1
percentage point
higher
+$94B
(+0.3%)
+$1,214B
(+3%)
-$1,120B
(-19%)
Inflation 1.7%
Inflation is 1
percentage point
higher
+$2,475B
(+7%)
+$3,191B
(+7%)
-$715B
(-12%)
www.kpcb.com
Source: CBO, “The Budget and Economic Outlook: Fiscal Years 2010 to 2020,” 1/10.
USA Inc. | What Might a Turnaround Expert Consider?
245
Past Performance Does Not Guarantee Future Results –
Japan’s Economic Miracle From 1960 to 1990 Rapidly Deteriorated
Into the ‘Lost Decades’ of 1990’s & 2000’s
Japan Real GDP Annual Growth Rates, 1960 – 2010
Real GDP Annual Growth Rates (%)
15%
10%
5%
0%
-5%
Inflection Point –
Bursting of Real Estate
Bubble in 1991
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Average Annual Real GDP Growth, Japan vs. USA, 1960’s – 2000’s
1960’s 1970’s 1980’s 1990’s 2000’s
Japan 10% 5% 4% 1.5% 0.7%
USA 4% 3% 3% 4% 2%
www.kpcb.com
Source: World Bank, IMF.
USA Inc. | What Might a Turnaround Expert Consider? 246
Unfunded Entitlement (Medicare + Social Security) + Underfunded
Entitlement Expenditures (Medicaid) =
Among Largest Long-Term Liabilities on USA Inc.'s Balance Sheet
USA Balance Sheet Liabilities Composition, F2010
Unfunded
Medicare
Medicaid*
$35.3T
All
Other
Federal
Employee
Benefits
Veteran
Benefits
Federal
Debt
Unfunded
Social
Security
$22.8T
$1.6T
$2.1T
$3.7T $9.1T $7.9T
www.kpcb.com
Note: Medicaid funding is appropriated by Congress (from general tax revenue) on an as-needed basis every year, therefore,
there is no need to maintain a contingency reserve, and, unlike Medicare, the “financial status” of the program is not in question
from an actuarial perspective. Here we estimated the net present value of future Medicaid spending through 2085E, assuming a
3% discount rate. Data source: Dept. of Treasury, Dept. of Health & Human Services Center for Medicare & Medicaid Services.
USA Inc. | What Might a Turnaround Expert Consider?
247
USA Inc.’s Financial Disconnect
� The country faces a fundamental disconnect between the
services the people expect the government to provide,
particularly in the form of benefits for older Americans, and
the tax revenues that people are willing to send to the
government to finance those services. That fundamental
disconnect will have to be addressed in some way if the
budget is to be placed on a sustainable course.
� - Douglas Elmendorf, Director of U.S. Congressional Budget Office, 11/10/2009
www.kpcb.com
USA Inc. | What Might a Turnaround Expert Consider? 248
An Observation from Ben Bernanke,
Current Chairman of the Federal Reserve
� A famous economist once said anything that can’t go on
forever will eventually stop, and this [government liabilities
from entitlement programs] will stop, but it might stop in a
very unpleasant way in terms of sharp cuts, a financial crisis,
high interest rates that stop growth, continued borrowing
from abroad. So, clearly we need to get control of this over
the medium term, and specifically we’re going to have to
look at entitlements because that’s a very big part of the
obligations of the federal government going forward.
� -- Ben Bernanke, Chairman of the Federal Reserve
� Testimony before House Budget Committee, June 9, 2010
www.kpcb.com
Note: Emphasis added.
USA Inc. | What Might a Turnaround Expert Consider?
249
Bad News: USA Inc.’s Entitlement Programs are Inflation Indexed,
Thus Potential Inflation – Which Would Reduce General Consumer Purchasing
Power – Would Not Reduce Entitlement Liabilities
Social Security, Medicare, Medicaid Spending (All Indexed to Inflation) as % Total
Federal Spending 1970-2020E
60%
As Percentage of Total Outlays (%)
50%
40%
30%
20%
Social Security Medicare Medicaid
50%
10%
0%
1970 1978 1986 1994 2002 2010E 2018E
www.kpcb.com
Data sources: The Budget and Economic Outlook, CBO 6/10.
USA Inc. | What Might a Turnaround Expert Consider? 250
Good News: While ‘Unfunded’ Liabilities Have Helped Bankrupt Companies,
USA Inc.'s Unfunded Liabilities are Not Legal Contracts
� Medicare / Social Security – While beneficiaries have a legal
entitlement to receive benefits as set forth under the Social Security Act,
Congress has the legal authority to change the levels of benefits
and/or the conditions under which they are paid. Congress’s
authority to modify provisions of the Social Security program was
affirmed in the 1960 Supreme Court decision in Flemming v. Nestor,
wherein the Court held that an individual does not have an accrued
“property right” in Social Security benefits. The Court has made clear in
subsequent decisions that the payment of Social Security taxes conveys
no contractual rights to Social Security benefits.
� Medicaid – Benefit levels & eligibility are determined jointly by Federal
and State governments. Federal funding is met through an appropriation
by Congress (and can be adjusted annually).
www.kpcb.com
Source: Congressional Research Service, Social Security Reform: Legal Analysis of Social Security Benefits Entitlement Issues.
USA Inc. | What Might a Turnaround Expert Consider?
251
What Might a Turnaround Expert Consider?
1
2
Focus on
Expenses
Focus on
Revenues
Reform
Entitlement
Programs
Drive Sustainable
Economic
Growth
Focus on
Operating
Efficiency
Change Tax
Policies
www.kpcb.com
USA Inc. | What Might a Turnaround Expert Consider? 252
Focus on Expenses:
Reform Entitlement Programs + Focus on Operating Efficiency
1
Focus on
Expenses
Restructure Social Security
Restructure Medicare & Medicaid
Reform
Entitlement
Programs
Focus on
Operating
Efficiency
Review Federal Wages & Benefits
Review Government Pension Plan Characteristics
& Compare with Private Sector Plans
Review Role of Unions
Review Government Cost Structure &
Consider Reducing Federal Headcount
Determine if There are Non-Core ‘Business Lines’
That Can Be Centralized / Locally Out-Sourced
www.kpcb.com
USA Inc. | What Might a Turnaround Expert Consider?
253
For Each of the Major Problems, We Highlight:
1) Mathematical Illustrations and 2) Policy Options
� Mathematical Illustrations
� Here we simply calculate how big a revenue increase and/or expense
decrease each major entitlement program needs to reach financial breakeven.
� These calculations are merely mechanical illustrations and are not meant to
portray realistic solutions.
� Policy Options
� We do not take a view on preferred policy options.
� We present policy options from our healthcare experts + 3 rd party
organizations (such as the Congressional Budget Office and National
Commission on Fiscal Responsibility and Reform) in an easy-to-understand
format to raise awareness and illustrate the financial impact of policy
decisions.
www.kpcb.com
USA Inc. | What Might a Turnaround Expert Consider? 254
1
Focus on
Expenses
Restructure Social Security
Restructure Medicare & Medicaid
Reform
Entitlement
Programs
Focus on
Operating
Efficiency
Review Federal Wages & Benefits
Review Government Pension Plan Characteristics
& Compare with Private Sector Plans
Review Role of Unions
Review Government Cost Structure &
Consider Reducing Federal Headcount
Determine if There are Non-Core ‘Business Lines’
That Can Be Centralized / Locally Out-Sourced
www.kpcb.com
USA Inc. | What Might a Turnaround Expert Consider?
255
Restructure Social Security: Variables To Make the Program
Financially Break-Even for the Long-Term
� Mathematical Illustrations* Slide 257–259
� 1) Retirement age – increase it to 73, from 67? or
� 2) Social Security benefits – decrease them by 12%? or
� 3) Social Security tax rate – increase it by 2 percentage points?
� Policy Options Slide 261–267
� 1) Combination of some / all mathematical illustrations above? and/or
� 2) Consider / implement CBO’s various policy options on Social Security’s tax
rates / taxable payroll / initial benefit formulas / cost-of-living adjustment… (July
2010)**? and/or
� 3) Consider / implement National Commission on Fiscal Responsibility and
Reform’s policy proposals (November 2010)***?
www.kpcb.com
Note: *For mathematical illustrations, we simply calculate how big a revenue increase AND / OR expense decrease each major
entitlement program needs to reach financial break-even. These calculations are merely mechanical illustrations and are not meant
to portray realistic solutions. **See: CBO, “Social Security Options 2010.”
***See: National Commission on Fiscal Responsibility and Reform, CoChairs’ Proposal, 11.10.10 Draft Document.
USA Inc. | What Might a Turnaround Expert Consider? 256
Restructure Social Security: Mathematical Illustration #1 –
Increase Retirement Age From 67 to 73
Increase Retirement Age
80
70
67
+9%
73
Full Retirement Age (Years)
60
50
40
30
20
10
0
Current
Proposed
Note: For mathematical illustrations, we simply calculate how big a revenue increase AND / OR expense decrease each major entitlement program needs to
reach financial break-even. These calculations are merely mechanical illustrations and are not meant to portray realistic solutions.
Note: Increase full retirement age to 73 will reduce average life expectancy at retirement to the same level as when Social Security was introduced in the
late 1930s. Source: Melissa M. Favreault and Richard W. Johnson, The Urban Institute, “Raising Social Security’s Retirement Age,” 7/10.
www.kpcb.com
USA Inc. | What Might a Turnaround Expert Consider? 257
Restructure Social Security: Mathematical Illustration #2 –
Reduce Social Security Expenses (Benefits) By 12%
Reduce Social Security Benefits by 12%, Immediately & Permanently
Average Annual Social Security Payments per
Beneficiary ($)
$14,000
$12,000
$10,000
$8,000
$6,000
$4,000
$2,000
$0
$13,010
-12%
$11,489
2009 2010&Beyond
Note: For mathematical illustrations, we simply calculate how big a revenue increase AND / OR expense decrease each major entitlement program
needs to reach financial break-even. These calculations are merely mechanical illustrations and are not meant to portray realistic solutions.
Source: Social Security Administration forecast in “The 2010 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance
and Federal Disability Insurance Trust Funds,” 8/10.
www.kpcb.com
USA Inc. | What Might a Turnaround Expert Consider? 258

Restructure Social Security: Mathematical Illustration #3 –
Increase Social Security Tax Rate From 12.4% to 14.2%
Increase Social Security Tax Rate by 1.92 Percentage Points, Immediately & Permanently
16
14.2%
Payroll Tax Rate (%)
12
8
4
12.4%
+1.92
Percentage
Points
0
2009 2010&Beyond
Note: For mathematical illustrations, we simply calculate how big a revenue increase AND / OR expense decrease each major entitlement program needs to
reach financial break-even. These calculations are merely mechanical illustrations and are not meant to portray realistic solutions.
Note: 1.92% is the estimated actuarial deficit for Social Security Trust Fund over a 75-year period from 2010 to 2085.
Source: Social Security Administration forecast in “The 2010 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and
Federal Disability Insurance Trust Funds,” 8/10.
www.kpcb.com
USA Inc. | What Might a Turnaround Expert Consider? 259
Good News: Mathematical Illustrations to Fix Social Security’s
Financial Problems Do Not Seem Drastic
In fact, when Social Security was nearing bankruptcy in 1983, a
combination of moderate reforms led to 25 consecutive years of
operating surpluses.
� Highlights of 1983 Social Security Reform
� 1) Raised full retirement age to 67 by 2027 (from 65)*
� 2) Reduced annual benefits by 5% (via a 6-month delay in cost-of-living
adjustment in 1983 & subsequent changes in benefit formulas and tax
schemes) .
� 3) Raised Social Security tax rates by 2.3% (via an advancement in
scheduled tax increase).
� 4) Made Social Security benefits (up to 50%) taxable income.
www.kpcb.com
Note: *For people born in 1937 or earlier, full retirement age (with 100% Social Security benefit) remained at 65. For people
born after 1960, full retirement age was raised to 67. For people born between 1937 and 1960, the full retirement age
progressively increases from 65 to 67. Source: Social Security Administration archive.
USA Inc. | What Might a Turnaround Expert Consider? 260
Restructure Social Security: Policy Options #1 –
Combining Raising Retirement Age + Reducing Benefits + Raising Tax Rates
� Consider:
� 1) Increase retirement age by 0-9% and/or
� 2) Reduce social security benefits by 0-12%? and/or
� 3) Increase social security tax rate from 12.4% to 14.2%? and/or
� 4) Combination of some / all of the above & more?
www.kpcb.com
USA Inc. | What Might a Turnaround Expert Consider?
261
Restructure Social Security: Policy Options From the Congressional Budget
Office (CBO) to Reduce Social Security Future Deficits By
1) Changing Tax Codes 1
Policy Options
Future Deficit
Reduction 2 (%)
2% gradually over a 20-year period 100%
Increase Payroll Tax
Rate by …
3% gradually over a 60-year period 83
1% in 2012 50
No limit, without Increasing benefits 150%
Raise the Taxable
Earnings Limit 3 to …
No limit 100
$250,000, without Increasing benefits 83
90% of earnings 33
Impose 4% Tax on
Earnings Above …
$106,800, without Increasing benefits 50%
$250,000, without Increasing benefits 17
Note: 1) Benefits are adjusted as taxation is changed, unless specified otherwise 2) As % of the estimated present value of Social Security trust fund
cumulative deficit in future 75 years. 3) Currently at $106,800
Source: CBO, “Social Security Options 2010.”
www.kpcb.com
USA Inc. | What Might a Turnaround Expert Consider? 262
Policy Options
Restructure Social Security: CBO’s Policy Options to
Reduce Social Security Future Deficits By
2) Changing Benefit Formula
Future Deficit
Reduction (%)
To Index Initial Benefits to Prices Rather Than Earnings 167 %
Reduce Primary
Insurance Amount 1
Factors ...
By ~33% for top 2 tiers of earnings 3 117
By 15% for all tiers of earnings 83
By 0.5% every year for all tiers of earnings 67
By ~33% for the top tier of earnings 17
Earnings in AIME 2 + Bend Points in PIA 1 to price 100%
Bend Points in PIA 1 formula to price 83
Index …
Earnings in AIME 2 formula to price 33
Initial benefits to changes in life expectancy 33
Lower Initial
Benefits 4 for ..
The top 70% of earners 83%
The top 50% of earners 67
Note: 1) Primary Insurance Amount (PIA): the benefit a person would receive if he/she elects to begin receiving retirement benefits at his/her normal
retirement age 2) Average Indexed Monthly Earnings (AIME): an average of monthly income received by a beneficiary during their work life 3) Currently
there are 3 tiers of earnings in calculation of PIA – top tier = 15% of monthly earnings over $4,586; tier 2 = 32% of monthly earnings between $761 and
$4,586; tier 3 = 90% of monthly earnings below $761 4) Benefits for newly qualified individuals. Source: CBO, “Social Security Options 2010.”
www.kpcb.com
USA Inc. | What Might a Turnaround Expert Consider? 263
Restructure Social Security: CBO’s Policy Solutions to
Reduce Social Security Future Deficits By
3) Raising Retirement Age / Lower Cost-of-Living Adjustment
Policy Options
Future Deficit
Reduction (%)
To 70 50%
Adjust Full Retirement
Age
Adjust Cost-of-living
Adjustment 1
Index to life expectancy 33
To 68 17
Reduce It by 0.5 Percentage Points 50%
Base It on the Chained CPI for All Urban Consumers 33
www.kpcb.com
Notes: 1) Cost-of-Living Adjustment (COLA): increases of Social Security’s general benefit based on cost of living, as
currently measured by CPI for Urban Wage Earners and Clerical Workers (CPI-W).
Source: CBO, “Social Security Options 2010.”
USA Inc. | What Might a Turnaround Expert Consider? 264
Restructure Social Security: Policy Options From Report of the
National Commission on Fiscal Responsibility and Reform
Policy Options
Gradually reduce future benefit payments to high earners while
increasing them for low earners by 2050
Gradually increase taxable maximum to 90% of covered earnings
by 2050
Apply refined inflation measure (chained-CPI) to cost-of-living
index
Future Social Security
Deficit Reduction 1
37%
35%
26%
Gradually increase retirement ages to 68 by 2050 / 69 by 2075 21%
Other 2 --
Total Future Social Security Deficit Reduction 116% 3
Note: 1) As % of the estimated present value of Social Security trust fund cumulative deficit in future 75 years. 2) Other measures include boosting benefit to
oldest old retirees and covering newly hired state and local workers after 2020. 3) total deficit reduction does not equal to the sum of individual reductions
owing to policy interplay. Source: National Commission on Fiscal Responsibility and Reform, “The Moment of Truth: Report of the National Commission on
Fiscal Responsibility and Reform,” 12/1/10.
www.kpcb.com
USA Inc. | What Might a Turnaround Expert Consider? 265
Restructure Social Security: Declining USA Household Savings Rate Creates
Challenge to Reducing Benefits as Americans are Under-Saving,
Thus Limiting Financial Cushion
Personal Savings Rate, 1965 – 2009
12%
9%
1965 – 1985 Average
10%
Personal Savings Rate (%)
8%
6%
4%
2%
3%
2000s Average
0%
1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009
www.kpcb.com
Note: Personal savings rate is calculated as the amount of savings divided by disposable income (income after taxes).
Source: BEA.
USA Inc. | What Might a Turnaround Expert Consider? 266
Restructure Social Security: Especially High Unemployment Levels Also
Create Challenge to Reducing Benefits
25%
USA Unemployment Rate, 1928 – 2010 YTD
20%
Unemployment Rate (%)
15%
10%
1948-2010 Average
Unemployment Rate
5.7%
5%
0%
1928 1933 1938 1943 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008
www.kpcb.com
Source: BLS, 2010 data as of 8/10.
USA Inc. | What Might a Turnaround Expert Consider?
267
1
Focus on
Expenses
Restructure Social Security
Restructure Medicare & Medicaid
Reform
Entitlement
Programs
Focus on
Operating
Efficiency
Review Federal Wages & Benefits
Review Government Pension Plan Characteristics
& Compare with Private Sector Plans
Review Role of Unions
Review Government Cost Structure &
Consider Reducing Federal Headcount
Determine if There are Non-Core ‘Business Lines’
That Can Be Centralized / Locally Out-Sourced
www.kpcb.com
USA Inc. | What Might a Turnaround Expert Consider? 268
Restructure Medicare & Medicaid:
Observations About America’s Healthcare System
� 1) High Expenses – however measured, the costs are high:
a) total dollars; b) share of GDP relative to other countries;
c) cost relative to ability to pay (government, business, or
individual), and
2) Inefficiencies – both the data and the insights of doctors,
nurses, patients, and healthcare professionals identify
opportunities for more efficient communication, data sharing
and cost saving.
www.kpcb.com
USA Inc. | What Might a Turnaround Expert Consider?
269
Restructure Medicare & Medicaid: Mathematical Challenge Related to
Government Healthcare Programs Facing USA Inc. per CBO Forecasts
Medicare & Medicaid Have Been Crowding Out Spending for Other Federal
Programs and are Projected to Exceed All Federal Revenue by 2080E
Federal Revenue & Medicare / Medicaid Spending as % of GDP, 1965 – 2080E
Federal Revenue & Medicare / Medicaid Spending as % of
GDP
www.kpcb.com
25%
20%
15%
10%
5%
0%
Federal Revenue as % of GDP
(forecast based on historical trend line)
Federal Spending on
Medicare & Medicaid as
% of GDP
1965 1975 1985 1995 2005 2015E 2025E 2035E 2045E 2055E 2065E 2075E
Source: CBO Long-Term Budget Outlook alternative fiscal scenario, 6/10.
USA Inc. | What Might a Turnaround Expert Consider? 270
Restructure Medicare & Medicaid: Variables in Restructuring Medicare &
Medicaid to Reduce Material Impact on USA Inc.’s Expenses
� Mathematical Illustrations* Slide 273–274
� 1) Medicare benefits – reduce them by 53% (or cap them)? or
� 2) Medicare tax rate – increase it by 4 percentage points?
� Policy Options Slide 275–328
� 1) Combination of mathematical illustrations – reduce benefits and/or increase
taxes? and/or
� 2) Isolate and address the drivers of medical cost inflation? and
� 3) Improve efficiency / productivity of healthcare system? and
4) Reduce services for some Medicaid beneficiaries? and
� 5) Consider / implement CBO’s 26 policy options that could reduce annual
budget deficit by up to 38%?** and/or
� 6) Consider / Implement National Commission on Fiscal Responsibility and
Reform’s medium- and long-term policy options***
Note: *Each mathematical illustration would bring Medicare Part A into long-term (75-year) actuarial balance. There is no mathematical illustration for
Medicaid or Medicare Part B & D as there’s no ‘dedicated’ funding.
**See: CBO, “Budget Options, Volume 1: Health Care,” 12/2008.
***See: National Commission on Fiscal Responsibility and Reform, “Co-Chairs’ Proposal,” 11/10/10.
www.kpcb.com
USA Inc. | What Might a Turnaround Expert Consider?
271
Restructure Medicare & Medicaid: Mathematical Illustrations*
� Mathematical Illustrations*
� 1) Medicare benefits – reduce / cap them?
� or
� 2) Medicare tax rate – increase it?
Note: *For mathematical illustrations, we simply calculate how big a revenue increase AND / OR expense decrease each major entitlement program needs
to reach financial break-even. These calculations are merely mechanical illustrations and are not meant to portray realistic solutions.
www.kpcb.com
USA Inc. | What Might a Turnaround Expert Consider?
272
Restructure Medicare & Medicaid: Mathematical Illustration #1 –
Reduce Medicare Benefits* By 53%
Sizing the problem:
It would take massive (53%) benefit cuts to address the shortfall of Medicare*
funding
$6,000
$5,000
$5,179
-53%
Average Annual Medicare*
Payments per Beneficiary ($)
$4,000
$3,000
$2,000
$1,000
$2,434
$0
2009 2010&Beyond
Note: For mathematical illustrations, we simply calculate how big a revenue increase AND / OR expense decrease each major entitlement program needs to reach
financial break-even. These calculations are merely mechanical illustrations and are not meant to portray realistic solutions.
Source: Dept. of Health & Human Services forecast in “2009 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary
Medical Insurance Trust Funds,” 5/09. *Note that data presented here are limited to Medicare Part A (Hospital Insurance) Trust Fund. Medicare Part B (Medical
Insurance) and Part D (Prescription Drug Benefits) are primarily funded via insurance premiums and general tax revenue transfers. Note also that data presented
here are estimates prior to PPACA (2009 healthcare reform).
www.kpcb.com
USA Inc. | What Might a Turnaround Expert Consider? 273
Restructure Medicare & Medicaid: Mathematical Illustration #2 –
Increase Medicare Tax Rate From 2.9% to 6.8%
Sizing the problem:
It would take massive (3.9 percentage points) payroll tax hikes on individual and
businesses to address the Medicare* funding shortfall
Payroll Tax Rate (%)
8
7
6
5
4
3
2
2.9%
+3.9
Percentage
Points
6.8%
1
0
2009 2010&Beyond
Note: For mathematical illustrations, we simply calculate how big a revenue increase AND / OR expense decrease each major entitlement program needs to reach
financial break-even. These calculations are merely mechanical illustrations and are not meant to portray realistic solutions.
Source: Dept. of Health & Human Services forecast in “2009 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary
Medical Insurance Trust Funds,” 5/09. *Note that data presented here are limited to Medicare Part A (Hospital Insurance) Trust Fund. Medicare Part B (Medical
Insurance) and Part D (Prescription Drug Benefits) are primarily funded via insurance premiums and general tax revenue transfers. Note also that data presented
here are estimates prior to PPACA (2009 healthcare reform).
www.kpcb.com
USA Inc. | What Might a Turnaround Expert Consider? 274

Restructure Medicare & Medicaid: Policy Options
� Policy Options
� 1) Combination of mathematical solutions – reduce benefits and / or increase
taxes? and/or
� 2) Isolate and address the drivers of rising healthcare costs? and
� 3) Improve efficiency / productivity of healthcare system? and
4) Reduce services for some Medicaid beneficiaries? and
� 5) Consider / implement CBO’s 26 policy options that could reduce annual
budget deficit by up to 38%? and/or
� 6) Consider / Implement National Commission on Fiscal Responsibility and
Reform’s medium- and long-term policy options?
www.kpcb.com
USA Inc. | What Might a Turnaround Expert Consider?
275
Restructure Medicare & Medicaid: Policy Option #1
� Combination of mathematical solutions –
reduce benefits and/or increase taxes?
www.kpcb.com
USA Inc. | What Might a Turnaround Expert Consider? 276
Restructure Medicare & Medicaid: Combination of Reducing Benefits
(Including Covered Lives) & / or Raising Taxes
� Consider:
� 1) Reduce Medicare benefits by 53%? and/or
� 2) Increase Medicare tax rate from 2.9% to 6.8%? and/or
� 3) Some combination of all / some the above
� However you look at it, this math is draconian. A 53% cut in
Medicare benefits and / or more than doubling taxes are unrealistic.
The situation for Medicaid is even worse, as Medicaid has no
dedicated funding source.
� Neither Medicare nor Medicaid has yet fully faced up to the crisis and
reform that Social Security experienced in the early 1980s.
www.kpcb.com
USA Inc. | What Might a Turnaround Expert Consider?
277
Restructure Medicare & Medicaid: Policy Option #2
� Isolate and address the drivers
of rising healthcare costs
www.kpcb.com
USA Inc. | What Might a Turnaround Expert Consider? 278
Restructure Medicare & Medicaid: Isolate and Address the Key Drivers
of Rising Healthcare Costs
USA Total Healthcare Spending Has Risen Faster than Peers’ (France, UK and Japan)*
Total Healthcare Spending as % of GDP
1970 2007
7% 16%
5% 11%
5% 8%
5% 8%
www.kpcb.com
Note: *Ranked by total healthcare spending in 2007; 1970 comparable data not available for Germany because of reunification.
Source: OECD, U.S. Department of Health & Human Services, Kaiser Family Foundation.
USA Inc. | What Might a Turnaround Expert Consider?
279
Restructure Medicare & Medicaid: Incentives Support Healthcare Cost Growth
• Consumers demand healthcare services with less regard
for the full economic impact as they pay only a fraction of
the true cost out of pocket.
• Healthcare service providers are generally rewarded for
pushing more services through the system, largely with
relatively less regard for cost effectiveness.
Bottom line = Powerful forces encourage spending
related to social / economic / legal issues throughout
the healthcare system.
www.kpcb.com
Source: Doug Simpson, Morgan Stanley Healthcare Research.
USA Inc. | What Might a Turnaround Expert Consider? 280
Restructure Medicare & Medicaid: Social + Economic + Legal Factors
Drive Incentives to Spend
1) Social – Growing + aging population (with related
disproportionate spending on end-of-life care) and unhealthy
lifestyles.
2) Economic – Healthcare service providers have financial
incentives to perform more services and drive revenue while
consumers often have little incentive to manage incremental
cost.
3) Legal - Rising overhead from defensive medicine (to avoid
lawsuits) and from regulatory compliance costs.
www.kpcb.com
Source: Morgan Stanley Healthcare Research.
USA Inc. | What Might a Turnaround Expert Consider?
281
Restructure Medicare & Medicaid: Social Forces that Push Up
Healthcare Spending
� 1) Growing and Aging Population
� 2) Unhealthy Lifestyles
� 3) Possible Solutions
www.kpcb.com
USA Inc. | What Might a Turnaround Expert Consider? 282
� 1) Growing and Aging Population
� 2) Unhealthy Lifestyles
� 3) Possible Solutions
www.kpcb.com
USA Inc. | What Might a Turnaround Expert Consider?
283
Restructure Medicare & Medicaid: Social Factors—
USA is Aging…13% of Americans Over 65 Years Old, Up from 5% in 1930
Older Population (65+) as Percent of Total Population, 1930 / 1970 / 2010E
Total Population
310MM
Total Population
203MM
13%
Total Population
123MM
Age 65+
5%
10%
1930 1970 2010E
# of Elderly
6MM
# of Elderly
20MM
# of Elderly
40MM
www.kpcb.com
Source: US Census Bureau.
USA Inc. | What Might a Turnaround Expert Consider? 284
Restructure Medicare & Medicaid: Social Factors—
Older People Spend 2x More per Year on Healthcare than Younger Americans
Share of Population vs. Healthcare Spending by Age Group, 2004
Population & Healthcare Spending % Share of Total
70%
60%
50%
40%
30%
20%
10%
0%
25%
13%
$2,650
63%
53%
$4,511
$14,797
34%
12%
$16,000
$14,000
$12,000
$10,000
$8,000
$6,000
$4,000
$2,000
$0
Annual Per Capita Healthcare Spending ($)
0-18 19-64 65+
Share of Population
Share of Healthcare Spending
Annual Healthcare Spending per Person
www.kpcb.com
Source: Dept. of Health & Human Services, US Census Bureau.
USA Inc. | What Might a Turnaround Expert Consider?
285
Restructure Medicare & Medicaid: Social Factors—
~28% of Annual Medicare Spending Geared Toward End-of-Life Care
(Last 12 Months)
2008 Medicare Total Benefit Expense
$363B
Medicare Spending on
Recipient’s Final Year of Life
$101B
28%
• People 65+ spent $14,797 per
year on healthcare on average in
2004, 3x what working-age
people (19-64) spend.
• It’s notable that ~28% of average
Medicare recipient spending occurs
in the final year of life and 12%
occurs in the final two months of
life.
www.kpcb.com
Sources: CMS, Medpac, Report to the Congress: Medicare Payment Policy, 3/10
USA Inc. | What Might a Turnaround Expert Consider? 286
� 1) Growing and Aging Population
� 2) Unhealthy Lifestyles
� 3) Possible Solutions
www.kpcb.com
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287
Restructure Medicare & Medicaid: Social Factors—
32% of Americans Considered Obese in 2008, Up from 15% in 1990…
1990
USA Adult Obesity Levels by State, 1990, 1999, 2008
1999
Obesity-Related Diseases
2008
Diabetes / Cancer / Respiratory /
Heart / Joint Diseases …
Obesity-Related Medical Costs
$147 billion in 2008, up 2x from 1998
to 7% of Healthcare Cost
No Data <10% 10%–14% 15%–19% 20%–24% 25%–������������������
Note: An adult is considered obese if his / her Body Mass Index (BMI) is over 30. Source: Centers for Disease Control Behavioral Risk Factor Surveillance
System, “America’s Health Rankings, A Call to Action for People and Their Communities, 2009 Edition”.
www.kpcb.com
USA Inc. | What Might a Turnaround Expert Consider? 288
Restructure Medicare & Medicaid: Social Factors—
Rising Obesity Pushes Up Healthcare Cost
� An estimated 7% of $2.1 trillion healthcare costs
(including those linked to diabetes, cancer, heart /
respiratory / joint diseases) were related to obesity in
2008. By comparison, that’s more than all corporate
income tax revenue that year.
www.kpcb.com
Note: Nearly half of all people in the U.S. with European ancestry carry a variant of the fat mass and obesity associated (FTO)
gene, vs. 25% of U.S. Hispanics, 15% of African Americans and 15% of Asian Americans, per UCLA.
Source: “Annual Medical Spending Attributable To Obesity: Payer- And Service-Specific Estimates."
Eric A. Finkelstein, Justin G. Trogdon, Joel W. Cohen, and William Dietz.
Health Affairs , July 27, 2009.
USA Inc. | What Might a Turnaround Expert Consider? 289
� 1) Growing and Aging Population
� 2) Unhealthy Lifestyles
� 3) Possible Solutions
www.kpcb.com
USA Inc. | What Might a Turnaround Expert Consider? 290
Restructure Medicare & Medicaid: Social Factors—Possible Solutions
Boost Healthcare Education & Incentives to Drive Better Choices
� Emphasize on disease prevention and wellness.
� Education and information
� Highlight health risk associated with certain behaviors and lifestyles
� Financial incentives for healthy habits
� Create social programs to champion healthy lifestyles and consumption
� Subsidize healthy foods for lower income population
� Discourage unhealthy behavior and consumption.
� Penalize poor health choices (create new incentives based upon lessons learned
from higher life insurance fees for smokers and car insurance fees for speeders)
� Consider additional / new taxes on cigarettes, non-diet sodas, etc.
www.kpcb.com
Source: Morgan Stanley Healthcare Research.
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291
Restructure Medicare & Medicaid: Economic Forces that Push Up
Healthcare Spending
1) Open access healthcare plans can increase access to care
(via greater choices of care providers), but can also
increase cost.
2) Consumers and providers are not always incentivized to
constrain their healthcare costs.
3) Even when appropriate, poor information & lack of price
transparency complicate comparison shopping for
consumers.
4) Advances in medical technology drive demand and costs.
www.kpcb.com
USA Inc. | What Might a Turnaround Expert Consider? 292
Restructure Medicare & Medicaid: Economic Factors—
Rise in Usage of “Open Access” Healthcare Plans Makes It Harder to
Control Patient Choices…Subsequently, Cost of Care Increases
Societal demand for less restrictive health insurance has driven a gradual switch to open access
plans. These plans offer consumers greater choices of medical providers, but at higher costs.
Share of Tightly Managed vs. Open Access Healthcare Plans in USA, 1988 - 2008
100%
% of All Healthcare Plans
80%
60%
40%
20%
Open Access
(PPO + POS)
Tightly Managed
(Conventional +
HMO)
Other (HDHP)
0%
1988 1996 2000 2002 2004 2006 2008
Note: PPO is Preferred Provider Organization, which allows enrollees to select any doctor / hospital in the insurance provider’s network without going through a
primary care physician. HMO is Health Maintenance Organization, which requires enrollees to coordinate all healthcare via a primary care physician (a family
doctor). POS is Point Of Service, which combines the features of an HMO and a PPO. HDHP is High-Deductible Health Plan, a form of catastrophic coverage with
lower premiums and higher deductibles than a traditional plan. Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 1999-2009; KPMG Survey of
Employer-Sponsored Health Benefits, 1993, 1996; The Health Insurance Association of America (HIAA), 1988
www.kpcb.com
USA Inc. | What Might a Turnaround Expert Consider? 293
Restructure Medicare & Medicaid: Economic Factors—
Less Incentive for Consumers or Providers to Control Costs
When Someone Else (Government / Taxpayers) Pays the Bills
Out-of-Pocket Spending Accounted for Just 12% of Healthcare Spending in 2009,
Down from 48% in 1960
50%
Out-of-Pocket Payments
Payments as % of Total Healthcare Spending
40%
30%
20%
10%
48%
Medicare
Introduced
Medicare + Medicaid Payments
Out-of-Pocket Medical Payments as % of Disposable Income
7%
4% 3%
35%
12%
0%
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
www.kpcb.com
Source: Department of Health & Human Services, Centers for Medicare & Medicaid Services.
USA Inc. | What Might a Turnaround Expert Consider? 294
Restructure Medicare & Medicaid: Economic Factors –
Employer and Government Funding System Separates Consumers from
True Costs of Healthcare
� When one doesn’t pay directly and gets an expensive good / service for
free (or well below cost), one tends to consume more – it’s basic supply
and demand economics.
� Count up the subsidies:
� Medicaid: 47 million (24MM children / 12MM low-income adults / 7MM
disabled / 4MM elderly) Americans (15% of population) each received $6,872
in taxpayer funds, on average, for healthcare in 2008 through Medicaid. That
$6,872 equals ~19% of annual per-capita income for Americans.
� Medicare: 45 million elderly Americans (15% of population) averaged $7,991
per person for healthcare in 2008 ($4,875 for hospital care; $3,116 for medical
insurance and prescription drugs). That equals ~23% of annual per capita
income.
� Private Market: 157mm Americans with private health coverage (subsidized
by employers) in 2008 paid just 16% of the total premium cost themselves for
single coverage and 27% for family coverage. In effect, that represented taxfree
“earnings” of $3,951 for singles or $9,256 for families (not including the
tax savings on their personal premium contributions).
www.kpcb.com
Source: Department of Health & Human Services, Centers for Medicare & Medicaid Services.
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Restructure Medicare & Medicaid: Economic Factors—
Healthcare Providers Are Rewarded for Driving Revenue
• While striving to provide the best care possible, healthcare
providers tend to have financial / legal / societal incentives to
provide more care, all else equal.
• Reimbursement for providers is generally volume-based (e.g., more
procedures generate more revenue for care providers), though there
are efforts to increasingly focus on quality.
• Unlike car buyers, for example, who often disregard a dealer’s
maxed-out model and choose only the features that are important to
them and what they can afford, healthcare buyers tend to buy all the
“features” as: 1) buyers (patients in this case) are typically not
medical experts, so they defer to doctors / care providers for
decisions; and 2) buyers only bear a small portion of the costs as
someone else (employer or government) is paying for the features.
www.kpcb.com
USA Inc. | What Might a Turnaround Expert Consider? 296
Restructure Medicare & Medicaid: Economic Factors—
Rising Healthcare Costs Disproportionately Borne by Employers and Individuals
Over the last few decades, private payors (employer-sponsored health insurance
plans) have consistently paid more than government payors (Medicare / Medicaid) and
have, in effect, subsidized government reimbursement.
Payment to Cost Ratio
140%
130%
120%
110%
100%
90%
80%
Healthcare Service Payment to Cost Ratio, 1990 - 2006
Private Payor
Medicare
Medicaid
70%
www.kpcb.com
60%
1990 1992 1994 1996 1998 2000 2002 2004 2006
Source: Avalere Health Analysis of American Hospital Association Annual Survey data, 2006, for community hospitals.
USA Inc. | What Might a Turnaround Expert Consider?
297
Restructure Medicare & Medicaid: Differential Payment Rates Can Create a
Negative Cycle Leading to Erosion of Private Healthcare Coverage and
Higher Entitlement Spending
5. Employers/
Consumers Drop
Insurance Coverage
4. Higher Health
Insurance Premiums
3. Higher Private
Market Cost Trend
2. Cost Shifting onto
the Private Market
1. Providers Charge
Higher Prices to
Private Market than to
Government Market
6. Increasing Number
of Uninsured
7. Increasing Use of
Medicaid / Medicare
8. Government
Reimbursement
Pressure Rises
9. Government Lowers
Reimbursement Rate to
Providers
www.kpcb.com
Source: Doug Simpson, Morgan Stanley Healthcare Research.
USA Inc. | What Might a Turnaround Expert Consider? 298
Restructure Medicare & Medicaid: Economic Factors—
Reimbursement Reform Is Easier Said than Done Owing to Political Sensitivity…
Percentage Contribution to Medicare
Medical Cost Growth Rate
by Spending Type, 2019E
Key Issues:
All Other
Rx Drugs
Nursing Home &
Home Health
9.9%
16.2%
Physician
& Clinical
Services
9.3%
20.1%
44.5%
Hospital
Care
- Consumers understandably do not
like constraints on their care
location.
- Doctors, nurses and hospitals are
fulfilling a difficult task at the core of
the healthcare delivery system.
- Care providers are very important
to local communities.
- Local hospitals are large
employers.
- Many hospitals are struggling
financially.
www.kpcb.com
Source: Data per CMS’ National Health Expenditure database, Doug Simpson, Morgan Stanley Healthcare Research.
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Restructure Medicare & Medicaid: Economic Factors—
Healthcare Service Providers are Already “Underpaid” by Government
USA Community Hospital Profit Margins & Inpatient Discharges by Payor Class
32%
�
Profit margins by
payor class (%),
2007
-9% -12%
-45%
4.5%
Profit margins from patients
with employer sponsored
insurance are sufficient to
leave hospital industry with
positive overall margin,
despite being only 36% of
inpatient discharges.
�
Percent of total
inpatient
discharges, by
payor class
(%), February
2009
36%
Employer
Sponsored
Insurance
42%
Medicare
17% 5%
Medicaid Self-Pay
100%
Total
Reimbursement cuts to
Medicare and/or Medicaid
would pose significant
challenges, as hospitals
already realize negative
margins from those payor
classes.
Source: Avalere Health analysis of American Hospital Association Annual Survey data, 2007, for community hospitals. Morgan Stanley Healthcare Research.
www.kpcb.com
USA Inc. | What Might a Turnaround Expert Consider? 300
www.kpcb.com
Restructure Medicare & Medicaid: Economic Factors—
Poor Information & Lack of Price Transparency
Make it Harder for Consumers to “Comparison Shop”
Patients are at a healthcare information disadvantage in two respects 1 :
• Lack of transparency:
‣ It’s harder for consumers to compare prices of healthcare services from
different healthcare providers than in other consumer markets given the
complexity of healthcare market.
‣ With employer- / government-subsidized insurance, many patients are
‘locked in’ with their insurance plans that do not incentivize “shopping
around.”
• Knowledge gap:
‣ Unlike other markets where consumers tend to use their own information and
preferences, consumers depend more on the advice and guidance of
physicians or other healthcare suppliers.
‣ Unlike other “merchandise,” healthcare is literally of life-and-death
importance to consumers, making risk aversion – and price
insensitivity – higher. This price insensitivity is exacerbated because the
consumer, in effect, gets it at a discounted price anyway.
Source: 1) Accounting for the cost of US healthcare, McKinsey Global Institute
USA Inc. | What Might a Turnaround Expert Consider? 301
Restructure Medicare & Medicaid: Economic Factors—
Consumers Increasingly Demand Expensive Treatment and Are Able to
Pay for it With Government Subsidies
Total High-End Surgeries up 50x from 1970-2004, Driven by Medical
Advancements + Consumer Ability to Spend Assisted by Government Payments
Coronary Procedures
# of Patients (Aged 50+) Undergoing
Advanced Procedures in USA
1970 2004
Typical Costs per
Procedure ($)
Angioplasty / Stent
Implantation
<20,000 1.1 million $12,000
Pacemaker / ICD 1 <10,000 350,000 $15-34,000
Bypass <10,000 220,000 $28,000
Dialysis Procedures <10,000 480,000
Joint Replacement Procedures
$24-72,000 per
year
Hip <20,000 390,000 $12,500
Knee -- 440,000 $12,500
www.kpcb.com
Note: 1) ICD is Implantable Cardioverter Defibrillator, which is similar to a pacemaker but for a heart rhythm that beats too fast.
Cost of procedure approximated by Medicare reimbursement.
USA Inc. | What Might a Turnaround Expert Consider? 302
Restructure Medicare & Medicaid: Economic Factors—
Unconstrained Access to Medical Technology Increases Cost of Care…
� Researchers generally agree that advances in medical technology
have contributed to rising US Health Spending 1
� Medical technology affects the costs of care through several
“mechanisms of action” 2
�
�
�
�
�
�
New treatments for previously untreatable terminal conditions
Major advances in clinical ability to treat previously untreatable acute conditions
New procedures for discovering and treating secondary diseases
New indications for a treatment over time
Ongoing, incremental improvements in existing capabilities
Major advances or the cumulative effect of incremental gains extending clinical
practice to conditions once regarded beyond its boundaries
� Very expensive, high-end medical procedures (such as dialysis and heart
bypass) – which can easily cost as much as the average annual income of
an American – are increasingly 60-70% subsidized by taxpayer dollars.
www.kpcb.com
Source: 1) “How Changes in Medical Technology Affect Healthcare Costs,” Kaiser Family Foundation, March 2007; 2) Richard A.
Retting, “Medical Innovation Duels Cost Containment,” Health Affairs (Summer 1994).
USA Inc. | What Might a Turnaround Expert Consider? 303
Opportunity for Two Mutually Reinforcing Cycles:
Information + Incentives…
� More widespread adoption of healthcare information technology, in particular
clinical decision support software, should yield better information and provider
decisions.
� Healthcare is at the cusp of leveraging decision-support technology after
historically lagging other industries.
� Opportunity to develop best practices to improve patient care and outcomes
and reduce medical errors and costs.
� More evidence-based care could help to narrow the variation in practice norms
� The American Recovery and Reinvestment Act of 2009 provided approximately
$19 billion for Medicare and Medicaid Health IT incentives.