From the Deal Journal blog at wsj.com:

By Michael Corkery

The government bailout of American International Group may have helped stabilize the global financial system, but look what taxpayers got stuck with: An underperforming, poorly run insurance company.

The latest proof? That would be today’s revelation that AIG has an $11 billion shortfall in reserves to pay workers compensation and business-insurance claims, according to a report today by Sanford Bernstein analyst Todd Bault. That shortfall may not result only in big losses in the coming quarters, it also could cause AIG to lose market share to competitors as consumer worry about the company’s ability to pay claims.

Slashing his price target to $12-a-share from $20 (Remember those hazy summer days when day traders bid up AIG to $53-a-share), Bault says the worst is finally coming true for AIG:

It was viewed by many that AIG’s weakened state would compel clients and brokers to want to move business. We were skeptical of this view because we felt that clients would instead stay put and wait for the uncertainty to pass before making a major decision…..But now, with this loss reserve result, we have a more analytical case to make that AIG may face client flight in the future, driven by fear over its potentially weakened claims-paying ability. That factor seems much more likely to matter to risk managers than what is happening in AIG’s Financial Products unit.

In other words, while AIG’s financial products created the credit defaults swaps and other risky derivatives that brought the company to its knees last fall, it is the shortcomings of AIG’s core insurance business that now could endanger the company’s future–and, by extension, the taxpayers’ $120 billion investment

The latest problems have Bault pining for the days when Hank Greenberg ran the company. “There is even some support to the idea that discipline was lost after…Greenberg left the company,” he wrote in his note, which helped send the stock down 14% to $28.57.

Taxpayers face similar challenges with their investments in General Motors and Chrysler. The government bailed out the auto companies primarily to save thousands of jobs in the Midwest, but after all the back slapping and feel-good patriotism wears off, the day-to-day reality of running troubled auto makers is setting in.

In GM’s case, the company has failed to sell two out of three brands it put up for sale (Saturn and now Saab); its North American sales are running out of steam, even as its international sales pick up. The chances that taxpayers will recover their full investment in Detroit and in AIG are looking increasingly shaky.

BusinessWeek had an awesome Cover Story on 10 Ways to Cut Health Care Costs. Please read.

10 Ways to Cut Health-Care Costs Right Now
Employers and hospitals don’t have to wait for Congress to address inefficiencies and waste

By Catherine Arnst

Seven hundred billion dollars. That’s a ballpark estimate of how much money is wasted in the U.S. medical system every single year, according to a new Thomson Reuters (TRI) report. A sum equal to roughly one-third of the nation’s total health-care spending is flushed away on unnecessary treatments, redundant tests, fraud, errors, and myriad other monetary sinkholes that do nothing to improve the nation’s health. Cut that figure by half, and there would be more than enough money to offer top-notch care to every one of America’s 46 million uninsured.

None of the health-care reform bills on the table in Washington do anything meaningful to address that wasted $700 billion. Nor do they call for changes in the underlying flaw that drives much of the waste—the fee-for-service system that pays doctors and hospitals for the amount of medical care delivered rather than for its quality. Under fee-for-service there is no financial incentive for doctors to eliminate waste, since they wouldn’t pocket any of the resulting savings. They would just earn less.

A BIG STEP FORWARD

BusinessWeek has looked at 10 such attempts to lower health-care costs and improve patient care. These innovations cannot have the same impact as a comprehensive federal bill. Nor are the gains from private efforts assured.

1. CRACK DOWN ON FRAUD AND ABUSE

Crime pays big when it comes to health care. This huge industry is run pretty much on the honor system. As law enforcement agencies have cracked down harder on illegal drugs, organized crime has diverted resources into multimillion-dollar medical scams, where there is less chance for detection. The FBI figures that fraudulent billings to Medicare, Medicaid, and private insurers account for 3% to 10% of total health spending, and the bureau concedes its estimates may be low. “Everywhere we look, we see evidence of fraud,” says Lewis Morris, chief counsel for the Office of the Inspector General at the U.S. Health & Human Services Dept.

2. DEVELOP A HEALTHY WORKFORCE

When Johnson & Johnson (JNJ) CEO William C. Weldon met with President Obama over the summer, he communicated a key message: Prevention pays. Weldon knows, because J&J has been offering comprehensive wellness programs to its 100,000 employees since 1995. Internal studies found that in the four years ended in 2002, those efforts saved $225 per employee per year.

3. COORDINATE CARE THROUGH FAMILY DOCTORS

A patient suffering from one or more chronic diseases may depend on several doctors, and rarely do they communicate with one another. This lack of care coordination means it’s nearly impossible to arrange complementary treatments, cross-check prescriptions, and avoid ordering the same diagnostic tests over and over. The resulting duplications and follow-up care cost the nation $25 billion to $50 billion a year.

4. MAKE HEALTH A COMMUNITY EFFORT

We are not a fit nation. One-third of U.S. adults are obese, and health spending on this group grew 80% from 2001 to 2006, to $166.7 billion.

5. STOP INFECTIONS IN HOSPITALS

Far too often, the biggest danger to patients is not their disease but the hospitals that treat them. Every year 1.7 million patients develop infections while in hospital, and 99,000 die as a result. These hospital-acquired infections add $30 billion to the nation’s annual health-care bill—and almost all are preventable. “For a long time there was a sense that a lot of these infections were inevitable,” says Dr. Donald Goldmann, senior vice-president of the nonprofit Institute for Healthcare Improvement. “But in the last five or six years medical professionals have come to realize we can do a lot better if we follow a zero-tolerance policy.”

6. GET PATIENTS TO TAKE THEIR MEDICINE

Three out of four Americans do not take their medicine as directed. This noncompliance leads to additional doctor visits, hospitalizations, and treatments that together add some $177 billion a year to the nation’s health-care bill, according to the National Council on Patient Information & Education.

7. DISCUSS OPTIONS NEAR THE END OF LIFE

One-quarter of Medicare dollars are spent in the last year of patients’ lives. The costs of end-of-life care vary wildly, however. The Dartmouth Institute for Health Policy has found that spending is nearly three times higher in Manhattan than in areas of Colorado, mainly because patients in Manhattan average 21.9 days in the hospital during their last six months, compared with only 6.3 days in Grand Junction, Colo. Yet higher costs don’t translate to longer or better lives.

8. USE INSURANCE TO MANAGE CHRONIC DISEASE

In 2009, UnitedHealthcare (UNH) introduced the Diabetes Health Plan, a new type of benefit that offers financial rewards to patients who manage their disease properly. Three companies, including General Electric (GE), are testing the plan, and 15 more workplaces signed on to roll it out in 2010. Employees who participate in the UnitedHealthcare plan must adhere to specific treatment guidelines and agree to be tracked by the insurer to make certain they are sticking with the program. In return, co-pays on their diabetes drugs are waived, along with other fees related to managing their disease.

9. LET WELL-INFORMED PATIENTS DECIDE

When Floyd “Jack” Fowler Jr. holds focus groups of heart patients, he’s amazed at their misplaced faith in the benefits of medical procedures. “They all think they’ll die if they don’t have bypass surgery or angioplasty,” says Fowler—even though studies show that both procedures extend lives or prevent heart attacks in only a tiny minority of especially sick patients. But hardly anyone knows this, he says.

10. APOLOGIZE TO THE PATIENT

Doctors regularly complain that fear of malpractice suits forces them to order far more tests and procedures than necessary. Although President Obama has said he is open to legislation that would limit malpractice awards, there may be a simpler solution. Sometimes all it takes is an apology.

The University of Michigan Health System adopted the policy in 2001 and reports that malpractice claims fell from 121 a year to 61 in 2006. The honesty “takes away some of the anger of patients and the ‘gotcha’ of plaintiff lawyers,” says Douglas B. Wojcieszak, who founded Sorry Works! after losing his brother to a medical error. “You don’t need any legislation, judge, or politician to do this—it’s simply customer service.” The University of Illinois Medical Center in Chicago started a formal apology program in 2006 and says the number of claims has since declined 40%, despite a 20% increase in clinical activity

Hank Greenberg is one of the most iconic of characters in the insurance and finance worlds. Maria Bartiromo of Businessweek had an interesting interview with him recently:

MARIA BARTIROMO

A New York Times story last week suggested that you are poaching talent from AIG and reconstructing the AIG model at your privately held firm, C.V. Starr. Is your intention to build a competitor to AIG?
MAURICE “HANK” GREENBERG

No. Look, I’m building an insurance company and an investment company. We didn’t poach anybody. We hired 13 people from AIG out of the 100,000-plus they have. We didn’t poach them; they came to us. A lot of them had left AIG previously. I know one company in Switzerland that hired 130 people from AIG.

So you’re saying AIG’s talent is fleeing?
That’s been going on for some time.

Are the restrictions on executive compensation imposed by pay czar Ken Feinberg driving talent into your arms?
They’re driving people into anybody’s arms, not just mine. Anybody in the insurance business. Why would someone running an important area of the company and doing a good job stay there for the maximum of $200,000 when they can maybe make $400,000 to $600,000 someplace else?

I’m sure you’ve thought about this, but what if Spitzer had not forced you out as CEO of AIG in 2005? How would things have been different?
It would have been 100% different. Nothing like [what has happened] would have taken place. [AIG] would have been strong. Oh, we would have had some losses, but they would have been minuscule compared with what we’ve seen.

How much money would you have saved the American taxpayer?
We wouldn’t, in my judgment, have had to borrow any money from the taxpayer.

What would you have done differently?
I know for a fact that [Martin] Sullivan told everybody: “Just do everything you want, get as much business as you can, and don’t worry about a goddam thing.” Everything they did disregarded risk management. That’s not the way you run a company. And the board sat on its tail. Frank Zarb did nothing. He was the goddam chairman. What did he do?

Did he understand what was happening?
Well, he was chairman. Shouldn’t he have known? What did he get paid for as chairman? Just to go to a meeting?

And if I remember correctly, the board increased their salaries.
Yes, they did. They were working so hard, they increased their salaries.

If you had still been at the helm of AIG during that black week in September 2008, and it became clear AIG needed a bailout to survive, would you have gone to the government or tapped into your connections in China and elsewhere?
I’d have done everything I could to keep the government out. Absolutely.

Since you left AIG, there have been a string of executives in charge: Sullivan, Robert Willumstad, Edward Liddy, and now Robert Benmosche. How would you rate the job Benmosche is doing?
From what I can see, he’s doing a pretty good job. He’s an experienced executive. He ran MetLife (MET). I think he’s a better leader. But if you can’t pay reasonable compensation, I don’t care how good you are.

Treasury Secretary Tim Geithner was asked on Meet the Press on Nov. 1 if he would like to see AIG prosper. And he said: “I’d like it to be successful enough that the taxpayer can get out.” After that, he said he didn’t care what happened.
That’s a really great statement, isn’t it?

What’s the government’s goal here?
To liquidate the company and pay the taxpayer back. But the taxpayer will never be paid back by liquidating AIG. The only way to get paid back is to rebuild the company so it becomes viable again. Why was it decided AIG would be the sacrificial lamb?

Was it to save Goldman Sachs?
Maybe. But I think there’s got to be a complete investigation of who did what and why.

How significant has this been in terms of wealth destruction for you?
Considerable. Not just for me, but for every one of the employees and executives at AIG. And how many shareholders? AIG had a market cap of $180 billion when I left. Goddam near worthless today.

Maria Bartiromo is the anchor of CNBC’s Closing Bell and writes the blog, Maria Bartiromo’s Investor Agenda, at http://investoragenda.cnbc.com.