The NewsHour with Jim Lehrer

JIM LEHRER: Good evening. I'm Jim Lehrer. On the NewsHour tonight: A summary of today's news; reporting and analysis on two of the day's major stories, the bankruptcy filing by WorldCom, and continuing chaos in the stock markets; then, a report on skyrocketing health care costs; and a book conversation about a millionaire investor with a passion for science.

NEWS SUMMARY

JIM LEHRER: WorldCom filed the largest bankruptcy case in U.S. history last night. It was twice the size of Enron's, the previous record. WorldCom listed assets of $107 billion against debts of $41 billion. CEO John Sidgmore said today he hoped the telecom giant could emerge from Chapter 11 protection within a year. He said none of the company's long-distance telephone customers would lose service in the interim. We'll have more on this in just a moment. Wall Street picked up today where it left off last week, with more losses. Stocks rallied several times, only to fall again. In the end, the Dow Jones Industrial Average closed down 234 points at 7784, a loss of nearly 3%. The NASDAQ also fell nearly 3%. It dropped 36 points to 1282. During a visit to Illinois today, President Bush tried to encourage investors.

PRESIDENT GEORGE W. BUSH: I do believe that the fundamentals for economic growth are real. And I believe Congress is going to get a bill that will help take some of the uncertainty out of market. And that bill is going to put some meaningful reforms in place. And then the investor is going to pick value, make decisions on value. And from what I hear, corporate profits are improving, which means values will be available for those who invest in the market.

JIM LEHRER: And we'll have more on the markets later in the program. California today became the first state to limit greenhouse gas emissions from new automobiles. Governor Gray Davis signed a law mandating cuts in carbon dioxide and other emissions as of 2009. A state board will decide the maximum reduction that's cost- effective. Automakers will then decide how to achieve it. The governor predicted other states, and eventually the federal government, would follow suit.

GOV. GRAY DAVIS: Now clearly there will be resistance to this bill and opponents will say the sky is falling. They said the sky was falling about unleaded gasoline. They said it about the catalytic converter. They even said about it seat belts and air bags. My friends, the sky is not falling. It's just getting a lot cleaner.

JIM LEHRER: But automakers said the law could force changes in new cars sold nationwide. They said they could not afford to build one set of cars for California, and another for the rest of the country. They also warned the rules could put an end to sport utility vehicles and other models that burn more fuel. Governor Davis denied that. U.S. troops have taken over security for Afghanistan's President Karzai at his request. Defense Secretary Rumsfeld confirmed that today. He called it a "short-term measure" after two top Afghan officials were killed in recent months. On another matter, Rumsfeld again defended U.S. air strikes in Afghanistan as the most accurate ever. On Sunday, the "New York Times" reported bombing raids may have caused 400 civilian deaths. It said on-site teams blamed flawed intelligence. Rumsfeld said he knew of no instance when Afghan informants deliberately pointed U.S. planes to the wrong target. And that's it for the News Summary tonight. Now it's on to WorldCom, the markets, managing care, and the author of "Tuxedo Park."

FOCUS FALLEN GIANT - WORLDCOM

JIM LEHRER: WorldCom; Kwame Holman begins.

KWAME HOLMAN: The widely anticipated filing of Chapter 11 bankruptcy came just a month after WorldCom's accounting scandal first broke. CEO John Sidgmore said the telecommunications giant had no other choice.

JOHN SIDGMORE: And frankly, it became the only way to provide for our company's future. That future, we believe, is important not only to our 60,000-plus employees and our 20 million customers, but to the U.S. Government and general public as well. We'll continue to pay our employees and provide benefits for those employees. We'll continue to provide service to our customers and pay our suppliers for their products and services.

KWAME HOLMAN: Under Chapter 11, WorldCom may continue to operate its businesses, but under the supervision of a federal bankruptcy court. The company must submit a reorganization plan, which must be approved by the court and by WorldCom's creditors. If reorganization is completed, the company will be released from court supervision. WorldCom says its more than 70 affiliated companies will remain in business, including MCI, the nation's number two long distance carrier, and UU Net, one of the nation's largest carriers of Internet traffic. It's part of what's known as the Internet backbone. Bankruptcy is the latest in a long slide for a company whose stock peaked at $64 in June of 1999. Since then, the overall technology sector has suffered a series of setbacks, and in late June, WorldCom revealed it misstated nearly $4 billion in expenses. This morning WorldCom was trading at eight cents a share when CEO Sidgmore spoke to the press.

SPOKESPERSON: Do you swear the testimony you are about to give...

KWAME HOLMAN: Going forward, the company faces a host of investigations. Congressional panels are looking into the scope of the accounting malpractice, as well as the role of former CEO Bernard Ebbers, suspected of complicity in the accounting scandal. Ebbers resigned in June, as news reports indicated he owed WorldCom $400 million in personal loans. Meanwhile, the Securities & Exchange Commission, which last month charged WorldCom with civil fraud, also is looking into Ebbers' activities. And today, the Justice Department asked WorldCom's bankruptcy judge to appoint an independent investigator to look into potential criminal wrongdoing. For their part, WorldCom's current leaders have commissioned a full-scale audit of their company by the firm KPMG.

JOHN SIDGMORE: I suspect that we won't be able to give you a truly definitive answer on our accounting until we complete... until KPMG completes its audit of our books. And our best guesstimate as to when that's going to occur is by the end of the year, but that could even slip a little bit past there.

KWAME HOLMAN: Sidgmore said he hopes the company will be able to emerge from bankruptcy as early as next spring.

JIM LEHRER: More on the WorldCom bankruptcy now from Susan Kalla, a telecommunications analyst with Friedman, Billings and Ramsey, a brokerage firm; Bob Atkinson, director of policy research at Columbia University's Institute for Tele- information; and Lynn Lopucki, a professor of bankruptcy law at UCLA.

Mr. Atkinson, did WorldCom pretty much have to file bankruptcy?

BOB ATKINSON: Once they were effectively unable to bay their current obligations, yes. It's just a fact of economic life; bankruptcy becomes inevitable.

JIM LEHRER: So there was no other option for them?

BOB ATKINSON: I don't think so once the accounting problem became known, confidence was lost, banks weren't willing to continue funding it; it became inevitable.

JIM LEHRER: Ms. Kalla, do you agree it was inevitable?

SUSAN KALLA: Oh, yeah. They ran out of cash. You can't operate a business that uses cash without any cash and the banks were no longer willing to lend them money at the current agreement. So the banks actually forced them into bankruptcy, which is a good thing, in my view.

JIM LEHRER: But they said they had, what, $100 billion in-- a little more than $100 billion in assets $40 some billion in debt and $2 billion or $3 billion in cash. Why could they not survive on that basis?

SUSAN KALLA: Well, they have $107 billion in assets but $50 billion of those assets are what is called good will, which are intangible assets or no assets at all. So you can't really count that. They have $41 billion in debt. Without filing bankruptcy, they had to pay back that $41 billion in debt. And to get access to the rest, they would have to sell assets, which in this market is difficult.

JIM LEHRER: Sure. Ms. Lopucki, what exactly did WorldCom protect itself from -- I'm sorry, Mr. Lopucki, what actually did WorldCom solve or protect itself from by filing bankruptcy today?

LYNN LOPUCKI: Well, the major banks had filed a lawsuit against WorldCom seeking to freeze its assets. We don't know the details of how that was settled but undoubtedly it was settled in a way that made bankruptcy inevitable.

JIM LEHRER: What is it now -- by filing bankruptcy, what is it that does not happen that would have happened had they not filed bankruptcy?

LYNN LOPUCKI: Their assets might have been frozen by the court and they would have been unable to operate. The purpose of the bankruptcy proceeding is to protect them while they attempt to reorganize, and the protection is protection from their creditors.

JIM LEHRER: And the creditors can do nothing. They have to wait until this thing is resolved before they can get any money that is owed them, is that correct?

LYNN LOPUCKI: That's right. They're going to have to wait out this proceeding.

JIM LEHRER: Mr. Atkinson, going back to what it is now that will happen, what does reorganize this company, WorldCom under Chapter 11? What do they have to do if they really are going to emerge from bankruptcy as still a company called WorldCom?

BOB ATKINSON: Their first priority, I think is to maintain confidence in two aspects. First customer confidence. Their principal real asset is their customer base. That's almost the scarce resource in the telecommunications business: Customers, paying customers. And of course the second part of confidence would be investor confidence or financial confidence. They will need additional capital put into the business just to keep on running, to pay the day-to-day bills, to continue to expand the network or to serve their customers. So-- but that has to be the first priority, just keep the money coming in either from customers or from phenomenon institutions and then they can reorganize their balance sheet and hopefully at the end of that process, come out with a company that in fact has a good, solid cash flow and even profit flow.

JIM LEHRER: Ms. Kalla, what are the chances of it being able, this company, in bankruptcy, being able to continue to service its customers in such a way that they will hang tough with them?

SUSAN KALLA: The prospects are excellent. They'll just continue to operate for their customers and they can go to the courts and to the creditors to try to get more money to make a proposal to get more money to continue to operate or to take some expansion with their customers as they need it. But the company has an immense amount of inventory in its network and has very highly qualified people working for it and has a very strong annuity stream of business. The customers that it has have been with it as long as 20 years. So it s not-- and it's very difficult for the customers to change vendors. So they're a highly value added service that the company offers. They're considered the top of the food chain in offering data services so it is likely they're going to continue to offer very good services to their customers; although there may be some quality issues, those are probably going to be very slight.

JIM LEHRER: Give us a feel, Ms. Kalla, for what kind of customers WorldCom has. What kind of people or companies are these?

SUSAN KALLA: Well, the most notable customers they have are the Fortune 25. Their customers just go they re go down list of the Fortune 25, almost every single one of them is one of WorldCom's customers. Most of the companies have multiple networks and they use multiple vendors just to have some price control. Those customers, we've called 25 of them last week and it looks like they're all staying with them. They might not give them new business, but their old networks will stay with them.

JIM LEHRER: We're talking about telephone networks, data transferring? What other kinds of businesses was WorldCom in?

SUSAN KALLA: They have very high end networks that are used for mission critical applications. For example, Merrill Lynch would use their communications network for all their back-end processing, for all their financial data. And companies like Dupont would use networks for R & D and they d networks for processing their different organizations. There's networks for every single application within a company.

JIM LEHRER: All right, Professor Lopucki, give us a feel for how the bankruptcy court, what role is it going to play as WorldCom now tries to redo itself and emerge, as Mr. Sidgmore said, hopefully within a year, out of bankruptcy?

LYNN LOPUCKI: Well, the bankruptcy court is going to try to give WorldCom the opportunity to reorganize if they can possibly do it. That is, the bankruptcy courts generally tend to favor reorganization, to afford every opportunity to hold back anybody else from the outside who is attempting to interfere with WorldCom's business. It will be a respite of maybe nine months to as much as two years. And at the end of that time, WorldCom will get a forgiveness of -- much of its debt will be converted into equity and then we'll see whether WorldCom can survive in its new configuration.

JIM LEHRER: Converted into equity in simple terms means that somebody who is owed money today will not get any money but will get stock in the new WorldCom or bonds or something like that?

LYNN LOPUCKI: Exactly. The bonds are cancelled and the bondholders receive shares of stock. The old stock is cancelled as well.

JIM LEHRER: Now is there a general test that bankruptcy courts use for viability -- I mean to establish, okay, these people made it and we're going to let them back into the real world? How do they do that?

LYNN LOPUCKI: The bankruptcy courts can help a company with its debt. If debt is the problem, the bankruptcy process can reduce that debt all the way to zero. But once the debt is down to zero, the company still has to earn a profit. At that point, their revenues have to exceed their expenses. Most of these companies do get out of bankruptcy; that is, their plan is confirmed by the bankruptcy court. But many of them fail in the few years after bankruptcy.

JIM LEHRER: Why?

LYNN LOPUCKI: Because the reorganizations in most indicates, haven't cut deeply enough. The business hasn't been fixed. The debt hasn't been cut sufficiently. There is a tendency when companies go into bankruptcy to not want to face up to the hard questions, the hard problems. You can see in this case WorldCom is claiming assets of $107 billion. Some analysts think they're worth as little as $15 billion and the market seems to be valuing them at less than the amount of the debt, $41 billion. So WorldCom may be going in here with some very unrealistic expectations.

JIM LEHRER: Do you agree with that, Mr. Atkinson?

BOB ATKINSON: It will be a difficult process and the telecommunications industry is generally in a state of flux. So as WorldCom begins to go through its plan, they may, frankly, have to face additional competition from the Baby Bells getting into the long distance business, AT&T trying to expand its market share, perhaps other companies in the long distance businesses, some of the smaller companies having their own financial problems, bankruptcies. And so there will certainly be a lot of pressure on the company, on the price side, on the revenue side of the equation. So I think yes, they are really going to have to get their costs way down because today's cost structure probably won't be sustainable two years from now, for example.

JIM LEHRER: Ms. Kalla, do you agree with what Professor Lopucki said in his figures about how people view exactly what WorldCom s assets really are at this point?

SUSAN KALLA: Some analysts think it is worth about $15 billion. We have a number that s a little bit lower than that. In terms of going forward, they have an immediate short-term opportunity that is very strong. Their customers are likely to stay with them. But on the horizon, there are many new technologies and there s many new aggressive players that are also coming out of bankruptcy. We like to term them as the zombies and the zombies are likely to completely de-stable pricing because they're coming out of bankruptcy also without any debt on the balance sheet. And they can offer lower prices. They have a low cost structure because they don't have to pay interest payments. So we're seeing that in long distance, prices could continue to be destabilized over the next three years. And at that point, some new technologies may be coming on the market that give competitors a 10-1 advantage over the existing players. So anything could happen.

JIM LEHRER: Professor Lopucki, in the meantime, what happens to the shareholders? What happened to the people who had invested in WorldCom during this bankruptcy process?

LYNN LOPUCKI: Well, they're still in the case right now. But as a practical matter, they have lost their money. They're almost undoubtedly going to have their shares cancelled. And what they get will be either nothing or some nominal amount.

JIM LEHRER: What about this issue today, the Justice Department asked the bankruptcy court and in fact-- a short while ago, earlier this evening, the bankruptcy court granted the request of the Justice Department to have an independent examiner look at possible fraud and manipulation and other things by the management of WorldCom. What is that all about? Is that a normal procedure?

LYNN LOPUCKI: It's today a common procedure. It doesn't happen in every case. But in a case like this where there has apparently been fraud, it is not uncommon at all to get an examiner. And the significance of the court's order is the fees of the examiner are going to be paid by the estate. WorldCom, the bankruptcy estate, pays most of the expenses that are incurred in the reorganization process: Their own and also other parties to the case.

JIM LEHRER: But running parallel then to the civil, what is basically a civil proceeding, the bankruptcy proceeding, is also then a criminal proceeding that is flowing out of the bankruptcy thing itself; is that correct? Am I saying that right?

LYNN LOPUCKI: Well, the bankruptcy court is not involved in any criminal proceedings. The bankruptcy court investigates. In the course of a bankruptcy, usually a lot of information is unearthed and becomes public. And the examiner is one of the processes for doing that, but once the examiner makes a report it is going to be up to someone else, a prosecutor, to take the matter further.

JIM LEHRER: Mr. Atkinson, finally this is a long process? WorldCom is going to be can with us for a long time to come no matter what finally happens as the end result of bankruptcy?

BOB ATKINSON: No. Either WorldCom will emerge from the bankruptcy and become a successful company for the relatively foreseeable future or it may just not make it out of bankruptcy and its pieces would be presumably acquired by other companies or even if it comes out of bankruptcy, other companies, through the competitive process, may take a lot of its customer base, et cetera. So it is not clear-- it would be impossible to predict that any specific company in the telecommunications is a long-term survivor. It is a competitive marketplace and competition means restructuring. It means sometimes failures. But consumers will continue to get, I think, a pretty good price for their telecommunications services and the telephones will continue to ring across America for the foreseeable future. This is not a crisis of the telecommunications industry at large. It's a crisis for one company and potentially problems for a number of other companies but the phones will keep ringing. We shouldn't be too worried about the fundamental infrastructure of the telecommunications industry.

JIM LEHRER: Okay. Thank you all three very much.

FOCUS MARKET FEARS

JIM LEHRER: Still to come on the NewsHour tonight, the stock market, health costs, and a conversation about "Tuxedo Park." Gwen Ifill has the markets.

GWEN IFILL: The wild ride continued on Wall Street today with the Dow Jones closing at its lowest level in over three years. The market's plunge is eroding the retirement accounts and stock portfolios of millions of Americans. When will it end? How far away is the bottom? To help us answer those questions and others, we're joined by Terry Savage, a personal finance columnist for the "Chicago Sun Times" and author of the book, "The Savage Truth on Money"; and David Kotok, president of Cumberland Advisors, a money management firm in New Jersey. Mr. Kotok, how shaken are investors? How shaken should they be?

DAVID KOTOK: Well, investors are certainly shaken, and they are reacting to a lot of fear. It's a cumulative fear because we are now in the third year of a bear market. We've burst the bubble, and investors are scared.

GWEN IFILL: Terry Savage, how shaken is everyone?

TERRRY SAVAGE: Shaken enough so that up until now, I think, in spite of the market decline people have been a bit frozen. I think we might note that the market has failed to bounce on numerous occasions even with good news. We might see the final act of panic, desperation selling, which ironically would probably be good news for the markets but not great news for those people who sell out of panic.

GWEN IFILL: The business cable networks today have been alive with speculations about what people should do. "Should they hold, should they sell, should they buy, what should they do?" Should people be staying in place or should they be fleeing for their lives and their futures?

TERRY SAVAGE: Well, that all depends on who you are. If you are a young person in your 20s, 30s, even 40s, having to put money in your 401(k) every month, you should take a look at the long-term picture or history of the market. According to Ibitsin, which tracks all the numbers, there has never been a 20-year period going back to 1921 where you would have lost money in a diversified portfolio of large company stocks-- and that includes reinvesting dividends. So you don't want to bet against those odds. That's the future of America a long uptrend-- but there are some people that should not have been so heavily invested in stocks in the first place, and all the savage truths about rebalancing and having diversification went on deaf ears. People thought it was so easy to get rich. And those people who are in retirement, certainly are closer to retirement, need to reassess. You cannot watch your money dribble away, and yet it is very painful to sell out at a time like this. But this could last a long time.

GWEN IFILL: David Kotok, are there other things people should be taking into account in addition to their proximity to retirement and their age?

DAVID KOTOK: Well, I think there are a lot of things. Terry said it well. She used the word diversification, which is key. And many investors got into trouble because they concentrated their investments in the tech sector and they got caught up in the bubble, and that's why they've really been hurt. Diversification and risk is a very, very sound principle. It doesn't mean you can't lose. But it means you can't lose it all at once. And that's... there's a very big difference. We always recommend that investors invest in a variety of things, and that includes stocks, but it also includes bonds and alternatives. And if people broadly diversify their investments among those alternatives, they will be better off.

GWEN IFILL: If you are a small investor at this point and the statements are coming in the mail and you can't even bear to open them, what should you be doing? Should you just hold at this point or should you be reviewing your entire portfolio and trying to figure how to restructure?

DAVID KOTOK: I believe investors should be reviewing their portfolios all the time, in good times and in bad times. And now we're in bad times, and they're being forced to do so. I agree again with Terry that to panic and sell at a time like this would be a tragic mistake. There is a lot of evidence that the economics of the country have turned since last fall and should continue to do so. And there's a lot of evidence that the economics will include growth next year. The Federal Reserve is clearly very stimulative. The fiscal situation is now stimulative. We are running a deficit. We have sectors of the economy, particularly defense and security, which are growth areas which we didn't have... wish we didn't have them because of the events that brought them there. So, the situation isn't totally bleak.

GWEN IFILL: So, Terry Savage, what has to happen for the skid to stop?

TERRY SAVAGE: Well, you know, bear markets -- people keep saying, "where is the bottom?" As if there is a rock bottom. Bear markets, in my experience-- and I was a trader on the floor of the Options Exchange in '73, '74, so I've seen how painful this can be firsthand-- bear markets don't hit bottom. They sort of hit quicksand and you're slogging through it.

GWEN IFILL: Are we in the quicksand yet?

TERRY SAVAGE: I think we are there, because people keep expecting it to bounce back, and it keeps getting sucked down. But even if you take the worst case scenario-- you asked what investors should do; let s assume that the market now, for the first time in a long time, drags the economy down: Layoffs at WorldCom, layoffs at their suppliers, fear on the part of consumers that don't spend as much. If that slows the economy down-- and it could for two or three or four years-- you should be asking yourself, is this affecting my life right now, my 401(k) plan? If it is the money I'm taking out and living on for retirement, that's one story, but if you re investing for the long run future, then you should view this as an opportunity. But there could be a worst case scenario. It could last longer than you think, and you have to look at your own portfolio and determine not your emotional state but your financial state.

GWEN IFILL: But you're saying years, not months?

TERRY SAVAGE: You know, I ll tell you, from 1972, the Dow was over 1000. It was there on the trading floor. It fell below 600 in '74. It was still below 800 in 1982, a period of eight years, when no one wanted stocks, no one wanted mutual funds, and you couldn't talk to people about investing. So while I'm not predicting that will happen again, it is not out of the question.

GWEN IFILL: David Kotok, we still see more people selling than buying, which is probably oversimplifying what has been going on in this crazy market today. But what has to happen for this kind of volatility to even out, for investor confidence to be restored?

DAVID KOTOK: Well, there's got to be a level in which stocks appear so cheap that the buyers who have been on strike-- and I think it's fair to say that the buyers have been on strike for a while-- start to picket the bargains and they overwhelm the panicked sellers. In a classic sense, we would have a classic selling climax. The market would go down sharply on high volume, it would appear as if the world is coming to an end, and then it would reverse and start an uptrend. A lot of people are looking for that. I don't know that we are going to get that pat scenario, but I think that there is a point in which stocks appear very, very cheap, and people start to position them again. And I believe we are going to see that within the next few weeks or few months, certainly by the fall. The next thing that is needed is restoration of confidence because of the scandals that we've seen. And I believe we are going to start to see that again, too, in the fall when, for the first time, we'll see some positive earnings comparisons and we'll be able to believe them or at least believe them more than we have in the past. So I think we're going through a process, which is curative and it's running its course. It's ugly while we're in it, but it is soon coming to an end.

GWEN IFILL: Terry Savage, you just talked about the scandals and lack of investor confidence because what is happening with the big companies. You just heard the analysts tell Jim in the last segment that this state of flux is something the economy and the markets have to deal with. Do you imagine that is going to put us in a situation where now volatility becomes the rule for the foreseeable future?

TERRY SAVAGE: Well, I think we've... we had volatility. We didn't complain about it on the upside when it would go up a lot and then back off and then go up some more. So we will live with volatility. In fact, the worst thing would be boredom where it just went down and stayed down. I look at what WorldCom today, and so many people said to me, "Terry, where did all that money go?" And I think of it sort of as a financial neutron bomb, where the business is left standing, the phone lines will still connect, but the money just vaporized. We have seen trillions of dollars of wealth vaporize just as it magically appeared in people's accounts. They weren't working for the money that happened in the stock market. People accepted that it could appear. Now they have to understand that it can disappear, and the art of investing is not necessarily to time the markets, but not to panic. And there are funds that are going up still.

GWEN IFILL: Does the emotion that fueled the run-ups and is now fueling a lot of the great sell- offs, does that emotion affect the economy, or does the economy drive the markets?

TERRY SAVAGE: Typically the markets are reacting to the economy. I mean, we've heard all the news, home sales or interest rates or so forth, but now we've reached the point where the markets may start to affect the economy. It's what both of us hope won't happen. It could possibly slow the economy, and that would drag out this bear market. But even if it does, you know, there are funds, they don't have to be growth funds. They're equity income funds, balance funds, people overlook those in the 401(k) accounts. They were too stodgy. If you are contributing and you must continue to contribute, because you believe if your future, if you don t, I mean, you re going to stop investing now for your future and you're in your 20s or 30s or 40 s, then you will have no future. You re creating the future. So invest conservatively.

GWEN IFILL: David Kotok, final word, is stodgy good now?

DAVID KOTOK: Well, stodgy is good. Don't forget bonds. They have a role, too.

GWEN IFILL: Okay. Well, thank you both very much for helping us.

TERRY SAVAGE: My pleasure.

FOCUS MANAGING CARE

JIM LEHRER: Now, a kind of battlefield report on trying to control the rising cost of health care. The reporter is Susan Dentzer of our health unit, a partnership with the Henry J. Kaiser Family Foundation.

DR. KRISTEN ROBINSON: It's good to see you today.

SUSAN DENTZER: To understand why health costs are rising so rapidly, consider the case of David Beeby. He's a top geologist employed by the state of California.

DR. KRISTEN ROBINSON: We probably just need to recheck your labs...

DAVID BEEBY: Okay.

DR. KRISTEN ROBINSON: ..And see how you're doing. Did you have any...

SUSAN DENTZER: Beeby is 58 years old, and though he's generally been in good health, he's also obese. On a routine visit to the doctor several months ago, he got bad news.

DAVID BEEBY: I got a blood test, and the blood test showed that my blood glucose levels were very, very high. Probably about a week later, I got a call saying come in to a diabetes training class that night.

DR. KRISTEN ROBINSON: Can we take a look at your blood sugars?

SUSAN DENTZER: Beeby was diagnosed with type II diabetes, the most common form of a disease that now affects 17 million Americans. Kristen Robinson is Beeby's doctor at Kaiser Permanente, a Health Maintenance Organization not affiliated with the Kaiser Family Foundation. Once she diagnosed the diabetes, she quickly ordered up drugs and other interventions.

DR. KRISTEN ROBINSON: And within six weeks he was able to transition from insulin three to four times a day over to oral medication, and he also did a very, very rigorous job of controlling his diet and starting exercise, and pursuing weight loss.

SUSAN DENTZER: The HMO also gave Beeby a high-tech monitor to sample his blood sugar levels several times a day...

HEALTH CARE OFFICIAL: If each of you will take a look on your particular item...

SUSAN DENTZER: ...And it provided education classes to help teach Beeby how to manage his diabetes and ward off the worst consequences of the disease, including blindness, amputations, and even death. Beeby says he realizes he'll be coping with the disease from here on out.

DAVID BEEBY: I guess I look at this as a chronic illness and something I'll have for the rest of my life, so having some magic end point wherein I'll be done with it isn't really an option for me. It really... it really requires just a change in lifestyle.

SUSAN DENTZER: The organization that will pay most of the bill for Beeby's care is headed by William Crist. He's president of the board of the California Public Employees Retirement System, or CalPERS. One of the nation's largest public pension systems, CalPERS also provides health insurance for more than one million people. Crist says that CalPERS' outlays for health care this year will run a staggering $3.5 billion.

WILLIAM CRIST: The rapid increase of our total health care costs is of great concern to us. It's just about doubled in the last four years. Probably the more important number is an unknown one and that is, where is it going in the next four years?

SUSAN DENTZER: Crist got an inkling of that several months ago when his organization began negotiating with HMO s over next year's premiums for CalPERS enrollees.

WILLIAM CRIST: The HMO s sent us in premium increases, one as high as 41%, andin general said, "well, we're just not sure we want to do business with you at all." And they certainly didn't want to do business with us at the rate we were proposing they pay.

SUSAN DENTZER: By the time the negotiations were finished, CalPERS had struck deals with only a few large HMO s, rather than the two dozen with which it once did business. That meant that as many as 350,000 enrollees would have to switch HMO s in 2003. And even with the handful of plans remaining, Crist says, costs were headed sharply higher.

WILLIAM CRIST: We're looking at a premium... average premium increase of right in the range of 25%. And the fears that we have is that looking forward into 2004 and so on, we may be even looking at rates of increase in health insurance premiums in excess of that, and certainly, at least in the double-digit numbers.

SUSAN DENTZER: Now the news about next year's premium increase has set off shock waves among employers and other health care purchasers across the nation.

HELEN DARLING: It was just a reconfirmation of the bad news that they've been facing for a couple of years, and know they're going to face for several more.

SUSAN DENTZER: Helen Darling heads the Washington Business Group on Health, an organization of large companies concerned about health care and health policy.

HELEN DARLING: We've had a 50% increase in the last five years in the large employer market, which is bad enough, and the last two were 12% and 14%. But those numbers are really startling, and when you think about the kinds of... the number of cereals... cereal boxes you have to sell or items that you have to manufacture, how many cars you have to sell to cover those kinds of costs, those additional costs, it's really very hard for corporate America.

SPOKESPERSON: So how's the program going for you?

SUSAN DENTZER: It's also hard on workers like Nancy Michaels. She's employed directly by CalPERS, selling the organization's retirement benefit plans to volunteer firefighters in California.

NANCY MICHAELS: (Makes engine revving sound)

SUSAN DENTZER: She's also a single mother with seven children.

NANCY MICHAELS: Come on, Louis. Let's go.

SUSAN DENTZER: Michaels says one of the attractions of working for CalPERS has been its historically generous health insurance plan. In fact, until several years ago, the costs of coverage were fully paid for CalPERS enrollees by the state.

NANCY MICHAELS: Even seeking state employment when I was 17 and a half years old, part of the incentive was the health benefits, was the benefit package. I felt that it was important. I knew I wanted a family eventually.

SUSAN DENTZER: But recently they've had to start paying ever more costly monthly premiums. For the Michaels' family, those now run about $60 a month. Next January the family's premiums will rise to about $90 a month.

NANCY MICHAELS: I'm here to pick up the prescription for Michaels.

SUSAN DENTZER: Then there are growing out-of-pocket costs for items like doctors' visits and prescription drugs.

NANCY MICHAELS: We recently had an experience where my 14-year-old broke her collarbone in a soccer game. I have spent since May 17 over $160 in co-pays and medications, visits to the doctor and the premium alone in just a little tiny bit over 30 days. And the costs of everything else are going up also. You know, groceries in this household have skyrocketed. So you do find yourself cutting.

DOCTOR: Could you lie back a second?

SUSAN DENTZER: Crist says it isn't entirely clear just why CalPERS' health costs are rising so steeply. On the other hand, experts say it is clear that CalPERS and other health care purchasers are faced with several costly trends.

GEORGE HALVORSON: We've got new drugs, new technology, new procedures, aging population, provider consolidation. It's just a ton of health care cost drivers that are affecting everyone in the country.

SUSAN DENTZER: George Halvorson is chair and chief executive officer of Kaiser Permanente, which provides health care to about a third of those enrolled under CalPERS.

GEORGE HALVORSON: The average population of CalPERS is about five years older than the rest of the population. So what we're seeing at CalPERS is exactly what we're going to see in the broader population a couple of years from now. When you're 30, you may be sick occasionally, and you get cured and then you're not sick anymore. And when you get to 55, you end up with hypertension and you have to be treated regularly.

SUSAN DENTZER: In addition to costlier patients, there are also forces making the provision of care more expensive. In California, a state law requiring hospitals to be earthquake-proof is adding billions of dollars in costs to retrofit old facilities or build new ones. Meanwhile, a shortage of nurses as well as other health care professionals is forcing hospitals to hike wages, and driving up overall labor costs as a result. Kaiser's Halvorson says hospitals are in no mood to swallow those costs after years in which health plans sought to shave their rates. Instead, those institutions are merging or otherwise teaming up to demand higher payments.

GEORGE HALVORSON: If you go into communities-- St. Louis, Milwaukee, San Diego- - across the country-- Boston-- where there used to be 30 or 40 separate hospitals competing with each other, each of them with low prices, you now have a couple of very large systems. And those systems have such great negotiating leverage now that they're going back to the health plans and saying, "here's our rate for this year. Take it or leave it." And we're seeing 35%, 40%, 50% increases.

SUSAN DENTZER: For now, officials of Kaiser and CalPERS say their best hope is taming costs for the sickest 15% of enrollees, who represent about 70% of the total health care tab. The hope is that managing their care wisely, through a process known as disease management, could save billions of dollars and improve the quality of care at the same time. Dr. Richard Harr oversees chronic care for patients in Kaiser s north valley region. He says a key element of the HMO's disease management programs is better educating the patient.

DR. RICHARD HARR: We really put a great deal of emphasis on having the patient try to understand the nature of their disease and what they can do to prevent the complications that accompany the disease. We'll also check their blood sugars and their lipids; we'll check for kidney disease on a regular basis, and if we find that they're not getting those procedures done, we will send them letters to encourage them to do that.

SUSAN DENTZER: The HMO also plans to invest more than $2 billion in new computer systems to help coordinate care. Eventually a paperless medical records system is to link all of Kaiser Permanente's clinics and hospitals, and provide state-of- the-art medical information right at doctors' fingertips.

DR. KRISTEN ROBINSON: Your cholesterol and your hemoglobin A.1.C. are up-to- date.

SUSAN DENTZER: Dr. Robinson, David Beeby's physician, uses an early version of the system to check his lab results and coordinate his care.

DR. KRISTEN ROBINSON: Well, it's incredibly helpful, and I can pull up all of his numbers over the past six years and compare them, and we can go over them together and talk about the progress that he's made.

SUSAN DENTZER: The problem, of course, is that much of this investment will cost money up front, in the hope of producing savings over time. So in the meantime, as costs continue to rise and more workers face the loss of health insurance, Crist argues that public policymakers must step in.

WILLIAM CRIST: It's a national crisis, one which I think public debate has to be focused on in a very serious sense within the immediate future, or we're going to find that it's not just the unemployed and the very poor people of our country and so on that are going without health care. It will be a lot of the working people in both the public and the private sectors.

SUSAN DENTZER: And as with so many trends that sweep the nation, the grim truth is that California may once again be leading the way.

CONVERSATION

JIM LEHRER: Finally tonight, a conversation with an author of a new book, and to Margaret Warner.

MARGARET WARNER: The book is "Tuxedo Park: A Wall Street Tycoon and the Secret Palace of Science that Changed the Course of War World II." The author is journalist Jennet Conant. Her book tells the largely forgotten story of Alfred lee Loomis, a Wall Street financial genius and an amateur scientist. Beginning in the 1920s, Loomis attracted many of the world's greatest scientists to a mansion he purchased in the aristocratic enclave of Tuxedo Park, New York, and converted into a world-class laboratory. The brain trust he assembled would ultimately develop radar and the atomic bomb.

Jennet Conant, welcome.

JENNET CONANT: Thank you.

MARGARET WARNER: Let's start by having you talk a little bit about Alfred Lee Loomis, who began in finance, not in science at all.

JENNET CONANT: Corporate lawyer, really. He started in law at a very proper law firm, Winthrop and Stinson...

MARGARET WARNER: 1912.

JENNET CONANT: His first cousin was Henry Stinson who was already a very well known figure by then. He'd been secretary of war, secretary of state in the Taft administration, and was a, you know, a very highly regarded lawyer. That was his first cousin. He was 20 years older than Alfred and his mentor. Alfred Loomis' father had died when he was very young, and Henry Stimson really raised him. So he went into law, got bored with law very quickly, and right after World War I, went into business with his brother-in- law, who was a very flashy bond salesman. And they took over, in kind of a Wall Street coup, this moribund firm called Bonbright and Company, and they turned it into the hot boutique firm of the 1920s, and they made a fortune.

MARGARET WARNER: And they anticipated the market crash.

JENNET CONANT: They did. They made their money in power. They wired America. It was rural electrification. And they really perfected the holding company for financing the giant generators that would bring power to the countryside, and they made a lot of money and they sat on every bank board and every railroad board, and were among the most powerful men on Wall Street and he did some of the biggest deals. And he would later say that he had these mathematical charts that he used to follow industries, and that he saw that the bubble was going to burst. And very quietly in 1928, they started pulling out of every stock that they had. They put it all in long-term government bonds and cash, and when Black Thursday came-- October 24, 1929-- they were sitting on a mountain of cash. And they did very, verywell.

MARGARET WARNER: Now, he put a lot of this cash, of course, to this whole other enterprise he had, in Tuxedo Park. Tell us about this world he created up there, how he attracted these incredible scientists, what they found when they got there.

JENNET CONANT: Well, he bought the mansion next to his at Tuxedo Park, which at that time was the elite community in America. All the Wall Street rich-- the Vanderbilts, the Astors, the Mortimers, it was... you know, Mrs. Astor's 400 lived in Tuxedo Park in these enormous mansions that looked like Versailles on the cliff sides of Tuxedo Park on the lake. And he had a mansion like that of his own, but he bought a second mansion, a huge white elephant, in 1926 which he gutted and turned into a deluxe private laboratory. It was the best of its kind and it had equipment that no university could afford. And so very quickly the reputation spread, particularly in Europe where money was very scarce for science, and he would send first-class tickets and Einstein and Heisenberg and Enrico Fermi, they would come over and be picked up by his Rolls Royce, and whisked off to Tuxedo Park where there would be a black tie dinner every night. Averell Harriman would come over from his estate, Arden. There'd be, you know, politicians and heads of state-- very important conversations about science and scientific policy, but by day, in the laboratory downstairs in this mansion, they would be doing first-rate scientific work. Many papers were published and his reputation became very well known, and it became one of the leading places for scientists to meet and give papers in the United States. And that went on all through the '20s, and he worked on Wall Street during the day, and he did this on weekends and in the evenings. It was sort of a grand hobby.

MARGARET WARNER: Now, we're going to fast-forward. We're going to skip the '30s, where he bankrolled all the important work, I know, in atom smashers and pre-radar, microwave and so on, to the day in 1940 when suddenly this hobby became a dead serious part of the American war effort.

JENNET CONANT: Well, what happened was he did have this reputation, and in 1940, Hitler had succeeded in marching through Europe. And all that lay before Hitler was the Channel and England and victory, and he had already devastated France, and the British knew that they were next, and there was nothing really to protect them. They had a primitive radar system called the chain home system, which were these giant stations that lined the coast, that gave them some warning of the Luftwaffe s arrival and it did help them withstand the Battle of Britain, but they knew that they would soon be brought to their knees. And Churchill, in one of the greatest gambles of the war, appointed a scientific mission, and it secretly smuggled all of England's greatest wartime secrets to America. And among them was a tiny object. They called it a pearl beyond price. It was called the cavity magnetron. You could hold it in the palm of your hand, and it was a powerful little generator, which would allow them for the first time to develop a weapon that would change all warfare, and it was called microwave radar. Today, it's just known as radar, but it was very high frequency, a narrow beam radar that was very precise. For the first time, you could put a radar detector in the nose of an airplane and that airplane could detect a submarine cresting above the waves. It could detect other planes behind clouds, in darkness; it could, for the first time, find a group of planes and know that it was 12 flying in formation, and not one. It changed all warfare.

MARGARET WARNER: But as you point out, the British just had this device and they needed the Americans to actually produce it, and Loomis was a key... was the key figure in doing that.

JENNET CONANT: They knew him, they knew of his work, they knew him personally-- he had been to England and looked at their radar factories. He knew many of the British citizens, they trusted him, and they had no men, no manpower, and no metal to build the kind of devices that they needed. America had money and men and could build it quickly, and they came to Loomis, to Tuxedo Park, and they unveiled this device in his living room. And Loomis got on the phone to Roosevelt and said, "let me build it, and let me build it now, because it will make all the difference." Remember, this is before Pearl Harbor, before we're in the war. In 1940, 2.5% of Americans were in favor of going to war against Nazi Germany. People forget that overwhelmingly, Americans did not want to get involved in the European conflict, as they called it. So this was a very secret undertaking, it did not have popular support, and Loomis started the radar lab at MIT-- they hid it in the middle of the campus-- with his own money. And then Congress came in with money and it became, of course, the largest wartime lab of the war, and many people believe that it won the war.

MARGARET WARNER: And then, as you also detail, a lot of the people from this so-called rag lab, Oppenheimer stole or took to go with the Manhattan Project.

JENNET CONANT: Well, the rag lab was a smashing success. They built these devices in record time. They went on every airplane and every submarine. They destroyed the Luftwaffe; they sunk the U-2 boat. It was an enormous success. By 1943, when General Leslie Groves and Oppenheimer were sitting around trying to figure out, "How do we build a bomb and build it quickly?" Where did they look? They looked at Loomis' rag lab and went, "this guy did it right. Not only are we going to make our Manhattan project look like his, we are going to get some of the same guys." Sure enough, very quickly they would secretly drop out of Cambridge, one by one. Under assumed names, they would take the train to the desert, and build a bomb.

MARGARET WARNER: One reviewer said after finishing your book he was ready to anoint Alfred Lee Loomis as "the most interesting person I never knew anything about." Why do you think history has not given him the recognition until now?

JENNET CONANT: Well, he didn't want it. He was a little bit like Howard Hughes in that he was very much a loner. He was fabulously wealthy, so he could afford to buy his privacy. He really did shutter himself away. He retired to East Hampton quite young, never gave an interview, hated the press, loathed historians, thought even less of economists. He really only wanted to associate with the scientists that he liked, the Nobel Laureates that were his best friends. He had very little time or interest in public recognition. He had a very scandalous personal life. He tried to shut his wife into an insane asylum, essentially, to run off with a colleague's much younger wife. In 1945, this was not done. It was made much of in the tabloids, which were as bad then as they are now, and he was very much stung by that kind of publicity and gossip and he became really a social pariah in New York. The proper people that were his friends turned their backs on him and he became very bitter about that, and something of a recluse in later life.

MARGARET WARNER: And briefly, before we go, what do you think it was about him, his personality, his mind, that made him what he was?

JENNET CONANT: Well, genius is an overused term, but he was certainly a mathematical whiz. I think he was also very much an American entrepreneur who had a certain kind of can-do mentality that meant that he was hugely successful on Wall Street and brought that combination of mathematical ability, and "we can do it and we can do it here better than anyone and faster than anyone" to the war, and that combination was enormously beneficial in the war.

MARGARET WARNER: Jennet Conant, thanks so much.

JENNET CONANT: You're welcome.

RECAP

JIM LEHRER: Again, the major developments of this day: WorldCom defended its decision to file the largest bankruptcy case in U.S. history. Wall Street suffered new losses. The Dow Jones Industrial Average closed down 230 points. And an Israeli air strike in Gaza killed the military leader of Hamas. The Islamic militant group. Palestinian officials said at least nine others were killed, including three children. We'll see you online, and again here tomorrow evening. I'm Jim Lehrer. Thank you and good night.