phantom stock

Phantom Stock

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Phantom stock is a method for companies to give their management or employees a bonus if the company performs well financially. Phantom stock provides a cash or stock bonus based on the value of a stated number of shares, to be paid out at the end of a specified period of time.

Phantom stock is essentially a cash bonus plan, although some plans pay out the benefits in the form of shares. Phantom stock is favored by closely held or family-owned companies who want to incentivize management and other employees without granting them equity. Phantom stock grants align employees' motives with owners' motives (that is, profit growth, increased stock prices) without granting employees an actual ownership stake in the company. Phantom stock can, but usually does not, pay dividends. When the payout is made, it is taxed as ordinary income to the employee and is deductible to the employer. Generally, phantom plans require the employee to become vested, either through seniority or meeting a performance target.

Normally, phantom stock is taxable upon vesting, even if not paid out. Use of a "rabbi trust" that subjects the payout to significant risk, such as the company not being able to pay creditors, may solve this problem.

Phantom stock accounting is straightforward. These plans are treated in the same way as deferred cash compensation. As the amount of the liability changes each year, an entry is made for the amount accrued. A decline in value would reduce the liability. These entries are not contingent on vesting. Phantom stock payouts are taxable to the employee as ordinary income and deductible to the company. However, they are also subject to complex rules governing deferred compensation that, if not properly followed, can lead to penalty taxes.

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Phantom Stock and Stock Appreciation Rights (SARs)

For many companies, the route to employee ownership is through a formal employee ownership plan such as an ESOP, 401(k) plan, stock option, or employee stock purchase plan (ESPPs - a regulated stock purchase plan with specific tax benefits). But for others, these plans, because of cost, regulatory requirements, corporate considerations, or other issues will not be the best fit. Other companies may have one or more of these plans but want to supplement them for certain employees with another kind of plan. For these companies, phantom stock and stock appreciation rights may be very attractive.

There are a number of situations that might call for one or more of these plans:

  • The company's owners want to share the economic value of equity, but not equity itself.
  • The company cannot offer conventional kinds of ownership plans because of corporate restrictions, as would be the case, for instance, with a Limited Liability Corporation, partnership, a sole proprietorship, or an S corporation concerned about the 100-owner rule.
  • The company already has a conventional ownership plan, such as an ESOP, but wants to provide additional equity incentives, perhaps without providing stock itself, to selected employees.
  • The company's leadership has considered other plans but found their rules too restrictive or implementation costs too high.
  • The company is a division of another company, but can create a measurement of its equity value and wants employees to have a share in that even though there is no actual stock.
  • The company is not a company - it is a nonprofit or government entity that nonetheless can create some kind of measurement that mimics equity growth that it would like to use as a basis to create an employee bonus.

This article provides a brief overview of the design, implementation, accounting, valuation, tax, and legal issues for the four kinds of plans it covers. None of these plans should be set up without the detailed advice of qualified legal and financial counsel. Sharing equity is a major step that should be considered thoroughly and carefully.

Phantom Stock

Phantom stock is simply a promise to pay a bonus in the form of the equivalent of either the value of company shares or the increase in that value over a period of time. For instance, a company could promise Mary, its new employee, that it would pay her a bonus every five years equal to the increase in the equity value of the firm times some percentage of total payroll at that point. Or it could promise to pay her an amount equal to the value of a fixed number of shares set at the time the promise is made. Other equity or allocation formulas could be used as well. The taxation of the bonus would be much like any other cash bonus--it is taxed as ordinary income at the time it is received. Phantom stock plans are not tax-qualified, so they are not subject to the same rules as ESOPs and 401(k) plans, provided they do not cover a broad group of employees. If they do, they could be subject to ERISA rules (see below). Unlike SARs, phantom stock may reflect dividends and stock splits. Phantom stock payments are usually made at a fixed, predetermined date.

Stock Appreciation Rights

A stock appreciation right (SAR) is much like phantom stock, except it provides the right to the monetary equivalent of the increase in the value of a specified number of shares over a specified period of time. As with phantom stock, this is normally paid out in cash, but it could be paid in shares. SARs often can be exercised any time after they vest. SARs are often granted in tandem with stock options (either ISOs or NSOs) to help finance the purchase of the options and/or pay tax if any is due upon exercise of the options; these SARs sometimes are called "tandem SARs."

One of the great advantages of these plans is their flexibility. But that flexibility is also their greatest challenge. Because they can be designed in so many ways, many decisions need to be made about such issues as who gets how much, vesting rules, liquidity concerns, restrictions on selling shares (when awards are settled in shares), eligibility, rights to interim distributions of earnings, and rights to participate in corporate governance (if any).

Tax Issues

For both phantom stock and SARs, employees are taxed when the right to the benefit is exercised. At that point, the value of the award, minus any consideration paid for it (there usually is none) is taxed as ordinary income and is deductible to the employee. If the award is settled in shares (as might occur with an SAR), the amount of the gain is taxable at exercise, even if the shares are not sold. Any subsequent gain on the shares is taxable as capital gain.

Accounting Issues

The company must record a compensation charge on its income statement as the employee's interest in the award increases. So from the time the grant is made until the award is paid out, the company records the value of the percentage of the promised shares or increase in the value of the shares, pro-rated over the term of the award. In each year, the value is adjusted to reflect the additional pro-rata share of the award the employee has earned, plus or minus any adjustments to value arising from the rise of fall in share price. Unlike accounting for variable award stock options, where a charge is amortized only over a vesting period, with phantom stock and SARs, the charge builds up during the vesting period, then after vesting all additional stock price increases are taken as they occur. when the vesting is triggered by a performance event, such as a profit target. In this case, the company must estimate the expected amount earned based on progress towards the target. The accounting treatment is more complicated if the vesting occurs gradually. Now each tranche of vested awards is treated as a separate award. Appreciation is allocated to each award pro-rata to time over which it is earned.

If SARs or phantom stock awards are settled in shares, however, their accounting is somewhat different. The company must use a formula to estimate the present value of the award at grant, making adjustments for expectd forfeitures.

ERISA Issues

If the plan is intended to benefit most or all employees in ways similar to qualified plans like ESOPs or 401(k) plans, and it defers some or all payment until after termination, it may be considered a de facto "ERISA plan." ERISA (the Employee Retirement Income and Security Act of 1974) is the federal law that governs retirement plans. It does not allow non-qualified plans to operate like qualified plans, so the plan could be ruled illegal. Similarly, if there is an explicit or implied reduction in compensation to get the phantom stock, there could be securities issues involved, most likely anti-fraud disclosure requirements. Phantom stock plans designed just for a limited number of employees, or as a bonus for a broader group of employees that pays out annually based on a measure of equity, would most likely avoid these problems.

Planning Issues

The first issue is figuring out how much phantom stock to give out. Care must be taken to avoid giving out too much to early participants and not leaving enough for later employees. Second, the equity of the company must be valued in a defensible, careful way. Third, tax and regulatory problems may make phantom stock more dangerous than it seems. Cash accumulated to pay for the benefit may be subject to an excess accumulated earnings tax (a tax on putting too much money in reserve and not using it for business). If funds are set aside, they may need to be segregated into a "rabbi trust" or "secular trust" to help avoid causing employees to pay tax on the benefit when it is promised rather than paid. Finally, if the plan is intended to benefit more than key employees and defers some or all payment until after termination or retirement, it may be considered a de facto "ERISA plan." ERISA (the Employee Retirement Income and Security Act of 1974) is the federal law that governs retirement plans.

Our Book on Phantom Stock, SARs, and Related Plans

Our book Beyond Stock Options has chapters on phantom stock and SARs, restricted stock, and other such plans, plus sample plan documents (which are included in word-processing format on a CD that comes with the book).

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Copyright © 2005 by The National Center for Employee Ownership (NCEO) (phone 510/208-1300; email nceo@nceo.org; WWW http://www.nceo.org/). All rights reserved. 


Phantom Stock

From: 101 Great Ideas for Managing People FROM AMERICA'S MOST INNOVATIVE SMALL COMPANIES | October 1999

John Lucey faced a challenge that's a perennial quandary among owners of family businesses and other closely heldcompanies: How to compensate fairly and motivate essential nonfamily managers without granting them equity. "I have onekey employee who brings a lot of value to the company," says Lucey, president of Wakefield Distribution Systems, awarehousing, transportation, and moving company based in Danvers, Mass. "I wanted to give her a long-term incentive tostay with us."

Lucey's solution was a "mirror" or "phantom" stock plan that his lawyer helped him devise and which was implemented in1994. This compensation tool is designed to motivate and retain key employees without sharing ownership in the company.Such plans can yield some of the same payoffs as equity grants or stock options. Using phantom stock "it's possible to pass onthe same financial reward to executives or others without incurring any of the risks or complications that might accompanythe sharing of equity," notes Jim Scannella, a principal in Arthur Andersen's human capital services group.

Here's how phantom stock plans work: You give your executive 1,000 shares of so-called phantom stock at, say, $10 a share.The phantom stock is not actual equity but is tied to the value of your company's stock. You schedule a company valuation forsome future date -- or spell out a formula that will determine the stock's value. If the valuation or the valuation formula showsthat your company's stock has risen by, say, $30 a share, you send the executive a $30,000 check. At tax time, your companyqualifies for a $30,000 tax deduction, while your executive pays taxes on $30,000 worth of ordinary income.

Each year for 10 years at Wakefield Distribution Systems, senior vice president Gabrielle Fecteau, the employee whomLucey considers essential to his business, earns "stock" equal to 1% of the company's assessed value. At the end of that time,she may cash out over a 10-year period, collecting not more than 10% of her accumulated value each year. And ifLucey -- who owns the majority of the stock and whose children own the rest -- at some point declares a dividend, Fecteau isentitled to a percentage equivalent to the amount of "stock" she has earned up to that point. Wakefield's accounting firm doesan annual business valuation. Over the course of five years, Lucey says the value of the company -- which had 1998 revenuesof $18 million -- has almost doubled.

Fecteau's continued presence is critical to Lucey's succession plan. His three children, ages 31, 30, and 25, are all involvedin the business. "My son, Kevin, is managing a division of the company," says Lucey, "and I want to give him some time tomature and to learn the business from Gaby as well as from me. She has more time to teach and train than I do, plus, my songets a different perspective from her." Lucey expects to be actively involved in the business for another three to five yearsand hopes that after that, his son and Fecteau will run it together. In the meantime, Lucey is quite pleased with his phantomstock ? or, as he prefers to call it, mirror stock ? plan. "It's the best way to incentivize key employees in a family-ownedbusiness or small business," he says.

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Henry Aaron on Health Care Costs | EconTalk | Library of Economics and Liberty - Sent Using Google Toolbar

Henry Aaron on Health Care Costs | EconTalk | Library of Economics and Liberty

In this bonus middle-of-the-week podcast, Henry Aaron of the Brookings Institution talks with EconTalk host Russ Roberts about health care costs. Researchers in a New England Journal of Medicine article have estimated that the US could save $209 billion if the US went to a single-payer system like Canada. Is this number reliable? Aaron takes a deeper look at the estimate and discusses the relevance of such estimates for health care policy.

This is a special mid-week podcast. It's a follow-up to an earlier podcast with Arnold Kling that raised the issue of administrative costs and potential savings from going to a single-payer system. It also ties in with recent discussions here at EconTalk about the challenges of accurate measurement in the social sciences. We hope you enjoy it. If not, come back Monday when our regular schedule resumes.

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Mike Munger on the Division of Labor | EconTalk | Library of Economics and Liberty

Mike Munger on the Division of Labor

Mike Munger
Hosted by Russ Roberts
Kevin Kelly on the Future of t... Bogle on Investing...

Michael MungerMike Munger of Duke University and EconTalk host Russ Roberts talk about specialization, the role of technology in aiding specialization and how the division of labor creates wealth.

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Kling on Hospitals and Health Care | EconTalk | Library of Economics and Liberty

Kling on Hospitals and Health Care

Arnold Kling
Hosted by Russ Roberts
McKenzie on Prices... Munger on the Political Econom...

Arnold Kling of EconLog talks with EconTalk host Russ Roberts about the death of his father and the lessons to be learned for how hospitals treat patients and our health care system treats hospitals.

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Lipstein on Hospitals | EconTalk | Library of Economics and Liberty

Steven Lipstein, President and CEO of BJC HealthCare--a billion hospital system in St. Louis, Missouri--talks with EconTalk host Russ Roberts about the economics of hospitals. They discuss pricing, the advantages and disadvantages of specialization in modern medical care, and culture and governance of non-profit hospitals vs. for-profit hospitals. At the end they talk about the positives and negatives of a national health board patterned after the Federal Reserve.

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Readings and Links related to this podcast

Podcast Readings
About this week's guest: About ideas and people mentioned in this podcast:


Podcast Highlights
0:36Intro. Hospitals: day-do-day operations and policies. Start with pricing: Bills from hospitals are a little mysterious. How do prices get set, what leeway? Where does the money come from? BJC has 13 hospitals, 2 teaching, some small rural, some in urban core, pediatric and adult. About 30% of revenue comes from the Federal government through Medicare, which insures people over 65 and certain categories of the disabled. About 13% comes from Medicaid, which is funded jointly by the Federal government and by the states, and insures those under a certain threshold of the poverty limit and other categories of the disabled. For those two groups, prices are not set by BJC but are legislated by the government. Not based on supply and demand. Other big payers: commercial payers--insurance companies and managed care. Hundreds of managed care contracts. Those insurers wanted to negotiated discounts with hospitals or doctors. The larger the discount, the higher the price grew. Example: If original price was $100 and insurer wanted a 2% discount, effective revenue to the hospital was $98. Over time, insurers wanted to negotiate bigger and bigger discounts, so it took a lot more of a price increase by the hospitals to generate that same $98. If the insurer wanted a 50% discount, price would grow to $200. Because other prices are legislated, because those costs have to be covered from some source, if the Medicare and Medicaid costs cannot be covered by those programs, the burden is shifted to the commercial side. End up with very inflated prices to cover the underpayments from Medicare and Medicaid plus these deep negotiated discounts. What's the meaningfulness of a discount? There's no difference between full price at $100 and half off at $200. Hospitals need to generate about a 3% operating margin. When you take that with their non-cash expenses like depreciation, end up with about 9-10% of revenue that helps them meet their capital expenditure obligations, to replace the facilities, property, plant equipment. About 6% of that from depreciation expense and 3% off operating margin. If operating margin is negative from Medicare and Medicaid, just shift it to the commercial payers. Have to mark those prices up. Prices mean very little inside the industry any more. Very few payers pay a list price. Prospect of trying to reform makes a lot of sense.
6:30Nuts and bolts: Russ, two kids delivered at BJC. Charges on bill, cost $15 but through insurance premiums as employee, covering each other. Long list on bill, including orange juice, very large number, something like $100. If everyone started bringing his own orange juice, really wouldn't reduce the cost of deliveries by $100, would it? Why charged $40 for an aspirin pill while in the hospital? Different explanations: tablet had to be individually packaged and delivered to the floor and delivered by a registered nurse, but also paying for the aspirin pill for everyone not insured, plus Medicaid and Medicare shortfall, plus teaching doctors and nurses how to administer the tablet. All the costs of the social missions: caring for the poor, educating next generation, caring for the patient, plus negotiated discount. Price has little meaning to the consumer or provider. No incentive to bring own orange juice or aspirin. Would bill go down if so? Some situations where bill can go down. Rules and regulations govern administration of medication in a hospital, so discouraged from bringing medication from home. Bringing orange juice from home might not be the most cost effective way to reduce your hospital bill.
10:37Side question: What proportion of day and staff time is spent trying to figure out these pricing complications? Not much of own individual time but a lot of money spent managing outdated revenue cycle in health care industry, estimated $300 billion more than other developed nations from fragmented system. Anecdote on complexity: Experience at BJC, Russ had sore throat that didn't go away, father had had polyp about the same age; doctor took out technology implement that looks like popsicle stick, thought it wasn't anything; then took out more complicated technology, scope, and explored throat. Russ could have declined the expensive technology, come back later if problem didn't go away. Pace of technological innovation. What kind of financial incentives, cost sharing, so that Russ would have thought twice before allowing the scope examination as opposed to a tongue depressor? Midst of that dilemma now. Increased deductibles, higher co-insurance, co-payments. Anything free will have higher demand than anything that costs money. Sometimes Russ would make a mistake, refuse care and end up with throat cancer. In current world, nobody says no. In America, 55% of households earn under $50,000 a year. If you earn up to $50,000 a year, challenged till recently by high gas prices, food prices, energy prices; concerned with downturn in overall economy; what does a $2000 deductible with $200 copayment mean? People will forego access to the health care. May 4 in a 100. Cost sharing by typical American is causing them to forestall health services, causing people to end up in the hospital for avoidable conditions or experience complications that they wouldn't have experienced had they had access to early treatment. The more cost-sharing and financial responsibility: how much is good and how much causes them to forego much needed care ending up costing more later on? Trade-off. [Taping date: November 24, 2008, financial turmoil and uncertainty.]
18:26At some point in the past, maybe in the 1980s or '70s, most effective non-invasive technique was an x-ray. That changed: got new techniques, MRI, CAT-scans; and they keep getting better. Robotic surgery. Pace of that: when you have to decide when to acquire a new piece of technology, who makes that call? Government, hospital? Governed by intellectual curiosity, affiliated with Washington School of Medicine, driven by desire to figure out which technologies are best. Doctors, scientists, consider whether patients will benefit. Teaching environment: learning, discovery, dissemination of new knowledge; want to be involved in figuring out what works, what adds value and what doesn't. Involved in early clinical trials. By the time proliferation to larger community, usually public and published studies. A 1% improvement that doubles the cost is not a benefit. Most attention now: end of life care. Mother, leukemia, extensive chemotherapy. If physician had said, "There's an 80% likelihood that you are in your last 2 years of life," would she have said she wanted the treatment to see if she was in that 20%. Once she realized that Medicare would cover it, she might have done it. Many families want to try to beat the odds. Probabilities are hard to think about. In technology, certainly there must be cases where you want to make sure the insurers will cover it before you adopt it, and legal pressures. Food and Drug Administration (FDA) approval for drugs and devices. Once approved, typically are covered by insurers, Medicare, and Medicaid. Do factor in if technology is financially viable. Duplicate equipment more of a problem with competitive model, Saskatchewan, Canada.
26:01BJC is an umbrella organization of 13 different hospitals, non-profit. How does profit/non-profit affect competitive environment? Does BJC face competition? Both not-for-profit and for-profit companies generate an operating surplus. Difference is that for-profit companies, hospitals, are able to distribute their earnings for individual benefit--shareholders, owners, investors. Not-for-profits do not distribute their earnings for individual benefit. By law they are required to retain those earnings for community benefit. Community benefit obligations of not-for-profit hospitals and hospital systems: what is it, how is it measured, quantified, reported back to the public? Tenet, for-profit hospitals, earnings could be taken to headquarters in Dallas or elsewhere or distributed as dividends. BJC retains earnings in St. Louis area and redeploys them for community benefit. Sounds good, but cost to that system: in the rest of the economy, role of profit and loss is to induce prudent risk-taking on the part of owners. Loss induces prudence. In the case of a for-profit operation, stock holders, owners judge the bottom line. Not-for-profit whether the community is benefiting or not is not decided by the community. No feedback loop as in a for-profit system. For a not-for-profit hospital, who does the CEO try to please? to whom accountable? Accountable to the patients. Board of Trustees representative of the community is reported to. Patients come at a time of great personal need, anxious, concerned; want to give good personal experience. Have to recruit the best and give a clinical environment and tools to do that. Second, have to be financially responsible, living within resources, with a little left over at the end of the month as savings, like a family budget. Renew property, plant, equipment. Third, position hospital to be around a long time. Not thinking just about next quarter's earnings or next month's earnings or what the value of the stock will be. Asset to the community, provide the community with a sustainable advantage over time. Fourth, stay true to social and academic mission.
34:06Goals conflict, tradeoffs, weird environment, incentives faced are unusual. Must be political pressure within and without organization to try to balance those goals. Board understands needing to be financially responsible and there needs to be a balance. Can't spend all in savings account today, not always able to build state-of-the-art facilities because buildings don't take care of patients--people do. Have to have the right balance. Doctors, nurses, technologists still at the core. Specialization: intense in the medical profession. One hundred years ago, you might just be a surgeon. Today, pediatric surgeon, etc. How does a hospital, given the benefits of that specialization, balance that against the holistic complexity of the human body? How do you keep one specialist from doing something that might benefit the liver but not the rest of the body? Family goes in as an advocate. How does hospital try to reduce those problems? Surge of new knowledge drives specialization. Used to be that family doctor was based on five or six elements, e.g., x-ray, physical exam. Now, knowledge of over 30,000 gene-pairs introducing a whole new set of information. Different kinds of diabetes. Huge specialization. The more specialty training, the higher the income. Causes doctors to pursue careers in the specialties. System rewards specialty training, so generalists are dependent on specialists or information technology. Why do the specialists make so much more? Whole 'nother weird market. Determined by work units. Requires more education, more residency, more highly valued. Over time, those differences have gotten out of whack. Medicare pays doctors out of work RVUs, relative value units, value for every hour of work provided, disproportionately weighted toward procedures involved. Shortages of primary care physicians--less remunerative and fewer and fewer doctors. More specialization, has costs, ability to communicate with each other; can use technology to help the communication, but imperfect. Hospitalists: physicians who spend 100% of their time in the hospital, coordinate the care you receive. Episodes of care go beyond the hospital. Hand-off involved. The more hand-offs you have, the greater the opportunity for failure of care coordination. Increasingly reliant on physicians and hospitals to coordinate our medical care. Fewer visits to primary care physician today. Whether in the hospital or home, need to involve family members in coordinating care. Hospitals can aid through communication strategies, electronic health records, being open. Mother leaving chemotherapy treatment, fell in parking lot, broke leg, ended up in emergency room. Needed coordination, family best.
47:03Role of data in making decisions in the hospital. Leonhardt podcast: door-to-balloon time, person comes in with heart problems. Measuring is a good thing in general. People come in with congestion, but could be pneumonia; go to doctor, stethescope, doctor says fine; hospitals do x-rays so as not to miss it, but that's expensive. Hand-washing data versus reality: probably a good idea but not in the habit. BJC has organization called center for health care quality and effectiveness, measures everything. Timeliness of service is directly correlated with outcomes. Last four years. Have 68 black-belt trained technicians, lean--trained to eliminate waste--and six sigma--eliminate variability. Aspire to get it right. Example of improvement: might have been in upper quartile, now in top ten for speed of administering. Timeliness, accuracy, completeness. Effect on outcomes? Use national indicators: evidence-based-medicine, use what you know and do it consistently. Doctors uncomfortable with that? Over 2000 physicians, over 1000 academic; trained at different times; some more facile with new technologies than others. More senior physicians have accumulated experience; learn from each other. Learning and innovation feed off of each other. What kind of regulations keep you from making those improvements? Some may slow down the process. Health insurance privacy and portability act (HIPA): information not always shared that perhaps should be shared. Want to ensure confidentiality but make it available, say, in emergency room at a time it's needed. Personal health records, as differentiated from electronic health records. BJC, myhealthfolders.com, medications lists online in family folders, would be available from any emergency room in the world. Security issue. Software changes pin number every two weeks. Electronic chip in one's arm. Could be scanned by anyone walking by.
57:38What would you change in the current regulatory environment? Max Baucus, 89-page white paper on everything wrong with the American health care system. Volume and complexity. Change: recognize that founding fathers didn't create those branches of government to design and implement our health care system. Federal Reserve model: Board legally chartered by Congress, commissioned with guaranteeing access to health insurance, affordable; and give individuals choice. Set up U.S. Health Board, delegate supervisory responsibility. By setting up the board, could begin to tackle real problems like administrative cost burden. Wouldn't have to set pricing nationally, could just create the units of service. Would be more consistency, less fragmentation. Take long-term planning horizon. Cannot be election cycles, even 2 or 4 or 8 years, not long enough planning horizon. Hayek, from The Fatal Conceit: "The curious task of economics is to demonstrate to men how little they know really know about what they imagine they can design." Surfeit of design in the current system. Board might be step in an improved direction. Governors in Fed Board of Governors appointed for 14 years. Buffered from political concerns, not lobbied directly about Fed Funds rate. Not best month to use the Fed as an analogy. Probably been spared some mistakes in health care by lobbying. Fed has acted fairly deliberately. Without central bank might be in worse position than today. No answer to which is better: explicit lobbying or implicit?

Dangers of Dehydration - And The Importance of Kidney Cleansing - Sent Using Google Toolbar

Dangers of Dehydration - And The Importance of Kidney Cleansing

Dangers of Dehydration - And The Importance of Kidney Cleansing
By Andreas Moritz

Andreas Moritz
Andreas Moritz
Level: Basic

Andreas Moritz is a medical intuitive; a practitioner of Ayurveda, Iridology, Shiatsu and Vibrational Medicine; a writer and an artist. Born in Southwest Germany in ... ...

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The human body is composed of 75 percent water and 25 percent solid matter. To provide nourishment, eliminate waste and regulate all the functions in the body, we need water. Most modern societies, however, no longer stress the importance of drinking water as the most important "nutrient" among all nutrients. Entire population groups are substituting water with tea, coffee, alcohol and other manufactured beverages. Many people don't realize that the natural thirst signal of the body is a sign that it requires pure, plain drinking water. Instead, they opt for other beverages in the belief that this would satisfy the body's water requirements. This is a false belief.

It is true that beverages such as tea, coffee, wine, beer, soft drinks and juices contain water but they also contain caffeine, alcohol, sugar, artificial sweeteners or other chemicals that act as strong dehydrators. The more you drink these beverages, the more dehydrated you become because the effects they create in the body are exactly opposite to the ones that are produced by water. Caffeine containing beverages, for example, trigger stress responses that have strong diuretic effects (causing increased urination, at first). Beverages with added sugar drastically raise blood sugar levels, which uses up large quantities of cellular water, too. Regular consumption of such beverages results in chronic dehydration, which is a common factor in every toxicity crisis.

There is no practical or rational reason to treat an illness (toxicity crisis) with synthetic drugs or even with natural medications and methods unless the body's need for hydration has been met first. Drugs and other forms of medical intervention can be dangerous for the human physiology largely because of their dehydrating effects. Most patients today are suffering from "thirst disease," a progressive state of dehydration in certain areas of the body. Unable to remove toxins from these parts due to insufficient water supply, the body is faced with the consequences of their destructive effects. The lack of recognition of the most basic aspects of water metabolism in our body can be held responsible for seeing a disease when it really is the body's urgent cry for water.

Recognizing Dehydration

Those who have lived for many years without proper water intake are the most likely to succumb to the build-up of toxins in the body. Chronic disease is always accompanied by dehydration and, in many cases, caused by dehydration. The longer a person lives on a low water ration and/or on a high ration of stimulating beverages or foods, the more severe and long lasting is the toxicity crisis. Heart disease, obesity, diabetes, rheumatoid arthritis, stomach ulcers, hypertension, cancer, MS, Alzheimer's, and many other chronic forms of disease are precipitated by years of "body drought." Infectious agents such as bacteria and viruses cannot thrive in a well-hydrated body. Drinking enough water is therefore one of the most important preventives for any disease.

People who do not drink enough water or unduly deplete their body's water reserves through overstimulation for a period of time gradually lower the ratio of the volume of water that exists inside the cells to the ratio of volume of water that is found outside the cells. Under dehydrated conditions, the cells may lose up to 28% or more of their water volume. This certainly undermines all cellular activities, whether they occur in skin cells, stomach cells, liver cells, kidney cells or heart cells. Whenever there is cellular dehydration, metabolic waste products are retained, causing symptoms that resemble disease but in truth are nothing but signs of disturbed water metabolism. Since more and more water begins to accumulate outside the cells, the dehydration may not be apparent to the afflicted person; he may in fact notice that he retains water, leading to swelling of his legs, feet, arms and face. Also his kidneys may begin to hold on to water, markedly reducing urinary secretion and causing retention of harmful waste material. Even the enzymes and proteins living in the dehydrated cells become so inefficient that they are no longer able to recognize the dehydrated state of the body; they fail to set off the "thirst alarm."

Demetria, a 53-year-old Greek woman consulted me to find relief for a painful condition of gallbladder disease. Her skin was dark gray, indicating a high concentration of toxins in her liver and throughout her body. Seeing how dehydrated (and swollen) her body was, I offered her a glass of water. She said: "I never drink water, it makes me sick!" I told her that her natural thirst signals no longer worked because of cellular dehydration and that without drinking water her body could not return to balance. Any water she would drink would instantly be used to remove some of the toxins lurking in her stomach, giving rise to nausea. In her case, any other therapy than drinking water would have been a waste of time and money.

A dehydrated person may also suffer from lack of energy. Due to the shortage of water inside the cell the normal osmotic flow of water through the cell membrane becomes disrupted or severely disturbed. Like in a stream, the movement of water into the cells generates "hydroelectric" energy, which is subsequently stored in form of ATP molecules (the main source of cellular energy). Normally, the water we drink keeps the cell volume balanced and the salt we eat maintains the balanced volume of water that is held outside the cells and in circulation; this generates the right osmotic pressure necessary for cellular nourishment and energy production. During dehydration, this basic process is undermined.

The Pain Connection

Another major indicator of dehydration in the body is pain. In response to increasing water shortage, the brain activates and stores the important neurotransmitter histamine, which directs certain subordinate water regulators to redistribute the amount of water that is in circulation. This system helps move water to areas where it is needed for basic metabolic activity and survival (from drought). When histamine and its subordinate regulators for water intake and distribution come across pain-sensing nerves in the body, they cause strong and continual pain. These pain signals, as they manifest, for example, in rheumatoid arthritis, angina, dyspepsia, low back problems, neuralgia, migraine, and hangover headaches, etc., are necessary to alert the person to attend to the problem of general or local dehydration.

Taking analgesics or other pain relieving medications such as antihistamines or antacids can cause irreversible damage in the body. They not only fail to address the real problem (which may be dehydration) but they also cut the connection between the neurotransmitter histamine and its subordinate regulators such as vasopressin, Renin-Angiotensin (RA), prostaglandin (PG), and kinins. Although the action of the pain killing drugs can relieve local pain for a while, they nevertheless stop the body from knowing the priority areas for water distribution, adding confusion to all its functions. Antihistamines -- also known as allergy drugs – effectively prevent the body's histamines from ensuring balanced water distribution.

In addition to jeopardizing the water regulating mechanisms, after reaching a certain pain threshold, painkillers become ineffective because the brain takes over as a direct center for monitoring pain perpetuation (unless of course the body is hydrated again). If the body produces pain out of its own accord (not caused through an injury), this should first be interpreted as a cry for water. The use of painkillers, which suppress this cardinal signal of chronic and local dehydration in the body and which "short circuit" its emergency routes, sabotages waste elimination and sows the seeds of chronic illness.

There is enough documentation to show that these drugs can have fatal side effects. They can cause gastrointestinal bleeding, killing thousands each year. Yet the body's natural pain signals are perfectly normal responses to an abnormal situation, which may be simple dehydration. In the case that a pain is simply unbearable, the use of painkillers, however, may be unavoidable. At the same time, the pain-afflicted person should drink plenty of fresh water and discontinue all energy-depleting factors, as these tend to have a strongly dehydrating effect.

"Body Drought" - the Strongest Form of Stress

Our brain, working round the clock, requires more water than any other part of the body. Under normal conditions, it contains about twenty percent of all the blood that circulates through the body. It is estimated that brain cells consist of 85 percent water. Their energy requirements are not only met by metabolizing glucose (simple sugar), but also by generating "hydroelectric" energy from the water drive through cell osmosis. The brain depends greatly on this self-generated source of energy to maintain its complex processes and efficiency.

Water deficiency in the brain tissue cut downs its energy supply and thereby depresses many of its vital functions – hence the word depression. With a low level of brain energy, we are unable to meet our personal and social challenges and subsequently succumb to fear, anxiety, anger and other emotional problems. We may feel drained, lethargic, stressed and depressed. The chronic fatigue syndrome, which is commonly known as M.E., is mainly a symptom of progressive brain dehydration and subsequent retention of metabolic toxins in the brain. The syndrome may disappear on its own when the afflicted person stops stimulating the brain with caffeine, tobacco, drugs, animal products, etc., and begins a consequent program of re-hydrating the body.

The Stress Response

When dehydrated, the body has to put up the fight of a lifetime -- similar to the one experienced in a "fight or flight" situation. The body meets a crisis situation by mobilizing several powerful hormones, including adrenalin, endorphins, cortisone, prolactin, vasopressin, and Renin-Angiotensin (RA).

Endorphins, for example, help us to withstand pain and stress and allow the body to continue most of its functions. Cortisone orders the mobilisation of stored energies and essential raw materials to supply the body with energy and basic nutrients during the crisis. In other words, this hormone allows the body to literally feed off itself. This in itself is a very stressful and damaging situation for the body and is expressed by such emotions as, "I can't cope anymore" or, "I feel this is eating at me." Many patients with Rheumatoid Arthritis, MS or other degenerative diseases take cortisone drugs, which often give them a boost of energy and morale for a relatively short period of time.

The "success" of the drug, however, only lasts as long as there are still reserves left in the body that can be mobilized for energy and nutrient distribution. Once the body has used up its emergency reserves the organism can barely function anymore and the symptoms of disease become worse than ever.

Constriction of blood vessels

When the cells in the body are under-supplied with water, the brain's pituitary gland produces the neurotransmitter vasopressin, a hormone that has the property of constricting blood vessels in areas where there is cellular dehydration. During dehydration, the quantity of water in the bloodstream is reduced. Vasopressin, as its name suggests, squeezes the vascular system, i.e., the capillaries and arteries, to reduce their fluid volume. This maneuver is necessary to continue having enough pressure to allow for a steady filtration of water into the cells. This gives vasopressin a hypertensive property. High blood pressure is a common experience among people who are dehydrated (for more information on hypertension and heart disease, see chapter 8). A similar situation occurs in the liver's bile ducts, which begin to constrict in response to restricted availability of water. Gallstone formation is a direct result of dehydration.

A person who drinks alcohol suppresses the secretion of vasopressin and thereby increases cellular dehydration (if alcohol consumption is excessive, cellular dehydration may reach dangerously high levels). To survive the body "drought," the body has to secrete ever more stress hormones, among them the addictive endorphins. With regular consumption of alcohol, meaning every day for several years, dehydration increases even further and endorphin production becomes an addictive habit. This may lead to alcoholism, a disease that has devastating consequences on a person's personal and social life.

Water Retention and Kidney Damage

The Renin-Angiotensin (RA) system is activated when there is a water shortage in the body. This system is used to direct the body to hold on to water wherever possible. It instructs the kidneys to inhibit urination and tightens the capillaries and the vascular system, particularly in areas that are not as vital as the brain and the heart muscles. At the same time, it stimulates an increase in the absorption of sodium (salt), which helps the body to retain water. Unless the body returns to its normal level of hydration, the RA system remains activated. But this also means that the pressure of the blood against the walls of the blood vessels remains abnormally high, causing the damage that is known as cardiovascular disease.

Hypertension and the retention of urine in the kidneys lead to kidney damage. Conventional treatments for this condition consist mostly of diuretic (urine forming) drugs and restricted salt consumption. Both may have severe drawbacks. Diuretic drugs, which are used to normalize the blood pressure, as well as reduced salt intake strongly undermine the body's emergency efforts to save the little water it has left for cell functions. The resulting stress response causes a further increase in dehydration and the vicious cycle is complete. There are so many kidney replacements made today that result from chronic dehydration, caused by something as simple as not drinking enough water or overstimulation of the nervous system.

The Caffeine and Alcohol Drama

The caffeine contained in such beverages as tea, coffee, cacao or colas not only stimulates the central nervous system and immune system but also acts as a strong diuretic. For every cup of coffee or tea you drink you relinquish approximately three cups of water, which the body cannot afford to give up without suffering damage. The caffeine containing cola beverages work in a similar way. Caffeine, being a nerve toxin, stimulates the body's stress hormones and triggers a strong immune response that may give a person the (false) impression that his level of energy and vitality has suddenly increased. To remove the nerve toxin caffeine, the body has to come up with extra water, which it takes from its cells. Hence there is an occurrence of cellular dehydration.

Caffeine, which is a major component in most soft drinks, removes water from the body faster than the body can absorb it again, thereby generating constant thirst. People, who frequently take soft drinks, can never really quench their thirst because their bodies continually and increasingly run out of cellular water. There are college students who drink as many as 10-14 cans of cola a day. Eventually, they confuse their bodies' never-ending thirst signal with hunger and they begin to overeat, causing swelling and excessive weight gain. Apart from its diuretic action and its addictive effects on the brain, regular caffeine intake overstimulates the heart muscles, causing exhaustion and heart disease.

Alcohol has a similar diuretic effect as caffeine containing beverages. For every glass of beer, for example, the body is forced to sacrifice about three glasses of water. A hangover results when due to alcohol abuse the brain suffers severe dehydration. If this occurs repeatedly, a large number of brain cells become damaged and die. Many important brain functions slow down or become depressed. Recovery is possible to a certain extent if alcohol consumption is discontinued.

Kidney Stones

The main functions of the kidneys are to keep the blood pure and healthy and maintain proper fluid balance in the body. To accomplish this difficult feat, the kidneys constantly monitor normal blood volume and filter from the blood the right quantity of urine to keep it balanced. There are many influences that can disrupt this mechanism and cause congestion in the kidneys. They include overstimulation, dehydration, fatigue, overeating, gallstones, blood pressure disturbance, medical or narcotic drugs, vitamins, digestive disorders, etc. When the kidneys are incapable of sufficiently separating the urine from the blood, part of the urine continues to circulate throughout the body, depositing urinary waste products in the blood vessels, joints, tissues, and organs. Skin diseases, strong body odor, sweating of palms and feet, water retention, intestinal swelling, high blood pressure, etc. are all signs of toxic blood caused by crystals and stones in the kidneys.

Stones in the kidneys begin as tiny crystals and can eventually become as large as an egg. The tiny crystals are too small to be detected by X-rays and since they do not cause pain, they are rarely noticed yet they are big enough to block the flow of liquid through the tiny kidney tubules. Crystals or stones are formed in the kidneys when urinary constituents, which normally in solution, are precipitated. Precipitation occurs when these particles occur in excessive amounts or when urine becomes too concentrated. The crystal particles or stones are usually full of sharp angles, which may cut and wear away the inner surface of the urinary canal (ureter) during their passage from the kidneys to the bladder. This causes severe pain in the loins or lower back. There may even be blood in the urine, pain running down the legs, numbness in the thighs and a difficulty in passing urine.

Most crystals or stones originate in the kidneys, although some may also be formed in the bladder. If a large stone enters a ureter, urine flow becomes obstructed. This can lead to serious complications, such as kidney infection or kidney failure.

Why The Need For A Kidney Cleanse?

The kidneys make a tremendous effort in trying to keep the body clear of toxic substances such as lead, cadmium, mercury and other impassable pollutants. They also maintain fluid and electrolyte balance and regulate the pressure from the heart that forces the blood through their filtering system. Kidney stones greatly impair this ability, which consequently increases the amounts of heavy metals and raises the body's general level of toxicity. This can lead to infection, high blood pressure, heart disease, brain disorders, cancer and many other diseases.

The following signs indicate the presence of crystals and stones in the kidneys or bladder: A dark or whitish color under the eyes; puffy or swollen eyes, particularly in the morning; deep wrinkles under and around the eyes; tiny whitish, tan-colored or dark lumps under the eyes, which can be felt or made visible when stretching the skin outwards towards the cheekbones; overlapping of the skin of the upper eyelid; chronic pain in the lower back; swelling of feet and legs; constant fear or anxiety.
There are a number of herbs that can effectively dissolve kidney stones within a period of 20-30 days (see the updated kidney cleanse protocol in the book The Amazing Liver & Gallbladder Flush (www.ener-chi.com); you can purchase the herbs from The Present Moment Herbs and Books in Minneapolis, tel. 800-378-3245 (ask for the "Moritz Kidney Tea") or other herb stores. Whether someone has been diagnosed as having kidney stones or not, doing a kidney cleanse once or twice a year produces tremendous curative and preventive benefits. The kidney cleanse not only improves physical health but also reduces stress, fear and anxieties.

This information has been derived from my book Timeless Secrets of Health & Rejuvenation (2005 edition).

Andreas Moritz is a medical intuitive; a practitioner of Ayurveda, Iridology, Shiatsu and Vibrational Medicine; a writer and an artist. He has authored four books on health and healing: "The Amazing Liver and Gallbladder Flush", "Timeless Secrets of Health and Rejuvenation," "Lifting the Veil of Duality," and "It's Time to Come Alive" (all books are available through http://www.ener-chi.com or http://www.amazon.com).

Andreas also is the artist who created the oil paintings for a new innovative approach to healing through energized art, called Ener-Chi Art. His latest healing tool for clearing emotional blocks and fear is called "Sacred Sant̬mony РDivine Chanting for Every Occasion." Andreas runs a free forum "Ask Andreas Moritz" on the popular health website Curezone.com (5 million readers and increasing). For more information contact Andreas Moritz, visit his Web site http://www.ener-chi.com or contact him at tel. 1-864-848-6410, Greer, South Carolina, USA, E-mail andmor@ener-chi.com.