Warren Buffett

Is Healthcare a ‘Tapeworm’ in the American Economy?

May 26, 2021 By David P. Lind

Tapeworms cause health problems in our bodies. They can rob us of important nutrients, block our intestines, and take up space in organs so they don’t function normally. Tapeworms keep our bodies from operating efficiently.

Warren Buffett described the American healthcare system as a “tapeworm in the American economy.” Given the latest failure of Haven, a joint health care venture with JP Morgan, Amazon and Buffett’s Berkshire Hathaway – the tapeworm appears to be live and well.

Buffett’s comment is brutally honest.

The tapeworm analogy is demonstrated in a new article from the New York Times, “Buoyed by Federal Covid Aid, Big Hospital Chains Buy Up Competitors.” This article paints a picture that some larger hospital chains are using Covid bailout money from the Provider Relief Fund and purchasing other hospitals and physician groups to grow their footprint in markets. Without much federal scrutiny, this bailout allows hospital chains to grow larger and dictate higher prices from private insurers, employers and individuals.

Multiplier Effect

I have to hand it to the American Hospital Association (AHA) and their state-based hospital members, including the Iowa Hospital Association (IHA). When payers demand to hold hospitals accountable to improve their outcomes at lower associated costs, hospitals revert to a tried-and-true formula to combat public scrutiny: Remind the public about how hospitals provide economic contributions to our communities and states.

As an example, in 2017, the AHA stated the “Health care sector has traditionally been an economic mainstay, providing stability and job growth in communities. Health care added more than 35,000 jobs per month in 2016.” The AHA mentions that hospitals employ more than 5.7 million workers, are one of the top sources of private-sector jobs, and purchase nearly $852 billion in goods and services from other businesses. More recently, Rick Pollack, President and CEO of the AHA, had a paid AHA advertisement in the Wall Street Journal titled, “Value of Health Systems Shown Clearly During the Pandemic.”

This information is pumped out every few years for each state to tout, including Iowa. The AHA provides a state-by-state economic impact grid that illustrates the value hospitals provide to their respective local economies. The IHA readily uses this information to display on their website. Of course, we are constantly reminded of the ‘multiplying effect’ that supports “thousands of additional jobs.” We are told that “more than 143,000 jobs are tied to Iowa hospitals, creating an overall impact that is worth nearly $8.6 billion to Iowa’s economy.” It is true that, along with public schools, hospitals are the largest employers within many of our communities.

Not to be outdone, the lobbying organization for insurance companies – America’s Health Insurance Plans (AHIP) – employs a similar approach to tout how private insurance is an economic boon for local economies. In early May, AHIP posted “By the Numbers: How Health Insurance Providers Contribute to State Economies and Peace of Mind.” The 2021 AHIP biennial report discusses how the economies of each state are impacted by health plans, specifically on the number of jobs generated and tax revenues paid to support the local economy.

Based on AHIP data, Iowa employs over 4,000 health plan employees and almost 13,000 insurance-related employees. Average annual wages for health plan employees are over $86,000 while insurance-related employees earn about $63,000 annually. By most standards, these wages are good for the Iowa economy, especially when using the multiplier effect.

Zero-Sum Game

Given the narratives being sold to us, perhaps we should supersize the entire U.S. economy by continuing to expand healthcare and health plans beyond their current size. But that simply will not work. There are economic tradeoffs that come into play.

It brings to mind poker and gambling, two popular examples of the zero-sum game. In poker, the sum of the amounts won by some players equals the combined losses of other players. In a zero-sum game, there is one winner and one loser.

“Currently, the U.S. healthcare and health insurance systems are really a patchwork of different programs, which create gaps and expensive inefficiencies”, according to economic health researcher, Katherine Baicker.

But who pays for these inefficiencies? ALL OF US.

What we pay to healthcare providers and insurers will indeed fund the job growth of doctors, nurses, medical technicians, health insurance personnel and professionals. To be sure, we need these services. But, as a consequence, we don’t have this money to spend (or save) on other economic necessities or preferences. This becomes an economic tradeoff that adversely impacts other parts of our economy.

Inefficient and opaque spending on healthcare creates another problem: a redistribution of our hard-earned money that is often being used to our own detriment – for lobbying efforts to ensure the status quo remains unchanged. Opaqueness breeds blind spending by those who pay. This is a vicious cycle that perpetuates the zero-sum game.

Law of Diminishing Marginal Returns & Opportunity Costs

Another economic term, Law of Diminishing Marginal Returns, is typically used when analyzing the production of a particular commodity. For example, when a factory employs workers to manufacture its products, at some point during production, the company will operate at an optimal level (with all other factors remaining constant). Over time, however, adding additional workers will result in less efficient operations.

At what point has healthcare exceeded the optimal revenue from its payers? When will the best possible returns obtained by healthcare diminish with every dollar invested? Are we there yet? The latest Kaiser Health News poll that found large employers are ready for more government involvement may suggest this point has been reached.

Put yet another way, what are the opportunity costs with each dollar spent on healthcare? Opportunity cost is the loss of the benefit that could have been enjoyed if the best alternative choice was chosen instead. Continuing to pay higher healthcare costs without receiving the commensurate benefits represents a lost opportunity of investing that money elsewhere – such as investing in updated infrastructures, efficient factory equipment or paying higher wages. Redirecting financial investments into other worthwhile opportunities would provide a multiplier effect for local economies.

Continuing to accept overpriced care is not the solution to sustain economic growth. In fact, overpriced and inefficient care is holding the economy back from becoming MORE robust. This is precisely Buffett’s point.

Summary

Contrary to the argument of being an ‘economic stimulus’ to local economies, the REAL purpose of healthcare is to enhance the quality of life by enhancing our health. It is true that creating reasonable profits to remain financially viable is necessary to stay in business to serve others. However, healthcare must focus on creating social health and well-being to fulfill its fundamental promise to society.

Marketing platforms being used by healthcare-related associations on how hospitals and health plans will benefit our communities is, at best, disingenuous. We live in a world of unfulfilled opportunities. Until these opportunities are given the chance to succeed, we will never know just how robust our economy can become.

How long do we allow the tapeworm to control our economic well-being?

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Filed Under: David P. Lind, Lindex Tagged With: America's Health Insurance Plans, American Hospital Association, Iowa Hospital Association, Kaiser Health News, Katherine Baicker, New York Times, Opportunity Costs, Warren Buffett, Zero-Sum Game

Role of Government in Healthcare – Has a ‘Tipping Point’ Been Reached?

May 12, 2021 By David P. Lind

With great interest, I read a newly-released report by the Kaiser Family Foundation (KFF) and the Purchaser Business Group on Health (PBGH) on how corporate executives view the role of government when controlling health costs. Let me just say, the findings are not a flattering compliment to the status quo.

As we have found in Iowa and all over the country, healthcare costs continue to climb, year after year. In the past, employers have relied on private insurers and the quasi ‘market system’ to stem the tide of unaffordable healthcare costs, eschewing government regulations that would likely control how much providers are paid. As we know through Medicare and Medicaid, the government is able to reimburse providers considerably less than private payers.

This new survey of over 300 large private employers with at least 5,000 employees was important for yet another reason. The surveyed respondents were corporate leaders in key positions, such as CEOs, CFOs, COOs – individuals who have powerful decision-making roles within their organizations. They are prone to influence the trajectory of their organizations in the future. Equally impressive is the nice mix of industries represented: Agriculture, Construction, Financial Services, Manufacturing, Mining, Retail Trade, Services, Telecommunication, and Transportation & Distribution.

Key Findings

The overall takeaway is that a large share of corporate leaders are likely to SUPPORT government efforts to control health spending. Only a small share of respondents would oppose government regulations.

As in the past, corporate leaders indicated they will continue to implement value-based payments, shift more costs to employees through plan designs and payroll-deductions – and find other ways to control their health costs – including direct-contracting relationships with health providers. But many leaders acknowledge that these measures have only been marginally successful, and despite conventional wisdom, large employers have little market clout to control their own costs.

This survey, therefore, sheds light on a new awakening that large employers may now have:

Bigger Role By Government – 87 percent of surveyed corporate officers believe the cost of health benefits will become unsustainable over the next 5 to 10 years. In fact, 85 percent indicate that the government needs to take on a bigger role in controlling costs and providing coverage.
Government Action on Hospital Prices – 78 percent of leaders expressed some level of support for government action on hospital prices, particularly in areas that have limited hospital competition. Of huge importance, less than five percent opposed these regulations.
Limiting Drug Prices – Surveyed leaders are equally supportive of having government limits on drug prices.
Public Insurance Option – About two-thirds (65 percent) of corporate leaders indicated having some level of support for a public insurance option for their employees. Additionally, a large majority support lowering the age for Medicare eligibility.

According to the surveyed executives, some advantages to having a greater governmental role in coverage and costs are:

Employers are relieved of the responsibility and the costs of managing health benefits (61 percent).
May enable the government to hold down costs (61 percent).
May be able to increase consumer choices by offering public plans (e.g., public option or Medicare buy-in) to compete with private plans (47 percent).
Might reduce administrative costs (29 percent).

Disadvantages include:

Government doesn’t have a great track record of running big programs like this effectively (43 percent).
Since the health care industry contributes so much money to political campaigns, lawmakers are never going to take steps to reduce costs (41 percent).
Employers might not have the ability to tailor health benefits to their employee needs (30 percent).

Employers are in the Healthcare Business

Warren Buffett once said that “General Motors is a health and benefits company with an auto company attached.” In fact, GM spends more on healthcare than steel to make cars. Starbucks, as another example, spends more on healthcare than coffee beans. For most employers, after payroll, healthcare is the second largest expense. Whether employers like it or not, this puts employers smack in the center of the healthcare business.

It remains to be seen whether corporate leaders will put lobbying and advocacy energy into healthcare legislation that pushes for more government regulations on healthcare pricing. But if this latest survey is an indication of a new tipping point on the horizon, this could be a catalyst for real change. Of course, health providers and insurers will lobby hard to keep this from happening.

Executives of large organizations have historically been vocal on healthcare costs, but primarily resistant to increased government regulation. If employers no longer wish to be in the healthcare business, or at least, not quite like they have been in the past and present, their formidable voice for larger government involvement may become too loud for Congress to ignore.

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Filed Under: Lindex Tagged With: David P. Lind Benchmark, KFF, Purchaser Business Group on Health, Warren Buffett

Another One Bites the Dust – Haven Ends Healthcare Quest

January 7, 2021 By David P. Lind

The medical industrial complex has claimed yet another innocent victim. But this is not just any victim.

Three years ago, an independent company, Haven Health, was formed by three powerhouse forces in the business world: Amazon, JPMorgan Chase and Berkshire Hathaway. Meant to transform healthcare, Haven was a very unique collaboration that put the healthcare industry on notice that a new sheriff would be in town to help clean up a messy and unruly industry dominated by legacy players.

The likes of Jeff Bezos (Amazon), Jamie Dimon (JPMorgan Chase) and Warren Buffett (Berkshire Hathaway) were serving as the newly-assembled sheriff that would instill both fear and respect by industry inhabitants. When this marriage was announced in 2018, I wrote a blog about the likelihood of having three disruptive ‘outsiders’ force long overdue changes to healthcare practices. I ended this blog with one stark sentence: “Only time will tell.”

Time is Now Here

It appears the healthcare industry is more complex (and unforgiving) than even the sheriff had believed. This most recent development reminds me of what President Trump naively claimed while attempting to repeal and replace Obamacare in 2017: “Nobody knew that healthcare could be so complicated…”

On Monday of this week, Haven announced that it will end its mission of exploring healthcare solutions, such as “piloting new ways to make primary care easier to access, insurance benefits simpler to understand and easier to use, and prescription drugs more affordable.” According to the Wall Street Journal (subscription required), any collaboration between these companies will become less formal in the future.

In addition to impacting their own respective workforces, the collaboration also intended to influence and disrupt the payment and delivery models currently in place. Reading between the lines, however, when their appointed chief executive, Dr. Atul Gawande, stepped down from his role in May of 2020, perhaps the proverbial ‘flywheel’ lost any inertia it may have gained.

Lesson Learned

Going forward, it will take more than three highly-respected leaders and their innovative organizations to mildly disrupt a system that desperately needs disruption, but has largely resisted meaningful changes. Many have tried to reform this massive industry, but up to this point, there has been very limited success.

In healthcare, bold changes may only come after America experiences an unimaginable crisis beyond anything we’ve ever encountered before. But then again, only time will tell.

–Update on Hospital Price Transparency Requirement

My Tuesday blog on the new hospital price transparency mandate revealed that two major Des Moines hospitals have not posted the required pricing information despite a national mandate to do so – beginning January 1. The penalty for noncompliance is, quite frankly, small potatoes for at least larger hospitals – just $300 a day. To learn more, the CMS issued a FAQ on December 23.

According to POLITICO Pulse just one-third of the top 20 hospitals have posted visible price lists as of New Year’s Day. Politico reports, of those hospitals that have posted, the information is often vague or hard-to-decifer. More to come in future blogs on this subject.

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Filed Under: David P. Lind Tagged With: Amazon, Berkshire Hathaway, David P. Lind Benchmark, Dr. Atul Gawande, Haven Health, Jamie Dimon, Jeff Bezos, JP Morgan Chase, Wall Street Journal, Warren Buffett

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