A little follow up for people who want to reinterpret what Buffett said… oh – and a stock reason for looking at all of this…

There are a few comments on the blog that annoy me.  One for instance is repeated below:

A review of the transcript will show that Buffett believes that: a) the legislation must focus on cost, in order to achieve the goal of universal coverage. This has nothing to do with socialized medicine; b) he believes a broader political consensus is required. Everyone is entitled to the their opinion, but not to someone else's.

Buffett clearly said he was for universality of health care.  He would – if given no other choice – vote for the current bill.  Universality – unless someone else has worked out how it happens – involves a person who can’t pay (or possibly won’t pay) being covered by other people.  That can happen via the tax system or via some kind of forced levy on other people.  But it necessarily involves the (partial) socialization of medicine.

He implies however – though does not say so directly – that universality (necessarily involving some socialization of costs) – could be a disaster if costs are not controlled.  I will go further and say that it will be a disaster if costs are not controlled.  Australia has spent the last twenty years on measures that control costs (with considerable success).  In the UK – but to a much lesser extent in Australia – those measures include queue rationing of some services.  Queue rationing known here as “hospital waiting lists” was for a long time one of the dominant issues in State politics.  Queues are less of an issue now than (say) ten years ago – but if you run the expression “hospital waiting lists” through Google News you will still find that it is a political issue.  Anyone who tells you that you can have universal coverage without some queue rationing is lying.  A decent part of the system however is working out what procedures must take place quickly and what procedures can safely wait a while.  In Australia some people are in pain whilst on waiting lists. 

Buffett states clearly that controlling costs will not be done with a bill that pleases everybody.  There are $2.3 trillion of costs – and every bit of those costs has a constituency.  He wants a real analysis of medical spending effectiveness.  He wants experts – and he points favorably at Dr Gawande.  Dr Gawande focuses on things that involve medical incomes (including the use of the Doctor’s pen to order tests and specialist treatment). 

He notes that medical employees as a percent of population are low in the US compared to other jurisdictions and yet medical expenditures are high as a proportion of GDP.  Some of this must be expenditure that does not go to medical staff (he points directly at medical kit).  But some of it must be the incomes of the participants are high relative to the rest of the population.  [Simple math here – less employees – more cost – so more cost per employee.  And I know kit is part of that equation… but kit expenditures are simply not large enough to make up the difference.  And most of the rest of the cost of a doctor is the doctor’s income.]

Buffett does not prescribe how you would crush medical costs as he suggests – but he notes that other countries have done it with universal coverage, providing more doctors, more nurses and more consultations.  He thus thinks it is possible (though politically terribly difficult).  He specifically thinks that this cannot be done by consensus (despite the comment repeated above) because a bill that pleases everyone can’t deal with costs.  [I added – though Buffett did not say – that that implies that the bill cannot be bipartisan.  In the current context that means a filibuster process – though Buffett did not say that either.  Still if there is a way for a non-consensus medical bill which provides universal coverage and cuts costs to be bipartisan show me and I will stand corrected.]

I doubt Buffett – as the world’s second richest man – would find queue rationing acceptable for himself – but that discussion never came up.  If you want to accuse him of hypocrisy go ahead.  When my wife damaged her knee in a skiing accident we queue jumped using supplementary private health insurance.   So accuse me of hypocrisy too.

Buffett obviously knows that a system that radically cuts costs but has the government meet some of those costs will necessarily involve rationing.  He is not a fool.  He just never said how the rationing should take place – preferring to leave that discussion to experts.  That way though he could sound reasonable and friendly whilst proposing reforms that will radically reduce some peoples’ incomes and somewhat limit access to medical care.  And that I guess is Warren Buffett to a tee.  He sounds all genial – but underneath is one of the most hard-headed men you will ever come across.

Why I am interested

This is actually a hard headed investment blog.  And Buffett is right.  Medical reform which does not control costs will be a disaster.  He is also right to finger medical kit.  The current bill does not address costs – so it is not the time to think about this – but some medical kit companies trade at nose-bleed valuations because they can sell growing amounts of high tech kit at high margins.  (Intuitive Surgical is a good example.) 

I am an irregular short-seller of stock in even the finest companies.  When America finally gets serious about controlling medical costs some of these stocks will be fantastic shorts – simply because controlling costs means reducing some people’s incomes and some corporate profits.

And – that is enough reason to take the partisan glasses off and look entirely rationally a the problem.  This bill does not give me a good reason to short Intuitive Surgical.  From the perspective of Warren Buffett however that is why it is not a good bill. 

 

John 

 

Follow up: 

Namazu  - the provider of the comment that annoyed me - suggests we might be arguing over the meaning of socialized.

I think that is probably a fair comment... it is not a word Buffett used.

I consider the mixed market system of Australia partially socialized. By far the bulk of medical costs are picked up by government and are shared through the tax system - but it looks quite different to the UK.  [My UK friends also prefer the Australian system…]

Still – a system where by far the bulk of the costs are picked up by government and shared through the tax system meets my definition of socialized.  [Though people who say keep government hands off Medicare might have a different view…]

Still in many categories (for example pharmaceuticals) the Australian government is effectively the monopoly buyer - and it uses that power to reduce costs. That is a KEY part of the story as to how costs are reduced in almost all other countries.

And yes - it does crush incomes of doctors and corporate profits.