Warren Buffett on Obama’s health reforms

Warren Buffett did one of his regular (extended) interviews with CNBC.  I think he appreciates the charm and attention from Becky Quick – even enough to get up at 5am and go to the steakhouse turned TV studio.  Most of these interviews are Buffett repeating his wholesome (and oft repeated) wisdom.  However he often comes up with a piercing analysis of something topical.  Today it was health care.

We (the US) have a little over 2.5 doctors per thousand.  Much of the world has over 3 doctors per thousand.  We have 11 nurses per thousand – much of the world has more.  We have three beds per thousand – much of the world has 6 or 7 beds per thousand. 

Having said this he points out that costs as a proportion of GDP are considerably higher than the rest of the world.  He then points out some statistics (for example infant mortality) where the US does worse than some other developed countries.  Importantly he points out that these costs are a passed onto other sectors of the economy.  He did not describe them as a “tax” on the rest of the economy – but that is what he meant.

He describes the situation as a “tape-worm” strangling American productivity and he is for health care reform but particularly health care reform that controls costs.  He would – in the absence of other choice – vote for the current bill.  That however is – in his case – very qualified support for the current bill.

The health-care part of the interview is worth watching.

 

 

In the interview he refers (favorably) to an article in the New Yorker by Atul Gawande which compares medical costs in high cost locations and low cost locations.  Dr Gawande describes health care driven by entrepreneurial doctors in an environment of over servicing.  I think the money quote in Gawande’s article is this:

Most Americans would be delighted to have the quality of care found in places like Rochester, Minnesota, or Seattle, Washington, or Durham, North Carolina—all of which have world-class hospitals and costs that fall below the national average. If we brought the cost curve in the expensive places down to their level, Medicare’s problems (indeed, almost all the federal government’s budget problems for the next fifty years) would be solved. The difficulty is how to go about it.

I have written about health care before (but I think Buffett says many things better).  Though in summary the costs of American health care is higher because:

1. America pays its doctors more than other countries (indeed substantially more than other countries)
   
2. There is less control on pharmaceutical expenditure and other medical kit (and Buffett notes that Americans spend a lot on medical kit), 
   
3. There is more hospital and health care administration – especially insurance operating - expense than other countries (although anyone who follows the bureaucracy of the National Health might think otherwise), and
   
4. There is more litigation and insurance expense than in other countries (though Buffett did not play up this aspect of cost comparisons).

I would love a decent breakdown of those things.  Unless however the costs are addressed health care reform will ultimately be an economic failure. 

And that is roughly how Buffett thinks about the Obama reforms.  The current health care bill provides universality of health care – but does not address the fundamental cost issues. 

That however is very difficult.  As Buffett puts it – the current health care bill is about $2.3 trillion annually.  And every one of those $2.3 trillion has a constituency.  Moreover that constituency is organized and are effective lobbyists.  Buffett thinks that there is simply no way to do an effective cost reduction health care bill by consensus.  That is hard to disagree with. 

As he puts it:

Everyone of those dollars is going to somebody and they are going to yell if that dollar becomes 80c or 90c. 

I thought he was being generous.  If American doctors were paid like Australian doctors my guess is those dollars would not become 85 cents.  More like 60 cents or less.  The squealing here was intense – but even after all that trimming doctors remain pretty well paid.  But you can’t get rich doing general practice and even specialist medicine is a ticket to the upper-middle class not to dynastic wealth. 

What allows Australia to pay so little for doctors is a monopoly buyer (the Government) actively suppressing their income.  It is little surprise that doctors do not in general support that bit of the reform agenda.

What ultimately Buffett was saying was that proper health care reform does not and cannot get broad agreement – and hence must be done with the expenditure of significant political capital.  He never says it – but I think he thinks that this would be a good time for the Democrats to outlast a filibuster.  Triangulating Democrats have their place – but not here.

Buffett thinks that if this is not done medical care will remain a growing parasite (“a tape worm”) for the rest of the American economy.  He supports an aggressive and interventionist solution.

Still – if you follow his numbers he thinks the savings are probably 4% of GDP.  The ambitious number in my original post was somewhat larger.  He is probably right on that too.

 

 

John

 

PS.  One of the more amusing things about this interview is Joe Kernan making an ass of himself.  Buffett is clearly saying that – correctly done – socialized medicine will improve the competitiveness of American industry (though the current bill is not a solution to costs).  This is anathema to Kernan’s oft-stated ideology – and Kernan repeatedly tries to restate Buffett’s position to suit his own ideological view rather than Buffett’s clearly enunciated position.  Becky Quick proves again that she is the heavyweight on that show and I can see why Buffett does appreciate her (intellectual) charms.