The High Cost of Healthcare

Last weekend was the Berkshire Hathaway Annual Meeting. Unlike most corporate meetings, the discussion at Berkshires meeting often strays far from the performance of the company into broader economic and political topics. It’s understandable—Warren Buffett and Charlie Munger have a way of cutting through ideological obfuscation when dissecting an issue, and both are intellectually honest in a way most people aren’t.

It’s worth watching the full meeting, but the discussion I found most interesting revolved around the cost of healthcare in the USA.

Taxes vs. Healthcare

Buffett notes that corporations have been railing against corporate taxes for decades, arguing that corporate taxes make America unable to compete with other countries, that lower taxes are the only way American businesses can prosper. The government has been responsive to this argument. Buffett observes that corporate taxes have fallen from about 4% of Gross Domestic Product in the 1960s to about 2% of GDP now.

In contrast, healthcare spending in the USA has grown from 5% of GDP in 1960 to 17% now. But the USA is unique in that much of that healthcare spending falls on corporations because most medical insurance in the US is provided by employers. This creates an interesting incongruity. While corporations rail against corporate taxes amounting to 2% of GDP, they seem to totally ignore the 17% of GDP cost of healthcare.

It looks even worse when you look at it from the perspective of global competitiveness. The worldwide average healthcare expenditure is 9%. Canada, the closest comparable country to the USA, spends about 11% of GDP. Thus, USA is spotting about eight percentage points more on healthcare than the average country, and six percentage points more than Canada.

To me, that makes healthcare spending the elephant in the room. Corporations that are vociferous about a potential two percentage point difference in corporate taxes should be far more worried about healthcare costs. That’s where American corporations are at a huge competitive disadvantage.

The difference between USA and everyone else

Charlie Munger is unlike most Republicans in that he doesn’t allow the party line to override the evidence—as I said, he’s intellectually honest. He states flatly that the cost difference is because of socialized medicine in other countries. In essence, the high cost of privatized medicine puts American companies at a competitive disadvantage compared to those in countries with socialized medicine.

I think this is a solid argument. I’d argue that the private healthcare system probably hurts America even more when it comes to innovation and entrepreneurialism. If your medical insurance is tied to your job, then it greatly disincentivizes you from leaving your job to start a new, innovative business. It would be irresponsible to leave your family without health insurance while you’re creating a company.  You’d literally be gambling their lives to do so.  Thus, privatized medicine is almost certainly hurting American innovation.

Why is it this way?

So if privatized medicine is so bad for corporations, why aren’t corporations fighting for single-payer? I think it’s a combination of ideology and incentives. Most people who run successful companies tend to believe in free-market capitalism. Their ideology often doesn’t distinguish between places where free-market capitalism works and where it fails. Thus, without much thought, they assume that the free market works in medicine, when it actually doesn’t.

Second, there are huge vested interests in maintaining the existing private system. That 17% of GDP isn’t just disappearing into the ether. It’s money flowing toward hospitals, doctors, pharmaceutical companies, insurers, drug distributors, and medical device companies. Each of these parties has a huge incentive to keep the money flowing—they care about the issue a lot, and lobby accordingly.

The people who would benefit from lower costs—essentially everyone else—care about it a bit, but not nearly as much as the medical industrial complex. The average person is going to express their opinions, but they aren’t going to throw money at politicians to get their way. And, even if they were inclined to throw money, they don’t have much money, not compared to the medical industry.

So, with bought politicians, the inferior system continues.

The bottom line

I don’t have any hope that this issue will be solved any time soon. That said, it is still an interesting issue to discuss. Because the data is so clear-cut, privatized medicine provides a good gauge of the degree to which someone who holds Republican views is intellectually honest and data-focussed, or if ideology is all that matters to them.