Wednesday, March 3, 2010

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.





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.


But What do I Know? said...

WB is a tapeworm strangling the US economy.

Matt P. said...

John, for an in depth and balanced look at the challenges of health care in the USA I strongly suggest you invest 2 hours in these NPR broadcasts. They are the best I have seen on explaining the prism/mosaic that is the US health care system.

Frozen in the North said...


You sure like to play with fire! I cannot wait for the comments from punters that claim that the U.S. system is the best in the world -- although it would mean contradicting Buffett. By the way I though that Atul Gawande article's money quote was:

The most expensive piece of medical equipment is a doctor’s pen. And, as a rule, hospital executives don’t own the pen caps. Doctors do.

and of course you tube's classic:

Josh Kalish said...

Hey, we could lower costs for everything if we just had the government monopolize all industries and then lower costs across-the-board. We will be so competitive.

Evan Falchuk said...

Well-said, John.

The wide scope of Buffet's comments - and your own analysis of the health care economy - reflect the fact that there really isn't a coherent health care "system" that can be "reformed."

But he's just wrong on the larger point. We have been focused on costs in America, for decades.

It's why medicine has become more about how to stop doctors and patients from spending too much money rather than about how to help them make sure they work together well.

Many of the problems he points out are a direct result of this focus on "costs costs costs" rather than "medicine medicine medicine.

I have some more thoughts here:

Cheers, and thanks,

Evan Falchuk

xtra said...

I think physician rates are a red herring in health care. The areas where we have seen above normal cost growth in health care are where we have low price sensitivity as a result of insurance that functions as a means of prepaying healthcare as opposed to spreading risk. In the areas of health care where there are substantial out of pocket costs (20% or more)-such as dental, vision, long term care, and plastic surgery, we have seen normal or negative cost growth. The present reform bill will exacerbate the current trend line, not mitigate it.
A good source for the break down of US health care costs was conducted by McKinsey:

Cynthia Beattie Mcgill said...

Everything Obama learned about diplomacy he learned in kindergarten and it is us, the Americans who are paying for him not learing good lessons in the childhood. Hope his putting America on the path of "set a good example and others will follow" philosphy works!

Callistenes said...

One of the reasons doctors charge so much in America is to cover malpractice insurance and maybe even more so the cost of repaying the student loans they have which can be 300k in total. No one ever talks about this. One of the reasons tuition is skyrocketing is that the government (state and federal) guarantees those loans so the universities jack up tuition. Drop the input costs and the total health care costs will go down.

doggydogworld said...

I didn't hear Buffett say Dems should outlast a filibuster. In fact quite the opposite. He made it very clear that it's a national problem which requires a bipartisan solution. He proposes a nonpartisan commission of experts to come up with a new system. The US has handled politically sensitive matters this way in the past -- before he became Fed Chair Alan Greenspan headed a committee to fix Social Security, a subject every bit as politically charged as health care. Military base closures are also selected by a special commission.

Generally in these situations Congress agrees ahead of time to accept the commission's recommendations without change (or to vote them down and start from scratch). This gives political cover against backlash from angry constituencies.

richard said...

A good breakdown of health care costs by category was done by McKinsey:

I doubt that battering suppliers would ultimately do much to reduce the trend line but would simply reset it at a lower level as utilization, which is already high in lots of areas, would accelerate. Evenso, the idea is politically untenable. I think one of the underlying findings in the cost study is that areas where there is little or no out-of-pocket cost account for most of above normal cost growth (the majority is in out-patient care). Areas of care where there are significant out-of-pocket costs show normal or lower cost growth.

John Hempton said...

Buffett clearly said the $2.3 trillion has constituencies. he thought a saving of 4% of GDP was possible - say $600 billion.

That is a LOT of constituencies you need to upset.

If there is a consensus way of doing that let me know.

The US is a low tax country by the standard of the OECD - but if you add the fact that much medical system which is paid for by taxes in other countries is paid for outside taxes in the US then it is not a low tax country at all.

But there is no easy solution here at all.


Namazu said...

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 medecine; b) he believes a broader political consensus is required. Everyone is entitled to the their opinion, but not to someone else's.

John Hempton said...

A review of the transcript will also show that Buffett believes in Universality - which necessarily means in the Government picking up some of the cost...

That is socialised medicine.

He wants socialised medicine that focuses on costs.

What part of that did you miss?


Namazu said...

Are we arguing over the meaning of 'socialized?' To me, 'universal' implies everyone has coverage--not the same coverage, and not coverage by the State as provider. For what it's worth, I think universal coverage is a public good that the US can afford and should bring about. Conflating this with Britain's NHS, which is by any definition socialized medicine, seems to me a conceptual error, and a policy mistake that I think we would do well to avoid.

xtra said...

"but if you add the fact that much medical system which is paid for by taxes in other countries is paid for outside taxes in the US then it is not a low tax country at all." This comment isn't entirely true. About 45% of health care is directly provided for by the government in the form of medicare, medicaid, VA, etc. If you include the forgone revenues as part of tax subsidies, the government involvement in health care is closer to 60%. This is to say that a good deal is already provisioned through taxes.

John Hempton said...

Comarping tax load by country is hard. Australia and the US I think are roughly comparable.

Australia forces people to save through compulsory private social security. Contributions are compulsory but are not considered a tax.

American has a payroll tax which some people do not consider a tax. For instance many statistics about tax burden by income in America specifically ignore the burden of payroll tax (for partisan reasons).

But both are compulsory imposts.

Australia meets the vast bulk - well over 85 percent of medical expenditure via the tax system. The US - on the statistic above - about 45 percent.

The difference is 40% of medical expenditure - which is about 7% of GDP. If you add 7% of GDP to the US tax burden it takes it above the Australian one.

Though if you add back the compulsory Australian private pension contributions Australia is again a higher tax country.


I have - in a past career - played with these figures in lots of jurisdications.

There are a bundle of low tax OECD countries - Australia, USA stand out. The burdens are comparable.

There are some mid tax ones (UK, Japan, New Zealand).

There are high tax ones (Northern Europe).

There are ones that do not fit. (Greece - should be mid-tax but compliance is low and so it is low tax... which is part of their current problem...)

My figures are a 12 years old because it is that long since I was a senior Treasury official in tax policy - and frankly - I do not keep up with that stuff any more.


Anonymous said...


What exactly (in the context of your) post is "medical kit" ?

John Hempton said...

Kit is everything from a bed to a robotic surgeon.

Beds do not cost much and the biggest maker (Hillenbrand) was never a very big company.

MRI equipment costs a fortune.

I used kit in the engineering sense -tools - usually big ones.

American hospitals spend FAR more on kit than hospitals elsewhere. Some of this clearly is useful. Some more questionable.

It is NOT the driver of the difference in expenses (doctors incomes are a bigger driver). But it is important.


The sellers of this sort of stuff make good margins when they can convince the doctors it is necessary. Strangely margin compression due to competition is slower in this area than in many others...

septizoniom said...

the metrics of doctors per capita and beds is not necessarily a postitive indicator merely by being higher. there are many factors that could be affecting this (such as productivity, non doctor medical professionals, out patient, etc.). i am surprised a writer with as gimlet an eye as yours fell for this without thinking or question.

Steve said...

John, great post and I’m delighted to see your interest in this topic.

This is a big issue- a decent proportion of GDP and with substative intergenerational issues. An argument can be extended that existing funding systems are a government run / sanctioned pyramid scheme. For each individual, the vast majority of their health care costs fall in the last year or two of life. It is not an analysis I have ever seen undertaken but my impression, as a clinician, is that individuals’ life-time health costs will exceed that which those individuals have paid into health care during their life (pro-rata taxation, insurance, co-payments), ie those exiting the pyramid, now, are still getting paid out. This golden age of health care consumption is unsustainable due to the shape of the age pyramid and changes in dependency ratio.

I don’t understand why most health care reform focuses on the macro (US legislation, proposed Australian changes) rather than the micro level. By micro level I mean decision making by clinicians for individual patients, as this is what drives costs and outcomes. This isn’t to promote some Gosplan for individual medical care, but rather reforms that dismantle the perverse incentives that influence clinicians decision makings. Existing systems distort the relationship between marginal cost and marginal benefit of each treatment decision. A few of many examples:

Under fee-for-service a clinician maximises income by performing more services. This really does lead to procedures being done that have little marginal benefit. There is no disincentive for clinicians to avoid high risk procedures even when there is a low likelihood of benefit. This leads to cascade of downstream costs as the complications unfold, yet the initiating clinician is insulated from these costs.

What a pharmecutical company can charge for a medication is not related to its marginal benefit but is related much more to how a drug is marketed. Companies are successful in having clinicians abandon old and about to be off-patent drug and prescribe new, clinically identical, on-patent drug. Clinicians have no incentive to use cheaper medications but are the target and prime beneficiary of marketing.

Expensive tests are substituted for history taking and examination because the latter costs the clinician their time and the former costs them nothing.

Clinicians get paid, irrespective of whether treatment goals are achieved (indeed treatment goals are rarely documented explicitly or communicated to patients).

Target driven health care systems (NHS and maybe coming to Oz) can create perverse incentives. If hospital managers will be penalised for elective surgery wait-lists, they transfer resources from emergency to elective activities, leading to (unmeasured) poor outcome for emergency patients. The ingenuity for artificially meeting targets knows no bounds- I’ve heard of emergency departments dealing with 4 and 12 hour rules by painting a line down the middle of the ED and designating one side a ward. Get close to the hourly rule time, and just wheel the patient from one side of the department to the other. I’ve heard of a hospital CEO asking clinicians to “do less tests for infection” so that the infection rate target could be met, even though this will directly harm patients because their infection will not be diagnosed.

BTW, administrative costs are high in the US because it is utilised to influence the marginal cost to clinicians of billing (time and hassle). Reduction in administrative costs would lead to a blow out in billing costs.

Clinicians need skin in this game. Health care can be reformed, with massive impact on the strangulating tapeworm, but it requires an appreciation that professionalism and administrative control fail to deliver economically rational clinical decision making. In my view all attempts at macro reform just rearrange the deckchairs and that only reform that changes the incentives that drive clinical decision making will avoid the iceberg.

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