Ken has been offering his thoughts on global markets, events, and trends on a weekly basis since early 2006. His rational perspective, based on decades of experience in risk management and analytics, provides all readers with helpful insights, commentary, and context. Both informative and entertaining, the posts offer clarity and simplicity, often using inspiration from his favorite artists and musicians.
Ken also authored Trading Risk: Enhanced Profitability through Risk Control (Wiley 2004), which challenged the traditional focus of risk management on loss avoidance. The book introduced a new risk management program that can help both money managers and individual traders evaluate which elements in a portfolio are working efficiently and which aren’t using an extremely simple set of statistical and arithmetic tools.
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- Heal Ourselves Monday, December 16, 2024
With all matters ’24 winding down and little of import scheduled on the tape (OK; we got FOMC this week, but I can’t work up much enthusiasm about it), I will attempt to school y’all as to what is really wrong with our Health Care System. This in the wake of that poor son of a bitch getting plugged during morning Midtown rush hour, and even more so the rise legions of misinformed souls who, with varying levels of irrationality, are applauding at least the intent, if not the consequence, of his action.
I take this whole thing somewhat personally for a couple of reasons. First, the murder happened on my turf. I have walked by that very spot thousands of times. I have occupied a half dozen offices – including my current one, within a couple of blocks of the crime scene. I park in the adjacent hotel garage regularly. For 10 years, I owned a Condo less than half a mile away.
The topic also touches me professionally, first because I have also spent many years working on projects, albeit with minimal success, designed to bring incremental rationality to health care costs. Moreover, I am, like > 50 million other Americans, a customer of United Health Care, paying for not only my own family’s coverage, but also that of my employees. They have been, upon occasion, maddening to deal with, and have outright pissed me off more than once.
But they are not the head of the dragon, nor, perhaps, even its tail.
But before I get to that, it is my pleasure to celebrate the following chart with you, which touches my soul almost as much as the image of the refurbished Notre Dame Cathedral I shared in last week’s note:
To what, for the uninitiated, I am referring is the essential end of a multi-year condition known as an Inverted Yield Curve, under which rates for shorter duration debt exceed those of longer maturities. And that ain’t natural. If you borrow a few bucks from a buddy and promise to pay him tomorrow, you’d expect to pay a lower vig than you would if your agreement called for you to cover this loan in, say, 2027.The Economics books tell you that an Inverted Yield Curve is a recessionary indicator, but I don’t think this is what’s been at play here. I think that the Treasury Market has been, since lockdowns at least, distorted by both Monetary and Fiscal Policy, and that a return to normalcy is a boon to rational capital allocation.
But back to UNH. Their projected 2024 profit is ~$23B – hardly chump change. But measured against the above-mentioned 50 million system users, and considering they have business lines other than insurance, their profit per patient < $500/year. Moreover, with a market cap that hovered before this Luigi dude gunned down their CEO at ~$500B (it is by this measure the 16th largest company in the world), the return to investors, owners of this business, is ~4.6% — again not chump change but less than the yield on 2-year Treasuries that prevailed before the Fed began cutting rates.
I sympathize with those who, having treatment coverage denied or delayed, have formed a rage against the insurance company itself, but their anger is misplaced. It is the system, not its custodians, that causes most of the problems.
Allow me to elaborate. First, and most broadly, the vital economic ecosystem known as Health Care is the most structurally distorted of any which I am aware. As an unavoidable reality, Supply AND Demand are set by the supplier. You don’t walk into a doctor’s office or a hospital and inform them of your preferences, they inform you of your needs. There’s nothing anybody can do about this. They also control the oversight mechanisms, but more about that below.
Further economic distortions emerged after WWII, when, facing a labor shortage, American Industry began to offer Health Care as part of compensation packages. Among other matters, there’s a tax arb here; for most of us, the dollars paid for health care coverage are worth as much as direct compensation –are perhaps even more valuable because they are received without a tax liability. Employers cover these costs and deduct the payments from their taxable income. In this way, trillions of dollars transferred across the economy escape the avaricious clutches of the tax man.
These two elements of Health Care economics have created incentives for overconsumption, as we all tend to gorge ourselves on any product or service for which somebody else is footing the bill. It is also at this point when Health Insurance became a misnomer. In other forms of insurance, we pay a premium to cover the adverse impacts of an unfortunate contingency. But with Health Insurance, nearly all economic burdens are underwritten by the insurer.
There are also misapprehensions as to who is covering these costs. Large corporations ALL underwrite their own risks in these realms and use companies such as UNH simply to merely push the paper around. When coverage for 40% of our fellow citizens paid for by taxpayers, most notably through programs such as Medicare and Medicaid are added in (the National Institute of Health estimates that 2/3rds of 2024 medical costs were paid by the government), the percentage of the costs of medicines, treatment and the like that are paid by insurance companies themselves drops to the low double digits (or below). Yes, it is your UNH rep that informs you that they won’t cover your hip replacement, but more often than not, they’re simply following guidelines of third-party underwriters.
This is not to suggest that insurance companies don’t play games to goose profits. They most certainly do. It’s the American Way.
We can also blame lawyers, who have boosted liabilities (contingent and actual) into the stratosphere. But I have some sympathy here, because, whatever else happens, lawyers gotta get paid.
There are, in addition, a few other distorting dynamics. First, particularly in this environment of accelerated technological development, many tasks that doctors perform (and for which they charge doctor-level fees) could, with greater ease, lower cost, and perhaps greater efficiency, be undertaken by machines and Health Care personnel without medical degrees. This would liberate physicians to apply their time and efforts to maximum treatment benefit, but I am not optimistic that any change in that direction will be speedy in its rendering. Doctors are like everyone else, insofar as that they don’t like giving up revenue streams. So, they continue to apply stethoscopes, blood pressure monitors and thermometers to our bodies every day, and this drives up costs and reduces treatment availability as well.
The American Medical Association lords over these matters, and one upsets them at one’s own hazard.
Perhaps the most difficult inefficiency to address is the disproportionate skew of Health Care expenditures for a given individual towards treatments taking place at the end of that person’s life. That infallible source – NIH – estimates that the percent of outlays in the last 12 months of an average person’s life is between 10% and 12%. This may not sound exorbitant, but if one recalls that human life spans are now approaching 80 years, it is 10x the amount expended in earlier years of our mortal existence.
The last days of my daddy – that old mixer Stuart Charles Grant, who I don’t believe darkened a doctor’s door for six or so decades, but who in in the last several months of his life spent more time inside medical facilities than out, is an anecdotal example.
And it did no good. He died anyway — I suspect within the same timeframes as would have prevailed if he had chosen to stay home. On the night of her death, they airlifted my mother from a suburban Chicago hospital to Northwestern Memorial, where, upon doctor’s advice, I authorized the same fatal morphine dose that she easily could’ve received without leaving her Lake Forrest deathbed.
We all have stories like these…
There are other issues as well, of course. At the lower end of the socioeconomic spectrum, we encounter untold instances under which all medical services begin in the Emergency Room and extend into the priciest realms of Health Care.
But in general, we have a system under which the supplier sets the demand levels and associated price, where consumers pay for only a small fraction of the products and services consumed, thereby incentivizing overconsumption and disincentivizing price disclipline, where doctors rule and lawyers run wild.
And an efficient mix between costs and competent treatment? Fuggedaboudit.
For anyone who cares to know, our projects involved creating a capital and trading market to swap expense streams for various diseases – most notably diabetes, the treatment of which we spend more than we do on Crude Oil. In our imagined Utopia, markets would set the price of care, based upon those righteous forces that govern other marketized elements of the economy. It could work, but our failed experiences suggest that the idea, best case, is ahead of its time.
The problems, meantime, appear to be intractable, but I think an honest rendering would suggest that we obtain better outcomes than those jurisdictions that feature universal Health Care. You may prefer the latter, but you may want to check with your friends in the U.K. to determine their wait times and experience quality for even the most basic and essential elements of their medical treatments. And please bear in mind that nothing’s for free, and that you’ll pay one way or another. Finally, with our government covering 67% of Health Care costs, we’re closer to socialized medicine than you may imagine.
I’m even more certain that plugging several holes into the back of an insurance CEO is, at best counterproductive and, at worst, catastrophic. We can choose to gaze into those dewy brown eyes and proclaim the hitman a visionary martyr. I don’t, however, feel it will accomplish much and may cause serious incremental carnage.
In the final analysis, like the physician referenced in Luke (4:23), we must seek to heal ourselves. Our problems are chronic and solutions elusive. But let’s at least start with a proper diagnosis, and then work diligently towards constructive, rather than damaging, murderous ends.
TIMSHEL