Warren Buffett’s business acumen incredible.
But, something you learn about Buffett if you read about him is that he doesn’t consider what the economy is going to do tomorrow when he buys a business. He buys a business primarily on the merits of the business itself. Does it have a good, strong, competitive position? Will it continue to pump out cash in the long-term? Are the managers any good? Those are the questions Buffett typically focuses on when deciding to buy a business.
If Buffett would like to speak about business, I’m all ears. When he talks about politics, the economy and government policy I’m left puzzled.
Buffett appeared earlier today on CNBC’s Squawk Box. One of the topics of discussion was health care. Here’s a link to the transcript of the portion of the interview that puzzled me.
Credit to the CNBC crew for taking Mr. Buffett to task. In the end, he actually didn’t say much of substance. He likened high health care costs to an “economic tapeworm” and said something ought to be done about those costs to move them from 17% of GDP, toward 13% – 14%.
After fuzzling around a bit about and saying that health insurance wasn’t the problem, something I agree with, Becky Quick asked what is. Buffett replied:
Well, the reason–the reason is we’re doing an awful lot of things that don’t need to be done, probably.
Then Greg Robinson, of Portland, Oregon asked:
Wouldn’t a better fix for health care be a system similar to auto insurance? Could you give a specific–a simple scenario of how Geico would insure a large portion–population of people, perhaps having them pay a portion of the bill themselves so they will police the doctors? I’m a big believer in catastrophic care, but paying for your own maintenance.
To Buffett’s credit, he punted and said we should ask the guy who wrote this article in the New Yorker.
Here’s where I agree with Buffett:
- Health insurance is not the problem.
- Costs may be too high.
- We do a lot of things that don’t need to be done.
What Buffett doesn’t understand, or at least doesn’t articulate in a manner that demonstrates his understanding, are the causes of #2 and #3.
But, he should. They’re the very same things that drive the earnings of his the businesses that make him one of the world’s richest men – supply and demand.
If medical costs are high, we should look and see what’s impacting supply and demand. Are there things unnecessarily restricting the supply of medical care which could drive prices up on increasing demand? Sure. The cost of malpractice insurance. Tight regulation of the medical care industry that regulates everything from drugs to the number of hospital beds in a county. Limited numbers of slots for doctors in medical schools. To name a few.
What about demand? Anything pushing hard on that side? Age demographics (e.g. baby boomers getting to peak medical spending age). Illegal aliens. Government subsidized care with no rationing mechanisms (i.e. prices).
Regarding #3, of course we do a lot of things that don’t need to be done. There’s a very, very good reason for that. We can afford to. We certainly don’t need many of the products Buffett’s company’s produce. Who needs a Peanut Buster Parfait? We buy PBP’s because we want to and can afford to. Has it ever occurred to Buffett that one of the reasons we spend 17% of GDP on health care is simply because we can (and because we need to clear our arteries out from all those PBP’s he sells us)?
Did Teddy Kennedy need to spend what he did trying to give himself another shot by beating cancer? Probably not. But, what he spent gets counted in the 17% of GDP figure. He spent that because he wanted to and he had the resources to do it. I don’t want to begrudge him of that freedom – this is still a free country, eh, Buffett?
After all, some of the experimental stuff that they tried out on him may wind up being much more affordable in 5 – 7 years and could end up saving the life of someone near and dear, much in the same way safety technology on high-end vehicles works its way down to the base level cars and saves lives.
Somewhere in the discussion Buffett pointed out that we spent 5% of GDP on health care in 1960 vs. 17% today. Much of the government intervention into health care has occurred after 1960. While, part of the reason we spend 17% of GDP on health care today is because we can, it would be nice to know how much we would spend on it with much less government intervention. My guess is that it would be closer to the 5% than the 17%.