Warren Buffett’s bluster about new healthcare venture bound to backfire. Then what?

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The News:

Warren Buffett says his joint venture with Jeff Bezos and Jamie Dimon is going for something bigger than shaving a few percentage points off healthcare costs. The big news broke in late January.

Buffett’s Berkshire Hathaway Inc. (Omaha NE), Amazon.com Inc. (Seattle) and JPMorgan Chase & Co. (NYC) were teaming up in a joint venture to do something about the high cost, complexity, and bureaucracy of US health care. The idea was that if they manage to lower costs in this $3.3 trillion industry, all Americans will benefit, news organization “Inc.” reports.

There was only one problem. None of the three partners offered any details whatsoever about their planned venture, other than to say it would be “free from profit-making incentives and constraints.”

And they added that the venture was in its very early stages. Some observers had high hopes for more detail in Buffett’s letter to Berkshire shareholders that accompanies the company’s annual report. But the letter contained not one word about the new initiative.

Buffett sat down for a three-hour interview last week with CNBC Squawk Box co-anchor Becky Quick. Among many other topics, he answered her questions about the new healthcare venture. There still are few details, but here’s what is known so far:

  1. Once the venture is up and running, it may open up to other companies.

For now, Buffett said, the venture is so new and unformed that the partners have yet to decide whether they are forming a company or not.

“We don’t necessarily have to form a company,” he said. “We may form a company, and probably will.”

  1. Its main purpose is to curb runaway healthcare costs.

One goal of the new joint venture is to deliver better health care that people feel better about receiving than may be true today, Buffett said. He added, “But its biggest goal is to control ever-rising healthcare costs.”

  1. Negotiating power may be one way to help lower costs, but it’s not the only way.

What can the new partnership do to reduce healthcare costs?

“It would be very easy, I think, to go in and shave off 3 or 4% [from] the cost of some things just using negotiating power,” Buffett said.

  1. It won’t be easy or quick.

Buffett is well aware of the obstacles facing any initiative toward cost reduction in health care.

“You talk about something that has $3.3 trillion in revenues presently going to people, and most people that are on the reception end of the $3.3 trillion are happy with things,” he said.

  1. The first step is finding the right CEO.

Buffett said the partners are currently on the hunt for the right person to lead this initiative. While they’ve been “inundated” with candidates, they will make that selection very carefully, he said.

Asked for a timetable, Buffett said he expected to have the CEO in place within a year, but perhaps not accomplish much more than that.

“That’s an enormously important job and we can’t afford to make a mistake,” he added

Steve’s Take:

When news first broke that the three aforementioned titans of US industry were joining forces to lower costs in this $3.3 trillion industry, and that they would be forming a nonprofit organization to implement their lofty goal, I thought back to my days in the nonprofit division of the Internal Revenue Service. This was way back when Medicare paid healthcare providers their costs of care–plus 2%. Period.

I was assigned to the IRS unit that dealt with nonprofit hospitals which back then were developing for-profit ancillary businesses to supplement the “cost-plus 2%” reimbursement scheme under Medicare. Simply put, most nonprofit hospitals needed revenue to supplement their loss leaders, like the emergency room, maternity and pediatrics, to name a few.

Then came the big surge of for-profit, investor-owned hospitals and nursing homes, starting with Hospital Corporation of America, National Medical Enterprises (later known as Tenet Healthcare) and Beverly Enterprises. One thing they all had in common was an obsession with reducing their operating costs to a minimum. Cut costs and maximize profits, was their mantra.

This trip down memory lane made me realize that the Buffett, Bezos, Dimon (BBD) troika is–first and foremost–still governed by, and supremely successful employing, this for-profit mantra. Cut costs! Not exactly emblematic of a truly nonprofit mission where providing quality care to the general public is the foundation of the exemption from Federal and state income taxation. Not a small deal, to put it mildly.)

And therein lies the fundamental contradiction at the heart of the BBD healthcare proposal. In their announcement, the partnership said that the joint venture will “pursue this objective through an independent company that is free from profit-making incentives and constraints.”

At first blush, the widespread public reaction was: “Now here’s an interesting proposal,” says David Akadjian for the Daily Kos. But something about the announcement didn’t sit well with him either. What Buffett says contradicts the idea that this will be an independent company free from profit-making, and profit-making incentives.

Here’s how and why this is important, Akadjian argues:

First, the contradiction.

The new nonprofit company is supposed to be free from profit-making incentives and constraints. Yet at the same time, the goal of the company is to fix “the ballooning costs of healthcare” which are acting as a “hungry tapeworm” on the American economy.

Buffett also mentions enhancing patient satisfaction and outcomes, but it seems pretty clear the real goal is to lower costs so companies can enjoy greater profits “once freed from this onerous tapeworm.”

Next, in economics, incentives matter.

You can tell people in your company all day long to do something, but if the organization is structured so that they are incentivized to do something else, they won’t do it.

For example, companies frequently reward members of their sales teams with commissions or bonuses if they reach a certain level of sales for a quarter. Often the commission will go up if they hit a certain level. This incentivizes sales teams to hit a sales goal.

This is great if short-term quarterly goals are the focus. What this can do, however, is override any other message that you are giving your sales team.

While it’s interesting that BBD are looking at taking on health care, the message some of us are hearing is that they’re not really interested in health care.

What they’re most interested in is lowering costs.

And there’s only so much savings BBD can squeeze out of health insurers, pharmacy benefit managers (PBMs) and drug distributors, Max Nisen at Bloomberg asserts. He’s right about that.

Those are relatively low-margin businesses (though PBMs are likely more profitable than operating margins imply). And large employers such as Amazon.com, Berkshire and JPMorgan likely get pretty good deals from such middlemen already.

But even with better incentives, reducing healthcare spending while increasing quality is easier said than done. One must usually be traded for the other. Many of the easiest spending fixes involve curtailing choice, which employees don’t like.

Steve's Take: Despite the bluster of Mr. Buffett and his two partners to fix #healthcare, all roads ultimately lead back to #Obamacare. A lesson about to be re-learned by Buffett & Co. Click To Tweet

Somehow, I just can’t believe that enhancing the overall quality of care that us average citizens get is at the heart of the three titans’ actual agenda. After all, they didn’t build what they built without first cutting costs to the bone. And along with that comes a cut–not enhancement–to quality. In health care, that’s always proven to be a crucial mistake.

Just ask the millions of Americans who don’t have healthcare coverage and what that eventually costs the rest of us when they wind up getting their medical care via the emergency room. At the end of 2017, 12.2% of US adults lacked health insurance, up from 10.9% at the end of 2016, as President Obama was completing his final term.

The increase of 1.3 percentage points, although modest, marks the first time since at least 2008 that the share of adults without insurance increased from the previous year, according to a report from Gallup, which conducts a widely followed survey asking Americans about their health coverage. The increase indicates that 3.2 million Americans lost health coverage in 2017, Gallup concluded.

Haven’t we been there, faced the music and finally fixed that problem with the Affordable Care Act? Despite the bluster of Mr. Buffett and his two partners, all roads ultimately lead back to Obamacare. A lesson about to be re-learned by Buffett & Co.

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