The Healthcare Cartel

I found this chart courtesy of Charles Hugh Smith, a brilliant essayist who has some incredible intuition on the market.

I’m borrowing some of his ideas in this post, simply because he wrote so concisely on the fact that our “free market healthcare” is driving our country to collapse.

In school, we are taught that the “profit motive” drives firms to maximize their profits through efficient resource allocation. If the companies don’t turn profit, theory posits that they aren’t being efficient, and thus should allocate resources elsewhere. Customers have a choice between which companies to choose from, so the companies with the best resource-allocation and best product for the lowest price are the ones chosen in a form of free-market competition. Competition lowers costs, and the world is better off because of it.

Oh, if only things were that simple.

We all know that healthcare is a profitable sector. It’s a for-profit institution, so of course we expect it to make some revenue. That’s how the laws of business WORK.

But in real world capitalism, the push to the lowest price doesn’t push the best to the top. It just makes it so that no one can turn a profit, due to price wars (hello, retail sector). The laws of business are more of suggestions at this point.

So healthcare took competition out of the equation. Did away with the laws of business. Completely erased the suggestions, and created cartels in the pharmaceutical industry, hospital chains, and insurance companies etc. etc.

Cartels are how profits are maximized, short and simple.

Imagine if all the kids selling lemonade on street corners got together and decided to charge the same price. Say that the regular price of lemonade should be $1.00, but these kids decided to restrict competition and fix prices to $5.00. On every street corner. In every city, in every town, in every state. You would HAVE to pay $5.00 for that lemonade. You wouldn’t have a choice(check this post out for some news on OPEC, one of the most notorious cartels that engages in similar behavior)

That’s exactly what the healthcare system has done.

Charge $5 for a cup of lemonade that should really only be $1 (and IS $1 in other countries)

Even if we got the little kids to somehow reintroduce competition in the world of lemonade, they would lobby the government to put price controls on lemonade, and donate to political campaigns in order to get their will to be done. Lemonade will always be $5, because the lemonade cartel theoretically owns the government with under-the-table checks and some strong monetary nudging.

The healthcare system does the same. As long as the cartel structure is intact, the healthcare system will use that to make a profit. They just donate to the government if any problems arise.

So how do we stop from paying $5 for a $1 lemonade?

We need to step up prevention, as it is low-profit. When people are really sick, as America unfortunately BELIEVES it is right now, there are countless treatments to be done, medicines to be prescribed, tests, visits, procedures, etc. etc. Sometimes, these steps only work to make people sicker.

When the healthcare system profits from chronic illness, it will use that to it’s advantage. It won’t make people better. And it makes sense not too – when your goal is to make profit, you won’t turn away the one thing that makes you money. It simply wouldn’t make sense at a for-profit institution. Keeping people sick is how they make money.

That would be like the lemonade kids turning away thirsty customers. It just isn’t a financially sound decision. But, the way the healthcare system operates is akin to the little kids lacing the lemonade with salt so the people keep coming back, thirstier than ever. Healthcare tells people that something is chronically wrong with them so they can continuously prescribe countless medicines, treatments, and procedures.

It might not be moral, but money sometimes isn’t a moral game, unfortunately.

Touching back to the first graph:

We spend an insane amount of money on healthcare, but get no return on that investment. We spend $2,000 more than the next most expensive country, but our life expectancy is the lowest by 1.5 years, on average. Our country is getting sicker and sicker. As an investor, I would get out of this trade immediately, if it were a stock.

Imagine that all the countries are stocks. You put $100 in America. Your friend put $50 in Japan, and another puts $33 in South Korea. After a few months, you realize that Japan has outperformed you, leaving your friend with a higher return of almost 5% and more capital WITH LESS OF AN INVESTMENT. South Korea does similarly, moving at a 3% higher return. Both end up with more than you, after spending less money.

Anyone would take that information and say “I’m not on my efficient frontier.”

Image result for efficient frontier

Too much risk, and not enough reward. You would move your money elsewhere.

You would also look at how your money was being allocated in that asset.

Administration costs are necessary, but do they need to 38% higher than Switzerland, on the aggregate? Probably not.

The system needs to be changed, but the cartels need to be eliminated for that to happen. The incentives to keep people sick need to go away, for the betterment of our society. Imagine if we had our entire population working to their full potential and a healthcare system that supported that. That would fix the system, and we would move into a society concentrated on preventive measures, rather than restorative treatment. Who knows what would happen next?

Disclaimer: These views are not investment advice, and should not be interpreted as such. These views are my own, and do not represent my employer. Trading has risk. Big risk. Make sure that you can balance your risk/reward, and trade small, and trade often.

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