Posts Tagged ‘healthcare’

Be Careful What You Wish For

July 28, 2009

Think quick!  You have a health issue –  in which set of 5 countries would you rather be treated?

Choice A:    Turkey, Mexico, Korea, Poland, Slovak Republic

Choice B:    United States, Switzerland, France, Germany, Austria

The first set of countries represent, in order, those OECD (Organisation for Economic Co-Operation and Devlopment) nations that spend the least on health as a percentage of GDP.  The second set of countries represents, in order, those OECD nations that spend the most on  health as a percent of GDP.  I used 2005 numbers as that is the most recent containing data for all the tracked economies.  (More data can be found here)

Critics of the U.S. system often point to how much we spend on healthcare.  However, this is clearly an inadequate measure.   Greg Mankiw’s blog has pointed to academic work that suggests that higher spending on healthcare is a rational response to higher income.   In his article in the current edition of “City Journal,” physician and Manhattan Institute fellow, David Gratzer, points out the flaws in thinking that, “a dollar spent is a dollar wasted.”

I’m not sure that, as a society, we’ve even achieved any kind of reasonable consensus for we want from our health system.  It is very difficult to make major changes in this system without understanding the end game.  As the above list of countries highlights, simply seeking to lower health expenditure as a percent of GDP may sound appealing, but probably isn’t what we’re really seeking.

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Healthcare Rights, Ethics and Debates

July 24, 2009

I have written very little about the healthcare debate because I do not consider myself sufficiently informed to add much value.  However, I’ve seen others make some valuable contributions, which are worth sharing.  In last weekend’s NY Times, bio-ethicist Pete Singer brings some honesty to the debate, in his opinion piece, “Why We Must Ration Health Care” (free registration may be required).   The thought that more patients could be served at lower cost without rationing is simply beyond belief to me — there simply aren’t enough inefficiencies to wring out of the system, and if there are, political intervention usually isn’t a very effective means of eliminating them.  This is just common sense.  Reducing health costs will involve rationing, but this is not necessarily a bad thing, just a realistic assessment.  The question really is how that rationing should occur, and whether this should be done by government, private business sector or individual choice.

The appropriate role for  government is at least partially dependent on whether health care should be regarded as a right.  This blog has many European readers who may take for granted that health care is a universal right.  However, this is by no means a consensus opinion in the United States.  A good friend in California city government told me about battles over cable television access in his town — many residents regarded affordable cable as a “right.”  In some ways, health care seems closer to the right to cable than, say, rights like freedom of speech or freedom of religion.   After all, rights to healthcare ultimately mean rights to someone else’s time, money or expertise… not exactly “unalienable rights.”   I  came across an opinion piece from Congressman John Campbell, a Republican out of California that attempts to wrestle with some of these issues; yes, it’s a political piece, and I know nothing about Campbell and his other views, but I think he tackles these issues in a common-sense, intelligent way.

None of this is to negate the need for an intelligent U.S. healthcare policy.  As medical technology continues to improve, it’s likely that we’ll see more applications that provide limited returns for large costs — some kind of rationing, led my government effort,  may well be desirable.   Whether healthcare is a right, a critical part of a social safety net, a middle class entitlement, or none of these, is all a matter of debate as well.  The key word here is “debate.”  These are weighty issues that deserve more thought, time and public input than we’ve given.  The argument that,  “if we don’t act quickly, we won’t ever have a solution” is highly unsatisfactory.  It may be that we’ve had no solution in the past because either there is no real consensus on the tradeoffs, or the proposed policies are worse than the current realities.  I, for one, am happy to see the healthcare debate move along a slower path.

Wal-Mart, Healthcare and Large Cap Outperformance

July 8, 2009

Wal-Mart made headlines last week by endorsing proposals in Washington that mandate employer-provided health insurance.  Fox New’s Elizabeth MacDonald does a good job analyzing the retail giant’s motives in her blog post and identifies competitive advantages that Wal-Mart would enjoy if this coverage were legally required.  In essence, because Wal-Mart already covers many employees and has the pricing power of an enormous company, new universal mandates are more crippling to its competitors.  MacDonald also argues that, by stepping forward now, Wal-Mart ensures a seat at the political table in shaping the legislation, ensuring that the law will be relatively beneficial to the company.

Wal-Mart’s action are a good example of the way that large companies, with their deep pockets and legions of lobbyists, can influence new regulations and legislation to their advantage at the expense of smaller competitors.  The more regulation created, the more the potential for this type of mischief.  This is not to pass judgment on the merits of the issue, but only to observe how large corporations can influence legislation in their favor better than smaller companies, and the more regulation, the greater the potential advantage.

It follows that a period of rising regulation can also be a period of relative advantage for large companies.  I’ve written before that investors should expect large cap outperformanceover the next few years.  The regulatory advantage is no doubt only a secondary or tertiary factor; I’ve tried to test relative large cap performance versus rising regulatory burdens (using proxies like the growth in pages of the Federal Register) and get inconclusive results as there are more important factors.  Nonetheless, logic and anecdotal support this view, and the Wal-Mart/healthcare episode is but one more example.

Certainly, large caps are putting in an unusually strong relative performance for this point in the investment cycle.  Below is the chart, illustrating the long term trends — a rising line in the upper panel indicates large cap outperformance.  Clearly the pronounced trend of  small-cap outperformance since the end of the technology bubble broke in 2006.  Since that time, there has been no pronounced broad capitalization advantage. 

Large vs Small: August 87 through June 09

Large vs Small: August 87 through June 09

It is interesting to note that small caps typically have strong outperformance as cash is being put back into the market after a downturn.  Cash flooding the market simply moves the price of smaller, less liquid companies more than that of larger ones.  This year, the historical pattern has not held true.  Reuters reported recently that cash levels are back to levels not seen since 2007 , and yet small caps performed essentially in line with large caps.  This suggests that there is underlying relative weakness in the small cap segment.  Although low interest rates may continue to drive cash levels lower, investors seeking yield are going to be biased towards bonds anyway.  Clearly the good news for small cap in terms of investment cash flows into equities is now largely in the past.   Superior liquidity, lower perceived risk, higher dividend yields, better ability to exploit emerging market demand, more access to credit, and yes, greater influence in shaping regulation, all point to the possibility of a long-term trend favoring large-cap stocks.

Disclosure: neither the author nor his clients have direct ownership of Wal-Mart stock.  Clients of the author’s firm may own Wal-Mart through discretionary accounts managed by third-parties.