Proof That Warren Buffet Reads This Blog

Posted on May 17, 2008
Filed Under General Rationing Issues |

Yesterday, Jacob Goldstein of the Wall Street Journal Health Blog reported that Warren Buffet greatly increased his stake in big health insurers during the first quarter of 2008. Specifically, he added 300,000 shares of WellPoint and 400,000 shares of UnitedHealth to the holdings of Berkshire Hathaway. Notably, the stock prices of both of these insurers have been tanking for months. So why would Mr. Buffet be buying them?

Mr. Buffet has a simple answer: “If we’re going to be buying things, we want to buy them on sale.”

To which the WSJ replies: “Of course, if it was simply a matter of increasing holdings that are falling, we’d all be billionaires. There must be more to it than that.”

Indeed, there is more to it than that, and careful readers of this blog (as Mr. Buffet must surely be) realize what that is.

The case against buying health insurance stock, it goes without saying, is plain for anyone to see. As DrRich has pointed out more than once, the mega-insurance companies have traditionally had three major pathways for increasing shareholder value:

1) Acquiring and privatizing community assets - generally non-profit hospitals and non-profit insurers - for a tiny fraction of their true value (through the collusion and/or ignorance of boards of trustees, state attorneys general, and state insurance commissioners), then letting the market assign the actual value of those formerly public assets to the company’s stock price.

2) Mergers and acquisitions of smaller insurers, i.e., through the consolidation of the industry.

3) Taking advantage of certain opportunities for “efficiency” that big insurance companies’ quasi-monopolies have bought them, such as cherrypicking patients, handcuffing doctors, retrospectively denying coverage to insured individuals, and the manifold other activities we can safely bundle under the rubric, “covert rationing.”

Obviously, all three of these pathways are closing off. There are few community-owned assets left to acquire, and consolidation has already left the U.S. with just a handful of important health insurance carriers. As for the “efficiencies,” opportunities here are drying up as well. For instance, this past December, shareholders of UnitedHealth Group (concerned because subscribers to the company’s insurance products had decreased by 315,000 in 2007) demanded a promise from company executives that the insurer would become “nicer” to its subscribers. Their own shareholders are wrecking their business model!

Insurance companies are left with the impossible task of trying to make a profit (and worse, to demonstrate continued growth) by actually managing the healthcare of sick people. This has never been accomplished in the modern era, and in all likelihood is not within the realm of possibility.

This explains why the stock prices of the big health insurers have been heading south for some time now. But what explains Warren Buffet’s enthusiasm for these failing businesses?

Two things. First, he recognizes the growing prospect of a Democratic victory this fall, in both houses of Congress and the Presidency. Second, he has clearly read and digested DrRich’s posting of six months ago that describes what will happen to the insurance industry with a Democratic victory.

Republican-style healthcare reform, even with a Republican such as John McCain, would bring the rapid and painful death of the health insurance industry. This, simply, is because the Republican strategy for healthcare reform relies on “competition and efficiency” in the private insurance market to save the healthcare system. Republicans, apparently, have not noticed that the insurance companies have been desperately trying their brand of “efficiency” for more than a decade now, and it’s been a disaster. The insurers have shot their efficiency wad; they’re entirely bereft of ideas; they haven’t a clue. Indeed, one can only imagine how the notion of a Republican victory, and the unbearable expectations such a victory will place upon them, must shake insurance executives to their core.

On the surface, Democrats will also put the insurance industry in an untenable position, as it is clearly their aim to drive insurers out of business (though they won’t actually tell us so). But Democrats actually have no performance expectations whatsoever for the insurance industry. Their only expectation is that the insurance companies should fail in due time. This prospect - as long as it’s preceded by one last, massive windfall - is quite acceptable to an insurance industry itself, which, realistically, can only be looking for a graceful exit strategy at this point.

As it happens, that one last windfall for the insurance industry is an integral part of the Democrat’s promise. For, before they drive private insurers into oblivion, the Democrats will present them with the gift of government-paid insurance premiums for many (Obama) or all (Clinton) of the 47 million uninsured Americans. These new premiums will amount to as much as $150 billion per annum. So, for at least a while, the Democrats will guarantee that health insurance profits will rise, executives bonuses will increase, and - more to the point - their stock prices will soar.

Which brings us back to what Warren Buffet is up to. DrRich is a great admirer of Mr. Buffet, and is sincerely happy to have been of assistance in furthering his understanding of the complex interplay between politics and the fiscal status of the big health insurers. So far, Mr. Buffet is playing the game perfectly.

DrRich does respectfully remind him, however, to carefully monitor this blog for the “sell” signal.

__________

Addendum. DrRich has just noticed that his deeply admired fellow blogger, DB, has challenged him this morning to a discussion of honor over the topic of malpractice reform, where DrRich has taken a very contrarian and highly unpopular position. Indeed, even DrRich hates himself for making such an argument. Nonetheless, DrRich is compelled, reluctantly, to answer in the affirmative (this being a matter of honor), and will post a reply within a day or two.

Comments

6 Responses to “Proof That Warren Buffet Reads This Blog”

  1. db on May 18th, 2008 3:46 am

    I await your reply.

  2. Dr. Val on May 18th, 2008 9:21 am

    Are the Dems a lock for November? I guess Warren thinks so… :)

  3. L-E on May 20th, 2008 1:00 pm

    Yesterday Warren B. announces that Obama is his choice, today that he will continue to hold fundraisers for Obama and Clinton until the nominee is chosen. . . BTW, after reading more of your blog and related links I think that one of my former bosses who has a similar name to the billionaire is a former colleague of yours.

  4. DrRich on May 20th, 2008 2:32 pm

    L-E,

    Not a surprise since Mr. Buffet would really be screwed if McCain won, now that he’s invested all that money in the health insurers.

    You must be referring to Buffo the Clown, a very early colleague in a different sort of circus.

  5. L-E on May 20th, 2008 4:30 pm

    Yes, some years under that tent. . . I imagine that you know the Binkster as well.

    Back to a Beltway-related topic, it has appeared to me since moving to the DC area that some of the defense contractors such as SAIC and Lockheed-Martin have increasingly added diversification into DHHS contracts in recent years.

  6. L-E on July 17th, 2008 1:07 pm

    Note the representatives of health insurance companies on the following list of individuals involved in the “transition [of] the nationwide focal point for health information interoperability from a government advisory group to a public-private organization”:http://www.ahicsuccessor.org/hhs/ahic.nsf/individuallist.htm.

Leave a Reply