Mark Foster: Greetings, my friends. This is Mark Foster of the Newport Legacy Insights Podcast. It is the morning of December 22nd, and I am hosting this discussion from my wintry home office in Whitefish, Montana. It is the last night of Hanukkah, and Christmas is going to be with us just in another couple of days. The family's flying in tomorrow, or the first part of the family, and looking forward to a wonderful holiday season here. Today's kind of a special day, because again, I'm fortunate to have a great guest speaker. The guest speaker is Eric Potoker. He's joining us, and Eric is the UBS healthcare analyst. He's a great asset to me. He's a great asset to our team. And Eric, thank you so much for helping us out this morning. I really, really appreciate your assistance. I really appreciate you, my friend.
Eric Potoker: Thank you. And thank you for that wonderful introduction.
Mark Foster: I really do appreciate you guys. The wealth management research team is just awesome. This is the second episode. This podcast is our second in a two-part series on the affordability crisis. A few months ago, I wanted to better understand the issues around the government shutdown. So I reached out to Eric, and we had a few discussions about the US healthcare system. We chatted about what part of the economy it was overall and how that compared to other countries and how effective that money was being spent. We talked about the issues causing the 43-day government shutdown. But before we begin with Eric, let's just quickly review the first episode of our Affordability Crisis Series. I hope you get a chance or got a chance to listen to it or will listen to it after this one. Clearly, the affordability crisis issue is a great move to the middle for the Democratic parties, and so many people can connect to stuff just costing more. Or they can connect to whatever you do, don't take away my free stuff.
The primary affordability issues being discussed these days in the news or public discourse are cost of housing, cost of higher education, that cost creating a significant student load debt and the never ending increase in healthcare costs. In episode one, we discussed housing and education. Today with Eric, we're going to be discussing arguably the most significant issue, which is healthcare. Healthcare is the most significant issue because right at the moment it's causing the national deficit to increase as well as our overall national debt. This truly is a national affordability issue, maybe not as much as an individual affordability issue as advertised. And it's only about one to one and a half percent of the population is going to be significantly impacted if they were to eliminate the Obamacare credits. But nonetheless, let's just dive right into the whole topic with Eric. So Eric, my friend, what percent of our economy is allocated to overall healthcare services? And given the fact that there's a whole bunch of gray haired dudes like me, the baby boomers, aging, what happens in the future?
Eric Potoker: Yeah, big question. The first question in terms of terms of percentage of economy, I mean, we are pushing up against 20% of US GDP being healthcare related, both services and products. And that has grown from, I think, about 17% two years ago. So it is growing both on an absolute basis, but also on a relative basis to the economy.
Mark Foster: So at that high a percentage of the overall GDP, and if most of that's getting funded through our debt and rising that fast, I mean, don't we hit a wall at some point?
Eric Potoker: Yeah. It seems that at these trends, it's almost impossible that we won't at some point run into a wall, and that would be most likely the rest of the world deciding they didn't want to purchase our debt, which is funding the deficit and healthcare being, as you said, a significant driver of our annual budget deficit. When that happens, [inaudible 00:04:49] question answered.
Mark Foster: Yeah, nobody knows. I mean, frankly, that national debt issue is the one I get the most and most significant issue that at some point did the bond vigilantes come in and interest rates go through the roof. And I think you made the comment, if we don't do something, we turn into Greece. I think you said that a couple of weeks ago. When I listen to these politicians on the news broadcast, and frankly, it's both sides of the spectrum, they seem to always want to blame the insurance companies or the pharmacy benefit management companies. Is that reasonable, or is that basically scapegoat politics?
Eric Potoker: Yeah, I think it falls under the category of scapegoat politics. And quite frankly, they're easy scapegoats for many people because the health insurers and the pharmacy benefit managers that are owned by the health insurers are middlemen, and their business models are relatively opaque. And that makes them easy to scapegoat. But just as context, if you look at the top insurers and their results are publicly available and you extrapolate that for the overall market, I'd say that insurers across the country generate a total of about 50 billion of pre-tax income, and that represents about 1% of total US healthcare spend. So they are a relatively small piece of the overall spending. And you'll hear people talk about their administrative expenses and those could be eliminated. Well, those administrative expenses are probably about 4% of total healthcare spends.
So even if you got rid of all the health insurers and the PBMs that operate underneath them, you're talking about 5% of total healthcare spend between profits and administrative expenses. And as you and I discussed last week, I think, you can't really eliminate the need for the administrative expense to be done by someone. So if the private health insurers are not going to do it, then most likely that will fall to the government. And it's an open question whether the government would be more efficient at administering health benefits in this country than the private sector. I doubt that they would be significantly more efficient.
Mark Foster: Yeah. So in essence, if you got rid of all the insurers and you got rid of all the pharmacy benefit companies, given the fact that somebody actually has to process all this stuff, all that's left is that 1% profit. And if healthcare costs are going up, I'm not sure what the number is, but say four or 5% a year, if all these companies just went away and it was handled by the government, there'd be no real savings period. It's basically insignificant.
Eric Potoker: Exactly.
Mark Foster: So in terms of bang for the buck, you had mentioned that part of the problem was there's a supply demand issue at the root of the overall costs. Can you articulate what created this potential shortage?
Eric Potoker: Yeah. And I think it's been a long time developing in terms of how the supply of healthcare is regulated in this country. The challenges for us to educate physicians, the challenges really in many states to build new hospitals and create new hospital beds. Those dynamics have been in place for decades in terms of the regulatory environment that limits supply. I'd say on the demand side, you mentioned baby boom generation. Obviously, there's a larger percentage of the population that is older, and older people tend to consume more healthcare. And then there are the other dynamics of access in particular where access is limited by whether one has insurance and also then what kind of insurance.
But I think for the supply demand dynamic, it's really that we have not addressed supply in recent decades while we have increased demand. And some of that, as I said, is demographic. Some of that is as simple as things like Obamacare, which increased the number of people who have insurance, who have some kind of access to healthcare, and that effectively increases demand, but on a stagnant supply that leads to price increases and/or shortages. And that's what we're increasingly seeing as the healthcare system plays out.
Mark Foster: So given the incredible amount of money that we allocate to healthcare, why is it that the United States doesn't have better outcomes than other countries, like the EU countries, that spend far and away less money on healthcare?
Eric Potoker: There are a number of factors there, and many of them are sort of over and above my pay grade. But from a healthcare perspective, I think the two that jump out, first, just the lifestyle and the way Americans live, I think, adds to some of the demand. And you can look at obesity rates and other sort of broader indications of people's health and how they pursue their health that I think is a factor in terms of the average acuity or sickness of the average person, especially as they live longer. And then the other part I think is access where we just, unlike other societies, we don't provide cradle to grave coverage at even a basic level for everyone in the society.
So that means that certain people just aren't going to have access because either they don't have jobs, or they're geographically isolated. And without access, that limits things like preventative care, early diagnosis, types of steps that would improve the average population's health. So I'd say those are probably the lifestyle and limited access to care compared to other countries.
Mark Foster: It's interesting. I mean, for the last 50 years or 40 years, my assumption has been that our healthcare system is far superior to anybody else's out there. I mean, we keep hearing that on and on and on. I mean, you definitely, hypothetically, they say you don't want to change the healthcare system because we wouldn't want to have the limited access that other countries seem to have. I question if that's really the case. Do you have any thoughts on that?
Eric Potoker: Yeah. I mean, look, I think there's a reason that people come from many other countries to receive care in the United States. I think at the high end, the quality of care, that's among the highest in the world, but it comes back to the access question for the average person, or even not even the average, but for the people really on the lower income spectrum who, again, don't have employer health insurance and don't have the resources themselves to basically provide their own insurance. Ultimately, it's a rationing question, and politically, it's very hard to talk about rationing healthcare in this country. And yet we do ration. We just ration in a rather inefficient and decentralized manner that enables a lot of politicians to talk about a system that doesn't have rationing, but it absolutely has rationing. I'd say it's just very inefficient rationing.
Mark Foster: Yeah. After our conversation about a month ago, we had kind of briefly chatted about the number of doctors and how does that compare to other areas. So after that conversation, I did look up how we compared to the EU. And it's interesting that in the EU, they have 4.2 doctors per every 1,000 people. And here, we have 2.8 doctors for every 1,000 people. And the EU, you can become a doctor in six years, and here it takes about 12 years. So maybe ours are better trained, but nonetheless, it's easier to create doctors over there. And in terms of the hospital beds available, they have 4.7 acute care beds per every thousand population versus our 2.8 acute care beds per thousand. So in essence, they have 50% more access to hospitals than the United States. And doesn't that speak directly to your issue of access?
Eric Potoker: Yeah. No, it absolutely does. I think that speaks to the limited supply. I think if we looked at that on just primary care physicians, we'd see it be even more of a skew between other developed countries in the US because in the US, so many physicians opt to become specialists. And it's really primary care where the majority of people can get their access and can get the basic types of diagnosis and treatment recommendations that can just lead to a generally healthier population. But again, when there's limited access to primary care, that really starts the cascade of lack of access and not just lack of access, but insufficient quality of access to the basic diagnostic and preventative needs that would help drive a healthier society.
Mark Foster: Yeah. Tied into looking up that data, one thing I learned, which surprised me is that these doctors have to go through a residency, as everybody knows, but those residencies are subsidized by Medicare. And because of that, they're tightly controlled and tightly limited. Doesn't that just ensure that there's going to be a constant supply issue? And haven't they created a system that pretty much pushes up the cost of care? And is that intentional? Is that an AMA thing or what?
Eric Potoker: You're correct. And that graduate medical education is in effect subsidized by the Medicare program. It's in part of what every hospital gets from Medicare for providing any kind of services to patients. It can be hotly contested when it comes time to cut hospital reimbursement. Often GME is one of the areas that can get cut as it was, I think ... Well, I'll stop there. [inaudible 00:14:38]. It's one of the areas that can often get cut, or at least talked about being cut. I do think it's one of the ways that, again, supply is limited, as you point out. I don't know that it's, in and of itself, it's the main issue. Again, it just gets to the cost and the complexity of producing, training a physician in the United States.
Mark Foster: Yeah. When we chatted a few weeks ago, I mentioned that these biotech stocks seem to be on a [inaudible 00:15:05], and in healthcare in general, some of these companies all of a sudden are doing pretty darn well. Odd that the market right now is led by these biotechs and gold miners, go figure. But I had asked you, if this is really going to be a national debt issue and we have to get the cost down, how does this sector become investible for the private companies? Where do you look?
Eric Potoker: I think it gets to the innovation that still is produced by the private sector. We still have, I think, tremendous innovation coming out of the pharmaceutical, biotech space, the medical device space. All of those are creating, if not cures, treatments for, in many cases, unmet demand or undermet demand. So I think there is clearly a case where there are a lot of conditions that need better therapies, and therein lies the opportunity to invest in healthcare. And the other side of that is how are these going to be paid for and how do payers, and payers are increasingly the government, but also private insurers in the United States, how do they adjudicate in terms of the value of any new or existing therapy on the market? And we see that play out, and it actually plays out not perfectly, but in a reasonably efficient manner such that drugs and devices that don't provide incremental value tend not to be reimbursed. And ones that provide value, particularly if they reduce downstream costs, do get reimbursed.
And we see that play out in a whole host of areas, but I'll point to obesity therapies for which we really did not have anything until the last three or four years. And we now have very effective treatments. And one can argue that they are too expensive and not accessible to parts of the population, but the prices are coming down. And with that, the access goes up, and the volumes will go up. And there is, at a certain price point, those treatments provide a positive return in the reduced risk downstream over time in terms of other healthcare conditions. So I do think where there is innovation and that innovation comes with the ability to improve health outcomes and lower costs, those are the places to invest within the healthcare sector.
Mark Foster: Everything these days seems to be AI oriented. Do you think potentially we see improved outcomes or better drug discovery or anything that helps reduce the overall costs or improve diagnoses?
Eric Potoker: A couple of issues that have plagued our country's ability to ration care effectively. So I think we have to assume that the solution to costs continuing to increase at the pace they are is greater rationing. And as I said before, we don't ration well today. The question is whether we will ration better going forward. And I do think AI, to the degree, it enables lots of data to be analyzed very quickly and effectively has the potential to lead to better rationing, more efficient rationing, I'll say. Better is a separate topic that people have various opinions on, but more efficient, better cost savings. Now, for AI to be effective, there needs to be really good data. And that is another issue where our healthcare system has limits because payers are dispersed. No one has a single database of health outcomes and health records for the entire population.
And we have laws in place that limit how third parties can access and use patient data. So navigating the regulatory environment and the sort of balkanized nature of our health insurance system is a challenge here that isn't, to the same extent, in other countries where there is a single payer. But I do think there's still enough data, and you don't need to have everyone's data in that database. You just need to have a database that is large enough, that can track patients, can track treatments and lead to a system that is better able to diagnose and then recommend the appropriate treatment for a specific patient. So I do think the advent of technology, AI being one main component of it, if the data is accessible, I think can lead to better outcomes and more efficient rationing of the demand that we have.
Mark Foster: Yeah. The problem is that rationing word drives people nuts. I mean, it's like, that's why we have the system that we have is because we don't want to ration it. If we want rationing, we'd go to Canada or go to the EU, and things are so different. I got to question if things really are all that different after looking up that info on access to doctors and access to hospitals, if they've got more doctors and more hospitals. But I guess there has to be rationing in the system because you can't just flush dollars down the toilet. I mean, I think about my cohort, the baby boomers, and the older I get, the more folks are coming up with these long-term issues. And can we really afford to spend a ton of money to buy me the three extra months is tough questions, tough questions.
Eric Potoker: Yeah. And to your point, you saw what happened, I think it was during Obamacare or the debate around Obamacare before it was passed as a law, one of the debates was around end of life care and how to better ration care the end of life. And that got turned into death panels politically, and that ended that discussion, very sensitive discussion for very real, understandable reasons. But politically in this country, the taboo around rationing is odd because we do ration. It's just we don't ration efficiently or as efficiently as we could. And I think ultimately that becomes a political question. It's a hard one to put a timeframe around.
And I would suspect that when the political stakes of not rationing more overtly become greater than the political stakes of saying one is going to ration, I mean, that's when you see real change, but I have no sense for when that would occur. And as you noted, this is a country that politically is very against that term rationing when it's applied to healthcare.
Mark Foster: Yeah. And I think the fellow, Peter Orszag, I think he was in the Obama administration.
Eric Potoker: Yeah, he was head of the Office of Management and Budget.
Mark Foster: Yeah. He made the comment last week sometime that 85% of the healthcare costs in the country are consumed by 15% of the people. So it brings up that last little topic that you're just talking about.
Eric Potoker: Absolutely.
Mark Foster: Well, it still seems to me that if the AMA opened up the gates and let more doctors in, or if there's more hospitals, that the excess supply would push down costs. Maybe that's just my simple mind. I don't know. But to summarize what we've chatted about these last two episodes, a lot of this does come down to supply and demand, be it the housing situation, be it the higher ed costs and really the issue, your world of healthcare. And it does seem like there are some things that can be done to reign in these costs. So do you have any final thoughts for us before we sign off and enjoy the holidays?
Eric Potoker: I can't say that I have any that we haven't already covered on the topic without us launching into a whole nother branch of the discussion. So maybe I'll hold off until we have a second chapter of the discussion at some point in the future.
Mark Foster: Okay. And by the way, I may sound like a proponent of nationalized healthcare and I'm not. I was just shocked, after you had led me to look into this a bit, I was shocked to see the differences between us and other nations, but I really appreciate your enlightening me in terms of what's going on and where we should be investing. And again, I really appreciate you, Eric, and your whole wealth management research team. You guys do a great job. We rely on you heavily.
Eric Potoker: Well, thank you for that, and thank you for all the really good questions.
Mark Foster: Oh, yeah. Well, I don't know how good my questions are. Very simplistic, but I hope you have a wonderful holiday season. And I know you're a skier, so I hope you get out to Utah and get in some great turns and have a wonderful season.
Eric Potoker: Thank you, Mark.
Mark Foster: Yeah. Hey, everybody. Happy holidays to you. I love you all. Until next month, Mark Foster and Eric signing out. Bye-bye.
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