Wednesday, May 27, 2009



As part of the deal worked out between GM and the UAW, a deal that looks like it will remain in effect even though it apparently didn’t save GM from having to visit bankruptcy court, the union agreed to reduce retiree health care benefits immediately. This will, as the Wall Street Journal put it, “leave hundreds of thousands of retirees paying higher out of pocket medical expenses. For decades, these retirees paid only minor charges.” This facet of the GM/UAW deal is by no means unique; not only did the Chrysler deal contain such language (and Ford cannot be far behind), but legions of employers inside and outside the car business (broadly defined) have cut back on medical benefits for both active and retired workers. Doubtless these are important developments for the companies, and especially for the workers and retirees, involved. However, they have broader ramifications for the entire economy and for society.

For years, health care has been one of the hottest sectors of the stock market. As an example, the Vanguard Health Care Fund, though having trouble, like most stock funds, over the last few years, has delivered an average annual return of 16.1% since its inception almost exactly 25 years ago (5/23/84). The logic behind this enthusiasm for health care stocks was that our population is growing older, as we age we consume more health care, and the economy will have no impact on our need for health care. The first two contentions are inarguable in a general sense (The second is arguable from the personal standpoint of the Pontificator. My consumption of health care has not grown as I have grown (rather rapidly, it seems) older; it remains at zero. I steadfastly refuse to see medical professionals of any type (other than on a non-professional basis, largely for the sake of a rather wonderful marriage). This is an effective way of combating the ever growing cost of health care (though my insurance rates continue to climb) and, so far, of maintaining my health, and sanity. The last point may be argued by many of my readers, and definitely by my wife and children, but that is another point.), but the third is nonsense if we substitute the noun “demand” for “need.” “Need” was never an appropriate word, as applied to health care in the United States, in the first place.

We think we need a lot of health care as long as someone else is paying for it; i.e., the demand curve for health care is nearly horizontal (if, as properly understood by mathematicians, price, the independent variable, is plotted on the x axis) or nearly vertical (if, as preferred by economists, demand, the dependent variable, is plotted on the x axis). As employers have provided ever richer health care coverage (Believe it or not, this is the situation that prevailed from World War II until about three years ago.), aided by one of the richest subsidies in the tax code, the “back of the store” at your local Walgreen’s or CVS has come to resemble Penn Station at 5:00 PM on a typical weekday afternoon. We run to the doctor for minor maladies that we once treated with a home remedies or cheap over the counter bromides or simply toughed out. People, encouraged by inane commercials for drugs they previously didn’t know existed, let alone think they needed, are going to their doctors (for a laughable deductible and/or co-pay) and demanding the latest trendy piffle from behind the drug counter in order to combat the latest perceived maladies that have, oddly, become a very hot topic for lunchtime conversation. What we used to call “indigestion” and we treated with Brioschi or Bromo-Seltzer is now “acid reflux disease” treated by a hyper-expensive drug for which we pay an even more laughable co-pay. What we used to call nervousness and we treated with a few stiff shots of Old Open Switch, a walk around the block, a few moments of communication with the Creator, a massage (which we paid for), a good night’s sleep, perhaps with the aid of a little Sominex, or a little enthusiastic private time with one’s spouse is now “anxiety disorder” that we treat with psychotropic drugs. Kids we used to describe as “all boy” and who were easily handled, and their energy redirected, by the likes of the sainted Sister Monica, are now in dire need of Ritalin. And don’t even get me started on strictly vainglorious cosmetic surgery that, while not always (but often, either according to plan outlines or through creative application for benefits) paid for by third parties, can easily be dispensed with when things get tight. This is not to say that there are plenty of legitimate needs for the aforementioned remedies (excluding purely vainglorious plastic (old fashioned term—thanks) surgery), but if their makers had to rely on purely legitimate needs for the sales of these products, one shudders to think what would happen to those makers’ revenues and profitability.

My point is that we only “need” a lot of the health care we consume because we only pay for a small portion of such care. When we have to pay for such things and/or finances get tight, maybe that tummy tuck, er, breast augmentation , or, ahem, very broadly defined male equivalent is not so necessary. Perhaps we try a little NyQuil or Pepto-Bismol before we run to the doctor with a sniffle or a stomach ache. Demand for health care will go down cyclically as the economy continues to struggle and secularly as third parties pay for less and less health care. While people will always need come health care, they certainly don’t need all the “health care” we as a society are consuming. As rational market forces are brought into play, and the bizarre distortions wrought by the dominance of third party payer schemes are wrung out the system, many of the most profitable operations (no pun intended) of the sector we call health care will be greatly reduced in magnitude and probably rendered unprofitable. And, while by no means an expert in the field of health care, I suspect our society will be healthier, or at least less neurotic, as we consume less “health care.”

Thus, the market’s enthusiasm for the health care sector may be coming to an end, though perhaps not an abrupt end. I suspect that the fat days for this sector are behind it. As I do with most of my hunches, I will find some way to act on this notion, probably by looking for good shorting opportunities as they arise in the months and years ahead.

(I also should try to limit the parenthetical remarks in the Insightful Pontificator; excessive use of these crutches is the mark of a poor, or at least a lazy, writer.)

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