Warren Buffett: Healthcare Is the Real Problem for American Business

By Michael DouglassMarketsFool.com

When Warren Buffett was asked Saturday about the American Health Care Act (or AHCA), taxes seemed the likely topic of discussion. After all, President Trump has signaled that the AHCA is the first salvo in a broader tax strategy designed to make American businesses more competitive. (And Warren Buffett has never been shy about tax policy.)

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But Buffett didn't go there.

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In fact, Buffett claimed at Berkshire Hathaway's (NYSE: BRK-A)(NYSE: BRK-B) annual shareholders meeting that other corporate leaders who complain about tax rates know that the real issue is healthcare. He even went so far as to call medical costs "the tapeworm of American economic competitiveness."

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That's a bold statement, but the research backs him up.

American healthcare costs are growing rapidly

According to Buffett and his business partner Charlie Munger, healthcare spending in the United States (and around the world) was around 5% of GDP in the 1960s but ramped faster in the US, with healthcare spending here now totaling around 17% of annual GDP versus low double digits worldwide. This means that, according to Buffett, "[other countries] have gained a five- or six-point advantage over us" in healthcare spending today.

They were a little off in the particulars, but on the overall issue, they're spot-on. According to the Centers for Medicare & Medicaid Services, healthcare spending grew from 5% of GDP in 1960 to 17.8% in 2015. And according to the World Bank, the US spent 17.1% of GDP on healthcare in 2014, while the overall worldwide average was 9.9%.

That's a lot of extra cost here in the United States -- over a trillion dollars in incremental healthcare spending due to that extra 7% of GDP we're spending compared to the rest of the world.

Chart generated by the author with data derived from the Centers for Medicare & Medicaid Services, 2015.

American business foots the bill

And American businesses, which provided insurance for 49% of the American population in 2015 according to the Kaiser Family Foundation, are suffering from this rapid growth.

According to the National Federation of Independent Business (or NFIB)'s 2016 survey of small business priorities and problems, the cost of health insurance is "the most severe" problem facing American small businesses today, and 52% of small-business owners identified it as a "critical" issue. And, like the growth in healthcare costs, this has been a long-standing issue: NFIB notes that healthcare cost has been the most severe issue cited by small businesses for the past 30 years running.

Why we're losing to other countries

Buffett and Munger are good at quickly identifying a problem and its components. Right after Buffett cited the "five- or six-point advantage" other countries had in healthcare spending over U.S. companies, Munger bluntly noted: "That's because of socialized medicine."

Later, Munger further explained that costs "put our manufacturers at a big disadvantage to other people where the government pays."

Keep in mind, these two have made a career out of identifying companies with competitive advantages and buying them before other investors catch on.

The European experience confirms their accuracy.

For example, drug prices are substantially lower in the European Union than in the United States, largely as a result of single-payer systems that aggressively negotiate on price before they allow drugs to be sold to their citizens. Pharma companies risk rejection of their drugs if they fail to offer sufficiently generous discounts, and the difference in drug prices is obvious.

The traditional American fee-for-service model, wherein hospitals were paid for every test and procedure they provided instead of whether they actually helped patients get better, is also a major culprit. The profit incentives in such a private system can have structural inefficiencies based on the competing priorities of insurers, hospitals, pharma companies, patients, and the government.

They opportunity

Buffett and Munger have identified healthcare as the biggest issue facing American businesses. If they're correct, the America has a tremendous economic opportunity.

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Michael Douglass owns shares of Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.