No Mercy / No Malice

The Fix

The Fix

This week, President Trump signed an executive order to lower drug prices, demanding the U.S. receive most favored nation status from pharmaceutical companies — that they charge Americans the lowest price paid abroad. Trump said his policy would cut drug prices by 59%: “Whoever is paying the lowest price, that’s the price that we’re going to get.” One issue though: It’s bullshit. Pharma stocks fell initially, but they more than recovered once the market realized the executive “order” is voluntary. The markets saw the order as a Mack Truck sees an insect — barely. The announcement is laughable when set against the regulatory capture of the U.S. healthcare industry.

Up Against It

In the Wall Street Journal, historian Niall Ferguson wrote, “any great power that spends more on debt service than on defense risks ceasing to be a great power.” Sooner or later, the interest on the debt crowds out a nation’s capacity to do anything else — fight wars, survive pandemics, build infrastructure, fund social safety nets, etc. In fiscal year 2024, the federal budget earmarked $877 billion for defense and $878 billion to pay the interest on our debt. As Ferguson explained, “America’s fiscal position is far more constrained today than ever before.” In fact, he argued, we’re facing a debt crisis similar to the ones that contributed to the downfalls of the Spanish, French, and British empires. As I previously wrote, countries typically are not conquered — they go broke. America is up against it.

Fiscal Gap

Reigning in our debt should be a national priority, but it isn’t. Congressional Republicans are working to make Trump’s tax cuts permanent, which would add $9 trillion to the debt — 3x the national debt of Germany. During the campaign, Elon Musk said he’d cut $2 trillion from the federal budget. More recently, DOGE claimed to have saved $160 billion, but a nonpartisan analysis determined those cuts came at a cost of $135 billion, netting savings of $25 billion. The GOP refuses to acknowledge math and believes the nation will grow if we cut taxes to zero. Meanwhile, nearly all Democrats oppose entitlement cuts, and most also oppose cutting defense spending, believing instead that we can tax our way out of debt. This bipartisan Kabuki dance is juvenile. Just as parents tell themselves their kid “doesn’t need college in today’s world,” we’ve decided there is a free lunch, governments with their own reserve currency don’t risk default, and we’re not headed toward a cliff.

Modern Monetary Theory is the latest consensual hallucination between policymakers who want to excuse their past behavior and those who want an excuse to spend more. They believe a perpetual motion machine does exist. Spoiler alert: It doesn’t. I received a degree in economics (weak flex, as I graduated with a 2.27), taught macro- and microeconomics in grad school (better flex), worked in fixed income for Morgan Stanley (getting weaker again), and have written several books on economics and finance (you decide). It’s dangerous to be certain, and I’m not an economist. But I am … certain that MMT is fucking stupid, and any economist espousing this intellectual traif makes RFK Jr. seem like Jonas Salk.

Anyway, when the adults show up we should have a serious sit-down re closing the fiscal gap — the amount the government needs to raise taxes and / or cut spending, as a share of GDP, to stabilize our fiscal health. The Treasury estimates the current fiscal gap is 4.3% of GDP. Stanley Druckenmiller, famous for betting against the British pound and delivering 30% annual returns over three decades, puts the gap at 7.7%.

U.S. debt-to-GDP currently stands at 120%, with the CBO projecting it could rise to 160% by the 2050s. But in a presentation that should be required viewing for Congress, Oakcliff Capital CEO Bryan Lawrence points out that the CBO projections include a number of unrealistic assumptions: no recessions, no wars, no pandemics, 4% interest on Treasuries, 2% inflation, a birth rate of 1.9, the addition of 1.9 million immigrants per year, and Trump’s tax cuts expiring. What we should focus on, Lawrence argues, is the 2% real growth in healthcare costs per capita. A 1 percentage point reduction in the growth of healthcare costs per capita translates to 3% of GDP. According to Lawrence, that gets us halfway to our goal of eliminating the fiscal gap, which he estimates to be 6% of GDP. In sum, reducing healthcare costs isn’t the best option, it’s the only option.

Expensive, but Bad

Every election cycle, candidates tell Americans their healthcare system is expensive and broken. Yes, Americans know this. Incomprehensible insurance bills, medical and dental debt haunting 40% of U.S. households, and trips to Canada or Mexico for cheaper prescription drugs have turned our healthcare system into one of our biggest sources of emotional distress. U.S. healthcare is a $4.9t corrupt cop. In a report that looked at costs and outcomes across 10 industrialized nations, researchers at the Commonwealth Fund wrote, “The U.S. continues to be in a class by itself in the underperformance of its healthcare sector.” For those in the back of the class, that’s the wrong kind of exceptionalism.

According to the most recent data, the U.S. spends $13,432 per capita on healthcare — more than twice what the average comparable nation spends. We pay 8x what Germany and Switzerland pay for Ozempic and 7x what they pay for Humira. Insulin, which has been in mass production since the 1930s, costs 8x more in the U.S. than it does in Greece. The median cost of a coronary bypass in the U.S. is $89,000, approximately 8x and 5x what the procedure costs in Spain and Australia, respectively. In the U.S. a childbirth with a C-section costs 4x what it does in South Africa. An appendectomy in the U.S. costs 3x what it does in the U.K. For what we spend, we should be the healthiest nation among our peers. We aren’t; we pay significantly more for dramatically poorer outcomes.

Follow the Money

This week, House Republicans floated $880 billion in Medicaid cuts over the next decade to help pay for Trump’s $4.5 trillion tax cut. Even by Washington standards, the math doesn’t math. But considering the GOP’s slim Congressional majority and the political fallout from throwing an estimated 8 million people off the health insurance rolls, the proposal likely won’t go anywhere. These aren’t serious people.

A serious person would ask a simple question: Where does the money the U.S. spends in excess of what other nations spend on healthcare go? Answer: 30% of it goes to administrative costs, split evenly between providers and insurers. Another 10% goes to prescription drugs. Higher salaries for U.S. doctors and nurses and investments in medical equipment account for the rest.

Let’s Make a Deal

There’s no silver bullet to lowering costs, but Bryan Lawrence identified our two most powerful tools: Pricing transparency and negotiating prescription drug costs. The 2022 Inflation Reduction Act (worst name ever) granted Medicare the power, for the first time, to negotiate drug prices. Based on a complicated formula, Health and Human Services selected 10 drugs covered under Medicare Part D. The discounts range from 38% to 79%. When these prices take effect next year, Medicare will save an estimated $6 billion, and Medicare beneficiaries will save $1.5 billion in out-of-pocket costs. In the final days of the administration, Biden’s HHS secretary announced another 15 drugs, including Ozempic, would be eligible for Medicare negotiation. Q: Why isn’t the largest purchaser of pharmaceuticals on the planet able to negotiate costs — like everyone else — on all drugs? A: Fuck if I know.

Price Transparency

The insurance industrial complex imprints two ideas into the zeitgeist. First, you’re irresponsible if you don’t have health insurance. Second, the best companies offer employees gold-plated plans as a point of differentiation. As an entrepreneur, I noticed that my firm’s health insurance premiums increased by two or four points above inflation every year. Those costs were effectively nonnegotiable, so when I had the means to do so, I went naked, saving my family $50,000 per year in premiums. Note: I’m not suggesting you do this — I’m fortunate to be able to absorb any healthcare costs.

Total U.S. healthcare expenditures were $4.9 trillion in 2023. Think about the previous sentence: The U.S. healthcare industrial complex is bigger than the entire German economy. Private businesses accounted for 18% of total expenditures, with three-quarters of that money going toward insurance premiums. American households, two-thirds of which have employer-sponsored plans, picked up another 27% of total expenditures via employee contributions to premiums, co-pays, and out-of-pocket expenses. In a functioning market, consumers would allocate their dollars toward lower costs and better outcomes. In the U.S. healthcare market, however, consumers are left in the dark while insurers and providers maximize profits.

More than 90% of Americans support greater healthcare price transparency. I don’t know what the other 10% of Americans are thinking, but I do know that roughly the same share of Americans work in healthcare. Probably just a coincidence. Injecting price transparency into healthcare could save an estimated $1 trillion annually, as employers and consumers could harness the power of markets to lower costs and inspire better outcomes. Senate Republicans, Democrats, and even the chamber’s lone socialist support the Health Care PRICE Transparency Act 2.0. So why hasn’t it become law? Because money is speech, and the healthcare industry and its lobbyists have told Congress, “Give us America’s wallet, or we will fucking kill you (get you booted out of office).”

K Street

In 2024, U.S. businesses spent $4.4 billion on lobbying. It may be the greatest ROI in economic history. One study found that lobbying connected to a 2004 law that created a one-time tax holiday for repatriated profits delivered a 22,000% return. In 2013, Amgen spent $5 million lobbying Congress for a two-year reprieve from Medicare price controls on a single drug. That effort resulted in $500 million of Medicare payments to Amgen. No other industry embodies regulatory capture like the healthcare industrial complex.

Andor

I’m watching Season 2 of Andor. It’s the best television show so far in the Star Wars franchise, but even if the Force isn’t strong with you, Andor is an illuminating case study in how revolutions begin. When we meet Cassian Andor, he’s a petty thief, but as the Empire steps up pressure across the galaxy, our hero and others like him evolve into revolutionaries.

Luigi Mangione, who allegedly murdered a health insurance CEO, isn’t a revolutionary, but he’s become a folk hero. His crowd-funded legal defense fund recently topped $1 million, with an average donation of $20. That a murderer would be seen as a hero is depraved — and revealing. Given everything America has lived through — deindustrialization, two forever wars in the Middle East, the Great Recession, an opioid epidemic, the highest per capita pandemic death rate among comparable industrialized nations, the largest generational wealth transfer in history, and millions of young men failing to launch — it’s not surprising that voters chose a felon who promised that he alone could fix it. He can’t, but if we don’t fix it, the wealth inequality at the root of America’s pain will self-correct via war, famine, or revolution.

Every One

A story that haunts me: For the first time, the New York Times announced the wedding of a young couple who weren’t legally getting married — just having a ceremony. The bride was suffering from terminal brain cancer and didn’t want her husband to inherit her medical debt when she died. We live in the most prosperous nation in history. We shouldn’t be asking our kids to borrow money to support their parents’ and grandparents’ lifestyle. And our daughters, every one, should be able to get married.

Life is so rich,

P.S. Did you know I have another newsletter? The Prof G Markets Pod now has a newsletter edition. Sign up here to receive it every Monday. What a thrill.