Monday, October 12, 2009

The Audacity of Extortion


“The only nonnegotiable principle here is success. Everything else is negotiable.”


—Rahm Emanuel, The New York Times, June 7, 2009


The CBO said Wednesday that the Senate Finance Committee's health bill would cost $829 billion over a decade and reduce the federal budget deficit by $81 billion over that period. That helped dispel concerns among moderate Democrats, and committee leaders set a vote on the bill for Tuesday. “This resolves one of the big unknowns,” said Sen. Evan Bayh. “It does create momentum.”

–The Wall Street Journal, October 9, 2009



Well the impending train wreck that is national healthcare so-called-reform looks to be pulling out of the station shortly: it has, we are told, “momentum.”

Not “logic,” or “rationality,” or “elegance,” or “demonstrable worth.”

It has “momentum.”

Now, momentum is a fine and wonderful thing when it is applied to something good—like, say, an upturn in the business cycle.

Business cycles start, always, as a rally in credit markets—i.e. cheap money. The availability of such cheap money then spreads from Wall Street to Main Street, encouraging spending for goods and services, which, in turn encourages new production…which creates rising employment, higher demand, and even higher employment.

That’s good “momentum.”

Momentum is not so fine or wonderful, however, when it is applied to something bad, like a downturn in the business cycle.

Lower spending causes production cuts and layoffs, which leads to lower spending which results in further layoffs, etc.

That’s bad “momentum.”

Momentum, in and of itself, is therefore absolutely meaningless: what matters are the facts of the case to which the term is applied.

And in this case, the facts of the so-called healthcare reform plan recently drafted by the Senator Finance Committee are this: it is in no way, shape, or form, “reform.”

It is, rather, a crude political construct fostered by extortion, to the benefit of both the politicians who can claim victory while accomplishing nothing good for taxpayers, and the special interests who will never claim victory in public but will sleep easy at night knowing they have, in fact, accomplished a great deal of good for themselves.

Lest we be accused of pointing political fingers—our interests are strictly mercenary, what with running a hedge fund and all—let us look at what, exactly, constitute the facts of this $829 billion bill, recently blessed by the Congressional Budget Office as a reform vehicle and deficit reducer.


Big picture, the Senate bill will, we are told, insure an additional 29 million “nonelderly” Americans ten years from now, thus raising the percentage of insured Americans from 83% to 94% in 10 years. (For you home-gamers, that’s a cost of $28,586 a person over 10 years, or $2,859 a year.)

We are also told that the plan will still leave 25 million Americans without insurance in 2019.

That’s right: according to the Bill itself, there will be 29 million Americans newly insured, and 25 million Americans still using hospital emergency rooms as their primary form of healthcare, in 2019.

How it is that the insuring of 29 million individuals at a cost of $829 billion, while leaving 25 million out in the cold, amounts to “reform,” we here at NotMakingThisUp don’t have a clue.

But we’ll leave the labels for others to defend or decry while we look at how this Clearly Non-Universal Healthcare Plan gets paid for.

The first way it gets paid for is this: Americans will be required to have health insurance, and if they don’t get it, they’ll pay a penalty of up to $750 a year. (It’s just like a tax, only it’s not called a tax, because the plan is not supposed to raise taxes. Go figure.)

So the government, as we pointed out above, will spend $2,859 a year per person for ten years to insure 29 million people, but will only fine/tax an uninsured person $750. Furthermore, there are exemptions to the fine/tax based on income levels and “hardship situations.”

The second major revenue source will be stiff new taxes on “Cadillac” insurance plans—so long as they aren’t in the name of a union member.

You can see the wheels coming off the track even before the train has left the station!

Now, how does the Senate bill make up the obvious funding gap?

Well, it assumes cost cuts. In particular, the bill postulates that Medicare will stiff doctors by slashing payments 25%…even though this will never happen.

Medicare cuts to docs get proposed every year, and every time they come up in Congress, they get blocked—as they will be blocked this year, too. Nevertheless, the Congressional Budget Office analysis which gave this Senate bill “momentum” assumes the Medicare cuts will happen.

All in all, the CBO report is about as meaningful as one of those 50 page company reports produced by Wall Street’s Finest, in which the target price of that company’s shares happens to amount to a few dollars above the current share price, as it always does.

Which is to say, the CBO report is not meaningful at all. Garbage in, garbage out, as we say on Wall Street.

Still, you may ask—as did Marlon Brando in “The Godfather”—how did things ever get this far?

How did an obvious farce of a bill, which doesn’t do the two things that it’s supposed to do—i.e. “reform” healthcare and provide “universal” coverage—get through the most influential Senate panel with what Washington calls “momentum”?

Simple: it was paid for by the very same special interests that all politicians promise to banish from the decision-making process when they arrive in Washington: Big Pharma, Big Hospitals, and Big Ambulance Chasers, to name just a few.

Let’s start with Big Pharma, which was the first special interest to buy off the White House, when it negotiated—directly inside that White House—an $80 billion maximum cut in drug prices over ten years.

$80 billion may sound like a lot of money, but it is not: $80 billion amounts to all of two years’ worth of Pfizer’s gross profits.

And that is a pittance when compared to the benefit Pfizer and the rest of Big Pharma will see under Healthcare So-Called Reform. After all, those extra 29 million newly insured American lives will mean more 29 million more mouths to swallow billions of extra pills every year.

Gosh, if each one of those 29 million newly insured mouths spends just $275.80 a year on pills from Big Pharma (less than the cost of a year’s worth of generic Lipitor), that’ll be $80 billion extra cash going to Big Pharma right there.

Not even George Bush would have tried to call this healthcare “reform” with a straight face.

How, you may ask, did such a thing happen under Barack Obama?

Not being politically inclined—we’re in business to make money, whoever happens to run the place—we think all signs point to Rahm Emanuel, the President’s Chief of Staff.

He is, after all, the same Rahm Emanuel who in June told the New York Times: “The only nonnegotiable principle here is success. Everything else is negotiable.”

Even, apparently, Obama’s populist principles.

Whatever the reason—and for the purpose of full disclosure—we have purchased shares of Big Pharma precisely because Obama’s “reform” should make that business better than anything George Bush could have envisioned in his wildest dreams.


Next up in the White House extortion caper was Big Hospital, which pledged $155 billion in cost savings in return for avoiding onerous cuts elsewhere.

Medical device makers, on the other hand, were apparently asleep at the switch during the negotiations. While Big Pharma and Big Hospital were promising a combined $235 billion to push the reform ax out of their way, the medical device companies were being targeted for $4 billion in cost cuts by the Senate Finance Committee.

(Don’t expect this cut to stand, however: it seems that the erstwhile populist Senators Al Franken and John Kerry—whose states are loaded with medical device makers and their employees—are now squawking at this particular aspect of healthcare “reform.”)

Big Labor, naturally, never needed to negotiate with the White House, thanks to its pre-election payoffs to the Obama campaign. Despite the Senate bill’s plan to impose stiff taxes on “Cadillac” healthcare plans, union jobs will be exempt, which is fortunate for Big Labor, since its members frequently get “Cadillac” healthcare coverage.

All in all, the so-called “healthcare reform” plan looks to have been put together by and for special interests, without a single actual “reform” in the bill—tort reform being the most obvious missing ingredient, for the obvious reason that Big Ambulance Chasers were on board Team Obama from Day One.

Say what you like about healthcare reform—say that it is necessary, or it is unnecessary; say that it is just another government program bound to fail, or that it is an important government duty to pick up where the private sector has failed; say that it is a manufactured crisis or that it is the most serious political issue of our time—but you can’t say this bill is rational, well-considered, and logical.

It is political, it is pay-for-play, and it is not reform. Indeed, it is Chicago politics at the National level.

How did our most populist modern President since Jimmy Carter come to allow such a state of affairs?

Well, apparently, everything—even principle—is negotiable.

Still, we leave the political name-calling for others who care about such stuff. Our business is to make money.

And unless something goes terribly wrong in subsequent legislative maneuvering, we think so-called “healthcare reform” provides the best opportunity for profitable investment in Big Pharma in decades.

The “Audacity of Hope”? Not that we can see.

More like, the Audacity of Extortion.



Jeff Matthews
I Am Not Making This Up

© 2009 NotMakingThisUp, LLC


The content contained in this blog represents only the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

14 comments:

Anonymous said...

Amen Jeff.

Who knows what else union members will be exempt from before this is over... or for that matter union-heavy industries what with all the new protectionist measures coming in (mind you, Bush was a devout protectionist in many ways also).

No need to worry though... clean coal (hack, cough, wheeze) and wind power will create such positive momentum with 'green collar jobs' that we can pay for it all!

Anonymous said...

Washington suffers from two irreversible problems: 1) The across-the-board misalignment of incentives and 2) A deeply embedded culture irrationality and inefficiency that causes the decent (Obama) to compromise everything they stand for.

The depressing reality is that the "system" isn't capable of creating anything BUT a bill like this. And Jeff, your correct analysis that the bill is steered by the major private industries is further proff that in order to figure out how it all works, all you've got to do is follow the money.

[sigh]

Kevin said...

One thing about making money, though - that money has to be worth something. Considering the pace of fraud, waste and mismanagement out of D.C. (not to mention the hypocrisy and deceit), all those dollars you make will be good for nothing more than kindling. Medicare is currently unfunded to the tune of $38 trillion. General tax revenue will be needed to pay social security benefits in 2016. On top of this, the current administration is force feeding another massive entitlement program that will not be sustainable from day one - for the sake of a political "victory". In truth, there is only one way out of this mess - a gimmick countless nations have resorted to prior to their eventual collapse - debase your currency. The dollar is doomed.

Kieran said...

I've always respected and appreciated your opinion, even when I've disagreed with it. But this is the first article you've written that's made me go out and buy a stock.

plus ca change...

Jeff Matthews said...

All: I apologize for not getting these comments up sooner.

Keep those virtual cards and letters coming....

JM

The Equalizer said...

Jeff,

I think you should continue to stay away from topics such as this. I cannot pretend to know which political side of the spectrum you fall onto. I can, however, say that consistently making sound logical arguments is not your forte in these discussions. Case in point:

How it is that the insuring of 29 million individuals at a cost of $829 billion, while leaving 25 million out in the cold, amounts to “reform,” we here at NotMakingThisUp don’t have a clue.

Let me answer that one for you: it's a reform because 29 million more individuals will be insured than at status quo.

Now you might have solid points elsewhere, but that statement was nonsensical and it took me effort to respond with something other than scathing sarcasm. Moving on:

Gosh, if each one of those 29 million newly insured mouths spends just $275.80 a year on pills from Big Pharma (less than the cost of a year’s worth of generic Lipitor), that’ll be $80 billion extra cash going to Big Pharma right there.

Easy enough solution if everyone of those 29 million needed just that and had no other medical problems. Otherwise, that was a monster logical fallacy that should not belong to a reasonable discussion as I usually find this blog to be.

I am of the same mind as you in that this reform is not truly a reform and the benefits, as usual, will go to someone other than people. At the same time, your way of arguing your conclusion is.. dare I say it... MADE UP. You do manage to squeak out a reasonable financial suggestion on Big Pharma, but beyond that all I can see is a veiled attempt at making feelings seem like reasoning.

I am looking forward to your post on European rail system instead of more of this baloney.

But What do I Know? said...

Preach it, brother. . . I had hopes for health care reform because it seemed so simple and obvious. Instead this bill is going to make things worse. Obama's heart is in the right place, I think, but he seems utterly incapable of sticking to anything. A well-meaning amateur is going to get eaten alive in the snake pit of power. Surely he has to realize that he looks weak, both in Washington and around the world.

In defense of the CBO, I would like to say that they are forced to score the bills according to the assumptions they receive. The Medicare cuts are similar to the AMT tax increase that is projected for all of the outyears--that's how Congress wrote the bills. Oftentimes (I don't know about this one) CBO will offer an alternative analysis with the rosy assumptions removed, but that one is generally ignored by the press and solons.

Jeff Matthews said...

The Equalizer: Your point here--

"Easy enough solution if everyone of those 29 million needed just that and had no other medical problems. Otherwise, that was a monster logical fallacy that should not belong to a reasonable discussion as I usually find this blog to be."

--misses the point of the piece, which is that Big Pharm cut a terrific deal for themselves. Period. Do you think otherwise?

Also, it's hard to grasp what you consider a the "monster logical fallicy," since you don't define it.

Sounds like your inherent political bias--since you seem intent on sniffing them out yourself--gets in the way of reading a fairly straightforward analysis of a deal between politicians and business people.


And, for the record, I'll write on whatever I choose to write on, just as you may read whatever you choose.

JM

The Equalizer said...

--misses the point of the piece, which is that Big Pharm cut a terrific deal for themselves. Period. Do you think otherwise?

Jeff,

I think I was decently clear in stating my agreement with the general suckiness of the said reform. Since you are so quick to actually assign political bias to me, I suspect that you might have missed that point.

As far as "sniffing out" political bias (kettle?), you are free to point out where exactly I attributed any political bias to you. Once you fail to do so, I hope you come around to actually reading my statement and understanding that the main issue is not the conclusion but the way you go about supporting it. A valid conclusion (you have that in your post) does not mean that all your arguments for it are valid.

The logical fallacy in your example is a false analogy, or if being generous, just a poorly built over exaggeration. It's the same as saying that giving everyone a shovel and a ton of asphalt will allow for cheaper road building. Yeah, probably true, but makes neither viable nor logical comparison nor does it get a point across as simply as you pretend.

You could just say that sending money straight to Big Pharma is a cheaper alternative for everyone. Simple.

And for the record, we,your readers, will continue to enjoy the good stuff you write and bash you for the bad stuff you write. You can choose to write what you want, but as this is supposedly a medium for conversation, it would help if you stopped being so touchy when people point out that you cover some topics better than others.

P.S. A decent link for all http://online.wsj.com/article/SB124579852347944191.html

Jeff Matthews said...

Equalizer:

Still trying to understand what exactly is the "false analogy" or "poorly built exaggeration."

Big Pharm cut an $80 billion deal to avoid other, involuntary, methods of reform.

That's a fact. It's not an analogy, nor is it an exaggeration.

And, as an investor, I think it's great for those companies.

Why is it great? Because it is so tiny relevant to Big Pharma profits.

I think you confuse putting that $80 billion in context--i.e. explaining that it amounts to the value of 29 million annual Lipitor prescriptions--with some sort of suggestion that we just give everyone $80 billion worth of meds.

Hope that helps.

JM

Anonymous said...

"Obama's heart is in the right place, I think, but he seems utterly incapable of sticking to anything. A well-meaning amateur is going to get eaten alive in the snake pit of power"? Buddy, he is the snake.

Conservative Brawler said...

Jeff,

Great article!

-Seth

Kid Dynamite said...

Jeff - isn't the term "populist senator" redundant?

Anonymous said...

More money for Big Pharma thanks to Big Government:

..."The legislation provides more Medicaid coverage for smoking-cessation medicines such as Chantix, made by Pfizer, and Zyban, made by Glaxo. Currently the drugs are on the 'excludable' list, meaning it is up to states whether to cover them in Medicaid...The bill would take the drugs off the list effective January 2014."

Mundy, Alicia. "Bill Boosts Treatments For Smokers." Wall Street Journal, October 16, 2009, A5.