The Healthcare Sector Job Growth is Propping Up the US Economy (For Now) | Eric Pachman
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The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough. Thank you. Let's close this door. Very pleased to be speaking once again to Eric Pakman, Chief Analytics Officer at Bank Creek Advisors. Eric, it is great to see you. How are you doing? Welcome to Monetary Matters. Yeah, thanks for having me again, Jack. Looking forward to the discussion.

So, Eric, last time we spoke, we talked mostly about the labor market. It was in 2024 on my previous show. You've built this incredible, truly incredible platform to dive deep into the labor market and see where are jobs being added, where are jobs being subtracted. Today, I want to talk to you about the healthcare industry because what I learned from your platform is that over half of the jobs added to the labor market over the past few years have been in healthcare. So people think, oh, it's just

It's just the government and it's just this, but really it isn't healthcare. And I want to know where is that strength coming from? And also, do you think that it is about to end? Because it's something you wrote recently, you compare the healthcare industry now to banks in 2008. So I take it you're not particularly optimistic. So just walk us through how you started thinking about this and what you think come for the healthcare sector.

So the set that you were referring to is the one that I've been kind of like shopping around, which, you know, if you look at the data visualizations, which we talked about at Lake's the last time that we spoke,

And by the way, just kind of as an additional plug is free to the public for anyone to use at Bancreep.com. If you look at the last two years and you drill down within the levels of the BLS hierarchy, you'll see that 63% of all jobs, you got to do a little math to figure this out, but 63% of all private jobs have come from healthcare and social assistance.

Now you may be like, okay, well, is that a lot or a little? Well, just know for context that only 17% of the workforce is in healthcare and social assistance. And so what really got me thinking about this was like looking at this data. Like I have no particular expertise on labor data. Like I'm not an economist. I'm just a data analyst, you know? And so as I started working with this data,

The healthcare space just keeps coming back to bite. I keep trying to run away from it, and yet the data pulls me right back in. And so as I'm looking at this data, I'm like, oh no, what if I subtracted this out? How strong is the economy actually?

And the answer is, is we've added about 40 to 45,000 jobs per month, private jobs over the last two years, which I don't need to tell you is not a very healthy level for an economy. It is not going to sustain full employment. You could argue we may already be in a recession had we not had this monstrosity, this problem, this unsolvable problem, I would say that is healthcare because it is our economic engine.

But it is so messed up, so inefficient, so much profiteering, so much price discrimination. But if we say we want to end it like quickly, well then, you know, the house of cards kind of collapses, right? Because it's not like this money is just going into the pockets of the evil empire. I mean, it is creating a lot of jobs as well. And so I'm just, I don't know the answer to this. I'm just looking at it and I'm like, I don't really know how we work this out.

You either keep going down this path, which, and I remember you mentioning this, it was such a good call out. It's like healthcare has become the backstop of the economy. And so it softens recessions, right? Because it just keeps growing and growing and growing, getting bigger and bigger. Well, now all of a sudden, here we are a year and a half later, and there's real talk about ending this. And

And it's not going to completely end it. It's not going to happen overnight. But when you're talking about taking a trillion dollars out of Medicaid over 10 years, I mean, right now we're spending about $900 billion on Medicaid. Like $100 billion a year is a huge chunk of money that's going to come out of that. And it's never happened before. We just don't.

This is the unknown that we're venturing into. And it just seems very, very hard to kind of wrap your head around, like, how do we grow our way out of this if we're going to kill the golden goose?

So you said that the economy might have been in a recession had it not been for this monstrosity of the healthcare system, the evil empire that is just sucking so much money out of the economy and people who pay health insurance and then deductibles, co-insurance, on top of that, they feel that. But the reality is, I think you're hinting that the evil empire employs a lot of people, like over 20 million people. It is really a huge, huge part of the labor market. And-

But just walk us through, how does this house of cards unravel? Because this house of cards has been building and building and building for many decades. And even during 2008, healthcare employment, I believe, went up. In 2020, it did decline, but it just is just like a straight line up and it's...

In an expansion, it adds tons of jobs. And in a recession, it also adds a ton of jobs. So this thing has continued for 50 years. Why do you think that this house of cards is going to unravel right now? I think that you have to look back at what caused it, right? And so there are many factors. And people, feel free to disagree with me on any of these. This is just my opinion as an observer and someone that worked in the industry for a little while. But

You had, you know, Medicare that came about, you know, in the mid, mid 20th century. Right. But then in 2006, we had Medicare part D. And so this is a wonderful thing. It's like, Hey, we're going to expand Medicare coverage to prescriptions for elderly people. Then, you know, call it like within the last, I'm kind of really thinking like within the last 30 years, you had Medicaid expansion, you had ACA, you had the marketplace expansion.

There are all of these kind of transformative type of we want to offer more health care to the populace, but the government and the states were not prepared to do it. Right. So they're like, how do we execute it?

And so what they did was they said, let's turn to the private market. And so you have like the evolution of managing the growth expansion, massive expansion of managed care Medicaid. So companies like Centene, companies like United that are basically signing contracts with the states and then receiving a capitated payment. So they're basically just saying like, we'll handle the load. You guys don't need to worry about it because you don't have the personnel to like actually do all this.

Well, what happened after that is then they signed subcontracts with the PBMs and those contracts were hidden. Everyone started vertically integrated. Money got shifted around. Inefficiencies, you know, there wasn't enough regulation on exactly how was this program being executed. And then you have the growth of like middlemen on top of middlemen on top of middlemen, which creates more and more jobs.

And then on top of that, you know, really starting in the 80s, 90s. And I just went back and looked at this at our world of data, which is like I'm the hugest fan of like. I love that. I love that. It's the best. Right. And so I'm looking at income inequality. Right. And so, you know, right now, I think the stat that I pulled off that Web site was that the top one percent of earners in this country are.

bring in about 30% of all the income in the country. And that's kind of where it was in like the late 1800s. And so from the late 1800s through 1970, it actually came down to a trough. And then, you know, I think with re-economics and everything, again, I'm not a historian, so I'm just guessing on that, but that started shifting back. And, you know, I think the situation that we have, again, feel free to disagree with me. You probably know better than I do.

is kind of, it's all come to a head right now, right? It's like, we have a lot of people, very wealthy, making a lot of money. We don't want to pay taxes to support the people that are very low income that keep growing and growing and growing. And as income inequality gets worse. So, I mean, I just looked at it and I have to be honest, like,

Since I left the healthcare space, I became a little detached from the kind of day-to-day analysis of all the numbers. And so pre-COVID, I was like looking at all the Medicaid enrollment numbers, Medicaid spending. I'm like, oh, $60 billion. Okay, that's how much we spend on Medicaid, something like that.

Or sorry, $600 million. So and then all of a sudden, like this goes up by like two, $300 billion within the span of two years. Medicaid enrollment spikes. There are now 100 million people in Medicaid, which I mean, 330 million people in this country, like 100 million people on Medicaid now.

It feels like we're reaching the breaking point, right? And then I think like if there's oxygen in this environment everywhere around it and we've been building and building and building all the oxygen since 1980 effectively, someone just needs to light the match.

And the version of the bill that came out of the Senate, this one big, beautiful bill, to me, that's the match. Now, the whole thing doesn't go boom immediately. Like there's phase in periods and everything. But once you like the match, it's once you squeeze the toothpaste out of the tube, I don't know how you get it back in. So I'm hoping that you and I can figure that out over the course of this podcast.

We're definitely going to figure it out. So the government is very involved in health care in the United States. In many other countries, the government's involved and just runs the system. But in the U.S., it delegates things to private agencies. So there's Medicare, which should be for the low income as well as disabled. Medicare, which is for elderly. And then the non-low income, non-elderly, non-disabled system.

people. Normally, before the Affordable Care Act, ACA, Obamacare, that was a private market. Obamacare came in and basically said health insurance companies, you're not allowed to price based on pre-existing conditions. So access went up, but pricing went up a bunch. So do you think the Affordable Care Act is the reason why health insurance is so expensive? No, there's so many more reasons. It's one of many, many. But by the way-

I just looked this up the other day in preparing for this. There are 24 million people using the marketplace right now as of the latest date, I think the beginning of this year. 93% are getting some form of subsidies. Those subsidies are set to expire by the end of the year. So yes, you have, I mean, I think the number is like 50. What do you mean the marketplace? I bought health insurance. Am I a user of the marketplace or you mean the healthcare marketplace?

Yeah, the Obamacare marketplace. So, I mean, when I became an entrepreneur, I mean, a big reason why it's difficult to become an entrepreneur is because I went from commercial health insurance to marketplace health insurance. And then I didn't qualify for subsidies. So I'm looking at these plans, which are garbage plans, right? I'm super high deductible. They don't really cover much of it. And you're paying like, I don't know, $1,000, $1,500 a month or something very, very, very pricey.

Well, I'm one of the 7% of Americans that do not receive subsidies. But if you are lower income, but not low enough income to be on Medicaid, you'll get a large subsidy of that. And so in some cases, you may not be paying much of anything for premiums. So this is giving 22-ish million Americans some sort of subsidized rate to be able to get marketplace insurance, ACA, Obamacare insurance. And that...

potentially, I mean, if the bill doesn't change, we'll go away at the end of the year. So when I look at it, it's like, okay, right now we have Medicaid at risk.

I don't know the details of all the Medicare cuts, but if there are any Medicare cuts, that could be at risk. And then the ACA program, the subsidies are at risk. Altogether, when you put it all together, it's about 57, 58% of all Americans are in some way getting healthcare through the federal government as a payer or a subsidizer of their healthcare. So, I mean, this is like a

This is huge. I mean, it is an absolute massive impact potentially. But I don't know if you want to go here yet. But the problem is, it's like we have a math problem. Right. I mean, like, look at, you know, it's not it doesn't take very much time to kind of pull down. Like, here's the federal government expenditures. You start looking through the line items and you're like, there's nowhere else to cut.

You know, I mean, can't touch interest expense. Department of Defense probably is off the table, defense spending, anything like that. And so then you see this giant healthcare and social assistance line item. And you're like, okay, well, if we really want to extend the tax cuts, what are you going to do? You know, we still have this big deficit that the CBO is forecasting, even if we do all these cuts. But where I think this whole thing could go to worst case scenario is

And I'd love to hear your thoughts on this again, because I so respect you as far as like everyone you talk to. Where this could go to worst case scenario is like, and this takes some time, is let's assume that this bill passes, the Senate version passes, kind of as is. We cut a trillion in Medicaid, ACA goes away, the subsidies go away. Well, you know, this money that basically 58% of all Americans are getting healthcare from, when that starts shrinking,

healthcare jobs should start shrinking, right? I mean, it doesn't really take a leap of faith to like assume that, or at least they shouldn't be growing and be the engine of economic growth anymore.

Well, if that happens, then the market will look at, by the way, we probably will have already cut by then. I'm not really worried about inflation right now. We can get into the other, you know, we can get into that a little bit. So let's say in state inflation stays muted over the next three, four or five months. Jobs are a little creaky. Maybe they start going down. We get a couple prints. I don't know. Waller came out and said we should be cutting as soon as the middle of the year. We start cutting. Everybody's happy.

And but everybody assumes that the Fed has control over, you know, inflation like their dual mandate and jobs.

Well, what I'm saying here is that the Fed has never had any control over healthcare jobs. Like look at any data set you want. We've already talked about this. Like I think on the last podcast, like I did a comparison of healthcare jobs versus interest rate policy, nothing, like just nothing there. And it's all because of Medicare, Medicaid government spending. And so if we start really cutting into that spending and the Fed starts cutting, and then everybody in the market is expecting to see the jobs number go up,

And it doesn't. It keeps going down. People are going to freak. Like this could be kind of like this moment of like, oh, no, the Fed has no control. What are we going to do? And then we can all kind of like think of our worst case scenarios on what happens to the dollar, on what sort of panic selling you have at that moment.

But I mean, if people start wrapping their heads around that the Fed does not have control over jobs because it's been all propped up by structural health care job growth, not cyclical like it used to be. Yeah, I just hope I'm wrong. I think that the Federal Reserve has a lot less control over the business cycle because things are less cyclical like, you know, Apple and Microsoft and, you know,

Walmart is not hiring and firing based on every single PMI. Back when we used to make stuff in the country, when that was... Companies would borrow tons of money from banks. Yes, the level of interest rate mattered a ton to job growth. And now that's less so. Okay, so it's the government...

government-funded but not government-controlled programs of Medicare and Medicaid that this bill actually is quite aggressive in cutting. And that is your primary concern. What about UnitedHealthcare stock? It's so weird. I was actually at an event with all these central bankers at Bloomberg, and I got this note, this CEO of UnitedHealthcare, your biggest healthcare stock in the country, known for some...

pretty aggressive pricing practices, let's put it that way. He was shot by this guy, Luigi Mangione. It was a huge news story. Incidentally, UnitedHealthcare, because it hasn't done a stock split, it actually is the biggest stock in the Dow. So it caused the Dow Jones to go down 15 days in a row or something crazy that it had never done. That was in December. Then UnitedHealthcare's stock itself just gets annihilated this year

What is going on with United Healthcare? I think that the best way that I've been able to explain this, and I can really get into the weeds on the prescription drug side, less so on, call it hospital expenses, that kind of thing. But it all rhymes, right? Think of United's business model. And I'm not, it's not just United. There's like Express Script, Cigna. There's, I mean, all the vertical integration, there's only really three. There's like CVS Caremarked.

Think of it as like trading arbitrage, but like a, for the last 30 years, roughly, it's like a permanent structural arbitrage that you can keep doing over and over and over again, where there's no market to kind of like make the arbitrage go away. Yeah.

So the best example of that in the prescription drug world, which a lot of this, like the work that I had done earlier on kind of exposed some of this with the prior company I was with, 46 Brooklyn and three axis advisors. It's something called spread price. So.

United can go to, say you're the pharmacy or you're the healthcare provider, right, Jack? And then I am the employer. United will stand in the middle of that. Or again, I'm just calling out United as an example, but any PBM will stand in the middle of that. Pharmacy benefit manager, yes. And then they will sign a contract with you.

very, very complex contract with like all sorts of acronyms that are made up that you don't have visibility into. And they'll say, we will guarantee some discount off of an arbitrary number, which you don't know, but you're like, awesome. Like I'm going to get an 85% discount to what's called AWP, average wholesale price.

And then they'll go to the other side and they'll say, okay, and I'm going to, um, you know, sign a contract with the employer. That's going to give them a 70% discount to that same thing. I don't know about your contract. You don't know about my contract, but I just locked in 15% of AWP. Well, AWP is like, say, um, I think, you know, probably for some drugs, it could be about a thousand times more than the actual cost of the drug.

So AWP for a drug is linked to, sorry to get into so many of the weeds, but like brand name drug will go up, up, up, up, up in list price that eventually will come off patent. And then the generic will crash as competitors come in. But the AWP of that generic drug never comes down. It always stays fixed to the price, that last price of the brand name drug.

And so that's why you could have a drug like a blood pressure medicine that will literally cost like two cents a pill that can have an AWP of $10 a pill, because that's what it was back in the day. It's like we're living in the past. And so you may be like, as the employer of the pharmacy, you know, let's say you're the employer. You may be like, I get an 80% discount to AWP. But then it's like, yeah, but that's you're paying $2 a pill for something that costs two cents a pill.

but then they can turn around to the pharmacy and they can basically buy it for two cents or three cents or four cents and lock in the gap between the two. And since this is all legal contract stuff, um,

You know, nobody ever checked it. Like it was just, it just kind of grew and grew and grew. And as list price go up, you know, the brand drug list prices keep going up and up and up and the drug manufacturers push them up. And then the PBMs will come in and say, this is great because we're locking in 10% of that list price. So we get, you know, the same percentage of a bigger and bigger and bigger pie.

But then the PBMs were able to vertically integrate to also manage your formulary. So they were able to say, well, screw what drug is best for you from an efficiency standpoint and a cost effectiveness standpoint. I just want to put whatever drug is best for me for my profit.

So they'll put you in a drug or put a drug on the formulary that's going to give them a huge rebate, even though it's far more expensive than an alternative that you could actually have. You get an 80% off a deal of some ridiculously overpriced thing than a 10% deal off of a super, super cheap thing. Yeah. So you can think that the drug world is there are two sides. There's brand slash specialty drugs where that is all about rebates.

and basically forcing you to only fill them at their company-owned pharmacies. And then there's generic side where they're basically trying to get a percentage of that artificially inflated price. And they're just able to continue to do that and then push the arbitrage bigger and bigger and bigger and bigger each year because nobody, I mean, they're all hidden behind contracts and the contracts have non-disclosures in them and I've seen it, right? Yeah.

And so this problem has just swelled. And I think it has really fooled investors because they've just seen a cash generation machine, right? I mean, because they are literally printing money out of nothing, out of thin air.

And it's lasted so long that I think people are like, wow, like why would this all of a sudden go away? And then what happened is it just went away, you know? And that's just talking about the prescription drug pricing side of it for United. There's also other things going on in the hospital side. They're spending more money. Like there's something called the medical loss ratio. So it's basically the lower that number is, the more profit the insurer is taking. Well, that's been going up because they've been having to provide more services and

So the profit that they expect off of programs like Medicare is going down. It's basically been the perfect storm. And then the sentiment is just a disaster for these guys because they've kind of, there's been enough exposure around these predatory practices that

they're starting, I think, to have to move away from them, which is going to be less profitable. In the non-medical insurance business, there's something called the combined ratio. So there's a loss ratio. Like I sell car insurance, 70% of, you know, I sell a thousand dollars of car insurance. I have to pay $700 of, of, of losses. So that's 70% loss ratio. But then my, I,

operating expenses, employees, office, et cetera, I think office, yeah, is 20%. So then the combined ratio would be 90%, which would be very good. Like Progressive and Geico's combined ratio is like 99% or 98%. Medical loss ratio, does that just cover the cost of the medicine or is that operating as well? So that's another thing that's been gamed, right? So the big problem within our system is the vertical integration.

So if I am a Medicaid program in a state and I'm like, wow, I just expanded, I need to figure out how am I going to serve these people? I don't have the staff to do this myself. Then I go and I hire the insurance company, say it's, you know, Aetna, right? And so, and then Aetna goes and hires the PBM, CVS. Well, they're the same company. And then CVS has the pharmacy and the specialty pharmacy.

So what happens, this has kind of been stamped out now, although it's game of whack-a-mole, so who knows, is the MLR is really only supposed to include the services, the products and everything, not administrative expenses.

But there are ways that if you own the entire value chain, that you can shift admin expenses from one place to another. So for example, if I take a whole bunch of spread pricing at the PBM level, then I can shift that and say, this is higher medical costs.

And then if the state is only managing the insurer, not the PBM, they'll be like, oh yeah, that is really high medical costs. And your NLR was crap, but then they're just banking money at the PBM side. And if they start monitoring the PBM, then the specialty pharmacy can bank it down over there. And so it's really, I used to talk about it this way. Like when you own all of the value chain, you can push around the

the money depending on how the program is structured. So in Medicare, not Medicaid, spread pricing is not allowed. It's a full pass-through program. But what we used to see when I was studying the individual drugs is that this is an example of that, a real example of that back five years ago or whatever. There is a drug called aripiprazole, which is generic abilified to mental health drug. And at that time it was generic and it was like 20 cents a pill, 10 cents a pill. It was really, really cheap, right?

So there are tiers within Medicare. That should have been on the cheapest tier one plan. So you walk in, you pay a $5 copay, you walk out. This is a cheap generic drug. Well, what Aetna did is they actually put this on tier four and said, no, no, no, this is a $10 per pill drug. And so there is no requirement in Medicare for the price of the drug that the insurance company or the PDM is saying it costs to have any basis in reality. It would be basically like walking in and saying,

well, that loaf of bread that you bought on insurance is $4,000, you know? And so therefore we have to put it on tier four and charge you a hundred dollar copay. But in reality, the loaf of bread is $2, you know, and you just paid a hundred dollars out of your pocket as the senior and then Medicare, the state, you know, their cost shares and everything, but they paid the rest of it. And so that you're allowed to do that. Like, you know,

There are thousands of distinct plans in Medicare when you actually go out to the data and like 90% of our control by three vertically integrated companies. So there's actually no competition, but very little competition within Medicare. There are thousands of prices for the exact same drug, the exact same time.

But when, you know, legislatures look at this, they're like thousands of Medicare plans, like pat ourselves on the back. We did such a good job in creating this marketplace. And you're like, man, this isn't capitalism. This is crony capitalism.

I mean, this is capitalism distorted. If we actually brought capitalism back, stripped all these things apart, we would end up with a tremendous amount of efficiency, even though we'd have less jobs, too. I don't know much about the health system, but from what I read about it, it almost sounds like there was a Soviet communist author who wrote a play mocking capitalism. Like, just like, oh, he's...

We have all of this expenditure and profiteering, and it's incredibly inefficient. The point you made about vertical integration, I remember in high school, learning vertical integration of, okay, horizontal is you expand and you buy all the steel mills, but vertical integration, you buy the railroads, you buy the distribution centers and the like. So I think Obamacare,

ACA, Affordable Care Act. It capped the medical ratio at 15%. You tell me later. Some sort of thing. So there's no profiteering, right? Because the medical loss ratio is capped. But then the only way that these insurance companies can grow is by acquiring businesses all throughout the value chain. So UnitedHealthcare, I think, is one of the most acquisitive companies. They bought the pharmacy benefit managers. They also bought a lot of the practices as well. So

Yeah, that's also the mess that we're in as well. The problem is there's no transparency in this marketplace. So nobody actually knows what the price of anything is. And that's the reason why, like, if you are allowed to buy all of, you know, if you are allowed to fully vertically integrate,

and nobody knows what the price is, then you can set price at any one of those parts of the value chain. Like this wouldn't work with televisions, right? It wouldn't work with like mayonnaise. Like it just, it just wouldn't, you know, there'd be no benefit to doing it because everybody knows what the, there's a fair competitive marketplace for that. And if all of a sudden, like I set the price of a jar of mayonnaise at $1,500, I'm just not going to sell it no matter how, like if I owned everything all the way back to like the egg farm, you know? So,

This is very, very different. Right. And that's why, I mean, before I was with Bank Creek, like we constantly pushed for transparency because you're trying to actually create a marketplace where capitalism has some shot, like capitalism has no chance in this marketplace. And it's because of all this vertical integration and the lack of transparency.

I mean, you know, years and years and years, people have been split pushing for disclosure of prices of specialty drugs, like specialty drugs are like the really expensive biologics infusions. I mean, I can't tell you how many times like that legislation has been put in and out of some appropriations bill and it's always been stripped out. And you wonder, like, why wouldn't we want to do this? And the answer is, and this is where it gets really nasty, Jack.

is that if you actually understand how money flows, which this was my area of expertise before I came to Van Creech, every part of the whole, every stakeholder benefits except the patient. There was a moment, there was a time when I was working with the state of Alabama and we were working with the teachers' youth.

Don't mind I call it. I'm calling them out. And, you know, we looked at kind of their expenses and everything. And like this is the state teachers. You would think that they will want transparency. And so, you know, we're looking at the model that they were in, which is all the spread pricing and the PBM games and all that kind of crap.

And then we're like, what if we just actually put in a model where we know the price of the drug? There's a public database called NATAC, National Average Drug Acquisition Cost. It's published every week. You can just download that. You can put a fair, transparent markup, kind of what Mark Cuban is trying to do, right? And then you can say, that's the price of the drug. Let's do that, right?

And then, you know, there were some stat senators in the state, GOP, Dems, didn't matter. Everybody's like, this makes a lot of sense. Like, this is good for the market. This is good for us as the state. We'll save money. Teachers Union came back and said, no, that's going to cost more.

And so why would that be the case? Well, it's because the patients, the employees, the teachers have some whatever deductible, say it's $5,000 and say, I get that first fill of the year and there's some artificially inflated number price. Well, I got to pay that out of pocket until I reach my deductible. But guess who gets the rebates on my money that I spent, the fake artificial money that I spent.

The employer, the teachers, you know, and they're like, we are using our teachers. And this is, by the way, anyone that works anywhere that has commercial insurance that has a high deductible, you are being used. You are being used by your employer. And you know what? Someone who doesn't use the benefit, they're getting the benefit of that because more than likely the money that you are spending on the artificially inflated numbers and the rebates that are going back to your employer are being used to subsidize the premiums in the plan.

And so this is why I always had the saying of like, we have a system that is designed that has the incentives to create sick people. In this country, the sick subsidize the healthy. This is not healthcare. It's sick generation, sick people generation.

Now, we can start talking about how do we fix this? Well, it has to start with like, how do we create incentives to actually create people that are healthy? Like, how do we really pay people for preventative care to keep them out of the hospital, to not take medication? And it starts very early on. It's not a quick fix, but that is not how our system works. It works to create sick people who then create the rebates. And this is why when you look at it, like, I mean, the federal government gets rebates, the state governments get rebates, the employers get rebates.

The PBMs benefit, the wholesalers benefit, the pharmacy, not all pharmacies, but a lot of pharmacies benefit, go through every stakeholder within the chain. They all want the status quo, except the patient. Patient gets screwed. Some of it is profit, but a lot of it is wages to go to people who, you know, spend money. Like that's why we have 20 million people in the healthcare system. So it's not just a question of profiteering, it's a question of

this is our economy, you know? Well, I mean, yeah. I mean, and like, look, I haven't like sat down and very carefully in a long time study, like United's, you know, financial statements and everything. But like the last time I did, it was like, okay, this is good, but this isn't like they're making, you know, like 99% profit margins. And like, I mean, it's like, yeah, there are a lot of people that work there. There are a lot of people that work at CVS. They look like high quality businesses from the outside in.

But I mean, it's not the best I've ever seen by any stretch of the imagination. Yeah, I have looked at UNH's financials recently and I had the same reaction. But it is possible that one of those businesses like Costco, that it has a very, very low reported margin. But actually, a lot of the, you know, it's a lot more sure than and certain than it is because, you know,

You say, oh, a business that has a 50% profit margin is you have a higher margin of safety than it has a 2% margin of safety. But if that 2% margin of safety is just like buying a dollar for 98 cents, then it is actually a pretty good business at all. Well, I actually have. And so we have to go off on a little tangent on this real quick. So your viewers will appreciate this.

There's a great article, I think, that came from Bloomberg or Wall Street Journal years and years ago that actually did analysis of that. So, again, there's nothing illegal going on here with their financial statement reporting. This is permitted.

but it kind of violates the spirit of the SEC reporting rules, right? So think of a PBM. So a PBM is processing a claim, but the pharmacy, if it's not a company-owned pharmacy, the pharmacy has that inventory. So the inventory is on the shelf. The pharmacy is actually claiming revenue for that. Well, in many cases, or at least back in the day, the PBM was also claiming revenue for that, the entire revenue for the transaction and the entire cost for that transaction.

So they weren't actually claiming only the fee revenue. They were saying if the drug cost $1,000, our cost is $1,000, right? And so they were dramatically shrinking their margins. And then the PBM lobby was walking around saying, well, look at pharma. Their margins are so much higher than ours. But then Wall Street Journal, and we did some analysis on this too, were like, yeah, but you didn't even take possession of that inventory.

And so technically you shouldn't be collecting all that revenue and all that expense. You're just using it to bloat everything to lower your margins. So I encourage people to kind of look back. It was fantastic investigative reporting that was done. But, you know, I thought I thought, you know, given that you brought that up, like I wanted to share that with the listeners. So you think that the bill that the beautiful bill is going to stop this this gravy train that could have serious macroeconomic consequences? I mean, like, do you think it could cause a recession?

Yeah. Yeah. I mean, the part that I, so I constantly am thinking and asking people, how am I wrong? How am I wrong? Nobody's been able to tell me how I'm wrong. So hopefully people in the comments will hear it.

The way that I think that I am wrong is just on timing. You know, like this is a math issue. It's a very simple math issue at this stage. And, you know, because of terrorists, because of a lot of the things that are going on, there's a lot of confidence that's already being lost in the fact that in the idea and the notion that we can continue to refinance our debt, pretending that we have a credit score of 830 when it's really like 30, you know.

And so we have this math issue that is going on right now. And I really don't know how to come out of that. Now, the timing of it, I don't know, these cuts are going to get phased in over a year, over two years. Every single year, we create more income inequality as a country. We create more people that need Medicaid.

The natural momentum is to generate more health care jobs if we don't check spending because of all the reasons that we've already talked about. So that could keep growing. I don't know, for another year, another two years. But at some point in time, we are going to start facing this massive tailwind. If this legislation doesn't get completely kind of undone.

But I mean, we're going to at some point in time. I mean, like it may not be a choice. Like right now it's a choice to cut Medicaid spending. At some point in time, it may be like the confidence has completely been blown in the dollar. Like, you know, we have to actually balance the budget or try to. And the only place you're going to be able to look is healthcare spending. And so then maybe you have like five years of partying left, 10 years of partying left, but like,

The, the, the downturn only gets worse, like the bigger you dig the hole. Right. So it's almost like you kind of want to get it over with, but then you have to get some very smart minds together to be like, how do you build this back? How do you recover? Like what's the next AI that's going to drive a lot of jobs or is AI going to just start getting rid of a lot of jobs to make the problem even worse? Like, I don't know what that next kind of area of growth is. That's going to take up the mantle from healthcare.

If we really, really have to get efficient about health care. And so the Medicaid cuts, how would and I understand what the Medicaid cuts are. What are the Medicare cuts? And then also, how would they lead to lower jobs? I mean, would they be health insurance companies and hospitals just

I've not studied nearly as closely on exactly what the nature of the Medicare cuts are. There were ideas of some cuts on the fringes coming from the Senate, but I don't know if they actually made it into the Senate version of the bill. The concern about any Medicare limitations or cuts is that a lot of commercial insurance, once you actually set Medicare reimbursement rates, Medicaid reimbursement rates, commercial just follows along on top of that.

from that. So if we're going to cut Medicare reimbursement rates at all or limit them at all, then that could, you know, lead to further pressure. Medicaid, there's, it's a lot cleaner. It's a lot clearer on exactly how that impacts. And that's the reason why kind of a lot of my communication, I've been a lot more focused on that until we have a little bit more clarity about what's actually coming within Medicare. I do know that, you know, like

Trump has talked about most favored nation, right? There's the executive order. Like I'd look, I'd lump that in. I'd lump NIH cuts in too. Like there's a lot of other kind of stuff that's coming along with this perfect storm. I can tell you that if most favored nation, first of all, I don't think it's executable. We can talk about that. Impossible to execute within this country, the way that the supply chain works. But if it did go into place, Medicare would

just be a disaster, right? Because we talked about it. Like all of the individual plans are allowed to set their prices right now. And so they can say, well, this drug costs us $2, but it really, we're going to charge a thousand or whatever. We're going to manipulate with tier it's on. Well, what if all of a sudden we said, no, the price is $2. Well, now you can't make any money as a Medicare provider.

But you think United is just going to be like, hey, sorry, investors, we're going to just lose a crap ton of money. No, you know what they're going to do? They're going to be like, and we're tripling all premiums. And so that is political suicide. And I don't quite understand why, you know, the White House's advisors aren't communicating this, that that's like the obvious and unintended consequence of what's going to happen. If you actually took away the money that you can make in that, premiums will go up.

And every senior is subjected to premiums. Not every senior is subjected to artificially inflated prices within Medicare Part D. Okay. So there's Medicare, Medicaid. Now let's talk about what you just talked about, which is drug pricing. Trump, I remember an article, Trump saying he was going to cut drug prices by as much as 80%. Obviously, that's probably not going to happen. But is that what you meant by most favored nations, as well as the thing that makes many people in this country...

very mad, regardless of where you are on the political spectrum. Like some drug that in France costs $10 costs $200 in America. Trump said that he is that what Trump said he was going to end it. And why? I mean, that sounds good. Why is that? Why is that bad? I mean, I know you just said, but I think in order to understand most favored nation, you have to understand how money flows throughout the supply chain. And so I also kind of random story had the opportunity to run a chain of independent pharmacies. So I had 22 independent pharmacies.

And so remember we talked about average wholesale price. We talked about these artificially inflated prices. Well, these artificially inflated prices are the benchmark prices for the entire supply chain, right? And so a pharmacy, when I am buying a drug from the wholesaler,

It is linked to these artificially inflated prices, whether it's average wholesale price or whether it's something else called WAC, a wholesale acquisition cost. They don't have any basis in reality, but they're very real for me as the pharmacy because I'm buying based on a discount to them. So,

Yes. You know, Australia probably pays 85% discount to WAC, the US WAC, but I can never buy as a pharmacy at that price. Right. So then you have to start thinking about kind of cashflow issues. So, so I am going to buy from the wholesaler, by the way, like, I mean, McKesson is getting, you know, McKesson, Cardinal, AmerisourceBergen, like they're getting a percentage of this list price, which is why they want the list price to be so high.

So what do you think if you basically went to them and said, hey, you know what? We're going to chop all the list prices by 80%. You think that that's going to be a good thing for them? I mean, the entire value chain works like this. It's totally true over the pharmacy benefit manager and a lot of health insurance companies and companies all have wings that are pharmacy benefit companies. But that industry, it doesn't sound like it deserves to exist. You need a wholesaler, right?

And so I go and I buy the drug at $100 or $1,000. And then maybe I'd buy it at a 5% discount to that as the pharmacy. And then someone comes in on Medicare and Medicare pays me $200. And so I, as the pharmacy, and by the way, pharmacy margins are razor thin. They're like 1%, 2%, 3%. They're nothing. And so I, as the pharmacy, am out $800 on that claim.

And every single claim that comes in on Medicare, the more expensive the drug, the more money I'm losing. And then I got to wait for the federal government or the drug manufacturer to actually pay me back. And I have no, like, I have no leverage against them. So I may have to wait two, three months to actually get a check. What will happen is that we'll just stop dispensing. Pharmacies will shut down dispensing brand drugs just over like they, you know,

none of them can afford it. Maybe CVS could, maybe, well, I don't think Walgreens could anymore. But I mean, like maybe a couple of them that are totally vertically integrated will still do it, but you'll basically have access to mail order and that's about it. You know, community pharmacies will shut down that will disproportionately affect rural communities. By the way, there was just an analysis done that, you know, over 300 rural hospitals could go away. I mean, this is really, really bad for,

for these low-income rural neighborhoods. It disproportionately affects kind of the lower-income Americans if that were to happen. But I'm just saying, like, there's actually no way to execute that. Just like there's no way to execute the IRA. You know, the IRA's kind of been around for a while, but, like...

Have we actually done a claim yet? And it's because they can't figure out, well, if I have if I negotiate a 50 percent discount on that, pharmacies can't buy it. And how am I going to flow the money back to them in order to make them whole without completely shutting down dispensing of like a drug like Eloquus or, you know, one of these top 10 drugs? So these programs are not the inflationary drugs, the fact that it granted Medicaid the power to negotiate prices for high prescription drugs. You say that they haven't done that.

Yeah, they can negotiate all they want, but it can't flow through into the system unless they basically say wholesaler, drug manufacturer, you need to change the list price to the price that I negotiate. They can negotiate for Medicare, but if the list price doesn't change, like when I'm a pharmacy, I don't have my Medicare inventory on the shelf, you know, that I bought at a 50% discount from Kess. It doesn't work that way. You buy all the inventory.

you know, and you lump it all together, no matter who the payer is.

And again, like it's, if pharmacies were very profitable businesses, maybe this would be okay, but they are not. Trust me, very, very difficult businesses, which I believe they only operate out of a labor of love, not because they actually want to make money anymore. So, so it's, it's not possible. They still haven't figured out like, how do we actually make the pharmacies whole immediately rather than have them having to wait for this payment to come back? Like, I don't know, a couple months after the fact, because the pharmacies will just stop dispensing it then.

Yeah, the pharmacy business way worse than it used to be because it used to be, you know, like you'd have people going to get the drugs, but then they buy stuff there. But Eric, like there are pharmacies in other countries. They make it happen, you know? So we have to talk about the benefits of our system because we have to give up the benefits if we want to have a system that works in the other country. So our country is one that has said,

We will deal with all of this frustration with the private market and the profiteering and everything to prioritize innovation. And so, you know, we have what's called an open formulary, generally speaking, where you can pretty much get any drug that comes out. So Medicaid is open for it. So they have to accept any drug, any manufacturers willing to pay the Medicaid drug program. So.

So that so we are basically subsidizing and Trump has said this and it is accurate. Like we are subsidizing innovation for the rest of the world with how much we're paying. Now, we've always seen that as a badge of honor. Like until Trump came into office, nobody ever wanted to sacrifice that.

You know, it was always like, we want the best Alzheimer's treatment. We want gene editing. We want cancer vaccines. Like we are, America is the bastion of progress within drugs and we are not willing to sacrifice this. So let's figure out how we can tweak things in order to make them less efficient. We don't want innovation to go away.

So if we want to go to Australia's system and we want to get their price, well, I can tell you, like, they don't get our brand new drugs for years after we get them. You know, they have prioritized like this, the Australian system. And I say Australia just because I studied it. You know, I know it better than I do like Denmark. They have made a decision that they want to prioritize the masses.

So they want affordable care. They want access for the vast majority of common disease states. And so in Australia, I mean, you can look it up online. I think no one will pay any more than $35 AUD for a copay.

And so that's not a lot. I mean, imagine if you were, you know, you had some treatment that you needed, you never would have to pay more than $35 for that drug. And so pretty amazing, right? But if we get the new Alzheimer's treatment, they will not have until the manufacturer is willing to negotiate the price down to where they can afford it. Right.

And so we can't have our cake and eat it too here. It's a, it's complete fallacy that people will believe that like we, it's a circular reference in Excel, right? It's like, you gotta, you gotta break that circular reference somehow to calculate. And so like, if I take their prices, I can't get the innovation because we don't actually pay enough for that innovation. And I got to go on a little bit longer on this. So

I wrote an entire 70 page report about the drug Nexium, which I'm sure everybody knows that it's stomach, you know, gas bloating, that kind of stuff, right? Nexium is what's called a line extension drug. So there was a drug called Prilosec. It went generic. AstraZeneca didn't know what to do. They were going to face this big patent cliff. They're like, let's just do the exact same molecule, except let's flip it on its edge, like your right hand, left hand. No different.

And let's call it Nexium. Let's market it as a better purple pill. Let's do all that kind of stuff. So that created $60 billion for them in revenue, right? We never needed that. And by the way, Australia would have said, I can get this for 20 cents a pill. Why would I ever pay $6 a pill for that? You're either going to sell this to me for 20, for 22 cents a pill, or I'm just going to stick with that. That's their system.

But what we did was we said, we'll take it. We'll gladly take it. You can build your entire business. You can lie and manipulate. They didn't completely lie. You can manipulate people into thinking it's better. Doctors don't care about cost. They'll prescribe it even if it's 1% better, even if it costs 100 times. But then you'll get to that next drug, which actually could be a very valuable drug. And AstraZeneca has come up since then with very high value add drugs, you know, drugs that have improved our quality of life.

But they may have never gotten there had they not had Nexium. So you have to think of a pharma company as like, if I don't have that stepping stone to bring like a, call it like a crappy exploitative drug to market, and I can't sell that, I can't always have a great idea. And it becomes more like VC, which is not sustainable, right? It's like, you know, if I don't have a home for that next product,

Bad idea drug. I may never get to the good idea drug. And you may have a folding of a lot of these companies or their business. So how did the non-U.S. pharmaceutical companies do it? Like Roche? They sell into the U.S. market. The U.S. market subsidizes all. Everyone gets their start in the U.S. market. Right. And then they go to the other markets and figure it out there. And everybody gets the discounts.

It's the way it works. Like, I mean, look, like you could say, hey, rest of world, you need to pay more. And I agree with that, right? If you want the innovation, you need to pay more. Like we've been subsidizing this forever, but like you can't force anyone to do that. You know, you have to make the innovation go away first by trying this out before we're like, oh, wow, we have this big gaping hole and we're not willing to step in to support it. And then you see if more money comes out from these other countries. But that's going to be a painful process to go through.

So 20% of healthcare in the US is, I think, pharmaceuticals. So like all of the profiteering that goes on and hospitals with doctors and nurses and the insurance company, like

That's not innovation. They're not inventing a new way for a nurse to put a bandage around my elbow. Yeah. I mean, it's very similar, though. I mean, if you've ever looked at chargemasters, you look at the prices that they have for, which I think that's one thing that Trump did in his first term, is he made all of that public. Now, good luck actually finding that. But if you go to a hospital website and you poke, poke, poke, poke, poke around, maybe AI makes it easier to find.

But back when I tried to do it, you could eventually find a charge master file file where you can look at the list prices of all their services and they are ridiculous. And so it's the same thing. It's like healthcare in this country is one big game of price discrimination where everybody, all the providers make money based on a percent of list price. And you put like the highest list. We did this in business school, right? It's like, I want to set my price as high as humanly possible. And

And then Jack, if you need a 90% discount, I'll give that to you. If someone else is willing to pay a 50% discount, I'll give it to them. 40% discount. If someone's really small, they can't afford it. Hey, no negotiating leverage, no discount for you. That's how I make the most money by figuring out what everyone's willingness to pay is. And in this case, it's not their willingness to pay.

It's their negotiating leverage, right? And so our entire system works this way. Prescription drugs, hospital spend, doctor bill, all that stuff is all that in general. I just know a lot more of the behind the scenes on prescribing drugs side. But the one area where price discrimination is not allowed is where it should be, which is insurance pricing. If you have a 20-year-old who doesn't smoke, their insurance costs should be a lot less expensive than an obese 65-year-old. But-

insurance companies are not really allowed to do a lot of aggressive pricing right there in the same way that like you know a 20 year old's car insurance would be way way more expensive than a 65 year old but inverse is not really allowed to be true in America it's all backwards it's all backwards if you talk to all about the problems uh

Any solutions or is that just, you know? Yeah, I mean, so like, okay. So I want to create kind of this fairytale world where we all get along and we actually have politicians that are listening to their brilliant staffers, which, you know, I can't say enough about the staffers that I've worked with in the past. They just understand the game and how there's all the ins and outs and everything. I do think there are solutions that over long periods of time,

can actually make a difference, right? And not sacrifice innovation as much. But they are all things that nobody will understand besides people that are insiders like I used to be, right? So I'll throw out one that nobody will understand, right? And the one is there is that particular benchmark, AWP, WAC, we talked about them.

There is one benchmark within the rebate program, within the Medicaid program, that if you shift it from AMP, again, it doesn't matter what these things mean, they're all artificial, to AWP, it would destroy generic manufacturers who are setting their AWP very, very high, and they would be forced to bring down their prices to something that is more in line with that. These are like surgical precision, like Navy SEAL, like,

tactical attacks on the system that are smart policy that nobody will understand well enough. So we'll get passed through and can have a big impact. But the problem is, is that policy is not, I think policy is broken in this country. Like there are people that are thinking of these policies, but it can't be sold by the politicians anymore.

And it can't be interpreted within like, I don't know, 100 characters or less on Twitter or whatever. And so if I went out and I tried to explain that as a presidential candidate, people would be like, huh?

Like, what are you talking about? Like, this is something that cannot be advertised. It needs kind of this tactical approach. And then you do one, you see how it works. You do another, you see how it works. Like, you know, scientific method, right? You do that over long periods of time. The FTC cracks down on, you know, this crazy amount of integration.

Like the PBM itself, forget about being integrated with everything else. Like what if we just had companies that were worried about your formulary, Jack, and they were all competing to provide you with the most cost-effective, efficient formulary, but they didn't also control pricing. So they had no profit motive besides to save you money. Now let's get 30 companies in there to compete just on that. Like let's let, let's restore it.

Get kind of good policy in there, good regulation in there, and then let capitalism attack and do its thing. Right. Right now, we've broken capitalism and there is nothing left.

We think capitalism is attacking the patients. It's attacking the patients, whereas I think it can actually attack for good. Like we can actually use it the way that it was intended. But people have to get down and dirty in there and like really understand like tactically, like we have to separate this from this. Now go figure it out. Drive everything down to lowest cost, just like we thought with televisions, you know, get transparency into the system. Like there are lots of things that can be done.

But we can't sell any of it as kind of something that, you know, the average voter is going to understand. Like the education is not there on the problem. And I just don't think that politicians will do it. So I have hope that my best case scenario is that we kick the can. I don't want to kick the can because I want the deficit to keep rising. But I don't also like if this policy gets passed right now, I don't see how we avoid a recession that loses faith in the Fed and what they can do.

But if there's some chance that we can get, we can restore health within the policy world, and then we can truly attack this, the FTC can start working, doing its job, what it should be doing. People can start understanding this and bring some semblance of respect back to politics in this country. Then, yeah, we can, we can work our way out of this, I think. But,

The downside of that is like, I mean, I probably should just go buy a lottery ticket. You know, the chances of that actually happening seem, it seems like we're moving more towards this kind of, you know, populist type of regime and social media is making it harder and harder to understand what's true and what's not. So I don't know how much hope I have in that. And then if you basically say, well, you better go buy a lottery ticket, the chances of that actually happening, then no, I don't see any way out of it. Right. I mean, yeah.

You have to assume that sane minds prevail in this in order to work our way out of this problem. And it will take a very, very long time. And then you wonder if, like, do foreign governments that are buying our debt, like, do they have enough patience for us to work on this? When they probably have no clue, like, what I'm talking about. So...

But, you know, there's a chance there. It's like it's like an Avengers, you know, Avengers Endgame when Iron Man's like, can we win this? And he's like, it's one in a million. But if I told you that it wouldn't happen. So maybe it's one in a million right now. There's a chance. There's a chance. And the Medicare thing is that reimbursement rates are going down. And that's why all these sent and all these companies that have Medicare Part D plans, their profits are going down. My understanding is that costs are going up.

Their expenses are going up relative to the reimbursements because reimbursements are being capped as far as how much they can rise and their costs are going up faster than that.

So if we actually start bringing down reimbursements even more, well, then kind of the bottom starts falling out. What are the costs that go on? Is it, you know, what like the cost of the hospital, the doctors, the nurses, the administrators, the medical supplies? Like what is the rent of the hospital? I don't know. What like what is the secret, you know, silver bullet that is why health care is so expensive?

The first part of that question, I don't think I can answer. Like, I haven't studied exactly what's going on with United in enough depth to know exactly what, you know, where is all the cost pressure coming now that wasn't coming like three years ago or something? Is it people that are coming back and finally getting all these elective procedures that were postponed during COVID and so on and so forth? I mean, it could be a plethora of things. The last part of the question that you generalized, I mean, gets back to everything that we've been talking about.

I mean, the cost inflation in general. If you are the insurer, this works out really well as long as you can price things up at the same rate that costs are going up because then you can retain the same percentage of a greater pie. And so your profit dollars, even if your margin isn't going up, your profit dollars can keep going up year after year. This is the ridiculous part about the whole, you know, the finger pointing between pharma and the PBMs or the insurance companies is like,

It's a distraction for the public. The PBMs are like, it's pharma's fault. And pharma's like, it's PBM's fault. But both of them love the status quo, especially the PBM, because the more pharma pushes its prices up, they just get, it's as simple as this. Everybody makes money on a percentage of the list price. And so if this inflated list price that could be 80% lower, besides all the reasons why it could, if it went down by that much, everybody's profits will go down by 80% if you're getting a same percentage of it.

So, I mean, that's the ultimate problem. And to the extent that in any given year you priced it expecting something and then your costs go up far faster than that, well, then now you have a problem with your insurer, right? And so that's what I assume in general is happening. It's like they did not price it. The actuary is messed up or like something like that where it's like, man, we should have priced this way higher to start the year. We whiffed on that.

And now our costs are up far higher than our revenue is. Would you be a buyer of UnitedHealthcare stock right now? Absolutely not, man. No. Really? I am so tarnished by my experience studying the inner workings of this. Like, I do not think the PBM function is worth anything in this country.

Nothing, right? It was worth something. Now, to be fair, back when it started, pharmacies were exploiting the price difference. And so the PBM stepped in and they're like, man, pharmacies make so much money. We want that. And then they basically shrunk that over time a little bit enough to say, look how much we're saving you versus 1975 or 80. But at this stage, the aggregated PBM function, the vertical integration, it's all long in the tooth.

it's all just contributing to our problem right now. Um, and, and you arguably could like blow the whole thing up and put, you know, small constituent pieces in, you know, like a hundred different competitors in different, you know, verticals in to replace a United. And so it's hard to even know like what a company like that is works, you know, if the arbitrage lasts forever,

you can value it, right? But if now we're in an environment where the arbitrage is going to go away, like, how do you value that at all? Like, I mean, I mean, I don't know. I like literally, I would not put any weight on any analyst estimate on what the future holds for United.

Because the health insurance pharmacy benefit manager and provider. So you're saying the pharmacy benefit manager has no value or maybe negative value? I don't think so. I mean, there's limited value. I think there are value to the functions that they provide, but there's not value to the collective when they actually do damage overall. And so, I mean, that's why I think investing in these names and trying to value hunt is very... It's risky, right? Because...

I was an analyst, right? And so I'm not trying to bash analysts here, but analysts, I know the job. Like you can't go out and be like, okay, United made X dollars this year and next year it's going to be, you know, 80% down. Like you'll get fired if you're wrong, but you have to hug consensus if you are an analyst. And so altogether, individual analysts may be really good and they may have imagination on what could happen, but altogether they have no imagination when you put together. Consensus just generally lacks imagination.

And so as you approach inflection points and we're looking at these forward valuations and you're like, oh, it trades at 10 times or 12 times or 13 times. Well, two years from now, you'd be like, that was 50 times. Yeah. That was not a value stock. That was really expensive and it was a value trap.

And that's the reason why, and I know we haven't talked at all about Bankrete, but we are the polar opposite of value because I've studied it enough where there's too much risk. It's really sexy to think that you're buying something cheap, but then far too often you're getting yourself involved in inflection, where inflection points in industries where you're missing something that

is like the Nassim Tlaib tail risk. You know, you're missing one of those events that the market is starting to suspect and you end up being wrong on like, you know, nine out of 10 of them and it just doesn't work. So, you know, this kind of like, call it, you know, fairly priced,

you know, structural compounders that can, you know, have these wide, these economic moats, these strong businesses that are kind of outside of these areas that you can at least see your potential disruption coming. I can just keep reinvesting cash. Like that's kind of where our sweet spot is. And that's what we've created our tools to look for. Simply because, you know, the value traps, when they work out bad, you know, like, you know, we have 30 stocks in each of our ETFs.

But if you got one that goes down by 50, 60, 70, 80 percent, it hurts. Right. Especially when you're being held on a relative basis and being judged on a relative basis. You can't afford to have too many of those. So, look, you want to put United in your PA and think that health care is going to be just fine because we're going to continue to propagate the structural thing. Yeah, it will. It should do quite well going forward. But if we're at the beginning of this inflection, no one knows what it's worth.

So I totally agree with you about value inflection points. You buy something at 10, 20 times earnings and it goes to 12 times earnings. Likely like the earnings next year are not going to be what is going into the equation that says it's going to be 12 times earnings. Like, like you said, but okay. So, so UnitedHealthcare, the pharmacy benefit manager,

is going to have huge trouble with if there's the most favored nations drug thing, the Medicare Part D reimbursement, that's going to be bad. Medicare health care is going to be bad. But what about the fact that if medical costs go up short term, it hurts the insurer, but long term it benefits the insurer because they could just raise prices? Yes, that's correct. You're right. I mean, long term, United's going to bake this in. Yeah.

If they see this going up a lot, they're going to reprice things and you're going to see more aggressive price increases. I mean, that's what I'm assuming, not anyone, logically. So that's the reason why, like, you know, I used to be a small employer and we would go in and sit down with our broker and they'd be like, guess what? Your healthcare costs are going to, your premiums are going to go by 20% next year. What? And so that's just how it works. And so, yes, you could see more aggressive going forward. And if you do believe that the model will continue,

Then I would think that you're right. I mean, it could work out, but I mean, here's the part, here's the point of this. The level of complexity here is so, so extreme that it makes my head spin. Like I have no clue what's going to happen. Once you start messing around with so many things at the same time and you start like actually taking huge chunks out of these federally funded programs, I literally have no idea what's going to happen. It's like anything can happen.

And so I just don't like investing in things where there is a risk of like,

that I have no visibility into. And I think that's what you're approaching right now. It's not what it used to be over the last 30 years for these guys anymore. There is these kind of catastrophic potential risks that you can't even put words to now on what could actually happen. It's just kind of one of these, like the unwinding that happened in 2008. Who could have actually walked through how that cascades through the entire system? There's no point in us even discussing that right now.

now. But the level of complexity within the system is that much, at least in the US. And so I'm just bracing myself, you know, if this all goes through.

It wouldn't happen that fast. But I'm bracing myself for the fallout overnight in the coming years. And how would the Medicaid cuts impact the insurance companies of the ecosystem? Setting the morality aside, I definitely would not welcome low-income people being cut off of the medical care that they currently have. But just on to the companies and to the broader macro economy, what would the implications of that be? How is that at 2008? Well, yeah. So, I mean...

Well, besides the jobs that we already talked about, and I'll get into that, so much of Medicaid expansion has been absorbed by managed care. So by companies like Centene, like these are, they are the bread and butter of kind of operations of Medicaid. And so if we start unwinding that, then the insurers that are serving Medicaid, which is pretty much all of them, you know, there are some that are much heavier like Centene, but like United's in there, they're all in there, you know, serving this.

So that would be very bad for them, right? I mean, because you would have either lives that are going off or a combination of Medicaid cuts just in general. The job sting, I think, is the biggest concern. You know, well, I don't invest. We don't invest in these health care companies, so it doesn't bother. The, it doesn't keep me up at night. The job is more concerning. So there is, and you know,

I'd encourage people, or maybe you could put in the show notes, but Barron's, you know, just, I did an interview with Barron's a little while ago about one very obscure part of Medicaid, which the last time we looked at the jobs dashboard, I admittedly did not know what was driving this, right? So if you drill down all the way to level six within the jobs dashboard,

And you go, you got to go back one month because they don't publish this for the latest month. So if you go back to April and you drilled out all the way to level six,

you will see the biggest greenest bubble there. And you may not be able to do it on the one month only. If you look at like the last two years, the last five years, the last 20 years, the biggest greenest kind of box there is services for the elderly and persons with disability. There you go. Thank you. Yes. Oh, I love when people already use my tool. So, so services for the elderly and people with disability. So for years, shame on me. I'm like, what's that?

Oh, that's interesting. And so you can go into the census, census.gov, and look at the NIACS lookup code. I actually show you this code within you. If you hover over it, you'll see the lookup code. So when you go into that and you search on that lookup code, you'll see this is adult daycare centers. You'll see it as daycare centers for disabled people.

And then I just started and went Googling, you know, and I'm like, what is an adult daycare center? And you go look at their websites and everything. And these things are popping up left and right everywhere. And so what it is, this is actually like kind of one of the best things that I've seen about our medical system, right? It's a win-win-win, right? It's, you know, I have an elderly father, mother, whatever.

who needs assistance, but I want to work my day job, but I'm their caretaker. I'm their primary caretaker mornings and evenings. And so I go in, I drop them off at a facility for that day. They can socialize. They have medical care there. People will be monitoring their medicines. They'll do all this stuff. And you do it at a fraction of the cost as institutionalized. If you were to institutionalize that person, assisted living or nursing homes, right? So the state saves money. I get to work.

And that elderly person gets to live at home. They get to go to sleep in their bed, right? Rather than being in an assisted living facility or nursing home, which trust me, like I've been in some recently. You don't want to be there. And so I dug into this before that Barron's interview. A lot of this, you can't say all, but like the majority of that entire industry is funded by a waiver program in Medicaid called the HCBS Waiver.

So waivers are called waivers. Like they're the easiest thing to cut if you have to actually cut. It's kind of like an add on. Right. Well, if you actually look at the number of people in this industry, which, by the way, has outgrown warehouse and storage. And if you look at the tool, which is like, think about it, how many warehouses and storage Amazon had to build in order to get you stuff in an hour. So this has grown faster than that.

It's two and a half million people work in this field, which is about 40% of the employment of the entire financial and insurance and all finance industry. Yep. And so, and it's a great industry. Like we're saving money. What if we start cutting this? That's potentially two and a half million jobs that are at risk. And this is one of the first things that could go away within Medicaid. And so not only are there 4 million people that are taking advantage of this, that are going to have to be institutionalized, which will just drive up costs for Medicaid.

But someone's going to lose their job somewhere. Like they're not going to hire them all back in nursing homes to take care of these people. People will just get crap coverage. But the people that are working at the daycare centers, like I may really what will happen is like, I'll be like, oh crap, I got to quit my job to take care of my family. And by the way, before I could work and I may have had ACA subsidies, I had health insurance. I was contributing to this economy. Now I got to go on that.

And so the whole thing is this just big circular mess that is being created by people that don't know or haven't really thought forward on this. Like, you know, at the very least, put an exclusion in for that program. I mean, everybody's saving money on that. And we're we've created more jobs in this than we have in any other granular industry. So that's what I worry about. That's what I worry about. I don't.

Look, Aetna and CVS and all these guys, they haven't earned my concern with what they've done. So whatever will happen to them will happen to them. And if you're an investor in them, just do your homework. You know, maybe it will work, maybe it won't. I don't care. What I care about is the broader economy. That's my purview. And what I do for the website, what I do for Bank Creek is I spend a lot of time trying to understand that and trying to understand these

how to look forward and what are the unintended consequences with decisions that we're making right now. And Eric, so earlier you said a solution, you said, I think some free market things to actually let real competition happen, which obviously to a large degree is not happening now. What about a more like left wing solution, like a public option or even a government option that is mandated that basically private insurance is not allowed at all? Do you think that that would be a better system for the United States?

It's hard to tell. I mean, I think that, you know, the way that the easiest answer to that is like, look at Australia, look at Germany, look, they've all done it in slightly different ways, but they have systems that prioritize care, access, and cost, you know, accessibility costs that eliminate inequities within the system and deprioritize innovation.

And we would end up with that system, you know? So one of my best friends who knows more about this than me, we always talk about like what the system needs is ranked choice voting. You know, we need people to go out there and say, what do we want healthcare policy to do? Do we want it to innovate? Do we want it to be low cost? Do we want it to be accessible to everybody? There's like four or five different options and then just rank them. Like I want to force you to rank them.

And then if innovation comes up number one overall, we don't have a problem. Let's just not change anything, right? Because we're doing a really good job. What if like eliminate inefficiencies, kill the profiteering, prioritize access, make sure no one's rationing insulin. We need a totally different system, but we're not going to have innovation. Like I think this idea that you can keep everything

It's just, it's a joke. It's, it's, it's fiction, you know? And I think the sooner that we realize that the, um, the sooner we'll be able to actually have a discussion about what we want to do. The problem that has come into play, I could have had that discussion with you four years ago. The problem that's come into play now is the jobs thing. So like, if we do decide we want the government to run all of this, well, let's say we're like Australia, best system.

They have a nationalized PBM system called the Pharmaceutical Benefit Scheme. Literally no PBMs in the country. Well, just wipe them off the face of US, right? How many jobs are we going to destroy if we wipe United away? Wipe them all away. Don't need them. That's a problem. It's a problem for the broader economy. So you can't just make a decision like that anymore in isolation.

Um, the further, the longer we've let this persist and the more we've benefited from the tailwinds that we've gotten to our economy, the, the more you're stuck with it. And so like you've talked about at the very beginning, like banks were too big to fail in 2018.

My saying right now is healthcare is too sick to cure. The healthcare industry makes this point, but it is true that the U.S. is a uniquely unhealthy country for a developed country. So that is part of the reason. It's not just greed and inefficiency. Eric, on your website, you've got this great jobs tracker. I mean, it really is

unlike anything that is available for free online and people, you know, if they are a data nerd, they should check it out. You also have something for inflation, CPI and PCE. Just on the medical inflation, I know there's a lot of funny business where there was reported medical deflation, even though costs were going up. And then now we have reported medical inflation. What's going on in the medical inflation front and just how big of a contributor is it to CPI and PCE? Yeah, it's a great question. I mean, like,

I'm really, really glad you asked it because the answer is, I don't know, but while we're talking, I will tell you. Yeah, yeah, yeah. We go to like PCE right now and we go to the Bankrete Inflation PCE visualizer. And then like, let's say we just go, if I look over on the left-hand side for April, 2025, this is what I'm looking at right now. You see the giant bubble is imputed rental of owner-occupied non-form housing. That's OER, you know, and then right next to that, you have nonprofit hospital services to households.

So right now, if I hug her over it, the inflation was 2.94%. That is lower than average of 3.46%. The prior year weight is 5%. So this is a heavy, heavy weight. And what we've actually found or what I've found, and you can find if you use our tools, is that PCE has a much, much heavier weight in medical care than CPI does. And this makes sense.

Because PCE is measuring our overall country's kind of mix of expenses. And so it's including all payers, right? It's including Medicare, Medicaid, commercial insurance. It's not just looking at the consumer's perspective, which is really just co-pays and deductibles, or at least should be.

- Okay, sorry, what's the thing? I'm on the thing, what is it called? I got medical care and hospitalization. Is there other stuff too? - Yeah, there's one that I'm looking at that works too. There's several of them. Like I'm looking at the biggest one, which is nonprofit hospital services to households. That's just the one that came up on my screen. And that is a 5% prior your weight. But you can just go and type in highlighted name. And if you just type in like medical, let's see what comes up. There's medical laboratories, other medical products, all of the professional medical services.

If I just typed in the word hospital at the bottom, I have government hospitals, nonprofit hospitals, proprietary hospitals. There's tons of them in here. So medical inflation is just, it's split in our tools into a lot of them. I can tell you that it adds up to probably somewhere around 15 to 18% within PCE. And that number is much lower within, within a CPI. It'd take me a second to pull that because I haven't looked at it. So,

I mean, like you said, and we talked about this last time, there was some weird stuff going on in CPI within the measurement of healthcare insurance, where it's hugely deflationary, then it went inflationary, but it's not majorly inflationary. Like when I look at all of these, none of them are big contributors to the inflation picture right now. I also have no idea how it measures. Like, I mean, you know, I think it's very important for people to understand these are numbers, right?

They are not anything else beyond numbers with very complex methodologies behind them that are measuring or attempting to be a proxy for the thing that they are labeled as.

And as soon as you start looking at that, you're like, okay, it's a number. And the best way that I can look at it is looking at historical averages and standard deviations, because that's probably going to be a better predictor of the future than saying, oh, my insurance bill just went up. I'm going to expect it to show up here. It may not. We learned that from auto insurance when we were tracking that. I mean, who knows how they were measuring?

I spent days and days trying to figure that out and it was measured differently in PCE than it was in CPI. So I don't really read into these numbers that much. Like our lived experience, one, there's bias that comes into our lived experience, but my lived experience does not translate into these numbers that often. Sometimes it does nigs, stuff like that, you know, but most of the time I just look at these as numbers. So Eric, we've, we've solved all of the healthcare issues, not just in the U S but around the globe. What, what,

What conclusions do you want to leave our audience here with? So my conclusions when I look at the healthcare industry are that, you know, I feel like we've reached kind of this inflection point, right? I mean, we've been constantly building and building as far as employment, as far as profit. And there have been structural elements, the growth of Medicare, Medicaid, federally subsidized programs that have led to this, right? We are now actively floating and very close to reversing all of that.

And in the past, there has been no correlation between our monetary policy, between anything that Powell and the Fed can do and health care jobs. And with health care jobs having created 63 percent of all jobs in the last two years and the rest of the economy being pretty much languishing, we have to start at least considering like what could happen if the Fed starts cutting and jobs do not respond.

So that, that, that's a question that I can't tell you what's going to happen. The complexities of that kind of make my head spin, but it's a question that we need to start grappling with and need to put in the back of our mind as far as investing. And I have to kind of say that, you know, I want to end this on a positive note and also with shamelessly plug, um,

The way that I'm thinking about it right now is very, very simple. It's like, these are idiosyncratic US problems. That was different in 2008 because everything was sliced and diced and held by banks all over the world, right? This is really a healthcare problem. It's an idiosyncratic US problem. If this is a problem that's going to put more pressure on the dollar, then other currencies should benefit. If this is a problem that's going to hold back US companies, international companies should benefit, especially with the unknown impacts of tariffs, right?

And so if you have a problem, if you're sitting on top of a problem right now, the easiest way to not have to worry about that problem is to get up and somewhere else. And so that's what I'm excited about is that international equities have underperformed US equities for a very, very long time. Rightfully so, right? But now we're sitting here and they're at a very large discount.

with arguably in a much safer kind of macro environment and macro setup, especially if you believe in anything that we've talked about. And so it is very hard to invest in international companies because you probably triple or quadruple the number of companies that you have to monitor, right?

Well, you know, that's why we created BCIL, you know, Bankrete Capital International Large Cap Developed Market ETF, where we, you know, systematically, methodically using a largely quant driven process, select just the top 30 at any given point in time and give you a very highly diversifying portfolio from an industry standpoint and then also from a geography standpoint.

And it's done very, very well. But I really think this is just the early stages of it. If you want to stay involved in the U.S.,

You really got to start thinking about the fallout of all this. There are going to be winners. There are going to be many more losers. And so, you know, passive may just may not work as well as it used to. Well, definitely isn't the S&P 500. I got to say, though, like it's amazing how strong U.S. corporate earnings have been with the chain around its neck of this super inefficient health care system. Like if there are long term solutions, I think that could make America better, maybe.

potentially, but I mean, America could be better. So that's kind of a discussion to have. It's like America could be better from a corporate profit standpoint, but this is more of an AI discussion, but it's also a healthcare discussion. But if we can actually fix healthcare, bring more AI into place, what are, how are people going to work though? You know? So we could be, corporate profits could increase and then we could have a contraction in the labor force. We could have, you know, escalating unemployment. And so,

What sort of environment is that? And how do you trade that? Like, I don't know. How do you invest in that? And the answer is, I'm not quite sure. That's a good question. We'll leave it there. Eric, thanks for coming on. Appreciate everyone out there listening. Reminder to check out Monetary Matters on not just YouTube, but Apple Podcasts, Spotify, wherever else you listen to the show. And please leave a rating and review. It really helps the show. Thanks. Until next time. Thank you. Just close this door.