A Broad Church: BRK/A, OpenAI, Medicaid
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That just woke me up and then I just didn't get back to sleep. I get up pretty early anyway. That's brutal. My kids, God bless them, mostly have always been pretty good sleepers.

The dogs turned today. I feel like we should note that we're in two separate places right now. We're in two separate places. I'm in the Bloomberg podcast studio, which is really cool. I'm at home. So I actually feel somewhat prepared for this, which is. Oh, wow. I don't. It's gonna be great. It's gonna be all you. I don't feel that prepared, but let's let's dive in. Hello. Something huge happened. Oh, wait, we have to. We have to do that. We don't have to. Go ahead. Something huge happened.

Something huge happened in Omaha. We can dispense with the introduction. People know who we are. Don't we speak for ourselves? Hello, it's the Money Stuff Podcast. The stuff with the money. I'm Matt. That's Katie. Let's go. All right, let's go. Warren Buffett. Wow. I tell you, it happened over the weekend at the Berkshire Hathaway-Sherrill meeting. Warren Buffett was like, by the way, I'm out at the end of the year. And, you know, as happens on the weekend, I'm like, I'm not going to write about this on Monday.

My wife was like, is this really news? It's a 94-year-old man retiring. Yeah, it is kind of funny and charming how shocking it was. I mean, not shocking, but still. He's 94. Everyone was surprised, even though we also knew who his successor was going to be. Yeah. Because it's been teased since like 2021. Not to be morbid, but like if you are a well-regarded, successful person,

person who is working successfully at age 94 people have a reason not to expect you to retire that's like i'm going to be carried out you know so it's interesting that he's retiring but at the same time i feel like one of your legacies will be how well you pick your successor that's true but you're right i mean we knew who the successor was but yes like having a sort of orderly transition is useful i

I kind of want to talk about Greg Abel. I mean, not to be disrespectful to Warren Buffett, but he's interesting in that he doesn't have much of an investing background. Like you think about, do you think about Charlie Munger? You think about Warren Buffett? You think about fantastic investors and he doesn't necessarily have that resume. He's more of an operator, like a business operator. It's so unique to have

a big company that is sort of best known as a vehicle for a guy's stock picks. And like the guy who made the stock picks is really good at making stock picks, right? And so it's like, there's a lot of value created in that company, but also, you know, they bought a lot of companies that they operate and manage. And it would be surprising if they took that giant company and transitioned it to like the second greatest stock picker ever, right? Like it sort of makes sense to be like, well, yeah, like railroads and insurance companies, you should...

We should make the CEO a guy who knows how to run railroads and hopefully the stock picking will take care of itself. But like, it would be weird if they picked a guy with a stock picking background because you'd have to run a company. Yeah, that's what he's going to do. I mean, I read something. I forget who it was from, which publication. But, you know, you think about Berkshire Hathaway. It has...

its reliance on like the insurance side of things. It's a lot of the energy business now. And that's obviously where Greg Abel, that's his sandbox. At the same time, though, it is fun to think about what

Berkshire Hathaway under Greg Abel could look like. There's a lot of speculation that maybe we could see some spinoffs. It's this huge, sprawling conglomerate with like 400,000 employees. Do you start to break things apart a little bit? So far, Greg Abel seems to be saying that obviously they're going to continue on the track they're on, but...

It's fun to imagine. It's pretty early days for him since he's not in charge. You know, but he's had a long time to think about it. And it's true. It doesn't take over until January 1st of 2026. But...

I don't know. I imagine in his idle daydreams, he thinks about what he's going to do. It is in so many ways a weird company, including just being a sprawling conglomerate is not really in, you know, hasn't been in vogue for 40 years now. And there are a lot of things that Berkshire gets away with or like is beloved for because of Warren Buffett's presence. But without Warren Buffett's presence, you know, at some point someone's going to be like, wow, we could use capital more efficiently. We could...

You know, have a cleaner story to tell to investors. Because the story you tell to investors now is like, ah, look, it's Warren Buffett, right? But, like, you can't tell that story anymore. And then you have to tell a story like, you know, ooh, or an energy company or whatever, right? You go from having this very straightforward, very widely appealing story about Berkshire Hathaway to being like, well, we do mobile homes and, you know, insurance. We have candy. Candy? Yeah. Yeah.

We own a big chunk of Apple for some reason. It's like when it's like when it's like all of this disparate stuff is stuff that Warren Buffett likes. Oh, Warren Buffett likes it. But it's like all this disparate stuff that Warren Buffett liked a long time ago. And it's like a less compelling story. Also, a question maybe they'll have to confront is, you know, we don't pay a dividend, which is fine because you had Warren Buffett there. But now maybe they'll start paying a dividend. I don't know.

Yeah, it's the thing I think about a lot, right? Like I write often a headline, a section header, people are worried about stock buybacks, right? Like there's this idea that like either a company allocates capital, right? Like it has money and it uses that to invest in building factories or buying other companies or doing whatever it does with the capital. Or it returns the capital to shareholders and says, you would do a better job of investing this capital than we would, right?

Nobody is agitating for Berkshire to return capital to shareholders because if you're an investor in Berkshire, you're not buying it because you're like, oh, I'm making a very focused bet on energy or whatever. You're not like, I just want their energy exposure. You're buying it because you want Warren Buffett exposure. And you're buying it because you're certain that Warren Buffett is a better allocator of capital than you are. You're buying it because you want Warren Buffett, who has the giant cash pile of

You're willing to wait around until he finds what he wants to do with that cash pile because you're certain that he's going to do a better job of investing in that cash pile than you are. But like most companies, there's some shareholder agitation to say, look, you, CEO of a company, if you hang on to a lot of cash, you'll probably deploy it in some wasteful way. You'll probably do some vanity project or invest in some dumb idea. You should return the cash to shareholders and the shareholders will do a better job of figuring out what to do with the cash than you will. Yeah.

And once we're in Buffett Lee, all those normal pressures kind of come into play. For those keeping track at home, the cash pile is currently at like $350 billion. So it's quite a bit. That's a big dividend. I'm interested to see what happens to the shares in general. We talk about...

Yeah, I don't have a great empirical sense of how big the Warren Buffett premium is. I've heard people argue that it has historically been large and is smaller now because...

Even like three months ago, like you were discounting a relatively short period of the Warren Buffett premium, right? You're like, well, Warren Buffett will be investing this money for some period of time, but not perpetuity.

But yeah, it's interesting to see what the Buffett-Bringer will sort of watch out to be. So talking about Greg Abel, the successor to Morton Buffett and Berkshire Hathaway, but perhaps a less formal successor. I know where you're going with this. Has also emerged this week. Can I guess? Please. Friend of the show. I wish I had a funnier guess. Friend of the show, Bill Ackman. Bill Ackman. He's executive chairman of Howard Hughes. He finally did it. He's drinking while the iron is hot. Like,

These are simultaneous actions, right? He struck his deal with Howard Hughes to take almost control, 47% of Howard Hughes?

plenty of times before. He's trying to basically model himself after Berkshire Hathaway, become a modern day Berkshire. And the timing was interesting. Buffett announced this over the weekend, and then this news for Bill Ackman broke on Monday. So maybe they just guessed at the time really well. It's like a real rush to get it done. It's like 24 hours to start the new Berkshire Hathaway. 24-hour turnaround, yeah. It is like Berkshire in the sense that

It is not an insurance company that he is acquiring control of in order to eventually run his insurance. Like, Berkshire Hathaway started as a textile company and then, like, you know, acquired insurance. And insurance turned out to be a big part of Buffett's success, right? Because you have, like, the sort of, like, cheap non-callable leverage that allows you to make a lot of interesting bets. Bill Ackman would also like to do that, but acquiring an insurer would be...

too easy so he acquired a real estate company to build his Berkshire out of I don't know yeah it is interesting to me as a guy who like reads and writes about like hedge funds and high frequency trading firms and stuff

how revered Warren Buffett is for doing this like really old school thing, which is like fundamental analysis, long-term buy and hold long investing in, in stocks. Right. I mean, he also, you know, as we were talking about, like he also like runs a conglomerate, right. And there's a lot of operating businesses there, but like, he's famous for being like, Ooh, I like Coke. I'll buy Coke and Coke goes up. Right. And he holds it for decades. And when,

When you look around at, like, people who are financial celebrities these days, 40 years ago, like, Warren Buffett was the best of a group of people who were competitors in that business, right? Like, you know, you would comp him to, like, celebrity mutual fund managers, right? But you look around at, like, financial celebrities these days, there's not a lot of that. You know, it's mostly, like...

People who run hedge funds and are not giving you long exposure to large cap equities, but they're doing some more complicated, more market neutral, more like alpha generating thing. Not stock pickers. Not stock pickers. And certainly not like very long term stock pickers. And the guy who has really positioned himself as being that is Bill Ackman, right? Like, and you look at his fund and it's, you know...

whatever, it's like 12 or 14 names that don't turn over that often, right? And I'll tell you, you know, they do derivative stuff on the side to kind of like smooth returns, but like the main business is like long-term fundamental stock picking. So it is interesting that he wants to get into the Warren Buffett game and he's like the only person who's doing the thing that Warren Buffett was doing, which I think is, you know, kind of passe in many respects, but, you know, still has an obvious appeal.

Hi, I'm Kelly Cavaniaro, Managing Director, Head of North America Institutional Distribution. At Janus Henderson Investors, we believe working together is the way to work better. Like combining your portfolio plans and our in-depth strategy, your valued assets and our valuable insights, your mission and our vision, working in harmony to seek the right investment opportunities. Janus Henderson Investors, investing in a brighter future together.

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If you thought that Berkshire Hathaway was an unusual company, not a normal company, boy, do I have a corporate structure for you. OpenAI. See, I think that OpenAI is a normal tech company. I think OpenAI is totally normal. OpenAI is a private tech company that is backed by venture capitalists and also Microsoft. It has a big stake in SoftMaket. It's a classic capital structure except for Microsoft. It has venture capitalists and it has a giant slug of money from SoftMaket.

And it is run by a charismatic visionary CEO, Sam Altman. And the explicit proposition of the company to investors is, look, we're not going to be focused on maximizing profits for you in the short term. We're not going to be run as a business.

We have a vision about what is good for humanity, and we're going to pursue that long-term vision. And when I say we, I mean Sam Altman has a vision for what is good for humanity, and he's going to pursue that long-term vision. And shareholders will not have much ability or desire to meddle with that in the pursuit of short-term profits. And that's very explicitly the proposition that Facebook put in its IPO prospectus, and that has become standard in Silicon Valley. It's like what you want as a venture capitalist is a vision.

visionary CEO with a like mission that is not the short-term pursuit of profit, but has some grand vision of like humanity's future. And you want to invest in that and kind of like take your hand off the wheel and let the visionary CEO cook. And that's what's happening here. But it's like, yeah, it's like a nonprofit. There's like all this stuff, but like, that's what's happening. Like the news is that like open AI is,

is a nonprofit that controls a for-profit basically. And they were going to convert to being a regular for-profit and now they're not. And instead they're going to be, you know, it's going to be like a for-profit company and it's going to be pretty normal and it's going to have shareholders. And one of the big shareholders will be the open AI nonprofit, but the nonprofit will control it, right? It will have, I've said, it'll have super funding shares. It'll

Something that rhymes with that. Maybe it'll have super-funding shares, maybe it'll have a contractual right to appoint the board, but it'll appoint the board of the for-profit. And who will run the non-profit? Well, there's a non-profit board, and the board will sort of perpetuate itself. The current board will pick future board members. And the board is, I don't want to say...

hand-picked by Sam Altman. But there was a non-profit board that fired Sam Altman and then he came back and as a condition of him coming back, he fired that board and replaced it with his board. So...

you know, who's going to disagree with his vision of what's best for humanity? Like SoftBank? Probably not. So I just think it's like a very normal tech company with like a lot of weird like clothing on it. Yeah. It's a story that like you've heard before about Facebook, you know. I find it a little bit exhausting, like the lip service. Maybe it's not lip service, but that these visionary founders pay to like bettering humanity. It makes a little bit more sense when you're talking about the mission of OpenAI. The mission of Facebook is fascinating.

pretty rich. I mean, when you phrase it that way, it just sounds like another form of ESG. I think they believe it in some form, you know? It's not ESG. It kind of, it rhymes with it. It's like very grandiose, right? Yeah. It's in many ways like one person's idiosyncratic vision of benefiting humanity, right? There's a broad category of ways that AI can go where Sam Altman will be like, that was great for humanity. And everyone else will be like, no, it wasn't, right? Like that's like a distinctly possible outcome.

Yeah. So how it stands right now. So Sam Altman wanted to completely separate from the nonprofit board, his nonprofit overseers. That's not happening. They're now a PBC, which it seems like wasn't a common structure until you started seeing these changes.

Yeah, there were a bunch of them. It's been a thing for more than a decade now. The non-open AI labs got really into being public benefit corporations. The idea of a PBC is that you can run the company, the board can run a company with the explicit ability to consider things other than shareholders, to consider the good of humanity, which I kind of think companies can do anyway. I don't know how material it is to be a PBC.

I mean, reading between the lines, just a teeny bit. They wanted to be a for-profit company where the nonprofit board owned a minority of the shares and a majority of the directors were elected by normal shareholders. And what they have now gotten is that, except that the nonprofit board controls the for-profit board, controls the, you know, has a majority of...

voting stake in the for-profit company. And so he gets to appoint the board of the for-profit company. But it's a pretty minor difference, I think. Well, sorry, it's not a minor difference. It's a minor structural difference. It's a major difference whether the company is sort of ultimately controlled by a board answerable to shareholders or ultimately controlled by a board, you know, answerable to the good of humanity as somewhat filtered through Sam Altman's visions. Right.

I don't know. Again, it kind of reminds me of ESG. Because you think about oil companies getting dinged for not prioritizing shareholders and starting to care about the environment. Maybe if they were PVCs, they would be insulated from those critiques. Yeah, I think it'd be hard to convert an oil company to a PVC, but it would be interesting to try.

Yeah, it would be fun. If I were starting a company right now, I would probably structure myself as a PBC. It seems like it just gives you a layer of protection. Yes, yes, exactly. Like a PBC, this is what I was saying about like the vision of humanity. Like a PBC at the margin makes you less answerable to shareholders and gives you more ability to be like, no, we're considering other stakeholders or other interests, right? And like that's always...

added to the flexibility of a CEO and a board, right? It always gives you an ability to say no to something you don't want to do because you're like, oh, we considered a different stakeholder, right? Like it's insulation from pressure, right? And

It is phrased or interpreted as like this company has more obligations because it has obligations to humanity as well as shareholders. But in fact, it means it has fewer obligations because it means it doesn't have like a binding obligation to shareholders in the same way that a regular company does. And like the obligations to humanity are not particularly binding. And so you just get to make more decisions based on what you want to do rather than what the shareholders want. This is my cynical take.

I like this. So, I mean, I don't know. It's just it's a it's humanity is a broad church and what's good for it is open to interpretation. I do. I want to say two other things. So one, I'm saying that open AI is now in a position where it can do what it thinks is best for humanity based on Sam Altman's vision of what is best for humanity.

But that's not quite true. So first of all, there is a board and the board, you know, has to exercise its own independent judgment and like, you know, is not totally under the control of Sam Walton who is not a sheltering. Only whatever moral power he brings to it and like one board seat, moral power is quite big because when he got fired, all the board got fired too. But anyway, but the other person who

has a lot of say over OpenAI's vision for humanity is the attorney general of the state of California. Also other attorneys like Delaware, but like largely California. Because OpenAI is controlled by a nonprofit, the nonprofit is subject to like state attorney general jurisdiction. And the attorney generals, particularly of California, had a lot of input into this for-profit conversion and I think still do, like get to sign off on like the current structure of

And they presumably have some power going forward if, like, OpenAI, the nonprofit, says we are going to...

appoint Skynet to the board of the public company so it can enslave humanity, the California Attorney General can be like, no, that's not in the best interest of humanity, so don't do it, right? There's some oversight of nonprofits that exists here that wouldn't exist if it was just a regular public company. So I don't know how that's going to work. I don't normally think that's super activist oversight, but because of all the weird stuff that has gone on with OpenAI, I

you know the California Attorney General is paying close attention and so there is some opportunity for that oversight to matter. The other thing I think is interesting is like, you know, I've said this is a normal company with a founder, with a vision, blah, blah, blah. But the one thing that makes it not normal is that Sam Altman owns zero shares of this company. And I don't know how that plays out, right? Like one possibility is that he will get some shares, right? Like at some point during this reorganization, he will say, as he sort of said before, like in previous iterations, he will say,

The shareholders, you know, Microsoft, SoftBank, whoever, the shareholders really want me to own stock so that I have properly aligned incentives. And so over my objections, I'm taking, you know, $20 billion worth of open AI stock, right? Like that's a possible thing that could happen.

But it's hard with this reorganization because now there's this two-tier structure where the nonprofit controls the for-profit. And historically, OpenAI's nonprofit board has not been allowed to own stock in the for-profit in order to keep its incentives pure. And that reasoning still applies. I don't know if they'll still do that. But it still makes sense to say, if you're on the board of the nonprofit that is trying to make sure that OpenAI does things that are best for humanity, you shouldn't have

a huge economic stake in the for-profit subsidiary because that would, you know, lead you to make decisions in the best interest of profit rather than the best interest of humanity. So I think it actually would be kind of hard to give him a big slug of stock now, although I don't really know. And then like, you know, how else can he get paid? I mean, my impression is that he does not want for material comforts for a variety of reasons. You know, he has had a career as a, you know, founder and venture capitalist before, you

but he also has all sorts of stakes and all sorts of AIJs and businesses. There's a lot of ways for Sam Altman to fund his lifestyle that kind of float around open AI and compose potential conflicts of interest. So it'll be interesting to watch that

Because he's not Mark Zuckerberg or Elon Musk or whatever, where his wealth is a 12-digit stake in open AI. I don't know Sam Allman at all, obviously. But I do wonder if he had a time machine and he could go back to the founding moments and...

he alone was making the decisions, how would he have set OpenAI up? Would he have just completely skipped all this nonprofit drama? They're PPC now, but does he wish that he had just founded it or it had been founded as a normal company and he was a normal startup CEO and it exploded this way? It's hard. I think that probably he would have liked to skip all this drama and getting sued by Elon Musk.

Right.

But, no, I think it was a mistake to start it as a nonprofit in the sense that they thought it would be less capital intensive to build large language models than it was. And so they, you know, were like, we're going to do this research funded by donations. And then they realized, oh, no, we need like tens of billions of dollars of donations and we're not going to get that. So we have to be a for profit. So I think in that sense, very clearly, they would have rather done.

started as a more normal company so that they could raise money efficiently without getting sued by Elon Musk. The only caveat to that is I do think that especially in the early days, and I think even a little bit now, the overlap between top AI researchers and people who worry about AI alignment is pretty significant. And I think early on, it was like...

to be a nonprofit in order to attract people and like motivate people to say, we're not just like a company, we're building AI for the benefit of humanity. I think it's good for getting researchers. I'm not sure it is anymore. I think it was helpful early on and I'm not sure that like they would have had the success they have had if they were a pure for-profit. But, you know, there's enough like counter examples where, you know, Google also building AI.

So I think probably would have rather started as a for-profit. One thing I was curious about as I was reading one of your columns about this was that this capped profit model, the company said that it worked when there was really only one company building generative AI. But in this era where you have, you know, a lot of companies who are doing this, that they need to switch to the PPC model. I wasn't quite sure how to read that.

Like, why wouldn't the PVC model make sense from the beginning? Why would a capped profit model ever make sense? I love the capped profit model. I've written about Sam Alban. I've described what he does as business negging. Like, a lot of what happens at OpenAI is they're like, oh, you know, we're just going to make too much money. And it's going to, like, destroy the meaning of money.

God, I hate when that happens.

Once we hit a trillion-dollar valuation, we can't give you any more money. People are like, wow, that sounds pretty good. But then you have all these competing AI companies, and they're like, well, we're aiming for a $10 trillion valuation. You get all of it, right? And then it's harder to sort of use the cat profit model. But when OpenAI was the only game in town, those warnings were so grandiose that I think they were appealing to investors.

Also, like, you know, even if they weren't appealing, even if they were bad, people are like, well, this is the only game in town. Like, you know, if I want AI exposure, I'll get this AI exposure up to a cap as opposed to nothing. Right. But if they're not the only game in town, people would rather not have the cap. Now they're competing with Anthropic to learn like $30 billion from SoftBank. So SoftBank would want something cleaner. Yeah, absolutely. That makes sense. Yeah.

Hi, I'm Kelly Cavaniaro, Managing Director, Head of North America Institutional Distribution. At Janus Henderson Investors, we believe working together is the way to work better. Like combining your portfolio plans and our in-depth strategy, your valued assets and our valuable insights, your mission and our vision, working in harmony to seek the right investment opportunities. Janus Henderson Investors, investing in a brighter future together.

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Shall we take a hard left turn and talk about Medicaid?

Right. Like the other end of the spectrum. What a great racket state governments and hospitals have going on. I used to be an equity derivatives banker. And one thing that I did, I'm not going to get into the details, convertible bond call options over this. But like what you do is you're like, you go to a company and you're like, we're going to sell you this product, right? And then it costs you like $60 million. You write a check to us for $60 million. And the IRS will cut your taxes by $80 million. Right.

And also the product has other nice features. But like, you know, the IRS will more than pay you for the product. This isn't always true, but it was occasionally true. Sometimes the IRS would pay you for half of the product. I was a derivatives banker for years before I figured out what I was doing. But like,

When you sort of figure out what you're doing, you're like, oh my gosh, like all products should be like this. All products should be like two people get in a room and one of them is like, I'm going to sell you this thing and someone else is going to pay for it. And then like, you know, like you have a great time because like you're not like fighting to divide the pie because like someone else is like providing you the pie. That's what's happening in Medicaid, right? So like what I wrote about this week is like there's a Times article about Republicans in Congress trying to get rid of the Medicaid provider tax law.

racket loophole. One state government calls it Mediscam. But basically the idea is like Medicaid is like hospitals or doctors or frequently like managed care organizations provide medical care to people who can't afford it under or insured under Medicaid. And they charge the government for that. And typically the way it works is that the state government pays some portion of the cost and the federal government pays some other portion of the cost.

It's like I think it averages to like the federal government pays 60%, the state government pays 40%. And the state is sort of like in charge of negotiating with the hospitals. And so someone figured out that if the state just paid more, then the federal government would match more. And then the state would have a higher cost, but it would get more money from the federal government.

And then what the state can do is it can tax the managed care organizations or the hospitals or whoever's providing the care. It can impose a special tax on them that takes back the money that the state paid. So ultimately, the state is paying less. The federal government is paying more. And there's like a refund or a payback from the hospitals paying the tax to the state.

And someone figured this out. And someone figured it out in the 80s. And in the 90s, Congress passed laws basically regulating how you could do this. And states have gotten better and better at gaming the regulations ever since. And they cheapened the cost of Medicaid to the state by finding ways to make the federal government pay more than it's supposed to. And now Congress is looking again into eliminating that because it does look like cheating. Apparently...

House Speaker Mike Johnson has backed away from this because it would be so politically toxic for Republicans in swing states. Yeah.

Yeah, because it's like a scam. Yeah. But it's a scam in the service of providing medical care. Like, it's a scam, but it's not like the state governments are using it to buy Lamborghinis, right? It's like they're using it to provide medical care while, like, not squeezing their budgets too much, right? And if you take away this scam, then the states that do it have to either, like, cut back drastically on Medicaid or, like, raise their taxes. Yeah.

And nobody's that excited to do that. And so that's why this scam has persisted, because it achieves a basically acceptable political outcome, right? Either someone has to pay for this care or it has to not be provided. And like, either of those things are sort of toxic. And so making the federal government pay for it is kind of like the

easiest choice and they're doing it in a scammy way. And you could imagine a world in which the federal government said, you know, instead of all this like gamesmanship, what we're going to do is federalize Medicaid and we'll just pay for all of it and we'll negotiate the prices ourselves and it'll be easier. But that doesn't seem that likely to happen in the near future. And so you have this scamming.

No. And in the meantime, it seems like, you know, they're happy to just let this persist as it is. It's funny. So 49 states employ this. I mean, New Hampshire, I think, is the one that calls it Metascam. But basically, I think they invented it too in New Hampshire. Yeah.

Do you know the one state that does not use Medicaid provider taxes? Isn't it Alaska? It is Alaska. And I find that charming. Yeah, I was reading a CBS News article about this, and I thought this was interesting. I think in the article, one of the health providers they talked to said that we're still losing money on Medicaid patients, but it goes from like 60%.

to 80% coverage or how much they're actually getting paid. But they quoted a Colorado-based health system, Lincoln Health, saying that it paid $500,000 in provider taxes, but it netted more than $3.6 million extra from Medicaid, according to its CEO, which is like 15% of its budget.

And by the way, that's how it's supposed to work. The regulations around how states are allowed to do this are complicated. But the basic idea of the regulations is that if you have a provider tax, you're supposed to redistribute money from non-Medicaid hospitals to Medicaid hospitals. So it's supposed to actually...

improve the allocation to Medicaid, right? It can't just be a refund from Medicaid. It has to be like helpful to the hospitals that treat a lot of Medicaid patients. States have found ways to abuse that. So that's not even true, but like that's the basic idea. So it's supposed to be good for the hospitals that treat a lot of Medicaid patients.

I just like this as an example of the tax that hospitals or anyone else is happy to pay. I love it as an example of like gamesmanship. Right. And like I do the analogy to like copay assistance programs, which is like drug companies. If you have insurance to buy like pharmaceuticals and you have a 20% copay,

Then a drug company will be like, well, we'll make the cost of the drug $10,000. Then you'll have a $2,000 copay. And we'll just give you the $2,000 copay. We'll pay it for you. And then the insurance company will pay the drug company $8,000. And the drug company will be better off than if it had just charged you a normal amount for the drug. And that's also regulated. But it's also a thing you can do a little bit at the margins. But the other analogy I was thinking of, and this is a tax that people are happy to pay, sort of, is the SALT tax deduction.

- Right, so like historically, Americans have been able to deduct their state and local taxes on their federal taxes. So if you pay $10,000 of state taxes, that reduces your federal income by $10,000.

And in the first Trump administration, I think they capped that at like $10,000. If you make a lot of money and live in a high-tax state, you can't deduct all of your state taxes. And people immediately got to work figuring out how to game that. And one classic effort that I've written about is that the state could set up a charity, right? And the charity isn't the business. It's just like providing state programs, right? The charity is just an arm of the state.

And you can make a donation to the charity. And if you make a donation to the charity, it's deductible from your federal taxes. And it also reduces one for one your state taxes because they'll say, oh, that just counts as state taxes. So it's not a state tax for federal income tax purposes, but it reduces your state taxes.

People tried that and the IRS said no. So that doesn't work, but it's a good effort. But the one that I really like is if you have business income in a pass-through business. So like most classically, if you're a partner at a law firm, you're a partner at a law firm, you get your share of the partnership's income just as your personal income. Like that's normally how it works. Like it just goes on your personal tax return and you pay taxes on it. But states figured out that they could make

state tax live at the business level. So the business pays the state tax. The business can deduct the state tax for federal purposes because it's a business expense, right? And then you as a partner get lower federal taxes. And so like law firm partners and like some other partners of businesses can sometimes avoid the state and local tax deduction cap by like a negotiated tax that they've worked out with their state. So I think there's a lot of this where like

State tax authorities and people and businesses try to work out ways to maximize their own take at the expense of the federal tax take. And this is one of them. It's just another example of that, that gamemanship.

As I started by saying, this is my career for a while. I love people dividing up tax benefits. Our listeners can't see, but there's a certain sparkle in Matt's eyes. Is there? As he describes this. There's like a lot of tiredness in my eyes.

And that was the Money Stuff Podcast. I'm Matt Levine. And I'm Katie Greifeld. You can find my work by subscribing to the Money Stuff newsletter on Bloomberg.com. And you can find me on Bloomberg TV every day on open interest between 9 to 11 a.m. Eastern. We'd love to hear from you. You can send an email to moneypod at Bloomberg.net. Ask us a question and we might answer it on air. You can also subscribe to our show wherever you're listening right now and leave us a review. It helps more people find the show.

The Money Stuff Podcast is produced by Anna Masarakis and Moses Andam. Our theme music was composed by Blake Maples. Brendan Francis-Newdom is our executive producer. And Sage Bauman is Bloomberg's head of podcasts. Thanks for listening to The Money Stuff Podcast. We'll be back next week with more stuff.

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