The Peter Attia Drive - #327 - Choices, costs, and challenges in US healthcare: insurance intricacies, drug pricing, economic impacts, and potential reforms | Saum Sutaria, M.D.

Episode Date: December 2, 2024

View the Show Notes Page for This Episode Become a Member to Receive Exclusive Content Sign Up to Receive Peter’s Weekly Newsletter Dr. Saum Sutaria is the Chairman and CEO of Tenet Healthcare and a former leader in McKinsey & Company’s Healthcare and Private Equity Practices, where he spent almost two decades shaping the field. In this episode, Saum unpacks the complexities of the U.S. healthcare system, providing a detailed overview of its structure, financial flows, and historical evolution. They delve into topics such as private insurance, Medicare, Medicaid, employer-sponsored coverage, drug pricing, PBMs and the administrative burdens impacting the system. Saum’s insights help connect healthcare spending to broader economic issues while exploring potential reforms and the role of technology in improving efficiency. Saum highlights how choice and innovation distinguish the U.S. healthcare system, explores the reasons behind exorbitant drug prices, and examines the potential solutions, challenges, and trade-offs involved in lowering costs while striving to improve access, quality, and affordability. The opinions expressed by Saum in this episode are his own and do not represent the views of his employer. We discuss: The US healthcare system: financial scale, integration with economy, and unique challenges [5:00]; Overview of how the US healthcare system currently works and how we got here [9:45]; The huge growth and price impact due to the transition from out-of-pocket payments in the 1950s to the modern, third-party payer model [18:30]; The unique structure and challenges of the US healthcare system compared to other developed nations [22:00]; Overview of Medicare and Medicaid: who they cover, purpose, and impact on healthcare spending [27:45]; Why the US kept a employer-sponsored insurance system rather than pursue universal healthcare [32:00]; The evolution of healthcare insurance: from catastrophic coverage to chronic disease management [36:00]; The challenge of managing healthcare costs while expanding access and meeting increased demand for chronic illness care [44:15]; Balancing cost, choice, and access: how the US healthcare system compares to Canada [48:45]; The role of the US in pharmaceutical innovation, it’s impact on drug pricing, and the potential effects of price controls on innovation and healthcare costs [56:15]; How misaligned incentives have driven up drug prices in the US [1:05:00]; The cost of innovation and choice, and the sustainability of the current healthcare cost expenditures in the US in the face of a shrinking workforce and aging population [1:11:30]; Health outcomes: why life expectancy is lower in the US despite excelling at extending lifespan beyond 70 [1:18:45]; Potential solutions and challenges to controlling drugs costs in the US while balancing choice and access and preserving innovation [1:26:15]; Balancing GLP-1 drug innovation with affordability and healthcare spending sustainability [1:40:00]; Reducing healthcare spending: complexities, trade offs, and implications of making needed cuts to healthcare expenditures [1:46:45]; The role of government regulation, opportunities for cost savings, and more [1:56:15]; Hospital billing: costs, charges, complexities, and paths to simplification [2:01:15]; How prioritizing access and choice increased expenditures: reviewing the impact of healthcare exchanges and the Affordable Care Act [2:08:00]; Feasibility of a universal Medicare program, and what a real path to sustainable healthcare looks like [2:15:45]; The challenge of long-term care and the potential of innovation, like device-based therapies and AI, to improve health [2:23:15]; and More. Connect With Peter on Twitter, Instagram, Facebook and YouTube

Hey everyone, welcome to the Drive Podcast. I'm your host, Peter Attia. This podcast, my website, and my weekly newsletter all focus on the goal of translating the science of longevity into something accessible for everyone. Our goal is to provide the best content in health and wellness, and we've established a great team of analysts to make this happen. It is extremely important to me to provide all of this content without relying on paid ads. To do this, our work is made entirely possible by our members, and in return, we offer exclusive member-only content and benefits above and beyond what is available for free.

If you want to take your knowledge of this space to the next level, it's our goal to ensure members get back much more than the price of a subscription. If you want to learn more about the benefits of our premium membership, head over to PeterAtiyaMD.com forward slash subscribe. My guest this week is Dr. Sam Sutaria. Sam is the CEO of Tenet Health, a healthcare service company that owns and operates hospitals, ambulatory, surgery centers, diagnostic imaging centers, and other healthcare facilities. Sam joined Tenet in 2019 after working for two decades at McKinsey & Company, where he was the leader of the healthcare and private

equity practice. I should note that Sam was also one of my most important mentors at McKinsey and was the individual that recruited me out of my residency at Hopkins to join McKinsey in 2006. Sam previously held an associate clinical and faculty appointment at the University of California at San Francisco where he also engaged in postgraduate training with a focus on internal medicine and cardiology. I wanted to have some on this podcast to discuss the US healthcare system for a long time. And the reason is this is one of the most complicated systems in the United States. And it's one that I just didn't feel I had a great understanding of. I certainly understood parts of it, but I couldn't put it all together. And of course, part of this

is that I didn't actually spend an enormous amount of time working on healthcare when I was at McKinsey. I think even though I was recruited to do it and spent some time on it, I actually spent more of my time in financial services and banking. I never really got the education maybe that I wish I did. And more importantly, enough has changed in the time that I've left that I think it was time to have this discussion from scratch. Now, my hypothesis going into this podcast was that if you understood all the dollars that flowed into the system and all the dollars that flowed out of the system, you would understand the system. And I will tell you now that that is exactly what happened. I came away from this discussion with a really thorough understanding of this,

and it has actually made it much easier for me to engage in the subsequent discussions that I've had with leaders in this field. It's made it much easier for me to digest the information that I've been reading. I suppose you'll be able to tell by the end of this podcast, this has become a real obsession of mine is truly understanding US healthcare from a cost perspective, a quality perspective and access perspective and trying to understand what it will take to make this better. In this discussion, we begin with the overview of how the US healthcare system currently works, how it is structured and how these costs flow.

We also do a little bit of a comparison to how the United States compares to other developed nations. We also talk a little bit about the history of how we got here. I think until I understood the history of this, going back to the 1950s and the 1960s, it was impossible for me to understand some of the baggage that we have in the current system. We looked at the intricacies of insurance, looking at private insurance, Medicare, Medicaid, and the challenges of employer sponsored coverage in the United States. We speak of course about drug pricing because this is one of the major areas where the United States is at a supreme disadvantage

compared to other countries. We talk about the impact drug pricing has on pharmaceutical innovation and of course the role of PBMs. In addition to the administrative burdens and what role technology may play in these areas going forward. We connect healthcare spending to the broader topic of economic issues and discuss potential reforms to the system considering what might be possible in the future. I came away from this again, I make the point in the podcast with at least my objectives met, which were I wanted to emerge from this podcast with the ability to sit down with anybody, regardless of their level of sophistication, and explain what is going on with the US healthcare system economically. As I said,

I came away from this feeling that my needs were met. And that is entirely a credit to Sam's ability to understand and deconstruct all components of the system. His breadth of knowledge is virtually unparalleled in this regard. And I am forever in Sam's gratitude. So without further delay, please enjoy my conversation with Sam Sutaria. Hey.

Hey. Hey. Sam, thank you so much for coming down to Austin to have this discussion. I appreciate the opportunity. Yeah, this is a conversation I've wanted to have for a long time, both for my edification, but also because I think it's such an important topic. And interestingly, for whatever reason, it waxes and wanes in public consciousness over time. There are periods of time when healthcare is on the forefront of everybody's mind. In some aspect, right, it can either be cost or quality or access.

For what it's worth at this moment, it seems to be dwarfed by other affairs, but that doesn't mean that it's not going to be front and center in six months or a year or whatever. And therefore, I think in many ways this discussion today, my hope is serves as the master class on the United States healthcare system. One other point I think I would make just for the listeners to understand is I fashion myself as a person who tends to get deep into things and then quickly come to an understanding of them. I have been rather unsuccessful in understanding healthcare.

I'm sure my understanding is greater than the average person. It still feels woefully inept relative to the effort I put into understanding it. So I'm personally just looking forward to how much more I'm going to understand this in a few hours than I do today. 06 Well, I'm sure with good questions, I'm going to learn a lot too. So I'm looking forward to it as well. 06 We're going to talk about the too. So I'm looking forward to it as well. We're going to talk about the things that people care about, which is why is it so expensive? Why isn't everybody covered? Why do we not have the best life expectancy?

In fact, on average, why do we have horrible life expectancy despite spending twice as much as anybody else? But we can't have that discussion if people don't understand the system. And that gets to what I just said a minute ago. It's a really complicated system. You're one of the most structured thinkers I know of, so I'm gonna actually just defer to you as to what framework do you want to put to this

for people to understand how so many trillions of dollars flow in, how many so many trillions of dollars flow out, who's paying, who's receiving, how is this thing organized, and why are we different than every other country on the planet? So let's start with how the system works from a financing perspective. And then I think we can talk about how that's different than other countries. We can talk about the impact on outcomes, and we can probably even start to set up the

framework on, as you say, the things people are interested in, why, and what can we do about it. But it's hard to start anywhere other than this is now close to 20% of the US economy, health care, 17%, 18% currently. But let's give a number to that. People don't understand how big the US economy is. So how many dollars are we talking about?

Yeah, we're talking about a US economy gross domestic product that's probably $28 trillion. That's 20% of the world, 25% of the world's economy. With about 7% or less. And another way to think about that's almost $90,000 per person in the US. We spend $11,000 to $12,000 per person in the US on total healthcare expenditure, just to put that in context, $4 trillion of expenditure in the healthcare sector. If you added up all of the exports that the United States sends out across all industries, you're talking about $3 trillion. We import more than we export. We're a consumer culture. That's close to $4 trillion, but not quite

at four trillion today. I mean, you just put that in context in terms of how much we spend in healthcare in the US. It's a huge number. And I appreciate the comments about how healthcare is a topic waxes and wanes with respect to being top of mind. But any discussion about the economy, about inflation, about jobs, you're really talking about healthcare in many ways. It may not be as direct as talking about healthcare policy, but you're really talking about healthcare given that it's almost 20% of the economy and there's no escaping that. Do we know that it represents roughly 20% of the workforce as well? Well, it probably represents in terms of wages a little bit more

than that because the average wage in healthcare is higher than in other areas. And this is something that as we get into how you think about the future, we should talk about because as healthcare, as a percentage of the US economy grows, you can't have that happen without considering what it does to the rest of the economy. And that's going to be an important discussion around US competitiveness, US affordability, US coverage, et cetera, given the nature of healthcare and healthcare issues today. Do you think it makes sense, Salman, feel free to shoot this idea down. Does it make sense to go back to the 1950s to start with Hilbert and to start with and then progress into Medicare and Medicaid.

Does historical context give people a sense of what happened after World War II? Let's do that because I think we can do it quickly and give people a sense of what happened. But let's just start with painting the picture of where we are today and then let's back up and say how did we get here? So four trillion dollars, just to keep this simple, about a trillion of that, dollars. Just to keep this simple, about a trillion of that, okay, one-fourth, comes from consumers. Some of that is spent in you and I both would contribute to the insurance we procure. And some of that we're directly consuming health care by spending money on health care services out of our pockets. But think about it as one-fourth or one trillion. Employers put another trillion into the system. So how do they do

that? Largely through employer sponsored insurance. So that's the second trillion. So now you've accounted only for half of it. So where's the other half coming from? The other half is coming from government, federal government and state government. These days, a lot of it is federal government. And the federal government contributes in two different ways, direct expenditures. And as we'll get into when we start talking about history, employer-sponsored coverage being the dominant source of coverage is unique to the United States, which is that your employer procures health insurance for employees, which then provides a form of coverage. That's relatively unique. Let's make sure that people appreciate that,

because someone listening to this might say, I have a health insurance card and it says Blue Shield on it. So doesn't Blue Shield provide my insurance? That's correct, but it's coming through your employer. And most people would recognize that because of their annual enrollment. So they're picking Blue Shield or Aetna or Cigna or United. Or if they're in a Medicare plan,

they may be looking at Humana or other blues plans. But the point is that the Humana, the Aetna, the whoever is on the card is usually providing an administrative service only if the employer is large enough that the employer is bearing the risk, which maybe we'll get into that. Maybe we should explain that a little more. Yeah.

Okay. So you've got a fourth that people are spending out of pocket in one form or another, some of it, of course, to subsidize their ability to buy insurance, a fourth that's coming from employers directly out of their profits. Now think about that trillion dollars for one second. Total US corporate profits are about, interestingly, coincidentally, just south of $4 trillion. Really? Corporate profits, okay, post-tax.

So the expenditure in healthcare is pretty significant when you think about it that way. Now off of total revenues, of course, it's a lot lower as a percentage. But if you think about it from the perspective of total corporate profits, that's a big, big number. The US consumer spends, you should think of it this way, for that $1 trillion. If you have a $20 bill, $1 of that is going into direct healthcare expenditure, like 5% of someone's expenditure in an annual average basis.

And then you've got the government. The government's spending about $2 trillion. Again, it's direct spend plus there's tax subsidy for employer-sponsored insurance. We'll get into that because that's a unique feature. When you talk about 1950s, 1954, the tax benefits for providing employer-sponsored insurance were codified into law.

By the way, going back to that $1 trillion that employers are spending, that is a pre-tax benefit basically to employees. And that's the incentive. And that's the incentive that started back in 1954, which is that giving people health care coverage through group purchased insurance by your employer is a pre-tax benefit rather than a post-tax benefit.

So it created an incentive for employer-sponsored insurance to grow and now, of course, ultimately become the dominant form of which people procure insurance today outside of government. What's the approximate cutoff in company size, at which point it makes sense to self-insure, which is what you're describing? Oh, I think it's, to your point, it's mostly larger companies that do that. But you know, the definition of large isn't that large. I mean, there are entities. 500 people. Yeah, there are entities with less than 500 employees that self-insure at times. Not that common, but certainly as you get above that level, it makes sense. Let's for a second,

put the federal spending in context. I mean, close to with the direct and the tax in kind contribution to healthcare, the federal government is making, you're getting close to 2 trillion, $1.8 trillion, 2 trillion. Defense spending, let's just put that in context. That's about a trillion. Social Security, 1.2 trillion today. Social Security doesn't come out of tax revenue directly. That's correct. The number doesn't come out of tax revenue directly. That's correct. The number that I keep thinking of, Som, is the government collects 5 trillion a year in taxes.

That's the government's income is 5 trillion, and we're putting 40% of that right back into healthcare if I'm understanding this correctly. Well, yeah. I mean, that may be what we collect, but obviously the government is spending closer to 6.8 trillion or something like that. Correct. That's right. There's a deficit.

So this is the other thing that we were talking about the other day that just blows my mind, which is we collect 5 trillion a year, we spend 7 trillion a year. So we have a deficit of 2 trillion a year in perpetuity. Oh, and by the way, we're sitting on 35 trillion of debt. Total debt. We're going to come back to this point. I'm going to borrow from Paul Tudor Jones on his very eloquent explanation for how do you put that in context?

Yeah. I mean, ultimately, that is, I think, the question when healthcare is such a large part of the economy, how sustainable is it what we're doing in healthcare expenditure? You take all that money and financing and then in the US there's a system that it goes into, right? You got $4 trillion, a quarter, a quarter and half from government and you're flowing it into a system. And in our system, about two and a half trillion of that plus some from the government is flowing into private insurance. They're covering what we would traditionally call commercial insurance, but the private

insurance community is also covering a bit of Medicare and Medicaid, increasingly large proportions of that. That's through programs like Medicare Advantage and things like that. Medicare Advantage or Manage Medicaid or other things like that, that allow for theoretically better choice, better benefits and other things, and maybe even cost control. And then there is a retail component. And then obviously the government does pay directly to providers through Medicare and Medicaid some amount of money, and that's about a trillion dollars.

So the split in flow, you can break it down pretty simply from that perspective. When I look at how the money's spent in a way that people can understand, I think of very simple rules. We'll get into this, which is administrative cost in the US is probably one of the biggest gaps to what we see in the rest of the world. And that can be good or bad. You have to make a judgment about whether all that administrative spend is creating a better system with more choice and better outcomes or not. But we do spend that. And that takes up close to 10 to 15% of the total pool of dollars. When you think about that number on $4 trillion, that's a huge amount of money going into administration.

We'll talk about that. For the remaining dollars, about a third goes into hospitals, hospitals and infrastructure-based care. About a third goes into physicians' offices and other clinic type activities. And about a third goes into physicians offices and other clinic type activities, and about a third goes into drugs. Again, simplification from that perspective. In the drug and I would add to that maybe drug and device category, I'm including the cost of pharmaceuticals that might be administered in a doctor's office or hospital. So just think about it as a third, a third, a third. And that's how

people can think about when I go spend my money or I go into the health care system and I'm spending money, on average, a third, a third, a third is happening there. Obviously, some people never end up in the hospital. Small proportion of people end up costing us a lot in hospitals, for example. Some people are not on any drugs. Some people may be on five or six drugs.

The system has a variety of what I call cross-subsidies in it. And just so that folks who are maybe thinking about other ways that they've heard this, because I know you've described it this way, which is it's often presented as half of the health care dollars are flowing into the facilities. One third of the doc is going into payroll and physicians, and then one sixth is going into drugs. That's right.

But the problem with that view, and the reason I like your one third, one third, one third better is it's more transparent, which is in the previous world where we say half goes into the facilities, we're discounting how much of that contains physician salary and how much of that also contains pharma. So when you strip that out, it's actually more elegant to point out. It's one third, one third, one third. Yeah, I mean, the delivery industry is a pass through to other things in some ways. And the 321 framework was probably an older framework.

If you look at the rise of the total drug costs, which I'm sure we'll get into, the third, a third, a third is absolutely a more transparent and simplified way of looking at how we're spending our dollars. Okay. That's where we are today. Let's go back. It's 1950. Someone comes home, it's late 40s,

early 50s. The US is on top of the world. We're the greatest country in the world. Our GDP as a percentage of global GDP has never been higher and may never be higher again. In fact, even today, by the way, I just looked this up because I was so interested. If you look at the percentage of global GDP that is the US's today, it's quote, only 20 to 25%, which is still staggering. Staggering. It was close to 40% post World War II. So what's happened over the last 20 years is China's GDP has expanded so much that as

much as we continue to grow, our relative share has gone down. So economically, we've never been more dominant than we were post World War II. What is true of healthcare? How does a person take care of themselves? The one piece of context I would add to that introduction is that at the same time, the US economy has grown robustly since then. Proportionally, I think that's an important factor in affordability, which is had the US economy stagnated and others grown, this affordability question would be a very different question than what we've seen happen, which is the US economy has grown incredibly robustly. But if you go back to the 1950s, and by the way, this is a global phenomenon, in and around the late 40s and let's say into the

late 1950s, in many places, significant investments in social welfare programs and healthcare were made. So we'll talk about the US, but just as context, the NHS in the UK was created in 1948, okay? So the systems that were designed to increase coverage originated in that timeframe, roughly. Now for us, it was 1965 when Medicare and Medicaid came into being, but it was somewhere in that range.

So you go back to the 1950s. I mean, first of all, we were spending less than 5% of GDP on healthcare, okay? Put that in context versus 17 and a half. Yeah, we're almost 20 at this point. Almost 20 from that perspective. More than half of those dollars were spent out of pocket, meaning you went to the doctor.

Which is today 25%. Which is today 25%. And actually, if you look at direct expenditures, where the dollars, some of the dollars that you're putting in. Are going to the premium. Are going to cover your insurance premium, it's really 15%. So your direct exposure, what you see and feel in terms of what you're

spending on healthcare is down to 15%. That's important because the socialization of coverage of costs has made the American consumer less sensitive to the price points that they're seeing for everything, for drugs, for doctors offices, for hospitalizations, etc. The other thing that's interesting is today, that means 85% of healthcare expenditures are covered by a third party, whereas it used to be about 50%. So again, that sensitization phenomenon is real. The federal government contributed about, say and a half percent to expenditures back then.

Today, it's north of 35%. We've already been through that. When you add direct spend plus tax benefits and other things that lost taxes for the federal government, et cetera, when you look at that, you're about a third of the expenditure being the federal government. So the rise of the federal government's role in healthcare has been material and almost as rapid as the rise in healthcare costs from that perspective. So it's a very different system of consumption.

Do we have a sense historically why as the NHS is coming into its existence in the UK and as most developed nations are developing systems that look far more like the NHS than what we've done, was there something about our geography being much more vast than say England was in the 1940s that led itself to this? Was it the nature of states' rights versus federal power? Like what was the difference? Yeah, I think there are all kinds of things in the ecosystem, including geographic diversity, state versus federal rights, and even fundamentally the drive that the American consumer has in

determining their own outcome. If you look at our system today, much of its construct is based on a desire for consumer choice. Many of these programs, these coverage programs, or some would say welfare programs that evolved like Medicare and Medicaid were designed to solve some substantial problems. So if you go back, what happened at that time? Two things happened in the 1950s. One was there was a significant commitment to investment in hospital capacity at the

time. I mean, there were people in America, not just rural, but suburban, that did not have easy access to acute hospitalization. And the technology and ability to intervene and save lives in that setting was improving significantly. And I think at the time, there was a belief that it wasn't fair or equitable, that that access wouldn't exist. That's called the Hill-Burton Act, you referred to it earlier, which if I think about it in simple terms, it guaranteed a hospital within every 10 miles or 15 miles of every American in concept. And that's what happened.

And that legislation drove our thinking in terms of access all the way until it expired in close to 2000, 1997, if I recall, from that perspective. So we made a massive investment in infrastructure from that perspective to provide people access. Okay. And that's important. The second thing that happened, of course, is that by the time you were in the 1960s, there really wasn't a coverage mechanism for seniors. I mean, there was patchwork stuff and there wasn't really a coverage mechanism for those with less means, what we today call Medicaid. And it got to the point, especially with the importance of the seniors power, not only of the purse, but from a political standpoint, where on average,

seniors were spending a quarter of their retirement income from social security on healthcare. That wasn't sustainable. So they neither had consistent coverage, it was inequitable, and on average, a quarter of the Social Security check was being spent on healthcare. And so why Medicare and ultimately Medicaid associated with it was you had a country whose economy was growing rapidly, we could afford to take care of our seniors, and that was the decision at the time. And it was met with great support obviously at the time. And so you created a system in which that coverage existed and therefore the federal government's expenditure jumped up significantly. Now why did we not do with

Medicare what was done with Social Security? In other words, my understanding, which again I'm embarrassed to say how little I understand this, but my understanding is Social Security is funded directly. It is not a budget line item. When I pay my Social Security on my paycheck, it's directly going to pay somebody, correct? It's not like building up a war chest that the government has to use to be paying down in the future. But Medicare works not the way Social Security does. but I still make a Medicare payment every month. So in other words, why haven't we at least been able to eliminate the challenge of Medicare and make it more like Social Security?

Yeah. Well, we do pay Medicare taxes today. I mean, now there are special taxes to help fund Medicare, but it's really, it's a solvency issue. Well, then it's a fungibility issue as well. You can use a Medicare tax to do something else. Absolutely. In hindsight, it's 100% clear.

If you think about when the legislation was put in, I said in 1950, we were like 4 and 1 half percent of GDP in health care. At the time Medicare came about in 1965, that number was in the mid-6s, mid to upper 6s at best. So who would have guessed that it would have risen to 17, 18, potentially in the future, 20%? I think, I mean, the US healthcare system in many ways

is a story, an optimistic story of well-intended policies that now are questioned based upon the way the expenditures have increased. There's another thing that's important to understand, which is as the US healthcare expenditures increase as a percentage of GDP, so did the rest of the developed world. So every developed nation that put in place programs, their version of Medicare or Medicaid, I understand more state-run than privately run, their expenditures increased. They started like us in the fours and they've landed in the 11 to 12

percent range. We've just accelerated up to 17, 18%. Think about it this way, from that time forward, the US economy relative to the healthcare economy, the healthcare economy has grown roughly 2% per year faster than the US economy. And the US economy has grown robustly, better than the rest of the world. So that's why the expenditures have gotten so high. And there have been periods where that's been slower and there have been periods where that's been faster. Every time there's a new coverage event, Medicare or Medicaid, some of what happened with the Medicare Modernization Act in 2000, we'll get into that when we talk about drug costs. And then obviously the Affordable Care Act, which created significantly more coverage,

that rate of increase for healthcare expenditures relative to GDP growth has widened. We're taking some things for granted here. Tell people what CMS is, what Medicare and Medicaid actually do. Who do they cover? Yeah, yeah. CMS, Center for Medicare and Medicaid Services,

as it's called. Medicare covers people over the age of 65 in a bunch of special categories of people with severe chronic illness, take dialysis as an example, that it might be hard to find coverage on the private market over a long period of time, given their needs. It is more than what I would describe as a safety net program. It's a coverage program for people over the age of 65. How long does one have to have paid into it to qualify for it?

Everybody qualifies for Medicare at the age of 65. It's not like social security where you had to. It's not like social security. The benefit doesn't vary. Anyone who is a US citizen will qualify. That's right. And so Medicare, another interesting piece of context, think about life expectancy. I mean, we're going

to get into life expectancy differences in the US. I mean, the fact is- What was life expectancy in 1965? Yeah, and I don't know what the exact number was in 1950 or 65. It wasn't what it is today. And the other thing you would say is that, look, I think you would agree over the last hundred years, in the broad context and scheme of things, life expectancy in the developed world has improved remarkably, 2X. And yes, there are now differences at the top of the spectrum between the US and others, which we'll get into, but this is in the context of a very, very rapid improvement in overall life expectancy. Health status may be a different thing, and I think that's also something

to talk about. And Medicaid, just to round that out. Yeah, okay. So Medicaid is a safety net program. It is a program designed for individuals below different definitions, state by state, of certain measures of federal poverty level. And the idea behind the coverage is that for those people, not only are their needs unique, but their ability to access healthcare services can be challenged. And the benefit of having programs like Medicaid is it increases, I won't say it makes it entirely equitable, it increases their ability to access the healthcare system in a reasonable manner with a coverage system that avoids

taking those least fortunate down a path of severe medical debt that would be overwhelming to their personal financial situation. That's how I think of Medicaid. Do you have a ballpark sense of where those cutoffs are? The cutoffs range somewhere between 100% and 200% plus of federal poverty level. And we'll get into maybe with the Affordable Care Act,

the exchanges and whatnot. Medicaid covers a lot of people. If you think about this, it now today covers 90 million people in the US, more than Medicare. Medicaid covers 90 million people. 90 million people today in the US. Some states, almost a third of those covered, think Rust Belt states are Medicaid today.

So this is a very large program. Medicare covers probably, I would guess, 65 million or so today and growing. As the population ages, we forecast that that 65 million will become close to 90 million at the peak of the baby boomer aging, which is around 2032, in terms of timeframe. But Medicaid today covers about 90 million people.

That's a big number. What is the federal poverty level today? I don't know. We can look that up in terms. I can tell you that the income level that defines federal poverty is pretty low. You or I would not consider that to be a reasonable living wage or income for a family in this environment with the cost of goods being what they are today.

Yeah, in other words, there are people who will not meet the criteria for poverty who maybe should based on purchasing power. And who will be underinsured. And that's where things like the exchanges from the Affordable Care Act have stepped in to provide at least options for additional coverage so that people's healthcare costs can be offset. Okay. That's helped bringing back to Medicare and Medicaid. If you really look at,

you have these programs that came into play. What drove the rapid expansion? Another view of the world would have been that you had this coverage, the healthcare system stood still, and maybe the costs increased, but they didn't increase beyond six, seven, eight percent of GDP. Now, let me ask you a question. I'm sorry to interrupt you, and you can tell me to just punt this and come back to it. I want to go back to the 1960s. We go to the great lengths to create Medicare and Medicaid. Why did we not at that moment say, hey, why don't we just roll this out for everybody,

just as the NHS has done? Why did we instead continue to keep two completely different worlds, which is we have a government-funded system for people of low socio-economic status. We have a government-funded system for people over 65 or with very chronic conditions. But for everybody else, we're going to do this crazy thing where your employer takes care of you. The employer-sponsored insurance system was already entrenched because of the tax benefits that existed. I see.

So that was a decade earlier. That is right. And so that was entrenched. And why does that matter? I think this is an important point about our belief in consumerism and choice. The marketplace provides choice in a way that many of the nationalized healthcare systems that exist in other countries don't. And if you really look at many of those other countries, while they have a nationalized healthcare system that purportedly has universal coverage,

they also have a private system no differently than ours where people with more means can procure better insurance and better access and a private healthcare system, etc. It's just not as widespread as it is here. In this country, there was a belief that was institutionalized by incentives that employer sponsored insurance was working. And remember, at that time, it wasn't that expensive, meaning employers often covered 100% of the premium. So the employee did not end up having to contribute like they do today to the cost of their insurance as an employee that they're receiving from their employer. It was a comfortable system if you imagine at the time. And based upon the system you got choice. Which product do I want? What kind of network do I want, et cetera.

What happened as a result of that expanding, especially employer-sponsored insurance expanding, is that insurance moved from being an individual product based upon your or my individual risk to group insurance. What are you doing with employer-sponsored insurance? You're aggregating all the employees and all their risk, and you're socializing that risk among the whole group and saying, look, in order to protect each of you individually, we're going to share the risk as a group. We're going to buy the insurance collectively, and it'll spread the risk among us to avoid

individual catastrophic loss from a healthcare care perspective, expenditure perspective. That's what we did. We socialized in group insurance. That was a big move in the insurance industry as employer sponsored insurance took off. Of course, Medicare, the concept of Medicare itself by bringing all seniors together was also socialization of health care costs across all seniors. Not all seniors spend equivalently, as you can imagine. So that was one. What happened on the other side is absolutely a story of incredible innovation over the last 50 to 75 years in healthcare.

And we can all debate what's resulted from that, but development and maturity of the pharmaceutical industry, development and maturity of the medical device industry, innovation in procedures and services that have allowed people to have invasive procedures in manners that used to hospitalize people for three weeks and now it could be three days and in some cases if you're having a knee or hip replaced it's at best three hours in and out the door is amazing. And yet the impact of that along with the socialization of healthcare costs and therefore removing the individual from understanding or feeling that cost directly because they're insured, together was a virtuous cycle that just drove up consumption.

I'm not an economist, but people would look at this and say, okay, there's moral hazard and concepts like that that exist with an insurance system like that. And we should spend a minute on what was insurance designed for back then and what is it now. I loved your analogy there. I've told this story before on the podcast, but assuming someone's listening who hasn't heard it, it's a great example. So, I had a friend who is American, but he lived and worked most of the year in Riyadh, in Saudi Arabia.

I was out visiting him in Saudi Arabia, this was 15 years ago. We were at his flat, and it was in the spring, and he was just getting ready to head back to DC where he lived. So, I said to him, I said, God, I can only imagine how hot it gets in Riyadh in the summer. So if you leave here in May, you come back in September, how hot is your apartment when you get back? Just out of curiosity, like is it a sauna?

And he goes, no, 70 degrees. I'm like, what do you mean? He goes, I leave the air conditioning on the whole summer. I'm like, you leave your house and leave the air conditioning on for four months? He goes, yeah, that's crazy. He goes, I'm not paying for it. The government subsidizes all of our energy costs here. I pay the equivalent of a few cents per whatever it is. He pays a few dollars over the summer to air condition his place. This is the exact point. When you don't have skin in the game, you can't make rational economic decisions. I shouldn't say that. It's a rational have skin in the game, you can't make rational economic decisions.

I shouldn't say that. It's a rational economic decision for him, but you can't make decisions that are wise in the context of resources. Yeah. I think that if you look at the concept of insurance, I mean, insurance is for random, infrequent, and unpredictable events. And when the primary role of insurance was to prevent catastrophic loss, if you had a heart attack, or you had an accident, or you had a heart attack or you had an accident or you had an appendicitis or yes, or you had a cancer, which back in

those days was less of a chronic disease. The concept of insurance made some sense. Now if you look at what drives expenditures from a health status standpoint, it's a lot of chronic illness and in many cases, it's multiple chronic illness. We'll get into obesity, diabetes, heart disease, lung disease, even the innovation in HIV care in this country. AIDS has become a chronic disease. Cancer is becoming more of a chronic disease. We try to ensure somewhat uninsurable events. You don't wake up every morning and think, oh, I've got car insurance. Let me go figure out how to use my car insurance

to get an oil change. But when we think about, we're gonna go to the doctor to get a preventative checkup or refill my regular diabetes medicine, which I'm gonna be on for the rest of my life, we think insurance. But it's not really an insurable event. Insurance today is a discount card.

It's not insurance in healthcare. Insurance traditionally would be in other parts of your life Insurance today is a discount card. It's not insurance in healthcare. Insurance traditionally would be in other parts of your life where you procure insurance for random infrequent and unpredictable events. Is this manifested in the financials? So if you look at the insurance companies and you strip out their ASO business, the part I referenced earlier about the administrative part where they administer insurance to the employers, but if you look at the part of their book of business where they bear the

risk, do they look like travelers? Do they look like Geico? Do they look like the types of companies that Warren Buffett is obsessed with because of float? Or do they just totally function different from that? No, no. They function differently from that perspective. I mean, obviously they have a tremendous amount of expertise in managing risk, but the nature of that risk they understand isn't random, infrequent, and unpredictable events. It's not car insurance. It's not life, it's not death, it's not disability.

That's right. The fundamental understanding that the insurance companies have to have to be successful in their risk business is understanding their risk pool. So you're going to have a thousand people in insurance. 5% may cost you 50% of your total spend. 20% may be 85% of your total spend. And then you'll have a large group of people that really on a unit basis don't spend very much.

And they have to understand that risk pool. If you and I wanted to start an insurance company tomorrow, I'm gonna hang up everything I'm doing, you're gonna hang up everything we're doing. We're gonna go start the Peter Somm Insurance Company where we take risk. We don't have an ASO business. What would it take for us to be successful?

It's very hard because the number one thing that would create the foundation beyond all of the infrastructure and systems and other things required to function in a complex ecosystem would be a large enough population of patients with a risk pool that you can understand. Look at all of the folks who've gotten into the newest exchange products that offered

an opportunity to do that are the exchanges that have come out of the Affordable Care Act. There have been insurance companies that have popped up and have failed, and there have been some that have struggled but still exist, and there have been some that have been gobbled up. The vast majority of success on the exchanges has been through traditional insurers who have the foundation of the systems to do so. And the innovation in that space has come from the Medicaid insurers who adapted their processes and systems to be able to come onto the exchanges at a lower cost point. So it would be very hard. It would be very hard to do that. Remember, the other thing

you'd have to have if you had an insurance pool, given that you have to make payments timely, is you've got to have enough capital backing the insurance risk. And so where do you raise all that capital? That's another thing. There are so many more questions I have on that, that I'll punt for when we get to the ACA. So the two things, we got a $4 trillion system. It's almost 20% of our GDP. It was not anything like that in the 1950s. There are a number of coverage welfare programs, if you will, that have been put into place. Many of them done in that context, in that time, not only with good intention, but reasonable projections that things would not have grown like this. Medical innovation, I mean, just look at the number of patents in the industry and how they've grown. The combination of

medical innovation, drugs, devices, service innovation, procedures, along with coverage, coverage that was disconnected from individual accountability, created a virtuous cycle of spend increase that has gotten us to this place. And it has been faster than GDP. And at the same time, it hasn't broken the system because the US economy has been thriving. I mean, the arguments about affordability that we may get into would be, well, at this level of expenditure, it's draining the US economy from being competitive. Well, I'm not sure that that's actually true yet. And we can get into forecasting where it's going to go. I'm not sure that's true yet. All of the dollars and benefits that have gone

into creating a healthcare system have created millions and millions of jobs. If you look back over the last 20 years, healthcare has probably created more jobs as a sector than in any other sector in the United States. Yeah, I was trying to think of that some. The only two things that I could even put alongside it as huge sectors, probably still don't create as many jobs would be energy and agriculture. Those would be the only two industries that could even come close to being in the same zip code as healthcare. And what's unique about those three, putting it aside the defense industry, energy, agriculture,

and healthcare are the three most subsidized industries by the government. Three most subsidized industries by the government. Three most subsidized industries by the government. By far, right? I mean, agriculture has been for a long time. Energy is very much so today, not just from a national security perspective, but in terms of the innovation needed there. And healthcare has been so, again, as we said, in the US,

probably since the early 1950s, certainly since 1965 when you had Medicare and Medicaid come about. And so the expenditures have just grown. Obviously, aging contributes a bit to that. There are some differences we can outline with other countries if we have an interest in it, but aging contributes a little bit to that. And then obviously, as business has grown, the value of this pre-tax benefit as more and more people are employed has grown to continue employer sponsored insurance

as a vehicle of private insurance to match the public programs, Medicare, Medicaid, and otherwise. And so the expenditures have grown significantly. One of the things that comes up is what have the industry participants done to actually help with this problem? And the argument will always get made, well, it's grown so quickly they've done nothing. And I don't think that's even remotely true. Sadly, I think you could be in a situation

where expenditures would have grown even faster. So think about this, from a hospitalization perspective, the number of bed days per thousand, so how many hospital days per thousand population have fallen by a half since 1980? The number of physicians per thousand people has more than doubled. The industry has added significant physician capacity in order to help with access. Do we have shortages still in certain areas?

Of course we do. But the number of physicians has doubled from about one and a half per thousand to 2.8 per thousand. So the industry has expanded its capacity. The insurance companies, through their managed care programs, have demonstrated the ability to manage cost. If the consumer were accepting of some of that management, That's a different issue to get into, which is how to do managed care in a way where it doesn't reduce and frustrate consumers or physicians with respect to choice and professional freedom. But make no mistake about it,

tight managed care has controlled costs for a short period of time until there's been a bit of a revolt in terms of that. And product choice within insurance companies has created choice. So if you go back, you had Medicare for a very long time. Sometime around the late 90s, 2000, Medicare Advantage really took off. Why did Medicare Advantage get created? Medicare Advantage was a way to create product and benefit choice for seniors that wasn't

just traditional Medicare. It's sort of the equivalent of the private insurance in the NHS system where you get the state-sponsored thing, but you want more choice. Right. And the government gave an incentive. I mean, I think that payments to private insurers as an incentive to get into the Medicare space were almost 115% of regular Medicare expenditures because they were trying to incentivize bringing people into the system,

privatizing part of the system, providing better benefits, giving them choice, and ultimately have that managed care hopefully reduce cost. And the jury's out on that in terms of whether it's really reduced costs or shifted costs or whatever. But it is a highly functional private system built on government dollars called Medicare Advantage and increasingly managed Medicaid is doing the same thing.

So the industry participants have done a lot in many ways over the last in particular 30 years in this space to try to curb costs without necessarily reducing this fundamental driver that defines our healthcare system, which is the desire for immediate access and choice. And that defines our system is that desire for immediate access and choice. I would even add another point to that because we're going to go deeper on those two, but you even mentioned that the number of physicians has doubled basically over the last 40 years, while the number of hospital bed days has fallen in half. Yeah, and the number of hospitals has declined.

The other thing to keep in mind is physicians in this country spend infinitely more than in any other country to become educated, and therefore the debt that they assume upon completion is also a big part of what drives, presumably, we must have the highest physician salaries in this country. Yeah, the US has the highest physician salaries relative to other countries, but I would tell you that physician compensation on a real basis since the 1990s has been flat or declining. That is a stunning fact. It grew rapidly from the 1950s roughly until the early 90s. But since then, physician compensation has been flat or in many cases declining. That has a lot of implications given the medical training debt that you're describing

about our ability to continue to grow the pool of physicians to meet the growing demand of healthcare services as the population is still aging, but also aging with chronic illness so that their needs are more intensive rather than not. And I'm not even yet getting into mental health, which has been an area that's been under invested in for the better part of three or four generations,

which as we now realize actually costs a lot, not just for mental health, but the impact on physical health, which drives our healthcare costs, especially in the context of chronic illness. We've been talking a lot about choice, but is it worth maybe spending a minute to explain to people some of the terms that I'm sure they've heard, but might not fully understand, like what's a PPO, what's an HMO, what's value-based care, how does Kaiser work? Can you explain what those things are so that people understand when they're making their

selection at open enrollment, they get a sense of what those things mean? Yeah. The way I would think about a PPO plan is it's one in which you're procuring insurance where you have relatively open network choice. There may be a preferred network where you get somewhat of a discount, but you have the choice to go wherever you want, however you want, et cetera. HMO, or Health Management Organization, is one in which that choice is narrowed. You're making a choice upfront to come into a program with less options, such that the

penalty for going out of that set of options is high and theoretically comes at a lower cost. And then you have systems within those that kind of operate in the frame of one of those two models, if you will. In the U.S., the PPO business has been growing significantly faster than the HMO business, back to the point around choice. Let's use the right word. It's more important than cost right now and has been more important than cost to consumers. That's not to say that people aren't feeling the costs of healthcare increasing and the burden of healthcare costs increasing in the way that they're getting their healthcare, but they're choosing PPO more than not, the marketplace is speaking. The simple answer on an example like Kaiser, Kaiser is largely a closed network health management organization

where what you're doing is you're buying an insurance product through Kaiser. It's a not-for-profit that you're buying an insurance product through Kaiser, and you're agreeing to stay within their network of hospitals, doctors, et cetera. They have a physician group that is largely bilaterally aligned to them on an exclusive basis that's a for-profit entity, the physician group. And the two of them together produce a product that ought

to cover the vast majority of your healthcare needs. In theory, based upon that integration of care, you either get lower cost or better outcomes or both. Again, I think the jury from a long-term perspective relative to other models is out, but it's innovative. It's worked in some places really, really well. They don't try to cover everything, right? If you have a child that's born with the most obscure congenital cardiovascular malformation, they might just say, you know what, that's something we will just send up to UCSF because they've got the right person there. I mean, my personal example, my mother had a rare form of brain cancer.

We had terrific oncologists at Kaiser who were incredibly dedicated and knowledgeable about oncologic care, who without hesitation sought expertise from UCSF when they needed it for the more sophisticated parts of her care, including letting her go there. So my personal belief from personal experience is that clinicians do make a lot of the choices at Kaiser. They get knocked sometimes that somehow there's a corporation sitting there telling them what to do. And yes, it is managed care. And yes, there are restrictions on in some ways,

how they construct their system. But when you have an esoteric problem, no one stops a physician from sending you to the right place there, in my experience. And all systems that are in managed care have out of network expenditure for rare things. I think that's a really important point and worth bringing up from that perspective. But you have these systems then that work in certain places and don't work in other places that effectively. The vast majority of the country today from an employer sponsored standpoint

is working in some form or another of a PPO system where people have choice because that's what they want. And again, that choice comes with a cost as we've talked about that maybe explains some of the differences between us and other countries. I grew up in Canada and I still have experience with the Canadian healthcare system because my entire family is there. And I don't know if you have experienced there previously, cause I know at McKinsey you did a lot of work for different provinces and stuff like that.

And obviously through the NHS, here's my take. And again, it's so anecdotal that I'm curious if it's reflective. My take is that if you needed heart surgery, if you needed a aortic valve replacement and a root repair and a cabbage, there's a surgeon in Canada that's just as good as the surgeon in the US, meaning the top 10% of the surgeons in Canada and the top 10% of the surgeons in the US are gonna be indistinguishable in that regard.

You're really going to get great care in that regard. The difference is you're gonna wait a heck of a lot longer. The hospital experience could be entirely different. Obviously you're not paying for it. Well, I think you have to be careful about that. You're paying for the taxes. You're paying for it of course for your taxes, yes, yeah. It's not coming out of your wages directly and you're not paying out of. Well, I think you have to be careful about that. You're paying for it. You're paying for it of course through your taxes. Yes, yes. It's not coming out of your wages directly and you're not paying out of pocket to your

point. Again, you're more shielded from the cost. But boy, if you're dealing with something like you've injured your knee and you need an MRI, the difference in how long you will wait to get that, it's immense. The speed, the choice, the access is really what goes down. The quality is not really the thing that has, at least in my experience, been degraded in a system like Canada. I think there are excellent physicians around the world and developed countries all over the place. There's no question about that.

I would tend to agree with your description of the top physicians in both places. I would draw one distinction, which is I think emergency care is accessible on an emergent immediate basis in most developed countries. Now the interventions that they may take, how interventional it may be, how aggressive they may be using the most modern technologies or modern devices or whatever may be different. But emergency care is available. If you had a heart attack immediately in Canada, went to the emergency room, you're gonna get treated very well.

I think where things change is the elective care. And by the way, heart surgery can be an elective, because you might think of elective as cosmetic surgery. No, a hip replacement, a knee replacement when you can't walk, a cataract replacement when you're half blind, or heart surgery can be elective. You're just scheduling it in advance. And you're absolutely right.

In many parts of the world, the wait times for those things are much longer. The cynical view of that is of course, that it's a cost management system. But what I would say is they've made a choice. It's an infrastructure. It's an infrastructure choice. So the way you would describe this in economic terms is that you have universal coverage, which creates the same moral hazard problem that we described here. People would consume infinitely, but they choose to cap it with supply side interventions,

constricting the supply or available supply of services in order to manage the demand. And what does that do? It creates wait times, right? Or accessibility problems. And you have a lot of Canadians who come into the US for healthcare on a more immediate basis, or they buy private insurance, which can reduce the wait times from that perspective if they can afford it. I mean, for better or for worse, right or wrong, nowhere in the world, no matter what healthcare system you're in, in a developed country, do you have fully equitable access? Those with means, there is always a system

to procure better access from that perspective. The thing that's different in the United States at scale that I think is interesting is not just the focus on consumer choice, but the United States has become comfortable in healthcare being the driver and leader of innovation. So in healthcare services, that is the proliferation of academic health science centers that conduct research, much of which used to be

supported exclusively by the NIH, which is a brilliant construct over the history of the United States, to really fund basic research and innovation, now clinical research and innovation, and increasingly funded through private industry. And that has driven a large proportion of the innovation in the world. The science that supports pharmaceutical development, for example, comes out of US academic health science centers, largely speaking. And then you have US-based pharmaceutical companies that develop 75, 80% of the world's pharmaceuticals and you can keep going and we can get into drug costs. But it is a unique feature of this country that we have chosen

to make that investment for the rest of the world. As I said the other day, it's no differently than we've seems to have made that choice in defense. And there are differences between the two. And this is what I want to come back to. So we're going to go into PBMs because I'm amazed we are as far into this podcast as we are and we haven't discussed PBMs. So we're going to get right to it for the people who are listening to us going, how have you not talked about drugs yet? Here's the fundamental difference.

You made a great point. Post-World War II, Bretton Woods Accord, the US makes a deal with the rest of the world effectively, which says, there's a Cold War coming and if you choose to be our ally, we will provide you security. Specifically through our Navy, we will ensure that your ships can pass freely throughout this entire world. We will not plant a flag on your soil. We might use military base. We're not here to be conquerors. We're not here to be emperors. But if you pick our side, we will assure your security. And so that's an example of how we greatly subsidized defense for the world, but we got something out of it. Now, when we are subsidizing drug costs for the rest of the world,

because as you point out, we develop all the drugs, it's not like we get different drugs than everybody else. Everybody else in the world gets the same drugs we developed. Everywhere else in the world has price controls that lower the cost of that. And in true economic fashion, it's sort of like somebody is squeezing down on the tube of toothpaste, all that toothpaste is exploding in the United States with drug costs.

So the question becomes, what are we getting for subsidizing the rest of the world's drug price? Well, first, I think you got to look at this in the context of when it developed. You're back to the question of, could anybody have predicted that we were going to go from 4% to 5% of GDP to 17? Could anybody have predicted that the drugs that were going to be developed and the advances

in science would result in multiple therapies for common diseases and orphan diseases, which are rare diseases, that might cost over a million dollars a year. Could anybody have predicted that? I think the system as it was set up, especially because drug development at that time was new, in particular small molecule development, and then somewhere in the late 70s, early 80s, you had the advent of biologics, which then grew into commercial products, especially in the mid 90s, raised the bar on innovation pretty significantly. And also everything that happened with respect to genetics opened up a whole broad range

of therapeutics that didn't really exist before when you were just taking small molecules and at scale testing them against targets. The cost of drug development went way up. Therefore, the price of drugs went way up, at least in the United States where you have a market. Now you end up in a situation, if you just fast forward to what people are thinking about today, especially because it's all over the news, you got GLP drugs that may have broad benefit because it's all over the news. You got GLP drugs that may have broad benefit, okay, for the population in one form or another. Why? Fundamentally, the drugs may be affected, but it's because our health status is poor. In a country where the health status wasn't so poor as it is in the United States, which chronic illness, the cost of those GLP drugs might not be projected to be so

high because less people would need them. And we can get into that a little bit around healthcare policy and what the national objectives for health would be. But you have common drugs now for common conditions that are extraordinarily expensive. I mean, there are alternatives that are much cheaper that might do a significant fraction, if not for many people, all of the job. Metformin would be a simple generic example that might take care of many of those things for people at a price point that's a thousandth of what.

But nevertheless, you have this innovation and you have also a culture that's obsessed with things like medical approaches to weight loss that has proven to be difficult to achieve through other means. What's the closest the US has come to trying to enforce some measure of price control in pharma in the US? Well, remember, there's one thing that's important to understand is that the Medicare Modernization Act that was passed in circa 2000, okay, which we've talked about some of the other aspects of it, forbade HHS from negotiating for drugs as an entity as CMS. We legislated that.

Right. We gave away negotiating power. The Inflation Reduction Act, which was passed in the Biden administration, has cracked that door open a bit for negotiation because the dynamics of drug pricing, the nature of the drugs. Just go back to 2000. Did the U S government, at least for Medicare say we will resign the right to ever negotiate explicitly. Was that a concession to pharma to get something else?

Well, how it came about in the lobby? I don't know the details, but it was an absolute direct concession that forbade HHS from negotiating. What did they get in return for direct concession that forbade HHS. Yes. But what did they get in return for that concession? Well, there were a whole set of other things that were part of the Medicare Modernization Act that we talked about. Like Medicare Advantage was created and scaled up,

which created a way to potentially have managed care, maybe manage the utilization of drugs, and therefore maybe curb the expenditures, create formularies that might encourage people to use generics rather than branded drugs if they were equivalent. There were other mechanisms put in place to try to control what people did understand as rising drug costs. They've just risen more substantially in the future. Again, I go back to context at the time, what should have been well intended and what were the unpredictable

consequences in some ways. Because the cynic is going to say, you know, Psalm, that sounds to me like pharma had better lobbyists than anybody else. I mean, we live in a political system in which our representatives that we elect vote for us and they are subject to lobbying. That's the nature you would hope that that would be superseded by good policy decisions at some point in time. And I'm not saying Medicare Modernization Act wasn't a good policy decision, but I don't

think it was a predicted effect what would happen. And so I think cracking that door open is good. Look, we get into these philosophical debates about we're a free economy, a free market economy. The government should not be engaged in price controls. But think about this, doctors are price takers from Medicare. Medicare sets their reimbursement, it's price control. They're price takers from private insurance for the most part.

Hospitals take Medicare prices as they're given. So Medicare is a monopsonist. They're a monopsonist. At the end of the day, they've applied it to doctors and to hospitals and other infrastructure-based care where they set the prices based upon their purchasing power. It just hasn't happened yet on the drug side. And you have to think, obviously, the debate is how do you do that in a way that doesn't deter innovation? Is there a sharing with the rest of the world that needs to happen? Or how do you do it in a way where if it's just the US, it doesn't deter innovation? Is there a sharing with the rest of the world that needs to happen? Or how do you do it in a way where if it's just the US, it doesn't deter innovation? Because that innovation has been incredibly beneficial to us in a number of different ways. And again, we're going to get into health status and outcomes and why they aren't so

good. But it has been helpful. And at the same time, leave enough of a return that actually the innovation won't stop and start to take advantage of some of that purchasing power. And I think that that's going to be an ongoing policy debate now that that door has been cracked open. And I think what's new is that both the more, and I really don't want to get into politics, but both the more populist brand of Republicans and Democrats seem to have understanding drug prices are on their radar screen on both sides, maybe in different ways. The industry will evolve and we'll see how that goes. Let's talk about this drug thing because going back to the very beginning of the discussion,

a third of the 85%, so again, I would like to anchor people to it. We're spending 4 trillion a year on healthcare. 15% of that is administration. That's something that exists virtually nowhere else. Of the 85% of that 4 trillion that's not administration, roughly a third of that is drugs and devices and more of that is drugs than devices. So drugs are a really, really, really expensive part of the US healthcare system. It also should be patently clear to anybody listening to us right now that we in this country are singularly paying infinitely more for every given drug than our peers are elsewhere for the exact same drug.

Let us now talk about the elephant in the room, the blessed PBM. Oh, PBMs. Okay. So let's talk about what a PBM is, because there's two issues with the PBMs that we should talk about. One is what do they do and how effective are they? Let's start there. Then there's the question of who owns them

and how do they work and is that vertical integration helpful or not helpful to the system, which we can get into. But the PBMs in essence are organizations that formed as intermediaries between pharma companies, insurers and pharmacies, where you get much of your medication, in order to help manage an increasingly large complexity of drugs. I mean, today there are probably 15,000 pharmaceuticals available.

The PBMs were designed to do a few things. Understand the market for those drugs. Make formularies that were either broad or restrictive. Manage benefit plans for employers who were looking to have preferred pricing on certain drugs versus other drugs. So they were created to try to say, okay, we've got a lot of expenditure here in the drug arena. The choices are complex. The number of drugs has gone up 15 or 16,000, whatever that number may be, and we need entities that help people make more

informed decisions in some ways at scale through employers or insurers, and in some ways at the retail pharmacy level when individuals are going to fill prescriptions, by the way, which includes things like generic substitution and things of that nature when that's appropriate and is allowed. That's what they were created to do. What did that create? It created a complex payment system because it used to be you buy a drug, the money goes to the pharma company from the pharmacy. The pharmacy buys a drug, they pay the pharma company. You have a direct interaction in a hospital, you get a payment.

The hospital buys the drug from the pharma company, you pay them something for that drug. You administer the drug and you get paid as part of your global fee for taking care of that patient, whatever the case may be. The PBMs came in the middle. When did they show up? PBMs showed up, forms of them showed, whatever the case may be. The PBMs came in the middle. When did they show up? PBMs showed up, forms of them showed up in the 80s, but the growth of PBMs has been in the last 20, 25 years and really has taken off recently for reasons that we'll get into about their ownership structure, if you think about it that way, which has brought more scrutiny to them than used to be there. You've created a system in which now

money is flowing less directly in many cases through the PBM. So the pharma companies may sell product but depending on what the PBM is doing in terms of committing market share to the pharma company, the PBM may earn a rebate. Okay? So you have a rebate that the PBM can earn. Now that rebate, the PBM may share with the insurance company or the employer who's signing up for that PBM service because they're saving them money through that rebate. So you have this new flow of dollars. Again, the idea behind this was to have better formularies, better understanding, allow people to have choice. Do you want a broad formulary? Do you want a narrow formulary?

Of course, incentives are incentives. And part of what's happened is that with a rebate structure, you can imagine incentives can exist for higher price product to move through a PBM and pass through. And some of that being offset with rebates on both ends. This is the classic example of, and I'm sure, I don't know who said it first, but it's been said a million times. Show me how a man gets paid and I'll tell you exactly how he's going to act.

This is straight from the horse's mouth. I will not identify this individual other than to say it is the CEO of a major pharma company who shared with me that he wanted to price one of his drugs at a low level. He wanted to undercut similar products on the market and come in at a lower price. The PBMs flatly told him, we will not put your drug on the formulary until you triple the price. Don't worry, we will make it up to you with a rebate. I mean, I don't even know how this

is legal. I mean, you understand why that is happening from the incentive system. How is this legal? How do these things exist? I think in some ways, it's what we've said about most of the US healthcare system, which is well-intended, reasonably constructed structures that might have been effective in one setting as things have changed, become less successful in this setting, and economic incentives can sometimes change to drive behaviors like you're describing, which I hope is not the norm.

But even if it's not as overt as a situation like that, subconsciously, what we've done is removed any incentive for a drug company to be concerned with the sticker value of the price of their drug. It's a meaningless entity because of these machinations and payments that you've outlined where rebates and kickbacks completely change the economics. Again, the system was so opaque to begin with. You've already outlined this idea where we're so uncoupled from our decisions. I don't just mean as patients. I mean, as doctors,

we have no earthly clue what a drug costs when we prescribe it. If I'm trying to decide to write somebody for Rizuvastatin versus Atorvastatin, it couldn't possibly enter my stream of consciousness why one of those might be 10 times more than the other. And yet we continue to just add unnecessary cost to a system. Well, I think you're getting at some of the more fundamental questions around what is innovation. So do we reward the innovation of a statin itself as the innovation, or do we reward the Me2s that come after it,

which sometimes grow to be larger than the original statin? And sometimes they're better. Tersepitide is better than semiglutide. Absolutely. They could be better. But how do we reward that innovation? What happens oftentimes is a florist set in terms of the reward for the initial innovation. As things get better, rather than competition with more molecules driving price down, it often drives price up because

the market moves to the better and better product. This gets back to supply side intervention in other countries. I never thought of it that way, which is how much they throttle supply in a system where demand could be unlimited and they have no control. Well, and in some of those countries, they will just say, look, 90% of the benefit is accrued with simvastatin, which was one of the original drugs. You're not going to prescribe atorvastatin or resuvastatin. That's just not going to happen. And so there's a limit and you have to qualify with certain criteria that are stringent to get to that more expensive

for the incremental 10% benefit. We don't work that way in this country. Physician choice around physician decision-making around those shows, and we've made the decision that we want to be able to afford that type of choice for the incrementally better drugs, sometimes better from a side effect profile standpoint, it can drive some of these decisions.

We've made that decision on an individual basis rather than a population basis. I think the point that we're talking about today is it's getting expensive. It's getting expensive to the point where 17, 18 approaching 20% of the GDP may be okay, but the next 50 to 75 years, if that grows to 35% of the US economy, I think then you have some very, very serious arguments about how sustainable is that if the US economy doesn't grow as rapidly as it has been growing. Well, now I'll bring up my favorite thing I've heard recently when Paul Tudor Jones was speaking with Andrew Ross Sorkin.

He wanted to put it into just the simplest terms for why there was no rational argument why anybody should buy a US Treasury, which was imagine I have $700,000 of debt. You've lent me $700,000. My income is $100,000 a year. So what does that mean? He's taking that from $35 trillion of debt currently and $5 trillion of tax revenue. So, my income is one seventh my debt. And as you pointed out, I'm going to continue to assume $2 trillion of debt a year in perpetuity. And I'm saying to you, the US bond holder, the person who's going to buy a 30-year treasury, I have $700,000 of debt, I make 100 grand a year, I want you to lend me 40 grand a year for the next 30 years,

and I promise you at the end of 30 years, I'm going to pay it all back. What do you have to believe for that to be true? You really have to believe I'm going to have a remarkable growth of income or a remarkable reduction of cost somewhere along the lines. Or a devaluation of the currency. Yeah. I'm going to have to inflate my way out of this thing. Again, none of these things are desirable, but when you say healthcare costs over the next two decades can potentially go from 20% to a third, how in the world could we imagine that the other costs contract to accommodate that? That's right. And that's the issue, right?

Which is that ultimately that's a very difficult proposition to actually get your head around and believe. And in particular, I think we should get into the outcomes in the US to explain what we're getting for all those dollars. You're right. It's very difficult to fathom expenditures getting to that level. Now, one optimistic point of view on healthcare expenditure growth out there is that if you just look at the aging curve of the population, in particular the boomers and how they're growing and even with increasing lifespan, the aging of the population in the US peaks

at about 2032-ish timeframe. You can look at different projections. So in the next eight years, we're gonna kind of reach the peak of aging. In other words, when I say aging, the number of people will grow every year that enter the above 65 Medicare world. And that number will peak,

and then we'll start to come down. So you and I will be right there. We will be right there, that's right. And then that number will start to come down. It's not just the boomers, obviously, but I'm just giving you the demographic. And the question is, when that comes down, will that mitigate this long-term trend of healthcare expenditure growth? So that's the optimistic view that there is a mitigant built into the system, just with the aging of the population. Now think about all of what you do. If at the same time, the consciousness and awareness

of just basic interventions in health status can improve health status even a little bit from a chronic condition standpoint, because that's not gonna be a one year or two year phenomenon, it takes a decade. Those two could together make a big difference in US healthcare cost expenditures. The challenge in terms of what's happening on the other side, especially in this context of debate around

immigration, is we're not growing the population of people under 65 who generate the economic productivity to fund the system to get to 2032. If you go back a number of years like the 80s, and you look at the number of people pre-Medicare, so call it 40 to 65 years old to Medicare, it was two times the population, two to one. Two times we're paying in to- Well, I'm roughly saying highest economic productivity is 40 to 65. 40 to 65, yep. Two times the number of people as you had Medicare. That number is trending towards 1.0 times the number of people as you had Medicare. That number is trending towards 1.0 by the time we hit 2032. So the generators of economic

activity and you know, economists will get into this discussion of, well, one of the reasons the US can afford to spend more on healthcare is we tend to work longer than much of the rest of the developed world. 65, people talk about working into their low 70s and others. So we generate more economic wealth to subsidize this healthcare system and other things that we may want to subsidize in the country. But that drop from two to one is significant and that's happening at the same time that we continue to have this aging. So while it's interesting to think 20 years out, I actually do think for the next 10 years, we got a problem. We've got expenditures that we know will grow because of the continued aging. So while it's interesting to think 20 years out, I actually do think for the next 10 years, we've got a problem. We've got expenditures that we know will grow because of the continued aging. The demographics are clear and we have a reduction. The only way to fill that is of course,

to have the US economy still be an attractive place for immigrants to come and work of all types, at all levels of work in order to fill that demographic hole. And we've got to get our head around that problem. I mean, who would have thought immigration is related to healthcare? We talked about this election, people are talking more about immigration than healthcare. Well, actually it's relevant to healthcare

because healthcare is such a large part of the economy. Everything comes back to it in the end when you think about it at a macroeconomic level. One of the things you pointed out that I was unaware of, although it totally makes sense and we could argue it's another potentially shining spot is, most people are very familiar with the fact that relative to our peers as developed nations,

the US has a pretty paltry life expectancy in aggregate. Most people can point to two things that tend to be the biggest drag on this. So the first has to do with fetal maternal health. The second has to do with overdoses in middle-aged men. We spent time on both of these. These are related to both access to health and deaths of despair respectively. The point you made was once you reach about the age of 70, your life expectancy in

the US exceeds that of any other nation. To your point, that's when the system actually kicks in, in terms of dragging out life pretty well. Let's talk about life expectancy. And I think the most important context to consider here is that whether you look over the last 50 to 75 years, we've used 1950 as a marker, or 100 years, life expectancy has improved remarkably. A lot of that has to do with infectious disease and other things, and that's fine. So when we say our life expectancies in the US are,

I think what we're really asking is, why are we three years-ish? Behind everybody else. Behind everybody else. Especially when we're spending 60 to 100% more. Spending the most, we're not getting the best stuff. And I think you make a really good point, which we've talked about before, which is somewhere between 60 and 75, the equation slip.

We go from dead last to first because the medical system we've created that optimizes for access, quality, sophistication, technology, the best drugs flips And it's actually quite effective at creating longevity from that standpoint. We can all discuss whether or not to use your language, the lifespan is improving with or without the health span, but nevertheless, the lifespan is the best in the developed world. So what's going on in the younger population? I think you hit on some of it. Look, infant mortality is two to three times the rate that we see in the rest of the world. Why? We have a higher rate of teen pregnancies. There's a higher rate of sexually transmitted diseases. You've got drug and substance abuse issues that play into that. And some of it is just, again, going back to this notion of access for

care in the prenatal window. And that's really important. Two, which you didn't really touch on, I would describe as broadly speaking, injuries and homicides. I mean, the rate of those in the US is significantly higher. I mean, homicides seven times the rest of the developed world. I mean, some of that goes back to gun violence, of course, that's unique in the United States versus others. If you look at this over a long period of time, by the way, some of the mortality in the younger generations had to do with wars, but put that aside is not something as relevant

today. Drug and substance abuse issues and just the flow of things like fentanyl and others that are creating a different generational impact of mortality is quite significant. Obviously, the penetration of things like HIV and AIDS, and even though that's become a chronic disease, over the last 25 years, it's been a significant driver of mortality. So you have these features that create excess mortality in the US, especially under the age of 65. Now when you combine that with the fact that our rates of obesity leading to things

like diabetes and heart disease when you're older are higher than the rest of the developed world, you have these unique issues, plus you have a fundamental health status issue that we're now recognizing costs the healthcare system money. Obesity and its consequences don't just emerge when you have out of control diabetes 15, 20 years later. The expenditures, the lost productivity in the workplace, all of those things happen earlier. So when you put those two together,

you have a health status problem. And by the way, they overcome and overwhelm the things we're better at. I mean, oddly enough, we're better at getting our vaccinations. We're better at cancer screening. We're better at treating blood pressure and cholesterol in this country back to the pharmaceutical culture. We smoke less significantly than other parts of the developed world. But guess what? That's being overwhelmed by these other factors,

in particular under the age of 65 or 70, whatever that range may be. And if you look at those conditions, unlike how effective the public health model was in infectious disease in reducing mortality over the last 100 years, it's kind of been ineffective. I mean, the combination of public health and nutritional science together in the way that they've evolved in the last 25, 30 years have been ineffective in managing

or dealing with these issues. Now you can get into debates about were they adequately funded or not funded and the quality of the science and all that. But the fact is they haven't been that effective relative to other interventions. And we've got to deal with that. This isn't an insurance coverage problem. I mean, we pretty much cover everybody other than undocumented today in the US or people that choose not to get covered because there are options now for everybody. And in some states, we're even covering undocumented. It's not a coverage problem.

This isn't a system problem in many ways. The healthcare system can accommodate the illness. It's the question of what led up to the illness that we haven't really fully dealt with in the country. And there's two forms, again, societal issues, whether that be gun violence or poverty leading to bad access to prenatal care, injuries, et cetera, or the chronic diseases that seem to be more prevalent here. How you fix that, you and I have talked about this for years. I mean, it's hard to change behavior.

If you really want to change trajectory, you really want to improve health span. It's hard to change behavior. And the more of that that can get built into the background that just changes the way people eat or changes the way people engage in physical activity, which could mean designing cities where you have to walk to work the vast majority of time rather than drive like many European nations have done. Those interventions themselves must have some benefit because you're seeing different outcomes between the countries and it overwhelms all these other factors. I don't know that the healthcare system as it stands today is going to solve our cost problem that's driven by the factors

I just described. It's certainly not going to change materially our outcome problem. Tinkering with the different parts of the system, we might be able to affect cost. The outcome problem is a more fundamental problem. Yeah. There's so much you've said there is pretty typical of your brilliance, which is you'll say something for 10 straight minutes and at the end I'll be like, that's a thesis that might have taken me a year to come up with. What I took away from that that's just very insightful is prior to the age of 65, the reason that we're in last place is a few of these things that are unfortunately more American

than they should be. So we talked about access to guns, a culture of violence, things you haven't even alluded to, but greater mental health crises that just go hand in hand with all these things. Poor access to prenatal care relative to other developed nations that's leading to a far higher degree of infant mortality. These things just add up. We talked about the drugs. I mean, for heaven's sakes, we have a fentanyl pipeline coming into this country that's an embarrassment. And as a result, 100,000 people a year more than that now

are overdosing. By the way, it gets back to this issue. The border is a health care issue. It just is. You can't escape it. Everything ties back in one form or another to health care. What I really thought was interesting is I talk about it in terms of medicine 2.0 and

medicine 3.0 and I've talked about how our system is really good medicine 2.0. It's really good at treating chronic problems and grinding out incremental years of life when you're chronically ill. That shines so much when you become a senior citizen. That's how we leapfrog every other country between ages 60 to 75. We go from last place in life expectancy to first because our machine shines. It really kicks in. And of course, it begs the question, why can't we have the best of both worlds?

Like these don't have to be mutually exclusive. You can preserve the latter, which is we have all of these remarkable pieces of technology and innovation and access and infrastructure and quality that give us that boost of life expectancy at the end. Why don't we increase the number of people that enter that sixth, that seventh decade of life? Let's increase that by 10% by applying better medicine 3.0 and access early in life. And by the way, I think you would increase it by more than 10%. The other thing that I keep playing back in my head is I've always talked about these

as three variables. So when I've talked about this, I've always talked about three variables. I've always talked about quality, cost, and access. But you've made me realize that choice is a part of that as well. And that's the part that I think is also very American. And I don't think we should be apologetic for it. It is just our culture. It is who we are.

We want the best and we want to be able to pick what we want. And that fourth variable puts even more pressure on the one that is unconstrained. So cost is unconstrained. We have said we want maximum quality. We want access and meaning when I have said, we want maximum quality. We want access. Meaning, when I want it, I want it now. I want to choose where I go. If I control those and I leave one to balloon and that one is cost, away it goes. The other systems as we've discussed have said, no, cost is constrained. Cost is a capped resource. Now, you see what's going to happen

to the others and that's where we get into the supply side throttle to lower access. Let's eliminate choice and you'll still get decent quality. That seems to be the choice that the rest of the world has made. That is right. And I think you can't underestimate the power. I think, by the way, choice sort of fits in a broad framework of access. If you have enough access points and they're differentiated, that allows choice. I actually like to keep them separate. Even though in my former model, they were the same,

I think the way you've described it is better because choice also means you have more drugs than you know what to do with. You have a formulary with how many thousands of drugs? I mean, there are probably 15,000 pharmaceuticals available today. One form or another, some of them are repeats, but my point is there's a lot of choice. Right. And we'll do minisectomies, we'll do meniscus repair surgeries, we'll do hip resurfacing, we'll do hip replacements. I mean, we'll do PRP. We'll do anything and everything.

You have more choice here. This is the biggest buffet on the planet when it comes to healthcare. Why is that is one of the questions that I think comes up. So I think first of all, I agree with you. We cannot underestimate the power of choice. I mean, we learned that in the 90s with managed care when it was quite constraining. And by the way, as I said before, that system lowered healthcare inflation. It only proved it for a short time because the backlash was so vicious against it. And I don't think we can go back there. Politically, even from the standpoint of not politically,

but just the way the system has evolved to create more options and more choice, it will be difficult to go back there. Limited supply side constraints, I think, at this stage have and are becoming a part of the dialogue. As I said, Medicare sets prices for doctors and hospitals. They probably will start doing so for certain drugs. It's purchasing power. One could argue that in some ways that's a form of supply side constraint. Let's even start with the choice before that because I always think we should start with the null choice, which is we can do absolutely nothing. We can sit here and say, Peter, Sam,

thank you for explaining this system. Actually, have a better understanding of it now. I want maximum choice, maximum access, maximum quality. Let cost be damned. Let's just leave it alone. Let's revisit it in five years. How about that? Let's just come back in five years and tell me if it's 22%, tell me if it's 23% of GDP. Once it hits 25, we wanna do something about it. We could literally just be ostriches and put our head in the sand and ignore this. Okay, let's put that aside and say,

no, most people at this point probably think we should at least have some ideas for how we can manage this. So now that's your first point, which is Medicare has made the hospital and the physician a price taker. Shouldn't it be able to do that to pharma? Now, let's talk about what's going to happen. Because now you just added one more squeeze

on the toothpaste tube while you're taking the cap off. Because if Europe and Canada and CMS force pharma to be price takers, what's going to happen to drug prices that are outside of CMS in the US? I think we have to avoid looking at extremes. But is that an extreme? Well, I would say this. I don't think the people who are talking about this in a rational way in terms of actual pricing, which is not you or me really in terms of the policy, I don't think anybody's

saying let's bring it down to the average of the OECD, et cetera, from where drugs are priced. The question is, are there ways to start to curb the inflation rate of price and actually rationalize some group purchasing capability? I think that the challenge with accepting the extremes is it will only fuel the discussion of innovation will stop, nothing will happen any further, that's not going to happen.

No, I agree. But someone will have to make a concession. And I think that somebody is actually the shareholder because I agree with you. I do not think innovation stops. And it's because innovation isn't even happening at those companies anymore. Anyway, innovation is the biotech's job at this point. But think about again, what you just said. That may be true in the short term, but the hallmark of American ingenuity is to take externalities.

This is an externality that might be relevant. Take that pressure. In that ecosystem, better models emerge. More efficient drug development will emerge. More efficient distribution mechanisms, more efficient sales and marketing, et cetera, will emerge. You're saying the shareholders shouldn't actually even be forced to suffer here.

I mean, it's always the case as companies have life cycles that shareholders succeed and at times suffer. But the innovators come out the back end stronger and sometimes there are new entrants, which change the game. I mean, that's the hallmark of the free market economy. So how do we reconcile that some? Because on the one hand, you're saying if pharma, if drug development and distribution had to become more economical, we are innovative enough as a country to do that. But at the same time, the whole reason we're saying that has to happen is we must have some measure of price control in drugs, which feels like a very anti-American thing. Yeah, right. I mean, this is what people get into, but there's two issues there. First of all,

I don't think that, remember, we took all the time to describe the entire complex pharma ecosystem. It's not just the pharmacos. There are companies that do basic research. There are pharmacos, there are PBMs, there are pharmacies, there's insurance. By the way, the insurance companies own the biggest PBMs. So there's a vertical integration point there that is important to understand. My point is that when you talk about this in terms of Medicare purchasing drugs with their scale, it is absolutely the case that that can be done in a market-based way. By the way, Walmart is one of the biggest retailers in the country. Arguably, they have one of the best procurement functions based upon the scale of what they're purchasing

that gets them better pricing from their suppliers. Auto manufacturers manage this in auto supplier, parts suppliers. It's not un-American to use scale, as long as that scale is not anti-competitive, to drive better pricing in what you purchase. It creates innovation across the entire value chain. Medicare, in this case, because it has become such a large source of expenditure in a private healthcare marketplace, behaving more like a primary buyer at scale, is not anti-American. How it gets implemented and how they do it

could turn anti-American. I'm using your term anti-American, free market versus not. But purchasing at scale is not an anti-American or anti-competitive concept. Do you think it is reasonable that Americans could expect to pay for drugs what their European and Canadian counterparts pay. I think it'd be very difficult to move in one move to that level of purchasing price

given what the starting point is in the marketplace. I don't see how you could do that without really having a shock to the industry. I mean, let's remember, I think 80% of the pharmaceutical industry resides and generates profits in the US as large employers, but not just large employers, large magnets for talent coming out of our universities. We have to remember, between them and their supply chain, they create a lot of innovation. A tremendous amount of innovation in this country that has advanced, you can call it Health 2.0, but it's advanced Health 2.0 because that's

the construct we have. So this has to be balanced. But the concept that a purchaser at scale can achieve better pricing, I would argue the time for that legislation from the 2000s to be revisited is here. I wasn't aware of this, but you said that the Inflation Reduction Act cracked the door on that. Yeah, it cracked the door open for certain drugs. And I think we'll see how that goes. I mean, this is going to get mired in politics and lobbying

and all kinds of things that you describe. But if you step back and look at the big picture of where health care expenditures are going, let's just step back and actually look at just pharmaceutical expenditures rather than healthcare expenditures. In addition to extraordinarily expensive drugs that have broad application like the GLPs, you have a broad range of orphan drugs that have been developed that orphan drugs meaning for rare diseases for very few people, sometimes miraculous benefit for them at extraordinarily high price.

It goes back to what you said about we want choice and access and we value saving as Americans that life more than what other countries may do in not saving that life and looking at it societally. And then the third thing is if you look at the pipeline of drugs for the next 10 years, I've done this. Look at the Pidoufalist or look at the pipeline of drugs for the next 10 years, I've done this, look at the PEDUFA list or whatever at the FDA, the number of unique biologic infusible drugs in particular for autoimmune disease and cancer that are slated to go through the process and get approved, which again, not having seen the data, it's hard to know whether they'll transform the care of those diseases or marginally improve them. But if they get approved, they'll be doing some benefit.

We'll create another massive explosion of drug costs here. So the proportion that's going to hospitals and doctors relative to drugs, if you look out over the next decade, is poised to change again based upon the pipelines. Meaning the third that's currently drugs is going to go up relative to the rest of the pie. Yeah. The inclusive version of the third where it's everything and yeah. And that's something we're going to have to grapple with.

That's going to widen the gap between us and the rest of the world. The current insurance model, that's right. It's going to widen the gap and also the current insurance model may not be designed to accommodate that cost without passing it back to employers and Medicare. And so then there's going to be a question again, what are we going to cover? What are we not going to cover? The way that healthcare costs are rising, we're being pushed to ask the supply side questions that the rest of the world has already asked and answered.

We're just grappling with it and it's hard because of what we've talked about. We don't want to give up choice and access in the process of grappling with those decisions. For other countries, when new drugs come online, it's easy for them. They have an established framework. Yeah, they have a dollar amount. Yeah, it's an established framework. The citizens are used to that established framework. Here, we haven't established the framework. The citizens are used to that established framework. Here, we haven't established the

framework. I mean, this goes to the point of it's not obvious that we have national health goals, a different topic, and I know that gets a little bit up in the sky a bit. But we're at a point where what we spend and what we get for what we spend is really, really good in some ways. Obviously not so good in other ways when you look at some of the outcomes. But many of those outcomes are not driven by the healthcare system as we've talked about. And so the question is where are we gonna put our incremental dollars? That's the question. Because the incremental dollars going straight into the current system, which I'm a participant in and everybody else, that's

gonna be necessary just because the population is aging. Fact of life, we're gonna have more demand for roughly the next decade. But are we going to do that at the exclusion of resources into these other things? Which in, again, in your language impacts healthspan. In my language, it impacts the two things which sit in the background that seem to be different than the rest of the world, which is just basic nutrition and basic physical activity. That seem to be different than the rest of the world, which is just basic nutrition and basic physical activity that seem to be major differences in how the US works versus others. Some of it because of geography, some of it because of our obsession with driving cars and whatever the case may be. It's not clear how we're going to approach that over the next decade because we don't have a

choice but to spend for the people that are going to continue aging in. After 2032, 2033, if the pressure on the aging portion reduces, we may have some choices, but we got to get there first. While the aging pressure might be taking a little bit of air out of the balloon, it's hard for me to imagine that it's taking more air out of the balloon than that which is being put in with the rising burden of obesity and type two diabetes. Let's talk about that for a moment. We haven't really explicitly and directly spoken about that.

So you and I used to mark our birth years roughly sometime in the seventies and talk about what the prevalence of diabetes or obesity was then relative to now. It's what three, four fold up? Obesity maybe, but type two diabetes, the year we were born is 1%. And today, 12 to 15%. Right, much more than.

Yeah, very conservatively a single log fold, but likely more. We've talked about it, it's a generational failure of nutritional science to really understand what creates obesity and it's sequela. Yeah, so here's the question. We have drugs now. They seem pretty remarkable. These GLP-1 agonists are doing something we have never seen before, which is simultaneously delivering the best efficacy we've ever seen coupled with what appears to be remarkable safety.

So maybe there's some marginal edge cases, but this is not fen-fen. This is not stimulants. We are dealing with truly efficacious, truly safe drugs. The problem is they cost so much money. I'd love to hear what you're reading about this, because what I'm reading is two different types of things. I'm reading, on the one hand, the Bull case that says, this is going to change the world.

We are finally going to address the burden of obesity and type 2 diabetes and metabolic disease with these drugs, because now all we got to do is give these drugs to everybody. Then the Bayer case says, that might be medically true, but economically, if you run the math, we're going to take a system on the verge of bankruptcy and bankrupt it if we have to rely on those drugs. I generally agree that these drugs are very effective. I get concerned about muscle loss in particular when I think about consequences for elderly people, especially from an orthopedic, everybody knows that hip fracture, whatever, due to muscle loss creates a very high degree of mortality.

But in general, I agree with the concept that these drugs are very effective. Now, if you look at this from a crass economic point of view, remember, what's the fundamental problem we have in terms of generating the wealth to pay for the system is that we've moved from a period where we had twice the number of economically productive people from 40 to 65 and above to now the ratio approaching one to one. So the best application of the drugs, if the idea is to improve health status, which then could improve economic productivity to support the system, would be applying them to the people who could still work, not the people over 65.

Not that people can't work over 65, but generally if you take that as a mindset of a period of retirement. I don't even know the dollar numbers, but let's just assume that the drug is $15,000 a year for one of these drugs. You're saying you have to get a multiple of $15,000 a year for one of these drugs. You're saying you have to get a multiple of $15,000 a year of productivity out of it from the individual who's now more able to work because their knee doesn't hurt as much, their back doesn't hurt as much due to the sequelae of obesity. I think if you're looking at it from the perspective of today's conversation around the

cost of the US healthcare system and how it interacts with the rest of the US healthcare economy, that's the math. And over 65, arguably, you may reduce the burden of disease, but you may increase longevity, which as we know, creates additional cost over time, because it's kind of unknown whether you can stay on these drugs or whether people will stay on the drugs above 70, 80 into their 90s and will there be a reversion? In other words, are you just delaying the spend or are you actually avoiding the spend? We don't know. What little I know about how these drugs work is that when you would draw them there is a negative effect from that perspective. How persistent that is and how that'll change over time, I guess,

with new drugs we'll find out. I go back to the notion though, that I think it's fundamentally not the right answer to wish that nobody innovated these drugs. I think that's crazy. And again, you can get into what it costs and who paid for it and who is paying for it given the price differences between here and the rest of the world. I will also say the prices for these drugs are too high.

My view, personal view, they're too high. I also believe that they won't stay this high as the penetration grows across newer and newer indications and the population. Even though, as you pointed out earlier, the Me Too train on this class of drugs is so long I can't see the caboose at this point. When you actually look at the pipeline of GLP, GIP, glucagon and other incretins out there, we've got 25 of these things in the pipeline. And will it simply be, if we go back into the American ethos of choice, quality, best, best,

best, are they just always going to be priced so high? And maybe you're right, maybe semiglutide trades at a discount and nobody wants it because that's so 2020. Right. Well, I think the reality is that because they're so visible, they have ended up generating a lot of political attention. And I think this gets back to a lot of things in the free market culture that we live in, which is we have wide operating parameters in a free market. But at times when things go outside of those parameters, it's not entirely a free market, it's just a wide parameter free market. When things go outside of those parameters,

people take notice and that leaves organizations with the choice. Do they proactively move themselves back into some acceptable parameters or do they wait for somebody to do it to them? And by the way, the US government, like any government, does have a history of moving things back into reasonable parameters. I mean, there's no such thing as a 100% free market economy from that standpoint, especially when we've described our own healthcare system as being somewhat free market and choice driven, but the economic flows essentially shield the consumer from the actual cost of the care that they're consuming, meaning the insurance scheme and other things.

So it is a difficult problem to solve. I understand your point about follow-ons, but I suspect that in some ways this will come back into some reasonable parameters. So I'm making a note here to myself. I'm just listing out the players in the system, the government, the employers and the payers. I'm going to lump them as one. The consumer, the medical system that I'm just going to call hospital, ambulatory center, physicians, the staff, the delivery system of healthcare, and then pharma. And I don't really know where to put the PBM.

Would you make them their own separate thing as a system or would you put them in with the payer? Where would you put them in with pharma? Well, they're owned by the payers. Okay. So if we were somehow given the ability to do anything we wanted and we said, we want to keep quality essentially where it is, maybe restrict choice a tiny bit, kind of leave access where it is, but we want to shrink cost by 25%. Is that metaphysically possible? And if so, how does that list of participants play a role in that? Well, 25% is a big number. No, it's a huge contraction. It's a huge contraction.

25% over the next X years. It's not going to be an overnight 25% reduction. Which by the way, let's just make sure people understand this. A 25% reduction in our healthcare spend would still have us being the most expensive country of healthcare in the world. We're not even getting to cost parity with other developed nations. But I'm just thinking about,

I'd like to get it closer to three trillion than four trillion. That's all I'm saying. Sure. I think the concept of absolute cost reduction is very different than bending the trend. We can get into whether there are absolute cost reductions that we can think about within the current system and what they would mean and what they would require. But I think the other way to ask the question longer term is can healthcare inflation mimic GDP inflation as opposed to being 2% faster or could it fall below it? But just getting it to that level of being at the same level of GDP inflation would be an enormous, enormous move and curbing of

the healthcare expenditures. So look, the first thing is the number one deterrent to absolute cut 25% out of the system is the extraordinarily negative shock on the economy of that type of job loss. So what you're basically saying- It's not healthcare, it's not insurance- You can't do this without cutting jobs. You cannot do this without cutting jobs. The US actually spends less on infrastructure as a proportion in health care services, buildings and whatnot than many other countries actually. But the people aspect of this, both the number of jobs and also the fact that our doctors, nurses, etc. are on a real wage basis paid higher than in other countries. The two of those together and other health care workers,

they contribute to the gap. The administrative side is the biggest gap. I was just about to say the administrative piece is how much of that is payroll? That's mostly payroll, isn't it? No, no. The administrative payroll meaning people. Yes. Yeah, but it's the system of having to adjudicate payments and all that. Yeah, but it is mostly a people-based system. By the way, why isn't AI doing that, Som? Well, it's increasingly doing that. Those of us who have more exposure to sophisticated scaled businesses that work in the revenue cycle or the insurers who are increasingly doing this are using it. Isn't that the poster child indication for AI?

It's the poster child indication for more automation that requires controls. The government, of course, AI is new and usually regulation doesn't catch up as quickly as the technology moves. So look at the last, just seven days, you have an article in, I think ProPublica that talked about a business that is using AI and denying claims at an extraordinary rate because of the AI

algorithms that are built in. All the insurers buy it, et cetera, et cetera. And is this just due to bad training? Well, I think it's a question of how the system is being used today. I don't think the system was originally created to do that, most likely. I mean, there is a balance between cost management and denying people what they need on an indications basis. I always think about the organizations in the ecosystem as starting with good intentions, but things can get away from people. If you read what's in there and it's true,

it's gotten out of hand. And I think many people, doctors, providers, etc, might feel that issues with pre-authorization and denials and other things have gotten out of hand. And I'm not here to represent one side or the other, despite what I do. Look at the flip side. You had a major insurance company come out and say that, look, coding is getting aggressive. That's the provider side that maybe is pushing the envelope in a way that they see all the data in all the systems and they're seeing something. I don't know how true it is any more than I know how true this other one is.

Checks and balances in the system when you have a private system are required. AI can either be an accelerant to reducing cost and being more efficient and effective, or if not controlled, could take one side or the other and move them in a direction that actually have negative consequences, over coding or under authorization of what people need as an example.

So we have to work better as an industry to actually get the right balance here. And that's why there's a lot of attention to this right now, because the balance is off and you can't unilaterally blame one side or the other from that perspective is my general viewpoint as I approach this problem. So if you think about the administrative cost side of it, yes, it's all people. Yes, it's built on a system that has gotten infinitely more complex in terms of paying and submitting and getting paid for claims, both with government and with private insurance and a whole bunch of other administrivia that does have an opportunity to be fixed. At this point, collaboration between the two sides doesn't seem as high. Technology has the potential of

reducing that cost, but it is at the expense of job loss if it happens. And I guess your point that you made at the very outset of our discussion is, we always hear administration and we think that's garbage, cut it. But the truth of it is, that administration is the price we pay to have the choice we have. That is right. We couldn't have the environment of choice if we didn't have the administration to adjudicate. Yes. And does it have to be as large? No. But there would have to be some administration. But the reason everybody else gets to avoid administration is it's draconian. Well, everybody else has administration. It's just sitting in their government and it's in one entity

rather than 50 entities. And it also limits choice by just saying there's not going to be a line by line adjudication of this. It is what it is. Here are your three drugs. Right. So then you have the other three components of the spend and those are all essentially people or somewhat people-based and the profiles of the three businesses are very different. So the only way you're going to actually, if you wanted to absolutely cut costs, I mean, you're talking about supply side intervention and price restriction or caps. Some states have tried inflation caps. We're not going to go up more than 3% per year, 4% per year, et cetera. There has been no discussion of, okay, we're just going to cut a quarter of the spend out of the health care system again.

So I think it would be catastrophic in terms of access and other things. That's not to say that we didn't wish we ended up at $3 trillion rather than $4 trillion. If you look back 50 to 75 years, but we're not there. Why hasn't this been a higher priority? So if we go back. Because the economy has done so well.

One of the important things that's critical is the US economy has outperformed the rest of the world and the rest of developed countries. And we've done it despite the more rapid expansion of healthcare costs than any other country. Arguably an economist would say that as healthcare is a percentage of GDP and as a percent of expenditures, remember we talked very beginning how much of the consumer spend it is, employer spend it is, would have materially suppressed wages. But let's ask the question, if it has suppressed wages because money has gone into that with this tax incentive, has that actually made in some ways the US economy more competitive?

With wages that have been, again, somewhat suppressed, which makes the American worker more competitive for various types of things that have a global labor footprint rather than just domestic. I don't think it's a given yet that healthcare costs on a net basis increasing to where they have have been a negative for the US economy. I mean, facts that are hard to escape from. The US economy is stronger and has grown more than other developed countries. Fact, the expenditure rate in healthcare is higher. Put aside outcomes for a second, depending on what we want. Our access and choice, which we prioritize, are better. In fact, the diversity of what the US workforce is doing today is probably more than it was a decade ago. There's more manufacturing return, you know, things like that. I think wage suppression may play a role in that. Again, you'd have to talk

to an economist to really understand the quantitative effects there. But I don't think we've reached the point yet where these healthcare expenditures at a macroeconomic level have deterred the US economy. I think we're in this conversation because the question is will it? That's exactly right, Sam. My view is we all know when Noah built the ark. And I feel like it's important to have these discussions before we're driving off the cliff because nothing that we're talking about can be fixed quickly. I'm having this discussion because I want to understand it. And I really hope that people far smarter than us who are far more influential and far more important perches,

are putting as much thought into this as they are into whatever other important policy decisions are out there, because it's very difficult to imagine that the private sector alone would solve this. Yeah. Well, I think that's an important point. Look, the role of government we haven't talked about, I would argue from my experience, healthcare is over-regulated by a lot. But you have to give the government credit

when they work to create quality standards that people had to meet, things like sepsis, when they work to create safety standards around basic problems that you see in healthcare. Those regulations have improved the consistency of performance of the US healthcare system. Right, if you have a CMS regulated operating room, you have a great operating room.

Right, so some fraction of what they've done has really, really helped. And you can't argue with that. And similarly, regulations that have been placed in other parts of the industry. So we may be overregulated, but you can't discount the value of some of that regulation. Where do you think the overregulation is being counterproductive in health care?

You asked a question earlier about what is value-based care. One of the things that I think we get very much caught up in is the concept that our system, which is more of a fee-for-service system versus some kind of value-based population health system would be the change that would be required. The interpretation is always, well, all these other countries who spend less, they must be a population health system or a value-based care system because everybody's in one insurance pool. What we've said in our discussion is no, it's a supply side intervention.

They just constrain and limit cost and infrastructure and they just decide what's going to be accessible. That's what drives the difference in their cost. And by the way, for all those economies, again, remember their healthcare expenditures went from four to 11 or 12. That's a massive increase for those countries too. It's just not as big as ours. So I think the concept here, you have to put this in perspective. The interventions that have fundamentally tried to change the workflow in healthcare,

value-based care, most of them haven't succeeded. Look at the companies and other organizations that have been in this space, despite the best of creative intentions, many of them have not succeeded. I would argue Medicare Advantage is the most important at scale value-based construct that has been somewhat successful. But most of the innovation in and around that has not been very successful. And that doesn't mean it's not going to get there at some point. Part of American ingenuity is trying and failing and trying and failing and trying and failing

until you find a model that works and credit to those that are trying to do that. But it hasn't succeeded. Where I think there are opportunities that are more direct is modernizing where we perform healthcare services into a lower cost setting. That's direct cost savings. We built with the Hill-Burton Act all this infrastructure that is hospitals. Let's point the figure at the industry that I'm most closely associated with. It has been happening. Some of that work is and could come out of hospitals into a lower cost setting. Let's just give an example. Give an example of a procedure that is done in hospitals and out of hospitals and give an example of the cost delta. I would give you the biggest example that has

probably had the most impact on health status and colorectal cancer is that if you go back 20 years, most colonoscopies were done in a hospital setting. Sometimes people stayed overnight for them, right? Just think about that. And they moved into an a hospital setting. Sometimes people stayed overnight for them, right? Just think about that. And they moved into an outpatient setting. You're in and out in 45 minutes plus recovery time from whatever anesthesia you have. What did that do to the hospital?

Yes, it moved business out of one setting into another setting, but that's not what really happened. What happened is when it got into a more convenient, quick, high-service, manageable setting, more people in the US started getting colonoscopies because it was easy and it had a screening benefit that's enormous. I credit the ambulatory surgery industry with actually preventing more colon cancers than any innovation in gastroenterology over the last 20, because it's now normal to get these. Just to make sure I understand the implication of that, it's twofold. One,

we've lowered the cost of each colonoscopy, but we've probably flattened or even raised the total cost because now more people are doing it. Oh, I think the total cost is probably much higher. The per unit cost went way down. Per unit cost went way down and everybody got access, so to speak. More people got access and it prevented more cancers, which have lots of downstream costs. So the idea of moving things into lower cost setting as appropriate is something we generally have to embrace as a way to manage the total cost,

especially if the demand on hospitals is going to go up with the aging. So what's the next version of that? The next version of that that we're in the middle of is, look, a hip and a knee replacement used to be a four day hospital stay. Now a lot of it is done on a same day basis in the hospital, but you can also do it in an ambulatory surgery center in an hour. And again, you recover and you walk out the same day and you go home and you do your PT at home and other things.

What is the difference there in the payer rate for those two? It's about half, costs about half. That's a big difference. You got your 25%. It's significantly different. One of the interesting questions is why does the device not cost less in one setting or another, but the total payment is half.

Let's spend a minute on this. This is another one of those great, great opacities in the healthcare system. So I need a heart surgery. So I need a coronary artery bypass and maybe throw in an aortic valve replacement. I've got aortic stenosis. I go to the hospital that is within my PPO network

to get that procedure done. How do the economics of that work? Does the hospital act as the single entity that bills the insurance company for everything? The surgeon's professional fee, the hospital fee, the device fee for the valve, the drugs, the ICU stay like, how does it work? Is it bundled? Sometimes with choice comes complexity. You're getting into medical billing, which has some complexity. At the simplest level, we break things into professional and technical expenses.

Okay. And I'm going to define technical, but professional may be easier to understand. The surgeon who operates on you gets paid a fee to operate on you for their skill and training and other things. And that is their professional fee. Does the anesthesiologist also have a pro fee in there? There are others involved in the surgery. The anesthesiologist who is again,

trained to provide incredibly sophisticated anesthesia to go on heart bypass, et cetera, gets paid a professional fee for that service, their personal fee for their time. The technical fee is the fee for having the surgery in the building and setting called a hospital and an operating room. And in that setting, you may use the operating room, you may stay in a hospital bed for three days, you may be in the ICU for a day, you may be given a

bunch of drugs and medications that are important for that. All of that cost goes into one bundle called the hospital DRG. In general, the reimbursement system, which used to fragment all that stuff, has moved into an element of single reimbursement called a DRG, diagnosis related group. By the way, a government innovation for Medicare that applies in much of the commercial world today. And you get paid a fee for all that stuff.

Now we make our lives a little bit complex because we often send patients confusing bills that lists everything that they had in that DRG and an individual price for each one of those things. Even though at the end of the day, what's gonna get adjudicated is one payment, very simple, and one copay if it even exists. But we make it very complicated by sending this entire list of everything you had, which you can imagine as a patient who's just coming out of and recovering from heart surgery,

the last thing you want to see is a line item of 60 different things that you had done and what the cost of those were were especially when those costs bear no Connection to what your insurance company or Medicare may have actually paid. It's a complicated system What would be the single reimbursement on the three vessel cabbage AVR aortic valve replacement? Oh, it's highly highly variable pick an average pair Medicare or somebody's gonna reimburse let let's say 20 something thousand, some number for that hospitalization. And how much of that is pro fee,

how much of that is technical fee? Well, the pro fee is, like I said, that's US the hospital fee, the pro fee may be separate. I mean, what a physician gets paid to do that, it could be 750 or a thousand dollars, let's say. Isn't that kind of amazing when people think about how low that is as a pro fee? I mean, again, the number could be higher

with other insurance companies and whatnot, but the point is, Yeah, and I mean, again, the number could be higher with other insurance companies and whatnot. But the point is, yeah, there's a big difference. I think what people can't fathom is that the cardiac surgeon who's operating on your heart might have a pro fee of $2,000. People can't fathom that. People can't fathom how low that is.

Because that also bundles them seeing you in clinic, them taking care of you for the five. They're taking care of you for five days in the hospital when you're in the ICU and they're on the floor. And again, it could be lower. Medicare might be below $2,000. Sure, but Peter, health care, the utility that people, again, using an economic term, the utility

that people gain from interactions with different parts of the health care system vary greatly relative to the actual payments that are made. Another way to say what I said is this is why the American consumer trusts their doctor. When you ask- Much more than the hospital. Much more than anybody else in the system, doctor and nurse. The next would be their hospital where they had their care.

The least would be the insurance company. That doesn't mean the economics flow that way within that. But the utility, which obviously has a qualitative personal component, is somewhat disconnected from those payments. But if we look at now that $25,000 of technical fee to the hospital, I've seen some of these bills, and I don't know what to make of them,

because it seems like, yeah, the hospital collected a lot but they're getting ripped off on paying things. This is where you hear the stories of like, the gauze costs $16, the little piece of four by four gauze that you have tens of those that you're gonna go through in the case, like it's almost like you're back in PBM land. Yeah, yeah, but I think that's a bit of a red herring. I think that when you say the cost,

so now we have this complexity of you have cost, you have price, and you have charge. So let me explain this. And again, I think this has almost no bearing on macro healthcare costs. The cost of the gauze is what the manufacturer who makes gauze charges the hospital to buy it. It is not $16 for a piece of gauze.

Of course, it's super cheap, as is a Tylenol pill or whatever. The price is bundled into that group payment that I said. So you're not really getting paid that much more than cost for the thing. The charge is this artificial construct created by the way in which we bill because of the way insurance billing is constructed That results in the perennial $16 gauze or $4 Tylenol pill or whatever the case may be. Nobody's being paid that amount. So why does that even exist? It exists because every hospital by federal regulation is required to have a charge master. By the way, so is every doctor's office that has a charge master, by the way, so is every doctor's office, that has charges off of which the free market negotiates contracted rates and brings that $4 Tylenol down to 20 cents.

Or the $16 gauze down to, I'm making it up because I don't know, whatever it is, cents. And that's what happens. This gets administrative cost. The system has evolved certain ways in which the administrative costs support nonsense like this at the end of the day. Remember what I said about insurance. It's not insurance in healthcare.

It's a discount card, meaning you're getting the value of group purchasing so you buy things at a lower cost. If you apply that in this setting, if you come in to the hospital without insurance, you're not getting that group discount. That's the bargain made between insurers and providers that you're going to get a better deal. It's a discount card. So if you come in without insurance, uh-oh, you're gonna be exposed to the $4

Tylenol or the $16 Gauze. And the reality is that's what turns into something that we never really talked about, which is bad debt. There's a lot of health care that's provided that has a charge associated with it nobody ever pays, billions and billions of dollars. In fact, I think it's about $40 billion a year or more. And then there's, of course, underinsurance, where people don't pay their portion of what they owe.

And again, with those kinds of prices, you can understand some of that. When last I looked at this statistic, medical expenses were the leading cause of personal bankruptcy. Yes, that may be the case. I don't know that for a fact, but I think the concept that medical expenses lead to medical debt that lead to personal bankruptcy is another difficult topic within this area. It's difficult based on what you just said though, Som. It's difficult based on the idea that this uninsured individual... Now, I want to come back to why is anybody uninsured in 2024, 2025?

Let's come back to the ACA. But you're uninsured and maybe it's because you made a risk adjusted calculation, which is, hey, insurance is going to cost me this many thousands of dollars a year. I'm young, I'm healthy, I don't need it. In an ideal world, I wish I had some catastrophic coverage. Now lo and behold, I'm back in the... And guess what? I'm getting charged four bucks for Tylenol, 16 bucks for Gauze, and all of a sudden I've

got a $250,000 bill that if we weren't playing with stupid monopoly money would be $14,000 and I could manage that. Right. That's the problem. And I think what happens as a result is that it either goes to nothing because people don't pay or most organized healthcare systems have the equivalent of a compact with the uninsured that rapidly discounts that price often by tenfold in order to adjudicate that. And I think that's very appropriate.

Yet you still have these unfortunate cases. The health care system today, the insurance system today, the cost of drugs today, and the structure that's been created works a lot better if you're in the system, not out of the system. Out of the system is uninsured. Yeah, and the uninsured. Yeah. And the uninsured today, with the Affordable Care Act, the uninsured rates have come way down because it expanded Medicaid.

So the people who could qualify due to whatever percentage of the federal poverty level, employment has expanded. The job market's been good, so more people have insurance through that. We've already talked about Medicare is growing rapidly because of aging. Medicaid has already hit 90 million people with that expansion. And then there's this gap where people, their employers may be too small to offer insurance. They don't qualify for Medicaid because they make too much money. And we created these things called the exchanges. And what that is, is the way to take that market and socialize the risk away from individual risk to group risk and make it more affordable.

And so a lot of people have been covered through that. Now we had a bunch of legal debate. The idea was you would do that and then you'd have this thing called the individual mandate, which meant you're going to be forced to get into something. And again, that got legally challenged. It's important to do that if you're truly trying to manage risk, because if you don't have an individual mandate, and we can talk about whether or not that's a fair thing to ask, but if you're just putting on your risk hat, an individual mandate is essential because you cannot have adverse selection into

your risk pool. Right. And that, again, requires an acceptance that there are many, many people who will sign up for insurance that won't need it, and they're subsidizing those that need it. The argument can be made. That's true in Medicare already. Why do people not fight about individual mandates and car insurance? Well, that's my point. I think that the legal challenges that occurred to individual mandate and ultimately disabled

it, if you will. I'm not an expert on the legal issues, but from the perspective of what we were trying to do as a society, it didn't help the system. Nevertheless, the exchanges have grown, they've been more expensive than people thought. Because of the risk. A little bit because of the risk pool, some of it because of the pricing of those insurance products. Some of it because of whether they look a little bit more like commercial insurance versus Medicaid. There's two flavors out there, a lot of complexity. But the fact is they've created coverage and access for a lot of people. And more importantly, they have created coverage and access for

working class, generally voting American citizens. And that means it's a powerful group that has access to this insurance coverage. And so them losing it or losing their subsidies becomes a real issue for everybody who's in the environment that has to make decisions on this. So what that leaves you with for uninsured, obviously undocumented people that don't have US citizenship or some legal ability to work here. And two is there are obviously people who choose, they just decide, hey, I'm young and healthy, I don't wanna buy on this thing. Right, I'm young, I'm healthy,

I'd make far too much to qualify for Medicaid, and my employer doesn't give me a health insurance, I'm choosing not to buy. How many people is that today? I don't know, it's not a large number, but it probably would be somewhere in the millions. So a silly semantic question. The ACA is the Affordable Care Act. It seems like an odd name given that its mandate was not to address

price but to address access. And if anything, it drove up price, it drove up cost. It's just silly, but was there an attempt? What was the view that the ACA was not only going to address what it clearly set out to address, which was access, but then in doing so, it would reduce cost. First of all, it's a political name. It's a bill that went through Congress and it's a political name. I'm just such a literal person. I think it's a more respectful way to talk about it than the way people talk about it

is Obamacare. I think it's a more respectable way to talk about it is the Affordable Care Act. I would just call it the Access Care Act is all I'm saying. It is. You can still call it ACA. It's the coverage care act, right? Yeah, the coverage care act. Yeah, the coverage care act. Yeah, I mean, that's really what it is in terms of what it eventually did.

I think there were a lot of big ideas thrown about mostly by academics and others that some of the policies within the Affordable Care Act would include affordability and lower cost. I mean, I just don't think it ended up happening that way for a few reasons. And then people will point at each other about, well, the legal challenges affected this. The reality is that it has increased expenditures because we know coverage at a group level that removes you from the direct exposure to the cost of care creates demand and higher expenditures. We saw that with Medicare. Comes back to the American thing.

And most of these exchange products have generally good physician and other choice associated with them. Some are narrow networks. Many of them have a lot of choice. So again, you prioritize choice and access. The costs could be higher than one may have guessed. On the other hand, they have been, again, as I said, incredibly powerful tools to provide coverage because that was the purported

goal of the act for those that didn't have it when combined with Medicaid expansion. Not all states have expanded Medicaid by the way either. All right. I mean, that was a state-based thing, but in aggregate, more people have been covered after the Affordable Care Act and therefore expenditures also went up, which is what you would expect at a simple level. We also talked about the fact that some of the value-based care constructs that they had haven't been successful. I mean, CMS has spent more money in their Medicare Innovation Arms, CMMMI, in creating the constructs of innovation than they actually saved in the programs they launched.

So it hasn't really worked yet. Again, American ingenuity, right? You keep trying and failing, trying and failing, and maybe one day you'll get it right. Just hasn't worked yet. JS McPHERSON Has there been any credible proposal put forth to create a Medicare program that covers everyone? What would be required to make that happen? JS McPHERSON Well, I think the first question would be, do you want the federal government

covering everybody when the whole purpose of the employer sponsored system is to have choice and to have access to different networks that you can pick from? I don't know that a one size fits all model would work. I think the second thing and probably from my perspective, the more important thing is that if what we've talked about here today bears some degree of accuracy around what the drivers of healthcare costs are now and are going to be, it's really about health status, chronic disease, aging, drug costs related to the chronic disease, the demand. Coverage is not what's lacking today.

Models of coverage is not what's lacking today. So Medicare for everybody isn't solved. It's solving the problem we don't have that much anymore. What you would rather call that would be price controls. If your argument is you want to put them on Medicare because Medicare reimburses less than everybody else, commercial insurance or whatever costs, yeah, then you should just call it we're going to have a price control. But then we're moving to a supply site intervention. That's a supply site intervention says we're going to have a price control. But then we're moving to a supply side intervention. That's a supply side intervention says we're going to constrain everybody's access and

choice. The reimbursement is going to come down and the infrastructure will survive or not survive and what's left will be what you can access. That's a different choice because that's what it would do. It'd be a buy down. Remember one thing and we haven't really talked about it that much. This system is built on a lot of cross subsidies. Healthy people in our model of insurance cross subsidize our fellow citizens who happen to

be ill in some period of time. In the same way, employer sponsored insurance, which reimburses healthcare at a higher level than Medicare or Medicaid, overcomes the unit cost under reimbursement of government health care. This goes back to the concept, the government already behaves as a monopsony here. They under reimburse what you get paid from Medicaid if you're a doctor or Medicare, maybe below your cost relative, it's cross-subsidized. So corporate profitability is subsidizing the government.

100%, 100%. And that cross-subsidy creates this dynamic where you can't have one go away without the other. That's why I'm so concerned about the notion that our number of 40 to 65-year-olds relative to the people that are getting the benefit from government that somewhat under reimburses unit care of cost is going down. The people generating the economic rents to cross subsidize the other side is going down. And what does that mean for our economy if

healthcare expenditures are growing this quickly? I mean, that's the essence of this discussion. And by the way, I haven't answered your question with any reasonable solution to how to cut 25%. I mean, you probably need somebody from totally outside the system to come up with an idea for that kind of cut. I am much more optimistic about the notion that healthcare expenditure inflation could be reduced to a level that is somewhat closer to GDP growth. And your argument is, look, we've made it this far. If healthcare is 18% of GDP, as long as we make sure it never exceeds 18% of GDP, even though the absolute dollars will go from four to four and a half to five trillion, we're

going to tolerate that because our economy is going to grow proportionately, not less, and that's the price that the United States is willing to pay to be first in class for choice, access, and quality. We're willing to pay that price. That sounds a little fatalist in terms of where we are. My framing would be we value quality, access, choice, and innovation, and we're willing to pay for it. It has not deterred the US economy to date in terms of being not only the leading but the fastest growing economy. And our problem that we need to solve societally is about, in the US, it's about two things, as we outlined. It's about the burden of chronic illness and aging and all of these

factors that drive worse outcomes that really aren't healthcare factors. Again, we talked about the infant mortality issues, the drug and drug access issues and the mortality associated with that, homicides, violence, injuries, et cetera. Working on those things plus the chronic illness side from the medical perspective are not anymore about insurance or coverage or whatever. They're about addressing those issues directly. But to your point, public health has been an abject failure when it comes to dealing with these things.

That's right. I mean, I'm not saying that the solution is public health. I mean, I think the success that public health, the current model in public health had in infectious disease over the last 75 to 100 years hasn't worked in this setting. I mean, even COVID is a good example of that. So much debate exists about what happened there. Why was US mortality higher than most other developed countries in COVID? I mean, the most effective thing that happened during COVID was the development of the vaccines, which was again, US ingenuity, innovation and spread around the world in many, many ways. And so I think we have to rethink these models.

And before we give them more funding, we need to make sure that they're doing the right thing for us. But if we can bring those things in line, I think we can make a difference. I come back to, which I learned from you more than anybody else, the background nutritional environment, if it changed, could make a big difference over a 10-year period. And if you add to that incorporating a degree of physical activity, as we all know, this isn't about going from being sedentary to running marathons. It's about being sedentary to some physical activity. And it has a huge potential benefit on the types of health care costs that come from chronic illness.

And those two things together, and addressing some of the US unique issues could bring healthcare expenditures in line with GDP growth pretty quickly. But you have to have that goal over a 10-year period. If it's a one or two or three-year goal, we will fail and give up before we try. But you can do it over a 10-year period, I think. That's where my optimism comes from. anything that's going to be done over a 10 year period has to be government run. There's no employer or individual who can subsidize something where the remuneration is that far out.

Well, I think you have to start by having a discussion around what's our national health objective. We don't have a national health objective right now. That seems obvious. And again, unless you just say by default, the national health objective is the ultimate in access and choice. And if that continues to be our objective, the system is designed to produce that. My point is that we can have access and choice and incrementally put dollars into these other things and make a difference to both without radically cutting access and choice. That's what we have to get our head around from a long-term perspective.

You're right, short-term interests from all kinds of industry participants and public participants as well may run counter to that 10-year goal. So by establishing that goal, the question is, go back to your point around what we did after World War II. It was a national goal to have an ecosystem of countries that stood for democracy and protected security around the world. And we were willing to invest in

it. This may not be an international problem, but it is a national problem. And so we got a rally around that. So I've got all my charts here that I've been studying to prep for this. And one of the things that stood out to me is one area where we actually spend less than the other developed nations because we're spending about 2X what they are on everything. We spend less on long-term care. I guess my question for you is why? Secondly, we haven't talked about one specific disease that is also increasing in prevalence,

which is dementia. Those two are pretty linked. What do you have to say about that with respect to future costs? I think our biggest challenge in innovation for the next 20 years is the management and care of neurocognitive decline, whether you formally have dementia or not.

One thing is true. When you age, people live longer. They inevitably have neurocognitive decline and they require more care. The culture in this country, just to address the long-term care expenditure piece pretty directly, I think there are many positive aspects of the culture of family taking care of generations

and that being something that's passed from generation to generation. We spend less in institutionalized long-term care because a lot of that work is done by families. Now that's also a burden. As people live longer and the cost and complexity of their care as they decline gets higher, the cost of providing that care is not just the direct cost, but it's lost wages and productivity in the economy as people, often women, come out of the workforce to take care

of the elderly from that perspective. So this problem is not just a healthcare problem. It could become a macroeconomic problem based upon feeding the workforce and lost productivity. The second reason I think this is a huge problem, we won't get too technical, simple issue of blood brain barrier. The traditional pharmaceutical model to care for these diseases may not work once there's onset of disease because of the blood brain barrier. And the concept there is that drugs which go into the

body don't get through effectively the barrier between the blood and the brain to be able to treat brain diseases. We need new forms of innovation and this is where I think you will see the prominence of engineering-based solutions rather than drug discovery-based solutions grow materially to help with these diseases. Think about what we do today with stimulation and neurostimulation in Parkinson's. That's a device-based therapy. I think the role of engineers in healthcare has an infinite future and upside for us because of neurological diseases and we've got to pivot our model, our research, our funding to deal

with this issue because we're gonna go from 65 million-ish people in Medicare today to 90 million by the mid 2030s. Again, go back to my point before of the number of people pre-Medicare declining that's gonna help finance the care for those people. So we need models for custodial care, meaning where to take care of them and how, that isn't a nursing home or long-term care,

which is too expensive. You gotta make that job easier in the household. And we need innovative, engineering-based solutions that help improve their cognitive function to make them more self-sufficient, to deal with their dementia for a longer period of time, so that they're more self-sufficient and less dependent. And solving that problem, I think, is one of the grand frontiers in medicine over the next 10 to 20 years, given the aging of the population. Because remember, we're going to age up through 2032,

2033, but those people are then going to live 10, 15 years. This is a 25-year problem, and I don't know that we've found the solution to that. On that thread of technology, we touched on it really briefly in terms of how AI can help with the absolute messiness of reconciliation and adjudication, but we didn't talk about technology in other ways and we didn't talk about AI in other ways. So what are your broad stroke thoughts on the role of technology in any of the variables we've talked about, but obviously in cost reduction being that it's the elephant in the room?

Yeah. I mean, I think today, if we look at the system and what's being developed in AI, administrative cost is the easiest and first application, I think, where you can actually see real cost reduction potential. So I think we hit that correctly. I think in the clinical realm, the electronic medical record,

which has been a massive industry expense, what it has done is created a much more organized system of record, but it hasn't really fully translated to a system of engagement for all the stakeholders. And I would argue hasn't really been transformative in improving the quality of care relative to other things. And it certainly hasn't really improved access or choice in any way from that perspective.

But taking that foundation and building in the potential benefits of AI in better clinical care, better understanding of evidence-based medicine, that has potential from the foundation. So while I'm not a big proponent of the fact that the foundation that's been very expensive has a huge return on investment that the industry has seen, it has had an organizing effect, almost table stakes, that were required to get off paper to enable things like AI to make a difference in the future. And you know what's gonna be interesting

is it'll remain to be seen. Do the traditional EMR participants or do new entrants really build the AI that does that? And I think there's a lot of work going on in that area. I think it's early. I think the hype is seriously of work going on in that area. I think it's early. I think the hype is seriously overblown in the near term in terms of the value that it will have. But from a long term perspective, conceptually, the power of the tool to really improve care, not just administrative

cost, I'm optimistic about. So Sam, three hours ago, we started talking and I said, I had hoped that by the end I would have, and and by extension the listeners would have a better understanding of the US healthcare system. I can't speak for them but I do speak for myself when I say I honestly think I understand this better than I ever have. I appreciate that. And that's a clear testament to you. Maybe just to spend one moment on the personal, I've talked a lot about my time at McKinsey

is a great chapter of my life. When I left medicine, didn't know what I wanted to do, but knew I didn't want to do clinical medicine at the time. What probably many don't know is you were single-handedly the person that plucked me out of Johns Hopkins and brought me out to San Francisco. And you, along with Hamid Samandari, were the two single most important mentors I had there.

I owe you such a debt, Sam, and it is such a pleasure to be sitting down with you today. I wouldn't be where I am today without you. Your influence on me is hard to overstate. I appreciate that. It's incredibly kind, but the reality is that you know, this, the pride that we have in what you've built and I have in my family has is incredible. And the thing about you from my perspective that I can't say about

virtually anybody else is that what you have built has been purely based upon your intellectual curiosity, creativity, and drive to know the truth as opposed to anything to do with your personal gain. I've known you from day one as having worked in that way in the environment that we were in together and all of the different things that you went to do after that in various, I mean, I remember algae, but the point is it was always driven

by that intellectual curiosity. And that's something that I wish more people had. And I think if there's any benefit of this conversation of us talking about this, somewhere out there in your audience, there's another person like you who will hopefully solve these problems because they're just as intellectually curious as you. It's a gift that the world will never understand the benefit of from what you're doing. I appreciate that, Sam. Thank you for this incredible, truly masterclass on a complicated system. I will say this, the single most optimistic

thing I take away from this is we might not have to slash the cost by something dramatic like 25%. If we can enact the right combination of policies, technologies, perturbations in behaviors and incentives that simply bend the cost curve towards GDP growth, we might actually be fine in the long run. I think that's true. Thank you for the opportunity. Thank you for listening to this week's episode of The Drive. Head over to peteratiamd.com forward slash show notes if you want to dig deeper into this episode. You can also find me on YouTube, Instagram, and Twitter, all with the handle p AtiyahMD. You can also leave us review on Apple podcasts or whatever podcast player you use. This podcast is for general

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