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

26:39There's another thing that's important to understand, which is as the US healthcare expenditures increase as a percentage GDP so did the rest of the developed world. So every developed nation that put in place programs, their version of Medicare 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 % 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.

27:26So 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 will 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.

27:59Who do they cover? Yeah, yeah. CMS Center for Medicare and Medicaid Services is called Medicare covers people over the age of 65 and 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're at.

28:34It'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 even know what age exactly. It was in 1955. 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 to X.

29:09And 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 wrap it up. 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 there needs unique, but their ability to access healthcare services can be challenged.

29:50And 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 percent plus of federal poverty level. And we'll get into maybe with the Affordable Care Act, the exchanges and whatnot.

30:28Medicaid covers a lot of people. If you think about this, it now today covers 90 million people in the US more than Medicare. Medicaid. The Medicaid. The Medicaid. 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 time frame. But Medicaid today covers about 90 million people.

31:08That'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 health care costs can be offset.

31:46Okay, that's helping bring them back to Medicare and Medicaid. So if you really look at, you have these programs that came into place. So 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 down 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 body, just as the NHS has done.

32:23Why did we instead continue to keep two completely different worlds, which is we have a government funded system for people of low socioeconomic 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 it's that it's 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.

33:00The 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 reportedly 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.

33:41Meaning 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 employee, or 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, etc? 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?

34:23You'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 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 healthcare costs across all seniors.

35:03Not 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 near -hyperplaced, it's at best three hours in and out the door is amazing.

35:49And 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.

36:26So I had a friend who is American, but he lived and worked most of the year in Riyadh in Saudi Arabia. And I was out visiting him in Saudi Arabia, this was 15 years ago. And we were at his flat and it was in the spring and he was just kind of getting ready to head back to DC where he lived. And I saw a said to him, I said, God, you know, 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?

36:59He 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. Like it was, 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 economic decision for him, but you can't make decisions that are wise in the context of resources, yeah.

37:31I 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 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, its multiple chronic illness will get into obesity, diabetes, heart disease, lung disease.

38:09Even the innovation in HIV care in this country, AIDS has become a chronic disease. Cancer is becoming more of a chronic disease. is 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 going to go to the doctor to get a preventative checkup or refill my regular diabetes medicine, which I'm going to 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.

38:43insurance 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 party referenced really 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 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 them?

39:20No, 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 current insurance. It's not life hack. 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 gonna have a thousand people in insurance. 5 % may cost you 50 % of your total spend. 20 % may be 85 % of your total spend.

39:53And 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's Psalm 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.

40:28I mean, 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. And 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.

41:09So 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 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's 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.

41:43Many 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.

42:23I 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 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.

43:08Those 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 health care are the 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 health care 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.

43:43And 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 of grown one significantly. One of the things that comes up is what of the industry participants done to actually help with this problem.

44:23And 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 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?

44:59Of 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 short period of time until there's been a bit of a revolt in terms of that.

45:41And 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.

46:36And the jury's out on that in terms of whether it's really reduced cost or shifted cost 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.

47:16I 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 is 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.

47:56That 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 training. 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 three or four generations, which is, you know, as we now realize actually costs a lot, not just for mental health, but the impact on physical health, which drives our health care costs, especially in the context of chronic illness.

48:48We'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 are? 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. Okay. So 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, etc.

49:26HMO, a 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 US, 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.

50:06That'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 places 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, etc. 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.

50:56And the two of them together produce a product that ought to cover the vast majority of your healthcare needs. And in theory, based upon that integration of care, you either get lower cost or better outcomes or both. And again, I think the jury from a long -term perspective relative to other models is out. but it's innovative. And it's worked in some places really, really well. And they don't try to cover everything, right? So 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.

51:32I mean, my personal example, my mother had a rare form of brain cancer. We had terrific oncologists that 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.

52:15But 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 in worth bringing up from that perspective. But you have these systems then that work in certain places and don't work and 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 explain some of the differences between us and other countries.

52:56I 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 experience there previously because 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 need 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 going to be indistinguishable in that regard.

53:32You'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 it of course. You're paying for it of course to your taxes. Yes, yeah. It's not coming out of your wages directly and you're not paying out a 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.

54:01It'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 develop 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.

54:45If you had a heart attack immediately in Canada, went to the emergency room, you're going to 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 weight times for those things are much longer. The cynical view of that is of course that it's a cost management system.

55:18But 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 You have a lot of Canadians who come into the US for healthcare on a more immediate basis where they buy private insurance, which can reduce the wait times from that perspective if they can afford it.

55:58I 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.

56:56And 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 different than we've seems to have made that choice in defense. And there are differences between the two.

57:31And 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 gonna get right to it for the people who are listening to us going How have you not talked about drugs yet? But here's the fundamental difference you made a great point so post -World War 2 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.

58:10We 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 you're 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.

58:49And 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?

59:31Could 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.

1:00:09Therefore, 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, 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.

1:00:45And 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. Metformant would be a simple generic example that might take care of many of those things for people at a price point that's 1 ,000th 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.

1:01:23What'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. I mean, 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.

1:02:06Did the US government at least for Medicare say we will resign the right to ever negotiate explicitly? Was that a concession to farm up 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. No, 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. 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 formulas that might encourage people to use generics rather than branded drugs if they were equivalent.

1:02:50There 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. Because this 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.

1:03:26And 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. But 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 monopsinist.

1:04:02They're a monopsinist at the end of the day. They've applied it to doctors and to hospitals and other infrastructure base care, where they set the prices based upon their purchasing power. It just hasn't happened yet on the drug side. 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, because that innovation has been incredibly beneficial to us in a number of different ways. And again, we're gonna get into health status and outcomes and why there aren't so good.

1:04:36But 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 wanna 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%.

1:05:21So again, I was like to anchor people to it. We're spending four trillion year on healthcare. 15 % of that is administration. That's something that exists virtually nowhere else. Of the 85 % of that four 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.

1:05:57Let 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 a 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.

1:06:39I 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 that scale through employers or insurers and in some ways at the retail pharmacy level when individuals are going to fill prescriptions.

1:07:30By 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.

1:08:02The PBMs came in the middle. When did they show up? PBM 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 will 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 PBMs. 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.

1:08:41Okay, 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 formularity? Do you want a narrow formularity? 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.

1:09:20And 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.

1:10:01Don'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 health care 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.

1:10:50It's a meaningless entity because of these machinations and payments that you've outlined, where rebates and kickbacks completely changed 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 clue what a drug costs when we prescribe it. If I'm trying to decide to write somebody for Rizuva statin versus a Torvva statin, 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.

1:11:37So do we reward the innovation of a statin itself as the innovation? Or do we reward the me -to's that come after it, which sometimes grow to be larger than the original stat? And sometimes they're better. Terzepotide is better than semi -glutide. 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. I mean, this gets back to supply side intervention in other countries.

1:12:17I 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 of the demand. Well, and in some of those countries, they will just say, look, 90 % of the benefit is accrued with Symbastatin, which was one of the original drugs. because you're not going to prescribe a torvastatin or Rasuvastatin, 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 choices.

1:12:53And 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. And I think the point that we're talking about today is it's getting expensive. And 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 U .S. 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.

1:13:37Well, 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 1 7th 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 U .S.

1:14:21bondholder, the person who's going to buy a 30 -year treasury. I have $700 ,000 a debt. I make a hundred 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. I mean, 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 line. Or a devaluation of the currency. Yeah, I'm going to have to inflate my way out of this thing. And 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?

1:15:03That'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 time frame.

1:15:43You can look at different projections. So in the next eight years, we're going to 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?

1:16:16So that's the optimistic view that there is a mitigate 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 and health status can improve health status even a little bit from a chronic condition standpoint, because that's not going to 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.

1:17:02If 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. Two 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 economists will get into this discussion of, well, one of the reasons the US can afford to spend more on health care is we tend to work longer than much of the rest of the developed world.

1:17:4265 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. 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.

1:18:25And 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. Actually, it's relevant to healthcare because healthcare is such a large part of the economy. Everything comes back to it in the end And when you think about it at a macroeconomic level, other 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 poultry life expectancy in aggregate.

1:18:59Most 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. And we spent time on both of these. These are related to both access to health and deaths of despair respectively. But 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 a hundred years life expectancy is improved remarkably A lot of that has to do with infectious disease and other things So that's fine.

1:19:51So when we say our life expectancies in the US are pulp I think what we're really asking is why are we three years behind everybody else behind everybody else especially when we're spending Spending miles for not getting the best out more And I think you make a really good point, which we've talked about before, which is somewhere between 60 and 75, the equation slept. 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.

1:20:28We 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.

1:21:02And 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 as 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.

1:21:45Obviously, 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.

1:22:30The expenditures, the loss 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, were better at cancer screening, were better at treating blood pressure and cholesterol in this country, back to the pharmaceutical culture. We smoke less significantly than other parts of the development. 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.

1:23:02And 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 where 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.

1:23:36This 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. times again, societal issues, whether that be gun violence or poverty leading to bad access to prenatal care, injuries, etc.

1:24:15or the chronic diseases that seem to be more prevalent here. How you fix that, you and I've 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.

1:24:56And 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.

1:25:31What 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. And 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.

1:26:08And as a result, a hundred thousand people a year more than that now are overdosing. By the way, it gets back to this issue. The border is a healthcare issue. It just is. You can't escape it. Everything ties back in one form or another to healthcare. 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. We're going to get it to really good at treating chronic problems and grinding out incremental years of life when you're chronically ill and that shines so much when you become a senior citizen.

1:26:44And 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.

1:27:24And 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. And I've always talked about quality, cost, and access. But you've made me realize that choice is a part of 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.

1:28:01We have said we want maximum quality. We want access and meaning when I want it, I want it now and 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 constraint, 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.

1:28:37I 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 formula, some of them are repeats, but my point is there's a lot of choice. Right. And we'll do minisectomies, we'll do miniscuous repair surgeries, we'll do hip resurfacing, we'll do hip replacements, I mean, we'll do PRP, we'll do anything and everything.

1:29:18You 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 is evolved to create more options and more choice.

1:29:53It 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. Okay, it's purchasing power. And 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, you have a better understanding of it now.

1:30:28I 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 want to 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 in the physician a price taker shouldn't it be able to do that to pharma?

1:31:07Now 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 irrational 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.

1:31:47The 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, and 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 job at this point.

1:32:22But 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, etc. It will emerge. You're saying the shareholder 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 again.

1:32:59That's the hallmark of the free market economy. So how do we reconcile that, Sam? 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.

1:33:32It's not just the pharma codes. There are companies that do basic research. There are pharma codes. There are PBMs. There are pharmacies. There's insurance. by the way, the insurance company's 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.

1:34:13Auto manufacturers manage this in auto 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, is 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, amusing your term anti -American free market versus not. But purchasing at scale is not an anti -American or anti -competitive concept.

1:34:58Do you think it is reasonable that Americans could expect to pay for drugs, what their European and Canadian counterparts. 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.

1:35:42I mean, 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, 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.

1:36:17But if you step back and look at the big picture of where healthcare expenditures are going, let's just step back and actually look at just pharmaceutical expenditures rather than healthcare care 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.

1:36:59And 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 pedophilist 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.

1:37:45Meaning 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. Yeah. And that's something we're going to have to grab. But 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 is already asked and answered.

1:38:23We'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 haven't established framework. 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. I mean, this goes to the point of it's not obvious that we have national health goals at 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.

1:39:00Obviously 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 going to 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 going to be necessary just because the population's aging. Fact of life, we're going to have more demand for roughly the next decade. But are we going to do that at the exclusion of resources into these other things?

1:39:30Which in, again, in your language impacts health span. 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 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.

1:40:13While 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 2 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 70s and talk about what the prevalence of diabetes or obesity was then Related to now. It's what three four fold up obesity maybe but type two diabetes the year we were born is 1 % And today Yeah, 10 to 15.

1:40:51Yeah, percent right much more than yeah very conservatively a single logfold 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 GLP1 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 FENFEN. This is not stimulants, right? We are dealing with truly efficacious.

1:41:32but 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, right? I'm reading on the one hand, the bull case that says, this is gonna change the world. We are finally going to address the burden of obesity and type two diabetes and metabolic disease with these drugs, because now all we gotta do is give these drugs to everybody. And then the bear 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.

1:42:13I 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.

1:42:55So 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 the 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 of productivity out of it from the individual who's now more able to work because their need doesn't hurt as much, their back doesn't hurt as much due to the sequelae of obesity.

1:43:37I 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?

1:44:10We don't know. What little I know about how these drugs work is that when you would draw them, there's 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.

1:44:41My view, personal view, they're too high. I also believe that they won't stay this high as the penetration grows across newer, newer indications and the population. Even though, as you pointed out earlier, the MeToo 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 Incratons 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 semi -glutide trades at a discount and nobody wants it, because that's so 2020.

1:45:31Right. 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 goes 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 goes 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?

1:46:08And 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.

1:46:43So I'm making a note here to myself. I'm just listening 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, or would you put them in with pharma? Followed 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.

1:47:20Maybe 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. Not a huge contraction. It's a huge contraction. 25 % over the next X years. Like 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.

1:47:59But I'm just thinking about I'd like to get it closer to 3 trillion than 4 trillion. That's all I'm saying. I think the concept of absolute, absolute cost reduction is very different than bending the trend. And 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.

1:48:37So 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 healthcare services, buildings and what not, than many other countries, actually. But the people aspect of this, both the number of jobs, and also the fact that our doctors, nurses, et cetera, are on a real wage basis paid higher than in other countries.

1:49:21The two of those together and other healthcare workers, they contribute to the gap. The administrative side is a big 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 claims and all that. Yeah, but it is mostly a people business. By the way, why is it an AI doing that, Tom? Well, it's increasingly doing that. I mean, 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.

1:49:55Isn't that the poster child indication for AI? It's the poster child indication for more automation that requires controls. Okay. And 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.

1:50:37I 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 indication's basis. I always think about the organizations and 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, et cetera, might feel that issues with pre -authorization and denials and other things have gotten at a hand. And I'm not here to represent one side or the other despite what I do.

1:51:09Look 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 and all the systems. And they're seeing something. I don't know how true it is anymore 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, overcoding or under authorization of what people need.

1:51:49As 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. This 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 administrativeia that does have an opportunity to be fixed at this point, collaboration between the two sides doesn't seem as high.

1:52:28Technology 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 true.

1:52:58Well, everybody else has administration. It's just sitting in the 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. That's right. It is what it is. It is. You're 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.

1:53:31Some 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 healthcare 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.

1:54:08and we've done it despite the more rapid expansion of healthcare costs than any other country. Arguably an economist would say that as healthcare as 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.

1:54:52I 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 returning, you know, things like that.

1:55:25I 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. Some my view is we all know when Noah built the arc 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 purchase 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.

1:56:15Yeah, 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 health care system You have a CMS regulated operating room. You have a great operating room So some fraction of what they've done has really really helped and you can't argue with that and And similarly, regulations that have been placed into other parts of the industry.

1:56:53So we may be over -regulated, but you can't discount the value of some of that regulation. Where do you think the over -regulation is being counted? 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. And 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.

1:57:27What we've said in our discussion is no. It's a supply side intervention. They just constrain and limit cost and infrastructure, or whatever. 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.

1:58:04I mean, 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 failing and failing and failing until you find a model that works and credit to those that are trying to do that, but it hasn't succeeded.

1:58:37where 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 Hillburton Act, all this infrastructure that is hospitals. Let's point the figure at the industry that I'm most closely associated with. And 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 given 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.

1:59:22Sometimes 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 term because it's now normal to get these.

2:00:07Just 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. I think the total cost is probably much higher. The per unit cost went 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 cost. 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 gonna 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 and you recover and you walk out the same day and you go home and you do your PT at home and other things.

2:01:01What is the difference there in the payer rate for those two? 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.

2:01:40How do the economics of that work? Does the hospital act as the single entity that builds 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.

2:02:20And 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, etc. 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 the hospital in 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.

2:03:02All 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 from 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 going to get adjudicated is one payment, very simple, and one copay if it even exists.

2:03:48But 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, 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, a erotic valve replacement? Oh, it's highly, highly variable. But pick an average pair. Medicare somebody's going to reimburse, let's say, 20 something thousand, some number for that hospitalization.

2:04:27And how much of that is pro fee? How much of that is technical fee? Well, the profee is, like I said, that's US the hospital. The profee may be separate. I mean, what if a physician gets paid to do that? So it could be $750 ,000 or $1 ,000, let's say. Isn't that kind of amazing when people think about how low that is as a profee? Yeah, 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 profee of $2 ,000. People can't fathom that.

2:04:57People can't fathom how low that is. because that also bundles them seeing you in clinic, them taking care of you for the five days. They're taking care of you for five days in the hospital when you're in the ICU and you're on the floor. And again, it could be lower. Medicare might be below, should have gone. Sure, but you're healthcare, the utility that people, again, using an economic term, the utility that people gain from interactions with different parts of the healthcare system, very 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.

2:05:33When you ask, who are much more than anybody else in the system, Dr. Ann Nurse, the next would be their hospital where they have 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 you have a hospital collected a lot, but they're getting ripped off on paying things.

2:06:09This is where you hear the stories of like the gauze cost $16. The little piece of 4x4 gauze that you have tens of those that you're going to go through in the case. Like it's almost like you're back in PBM. 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 having cost. Yeah. 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.

2:06:45Of 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 or $4, or Tylenol pill, or whatever the case may. 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 charges off of which the free market negotiates contracted rates and brings that $4 .00 tile and all down to $0 .20.

2:07:33Or the $16 .00 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 into 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.

2:08:13It's a discount card. So if you come in without insurance, oh, you're going to be exposed to the $4 tile and all, 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 healthcare 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, under insurance where people don't pay their portion of what they owe. And again, with those kind of prices, you can understand some of that. When last I looked at this statistic, medical expenses were the leading cause of personal bankruptcy.

2:08:55Yes, 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. And it's difficult based on what you just said though, Psalm, it's difficult based on the idea that this uninsured individual, now I wanna come back to why is anybody uninsured in 2020 for 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 gonna cost me this many thousands of dollars a year, I'm young, I'm healthy, I don't need it.

2:09:30In an ideal world, I wish I had some catastrophic coverage, Now, loan behold, I'm back in the head. Again, guess what? I'm getting charged four bucks for time and all, 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 health care organized health care systems have the equivalent of a compact with the uninsured that rapidly discounts that price often by tenfold in order to adjudicate that.

2:10:05And I think that's very appropriate. Yet you still have these unfortunate cases. The healthcare 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 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. Some more people have insurance through that.

2:10:41We've already talked about Medicare's 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 gonna 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.

2:11:39Right. 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 could be made. That's true in Medicare already. Why did 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.

2:12:11They've been more expensive than people thought. Because of the risk. A little bit because of the risk 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?

2:12:56Obviously undocumented people that don't have US citizenship or some legal ability to work here and two Is there obviously people who choose they just decide hey, I'm young and healthy. I don't want to 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.

2:13:32And if anything, it drove up price. It drove up cost. It's just silly, but was there an attempt? 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 literal person. A respectful way to talk about it, then the way people talk about it is ObamaCare. I think it's a more respectable way to talk about it as the Affordable Care Act. I would just call it the Access Care Act, is all I'm saying.

2:14:01It is still called the ACA. It's the coverage care act. The coverage care act. Yeah, 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 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.

2:14:40We saw that with Medicare. Comes back to the same principles. And most of these exchange products have generally good physician and other choice associated with them. Summer Nero 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.

2:15:16But 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, CMMI, in creating the constructs of innovation than they actually saved in the programs they launched. So it hasn't really worked yet. Again, the American ingenuity, right? You keep trying and failing, trying and failing, and maybe one day you'll get it right.

2:15:47Just hasn't worked yet. But has there been any credible proposal put forth to create a Medicare program that covers everyone? What would be required to make that happen? 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.

2:16:39Coverage is not what's lacking today. Models of coverage is not what's lacking today. So Medicare for everybody is in salt. 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 side intervention. That's a supply side intervention says we're going to constrain everybody's access and choice.

2:17:09The 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 would 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 healthcare.

2:17:48This goes back to the concept. The government already behaves as an obscenity here. They under reimburse what you get paid from Medicaid if you're a doctor or Medicare may be 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 reimbursement unit care of cost is going down.

2:18:27The 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 and could be reduced to a level that is somewhat closer to GDP growth. And your argument is, look, we've made it this far.

2:19:05If 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. I mean, 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 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.

2:20:01It'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 that mortality associated with that, homicides, violence, injuries, etc. 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.

2:20:37I 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 the 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.

2:21:06And 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 it on the types of healthcare costs that come from chronic illness.

2:21:42And 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. And that's where my optimism comes from. But 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.

2:22:18We 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.

2:23:00That's why establishing that goal, 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. So we got a rally around that. I've got all my charts here that I've been studying to prep for this. 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 two X, what they are on everything.

2:23:31We spend less on long -term care. So 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. So 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.

2:24:21We 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 loss productivity. The second reason I think this is a huge problem, we want to get to technical, simple issue of blood brain barrier.

2:25:02The 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 in 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 neuro stimulation in Parkinson's.

2:25:41That'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 going to go from 65 millionish people in Medicare today to 90 million by the mid -2030s. And again, go back to my point before of the number of people pre -medicare declining that's going to 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 got to make that job easier in the household.

2:26:24And 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 for the next 10 to 20 years, given the aging of the population. Because remember, we're gonna age up through 20, 32, 20, 33, but those people are then gonna 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 threat 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.

2:27:12So 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 potentials. 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.

2:27:51And 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.

2:28:31And you know what's going to 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 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, Psalm 3, I was a good, we started talking and I said I had hoped that by the end I would have, and by extension the listeners would have a better understanding of the US healthcare system.

2:29:08I 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 as 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.

2:29:41I 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.

2:30:21I've known you from day one is 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.

2:30:55I appreciate that, Sam. And thank you for this incredible, truly master class 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 dramatically 25%. If we can enact the right combination of policies, technologies, perturbations and 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.

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