I just finished reading Michael Lewis' "The Big Short". It is well worth reading and of all the books I have read on the financial breakdown of 2008, it is the one that gets the best mix of forest and trees. My favorite books tell stories of specific people and circumstances which reveal principles which are generalizable to many other circumstances, particularly medicine and health care. This is one of those books.
One of my pet peeves is to hear colleagues within medicine who somehow believe that somehow the delivery of health care is fundamentally different from the delivery of other goods and services to humankind. The problem of this perspective is at least two-fold. First, it is imply wrong. Second, it serves as the premise to discard thousands of years of human experience to justify unwise policy decisions.
How does this all relate to a book on bad bets on sub-prime mortgages? The two are linked because the respective industries are the products of many of the same flaws, specifically:
1. Inability of leadership within the industry to effect real change and the lack of a global view
2. The inherent drive to game the system
3. Short term timelines
4. Wrong incentives
My first response to The Big Short was disbelief. How could anyone involved at any level view institutions and processes involved as durable? For any given person operating within this industry who had half a brain, it should have been obvious that this was utter madness. While maybe it is not surprising that a lowly loan originator might not be one to pull the switch to sound the alarm, someone at some level of leadership should have seen what was coming. How could anyone believe that making money by loaning money to those who could never pay it back was a viable business? Ultimately it was not anyone on the inside who recognized the madness. It was outsiders who figured out how to bet against this business model and brought it down, becoming very wealthy in the process.
The parallels to health care are many. In the financial world, the industry used the ratings agencies to game the system. In doing so, they implied value where none actually existed and thus altered investing decisions and capital allocations.Money was invested in housing stock that was not needed and scarce capital was mis- allocated. In health care, the gaming opportunities are derived from the CPT and RBRVS. They are our own rating agencies. Based upon how these entities decide what does and does not have value, physicians and health care entities allocate scarce resources to expand particular product lines. Unfortunately, this approach creates a disconnect between what brings value to physicians and health systems and what actually brings value to patients. Like the bond ratings, we game the value assignment process, both the political process used to assign values and the investment process which follows as a consequence of the artificial values assigned. One would think that the foolishness of using such an approach to define value would be obvious to anyone with any appreciation of universal failure of such approaches through history. Alas, remember that health care is different and based upon this we are instructed to ignore the entirety of human experience relating to allocation of scarce resources.
Many participants within the mortgage bond and CDO world realized that the premises underlying their industry were bogus and not sustainable. Similarly, there are many within the health care industry who realize that we are riding a train headed off the cliff. Where within the hierarchy are those most likely to sound the alarm. Too low in the hierarchy and no one will listen. Too high up and they will have too much to lose in the short term. Leadership within health care, like leadership within the mortgage bond business, will not be capable of inducing change.
Part of the problem with leadership is based upon who rises to such positions and what they are charged to do. Business leaders (and those who run health care are business leaders) are basically very practical people. However, practical people are not necessarily reflective people. To see the big picture, one needs to step away from the practical at times and reflect upon the bigger picture. Some leaders in health care are capable of such reflection but that is not what they are paid to do. It is a secondary concern and only rarely will such thinking be rewarded. In the booming mortgage bond and derivative industry of the mid 2000s, no CEO who questioned the basic premises of their industry was rewarded. Similarly, leadership within health care must focus on how best to game the system as it now stands. No CEO with a huge fixed investment will want to put the model which that investment is based in jeopardy.
This leads me to the obvious question? How can one short health care? Should someone short health care? ObamaCare will attempt to decrease how much money will go to continue inflating the health care bubble, but the methods are all wrong. Over the short term, more money will pile in. The bubble will continue to grow. Gaming opportunities will abound. Where in health care are the equivalent of the overbuilt tracks of homes and condos in Las Vegas and south Florida? Much like the empty strip shopping centers in central Florida, who is borrowing money to overbuild health care facilities which no one will use? Short sellers have a bad rap but they are the canaries in the mine. They provide the early warning system that things are going where they should not go.
Those players in the Big Short who saw this coming may have seen it early on and made a financial killing, but they were ultimately devastated. It is always better to be the optimist but sometimes that is simply not possible. Too many optimists and you end up with bubbles that need to break, the earlier the better. I am now convinced that someone needs to short health care and break the bubble before it gets even larger.