When it comes to healthcare reform, people believe some very strange things. Or so says Cliff Asness, founder of AQR Capital Management. Today, the seven biggest “myths” are exposed...

My little brother and his fiancée dropped into Reno/Tahoe for the weekend. They were wending their way west to go apartment hunting in San Francisco, visiting friends and family along the way.

On Saturday we took a two-hour catamaran cruise up at the lake. It was as perfect a day as I’d ever seen it. The water was so clear and blue, you could see 30 feet down through the netting of the boat. The sky was just as blue – not a cloud to be seen – and the day was just hot enough to be perfected by a crisp Tahoe breeze.

At one point in the cruise we sailed past the “Ellison project” – a stretch of lakefront put under construction by Larry Ellison, the billionaire founder of Oracle (ORCL:NASDAQ). The two adjoining $15 million mansions weren’t big enough for Larry, so he had them torn down to build something more to his liking instead.

At another, equally secluded bend in the Tahoe shoreline (the lake is 22 miles long), we passed by the Stack family estate. Robert Stack, the late actor best known for The Untouchables and Unsolved Mysteries, spent his boyhood summers there. Adjacent to this, a 5- or 6-acre parcel of waterfront land was on the market for “only” $19 million – a bargain-basement price by Tahoe standards.

As we noshed on beer and wine and cheese and fruit, I joked with my little brother that we should go in on the property together – get the ball rolling on a new patch of Litle estate.

“Not just yet, big bro,” he replied. “Unless I can make do with, say, a zero-point-five percentage ownership.”

“Couple years,” I chuckled back. We were joking, of course... $19 mil is a bit rich for a piece of undeveloped real estate... but then again, five or 10 years from now, who knows?

Perfect weekends like the one that just unfolded in Tahoe remind me of something Einstein once said – you can live your life as if everything is a miracle, or nothing is. I think that’s true. In hearing the stories of some of the families who built those lakefront estates, I was also reminded of something else I believe.

Of all the traits that separate those who live their dreams from those who don’t, courage and determination seem to be the biggest two factors by far. Smarts, connections, money, and even lucky breaks seem to pale in comparison to those first two. Luck is still an undeniable factor, of course, but in some ways luck is like an ocean wave. It’s not enough just to be standing on the beach... you have to have the gumption to get out there and surf it.

Anyhow, just some quick thoughts from an idyllic weekend...

Cliff Asness, Hero

Back to the slightly more grim (but important) matter at hand. It’s not the custom of Taipan Daily to direct readers to outside essays written by outside writers. But in this case, the piece to which I call your attention now is well worth it.

The piece is called “Health Care Mythology” by Clifford Asness. A friend forwarded it to me, but you can find it on this Web site (the WSJ has been directing readers there too).

As the founder of a multibillion-dollar quantitative strategy hedge fund, Cliff Asness makes for an unlikely hero. Your humble editor calls him a hero, in a tongue-in-cheek but not totally undeserved sense of the term, because Asness is wealthy, outspoken and exposed. The things he says – and he says them quite forcefully – could lead to trouble for his wildly successful fund management business.

In “Health Care Mythology,” Asness eloquently and brutally dismantles certain myths about the healthcare industry. Lest you think this is a boring exercise from a stuffy fund manager, consider some of these excerpts:

...Step one is understanding how and why they are wrong. Step two is kicking their asses back to Cuba where they can get in line with Michael Moore for their free gastric bypasses.

.... if one more person cites soaring health care costs as an indictment of the free market, when it is in fact a staggering achievement of the free market, I’m going to rupture their appendix and send them to a queue in the UK to get it fixed. Last we’ll see of them…

The Seven Myths, Summarized

In case you don’t have time to read Cliff’s more than 6,000-word commonsense manifesto – a good chunk of prose by even your humble editor’s standards! – the seven myths are summarized briefly here. (Keep in mind, though, that the summaries really are no substitute for reading the whole “Health Care Mythology” piece.)

Myth #1: Healthcare Costs Are Soaring

No they’re not, says Cliff Asness. They only appear to be soaring if you compare on price but forget to compare on quality. As Cliff puts it, “you cannot judge the cost of something simply by what you spend.” We may be spending a lot more dough than we did in the 1950s, but we’re also getting a lot more value for our money. As Asness puts it, “nobody in the US really wants 1950’s health care (or even 1990’s health care). They just want to pay 1950 prices for 2009 health care.”

Myth #2: The Canadian Drug Story

Those who cast a skeptical eye on healthcare reform are constantly beaten over the head with the Canadian success story. Our neighbors to the north have a far more humane and effective system, the reformers say. Cliff Asness calls B.S. on this argument by making a non-politically correct point.... the government-run Canadian system only works by leeching off the free-market U.S. one.

Asness’ case in point is the drug market. U.S.-based pharmaceutical companies have to spend ungodly sums of money on the testing, development and marketing of new drugs. Big pharma then has to charge a lot of money for their end product to recoup this massively expensive pipeline cost – otherwise the drug isn’t worth making in the first place.

But Canada, in its capacity to act as a single government-backed customer, puts big pharma over a barrel. After a drug is already developed for the U.S. market, it only makes sense to sell into Canada too, and big pharma needs all the profits it can get to fund further research.

So basically, Asness argues, many of Canada’s benefits come from piggybacking on a functional American system. Take the functioning U.S. market out of the equation and what do you get? No more cheap drugs, eh.

Myth #3: Socialized Medicine Works in Some Places

As Asness sees it, the leech argument further applies to all the government-run healthcare systems in the world that benefit from an influx of U.S.-based medical advances originally developed for a profitable market.

And so, Asness argues, if America tries to go the way of Canada or the U.K. or what have you, there will be no one for America to leech off of in terms of drug development and innovation... and the U.S. centric march of progress towards better medical technology will simply collapse.

So, please [Asness begs], stop pointing to all those “successes” that even while living off the US still kill hard-working people who could afford their own health care while they stand in line for the government’s version (people’s cancers growing while waiting ten weeks for a routine scan, which these people could often afford on their own if allowed, is a human tragedy). Even the successes you gin up for them would not be possible without the last best hope of humankind (the US) on the front lines again making the miracles for the world.

Myth #4: Socialized Medicine Is Better Because Their Cost/GDP for Healthcare Is Lower

Asness argues that this is a failing of logic rather than statistics.

While technically correct in a pure statistical sense, the fact that countries with socialized medicine spend less per capita on healthcare is misleading for a number of reasons. For one, Asness points out, many of these countries are subsidized by U.S. drug development and innovation. Second, differences in overall spending do not account for choices made in the United States that simply aren’t available elsewhere.

There are a number of other arguments Asness uses – basic point being, you can’t always trust an upfront number to tell an accurate story. As Mark Twain liked to say, “there are lies, damn lies, and statistics.”

Myth #5: A Public Option Can Co-Exist With a Private Option

This is the myth that, under the guise of national healthcare reform, those who want to keep access to a private system can do so without seeing significant degradation of their choices.

Asness argues at length that this is basically a ruse. If we go “public,” Asness asserts, we are signing up for socialized medicine whether we like it or not. There are all kinds of technicalities and wavers and ways to artfully dodge this assertion, and Asness tackles many if not most of them in his piece.

Myth #6: We Can Have Health Care Without Rationing

For this myth, Asness points to the elephant in the room, addressing an ugly word – “rationing” – that no one in Washington seems comfortable with.

It’s simple economics, Asness says. No matter how much we might wish it weren’t so, idealism won’t change the fact that a scarce good cannot be provided in unlimited, equal amounts to everyone. As Asness puts it,

If you have a material good or service, like health care, that is ever increasing in quality, and therefore cost, there is no way everyone on Earth can have the best at all times (actually the quality increases are not necessary for rationing to be needed, it just makes the example clearer). It’s going to be rationed by some means. The alternatives come down to the marketplace or the government.

Myth #7: Health Care Is a Right

“Nope, it’s not,” Asness says. “But we are at the nuclear bomb of the discussion. The one guaranteed to get me yelled at or perhaps picketed by a mob waving signs printed up with George Soros’s money.”

Asness makes the case as to why healthcare is not a “right” with a mix of insight and sarcasm. Much of his argument centers around the difference between positive and negative rights – e.g. the right to be left in peace versus the right to some form of entitlement – and also touches on the crazy idea that new technology, a driving force in medical care, should somehow be instantly appropriated for the masses. (At one point Asness asks, “Did you have a right to chemotherapy in 1600 AD?”)

Asness further goes on to point out one of the ironies of “unfair” free market healthcare versus “fair” government provided healthcare.

In an “unfair” system, the initial users of a new medical technology are willing to pay an expensive price – a price the masses could not afford. But the profits generated from this early use lead to innovation and price competition, eventually making the medical technology available to everyone.

Think of it like DVD players. These days you can buy a serviceable DVD player for a whopping 30 bucks. Considering the technology involved, that’s damn cheap... and that’s why DVD players are so popular. But DVD players started out being ridiculously expensive... too expensive for the average family to afford. It was the “early adopters” willing to pay hundreds and hundreds of dollars for experimental technology (the first DVD player prototypes) who enabled profit-driven improvements and the migration to a mass market.

So now imagine what would happen if the government had declared home entertainment equipment to be a “right” from the outset. Under this “rights” based system, the idea of a super-expensive DVD player that only some rich technophile could afford would be considered an outrage. And in the absence of expensive DVD players at the outset, the competition-driven free market would never have figured out how to serve up cheap ones.

The DVD player story is Silicon Valley in microcosm. “First expensive, then cheap” is how innovation spreads. The difference between healthcare technology and home entertainment technology is an emotional one, not a logical one... and so viewing healthcare as a “right” creates the same problems you get when the government is put in charge of most anything at all.

What do you think? Is Cliff Asness on target? Or do views such as these count more as part of the problem than the solution? Let me know: justice@taipandaily.com

Other Related Topics: Healthcare Industry , Justice Litle , Macro Trader , Pharmaceuticals

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