Healthcare, Not the Tax Code, Is Drag on U.S. Firms

SMITH BRAIN TRUST – Health insurance – not the U.S. tax code – is "crippling our business around the world," Warren Buffett said during Berkshire Hathaway’s annual shareholder meeting on May 6, 2017, in Omaha.

In what New York Times columnist Andrew Ross Sorkin described as a "blunt" and "implicit rebuke" of his fellow chief executives, Berkshire Chairman Buffett said business leaders would be smart to shift their focus away from their tax bills and toward health care costs, which have been rising at an alarming rate, devouring profits. He blasted the recently passed U.S. House bill to repeal and replace Obamacare, and touted the broad benefits of a single-payer or universal type of health coverage for all U.S. citizens, perhaps with an opt-out provision that would allow the wealthy to choose a more bespoke plan.

Clinical Professor of Finance David Kass at the University of Maryland's Robert H. Smith School of Business attended the Berkshire meeting, along with faculty colleagues Elinda Kiss and Julie Pavlovsky, and 10 Smith finance students. The annual meeting is an annual tradition for Kass, who has taken students to the "Woodstock of Capitalism" for the past 10 years. 

Buffett told the crowd last weekend in Omaha that the healthcare overhaul bill provides a big tax cut for those who earn more than $250,000 per year from capital gains and would result in a 17 percent tax cut for him – roughly $680,000 of the $4 million in taxes that he paid in 2016.

Corporate taxes, he said, have declined over the past 50 years to 2 percent of gross domestic product, from 4 percent. 

Berkshire Vice Chairman Charlie Munger referred to the overutilization of medical services for people he described as "almost dead," Kass said. Munger gave an example of a Texas hospital where, he said, surgeons provide heart surgery to healthy patients. The outcomes of these surgeries are typically good, Munger explained, since the patients didn't need heart procedures to begin with.

"Meanwhile," Kass adds, "American corporations are disadvantaged by the statutory U.S. corporate tax rate of 35 percent, which is about double that of the likes of Germany, Britain and Canada. Furthermore, the inability of U.S. corporations to bring back profits earned abroad, without being subject to higher tax rates than our trading partners, puts the U.S. at a major disadvantage. Corporate tax reform, subsequently, is likely to play a major role in stimulating the economy to grow faster than its recent 2 percent rate."

Kass is a former health economist for the Federal Government (Federal Trade Commission, General Accounting Office, Department of Defense and Bureau of Economic Analysis) and has closely followed Buffett's investments and philosophy for more than 35 years. He weighs in on Buffett’s views on the healthcare and tax overhaul issues facing U.S. companies.

The tradition of U.S. corporations providing health insurance, tax free, to employees originated with World War II-era wage and price controls, Kass says. Companies at the time circumvented controls to compete for workers by offering health insurance. "The Affordable Care Act (ACA), requiring large employers to provide health insurance, continued this tradition," Kass says.

"Healthcare may be judged in terms of cost, quality and access," he adds. 

"A major reason for the sharp increases in U.S. healthcare costs is the predominant fee-for-service model. The more that is provided, the greater the provider's income will be. This provides a clear incentive for the over-provision of services to patients."

"With respect to quality," Kass says, "technology and research have produced much higher quality of care today than in the past."

Some of the services, he acknowledges, come with a high price tag, such as medical resonance imaging (MRI). But those services are "very beneficial to patients and have helped to significantly increase life expectancy," he adds. "Access has also substantially improved through the 1965 introduction of Medicare, along with Medicaid and the ACA. This, too, adds to total cost. But these additional costs have resulted in substantial benefits to society in terms of life expectancy and quality of life."

"The ACA has its problems, which need to be addressed," Kass says. "Providers need to be discouraged from offering unnecessary services. However, access to both preventive and necessary care should not be reduced. Healthcare research and technological improvements should continue to be encouraged."

However, Kass adds, corporate taxes and healthcare are "two separate issues and should not be conflated. They are both very important and need to be addressed."

In case you missed it… 

CNBC’s traditional, post-Berkshire Hathaway meeting interview with Buffett, Munger and Bill Gates yielded these key takeaways, according to Kass:

• Warren Buffett defended 3G Capital and Kraft Heinz in cutting unnecessary people to improve productivity and grow economy.
• Wells Fargo’s reputation has been hurt in the short run, but earnings power will not be hurt in the long run.
• Buffett is not currently buying Google and Amazon, but he is more likely to buy them than short them.
• The most important variable in determining market valuation is interest rates. The market is "dirt cheap" if interest rates remain at current levels for the next 10-20 years.