Warren Buffett's Muddled Understanding of Healthcare Costs

The Berkshire Hathaway annual meeting must be nearly upon us, as Warren Buffett spent three hours on CNBC this morning. Thanks to his close relationship with co-anchor Becky Quick, the Omaha-based asset manager spends a distressingly large amount of time on CNBC's programs nowadays.


If you are wondering what the term "halo effect" means, just tune into Buffett for 20 minutes or so. He is peppered with questions far outside the range of his asset management skills. And, looking at the nearby price chart of Berkshire and the S&P500 for the past 2 years, those skills are seen to have waned recently.

So we come to the CNBC co-anchors beseeching Buffett to share his vast font of health care knowledge with them, and their viewers.

Now, one thing you need to realize is that Buffett is not a stupid man. He knows he is a potential target of government, should he ever be seen as voicing outright disdain for or opposition to it.

Therefore, Buffett, I believe upon being advised Obama would win the 2008 presidential election, allied himself with the Democrat. Now, despite a year's worth of horrendous mismanagement as president, when asked how he views Obama's performance, Buffett is of course laudatory.

After all, he knows the value being out of the rifle scopes of a sitting administration and a Congress controlled by the same party.

Thus, Buffett then went on to declare his support for the current mess of a health care proposal, rather than have 'the status quo.'

But here's the problem. Buffett isn't viewing the current US health care situation correctly.

In a theme I'll continue in tomorrow's post, Buffett confuses choices about spending one's income, and quality of care, with total cost.

For example, Buffett made some incorrect statements about the quality of US healthcare, relative to other countries, then contrasted health care costs of decades past with those of today.

Unbelievably, Buffett never bothered to even make a glancing reference to the immensely superior level of medical care in the US today, versus the 1960s, nor the enormous increase in years of lives now made possible by more advanced, knowledgeable medical treatment.

At several points in the discussion, Buffett claimed to have no real knowledge of the sector, but then plunged ahead, again, tossing off wrong diagnoses and crying "crisis."

For example, in direct contrast to several Wall Street Journal editorialists with deeper backgrounds on the subject than Buffett, he blithely declared increased spending as essentially wasteful and a crushing burden on American competitiveness.

What Buffett ignored, but others have noted, is that greater discretionary spending on health care is a hallmark of wealthier society.

Here's one way to see Buffett's error.

Americans spend more time and money on leisure activities now than they did fifty years ago. And, given the relatively lower costs, in percentage terms, of various other household expenses, almost certainly more in percentage terms, as well.

Oh my God!

We have a leisure spending crisis! Fifty years ago, nobody spent money downloading music to iPods! Now, they do.

What will we do? American businesses must be shouldering the burden of all that digital entertainment expense, mustn't they?

Buffett confuses changes in discretionary spending with escalating costs for a controlled level of consumption.

Oil prices are higher now than they were fifty years ago, too. Isn't that another crisis? Shouldn't that be tackled by Congress?

The key flaw in Buffett's argument, much as Boone Pickens' over energy costs, is to pick one input to our economy, note the rise in its cost, and declare an emergency, while failing to observe the rise as at least partially attributable to consumer discretionary spending and business use to create even higher-value outputs.

Buffett is right in one respect, though. He doesn't understand the health care sector. And, thus, should probably just remain silent when questioned about it. In fact, that's probably a pretty good idea for him on anything outside a rather narrowly-defined scope of asset management questions.