• Jeff Matthews

The Audacity of Extortion

“The only nonnegotiable principle here is success. Everything else is negotiable.” —Rahm Emanuel, The New York Times, June 7, 2009 The CBO said Wednesday that the Senate Finance Committee’s health bill would cost $829 billion over a decade and reduce the federal budget deficit by $81 billion over that period. That helped dispel concerns among moderate Democrats, and committee leaders set a vote on the bill for Tuesday. “This resolves one of the big unknowns,” said Sen. Evan Bayh. “It does create momentum.”

–The Wall Street Journal, October 9, 2009

Well the impending train wreck that is national healthcare so-called-reform looks to be pulling out of the station shortly: it has, we are told, “momentum.”

Not “logic,” or “rationality,” or “elegance,” or “demonstrable worth.”

It has “momentum.”

Now, momentum is a fine and wonderful thing when it is applied to something good—like, say, an upturn in the business cycle.

Business cycles start, always, as a rally in credit markets—i.e. cheap money. The availability of such cheap money then spreads from Wall Street to Main Street, encouraging spending for goods and services, which, in turn encourages new production…which creates rising employment, higher demand, and even higher employment.

That’s good “momentum.”

Momentum is not so fine or wonderful, however, when it is applied to something bad, like a downturn in the business cycle.

Lower spending causes production cuts and layoffs, which leads to lower spending which results in further layoffs, etc.

That’s bad “momentum.”

Momentum, in and of itself, is therefore absolutely meaningless: what matters are the facts of the case to which the term is applied.

And in this case, the facts of the so-called healthcare reform plan recently drafted by the Senator Finance Committee are this: it is in no way, shape, or form, “reform.”

It is, rather, a crude political construct fostered by extortion, to the benefit of both the politicians who can claim victory while accomplishing nothing good for taxpayers, and the special interests who will never claim victory in public but will sleep easy at night knowing they have, in fact, accomplished a great deal of good for themselves.

Lest we be accused of pointing political fingers—our interests are strictly mercenary, what with running a hedge fund and all—let us look at what, exactly, constitute the facts of this $829 billion bill, recently blessed by the Congressional Budget Office as a reform vehicle and deficit reducer. Big picture, the Senate bill will, we are told, insure an additional 29 million “nonelderly” Americans ten years from now, thus raising the percentage of insured Americans from 83% to 94% in 10 years. (For you home-gamers, that’s a cost of $28,586 a person over 10 years, or $2,859 a year.)

We are also told that the plan will still leave 25 million Americans without insurance in 2019.

That’s right: according to the Bill itself, there will be 29 million Americans newly insured, and 25 million Americans still using hospital emergency rooms as their primary form of healthcare, in 2019.

How it is that the insuring of 29 million individuals at a cost of $829 billion, while leaving 25 million out in the cold, amounts to “reform,” we here at NotMakingThisUp don’t have a clue.

But we’ll leave the labels for others to defend or decry while we look at how this Clearly Non-Universal Healthcare Plan gets paid for.

The first way it gets paid for is this: Americans will be required to have health insurance, and if they don’t get it, they’ll pay a penalty of up to $750 a year. (It’s just like a tax, only it’s not called a tax, because the plan is not supposed to raise taxes. Go figure.)

So the government, as we pointed out above, will spend $2,859 a year per person for ten years to insure 29 million people, but will only fine/tax an uninsured person $750. Furthermore, there are exemptions to the fine/tax based on income levels and “hardship situations.”

The second major revenue source will be stiff new taxes on “Cadillac” insurance plans—so long as they aren’t in the name of a union member.

You can see the wheels coming off the track even before the train has left the station!

Now, how does the Senate bill make up the obvious funding gap?

Well, it assumes cost cuts. In particular, the bill postulates that Medicare will stiff doctors by slashing payments 25%…even though this will never happen.

Medicare cuts to docs get proposed every year, and every time they come up in Congress, they get blocked—as they will be blocked this year, too. Nevertheless, the Congressional Budget Office analysis which gave this Senate bill “momentum” assumes the Medicare cuts will happen. All in all, the CBO report is about as meaningful as one of those 50 page company reports produced by Wall Street’s Finest, in which the target price of that company’s shares happens to amount to a few dollars above the current share price, as it always does.

Which is to say, the CBO report is not meaningful at all. Garbage in, garbage out, as we say on Wall Street.

Still, you may ask—as did Marlon Brando in “The Godfather”—how did things ever get this far?

How did an obvious farce of a bill, which doesn’t do the two things that it’s supposed to do—i.e. “reform” healthcare and provide “universal” coverage—get through the most influential Senate panel with what Washington calls “momentum”?

Simple: it was paid for by the very same special interests that all politicians promise to banish from the decision-making process when they arrive in Washington: Big Pharma, Big Hospitals, and Big Ambulance Chasers, to name just a few.

Let’s start with Big Pharma, which was the first special interest to buy off the White House, when it negotiated—directly inside that White House—an $80 billion maximum cut in drug prices over ten years.

$80 billion may sound like a lot of money, but it is not: $80 billion amounts to all of two years’ worth of Pfizer’s gross profits.

And that is a pittance when compared to the benefit Pfizer and the rest of Big Pharma will see under Healthcare So-Called Reform. After all, those extra 29 million newly insured American lives will mean more 29 million more mouths to swallow billions of extra pills every year.

Gosh, if each one of those 29 million newly insured mouths spends just $275.80 a year on pills from Big Pharma (less than the cost of a year’s worth of generic Lipitor), that’ll be $80 billion extra cash going to Big Pharma right there.

Not even George Bush would have tried to call this healthcare “reform” with a straight face.

How, you may ask, did such a thing happen under Barack Obama?

Not being politically inclined—we’re in business to make money, whoever happens to run the place—we think all signs point to Rahm Emanuel, the President’s Chief of Staff.

He is, after all, the same Rahm Emanuel who in June told the New York Times: “The only nonnegotiable principle here is success. Everything else is negotiable.”

Even, apparently, Obama’s populist principles.

Whatever the reason—and for the purpose of full disclosure—we have purchased shares of Big Pharma precisely because Obama’s “reform” should make that business better than anything George Bush could have envisioned in his wildest dreams.

Next up in the White House extortion caper was Big Hospital, which pledged $155 billion in cost savings in return for avoiding onerous cuts elsewhere.

Medical device makers, on the other hand, were apparently asleep at the switch during the negotiations. While Big Pharma and Big Hospital were promising a combined $235 billion to push the reform ax out of their way, the medical device companies were being targeted for $4 billion in cost cuts by the Senate Finance Committee.

(Don’t expect this cut to stand, however: it seems that the erstwhile populist Senators Al Franken and John Kerry—whose states are loaded with medical device makers and their employees—are now squawking at this particular aspect of healthcare “reform.”)

Big Labor, naturally, never needed to negotiate with the White House, thanks to its pre-election payoffs to the Obama campaign. Despite the Senate bill’s plan to impose stiff taxes on “Cadillac” healthcare plans, union jobs will be exempt, which is fortunate for Big Labor, since its members frequently get “Cadillac” healthcare coverage.

All in all, the so-called “healthcare reform” plan looks to have been put together by and for special interests, without a single actual “reform” in the bill—tort reform being the most obvious missing ingredient, for the obvious reason that Big Ambulance Chasers were on board Team Obama from Day One.

Say what you like about healthcare reform—say that it is necessary, or it is unnecessary; say that it is just another government program bound to fail, or that it is an important government duty to pick up where the private sector has failed; say that it is a manufactured crisis or that it is the most serious political issue of our time—but you can’t say this bill is rational, well-considered, and logical.

It is political, it is pay-for-play, and it is not reform. Indeed, it is Chicago politics at the National level.

How did our most populist modern President since Jimmy Carter come to allow such a state of affairs?

Well, apparently, everything—even principle—is negotiable.

Still, we leave the political name-calling for others who care about such stuff. Our business is to make money.

And unless something goes terribly wrong in subsequent legislative maneuvering, we think so-called “healthcare reform” provides the best opportunity for profitable investment in Big Pharma in decades.

The “Audacity of Hope”? Not that we can see. More like, the Audacity of Extortion.

Jeff Matthews I Am Not Making This Up © 2009 NotMakingThisUp, LLC The content contained in this blog represents only the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

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The content contained in this blog represents only the opinions of Mr. Matthews. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. The content herein is intended solely for the entertainment of the reader, and the author.

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