On Health Care Industry

Question: Opinion on the healthcare industry and its costs?

Buffett: We looked at healthcare costs, which were exploding a few years ago. Workman’s Comp costs have risen dramatically, and are huge for us. $6,000-$7,000 per employee. That’s in inflationary part of the US economy and we and our employees can’t control it.

Health costs will keep growing and we don’t have any answers. But Charlie runs a hospital, so maybe he’ll have some insights.

[CHARLIE MUNGER: The quality of the medical care delivered, including the pharmaceutical industry, has improved a lot. I don’t think it’s crazy for a rich country like the US to spend 15% of GDP on healthcare, and if it rose to 16-17%, it’s not a big worry.

But if other countries spend 7-8% [of GDP on healthcare] and have good systems, are we getting a good deal?

[CHARLIE MUNGER: We’re not on a dollar for dollar basis. But I’m not [troubled by how much we spend].]

Source: 2003 Berkshire Hathaway Annual Shareholders Meeting


[Re: The Pharmaceutical Industry]

That industry is in a state of flux right now. It’s historically earned very good returns on invested capital, but it could well be that the world will unfold differently in the future than in the past. I’m not sure I can give you a good answer on that.

[CHARLIE MUNGER: We just throw some decisions into the “too hard” file and go onto others.]

We get paid not for jumping over 7-foot bars but for finding 1-foot bars that we can step over.

Source: 2003 Berkshire Hathaway Annual Shareholders Meeting


[CHARLIE MUNGER: A lot of people have made a lot of money selling health insurance. I’ve seen it as Chairman of a central-city hospital [the Good Samaritan Hospital in Los Angeles]. You’re right that there have been a lot of bad ethics. A lot of good ethics, too.

Generally, [investing in the healthcare area] goes into the “too hard” pile – unless Warren’s been keeping something from me.]

No, we’ve never done anything in healthcare.

[CHARLIE MUNGER: You [the shareholder who asked the question] are right though – the worst of the ethics is really bad.]

Source: 2006 Berkshire Hathaway Annual Shareholders Meeting


[Re: fixing the U.S. Healthcare System]

Munger: It’s too tough. We can’t solve that one. We try to look for easy problems. We don’t try tough things. Sometimes life hands you a very tough problem you have to wrestle with – not financial problems for us, but personal ones.

If we were looking at a private-sector solution, we’d look for low distribution costs. You don’t want a lot of revenue soaked up in frictional costs, but I don’t know how to do that. If we’re paying 15% of GDP [for healthcare], you’d think someone would figure it out. Maybe this will come up in the upcoming presidential campaign.

Source: 2007 Berkshire Hathaway Annual Shareholders Meeting


[Re: Pharma? How do you value the pipeline of drug companies?]

WB: Unlike many businesses, when we invest in pharma, we don’t know the answer on the pipeline, and it’ll be a different pipeline 5 years from now anyway. We don’t know whether Pfizer or Merck, etc, have a better chance, or which of those will come out with a blockbuster. But we do feel we have a group of companies bought at a fair price that, overall, will do well and should offer chances for decent profits. These companies are doing very important things. I could not tell you the potential in the pipeline. A group approach makes sense. It is not the way we would go at banks. If you buy pharma at a reasonable multiple, you will probably do okay 5-10 years from now.

CHARLIE MUNGER: You now have a monopoly on our joint knowledge of pharmacology.

WB: He gets cranky at the end of the day. [laughter]

Source: 2008 Berkshire Hathaway Annual Shareholders Meeting