In 2010, Michael Lewis enriched our lives through the book, The Big Short, by explaining how a small group of individuals became extremely wealthy by short selling the US housing market. To make everyones’ Christmas more special, Hollywood decided to further the enrichment process by having holiday movie goers relive the financial crisis by releasing the The Big Short in movie form. Being a glutton for punishment, I decided to revisit the devastation.
As I sat in the darkness of the movie theater enjoying the “spin” Hollywood put on the book, I thought about where we are in the turbulent healthcare environment. The movie made me wonder where’s healthcare’s “ground zero.” For those not familiar with The Big Short, Lewis traces the “thinking” of how shorting the housing market went back to a physician, Michael Burry. In simplified form, Dr. Burry discovered trends that were contributing to a dramatically changing housing market and as a result also causing an equally volatile mortgage environment. Dr. Burry was able to use his knowledge of complex financial instruments to figure out how to effectively “short” the housing market.
This started me thinking about all the changes going on in healthcare. Ironically, there are some parallels between housing and healthcare. Owning a home was the American Dream. Healthcare is being treated more and more as a right of each American through Obamacare, Medicare and Medicaid. Financial support for both homeownership and healthcare is now becoming a larger focus of government. Both industries are comprised of very complex infrastructures. Just like in youth soccer where the majority of focus of both industries is/was on the present location of the ball and not where the ball is/was going. Conventional thinking gets caught up in the day to day issues and largely ignores future developing issues. Large economic benefits were/are accruing to the incumbents.
Wall Street had been involved in subprime lending for a long-time prior to 2000. Dr. Burry, a less experienced financial investor, began to notice an over whelming growth in subprime lending beginning in 2004. Through further investigation and observation, he concluded an investment opportunity was developing. This led him to his interest in figuring out how to “short” mortgage related bonds. Through studying and research he found a tool, the “credit default swap.” When Burry started his process, there was no market for credit default swaps on subprime mortgages. Within in three years, it became a trillion dollar market. What is so striking to us is the 20/20 clarity of hindsight that’s represented in books like The Big Short. When writers look back on whatever company or story they’re telling, the foresight of some and the stupidity of others is shocking.
Part of what brought about the real estate crisis was the simple fact that lower/middle class Americans couldn’t pay their mortgages. At this point, any similarities to this same group having trouble paying their healthcare bills is coincidental (or is it?). We can’t help but wonder “what if?” Are high-deductible medical insurance products the subprime mortgage equivalent? Is Obamacare the governmental equivalent of Fannie Mae and Freddie Mac? There are many documented stories relating healthcare costs and financial challenges facing the auto industry as far back as 1984 when Lee Iacocca was running Chrysler. So we wonder if we have actually seen the warning signals related to the cost of healthcare on American business and the American public and chosen to ignore them? We recently saw in the current Federal budget package that corporate America lobbied for and was successful in getting included a two year deferral on the “Cadillac tax” on medical benefits. In our local Dallas-Fort Worth market, we recently noticed First Choice Emergency Room, a freestanding emergency room system, advertising that they were now accepting all insurance companies. This seemed counter-intuitive to us that insurance companies would now be contracting with what is known to be “high cost” service providers. Or has something changed? The healthcare marketplace is filled with “new” providers and initiatives. Most recently the Dallas Morning News ran an article, “The new health care: Hospitals want to keep you out of hospitals.” Needless to say, as a former healthcare CFO, I found this article to be a bit disingenuous. For one, population health management the last time we checked doesn’t pay anywhere close to what cardiac or orthopedic surgeries pay. Secondly, the success of population health management is still pretty questionable. However, it certainly makes for good headlines.
So now we’re wondering where is ground zero for the healthcare transformation. For doubters we look at the business environment of just the past 50 years and see numerous examples of “Davids” coming out of nowhere to topple Goliath. If one was interested in the beginnings of the tablet, smartphone or portable media players, Apple in Cupertino, California should be one of the locations to visit. If one was looking for a highly successful commercial airlines company, Southwest Airlines in Dallas, Texas would certainly be on the list. If one were interested in the retailing revolution, Walmart in Bentonville, Arkansas would be on the trip list. We could go on but we think you get our point. One of the compelling aspects of The Big Short, is the relatively compact timeframe in which things occur. From when the opportunity to short the housing market was discovered and investments made, generating the gains was about a 3-4 year window. Other than those actually making the investments, we don’t believe anyone would have predicted the magnitude of financial distress that occurred could happen in this short time period. We believe somewhere an organization exists that’s going to be the one to similarily transform healthcare. When the healthcare transformation story is written in hindsight, this organization will be at ground zero.
What we don’t know is how long is the gestation period? Are we looking at decades or months? Are there environmental predictors that will make an organization’s development more successful? If so, what are they? Steve Jobs, Herb Kelleher and Sam Walton all had pretty unique views of their business environments and were pretty contrarian business leaders compared to their contemporaries. Is it possible to identify the “leader” that will be the one? Are there triggering events that would be a tip-off to something new evolving? Are other organizations watching the horizon for the “disrupter.”
We have come to the conclusion someone always knows or is experiencing the benefits of a “transformational” business/company/organization that ultimately becomes the industry leader. The trick is in discovery. For example, I was living in Phoenix in the early 80’s and traveling for work to Albuquerque, New Mexico. There were probably about 5 or 6 airlines that flew between Phoenix and Albuquerque and the fares were all around $300 to $400 roundtrip. An upstart airlines out of Texas started flying to Albuquerque by the name of Southwest and soon was flying from Albuquerque to Phoenix at roundtrip airfares less than $100. This is an example of personal discovery!!!!! So we know what it looks and feels like.
Here’s another interesting lesson from The Big Short and useful in our search for our transformative company. The main characters in the story mostly worked for themselves or for small investment firms. John Paulson, not a main character in The Big Short story but, is an equally important person in the overall financial crisis story because like the others he made an extraordinarily large sum of money by shorting the housing market. He made about $20 billion for his firm, Paulson & Co. Innovative and entrepreneurial individuals don’t last long in large, established organizations. Large, established organizations aren’t looking for transformative innovation. Predictable earnings, predictable budgets are necessary in established organizations; predictable is the definition of success, not transformation. Therefore, we’re very doubtful the transformative organization we’re looking for is one of the large established incumbent healthcare organizations of today.
We are sending out this blog as our request for help. We’re asking our readership to help us find the “one”. We have all seen many organizations emerge in our lifetimes that have displaced former household names that were industry leaders. The financial crisis eliminated two investment banks, Lehman Brothers and Bear Stearns, which had never happened before in the history of Wall Street. Without governmental intervention the list most likely would have been much larger followed by a list of “new” investment banks. We believe consumers will know what “new” healthcare looks and feels like when they see it. Please send us names of organizations that you think are on their way.