Warren Buffett: Health care is a "tape worm" for the U.S.

By Michael Douglass

When Warren Buffett was asked Saturday about the American Health Care Act (AHCA), taxes seemed the likely topic of discussion. After all, President Donald Trump has signaled that the AHCA is the first salvo in a broader tax strategy designed to make American businesses more competitive. (And Warren Buffett has never been shy about tax policy.)

But Buffett didn't go there.

In fact, Buffett claimed at Berkshire Hathaway's (BRK-A, BRK-B) annual shareholders meeting that other corporate leaders who complain about tax rates know the real issue is health care. He even went so far as to call medical costs "the tapeworm of American economic competitiveness."

That's a bold statement, but the research backs him up.

According to Buffett and his business partner Charlie Munger, health care spending in the U.S. (and around the world) was around 5 percent of GDP in the 1960s but ramped up faster in the U.S., with health care spending here now totaling around 17 percent of annual GDP versus low double digits worldwide. This means, according to Buffett, "[other countries] have gained a five- or six-point advantage over us" in health care spending today.

They were a little off in the particulars, but on the overall issue, they're spot-on. According to the Centers for Medicare & Medicaid Services, health care spending grew from 5 percent of GDP in 1960 to 17.8 percent in 2015. And according to the World Bank, the U.S. spent 17.1 percent of GDP on health care in 2014, while the overall worldwide average was 9.9 percent.

That's a lot of extra cost here in the U.S. -- over a trillion dollars in incremental health care spending due to that extra 7 percent of GDP we're spending compared to the rest of the world.

American businesses, which provided insurance for 49 percent of the American population in 2015 according to the Kaiser Family Foundation, are suffering from this rapid growth.

According to the National Federation of Independent Business's (NFIB) 2016 survey of small-business priorities and problems, the cost of health insurance is "the most severe" problem facing American small businesses today, and 52 percent of small-business owners identified it as a "critical" issue. And like the growth in health care costs, this has been a long-standing issue: NFIB noted that health care costs have been the most severe issue cited by small businesses for the past 30 years running.

Buffett and Munger are good at quickly identifying a problem and its components. Right after Buffett cited the "five- or six-point advantage" other countries had in health care spending over U.S. companies, Munger bluntly noted: "That's because of socialized medicine."

Later, Munger further explained that costs "put our manufacturers at a big disadvantage to other people where the government pays."

Keep in mind, these two have made a career out of identifying companies with competitive advantages and buying them before other investors catch on.

The European experience confirms their accuracy.

For example, drug prices are substantially lower in the European Union than in the U.S., largely as a result of single-payer systems that aggressively negotiate on price before they allow drugs to be sold to their citizens. Pharma companies risk rejection of their drugs if they fail to offer sufficiently generous discounts, and the difference in drug prices is obvious.

The traditional American fee-for-service model, wherein hospitals were paid for every test and procedure they provide instead of whether they actually help patients get better, is also a major culprit. The profit incentives in such a private system can have structural inefficiencies based on the competing priorities of insurers, hospitals, pharma companies, patients and the government.

Buffett and Munger have identified health care as the biggest issue facing American businesses. If they're correct, the U.S. has a tremendous economic opportunity.

This article was originally published on Motley Fool.

Michael Douglass owns shares of Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.