Quick Take on "Abusive Capitalism"

An American Healthcare Story from Adam Smith to Simon Sinek

In an age where Adam Smith's vision of consumer-centered capitalism seems as archaic as handwritten letters, the American Healthcare Delivery System stands as a monument to modern-day distortions.  Smith, with his quaint beliefs in the invisible hand guiding markets to serve the consumer, would be aghast at today's healthcare landscape, a freakish carnival of private equity puppeteers, an oligopoly of four insurers juggling policyholders like hot potatoes, and Pharmacy Benefit Managers (PBMs) concocting inscrutable alchemies to squeeze out profits.

The stage is further crowded with hospital conglomerates, swollen like ancient city-states, all under the watchful eyes of Wall Street’s insatiable maw, ravenous for the quick wins of short-term stock gains.  Here lies the perversion of Smith's capitalism: a system where consumer well-being is the afterthought in a grandiose scheme orchestrated for the endless feast of shareholder greed, with EBITDA as their mantra and healthcare as the sacrificial lamb. This, indeed, is the tableau of American healthcare: a system contorted beyond recognition, where the health of the market far outweighs the health of the patient. 

As I prepare for my new position at The Mahoney Group, I’m reading Simon Sinek's The Infinite Game. It is fantastic. Below are a few excerpts from Chapter 5.

He nails healthcare. 

How about your industry? 

I could not be prouder to have transitioned to a small, agile, employee-owned company that will lock arms with me in this fight. 

The eighteenth-century Scottish philosopher and economist [Adam Smith] is widely accepted as the father of economics and modern capitalism. ‘Consumption,’ he wrote in The Wealth of Nations, ‘is the sole end and purpose of all production and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer.’ He went on to explain, ‘The maxim is so perfectly self-evident, that it would be absurd to attempt to prove it.’ Put simply, the company’s interests should always be secondary to the interest of the consumer (ironically, a point Smith believed so ‘self-evident,’ he felt it was absurd to try to prove it, and yet here I am writing a whole book about it).

Smith, however, was not blind to our finite predilections. He recognized that ‘in the mercantile system the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production, and not consumption, as the ultimate end and object of all industry and commerce.’ In a nutshell, Smith accepted that it was human nature for people to act to advance their own interests. He called our propensity for self-interest the “invisible hand.’ He went on to theorize that because the invisible hand was a universal truth (because of our selfish motivations we all want to build strong companies), it ultimately benefits the consumer. ‘It is not from the benevolence of the butcher, the brewer, or the baker that we can expect our dinner, but from their regard to their own interest,’ he explained. The butcher has a selfish desire to offer the best cuts of meat without regard for the brewer or the baker. And the brewer wants to make the best beer, regardless of what meat or bread is available on the market. And the baker wants to make the tastiest loaves without any consideration for what we may put on our sandwiches. The result, Smith believed, is that we, the consumers, get the best of everything . . . at least we do if the system is balanced. However, Smith did not consider a time in which the selfishness of outside investors and an analyst community would put that system completely out of balance. He did not anticipate that an entire group of self-interested outsiders would exert massive pressure on the baker to cut costs and use cheaper ingredients in order to maximize the investors’ gains. …

Capitalism Abuse

The finite-minded form of capitalism that exists today bears little resemblance to the more infinite-minded form that inspired America’s founders (Thomas Jefferson owned all three volumes of Smith’s Wealth of Nations) and served as the bedrock for the growth of the American nation. Capitalism today is, in name only, the capitalism that Adam Smith envisioned over 200 years ago. And it looks nothing like the capitalism practiced by companies like Ford, Kodak and Sears in the late 19th and early 20th centuries, before they too fell prey to finite thinking and lost their way. What many leaders in business practice these days is more of an abuse of capitalism, or ‘capitalism abuse.’ Like in the case of alcohol abuse, ‘abuse’ is defined as improper use of something. To use something for a reason other than that for which it was intended. And if capitalism was intended to benefit the consumer and the leaders of companies were to be the stewards of something greater than themselves, they are not using it that way today.’ …

‘The constant abuse since the late 1970s has left us with a form of capitalism that is now, in fact, broken. It is a kind of bastardized capitalism that is organized to advance the interests of a few people who abuse the system for personal gain, which has done little to advance the true benefits of capitalism as a philosophy (as evidenced by anticapitalist and protectionist movements around the globe). Indeed, the entire philosophy of shareholder primacy and Friedman’s definition of the purpose of business was promoted by investors themselves as a way to incentivize executives to prioritize and protect their finite interests above all else.’ …

It doesn’t take an MBA to understand why. As Dr. Stout explains in her book, The Shareholder Value Myth, ‘If 80 percent of the CEO’s pay is based on what the share price is going to do next year, he or she is going to do their best to make sure that share price goes up, even if the consequences might be harmful to employees, to customers, to society, to the environment or even to the corporation itself in the long-term.’ When we tie pay packages directly to stock price, it promotes practices like closing factories, keeping wages down, implementing extreme cost cutting and conducting annual rounds of layoffs—tactics that might boost the stock price in the near term, but often do damage to an organization’s ability to survive and thrive in the Infinite Game. Buybacks are another often legitimate practice that has been abused by public company executives seeking to prop up their share price. By buying back its own shares, based on the laws of supply and demand, they temporarily increase demand for their stock, which temporarily drives up the price (which temporarily makes the executives look good).