By William LAZONICK and Öner TULUM
SUMMARY
The US healthcare system is under attack. Of course, for more than a decade, Congressional Republicans have been threatening to put an end to Obamacare, but they have never proposed a plan to put in its place. A far more damaging attack has been mounted by powerful shareholders, both public and private, who, going back to the 1980s, have been extracting far more value from the business corporations that deliver healthcare goods and services than these shareholders have contributed to value creation in these companies. We call this extraction-creation imbalance “predatory value extraction” (PVE).
We identify the perpetrators as “public equity” and “private equity” to distinguish between the (typically legal) looting of healthcare corporations that are publicly traded on the stock market and those that are not traded on the stock market and hence deemed to be “private.” For public equity the main tool of PVE takes the form of open-market share repurchases—aka stock buybacks—while for private equity it takes the form of dividend recapitalizations, although in both cases the toolbox contains many other value-extracting devices as well.
There is nothing wrong per se with extracting value. The delivery of high-quality healthcare depends on paying those employees who deliver healthcare goods and services wages and benefits that balance the value that they contribute through their work with value that they extract as incomes. With a healthcare system that provides high-quality goods and services in place, government policy can then consider ways of making healthcare affordable to the US population. A system of healthcare delivery that achieves a creation-extraction balance would provide healthcare that is not only much higher-quality but, on a per capita basis, much lower cost than the system that currently prevails in the United States.
The purpose of this essay is to shine a bright light on PVE in the US healthcare system so that more resources will be devoted to systematically researching the problem and informing government policy makers, business executives, and concerned Americans what they can do about it. The problem of PVE is by no means limited to corporations in the US healthcare sector. Since the 1980s, when US business executives began to embrace a new, but deeply flawed, ideology that, for the sake of economic efficiency, a company should be run to “maximize shareholder value,” PVE has become increasingly pervasive in the US corporate economy.2 By virtue of the centrality of healthcare to the wellbeing of the population, however, it is a sector in which the damage done by PVE is most apparent and its eradication most urgent. With the evidence that we present in this report, we hope to convey how PVE by public equity and private equity are operating, at times in tandem, to subvert the delivery of high-quality, low-cost healthcare in the United States.
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