Philadelphia Reflections

The Nature of Ownership Relationships

It does seem appropriate to limit the actively managed portfolio of an HSA to health-related corporations, but it raises suspicions about motives. You want to stick with what you know, but you don't want to raise anti-trust concerns. There is a rather long history of medical organizations starting hospitals, drug stores and the like when there was no one else to do it. Eventually, however, competition did present itself along with arguments of conflict of interest, and rather forcefully. Since the purpose of this enlarged and actively managed portfolio would be to manage the shares rather than the business, it probably could be done if care were taken.

Furthermore, the range of businesses which would qualify as health-related is extremely varied. Over the past century, we have seen Medical Societies own malpractice insurance companies, medical journals, post-graduate educational tape recordings, health insurance companies, and hospitals and rehabilitation centers. Even more enticing are drug companies and medical device makers. Among all this variety could probably be found choices which avoid legal criticisms, but still serve the essential purpose of choosing superior investment vehicles. This is a vital central point, and we will return to it in later chapters. After all, members of almost any professional field would be likely to predict winners and losers in related industries with more accuracy than the public would, and therefore experience better performance in its choices. That would be particularly true when companies remain relatively small, unattractive to professional portfolio managers. And it's entirely different from buyer collusion to suppress producer prices of companies they control, but that distinction must be kept clear from the outset. Small companies grow, merge, and assume new characteristics over time, so a track record of selling profitable portfolio members who wander from original purposes, provides additional protection from this sort of suspicion.

At this early point of discussion, it should be recalled there is nothing magic about the level of interest rates, which in a general sense determine the returns of the stock market. Interest rates reflect the relative scarcity or abundance of money in the economy and are sometimes spoken of as the rental cost of money. Since governments control the supply of money, central banks tend to modify interest rates in order to stimulate or restrain the economy, as well as to reduce the cost of government borrowing. The consequence is a rather permanent inclination for interest rates to be held lower than they would be without government control, and a latent hostility of government to activities, such as this one, to derive a source of income from investment. The situation is further complicated by the increasingly important role of foreign governments, who sometimes make it difficult for the central bank to raise rates, even when it wants to. This oversimplification leads to the need for HSA managers to be measured by total return, not dividends, and common stock rather than bonds. Splendid returns can sometimes be produced at the time of reversals by doing otherwise, but can safely be shunned by maintaining a many-year horizon of complacency.

In all this potential complexity of starting an untried idea, it seems likely some laws must be changed. Not only must a selection be made of the most congenial legal environment (state or federal), but in the huge welter of existing regulation, it may well be the case that some existing law conflicts inadvertently, and a political argument must be made to adjust the blockade, or at least to make it clear no attempt was intended to circumvent the unintended awkwardness. We start with whether the various pieces of this approach might be combined into an umbrella corporation. The closest approach to such a corporation might be a whole-life insurance company, although we do not claim the similarity is perfect. It will require two chapters to cover this approach, one to examine the similarities, the other to devise solutions for the dissimilarities.

Originally published: Monday, June 27, 2016; most-recently modified: Friday, June 07, 2019