Health Care Must Insure the Young to Make it Work, Miller Says

Alan Miller, chief executive officer of Universal Health Services, which is based in King of Prussia, Pennsylvania. But he is here with us in our Bloomberg eleven three oh studio. Thank you so much for joining us, Allen. Um. I want to start with your company, Universal Health. It shares her up almost eight so far this year. This doesn't really jibe with a lot of what we hear about the health care sector and how depressed it's been. What is your company doing? That has sort of led to

these Well, we're not. We've been in business for thirty eight years. UM, we've grown every year. UM. We UM are diversified, we are in acute care. We're in behavioral health. We're a leader in the nation and behavioral health, and we are international in the UK. We've been growing there, so it's a nice diversified mix. We've done well financially. UM. We are in fast growing markets. That's our strategy. UH. And we're reliable. People know the company. UM. We are conservative.

UM Our debt is less than FI many others are much much more leverage. So we've been doing this for a long time and I think people have become aware of us and they're comfortable that we're going to continue. Know we're gonna get to the political side of this in a minute, but I want to just touch on the situation for hospitals in general, acute care hospitals across the country. We've heard a lot about, UH, the vacancy rates in beds, the fact that reimbursements from medicated Medicare

have been challenging. UH. And I'm wondering, would you buy an acute care hospital right now? We do. We just built one. Yeah, we we just opened Henderson in Las Vegas. It is our sixth acute care hospital in Las Vegas. UM. It is doing very well. We opened two years ago we opened into Mecuela in southern California. It's doing very well. Oh yes, we we buy hospitals and we build hospitals. So what's this you here? Why do we hear so

much talk about the decline in hospitals. I don't understand that UM other than UM people are reflecting the fact that perhaps I'm sure UM Obamacare UM ensured twenty to million people who did not have insurance before, and so that has been very good for the hospitals because obviously when these people present themselves at a hospital, they have some sort of ability to pay where they may have not been able to do that in the past. So

that's certainly very positive if your patients can pay. And UM now with Obamacare in question because of the Republican parties saying that they would replace it, UH and their efforts have not been successful. At the first crack and UM without going through all of it, which I am very familiar with, UM, it did it did tend. It's complicated,

it did tend to UM reduce coverage. That's what the big A back was, and a lot of people, including many Republicans in Congress, said we can't stop coverage or withdraw coverage, um from all these people that needed everyone should have coverage. Have any Republican leaders reached out to you to ask you advice on how to reshape or fine tune? Well, yes, Um, I wrote a book a number of years ago, and a number of those things, um or a number of the suggestions in the book

are still applicable. One of them is selling across state lines. And you see that now, because that would get the insurance companies more competitive and they more of them would come into every market. So that makes a lot of sense. Um. I've always been very keen on tort reform because trial lawyers should not be uh involved in premiums of insurance and then needs to be a tort reform um on

a nationtional basis, state by state. It's happened, Just to be clear, this is in order to cap potential medical practice. Laws of them give some sense of the premiums for say, you know a neurosurgeon, it's something like a hundred thousand dollars a year or something to ensure yourself, right, it's something, it's something pretty pretty tremendous. It's it's it's it's outrageous only because of the trial lawyers and UM situations where there's no cap on pain and suffering. We're not talking

about UM people being reimbursed for care. We're talking about UM an outrageous situation in most cases where UM trial lawyers are are driving up insurance premiums. What about drug prices? There's been so much discussion about how high the cost is for pharmaceuticals. Do you feel like this issue is something that is overblown. Do you think that there are many savings that could come from some kind of agreement?

I think what should happen, Well, what could happen is let the federal government UM and negotiate with the farmer industry UM. We buy out of a cooperative and so we do negotiate UM on an industry wide basis UM based on volume. Other than that, I'm not an expert. On hold on a second, what what kind of cooperative is this? It's called Premier and we buy through it. Yeah. Absolutely, And a number of hospitals are involved. And it's just

a question of volume, which is basic business. If you have a lot of volume, the sellers are very interested in dealing with you. So how optimistic are you that there will be good changes? Made to Obamacare or a potential replacement to it. Well, I think that UM, the things I started to mention I did mention to you UM would be helpful. And the big thing is UM

getting younger people to have insurance. UM. This enables the insurance companies their actuaries to not only be looking at older people who are sicker, but having younger people in the mix makes the insurance more affordable. And they have not been able to UM the mandates were too small to push these people to have insurance. We must have the younger people insured in order to make the whole insurance thing work. Allen Miller, thank you so much for

joining us. Really is a wonderful to have you. Allen Miller is chief executive officer of Universal Health Services. It is based in King of Prussia, Pennsylvania, and it's a broad based, multifaceted company that owns behavioral health facilities, acute care hospitals, and ambulatory centers throughout the US, the UK, put RICO, and the Virgin Islands. Leverage in US stocks has risen to the highest level on record. How concerned

our investors about this. I am honored to bring in David Lebovits global market strategist for JP Morgan, who's here with us in our Bloomberg eleven three oh studio and David we were just chatting about how much UH margin debt has increased in US stocks. This to me indicates an incredible amount of complacency, just that people are willing to double down on their bets. How are you taking this? And does this sort of a raise some kind of

alarm to you? You know, I think that the biggest concern is what this means and what it tells us about investor sentiment. You know, our investors so excited about equities that they're willing to borrow money to pump even more into the stock market. And I think that it's it's it's reasonable to look at this and see the rate of change and see the levels that we're currently sitting at from a margin debt standpoint, and say, you know, has this market come too far too fast? And we

have And that's the and that's the question. You know, we have seen we have seen quite a rally here, but it's our view that the underlying economic fundamentals actually look pretty good. You know, this rally really began um or at least we started to see yields rise and and give some more confidence to the equity market, you know, back in the late summer of two thousands sixteen. So the economic data has been getting better for a while. You know, I think that the pullback we've seen here

in the market is probably justified. It's a little bit more of a backfill um as opposed to the beginning of something bigger. But what we're focused on is the upcoming earning season. You know. The question to our mind is are these companies making money? If the cash flows are there, if the earnings are there, I think stock prices can keep moving higher. If we see some weakness and earnings. I think that this thing is like margin debt, maybe maybe worth keeping an eye on. Well. I mean,

we are seeing some other cracks. I mean, because we were just talking about how that seems to be the consensus right now that the economy is in fairly good shape that you know, despite some clouds around the edges.

In general, things are chugging along. But we did see a pretty substantial decline in commercial and industrial loans on US bank balance sheets in a recent survey, and this raised some alarms that either banks were tightening up their lending criteria to such a degree that they're not allowing companies to get credit, or that there just isn't the demand, which suggests that the economy isn't growing that fast. How do you interpret this? You know, we think that it's

not as much a bank issue. UM. Lending standards have been pretty tight, and you know, the quality of borrowers the banks of looking for has been pretty elevated for the better part of this business cycle. UM. Actually, one thing that we've found is that when you look at capital expenditures and you look at CNI loans UM, the capital expenditure data actually tends to lead some of the CNIDADA.

So actually, what I think is going on here in terms of the decline in the lending data is and we went through this period from a two thousand fourteen to mid two thousand sixteen where manufacturing was under a tremendous amount of pressure because of lower commodity prices and a stronger dollar. I think we're just seeing some lagged effects of that and some of the pullback in investment that companies went through, and that's why we're seeing c ANY loans cool off a little bit here. We don't

necessarily think again, it's the beginning of something bigger. More, we think it's a reflection of what's actually happened in the past. You know, given the fact that what you're saying is so coherent with when and jibs so directly with what a lot of other people are saying, which is the economy is doing fairly well. Some of these warning signs are a little concerning, but they're not anything

that big. Uh. It seems like people are sort of pricing in the same scenario, which is sort of chugging along growth. Does this mean a that returns are going to be a lot lower because everybody is piling into the same trades and there isn't a lot of value to be found, or B that everybody's missing something and that the chance of of a substantial hiccup is getting greater. You know, I think that it's more the former than

the ladder. I think that return expectations for US assets in general, both stocks and bonds, have certainly come down here the couple of years. So our view is that over the next ten to fifteen years, US equities should return you about five and a half percent a year um, which is, you know, a couple percent below the the seven and eight percent bogies that have been thrown around previously.

But what I would say is just because there's not dwindling opportunity, perhaps less opportunity from a return standpoint in the US, we're thinking much more seriously about opportunities in Europe, opportunities and emerging markets, places outside of the US where the potential for elevated return seems to be a little bit greater than here in the States. So where are you looking in particular, So within emerging markets, we like the Asian economies more than the Latin American economies. We

like the manufacturers more than the commodity exporters. And then within Europe, you know, we're really focusing on the domestic recovery that's going on there. You have an unemployment rate which is backed down at the level where it was before the double dip back in two thousand twelve. You've capath city utilization which is up around its long term average. The p m I data, It is a survey, but the p m I data has been pretty solid there.

So we think that playing this domestic recovery, thinking about some of the consumer companies in Europe is a good way of going about that. How hard is it to invest in Asia given the questions around the quality of some of the economic data that you get out of there, It's it's difficult. You know. China in particular is kind of a kind of a black box. They say we have the six and a half percent growth target, and magically they seem to come very close to six and

a half. Well, did you read the art. I think it was black Rock using drones to look at factories in China to sort of assess growth in their own way. I have heard about the satellite images where people are counting the cars in the parking lot. You know, some of the things that we do is we look at, for example, the Taiwan import data from China rather than the China export data to Taiwan. So we try to

square that circle in a couple of different ways. But you know the benefit for investors is they're getting access to more information. They're finding themselves with new and different ways of building a picture around what's going on in emerging markets. So the data has been an issue. The data will continue to be somewhat of an issue, but I think we're moving in the right direction, and I think that investors are able to get a better sense

of the profitability of some of these companies. What's the biggest risk area right now in markets? So I think that there are a couple of risks right now. To me, the markets are standing on kind of two pillars. One of them is a political pillar and one of them is a nominal growth pillar. Now, the political pillar, you know, both in the US and abroad, is looking a little bit wobbly. We saw the UK, you know, begin their

Brexit negotiations the other day. Um, we've had some disappointments here in the US in terms of the pace of of policy reform relative to what some people were expecting. But the nominal growth pillars still looks okay. So I think one of the biggest risks is that the nominal data, that the activity data, starts to deteriorate. Because you know, we're we're investors, right We're trying to follow the cash flows.

We're trying to find the companies that are generating earnings, and if the economic data starts to deteriorate, that's a signal that it's going to be more difficult for these companies to generate profits going forward, and if we think back to the last time that happened again from mid fourteen to mid six team, right, the stock market didn't go anywhere. People always say to me, David, why didn't the stock market go anywhere from June fourteen until the

middle of two thousand and sixteen. And my answer is, well, because earnings weren't growing. So the biggest risk in my view, is that the activity data rolls over and that passes through and hinder's corporate profitability. All right, thank you so much for joining us. Really, what I'm speaking with you David Lebovitz. He is the global market strategist for JP Morgan Investment Management, and he joins us here in our

Bloomberg eleven three oh studio. Right now, I want to talk about a three day gathering that's happening in May that's going to be host it by Amazon and attended by executives from General Mills and Montalis, among others. Craig Giomana, who wrote this fantastic story, is here with us in our Bloomberg eleven three oh studio. Craig um this is a tremendously interesting story because it really highlights how Amazon is trying to take over the entire retailing sector. Can

you tell us a little bit about this three day meeting? Yes, So, I mean you're right, the Amazon is trying to take over everything. They're the everything store and kind of the one area that they haven't really cracked is food. You know, they only e commerce for groceries is only like one

point five percent of the market. Amazon has taken over everything else, and they're kind of looking at this really hard and comes We've come to find out that in May they're bringing you know, big companies sort of from the CpG world consumer package goods and household products out to Seattle to talk about logistics and supply chain stuff.

And they're basically trying to get General Mills and Montolis and these companies that make our food to think about a world where e commerce is primary, So put it in different boxes and package it in a way that we can ship it to actly to people. So this is Amazon really muscling in more to the grocery stores, turf and just to be clear, right now, food goes largely through Walmart, Target or Costco and then it could potentially be ordered on Amazon. Right, There's there's plenty of

delivery services that have popped up. I mean, I think in New York City that stuff is popular. But you gotta remember it's a big country out there, and like I said, one point five percent of the grocery market is online, So really we're talking about people still going to Kroger Albertson's safe way to shop for groceries. People don't buy food online at this point, but it's growing and it's clearly has gotten the attention of the general

mills is of the world. These guys are struggling for sales growth and they really can't ignore Amazon, and they're trying to figure out, you know, a world where, like everything else, people used to say, we're never going to buy shoes online, we have to try them on, or we're not going to buy books online. But that's where

we are with food. It's kind of the last frontier. Well, but to get a sense, I mean, because to your point you were saying, in this city it's pretty popular with Fresh Direct or even just other delivery services from grocery stores. It's more popular because people don't have cars. But in other places, I mean, what's the challenge for Amazon just with respected distribution of shipping fresh food, and and you know some organization like fresh Direct, how much

penetration have they gotten outside of cities. But the shortager is not much. Fresh Direct does well in New York City. There's something called Pepod, which is owned by the company that owns Stop and Shop. They've done okay, but it's

called the last mile. Basically, it's just incredibly expensive to run those trucks and to do it economically when you have one house on a block in the suburbs, to run a refrigerated truck out there, make sure the ice cream is cold, all the produce looks how the people wanted. The steak is what they want. Amazon has been trying this for years. Amazon has been going after fresh food for you know, a decade at least, and it just hasn't worked. So now they're really stepping up those efforts.

So is this do you expect that at this three day meeting part of the discussion will be how they can more efficiently transport these goods to people's houses other than to the stores. Yes, I mean, I think what we know about it is it's Amazon saying to these big companies, hey, let's come out and let's talk about a world where you're thinking not necessarily about the store first, but about selling stuff direct to consumers online. So the Cheerios box, think about that, that's set up to catch

your eye in a store. You know, years and years decades of people grocery shopping that way. That's how the box is designed. So Amazon is going to say, let's think about, we don't need this box like this necessarily, Let's put it in a box that we can take real quick and ship it out. So it's just them getting, you know, trying to get these companies to change their mindset a bit. So the Walmart targets and Costcoats of the world, they must be fighting back. They are right,

So Walmart. The big thing for Walmart is something called click and collect, where basically you're going to go online, order order your food, you drive up to the curb and they have it ready for you. Because Walmart wants to live in a world where you're still maybe going to go into that store. Plus, in a big part of the country, people are out on the weekends in their cars. Again, this is a bit of a sort of New York City San Francisco versus the rest of

the country thing. It's still convenient for people to pick up those groceries in their cars. So you know, Walmart is just desperate to get you into the store where you start grabbing other stuff. That's how they make their margins. Is this the first time Amazon has held a meeting like this that we know of? That we know of? And I mean again, it's very very small part of the business, and you know, grocery stores aren't going away

anytime soon. But I think why this is so interesting to everyone is that food is like the last thing that Amazon hasn't cracked. They've taken over electronics, clothes, books, all these other things, and now here they are coming hard for the food business and they've been unsuccessful to this point, but are clearly going after it. Craig Jamanna, thank you so much for coming in and talking with us.

Thank It's really a fascinating story. The last frontier for Amazon and maybe the last frontier for some of these big retailers that want to keep a corner on this market. Craig is a consumer reporter here at Bloomberg News, fresh off the plane from Hong Kong. Mark Gabay, CEO of Asia Pacific LaSalle Investment Management, is here with US in our Bloomberg eleven three oh studio, and I am so excited to speak with you Mark about what the flows are doing right now from Asia to the US with

respect to real estate. Uh. First, I want to start with these images that I'm sure a lot of people have seen, of these empty buildings that have been built in China with not enough people to fill them. Uh. This raises a lot of fear and expectation that the housing market in China is going to collapse. What do you tell your your clients in the U S who

are looking to invest in China and how concerned are they? Right? So, first of all, it's true there are a lot of empty buildings and mostly the secondary cities in China, not so much the primary cities like a Shanghai or Beijing, but some of the other secondary city So it is a concern. But overall, we tell people they have to understand in China that is a store of wealth for the retail market. So there's not a lot of options for retail investors where to put their money in China.

Bank deposit rates are low, they tend to put it in real estate and so when they buy these units, they're not really looking to rent them out, so they're actually quite comfortable leaving them empty, which is a typical compared to the US, but typical for their But how much of these purchases are being financed with leverage. It's not as highly levered as as the U S. So usually we would say mortgagees there in the fifty to

sixty percent range, maybe sev tops. So in Asia you tend to have a bank market for retail where more money is put down, so we don't believe it's leveraged, but we would say is it a good thing for the overall real estate market? No, it's not good because if if someone try to sell some of those units would be much harder to sell them on the secondary market. So where are U S investors flanning opportunities within Asian real estate right now? Well, that really depends on your

risk profile. If you're a high risk investor or a low risk investor. If you're a higher risk investor, then you are generally looking at the gateway cities and you're looking at commercial buildings that have good income profiles because fundamentally borrowing rates are quite low in the region and you can still generate good cap rates on your buildings and that's creating nice cash flow. So Tokyo, Sydney, soul um. And you know, one thing that we were also talking

about is is a flip side so UH. For a long time, China's Chinese investors are Since two thousand, Chinese investors have been studily increasing their investment UH in the US and in some of the big cities. And there's been a big question about whether we're gonna start seeing a pullback of that money and those investments due to capital controls UH in China as well as a less uh benevolent environment for them in the US. UM. What

have you seen? It will edb and flow. I don't think that will change, but I think the overall trend will be the same. They will continue to flow out and look to diversify its holdings. And there's just so much capital saved up in China across the board UH, and it is trying to get out for purposes of diversification. And real estate tends to be an asset class of the Chinese like to use again to hold you know, to store wealth, so they don't really look at it

so much as a cash flow asset. They look at it as as a way to to to save money and hold an asset over time. Although we have seen reports about a slowdown in Chinese investors or Asian investors generally in US property, there's a slowdown, but I think there's a lot of capital that's already outside of it, what we would characterize as Chinese capital that's already outside of China, and whether it's in Hong Kong or in Singapore and other cities, there's a fair amount of capital

that's out out there. So if there's a slowdown, I'd say it's temporary. UM. It's just the Chinese government trying to make sure the currency store stays in balance, and there's not dramatic capital flight, but that trends not going away. Well, I'd expect we'd see more Chinese capital coming out. So LESL Investment Management overseas about seven billion dollars real estate? Is that all in Asia? That the seven We are sixty billion globally with about twelve billion in securities and

forty eight billion in private. Of the forty eight billion of private, seven billion of it is in Asia. Okay, And so what have you invested in UM? Recently? We've been UM by quite a bit of office and UM logistics in in Tokyo. That's a favorite sector for US. Logistics in China is a favorite sector for US. Retail in Australia. What places have you been avoiding or sort of pulling back from? For US? Not really playing back, but i'd say avoiding. We're not really an emerging market investors,

so you don't see US investing in India. We don't invest in Vietnam, Philippines, Thailand. So we tend to stay in the developed markets because we think the risk return there is quite favorable. Do you think fears about China's economy exploding are overblown right now? We do you think it's overblown? I think the Chinese have demonstrated, uh, they're a command economy, which means they can control UM a

lot of what can be deemed as panic. I think they've done in a job controlling that in the last couple of years, and we expect they're going to continue to do it. So we don't think the hard landing scenario is really um the main scenario. There's still potential of that, but it's not We're not worried about it. Given that. Have you seen an increase in US investors

looking to invest in Asia. Uh, definitely. We would say over the last couple of years that trend line has probably been increasing ten to fifteen percent year a year over year years. So a couple of years ago, we would say that's about a twenty billion dollar kind of market in terms of investors come into to UH Asia.

Now it's it's in that billion dollar range, and recently we'd say there's much more European and US money coming into Asia, and I think it's about diversification fundamentally, and as far as Asian investors coming in, you're just saying real quick kind of similar to that. I mean, it's also a double digit growth rate. It's getting to be bigger, but as you pointed out, it's going to EBB and flow a little bit. But it's been a consistent uptake

year year over year. So I think what's happening is there's so much money saved in the world and it's looking to put it find a home someplace in real estates natural that big ball of money just rolling around the world. Thank you so much for joining us. Mark Goobey, CEO of Asia Pacific at LaSalle Investment Management, overseeing about seven billion dollars of assets real estate assets in Asia. Thanks for listening to the Bloomberg P and L podcast.

You can subscribe and listen to interviews at iTunes, SoundCloud, or whatever podcast platform you prefer. I'm Pim Fox. I'm out there on Twitter at pim Fox. I'm out there on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio