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Exxon Reports Record, Blowout Earnings; Stock Soars To All-Time High

Exxon Reports Record, Blowout Earnings; Stock Soars To All-Time High

The worse the tech wreck, the more the fuel – so to speak – for energy…

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Exxon Reports Record, Blowout Earnings; Stock Soars To All-Time High

The worse the tech wreck, the more the fuel - so to speak - for energy gains, and following what has been the worst quarter for megacap tech names, most of which have tumbled double digits following dismal earnings, it is hardly a surprise that the two largest US energy majors just had blowout quarters, with Exxon posting its strongest quarterly result in the company’s 152-year history including its highest ever net income, while #2 Chevron reported its second-largest profit; the two companies amassed more than $30 billion in combined net income as Democrats blast Big Oil for raking in massive profits but since a red avalanche is coming to Congress in less than two weeks, we doubt anyone cares what Democrats think.

We'll leave the analysis of Chevron to someone else, like Warren Buffet for example, and focus instead on the one stock we have been recommending ever since the summer of 2020 when it traded below $40 and when the megabrains at S&P Global decided to kick it out of the Dow Jones (it is up 170% since then).

Exxon Mobil, the company that now represents all that is wrong with the admin's ESG policies and the world's Green agenda, smashed expectations as soaring energy prices fuelled a record-breaking quarterly profit, nearly matching that of tech giant Apple.

Its $19.66 billion third-quarter net profit far exceeded recently raised Wall Street forecasts as sky-rocketing natural gas and high oil prices put its earnings within reach of Apple's $20.7 billion net for the same period. As recently as 2013, Exxon ranked as the largest publicly traded U.S. company by market value - a position now held by Apple. XOM's market cap is $450BN today while AAPL is $2.3 trillion, so XOM would need to rise just 5x from here - a stock price of $550 - to catch up to AAPL.

The top US oil producer also reported per share profit of $4.68, exceeding Wall Street's $3.89 consensus view, on a huge jump in natural gas earnings, continued high oil prices and strong fuel sales.

"Our investments over the past five years, including through the lows of the pandemic, are really driving our results today," Chief Financial Officer Kathryn Mikells told Reuters.

Some more details from the company's blowout, record quarter:

  • Total revenues & other income $112.07 billion, +52% y/y, blowing away estimates of $103.14 billion
  • EPS $4.68 vs. $1.58 y/y, blowing away estimates of $3.89
    • Upstream adjusted net income $11.84 billion, estimate $11.69 billion
    • Energy products adjusted net income $5.54 billion, estimate $3.39 billion
    • Chemical products adjusted net income $812 million, estimate $791.9 million
    • Specialty products adjusted net income $762 million, estimate $750.5 million
  • Chemical prime product sales 4,680 kt, -2.8% y/y
  • Production 3,716 KOEBD, +1.4% y/y
  • Crude oil, NGL, bitumen and synthetic oil production 2,389 KBD, +3.3% y/y
  • Natural gas production 7,963 MCFD, -1.8% y/y
  • Refinery throughput 4,165 KBD, +2.8% y/y

Exxon, which led record gains by the five producers known as oil majors in the prior quarter, pulled far ahead of peers Shell and TotalEnergies with third-quarter profits almost twice as big. Its gains were aided by its highly criticized decision to double down on fossil fuels as European competitors shifted to renewables. The company has banked a record $43 billion in the first nine months of this year, 19% more than in the same period of 2008, when oil prices traded at a record level of $140 per barrel.

Some more highlights from the quarter:

  • Achieved best-ever quarterly refining throughput in North America and highest globally since 2008
  • Strong quarterly oil and gas production; ~50 Koebd increase
    •  Record in the Permian Basin
    •  Guyana grew to ~360 Kbd
    •  First LNG production was achieved from Mozambique’s Coral South FLNG development in October
  • Asset sales delivered $2.7 billion in cash proceeds in the quarter, bringing the yearto2 date proceeds to ~$4 billion
  • Still sees capital expenditure $21 billion to $24 billion, estimate $17.77 billion

The company spent $5.73 billion on new oil and gas projects last quarter, up 24% from a year ago, and remains on track to hit an investment target of $21 billion to $24 billion this year.

Rising profits have renewed calls by U.S. President Joe Biden for companies to invest the windfall profits from this year's energy price runup in production rather than buy back their own shares.

Exxon also said it will maintain its $30 billion share buyback program through 2023 while increasing dividends. On Friday, it declared a fourth-quarter per share dividend of 91 cents, up 3 cents, and will pay $15 billion to shareholders this year.

Unlike the megacap tech giants which are spending like drunken sailors hoping the Fed will the zero-cost funding flowing forever, and their stocks are collapsing as a result, Exxon said that Q3 earnings growth was driven not only by higher refining throughput but also "cost control, which more than offset margin declines." Yes, it can be done, if only management is competent and qualfied!

Some more commentary and context from the quarter:

  • Declared 4Q Div of $0.91/Shr, up 3c from $0.88; Paying Out $15B in Div Aggregate for Year
  • On Track With Year Guidance of $21B to $24B for Capex
  • On Track to Exceed $9B in Annual Savings by 2023
  • Sees 4Q Corporate, Financing Expenses to Be ~$500M
  • 4Q Upstream, Sees Higher Volumes With Growth in Permian
  • Qtr incl favorable identified items of nearly $1 billion associated with completion of XTO Energy Canada and Romania Upstream affiliate divestments and one-time benefits from tax and other reserve adjustments, partly offset by impairments
  • Upstream Gas realizations increased 22% on European supply concerns and efforts to build inventory ahead of winter, more than offsetting the impact of decreasing crude realizations, which were down 12% on modest supply increases
  • “Rigorous cost control and growth of higher-margin petroleum and chemical products also contributed to earnings and cash flow growth in the quarter.”

Exxon said its oil and gas production from the Permian Basin is near 560,000 barrels of oil equivalent per day (boed), a record. That is up 11% or 50,000 barrels per day from a year ago. Results were helped by an almost 100,000 boed increase over the previous quarter in Guyana, where Exxon leads a consortium responsible for all output in the South American nation.

But output was hit by its withdrawal from Russia, where it abandoned more than $4 billion in assets and a 220,000 boed project following Moscow's invasion of Ukraine. Exxon said its assets were expropriated. As a result, the company reduced its production forecast for the year by about 100,000 barrels per day.

"We are going to end up at about 3.7 million barrels a day for the full year," Mikells said, down from a 3.8 million goal set in February.

Despite that, Exxon's cash flow bridge was a chart of beauty: the company generated $22BN in cash flow in Q3,  and after paying down $1.2BN in debt and $8.2BN in shareholder distributions as well as $1.1BN in other spending, it was left with a whopping $30.5BN in cash on hand, a far cry from the near-insolvency the company found itself in in the aftermath of the Covid crash.

Not surprisingly, the company's outlook was solid, expecting strong Permian volume and growth, while warning of "slightly higher turnarounds and planned maintenance" across energy, chemical and specialty products.

Besides stellar earnings, the company did not walk back from challenging the increasingly hostile political environment. Exxon was quick to point out that Europe's energy crisis is largely the result of its own doing.

Exxon also responded directly to Biden’s criticism of record energy-industry profits by pointing to the company’s much-vaunted dividend, which it increased on Friday by a larger-than-expected amount.

“There has been discussion in the U.S. about our industry returning some of our profits directly to the American people,” Exxon Chief Executive Officer Darren Woods said in prepared remarks ahead of the company’s earnings conference call. “That’s exactly what we’re doing in the form of our quarterly dividend.”

As pointed out above, Exxon raised its quarterly dividend to 91 cents per share from 88 cents, 1 cent more than forecast. Exxon’s dividend payments over the last 12 months have overtaken Apple Inc.’s to become the second-largest in the S&P 500 Index, behind Microsoft Corp, according to data compiled by Bloomberg.

Alas, there were no additional shareholder returns announced for Chevron, unlike Shell, Repsol and Equinor; however, just months ago, the company raised dividends and share buybacks to a combined $25 billion a year.

Of course, rewarding energy shareholders - who were crushed during the covid crisis with XOM stocks plunging almost 80% from all time highs - has done nothing to appease the senile resident of the White House basement, however, and in fact has fueled his resentment against Big Oil. On Thursday, he once again attacked oil companies after Shell issued bumper earnings, criticizing the UK company for increasing its dividend rather than cutting prices at the pump.

The good news for XOM investors is that after Nov 8, anything the raging Democrats have to say or propose in their crusade to nationalize every profitable asset in the economy, is irrelevant.

The other good news for XOM investors: in response to these stellar, blowout earnings, XOM stock just hit a new all time high this morning, rising as high as $111.1 pre-market. And despite Jim Cramer turning bullish on energy names, we are hopeful that there is much more upside in the name.

The sellside was, naturally, full of praise:

  • Piper Sandler (Overweight): Exxon “showed off its leading leverage to global refining with a significant beat on 3Q results,” analyst Ryan Todd writes
    • Results demonstrated “impressive leverage to robust gas markets that more than offset the weaker crude prices”
  • Truist Securities (Hold; PT $111): Better natural gas prices, higher oil volumes lifted results but were “offset by higher spending”
    • Analyst Neal Dingmann notes Exxon is pursuing multiple projects including in Guyana and the Beaumont refinery expansion, but says “prioritizing Permian growth in the near-term to fund the longer cycle projects would result in higher investor interest”
  • Jefferies (Buy; PT $133): Analyst Lloyd Byrne looks for detail on an activity ramp up and “inflation in the Permian”
    • Notes upstream adj. net income of $11.8 billion was 12% lower than the bank’s estimate of $13.5 billion, though 9% higher than consensus
    • International upstream production was “the primary driver of the consensus beat” as a result of higher European natural gas prices

The company's full earnings presentation is below.

Tyler Durden Fri, 10/28/2022 - 09:34

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Congress’ failure so far to deliver on promise of tens of billions in new research spending threatens America’s long-term economic competitiveness

A deal that avoided a shutdown also slashed spending for the National Science Foundation, putting it billions below a congressional target intended to…

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Science is again on the chopping block on Capitol Hill. AP Photo/Sait Serkan Gurbuz

Federal spending on fundamental scientific research is pivotal to America’s long-term economic competitiveness and growth. But less than two years after agreeing the U.S. needed to invest tens of billions of dollars more in basic research than it had been, Congress is already seriously scaling back its plans.

A package of funding bills recently passed by Congress and signed by President Joe Biden on March 9, 2024, cuts the current fiscal year budget for the National Science Foundation, America’s premier basic science research agency, by over 8% relative to last year. That puts the NSF’s current allocation US$6.6 billion below targets Congress set in 2022.

And the president’s budget blueprint for the next fiscal year, released on March 11, doesn’t look much better. Even assuming his request for the NSF is fully funded, it would still, based on my calculations, leave the agency a total of $15 billion behind the plan Congress laid out to help the U.S. keep up with countries such as China that are rapidly increasing their science budgets.

I am a sociologist who studies how research universities contribute to the public good. I’m also the executive director of the Institute for Research on Innovation and Science, a national university consortium whose members share data that helps us understand, explain and work to amplify those benefits.

Our data shows how underfunding basic research, especially in high-priority areas, poses a real threat to the United States’ role as a leader in critical technology areas, forestalls innovation and makes it harder to recruit the skilled workers that high-tech companies need to succeed.

A promised investment

Less than two years ago, in August 2022, university researchers like me had reason to celebrate.

Congress had just passed the bipartisan CHIPS and Science Act. The science part of the law promised one of the biggest federal investments in the National Science Foundation in its 74-year history.

The CHIPS act authorized US$81 billion for the agency, promised to double its budget by 2027 and directed it to “address societal, national, and geostrategic challenges for the benefit of all Americans” by investing in research.

But there was one very big snag. The money still has to be appropriated by Congress every year. Lawmakers haven’t been good at doing that recently. As lawmakers struggle to keep the lights on, fundamental research is quickly becoming a casualty of political dysfunction.

Research’s critical impact

That’s bad because fundamental research matters in more ways than you might expect.

For instance, the basic discoveries that made the COVID-19 vaccine possible stretch back to the early 1960s. Such research investments contribute to the health, wealth and well-being of society, support jobs and regional economies and are vital to the U.S. economy and national security.

Lagging research investment will hurt U.S. leadership in critical technologies such as artificial intelligence, advanced communications, clean energy and biotechnology. Less support means less new research work gets done, fewer new researchers are trained and important new discoveries are made elsewhere.

But disrupting federal research funding also directly affects people’s jobs, lives and the economy.

Businesses nationwide thrive by selling the goods and services – everything from pipettes and biological specimens to notebooks and plane tickets – that are necessary for research. Those vendors include high-tech startups, manufacturers, contractors and even Main Street businesses like your local hardware store. They employ your neighbors and friends and contribute to the economic health of your hometown and the nation.

Nearly a third of the $10 billion in federal research funds that 26 of the universities in our consortium used in 2022 directly supported U.S. employers, including:

  • A Detroit welding shop that sells gases many labs use in experiments funded by the National Institutes of Health, National Science Foundation, Department of Defense and Department of Energy.

  • A Dallas-based construction company that is building an advanced vaccine and drug development facility paid for by the Department of Health and Human Services.

  • More than a dozen Utah businesses, including surveyors, engineers and construction and trucking companies, working on a Department of Energy project to develop breakthroughs in geothermal energy.

When Congress shortchanges basic research, it also damages businesses like these and people you might not usually associate with academic science and engineering. Construction and manufacturing companies earn more than $2 billion each year from federally funded research done by our consortium’s members.

A lag or cut in federal research funding would harm U.S. competitiveness in critical advanced technologies such as artificial intelligence and robotics. Hispanolistic/E+ via Getty Images

Jobs and innovation

Disrupting or decreasing research funding also slows the flow of STEM – science, technology, engineering and math – talent from universities to American businesses. Highly trained people are essential to corporate innovation and to U.S. leadership in key fields, such as AI, where companies depend on hiring to secure research expertise.

In 2022, federal research grants paid wages for about 122,500 people at universities that shared data with my institute. More than half of them were students or trainees. Our data shows that they go on to many types of jobs but are particularly important for leading tech companies such as Google, Amazon, Apple, Facebook and Intel.

That same data lets me estimate that over 300,000 people who worked at U.S. universities in 2022 were paid by federal research funds. Threats to federal research investments put academic jobs at risk. They also hurt private sector innovation because even the most successful companies need to hire people with expert research skills. Most people learn those skills by working on university research projects, and most of those projects are federally funded.

High stakes

If Congress doesn’t move to fund fundamental science research to meet CHIPS and Science Act targets – and make up for the $11.6 billion it’s already behind schedule – the long-term consequences for American competitiveness could be serious.

Over time, companies would see fewer skilled job candidates, and academic and corporate researchers would produce fewer discoveries. Fewer high-tech startups would mean slower economic growth. America would become less competitive in the age of AI. This would turn one of the fears that led lawmakers to pass the CHIPS and Science Act into a reality.

Ultimately, it’s up to lawmakers to decide whether to fulfill their promise to invest more in the research that supports jobs across the economy and in American innovation, competitiveness and economic growth. So far, that promise is looking pretty fragile.

This is an updated version of an article originally published on Jan. 16, 2024.

Jason Owen-Smith receives research support from the National Science Foundation, the National Institutes of Health, the Alfred P. Sloan Foundation and Wellcome Leap.

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International

What’s Driving Industrial Development in the Southwest U.S.

The post-COVID-19 pandemic pipeline, supply imbalances, investment and construction challenges: these are just a few of the topics address by a powerhouse…

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The post-COVID-19 pandemic pipeline, supply imbalances, investment and construction challenges: these are just a few of the topics address by a powerhouse panel of executives in industrial real estate this week at NAIOP’s I.CON West in Long Beach, California. Led by Dawn McCombs, principal and Denver lead industrial specialist for Avison Young, the panel tackled some of the biggest issues facing the sector in the Western U.S. 

Starting with the pandemic in 2020 and continuing through 2022, McCombs said, the industrial sector experienced a huge surge in demand, resulting in historic vacancies, rent growth and record deliveries. Operating fundamentals began to normalize in 2023 and construction starts declined, certainly impacting vacancy and absorption moving forward.  

“Development starts dropped by 65% year-over-year across the U.S. last year. In Q4, we were down 25% from pre-COVID norms,” began Megan Creecy-Herman, president, U.S. West Region, Prologis, noting that all of that is setting us up to see an improvement of fundamentals in the market. “U.S. vacancy ended 2023 at about 5%, which is very healthy.” 

Vacancies are expected to grow in Q1 and Q2, peaking mid-year at around 7%. Creecy-Herman expects to see an increase in absorption as customers begin to have confidence in the economy, and everyone gets some certainty on what the Fed does with interest rates. 

“It’s an interesting dynamic to see such a great increase in rents, which have almost doubled in some markets,” said Reon Roski, CEO, Majestic Realty Co. “It’s healthy to see a slowing down… before [rents] go back up.” 

Pre-pandemic, a lot of markets were used to 4-5% vacancy, said Brooke Birtcher Gustafson, fifth-generation president of Birtcher Development. “Everyone was a little tepid about where things are headed with a mediocre outlook for 2024, but much of this is normalizing in the Southwest markets.”  

McCombs asked the panel where their companies found themselves in the construction pipeline when the Fed raised rates in 2022.   

In Salt Lake City, said Angela Eldredge, chief operations officer at Price Real Estate, there is a typical 12-18-month lead time on construction materials. “As rates started to rise in 2022, lots of permits had already been pulled and construction starts were beginning, so those project deliveries were in fall 2023. [The slowdown] was good for our market because it kept rates high, vacancies lower and helped normalize the market to a healthy pace.” 

A supply imbalance can stress any market, and Gustafson joked that the current imbalance reminded her of a favorite quote from the movie Super Troopers: “Desperation is a stinky cologne.” “We’re all still a little crazed where this imbalance has put us, but for the patient investor and owner, there will be a rebalancing and opportunity for the good quality real estate to pass the sniff test,” she said.  

At Bircher, Gustafson said that mid-pandemic, there were predictions that one billion square feet of new product would be required to meet tenant demand, e-commerce growth and safety stock. That transition opened a great opportunity for investors to run at the goal. “In California, the entitlement process is lengthy, around 24-36 months to get from the start of an acquisition to the completion of a building,” she said. Fast forward to 2023-2024, a lot of what is being delivered in 2024 is the result of that chase.  

“Being an optimistic developer, there is good news. The supply imbalance helped normalize what was an unsustainable surge in rents and land values,” she said. “It allowed corporate heads of real estate to proactively evaluate growth opportunities, opened the door for contrarian investors to land bank as values drop, and provided tenants with options as there is more product. Investment goals and strategies have shifted, and that’s created opportunity for buyers.” 

“Developers only know how to run and develop as much as we can,” said Roski. “There are certain times in cycles that we are forced to slow down, which is a good thing. In the last few years, Majestic has delivered 12-14 million square feet, and this year we are developing 6-8 million square feet. It’s all part of the cycle.”  

Creecy-Herman noted that compared to the other asset classes and opportunities out there, including office and multifamily, industrial remains much more attractive for investment. “That was absolutely one of the things that underpinned the amount of investment we saw in a relatively short time period,” she said.  

Market rent growth across Los Angeles, Inland Empire and Orange County moved up more than 100% in a 24-month period. That created opportunities for landlords to flexible as they’re filling up their buildings. “Normalizing can be uncomfortable especially after that kind of historic high, but at the same time it’s setting us up for strong years ahead,” she said. 

Issues that owners and landlords are facing with not as much movement in the market is driving a change in strategy, noted Gustafson. “Comps are all over the place,” she said. “You have to dive deep into every single deal that is done to understand it and how investment strategies are changing.” 

Tenants experienced a variety of challenges in the pandemic years, from supply chain to labor shortages on the negative side, to increased demand for products on the positive, McCombs noted.  

“Prologis has about 6,700 customers around the world, from small to large, and the universal lesson [from the pandemic] is taking a more conservative posture on inventories,” Creecy-Herman said. “Customers are beefing up inventories, and that conservatism in the supply chain is a lesson learned that’s going to stick with us for a long time.” She noted that the company has plenty of clients who want to take more space but are waiting on more certainty from the broader economy.  

“E-commerce grew by 8% last year, and we think that’s going to accelerate to 10% this year. This is still less than 25% of all retail sales, so the acceleration we’re going to see in e-commerce… is going to drive the business forward for a long time,” she said. 

Roski noted that customers continually re-evaluate their warehouse locations, expanding during the pandemic and now consolidating but staying within one delivery day of vast consumer bases.  

“This is a generational change,” said Creecy-Herman. “Millions of young consumers have one-day delivery as a baseline for their shopping experience. Think of what this means for our business long term to help our customers meet these expectations.” 

McCombs asked the panelists what kind of leasing activity they are experiencing as a return to normalcy is expected in 2024. 

“During the pandemic, shifts in the ports and supply chain created a build up along the Mexican border,” said Roski, noting border towns’ importance to increased manufacturing in Mexico. A shift of populations out of California and into Arizona, Nevada, Texas and Florida have resulted in an expansion of warehouses in those markets. 

Eldridge said that Salt Lake City’s “sweet spot” is 100-200 million square feet, noting that the market is best described as a mid-box distribution hub that is close to California and Midwest markets. “Our location opens up the entire U.S. to our market, and it’s continuing to grow,” she said.   

The recent supply chain and West Coast port clogs prompted significant investment in nearshoring and port improvements. “Ports are always changing,” said Roski, listing a looming strike at East Coast ports, challenges with pirates in the Suez Canal, and water issues in the Panama Canal. “Companies used to fix on one port and that’s where they’d bring in their imports, but now see they need to be [bring product] in a couple of places.” 

“Laredo, [Texas,] is one of the largest ports in the U.S., and there’s no water. It’s trucks coming across the border. Companies have learned to be nimble and not focused on one area,” she said. 

“All of the markets in the southwest are becoming more interconnected and interdependent than they were previously,” Creecy-Herman said. “In Southern California, there are 10 markets within 500 miles with over 25 million consumers who spend, on average, 10% more than typical U.S. consumers.” Combined with the port complex, those fundamentals aren’t changing. Creecy-Herman noted that it’s less of a California exodus than it is a complementary strategy where customers are taking space in other markets as they grow. In the last 10 years, she noted there has been significant maturation of markets such as Las Vegas and Phoenix. As they’ve become more diversified, customers want to have a presence there. 

In the last decade, Gustafson said, the consumer base has shifted. Tenants continue to change strategies to adapt, such as hub-and-spoke approaches.  From an investment perspective, she said that strategies change weekly in response to market dynamics that are unprecedented.  

McCombs said that construction challenges and utility constraints have been compounded by increased demand for water and power. 

“Those are big issues from the beginning when we’re deciding on whether to buy the dirt, and another decision during construction,” Roski said. “In some markets, we order transformers more than a year before they are needed. Otherwise, the time comes [to use them] and we can’t get them. It’s a new dynamic of how leases are structured because it’s something that’s out of our control.” She noted that it’s becoming a bigger issue with electrification of cars, trucks and real estate, and the U.S. power grid is not prepared to handle it.  

Salt Lake City’s land constraints play a role in site selection, said Eldridge. “Land values of areas near water are skyrocketing.” 

The panelists agreed that a favorable outlook is ahead for 2024, and today’s rebalancing will drive a healthy industry in the future as demand and rates return to normalized levels, creating opportunities for investors, developers and tenants.  


This post is brought to you by JLL, the social media and conference blog sponsor of NAIOP’s I.CON West 2024. Learn more about JLL at www.us.jll.com or www.jll.ca.

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Buyouts can bring relief from medical debt, but they’re far from a cure

Local governments are increasingly buying – and forgiving – their residents’ medical debt.

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Medical debt can have devastating consequences. PhotoAlto/Odilon Dimier via Getty Images

One in 10 Americans carry medical debt, while 2 in 5 are underinsured and at risk of not being able to pay their medical bills.

This burden crushes millions of families under mounting bills and contributes to the widening gap between rich and poor.

Some relief has come with a wave of debt buyouts by county and city governments, charities and even fast-food restaurants that pay pennies on the dollar to clear enormous balances. But as a health policy and economics researcher who studies out-of-pocket medical expenses, I think these buyouts are only a partial solution.

A quick fix that works

Over the past 10 years, the nonprofit RIP Medical Debt has emerged as the leader in making buyouts happen, using crowdfunding campaigns, celebrity engagement, and partnerships in the private and public sectors. It connects charitable buyers with hospitals and debt collection companies to arrange the sale and erasure of large bundles of debt.

The buyouts focus on low-income households and those with extreme debt burdens. You can’t sign up to have debt wiped away; you just get notified if you’re one of the lucky ones included in a bundle that’s bought off. In 2020, the U.S. Department of Health and Human Services reviewed this strategy and determined it didn’t violate anti-kickback statutes, which reassured hospitals and collectors that they wouldn’t get in legal trouble partnering with RIP Medical Debt.

Buying a bundle of debt saddling low-income families can be a bargain. Hospitals and collection agencies are typically willing to sell the debt for steep discounts, even pennies on the dollar. That’s a great return on investment for philanthropists looking to make a big social impact.

And it’s not just charities pitching in. Local governments across the country, from Cook County, Illinois, to New Orleans, have been directing sizable public funds toward this cause. New York City recently announced plans to buy off the medical debt for half a million residents, at a cost of US$18 million. That would be the largest public buyout on record, although Los Angeles County may trump New York if it carries out its proposal to spend $24 million to help 810,000 residents erase their debt.

HBO’s John Oliver has collaborated with RIP Medical Debt.

Nationally, RIP Medical Debt has helped clear more than $10 billion in debt over the past decade. That’s a huge number, but a small fraction of the estimated $220 billion in medical debt out there. Ultimately, prevention would be better than cure.

Preventing medical debt is trickier

Medical debt has been a persistent problem over the past decade even after the reforms of the 2010 Affordable Care Act increased insurance coverage and made a dent in debt, especially in states that expanded Medicaid. A recent national survey by the Commonwealth Fund found that 43% of Americans lacked adequate insurance in 2022, which puts them at risk of taking on medical debt.

Unfortunately, it’s incredibly difficult to close coverage gaps in the patchwork American insurance system, which ties eligibility to employment, income, age, family size and location – all things that can change over time. But even in the absence of a total overhaul, there are several policy proposals that could keep the medical debt problem from getting worse.

Medicaid expansion has been shown to reduce uninsurance, underinsurance and medical debt. Unfortunately, insurance gaps are likely to get worse in the coming year, as states unwind their pandemic-era Medicaid rules, leaving millions without coverage. Bolstering Medicaid access in the 10 states that haven’t yet expanded the program could go a long way.

Once patients have a medical bill in hand that they can’t afford, it can be tricky to navigate financial aid and payment options. Some states, like Maryland and California, are ahead of the curve with policies that make it easier for patients to access aid and that rein in the use of liens, lawsuits and other aggressive collections tactics. More states could follow suit.

Another major factor driving underinsurance is rising out-of-pocket costs – like high deductibles – for those with private insurance. This is especially a concern for low-wage workers who live paycheck to paycheck. More than half of large employers believe their employees have concerns about their ability to afford medical care.

Lowering deductibles and out-of-pocket maximums could protect patients from accumulating debt, since it would lower the total amount they could incur in a given time period. But if the current system otherwise stayed the same, then premiums would have to rise to offset the reduction in out-of-pocket payments. Higher premiums would transfer costs across everyone in the insurance pool and make enrolling in insurance unreachable for some – which doesn’t solve the underinsurance problem.

Reducing out-of-pocket liability without inflating premiums would only be possible if the overall cost of health care drops. Fortunately, there’s room to reduce waste. Americans spend more on health care than people in other wealthy countries do, and arguably get less for their money. More than a quarter of health spending is on administrative costs, and the high prices Americans pay don’t necessarily translate into high-value care. That’s why some states like Massachusetts and California are experimenting with cost growth limits.

Momentum toward policy change

The growing number of city and county governments buying off medical debt signals that local leaders view medical debt as a problem worth solving. Congress has passed substantial price transparency laws and prohibited surprise medical billing in recent years. The Consumer Financial Protection Bureau is exploring rule changes for medical debt collections and reporting, and national credit bureaus have voluntarily removed some medical debt from credit reports to limit its impact on people’s approval for loans, leases and jobs.

These recent actions show that leaders at all levels of government want to end medical debt. I think that’s a good sign. After all, recognizing a problem is the first step toward meaningful change.

Erin Duffy receives funding from Arnold Ventures.

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