The Customer Revolution in Healthcare and the Corollaries Between the Spanish Flu and COVID-19

David Johnson, CEO of 4sightHEALTH talks about the customer revoultion in healthcare and the corollaries between the Spanish flu and COVID-19.
David Johnson, founder and CEO of 4sight Health, discusses similarities between the Spanish Flu and COVID-19, healthcare reform, and the steps necessary to strengthen public health. In 1918 the Spanish Flu swept the United States due to asymptomatic carriers and politically motivated assemblies much like what is being experienced today. Johnson attributes the extent of the health crisis to our nations failure to react quickly, pursue testing efforts, and inefficient contact tracing.

The healthcare industry’s layoffs have caused professionals to prefer collecting unemployment benefits rather than risk their safety in the line of work. On a more positive note, medical professionals are discovering the benefits of remote, video consultations which maximize efficiency and convenience. Although advancements are being made via technology, the industry needs to experience customer demand for value, liberation of data, and the creation of a level playing field by the prioritization of transparency.

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Ryan Morfin:

Welcome to Non-Beta Alpha, I’m Ryan Morfin. On today’s episode, we have Dave Johnson, the CEO and founder of Foresight Health, a former head of investment banking at Bank of America in healthcare. He’s going to come today to talk to us about his new book, The Customer Revolution in Healthcare and talk to us a little bit about the historical corollaries between the Spanish flu and the coronavirus. This is Non-Beta Alpha. Dave, thanks for coming on the show, we appreciate you joining us this morning.

Dave Johnson:

Thank you Ryan, it’s a delight to be on your show.

Ryan Morfin:

Well, we’d love to cover a lot of ground with you. You’re one of the healthcare experts across the country with your background from your investment banking and healthcare to consulting large health systems around the country. Healthcare is really driving stock market performance, it’s driving kind of future outlook of earnings. And we believe the market is really trading off of coronavirus news, antiviral therapy news, and vaccine news. I was wondering if we could take a step back and look at a historical perspective. You wrote a really interesting piece recently about the Spanish flu and the corollaries today. Would you mind sharing a little bit about kind of what happened in 1918 from your standpoint and what are some of the things that we should be watching for this pandemic?

Dave Johnson:

Yeah. Probably 10 years ago, Ryan, I read John Barry’s book, The Great Influenza, which is the history of that disease at that time. And there was a section in the book that I found absolutely chilling, it was a meeting in the Oval Office in October of 1918 as the US was gearing up for World War I between President Wilson and the army chief of staff. And what had happened was the flu had come to America early and was spreading through the military. We drafted everybody in the country between the ages of 18 and 45. So 13 million people, 4 million were already in the camps crammed in there. And that turned out to be the perfect environment for spreading the disease as we know now with the coronavirus when you cram people together, that’s not a good thing.

Dave Johnson:

So what was happening was the soldiers were shipping off to Europe in train cars and arriving on the East Coast and then ultimately in Europe with the flu most sick, as many as 10% dying. And Wilson was debating whether to slow down the troop movements or to continue to, President Woodrow Wilson or to continue to feed the army in Europe. And I just remember what a tough position for president of the United States to be in to have to make that type of chilling decision between letting the disease spread, even accelerate or get on with the war. Wilson chose to get on with the war, the disease ultimately killed 675,000 Americans. It also spread worldwide and killed as many as 50 to 100 million people. Numbers aren’t exactly there, but at least 50 million people and as many as 10% of populations in low income countries.

Dave Johnson:

So it was a devastating disease. It was like this one, it started slow. People didn’t always show symptoms but once it unleashed, it went through populations. Wilson, by the way, never spoke about the Spanish flu publicly. So there were preparations in the military to try to distance and so on, but in public it was all left to local governments, some of which did a good job, some of which did a bad job. Does that sound familiar? And in Philadelphia, for example, they held this big parade, the biggest parade in the history of the city to sell war bonds. And this was as the disease was spreading, and it literally turned Philadelphia into a ghost town, body stacking up in the streets and so on.

Dave Johnson:

I guess the last thing I’ll say, and then you can ask me any questions you want is that there are just eerie parallels between what happened then in terms of how the United States responded to a pandemic and how we have responded this year. The same things and in many ways make the country great. The libertarian streak, the innate optimism, maybe some of the political divisiveness debate were at play there. So people just didn’t really wake up to this until it was too late and then we had a tiger by the tail. And that’s been, obviously part of the experience here as other countries have been able clamp down and get the virus under control. And we’re still rolling through phase one here. That’s maybe the other cautionary tale about the 1918 pandemic, had three waves. The first was pretty mild relatively speaking. And the second was the one, and that was in the spring. And the second which came back in the fall was the one that killed people on a massive scale.

Ryan Morfin:

Well, that’s what’s my biggest concern at this point is we have I think to figure out the right balancing act on the tight rope here, these tough decisions about destroying consumer demand, which is the majority of our economy in the US versus keeping a safe healthcare posture for a pandemic, trying to balance that out. I’ll just give you some stats that I looked at this morning, and I know you briefly talked about this. So there’s about almost 10 million people have gotten infected with the coronavirus, 25% of them are in this country, 25% of the deaths are in this country. Is that because we’ve got better testing protocols in place or is it just a terrible travesty in terms of bad logistics really bringing out some of the bad symptoms of a very sick healthcare system?

Dave Johnson:

It’s more the latter than the former. We’ve obviously been gearing up tests. We say 10 million people have it in the world, and I think the number is now closing in on two and a half million people in the US. The real number of people that probably had the diseases is probably 10 times that, so maybe 25 million. Still less than 10% of the population, so we’re nowhere near the herd immunity. But in terms of the deaths, we were slow to respond because we didn’t have the testing in place early. We only had the blood [inaudible 00:08:15] instrument of shutting down the economy and social distancing to try to slow things down, and it did. We opened back up earlier than the guidelines suggested or at least some areas of the country did.

Dave Johnson:

Those are some of the states that are now really getting hit hard, Texas, Florida, Arizona. California interestingly has been one of the states that gets high marks for having done everything right. And yet as they’ve reopened, they’re now experiencing another big wave of infections. The death rate has slowed down, but we’re still on a path to probably have 150 to 200,000 people die from COVID-19 this year. One of the things that’s frustrating to me is that as we’ve gotten the disease under control, we haven’t used the proven method of tracing people. So in other countries where they’ve got the percentages of cases low in Europe and in Asia, when a new person gets infected, they immediately isolate that person and figure out who they’ve been in contact with. And with numbers low enough, you can open an economy and manage the disease.

Dave Johnson:

And ultimately that’s what we need to get to here as well. We need to protect the most vulnerable, the elderly, those with chronic disease and so on and really have a position of keeping those people as safe as we can and away from the disease while we open up the economy. But when the diseases is rampant as it is now, the policy alternatives slimmed down and we end up like you’ve now had in Texas where they’re starting to close down bars. And if it continues to ramp up, we’ll probably see more of the lockdown type mechanisms come into play. But I don’t know how many times … You’re a capitalist like I am Ryan, how many times can we go to that strategy of shutting down the whole country? Maybe we do it in pockets. But we have to figure out how to have an economy that functions while containing the disease. It’s very much a work in progress right now. We kind of know what to do, but we haven’t figured out how to do it.

Ryan Morfin:

I think it goes to political will. And I think whenever you have an elected official on the horizon of an election, I don’t think they’ve got the political capital to spend because it’s going to be an unpopular dose of medicine for the population staying home. It’s just not in the American DNA to take those types of instructions. And yet we expect our kindergarteners and first graders to listen to their teachers, it’s amazing to me. I hope so, I hope so, but I doubt it. So there’s some interesting and sad statistics about our healthcare system, and we’ve tried addressing it with the Affordable Care Act and several iterations of public policy to try to move the US healthcare system in a better value, better outcomes posture.

Ryan Morfin:

But right now, the World Health Organization ranked us the 37th performing health system in the world right behind Czech Republic and Jamaica. We spend way more money, two to one on healthcare from a GDP percentage and we still have bad outcomes. Maybe you can talk a little bit about the health system. I guess it seems like these comorbidity issues, the reason why we’re having such a high case load here is because there’s a lot of people who are just sick, I guess, and just haven’t had access to healthcare. Maybe you can talk a little bit about kind of where was the health system prior to the coronavirus, how has the coronavirus negatively impacted it from a financial standpoint and also from a structural standpoint? And then where do you see it going from there?

Dave Johnson:

Sure. Just some small questions there. Let’s talk first about the health system itself. When we put in Medicare and Medicaid in the 60s, it took all of President Johnson’s, no relation by the way, President Johnson’s considerable skill to get that passed. Medicare basically socialized medicine for the elderly, and Medicaid federal state program for low income people came into existence and dramatically improved the health of those two groups. But President Johnson had to agree to two provisions that really were catastrophic in terms of the longterm impact of the design of our health system. And he had to agree to those largely with the American Medical Association.

Dave Johnson:

The first was cost plus reimbursement or cost plus payment. Basically the government agreed to pay the cost plus margin for any and all healthcare treatments. You don’t have to be a genius to realize that when you pay for volume, you get volume. So that was number one. And cost plus payment, which it was called in the 60s is now called fee for service. And it’s probably 85 to 90% of the payment model that we have in hospitals. So if you really want to understand why things happen within the health system, it’s almost always they’re doing things to figure out how to bill in such a way that they can get paid for it. Not very consistent human behavior. So that’s number one, cost plus payment.

Dave Johnson:

And the second, which isn’t as well known is they agreed to no governmental interference in medical decision making at all. So in essence as long as a doctor can make a reasonable medical recommendation, the government has to pay for it. Well, the combination of those two factors, paying cost plus a margin for procedures and very little restriction on what the system would cover, would not cover led to an explosion in healthcare. It’s not like people didn’t see it at the time, there was a healthcare economist at UCLA, Milton Roemer who made the statement that in the presence of third party payment, supply creates its own demand. A shorthand way of saying that is a hospital built as a hospital filled. So in essence, we have an artificial economic system where supply drives the demand of services.

Dave Johnson:

If you were to ask me to predict the amount of cardiology procedures in any given market, you’d think you’d look at demographics, the age of the population, some of the lifestyle behaviors, maybe environmental factors. None of that turns out to have very much predictive power. The best predictor of cardiology procedures in any market in the country is the number of cardiologists, they literally create their own demand. And just take that concept and multiply it across all of the different medical disciplines and you can understand why 50 plus years after Medicare we have a system that pays for a huge amount of activity but doesn’t really get at what it should be getting at, which is how do we drive better outcomes from the healthcare we do provide, how do we prevent disease from happening in the first place? How do we manage chronic disease so that it doesn’t explode into acute conditions? How do we integrate mental health with physical health so that people are on balance, are much better prepared to live day-to-day in America.

Dave Johnson:

The system doesn’t pay to do any of those things. And I’ve always said that we’re not going to change the way we deliver healthcare in the country until we change the way we pay for healthcare. And what we really need to do is, and we’re starting to do this is shift the risk of treatment to providers. So full risk bundles for episodic care. So if you need knee replacement, you get a fixed price, 15 grand or something like that. And the doctors in the hospital have the responsibility to do it for that amount and cover any mistakes or subsequent care, unexpected subsequent care. And then on sort of population health, moving to a per member kind of per month where you pay in advance. Then the health company is responsible for all the care. Kaiser does that, most Medicare advantage plans now have some form of that called capitated payment risk.

Dave Johnson:

And ironically Ryan, the companies that take more risk like that are the ones that have survived COVID pretty well. What’s happened under COVID is the patients have disappeared. So people aren’t going for elective surgeries, they’re not going to the ER, they’re not going to the primary care physician. As many as half of the adults in the country have skipped care themselves or had somebody in their household skip care. It kind of reminds me of the Andy Warhol song from the 60s, where have all the flowers gone. So the health system is trying to figure out where have all the patients gone?

Ryan Morfin:

Well, that’s a great question. So what is happening? People aren’t just magically healthier, I don’t think. Are we as a country addicted to low value care and we go because we’re being led astray by doctors who look at this as a business or are we getting sicker as a country because we’re not getting the care that we need?

Dave Johnson:

Yeah. The answer’s probably both although there’s a great amount of need to know the details. We certainly get a lot of low value care. I like two by two matrix, charts, Ryan. So if you think of a two by two with market on the Y axis or on the X axis and medicine on the Y axis, and then you’ve got sort of good and bad. So when you have a good market but bad medicine, you’re getting an MRI for 500 bucks. But since you don’t need it, it’s still wasted. Where you have good medicine and a bad market, you need an MRI, but it shouldn’t cost 5,000 bucks, which it often does at academic medical centers or most hospitals.

Dave Johnson:

So you get that kind of over-payment on the one side and over-treatment on the other side. So bad medicine, good market is over-treatment. Good medicine, bad market is over-payment. And then in many cases, you get both, which is pure fragmentation. And there just aren’t enough instances where you get good market and good medicine. There are pockets of it in the country. So there are enormous pressures to kind of drive care to where it’s both good medicine and good market. And it’s true, this full risk contracting that I talked about. There are a lot of initiatives pushing it that way. The government also under Secretary Azar at HHS has done a lot to kind of level the competitive playing field to make pricing more transparent, outcomes more transparent, encourage data interoperability. All of that was going on before COVID putting a lot of pressure on the system to change.

Dave Johnson:

And then COVID came and discovered you really can’t have a health system without patients. So we’ve got some, just to answer your question, there’s some. Right now it’s relatively small, probably 10% of people that are skipping care and having an adverse impact, so 90% aren’t. And some people do better with less care, but the jury’s still out. You can’t have bad chronic conditions and skip your care and not expect to have a really adverse impact at some point. I guess on the flip side, we do have an opportunity to study what happens when people delay care. I hope we take advantage of that and come out of this with a much better understanding of sort of what is low value care and what is absolutely vital care and come up with ways to encourage people that absolutely need the care to receive it and to stop paying for the low value care that’s way too prevalent within the delivery system.

Ryan Morfin:

That’s going to be a fascinating study because I agree. A lot of these procedures may just be doctors wanting to make the mortgage payment or fill their quota at the hospital that they work for. People need to realize these are for profit. Yeah, absolutely, absolutely. It’s been a fascinating time right now for the healthcare systems. And so one question for you is given that we paused all these elective procedures looking at a hospital system as a business, how damaging has the coronavirus pandemic and the posture that the hospitals have taken to really become COVID only facilities for a period of time. How has that damaged the financial health of these hospital systems and how big is this donut getting in terms of the balance sheets of these hospital systems?

Dave Johnson:

Yeah, no, it’s catastrophic. The system is run on differential payment for the same things. Just take something simple like childbirth. If a mother with Medicaid insurance delivers a baby, the payment for that will pick … Well, we’ll just say 1,500 bucks or something like that. If it’s a commercial insurance, the really five star commercial insurance, the payment could be as much as 10 times that. I think the average non-cesarean birth for a commercial insurance plan in the country is over 10,000 bucks. And that was actually more than Prince William and Princess Kate paid to have their baby born in the posh Lido wing of the nicest hospital in London. They paid like 8,500 bucks.

Dave Johnson:

So by corollary, maybe every boy and girl born with commercial insurance in this country is really a prince or a princess. But you just can’t catch, you get this massive differential for doing the same thing. And so what hospitals do naturally is they try to maximize the amount of commercially insured business they do and minimize the amount of government funded business or business where people don’t pay at all. So what happened with elective surgery, which is what most commercial surgery is when that got shut down, not only were you shutting down volume in and of itself, you were also shutting down the high paying volume. And so it has had a disproportionate impact on health systems. Government’s thrown a fair amount of money at hospitals through the CARES Act, actually the whole health system is kind of propping it up during this period of time.

Dave Johnson:

The best health systems have gold-plated balance sheets and often billions in cash reserves, they would weather the storm. But the average community hospital in this country, probably is insolvent without the added government support right now. The volume is starting to come back as the country opens back up. They’re going to maybe 70% of pre COVID levels. You’d actually kind of expect it to be 125, 150% of pre COVID levels on elective surgeries because they’re having to make up for the pent up demand. So the patients just aren’t coming back. We’re going to be living with this for a while too, where of all the patients gone? So it does turn out that consumers are important to the healthcare system. You really need them to operate.

Ryan Morfin:

That’s fascinating. Do you think there’s going to be without further government assistance in the next 12 to 24 months a needed bailout of the healthcare system if the patients don’t come back or do we just have less hospitals going forward?

Dave Johnson:

That’s a really good question. I’ve been debating with some friends of mine if you took a pure market approach, hospitals will close down if they no longer can financially survive. But you can imagine that that would happen in a somewhat haphazard way geographically and disproportionally affect low income areas. So that’s not a good outcome. On the other hand if we let the government decide who stays and who loses, then it becomes a very political process. New York state actually did that about 10 years ago with the Berger commission, they closed a bunch of hospitals in a top down manner. It was like military base closures. There’s this commission and it was secret, and then they announced which hospitals were closing and they went through with it.

Dave Johnson:

Probably what we need to do is over time, because I personally believe everyone in the country deserves access to appropriate and affordable healthcare. And the fact that we spend 18% of our economy on healthcare, which the next big country, the next highest percentage is France at 12%. To me, there’s enough money in the system, we’re just not spending it the right way. So we need to figure out how to reallocate resources in such a way that we grant much greater access, we provide appropriate care, we get rid of this low value care that you had mentioned earlier. And that’s a longterm process. It means not funding hospitals that are 30% full and not having great outcomes.

Dave Johnson:

It probably means fewer hospitals, more community health centers, more investment in behavioral health, much greater connectivity on the digital side, more emphasis on prevention. And you should ask me about prevention, Ryan, because you and I are both former soccer players. I learned something about healthcare sort of getting ready for the World Cup in 2016, I read the book, The Numbers Game which has money ball for soccer. It ended up being interesting parallels between soccer and the healthcare. But anyway, you want to ask me about that, we can-

Ryan Morfin:

Yeah, we can go on that. Well, I was going to say before we move on to the preventative stuff, because that’s really critical. And we do some work with Dr. Azar and HealthCorp at our company, love to talk about that. We’re in the middle of a pandemic, I think we got rid of like 1.4 million healthcare workers so far in the last few months, just in April. So as we’re surging the need for more healthcare, we’re firing healthcare workers, does that mean we were just bloated and we were overstaffed? That just I think highlights the inaccuracy of allocation of resources.

Dave Johnson:

Yeah. It’s actually crazy. Another thing is we spend all this money on field hospitals and hardly treated any patients in them. And it was even worse than that because they were recruiting healthcare workers on the spot market and paying premium prices. So they were actually taking experienced health care workers away from hospitals like here in Chicago where I live that were under pressure from COVID. The reason we laid off people is because the elective surgeries declined and hospitals, particularly those that weren’t in surge areas for COVID were really just bleeding red ink and they had to furlough or lay off people just to say afloat. It didn’t make any sense. And so a bunch of places, imagine Florida, Arizona having laid off people, and now suddenly they’re having to address COVID.

Dave Johnson:

We have not had a rational approach to thinking about how do we take our experienced healthcare people and apply them in the pandemic situation in ways that doesn’t burn them out, keeps them safe, keeps them available. And then when it really gets bad, like it did it New York, people can’t even get into the hospitals, so they start dying at home, which I think when the numbers find that come out, you will find that a lot of people in New York in the worst days died because they couldn’t get access to regular medical care or they had COVID and didn’t realize it and it got them before they could get to the emergency room because the emergency rooms were packed or they couldn’t get an ambulance or so on.

Dave Johnson:

New York came dangerously close to buckling and ultimately came through with a lot of support from other parts of the country. We should almost have a mobile workforce that’s going around to help out areas of the country as they surge. What I’m hearing and reading about Houston right now makes me think that could turn very bad very quickly. So don’t we want to have the right mix of facilities and people there to respond to the crisis appropriately so it doesn’t overwhelm the system, burn people out, ultimately lead to more deaths and burnout among professional staff? So yeah, we don’t have the resource allocation right by any means.

Dave Johnson:

One thing on the positive side is the industry overall has suppressed some proven business models that offer great care at low prices. The best example is our virtual care. I was talking to a CFO this week at Gunderson Health System in Wisconsin who said before the pandemic, fewer than 5% of their primary visits were occurring versus telemedicine or phone visits, so virtual visits. And they expect by the end of the year over 50% of the visits will occur virtually. So we’re discovering that virtual care is a remarkably powerful resource to treat all kinds of conditions.

Dave Johnson:

And we probably should have been going down that way to a much greater extent than we have been, but the payment models were getting in the way. We’ve kind of fixed the payment model at least during the crisis period. Necessity is the mother invention, so we’re seeing a lot of innovation and care delivery both with COVID and with non COVID care. But overall, we weren’t ready for this and our system isn’t set up to kind of surge in the right ways when under pressure. So we’re going to have to go back to the drawing board and fix this once we’re through with it. We don’t want the healthcare system to look like it did pre COVID and be as vulnerable to pandemic attack as it has turned out to be

Ryan Morfin:

Well, it’s interesting. So I talked to a friend of mine who’s in Scottsdale, Arizona, the hospital his wife works at is 100% full. And they’re short-staffed because they got rid of all these other people a few months ago. And they’re making more money being unemployed, not wanting to go into hazard pay. And so they’re sitting at home saying, “You know what, we’re good. Thanks for firing us, we’re making more money now than we were before. And we don’t have put our health at risk.” It needs to get readdressed I think, whether it’s a new payroll tax issue or a payroll tax furlough or how they redo the unemployment benefits. There needs to be something to help us reallocate resources because we’re burning money right now that, I mean, we have right now. But the liquidity, the solvency question of the US fed is going to come up at some point if we keep throwing money like it’s going out of style.

Dave Johnson:

Put my economist hat on for a second because everything you’re saying is true. It’s amazing to me the extent to which the federal government is basically printing money right now and people are buying it. On the other hand, and I’ve asked a couple of economist friends of mine, commodity prices are also low. In fact, oil actually went negative for a period of time in March and early April, still not. So we’ve got sort of the risk of deflation on the horizon to it. It is a world of extremes where we could see there are all the reasons to believe that inflation can return with a vengeance with all of this printing of money and fiscal stimulus and so on.

Dave Johnson:

On the other hand, the core economy. We need to buy a new car and my wife and I were talking about it. So let’s wait six months, there’s a huge surplus where we’ll be able to get a phenomenal deal. So you got sort of that going on too. So how to balance the deflationary pressures and the inflationary pressures at the same time, it’s a tough, tough job for the federal reserve and treasury and our government generally. But hopefully they get the formula right. Doesn’t feel like they do right now though.

Ryan Morfin:

Well, be careful with a new car. I’d advise getting a car that’s a year or two older, I’ll tell you why, because there’s no spare parts being manufactured right now, they’ve frozen. So a lot of the cars that are in the shop right now have been there for six months, and they can’t find the parts. And so there’s a shortage of new parts for 2020, 2019 models. So just some food for thought when you’re out at the lot, ask them how their inventory of spare parts is because it doesn’t exist right now. It’s fascinating. I’ll tell you, I’ll tell you. Before we move on to the vaccine and treatments and where you think we’re going there, preventative medicine in the United States, food access, nutrition, exercise. Things that we should all be doing to avoid comorbidity issues, where is the healthcare system moving in that direction?

Dave Johnson:

Well, let me you about the numbers game. So I’m a huge soccer fan. In fact, one of my biggest disappointments because I had tickets to the European championship game that was supposed to happen in July, and it’s been pushed to next year now. That’s kind of a birthday present to myself. So anyway, for the World Cup in 2018, I read The Numbers Game, which is money ball for baseball. And the subtitle was, why everything you think you know about soccer is wrong. And it turned out to be a true statement. Of all of the professional sports, soccer is the only one where preventing a goal is more important than scoring a goal. And the reason is there aren’t many goals. And when you tie zero-zero, you get a point.

Dave Johnson:

So defense is more important than offense, which basketball is the opposite of that. Basketball is a strong link sport. LeBron James a couple of years ago took a very mediocre Cleveland Cavaliers team to the NBA finals just on the strength of his talent. Soccer is the opposite. The good teams, they call it you’re only as strong as your weakest link. So they have the smallest gap between the best player on the team and the worst player on the team. So everybody on the field is good and we tend to focus on the goal scorers, they’re easy to find. They’re the ones that get mobbed, toss their shirt off after the game and so on. But it’s really the defense that the wins the championships.

Dave Johnson:

And the thing about defense is you got to do 100 things right. You know this, you got to be in position, you got to know your scheme, you got to know the other team’s scheme, you got to be communicating. That’s why the goalie spends half the match kind of screaming at everybody, getting them into position. The goalie actually doesn’t want to take any shots, but is there obviously as a last offense. And it struck me that that healthcare is the ultimate weak link enterprise, and we spend all our money off defense, on treatment and nowhere near enough on prevention, chronic disease management, behavioral health. And it’s not a hard concept. But if we can prevent a surgery, that’s better than having a surgery with the best surgeon in the best facility with the latest techniques and so on.

Dave Johnson:

And so we need to get much better balance between our defense and our offense in healthcare. We have great offense in healthcare but we’ve got a very poorest defense. And that’s why you’re starting, not starting to see, but why there are these just incredible gaps in life expectancy between middle class and high income neighborhoods in America and low income neighborhoods in America. Where I live in Chicago, life expectancy downtown is 15, 16 years longer than it is five miles West in Garfield Park. And that’s an inner city neighborhood. And the primary reason is those populations as we’re seeing with COVID suffer disproportionately from chronic disease, so diabetes, heart disease, CLPD, asthma. And it takes a real toll on their health. And the coronavirus being as opportunistic as it is is preying on those sicker populations with a vengeance.

Dave Johnson:

So we need to rethink how we spend our healthcare resources. And it’s really like the old saying an ounce of prevention is worth a pound of cure. If we can do a better job with prevention, with helping people manage their chronic disease. And many of the most promising new business models are focusing on that. We’re seeing a number of companies that do enhance primary care, they tend to be paid on this capitated per member per month. So they own the risk. And when they own the risk for a population, they communicate with them frequently if they need something like meals or advice on their medication, they get it. Loneliness is a big issue, so there are programs that come up where they have high school kids go visit elderly people. It’s good for everybody.

Dave Johnson:

We just need to start thinking about health as well as healthcare. And relative to other countries, we’re an outlier in how much we spend on healthcare services. But we’re also an outlier in how little we spend on preventative social determinants of health and so on to try to kind of make people’s day-to-day lives a little bit easier. Our debate, political debate tends to be let the market do it or let the government do it. And they’re obviously both really important. But I increasingly think that we’re not going to get the type of healthcare we want unless we get really strong community organizations. So communities need to want to be healthier, and we have to help communities kind of recapture that old sense of community pride and so on, that’s atrophied in many places in America.

Dave Johnson:

And it doesn’t necessarily cost any money. If you hang around with people that are exercising all the time, you’re going to exercise more. If you hang around with people that are practicing bad health behaviors, you’re likely to do that too. So you know what, at the end of the day soccer explains healthcare, Ryan. It’s a weak link enterprise, got to keep the goals out of the net or the ball out of the net. We really need to start doing that in healthcare.

Ryan Morfin:

Yep, defense wins championships, that’s right, absolutely. So one quick question for you, do you think, going back to the coronavirus, do you think there’s … The jury’s still out that this was a natural jump from bats to humans or do you think there is kind of some funny business that we haven’t been told on how we got this virus?

Dave Johnson:

I think it was animal human transmission. I don’t think it was the government in China kind of playing with the viral warfare and having it get out personally, that’s my opinion. And because the world is so much more interconnected when these outbreaks occur, when disease does jump from animals to humans, the possibilities of transmission are magnified because just the level of connectivity. Part of the reason, I told you before we got on the air here that the furthest I’ve been from my house since the middle of March is three miles. And I’m somebody that is a 100,000 mile flyer on American and have been for decades.

Dave Johnson:

We just aren’t traveling around as much, but we need to travel around, we need to engage again. I do think it was animal to human transmission that got this going. I don’t think the Chinese government handled it well, they clearly were lying to everybody else, the WHO, other countries saying they had it under control when they didn’t. Their statistics were really questionable. And that’s part of the reason the world got caught flat footed on this as we were overconfident that China had contained the disease and it was going to be limited to Asia the way SARS had been. So China has a lot of explaining to do on how they handled the early part of the disease, but I don’t think they-

Ryan Morfin:

I was hoping that it would come out that it was coming out from a lab because I think the problem we’re going to see is we’re going to see this a lot happen a lot more frequently going forward because of the urbanization that’s going on around the world and the globalization. I think we’re going to see a lot more pandemics in the years to come that will unfortunately be global like this one. But to your point about China screwing with the data, I think the World Health Organization also has a tremendous amount of explaining to do because I guess Taiwan wrote a memo in December talking about this outbreak in Wuhan. And China and the World Health Organization decided to ignore the Taiwanese scientists’ claims and really put the rest of the world on their back foot for a few months when we really should have been ramping up.

Dave Johnson:

Yeah, same, too much confidence in China even though the US is paying the biggest share of the World Health Organization’s budget, it seems to cater disproportionately to China and did so this time with catastrophic consequences.

Ryan Morfin:

I’m wondering if there’s criminal charges for the folks, the World Health Organization? I mean, there’s some talk about it now, but I don’t know what your thoughts are on that.

Dave Johnson:

That’s beyond my pay grade. I don’t even know how you’d do that, would you take them to the Hague and to the world court? I’m less worried about the criminal charges than kind of getting to the root of what happened and making sure that it just doesn’t happen again. I had a conversation with Mike Levitt the former HHS secretary and he said when he was HHS secretary, he did something like 56 tabletop exercises with pandemics. And they always had catastrophic consequences, not prepared, outbreaks and so on. People said, well, this is a black swan. It’s more like that new concept, the gray rhino, this thing is staring us in our face and we just chose to not pay attention to it.

Dave Johnson:

There’s a lot we have to do next time, Ryan. If this virus had the killing effect of the Ebola virus, it’s got some other kind of treacherous characteristics. That would have been like the black plague in the middle ages. We need to get our act together as a world because the economy is global, disease doesn’t know borders, and we can’t have countries lying to us. We need the World Health Organization to really be on the front lines in the same way the CDC here has not really been as effective as it should have been, could have been. Hopefully will be in the future. The health organizations have let us down.

Ryan Morfin:

Well, going to what you mentioned about the black plague, life expectancy went from 35 years old to down to 18 years old in a matter of a few years. And how do you think life expectancy is going to change in the US across the board?

Dave Johnson:

Well, most of the people that are dying from coronavirus are much older. And those who are younger tend to have chronic diseases of multiple comorbidities, which is a fancy way of saying they have diabetes and heart disease at the same time. I don’t know that it’s going to drive down life expectancy much overall, probably a little bit. But if you go neighborhood by neighborhood, it’s going to exacerbate this trend, this death gap between healthier communities and less healthy communities. Somebody asked me a couple of weeks ago in the middle of the George Floyd protests, and it was a Friday, said, “How’s it going?” How’s it not going? We’ve got social unrest from the 1960s, economic on restaurant from the 1930s, medical uncertainty from equivalent or greater than the pandemic from 1918. And let’s throw in climate change too just to make it fun.

Dave Johnson:

And I said, “I’m just glad it’s Friday.” Anyway, we’ve got a lot as a country on our plate right now. But these disparities between low income areas and higher income areas in sort of health and wellbeing are stark. There’s a lot the health system can do on the preventative side to start to address that. We obviously have to address some of these other issues related to policing in schools and so on too. But I got to say, I don’t think everything is … I am about to go on the board of something called The Community Builders, which is the largest nonprofit developer of low income communities in America. And they’re doing a couple of major projects in Chicago, including the redevelopment of the Harold Ickes Project which is now called South Bridge, which was the line of housing projects along the Dan Ryan Expressway state street, which were just catastrophic.

Dave Johnson:

And I got to tell you, Ryan, some of the thinking that’s going into, how do you create a community, a mixed income community, multi-generational, multi-ethnic, have economic activity, sort of blend health into the fabric of the community in ways that make it integral to day-to-day living, how you encourage connection. I’ve just been really impressed with some of the depth of thinking about that. We’ve got our problems in Chicago, we’ve got our problems in America. There are a lot of really smart people trying to think about how to redo this at the grassroots level. And it’s not all government funding, it kind of goes back to the point I was making earlier, we got to figure out how to strengthen communities. And when we strengthen communities, good things happen for everybody.

Ryan Morfin:

What are your thoughts on treatments and vaccines? Do you think we’re going to get one for coronavirus, and what are you hearing in the health community?

Dave Johnson:

That old adage, prepare to get lucky. I think our mindset should be the vaccine is still a year or two off, there’s no panacea. We got to figure out in a granular way how to protect people who are most at risk to coronavirus. We need to figure out how to open up the economy and live with the virus while we as part of our routine, we need to be able to flex when there are hotspots. At the same time, we need to work as hard as we possibly can, which we are doing to come up with not only a vaccine but treatments that work and then be in a position to get lucky. I think if we put all of our hope on the vaccine and don’t do the hard work of re-engineering our health system and our economy to live with this today and other similar outbreaks in the future, we’re going to do a grave disservice to ourselves today and obviously to future generations. Let’s prepare to get lucky. And I hope we do, I mean, I desperately hope we do.

Ryan Morfin:

Well, I’d like to talk a little bit about your book, The Customer Revolution in Healthcare: Delivering Kinder, Smarter, Affordable Care for All. Can you talk to us a little bit about that book and what’s inside?

Dave Johnson:

Yeah, yeah. The Customer Revolution in Healthcare. The title says a lot. First of all, we had a debate about should it be the customer or the consumer revolution. And we came down on customer because most people that buy health insurance today are governments and large self-insured corporations. And my biggest disappointment with system as a whole, Ryan, is that those purchasing health insurance haven’t demanded more value from the system, and that’s starting to happen. So as customers step up and have the information to make better decisions and push these kind of risk based payment models, the marketplace responds. I mentioned earlier some of these enhanced primary care companies, there’s this concept called dual eligibles in healthcare. And these are people that qualify for both Medicare and Medicaid, so old, poor, and often very sick people.

Dave Johnson:

But when you put that Medicare payment together with the Medicaid payment, you get a pretty big, robust payment, and it’s enough to manage the care of these people. So we’ve seen an explosion in the number of companies that are now focused on how do we keep these dual eligibles healthier and more productive? And that’s historically a group the health system hasn’t paid a lot of attention to. So we ultimately will change the way we deliver health care by changing the way we pay for it, and customers are a big part of it. And then my ultimate goal would be to have consumers and customers be interchangeable the way we are in many industries. So that was a big word, customer. Revolution, big word.

Dave Johnson:

I am incredibly frustrated by the system’s inability to incrementally improve. While there has been progress, the big picture trend has been we spend more and more money on healthcare every year, it grows at rates greater than inflation. And overall, our population is sicker, our outcomes are worse and so on. So it’s not working. So incremental reform the way we see it in other industries doesn’t work. So we need fundamental reform. That goes really to I think three areas. One is we need customers to activate and really demand value from the system. We need to liberate data. Data liberate, data want us to be free, it wants to flow to where it can be the most use.

Dave Johnson:

There was an article came out, this guy in Seattle who was one of the first COVID-19 patients on a respirator, and he came out after a few weeks, he’s in his 70s. His treatment bill was 181 pages and totaled $1.1 million. I mean, it was absolutely in comprehensible. And the government is going to pick up the cost. But if we have the data flowing to where it needs to be, it can’t be fragmented, it can’t be in pockets. Innovative companies can get access to it and build the apps and the APIs to do [inaudible 00:59:56]. And I happen to think we’re just like in 2007 when the smartphone came out, we’re on the cusp of another convergence in technologies between 5G and all of the analytics, cloud based analytics to kind of step up. 3G and 4G with the iPhone is what’s powered the smartphone economy and the gig economy. Under 4G, each wifi connection point has a thousand or each wifi station has a thousand connections. In 5G it goes to millions.

Dave Johnson:

So everything is going to be talking to everything else. Your toothbrush will tell you whether you’re going to get sick or not. I think data harnessed, curated, aggregated, curated, applied, enormous possibility across the economy as a whole, but particularly in healthcare because healthcare has lagged others. So that’s sort of the second force multiplier. And then the third is the government doing what the government should do, which is creating a level playing field, guaranteeing transparency, not letting entrenched incumbents overwhelm innovative new companies. So we don’t need government to run healthcare, we need government to create a level of competitive playing field. And quite honestly both in the Obama administration and even more in the Trump administration, they’re very encouraging signs on the regulatory front that will get that that right.

Dave Johnson:

Not incremental, change revolutionary change. And then in the subtitle, it’s kinder, smarter, affordable care for all. So if we get the medicine right and we get the market right, we can make it affordable. And we’re a rich country. And I believe everybody should have access to appropriate affordable health insurance. And that’s the last chapter in the book. I kind of talk about revolutionary upstarts, so new companies that are doing revolutionary things, revolutionary incumbents that change their business models and become part of the solution and then healthcare for all. And the thing is we have to figure out a way to do that that’s American. So that’s not going to be a single payer system, it’s not going to be a Medicare for all, people won’t accept that. But I could see us having a pluralistic model where there’s health insurance for everyone in some form, the government subsidizing for those who need it.

Dave Johnson:

But if we’re going to be able to afford this without living in caves, we got to bring down the prices. We got to get rid of the low value care, we got to step up prevention. We got to step up chronic disease management, and we got to treat the whole person physical and mental. So we need to spend the money we’re currently spending better. And if we do that, Ryan, if we do that, if instead of having our health insurance or healthcare go to be 20, 25% of our economy, if it starts going the other way 17, 15% of the economy, think of the resources that we will free up as a country to pay people more money, to invest in productive industries and so on. So I’m bullish on America anyway as our model and so on. But if we can get healthcare right along the lines I had discussed that’ll turbocharge the American economy, it’ll be a stimulant to growth. It will do great things for the country.

Dave Johnson:

And quite honestly, if we don’t do it, we’re looking at a future of ever greater health disparities, evermore money spent on chronic disease, exploding chronic disease, greater inequality, lower productivity, less happiness. And who wants that for the United States of America?

Ryan Morfin:

That doesn’t sound like a fun Friday. What are your thoughts on the kind of the COVID bills you just mentioned, this guy had a $1.1 million hospital bill? Do you think there was some playing with the numbers out of the healthcare systems, like saying, you know what, you’ve got COVID and you’ve got COVID. Is there a problem with the data that’s been coming out of the healthcare systems given the reimbursement?

Dave Johnson:

It’s not a problem with the data. It’s kind of back to where we started, if you get paid to do things, why is there an extra intern in your room? Why do I get a vitamin D screen every time I go on for a lab test even though it does no good? Why did my wife’s gynecologist after she bought a urine testing machine prescribed a urine test? I must say my wife’s former gynecologist. If there were a movie called health care, it would have the same title, it would be follow the money. So hospitals, doctors, they’re doing what they know how to do, which is get paid for everything they do. And if they can get paid for doing more stuff, they do more stuff. So you end up with 181-page bill. I don’t know what the guy’s care should have cost, but it shouldn’t have been 1,000,000 and 1.

Ryan Morfin:

Yeah, that’s insane, that’s insane. Two final questions, Trump talks a lot about the fact that he’s helped fix the VA. What does the healthcare industry say about that? Is the VA getting better outcomes today under the Trump administration?

Dave Johnson:

Well, I would say the VA has been on an upswing for the last 20 years or so despite some of the occasional bad press. So 20 years ago, the VA was looking at its facilities and the average age of their hospitals was over 50 years. And they were about to do a massive capital campaign to build new hospitals. Whoever the secretary was at the time said, “Let’s re-examine this.” And they decided instead to spend the money on technology, so getting a uniform health record. So if you go into any VA facility in the country as a VA member just like you can do in another countries, your health records come up. There isn’t this discontinuity between providers. So they invested in technology, they invested in mental health services in a big way because that’s a problem with veterans. They’ve taken on the homeless problem.

Dave Johnson:

And they’ve really I think embraced this idea of holistic coordinated care. And because they weren’t doing as much with physical, they’ve also been a leader in virtual care. So the VA if you need a psych consult, boom, get it like that. So I would say under Trump, those reforms have continued. And the VA on a per dollar cost probably provides some of the best healthcare in the country for a population that’s really pretty sick. So I think the Trump administration has continued a trend that is good for veterans. And I think a good example for the rest of the country about what healthcare can be if you’re not spending money on the latest laser gun, you’re doing the hard work of prevention, chronic disease management, behavioral health, getting the information where it needs to be, seeing people as whole persons not as sort of cogs in an assembly line where I do this, and then I hand them off to you to do that.

Dave Johnson:

We’re people, we aren’t machines, and you can’t get the spare parts the way you can for cars. Although evidently what you’re saying is we can’t get them for new cars now or either. I say the VA has been on an upswing and the it’s continued during the Trump administration.

Ryan Morfin:

What are some silver linings you see for the US economy right now if any?

Dave Johnson:

I do think we’re fundamentally rethinking how we work. I don’t know about your company, but my company is as productive working from home, maybe even more productive than when we all get together. So I think coming out of this we’ll have new models for work that will be better, more efficient. We’ll figure out when people do need to be other when they can work on their own. I think that’s a positive. In healthcare, I think the rise of virtual care and allowing people to practice at top of license or breakthroughs that won’t go back in the bottle and they have cumulatively compounding benefits over time. So that’s the plus side. I don’t know, Ryan. People said, well, it’s going to be a V-shape, we’re going to bounce right back and then it’s where it’ll be, more of a Nike shwoosh or it’ll be one of these W. I don’t think it will be like the 2008, 2009 recession, but it does feel like we’re going to be in a hole for a while and it’s going to take some time to dig out. Sorry, one-

Ryan Morfin:

I think it’s going to be like a Fibonacci sequence just kind of bouncing up and down volatility until we start to find a new way forward, a next normal if you will. So we’re going to buy some books and send them out to some of our folks, The Customer Revolution in Healthcare. Very excited to read it, and we’ll love to have you back. I’m sure I’ll have a lot more questions after I do. What other books are you reading to educate yourself just about in life in general or what podcast? Where are you going for information today to help make sense of where we’re at?

Dave Johnson:

Well, I’m a big reader. I was a Peace Corps volunteer in Africa right out of college, and I became a reader the way that people watch TV. So I’ve always been a big reader. I just finished The Splendid and the Vile, which is about Winston Churchill’s first year as prime minister. And I actually found it pretty encouraging. If you can imagine what it was like to live in London where there were bombers overhead for 150, 180 nights in a row with massive devastation. And yet every day the British people got up and swept the sidewalks and went back to work. And Churchill was their leader, and he’d get on the radio, which he did a lot. And he had sort of three parts to his speeches.

Dave Johnson:

One was the absolute truth, how bad it. His interpretation of the events would be the second part. And often there was an optimistic kind of element to that. And then it wasn’t till he’d done those first two things, the truth and the interpretation that he got to the soaring rhetoric, we’ll fight them on the beaches, our finest hour and so on. In a dark time, that turned out to be kind of a nice book to read. I’m a big fan of the Malcolm Gladwell revisionist history podcasts, they’re really well done. And actually there are a number of series on that sort of Malcolm Gladwell’s channel that I think are good. The one on Michael Lewis and the declining role of referees in society and what that means that I thought was a fascinating one.

Dave Johnson:

And then I read a ton of healthcare care books. I was an English literature major, still occasionally read some poetry. So I went back and re-read The Waste Land by T. S. Eliot not too long ago, which has that incredible first line, April is the cruelest month, breeding lilies in the dead ground about World War I. April was a pretty cruel month in America, that’s why I found the echoes of the 1918 pandemic here in 2020. Oh, you know what, I will give people one book, I really like Raghu Rajan, he’s an economist at the University of Chicago called a book called The Third Pillar which talks about sort of the history of the three pillars of society, government, market, and community. And I’ve taken a lot of my thinking and you’ve heard some of it today from Raghu’s work on the need to strengthen communities in our society. It’s a magisterial work, it kind of goes back to the middle ages and works its way forward. It’s filled with I think incredible insights. So I’ll offer that one up too.

Ryan Morfin:

That’s great, I’m going to buy that one. I’ve read his previous work. I think he was the central banker for India for a while, right?

Dave Johnson:

Yeah, youngest economist ever at the International Monetary Fund. He’s a friend of mine, I helped edit his second book Fault Lines, which you may have read, which was incredible. And Raghu was the one at the Big Economics Conference in Jackson Hole in 2006 that predicted the recession, the great recession. And he kind of got laughed out of Jackson Hole only to be proven right a short time later. So smart guy and a good writer too, by the way.

Ryan Morfin:

Dave, I appreciate you joining us today. Learned a lot, can’t wait to dig into your book. And we’d love to have you back in the months ahead to talk more about this kind of evolving healthcare crisis.

Dave Johnson:

Ryan, I’ll jump the barricades with the anyway. So after you read the book, I’m sure you’re going to be a true healthcare revolutionary and we’ll go out to fight in the good fight together. I’ll come back anytime.

Ryan Morfin:

Thanks so much, I appreciate it. Thanks for watching Non-Beta Alpha. And before we go, please remember to subscribe and leave us a review on Apple Podcast or YouTube channel. This is Non-Beta Alpha, and now you know.

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Ryan Morfin: Welcome to Non-Beta Alpha. I'm Ryan Morfin. On today's episode, we have Pini Althaus, CEO of USA Rare Earth, talking to us about the supply chain glut in rare earth minerals. This is Non-Beta Alpha.

Ryan MorfinPini, Welcome to the show. Thank you for coming on today.

Pini AlthausThank you for having me, Ryan. Good to be here.

Ryan Morfin: So you're an investor and a miner in rare earth minerals. Can you share with our listener base, what are rare earth minerals? Why are they important and why is there a geopolitical race going on globally?

Pini AlthausYeah, I mean, rare earths are an extremely ubiquitous part of all advanced manufacturing or technology manufacturing today's day and age. Several years ago, I had not heard too much about rare earths myself. I was not that familiar with it and being involved in this sector, in this company, for the past few years has given me an education of course. And I mean, I was sad to hear that 50% of all imports into the United States contain are earth elements and it runs the gamut from consumer electronic devices that we use every day. Our cell phones, our laptops, most communication devices, medical equipment. So there's a tie with COVID, which we can touch on at your discretion. Electric vehicles, defense equipment. So pretty much anything or everything high tech today has a rare earth element or critical minerals contained within them.

Ryan MorfinAnd what are some of the names of some of the more important rare earth? I know there's lithium for batteries, but what else is considered in this category, critical?

Pini Althaus: Yeah, so lithium is a separate category to battery material. The rare earths are 17 rare earths. The four, let's call it, key rare earths that we're focused on at our company, the four rare earths that go into the permanent magnets. And these are the magnets that are found, there are a number of them in your back of your cell phone or an iPad. But if you look at an F35 striker jet, you've got about a ton of rare earth magnets in those. And we've got two heavy rare earths and two light rare earths is part of the permanent magnets. You've got dysprosium, ytterbium are the heavies, and then you've got neodymium, praseodymium as the two light rare earths. So those would be key rare earths that are the focus.

Ryan MorfinAnd you use these in, I guess, in military applications as well, but historically, where has the United States sourced the rare earth for supply chain?

Pini AlthausYeah. And that's the shocking part. We've been securing those materials from China. So China controls the rare earth sector and has done so for the past 30 years or so. And it was a significant misstep on the part of the United States, allowing China to have this control. And actually this wasn't a question of China coming in and doing anything nefarious as far as stealing IP or anything. The US government made a conscious decision about 30 years ago to allow China to come to the United States and acquire the processing capabilities for rare earths. So just as part of some background, you've got the rare earth materials containing various mining projects, but once you extract them, you have to then process them and they go through certain phases before they get to the magnet phase. And China, the thought process was let China do the mining, let China do the processing.

Pini AlthausWe don't need to do that here. And we'll buy the materials from China cheaply and the premier of China at the time, Deng Xiaoping made the comment, he said, "The Middle East has oil. China has rare earths." And unfortunately we weren't smart enough to understand what he was saying. And the Chinese understood that the future of manufacturing is going to revolve around control of the rare earth and critical mineral supply chain. So if you think about it today, Ryan, we cannot build... Forget about consumer electronics and medical equipment. We cannot build the equipment that the US Pentagon or the US armed forces require, whether it's F35 fighter jet, Tomahawk cruise missile, communications equipment, without going to China and obtaining those materials. And it's obvious to all that this should be extremely alarming. We've seen China use this as a weapon, if you will, as far as how it interacts with other countries back in 2010, when there was a dispute between China and Japan on the East China Sea.

Pini AlthausSo China cut off rare earth exports from Japan for 40 days. Japan obviously being a significant user of rare earth elements for their high-tech manufacturing sector, that was stopped after 40 days. But in fact, it was President Obama that first made the United States aware of this, formed a division within the Department of Defense to handle this issue, but not much has happened. And we continue to be relying on China for these materials. And what has been made about trade war with China and whether the trade war is really the impetus for China withholding rare earth exports. And that is a huge misnomer. Whilst China had been talking or implying that they would cut off rare earth exports, the truth of the matter is that China, under it's made in China, 2025 mandate, its belt and road initiatives and others. And you seem to control the critical minerals and rare earth supply chain so that it can continue its dominance as a manufacturer or a global supplier of these materials and finished products.

Pini Althaus: It's the backbone of its economy. And in fact, China has become a net importer of rare earths from different countries like Miramar and others. So with that, they are decreasing the exports to countries like the United States, Japan and others.

Ryan Morfin: And was it ever a risk that the Chinese were going to turn off the exports of rare earth to the US during the trade war? How close were we to that? And was that ever some saber rattling that went down during trade negotiations?

Pini AlthausYeah, I think it was saber rattling. I think it would be paramount to an act of war. I can't say with any authority that that would not happen, but it would be probably, aside from war itself, it would be one of the most significant acts of war cutting the United States off from the ability to procure rare earths. But that being said, I mean, if you look at, as an analogy, the oil and gas sector and the reliance of the United States had for many, many years on OPEC countries to supply us with the oil. And we had embargoes and we had price manipulation by OPEC. This is far more significant given the ubiquity of where these rare earths go. And yes, we're always under the threat that China can cut off exports under the guise of a trade war or for any other nefarious reasons.

Pini AlthausBut I think even more importantly, to just as the natural run of the course of things with regards to their business and their desire to maintain themselves as the global leader in manufacturing and exporting of goods, China is in a position now where it actually requires these materials for their own domestic consumption and can legitimately cut off rare earth exports by stating that they need it for manufacturing and that would actually be somewhat correct. So we're in an extremely dangerous position here with this reliance on China. And it wouldn't just be China. If it was another country, it would be similar issues, not to the same extent, but reliance on one country for these materials is dangerous.

Ryan Morfin: And it's been mentioned in the past that in 2010, China flooded the market to really kill all the competitors in the rare earth mining industry. Where was the World Trade Organization during this period? And how did that play out and how does that set the chess board for China to run the tables?

Pini Althaus:

Yeah. So the WTO stepped in when China cut off rare earth exports from Japan, I think it lasted for about 40 days because the US and Japan protested the WTO, and they stepped in and China resumed exports. While I'm not an expert on these trade matters, one thing that I am aware of is that one of the reasons why China had to resume the export of rare earths was it did not legitimately need all the rare earths for domestic consumption. So therefore it was a nefarious act, if you will, to cut off rare earth exports. Now that has changed, which means China have to cut off rare earth exports today, they have a legitimate case to say that they require these materials. There's a shortage of these materials and they require them for their own domestic purposes. It is the backbone of their economy and there's very little we could do about this today, which is why it's becoming an even more urgent issue.

Ryan Morfin:

And the US government started stockpiling some of these after that incident. Can you talk a little bit about what DOD and DOE has done to start making sure that there's not a critical supply shortage going forward, and is it enough?

Pini Althaus:

Yeah, again, there is a national defense stock pile, and there are materials still that the United States needs to procure in order to shore up its stockpile. There are magnets, the finished magnet products as well, the United States government needs to stockpile. Again, there's a limited amount that the United States government has. It requires approval from Congress, whether it's in the NDAA or other approvals from Congress, to allocate monies for the national defense stock pile of these materials. That being said, there's no endless supply of these materials. And unfortunately, the apparatus, the way it's set up right now with the US government, it's going to continue to require having a secure supply chain of those materials for many, many years to come. So it's not a question of stockpiling for 10 or 20 years, and then this complacency and saying, we'll kick the can down the road. But keep in mind as well, Ryan, that US government accounts for low single digits of overall rare earth imports into the United States.

Pini Althaus:

We're talking about defense contractors, we're talking about the manufacturing sector. The direct impact this has on the economy, jobs, the automotive sector, and others is significant. So it's not just limited to the United States government. If you look at over the past couple of weeks, the sanctions that China have put on Raytheon, Boeing, Lockheed, et cetera. I mean, the question is where are they going to get those materials? And if we go beyond that, you need rare earths for the 5G network. Now that Huawei has been banned from installing the network, not only in the US but other countries, we have to have the ability to get a secure supply of these materials as well. Which currently, again, trying to control the hundred percent. So it runs across the board, both for government, defense and manufacturing in this country.

Ryan Morfin:

Well, and so help me paint a picture for our audience. Does China have all the mines for rare earth, or they're the only ones who started mining it? Or are their mines globally dispersed and nobody's been doing the actual infrastructure to do the mining?

Pini Althaus:

Yeah. So finding rare earth projects or rare earth elements is not the difficult part. It's finding them in significant quantities that makes a project economically viable. And part of that consideration are the environmental rigors that companies in the West have to adhere to. And China, even by their own admission, have had a complete disregard for mining these materials and even for processing these materials. And in fact, just the last week or so, the BBC did an expose on this, 60 Minutes has done an expose on this. But the Chinese have not denied this and have talked about cleaning up their act, but it has an effect on the bottom line for what the costs of mining and processing are if you have no environmental standards to adhere to. So China have exploited those rare earth projects they have, primarily in inner Mongolia, and have brought a number of projects online and quite quickly, and in a significant way, with a complete disregard for the environment.

Pini Althaus:

So it was seen as an environmental no-no in the West for many years. Now, what's happened over the past few years is you're starting to see rare earth projects in different parts of the world sprout up. You've got the Mountain World project in Australia owned by Linus, which is a producer of Nd and Pr, neodymium and praseodymium. So two of the light rare earths. They may have some heavy rare earths coming online at some point in time. And you've got Arafura, which is another company in Australia that we're working with to assist them with their processing so they don't have to send the materials to China for processing. But really these are a drop in the bucket for what the requirements are for the United States. And certainly what the requirements are for allied countries, the EU, et cetera. So there is a race, if you will, worldwide to start bringing projects online. The Chinese are very active in trying to secure assets outside of China.

Pini Althaus:

So in Africa. They have ownership of a project in Greenland. So there is somewhat of a race. The Australian government has stepped in and has started limiting the ability for China to own, or have ownership in, or off takes for the Australian rare earth projects. And that's part of the strategic Alliance between Australia and the US. Canada, similar thing as well. There are a number of projects that are looking to come alive, but these projects are, for the most part, will take many, many years to come online. We have to expedite the process. We have to assist with a [inaudible 00:14:41] supply chain and the domestic rare earth sector, because previously investors have been scared off by things like China flooding the market, which is not a possibility at this point in time, given that China can't actually afford to flood the market. They are already very heavily subsidizing their mine to magnet supply chain there.

Pini Althaus:

This is more now a case of being able to get production from non-Chinese sources so that the United States and allies have a viable, secure supply chain of these materials. And it's a concern worldwide. We speak to governments all over the world, and we're all facing the same issue. Some more than others, especially countries like Japan, that don't have their own rare earth projects there and are reliant on Australia where they've made some investments there. And in the United States, they've made an investment recently in Africa. So there is this race, if you will. And I think we've got a five-year window here to at least stand up a few projects worldwide. Otherwise we've lost this race and we will be dependent on China for many, many years to come. And Ryan, it's a bit of a hypocrisy. If you look at it where you've got materials going through clean, green energy applications, like electric vehicles, wind turbines, et cetera.

Pini Althaus:

That we're sourcing these materials from China, where they've, again by their own admission, has been complete environmental devastation to water bodies around these mines and processing facilities, to the communities. People have been getting sick around these projects yet we're putting these materials into our electric vehicles or wind turbines. It makes no sense at all. And people are starting to wake up to this. And that's why the sector is starting to see a lot of support come out of Congress and bi-partisan support. And in fact, it's one of the only bi-partisan issues right now in Washington. And it's good to see that some things decided to move in the right direction.

Ryan Morfin:

And is there a special process? You talk about the expense, is it really difficult to mine these? You have to go through a special chemical process to extract and clean and purify. Is it a lot harder than, say, gold or silver or some of the other, we'll call, more traditional elements?

Pini Althaus:

Yeah. It's all about the processing to some extent. So if you look at MP Materials in California, which used to be Molycorp before they went through their bankruptcy. They are a miner of Cerium and Lanthanum, which are two of the light rare earths, the lower valued light rare earths. Given that they do not currently have processing technology, they are sending those materials to China for processing where China is tariffing those heavily. Linus is also, they're doing their processing work in Malaysia and elsewhere. So it's really about the processing at this stage. One of the things that we've done, after we put out our PDA last year with our upgraded resource, which now includes a significant amount of lithium. We make a decision that, based on the test work that we had done around our processing methodology, that we were not going to send our materials to China. That it's paramount for us to do this work in the United States and in a collaborative effort as well.

Pini Althaus:

We've been asked by some of our investors, "Well, why would you be looking to help other projects with their processing?" And the answer is simple. There's no one project or one company that's going to put China out of business or make a dent, or somehow be able to take care of the overall demand worldwide for rare earths and critical minerals. And it's very important for us to have processing capability in the West. So that was the impetus for us opening up our own rare earth and critical minerals processing facility earlier this year, which we did in Wheatridge, Colorado. And in fact, we've made some significant progress on the method that we're using for this. And we're starting to collaborate with Australian companies, Canadian companies. We're currently talking to a group over in Europe as well, because this has to be a collaborative effort.

Ryan Morfin:

How does Europe solve for these problems? Do they have this better under control than the US?

Pini Althaus:

No, they're in a far worse position than we are. The EU commission recently put out a report, I think, a couple of months ago that the requirement for rare earths is going to increase tenfold within a short period of time. Lithium 18 times. They don't really have rare earth projects. Again, there are the Greenland projects, which people have heard in the news recently. Those need to further development work so they don't have rare earth projects ready to come online there. There are a couple of lithium projects that are spread around Europe, but for the most part, Europe is in an even more precarious position. If you look at Germany with the auto manufacturers, you look at the big companies like ThyssenKrupp and others, all these countries and companies are looking for alternatives to China, because we've already seen in the news about China withholding or reducing exports of some of these rare earths that are required for these industries.

Ryan Morfin:

And you mentioned earlier the regulatory posture of the US makes it difficult to mine. Is it becoming a more bi-partisan issue that we need to maybe relax some regulation around the mining exercise, to incentivize private sector to come in and start producing this? Or is the Republican party versus the Democratic party on two separate pages of music?

Pini Althaus:

Yeah. Good question, Ryan. I mean traditionally the Republican party is obviously being more pro-mining and in favor of less regulation when it comes to these things. With regards to our project, we're on Texas state land. So we don't trigger federal environmental permitting at this point in time. And obviously Texas being Texas, a mining state and oil and gas state, things are a lot easier in Texas than they are on projects on federal land where the Bureau of Land Management controls the environmental process around that. But the thing is here, and I don't want to step into what other companies are doing, et cetera, but we do need to be reasonable about allowing projects to come online if they're adhering to environmental standards that are acceptable worldwide. And what we do know, is that China is destroying the environment and cities and water bodies around their mines and processing facilities.

Pini Althaus:

We have standards here in the United States, and I think what we need to do is make it easier for companies to mine, while at the same time protecting the environment. And there are ways to do that. And we're definitely seeing buy-in from Congress, from both sides, with regards to looking how we can stand up a secure supply chain. And, obviously under the Obama administration, they had very strict regulations when it comes to mining. And that's changed under the Trump administration. Hopefully what we start to see is some normal middle ground that'll allow other projects to come online.

Ryan Morfin:

And typically in these rare earth mines, is it amalgamation of different minerals that are all consolidated together and you have to separate them out? Or do you ever find pure play, Europium, I can't even pronounce some of these. Gadolinium, Cerium. I mean, are they all mixed together and you've got to filter and sift them through, or are they pure play mines?

Pini Althaus:

No, they're generally they have a mix. So they're polymetallic projects. They have a number of different materials. Some projects, you more to what we call the light rare earths like MP in California or Linus in Australia. Our project is actually on the opposite end of the spectrum. We have a very high concentration of heavy rare earths. That being said, we do have to go through a process of separating these materials. But the case of our project where we've got 30 materials. We're not going to produce 30 materials. We're not going to market 30 materials. So what we're doing is we're focusing on the key materials that are marketable, that we need for permanent magnets, lithium as well, and working on the separation and the optimization of those materials in particular. But we're all faced with the same processing challenges and that is something that can't be set.

Pini Althaus:

There's no easy way to do this. There are different technologies that have been used in different parts of the world. So predominantly there's a process called solvent extraction, but it's big, it's bulky, it's not benign. It's a bespoke solution for one particular project. So it doesn't work for feedstock from other projects. What we've done is we're using a processing technology that's actually been around since the 1940s. It was part of the Manhattan Project. It's called continuous ion exchange. In fact, the Chinese use it to increase the purities from 99.99 to four nines, five nines, and even six nines. So for some applications you require higher purity levels. It's a far easier processing method to scale up and to take feedstock from other projects. In fact, we've demonstrated for the Department of Energy that we can take coal waste from Pennsylvania and do high purity separation of rare earths using our processing methods. So it's not a step that can be skipped unless one needs to send it to China for processing, which is not going to help us with our objectives here.

Ryan Morfin:

How many other, we'll call it, going concerns on any other businesses that are doing this, that are trying to, I guess, start the development of these mines. Are you guys one of a few or are you one of many? And is it an international or just a US game? Who's leading the charge at going after this?

Pini Althaus:

Yeah, well, I'd say the Australians are leading it outside of China right now. You've got some really good projects in Australia. Again, more skewed toward the light rare earths. There's one more heavy rare earth project in Australia, which is not yet producing. The United States, you've got MP Materials, you've got Ucore in Alaska, you've got the Bear Lodge project in Wyoming, which is also another light rare earth project. So as far as a heavy rare earth project that looks like it will come online in the near term, that would be our project. In Canada there are a couple of projects there as well, and again, more skewed toward the light rare earths. But we really need to get as many of these projects online as possible. Because again, I don't see it as competition. We all have a problem doing supply agreements or offtake agreements for our materials.

Pini Althaus:

In fact, one of the things that we're going to have to consider is looking at potentially scaling up our production, based on the demand that we're already starting to see. And I think other companies would find that as well. So it's all about the economics of the project. You have projects that were economically viable back in 2012 or rare earth prices with 35% or so higher than they are today, and are not necessarily viable today. So that's the challenge as well, economically viable projects. And we've got to get as many of them online as possible. It takes many, many years. I mean, our project has had over $70 million put into it to get to where we are today, and we're close to getting to the production scenario. It all revolves around processing at this point in time.

Pini Althaus:

We'd be very happy to see another couple of projects come online, because this is extremely important for national security and for the economy as well. I mean, if you think about it, Ryan, if you've got a billion dollars of rare earth materials, that translates into a trillion dollars or I should say trillions of dollars of finished product. So you've got a magnet in your phone there that's worth a couple of dollars and the cell phone's a thousand dollars. And electric vehicles and defense applications even more.

Ryan Morfin:

Yeah, everyone has one of these iPhones now, and there's tremendous amounts of rare earth on the circuit boards here. And I think people take it for granted that that supply chain is not secure right now. So one question for you, there's talk of this maybe medium term to longterm, but there's talk about mining in space. Do you think that's a feasible option in the longterm, medium term? What are your thoughts on that?

Pini Althaus:

No, that's just ridiculous. I mean, we're trying to find ways to make mining on earth economically viable. I think the cost of going up to space would be more than what our capex will be bringing our entire project into production. I mean, we've got about a 350 to $400 million capex to bring 130 year mine life into production. I'm not an aerospace expert, but I think sending a rocket, building a rocket ship and sending it up, I think maybe on the fuel alone, you could bring a couple of projects into production. So unless we have a fortunate situation or an asteroid lands on earth, and fortunate if it lands somewhere where we don't care, I don't see how that happens. And if it's big enough, it's a problem as well. It's nonsense. And even, options aside of the deep sea mining for rare earths, I mean, you've got all sorts of environmental issues around that as well. I think we need to look at projects that we can bring online, that can be done so in an economic way, that can be done so in an environmentally responsible way.

Pini Althaus:

I mean, one of the things that we've done at our project is we've got in excess of 60% of the materials that have come out around top, will have a clean green energy applicability to them. So we're using the benign processing method. We're going to be using renewable energy on site. In fact, we will likely be putting a solar farm on site as well. We've talked to a couple of companies that have approached us about that, and we'll be a net producer of power for the surrounding area. So there are ways to do it which don't affect the environment. Obviously if there's a project that's situated on a sensitive area, that's a unique situation for that specific project. We've seen it with the Pebble project, which is not a rare earth project. The Pebble project in Alaska where their environmental concerns is we've been recognized by both Republicans and Democrats, but we have to be reasonable about the projects that don't have environmental concerns.

Ryan Morfin:

So Pini, in season two, we ask all of our guests a series of six questions. They're usually, yes, no questions, but trying to take a survey of our conversations. And if you want to add a little context to the yes or no, feel free, but here goes the first question. If there was a COVID vaccine available today, would you take it?

Pini Althaus:

Yes.

Ryan Morfin:

Who do you think is going to win the election?

Pini Althaus:

Which election?

Ryan Morfin:

The US election.

Pini Althaus:

Well, I think it looks like Joe Biden's going to win it, but I think what happens, if we go past January six from my understanding is that the house will vote on it and it's one vote per state. But I don't know if I see it getting there at this point in time. I really don't have a crystal ball.

Ryan Morfin:

Third question. What type of economic recovery are we in? What type of shape is it taking? A V-shape, W, U, L?

Pini Althaus:

Yeah, I think 2021 is going to be challenging. I think we've been, and rightly so. I mean, we've had no choice as of almost every other country. We've been printing money for the past year because of COVID. And I think we've got to brace ourselves that, at some point in time, the chickens come home to roost. It was a necessary step. People needed it on an individual level. Businesses needed it as well, but I think we've got to do whatever we can to stimulate the economy, give people confidence to go out and work again, employ people. So I think we've got to watch ourselves, especially in 2021. And I have some concerns, but long-term, I think the approach in the United States is a healthy one.

Ryan Morfin:

During lockdown this summer and quarantine, was there anything in particular that you accomplished that you're particularly proud of?

Pini Althaus:

Yeah. A great amount of family time, which, if you would've asked me a few years ago if I could sit at home and be at home for six months, I would have told you absolutely not. I wouldn't be able to do it for six days, but it has... I'm sure it's done this with a lot of families as well. It's brought families together. We had a baby actually last year on Thanksgiving. So I was doing a lot of travel at the time and thought I wouldn't get to see my daughter in her first year or couple of years too often. And being home with her every day is actually been just the most amazing experience. So thankful at least for some silver lining in COVID.

Ryan Morfin:

Are there any silver linings that you see in the economy going into 2021?

Pini Althaus:

Yeah, I think we've gone through an absolute beating and it looks like we've got the ability to come out of it. And I think that's a testament to how strong the economy was built up in the years preceding COVID. So overall I remain an optimist. I mean, we are a country built on opportunity and going out and making it happen. And we're not a socialist country sitting and waiting for people to send us paychecks or wealth distribution or anything like that. I think the American dream still lives on. I think if you go out and you're willing to work and put your head to it and heart in it, I think we do have the ability to climb out of it. So if we look at what the economy is doing over the past few weeks, it looks like it's starting to rebound. And to me, that's assuring because it could go completely one way as well.

Ryan Morfin:

And the last question is, is there anything that you're watching, or listening to, or reading today that has been impactful on your thinking that you'd like to share with our audience?

Pini Althaus:

Yeah, that's a good question. I think it's been more personal stories. The news, I sort of take that in context or with more than a grain of salt. In some cases stay off the news channels for a number of days at a time, it became quite repetitive. But I think on the personal side, talking to friends, my family's all back home in Australia, they've just come out of 110 day lockdown, which we can't relate to that. It's been very trying on them and seeing the fortitude that they've had to come out of that and stay intact. I think the mental health issues that will come out of COVID are going to have a far longer effect than the economic issues. I think we're going to have to focus on mental health issues in this country for a long time to come.

Pini Althaus:

The impact on kids has been significant with regards to lockdown or remote schooling, et cetera. But to see people come through it. I think it's a testament to people in general and to the country and other countries as well, to see got that fortitude and survival instinct to try to get through whatever adversity we can. So hearing the personal stories, the challenges that people have gone through, I think it's made me a lot more aware of things that I have to be thankful for and where we can help out other people as well. I think we have to be united going forward because there are things...

Pini Althaus:

I think one of the things that COVID has shown us is we can get into this complacency and life goes on and we go one day to the next. And all of a sudden we get hit by something that affects everybody equally. I mean, COVID, whilst there were groups of people, whether it was the elderly or people with underlying health conditions, that got hit the worst. I mean, we all got hit in some form or another. So really, this should be something that unites us, not divides us.

Ryan Morfin:

Well, Pini, I appreciate you coming on today to talk to us a little bit about the supply chain crimp on rare earth and we'll definitely keep an eye on it and would love to have you back in the future.

Pini Althaus:

Thank you, Ryan. Thanks for having me.

Ryan Morfin:

Absolutely. Thank you. Bye-bye. Thanks for watching Non-Beta Alpha. And before we go, please remember to like, and subscribe on Apple podcasts and our YouTube channel. This is Non-Beta Alpha, and now you know.

 

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