THE BIG SHORT

[The following is based on financial data from SEC 10-Q filings, September 2025]

Everyone thinks the American healthcare system is broken because of drug prices, or insurance denials, or hospital bills.

They're arguing about symptoms. No one's looking at the balance sheets.

We applied a standard corporate finance test to the eight largest health insurers: Does the business generate returns above its cost of capital?

If yes, it creates value. If no, it destroys value.

SEVEN OF EIGHT ARE DESTROYING CAPITAL.

Not losing money—destroying capital. The business model itself no longer works.

The eighth—Molina Healthcare—is down 58% in six months. The market has already priced in its collapse.

This isn't a bad quarter. This is the math catching up.

In 2005, a hedge fund manager named Michael Burry did something nobody else on Wall Street bothered to do.

He read the actual mortgages inside the bonds everyone was buying.

What he found was garbage—loans to people who could never pay them back, rated triple-A by agencies paid to look the other way.

We did the same thing with health insurers.

The findings are in the SEC filings. Anyone can verify them.

When the entire industry falls below its cost of capital, that's not cyclical.

That's structural.

Here's how private health insurance is supposed to work:

Insurers collect premiums. They pay providers when members get sick. They make money on the spread—premiums minus claims minus administrative costs.

"Managed care" was supposed to mean they actively manage the care to reduce costs. Coordinate treatment. Prevent unnecessary utilization. Bend the cost curve.

Here's what actually happened.

In 2010, the Affordable Care Act capped insurer margins through Medical Loss Ratio regulations. Insurers must spend 80-85% of premiums on medical claims. This limits gross margins to 15-20%.

Meanwhile, providers consolidated. Between 2002 and 2020, there were over 1,000 hospital mergers. The FTC challenged thirteen. Enforcement rate: 1.3%.

The result: 90% of metropolitan areas now qualify as "highly concentrated" for hospital services.

The arithmetic is straightforward: when costs grow faster than you can raise prices, and your margins are capped, you eventually go broke.

As for "managing care"—the peer-reviewed evidence is sobering. Care management programs identify patients using claims data—which is backward-looking.

By the time a patient shows up in claims as high-risk, they're already high-cost. The hospitalization is already happening. The dialysis is already starting. The amputation is already scheduled.

Nobody had that telescope.

So the payor industry didn't manage care. It managed a financial arbitrage—collecting premiums today, paying claims tomorrow, and hoping the spread held.

The spread no longer holds.

If the math has been unsustainable, why hasn't anyone noticed?

Because government subsidies masked the underlying economics.

Three revenue streams grew rapidly over the past decade:

These weren't bailouts. They were growth engines that allowed insurers to offset margin compression with volume expansion.

The effect: reported insurer financials looked stable even as the underlying unit economics deteriorated.

This also distorted the policy conversation. When Washington reports "healthcare spending," the figures reflect premiums paid—which include insurer margins, administrative costs, and the financial buffer that absorbs cost volatility.

As long as subsidies flowed and new markets opened, the financial arbitrage held.

July 4, 2025

The One Big Beautiful Bill Act becomes law.

The policy rationale was fiscal discipline and program reform.

The effect on insurer economics: the growth engines that offset margin compression are being withdrawn.

Individual market insurers lose the subsidies that allowed them to price competitively. Medicaid MCOs—including Molina, the only current value creator—face enrollment declines. MA plans face continued rate pressure.

Critically, OBBBA does not address provider consolidation. No new antitrust authorities. No pricing transparency requirements with enforcement teeth.

The legislation removes the revenue cushion on the payor side while leaving the cost drivers intact on the provider side.

Markets are forward-looking. Molina's stock dropped 58% in six months—from $360 to $155—as investors priced in the Medicaid exposure.

The only insurer generating positive returns is now valued for potential failure.

In the years before 2008, the warning signs were visible. Mortgage default rates were rising. Underwriting standards had collapsed. The loan tapes inside CDOs were full of garbage.

But the Federal Reserve saw monetary policy. The SEC saw securities disclosure. State regulators saw home insurance solvency. Ratings agencies saw fee revenue. Congress saw homeownership rates.

Nobody was charged with seeing the whole system. Fragmented jurisdiction meant fragmented vision.

Healthcare is similarly fragmented.

No single entity is responsible for asking: "Is private health insurance financially sustainable as a business model?"

The question wasn't asked because it wasn't anyone's job to ask it.

This isn't malice or conspiracy. It's how fragmented oversight produces blind spots large enough to hide systemic risk.

In The Big Short, Michael Burry found an instrument—credit default swaps—that allowed him to translate his foresight into a position. He saw the collapse coming and found a mechanism to act on what he saw.

Healthcare has a different kind of telescope available.

Remember why managed care failed to bend the curve?

The programs used claims data—backward-looking. By the time patients showed up as high-risk, they were already high-cost. The trajectory was locked.

The telescope that was missing now exists.

Payor actuarial models are backward-looking. They price risk based on historical claims experience. But chronic disease progression is nonlinear. A patient can appear stable for years, then cascade rapidly through complication stages.

By the time progression appears in claims data, the costs are largely locked in. The hospitalization, the dialysis, the ICU stay—they're already inevitable.

DPI identifies patients at inflection points—what we call PNG04 and PNG05 stages—where disease complexity is present but complications haven't yet occurred.

At these stages, intervention can still alter the trajectory.

This is where the curve can actually be bent.

This is the equivalent of reading the loan tapes. It shows what's actually inside the book.

Here's where our story can diverge from The Big Short.

Burry, Eisman, and the others could only do one thing with their foresight: bet against the collapse. They couldn't stop it. They couldn't go door to door and refinance the bad loans. They couldn't fix the underlying mortgages.

By the time Burry saw it coming, the loans were already written. The CDOs were already packaged. The collapse was baked in. All he could do was bet on timing.

Disease progression is different.

A mortgage that's been signed is a fixed obligation. Disease progression is a clinical trajectory that can still be bent.

At PNG04, a patient is at an inflection point—multiple chronic conditions, but still low complexity. Intervention at this stage costs $1,000-$3,000 per year. The prevented complications—hospitalization, amputation, dialysis, ICU—are worth $50,000-$100,000 in avoided costs.

That's not a bet on collapse. That's an intervention that changes the outcome.

The foresight doesn't have to be used to short the system. It can be used to fix it.

We have the analysis. We've done the math. The data is in public filings.

Somebody needs to show them the math.

"In The Big Short, the banks got bailed out. The homeowners lost their homes. Nobody went to jail. By 2015, Wall Street was selling the same toxic products under a new name: 'Bespoke Tranche Opportunity.'"

The question is not whether the current model is sustainable.

The question is whether we see it clearly—
and what we do with that clarity.