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How the SVB Failure Affects Healthcare · CareTalk: Healthcare. Unfiltered.

• 0:00
  David: The Silicon Valley Bank failure came very suddenly and is a big surprise.
• 0:04
  David: Everyone else is talking about what it means for other banks and for the broader financial markets and the economy, but our question is, what, if anything, does it mean for healthcare?
• 0:14
  David: Welcome to CareTalk America's Home for Incisive Debate about healthcare, business, and policy.
• 0:19
  David: I'm David Williams, president of Health Business Group.
• 0:23
  John: And I'm John Driscoll, the president of Walgreen, south David, what is this whole bank in Silicon Valley?
• 0:28
  John: Talk
• 0:28
  David: to me.
• 0:29
  David: . Well, it isn't anymore, John.
• 0:31
  David: They, uh, they closed it down and they gave it a new name.
• 0:33
  David: So I think, you know, why, what is the thing?
• 0:35
  David: So it's kind of a new fangled bank, um, which we'll talk about in a minute, what's new about it.
• 0:39
  David: But it was done in, in the end by a classic bank run, which just means.
• 0:43
  David: Everybody wanted to rush and get their money out at the same time.
• 0:46
  David: And guess what?
• 0:47
  David: Even the best capitalized banks don't keep all the money in the, in the teller's tills ready to hand it out.
• 0:52
  David: But,
• 0:53
  John: but, but David, who, who is Silicon Valley Bank and why should we care?
• 1:00
  David: Silicon Valley Bank, as the name would, uh, imply, is actually bank set up in Silicon Valley and to serve Silicon Valley companies, tech companies.
• 1:08
  David: And it's, it's, it's elsewhere.
• 1:10
  David: And the other tech capitals like Boston, um, and London, uh, as well.
• 1:14
  David: And what they do is they work as a, as a classic bank, but they do some more innovative things.
• 1:20
  David: They are a little more generous in terms of understanding, okay, these are startup companies.
• 1:25
  David: While they're not established, uh, concerns, they don't have normal, uh, balance sheets, they have backing from venture capitalists.
• 1:32
  David: They have some needs along the way.
• 1:34
  David: And so they basically, they would consider themselves to be sort of enlightened in how they do banking, uh, for the startup community.
• 1:42
  David: But it's a relatively big bank, John, that was the 16th, 16th biggest bank in the country.
• 1:46
  John: And, and so why should, why should the average person care?
• 1:51
  John: And then let's get into what, what, what's the implications for he.
• 1:55
  John: , David: John, the reason the average all, they may not need to care, but in sometimes what you have with a, a bank run, they're always worried about the broader c contagion, you know, which means that, uh, oh, somebody wants to get money outta one bank.
• 2:10
  John: Now we need to get money out of all the banks.
• 2:11
  John: And that's what happened, John, at the, uh, the dawn of the Great Depression and they had a bank holiday and had to close the banks, et cetera.
• 2:17
  John: That's not at all what's happening here, John.
• 2:19
  John: And so I would say the average person.
• 2:21
  John: The average person doesn't actually need to worry.
• 2:24
  John: And in fact, what happened is some of the bad boys, so-called sophisticated investors, like some of the top venture capitalists kind of panicked themselves and instigated a run on their own bank.
• 2:36
  John: .
• 2:36
  John: John: See, I, I actually As you know, that, that there is a, that Silicon Valley Bank is really the bank for innovative digital healthcare companies and, and of lot things.
• 2:47
  John: The Napa Valley wine in Napa and Sonoma wine industry.
• 2:51
  John: And yes, they were known for generous and flexible terms, but they may look kind of goofy.
• 2:57
  John: In retrospect, uh, Silicon Valley Bank didn't, didn't start really large.
• 3:02
  John: It actually blew up, grew like crazy during the pandemic, when, when, when not just the economy was flushed with money as we kind of dealt with the public health emergency.
• 3:13
  John: But you saw, uh, digital companies as people work from home, just rake it in, in terms of venture capital.
• 3:21
  John: And it became this very fast running spin cycle.
• 3:23
  John: And I think they probably went from.
• 3:25
  John: 30th largest, the 16th largest.
• 3:27
  John: Very, very quickly, David, with the explosion of.
• 3:32
  John: Money into Silicon Valley.
• 3:35
  John: And Silicon Valley really represents not just the, the, the, the semiconductor wafer producers, but anything to do with software, enterprise software, consumer software, the Facebooks of the world, but also most of the.
• 3:50
  John: Digital health companies and what a lot of other small companies found is that they, because of that, those flexible terms, which generally banks that are growing like crazy will be more flexible because they're ge, they're seeing a influx of deposits, uh, and that that wheel was spinning really fast.
• 4:09
  John: But I actually think, David, when one.
• 4:13
  John: Name, large scale bank sort of goes kabuki.
• 4:18
  John: I I actually think everybody's gotta worry because the, a bank run is a bad thing for exactly what you said.
• 4:27
  John: That there is a, there is a, a na because of the leverage implicit in banking that you owe, they are, banks typically are lending a lot more money than they actually have on hand.
• 4:40
  John: That a short.
• 4:43
  John: , you know, run on it, which is really people pulling bank money out of the banks can undermine confidence, not just in one bank, but in many.
• 4:51
  John: And I think that's why the Feds stepped in.
• 4:54
  David: So John, let's, it certainly has, you know, you never know what's gonna happen with fear tends to spread.
• 4:58
  David: Let's spend another minute on the specifics of the Silicon Valley Bank and then talk about the healthcare side of it.
• 5:02
  David: So, as you said, they, they sucked in a lot of money, uh, during the pandemic boom, right?
• 5:08
  David: And those are short term deposits.
• 5:09
  David: The nature of bank deposit.
• 5:10
  David: It could be withdrawn immediately.
• 5:12
  David: They invested a lot of that money in long date, uh, tr.
• 5:16
  David: Which means that those are, they're very liquid means you can buy and sell them easily, but when interest rates go up, the value of them goes down.
• 5:23
  David: And then what happened is also everybody's insured up to $250,000.
• 5:27
  David: And most banks, that's most of the deposits, but it's Silicon Valley Bank because you're dealing with these, these companies that have raised a lot of money.
• 5:32
  David: 95 plus percent of the money is actually uninsured.
• 5:35
  David: So you had the fact that people said, wait a minute, I'm not necessarily insured here at this bank.
• 5:39
  David: And then also you've got, you know, venture capitalists that act like lemmings.
• 5:43
  David: And when one started to tell people to pull money out, everybody did.
• 5:46
  David: Other banks aren't networked like that and people have 250,000 or less in the bank in general.
• 5:51
  David: And that's one reason the banks are not, well,
• 5:53
  John: I don't threat, I I don't think you're right there.
• 5:55
  John: I think you see a lot of regional banks where not everybody is in.
• 6:01
  John: again, the insurance from the, the Federal Deposit Insurance Corporation is a federal benefit.
• 6:07
  John: Banks pay a fee to make sure they go there is an insurance fund and that's what's being used to bail out, even though no one wants to use that word, uh, the , Silicon Valley Bank.
• 6:18
  John: And I think it's the right, the right move.
• 6:21
  John: Uh, but what they've done is they've actually.
• 6:23
  John: Not just taking care of those up to$250,000, but pretty much every, everybody who's got deposits in relationships at the bank, although the, the, it, it will wipe out and take to zero the value of the equity, which is the stock and the bonds issued by Silicon Valley Bank.
• 6:41
  John: But the, but the, I I, I think that there's actually a lot of banks, David, uh, contrary to what you're saying, that.
• 6:50
  John: Significant amounts of funds above that insured level.
• 6:54
  John: Um, but what made this so potentially catastrophic and painful is it really hammered?
• 7:00
  John: Uh, a pretty critical part of the, the, the, the industry, uh, an industry.
• 7:06
  John: Much more comprehensively, really taking out, uh, potentially an entire generation of, of, of digital and digital health companies, which I think would've been devastating to the innovation economy.
• 7:18
  John: Um, but the secondary problem is a lot of the, you know, we, we want a, I think we want a diverse, uh, many sized banking industry in America.
• 7:30
  John: And when you have this kind of contagion as you call it, which is really.
• 7:34
  John: Of, of people's lack of confidence in the, in the, in the, in the, in the, uh, dependability of the banks they work with.
• 7:43
  John: That can actually spread to all, all regional banks.
• 7:45
  John: And there's a flight to scale and then you have more concentration of power and a small number of banks, and that's not good either.
• 7:52
  John: But the, the, the healthcare implication here is I think twofold.
• 7:57
  John: There's a lot of digital.
• 7:58
  John: I mean, look, look, David, look at their website.
• 8:00
  John: They've got a lot of healthcare companies listed there.
• 8:03
  John: This could, this could have really damage.
• 8:06
  John: Uh, the, the He Healthcare innovators.
• 8:08
  John: John, what
• 8:08
  David: I will say is that if you ever get tired of, uh, giving out prescriptions or whatever you're doing now, uh, in your current job, you could be a fed, uh, governor or lieutenant Governor.
• 8:17
  David: Let's talk about a couple of those things on their website, which has been taken down, but I, I, I spotted 'em before they did.
• 8:21
  David: So let's give a couple examples of companies we know.
• 8:24
  David: So they have a lot of case studies.
• 8:25
  David: So one is, uh, ade.
• 8:27
  David: Okay?
• 8:27
  David: So this is a company that, that takes risk on Medicare Advantage.
• 8:30
  David: Um, accounts for, uh, for physician practices.
• 8:35
  David: Now, what they say on the site is, look, here's a new company with an unproven business model.
• 8:39
  David: They only get paid, you know, once a year based on the savings calculations.
• 8:42
  David: There's no guarantees that they're gonna save anything.
• 8:45
  David: Um, but Silicon Valley Bank gave them a loan alongside their, alongside their seed round of financing, plus other regular banking things that staff need, like credit cards.
• 8:53
  David: So they understood presumably what was going on.
• 8:56
  David: Medicare Advantage, it's a big deal.
• 8:58
  David: A lot of big companies are gonna be interested in that.
• 9:01
  David: They need to get out of the gates.
• 9:03
  David: And so they were able to put that money, you know, that a regular bank wouldn't have done priva, another company in a similar uh, line of business, you know, gave them, uh, decent sized loans and allowed them to change as they matured from different types of financing.
• 9:17
  David: That was more from a venture debt standpoint to what they call cash flow debt based on their actual cash flow as the company, uh, grew and they provided more liquidity during the pandemic.
• 9:26
  David: And then you've got drug.
• 9:28
  David: that are trying to accelerate, uh, drug development.
• 9:31
  David: Dice Therapeutics was an example and help them to accelerate their development because they don't need to use all of just a venture funds, uh, in order to do it.
• 9:39
  David: They allow them to use.
• 9:41
  David: Uh, bank loans for things that actually can be secured like equipment and can be resold if the companies didn't, didn't do well.
• 9:46
  David: So they did encourage the innovation economy by doing that, but it was, they, they probably assumed wrongly that since they'd done so much for the innovation economy and the venture capital firms, the venture capital firms would repay them.
• 9:57
  David: And for example, if Peter Thiel had a question about how the bank was.
• 10:01
  David: He wouldn't have put it first on Twitter.
• 10:03
  David: He would've called the bank and gotten it taken care of quietly.
• 10:05
  David: But they were
• 10:06
  John: wrong about that.
• 10:06
  John: Yeah.
• 10:06
  John: You, you're, you're, you're, you're, you're, you're calling out I think two really important things, David.
• 10:11
  John: One is that Silicon Valley Bank was really a layer of venture capital and venture support that was critical for a lot of really successful, in some way be flaky companies.
• 10:22
  John: And they stepped into that role because there was momentum behind, uh, a lot of venture and early stage inventing when that's investing, when that stopped.
• 10:32
  John: I think the potential illiquidity lack of capital, uh, risk increases.
• 10:38
  John: I mean, when you go from a zero interest rate roughly period to when we're rising interest rates, the point that you made earlier, it really does change the risk dynamic pretty dramatically.
• 10:48
  John: Every CO a hundred basis points, one, every percent, um, actually can, can put a, a much bigger set of percent of companies into, uh, bankruptcy or into, into.
• 11:01
  John: Difficulty.
• 11:02
  John: Um, you know, I, I, I, I think you underestimate the import, the impact David, in, again, it ha this could have, could have had a devastating impact on healthcare innovators.
• 11:12
  John: But I also, I, I think you're underestimating the importance of protecting the entire system against panic.
• 11:19
  John: Uh, which, which is really what, this is what's impressive to me about the what the adminis.
• 11:25
  John: has done, and frankly what the Republicans and the Democrats pulled off in oh eight is the American economy is pretty good at coming together, government and business in a bipartisan way, in a crisis, and I think in, in this crazy partisan time.
• 11:42
  John: That's sort of an interesting.
• 11:44
  John: Um, uh, you know, it, it's, it's sort of reassuring that while everybody's trying to, you know, kill each other politically and play the culture war card, that in a, in a crunch, we do come together as I think you saw over the weekend for Silicon Valley Bank.
• 11:59
  David: John, let's talk about beyond the so-called innovation economy, which basically, from what I can understand means companies that do nothing and burn a lot of money.
• 12:06
  David: And let's talk about real healthcare companies like, uh, like hospitals.
• 12:10
  David: All right, John Is, are other institutions like hospitals and health plans, are they in danger of suffering a similar fate to what's happened to the so-called innovation economy and Silicon Valley?
• 12:20
  John: Yeah.
• 12:20
  John: I, I think it really comes back to that interest rate.
• 12:23
  John: You know, the, that's the, the amount of, of, uh, that's the way the, the federal government or the, the, the Fed, the, the, the, the Fed, um, actually regulates the bank lending rates, which affects interest rates on everything from mortgages and cars to bonds for hospitals.
• 12:40
  John: And I don't.
• 12:41
  John: Particularly in a rising rate environment.
• 12:43
  John: Um, that, that, that's, that there's, I think the fed's got a call this morning on where they're gonna, where they're gonna take interest rates.
• 12:50
  John: I don't think we know, I mean, there's this great phrase from, from Warren Buffett that you really don't know who's swimming naked until the tide goes out.
• 12:58
  John: And I think that's true.
• 13:00
  John: When, when, when you, when interest rates rise.
• 13:02
  John: You're gonna see secondary impacts that could be quite devastating.
• 13:05
  John: Hospitals are having the, one of the toughest, uh, uh, 12 month periods ever post pandemic, uh, trying to adjust to the new normal.
• 13:13
  John: They've all taken out a lot of bonds.
• 13:14
  John: Some of those bonds are variable rates, which is the rate varies.
• 13:17
  John: Their, their debt rating, which, uh, you know, varies with what the Fed rate is.
• 13:24
  John: So, I don't think we know, I, I, I, I think there's gonna be, it's less about Silicon Valley Bank and more.
• 13:30
  John: How do, how does the entire economy and healthcare is 20% of the economy adjust to the new normal where it costs more to do business?
• 13:39
  David: John, I think, uh, you put the spotlight correctly on.
• 13:44
  David: Hospitals, which don't tend to work with Silicon Valley Bank, but the extent that they're losing money.
• 13:48
  David: Cause hospitals have a very tough financial year now they have to finance that.
• 13:52
  David: So they need to issue typically new debt.
• 13:54
  David: So the bonds are at a higher interest rate.
• 13:56
  David: That means they have to pay even more, uh, in order to borrow because the general interest rate's gone up.
• 14:01
  David: And also their business is deteriorated, which means their credit rating.
• 14:05
  David: Are dropping in some cases from investment grade to so-called junk or high yield status, and it, it kind of can spiral upon itself.
• 14:13
  David: And so the hospitals may be the ones that, uh, that will need a bailout, uh, as opposed to the so-called, uh, innovators.
• 14:22
  David: John, what do you think?
• 14:22
  David: I,
• 14:24
  John: I think it's, uh, hospitals and doctors and everyone, and by the way, all of this is inflation.
• 14:29
  John: , which will push the fed to increased rates even far, far.
• 14:32
  John: I mean like this, this, this supply demand dynamic of inflation versus interest rate rises is gonna put a crunch on everyone in healthcare.
• 14:40
  David: Well, John, before we, um, you know, waste our listeners' time with any more wonderful news, I would say let's, let's cut it off right here and say that's it for yet another episode of CareTalk.
• 14:50
  David: We've been talking about Silicon Valley Bank and its implications for healthcare.
• 14:55
  David: I'm David Williams, president of Health Business Group,
• 14:59
  John: and I'm John Driscoll, the President of Walgreens Health if you like what you heard or you didn't, please subscribe on your favorite service.