A Broad Church: BRK/A, OpenAI, Medicaid

Summary

Money Stuff: The Podcast

Episode Title: A Broad Church: BRK/A, OpenAI, Medicaid
Release Date: May 9, 2025
Hosts: Matt Levine & Katie Greifeld

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1. Warren Buffett's Retirement and Berkshire Hathaway's Future

The episode kicks off with a significant update from the recent Berkshire Hathaway shareholder meeting where Warren Buffett announced his retirement at [02:43], stating, "I'm out at the end of the year." This revelation sparked immediate discussions about the future leadership and strategic direction of the conglomerate.

Katie Greifeld reflects on the surprise element despite knowing the successor was likely to be Greg Abel, highlighting the uniqueness of Berkshire Hathaway as a company primarily driven by Buffett's exceptional stock-picking prowess rather than a traditional operating CEO. Matt Levine elaborates on this by noting, "It's so unique to have a big company that is sort of best known as a vehicle for a guy's stock picks." He emphasizes the challenge Berkshire faces in maintaining its investment strategy under new leadership without Buffett's direct influence.

The conversation delves into the "Warren Buffett premium", where investors are attracted not just to the company's diverse holdings but also to Buffett's legendary reputation for capital allocation. Levine speculates on how this premium might diminish post-Buffett, questioning, "I don't have a great empirical sense of how big the Warren Buffett premium is."

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2. Bill Ackman's Strategic Moves with Howard Hughes

Transitioning from Berkshire Hathaway, the hosts discuss Bill Ackman's recent acquisition of nearly 47% of Howard Hughes at [09:29]. Ackman's intention to model Howard Hughes after Berkshire Hathaway is a focal point, with Greifeld observing, "he's trying to basically model himself after Berkshire Hathaway become a modern day Berkshire."

Levine compares this maneuver to Buffett's strategy, noting differences in industry focus—Ackman is steering towards real estate rather than insurance. He remarks, "It sort of makes sense to be like railroads and insurance companies. We should make the CEO a guy who knows how to run railroads..." This analogy underscores the strategic alignment Ackman seeks in transforming Howard Hughes.

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3. OpenAI's Corporate Structure Transformation

A substantial portion of the podcast examines OpenAI's shift from a nonprofit to a public benefit corporation (PBC), discussed around [14:57]. Levine characterizes OpenAI as a "normal tech company with a lot of weird clothing on it," pointing out the company's intricate balance between visionary leadership and traditional corporate structures.

Key points include:

• Governance: The nonprofit board maintains control over the for-profit entity, ensuring decisions align with a broader mission beyond shareholder profits. Levine explains, "the nonprofit board controls the for profit board...and gets to appoint the board of the for profit company."

• Sam Altman's Role: Despite being the CEO, Altman owns no shares in OpenAI, raising questions about his compensation and incentive structures. He states, "He's not Mark Zuckerberg or Elon Musk...his wealth is a 12 digit stake in OpenAI." This highlights the unique dynamics of leadership in OpenAI compared to other tech giants.

• Regulatory Oversight: The involvement of the California Attorney General introduces another layer of oversight, potentially influencing OpenAI's strategic decisions. Levine notes, "There's some oversight of nonprofits that exists here that wouldn't exist if it was just a regular public company."

Greifeld adds perspective on the PBC model's viability, suggesting it offers CEOs greater flexibility and protection from shareholder pressures, though Levine counters by discussing how it might actually reduce binding obligations to shareholders.

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4. Medicaid Provider Tax Loophole and Political Challenges

Shifting gears, the hosts tackle the complex issue of Medicaid provider taxes, introducing it as a "great racket" used by state governments to optimize funding for medical care providers. Levine describes the mechanism, "States have figured out that if the state just paid more, then the federal government would match more..." Essentially, states impose special taxes on healthcare providers to leverage higher federal funding.

Katie Greifeld underscores the political sensitivity of reforming this system, mentioning that House Speaker Mike Johnson has retreated from efforts to eliminate the loophole due to its unpopularity in swing states. Levine explains the dilemma states face: removing the loophole would either necessitate cutting Medicaid services or increasing taxes, both politically untenable options.

The discussion includes:

• Economic Impact: A case study of Lincoln Health in Colorado illustrates the financial implications, where a $500,000 provider tax leads to over $3.6 million in additional Medicaid funds.

• Regulatory Challenges: Levine points out that while the intent behind provider taxes is to redistribute funds to Medicaid-serving hospitals, states have often manipulated regulations to maximize their financial advantage, thereby undermining the system's integrity.

Greifeld appreciates the complexity of Medicaid funding strategies, highlighting how states use such mechanisms to sustain Medicaid programs without overtly increasing their budgets.

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Conclusion

Throughout the episode, Matt Levine and Katie Greifeld provide insightful analyses into complex financial and corporate structures, blending wit with technical explanations. From the succession plans of a conglomerate giant and strategic moves by hedge fund leaders to the intricate governance of a leading AI company and the political-economic strategies underpinning Medicaid funding, the hosts deliver a comprehensive exploration of each topic.

Notable takeaways include the fragility and significance of leadership transitions in large companies, the evolving nature of corporate governance in tech industries, and the persistent challenges in aligning political incentives with effective public service programs.

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Notable Quotes:

• Matt Levine [02:43]: "I'm out at the end of the year."
• Katie Greifeld [03:24]: "Having an orderly transition is useful."
• Matt Levine [06:37]: "We have candy. We own a big chunk of Apple for some reason."
• Katie Greifeld [08:29]: "The cash pile is currently at like $350 billion."
• Matt Levine [14:57]: "OpenAI is a normal tech company with a lot of weird clothing on it."

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This summary encapsulates the key discussions and insights from the "A Broad Church: BRK/A, OpenAI, Medicaid" episode, offering listeners a detailed overview of the critical topics covered by Matt Levine and Katie Greifeld.

Transcript

[Matt Levine]

You're listening to an iHeart podcast.

[Kelly Cavagnaro]

Hi, I'm Kelly Cavagnaro, Managing Director, Head of North America Institutional Distribution at Janice Henderson Investors we believe working together is the way to work better. Like combining your portfolio plans and our in depth strategy. Your valued assets and our valuable insights. Your mission and our vision working in harmony to seek the right investment opportunities. Janice Henderson Investors Investing in a brighter future together.

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[Matt Levine]

News I've been up since like 3:30 this morning because our saw a raccoon and barked at him and then we had to go outside and chase the.

[Katie Greifeld]

Raccoon and that took hours.

[Matt Levine]

That just woke me up and then I just didn't get back to sleep. I got up pretty early anyway.

[Katie Greifeld]

That's brutal.

[Matt Levine]

My kids, God bless them mostly, have always been pretty good sleepers. The dog's turn today.

[Katie Greifeld]

But you know, I feel like we should note that we're in two separate places right now.

[Matt Levine]

We're in two separate places. I'm in the Bloomberg podcast studio, which is really cool.

[Katie Greifeld]

I'm at home. So I actually feel somewhat prepared for this, which is.

[Matt Levine]

Oh, wow. I don't. It's gonna be great. It's gonna be all you.

[Katie Greifeld]

I don't feel that prepared. But let's. Let's dive in.

[Matt Levine]

Hello.

[Katie Greifeld]

Something huge happened. Oh, wait. We have to. We have to do that.

[Matt Levine]

We don't have to. Go ahead. Something huge happened.

[Katie Greifeld]

Something huge happened.

[Matt Levine]

We can dispense with the introduction.

[Katie Greifeld]

People know who we are, don't we? Speak for ourselves.

[Matt Levine]

Hello. It's the money stuff podcast. The stuff with the money. I'm Matt. That's Katie. Let's go.

[Katie Greifeld]

All right, let's go. Warren Buffett Wow.

[Matt Levine]

I tell you, it happened over the weekend at the Berkshire Hathaway shareholder meeting. Warren Buffett was like, by the way, I'm out at the end of the year and you know, as happens on the weekend, I'm like, ugh, I gotta write about this on Monday. My wife was like, is this really news? It's a 94 year old man retiring.

[Katie Greifeld]

It's like, yeah, it is kind of funny and charming how shocking it was. I mean, not shocking, but still when the moment before everyone was surprised. Even though we also knew who his successor was going to be. Because it's been teased since like 2021.

[Matt Levine]

Not to be morbid, but like, if you are a well regarded, successful person who is working successfully at age 94, people have a reason not to expect you to retire. Like, that's like, I'm going to be carried out, you know. So it's interesting that he's retiring, but.

[Katie Greifeld]

At the same time, I feel like one of your legacies will be how well you pick your successor.

[Matt Levine]

That's true, but you're right, I mean, we knew who the successor was, but yes, like having a sort of orderly transition is useful.

[Katie Greifeld]

I kind of want to talk about Greg Abel. I mean, not to be disrespectful to Warren Buffett, but he's interesting in that he doesn't have much of an investing background. Do you think about Charlie Munger? You think about Warren Buffett, you think about fantastic investors. And he doesn't necessarily have that resume. He's more of an operator, like a business operator.

[Matt Levine]

It's so unique to have a big company that is sort of best known as a vehicle for a guy's stock picks. And the guy who made the stock picks is really good at making stock picks. And so it's like there's a lot of value created in that company. But also they bought a lot of companies that they operate and manage. And it would be surprising if they took that giant company and transitioned it to the second greatest stock picker ever. It sort of makes sense to be like railroads and insurance companies. We should make the CEO a guy who knows how to run railroads and hopefully the stock picking will take care of itself. But it would be weird if they picked a guy with a stock picking background because he'd have to run a company.

[Katie Greifeld]

Yeah, that's what he's going to do. I mean, I read something, I forget who it was from which publication, but you think about Berkshire Hathaway. It has lessened its reliance on the insurance side of things. It's a lot of the energy business now, and that's obviously where Greg Abel. That's his sandbox. At the same time, though, it is fun to think about what Berkshire Hathaway under Greg Abel could look like. There's a lot of speculation that maybe we could see some spinoffs. It's this huge, sprawling conglomerate with like 400,000 employees. Do you start to break things apart a little bit? So far, Greg Abel seems to be saying that obviously they're going to continue on the track they're on. But it's fun to imagine it's pretty.

[Matt Levine]

Early days for him since he's not.

[Katie Greifeld]

In charge, you know, but he's had a long time to think about it. And it's true, it doesn't take over until January 1st of 2026, but I don't know. I imagine in his idle daydreams, he thinks about what he's going to do.

[Matt Levine]

It is, in so many ways, a weird company. Including just being a sprawling conglomerate is not really, you know, hasn't been in Vogue for 40 years now. And there are a lot of things that Berkshire gets away with or like, is beloved for because of what, Warren Buffett's presence. But without Warren Buffett's presence, at some point someone's going to be like, wow, we could use capital more efficiently. We could have a cleaner story to tell to investors. Because the story you tell the investors now is like, ah, look, it's Warren Buffett, right? But you can't tell that story anymore. And then you have to tell a story like, ooh, or an energy company or whatever. You go from having this very straightforward, very widely appealing story about Berkshire Hathaway to being like, well, we do mobile homes and insurance.

[Katie Greifeld]

We have candy.

[Matt Levine]

Candy. We own a big chunk of Apple for some reason. It's true. When it's like all of this disparate stuff is stuff that Warren Buffett likes. Everyone's like, oh, Warren Buffett likes it. But it's like all this disparate stuff that Warren Buffett liked a long time ago, then it's a less compelling story.

[Katie Greifeld]

Also, a question maybe they'll have to confront is, we don't pay a dividend. Which is fine because you had Warren Buffett there, but now maybe they'll start paying a dividend. I don't know.

[Matt Levine]

Yeah, it's the thing I think about a lot, right? I write often a headline, a section header. People are worried about stock buybacks, right? There's this idea that either a company allocates capital, it has money and it uses that to invest in building factories or buying other companies or doing whatever it does with the capital, or it returns the capital to shareholders and says, you would do a better job of investing this capital than we would. Nobody is agitating for Berkshire to return capital to shareholders because if you're an investor in Berkshire, you're not buying it because you're like, oh, I'm making a very focused bet on energy or whatever. You're not like, I just want their energy exposure. You're buying it because you want Warren Buffett exposure. And you're buying it because you're certain that Warren Buffett is a better allocator of capital than you are. You're buying it because you want Warren Buffett, who has the giant cash pile. You're willing to wait around until he finds what he wants to do with that cash pile because you're certain that he's going to do a better job of investing in that cash pile than you are. But like most companies, there's some shareholder agitation to say, look, you CEO of a company, if you hang on to a lot of cash, you'll probably deploy it in some wasteful way. You'll probably, like, do some vanity project or, like, invest in some dumb idea. You should return the cash to shareholders, and the shareholders will do a better job of figuring out what to do with the cash than you will.

[Katie Greifeld]

Yeah.

[Matt Levine]

And once Warren Buffett leaves, all those normal pressures kind of come into play.

[Katie Greifeld]

For those keeping track at home, the cash pile is currently at like $350 billion. So it's quite a bit.

[Matt Levine]

That's a big dividend.

[Katie Greifeld]

I'm interested to see what happens to the shares. In general, we talk about the so and so premium on the show frequently. Usually it's the Elon Musk premium. In this case, it's the Warren Buffett premium, which ties into the discussion over the dividend nicely.

[Matt Levine]

Yeah, I don't have a great empirical sense of how big the Warren Buffett premium is. I've heard people argue that it has historically been large and is smaller now because even three months ago, you were discounting a relatively short period of the Warren Buffett premium. You're like, well, Warren Buffett will be investing this money for some period of time, but not perpetuity. But, yeah, it's interesting to see what the Buffett premium will wash out to be.

[Katie Greifeld]

So we're talking about Greg Abel, the successor to Warren Buffett in Berkshire Hathaway, but perhaps a less formal.

[Matt Levine]

I know where you're going with this.

[Katie Greifeld]

Has Also emerged this week.

[Matt Levine]

Can I guess, please? I wish I had a funnier guess. Friend of the show, Bill Ackman.

[Katie Greifeld]

Bill Ackman, he's executive chairman of Howard Hughes. He finally did it.

[Matt Levine]

He's striking while the iron is hot. Like these are like simultaneous actions, right? Like he struck his deal with Howard Hughes to take like almost control 47% of Howard Hughes.

[Katie Greifeld]

47% of Howard Hughes holdings. So he is weighing plans to build and ensure expand the real estate company's remit. And as he stated plenty of times before, he's trying to basically model himself after Berkshire Hathaway become a modern day Berkshire. And the timing was interesting. Buffett announced this over the weekend and then this news for Bill Ackman broke on Monday. So maybe they just guessed at the time.

[Matt Levine]

It's a real rush to get it done. 24 hours to start the new Berkshire.

[Katie Greifeld]

24 hour turnaround.

[Matt Levine]

Yeah, it is like Berkshire in the sense that it is not an insurance company that he is acquiring control of in order to eventually run an insurance company. Berkshire Hathaway started as a textile company and then acquired insurance. And insurance turned out to be a big part of Buffett's success because you have the sort of cheap, non callable leverage that allows you to make a lot of interesting bets. Bill Ackman would also like to do that, but acquiring an insurer would be too easy. So he acquired a real estate company to build his Berkshire out of. I don't know.

[Katie Greifeld]

Yeah.

[Matt Levine]

It is interesting to me as a guy who reads and writes about hedge funds and high frequency trading firms and stuff, how revered Warren Buffett is for doing this really old school thing which is fundamental analysis, long term buy and hold, long investing in stocks, right. I mean, he also, you know, as we were talking about like he also like runs a conglomerate, right. And there's a lot of operating businesses there. But like he's famous for being like, ooh, I like Coke, I'll buy Coke. And Coke goes up, right? And he holds it for decades. And when you look around at like people who are financial celebrities these days, 40 years ago, like Warren Buffett was the best of a group of people who were competitors in that business, right. Like, you know, you would comp him to like celebrity mutual fund managers, right? But you look at it like financial celebrities these days. There's not a lot of that. You know, it's most mostly people who run hedge funds and are not giving you long exposure to large cap equities, but they're doing some more complicated, more market neutral more alpha generating things. Not stock pickers, not stock pickers and certainly not very long term stock pickers. And the guy who has really positioned himself as being that is Bill Ackman. And you look at his fund and it's whatever it's 12 or 14 names that don't turn over that often and he'll tell you they do derivative stuff on the side to smooth the returns. But the main business is long term fundamental stock picking. So it is interesting that he wants to get into the Warren Buffett game and he's like the only person who's doing the thing that Warren Buffett was doing, which I think is kind of passe in many respects but still has an obvious appeal.

[Kelly Cavagnaro]

Hi, I'm Kelly Cavagnaro, Managing Director, Head of North America Institutional Distribution at Janice Henderson Investors we believe working together is the way to work better. Like combining your portfolio plans and our in depth strategy, your valued assets and our valuable insights, your mission and our vision working in harmony to seek the right investment opportunities. Janice Henderson Investors Investing in a brighter.

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[Katie Greifeld]

If you thought that Berkshire Hathaway was an unusual company, not a normal company, boy do I have a corporate structure for you OpenAI.

[Matt Levine]

See, I think that OpenAI is a normal tech company. I think OpenAI is totally normal. OpenAI is a private tech company that is backed by venture capitalists and also Microsoft and like SoftBank. Right? So the classic capital structure, except for Microsoft has like venture capitalists and has like a giant slug of money from SoftBank. And it is run by a charismatic vision visionary CEO Sam Altman. And the explicit proposition of the company to investors is, look, we're not going to be focused on maximizing profits for you in the short term. We're not going to be run as a business. We have a vision about what is good for humanity and we're going to pursue that long term vision. When I say we, I mean Sam Altman has a vision for what is good for humanity and he's going to pursue that long term vision. And shareholders will not have much ability or desire to like meddle with that in the pursuit of short term profits. And that's like very explicitly the proposition that like Facebook put in its IPO perspectives and that has become like standard in Silicon Valley. Right? It's like what you want as a venture capitalist is a visionary CEO with a like, mission that is not the short term pursuit of profit, but has some grand vision of like humanity's future. And you want to invest in that and kind of like take your hand off the wheel and let the visionary CEO cook. And that's what's happening here. But it's nonprofit. There's like all this stuff, but like that's what's happening. The News is that OpenAI is a nonprofit that controls a for profit basically, and they were going to convert to being a regular for profit and now they're not. And instead they're going to be, you know, a for profit company and it's going to be pretty normal and it's going to have shareholders. And one of the big shareholders will be the OpenAI nonprofit. But the nonprofit will control it. Right. I've said it'll have super voting shares. Something that rhymes with that. Maybe it'll have super voting shares. Maybe it'll have a contractual right to appoint the board, but it'll appoint the board of the for profit. And you know, who will run the nonprofit. Well, there's a nonprofit board and like the board will sort of perpetuate itself, right? Like the current board will pick future board members. And like the board is like, I don't want to say handpicked by Sam Altman, but there was a nonprofit board that fired Sam Altman and Then he came back and as a condition of him coming back, he fired that board and replaced it with his board. So, you know, who's going to disagree with his vision of what's best for humanity? Like Softbank? Probably not. So I just think it's like a very normal tech company with a lot of weird clothing on it. It's a story that you've heard before about Facebook.

[Katie Greifeld]

I find it a little bit exhausting, the lip service. Maybe it's not lip service, but that these visionary found to bettering humanity. It makes a little bit more sense when you're talking about the mission of OpenAI. The mission of Facebook is pretty rich. I mean, when you phrase it that way, it just sounds like another form.

[Matt Levine]

Of think they believe it in some form. It's not.

[Katie Greifeld]

It rhymes with it.

[Matt Levine]

It's very grandiose. Right. It's in many ways one person's idiosyncratic vision of benefiting humanity. Right. There's a broad category of ways that AI can go where Sam Altman will be like, that was great for humanity. And everyone else will be like, no, it wasn't. Right. That's a distinctly possible outcome.

[Katie Greifeld]

Yeah. So how it stands right now? So Sam Altman wanted to completely separate from the nonprofit board, his nonprofit overseers. That's not happening. They're now a pbc, which it seems like wasn't a common structure until you started seeing these AI labs.

[Matt Levine]

Yeah, there were a bunch of them. Like it's been a thing for like more than a decade now. Yeah, the non OpenAI labs got really into being public benefit corporations. The idea of a PBC is that you can run the company, the board can run a company with the explicit ability to consider things other than shareholders, to consider the good of humanity, which I kind of think companies can do anyway. I don't know how material it is to be a pbc. I mean, reading between the lines just a teeny bit, they wanted to be a for profit company where the nonprofit board owned a minority of the shares and a majority of the directors were elected by normal shareholders. And. And what they have now gotten is that. Except that the nonprofit board controls the for profit board controls the, you know, has a majority voting stake in the for profit company and so gets to appoint the board of the for profit company. But this is a pretty minor difference, I think. Well, sorry, it's not a minor difference. It's a minor structural difference. It's a major difference whether the company is sort of ultimately controlled by a board answerable to shareholders or ultimately controlled by a board, you know, answerable to the good of humanity as somewhat filtered through Sam Altman's visions.

[Katie Greifeld]

I don't know. Again, it kind of reminds me of ESG because you think about oil companies getting dinged for not prioritizing shareholders and starting to care about the environment. Maybe if they were PBCs, they would be insulated from those critiques.

[Matt Levine]

Yeah, I think it'd be hard to convert a whole company to a pbc, but it would be interesting to try.

[Katie Greifeld]

Yeah, it would be fun. If I were starting a company right now, I would probably structure myself as a pbc. It seems like it just gives you a layer of protection.

[Matt Levine]

Yes, yes, exactly. Like a pbc. This is what I was saying about, like, the vision of humanity. Like a PBC at the margin makes you less answerable to shareholders and gives you more ability to be like, no, we're considering other stakeholders or other interests. Right. And like, that's always added to the flexibility of a CEO and a board. Right. It always gives you an ability to say no to something you don't want to do because you're like, oh, we considered a different stakeholder. Right. Like, it's insulation from pressure. And it is phrased or interpreted as like, this company has more obligations because it has obligations to humanity as well as shareholders. But in fact, it means it has fewer obligations because it means it doesn't have a binding obligation to shareholders in the same way that a regular company does. And the obligations to humanity are not particularly binding. And so you just get to make more decisions based on what you want to do rather than what the shareholders want. This is my technical take.

[Katie Greifeld]

I like this. So, I mean, I don't know. It's just humanity is a broad church, and what's good for it is open to interpretation.

[Matt Levine]

I want to say two other things about it. So, one, I'm saying that OpenAI is now in a position where it can do what it thinks is best for humanity based on Sam Altman's vision of what is best for humanity. But that's not quite true. So, first of all, there is a board, and the board has to exercise its own independent judgment and is not totally under the control of Sam Altman, who is not a shareholder and has only whatever moral power he brings to it. And one board seat, moral power is quite big because when he got fired, all the board got fired too. But anyway. But the other person who has a lot of say over OpenAI's vision for humanity is the Attorney General of the State of California. Also Other attorneys, like Delaware, but largely California, because OpenAI is controlled by a nonprofit. The nonprofit is subject to state attorney general jurisdiction. And the Attorney General's, particularly of California, had a lot of input into this for profit conversion and I think still do get to sign off on the current structure and they presumably have some power going forward. If OpenAI, the nonprofit, says, we are going to appoint Skynet to the board of the public companies who can enslave humanity, the California Attorney General can be like, no, that's not in the best interest of humanity, so don't do it. There's some oversight of nonprofits that exists here that wouldn't exist if it was just a regular public company. So I don't know how that's going to work. I don't normally think that's super activist oversight, but because of all the weird stuff that has gone on with OpenAI, you know, the California Attorney General is paying close attention and so there is some opportunity for that oversight to matter. The other thing I think is interesting is like, you know, I've said this is a normal company with a founder with a vision, blah, blah, blah. But the one thing that makes it not normal is that Sam Altman owns 0 shares of this company. And I don't know how that plays out, right? Like, one possibility is that he will get some shares, right? Like at some point during this reorganization, he will say, as he sort of said before, like in previous iterations, he will say the shareholders, you know, Microsoft, SoftBank, whoever, the shareholders really want me to own stock so that I have properly aligned incentives. And so over my objections, I'm taking, you know, $20 billion worth of OpenAI stock, right? Like that's a possible thing that could happen. But it's hard with this reorganization because now there's this two tier structure where the nonprofit controls the for profit. And historically OpenAI's nonprofit board has not been allowed to own stock in the for profit in order to keep its incentives pure. And that reasoning still applies. I don't know if they'll still do that, but like, it still makes sense to say if you're on the board of the nonprofit. That is true. Trying to make sure that OpenAI does things that are best for humanity. You shouldn't have a huge economic stake in the for profit subsidiary because that would lead you to make decisions in the best interest of profit rather than the best interest of humanity. So I think it actually would be kind of hard to give him a big slug of stock now, although I don't really know. And Then how else can he get paid? I mean, my impression is that he does not want for material comforts for a variety of reasons. He has had a career as a founder and venture capitalist before OpenAI, but he also has all sorts of stakes in all sorts of aijs and businesses. There's a lot of ways for Sam Altman to fund his lifestyle that kind of float around OpenAI and compose potential conflicts of interest. So it'll be interesting to watch that because he's not Mark Zuckerberg or Elon Musk or whatever where his wealth is a 12 digit stake in OpenAI.

[Katie Greifeld]

I don't know Sam Allman at all, obviously, but I do wonder if he had a time and he could go back to the founding moments and he alone was making the decisions, how would he have set OpenAI up? Would he have just completely skipped all this nonprofit drama? They're PBC now. But does he wish that he had just founded it or it had been founded as a normal company and he was a normal startup CEO and it exploded this way?

[Matt Levine]

It's hard. I think that probably he would have liked to skip all this drama and getting sued by Elon Musk and being subject to the oversight of state attorneys.

[Katie Greifeld]

General, getting ousted, then brought back in.

[Matt Levine]

Yeah. Although getting ousted and brought back could happen to a for profit CEO as well.

[Katie Greifeld]

That's true. And it probably helps with your aura points.

[Matt Levine]

Oh yeah, it definitely entrenches his power when he's ousted and has to be brought back in 24 hours because like, otherwise the company would collapse. Like that makes him like pretty essential. But no, I think it was a mistake to start it as a nonprofit in the sense that they thought it would be less capital intensive to build large language models than it was. And so they were like, we're going to do this research funded by donations. And then they realized, oh no, we need tens of billions of dollars of donations and we're not going to get that. So we have to be a for profit. So I think in that sense, very clearly they would have rather started as a more normal company so that they could raise money efficiently without getting sued by Elon Musk. The only caveat to that is I do think that especially in the early days, and I think even a little bit now, the overlap between top AI researchers and people who worry about AI alignment is pretty significant. And I think early on it was important to be a nonprofit in order to attract people and motivate people to say, we're not just a company, we're building AI for the benefit of humanity, I think is good for getting researchers. I'm not sure it is anymore. I think it was helpful early on and I'm not sure that they would have had the success they they have had if they were pure for profit. But there's enough counterexamples where Google also building AI. So I think probably would have rather started as a for profit.

[Katie Greifeld]

One thing I was curious about as I was reading one of your columns about this was that this capped profit model, the company said that it worked when there was really only one company building generative AI. But in this era where you have a lot of companies who are doing this, that they need to switch to the PPC model, I wasn't quite sure how to read that. Why wouldn't the PVC model make sense from the beginning? Why would a capped profit model ever make sense?

[Matt Levine]

I love the capped profit model. I've written about Sam Altman. I've described what he does as business negging. A lot of what happens at OpenAI is they're like, oh, you know, we're just going to make too much money and it's going to destroy the meaning of money.

[Katie Greifeld]

God, I hate that.

[Matt Levine]

And so we're just warning you about that. If you invest with us, we're going to give you so much money back that money will lose all meaning. And people are like, oh, that sounds really good. There's a lot of ways to express that. And one of them is the cap profit. Be like, guys, I'm really sorry to tell you, but once we hit a trillion dollar valuation, we can't give you any more money. People are like, wow, that sounds pretty good. But then you have all these competing AI companies and they're like, well, we're aiming for a $10 trillion valuation. You get all of it and then it's harder to sort of use the cap profit model. But when OpenAI was the only game in town, those warnings were so grandiose that I think they were appealing to investors also, even if they weren't appealing, even if they were bad, people are like, well, this is the only game in town. If I want AI exposure, I'll get this AI exposure up to a cap as opposed to nothing. But if they're not the only game in town, people rather not have the cap.

[Katie Greifeld]

Now they're competing with anthropic to learn $30 billion from SoftBank. So SoftBank would want something cleaner.

[Matt Levine]

Yeah, absolutely.

[Katie Greifeld]

That makes sense.

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[Katie Greifeld]

Shall we take a hard left turn and talk about Medicaid, right?

[Matt Levine]

Like the other end of the spectrum.

[Katie Greifeld]

What a great racket state governments and hospitals have going on.

[Matt Levine]

I used to be an equity derivatives banker and one thing that I did I'm not going to get into the details. Convertible bond call options, overlays. But what you do is you're like, you go to a company and you're like, we're going to sell you this product and then it costs you like $60 million. You write a check to us for $60 million and the IRS will cut your taxes by $80 million. And also the product has other nice features, but the IRS will more than pay you for the product. This is always true, but it was occasionally true. Sometimes the IRS would pay you for half of the product. I was a derivatives banker for years before I figured out what I was doing. But when you figure out what you're doing. You're like, oh, my gosh, all products should be like this. All products should be like, two people get in a room and one of them is like, I'm going to sell you this thing and someone else is going to pay for it. And then you have a great time because you're not fighting to divide the pie because someone else is providing you the pie. That's what's happening in Medicaid. Right. So what I wrote about this week is there's a Times article about Republicans in Congress trying to get rid of the Medicaid provider tax racket loophole. One state government calls it meta scam. But basically the idea is like, Medicaid is like hospitals or doctors, or frequently, like managed care organizations provide medical care to people who can't afford it insured under Medicaid, and they charge the government for that. And typically the way it works is that the state government pays some portion of the cost and the federal government pays some other portion of the cost. It's like, I think it averages to the Federal government pays 60% and the state government pays 40%, and the state is sort of like in charge of negotiating with hospitals. And so someone figured out that if the state just paid more, then the federal government would match more, and then the state would have a higher cost, but it would get more money from the federal government. And then what the state can do is it can tax the managed care organizations or the hospitals or whoever's providing the care. It can impose a special tax on them that takes back the money that the state paid. So ultimately, the state is paying less, the federal government is paying more, and there's a refund or a payback from the hospitals paying the tax to the state. And someone figured this out. And someone figured it out in the 80s and in the 90s, Congress passed laws basically regulating how you could do this. And states have gotten better and better at gaming the regulations ever since. And they, like, cheapened the cost of Medicaid to the state by, like, finding ways to make the federal government pay more than it's supposed to. And now Congress is looking again into eliminating that because it does look like cheating.

[Katie Greifeld]

Apparently, House Speaker Mike Johnson has backed away from this because it would be so politically toxic for Republicans in swing states.

[Matt Levine]

Yeah, because it's like a scam. Yeah, but it's a scam in the service of providing medical care. Like, it's. It's a scam. But it's not like the state governments are using it to buy Lamborghinis Right. It's like they're using it to provide medical care while like not squeezing their budgets too much. Right. And if you take away this scam, then the states that do it have to either like cut back drastically on Medicaid or like raise their taxes. And nobody's that excited to do that. And so that's why this, this scam has persisted because it achieves a basically acceptable political outcome. Right. Either someone has to pay for this care or it has to not be provided. And like, like either of those things are sort of toxic. And so making the federal government pay for it is kind of like the easiest choice. And they're doing it in a scammy way. And you could imagine a world in which the federal government said, instead of all this gamesmanship, what we're going to do is federalize Medicaid and we'll just pay for all of it and we'll negotiate the prices ourselves and it'll be easier. But that doesn't seem that likely to happen in the near future. And so you have this scamming.

[Katie Greifeld]

No. In the meantime, it seems like they're happy to just let this persist as it is. It's funny. So 49 states employ this. I mean, New Hampshire, I think is the one that calls it Metascam, but basically.

[Matt Levine]

Yeah, I think they invented it too, in New Hampshire. Yeah.

[Katie Greifeld]

Do you know the one state that does not use Medicaid provider taxes?

[Matt Levine]

Isn't it Alaska?

[Katie Greifeld]

It is Alaska. And I find that charming. Yeah. I was reading a CBS News article about this and I thought this was interesting. I think in the article one of the health providers they talked to said that, that we're still losing money on Medicaid patients, but it goes from like 60% coverage to 80% coverage or how much they're actually getting paid. But they quoted a Colorado based health system, Lincoln Health, saying that it paid $500,000 in provider taxes, but it netted more than $3.6 million extra from Medicaid according to its CEO, which is like 15% of its budget.

[Matt Levine]

And by the way, that's how it's supposed to work. Like, the regulations around how states are allowed to do this are complicated. But the basic idea of the reg is that if you have a provider tax, you're supposed to redistribute money from like non Medicaid hospitals to like Medicaid hospitals. So it's supposed to actually improve the allocation to Medicaid. Right. It can't just be a refund from Medicaid. It has to be like helpful to the hospitals that treat a lot of Medicaid patients. States have found ways to abuse that. So that's not even true. But like, that's the basic idea. So it's supposed to be good for the hospitals that treat a lot of Medicaid patients.

[Katie Greifeld]

I just like this as an example of a tax that hospitals or anyone else is happy to pay.

[Matt Levine]

I love it as an example of gamesmanship. And I drew the analogy to co pay assistance programs, which is drug companies. If you have insurance to buy pharmaceuticals and you have a 20% copay, then a drug company will be like, well, we'll make the cost of the drug $10,000 and then you'll have a $2,000 copay and we'll just give you the $2,000 copay, we'll pay it for you. And then the insurance company will pay the drug company 8000 do and the drug company will be better off than if it had just charged you a normal amount for the drug. And that's also regulated, but it's also a thing you can do a little bit at the margins. But the other analogy I was thinking of, and this is a tax that people are happy to pay, sort of is the SALT tax deduction. So historically Americans have been able to deduct their state and local taxes on their federal taxes. So if you pay $10,000 of state taxes, that reduces your federal income by $10,000. And in the first Trump administration, I think they capped that at like $10,000. So if a lot of money and live in a high tax state, you can't deduct all of your state taxes. And people immediately got to work figuring out how to game that. And one classic effort that I've written about is that the state could set up a charity and the charity is in the business of just providing state programs. The charity is just an arm of the state and you can make a donation to the charity. And if you make a donation to the charity, it's deductible from your federal taxes. And it also reduces one for one, your state taxes because they'll say, oh, that just counts as state taxes. So like it's not a state tax for federal income tax purposes, but it like reduces your state taxes. People tried that and the IRS said no. So that doesn't work. But it's a good effort. But the one that I really like is if you have business income in a pass through business. So like most classically, if you're a partner at a law firm, if you're a partner at a law firm, you get your share of the partnership's income just as your personal income. Like that's normally how it works. Like it just goes on your personal personal tax return and you pay taxes on it. But states figured out that they could make the state tax live at the business level. So the business pays the state tax. The business can deduct the state tax for federal purposes because it's a business expense. Right? And then you as a partner get lower federal taxes. And so like law firm partners and like some other partners of businesses can sometimes avoid the state and local tax deduction cap by a negotiated tax that they've worked out with their state. So I think there's a lot of this where state tax authorities and people and businesses try to work out ways to maximize their own take at the expense of the federal tax take. And this is one of them.

[Katie Greifeld]

It's just another example of that, that gamemanship.

[Matt Levine]

I started by saying this was my career for a while. I love, I love people dividing up.

[Katie Greifeld]

Tax benefits our listeners can't see. But there's a certain sparkle in Matt's eyes. He's there as he describes this.

[Matt Levine]

There's like a lot of tiredness in my eyes. And that was the Money Stuff Podcast. I'm Matt Levine.

[Katie Greifeld]

And I'm Katie Greifeld.

[Matt Levine]

You can find my work by subscribing to the Money stuff newsletter on bloomberg.com.

[Katie Greifeld]

And you can find me on Bloomberg TV every day on Openint between 9 to 11am Eastern.

[Matt Levine]

We'd love to hear from you. You can send an email to moneypodloomburg.net Ask us a question and we might answer it on air.

[Katie Greifeld]

You can also subscribe to our show wherever you're listening right now and leave us a review. It helps more people find the show.

[Matt Levine]

The Money Stuff Podcast is produced by Anna Mazarakis and Moses Andam.

[Katie Greifeld]

Our theme music was composed by Blake.

[Matt Levine]

Maples, Brendan Francis Newnham is our executive.

[Katie Greifeld]

Producer and Sage Bauman is Bloomberg's head of podcast.

[Matt Levine]

Thanks for listening to the Money Stuff podcast. We'll be back next week with more stuff.

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[Katie Greifeld]

Power.

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[Matt Levine]

Com, you're listening to an iHeart podcast.