Home Economics The Public Plan and Private Profit

The Public Plan and Private Profit


Sometimes we can become so involved with our own expertise that we can calculate ourselves out the door, down the street and into a trash bin. To use one example, why did we not see that President Bush and Vice President Cheney…which it seems now so crystal clear…had ulterior motives for attacking the country of Iraq? Why did we not see through that plan, which, given the tragic deaths of innocent Iraqis and the deaths of both Iraqi military and American military now seems so devious and cruel? We became so involved in the back-and-forth of irrelevant arguments that we lost sight of the truth. And the truth was that we did not need to go to war with Iraq. There were much simpler solutions.

Today we are involved in a debate over health care. That we should have one side even debating the issue with arguments that are eventually proved not only false but disingenuous should tell us something about the debate and about those opposing it. But not all people are disingenuous. Some…and some who are normally quite able and sound and ethical…seem confused by all the mixed rhetoric. That is what happened to distinguished economist, Dr. Robert Samuelson yesterday, October 26, 2009, concerning the public option to a health care plan. In our opinion.

That is not to say that Dr. Samuelson lacks knowledge, or a brilliant mind, or to deny his many fine accomplishments in economics. It is simply to say that, in this case, he is wrong.

Dr. Samuelson detracts from the value of the public option as a tool to reduce costs. He tips off his personal bias (in this particular aspect of the debate) with a passing comment in one statement that the public option is a way to “discipline greedy private insurers.” It may not actually be factual that private insurers, as a general group, are greedy and it is further unlikely that this proposal has any objective to “discipline” them. On the other hand, the public option is a solution to the economic problems of health care. It is the first step in a process.

Rather than counter Dr. Samuelson’s arguments one by one, it makes more sense to go directly to the issue. How do we manage health care for a country in the best possible way and with the least possible cost for those who need health care but have limited funds or no funds? How do we provide health care for all? And how do we even maintain a standard of excellence for those who can afford a level of health care that is beyond normal, that is perhaps, extra-ordinary, and who can afford to seek it and therefore deserve it?

Now one might say that everyone deserves the best possible health care. To that there should be at least as many who say that it is neither possible nor advisable to give everyone the best possible health care but instead give them excellent health care as a birthright and as an American citizen. At present, health care is neither. We are, however, as society that also believes that those who earn more should have more options.

One thing has become almost a certainty in this discussion. Profit is added to health care in the private health care industry. When you add profit, you do two things. One, you add a layer of management. Second, unless you have a monopoly which would automatically mean higher prices unless it were regulated, you would at the least add marketing, which is a a substantial cost.

There would be lower costs with a public option because there would be no management, merely levels of supervision. This is not a distinction with out a difference. When there is profit, there is the goal of attainment of profit. From this there is a different motivation. Incentives in a for-profit system are always to maximize profits or else the system is working less than efficiently. You cannot go maximum speed while keeping one foot on the brake. You either accelerate or decelerate in the free enterprise system.

So if the goal is profit, which it has been…so we do have some experience with how the play eventually ends…the ultimate goal is to get maximum price and maximum margins. We know how to do that. We make our care services as efficient as possible; we charge as much as the customer can possibly afford; we keep costs…delivery of care services…as low as possible. How do we do that?

Ethically, we do it by making sure that there are no extra tests performed, no extra procedures performed and no extra costs of any other kind that are introduced into the result that adds to cost. The health insurer pays for what is necessary at as many predetermined rates as possible. The insurer administers by watching overhead, like labor costs for administration, and calculating on a long time-horizon the premiums. When costs exceed premiums, and profit margins disappear, the private insurer acts exactly as would any other business.

If the insurer nudges up against being unethical, it might deny dubious claims or claims that are technically incorrect. It might maintain that, because someone had a pre-existing condition that could have caused a current health problem that it did, in fact, cause that problem…and deny the claim.

The idea is to constantly work to maintain the margins of profit because investors have put up $100 and want to get back $115 rather than $101 or $99. And health care, if managed properly, and nudges ethics or actually crosses over into unethical territory…which would be denying a legitimate claim…can earn $130 on that investment. So investors have an interest, a primary interest. Investors are not giving their money to a charity as a donation. In this case, they are looking for their money to be returned…with interest.

As long as those factors exist, there is no private health care company that will have costs lower than a non-profit health care provider and without any question none that will have costs lower than a government-run public health care provider. No matter how much you twist and turn the numbers, one is a motorboat the other is a canoe. Efficiency of operation being equal, the non-profit will win.

We can take the numbers that exist for Medicare and say that it will have so and so much cost for such and such. Then we can compare United Health Care and WellPoint or Kaiser…or Mayo. It makes no difference. Either you will make a profit or you won’t. If your goal is profit, you will eventually cost more. There is no logic that supports anything else.

There is no argument that a government system is inefficient and will reduce quality of care. If the process requires that we have private specialists to perform services, create drugs, run hospitals, hire physicians and surgeons…because that is more efficient…then we will–but only as long as the entire system is non-profit. Because at any given time during the process, at any place in the continuous chain of health care delivery, a for-profit system adds unnecessary costs.

If you give a penny to someone and that person merely hands it to someone else, there is no cost. But if that person needs a penny for the cost of handing that penny to someone else, it now is two cents to the other person. But if, in addition to the penny of extra cost is added another penny of profit for the service rendered, it will be a minimum of three pennies. It cannot be two or the profit is gone. If the objective is to pass the penny on at the least possible cost, the value of services rendered must be dropped. That is the simple case here. One can dispute the ratios but not the simple logic. To lower costs we must remove profit.

Much of Dr. Samuelson’s arguments are based on his assumptions of human nature and the way economic transactions work. And some would say that this is important because life is complex and these issues are complex. Dr. Samuelson says that part of the difference between private insurance costs and Medicare costs is illusion. If the illusion is that Medicare has administrative costs that are as high as the administrative costs of a private system, which would be hopefully be about 20%, then the argument should not be to use the private system but to lower the costs of Medicare.

In other words, if because Fedex charges $5.00 for a package and the Post Office charges $5.00, we need to examine what to do, it is not to increase the price of the Post Office to meet automatically the higher price of Fedex. It is to cut costs at the Post Office…because some aspect of the system is very inefficient. We must assume that Fedex is as efficient as they can be, if they are in a competitive situation. In fact, we should have some incentives

Dr. Samuelson says that a system like Medicare (he uses extended Medicare as an example) might not work and would have to be “bailed out” by government. The idea of a “bail out” presumes a standard. If a person has an appendix out and it costs x for the hospital and y for the doctor and z for the other peripheral costs, that is what it costs.

On the other hand, if, as Dr. Samuelson does, there is a predetermined standard, which says that it should cost A, then it may be necessary to “bail out” that situation if it costs more. But in the former case, it is what it is. There are no preconceived notions or ideas of costs. There is no “bail out” because that is an artificial economic construct to match up with an expectation. And since there is no profit, we would work towards maximum efficiency as the goal over the long term, not meeting or beating standards. We would go as low as we could consistent with standards of good patient care.

The attractive part of a non-profit system is that we now…at this juncture in our economic efficiency…use techniques to modify at least one segment of our health care to reduce costs. As long as citizens wish to continue to pay extra costs for the dubious benefits of a private system that should perhaps be their right. But others should not be prohibited from obtaining the best possible care at the lowest possible cost. It is as simple…and no more complicated no matter what anyone says…as A + B versus A+B+C. The former will always be less costly if the numbers are comparable.

It is also as simple as this: private health insurance is good when you take in premiums that are more than costs. But when costs are higher than premiums you lose money. Costs are only higher than premiums when you have to pay for people who are sick. Consequently, there will always be a dis-incentive to help people who are sick in a private, for-profit health insurance company. It is not greed, as Dr. Samuelson seems to think others believe. It is a simple matter of logic. In the public system their is no dis-incentive because the goals are different. The goal in a public system is not profit but the best possible care at the lowest possible cost.

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