Monday, August 3, 2009

On profits and the healthcare system

One of my conservative friends brought this article to my attention. I find myself disagreeing with it from personal experience in the software business, and I decided to construct a thought experiment.

Let's say that I were to do some market research and figure out that the product that wasn't being provided that a lot of people wanted was a journal to write down all their experiences with their pets, and to share them with other peoples' experiences. So, I could register, put together a team of developers, write the software, and put it online. Let's say that it became a huge hit. People signed up in droves, profits soared, even to the point where we could take the company public and get a strong IPO. The company would be profitable because we would have offered a new service that wasn't available before.

This is all well and good, but in all likelihood the success wouldn't last long. Why? Because of the laws of supply and demand, of course! With a high demand for pet journals, others would naturally enter the market to try to steal some market share. Microsoft would step in with their product, Google would have a free pet journal, and countless lesser players would make their offerings. Even if I still had the best pet journal on the web, these other companies would inevitably grab some market share. And they would offer some new innovations based on their own research that improved the experience of pet journaling.

There's nothing wrong with this--in fact, it's a good thing, and one of capitalism's biggest selling points. Despite my skepticism of capitalism I'm sold on it being more responsive than other systems like full-on Marxism, with better outcomes in general and particular. But the computer industry is a good example of capitalism's virtues, as it's highly competitive, with relatively small barriers to entry. Companies operate on fairly small margins of profit. Dell, for example, runs on a 4.7% profit margin. I think it's safe to say that the conservative case that competition breeds advancement is correct in the case of the computer industry--just check out computer games from ten years ago and compare them to ones now to see my point.

But the insurance industry isn't like that. There aren't dozens of insurance companies in every state, coming up with great new ways of cutting costs while providing more care. As this old post from Political Animal tells us, it's usually one or two insurers that control the market in a state:
The report, released by Health Care for America Now (HCAN), uses data compiled by the American Medical Association to show that 94 percent of the country's insurance markets are defined as "highly concentrated," according to Justice Department guidelines. [snip]

Specifically, the Justice Department considers a marketplace "highly concentrated" if a company's market share tops 42%. HCAN found 10 states in which one or two companies control 80% or more of the market. In Alabama, home to Sen. Richard Shelby (R), one of the strongest opponents of reform, Blue Cross Blue Shield controls 83% of the statewide market.
Now, to be fair, this doesn't necessarily demand a public insurance plan, or any particular model of reform. Presumably, the Sherman Antitrust Act could be used to break up some of these mammoth insurance companies. But this is why the notion that America's current healthcare system is better because there's "competition" is spurious. There isn't much competition. It's a patchwork of regional private single-payer systems, a.k.a. the worst of all possible worlds, and these companies use their clout and money to distort the marketplace and keep their profits high. A company starting up and getting high profits is great. A company sustaining high profits year after year is usually an indicator that something is wrong, in my experience, Microsoft being an example of this trend as well. If your theory is that competition improves the quality of everything (and insurance in particular), then the current system is probably the worst kind of system there is. And if you're like me, and you think that private insurance is essentially inferior and that getting rid of it altogether is preferable to the status quo (while not going whole-hog like Britain and putting hospitals and doctors under governmetn control), then the system is nearly as bad. I am, of course, open to something like Wyden-Bennett that would combine a lot of the benefits of both approaches, but I don't think it would work politically and I think that the Republican support for that option is illusory. A lot of Republicans support the bill because it's a comprehensive health care solution that isn't the President's plan--if it became the President's plan, they'd find something else.

The Man, The Myth, The Bio

East Bay, California, United States
Problem: I have lots of opinions on politics and culture that I need to vent. If I do not do this I will wind up muttering to myself, and that's only like one or two steps away from being a hobo. Solution: I write two blogs. A political blog that has some evident sympathies (pro-Obama, mostly liberal though I dissent on some issues, like guns and trade) and a culture blog that does, well, cultural essays in a more long-form manner. My particular thing is taking overrated things (movies, mostly, but other things too) down a peg and putting underrated things up a peg. I'm sort of the court of last resort, and I tend to focus on more obscure cultural phenomena.