The Problem with Profits

Stephen Carter, one of my best professors at law school and also an accomplished novelist, has an op-ed in today’s Washington Post arguing that high corporate profits are a good thing, and as a consequence we need to have a strong and profitable for-profit health insurance sector. Here’s the essence of his argument:

High profits are excellent news. When corporate earnings reach record levels, we should be celebrating. The only way a firm can make money is to sell people what they want at a price they are willing to pay. If a firm makes lots of money, lots of people are getting what they want.

I agree that the pursuit of high profits is a good thing. That is what makes a free-market capitalist system work, and it’s what made me start a company eight years ago. But basic microeconomics says that high profits themselves are generally not a good thing.

In a competitive market, if one company is earning high profits, then other people will want to start new companies to compete with it. By entering the market, they increase competition, reducing profit margins for the original market leader; more companies and more competition also mean more innovation; both of these factors increase overall social welfare. In a true competitive market, one without barriers to entry or market power, companies should not earn any profits at all, because competition will drive price down to marginal cost. (Steve Goldman, one of my economics professors, once said that if you wake an economist up in the middle of the night and ask him or her, “what is price?,” he should answer, “marginal cost.”)

The real world is different, of course. Companies have to earn profits sufficient to cover their cost of capital. And if you invent a successful new product, you will earn excess profits for some period of time; but over time your competitors will catch up and those excess profits will go away (see the IBM personal computer, for example).

So if you see a company that has very high profits over a sustained period, there are two possibilities: either it is benefiting from a non-competitive market (e.g., it is a monopoly), or it is simply exceptional at innovating and staying ahead of the competition for years on end. If you see a whole industry that has sustained high profits, however, the latter explanation cannot hold, and you should immediately suspect a lack of competition.

In short, the thing that we should celebrate is not high profits, but competition. The pursuit of high profits is what motivates competition; but if a whole industry achieves high profits, then what you are seeing is not competition, but its opposite.

Now what’s going on in health care? Look at page six of this report. In most states, the combined market share of the top two health insurers is well over sixty percent. That is not a competitive market, but a market controlled by one or two companies.

In addition, there are good reasons why a free market is not how you want to allocate health care anyway. For one thing, as I have argued, a free market for health care is a market in which sick people die, because no one will sell a sick person an insurance policy that costs less than his or her expected costs under the policy.

Second, as Paul Krugman explains, health care is a good that does not conform to the basic assumptions that you need for free markets to produce optimal solutions. I won’t try to summarize, since he already summarizes elegantly. But before you dismiss Krugman as a liberal pundit, note that his main source is a paper by Kenneth Arrow – as in the Arrow-Debreu Theory, the centerpiece of general equilibrium theory and of mainstream microeconomics in general in the last fifty years.

Now, it is perhaps possible that private health insurers could be part of a well-functioning health care system – if, for example, they were not allowed to engage in medical underwriting (which is what makes sick people unable to buy insurance at any price they can afford). But that’s not the system we have now. Instead, we have local oligopolies, and if they earn high profits, that’s a product of market power and lobbying clout, not “lots of people . . . getting what they want.” (Do you know anyone who actually buys insurance – either someone in the individual market or someone who buys insurance for an employer – who is happy about what he or she is getting these days?)

Obviously companies should make profits; the need to make profits is what separates good companies from bad ones. And people should be able to get rich making excess profits that result from innovation; you can make a lot of money in the period between the innovation and the competition catching up with you. But if you see sustained high profits by an entire industry of corporate behemoths, you should be very, very worried.

By James Kwak

65 responses to “The Problem with Profits

  1. If you are going to be effective you cannot respond to the bleating of every bought and paid for economist. Why not get to the heart of the problem? Health care is not an industry; it is a swindle from top to bottom. Doctors, drug companies, insurance companies are all desperate rent seekers and must be controlled if anyone but the super rich and the cowering middle class are to be served at all. When doctors controlled the racket it was bad enough, but at least most doctors believed that Hippocratic stuff and tried their best. By today’s standards, their prices were pretty reasonable, since they did not support a layer of insurance company CEOs. Now we have a financial industry ripping off the system like they do with auto driving and hurricanes. You pay and pay and pay and pay and pay and then when something happens they point out this little clause in the policy which says you don’t get anything because you misrepresented your mother’s history. Perhaps worst of all, you are only covered for service by the drug pushing body slashers, not by the acupuncturists who at least do not make you worse off even when they occasionally cannot solve your problem. This time, like all times, we are not going to get reform; we are going to get compulsory blackmail and send off an even more grotesque percentage of GDP to the great triumvirate of rip off artists: medical doctors, drug companies and insurance companies.

  2. Anonymous Jones

    This is a good post. There is a third possible explanation of sustained profits for one company: luck. But that’s it. Just three possibilities. And luck is just as deficient at explaining a whole industry’s high profits as exceptional innovation is.

    Carter’s statement is so grotesque in its distortion of reality that it should not need to be countered, but I’m still glad you did.

  3. Eric Dewey, Portland, Oregon

    Hope you had this discussion directly with Prof. Carter – if Yale Law profs are this deficient in Econ 101, that explains a lot of why we’re in this pickle…

  4. Slight clarification I think is needed to this post. When a company is said to not earn profits at all under a competitive market we are speaking about Economic Profits. When a company’s price = marginal cost that marginal cost also includes its cost of capital. Minor point but I think this is a great post and indeed true.

  5. I have to take issue with the doctor part. It takes a whole lot of time and money to become a doctor, and IMO they deserve to be paid very well.
    How would you like it if your bypass/appendectomy/broken ankle were treated on a low-bid basis?

    What I think you are objecting to is that doctors are often paid on a fee for service basis, which gives them an incentive to do more to treat a patient than might be actually necessary. Malpractice threat mitigation also encourages this. This is a problem and should be corrected, but it is not THE problem…

  6. “In a competitive market, if one company is earning high profits, then other people will want to start new companies to compete with it. By entering the market, they increase competition, reducing profit margins for the original market leader; more companies and more competition also mean more innovation; both of these factors increase overall social welfare. In a true competitive market, one without barriers to entry or market power, companies should not earn any profits at all, because competition will drive price down to marginal cost. ”

    This posts seems to use profits interchangeably, but economic profits accounting profits. Accounting profits are revenues minus expenses, while economic profits take into account opportunity cost.

  7. My post for the unequal sign didn’t show up properly, but it was supposed to say economic profits don’t equal accounting profits. Alex’s post is also on top of this.

  8. I would instead argue that when you see outsized profits you are looking at an externality effect – either on the cost or income side – resulting from an action (or lack thereof) outside the system (ie government).
    Somewhere, somehow, a cost is not being accurately accounted for.

  9. There are two issues:

    1. Insufficient doctors in US: AMA is controlling the number of medical colleges and the flow of doctors into the economy.. If you liberalize it and get more doctors into the system, then automatically their fees will come down.. AMA may cite the quality issue, but quality docs will survive and do better than untalented ones..

    2. Choice in choosing healthcare: One of the options need to be “have no insurance and pay on per visit basis”. This is possible only if you have sufficient doctors in the economy.. Visit doctors when you need and pay only visit basis, no monthly insurance business.. So no pain in visiting doctors majority of the time.. You can purchase insurance to cover only major issues..

  10. I have been hearing from experts on the left and the right that insurance companies are typically earning 3-5%.

    Does that qualify in anyone’s view as “sustained high profits by an industry of corporate behemoths”? The question it raises, rather, is why, despite being structured oligopolistically (rather than competitively), earnings are still so low for these organizations.

  11. This is all pissing in the wind because the Democratic Congress has broken in to their little regional segments and single payer is dead. This is what the rest of the industrial West uses for health care delivery. Government pays the doctors directly on salary. Diagnostic gear owned by single payer. Hospitals owned by single payer. The system we use translates to doctors make the most income off of sick old people, insurance companies make the most income off of young healthy people. Drug companies make the most income from middle aged sick people who will live another 30 years. The best model for delivery is Tri care or Kaiser Permamente, P.S. Group health. Tricare is for active and retired military and they love it. They love it so much they don’t want anyone else to use it on their dime/tax dollars. They love it so much they retire and live next to military bases.
    This fantasy about health care being a free market is the biggest joke of the year. The customer cannot access price information and the competitors are not advertising prices. Even the insurance companies fail to provide price competition because their policies have to be decoded over a 50 page contract plus they add the privilege of revoking your converage. The whole industry creates a feeding frenzy for lawyers as it should because it is run by Carnies

  12. Agreed. It’s quite straightforward economics. Very surprising that some one would go into print with an argument like that.

  13. I have no issue at all with profitable corporations. I never cared a fig for what Goldman Sachs declared as profits – until their profits and subsequent bonuses become subsidized by the government.

    Looking at the oil companies – last summer, Exxon declared record profits – record profits attributable, analysts said, to the record prices they charged per barrel – $150/barrel. Which then translated into significantly higher prices at the pump – $4.00/gallon.

    Their profits busted up the middle class’ ability to pay for much else other than groceries and gas (and groceries got more expensive as a result of the gas prices.) There was an enormous ripple effect seen in hotels, resorts, restaurants, etc. that contributed to the toppling of our economy. (The Nielsen Company has a great deal of data showing the link between rising food and gas costs and the decrease in consumer spending.)

    I am assuming that your professor’s health insurance comes from Harvard or whatever institution you are attending and that he thinks his co-pay equates the cost of the office visit – and he’s ignorant of the fact that the dizzying array of billing codes established by insurance for medical professionals to use when invoicing is a horrible business model to follow.

    Health care is not akin to leather seats or a first class upgrade. It is a matter of life and death.

    Health insurance companies can only make profit by withholding treatment from sick people. That’s their business model. To argue the greatness of such a thing is a morally bankrupt argument.

    I’ve had to haggle too many times with the insurance company over payment of covered services to think it’s just an accident every time it happens. It is a deliberate corporate policy – and some insurance companies are worse than others.

    As an individual patient, I cannot at all compete against the insurance companies. The “free market” has nothing at all to do with their profit. They’ve become profit making ventures by stacking the deck against the consumers who use their product. Thus we are now engaged in the great national debate of the reform of their industry.

    Your professor might want to consider that middle class consumers, whose wages have been stagnant for more than a decade, are finding it ever harder to prop up the high cost of profit in America.

  14. I find that somewhat implausible. No private sector companies can survive on 3-4% return on capital, or indeed return on equity. The return is not sufficient to provide a return on the risk.

    3-4% could be the profit margin. Multiply the profit margin by the capital-to-sales ratio to get return on capital. Multiply that by the leverage ratio to get the return on equity. (The intuition, here, in case you’re not familiar, that a small profit margin can make a good return if you put a tiny amount of capital in to generate the sales that make the small margin- if you borrow that money, you will be a rich man.)

  15. In Canada, doctors are paid on a fee-for-service basis and appear to be paid quite well.

    http://www.torontosun.com/news/canada/2009/05/19/9496851-sun.html

    But, they don’t need the army of people to fill out forms and deal with the various insurance companies so more drops to the bottom line than in the US.

    Oh, and malpractice insurance doesn’t cost them anywhere near as much.

    http://www.tampabay.com/news/article1021977.ece

  16. Scot Griffin

    An unspoken assumption in Carter’s piece appears to be that every human endeavor that can be monetized should be monetized. That the profit motive, whenever it arises, should always be given the deference due the free market gods.

    That assumption is demonstrably false.

    First, entire classes of monetizable human behavior are criminal and, therefore, prohibited by law to protect the public good. Greed cannot be good when it is criminal.

    Second, other classes of monetizable human behavior are regulated because they can lead to criminal behavior or harm the public health. For example, the distribution of opiates is highly regulated.

    Third, other classes of monetizable human behavior have always been coopted by the state to protect the state and the public order. The armed services are a perfect example of this.

    Now, look at the defense industry. In spite of the fact that the armed services have always been state institutions, the defense industry has thrived through innovation. Is there any reason to believe that we would not see a similar dynamic if the profit motive were taken out of the end delivery of medical services?

    The bottom line is that private vice does not necessarily lead to public virtue, and it is foolhardy to assume otherwise. Ill-gotten gains actually harm the public good, and the unsavory nature of the healthcare industry’s rise in profits is what is really at issue.

  17. Monopolies and duopolies are dangerous and distort markets. Something must break them up. I think selling insurance over state lines would be a good start but national public plans would be more efficient.

  18. Agoraphobic Kleptomaniac

    “One of the options need to be “have no insurance and pay on per visit basis”. This is possible only if you have sufficient doctors in the economy.. ”

    But this is what we have now. I agree that the AMA does a good job of limiting the number of doctors, driving up costs slightly. However, the extra costs don’t just add up to only account for a shortage of doctors.

    Also, in a good health care system, you want to promote good health, and a pay-for-useage model does not promote good health. It’s reflexive, not proactive. Health care costs for everyone go down when you practice preventative medicine rather than expensive treatments for preventable illnesses. This is a public health issue, too. Do you really want people out there spreading deadly diseases due to the fact they don’t want to spend $100 to go see a doctor and get some antibiotics?

  19. The problem with health insurance is the problem with “defined-benefit”. If you tweak it to, say ,the insurance you pay premiums to will cover up to $5mm of medical costs, then the health insurance becomes like life insurance, which I do not think Mr. Kwak is saying as can not be provided by free market. In that way the insurance companies can do actuarial accounting and the consumers can get to “manage cost”. This will circumvent the issue of the govt or insurance companies managing cost/rationing care.

  20. Single payer is not dead even if this congress is screwing up so badly. It takes more than that to kill a good idea. If we cannot get the beltway hacks to show a little decency and common sense, we still have fifty states to work on, and a lot of people are in this for the long haul. The fat lady hasn’t sung yet.

  21. List companies of recent times that have high profits and you will come up with names like Exxon, Microsoft… typically you need a monopoly of one form or another to make good profits today. It can be actual monopoly or a sort of monopoly by consent, as exists in the oil industry.

    The notion of insurance itself is a big problem: it can either be regarded as shared losses or as pre-paying your own losses. In neither case is it worth the kind of vig that insurance companies draw. It is simply a minor redistribution service.

  22. “I have been hearing from experts on the left and the right that insurance companies are typically earning 3-5%.”

    Three to five percent of what? Of your money? Or three to five on their operation? The difference is vast. If they paid their operations and their salaries and made zero percent, they’d still be ‘making’ money.

  23. Paying $100 to a doctor, not a problem.. But would you like to pay every month to an insurance that denies coverage to you when you need it? When the costs are low, people will automatically take preventive steps.. For that matter, even now there may be many uninsured people are carrying communicable dieseses.. do we know? public health becomes a priority for the government, not private insurance companies..

  24. fiddleandcreel

    Nice work, and the other fact that free-marketeers fail to realize is a behavioral one, that is, people think cheaper health care doesn’t work as well as expensive health care. Patients claim that expensive placebos work better than the cheap ones. I mean do you want to go to the bargain basement back alley physician for your appendix removal? NO, who would? So naturally a free market in health care actually drives prices up.

    Just look at the most experimental cutting edge drugs for cancer, they usually aren’t the cheapest. Naturally what does everyone want to try if its their last resort? The cheapest or the most expensive? I do not think so. This kind of market probably has a name but since I’m not an economist I won’t pretend to know what is but I’m sure its been studied before.

  25. Profit in and of itself is not a bad thing. However, it is an endeavor, not a reason for being. At issue in the healthcare debate is the focus of insurers on making money at the expense of all else. There have been very public instances where profit won out, if treatment was deemed to be unprofitable or just not as profitable. As noted above, consider how the country was being broken as the oil industry brought in record profits. Profitable and high profit are very different calculations. Even now, if a pharmaceutical company had an outright cure for a condition that was inexpensive vs. a moderately expensive inhibitor for the same condition that would have to be taken repeatedly, which product would make it to market? Especially if the cure and the inhibitor cost the exact same to manufacture, there is little doubt the accountants would be pushing for inhibitor and the regular purchase thereof versus, the onetime purchase of an outright cure. Look at all the damage to the environment because very profitable shortcuts vs. the cost of actually protecting the public. I’d guess that most corporate cost saving measures and shortcuts often result in very bad side effects. Why would they not be, the goal was to save money and increase profit. Not protecting anyone or anything.

    High profit is all about the car industry building cars not quite as good as they used to, just to get you back in the showroom a few more times over a lifetime. It’s about keeping better products off the market, through courtrooms and any other means than competing. Look at what’s become of the phone companies, where there is virtually no landline or broadband competition. If you’re buying a home and want FIOS, you’d better make certain your house falls in Verizon’s service area and not AT&T.

    The sad truth is elected officials let the public down severely. Regulatory enforcement and perhaps antitrust laws might have saved the country from “too big to fail”, which is really code for
    ‘don’t treat us as callously as we treat none management, our customers and tax payers…’. High profits is all about taking everything and leaving nothing and that is exactly what they’ve done. CEOs make very bad decisions, no problem, they’ll make it up in layoffs, recision and anything other than living by their own prescription for everyone else. As if not protecting the public wasn’t enough the first time, when hell came due, politicians cut the safety nets of the very people they refused to protect in the first place.

  26. So the takeaway:

    1. True innovation, for a company or a sector, has a brief window. (Nobody stays legitimately innovative forever.)

    2. Then competition catches up, the market matures, profit regresses to a low mean.

    3. Unless lobbying/bribery/capture/rent-seeking/monopoly/corporatism has intervened.

    Given the evidence of history, we can add

    4. Everyone, upon running out of real innovative energy (end of (1)), seeing stagnation and competitive equilibrium loom (2), turns to lobbying, lawsuits, bribery and other anti-competitive behavior to try to accomplish (3).

  27. donthelibertariandemocrat

    Let me offer a different perspective. I want to agree with Carter about this:

    “Private insurers, by contrast, will cut whatever they can. This puts them at constant war with regulators and patients, but beneath this tension is a certain useful discipline. We want health care to be cheaper, and the for-profit health-care industry has every incentive to make it so.”

    The point is that Insurance is a contract. There is no reason that the following conditions couldn’t be included in such contracts:

    http://yglesias.thinkprogress.org/archiv es/2009/07/the-public-plan-you-wont-have -access-to.php

    “The most important part of the bills that actually exist—the part that will impact the lives of most Americans—are the new regulations on insurers.

    The administration is proposing:

    — A ban on discriminating against people with pre-existing conditions.

    — Caps on out-of-pocket spending.

    — No cost-sharing for preventive care.

    — No “rescission” of coverage for people who get seriously ill.

    — No gender discrimination.

    — No caps on coverage, either lifetime or annual.

    — Extension of family coverage for kids up to the age of 26.

    — Guaranteed insurance renewal.”

    The thing is to have a third party with enough clout to negotiate such a deal, say the Federal Govt. The govt could even propose its own competing plan if it couldn’t get the deal that it wants. In the end, the govt will step in where the private market of insurance doesn’t cover enough. In some cases, the govt itself offers insurance where it tends to often get stuck with the tab. So, there’s nothing new about that discovery.

    The only reason that you would favor my idea as opposed to employer insurance and a total govt plan is if:
    1) You think that the employer based option doesn’t have the clout to get the best deal, and it hides the cost of health care from the recipients of it, causing expenses to be less than efficient.
    2) The single payer plan will save money over the current mess, but will end up costing us quite a bit more than its advocates claim as politicians will be loathe to increase taxes or cut services. Its better to have a market make those type of decisions, especially if the govt can negotiate effectively the basic conditions.

    Let me give my plan:

    “This tells you right away that health care can’t be sold like bread. It must be largely paid for by some kind of insurance. And this in turn means that someone other than the patient ends up making decisions about what to buy. Consumer choice is nonsense when it comes to health care. And you can’t just trust insurance companies either — they’re not in business for their health, or yours.”

    You can use the market. You can have the govt buy Catastrophic Insurance for everyone. The bargaining power of the govt should lead to competition from insurance companies to reduce premiums. Should they not do so, the govt could offer its own plan to get the ball rolling. This will be paid for by taxes. If someone wants to buy their own insurance, that’s fine. However, they will be paying taxes for this govt program. It is true that, in general, these costs can’t be individually priced and shopped. Also, it’s hard for individuals acting alone to drive down costs and get insurance. But my proposal just solved that problem.

    However, there are plenty of health care costs that could be priced and shopped. So, you could develop a list of those services. These costs would be subject to a deductible based on income, so that no one would be impoverished by medical costs. It would still be in everyone’s interest to keep costs down in this case. This is competition. It could be used for drugs, yoga classes, office visits, urgent care as opposed to emergency room care, etc. This list would include only costs that can be priced and bought by individual consumers. People might also buy insurance on these costs depending upon their deductible.

    So, you have two different markets, both subject to market conditions that lower costs. This plan tells you how it is funded, how it lowers costs, and how it covers everyone. This is done simply and clearly.

    There is no guarantee that, in the US, a single payer system would lower costs. In fact, if citizens don’t like it, it would probably end up costing much more than planned. It would simply shift the issue to Congress, and be subject to all the forces that currently influence Congress.

    This a version of the plan put forward by Milton Friedman.

  28. Private health insurers, like financiers, should have to prove that what’s in their obvious material interest is aligned with the social good. Rob Johnson, who blogs over at NewDeal2.0, made the a persuasive case this week that Wall Street bowled us over with fancy words we weren’t allowed to question (“innovation” or “progress” sound familiar?) and promised us to trust they were good. Naysayers were dutifully excommunicated. There are a lot of lessons for the health care debate in Rob’s analysis of what happened on Wall Street. (The post is here, if you are interested: http://www.newdeal20.org/?p=3476)

  29. Part I
    “High profits are excellent news. When corporate earnings reach record levels, we should be celebrating.”
    Part II
    “The only way a firm can make money is to sell people what they want at a price they are willing to pay. If a firm makes lots of money, lots of people are getting what they want.”

    I would agree with Part I
    I would also agree with Part II, except that it does not seem to apply to health care. When you buy a car, it is yours, and you know what you are getting. If when you need it most, insurers can rescind your coverage based on technicalities or can increase your premium to the point where you are forced to quit, are you getting what you wanted at a price you were willing to pay? or do you feel swindled? The last sentence may well read for some insurers : If a firm makes lots of money, it may happen that lots of people believe they are getting what they want while thew few in need realize they are getting very little.”
    In and industry where 10% of patients accounts for 65% of medical cost, there is an economic incentive to rescind them. The law and system should create incentives for companies to be concentrated on prevention and on diminishing the cost of healing this 10% rather than on rescind them.
    This is one of the many problems affecting health care in US.

  30. I’ve had two experiences with Carribean Medical School doctors. One graduated, but their medical school was not approved in most states. A little payola, and poof… problem solved. The new doctor had interesting ideas… old people were “icky,” and “I can make a fortune with medspas!”

    The other one went into practice with their mother, who had a long career serving her community. When patients sign up with her, they get him. He tends to, um, miss a lot of important things.

  31. Dear James,

    Do you know how you finance Goldman Sachs profits?

    http://www.motherjones.com/politics/2009/07/how-you-finance-goldman-sachs’-profits

    Something to do with SIGMA X?
    http://www.zerohedge.com/

    Well, I am not an economist nor a lawyer. But this seems to be very serious indeed.

  32. CBS from the West

    Miscellaneous thoughts about several of the comments:

    1. Preventive health care services usually do _not_ reduce health care costs. There are a handful of preventive measures that do (mostly health policy interventions rather than clinical preventive services), but most actually increase total costs. There are several reasons for this, but in most cases the most important is that prevention is applied to an large population of people, most of whom will not get the targeted disease anyway. (E.g. every woman, in theory, gets regular mammograms, but only about 1 in 10 will ever have gotten breast cancer anyway–meanwhile the other 9 are racking up mammogram charges as well as occasional biopsies to clarify false positive results. And mammography is among the more cost-effective preventive services.) That’s not to say that prevention can’t be good value for the money–it often, usually is. But it doesn’t _save_ money. The published literature on this topic is abundant and I don’t quite know why the myth that preventive services save money persists.

    2. Doctors in general don’t even know which treatments really work for most patients which do not; typically they sincerely believe they are doing good. The public seems to believe that health care is a matter of life and death. Well, occasionally it is, but most of the time it is not, and not infrequently it is a complete waste.

    3. Insurers do _not_ have much incentive to hold down costs. Perhaps in the individual market they do, but in the employer market they have had very little difficult simply passing costs through to the employers, perhaps because the employer’s costs are tax-subsidized. But to think of the insurers as counter-parties to the doctors and hospitals and pharma is misguided: their interests are aligned. You could best think of the health insurance business model as taking a commission on all health services provided.

  33. I believe you’re seeking for the term “Geffen good”.

  34. “high corporate profits are a good thing, and as a consequence we need to have a strong and profitable for-profit health insurance sector”

    duh!

    how silly!

  35. Obe-Wan Kenobie

    Doctors — take a whole lot of time and money to be a doctor. Change that part of the equation. That comes under education reform. There is a better way to train and provide doctors, at different lefels of expertise. There does not need to be only, the few, the proud, the billionaires.

  36. LarryKudlowIsGiddy

    There are so many agenda rats hopping on the health care ship that is is going to sink before it ever leaves the harbor.

    Every last senator and representative is lining up their own “bill” to cover exams, and living wills and medical powers of attorney, and preventative, and health club memberships and psychiatric exams and counseling and therapy…. all insured, all benefits that you make a $10 co-pay at the counter and dance off while the admin personnel battle it out with the insurance company which I suppose now is going to be ourselves, the American taxpayer. Sure, this seems like it will work.

  37. TonyForesta

    There is an even darker more perverse side to profit. Once a critical threshold is crossed, and I’ll leave it to the analyst to mark that point, – but profit shapeshifts into power. The power to influence markets, governments, laws, regulatory agencies, and ultimately control. When wealth expands to power and power equals control an evil is born.

    Doctors, healthcare providers, surgeons, researchers, scientist who are exceptional, who provide some massive good to the greater society from their genious and hard work deserve to be rewarded handsomely. All society benefits from the genious of healers, inventors, and brilliant technologies, or applications, or idea’s that move all humanity from darkness to light, from pain to relief, from disease to goodhealth. But why do insurance executives earn millions of dollars a year, or hundreds of millions of dollars for the predatorclass CEO’s and the swindlers and thieves who take advantage of loopholes, and captured regulators, and bribed politicians, and vulnerable and unrepresented populations for PROFIT. Here profit is evil. It is a way for the predatorclass to dominate ruthlessly and obdurately the weakest and most vulnerable of our society. If this is the world we want. If we are fascist pigs and carnivores, vampires sucking off the blood of the poor and the week and the downtrodden – then go forth and conquer predatorclass biiaaaatches! But know this – you bleed like the rest of us. You can hide in your oppulent palaces and shield yourselves behind the cloak and mask of the socalled government that affords your kind alone every largess, advantage, protection, and defense – but if you are caught one day in the open, if you fail to protect yourself adequately – you and your will bleed like the rest of us.

    Profit is good if it benefits the greater society, but once profit is dominated and perverted into gains for thefew exclusively – profit looses it’s lustre and it’s benefit and shapeshifts into abuse. Look to history predatorclass fiends and monsters. When profits and wealth subvert the hopes and endanger the lives of the people – there will be a reckoning, and a balancing and the predatorclass will bleed.

    Profit is good. Wanton greed and abuse to glean obscene illgotten profit is evil, and will be reconciled tit for tat predatorclass biiiiaaatches.

  38. Here it is folks:
    1) Bust the doctor’s union. Doctors are highly respected everywhere, but in NO other country do they make as much money as the USA. No free market here!
    2. Why are employers responsible for health insurance? Do they pay your auto or home insurance? IMHO this has been the factor most vastly distorting the health care market. Wonder of wonders, when I loose my job I also lose my health insurance! What demon form hell came up with this idea?
    3. Americans need to take more responsibility for their own health. Really, evey time I visit the Midwest I am appalled by the fat.
    4. And 4, we’re going to have to get a bit more fatalistic. We get old and die: get used to it. Most dollars are spent in the last 6 months of life, when they do the least good…unless you own a nursing home. Honestly, Christians, for all their harping about the Next World, are as a group the most afraid of going there.

    Now when I have a problem, I go to Thailand or Singapore. When I am, someday, handed the death sentence of a terminal diagnosis, I’m going off the back of Hoover Dam.

  39. Nice common sense post.

    The tax subsidy for employer sponsored insurance (ESI) will cost $240 billion in 2010.

    People like their subsidized private plans for sure. Make them foot the bill without subsidy and we’d have health care reform in a NY second.

  40. So if you see a company that has very high profits over a sustained period, there are two possibilities: either it is benefiting from a non-competitive market (e.g., it is a monopoly), or it is simply exceptional at innovating and staying ahead of the competition for years on end.

    I too was wondering how this applied to Exxon and Goldman Sachs. Neither of them is, so far as I know, a monopoly, nor are they exceptional at innovating. I would argue they are both really good at manipulating prices for their “products” to generate record profits, and that, as companies, they don’t have alot of value added if they can make such huge returns above marginal cost.

    My other problem with Carter’s piece is that he assumes, as Alan Greenspan once did, that actors in markets pursuing profits are doing so rationally, both in terms of their own survival, and in terms of the long range stability of their sector. I would argue that recent history shows otherwise (as does much older economic history as well) – and both Goldman and Exxon are prime exmaples. Profits are king – beig around and bale to do business next year is not.

  41. John Bates Clark famously encapsulated the case for the market mechanism as the use of the carrot of profits and the stick of competition. Often this has now been perverted to the belief that since profits are good, the stick must be bad.

  42. Mr. Kwak’s comments about Prof. were very gracious, but my experience was different. To be honest, our entire class thought he was rather dim.

  43. Steve Bannister

    Very useful, and economically correct, post. All this chatter (not just here) has caused me to start to think about the capitalist system in a different light.

    While many capitalists cloak themselves in “free-market” rhetoric, in fact the driving force of capitalism is to maximize, well, in Marxian terms, surplus extraction. Nothing about maximizing competition or perfect markets or any of the economic orthodoxy they appeal to so often and so disingenuously.

    So Capitalism is ANTI-competitive, and is monopoly power (or market imperfection) maximizing at its core (I started to say “soul”, but that caused my fingers to seize up in a fit of digitive dissonance.)

    Sustained excess profits (above economic costs) are a clear symptom of this characteristic, which the health care industry certainly exhibits.

    Even worse, the insurance part of health care is a great example of the growth of almost totally unproductive financial capital at the expense of productive (almost equivalent to manufacturing) capital since about 1980. This is an increasingly extremely negative structural aspect of the US economy whose mirror image in many respects is our persistent current account deficit.

    So there are many economic and social lessons to be drawn from this current episode. And I am NOT anti-Capitalist. It accounts for much of the dynamism and growth in many economies. It simply must be controlled along the lines which James outlines…when economic profits above zero persist, then something bad is happening which must be corrected for the good of both the society and the economy embedded within it.

  44. Our country is embroiled in controversy and debate over health care reform. Focus on the purpose of health care has been lost. Health care has two purposes:

    1. Keep people healthy.
    2. Get people well when sick.

    Barack Obama and the Democrats have killed single-payer universal health care which was by far the most popular alternative. Now they are confusing the issue with talk about a “public option” when the only real “public option” is something like VA or the Indian Health Service; both of which could be combined and expanded to include everyone under a Public Health Service.

    Our public officials squander our limited and scarce resources— during a period of a crumbling economy— financing wars in three countries; subsidizing the Israeli military machine; and spending trillions of dollars financing 800 U.S. military bases on foreign soil dotting the globe; and then they tell us there is no money for health care. Instead, we should be building 800 public health care centers stretching out across the United States providing a public health care system which includes:

    • No-fees/No premiums
    • Comprehensive (cradle to grave)
    • All-inclusive (general, dental, eyes, physical therapy, prescription drugs)
    • Universal (everybody in; nobody out)
    • Publicly funded
    • Publicly administered
    • Publicly delivered

    The United States is the wealthiest country in the world.

    We can afford to provide a first-rate, world-class, free public health care system for our own people— if we get our priorities straight.

    We need health care reform based upon: Everybody in; all the profiteers out.

    Health care is supposed to be about people, a human right; not about profits.

    Representing workers employed in smoke-filled casinos suffering from cancers and heart & lung problems, I know a little something about why we need health care reform now.

    Alan L. Maki
    Director of Organizing,
    Midwest Casino Workers Organizing Council

    58891 County Road 13
    Warroad, Minnesota 56763
    Phone: 218-386-2432
    Cell: 651-587-5541
    E-mail: amaki000@centurytel.net

  45. I have no problem with a universal health care system that excludes smokers, heavy drinkers, drug addicts, the overweight and obese and couch potatoes. That is a universal health care program that is both fair and affordable. What is being proposed is both unaffordable and unfair. However, in our democracy, as in most others, it is those who live a responsible, common sense life who pick up the tab for all those who don’t and this extends well beyond just health care. Eventually I suspect, our democracy will follow the path of all those which preceded it. It will collapse. That is 100% certain as no democracy has ever survived. Our Founders knew this and attempted to institute safeguards, which we have done away with.

  46. I don’t think that luck can explain high industry-wide profit margins. In a market which is populated by homogenous firms which are offering the same product, they can only really compete on price. And competing on price reduces profit margins.

    Luck does not play a role here. A market like this that sustains high profits over the long run is simply not competing on price. Insurance companies are not designing and patenting new drugs or procedures; they are essentially selling a commodity, and so the prices should converge to somewhere around marginal cost plus cost of capital.

    And how could a market like this compete on price? Although they are essentially offering the same underlying service, in another sense, each company is operating as a monopoly in its own market.

    How can this be? Because although they are putatively selling the same product (insurance) they are actually all selling different products (insurance which no one can understand). Because you cannot properly value the insurance, due to the complexity of the policy, the impossibility of properly assessing your own future financial risk regarding health care, and your inability to know if rescission will leave you with no health care at all, you really have no way of comparing the value of one policy to another. Which makes the idea of a competitive insurance industry a joke.

  47. We can afford a universal health care system that excludes smokers, drug addicts, the overweight and obese and couch potatoes. That’s because about 30% of illness is due to genes. The rest is due to lifestyle. Why should people who practice a healthy lifestyle pay for the health care of those who don’t, especially when those who don’t are by far the most expensive to treat and they generally contribute the least to the nation’s wealth. A universal healthcare system that encompasses all is unfair to those who lead a healthy lifestyle and unaffordable for the nation as a whole.

  48. In Canada you have to pray that your illness will be not so severe as to kill you before you can get scheduled to see a specialist to see you. That’s one way of treating everybody.

    Canadians suffer from the worst diagnostic competency and speed in the western world, yet provide the most robust and genuinely humane outpatient care.

    The ideal situation is to live on the border and if you are sick, get quickly diagnosed in the US and then continuing care in Canada.

    The rest of you yokels extolling the virtues of Canadian healthcare and holding it up as an example to follow simply know not of what you speak.

  49. Oh how they love to solve problems with the problems themselves. That’s one of my patented sayings for Congress and the Senate. We have a problem with uninsured Americans who can’t afford the hyperinflated insurance industry prices, and we have a bankruptcy problem caused by healthcare. What does Congress/Senate do? They pass bills to shove insurance industry insurance down everyone’s throat with very little control of cost to insure everyone, but watch that exacerbate the problem of bankruptcies. We have a problem with our healthcare being employer-based, which is crushing us in the global economy of countries that don’t do that to employers, yet the only proposed solutions still force this burden on American employers. This is a couple reasons I think this should fail this year. Now hear me out, if this fails then why it fails will be the big issue next year coming up on the 2010 election. That is sure to inspire the next great democratic sweep up of this filthy government that can’t be trusted to solve this problem in the interest of the people. After the 2010 election we are sure to have a Congress/Senate that can pass some decent healthcare reform. So can we all survive till then? Can the American economy?

  50. Actually, the number of days (per capita) that the uninsured people do not get to see specialist is higher then the number of days that people in Canada wait to see the specialist. With the routine specialist visit like ENT, radioligist, etc, there is no more waiting the in US.

  51. Ok, where is that data. Happy to change my view if the facts work in practice.

  52. Go ahead, ask any American receiving health insurance from their employer: they’ll tell you it’s a must-have because it’s a benefit, i.e. it’s FREE. To the extent their consciousness can comprehend, it has no cost: see, there really IS a Santa Claus! Go ahead Mr. Economist, try to convince them otherwise.

    My own awareness, being one level above mollusks and small fishes, dictated that I receive my full salary with NO benefits, whereas I’d use MY money to buy the things I wanted, in this case, health insurance with a high deductible ($2500). Using health insurance for office visits is like using car insurance for oil changes.

    Econodudes know that employer-sponsored health care is not free, and they have a general suspicion of where hidden costs go to live. As long as the debate labors (pardon the oun) under such mythological constructs, actually rationalizing this system is a fool’s errand.

  53. I’m working on a survey for workign Americans:
    1, Is the Earth flat or round?
    2. Was it created in 7 days, or 4.5 billion years?
    3. Was it the tooth fairy that left $.25 under your pillow (must be up to $2.75 now with inflation and rising expectations), or your dad?
    4. Were the Moon Landings real or faked?
    5. Is Pamela Anderson natural or a triumph of biotechnology?
    6. Is the health insurance from your employer free, or does the money actually come out of your pocket anyway, in a sneaky roundabout fashion that you have no control over?

    p.s. is Marx making a comeback? I sure do like Steve Keen (debtdeflation.com)

  54. I am against the healthcare insurance subsidy, just as I am against the home ownership subsidy, and the ethanol subsidy, the farm subsidy and the clean air subsidy. What we need is a health insurance programs that pays for all illnesses caused by uncontrollable factors like accidents and genes. This would be a universal health program that excluded smokers, heavy drinkers, the overweight and obese, and couch potatoes. This is a universal health care program that is both fair and affordable. What is being proposed is both unfair and unaffordable.

  55. Agreed. Their college education should be paid for, with the stipulation that they will put in a certain amount of time in underserved areas. In fact, I’m thinking we will get a better caliber of doctors that way, because those that are not wealthy enough now to become doctors will be able to. There will be a broader pool of candidates, many of whom will actually care more about the patients than about money.

  56. I was injured on the job in May of 2006. I have no complaints of the care I received while I was covered. Once I was out of the hospital and the Insurance company decided I was fully recovered (against the opinion of the doctor’s THEY sent me to)all benefits ceased and the full court press began. Once they were able to settle my case cheaply, all medical care for my injury (flesh eating disease contracted on the job) ceased and I was on my own. Unemployed, partially disabled and unable to return to my old line of work, I tried to get insurance. That old line of :pre-existing condition” prevented me from getting insurance for myself and my wife (2 cancer surgeries). We had lost our Group Health plan which was anything but free. Since then we have struggled, I have been back to the hospital for follow up care (new infection in the leg-3 days…$24,000.00 in debt) Bankruptcy will soon follow. SO any of you who say reform is not needed, I pray you stay healthy and never see what we have. Our medications alone are more than we can afford monthly. At 48, I had a good job, 401K, savings and was preparing for kids in College. Now at 51, we are bankrupt, broke and trying to keep the house. Like I said, if you don’t have compassion, had the good luck to stay healthy. The company I worked for also recently eliminated medical benefits for retirees (after offering it for over 40 years). If we did pay for benefits the most recent quote which would not cover our “pre-existing” condistions would cost us 97% of our monthly income. I call that outrageous. Description of my injury;

    http://www.nnff.org/survivors/gareth_bolt/gareth_bolt.htm

  57. i have to say that i am one of the people who no one knows that is happy with their health insurance. it’s a bit expensive relative to my income – about $115 a month for a 29 year old male who’s a full time student – but i don’t think it’s unreasonable. My car insurance is $90 a month for a 16 year old car worth less than $4,000 that i own outright.

    In fairness though, I almost never go to the doctor because I almost never get sick and take no prescription meds so I have a fairly high deductible. I basically look at it as emergency insurance. Maybe this is well below the norm, but it’s been pretty much at that rate since I was 24. I’m also pretty damn healthy – 6′ 2″, 155 lbs. and cholesterol of 140.

    I only mention that because I don’t know many men my age (or women for that matter) who aren’t carrying at least 10-15 extra pounds. I assume I pay low rates because I’m about as healthy as an insurance company could want me to be.

    Maybe people with families have different experiences and rates are outrageous, i wouldn’t know. It seems to me that people are willing to spend many hundreds of dollars a month on things that (supposedly) are far less important than their health, yet they want to spend a fraction of that amount on health insurance.

    how many people who demand nationalized health care take their own health very seriously? i know very few people who exercise daily, eat a consistently healthy diet, get enough sleep, etc. If you’re in bad health, health care is expensive.

    I realize that some people don’t actively pursue poor health. I want those people to get the care they need and think that they should, but that is not most people.

    If people really care about health care costs for the poor, or those who get hit by a debilitating or terminal illness (as i do), there should be a bigger campaign towards preventive medicine so that the people who truly require expensive treatments (for diseases/conditions that could not be prevented) won’t be competing for treatment dollars with the fat, lazy people in their plan that don’t take care of themselves.

  58. ExxonMobil controls less than 10% of the world oil market, probably even less than 5%. The $150/bbl. price had nothing to do with ExxonMobil. That is what the market was pricing crude at. If ExxonMobil had charged $50/bbl., they would have sold all their crude in a nanosecond and the market would be right back at $150/bbl. They would then be spending millions to defend themselves against a huge shareholder law suit for squandering shareholder assets. You obviously no nothing about how the international oil market works. This is the problem with our times. Everyone thinks they’re an expert but in reality lack almost complete knowledge.

  59. That’s a perfectly good point, but unfortunately neither of us knows. The googleverse has not been able to substantiate or refute the 3-5% figure, which I have heard, among other places, on NPR from a public plan advocate. Certainly the thrust of her point was that although the rates for plans are frequently raised substantially, the cost of health care keeps catching up, so that ultimately most insurance companies are making thin profits despite rising prices.

    I’m strongly opposed to a public plan because I think on analysis it’s plain that it’s better to have insurers be the rationing agent than any alternative. Real reform should be about opening up an insurance market by increasing both consumer choice and the availability of relevant information about managed plan health outcomes, in usable form.

    But I think the case about “corporate behemoth greed and profit” is probably a canard. American health care costs twice per capita what it costs in some of the socialized OECD nations. Anyone have numbers to show that a major part of that is due to insurance company profitmaking?

  60. I think the case about “corporate behemoth greed and profit” is probably a canard. American health care costs twice per capita what it costs in some of the socialized OECD nations. Does anyone really believe a major part of that is insurance company profitmaking?

    I’m strongly opposed to a public plan because I think on analysis it’s much better to have insurers be the rationing agent than any alternative. Real reform should be about opening up a real insurance market by increasing both consumer choice and the availability of relevant information about managed plan health outcomes, in usable form. That might mean an FDA-style label on plan products, and it definitely means ending employer-provided plans.

  61. it’s interesting to listen to the health care insurance giants cry out unfair advantage of a government health care insurance reform program. the business strategy of health care insurance companies is consolidation and establish little to no competition. they cry out “free market” but when you put on your contrarian hat you see they’re opposing the strategy they currently use. maybe i’m being too cynical, but sometimes i believe there are those that don’t want small/medium businesses to be competitive. CHINA is darling of wallStreet. investors seem to be more concerned with china than the u.s. market/economy. how is the u.s. to become competitive in the global economy if foreign countries like have an unfair advantage? china is now implementing a universal health care system something you hear very little about. i would think this would only encourage more business abroad.
    http://www.nytimes.com/2009/01/22/world/asia/22iht-beijing.1.19590543.html?_r=1

  62. One physician’s perspective (pediatric radiology). I worked in the Canadian system for 14 years, returning because of poor pay and difficulty getting up to date equipment. Pay is better now from what I know. My father-in-law died of lung CA, not detected because he didn’t get a chest CT -would not happen here. Mother-in-law died of ischemic bowel. Maybe placing a stent in the artery wouldn’t have helped, but it wasn’t available. I have read the Can. govt. spends a billion dollars a year sending patients across the border for MRIs because they don’t have/won’t buy enough MRI scanners. The only way you can lower costs is by restricting care. Someone suggested more physicians such as licensing the Caribbean graduates. They go there because their grades are not good enough to get in here. I havae never seen one in an academic institution. Would you take your car to a half trained mechanic? It is not true only the wealthy go to med school in the US. The unwealthy graduate with very large loans, but unlike undergrads, they don’t default. There are also a fair number of scholarships. Another reason we have high costs is our morality. We spend a large amount of money on disabled children and adults. In France, the fetus has no rights, but the child at birth has the right to be healthy. The disabled don’t get born there. Families in the US have the “right” to demand treatment contiue regardless of cost or usefullness. This is one reason why so much is spent in the last stages of life. Malpractice – Costs will not go down without tort reform. Many exams I read are done because there is one chance in 1000-10000 the headache could be a tumor, and the Dr. is afraid of being sued (and will be) if the diagnosis is missed. Lastly, a health bill with 1,000 pages cannot be reform. Change and control yes, but not reform.

  63. “But before you dismiss Krugman as a liberal pundit”

    Just wondering James why would anyone initially dismiss the commentary of a Nobel Prize winning Princeton Economics Professor who writes a bi-weekly column for the New York Times?

    Oh yea and he is one of like 3 economists who foresaw the economic crisis. If he doesn’t have credibility, who does?

  64. In pursuit of high profits, companies should also be allowed to violate antitrust laws, forming monopolies around healthcare. People ought to have to mortgage their grandchildren to receive even routine medical care.

    The health care industry could also partner with industrial polluters to increase cancer rates, and with food producers to increase diabetes and heart disease.

  65. they do that already