How Business Works

Acme, Inc. makes all sorts of things, and as you're probably aware, they're the main supplier for coyotes looking for that extra edge when trying to catch roadrunners.  I'm not entirely sure how coyotes get so much money, and it seems that at least a few of the items Acme sells should be illegal.  But their ability to stay in business is very straightforward.

An examplet:  Acme has rocket-propelled roller skates for sale.  It costs them a certain amount to manufacture rocket-propelled roller skates, and they sell them to the coyotes for a higher price.  Probably, given the demo they're serving, a much higher price.  Acme's profit, then, is directly tied to the number of products they are able to sell.  If they have customers besides coyotes - who apparently don't care if things actually work or not - their ongoing ability to sell their products, and therefore make more profit, is tied to their products' level of quality.

Yes, this is fairly elementary, but stick with me, because an awful lot of people (read: politicians, Village media) seem like they fail to grasp this.

Next lets think of Acme, LLC, which is a web-hosting company.  The coyotes have discovered the joys of textured vegetable protein, but since they still have an insatiable desire to capture roadrunners, they've created World of Roadrunner, an online game, which is wildly popular.  They need a lot of servers to keep it running, and Acme, LLC, as a tier-3 data center, is able to host all the servers in a secure environment with 99.99999% uptime.  They don't sell a product that the coyotes can hold, but a service.  Even with this difference, though, the basic business model and motivations are the same.  Acme, LLC has to pay a certain amount for bandwidth, electricity, infrastructure like CRACs (air conditioning), UPSs, diesel generators, payroll, etc., and they charge the coyotes a price that's a bit higher than their costs so they can make a profit.  Their ability to continue to make this profit is directly tied to the quality of their service - uptime, ability to upgrade servers, all that good stuff.

Now, let's consider Acme Healthcare United, a health insurance company.  Coyotes tend to get injured a lot - it used to be things like broken bones, skin grafts for burns, major trauma types of things.  Now the coyotes need treatment more for carpal tunnel syndrome, eye injuries, heart disease, high blood pressure, high cholesterol and other ailments that come from a sedentary, Cheetos-rich lifestyle.

This is where things get different, because the idea behind health insurance is not the same as the idea behind other types of businesses.  Health insurance comes from mutual societies - really, they're a type of commune, of socialism.  The idea is that a group of people pay into a fund on a regular basis and are then able to draw from the communal fund when they need it.  There are no products or services on offer, at least not in the way these are usually considered.  And every penny that is taken out of the fund for administrative costs is a penny that is no longer available for the purpose of having the fund in the first place.

So, can you see how having a for-profit health insurance company is by its very nature an unethical enterprise?  The "profits" are simply money that is being diverted from its main purpose - not for the running of the fund, which is necessary - but to enrich others.  Yes, I'm aware of people purchasing stock in these companies, but A)a well-run health insurance company doesn't need infusions of cash and B)these stockholders expect a greater return on their investment, which simply means more money diverted from purchasing healthcare than they invested in the first place.

Add to this America's ridiculous CEO pay structure - health insurance companies pay their CEOs in the millions per year range, just like other large companies - and it seems clear that a lot of the money Americans spend on health insurance is being diverted from its purpose of purchasing care for members into the pockets of, relatively speaking, a very few people.

That's why we need a public option for health insurance - a government-run health insurance plan that is able to act in the health care market exactly the same way for-profit insurance companies do - which will not divert members' premiums into the pockets of senior executives and stockholders.  And the fact that health insurance like this is inherently more efficient than for-profit insurance is why there is so much pushback on this idea.  For-profit health insurance companies, and the politicians in their pockets, are terrified of giving everyone in the country the ability to purchase Congress's health insurance (for example).  We need to keep up the pressure and not let the only thing that could truly reform our health care system and break profit's stranglehold on it fall by the wayside in the name of "bipartisanship."

Comments

[litbrit]

So, can you see how having a for-profit health insurance company is by its very nature an unethical enterprise?

Exactly.

Whereas with all other corporations, profit is directly related to customers getting a service or product and being satisfied with it, with health-care insurance companies, profitability actually depends on how well and how often the company actually denies the customer said service and product, and customer satisfaction is pretty much beside the point.

As so many have said before, it's a business model that pits fiduciary responsibility to shareholders against ethical responsibilities of the most critical kind. And it's impossible to reconcile the two, in my opinion: you can either be responsible to your shareholders, or responsible to sick people who depend on being able to access the medical care they've paid for in advance. Not, as Stephen points out so well, both.

I want to see single-payer, for-real, nationalized health care; absent that, the only way to keep these corporate ("private") interests honest (and I use the term "honest" loosely) is to have a public option.

President Obama had better not back down on this!

[ballgame]

Excellent post, Stephen.

litbrit, while I completely agree with your first two grafs, I have my doubts about the desirability of the 'public option'. Mark Almberg makes a strong case that the "public option" will be a hurdle, not a ladder, to single payer over at the Physicians for a National Publich Health Program blog (h/t selise over at FDL).

I have a feeling that the for-profit insurance entities will be only too willing to support the public option … I'm sure they're devising ways right now to dump the sick and elderly into the public option, while they go after the young and healthy. And unethical Republican politicians (I'm being redundant, I know) will then trumpet the resulting statistics to show that government health programs are so much more costly than the private ones.

I hope I'm wrong, because Barack seems to have little appetite to go against the tide of Big Money that's blocking single payer.

[ballgame]

That's actually Nick Skala making the case; Mark Almberg was simply posting it.

[Sir Charles]

ballgame,

Whatever it's flaws (and I'm a single payer man all the way), I think the public plan option is the only chance that we will have to possibly move over time towards single payer. Moreover, I think it is the only way that reform will be able to lead to greater efficiency and cost containment.

I understand the problem that you are highlighting, but I have a feeling that a lot of consumers are going to be more comfortable with the government option rather than continue to be at the tender mercies of the "recissionists."

[Phoenician in a time of Romans]

There's another point.

With Acme Inc and Acme LLC, their profit motive is aligned with the public good, loosely speaking. The coyote public values the rocket-skates or World of Roadrunner access, and the company makes a profit supplying them.

With Acme Healthcare, the public values the security of paying a set amount in return for the coverage of unexpected or developing illnesses. The profit motive of the company is geared towards maximising a steady income of premiums and minimising pay-outs.

It's not just that the company takes money from the pool, but that they are also motivated to run their business contrary to the public good, the perceived public purpose for health insurance.

[Stephen]

they are also motivated to run their business contrary to the public good, the perceived public purpose for health insurance.

Yes, exactly. They've discovered a business model in which they can deliberately and openly mistreat their customers without any negative effects to their business; indeed they profit from it.

And there's thousands of economists ready to preach the wonders of rational actors in free markets, despite all the evidence of our lyin' eyes.

[Sir Charles]

PiatoR,

I am alarmed at Acme's seeming monopoly in the rocket-skates arena.

[MR Bill]

At least Acme Bat-man (not a registered trademark) outfits are "guaranteed for the life of the user"...

[Karmakin]

One of the problems I have with this debate, as a person who thinks that it's single-payer or die is that people kinda miss Obama's position. He's actually a strong supporter of a public option, or theoretically even full single payer.

However, the other side of the coin is that there's a possibility that the switchover could be a major economic shock (and not in a good way). Health care is such a major sector of the economy, that changing the flow of money could have major repercussions.

And yes, Obama's goal is whatever reform he can get without overturning the applecart. (Be it health or finance or whatever)

Personally, I say that there's no real option here. It's single-payer or economic death IMO. And if that means overturning the applecart, so be it.

[dm]

I'm also a single-payer supporter, but, as Karmakin points out, a problem with single-payer is that the insurance industry employs about 2 million people (2.3 million in 2006). I assume health insurance is a big fraction of that. Any transition to single-payer is going to have to deal with jobs for that million or so people.

I think the public option probably does that as well as anything in our imperfect market-based system --- it gives those people a chance to find work in other industries as private health insurance is unable to compete and downsizes as a result.

[Sir Charles]

Karmakin and dm,

I think that there would certainly be some contraction in the insurance industry were we to achieve a single payer system. In addition to the CEO class, you'd lose jobs in areas like sales (which are ridiculously well remunersted in many cases), actuarial and risk anlysis, and a fair number of managerial employees. However, a lot of the rank and file employees are claims payers, and you would still need them even in a single payer environment.

On the provider side of the ledger, you would shed some of the people who spend their time dealing with our crazy quilt system. However, you could then use those resources to actually employ more health care providers.

There would be dislocations, but I don't think that they would be appreciably different in magnitude than those normally associated with a dynamic capitalist economy.

The gains in efficiency and universality would completely offset the downside. Moreover, employers relieved of the burden of providing health insurance would very likely be able to hire more aggressively.

[Prosehack65]

You all, in typical librul fashun, are missing the REAL ISSUE here, what with your silly debates about the actual merits of the various programs.

What really messes up the captialistgodgiven right of these companies to make obscene profits is that the crazy coyote insists on exercising by chasing after the road runner; he then gets a concussion, sprained ankle or broken bones (that canyon landing's a doozy) and puts stress on our healthcare system. He should just sit back and smoke cigars and eat fatty foods--and make enough money to pay for his cochlear implant (non necessary, non approved under many plans procedure) himself.

[Sir Charles]

Prosehack,

You forgot to mention taken his Acme, um, "rocket propellant" and relaxing with those underage coyotes on a tropicsl isle.

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