Private Profits, a Necessary Evil Making  Social Safety Net Possible

It is a socialistic idea that making a profit is a vice; I consider the real vice is making a loss

Winston Churchill

Today  I  was reading today’s health care news.

It went like this:

·         UnitedHealth to exit California’s ObamaCare exchanges 

·         Texas BCBS asks to raise rates by 59.4%

·         Hospitals in ACOs may lose exemptions and profits as charitable  institutions

·         Insurers say they require 2017 ObamaCare rate hikes to satisfy stakeholders

·         Clinton must defend the calamity of premium hikes

·         Ohio’s non-profit co-op shuts down.

Deepening Concern over Role of Profit

What these news items share in common are deepening  concerns over the role of profits  in our health care system.     This concern is  a rehash of the century’s old argument -  how to divvy up profits between the government  and private sectors, between socialism and capitalism’s special interests.

Since  socialist Bernie Sanders launched his presidential bid,  he has argued that for-profit health care has to go and nobody should make any money out of health care.    The head of western health care system,  a nun,  on the other hand, cogently  said,  “ No margin, no mission.” And Peter F. Drucker, the father of modern management,  characterized the socialistic mindset as  “ Once the ‘wicked private interests have been eliminated, the right course of action will emerge, and decisions will be rational and automatic. Private business and profits are bad – ergo, government ownership must be good.”’

And so it goes.  It’s profits vs. the people, too much profit for business vs.too little money for the people.  

There’s only  five problems with the rosy socialistic scenario.  

Trouble with Socialism's Problem  with Profit

One, there’s never enough rich people to go around, and the burden must fall on the middle class.

Two, socialism hasn’t worked well for even the most advanced socialistic countries,  many of whom are nearing bankruptcy from generous social welfare and entitlement programs and most of whom are scrambling to offer alternative private practices  for those seeking choice of non-government care.

Three, socialism presumes a centralized remote government bureaucracy  can regulate, monitor, and control what goes on at the level of marketplace where billions of transactions take place.

Four,  socialists assume that profit-making  is not amicable  or “fair” for  the people and that government knows what margins are necessary to run all  health care sectors, in short, that.

Government may think it knoweth

What health care profits are best for most of us,

But i markets often bestoweth

What profit margins are good for the rest of us.

Five,  as Edmund Burke (1729-1797), the British parliamentarian  who was sympathetic to the American revolution, declared:  “All government  - indeed, every human benefit and enjome3nt , ever virtue and every product – is  founded on compromise and barter. (Conciliation with American speech, 1775).

Every Human Activity Requires a Profit

Burke’s point was that every human activity, health care or otherwise, require a profit margin to stay in business, satisfy constituents or stakeholders  to carry out its mission, commercial  or charitable.   These activities include “not-for-profit” and “for-profit” organizations .  Indeed,  the different between for-profit and not-for-profits is not clear cut.  Indeed,  six of the ten most profitable hospitals are not-for-profit organizations.

Profit Margins Vary in Health Care Sectors

Profit margins vary by health care sector and risks involved.    According to Quora, profits vary by health care subsector (Sabrina Ali, former health care marketing analyst, these are profit margins by  health industry subsector,  May 10, 2016)

Health Care Subsector                  Example              Profit Margin

 Global Pharmaceutical                 Pfizer                       43%

Global Medical Device                   Medtronics             33%

Hospitals                                           HCA                        20%

Health Insurance                             Aetna                        9%

Source: Capital IQ for the margins

These margins may appear excessive to socialists who do not know the dynamics of any given  health care sector, and they will certainly vary within any given sector, depending on the age the competing organizations and their age.  

How government would go about regulating those in any given sector can be counterproductive, e.g.,  Pfizer and Medtronic may move to Ireland to avoid prohibitive U.S. corporate income taxes.

Profits and Economic Growth

Why is this:  because the U.S is one of the few countries in the world that taxes earned abroad and because the U.S. has the highest corporate income tax (35%) on profits of any major industrialized company.  And it can be argued that ObamaCare, because of its aggressive regulations and high taxes,  has slowed economic growth to 2% compared to the usual 3 to 4% following a deep recession,  the slowest economic recovery since World War II.

Safety Net and Profits

Everybody agrees the U.S. needs a social safety net to help the have-nots in our society, but we do not agree  how big should it be.    The U.S., if you include Medicare, Medicaid, ObamaCare, CHIP, and the VA in the social safety net,  already pays roughly half of the nation’s $3 trillion in health care costs.   Given our national deficit, government debts ( 1/3 of which are due to entitlements),  hospitals and doctors going out of business due to ObamaCare cuts,  how deeply should government cut into corporate and private profits to make government health care spending sustainable.    Only one thing is certain.   A growing economy and private profits are a necessary evil to pay for government expenditures on the safety net.