And private insurers have to make a profit. Nothing wrong with that. That’s what they do. And so you’ve got higher administrative costs, plus profit on top of that. – Pres. Obama, Oct. 3, 2012
Amid the hoopla about the candidates’ relative perspicacious energies during last week’s debate, the above quote by Pres. Obama seems to have been lost. In his worst line in the debate, Obama reveals his socialist instincts and complete ignorance of how the private sector works. That line alone renders him unfit for public office because it shows his ideologue faith in big government and misunderstanding of the critical value of profit in a free market.
Obama’s posit underlying his quote is that government can be more efficient than for-profit companies. First off, the quote belies his repeated promise that people can keep their insurance if they like it; he is clearly implying that government insurance is better, so it will eventually replace private insurance. Obama has advocated for a single payer (i.e. socialized) healthcare system, so this gaffe has legs.
The argument behind Obama’s quote is that government healthcare like Medicare and Medicaid has a lower administrative overhead than does a typical insurer. Further, that insurer must earn a profit. Both of these drain money from services to patients, and reduce the quality of health care. Even so, Obama’s arguments do not support his conclusion that government health insurance results in better or cheaper care for patients. The key to Obama’ error is understanding profit.
As Obama would probably agree, profit is the thin and uncertain margin between revenue and expense. Profit is the goal, the only goal, of business. Profit is to be maximized, and the risk of failure to profit is to be avoided. Businesses innovate and invest to increase and protect their profits. What Obama appears to not know is that profit also is the messenger particle of business.
Businesses study each other’s profits, and emulate the best practices of their peers. When a company earns a superior profit, its peers move to compete by either providing a better product or a similar product at a lower price. This competition drives down overall profits to the level only the most efficient company can tolerate.
By competing for each other’s profits, companies also attempt to optimize the amount of administrative overhead they require. Reducing administrative headcount is often a path to more profit, but not always, and Obama’s allegation that the government is more efficient is suspect. If the government overpays for services or is wasteful in its distribution, it causes administrative overhead to appear lower. Further, governments often apply their administrative efforts to tasks unrelated to customer service; governments work for themselves, not the people. Without profit as a measure of success, government bureaucrats are inclined to maintain the status quo even when it is wasteful. Therefore, applying the private sector’s metric of administrative overhead to government is not helpful.
If Obama’s argument for socialized healthcare were valid, why then is his administration now outsourcing flights to the International Space Station to Space X, a for-profit company? Their profit motive should be costing taxpayers money, yet Space X’s cargo rockets are far cheaper than the Space Shuttle they are replacing. Also, why does the government allow for-profit airlines, car companies, or anything? The obvious answer is that this idea was tried in communist Europe and Asia, and it failed so miserably that it killed 100 million people.
Voters should listen to Obama’s own words. He wants a socialized single payer healthcare system for the US. Anyone who thinks that is a bad idea really should not vote for him.