The role of profit

on Aug 17 in Economics, health care tagged by Trevor Hicks

One of the themes I see from the left regarding the health care debate is a desire to wring profit-making institutions out of our health care system. Some people are obviously very uncomfortable with the idea that companies exist to profit solely from the suffering of others. It’s difficult for me to pinpoint exactly why profits in health care generate more of an ‘ick’ factor for some than say, selling food which is a much more vital need than medicine, but clearly it exists. I think there is also a perception that profit represents a tax on the the purchaser of a good or service that doesn’t add value to society as a whole. That is, once the costs are covered and salaries paid, profits represent a company’s exploitation of its customers and if profits could be made to go away that the customers would be able to pay lower prices for the same goods and thus be better off.

I don’t have anything to say about the ‘ick’ factor on profits in health care. I’m a guy who favors allowing people to sell kidneys so clearly I have a much lower threshhold of ‘ick’ than most people. Or at least, I don’t think my ‘ick’s or anyone else’s should be enshrined in law or public policy.

Profits play a vital role in a free society, though, much like the role of prices free from controls. They are the driving factors why free societies are much wealthier and well fed than less free societies. In particular, the pursuit of profit makes companies generally perform better than government solutions for at least two reasons. In a free market where customers have the right to choose a provider, profits force the providers to deliver real value to customers or go out of business. The other angle for a provider is the cost discipline that profits impose. If a provider merely passes its costs on to customers, there is no real incentive to put forth the effort to improve efficiency or trim costs. In a profit model, those efforts are rewarded with extra money in the provider’s pocket. And in a competitive market where all providers are striving to earn business, those temporary excess profits are competed away as prices are lowered by a competitor willing to earn more business at the cost of a slightly lower margin.

I understand I’ve presented a sort of idealized version of the story and there are all kinds of ways that this story is incomplete. I don’t mean to suggest either that government always screws things up and markets are always perfect, far from it. Companies competing in free markets are just as imperfect as governments and make just as bad mistakes. The value of a market is that companies have to improve or die, government mistakes tend to hang around forever.

So while I’m happy to entertain ideas about how our system for health care financing can improve on distribution, efficiency and impact on public finances. I’m very leery of turning things over to a single payer or government run system, because then our system will stop getting better on the things it does well. We would all be sorry if our state of medical prowess had frozen in 1980 because we can list the various improvements in diagnostic tools and pharmaceuticals that have come about since then. The people of 2040 will be much worse off than they could be if they are stuck with 2010 medical capability. And while it will be easy to point to the people that would be helped by a massive overhaul of the system, the victims of that overhaul will largely be unseen as they will consist of all the people that could have been helped by a more efficient system with better technology but weren’t because it stopped or greatly slowed innovating and improving.