Obamacare Meltdown Shows the Importance of Profits

Let me tell you a story.

Ever with good intentions, Congress passes a law to further regulate a market that was already heavily regulated beforehand.

Private businesses try to participate in this market, only to find that they continuously lose money, year after year.

Said private businesses cease participating in this market in order to stop losing money, and focus their efforts elsewhere.

How would a reasonable person describe the behavior of the businesses? Rational, prudent, obvious?

How about greedy?

On the economic left, that appears to be a winning explanation for the fact that another major health insurance company has decided to withdraw from more of the Obamacare exchanges. Specifically, Aetna has announced plans to withdraw from 11 of the 15 states they have been participating in.

Senator Bernie Sanders offered a characteristically moderate assessment of the news:

It is disappointing that Aetna has joined other large for-profit health insurance companies in pulling out of the insurance marketplace. Despite the Affordable Care Act bringing them millions more paying customers than ever before, these companies are more concerned with making huge profits then ensuring access to health care for all Americans.

A similar tone was struck by others in the progressive community, as noted in the piece cited above.

So what’s Bernie talking about? Is Aetna simply walking away from profits in an effort to smite poor and sick Americans?

No.

In fact, according to Zero Hedge. Aetna is projecting that it will lose $300 million on its Obamacare exchange business in 2016 alone. In context, this would represent 12.5% of Aetna’s net income from 2015. So it’s not going to bankrupt Aetna, but it is still significant.

Bernie is right that the Affordable Care Act brought in more paying customers; the problem is that those customers aren’t free. The average healthcare expenses that came with them, at least in the state exchanges,  were dramatically higher, on average, than the premiums and resulted in substantial losses for Aetna and others. Indeed, there has been a veritable flood of major insurance companies rushing for the exits on the Obamacare exchanges.

Bernie is also right that the health insurance companies are putting profits before ensuring access to health care for all. Of course they are. They are for-profit companies; it’s kind of their thing.*

It’s easy to blame for-profit companies for Obamacare’s downfall, because people love to hate them. But it’s not a new story that for-profit companies exist to seek profit. This was true before Obamacare was passed, it’s true now, and it will be true in the future. Which leads us to a critical point:

If your healthcare policy requires companies not to pursue profits in order for it to be successful, then it is a terrible policy.

It’s the economics equivalent of trying to fly by jumping off a cliff. It would have worked if gravity didn’t exist, you say. Maybe so. But gravity does exist, and we know that in advance. Thus, it’s a terrible idea, too.

The value of profits
More to the point, it’s worth pushing back on the casual assumption that profits are evil. Profits are not evil. In fact, they are essential for a market economy to work. And the Aetna decision illustrates this point very well.

It is beyond the scope of our present discussion to give a full economic explanation of profits. But in the context of the healthcare, profits are a sign of sustainability. I don’t mean sustainability in the environmental sense, but in the economic one.

If a business is making profits off providing a service, then chances are, it will continue to provide that service in the future. It’s in the business’s own self-interest to do so.

In a market-based healthcare system, everyone in the chain of service delivery needs to be able to make money–the doctor, the hospital, the medical supply company, and yes, even the damn health insurance company. Because if any member in this chain is failing to make money, then they are a risk to drop out.

This is precisely what happened with Aetna. It was losing money on the state exchanges, so it stopped participating. In some cases, this might be a minor inconvenience for policyholders who still have several options remaining. In other places, however, it is expected to reduce the highly touted competitive exchanges down to a single provider. So much for choice.

The core problem is that if the service-provider isn’t making money, then it ceases to be about economic self-interest and starts becoming an act of charity. There’s nothing wrong with charity. It’s a wonderful thing. But people (and businesses, in some cases) provide charity when they have the resources and desire to do so. If they encounter financial challenges in their own life, they may have to cut back on giving and take on more profitable work. This obvious reality makes charity far less reliable and enduring than a regular market exchange that is in both parties’ interest.

Based on this understanding, Aetna’s decision must be viewed in a new light. Aetna’s losses may have been due to the new Obamacare requirements, managerial incompetence, or a mixture thereof. In any case, something had to give. If we really want healthcare coverage for all, we probably also want that coverage to continue to exist over time. In other words, it needs to be sustainable.

And for it to be sustainable, it must be profitable–even for that widely-derided fount of evil known as the health insurance companies.

What comes next?

The Common Dreams article cited above suggests that the continued withdrawal of companies from the healthcare exchanges proves that a single-user system is necessary. And at least, that kind of system would not rest on the core structural problem in Obamacare, which all but ensures insurance companies will not be able to break even, as we wrote about previously. A single-payer system does away with the notion of profit and loss entirely, since the government clearly doesn’t care if costs exceed revenues (at least for now).

That said, we must recognize that the Affordable Care Act was a substantial expansion of government intervention into the healthcare market. The result has been a very rapid collapse.

In other words, a large government intervention in a market proved to be a huge failure. Yet the proposed remedy is to give that same government even more control of that market. This should give us pause.

 

*Indeed, the publicly traded companies are actually required by law to attempt to maximize profits; that is, management can be sued by shareholders if they prioritize something besides profits.

Note: Another suggestion put forth to explain Aetna’s behavior is that they are trying to use the bad publicity on Obamacare as leverage so that the Department of Justice will permit a major merger to go through. Senator Warren has suggested this, for instance. And the CEO of Aetna actually stated somewhat explicitly that, in the absence of a merger, Aetna might have to withdraw from its remaining states.

Certainly, this is a good negotiating tactic, but the conspiratorial angle is far from compelling. Of course, Aetna wants to pursue a merger that could save costs and further expand their insurance risk pools. That’s obviously true, and it’s conceivable it could help their bottom line. Fair enough.

But linking the decision to actually leave to their blackmail efforts seems to be a stretch. After all, they would have just given away 11 state’s worth of leverage without gaining anything in return, if this was the opening bid. So if the whole point of withdrawing was blackmail, then Aetna is awful at it.

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