On Regulating Insurance Profits

A few years back, Patrick Byrne earned the wrath of the progressive community with the suggestion that public schools should spend 65% of their budget on education.

The public school system, as everyone knows, is a primary trough for progressive political activism. Many of the most progressive school districts prefer to use the funds allocated for education to achieve the progressive goal of redistributive justice to the lesser goal of educating children.

Mr. Byrne was openly vilified by the left for the 65% suggestion.

With this in mind, I find myself startled to see progressive lauding the 2009 health care bill for setting a percent limit on the cut insurance companies can take. In a show of duplicity, self-righteous pat themselves on the back with the demand that a set percent of premiums be spent on "medical care."

(I put "medical care" in quotes because the progressives running the health care system will get to define what is and is not "medical care" as political expediency demands. For example, I would expect the $300,000 a year that Michelle Obama earned as a political appointee at the University of Chicago Medical Center to be considered a medical expense. One might also consider the hefty lawyer fees collected in malpractice suits to be medical expenses.

Let's face it. In a world where there is a great deal of collusion between insurance companies and health care providers, there is often ways for big insurance companies to shift profits from the insurance side of the books to the health care side of the books)

The duplicity of the left aside, the reason for this post is a direct observation that setting the profits of insurance companies at a fixed percent does not help reduce medical care costs.

When a company works on a percentage basis, their efforts focus on increasing total sales.

The reason that we do not see the productivity gains in health care reflected as price drops is that the insurance companies that control health care spending do not want to see the prices drop. Their profits would plunge if prices dropped.

If we wanted to see a price drop in insurance, we might try a system where the insurance companies worked on a fixed amount or hourly wage. This is what I was hoping to try with the Health Care Advocates in the Medical Savings and Loan.

Better yet, one might try a system where the agents get a bonus for cutting expenses.

Imagine the plight of a company working under the regulatory regime of Pelosi-Reid that gave bonuses for cutting medical costs. Lets imagine that young entrepreneurs came up with an ingenious way to dramatically reduce health care expenses for the company.

What would happen in our progressive regime is the company offering the bonus would become Federal criminals as the combined reduction in medical expenses and bonus crossed the performance threshold set by Congress.

While setting insurance company's income as a percent of medical expenses polls well with those driven by wealth envy, the program does not actually reduce health care expenses, nor does it actually affect the gap between rich and poor in any meaningful way.

Having Federal regulators setting wages and prices in the insurance industry does little more than give an inside advantage to those companies with political connections as they can get the wages and prices set in ways that are favorable to their business model.