Capping Profits

Is capping earnings really a solution or just a feel-good anti-market gimmick.

The WSJ Reports: "Blue Shield of California said it would limit how much of its earnings it keeps, amid public pressure to control health costs. The nonprofit said it would cap its annual net income at 2% of revenue."

First off, Blue Shield self-righteously declares itself a "nonprofit" so what business does it have to be making any profit? Shouldn't a nonprofit be making no profit?

There are so many ways for a big complex financial entity to syphon off money. A declaration to cap profits at a given percent might simply indicate that the firm has a different way to syphon off money.

It is easy to cap the profit of any company. Simply spend the money. One could give the executives big salaries with big bonuses and the profits go down.

BTW growth stocks often go years without positive earnings because they actively re-invest all income. Apple Computer and Microsoft went for years without a reported profit.

Finally, the profit of insurance companies can be deceptive. The profit is calculated as a percent of the size of the pool. 2% of a pool with $100B is two billion dollars.

Another business without a big pool of cash might report no profit. For example, a garage band does not involve a big capital investment. When the garage band makes a hundred bucks playing at a bar, that hundred bucks is all profit. The expense for the band might be a few bucks for gas and 90% profit. Despite the fact that they just make 90% profit, their earnings are far less than the big insurance company whose profit was calculated as a percent of a big pool.

BTW, the medical savings and loan lets people keep the bulk of their health care dollars. Because the MSL is not reporting earning as a percent of the total health care dollars, its profits would higher than the small amount of money it actually does handle.

I am filing this announcement by a nonprofit that its profit is only 2% under "self-righteous snittery."