Profits are bad, according to many Democrats running for president.
“There are too many people profiteering off of the pain of people in America, from pharmaceutical companies to insurers,” Sen. Cory Booker of New Jersey said at the Democratic debate on June 26.
“The insurance companies last year alone sucked $23 billion in profits out of the health care system,” Sen. Elizabeth Warren of Massachusetts fumed in the same debate.
In another debate the following night, Sen. Kirsten Gillibrand of New York argued that “I would not be spending money in for-profit prisons to lock up children and asylum-seekers.”
And Bernie Sanders of Vermont insisted that “health care is a human right, not something to make huge profits off of.”
Are profits really that bad? Not if you count the efficiencies they create alongside the salaries and bonuses they put in the pockets of executives and shareholders.
Profits are an elemental component of capitalism. Without the prospect of financial gain, nobody would take risks on new businesses, new products or new ideas. An organization without profits is often one with lackluster management, unmotivated workers and angry customers.
We do shackle the profit motive for certain matters of public interest, such as delivering mail or providing energy to homes. The Sanders-Warren wing of the Democratic party now insists we should extend the same logic to health care, prescription drugs, prison management and even higher education.
This is dangerous thinking because it ignores what the profit motive actually accomplishes. To be profitable, private-sector companies must optimize efficiency. In a market with healthy competition, companies pass on some of the cost savings to consumers and continually improve their offerings, to lure new customers and increase revenue. Government, in a healthy system, sets and enforces rules assuring nobody cheats.
Consider the U.S. health care system
Capitalism has many flaws, but it’s usually better than government-run production with no profits. Warren talks as if moving to a single-payer health care system will leave everything the same, except there will be an extra $23 billion in former profits to spend on patient care. But this assumes efficiency in the health care system would remain the same, which it almost certainly wouldn’t.
Doctors would get paid less in a government-run system, causing some to leave the field. There’d be minimal incentive to reduce patient wait times or improve care. And in place of pressure to boost profits there would be pressure to meet budgets and make sure no new tax revenue is required. Oh, there would also be meddling by self-interested and possibly corrupt politicians.
Economists have argued for decades whether a publicly run health system, with no profit motive, would be better for patients and taxpayers than one with big for-profit providers. There’s no conclusive answer. The current system is a hybrid. Private insurance and out-of-pocket spending—the for-profit part of the health care industry—account for about 44% of the $3.8 trillion in annual spending on health in the United States. Government programs such as Medicare and Medicaid cover about 41%. There’s an important caveat, though: Medicare and Medicaid are government programs, but they mostly pay private-sector caregivers working at for-profit organizations.
There are other signs the for-profit health care industry works reasonably well. A recent survey by the Kaiser Family Foundation found that 61% of people who get insurance through an employer in the private system are satisfied with their coverage. Only 6% are deeply unsatisfied. That suggests the profit motive is working.
Warren, Sanders et. al. want to bring more of the US economy under government control, with Uncle Sam picking up the tab for college attendance, directing an overhaul of the energy and transportation sectors and perhaps even manufacturing some prescription drugs. Exerting government control might seem like a reliable way to solve pernicious problems. But government spending generates its own problems, such as the notorious $600 toilet seats the Pentagon once purchased. And from time to time it becomes popular to move work out of the government sector, because private contractors can often do the job cheaper, faster and better.
In the 1990s, for instance, President Bill Clinton pushed a “reinventing government” initiative focused on the kind of performance metrics common in business at the time. It was fashionable then to outsource government work—such as running prisons—to private contractors. The pendulum may be swinging back, but it’s worth recalling that critics have labeled government-run prisons just as inhumane as some say privately run prisons are today. Windfall savings and dramatic improvements never seem to materialize as promised.
Rick Newman is the author of four books, including “Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman