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Wow, Obama Has Inverted the Supply Curve

I am having a blast at the Change.gov transition site for Obama, now that I have satisfied myself it is not a fake.  Those who doubt that Obama has super-human powers should read this, from the Obama site:

The Obama-Biden plan provides affordable, accessible health care for all Americans, builds on the existing health care system, and uses existing providers, doctors and plans to implement the plan. Under the Obama-Biden plan, patients will be able to make health care decisions with their doctors, instead of being blocked by insurance company bureaucrats.

Under the plan, if you like your current health insurance, nothing changes, except your costs will go down by as much as $2,500 per year.

If you don’t have health insurance, you will have a choice of new, affordable health insurance options.

Wow - so now you can go out purchase any care you want - any tests, any procedures, whatever - and no one is going to tell you no.  Everything is paid for.  You have a blank check to go spend.  And, by granting you an infinite supply of care, your cost is going to go down.  Obama is really superman, because no one else in history has figured out how to invert the supply curve or make 2x cost less than x.

You see, it's all about insurers' margins.  If we can just cut down on those fat margins, everyone can have full health care and a pony for less money.  You doctors who are worried about health care, you will have it better too:

Prevent insurers from overcharging doctors for their malpractice insurance and invest in proven strategies to reduce preventable medical errors.

All these years you thought malpractice insurance costs were high because of huge malpractice court settlements that usually bore little relationship to true malpractice, well, you were wrong.  Its because of the insurers and their margins.  We don't have to reform malpractice tort law (which is just as well since tort lawyers were so generous with donations to our campaign), we just have to get insurers to stop overcharging doctors.

To give you an idea of the absolutely huge amount of savings that can be extracted by just pounding on the insurers to give more coverage for less money, let's take a look at those outsized margins they are making.  These are net profit margins reported by Google Finance for 3Q2008 of the largest health care providers and insurers:

Cigna:  3.50%
United Health Group:  4.56%
Aetna:  3.64%
WellCare:  4.08%
Amerigroup:  3.51%
Humana 2.56%
WellPoint:  5.49%

Freaking robber barons!  Look at those outsized margins.  No wonder we have a health care crisis.  By cutting these guys margins in half, Obama expects to reduce the price of health care by 1-2%, which should be more than enough to pay for large increases in services and 30-50% price cuts.

Update:  Oh, its magic.  That explains it.

Update #2:  OK, the page has come down, as have most all the pages that had any kind of policy detail or promises in them.  I wish I had screen shots, but I can say everything above was cut and pasted directly form the web site.  Could I make that stuff up?  Too bad, there probably were another 10 blog posts in there somewhere. 

Posted on November 7, 2008 at 08:50 AM | Permalink

Comments

Nice snark, but since they're railing against the evils of capitalism you'd have to back out executive compensation and dividends paid. I still don't think you'll get anywhere remotely close to 50%, but if you really want to bludgeon them intellectually those would be the numbers to have.

Posted by: ErikTheRed | Nov 7, 2008 10:43:11 AM

This is excellent analysis and should be widely distributed. Keep up the great work!

Posted by: Brandon | Nov 7, 2008 11:01:01 AM

First post on your excellent site. A couple of things I would like add. Although the margings that insurance companies make does not seem like much, that is not where the problem is. Insurance companies do not provide medical services! Everything they do is a drain on the healthcare system. Providers and hospitals spend large amounts of money, time and resources to get the reimbursements they are due. Imagine healthcare without the current insurance bureaucracy. It could be beautiful...

Lawyers try to play a similiar game. they will point out that settlement and jury payouts only account for 1-3% of medical costs. They miss the real costs of defensive medicine: extra tests ordered, more specialists consulted, more paperwork, standards of care that have no bearing on science but have been shaped by the courtroom..........Imagine how much less a doctor visit would be if malpractice premiums were gone?

Government does not do any better. what pencil pusher dreamed up never events?

Get medicine back to the providers and Patients. Access to care, quality of care and cost would all improve....

thanks for letting me rant....

Posted by: Dirtball | Nov 7, 2008 11:05:46 AM

Insurance needs to be insurance, a protection against an unlikely buy potentially expensive event. My house insurance doesn't cover home repairs and maintenance. My car insurance doesn't pay for filling my tank or other maintenance. Why should health insurance pay for the equivalent items? If insurance were personal and simply covered the bigger ticket items, insurance would be much less expensive.

Expenditures on routine health care should be no different than expenditures on housing or food. Those in dire circumstances, poor people or chronically ill, could be handled as a separate case, either through charity (ideally) or some government support. We don't need to make the entire country wards of the government to solve the problems of a few.

Posted by: J Howe | Nov 7, 2008 12:06:35 PM

One other thing, I do agree with ErikTheRed that having profit numbers which were somehow adjusted to exclude executive compensation (less compensation expense, higher profit margin) would make a stronger case. My guess is that you could pay the executives nothing and still not come up with the numbers you would need to support Obama's grand plan.

Posted by: J Howe | Nov 7, 2008 12:09:39 PM

I'm with ErikTheRed too because I wouldn't even bother to run a company if it only returned 2.5%. Or is the fact that 2.5% of $12 billion is bigger than 2.5% of $10 billion mean you can get a pretty good investment return after all?

Posted by: Noumenon | Nov 7, 2008 12:21:06 PM

"since they're railing against the evils of capitalism you'd have to back out executive compensation and dividends paid"

Well, perhaps executive compensation, but even in socialist organizations you've really got to pay somebody to run the thing. In any case, executive compensation is just a tiny portion of company revenues. For example, in 2003 Cigna had revenues of $18.8 billion. Total compensation for its top 7 executives was only $27 million, about one-tenth of one percent of revenues.

Dividends are generally paid out of profits - either current year or retained earnings. I think adding dividends to profits would be double-counting, wouldn't it?

Posted by: John Dewey | Nov 7, 2008 1:58:28 PM

Enough already with the tired rant about executive compensation, this is not Democratic Underground. Go somewhere they believe such stupidity.

The real point to understand about upper management pay is that those bastards lose their jobs when they don't produce! Something to consider when listening to piece-of-shit congressmen and pork-laden senators bleat about 'Oh the injustice.'

Give me a fucking break.

Posted by: dr kill | Nov 7, 2008 3:24:52 PM

I don't think it's correct to look at profit margins. Look at return on equity, which is what accrues to shareholders for their investment:

CIGNA 24.7%
UNITED HEALTH 22.8%
etc.

These are very profitable businesses. I don't have time to add it up, but I bet they make in aggregate something like $30-$50 billion per year in pre-tax earnings. That's the pot of gold Obama is after.

Posted by: Scott | Nov 7, 2008 4:41:29 PM

Even the absurd HillaryCare proposal made more sense than ObamaCare. The myth of insurer margins being too high is based on longstanding comparisons between Medicare overhead and third-party insurer overhead. The comparison is flawed because the calculated Medicare "margin" only includes labor and supplies: the costs of the buildings, mainframe computers, employee parking lots, etc. aren't included.

The idea that medical malpractice premiums are high because of insurer rip-offs is a joke. Many medical malpractice insurers are non-profit medical associations. In other words, most physicians are insuring themselves via state medical groups or national specialty groups that have minimal overhead, no stockholders, and no profits. Insurance costs are directly related to the magnitudes of malpractice awards. Overhead, profit, and insurer greed are not the drivers of high premiums.

Posted by: Dr. T | Nov 7, 2008 6:21:54 PM

Freaking robber barons! Look at those outsized margins. No wonder we have a health care crisis. By cutting these guys margins in half, Obama expects to reduce the price of health care by 1-2%, which should be more than enough to pay for large increases in services and 30-50% price cuts.


Damn straight. Let's kill off drug innovation, and med school opportunity cost while we're at it (8 years of med school + residency to work for gov't? No thanks, Hillary. See ya.)

My doc just impromptu flew off the handle at what Obamarama was proposing in August. A significant portion of the medical community hates him. Yes, hate, Hippocrates.

Apparently Obamarama also has the following superpowers:

economic disincentive immunity,

ability to cure all known diseases,

make all his namesake babies beautiful and non-colicky, and

solve the global financial crisis with the shiny red button. Before lunch.

I can't wait to watch this ignorant, self-absorbed, unqualified fraud fail spectacularly.

Posted by: Mesa Econoguy | Nov 7, 2008 7:29:54 PM

Is anyone here surprised??? It's not like all of the extreme socialist/marxist history was that hidden from anyone who wanted to look for it.

I work in a financial firm, and today I heard one of the obamamaniacs awestruck in desribing how obama's address caused the market to jump 250 points (somehow forgetting that it dropped about 1000 in two days). She said that he explained how he was going to fix the problems and it filled the market with hope... These people think he is freakin magic. They will endorse all of these programs whole heartedly, and will believe to the bitter end. Starting to remind me of some other country with a hope and change bringing charismatic leader...

We are in very serious trouble.

Posted by: Valens | Nov 7, 2008 9:56:59 PM

Thanks, good review. The comparison is flawed because the calculated Medicare "margin" only includes labor and supplies: the costs of the buildings, mainframe computers, employee parking lots, etc. aren't included.

Posted by: drogen | Nov 8, 2008 3:09:42 AM

this is just death by installment. the plan is to squeeze the insurers until they fail then move to a one payor system, which will be a disaster. hospital doctors are one of the few groups that consider the expense of what they do as little as do government employees. the phrase "government doctor" really ought to strike fear into the heart of any budget admin... also consider: private doctors are right in the crosshairs of the obama tax plan. they earn over $250k, all cash, with very little they can do to shield it. crank up their taxes and see how many want to take on med school loans in the future and how many opt for early retirement.

Posted by: morganovich | Nov 8, 2008 7:22:54 AM

My favorite part is how, by greatly increasing the demand across the board for the existing scarce supply of health care providers, Obama thinks prices will FALL. Safe to say he's never drawn out a supply and demand curve graph and wouldn't understand the concept of "demand curve shifting to the right". Great analytical work on pointing to net margins for insurance suppliers -- but whenever I've brought up something like that in conversation, people just plug their ears and shout "you're only saying that because you're a REPUBLICAN!!!"

Posted by: Kevin | Nov 8, 2008 8:47:52 AM

On a whim I started watching The Warriors (1979) this morning. I got about 15 minutes into it when I recalled this post and its update on the 'magical'.

It looks like Barack has been painted as some sort of Cyrus on a handful of levels: watching the movie now is like watching a parody of today's U.S. political landscape. Only in this movie, a group of thugs come to a group meeting in an effort to collectivize and take over New York City from the establishment. In real life, a group of thugs take over the controls of an already bloated federal government and take over a perceivably wounded economic system with something else. Life imitating art? Can. You. Dig. It!

Posted by: LowcountryJoe | Nov 8, 2008 9:47:21 AM

@dr kill: Nobody here is bemoaning executive compensation. Personally, I'm an executive and I enjoy being compensated. It pays the bills and all. What we're saying is that outside of preaching to the choir (us), the argument would be more compelling if it addressed the immediate objections that would be raised to it by your more sophisticated and nuanced Obamabots (the average ones being capable of not much more than drooling on themselves when points like these are made). We're selling an idea here, and like any sales process you need to anticipate and deal with problems that will occur during the sale.

The objection is that a well-run publicly-traded company doesn't just pile up money in a vault at the end of the year and then jump around in it naked like Scrooge McDuck. They pay out bonuses (some outrageous, but that should be an issue for board members and shareholders to address rather than the government), they pay dividends, buy back stock, and otherwise compensate their employees, executives and shareholders. In hopey-changey-land, these evils of capitalism would go bye-bye and the savings passed on to consumers (conveniently ignoring just how well these things are run absent any incentives for efficiency provided by the market). The argument that is being put forth is that these savings don't come anywhere near paying for the extra stuff promised by the Obamessiah. The argument is stronger if it makes an accurate accounting of both sides of the equation.

Posted by: ErikTheRed | Nov 8, 2008 11:28:15 AM

scott-

$50 bn may sounds like a lot of money, but it is a pittance in comparison to US healthcare spending. US healthcare is a $2.26 trillion/year business. it's 15% of GDP. 50 billion is 2% of spending. even if he were to take all of the profits of the entire industry (and keep in mind that much of their profit comes from other lines like property/casualty), it would make NO MATERIAL DIFFERENCE.

this plan is a sham and a trojan house, pure and simple. drive the insurers out of the business (and probably out of malpractice as well) and replace them with single payor. THAT will be a disaster and lead to astronomical premiums for anyone who actually wants private coverage to avoid the endless waits that will come with single payor.

the british health system BRAGS that wait times to see a specialist after a referral are now down to an average of six months. i don't know about you, but that sounds like a much lower standard of care than i am interested in.

Posted by: morganovich | Nov 8, 2008 2:36:53 PM

I've had wait times here between 1 and 3 months. Not 6, sure, but still long enough that you can die waiting for someone to get around to figuring out what's killing you.

In my view, the problem with health care in the US is not on the business end, but in how doctor's themselves practice. Look at Mayo Clinic, where doctor's check each other's work and are accountable to the organization for their results. If that were the norm, which it certainly isn't, costs would come down and results would improve. Doctor's in private care are essentially unaccountable, arrogant, and provide surprisingly poor care unless your problem is trivial.

This leads to more lawsuits, to higher costs because people are too often diagnosed late in the progress of their disease, and to more visits overall, clogging the system.

Doctor's are also, as a class, given too much deference. There's a fundamental moral hazard in having a whole class of people who cannot be criticized, and I think we've seen the results of that hazard in the system.

Sorry about the rant. It's just that I think our discussion of this issue tends to be completely off target. The health care system can be improved dramatically.

Posted by: adam d. | Nov 8, 2008 11:21:52 PM

Obama's argument evinces little to no understanding of how the insurance market actually works. An insurance company tracks a number called the combined ratio, which is the cost of running the business, plus the claims experience. That number is usually over 100% for most lines, denoting that they lose a bit of money on average from every policy. It's actually a relatively rare year where an insurance writer will make money on the claims experience from the insurance itself, although it does happen. Insurers make money by making you pay your premiums up front, investing that money, and then paying out claims throughout the year from that kitty and whatever returns on investment they've made. Warren Buffett calls the combined ratio the "cost of capital," and as such, writing insurance is just a manner of relatively cheap fundraising for an investment fund.

Posted by: Insurance Consultant | Nov 9, 2008 12:06:26 AM

"Sorry about the rant. It's just that I think our discussion of this issue tends to be completely off target. The health care system can be improved dramatically."

I think that most people agree that the U.S. system can be improved, but the socialized, single-payer systems are not an improvement. See this decision by the Supreme Court of Canada for example:

http://scc.lexum.umontreal.ca/en/2005/2005scc35/2005scc35.html

Although I have no link, a few months ago I read that in England hospitals were making people wait in their ambulances rather than come into the ER because the official wait time does not start until you are inside.

I have experience with the Medicaid system as implemented in Arizona and (1) big private insurance companies are still involved; (2) many (enrolled) people are denied requested medical services by these insurers/the state; and (3) the doctors and hospitals are frequently not paid for providing services that are covered. Unlike the private system, when the Doc does not get paid by the insurers/the state they cannot bill the patient. As others have remarked, this is not a system that is likely to encourage people to become doctors.

Posted by: mahtso | Nov 9, 2008 8:43:46 AM

Great post. I would like to give some anecdotal evidence to the wrongheadedness of the Obama plan. I work as a provider in the medical community. When I have a patient with a complaint of low back pain, I usually treat them with anti-inflammatory medications and a narcotic if the patient has severe pain. The average patient does not need an MRI because that is indicated for symptoms involved with a pinched nerve. Medicaid patients almost always demand a MRI because they are interested as to what it would show and it costs them absolutely nothing. When you add all these people to the patient pool with no disincentives to more expensive care the cost will skyrocket.

Since the Democrats are implying that healthcare is a right for all, the answer will not be to cut back care. The answer will be to raise taxes or to pay providers and hospitals less. This will in turn decrease the care that the average patient receives. There must be repercussions to bad financial planning and poor life choices. Egalitarianism is evil. It demands every child be punished when only one steals a cookie. It punishes the child who obeys and saves by splitting up his savings to give to the child who lived for the moment. If this new morality extends for any period at all, there will be no reason to excel. This is a real disincentive for being responsible as socialist countries have learned. Canadian specialists limit the number of patients they will treat because there is no benefit to being a slave. I am sure some believe Doctors should be glad to work for less. Market forces are what makes a medical career attractive. Remove the benefits of that career and watch the quality and number of people entering the profession plummet. Part of me would prefer that my plumber was compelled to work for a fee set by the government but I would not blame that plumber for changing his profession.

Posted by: Locus | Nov 9, 2008 10:59:23 AM

I have the screenshots from the rest of the policy pages, if you want them.

Posted by: Anon | Nov 9, 2008 11:03:58 AM

I work with doctors every day, hell, I even played one in medical school. The guys with whom I've been talking are going "John Galt" in their private practice, ceasing to see M'caid'/M'care patients, and stopping all charitable work and donations, since that's The Government's job, according to the Obama/Biden Doctrine and tax returns. The People have voted for The One who promised that when he was elected, that would be "the moment when we began to provide care for the sick..." . Let's see him do it without so many doctors who thought they'd been "providing care" to the sick all this time. Doctors have seen their retirement funds disappear like anyone with a 401K or IRA account, and seeing themselves further enslaved to socialist economics is the last straw. Jam the system, patriots. Go to the public health clinics and get your free vaccinations and any other services they provide. Apply for all that free government stuff like grants for observing your hamster or for performance art involving feces. Don't just remove your production from the redistribution pot, burden the socialist bureaucracy, demand that Obama deliver the goods. Yes, we can, till is is did. Git'r done, or enjoy The Party, comrades. Hawaii bankrupted and dropped its socialized medical utopia plan after seven months, the citizens being smart enough to stop paying for private insurance when they could get it free from government. Democracy and Capitalism are truly the worst forms of government and economics on earth...except for all the others. We are about to try Communism and Socialism on a grand scale in America. Take a lesson from the Obama campaign: use government to bring down Government. ACORN did it.

Posted by: twolaneflash | Nov 9, 2008 12:18:24 PM

Get the page from Google cache before Google's cache updates to the 404.

Posted by: Anony | Nov 9, 2008 12:28:48 PM

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