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June 26, 2010
Insurance, Profits, and the Revenue Fairies
Maybe - just maybe - these government types really are ignorant of how business works.
Maybe it's not just that they hate business and business people - which they do - but they have no idea of what businesses are about.
For example, here's a quote from the June 23 Wall Street Journal: "President Obama told health-insurance executives they should keep a lid on big rate increases, but the executives said some rises were unavoidable because the new health law requires them to offer better benefits."
See the problem?
Let me make this simple, so even an Ivy League graduate can understand. In fact, let's make this really easy: let's do multiple choice.
Q: If the law now requires more money to go to the claims of policyholders, where is that money going to come from?
What's the answer?
Let's do what I often do with my university business students when they have a problem with one of my multiple choice questions: go through the choices one by one.
The President and many others who work in government probably wouldn't go with (a). Although they think executives make gazillions of dollars, even they know an annual $20 million executive compensation wouldn't cover the kinds of payouts Obama and his minions envision for insurance beneficiaries.
The answer, in their minds, has to be (b). Given their lack of understanding ofr business, Obama & company believe that insurance companies - in their evil corporate greed - make too much profit. As a result, these corporations need to reduce their profits and give more to beneficiaries. In effect, the Obamanistas are no different than that woman on WJR in Detroit a while back who lined up for a stimulus cash giveaway:
An ignorant woman? Perhaps - but her reasoning was right down the line of Obama and other Democrats and probably a lot of the Harvard faculty: insurance companies can just go to their stash and get more money to give to beneficiaries.
The "stash" in their minds is profit.
Earlier, we eliminated answer (a), executive compensation. And I would suggest that the answer (c) - the revenue fairies -- would be better than (a) or (b).
Of course, you know that's not correct: there are no revenue fairies (except in the minds of some government types).
The answer is (d), "None of the above."
But what's wrong with (b)? Why can't insurance companies pay beneficiaries out of profits?
In a company chartered and designed to make a return on investment, profits are the equivalent of a necessary expense.
Profits are not an optional "stash." They are the reason for the company's existence.
Profits are a return on investment.
If profits go away, so do investors - they'll find some other enterprise in which they can invest in order to make a return.
If investors go away, the company fails.
It's that simple.
The government wants insurance companies to pay out more to beneficiaries. The money won't come from (a) executive compensation, (b) profits, or (c) the revenue fairies. That money comes from (d) "None of the above."
And that "none of the above" is just what the Wall Street Journal indicated: the increased premiums of the insured.
Of course, if government drives down the premium rates, profits drop, investors will leave, insurance companies will go bankrupt and what happens then?
Government will have to step in to take over the insurance industry and...
Wait a minute.
Maybe these government types are not as ignorant as I thought.