Keep the Profit Motive in Health Care

Why do many Oregonians think we should take the profit motive out of health care? At a public meeting in Portland on June 10th, this theme was repeated and applauded over and over again.

Yet, when participants were asked about the recent trend toward $4 generic drug prescriptions, their views began to change. Why is Fred Meyer now offering $4 prescriptions? Why is Safeway offering to match competitors’ prescription prices?

The answer is that last year Wal-Mart launched an aggressive program offering 30-day supplies of common generic drugs for just $4. Both Fred Meyer and Safeway decided to match that low price rather than risk losing customers to a competitor. Each of these big chains is a for-profit company. Yet, each realized that to make profits in health care, they needed to offer something that would attract and retain customers.

Taking the profit out of health care wouldn’t necessarily do anything to reduce prices. Who believes that government centralized drug purchasing, or price controls, would drop prescription prices down to just $4 each?

The “profit motive is bad” fallacy is based on the misconception that profit is a cost of doing business. But profit is not a cost; profit is a signal that consumer needs are being met. Satisfy more consumers, and a business can earn more profits.

So, rather than eliminating profit from our health care system, we need to encourage companies to innovate and to earn profits by lowering prices to consumers.

Steve Buckstein is Senior Policy Analyst and founder of Cascade Policy Institute, Oregon’s free market research center.

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Posted by at 05:30 | Posted in Measure 37 | 49 Comments |Email This Post Email This Post |Print This Post Print This Post
  • Jerry

    These people who favor government control are simply ignorant about how our economy works. It is sad, but true.
    They don’t have a clue.
    Maybe if they would work for free then I would see how they want no profits for others, but, sadly, these same people are always wanting more without doing anything to earn it.
    It is so sad as to be pathetic.
    How do they function with such a level of ignorance??
    I often wonder.
    One thing I know for sure. Rich people should pay more for a loaf of bread than poor people.
    It only makes sense.

  • Joanne Rigutto

    I don’t think that those businesses offering the $4 generic prescription drugs are doing it so that health care can be proffitable. I think they’re doing it to bring customers into their stores who will make other proffitable purchases.

    The store’s, from my understanding, are only offering the cheap generics to people who have insurance so they are at least getting something for the drugs, and I’ll bet they aren’t billing the insurance company for the $4 they charged the customer. Although, perhaps in light of the fact thay you can sell more units at the low price, therefore necessitating the purchase of more product from the manufacturer and if they are paying full bore for the discounted drugs then that would help make the drug company more proffitable, although being generic, the drug would be off patent and the particular package of pills you just bought for $4 might not even have been made by the original patent holder.

    Safeway and Fred Meyer do the same with their buying clubs. In that case, they are tracking your purchases and probably selling the demographic data or using it for other marketing purposes in order to make up for the loss the discount generated in sales prices. Personally, I sell my buying info to Safeway rather than Fred Meyer – Safeway pays better.

    I’m not saying that it’s a good thing or a bad thing, it’s just a marketing tool. I also don’t think that the stores are offering cheap generics because they believe that health care needs to be proffitable. It’s just a marketing tool. I also doubt that the companies are doing this in an effort to ‘help the poor’, if that were the case they’d make the cheap generics available to the people who don’t have medical insurance. I wonder what they would do if a person with insurance that carried a $10,000 deductible or no prescription coverage on their plan came in and tried to buy the $4 generic?

    I have to swing by Fredy’s tonight on the way home from work. I’ll ask at the pharmacy if they’re still open, not sure when they close. I’ll let ya’ll know what I find out….

    If Fred Meyer will sell the $4 generics to someone who doesn’t have insurance or prescription drug coverage, etc. then good on them, and I’ll make sure I make my next purchase of those types of prescriptions at the Fredy’s in Canby for sure. I don’t do Wal Mart, the closest store is too far away from Mulino and I usually don’t go to Woodburn if I can get something in Canby or Molalla.

  • David

    > Yet, each realized that to make profits in health
    > care, they needed to offer something that would
    > attract and retain customers.

    Joanne is right: WalMart and Fred Meyer aren’t offering $4 prescriptions to make a profit in health care. They’re doing it to get people into their stores so they will buy groceries and the other stuff WalMart and Fred Meyer sells. There’s nothing (too much) wrong with that, except that these $4 prescriptions don’t cover many of the most popular, necessary, and modern drugs.

    They are in no way a substitute for a full health insurance plan, and US health statistics continue to lag significantly behind most other industrialized countries, almost all of which have single payer health care.

  • Sybella

    I purchase my prescriptions online at Costco Pharmacy. I choose to use generic drugs wherever possible, because I am on permanent medication. There is a massive difference in the price I pay. It cost me so much more using my Prescription coverage, I took the information away.

    I don’t use it, but Costco offers reduced price prescriptions to those who do not have coverage.

    Joanne, you are correct it is a marketing tool. Because I live 150 miles from the nearest Costco, I also order things from them online at the same time. They may not make much on my four times a year prescription, but trust me, they make money on the other things I buy because I’m there already, why? To get my prescription.

    All businesses are in business to make a profit. Even OLCC. Why should business owners, of whatever kind, put their lives on hold, and many many times everything they own, to not make profit.

    Why would an employee go to work if he couldn’t earn money. It’s the same thing. Profit, boys and girls, is what makes the world go around and a smart business person works for profit. Yes even the big guys. They didn’t go into business to be nice to you. The Doctor didn’t spend so many years and dollars to become a physician just to be nice to you. It’s all done for gain. GAIN IS GOOD. Without gain, we would all be living in a hut, if we were lucky, maybe under a bush.

    There is virtue in profit

  • Steve Buckstein

    To those questioning whether $4 prescriptions are loss leaders just to get people into stores, I don’t know about Fred Meyer and Safeway, but Wal-Mart reports that it does make money on these prescriptions.

    And, about 25% of its $4 prescription customers are uninsured, and they buy the drugs for the same $4 price insured customers do.

    • dean

      Steve…to answer the question you posed at the top:

      “Why do many Oregonians think we should take the profit motive out of *health care*?” I think the appropriate question is taking the profit motive out of *health insurance* provision, not necessarily out of *health care*. Under a universal, single payer system (France,) or a highly regulated non profit insurance system (Switzerland,) doctors, clinics and hospitals still compete for patients as long as they are not made government employees (as in Great Britain).

      Every other industrialized nation that has taken profit out of health insurance has superior health care results for less total cost than the United States. EVERY SINGLE ONE. And they do so with universal coverage. We have experimented with for profit insurance markets, the results have long been in, and in this instance they failed. They leave too many people uninsured or under insured, they leave most others insecure, they dump the highest cost patients on the public tab (poor and elderly,) and they result in insurance bureaucrats deciding on procedures instead of doctors. Overall we get less health care and poorer outcomes at higher cost, in spite of a few cheaply available drugs here and there.

      • Tim Lyman

        “Every other industrialized nation that has taken profit out of health insurance has superior health care results for less total cost than the United States”

        That is, quite simply, a complete and total lie.

    • Sybella

      Could that have anything to do with these medications not being made in the US? I have received generic meds from my local pharmacy that was made out of the country

    • Joanne Rigutto

      Steve, if Wal Mart is making money on the $4 prescriptions I’d be curious to know which drugs they are selling at that price, what the price was before they started offering the drugs at $4, and what the proffit margin is at the $4 rate and if the generics they are selling are being manufactured by the original patent holder or not.

      I don’t have a problem with people or companies making a profit, that’s how the bills get paid, bills like paying dividends, and increase the value of stock, or if it’s a small company privately held company, it’s how the owners of the company get paid for the work they do. I have a sole proprietorship, and beleive me, if I don’t turn a profit, I don’t get paid.

      I’ve always found it ironic that while many people like to bash companies like Wal Mart, those in the pharmecutical industry, healthcare industry, and everyone’s favorite target du jour the oil industry, for making ‘obscene’ profits, those same people don’t have any trouble what so ever with employees making the highest wage they possibly can. Wages are employee’s equivelant to gross revenue generated by a business, and what a person is able to put away in savings or invest could be seen as the employee’s equivelant to a company’s profit. Most individuals and companies alike try to make the most they can, however they can do it, and I’ve never understood why it’s ok for one and not the other.

      Then on the other hand, there are those who see things from the other side, believing that it’s ok for business to make as much money as it wants but not for employees.

      • Steve Buckstein

        Joanne, I understand that Wal-Mart now offers over 360 generic drugs at $4 for a 30-day supply. I don’t know what the prices were before, but since the program began in late 2006 Wal-Mart states that consumers have saved over $1 billion in their stores alone, not counting the savings in other stores that copied the program. This seems more significant than Dean’s assertion above that this program represents just “…a few cheaply available drugs here and there.”

        According to the company, these drugs represent up to 95% of the prescriptions written in a majority of therapeutic categories. I don’t know which are manufactured by the original patent holders, if any.

  • Joanne Rigutto

    On another note, regarding Dean’s comment on quality of health care in other countries, and Sybella’s comment about out of country manufactuing of drugs, I wonder about what goes into making quality health care just that – good quality.

    Lets take a look at the different things that go into making up what we call health care –

    – Trained personel, that is pharmacists, doctors, nurses, anesthesiologists, and other medical specialists.

    – Treatments, both pharmacological and mechanical, radialogical, and all of the other types, etc..

    – Emergency services, such as paramedics, ambulance, firefighters, etc..

    – Hardscape infrastructure, such as the buildings that house the hospitals and treatment centers, medical centers that do the research, the universities that give the training to the people who will be treating the injured and ill, etc..

    – Even the ancillary things that make the type of health care that people in the industrializes nations take as a given possible, like computers with out which virtual modeling of organic molecules, new prosthesis design, research into physics and mathmatics would be much more difficult if not impossible, and on which much of our modern mecical treatments are dependant.

    All of these things and more are either wholey or partially dependant on proffit. Agruably even the publicly funded parts of the healthcare industry in the USA and around the world are dependant on various companies making a profit because even if one assumed that the bulk of taxes are paid by individual employees, and I don’t know if that’s true or not, the bulk of the population of at least the industrialized countries in the world work as employees, not as indepedant businesses or contractors. If there aren’t profitable companies around, there will be fewer jobs around, and if an awful lot of us weren’t making a profit, there would be far fewer taxes and fees to be paid to government which in turn uses that money to fund the medical infrustructure that we call health care.

    This being the case, I wonder how much R&D is done from country to country. Is a larger portion of R&D in medicine being done in the countries where profit is the driving motive for the health care industry or in the countries where profit is not? I don’t know, I’m asking an honest question here, not being facetious.

    • dean

      Joanne…I don’t honestly know the answer to your question. But a key point not to miss is that taking profit out of the *health insurance* business is not the same as taking profit out of *medical care*. An inventor who creates a better MRI still has a market in a single payer or non-profit insurance system, because it is the care providers who buy that equipment and then pay it off through delivery of medical services. The insurance companies (other than integrated operations like Kaiser) do not provide any medical service, so they don’t buy the equipment.

      All the infrastructure for health care delivery you list exists in every other advanced nation. America is likley to remain a technology innovator even if we were to adopt a Swiss or French system. What is the practical difference to you and me if we send $3-400 a month in taxes that then gets sent to doctors to pay for our care, or if we send $3-400 to a private insurer for the same? As a self-employed person (as we both are,) the difference is that in the former case, if you suffer an injury or illness and can’t work for a while, your tax supported system will continue to provide you the same care. If you get sick or injured in our present system, your private insurance system will drop you like a hot rock as soon as you miss a payment or 2, and you will be filing for bankruptcy. If you are lucky to be poor or old enough before you die, then you might get tax supported Medicare or Medicaid to see you through. Otherwise you can take your chances at the emergency room door.

      Steve…when you can demonstrate that overall health care costs and results in the US are similar or favorable to those in other advanced nations, then you have a case. Pointing to a single example, e.g. low cost drugs at WallMart, is like pointing to a few cool days or months to refute global warming (not that I want to open up that debate again here God forbid.)

      What is the overall cost of drugs to patients in the US versus everywhere else? I’ll bet you in the aggregate it is much higher, WallMart and Freddies notwithstanding.

      • Steve Buckstein

        Dean, with respect, my case for the profit motive doesn’t depend on demonstrating anything about overall health care costs and results in the US versus other countries. There are many variables involved. My case is simply that profit is not a cost that raises the price of anything to anybody. Profit is a signal that, everything else being equal, the producer is meeting customer needs. Government interventions in the market can have both pro and anti profit effects, but without understanding the pure function of profit we’re less likely to get the policy decisions right.

        • dean

          Steve…with due respect returned, you are stating a theoretical defense of the profit motive, then using a single example ($4 drugs) within a vast health care system to butress your point. Yet the overwhelming evidence is that our for profit health insurance system in fact delivers lousy, expensive, incomplete, and insufficient health care in comparison with the numerous non profit, government managed models that are out there.

          The profit motive works well for most of our economy. It does not appear to work in some arenas, and health insurance is a prime example. In this case, the profit motive seems to have aggregate negative results, even though for certain people, in certain situations, it delivers positives.

          And again…I’m distinguishing between health insurance and health care delivery. Different animals. Health insurers are not “delivering” much of anything to the consumer. They take our money through contracts with our employers that most of us have little say over, do everything they legally can to prevent high risk members, pool the money, rake 15-30% off the top, and grudgingly pass the rest to those who actually deliver the services we want. Is this profitable? Apparently so. Is it efficient? Hardly. Does it “raise the price?” All available evidence says yes. Are they meeting the needs of their customer? If polls are a guide….no they are not.

          I’m interested in your last point: “Government interventions in the market can have both pro and anti profit effects…”

          Pro effects? Government interventions? I don’t think I have ever seen a link like that from you before. Have I managed to make a breakthrough?

          • Steve Buckstein

            Dean, I think we can agree that our health “insurance” system is broken. Our disagreement comes when we fix blame. You seem to blame the profit seeking insurance companies. I blame government regulation. Oregonians, for example, must pay for some 33 plus health insurance mandates or we can’t buy insurance at all (in most cases). We also can’t purchase policies across state lines, where prices may be much cheaper for essentially the same coverage.

            Your beef with not getting much from insurance contracts we have through our employers is also an example of government failure. If all insurance costs had the same tax treatment, we wouldn’t have seen the move to employer provided health insurance at all. Equalizing the tax treatment now (so we can deduct individually purchased insurance) is the least we can do to give the rest of us a level playing field.

            I’m not sure why you think my statement that “Government interventions in the market can have both pro and anti profit effects…” is anything new. Government subsidies can enhance corporate profits, while price controls can reduce profits. I view neither intervention as acceptable in a free society.

          • David from Eugene


            What exactly are the 33 mandates? I ask because the few I am aware of are to ensure a basic level of coverage and are supported as necessary by the health care community.

          • Steve Buckstein

            David, as of July, 2007 here is the list of Oregon health insurance mandates that I’m aware of:

            Mandated benefits: Alcoholism treatment, alcohol/intoxicant related injury , cervical cancer/HPV screening, contraceptives (new via HB2700, only for insurance that includes prescription drug benefits), diabetes self management, diabetic supply, drug abuse treatment, emergency services, long term care, mammogram, mastectomy, maternity, maternity stay, mental health general, mental health parity, off label drug use, orthotics/prosthetics, PKU formula, prostate cancer screening. (19)

            Mandated providers: Acupuncturists, dentists, nurse practioners, optometrists, psychologists, public or other facilities, social workers (7)

            Covered person mandates: adopted children, continuation/dependents, continuation employees, conversion to non-group, dependent students, new borns, non-custodial children (7).

            It adds up to a grand total of 33 mandates.

          • David from Eugene


            Thank you for the information. With the possible exception of acupuncture I do not see anything on that list that should not be included in the most basic of health coverage. So as I see it these mandates rather then unnecessarily raising the cost of insurance, insure that any health insurance policy provides a basic level health care. Yes, there is coverage on that list that some individual policy holders will not need, but given the diverse make up of the risk pool they do need to be included. And yes eliminating all mandates might reduce premiums but then so would limiting a policy to those medical conditions contracted on Tuesdays and requiring the claimant to provide proof before payment. That too could reduce premiums but would also not be in the public interest.

          • Steve Buckstein

            David, if you define 32 of these 33 mandates as necessary for the “most basic of health coverage” then I suggest that you are confusing health care and health insurance. Insurance, as I state elsewhere here, should be for unexpected, high cost events that relatively few of us will face. Insurance is our way of sharing the risk. Routine care, such as PSA tests for men over 50, are part of routine care. Rather than insure against them, we should budget for them. Paying for them through middlemen simply raises the cost.

            Even high cost events that you think should be mandates may simply push insurance costs beyond the ability of some to pay for it, leaving them without insurance for anything. Better to let individuals make those choices rather than imposing a one-size-fits-all mandate on everyone.

          • David from Eugene


            First of all I hope you understand that your view of the function of health insurance is contrary to both its historic roots and that of the general public. The beginning of employer based health coverage, the program Henry Kaiser established to attract workers to his shipyards, was to provide health care not just unexpected high cost medical crisis. To this day most employer based health insurance and its individual health coverage counter parts follow that model.

            Second, my personal experience is those unexpected high cost medical crises are not nearly as rare as you imply. I do not see it a matter of if your household will be visited by one but rather when and in what form it will take.

            Lastly, there is a definite cost saving benefit in catching heart, circulatory problems and cancer early. So separating early discovery from treatment by not covering mammograms, prostate examinations and pre-natal care is no way to reduce costs unless there is an expectation on the part of the insurance carrier that by delaying discovery there will be cost savings to them. This brings me back to my point about the negative impact the profit motive may have on health insurance.

          • Steve Buckstein

            David, yes I do understand that my view of the proper function of health insurance is contrary to that of the general public. I’m not familiar with the motives you mention for Kaiser attracting workers to his shipyards, but I don’t doubt your statement. I would simply say that if providing not just health insurance, but health care was and still is a motive of American companies, then there are less expensive ways to do that than have a third party collect premiums and pay out benefits. Health Savings Accounts are one way that workers, and others, can save for their own routine health care expenses.

          • David from Eugene


            Henry Kaiser’s program was a way to get around war-time wage restrictions and a need to get workers to build Liberty Ships on the west coast. As I understand it was established as company provided health system (i.e. company doctors working in company clinics and hospitals). Kaiser Permanente health system is the descendent of this system.

            My perception is that the Health Savings Account idea is a fairly recent development, which could explain why it is not more common. And while it might reduce the company’s health benefits costs, I am not sure that it would have a similar impact on the health care costs of the covered individual. As it replaces centralized purchasing advantages of the health care provider and replaces with the individual health care consumer negotiating with individual providers.

          • Steve Buckstein

            David, thanks for the info on Kaiser’s program. I knew about how WWII wage restrictions led employers to provide health insurance, but wasn’t aware of how Kaiser went even farther.

            You might be underestimating the cost-saving benefits of HSAs for individuals. Centralized purchasing has advantages, but the patient is still relying on a third-party to pay his bill, therefore (all else being equal) he is less likely to question the cost or to price shop. When the money comes out of your own pocket (or even out of a savings account provided by your employer, but now your money) there is more incentive to consider price when choosing a procedure or provider.

          • David from Eugene


            No problem, sharing information and friendly but spirited debate is the best way to make public policy. By the way you might find the organizational structure of the Kaiser Permanente health system interesting. As I understand it is made up a set of interrelated but separate parts a health insurance carrier that only covers treatment received in a Permanente health clinic system or a Kaiser Hospital, each of which contract to a physicians group that provides the doctors. I have been covered by them several times in the past and got good care once I learned how the system worked.

            I am not sure that price shopping for medical care is a practical option. The system for doing it does not really exist. A few years back I needed a GP to work with a specialist that I got via an emergency room visit. I found that Doctor shopping at $200-250 a pop in cash is not really practical. And lying on an emergency room bed is not at a good place to determine if a test is necessary or not. It may work for drugs, eye glasses and some elective surgery but it just is not practical for most health care, mainly because the final result is more important then money. Which, all things considered, is a proper priority; after all it is one thing if the discount toaster you bought quits working it is quite another if it is your heart pacemaker that fails.

          • Steve Buckstein

            David, of course price shopping while lying on an emergency room bed is not practical, but some 80 percent of medical visits are routine, not emergencies. The fact that a system for shopping in these cases doesn’t exist probably has more to do with how we pay for health care (through third parties) anything inherent in health care delivery itself. You’ve probably heard anecdotal stories about hospitals or providers responding to patients who ask about prices with “why do you care what it costs, you’re insurance company will pay for it.” Take away that excuse and I believe many more providers would quickly figure out that they need to provide good price information if they hope to keep or attract patients.

            To say that the final result is more important than money is fine on one level, but for most people money is always a consideration. We all have limited resources, be they time, money, etc., and we are always making choices about how to allocate those resources. Even the wealthiest person wouldn’t spend all their time taking every test any doctor thought might be useful, simply because even the rich only have 24 hours in their day.

      • Anonymous

        dean, if the insurance comes out of the private sector and into the public, you can be sure the profit will go out of medical care.

  • David from Eugene


    Health Care and Health INSURANCE are not the same thing. In the area of health INSURANCE the profit motive is bad. The inclusion of the profit motive into health INSURANCE creates a motivation for the INSURANCE carrier not to provide or to avoid coverage. Simply put, the less they pay out for health services to their policy holders the greater their profits. It does not matter if this motivation is the part of the formal policies of any insurance company; all profitable companies regardless of business sector watch costs to insure their profitability and continued existence. The line between prudent cost containment and denying expensive medical treatment is a grey and blurry one. The mere existence of this motivation is good reason to move to a not-for-profit model for providing health INSURANCE.

    As to centralized purchasing reducing the cost of drugs, that is exactly what Wal Mart has done. They used their centralized purchasing power to reduce their drug cost to the level they can afford to sell them for $4. Given that the volume of drugs currently directly or indirectly purchased by the United States government for the Military, the VA, the federal prison system, federal employee health insurance programs, and Medicare is at a level equal to or greater then Wal Marts what makes you think the United States Government couldn’t negotiate a similar or better deal if it was permitted to do so.

    Profit is a cost of doing business both literally and figuratively. First, profits in the form of stockholder dividends are how a company pays for capital. Second, in the case of Doctors and other individual practitioners it is how they pay for their personal costs (i.e. food, shelter, clothing, and such). Third, it is where a company gets the money for its rainy day fund. And lastly, it is the baseline factor in the company’s decision making process whether it is to enter the market in the first place or in determining how they will engage in an existing business. Remember; few companies knowingly enter into a market where they will always lose money.

    Lastly, the fact that a company makes a profit does not directly relate to the level of customer satisfaction. The phone companies have been making profits for years despite poor customer satisfaction. And to return to Health Care no one competitively shops for hospitals while strapped to a gurney in an ambulance.

    • dean

      Obviously I agree with all of David’s points.

      Steve…the system is not “broken.” it is merely breaking down. Enough people still get good enough care that the revolution is able to be postponed. But not for much longer by my political calendar.

      I’m not “blaming” anyone. I’m just pointing out the facts. We in the US, alone in the industrial world, have held onto a for profit INSURANCE system against all evidence that this is an inefficient and ineffective way to provide a middleman for actual HEALTH CARE. We have held onto it primarily because FOR-PROFIT INSURANCE COMPANIES have lobbied, obfuscated, lied, exaggerated, and pulled out all stops to demonize those who have dared to try and improve life for the many at their expense. Drat. I guess I am blaming them after all.

      Making the system even “more free,” as you suggest, would probably help some of the haves, but it will not help the have nots, particularly those who have pre-existing conditions. And many of the “haves,” once they encounter some bad luck, will join the have nots, unless they get lucky and live long enough to reach the government dole (Medicare).

      Employer provided insurance has been attributed to wage and price controls during WW2. It was a way for companies to attract and keep workers when they could not raise their wages. I believe the tax preferential aspects came in later, lobbied of course by said companies.

      If I was granted “more choices” under your scenario, and if I had a pre-existing condition, what good would it do me? Or if I was laid off, or laid up as the case may be, and could not make payments for a few months…what then?

      Sorry I misinterpreted your meaning on the government interventions comment. I should have known this is not the Christmas season.

      • Steve Buckstein

        Dean, not wanting to just endlessly make the same arguments, I’ll simply clarify a couple points.

        You’re correct that employer-provided health insurance is fallout from wage and price controls during WWII and the tax preferences came later. But, by establishing those preferences, Congress was explicitly telling the rest of us that we would have to pay the government before we could purchase health insurance. Making insurance premiums tax deductible doesn’t make them “more free,” it simply makes them more affordable.

        Until we move to your envisioned “revolution,” I would hope you could bring yourself to advocate for equal tax treatment for insurance provided by employers and that purchased by individuals.

    • Steve Buckstein

      David, you cover a number of points, but let me respond to just the first two here. Because an insurance company might avoid high costs by declining to insure specific individuals is not a reason to take the profit motive out of the insurance business.

      The whole concept of insurance is that large numbers of people pool their risk in a specific area, in this case in health care. We know that some of us will get hit by a bus; get cancer, etc. which are expensive, unpredictable events that most people can’t self-finance. But we also know that most of us will have routine medical expenses such as check-ups, tests, etc. and “insuring” for these predictable events simply raises their cost.

      The company we choose to “insure” us against high-cost, low-probability events can be guided by the profit motive just like companies in any other field. You may not like it, but if an insurance company chooses to reject covering someone it believes may be too high risk, that can actually benefit the rest of its policyholders. Without the profit motive, all the policyholders may end up paying more.

      Second, I don’t think you should equate what Wal-Mart did in getting prescription prices down to $4 with government centralizing drug purchasing. When I asked participants at the Oregon Health Fund Board public hearing how many thought that government centralized purchasing would have ever given us $4 prescriptions, no one raised their hands. While there are economies of scale in competitive markets, there are often dis-economies of scale in monopoly systems. That’s why Wal-Mart’s $4 announcement made such a splash – no one ever thought such a huge price reduction would ever happen in a market characterized by seemingly ever-increasing prices. It took the profit-motive to get the job done.

      • dean

        Steve…question for you. What state or nation has the least regulated, most free market health insurance system? And what is their track record on cost, percent of people covered, and health outcomes?

        This is not a trick question. I don’t know the answer and was hoping you might.

        • dean

          Oh…yes I support equal tax teatment if it means what I think it means (full deductability for self-employed schmos like me).

          • Steve Buckstein

            Yes Dean, that’s exactly what it means. Glad we can both support something that will help you.

          • dean

            Steve…it seems to me that if one is pushing for more free market, then one ought to be able to point to the results from the least regulated places as positive examples. I have seen the Cato take on WHO and basically I don’t buy their analysis or conclusions, but it is what it is.

        • Steve Buckstein

          Dean, I don’t have a simple answer to your question. The more complex answer risk rehashing my February 29th Catalyst post, “Beware Health Care System Rankings.”

          For those who didn’t see it, Cato Institute published a rebuttal to a World Health Organization report purporting to document health care inputs and outputs worldwide.

          The post and discussion are at:

      • David from Eugene


        While insurance companies exercising their right to decline to cover individuals is a problem. That was not the problem I was identifying. I was addressing a motivation for an insurance company to avoid paying for a policy holder’s medical care.

        As to your proposition that by not providing coverage to high risk individuals, insurance companies are keeping premiums down, the reality is quite the opposite as the cost of providing health care to the un and under insured is indirectly included.

        Centralized purchasing is centralized purchasing regardless the form of the organization practicing it. There is no logical reason to assume that what Wal Mart has demonstrated as possible could not be duplicated by a government agency. As to the response to your question at the public hearing, given that conventional wisdom did not think what Wal Mart did was possible at all is it at all surprising that the attendees didn’t think government could have done it? But now it is known it is possible, the only reason the federal government could not negotiated a similar deal is that, under the pressure from Drug company lobbyists, Congress has forbidden them to do so.

  • Jerry

    Hey all you people. What are you arguing about? Profit is good. Loss is bad.
    Not that hard.
    Freedom is good.
    Restrictions are bad.
    Let me make my own decisions.
    Don’t make me pay for someone elses decisions.
    Who cares about why the stores are offering $4 prescriptions? It doesn’t matter.
    Government could never do that – ever – but the free market can.
    Please, people, get a grip.
    This stuff is not hard to figure out.

    • dean

      Jerry…you have made it all so simple, it has allowed you to park your brain at the door and not bother to think, analyze, learn facts, or consider that there are other ways of looking at things. You are the one who needs to get a grip, and get some perspective on your own narrow horizons.

      “Freedom is good.” You live in a constitutionally based society. Your “freedom” is protected, but also limited. Freedom to pollute? Freedom to punch someone in the nose? Freedom to discriminate against dark skinned people by refusing to hire them or rent them a house? Absolute freedom Jerry? I don’t think so.

      “Restrictions are bad.” From speed limits? From yelling fire in a crowded theatre? From advocating a crime? From storing hazardous waste on your property? Right.

      “Let me make my own decisions.” Fine…go right ahead, but within the framework of the law.

      “Don’t make me pay for someone elses decisions.” Sorry. You and I are both suick paying into the collective kitty for things we don’t want to pay for because legislatures pass laws and raise taxes. You live in America or any other nation…you pay for the privledge. Otherwise go find an unoccupied, unclaimed island.

      “Government could never do that.” Right. Because so-called “conservatives” in Congress wont let them. They would rather waste taxpayer money than deprive pharmaceutical companies of any profit. Brilliant.

      No…its not hard to figure out Jerry. Try thinking outside your self-built box for a change.

    • David from Eugene


      It is a matter of your point of view; “Profit is good. Loss is bad” is only accurate if you are the seller. If you are buying getting some thing at a loss is good and paying an excessive profit is bad.

      • Steve Buckstein

        David, I think your analysis is too short sighted. Your assumption that it’s good for a buyer to get something at a loss (to the seller) may work in the short run, but in the long run the seller will go out of business, so the buyer won’t get any of that good or service from that seller in the future.

        A buyer doesn’t really care if the seller makes a profit or takes a loss on any specific transaction. If the buyer values the product or service more than he values the money he parts with to acquire it, he wins.

        Same for the seller. If he values the money he earns on the transaction more than he values the good or service he’s providing, then he wins.

        Voluntary transactions in the economy generally only occur when both buyer and seller win. Each gets something he values more than what he’s giving up.

        • dean

          Steve…tough to apply that principle to the health insurance market, since the “buyer” is the employer, the “user’ is the employee, and the service deliverer is a medical practitioner. The insurance companies (sellers) are mere middlemen who rake in a tidy sum for what is an unecessary service that can be delivered better and cheaper by the government, as proven elswhere time and again.

          If we were to squeeze the insurance companies to the point where they are unprofitable and go out of business, we would be much better off. But we don’t want to squeeze the medical practitioners too hard or we could lose their services.

  • Steve Buckstein

    Dean, I agree that it’s tough to have a win-win voluntary transaction with the buyer not being the user, and a third party paying the bills. We can deal with the first part by working to decouple health insurance from employment as Sen. Wyden proposes.

    But don’t be so sure that government is a “better and cheaper” middleman than the insurance companies. As Harvard professor Malcolm Sparrow points out, 20% of the Medicare budget could be eaten up by fraud and mismanagement – dwarfing its claimed 2% overhead (see

    Figuring out who to “squeeze” is a thankless task. You start out wanting to get the insurance companies out of the middle, but even though you realize that “squeezing” the providers too hard may harm all of us, you risk other unintended consequences with as bad or worse effects.

    • dean

      We can agree there are no perfect solutions. My least bad solution is single payer insurance, with freedom of choice on who and where one goes for privately provided, competing medical services.

      Would there be fraud on the part of the providers (over billing, billing for services not provided, etc…)? Yes. But this is why we have laws and enforcement mechanisms. Place a few providers in stocks and fraud will diminish. And who is to say the providers are not equally frauding teh insurance companies? The bigger challenge on single payer is global budgeting, which is why supplimentary private insurance is still needed. France has it, Canada does not, and it explains a lot about the different qualitative rankings of the 2 systems (numero uno versus numero 33.)

  • Steve Buckstein

    Dean, if “laws and enforcement mechanisms” were working now, Medicare shouldn’t be experiencing such high levels of fraud and mismanagement.

    Sure, “throwing a few providers in stocks” might diminish fraud, but frankly I think the private insurance companies have a lot more incentive to minimize fraud than a government agency does. Chalk another point up for the profit motive.

    • David from Eugene


      The other half of the fraud question is how much the level of oversight, safeguards, and enforcement would cost both in money and service inefficiencies. And whether the amount of fraud prevented is worth those costs.

      • dean

        Steve…I was thinking about your stated opinion that:

        “private insurance companies have a lot more incentive to minimize fraud than a government agency does. Chalk another point up for the profit motive.”

        I don’t know that I would agree. They may have a greater ECONOMIC incentive, but there are lots of other incentives and motivations in life. If one’s job is a government insurance fraud investigator, then one has the incentive of doing a good job (self-satisfaction) or the incentive of promotions for closing cases. Fire fighters don’t need a profit incentive to put out fires, police don’t need one to patrol our streets, teachers don’t need one to teach, and so forth. Why would we believe a government insurance investigator is poorly motivated?

        Sometimes simply “doing the right thing: ethically is sufficient motivation to do one’s job.

  • Steve Buckstein

    Dean, you’re correct that government employees can have incentives to “do the right thing” too. But the organizations they work for often don’t have the same incentives private organizations have. Because, at least in the short to mid-term, government’s “customers” can’t choose an alternate service provider, agencies have a lower incentive to meet “customer” expectations than do private providers who face competition.

    I often make the point that public or private service provision isn’t as important as whether the provider is a monopoly or subject to competition. For example, between a private bus monopoly and two competing public bus companies, I might prefer the competing public ones.

    Also, public choice economics tells us that government employees are generally not altruistic individuals who put the interests of their citizens above the interests of themselves and their own families. Competition and choice in the economy better align the interests of providers and customers than does politics.

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