Do Profits Diminish Medical Care?

Government is the real source of health care distortion

I recently visited a doctor whose son was a philosophy major.  During a late-night discussion on medicine, the young man declared that profits “have no place in medical care.”  He went on: “It is immoral to profit over the sickness of someone else.”

I said nothing at the time, although Jane Orient later told me that I should have told him that doctors don’t profit from an illness; instead, they earn a profit (or have the opportunity for profit) when they attempt to help cure the illness or at least alleviate some of patient’s problems.  For that matter, my mechanic does not profit because my car has broken down; he earns a profit when he tries to fix the problem so I can have my car back in good shape.

The problem is not just with misidentifying why someone might profit; the problem is that most people do not understand the very nature of economic profit, nor do they understand that profits actually make their own lives better when they are earned in a free market.  Instead, their reaction is captured in a recent column by Cynthia Tucker, the editorial page editor of the virulently anti-capitalist Atlanta Journal-Constitution:

The for-profit health insurance industry is in the business of maximizing profits for their shareholders, and the only way they can do that is to hold down the payments they make for medical care. That means they spend a lot of their time (and a lot of their money) figuring out ways to deny claims.

She adds:

At recent townhall-style forums held by members of Congress or administration officials, some belligerent tea-baggers have held up signs saying, “What’s wrong with profit?” The answer is this: It has no place in the health insurance industry. It distorts and disrupts the provisions of health care, adding costs without adding quality of care.

The health care market doesn’t function like the market for automobiles or artichokes or flat-screen TVs. If you don’t like the price, you just don’t buy. But you walk away from expensive health insurance at your own risk.

Before answering this statement, I need to point out that I do not believe that the third-party insurance system for paying for most routine medical care is a good thing, and if there is any distorting factor in medical care, it is the proliferation of third-party payments.  (I will add that if we had such third-party payments for groceries, we would have a “grocery crisis,” as well.)

Nonetheless, Tucker is wrong about the role of profits, including those of  health-insurance companies.  Now her reasoning appeals to the “person on the street,” but that does not make it right.  She is saying that (1) health-insurance companies earn income from their premiums, and (2) the more claims they deny, the more they profit, since they pay out less money.

The first thing to note is that if health care is a scarce good, then the market for it will function like the market for automobiles, artichokes, and flat-screen TVs.  In fact, if the market for care were not so heavily regulated by government, and if government were not intervening through its own payment programs like Medicare, people would have more choices and face lower real costs for care just as they do with nearly everything else that has been improved by capitalism and, yes, the profit system.

Second, profits do not “distort” a market (unless the government provides perverse incentives, as we recently saw in the Wall Street meltdown).  Profits and losses serve as a mechanism by which entrepreneurs are able to direct resources to their highest valued uses, and they send signals to producers as to what is working and what is not.  If there are distortions in any market, they are caused by government (such as states mandating health insurers to pay for politically popular treatments that drive up costs for everyone else).

In a capitalist system, people prosper by providing goods and services that people need and want.  It is not the free market that creates distortions; it is and always will be government.