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Wednesday, September 30, 2009

White House Reality Check

Well I ran across a link to the White House blog which featured a Reality Check. Not quite sure if the White House blog should be attacking other sources, but that’s another issue.

I was discouraged to find another blog post on health care which itself needed a Reality Check of how business works. The Q/A from the post is below:

Q: But what about the fees on insurance companies, drugmakers, devicemakers? Won’t that be passed on to consumers as a hidden tax?

A: No, for at least three reasons:

1. First, the fees are lump sum, not per unit, so you should not expect that manufacturers will pass them on.

  • Do critics really think the drug companies are holding back their prices today out of the goodness of their hearts and would decide to raise them to make up for this lump sum - but couldn't raise them today to get higher profits?

2. Second, these fees are intended to recapture part of the benefits these businesses will get from reform, as they acquire tens of millions of new customers.

  • If you believe the lump sum tax put pressure on them to raise prices, then the fact that they are getting lots of revenue from new customers will reduce that pressure.

3. Third, the fees are all going to ensure that we are increasing the numbers getting affordable coverage and thus reducing the $1,000 hidden tax that millions of Americans pay for the uncompensated care of the uninsured.

  • So even if you believed that somehow companies would find a way to pass them along, that would be more than outweighed by the benefits middle-class families would get from not only hundreds of billions of dollars in health care tax credits but from reducing the hidden tax they currently pay for the uninsured.

The third point is partially debatable, but the first two items are blatantly inaccurate and show a real lack of understanding on how business work. I’m currently studying to take the test to become a Certified Cost Engineer, which includes in great detail on how costing and pricing works, so I’m knee deep on how businesses should come up with what they charge to stay in business.

First lets look at the first reason and I’ll explain why it’s wrong. They state that “the fees are lump sum, not per unit, so you should not expect that manufacturers will pass them on.” Sure they won’t pass them on if they don’t plan on staying in business. A sound business takes all of their costs, both direct and indirect, and come up with a price. Direct costs include labor, materials, shipping costs and other cost directly related to producing or providing a service. Indirect costs are costs that are not directly attributable to the product or service. Indirect costs include overhead items, taxes, fees, etc. Some direct and indirect fees are lump sum, such as a business license, and are easily converted into a unit cost. Since the answerer at the White House doesn’t appear to know how, I’ll do the math. First off lets say a business provides 200 medical widgets to the paying public. They are going to be paying $1,000 in fee for the privilege of providing this product. We take the $1,000 and divide by the number of medical widgets to get the cost per medical widgets. In this example it’s $5/unit ($1,000/200). Fortunately in this country we are able to make a profit which means that the investors in the business want to make a profit, depending on the industry, usually 5-10%. In this example the price of the tax to the purchasing person would be $5/unit * 1.05 = $5.25/unit (not correct, it’s actually higher). As you can see the math is really simple, they teach it in elementary school, and it is quite easy to take a lump sum cost and convert it into a unit cost. The cost will be passed onto the consumers.

The second part of the first reason appears to be a fallacy. It makes it seem like producers of drugs, devices and insurance companies are able to charge whatever they want to increase profits at any time. If got to say this totally ignores the reality of the real world. The insurance companies regularly look at the cost and benefits of what drug makers and device makers charge. If the costs outweigh the benefits an insurance company isn’t likely to provide those drugs or devices to it’s policy holders*. Insurance companies are in the same boat, but with companies and individual policy holders deciding whether or not to stay with the insurance company. Some large companies even cut out the insurance company and self insure. When the government imposes a tax prices go higher because everyone has to pay the fee. If one company arbitrarily raises prices they often loose customers to rivals who provide the same benefits at a reduced cost.

The second reason, well I’m not quite sure what they are going for here. Aren’t the payroll, FICA, property, unemployment and income taxes enough? Why do we need another tax to punish success? I guess they don’t believe the companies will experience higher income taxes from the increased number of customers. They also state “If you believe the lump sum tax put pressure on them to raise prices, then the fact that they are getting lots of revenue from new customers will reduce that pressure.” Wow, a company has higher costs and magically higher revenue from new customers is supposed to make that cost magically disappear. Simply put a well run company takes all of their costs, including taxes, includes a profit and sets the price. A company doesn’t have a stack of costs it puts off to the side that it doesn’t want to pass on to the customers. Poorly run companies have done this, just look at General Motors and its legacy union costs. If you haven’t heard, General Motors went through bankruptcy.

If we can’t trust them on the first two points, how are we suppossed to trust them on the last? I think I’ve proven they don’t understand the basics of business, but somehow we are supposed to believe in this magical savings for the middle class? If they are wrong on the basics, how can we trust them with our health?

* Until the government gets involved and passes a law stating that the drug or device needs to be included, higher insurance premiums result. Insurance company is blamed for higher premiums from those who forced the insurance company to provide those drugs and devices complain that premiums are going up for no reason.

1 comment:

Anonymous said...

Somehow liberals (you guessed it - I'm not one) get the idea that capitalism and profits are evil. Waht's evil is an obese government. Without profits, there is no incentive to do better or even do at all. What products would we now have to do without if profits did not drive innovation? I'm sure not going to outlay $1 million to develop/ test/ get approval for a new drug if I can't realize $2 million in profits in order to develop the next one, meet payroll, pay health ins premiums and pay taxes. My retirement savings are invested mostly in stocks as many others' are, I want companies to profit so my investment will grow. So big gov't - get out of the way!!!

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