It’s What They Do

Companies try to maximize profit.  Crocodiles attack wildebeasts. Conspiracy theorists see conspiracies behind every tree.  Politicians lie to get votes.  Monopolies expand costs to absorb all available revenue.

When my friend asked about the general trend toward de-regulation, he pointed out that he would have made a lot more money selling his business to a national chain, but when he was selling, the Federal Trade Commission ruled that his proposed sale of a regional chain of supermarkets to A&P would have made an illegal monopoly where he operated.  He had to settle for a lower price.

If he had known what was coming later in the 80’s, he would have held out for a generation of anti-regulation regulators that were sweeping into government.  His sale to A&P would have gone through, and he’d be even richer than he is now.  Why would A&P pay more?  Because they would have a monopoly.

The new regulators were propelled by the Reagan slogan that the “government is the problem,” and there were many true believers.

If  government is the problem, we should all want our government replaced with anarchy, of course.

I’m reminded of a fact that stuck with me since the 1970’s —  when banks and other financial institutions replaced rows of  eye-shaded accountants with modern mainframe computers, their accounting costs actually went up.  Same with companies that replaced typing pools with large word processor systems secretaries could use.

It all stemmed, according to friend who was a Lifer working for Big Blue (IBM) from a plan they cooked up in Armonk.  In the 1960’s IBM had looked at each industry from the viewpoint of how much of that industy’s total revenue could potentially be spent on computerization.  Then they set about developing a hardware/software solution that cost just that much.

There’s a kind of elegant logic in it.

There’s no doubt that adding up a pile of sales receipts was faster and cheaper with a computer, but IBM was clever enough to convince their customers that they would be able to do more, and make more, if they just used their new computer systems to analyze those receipts and not just add them up.

They figured out so many things to do with new-found computing power that their customers willingly spent far more dealing with the numbers using computers than they had been spending before with a room full of accountants wearing green eyeshades and adding the numbers in ledger books.

IBM was using its market leader position to maximize profits by maximizing spending (by their customers).

Eventually the IBM paradigm collapsed under its own weight, and its failure to understand that competition wouldn’t come from other mainframe makers.

By the late 1980’s, you could read articles about IBM mainframe systems being replaced by minicomputer systems at a purchase cost equal to or less than the annual maintenance fees on the Big Iron (mainframes).  Shared word processing systems gave way to PC’s on every desk. Typists disappeared as a profession, like telephone switchboard operators before them.

Did our economy spend less on getting typed pages?  No, probably not.  Did we spend less on telephone communication?  Not quite.  Did we spend less time communicating the written or spoken word?  Are you kidding?

By having various modes of communication competing for our dollars, we did get cheaper long distance phone calls, cheaper publishing, cheaper written communication and far cheaper advertising.  Combined with factory automation, we were able to produce and sell more stuff with less overhead.

Except where there were monopolies.

Now to my comment to my friend who sold his supermarkets too soon:

There is one other thing you mentioned in your comment that I didn’t deal with, the issue of monopoly power. When Teddy Roosevelt went after the Trusts, he did so because Darwinian capitalism in the 1800’s had culminated in all our basic industries being taken over by a few people who used their economic strength to drive smaller competitors out of business.

Old John D could run gas stations at a loss for years if that’s what it took for him to drive a smaller regional competitor to bankruptcy, at which point he could buy their wells and refineries for pennies. Then he could move the price at the pump up to whatever the local market would bear.

Just look at our health insurance business to see another example of monopolistic power resulting in maximizing the cost to its customers. Our health insurance business is the only major industry in America that has had its administrative costs go up as a percentage of revenues over the past 20 years. By the way, everywhere else around the G-20, health care administrative costs have gone down as percentage of the pie, as have administrative costs in every other business sector in all the major economies.

Those that choose to look only at admitted profit from the insurance companies are truly defending inefficiency, and I suspect doing so for the same reason the financial regulators believed that derivatives should not be regulated. They don’t like the idea of government control, so they look for rationalizations to defend a system that is worse at delivering the service than the systems just about anywhere else.

I’m not talking about the quality of the specific healthcare services being delivered, just the system of paying for it.

Public school systems spend more per student, even as a percentage of GDP, than they did in the past.  Our prisons have turned into an enormous, for-profit business. Baseball salaries (not just for players) went to the moon, threatening the existence of some clubs, even while a day at the game is half a week’s pay rather than half a day’s.  Building major weapons systems has become so concentrated that even when the military doesn’t want a big new weapon, the Congress keeps paying for it and forcing it on them.

How can this be?  Simple.  It’s what they do.  Monopolies try to maintain their competition-free environment, and they try to maximize the amount of the economy they absorb.

We have elections, and occasionally even new political parties to restrain the monopoly of government.  Police departments have internal affairs investigators.  Schools have local school boards.

When the controls fail, we have to fix the system, especially if we’re convinced we need a monopoly.  I for one am not convinced that processing payments for health care needs to be a price-setting private monopoly.

In the ultimate irony, the biggest threat hard-core anti-reform advocates bring up in the discussion of setting up a publicly managed insurance plan is that such a plan could become a monopoly some day.

My answer is that the private industry needs to get its overhead costs down to 5% or less from the current 30%.  Then we wouldn’t need to think about setting up a more efficient government provider.

They had their chance, and by behaving as rational corporate monopolies, they blew it.  But it’s what they do, so I can’t really blame them.

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7 Responses to It’s What They Do

  1. Chris Drucker says:

    “My answer is that the private industry needs to get its overhead costs down to 5% or less from the current 30%. Then we wouldn’t need to think about setting up a more efficient government provider.”

    But what about the threat/concept that a public option also opens the door to enentual government control of the whole system? akin to Venezuela.

    • hhill51 says:

      Chris –

      I’m not sure why Venezuela is so popular as our natural next stop among so many pundits. We’re a pretty stubborn lot. Witness how many people stand up to say our medical care delivery system is best in the world, when objective measures show that’s plainly false. Why wouldn’t we “drift,” if we’re going to at all, toward systems in countries that have our kind of political, legal and economic system? Before Venezuela, I would be inclined to say we would emulate how they do it in Japan, The Netherlands, Switzerland, France, Germany, Italy, Canada, Taiwan, or even the UK, if we moved at all.

  2. Chris Drucker says:

    Howard,
    Agreed there is a popular belief that our healthcare system, with its issues, is still the best in the world. Are you saying that the other countries you list have better systems? I’m not arguing the point, just looking for examples of other countries using the concepts our Congressional leaders are trying to initiate, specifically the ‘public option’, where it clearly results in a better system than what we currently have.

    Further, when you say the healthcare insurance industry failed to get its overhead costs down, would you not agree there is a correllation between the industry’s overhead and governments increasing regulation/rules imposed on it?

    I’m not saying our system does not need some type of change, it does, but ‘out of the frying pan into the fire’ is a type of change too. I’d just like to feel we are not going $1.8T further into debt just to jump over the lip of the frying pan.

    • hhill51 says:

      It’s not the health care that is the problem. It’s the way we pay for it, with 30% overhead. As a protected monopoly, insurance did exactly what every uncontrolled monopoly does — it grew and became less efficient in order to absorb all available revenue.

      They somehow did this in spite of standardization of claim forms, in spite of electronic claim submission, in spite of lower physical document handling costs and in spite of large group discount negotiations…… It’s the nature of the beast, and not self-correcting.

    • hhill51 says:

      As to those examples, I started with the countries that have economic systems most like ours, and gradually went “down the scale” toward the socialist end. Since none of the proposals now being considered even come close to the Canadian “Medicare for everyone” single-payer system, much less the UK’s National Health Service with doctors on salary, I think a jump to a Chavez style neo-Marxist state is so far beyond the realm of possibility that bringing it up is just plain silly. Taiwan and Switzerland are interesting because they are a supremely capitalistic countries that decided to fix their systems in the past 15 years. They looked at what others did, and adopted very successful universal coverage systems that have delivery and billing all handled by private enterprise at half the cost to their economies compared to what we spend. I think we have a chance to be more competitive internationally if we can just get out of our own way, and fix it.

  3. Alex Stetkevych says:

    Begin with the impact on overhead of meaningful Tort Reform

    • hhill51 says:

      According to the CBO, tort reform will result in slower growth in malpractice insurance premiums that will translate into – get ready for this – a whopping 0.2% savings on health care. They studied the states with existing tort reform to arrive at this conclusion.

      Administrative overhead and sales cost is the low-hanging fruit in our existing “system.”

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