Monday, April 13, 2009

Unfair Competition

Say you owned a business selling hot dogs on the street corner. Hot dogs are easy to prepare, affordable for most and in high demand (especially at lunch time).

You have run this business for some time, have established clientele for repeat business and even pick up new clients from time to time. Even though there are restaurants nearby, you really have a niche market with almost no competition.

Life is good.

But say a new hot dog vendor shows up one day and parks their cart next to yours. Your hot dogs sell for $2.50. Add a little more for cheese or chili.

The new guy is selling the same hot dog for $1.25 with all the works.

How long will you stay in business?

More importantly, how long will your competitor stick around when his dogs are half the price of yours?

If your competitor has an unfair advantage, such as the ability to draw unlimited cash to fund his business and never have to worry about paying it back then don't expect the competition to go away any time soon.

Now, instead of hot dogs, let's say you sell another high demand product like health insurance. Your product is priced to cover your costs and leave a little left over to provide you with some income.

But now a competitor comes along that doesn't have to play by the same rules. They have the ability to dictate what services are covered, who is entitled to those services, and how much they will pay medical providers for there services. But they have another advantage that you don't. They don't have to play by the same rules as you. They can borrow money at any time and never have to worry about paying it back. Nor do they have to "qualify" for the loan.

How long before your clients stop buying your product when they can get the same thing for half price?

If the new regime in Washington get's their way this might happen. Obama-care will work something like this.
Democrats this year want to institute a "public option" -- an insurance program financed by taxpayers, managed by government and open to everyone, much like Medicare.
Financed by taxpayers. In other words, you will be forced to pay for it whether you want it or not.
This public option will supposedly "compete" with private alternatives. As President Obama likes to put it, those who are happy with the insurance they have now can keep it -- and if they happen to prefer the government offering, well, gee whiz, that's the free market at work.
No one is forcing you to buy the new plan. You have a choice.

When Massachusetts mandated health insurance for everyone and offered a choice of a "free market" plan or a tax subsidized plan, guess what happened?

A couple of things.

Many who had health insurance before dropped it in favor of the free or subsidized plan. After all, why pay for something when you can get it for free?

The other was a squeeze play on primary care. Suddenly, it was easier to get tickets to game 7 of the World Series than to get an appointment with a primary care doctor.
A public program won't compete in a way that any normal business would recognize. As an entitlement, Congress's creation will enjoy potentially unlimited access to the Treasury, without incurring the risks or hedging against losses that private carriers do. As people gravitate to "free" or heavily subsidized care, the inevitably explosive costs will be covered in part with increased outlays to keep premiums artificially low or even offer extra benefits. Lacking such taxpayer cash, private insurance rates will escalate.
Unlimited access to cash without incurring risk.

Sounds great, right?

Except eventually, everyone pays.

Kind of like the mortgage crisis. All of us are now paying for the abuses of a few which were subsidized to a great extent by Fannie & Freddie . . . those quasi-government entities backed by the full faith and credit of the taxpayer.
Much like Medicare, overall spending in the public option will be controlled over time by paying less for medical services, drugs and technology. With its monopsony purchasing power, below-market fees will be dictated on a take-it-or-leave-it basis -- an offer hospitals and physicians won't be able to refuse. Medicare's current reimbursement policies pay hospitals only 71% of private rates, and doctors 81%, according to the Lewin Group.
Right now, hospitals and doctors are not required to accept Medicare patients unless they also receive taxpayer funds. Sound familiar? But there is talk about imposing severe payroll tax penalties on medical providers who do not accept Medicare patients. In other words, government sanctioned extortion.
In a recent analysis, Lewin estimates that enrollment in the public option will reach 131 million people if it is open to everyone and pays Medicare rates. Fully 119 million people will shift out of -- or lose -- private coverage.
If you think Medicare is currently working well, then you don't know Medicare.
About 170 million people currently have private insurance, which is already pressured by the price controls of Medicare and Medicaid. A significant share of government underpayments are simply transferred to the private sector, adding tens of billions of dollars every year to consumer health bills.
That is referred to as cost shifting.

What the government doesn't pay is made up by the rest of us.

We pay more so those on the taxpayer funded government health insurance plan can have their free care. Sweet deal, huh?

But wait.

We, as taxpayers, pay for it any way.

Our taxes fund Medicare and then we pay again because Medicare short changes the medical providers.

What a country.
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