Tuesday, May 17, 2011

Chasing Profits

The New York Times' Reed Abelson is a good writer, but (as with so many in the MSM), she seems unable to distinguish between "profits" and "profit margins." What's the diff, you ask?

Here's a good example:

"ABC Widgets builds 100 widgets, and sells them for $1 each. First they have to buy the materials for about 60c, then assemble and market, for about 15c. Then they sell for $1 and give the govt 18c in taxes per widget. That means each widget costs 93c to make, leaving ABC with a 7c profit margin per widget. If they sell all 100, they make $7 in profit.

Next year, material and assembly costs a little more, so they raise the price of the widgets to $1.50. Costs end up at $1.43, which leaves a profit margin of 7c again. But widgets are popular this year, so they sell 200!

ABC Posts Record Profits of $14! Congress to investigate!"

Now, let's contrast that with Ms Abelson's intellectually vapid take:

"The nation’s major health insurers are barreling into a third year of record profits ... The nation’s major health insurers are barreling into a third year of record profits"

There's more, but that's the gist. The problem is that the cost of health care keeps increasing, and carriers can't go back and assess insureds (or previously insured folks) for their losses. They have to price for what may come, and there's no sign that the rising cost of health care delivery will abate any time soon (or at all).

Still, one is tempted to say "that's all well and good, Henry, but these profiteers are making obscene amounts of money on the backs of their insureds."


Let's go back to the widgets: how much money should ABC be allowed to make? Remember, ABC provides employment (and thus an income) to those who make the product. Their employees count on those paychecks; if ABC doesn't make enough money to stay in business, well...

So they need to make a profit, and they have to decide the scope of that profit. So, another question: is 5% enough? 10? How much would you be willing to settle for?

It's an important question because this chart, which our own Mike Feehan graciously sent along, shows exactly what other related players in the health care delivery and financing consider "reasonable:"

[Click graphic to embiggen]

Is 4.4% a "reasonable" return on investment? In this economy, perhaps so (take a look at your 401 201k); but it's a fraction of that claimed by some others. As an aside: how long do you think doctors will settle for sub-2% returns? And what does that bode for future availability of health care?

Now, if only the MSM would take a remedial econ class.

[Hat Tip: FoIB Holly R]
blog comments powered by Disqus