Wednesday, July 15, 2009

Maybe some businesses are different—really different—than others

My favorite blogger, Nate Silver, ran an essay recently that made me start thinking in a new way about the government’s involvement in business—certainly a topic that’s been in the news for the last year with the federal government bailing out the banks, the auto industry and insurer AIG among other actions. Currently, one big debate is about whether there should be a “public option” in health care—a government run insurance plan that would compete with private insurers.

Nate Silver (his article is here: looks at the conservative opposition to the public option, and finds something unusual. Conservatives oppose the public option not because they believe, as usual, that the government will do a bad job, but because the government will do too good a job—and run all the private insurers out of business. This idea bears thinking about seriously, because not only almost all conservatives, but Nate Silver and many liberals (including myself) think the government would do a bad job of running most businesses. Could a government airline compete with Southwest Airlines? I don’t think so. In fact, I don’t think the government could compete with McDonald’s or Apple or Microsoft or almost any well-run private company.

How then could a government-run insurance company not only compete with, but run out of business, private insurers? Silver thinks it’s because insurance companies are different then most companies. There’s no real competition in the same way there are in most businesses. There’s no “product” that can be better than your competitors; no Mac to be better than an IBM; no Big Mac to compare to a Whopper; no Chevy and no Ford. There’s only money.

An insurance company collects premiums that are a little higher than the value of the risk it is insuring. By doing this with many people and spreading the risk, the insurance company can make money and its customers pay a smaller cost so they don’t face financial ruin if they get sick, or their house burns down or whatever calamity they are insuring against actually happens.

But no insurance company’s money is better than another’s. If the company pays then that’s all you need. There may competition around the edges in service or convenience or some price competition, but so long as the actuaries do the calculations right, insurance companies can’t really compete on product.

Money is fungible. It’s only a symbol.

To start an insurance company, the first thing you need is deep pockets, because after all, if the first person you insure gets cancer, then you’ve got to be able to pay for that person’s medical costs. Because you need so much capital, it’s hard to start an insurance company. The government doesn’t have this problem. It’s big already.

So I’ve gone a long way around the horn, but in the end I think insurance companies may be different than other kinds of companies because they deal solely in money. If that’s the case, then the government’s money is as good as anyone else’s—even bureaucrats can’t screw up money. The government already pays for 40% of insurance cost through Medicare and Medicaid and those programs aren’t any worse (or better) than private insurers. The government manages to tax us all without any problems and does an efficient job of paying out Social Security. This is all a mechanical function that doesn’t call for innovation or creativity or any of the other skills that make private enterprise so valuable in most fields.

Remember that most insurance companies were originally mutual companies—owned by the people they insure. Some, such as Blue Cross, Blue Shield, are still mutual companies. Maybe a really big mutual insurance company that includes all of us that want to join will dominate the market.

If you can’t compete with the government, though, I don’t have any sympathy for you if you go out of business. Let the government create a public insurance company and then we’ll find out whether private insurance companies really do anything useful.

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