For-profit companies outperform nonprofits

Here’s a research finding that I find counterintuitive: A for-profit company can deliver products and services at a lower price than the government or a nonprofit. It doesn’t seem to make sense because the costs should be about the same. On top of that, the company has to have additional revenue — i.e., profit — to compensate the owner for the cost of capital.

But the proof is everywhere we turn. Those of us old enough can remember one of the most dramatic examples — long-distance telephone calls. When I was young we used to talk so fast during long-distance calls because the price for 3 minutes was not cheap. Then along came MCI, breaking the stronghold that AT&T had — which as a government-sanctioned monopoly, operated more like a government organization than a for-profit company — and the costs plummeted.

Amtrak, as a government-run corporation, is a common example for the exorbitant costs associated with services provided by the government. The cost of mailing packages dropped steeply when FedEx started competing with the U.S. Postal Service. Interestingly, the USPS improved dramatically once it had competition.

Readers of my previous columns will remember that when government intrudes in a market, it is no longer free. This mostly affects poor people, who don’t have the resources to influence the form of government intrusion in the first place and can’t “play the game” that the government intrusion requires as well as those with more money.

Even though we have this universal truth, one part of the Affordable Care Act established nonprofits to compete with health insurance providers to placate the progressive wing of the Democratic Party. Twenty-four Consumer Operated and Oriented Plans, or CO-OPs, were established in 26 states, but not in North Carolina.

The hope was that CO-OPs would broaden coverage by being able to offer lower rates, inject competition and focus more on the consumer.

Vermont’s plan went bankrupt before even getting off the ground. Iowa’s CO-OP, including Nebraska, went bankrupt in January, never to repay the $145 million it borrowed from the taxpayers. Recently, New York’s plan shuttered its doors, ending health care coverage for more than 100,000 people at a cost of $265 million.

As a taxpayer, you probably didn’t even know you invested in these CO-OPs and that your investment has now been wiped out. Nearly all of the remaining CO-OPs are in dire financial straits.

How did this happen? Those who hoped it would work argue that the government regulations established in the first place were not supportive. For example, they required start-up capital to be repaid in five years.

That argument shows exactly why these organizations can’t compete. Legislators or bureaucrats are not attuned to the business dynamics to write appropriate laws in the first place. Even if they could, the laws might need to be modified on a daily basis. That’s how business owners respond to what they learn constantly from customers and suppliers in the marketplace.

While these nonprofits are failing spectacularly, the health insurance companies are raking in money. The Affordable Care Act is certainly the largest gift that the government has ever provided to an industry. The government has essentially mandated that about 40 million new customers need to buy a product costing thousands of dollars that they had never bought before.

The government even subsidizes the cost, in some cases, paying more than 90 percent of the cost so an individual or family can pay the insurance company. This “gold mine” opportunity has not gone unnoticed.

The stock price of companies in the health insurance industry has gone up much higher than the market, and the pay of top employees of health care providers has skyrocketed. The highest-paid CEOs saw their pay soar 29.6 percent in 2012 and 2013. Their pay rates stayed level in 2014, but jumped another 8.2 percent this year. Here in North Carolina we are seeing these types of increases, too.

When long-distance telephone calls became more of an open market, I remember wondering, “How can MCI or Sprint make it if they have to run commercials on TV and make a profit?” The simple answer is that when business owners’ livelihood depends on the success of the company, they do anything and everything to make it work.

Fortunately, when it works for them, it really benefits the customers.

Eric Dent is a business professor at Fayetteville State University who lives in Lumberton.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s