Sunday, March 21, 2010
Stir N the Political Pot: Of Lemons and Healthcare Reform...
While, I never intended that this blog be used as a forum for political commentary, I felt compelled to write today on the economics of the proposed healthcare reform bill which is being voted on today by our government.
I consider myself an independent, because I tend to just shake my head in disbelief most of the time at what our government thinks is a good idea. I have no allegience to either party. I am progressive on the topic of human rights and freedoms, but quite conservative fiscally.
I believe that the New Healthcare bill that our government is voting on today is a really poor idea. This plan is a real lemon and I think it is only fitting that I use the following analogy to get my point across....
Let's say I own a lemonade stand. I pay for lemons and sugar and the space where I conduct my business. The water I use to make my lemonade is paid for by the people who I rent my shop from. I price my lemonade at $1 a cup. This covers the costs of running my business and adds a small percentage so that I can also make a small profit.
Now say that the owner of my shop comes to me and tells me that the water is no longer going to be free. I will have to pay extra for the water, because I cannot make lemonade without water and – while I regret the impact on my customers, I have no choice but to raise the price of each serving of lemonade to S1.10 per cup to cover this increased expense.
During this time, the person who sells me lemons and sugar has been hit with increased taxes on the sale of their products. They regret to inform me that they have no choice but to raise the prices of lemons and sugar so that they can cover their increased expense imposed by these taxes. I- in turn- have no choice but to pass that cost on to my customers and now a cup of lemonade will cost $1.30 to cover my increased expense.
The government steps in and tells my customers that drinking a cup of lemonade each day is now mandatory and those who don’t buy lemonade each day will be fined $5 per day. As a seller of lemonade, I am thrilled because demand for my product has instantly increased.
While my costs for ingredients per cup remain constant. I have to hire additional help to meet this demand and pay for a bigger shop and extra equipment. I set a new price on a cup of lemonade to a price that ensures I can meet these costs and not lose profit.
Yet, I find that I also must ensure that I am competitive. I see that Lou's Lemonade stand down the street is selling Lemonade for $4.50 a cup now. I realize that if I just substitue the costly sugar for a more inexpensive (and untaxed) artificial sweetner and then use a bit less lemon in each cup, I may be able to undercut Lou's price by 25cents a cup. I set my new price at $4.25 a cup, and soon Lou has no choice but to follow suit. He changes the quality of his recipe and settles on a more competitive price.
This is real business economics and I believe it is an accurate description of how our insurance companies are going to respond if the Health Care bill passes today. Take away the subsidies to Medicare (free water), impose taxes on drug companies and medical device manufacturers (lemon and sugar suppliers) and the insurance companies (lemonade stand) are going to be forced to increase their prices and decrease the quality of coverage.
When the government makes healthcare mandatory- you and I will be further hit because we will have no choice but to do business with the insurance companies. This is great news for the insurance companies. Insurance companies are big business! Their goal- like any other business- is to cut costs and increase revenues. All increased costs will be passed to the end users (you and me) –everyone will be paying more and getting less.
I – for one- will be hoping that the Health care reform bill fails today. I do believe that Americans need access to affordable quality healthcare. This plan is not going to provide that.