The Conversation

Anti-competitive profit caps of ObamaCare

The other day, I was musing with some online correspondents that Democrats are working overtime to shift blame for higher premiums and cancelled policies onto insurance companies, but ObamaCare's vast array of regulations don't impose rock-solid price caps, or prevent policies from ending, even though in theory both of those (hideous) ideas could have been included.  In other words, the private-sector scapegoats are getting savaged for doing what they are legally allowed to do - indeed, legally required to do, in the case of the brutally tight HHS regulations issued to prevent insurance policies from being "grandfathered" as easily as Obama originally promised.  

Someone pointed out that ObamaCare actually does include profit caps, which aren't quite the same thing as price controls.  There are provisions that essentially limit insurance companies to taking no more than 20 percent in administrative overhead and profit.  The other 80 percent of revenue from insurance premiums has to be paid out in claims.  

This sort of thing is a crowd-pleasing liberal-populist measure, which many people would love to see applied to other industries as well.  Those evil capitalists and their cursed profits!  20 percent should be enough for anyone!

But as Jim Pethokoukis of the American Enterprise Institute observes, profit caps are actually a powerful anti-competitive measure.  Established Big Business loves the idea of limiting profits, because it's a barbed-wire fence preventing new competitors from entering he marketplace.  

That's because a start-up company can expect huge losses at first - it takes a lot of money to get any serious enterprise going, especially when it's trying to be innovative.  Only the lure of larger profits down the line makes the effort worthwhile for entrepreneurs and investors.  Perhaps this eventually smooths out to an acceptable level in the 20 percent range (or whatever figure the profit-cappers choose) but that comes after early years of, say, 30 percent loss followed by 50 percent gains.  Also, a very large corporation might be satisfied with 20 percent profit on tens of millions in revenue, but a smaller company can't attract investors with such a percentage return on much smaller volume.

Limiting profit prizes, while leaving unlimited losses yawning like open pits beneath the feet of investors, is a great scheme for ensuring that long-established operations comfortable with the controlled profits will dominate the market.  It's funny how often these "populist" and "anti-business" ideas work out just swimmingly for big corporations with the right political connections and market dominance.  They can afford to take hits that crush smaller competitors; they might be eager to do so.  Anti-competition remains the most "valuable" product in corrupt Big Government's limited inventory, and there will always be buyers.



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