During his extended TV appearance on ABC news last week, President Obama defended his idea for a public health insurance plan.  He said one of the reasons it will be competitive with private insurers is that, as a nonprofit government sponsored enterprise (GSE), it will offer lower premiums, since it won’t have to earn any profits.

His statement echoed a widespread misconception that nonprofit health insurers, hospitals, and co-op health plans are somehow a better deal for consumers because, without shareholders, they don’t need to earn profits.  It is true that for-profit businesses strive to earn something we call profits, but it is equally true that nonprofit businesses work just as diligently to earn equivalent surpluses.  Both are the excess of revenues over expenses.

What’s the difference between a profit and a surplus? Just this: the former is taxable and the latter is not. Either way, profits/surpluses are a necessary requirement for any operating enterprise if it is to be a self-sufficient, unsubsidized economic entity.  That’s because profits/surpluses are necessary for repaying debt, building reserves against potential losses, buying new plant and equipment, and expanding to meet increased demand.

Health insurers have the additional burden of building large reserves and surpluses in accord with regulatory requirements to ensure that their members’ insurance claims will be paid come hell or high water.  President Obama also pledged that the public health plan will have to abide by the same rules as private insurers (part of his “level playing field”).  Assuming he follows through with this promise and forgoes any government subsidy for the public plan, such reserves and surpluses will be as necessary for it as for private sector players.

Any failure to include a healthy margin for surplus in the public health plan’s premiums will create the substantial risk of a federal bailout if it ever under-prices its insurance for potentially millions of Americans.  Otherwise, it could become just another failed and bailed GSE, like Fannie, Freddie, GM, or AIG (the latter two having become defacto GSEs retroactively).  And if the plan does include such surplus margins, it will not gain the competitive advantage President Obama claimed.  He can’t have it both ways.

The President is ill-served by advisors who prep him to make such contradictory—if crowd-pleasing—arguments about health care reform.

This entry was posted in Government vs Markets, Health Insurance, Health Reform Goals, Myths and Bad Ideas and tagged , , , , . Bookmark the permalink.


  1. Theresa says:

    Bravo! I have dealt with the “poverty equals godliness” mentality for years, and intend to show this column to a few associates in the non-profit world. Without a bona fide, substantiated surplus in place, the U.S. government could end up… oh, right where it is.

Leave a Reply

Your email address will not be published.

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>