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Comment by grecy | Hacker News Reader

Except that every company involved in the healthcare industry in America (drug companies, insurance companies, hospitals, etc.) make hundreds of billions (or trillions) in profit each and every year.

The reason for the high prices is because healthcare in the US is an extremely, extremely lucrative for-profit industry.

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Health insurers and hospitals have profit margins under 5%. Pharma margins are larger but not outrageously so.

https://www.investopedia.com/ask/answers/052515/what-usual-p...

https://www.advisory.com/daily-briefing/2017/05/18/moodys-re...

https://www.bbc.com/news/business-28212223

That doesn't mean anything at all. The problem is dissipation of rents -- when an industry gets an economic rent, expenses will tend to increase to the maximum allowed by market discipline. This is true for all bureaucracies -- e.g. Universities are always out of money but keep charging more. Hospitals are always out of money but still charge too much. That a firm finds a way to spend the money does not mean that the amount charged is the minimum that is possible in a long term stable solution. Prices are clearly out of line in these fields with OECD averages, yet each specific firm finds that its expenses are great enough that they only earn the market required return.

So where does the money physically go? If I’m a rent-seeker, I still have an incentive to be stingy with my expenses. The only reason I wouldn’t would be if someone else had a monopoly and was rent-seeking on me, but who’s doing that?

I wouldn’t rule out the possibility that it’s rent-seeking all the way down, but you’d have to make that case. Suppose you say, doctors and pharma companies are rent-seeking, and I say doctors don’t really bring home the bacon and pharma has a 5% profit margin. Then you say, well, it’s the bureaucrats, and then I say, why doesn’t some pharma company just fire the bureaucrats and keep the profit margin to themselves? They can’t because of regulations? That’s not even rent-seeking anymore, it’s just over-regulation and you can fix it with deregulation.

OK, well, the doctors have their student loans and the pharma companies have some other requirements that they need universities for, so universities are the real rent-seekers. Except it’s not the universities, who are broke, it’s—well, who seeks rent from universities? I’m not ruling it out, but this is also starting to sound like it leads back to the Rothschilds somehow.

You can’t just say “Americans pay more for X therefore rent-seeking”. There are lots of things that can cause inefficiencies.

Yes, you, personally have an incentive to be stingy.

But when you are talking about a big organization, they find ways of spending money because the managers of the organization are not aligned with the shareholders. Every organization has pressure to keep expanding because there is always more stuff that could be done, and you can hire people to do that stuff up until the total earnings are in line with the market return irrespective of the above average earnings that could be had without all the extra activity. They will keep spending on marginal expenses to "defend" their rents up until no rents are to be had. This is called rent dissipation.

A good example would be education, and count the number of educational administrators, gold plated dorm rooms, activity centers, weird classes, etc. Then go look at hospital spending. Instead of the nurse giving you a tylenol, they invest in a prescription dispensing vending machine that costs $$$, and they hire more administrators. Then take a look at your standard corporation and look at all the odd positions they have that a "lean" smaller company or a start up would never have. Compliance officers, marketing staff, assistant to the marketing staff, support services, travel support, real estate management services, etc.

So you can think of this as a law of bureaucracy, unless there is someone imposing discipline on the cost side, the managers of a bureaucracy are going to grow that bureaucracy until they run out of money. This is how ATT ends up funding basic research and discovering the cosmic microwave background radiation. Because they have all this money to spend. And I guarantee you that at its halcyon days when it was obviously a monopoly and thus earning monopoly rents, ATT was not earning more than the average market return on their investment because they kept "investing" in hiring more staff and more resources up until the total return fell to the market required return.

You know, the more I think about it, the more I like this idea. It's not so much that capitalists are rapacious and sociopathic, it's that most administrators and bureaucrats are prone to mediocrity and only exercise cost discipline when they are under a constraint forcing them to do so.

The robber baron would actually be preferable, in a certain sense, because at least then, someone would benefit from the rent-seeking. The problem being that if you were a robber baron, there are much better ways to get rich. Also, many of these rent-seekers are not even for-profit enterprises.

And as a completely different example, what this principle suggests is that nations with a low interest rate environment will generally see a decline in profits corresponding to the lower rate. So for example Japan, a nation where corporate profits became notoriously low after the period of zero interest rates. Or, for example, China, where various subsidies to the cost of capital result in very low and sometimes negative cost of capital to state owned enterprises (SOE). It's these SOEs that end up doing weird things like a metal mining SOE building a replica of an Austrian village for a tourist attraction (https://www.youtube.com/watch?v=hP-7f1XW7jE). How on earth would a mining company do that except for the fact that they have a lot of money lying around due to earning economic rents? They find ways of spending money up until their return is the market return.

This is completely independent of their pricing power or monopolistic status.

Doctors in the US make almost twice of what doctors in other developed countries make.

If you're saying it's because they have to pay for med school... then maybe it's med school that's taking the bacon :P

https://journal.practicelink.com/vital-stats/physician-compe...

And, as rsj_hn, all the bizarre administrative overhead eats a lot of profits which are basically dissipated, it's economic wealth destruction.

They have lower profit margins than most tech companies like apple.

Apples and oranges.

How so? The products they make are different, but at the end of the day they are both industries living in the capitalist society we've created, driven by the same incentives, and largely operating by similar principles. How is it morally acceptable for a tech company to make huge margins and yet morally reprehensible for a pharma company to make margins that are smaller?

The answer to this is so obvious that I almost have to assume that you're not asking in good faith, unless your purpose is to point out the flaws in our society's views on economics. Tech companies like the ones mentioned are known for primarily producing non-essential luxury goods like smartphones or B2B services. The pharma companies under discussion are in many cases producing drugs that people must take in order to live.

> hundreds of billions (or trillions) in profit each and every year.

No company makes trillions of dollars in profit.

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