Medicare and widgets, a simplified explanation

8/16/2012- Kelly Knight  In the discussion on Medicare and seniors, the President has strongly asserted that the shift of $716 billion from Medicare as we now know it to Obamacare does not reduce benefits for recipients.  While it may be true that the benefit package is not changed, what is true is that the payment to the medical providers for those benefits is reduced.  There will be two possible end results: either medical providers will stop accepting Medicare patients and payments, which will have the net effect of increasing wait times for treatment for seniors at those offices who continue accepting Medicare payments, or providers will raise their rates on those who pay by some other means, which will increase insurance premiums and out of pocket costs for those not on Medicare.

In simple terms: Let’s say you sell widgets for $10 each, with a standard profit margin of 3-5%.  After the cost of material, labor, and over-head, your net profit is $.30-$.50 per widget.  The government determines that widgets are essential for the well-being of a certain group of people, that those people are entitled to widgets, and that the government is going to pay for those people to have the widgets.  To pay for the widgets the government is going to extract by force of law a small amount of money from every taxpayer, whether they are eligible for the widgets or not. In addition, the government mandates that they will only pay you a discounted rate for the widgets; in this case 30% less than everyone else, or $7 per widget.  Your cost of production is between $9.50 and $9.70 per widget, and so you are placed in a situation where you must now subsidize the widget entitlement to the tune of $2.50 to $2.70 each.  To compensate for this, you have two options: raise the price of the widget to everyone else, or stop selling widgets to the government.

In the case of healthcare, the matter is complicated by the introduction of third-party payers (insurance companies).  Rather than buying widgets directly from you, groups of people get together and pay a third party a fixed amount every month (let’s say $1) and rely on that third party to pay for the widgets on the off chance that some of the individuals might need a widget.  In one year, some of those people get 2 or 3 widgets, and others find they don’t need any widgets.  In the end, the third party makes a little money for their service, and some people get more widgets than they paid the third party for, and others end up paying for widgets they never needed.  But in this scenario, everyone who paid for the services of the third party to buy widgets did so of their own free will and choice, and you as the widget provided elected to participate with the third party of your own free will and choice.  In the government plan, everyone who earned an income was forced to pay into the third party (the government) for widgets that not everyone was eligible to receive.

But what does any of this matter?  After all, if you have a company making and selling widgets, you didn’t build that, somebody else did, which means those profit margins, they don’t belong to you.

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