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A Parable of a Familiar Industry

A Parable of a Familiar Industry

Once upon a time, there was an industry which provided a highly useful and in-demand set of products and services. Virtually all members of society sooner or later made use of the industry, and most would be repeat customers. The industry steadily grew, increasing both the variety and sophistication of its offerings.

Due to near-universal demand for the industry’s goods and services, insurance companies developed to profitably position themselves as middlemen between the industry and its customers. Government interposed itself as well, and also imposed regulations on the industry as a whole to make sure everyone behaved themselves. It became an exception, rather than the rule, for customers to directly pay for the goods and services they were receiving from the industry. As a result, prices stopped being determined by the seller and buyer, and started being set by the government and third-party insurers.

Numerous smart people put a lot of effort into calculating how much everything should be worth. Of course, payment had to exceed the cost of overhead (equipment, real estate, electricity, personnel, etc.) sufficiently to allow for a profit; otherwise, nobody would seek to go into the industry anymore.

Years went by, and times were not always good. Government was always under pressure to cut costs (so as to lower taxes or to spend more somewhere else), and the third-party insurers were always in search of ways to cut costs (so as to lower premiums or to profit more). However, reimbursements to the industry could only be cut a finite amount before eliminating the profitability of the industry’s goods and services. After all, nobody would expect an industry to operate at or below its break-even point.

As it happens, they could. And did. More of the abovementioned smart people came up with the idea that, yes, the newest cuts being proposed are such that nobody could make a profit by providing service No. 1… but the industry needn’t worry, because it can still do very well for itself by providing services No. 2 through No. 10, which have been generously permitted to remain profitable. (If it helps, you can give names instead of numbers to the services: X-rays, ultrasounds, nephrology consults, lap choles...)

The industry grumbled a bit, but endured it. It was better than fighting City Hall, after all. Also, the law prohibited most of the industry from engaging in collective bargaining, so a unified “we’re not going to take this” response was not in the cards.

Fast-forward a few governmental administrations and a few more cycles of boom and bust, accompanied by additional cost-cutting. Overhead hasn’t been reduced; in many ways it’s risen. In the meantime, cuts have rendered services No. 2 through 7 unprofitable, if not money-losers. The industry is now limping along on Nos. 8 through 10, amid a constant stream of intel that the remaining profitable ventures are being considered for the chopping-block.

Can you guess what happens next? We’re about to find out.

Disclosures

 
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