Over the past several weeks, I’ve been fuming and irritated about the whole health care reform debate.
Now, I’ll leave politics aside (really) in terms of what I personally feel about the whole thing, but my gripe is in regards to HOW President Obama has been describing the problem… and even more irritating is how many people seem to be accepting his perspective without critical challenge.
You see the skill that the average person seems to lack and I’m coming to discover that many business owners either lacks or doesn’t use is what I call the 2nd most useful, but boring, skill in business.
What is this skill?
It’s what I call “root cause analysis”.
Well… I did say the skill was B-O-R-I-N-G didn’t I?
(There is truth in advertising).
The basic idea behind root cause analysis is simple. Everything you don’t like in your business, in your life, or in your economy isn’t really a problem at all. It’s more commonly a highly visible symptom of an underlying (often hard to see) problem.
In business as in life, this is very important.
If you don’t focus on the right problem, it is impossible to come up with the right solution.
For example, Obama has been characterizing the health care problem as health insurance companies are just too greedy. And we need to force them to be less greedy (but setting max price increases, etc…), creating a more competitive marketplace, etc…
And as an example, he points to Anthem Blue Cross’s recent price increases of up to 40% for some customers as an example of how “evil” these insurance companies are.
But, using “root cause analysis” one has to ask WHY the health insurance companies consistently raises rates 10%+ each year and why a select few Anthem Blue Cross customers had their rates raised 40%?
If you factually verify the “they’re a bunch of greedy bastards” theory, you find that the average net profit margin of the top 10 health insurance companies was about 3% – 4%. If you look at the top 3 – 4 carriers, they are at about a 7% net margin.
By point of comparison, the net profit margin (based on EBITDA) for Costco in 2009 was 3.5%. The net profit margin for Nordstroms was 13%.
So if a carrier raises prices by up to 40%, but whose net profits say increase from say 5% to 7%, where is the remaining 38% of the price increase going?
In a word… COSTS.
The REAL root-cause reason health care insurance prices are skyrocketing is because factually health care COSTS are sky rocketing.
Sure some of that price increase is going to the bottom line for carriers, but the increase in profits is a small percentage of the overall increase in rates to customers.
The big problem is costs.
This is being driven by a three factors.
First, the US population is getting older. Older people have more health problems. The more health problems you have, the more health care costs you incur.
Second, a lot of health people are opting to go without health care insurance either to save money or because they lost their jobs and benefits.
Health insurance companies make their profits on health people and lose money on sick people. When a lot of the younger, healthier people are going without insurance, the average cost per member that remains insured goes up.
Suddenly older, sicker people have to pay more to cover their costs because there are fewer younger, healthier people to do it.
Third, as a country we believe everyone deserves the best possible health care. While this is a nice sentiment, the problem is the best possible care cost a lot of money.
So as Americans we want the best, but you know what we don’t actually want to pay for it. For example, at what price tag is a human life no longer worth saving?
When is a life saving treatment too expensive and as a country we’re better off letting someone die instead? $1 million? $10 million?
I don’t have the answer, but if you look at countries with Universal health care (like Canada)… there IS a cut-off price.
This is the brutal, honest reality of the situation… and you can see why no politician wants to touch it with a 10 foot pole. You would get absolutely demonized by the media.
(And it is for this reason, I would be a lousy politician 🙂
So why am I explaining all of this to you?
Because in difficult times, the resources in your business are very limited. You can’t afford to fight every battle and solve every problem (especially the wrong ones!).
In the health care example above, the Obama administration is focusing on trimming insurance company profits. There isn’t that much to trim!
Even if they made every for-profit insurance company a non-profit, the problem would still exist.
There’s a lot of energy being wasted on NOT actually fixing the problem.
In your business, you can’t afford to do this.
If sales are down, WHY is it down?
Do your products stink? Are your prospects unable to grasp why they should do business with you instead of your competitors?
It’s a cop out to say it’s because there is a recession and there are fewer customers spending less money… because even in shrinking industries there are ALWAYS companies who are growing.
To be one of those companies, you have to be brutally honest with yourself and examine your own business with a critical eye.
You need to find the “root causes” of those “problems” in your business and fix them.
As you can see from my health care example above, dealing with the root cause of a problem is rarely a comfortable activity–but it is most definitely an effective one.
(And if you’re curious as to what I think the single most useful, but boring, skill in business is… it’s accounting. It is incredibly useful, but regrettable pretty boring. I’ll save that topic for another day.)