If FedEx Can Compete With the US Government, Why Can't Health Insurers?

The Obama Administration's announcement concerning it's vision of a reformed American health care system, a vision based upon a Government based option to private insurance, has provoked quite a debate-one that seems able to fill the op-ed pages of major newspapers on a daily basis. The arguments, both in favor of and against a government intervention into the health care realm, are for the most part legitimate, provocative, and varied. Opponents of the reform measures outlined by the President will generally put forth arguments that revolve around one or more of the following points:

1. There is nothing wrong with America's current health care system.
2. If there is something wrong with America's health care system, the Government should have no role in fixing it.
3. The United States can not afford to implement meaningful health care reform, at least not at this time.
4. The Government is not capable of effectively managing the nation's health care system.
5. Doctors personally hate the thought of it.
6. If subjected to drug price "negotiations" with the Government, pharmaceutical companies will be forced to allocate less money to the R&D that is necessary to solve a host of pressing medical issues.
7. A Government health insurance option will "crowd out" private insurance companies, rendering them useless.

As we've already stated, these are all perfectly valid arguments that merit serious discussion. To counter #7 however, we would argue that a reasonably applicable precedent of public/private co-existence has been in place for over 30 years. The peaceful existence we speak of is between the United States Postal Service, Federal Express, and the United Parcel Service.

Although an organized system of mail delivery has been in place in the United States ever since Benjamin Franklin was named the first Postmaster General in 1775, the United States Postal Service as we know it was not created until the Postal Reorganization Act of 1970. This Act essentially created a Government business that would be forced to fund it's operations through it's own revenue - not taxes. Although initially subsidized in part by the federal government, the USPS was able to become operationally independent in 1982. The Act also created the Postal Rates Commission, and empowered the Commission to regulate the USPS and force it to adopt "fair" postal rates. It was during this exact time period that Federal Express(FDX) was incorporated(1971) and began operations(1973). The United Parcel Service(UPS) in contrast, was already a mature company at this time, and by 1975 it provided service to every address in the continental US. So here we have three nationwide package delivery services: one that received Government subsidies throughout the 1970's, one private upstart, and one more mature private company. An individual who carefully observed the circumstances in 1970 likely would not have predicted the current circumstances of these three organizations today.

In 2008, the US Postal Service, FedEx, and UPS reported annual revenue of $74.9B, $37.9B, and $51.4B respectively. Not only was FedEx able to avoid being "crowded out" by an already established Government business, it has since surpassed the USPS in relevancy - not an earnings season goes by without FedEx being described as a "bellwether" company. At the same time however, the US Postal Service has been able to provide quality services at a low cost to Americans. If a company needs an important contract delivered to a client before 10AM the next morning, it will use FedEx(or UPS), and it will pay a premium for this service. If the same company doesn't mind waiting 2-3 days however, it may choose to save money(especially these days) and go with the US Postal Service option. We would argue that the same dynamic can exist in the health care industry, given the proper implementation by the Government of course.

In order to address in preemptive fashion an obvious criticism that could be lobbed towards our argument, we will state that there are obvious differences between the health care and shipping industries. Some people might think that these differences are profound enough to negate any argument that attempts to compare the two. However, the rise of FedEx should be evidence enough that the existence of a Government option within an industry does not, by default, lead to the "crowding out" of other private participants. The emergence of a government option might have the potential to put some health insurers out of business, however, the strongest and most efficient companies in the private sector should live on and remain profitable - an outcome that would be to the benefit of everyone.

*No position in any of the securities mentioned in this article

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