Janet Trautwein: With health care fixed, next Congress turns to kitchen appliances

Congressional leaders just announced plans to address the mounting lack of affordability in the market for kitchen appliances. "Now that we're finished with healthcare reform, I'll introduce the Kitchen Appliance Affordability and Fairness Act of 2010," Sen. Jim Meddlesome, D-Nannystate, said this week.

The KAAFA would require all kitchen-appliance manufacturers to spend at least 85 percent of their revenues on materials -- not labor, marketing, or infrastructure -- by 2014. Proponents of the measure claim that it will prevent profit-driven blender-makers from wasting money on administration and bloated executive salaries -- and thus lead to lower prices for ordinary consumers.

"The manufacturers of blenders and toasters have jacked up prices with impunity for far too long," said Meddlesome. "It's high time we put an end to their abusive practices."

Meddlesome's bill was inspired by a provision in the healthcare reform package that would require insurers to spend a certain percentage of their revenues on medical claims. Supporters of the KAAFA want to extend similar "minimum loss ratios" to the kitchen-appliance industry.

"Insurance companies and appliance-makers alike have devoted too much of their revenue to profit and administration," declared Meddlesome. "With these new rules, we're simply ensuring that every regular John Q. Cuisinart gets a fair deal."

Financial data on the two industries' profits seem to contradict Meddlesome's claims. According to Yahoo Finance, the insurance and appliance sectors are among the least profitable in the U.S. economy, with profit margins of just 4.4 percent and 1.9 percent -- good enough for 87th and 121st, respectively.

Representatives from BlenderCorp USA expressed dismay with the KAAFA proposal, saying that the company's current pricing structure would fall afoul of the law.

BlenderCorp's CEO explains: "Our mid-range blender retails for $50. We use 75 percent of the sale price to pay for materials, 20 percent to pay for labor and marketing, and 5 percent for profit to fund research into our next wave of blending products.

"By forcing us to spend 85 percent of our revenues on materials, Congress is effectively mandating that we cut jobs, curtail research and development, raise prices -- or enact some combination of all three."

Economists predict that the new minimum-loss ratio would lead to waves of consolidation within the kitchen-appliance industry -- and even the outright failure of many companies.

"Many small manufacturers will not be able to establish the economies of scale necessary to comply with the new regulations," said Joseph Commonsense, a professor of finance at Faber College. "If these firms don't merge with one another, they'll simply go out of business."

Either way, predicts Commonsense, consumers will face fewer choices in the blender market. "The public will have to suffer through several rounds of price hikes -- first when the minimum loss ratios go into effect, and then again after the surviving blender makers capitalize on their lack of competition by jacking up rates," he said.

Meddlesome is undeterred by the prospect of newly expensive home appliances. "I don't care about the blender-makers' threats to raise prices," he said. "This is about taking a stand against greedy profiteering."

Ordinary Americans may pay the price for his crusade. Ironically, Congress's embrace of "minimum loss ratios" as a means of lowering the price of consumer goods seems poised to make blenders -- not to mention health insurance -- unaffordable.

Janet Trautwein is CEO of the National Association of Health Underwriters.