Planned Parenthood’s business model depends on keeping poor and minority women away from cheap birth control, which means more and higher abortion revenue.

“While there are cases where even the law recognizes an abortion as justifiable if recommended by a physician, I assert that the hundreds of thousands of abortions performed in America each year are a disgrace to civilization.” — Margaret Sanger, founder of Planned Parenthood (Planned Parenthood performs about a third of the 1.1 million abortions that occur in the United States every year).

GOP Sens. Cory Gardner and Kelly Ayotte have recently proposed a bill that provides incentives for birth-control pill manufacturers to apply to the Food and Drug Administration for over-the-counter (OTC) status. Oddly enough, Planned Parenthood objects.

Planned Parenthood claims that the proposed bill would gut the Affordable Care Act’s (ACA’s) birth-control mandate. Planned Parenthood President Cecile Richards said, “This bill is a sham and an insult to women… It would give women fewer birth control options and force women to pay twice for their birth control.”

In response, Reason’s Elizabeth Nolan Brown aptly pointed out that the bill was no such thing: (1) just because one type of birth-control pill is available OTC doesn’t mean all forms of the pill will be; (2) just because a drug is OTC doesn’t mean it can’t also be available via a prescription (think of allergy drugs); (3) there’s no reason to think the birth-control mandate doesn’t cover OTC contraception (it already covers Plan B, which is OTC); and (4) the ACA’s birth-control mandate does nothing for poor uninsured women, who have the most to gain from OTC access (women on Medicaid already had full birth-control coverage, and the mandate only applies to private insurance).

In short, despite Planned Parenthood’s rhetoric about looking out for women, its opposition to the Gardner-Ayotte bill appears baseless. Brown muses that the mere possibility of removing the ACA’s mandate makes a highly-politicized Planned Parenthood reject the proposed bill. S.E. Cupp believes Planned Parenthood is rejecting the Gardner-Ayotte proposal because Republicans authored it. National Review’s Jillian Kay Melchior believes Planned Parenthood opposes the measure because it “makes” $1.2 billion per year from contraceptive services (actually, the organization’s total revenue is about $1.2 billion a year).

But there is a much deeper explanation, driven by the rational behavior of an organization seeking to maximize financial gain. To begin to understand why Planned Parenthood opposes OTC birth control, one must look to an obscure New York Times article from the mid-90s, which details post-Soviet Romania’s miserable abortion-culture.

The Romanian Connection

In 1995, Romania had 2.2 abortions for every live birth. Minimal consumer-choice at the state-run system, coupled with low payouts to health professionals when they provided birth control and high rewards when they provided abortions, allowed the state-run system to undersupply birth control and oversupply abortion, causing untold misery for Romanian women.

That same foul cocktail applies to poor, disproportionately minority women in urban areas attempting to access family planning in today’s America. The Centers for Disease Control (CDC), a government agency, says that between 2007 and 2010, nearly 36 percent of all abortions in the United States were performed on black fetuses, even though blacks make up only 12.8 percent of the population. Overall, more than half of American abortions between 2007 and 2010 were of minority fetuses.

Poverty alone is not the explanation: there are almost twice as many poor whites as there are poor blacks in America, yet black women who live below the federal poverty line contribute to 14 percent of the nation’s abortions, while poor white women contribute to only 11.7 percent of the nation’s abortions. The real explanation is found in identifying this group’s family-planning provider, and that provider’s incentives.

Inadequate Contraceptive Access

The Left always reminds us of the correlation between unplanned pregnancies and the abortion rate, and points out that greater birth-control access among the poor would stem the tide of abortion. After billions of dollars funding contraceptive access for poor women with high unintended pregnancy rates to show for it, the Left now says that if conservatives really cared about abortion, we would advocate for greater use of Long-Acting-Reversible-Contraceptives (LARCs), such as the intrauterine device (IUD).

According to the Left’s story-telling, poor women deal with unique stresses that make it hard for them to rely on traditional forms of birth control, and this explains why traditional birth-control methods have been relatively ineffective for poor women, as compared to their better-off peers. If these devices carry a prohibitive cost and destroy human embryos, too bad for taxpayers, and too bad for religious conservatives.

Yet the Left (as usual) has a problem. This line of analysis doesn’t begin to explain why the rate of unplanned pregnancies among America’s poor rose dramatically in the mid-90s (see chart). Did the stress associated with poverty dramatically increase?

As well-off women saw rates of unintended pregnancies continue to decline, women of lesser means saw their unintended pregnancy rate skyrocket. According to the American Prospect, the average abortion patient used to be “[a] middle-class, white high-school or college student with no children whose bright future could be derailed by motherhood,” while today she is more likely “a twenty something single mother of color.” An unexplained “[l]oss of [birth control] access for poorer [minority] women” occurred in the 1990s.

What if the primary provider of that birth control access is to blame?

According to The Guttmacher Institute, Planned Parenthood’s research arm, “minority women, women who are poor, and women with little education are more likely than women overall to report dissatisfaction with either their contraceptive method or provider.” Oddly enough, Planned Parenthood is the primary provider of family planning for poor, disproportionately minority, urban women.

In other words, the Left is right about birth-control access being substandard among certain populations, but wrong about everything else. What if the primary provider of that birth control access is to blame?

Remember the high rate of black abortions in America? If poor black women disproportionately rely on a certain provider because they are disproportionately located in urban areas (due to federal housing policies of the ’50s and ’60s that concentrated poor blacks in urban areas), it would make sense that this provider’s actions would disproportionately affect poor blacks.

So Planned Parenthood’s veiled opposition to OTC birth-control pills would be rational, if it depended upon reduced consumer choice among its target market. The following details the similarities between mid-90s Romania and Planned Parenthood’s services to poor women in modern-day urban U.S.A.

How Planned Parenthood Reduces Consumer Choice

Romanian women in the mid-90s faced little consumer choice, and Planned Parenthood’s target market experiences reduced consumer choice.

1. Planned Parenthood Dominates Urban Areas

After Roe v. Wade, abortion became one of the most unregulated areas of American commerce. Low barriers to entry and high profit margins led providers to flood the market. Planned Parenthood v. Casey, decided in 1992, allowed states to regulate the abortion industry more closely, to ensure that women made more informed decisions before having abortions, and also to better protect women’s health.

After Casey, Planned Parenthood’s abortion market share increased dramatically, to commanding a third of the U.S. market today.

When states began regulating abortion within the limits Casey had defined, the fixed costs associated with providing abortions began rising in the early ’90s. This pushed many non-specialized providers out of the market, and gave Planned Parenthood a dominant position in abortion market-share.

Before Casey, Planned Parenthood’s abortion market share was flat year-on-year, holding less than a tenth of the market. After Casey, Planned Parenthood’s abortion market share increased dramatically, to commanding a third of the U.S. market today (or 40 percent of all reported abortions). Planned Parenthood’s revenues reflected this growth: though flat in the early ’90s, it saw a consistent yearly uptick after the Casey decision.

Amy Hagstrom-Miller, operator of an independent chain of abortion clinics in Texas and Maryland, was quoted saying, “This is not the Planned Parenthood we all grew up with… they now have more of a business approach, much more aggressive… [t]hey’re not unlike other big national chains… They put local independent businesses in a tough situation.”

According to The Wall Street Journal, “Ms. Hagstrom-Miller competes with Planned Parenthood for abortion patients – and finds it deeply frustrating… She does not receive the government grants or tax-deductible contributions that bolster Planned Parenthood, and says she can’t match the nonprofit’s budget for advertising or clinic upgrades … She has carved her own niche by touting her care as more holistic — and by charging $425 for a first-trimester surgery at her Austin clinic, compared with $475 at the local Planned Parenthood.”

As the number of abortion providers dropped, more providers located in densely populated urban areas, where fixed costs could be offset by higher volumes.

Consolidation in the U.S. abortion industry also had geographic consequences. As the number of abortion providers dropped, more providers located in densely populated urban areas, where fixed costs could be offset by higher volumes.

Title X also assists Planned Parenthood’s focus on urban areas (no matter whether a Planned Parenthood clinic provides actual abortion-services or just abortion referral). Passed by Congress and signed by President Nixon in 1970, Title X offers grants for organizations that provide birth control to low-income women. Title X creates a further incentive for urban location, as grant amounts are predicated on the provider’s proximity to poor populations (the closer a Title X grantee is to the greatest number of poor people, the larger the grant amount). Almost a third of Title X expenditure goes to Planned Parenthood, its biggest recipient, to the tune of $70 million as of 2010.

2. Planned Parenthood Targets Poor Women Who Depend on Publicly Funded Care

Poor and minority women in urban areas—the women experiencing high rates of unintended pregnancies—are Planned Parenthood’s customer base. Seventy-nine percent of Planned Parenthood patients have incomes at or below 150 percent of the federal poverty level. The “vast majority” of the organization’s female patients lack private health insurance, meaning they rely on Medicaid (federal and state-sponsored health insurance for the poor) or are uninsured. Planned Parenthood brags that “only 3% of Planned Parenthood patients can afford the full cost of their care and, for many, Planned Parenthood functions as their primary care provider.”

In many urban areas, Planned Parenthood is one of the few providers that accepts Medicaid.

For a poor woman who is uninsured, her primary hope of family planning services is a Title X-funded clinic. This clinic is likely to be a Planned Parenthood affiliate, as Planned Parenthood receives the largest portion of Title X funding. This means uninsured women have little choice about where they receive family planning services.

A Guttmacher study found that 6 in 10 women who visited a “specialty contraceptive clinic” (a Title X grantee) considered the clinic their “usual source of medical care.” Four in 10 women surveyed considered the clinic their “only source of health care.” The study (which included 22 clinics) only targeted communities known to have multiple Title X grantees, or “safety-net providers.” This means the proportion of women for whom Planned Parenthood clinics are their only avenue to healthcare is probably much higher nationally.

If a poor woman of childbearing age doesn’t have private insurance but is insured, she receives Medicaid. In many urban areas, Planned Parenthood is one of the few providers that accepts Medicaid. The absence of competition here is due to two factors.

First, Medicaid’s under-compensation of doctors and hospitals leads most medical providers to reject Medicaid altogether. In urban areas, where there is likely to be a higher-than-average concentration of Medicaid recipients, a provider’s incentive to not accept Medicaid is magnified. (By the way, this inherent flaw in Medicaid explains recent stories of emergency-room visits rising after the ACA’s Medicaid expansion).

Planned Parenthood can uniquely afford to accept Medicaid because it also receives Title X, a funding source other potential providers either don’t receive or don’t receive to the same degree.

Second, Planned Parenthood can uniquely afford to accept Medicaid because it also receives Title X, a funding source other potential non-specialized health providers (hospitals, etc.) either don’t receive or don’t receive to the same degree.

Some conservatives have long accused Title X of freeing up more money for abortions. More accurately, Title X serves as an extra incentive for Planned Parenthood to accept Medicaid. Title X tops-up Medicaid’s subpar payouts by not only covering fixed costs but also allowing Title X grantees to receive special Medicaid pricing. Planned Parenthood lobby groups specifically point out that Title X is necessary because Medicaid doesn’t provide adequate compensation for their services.

So both Title X and Medicaid are necessary for Planned Parenthood to remain viable. Planned Parenthood, a billion-dollar organization, receives almost half of its yearly funding from government: $540 million in fiscal year 2013, of which $70 million (as of 2011) comes from Title X and $387 million (as of 2011) comes from Medicaid.

Abortions Generate Higher Profits Than Birth Control Does

As a rational economic actor that seeks to maximize financial gains, financial incentives drive Planned Parenthood’s actions. Some will stop here and point out that Planned Parenthood is a nonprofit organization. First, this is a legal classification only (the National Football League was a nonprofit until last year). Just because an organization is a nonprofit doesn’t mean it will not behave rationally, attempting to reduce costs and increase revenue. Instead of rewarding financial gains to a shareholder, a nonprofit plugs its financial gains into higher salaries and bigger benefits for its employees (Richards makes half a million dollars every year as Planned Parenthood’s president).

Instead rewarding financial gains to a shareholder, a nonprofit plugs its financial gains into higher salaries and bigger benefits for its employees.

Second, though the national organization is flush with cash, many local Planned Parenthood “affiliates” (Planned Parenthood operates a franchise model) are highly cost-sensitive, to the point where several have fraudulently overbilled Medicaid. Because of the franchise model, clinics must be independently financially-viable.

In mid-90s Romania, health workers who provided family planning made little offloading contraception, but were heavily compensated when providing abortion. Planned Parenthood clinics’ near-monopolistic power over poor urban women provides an overwhelming incentive to undersupply birth control. In doing so, its affiliates push their high-margin product—abortion.

1. An Incentive to Undersupply Birth Control

Planned Parenthood has an incentive to undersupply birth control to its captive market of poor urban women who depend on publicly funded care. For uninsured women, the organization’s clinics face a marginal (per service rendered) loss when supplying birth control under Title X’s grant-based system.

Although Planned Parenthood may make money when supplying birth control under Medicaid, margins are often razor thin.

Title X’s grant-based funding means that, after a certain point—conceivably when Planned Parenthood feels it has given out enough birth control to satisfy the government and ensure future grant awards—the marginal cost of distributing birth control hugely outweighs the marginal benefit.

Although Planned Parenthood may make money when supplying birth control under Medicaid, margins are often razor thin (the exact compensation rate depends on the state, but note here that Planned Parenthood’s real interest in the ACA is Medicaid expansion). This explains contraception mailer programs that attempt to eliminate the administrative costs of a clinic visit—costs that prevent a customer from returning for another supply. If the mailer program does accept Medicaid, it is better than undersupplying the market, but many Planned Parenthood affiliates’ mailers do not accept Medicaid—again, because Medicaid may barely cover costs, and because some states disallow such a program because it is open to waste, fraud, and abuse.

Further, for all Planned Parenthood’s hype about preventative birth control, the organization does a subpar job at putting preventative birth control in the hands of its customers. In 2012, 40 percent of the “contraceptive services” provided by Planned Parenthood consisted of emergency contraception (such as Plan B, which most likely carries higher margins than ordinary birth control).

Even left-leaning blogs lament stories of young women being pressured to make costly “donations” for basic contraceptive services. They also note that financial incentives could lead Planned Parenthood to offload forms of birth control that are less effective or safe compared to other alternatives.

So Planned Parenthood loses money distributing birth control to uninsured women, and gains little by distributing birth control through Medicaid. Planned Parenthood’s failure to meet demand for birth control reduces costs, and also stimulates demand for abortion. When Planned Parenthood doesn’t adequately meet customer demand for birth control, its customers, with nowhere else to turn, come back for the high-margin product.

2. Abortion Is Planned Parenthood’s Premium Product

Planned Parenthood makes a good deal of money, on the margin (per service rendered), when providing abortion services. Abortion is usually paid for out-of-pocket, to the tune of around $500, and carries high margins for providers. According to Guttmacher, around 65 percent of women who receive abortions lack private insurance (they are either uninsured, 33 percent, or received Medicaid, 31 percent).

The vast majority of abortions Planned Parenthood sells are paid out-of-pocket.

How do poor women afford to pay for abortion themselves? When an unplanned pregnancy is only a remote possibility, women are cost-sensitive towards expensive, but effective, contraception (especially when they can receive less-effective contraception at little to no cost). But when women face an unplanned pregnancy, they are less cost-sensitive. Also, while the male involved typically does not contribute to the birth-control bill, he will contribute to an abortion, as he is on the hook for support payments if the unplanned pregnancy is brought to term. The vast majority of abortions Planned Parenthood sells are paid out-of-pocket.

While Planned Parenthood claims that only 3 percent of its services are abortions, the organization calculates this number by counting every little thing it does as a separate “service” (a pack of pills, a sexually transmitted disease test, and an exam are three separate services). In fact, 1 in 10 Planned Parenthood customers receive abortion services. Again, the organization is the clear market-leader in abortions, commanding about 30-40 percent of the U.S. abortion market.

Yet, even more important than the volume of abortions compared to other services, Planned Parenthood makes the most money, on the margin, when it provides abortions. In criticizing Planned Parenthood’s claim that only 3 percent of its services consist of abortion, Slate calls abortion Planned Parenthood’s “premium product,” likening it to a store that sells luxury watches, and refers to Planned Parenthood’s “3% number” as “the most meaningless abortion statistic ever.”

Slate calls abortion Planned Parenthood’s ‘premium product,’ likening it to a store that sells luxury watches.

Media Matters and PolitiFact have pointed out that abortion services, which bring in about $165 million per year, only make up “less than 15 percent of Planned Parenthood’s annual revenue.” But this analysis is overly simplistic. Looking at the national organization as of several years ago, around $320 million in revenues comes from clinics, of which $165 million is due to abortion services. Private donations provide $223 million, and $487 million comes from Title X and Medicaid. The portion of this revenue generating the greatest boost to the bottom line, aside from donations, is abortion-services.

And the national organization’s revenue from abortion matters little. As mentioned above, Planned Parenthood follows a franchise business model—like Burger King and McDonalds—so clinics must be self-sustaining apart from the national organization. This is important, because this means incentives and financial concerns at the clinic level have the greatest sway on organizational behavior.

Around 50 percent of the organization’s clinic revenue is generated from abortion (a more conservative estimate puts this figure at 37 percent, which is high nonetheless). If you factor in Title X grants and Medicaid billings, the figure is brought down to 20 percent, yet Title X and Medicaid are sources of revenue that don’t provide much income after costs. Again, keep in mind that, compared to other clinic-level revenue-sources, abortion contributes the most to the bottom line after costs are factored in.

Abby Johnson, a former director of Planned Parenthood’s clinic in Bryan, Texas, and Planned Parenthood “Employee of the Year” in 2008, claims that Planned Parenthood clinics projected the same number of female customers year to year, but consistently called for an increase in abortion sales. Johnson recounts that, one year, the organization doubled its abortions target over the previous period (while the market size and customer base was largely expected to stay the same).

Because franchisees must be completely self-sustaining, local clinics face immense pressure to cut costs.

And Planned Parenthood is highly cost-sensitive regarding abortions. Because franchisees must be completely self-sustaining, local clinics face immense pressure to cut costs. When Johnson was an employee, a visiting abortion doctor used an ultrasound device to identify ectopic pregnancies and prevent perforating the uterus. This was a first for Johnson because Planned Parenthood does not use an ultrasound device unless state law requires it.

When Johnson asked her superiors why Planned Parenthood didn’t use ultrasound, her superiors contended this was too costly, and would add an extra five minutes to each procedure. Her clinic needed to do between 25 and 50 abortions per day to remain profitable. Johnson also recounts how, ideally, an experienced physician could perform 75 abortions per day, and how the clinic wanted to have a woman on and off the table in no more than five minutes.

Planned Parenthood’s Conflicting Interests

At the end of the day, Planned Parenthood has a business model, very much akin to HP or Apple, and abortion is essential to it. Just as HP sells its printers at cost so it can make huge profits on printer ink, Planned Parenthood provides most of its services at cost, but profits when customers need abortions.

Just as HP sells its printers at cost so it can make huge profits on printer ink, Planned Parenthood provides most of its services at cost, but profits when customers need abortions.

Just as Apple uses its stores not as profit centers, but as extenders of the Apple brand that give potential customers hands-on knowledge about Apple products, most Planned Parenthood clinics only provide abortion referral and function at cost, but refer abortions to the profit-generating clinic that provides them.

Yet an organization that carries both contraception and abortion faces an inherent conflict of interest, as abortion and birth control are, to some extent at least, competing services. A monopoly magnifies this ability to push one service over another, as the case of Romania shows.

Just as a single gas station in a remote area can get away with selling only premium gasoline, while gas stations with competitors must offer more choice, so is it with Planned Parenthood. Because poor urban women have nowhere else to receive birth control, they are forced to frequent an organization that has a vested interest in seeing them eventually pay more to have abortions.

Planned Parenthood can’t have it both ways. The organization consistently decries the lack of family planning access for rural women while its customer base experiences the highest rate of unplanned pregnancies in America—a far worse rate than that among rural women who supposedly don’t have any family planning access at all.

The Solution: More Consumer Choice

Advocates for abortion have long contended that we need more birth-control access and education if we want to stem the tide of abortion. What if they are right, but their chosen agent of birth-control distribution is doing a terrible job?

Planned Parenthood then steers this captive market towards its abortion services by not providing adequate birth-control choice and access, because abortion is Planned Parenthood’s premium product.

In Romania in the mid-90s, a government-run health monopoly meant consumers had little choice. And Romanian doctors were poorly compensated when providing birth control, but heavily compensated for performing abortions. The result was a higher rate of abortions than live births, and misery for Romanian women. In America, many poor urban women have little choice aside from Planned Parenthood, and abortions make the most money for Planned Parenthood franchisees, after costs.

This also helps to explain the high black abortion rate in America. Poor black women disproportionately reside in urban areas, and in urban areas a poor woman’s primary avenue to healthcare is Planned Parenthood, which disproportionately services poor black women. Planned Parenthood then steers this captive market towards its abortion services by not providing adequate birth-control choice and access, because abortion is Planned Parenthood’s premium product. Planned Parenthood’s quest for financial gain drives the high black abortion rate.

What is to be done? Poor, urban women need more choice. Bill Clinton said abortion should be “safe, legal and rare,” and that women should always have the “choice” of abortion. For many poor American women, abortion is not safe, it is not rare, and there is little choice.

Next Steps for Policymakers

The solution must be to break Planned Parenthood’s monopoly over the lives of poor urban women, providing poor urban women with greater choice.

First, Congress should reform Medicaid, so poor urban women have more medical choices. Doctors should be compensated fairly so more providers accept Medicaid payment, and recipients should have more health-care choice and ownership. Even better than just reforming Medicaid, which doesn’t cover all of America’s poor, Congress should pass the American Enterprise Institute’s comprehensive health-reform plan (“The Best of Both Worlds”). This plan would cover all Americans faster than Obamacare, while sticking to market-based principles.

Planned Parenthood should be hauled in front of Congress and questioned about its birth-control programs and incentives.

Second, Title X should be completely shifted away from a grant system to a fee-for-service program. As part of this, grantees should be rewarded for good results. For example, Title X funds used for family planning should be predicated on a female patient receiving consistent (not one-time) birth-control services and not experiencing an unplanned pregnancy by a specified later date.

Further, because of the inherent conflict of interest involved in birth-control distribution and providing abortion-services, policymakers should consider a Glass-Steagall regime for family planning: in other words, the same reproductive care provider can’t offer both abortion and birth control. This would stop Title X dollars from going to abortion providers, or at the very least would vet Title X recipients who also sell abortion-related products and services (through increased record-keeping and disclosure requirements).

Third, Planned Parenthood should be hauled in front of Congress and questioned about its birth-control programs and incentives. If subsequent congressional investigation finds Planned Parenthood is placing profit over its patients health needs, it should no longer receive assistance from taxpayers. ‘

Finally, Congress should pass the Gardner-Ayotte bill, and do everything possible to increase the prospect of OTC birth control. This could reduce unintended pregnancies dramatically, especially among uninsured women, and would allow poor women choices outside of Planned Parenthood. Ironically, the greatest enemy to Planned Parenthood, the nation’s largest “pro-choice” advocate, might be more consumer choice for its customer base.

States have a role to play, as well. California is still in the process of implementing a law allowing pharmacists to prescribe the birth-control pill. A Republican legislator has just introduced a similar measure in Oregon. More states should follow suit. This so-called “behind the counter access” would increase consumer choice, damaging Planned Parenthood.

This is not a partisan issue or a pro-life issue. If Planned Parenthood’s behavior is harming women, something should be done about it. As Thomas Jefferson said about American slavery: “Indeed, I tremble for my country when I reflect that God is just, that His justice cannot sleep forever.”