JUST HOW MUCH DO PRIVATE INSURERS ADD TO THE NATION’S HEALTH CARE BILL?
As a nation, we are spending well over $2 trillion a year on health care. This includes: all of the money that you and I pay out-of pocket to cover co-pays, deductibles and drugs; the dollars that you and I (and our employers) fork over for private insurance; the money Medicare, Medicaid and SCHIP lay out to reimburse doctors, hospitals and patients; the billions taxpayers chip in to fund veterans’ health programs, public hospitals, school programs, and health insurance for government employees as well as the money private charities contribute to health care.
What exactly are we paying for? How much of that money is used to pay the CEOs of drug companies salaries that read like telephone numbers? How much do hospitals eat up? How much is spent on insurance company ads? How much is used to provide healthcare for the poor?
I’ve decided to do a series of posts spelling out exactly where the money goes. Today, I’m going to start with private insurance.
Many people believe that if we just eliminated the private insurance industry, healthcare would become much more affordable. There is a general sense that the “administrative costs” of private insurance are siphoning off a sizable share of our health care dollars.
There is some truth to that: because we have multiple insurers—not to mention so many solo practitioners, small hospitals, clinics, and individuals filing for reimbursement—the paperwork is enormous. If we had only one big insurance company that used just one set of forms we could simplify the paperwork greatly. People who want a “single payer” system, with the government paying all of the bills, point out that the savings would be enormous.
And we could cut costs even more if, instead of having tens of thousands of health care providers filing for separate reimbursements, doctors, hospitals and clinics joined together into, say, eight our ten large organizations like Kaiser Permanente, each with its own back office. The doctors would be on salary, so rather than filing for payment for each service they performed, they would receive a monthly check for taking care of their patients, just as they do at Kaiser Permanent or the Mayo Clinic (where doctors are on salary).
In other words, it is not only a fragmented multi-payer insurance industry that generates so much paperwork; on the other side of the transaction a fractured network of separate providers adds to a mind-boggling stack of paper. Unlike most other developed countries, we have turned healthcare into a cottage industry. This gives us lots of choices: we can select from a Chinese menu of insurance plans and proviers. But it also means higher administrative costs. In this post I would like to focus first on just on how much our huge private insurance industry is costing us. (In a later post, we’ll look at the price we pay for a fee-for-service system of independent providers.)
In our highly competitive health care economy insurers have many
expenses, including advertising, marketing and lobbying. They also must
pay their employees. And, to compete with other insurers for “top
talent,” they feel obliged to pay their executives salaries that some
call “obscene.” In addition, in states where an insurer can charge you
more if you are sick, health plans spend enormous sums on
“underwriting”—which means figuring out how much more to charge if you
have a pre-existing condition. They also have to pay bonuses to
eagle-eyed employees who comb through the claims—looking for reasons
not to reimburse you or your doctor. Finally, they have to generate
profits for their shareholders. And investors expect those earnings to
grow, year after year.
How much does all of that cost? Every insurer pays out a certain
percentage of the premiums that it takes in to reimburse patients and
health care providers; what is left over covers expenses and profits.
Wall Street calls the share of premiums that the company is actually
forced to spend on health care its “medical loss ratio.” For example,
in 2006, UnitedHealth Group (UNH) had a “medical loss ratio” of
81.73%; i.e. for every $1 million of premiums that it took it, in
spent 81.73% (roughly $817,000) reimbursing claims. This left it with
with a little over $183,000 to cover advertising, marketing,
underwriting, salaries, etc.—plus profits for investors.
If UNH had been less efficient, it would have had a higher medical loss
ratio. In other words, it would have paid out a larger share of its
revenue in reimbursements, and its share price would no doubt have gone
down. (From Wall Street’s point of view, the goal is for an insurance
company to pay out as little as possible.)
If I became czarina tomorrow, waved my wand, and closed own the entire
private health insurance industry, how much could we save? Would our $2
trillion health care bill fall to $1.8 trillion? $1.6 trillion?
Here is the deeply disappointing answer. All of the money that private
health insurance companies lay out for something other than health
care—that $183,000 out of very million that UNH spreads around paying
for advertising, underwriting, executive bonuses and lobbying —amounts
to just 4.5 percent of our nation’s $2 trillion dollar annual health
Okay, 4.5 percent of $2.2 trillion is “real money.” But keep in mind
that in 2005, total health care spending in the U.S. grew by 6.9
percent. So the 4.5 percent that I just shaved from our health care
bill by snuffing out the private health insurance industry (and
shifting to a single-payer government plan) would be wiped out by
inflation in one year.
Moreover, a single-payer system also would have administrative
expenses. Not as many, to be sure. The government doesn’t have to
advertise or lobby itself. And it doesn’t pay its executives nearly as
well as the private sector. Nevertheless, the government’s
administrative expenses now equal 2.2 percent of our health care bill.
If we expanded Medicare to cover everyone, those administrative
expenses would grow. So the savings I achieved by wiping out private
insurers could easily fall to just 3.5 percent of our total health care
None of this is an argument for or against a single-payer system. My
goal here is only to illustrate that no single sector of our health
care economy is responsible for the high cost of health care in the
U.S. Drug-makers, device-makers, insurers, some hospitals, some
physicians, and some patients…together we all are driving runaway
health care inflation.
The pie chart below shows you how much of the $2 trillion pie goes to
private insurers. In future posts, I’ll color in the other slices.