About 4 percent of what we spend in health care in this country goes to our administrative costs and profits.
Now, of course, this is a piece of propaganda - meaning there is an element of truth to it, but it's used to obscure the whole reality. What the insurance companies are doing is cleverly measuring their profits and administrative costs against total national health care spending, and not just the portion of health care spending that is actually done by health insurance companies. Almost half of health care spending in this country are done by the public sector, and by 2011, public spending on health care will be more than half of total health expenditures. What's more, private insurers don't even do all of the private health care spending. So I will go about actually figuring out what that 4% amounts to when you strip out all the mumbo jumbo and focus on just the expenses made by health insurers.
The Center for Medicare and Medicaid Studies (CMS), the agency that keeps track of health expenditure numbers, released numbers showing US total health expenditures having topped $2.3 trillion in 2008, and $1.2 trillion of it was private health expenditures. So lets do a little quick math:
Health insurance company profits and administrative costs accounted for 4 percent of total national health expenditures, or according to CMS, $92 billion. And that number is actually 7.7% of private health expenditures, not 4%. But wait, that's not all. Is all the private health expenditures done by private health insurance? Of course not. There's your cost sharing when you have insurance, some expenditure for people without insurance or procedure that isn't covered by insurance by private individuals, and expenditure by charitable and philanthropic sources.
It turns out that of the $1.2 Trillion in national private health expenditures, only about $780 billion, or less than 64%, was attributable to private health insurance spending in 2008. This tracks closely with Kaiser Family Foundation's calculations for the previous year. So the profits and administrative costs that AHIP admits to for the health insurance companies, $92 Billion, are actually it's 12% of actual health insurance company spending.. That's three times as much as the AHIP would like you think.
Guess what? The 12% number tracks well with a CBO report last year that put administrative costs and profits at - you guessed it - 12% industry-wide. You might say, then is the 15-20% maximum profits and administrative costs (depending on the market - large group markets have an 85% Medical Loss ratio requirement, small group and individual markets 80%, with the ability of states to set lower requirements) in the health reform bill meaningless in terms of helping with costs and premiums? Not at all. For one thing, this 12% is of total revenue of insurance companies, whereas the health reform proposal restricts 15% of premium revenue. There's a small difference. But that's not really why the 80-85% Medical Loss Ratio (again, depending on the market) is important. Ezra Klein wrote about it last June:
Nor is it easy to measure administrative costs among private insurers. For one thing, which private insurers? When the Congressional Budget Office examined this issue, it found that administrative costs -- including advertising and profits -- accounted for 12 percent of the average insurer's dollar. But that hid substantial variation among insurers. Among employer-based plans, the largest firms had the lowest costs. Plans covering companies with at least 1,000 employees had a mere 7 percent in administrative costs. Those covering companies with fewer than 25 employees spent 26 percent of premiums on administration. And the individual market was a mess: 30 percent.The big problem in health insurance isn't in the large group market. If you work for a big company (save Walmart, probably), they likely already provide you with pretty good insurance. But the biggest problem is with small group and individual markets, and as you can see, for those plans, administrative costs and profits shoot through the roof. No wonder insurers like it when people move to the individual market now, and it's also no wonder that insurers don't like the reforms in the private market as well as setting up exchanges that would give people buying in the individual market the same kind of leverage that the largest employers have. That 26 and 30 percent figures above drop to 20 percent right away when the MLR requirements go into effect.
Now of course, surely, health insurance companies aren't the only problem in our health insurance system. The hospital industry, the pharmaceutical industry are all just as big - or perhaps bigger - culprits in our broken system as are health insurance companies. As is our antiquated medical records system. There are steps for all of these in health reform - and I will cover them in detail next week. But for now, here's my question: who negotiates rates with medical providers and drug companies? Currently, they have no incentive to negotiate lower prices in the small group and individual markets, since the consumers have little choice when the insurance company simply passes on those other costs. Health reform will force insurance companies to negotiate as hard on behalf of those plans as they do for their bigger customers - the large group plans.
At any rate, in conclusion, AHIP is trying propagandize with their ad, as they usually do. That is nothing we didn't know, but here's proof. If you want to give them call and an earful, feel free.
America’s Health Insurance Plans
601 Pennsylvania Avenue, NW
Washington, DC 20004