An editorial by Kerry Weems and Benjamin Sasse in today’s Wall Street Journal argues that “the administrative expenses of private insurance plans represent money well spent for their members“:
But the comparison between public and private plans is a false comparison. Private insurance and public benefits are not the same business….Many who favor a public plan as part of comprehensive health-care reform dismiss the administrative “overhead” of private plans as having little or no value….In fact, the administrative expenses of private insurance plans represent money well spent for their members. Here are four reasons: First, private insurers must build provider networks….Second, private insurers must negotiate rates….Third, private insurers must combat fraud — or go out of business….Fourth, private insurers must incur the administrative cost of marketing.
It’s difficult to argue that higher administrative costs translate into better quality health care or that highly-consolidated health insurance markets are too busy negotiating prices with providers to lower administrative spending. Medical loss ratios, an indicator of how much revenue insurance companies spend on care vs. how much they keep as profits, have dropped precipitously in the last decade. That is, as more and more people have become uninsured or discovered that they don’t have enough insurance to cover their medical expenses, insurers have grown richer.
Moreover, breakdowns of how private plans allocate their administrative dollars are unavailable and Weems and Sasse’s argument is a hypothesis at best. But an apples-to-apples comparison of how much private plans participating in the government-subsidized Medicare Advantage spend on administration compared to traditional Medicare, suggests that the latter is far more efficient.
Medicare and Medicare Advantage treat the same population, yet according to the Congressional Budget Office the Medicare public plan spends less than 2 percent of expenditures on administrative costs, “compared with approximately 11 percent of spending by private plans under Medicare Advantage.” The Government Accountability Office has also concluded that these private plans are channeling the extra subsidy towards increased profit, not improved benefits:
On average, MA organizations’ self-reported actual profit margin was 5.1 percent of total revenue, which is approximately $1.14 billion more in profits in 2005 than MA organizations projected…Nearly two-thirds of beneficiaries were enrolled in health benefit plans offered by MA organizations for which the percentage of revenue dedicated to profits was greater than projected and the percentage of revenue dedicated to expenditures (medical and non-medical combined) was lower than projected.
The point is this: high administrative spending is responsible for skyrocketing health care costs and excess spending in the health care system. According to an analysis by the McKinsey Global Institute, excess spending on “health administration and insurance” accounted for as much as 21 percent of the estimated total excess spending ($477 billion in 2003)” and 85 percent of this excess overhead “can be attributed to the highly complex private health insurance system in the United States.”
It’s also worth noting that other industrialized nations provide their citizens with universal, high quality health care while spending very little on administrative overhead. It is possible to receive good health care without spending a fortune on administrators. But only in America do we continue to insist on rewarding those who spend our health care dollars so inefficiently.