Robert Zirkelbach of America’s Health Insurance Plans:
For every dollar spent on health care in America, less than one penny goes toward health plan profits. The focus needs to be on the other 99 cents.
Now let’s count all the ways that’s wrong:
1. $21 billion a year – the health insurers’ net for 2006, the most recent year I can find – is about 20% of the annual budget cost of health care reform. That ain’t hay.
2. Last year, Anthem racked up more than $2b in operating profit (not counting an equal-sized one-time gain). That’s one insurer in one state, albeit the biggest insurer in the biggest state. I doubt that Anthem gets 10% of total health insurance industry profits. So the current figure is probably substantially higher than the $21b from four years ago.
3. Medical loss ratios – the fraction of premium dollars going back out as paid claims – run about 80%. So in fact the insurance company consumes or keeps about 20 cents of every premium dollar.
4. The 1% isn’t the insurers’ profit margin, since the base is total health care expenditures, not insurance premiums. The actual profit-to-premium figure is about 3.3%. Even figuring profits against premiums is misleading; the right base is value-added. Of the money taken in as premiums and not paid out as claims, about 85% is expense and 15% profit.
5. Excessive executive compensation counts as “expense” rather than “profit.” The CEOs of the top five health insurers averaged $24 million in compensation in 2008.
6. The actual cost of insurance includes the burden of paperwork and delay the insurance companies impose on providers and policyholders. I haven’t seen a figure for those costs. (This is parallel to the argument about malpractice; the actual cost of malpractice awards and defense lawyers’ fees only comes to about 2% of health care costs; if malpractice is a major issue, it’s because of the effects of the threat of lawsuit on physicians’ behavior.)
But let’s not be too harsh on poor Mr. Zirklebach, who lies for a living. (As Falstaff said when accused of theft, ” ’tis no sin for a man to labour in his vocation.”) Anyway, he’s falling in to the President’s trap; if Obama can make the insurance companies the issue, the good guys win.
Points 7 repeats point 3.
#1/#4 – So what? The claim being made is that the total profits of the health insurance industry are a drop in the bucket compared to total system costs. Nothing you've articulated contradicts that claim. Your point #2, if correct, proves that its maybe a big drop rather than a small drop. But a drop it remains.
#3/#7 – Insurance companies perform administrative tasks that would still need to be performed in any alternative system. For the 20% figure to be meaningful in this debate, you would need to plausibly show that these tasks could be performed with greater efficiency in an alternate system. Perhaps you believe that on faith. Perhaps opponents of health care reform reject that on faith. but let's be clear – neither side has an especially fact-based basis for making their claims.
#5 – This is not a serious argument. Is the debate about protecting the uninsured or about punishing health insurance company executives?
#6 – Maybe this is true. Although proponents of malpractice reform can point to behavior in the "fat segment of the cost bar" to bolster their claim, whereas you can only point to behavior in the "thin segment of the cost bar" to bolster your claim.
Medicare and Medicaid have zero profits, but are health care costs in America and involve huge expenditures. Thus, it appears that Zirklebach is artificially devaluing the amount of insurance industry underwritten health care costs that are profits.
As for sd, #5 is a serious argument. There is only a finite pool of money from which to protect the uninsured; if insurance executives are artificially being compensated above and beyond their true market value (which they are because they are ultimately only answerable to themselves), then yes this is about protecting the uninsured rather than "punishing" executives (no one is actually being "punished" since the only thing being taken away is money not earned.)
Insurance companies divert income to executives to avoid corporate taxation and to disguise the amount of income health insurers receive relative to the benefits provided. Since today's insurance companies operate as much for the benefit of their executives as stockholders (many of whom are executives), this is disguised profit. It certainly isn't a health care cost, since executives in the insurance industry are not contributing that much worth to the actual care of patients or administration of the plans. Indeed, insurance companies are counting as costs overspending due to their own mismanagement ($120 for a single Tylenol does, e.g.; because they choose to compensate themselves instead of hiring sufficient auditors of claims, routinely paying out any amount under $X, the majority of claims, rather than auditing those claims for overcharges).
I think #2 is wrong; Anthem operates in most states, not only one state. (They are the biggest insurer nationwide.)
David:
The claim quoted above is directly aimed at a common argument of promponents of health care reform: namely that the U.S. has much higher per-capita health care costs than do other developed countries, and that this is because of private for-profit insurance.
His point is that insurance industry profits are a tiny fraction of health care expenditures, and thus that pushing for-profit health insurance out of the mix will not close the gap in per capita expenditures between the U.S. and other countries.
So including Medicare/Medicaid doesn't change the argument, as expenditures for those programs are included in the cross-country per capita expenditures comparisons.
And the point about health insurance company executive compensation is that taking every single penny paid to an insurance company executive and putting into a pool to provide healthcare for the poor wouldn't even come close to being rounding error in the estimate of the % uninsured. Indeed, your defense of it as a "serious argument" is weak tea. You note that "There is only a finite pool of money from which to protect the uninsured" which is logically correct but practically meaningless for the reason noted above, and then rant for 2 paragraphs about how horrible it is that these guys get paid what they do, which doesn't exactly go very far in showing that you're really concerned about helping the uninsured vs. hurting a handful of corporate executives.
When someone refers to an argument as the "sophism of the week" and then in explaining refers–apparently in earnest!–to a percentage of budget costs, well, I just have to laugh. So many bad arguments presented so unpersuasively.
sd: You challenge Mark´s self-evident claim that administrative costs are too high in the USA because of for-profit, underregulated private insurance. Proof here from McKinsey on Germany and Canada: Germany has a pretty decentralised, multiple-insurer system so its admin costs are relatively high among OECD countries. A centralised public-service system like Britain´s and Sweden´s can achieve much lower admin costs (5% in England in 2005), but the German figure is a more realistic target for the USA.
Anecdote: when my wife had to go to the A&E of the local hospital in Spain after a fall, the non-medical admissions desk was run by one young woman, whose job was simply to take names and health numbers: no money was involved.
No other OECD country than the USA employs large numbers of people whose job is to deny and challenge claims and segment their customers by risk. French caisses d´assurances maladie do have small audit units to detect fraud and abuse, mainly on occupational injury and sick leave cases. They would never get involved in decisions on say cancer treatment.
sd,
His point is that insurance industry profits are a tiny fraction of health care expenditures, and thus that pushing for-profit health insurance out of the mix will not close the gap in per capita expenditures between the U.S. and other countries.
But their profits are not the only way the private insurers contribute to costs. All their expenses other than claims payments are part of the cost. So to the extent they have excessive administrative costs, for example, they also drive up the bill. And the costs they impose on physicians also drive it up even though that doesn't show up in the insurers' financial statements.
The profit number is, as people have pointed out, only the above-water part of the million-square-mile ice shelf. It's what's left over after the "loss ratios" and the rescission teams and the billions in advertising and marketing and the executive salaries and all the other marks of bloated oligopolists. But it's also the thing that provides much of the incentive for the bloat, especially when executives are being compensated with stock options and all the other wall street gimmicks that require endless year-to-year increases in posted numbers.
> And the point about health insurance company executive compensation is that
> taking every single penny paid to an insurance company executive and putting
> into a pool to provide healthcare for the poor wouldn’t even come close to being
> rounding error in the estimate of the % uninsured. Indeed, your defense of it as
> a “serious argument” is weak tea.
"Weak tea" is believing that modern businessmen leave much on the table to be taxed as profit. Reported profits tell you absolutely nothing about the skim ratio (that's "waste, fraud, and abuse" in Republican-speak), by design.
Cranky
James:
The McKinsey Global Institute briefing paper that Uwe Reinhardt refers to concludes that the U.S. spends $650B annually above what would be "expected" given GDP per capita.
Of this, McKinsey attributes $91B to excess administrative costs, but of that $28B to excess administrative costs in public programs. So you're left with $63B in excess administrative costs attributable to private insureres, of which $21B is profit (which presumably goes away under a fully-public system), $9B is taxes (which presumably goes away in a public system, though you'd need to net out the $9B against the tax revenues that feed that public system) and $33B is SG&A.
Now, even if we take the McKinsey analysis as Gospel, and blame the private insurance system for all $63B in excess spending, that's still less than 10% of the total amount that the U.S. spends over the expected level.
Where is the other 90%? Well, as you read through the McKinsey paper you see of course that the U.S. has the highest physicians salaries in the world, the highest nurse salaries in the world, greater spending on drugs (which tend to reach the U.S. market before they reach the markets in other industrialized countries), higher spending on many capital categories, etc. etc. etc. These are hard costs. You can't pin the exceptionally high compensation paid to doctors and nurses in the U.S. on "hidden" administrative costs. You can't pin the exceptionally high spending on drugs in the U.S. on "hidden" administrative costs. You can;t pin the exceptionally high spending on devices and capital equipment in the U.S. on "hidden" administrative costs. If anything, those ghoulish bean counters in the health insurance companies who work so hard to decline claims may well be keeping some of these categories in check. In other words, the non-administrative portion of U.S. healthcare costs might be even higher than they are today without those greedy for-profit insurers trying so hard to cut spending.
In short, Robert Zirkelbach is more right than wrong. The vast majority of the spending gap between the U.S. and other industrialized nations stems from things other than the private insurance system.
"You can’t pin the exceptionally high compensation paid to doctors and nurses in the U.S. on “hidden” administrative costs. You can’t pin the exceptionally high spending on drugs in the U.S. on “hidden” administrative costs. You can;t pin the exceptionally high spending on devices and capital equipment in the U.S. on “hidden” administrative costs. "
Actually, you can. When doctors and nurses can't actually do their jobs in a satisfying manner, they're going to demand higher compensation to make up for it. When they see that the people who decided whether they get paid or not are playing them for fools, they're going to figure out how to game the system as well. When insurors and pharma companies can effectively set drug prices together, and pharma companies can spend billions of dollars paying doctors to be shills, all the while billing patients for their decisions, you're going to get high spending on drugs. When every item of capital equipment goes into the basis from which compensation gets calculated, and institutions compete to attract patients based on what gizmos they have, surprise, surprise spending goes up. And it's the private-insurance business that lubricates the profit-maximizing model.
Paul:
You're kind of just making shit up now. If physicians and nurses hated dealing with private insurance so much that they "demanded" higher compensation for their efforts, then presumably they would flock to treat as many medicare/medicaid patients as they possibly could. After all, no game playing against profit-maximizing underwriters in the public system. And the best physicians and nurses – those with the greatest skill and the greatest market power, should end up with the highest % of medicare/medicaid patients in their patient base. Care to bet on whether that's actually true?
"When insurors and pharma companies can effectively set drug prices together"
This of course is the "Darth Vader is in a bowling league with Pol Pot" fallacy. That is, the assumption that since party X is eeeevil, and party Y is eeeevil, that they must be cooperating somehow to the detriment of the greater good.
But insurance companies buy from drug companies. To the extent that insurance companies are profit-maximizing weasels, they will attempt to give less money to drug companies by rationing the use of drugs and trying to drive down prices. To the extent that drug companies are profit-maximizing weasels, they will attempt to extract more money from insurance companies by expanding the use of drugs and protecting prices. You can plausibly "blame" drug companies for high drug prices, but to blame private insurers for high drug prices is just flat out stupid.
"and institutions compete to attract patients based on what gizmos they have"
You mean like saying "Hey, if you need an MRI and don't want to wait 4 weeks you should come here because we have an MRI machine you can use the day after tomorrow?"
U.S. citizens consume more healthcare, including way more high-cost cutting edge healthcare, than citizens of other advanced countries. This explains the lion's share of the gap in per capita spending between the U.S. and other countries. Maybe this is a good deal. Maybe its a bad deal. But until it changes, the U.S. isn't going to come anywhere close to the per capita spending that prevails in other developed countries. To pretend otherwise is to substitute a desire to inflict maximum pain on insurance company executives for a desire to actually solve the problem of high medical costs.
Just to take one of these strawclaims:
"You mean like saying “Hey, if you need an MRI and don’t want to wait 4 weeks you should come here because we have an MRI machine you can use the day after tomorrow?”"
No, like saying "You need an MRI because it's much more modern than the plain x-ray that would have just as much diagnostic power, and our facility, which we doctors take a cut of the revenues from, is underutilized because there are already four other hospitals with MRIs in town. Besides, we can't get you in there quickly because they give priority to their doctor/owners."
What you seem to be missing here is that the greater consumption is not sui generis. It's taken a lot of hard marketing work on patients and doctors to get consumption of medical goods and services (as opposed to actual care) so high. But everybody in the industry has learned that they do better by having a bigger pie rather than a bigger slice of a smaller one.
(Oh, and on the drug-price thing, you seem to be under the impression that insurance companies cover a majority of the cost of prescriptions drugs. Not around here. They negotiate prices, sure, but in the knowledge that the patients will be paying the lion's share, and also in the knowledge that they can raise premiums to cover their costs and then some.)
I believe sd is right that the unnecessary overhead in the private health insurance system is a small fraction of the total excess of US healthcare expenditures over those of other developed countries. But even if his calculation of 10% is right, so what? Should we not try to recover that 10% just because it isn't 90%? I hardly think so. Let's take the 10%, and then go after the next 10%, and so on. And even if it were only 1% as Zirkelbach claims, it would still be worth doing. I'm a lot happier doing it if it's 10% than 1%, and I'll be even happier if it turns out to be, say, 25%. But nobody here has articulated a reason not to past the health care bill, not even Zirkelbach. Sadly, our ridiculous dysfunctional political discourse seems to require that the opposition be demonized to have any chance of "winning" one of these "debates". At least attacking the insurance companies is in the name of something constructive, unlike demonizing health care reform supporters as proponents of "death panels". And, again unlike "death panels", it has the virtue of being at least approximately true.