The Truth Behind Insurance Company Profits

AP reporter Calvin Woodward argued yesterday that health insurers are not the bloated fat cats reformers make them out to be. Instead, he points out, they typically operate at a lean, mean “6 percent profit margin” — lower than most other industries.

He’s missing the point.

This report, from the New England Journal of Medicine, shows us the actual break down of where our health care dollar goes:

For Every Dollar Spent on Health Care in America

Granted, Government run health care has some administrative costs too. But without actuaries and marketing, Medicare spends a mere 3.6 cents out of every dollar on overhead. (Countless blogs have linked to a Heritage foundation study that suggests Medicare administrative costs are actually higher than this because their patients tend to spend more on care, but Nobel winner Paul Krugman effectively refutes this propaganda).

However, it’s generally thought that more insurance fraud exists in Medicare than does in private industry. A recent study suggests a  whopping 12.4% of medicare payments were “suspect”.  It’s unknown how much fraud exists in private insurance companies, but it’s generally believed to be a lesser amount than exists in medicare since private industries are  motivated to turn a profit. So, if we’re wildly optimistic and suggest no fraud occurs with private insurers, the scales look as though they might tip in  industry’s favor. Private insurers eat 6 cents in profit and 6 cents in administrative costs, while medicare eats 3.6 cents in administrative costs and 12.4 cents in fraud – a total “waste” of 16 cents compared to private insurers 12.

But we’re still neglecting the costs that hospitals and doctors incur to sort through the paper work nightmare generated by 100 different insurance plans. While not all hospital and doctor administrative costs are due to the insurance company paper work,  a survey of Canada’s hospital and doctor administrative costs suggested they spend roughly one third (per capita) of what American’s pay.

With this knowledge, we can draw a (very rough estimate) of where our health care dollar would go it we created a single payer medicare-like system in America.

For Every Dollar Spent on Health Care in a single payer Medicare-like system

This is a considerable savings. And it seems like a mild increase in administrative costs could afford even more savings in fraud prevention. In fact, if the government were actually providing the care (as they do in the veteren hospital system) as opposed to doling out payments to private industy as they do in medicare, the fraud would be substantially reduced.

There is considerable resistance to this sort of socialization. Senators don’t even want to read a 209 page bill. (For those of you that thought is was 2000 pages, click here)

But the alternative of letting private insurance companies determine our care is untenable.   Let’s look at the reason insurance companies spend so much on actuaries. They make money by avoiding the provision of coverage for those who actually need it.

They do this two ways:

1)     Refusing to accept those with “pre-existing” conditions. (Often your employer can fight this due to Clinton’s Health Care Portability act. But if you’re self employed, you are afforded no such luxury.)

2)     Rescinding coverage once one gets sick by proving the condition was, in fact, pre-existing. A congressional study done lately said that three large insurers had 20,000 rescissions in the last 5 years alone.

What happens to these people denied coverage? If their condition is not life threatening (Slipped disk, arthritis, depression, etc) they are likely to suffer without care. Once their condition becomes unmanageable or life threatening, they tend to go bankrupt in an attempt to pay for care, at which point they become eligible for Medicaid, which is often too little too late.

So not only are health insurers eating up a large portion of our health care dollar, but they are shoving the highest cost customers on to the U.S. tax payers.

This is how the clever get rich in America; by cheating  the system as much as they possibly can. It’s all done under the hypnotic mantra of the “Free Market”, and it’s supported by zealous rage of tea party zombies, blissfully unaware that they are the very suckers the plutonomy exploits.