Affordability vs. Medical Insurer Earnings

Affordability vs. Medical Insurer Earnings - Odds Against the Public Option Plan Are Increasing

It is well accepted that health outcomes are generally no better and in some categories worse than in Western Europe. Yet the price paid in the U.S. for healthcare is at least 50% higher per person or $830 billion more. It may come as a surprise, but total U.S. medical insurance company profits amount to a small percent of the $2.5 trillion in total current healthcare spending. It is only logical to conclude we are not getting what we pay for because waste and inefficiency are rampant. Why, because there is a direct cause and effect relationship between the desire to grow profits, a relatively small number, and wasteful non-productive spending, a massively large number.

Once the facts are presented, the proof of this reality is easy to understand.

Spending and revenue are one in the same for insurers. Grow spending and you increase revenue and profit dollars. Cut spending and earning will decline. Cutting waste and inefficiency produces the same result.

The mechanics are simple: profit margins allowed by state insurance regulators are typically 5% or less. That percent times the sum of total insured spending equals the insurers’ profit dollars. To grow earnings by 10%, total insured spending, whether productive or wasteful, has to grow by the same percent. The tail is wagging a very large dog.

The insurers are not gaming the system, this is the U.S. system. It thrives because: 1) the service is essential and demand is strong and growing, and 2) nothing is in place to check spending other than America’s ability to pay.

Anyone would be hard pressed to design a worse system for delivery of quality healthcare at an affordable price. Why are programs that reduce the volume of re-admissions abandoned and few and far between? Medical records are not shared because they aren’t in electronic form. The answer; insurers do not want to reimburse and promote anything that reduces spending for reasons already cited. It does not matter that these types of initiatives improve care. In fact, non electronic medical record keeping is the primary driver of repeat testing, not fear of lawsuits, largely a resulting problem or symptom.

Other negative consequences are less obvious. The patient loads of primary care physicians are increasing. Their highest and best use, from a revenue point of view, is being the volume generators to feed the specialist community, where the money is. This also leaves them with little time to practice preventative care or to educate patients.

The basic question is: How do you get rid of excessive waste and inefficiency and make sure that the resulting savings translates into lower prices? Competition is clearly the missing ingredient. It is the natural enemy of waste and inefficiency because it forces providers of any product or service to deliver value for the money spent. It is not really surprising that insurers have been allowed to operate without competition for so long. Up to now, the only apparent alternative was nationalization, something the majority of Americans clearly do not want.

The insurers are very much in favor of requiring all uninsured citizens under the age of 65 to buy private insurance with government subsidy for those who can not afford it. In exchange they would insure people with “pre-existing medical conditions”. They do this every day in large employee sponsored group plans with no problem and very good profits. Without a public option plan, the mandate would in fact create a very large new captive group that would be privately insured at today’s bloated prices.

A hypothetical best case multi year mission for a new self-sufficient public option plan; lower the cost of insurance to a level that equals 115% to 120% of spending in Western Europe, no more or less. That amount of spending would be more than enough to cover insurer profits. Medicare and Medicaid would capture the same savings than would accrue in the in the private market due to premium rate reductions. By law, all providers must accept the plan or it will fail in its mission, however modest or bold. Without this proviso, a non-profit national insurance exchange would be nothing more than a fly in the insurers’ ointment.

The private insurers will not compete on the basis of price unless forced to. What business would voluntarily subject themselves to price competition or a greater degree competition? If you want affordability, a strong public option plan is a must. The Country simply cannot afford the scale of that much waste and inefficiency and not pay a price in terms of standard of living.

In dollars, the difference between spending 20% more for healthcare versus 50% more, as we now do, is $500 billion per year in current dollars. The trade off is simple: less prosperity for private insurers and the best compensated providers. They would get less money for incremental per patient treatments and tests. In return, providers would get reimbursed for programs that reduce wasteful spending and improve health outcomes.

Congress is already willing to give big concessions to the insurers; age based pricing and mandated coverage. Failure to deliver a public option plan that has pricing power would be the final nail in the affordable healthcare coffin. It’s appears that will be the case; Very good news indeed equity shareholders if not already fully reflected in healthcare insurer share prices.