Insurance Policy Overhead: Congress Is Getting It Wrong Again

The Senate Committee on Commerce, Science, and Transportation issued a staff report on medical loss ratios for individual and group health plans. It has been getting substantial press coverage, all of which suggests that the administrative costs for individual health insurance policies are higher than for large group health insurance policies. The problem is that none of the data in the staff report are sufficient to support this claim.

As with all such claims, the staff report concentrates on the policy cost as reported by insurers, subtracts medical claims from insurer revenue and calls the remainder administrative overhead. The problem is that this method does not account for the substantial resources that employers, whether using large or small group policies, must pour into the human resources functions necessary to keep track of eligibility and payments, and to help employees navigate their group plans.

In contrast, the premiums for individual policies include all costs, including marketing, fraud detection, customer service, keeping track of payments, medical claims, and taxes. The cost of informing policy holders about their policies is often done by brokers. This cost is included in sales commissions. The premiums for large groups do not include the cost of informing individual policy holders about their policies, or the costs of negotiating the policy itself. These costs are borne by employers, often in the form of large human resources departments, and indirectly by employees in the form of lower cash wages.

Because human resources and negotiating costs have been consistently ignored in comparisons of the cost of individual and large group policies, we have no reliable information about their relative cost or efficiency.

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