Misguided Regulation

The following is Scott E. Harrington in an American Enterprise Institute paper.

On health insurance company profits and administrative expenses:

Using NHE data, the estimated ratio of private health insurance medical benefits to total premiums (including self-funded plans) has averaged 87.7 percent since 1965…

Data from a variety of other sources indicate that health insurers’ profit margins (net income to revenues) typically average about 3 percent (less for nonprofits)…

Thus, the aggregate data clearly belie the notion that health insurance market expenses and profits are a major driver of high and rapidly growing health insurance premiums.

On private insurance versus Medicare:

Proponents of much tighter regulation commonly compare private insurance to Medicare, for which reported administrative expenses are about 1.5 percent of costs in the fee-for-service program. The low expense ratios for Medicare reflect a number of differences from private plans, including much higher per-capita claim costs for Medicare, which reduce administrative expenses as a proportion of total costs, and exclusion of general overhead, enrollment, and billing costs. Traditional Medicare does not negotiate with providers, engage in medical management, spend much to reduce fraud and abuse, or incur the state premium taxes or regulatory compliance costs incurred by private insurers.

Comments (9)

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  1. Ken says:

    I had seen this paper earlier. It is quite good. What Sebelius is trying to do with all her regulations is ruin private health insurance.

  2. Tom H. says:

    Scott Harrington makes sense. Kathleen Sebelius does not.

  3. Greg says:

    You’re right. It is misguided regulation.

  4. Linda Gorman says:

    Misguided regulation or regulation with a specific end in mind that has to be hidden in order to succeed?

  5. I would go even farther than Prof. Harrington on the issue of administrative costs in Medicare vs. private health insurance. As Ben Zycher has noted (http://www.manhattan-institute.org/html/mpr_05.htm), the lower costs are not real.

    Single-payer systems enjoy tax revenues for which the cost of collection is “free,” they bury some administrative costs in other parts of the government, etc. In the case of Medicare, because it pays for older people, its medical claims are higher than private insurers, artificially making the MLR look better.

  6. steve says:

    Sigh, you guys always forgot the other side of administrative costs. My billing department spends the large majority of its time dealing with private insurer issues. Most of my patients are on Medicare.


  7. “steve” what is your specialty? Under consumer-driven health care, I expect that your administrative costs of dealing with insurers would be zero. That is because no insurer would care how much money passed between your patients and you until the spending was for a catastrophically expensive amount.

    Ask the laser-eye surgical centers what their administrative costs are for insurance. The answer, of course, is zero.

    I’ve been hearing that in Marin County, a wealthy liberal county north of the Golden Gate Bridge (where I live, although I am a poor conservative), more doctors are bailing out of the system to practice concierge or boutique medicine. This is leading to shortage of access to care for Medicare patients.

  8. Devon Herrick says:

    I suspect the proportion of funds spent on waste, fraud and abuse in Medicare would equate to a significant portion of the percentage of spending above the medical loss ratio in private coverage. As the text said, Medicare doesn’t manage anything — it just hires private plans (typically the Blues) to process and pay claims.

  9. Marcia says:

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