The Insurance Industry Can’t Lose

The health insurance industry’s double cross of Obama has created a storm of controversy. But it probably won’t amount to much. There’s been a lot of talk about punishing the industry for its actions: through a barely conceivable threat to remove the industry’s antitrust exemption or by resurrecting the public option. Neither seems very likely.

Historically, with solid support in Congress—especially from the Dodd family (father Thomas and son Christopher) the insurance industry has evaded federal regulation. Instead, it’s regulated by the states, which—lacking sufficient money and political nerve—have been a pushover. Under Obama, there’s little likelihood of this changing.

The public option itself is fraught with weak points that ought to reassure the industry.  Even if it passes, they may make more money, not less. That’s because a public option won’t create a new federal insurance program but rather a contract apparatus whereby the government would in effect buy policies from private companies and let existing insurance entities—Blue Cross-Blue Shield, for example—run the public option system. In fact, the entire concept would resemble an outsourcing scheme more than anything truly “public.” Similarly, the newly fashionable co-op proposal would most likely involve a local health insurance co-op contracting out the insurance function to private companies or systems like Blue Cross-Blue Shield.

Drs. David Himmelstein and Steffie Woolhandler of Physicians for a National Health Plan point out [pdf] that the public option won’t fix the health care system because:

It foregoes at least 84 percent of the administrative savings available through single payer. The public plan option would do nothing to streamline the administrative tasks (and costs) of hospitals, physicians offices, and nursing homes. They would still contend with multiple payers, and hence still need the complex cost tracking and billing apparatus that drives administrative costs.  These unnecessary provider administrative costs account for the vast majority of bureaucratic waste. Hence, even if 95 percent of Americans who are currently privately insured were to join a public plan (and it had overhead costs at current Medicare levels), the savings on insurance overhead would amount to only 16 percent of the roughly $400 billion annually achievable through single payer.

Those who think a public option might provide beneficial competition should consider what has happened to the Medicare Part D drug insurance program. I am a participant. I don’t buy drugs from the government or even at prices set by the government. I must buy my drugs through a private insurance company—in my case AARP—which then negotiates the price with pharmaceutical companies. This arrangement is one of the reasons why Medicare is so expensive. It is not because old farts are stealing from the young. It’s because old farts are being yanked around by the insurance and pharmaceutical industries who have free reign within the Medicare system. 

Finally, those who worry insurance companies are getting a raw deal might want to consider just how these big companies work. Dr. Jeoffry B. Gordon provided this excellent description of the United Health Group, first published in Daily Kos:

First, let me dwell on the track record of an individual insurance company, specifically United Health Plans. United Health Group is America’s largest health insurance company. According to their 2008 annual report United has 75,000 employees, insures 29.1 million Americans directly and covers up to 78 million people, contracts with 650,000 doctors and 5200 hospitals. Their insurance programs include: a government subsidized Medicare Advantage program called Secure Horizons, a Medicare Part D prescription program called Prescription Solutions, and they have an exclusive arrangement with AARP to offer a Medicare supplement.

In 2008 United Health had total revenues of approximately $81.2 billion…and their 2008 net revenue was $5.2 billion from health insurance. (This profit was in essence moneys diverted from health insurance premiums paid by government, individuals and employees to obtain medical care even after the company’s huge administrative costs are deducted.)… According to SEC filings, during our current economic and health care crisis their 2009 first quarter total revenue went up 8 percent to $22 billion and their net profit was $984 million. According to the company’s own report they have a medical loss ratio of about 80 per cent—that is, of collected premiums they spend only about 80 percent on actual medical care…we lose 20 per cent of the money we pay them to their overhead and profit.


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