To participate in the government insurance exchange, an insurance company must spend at least 85 cents of each dollar of premiums paid through large group insurance plans (or 80 cents of each dollar paid by individuals or through small group plans) directly on health care costs for the policy owners. If, in any one year, that quota is not met, the company must refund the amount not spent to the policy holder.
This leaves, of course, the remaining 15 or 20 cents of each dollar to cover everything else it takes to run an insurance company. Those expenses would include staff salaries, buildings, supplies, actuarial research, marketing, agent commissions, profit to the stockholders, financial reserves for emergencies, and more.
No one quibbles with a desire to see as much money as possible go toward actual health care costs, and no one wants to give the companies incentive to deny coverage to stoke their profits, but some in the insurance business assert such a low percentage for overhead will drive insurance companies out of business. So does that represent a reasonable figure?
Contrary to what many believe, the health insurance business is not particularly profitable, as industries go. Its profit over expenses is a measly 3.3 percent, for a ranking of 86 out of 100 major industries. Compared to the profits of the beer industry (25.9 percent), the software industry (22.7 percent) and medical lab services (8.2 percent), the insurance industry is downright struggling. The profitability of gas and electric utilities are two to three times as high as that of health care insurance companies.
Consider the costs involved in providing health care services, either directly to a health care provider or to the policy holder. There are insurance plans to be designed and tested, agents and marketing people to sell and service the plans, personnel to administer authorizations and process payments, others to collect and invest the premiums, still others to research medical treatments that might be authorized or to determine the proper premium levels. Now add in the new requirement to track and, if necessary, reimburse excess premiums paid, and you have a whole lot of overhead above that already built into any going concern.
A look at other industries’ overhead is instructive. A 2006 study of 244 life insurance companies measured average overhead at about 9½ percent of each premium dollar. Compared with health care insurance, however, administering life insurance would seem to be fairly simple: You market the policies, collect the premiums and pay when the insured person dies. The company might have to investigate the circumstances of the death, but it is hardly the ongoing claims-and-payments relationship health insurance companies must maintain with their insured customers.
What about other industries? Obviously there are wide variations depending on the type of industry, but consider the labor union industry. A study found that unions use about half of all union dues for overhead. Harvard University uses 53 percent of its income to cover its overhead other than teaching, research and student services.
A nonprofit corporation or foundation is considered well-run if it uses no more than one-third of its income for overhead. The federal equivalent to United Way, the Combined Federal Campaign, rates nonprofits approved for its campaign if it generally keeps its overhead around 25 percent — though it will make exceptions upon application. The American Cancer Society spends 27.1 percent of its revenue on administration and fundraising. The Joyce Foundation, upon whose board President Obama once sat, had in 2008 revenue of just over $16 million and an overhead of almost $6 million, about 38 percent.
Probably the closest government program one might compare to private health insurance is the vast Medicare program. Officially, the government claims administration overhead is a mere 2 percent. A study completed in 2006 compared Medicare to private health insurance programs. The study estimated the true overhead for Medicare was closer to 5 percent, while private insurance plan overheads, if you exclude certain costs unique to private insurance, such as taxes, commissions and profit, is around 9 percent.
Medicare has an advantage of being just one program, without competition, covering some 50 million people, while the private companies have no such economy of scale or lack of competition.
Can our nation maintain a private health care insurance industry on the standards set out in the new health care reform bill? Given these figures, and another requirement of the bill that gives the government the right to approve proposed premium increases, it might be time to listen to those skeptical insurance industry people.
• Pamela Case, a local freelance paralegal, is among a select group of local residents with columns in the Tracy Press.