Healthcare Follies: Part One—Insurance Companies

As the presidential contest begins, the healthcare discussion quickly degrades into the predictable extremes, leaving the majority out.

“Medicare for All” has become a rallying cry for many of the newly announced Democratic candidates. What is important about this is that it will relaunch a discussion about the healthcare crisis in the US, if the Republican Party will participate in a rational way. What is NOT important is that the over-simplified “Medicare for All” rallying cry be the beginning and end of the discussion. You can expect, however, the well worn arguments to emerge that will impede a fact-based and rational discussion. The first is the subject of private insurance.

The first lightning rod was presidential candidate Kamala Harris, a supporter of “Medicare for All.” During a recent appearance, she made a mistake in modern politics: She told the truth. When asked about the role of private insurance in modern healthcare, she said, “Eliminate all of that, let’s move on.” Immediately the opposition pounced.

Rich Lowry, writing for the National Review, was one of the many that criticized her. He wrote, “Senator Kamala Harris committed a most unusual gaffe at her CNN town hall the other night— not by misspeaking about one of her central policy proposals, but by describing it accurately.” He went on to say, “The Harris flap shows that insufficient thought has been given to how these proposals will strike people not already favorably disposed to the new socialism,” adding later that “her position is jaw-droppingly radical.”

Let’s try to be fact-based and rational.  As we lay out in our Healthcare Position, the US spends more on healthcare than any other industrialized country (18% of GDP versus 8% to 12% for German, Japan, and France) while achieving inferior outcomes in most standard categories of measurement. The largest contributors to this cost include the complexity of our payment system as well as the presence of for-profit companies within that system.   

Unlike most other developed countries, the US administers non-Medicare and Medicaid payments for healthcare through a system of for-profit health insurance companies. The insurance company has several responsibilities in this system: underwrite (meaning choose whom to insure and whom not to); review claims and determine which ones to pay and not to pay; negotiate prices with caregivers, hospitals, and drug companies; and make a profit. When you take all of this expense into consideration, the average insurance company pays out about 80% of the premium that it collects. The 20% it keeps compares to 3% for Medicare, which is about the same for countries like Germany, France, etc.

In addition to the cost of insurance administration, the US payment system is relatively complex given the presence of Medicare, Medicaid, the Veterans Administration, the myriad of private insurance companies with their own rules and processes, public service insurance, etc. Managing this complexity represents an enormous cost to individual physicians, hospital staffs, etc.  

According to researchers from Harvard University and the London School of Economics, such administrative costs added up to approximately 8% of GDP, compared to 3% of GDP of 10 other developed countries.

This factor alone, therefore, is the largest driver of the cost of the US system.

To quote T. R. Reid in The Healing of America, “The administrative monstrosity we have built costs us a lot of money—by far the highest administrative costs of any health care system on earth. The U.S. Government Accountability Office concluded that if the country could get the administrative costs of its medical system down to the Canadian level, the money saved would be enough to pay for health care for all the Americans who are uninsured.”

While “Medicare for All” may not be the answer, let’s view it as the beginning of a discussion. This discussion cannot be fact-based and rational without including costs. Labels such as “new socialism” and “jaw-droppingly radical” do not encourage discussion or inform. Private insurance and payment complexity are the largest drivers of costs. Countries that provide better healthcare for less have generally transitioned to nonprofit payment administrative systems. If it works there, perhaps we should learn from it rather than disparage it as “jaw-droppingly radical.”