America’s Health Insurance Plans, the trade group for commercial health insurance companies, published an infographic this month breaking down how the industry spends every dollar it receives in premiums.
The group apparently crafted the visual aid to defend rising premiums its member companies are charging customers.
But the chart also inadvertently helps explain why commercial health insurance is a bad deal.
The graphic shows that about 80 percent of every premium dollar goes toward medical expenses ― prescription drugs, doctor visits, hospitalization and other services. Approximately 18 percent goes to administrative costs, and some 3 percent is profit. (The total is more than 100 percent because of rounding. America’s Health Insurance Plans explains how it gathered the figures for its infographic here.)
By contrast, Medicare, the largest U.S. public insurer, paid just 1.5 percent of its budget to administer traditional insurance plans for seniors and workers with severe disabilities in 2015, according to official data. The rest of Medicare’s budget went to paying doctors, hospitals, drug companies and other health care providers.
When you account for administrative costs of Medicare’s private plans, which cover some one-third of Medicare beneficiaries, Medicare’s overhead approaches 6.4 percent of its budget.
The comparison shows that expanding Medicare to cover the entire population ― or adopting a single-payer health insurance system ― would significantly reduce health care costs by eliminating a whole lot of expenses that aren’t related to medical care. That’s in part because Medicare does not have to advertise its services, make a profit for investors, or reward its executives with multi-million-dollar compensation packages, as private insurers do.
If the Republican health care replacement law takes effect, it could encourage companies to jack up executive pay even higher. The legislation would raise limits on how much executive compensation a company can deduct from taxes.
Some critics claim the Medicare figures are misleading, because the government insurance program benefits from Social Security Administration and Internal Revenue Service help in collecting the taxes it needs to fund its operations.
In fact, Medicare reimburses the other federal agencies for their services, according to Paul Van de Water, a senior fellow at the liberal Center on Budget & Policy Priorities.
“The notion that there are all these federal costs that are not accounted for is absolutely positively false,” Van de Water said.
There are risks and tradeoffs of a single-payer system, like the possibility that insurance coverage will provide fewer benefits than the private insurance market, according to Austin Frakt, a health economist for the Department of Veterans Affairs with academic posts at Boston University and Harvard.
And there are other systems for bringing down costs, like all-payer rate setting, which allows multiple insurers to negotiate provider prices as a single unit, Frakt added.
But “if you look just at cost control, you almost can’t do better than single payer,” Frakt said.
Thanks, America’s Health Insurance Plans!