It has the thankless job of saying ‘no.’ But policing claims allows you to get better benefits.
Private health insurers are punching bags of choice in the Democratic presidential primary. “The insurance companies last year alone sucked $23 billion in profits out of the health-care system,” Elizabeth Warren fulminated in a June debate. Kamala Harris charged in January that “it is inhumane to make people go through a system where they literally cannot receive the benefit of what medical science has to offer because some insurance company has decided it doesn’t meet their bottom line in terms of their profit motivation.”
Insurers are unpopular because their job is to say “no.” They police medical claims for waste and encourage patients to seek care from cost-effective providers. Yet they deliver a real benefit to consumers. The clearest way to observe this is to compare traditional Medicare, where government manages seniors’ claims, with Medicare Advantage, where private insurers do.
Private Medicare Advantage plans receive a lump-sum payment for covering the standard Medicare benefit, adjusted for the medical needs of enrollees. Their bids average 10% less than the cost at which the government would cover the same package of benefits under traditional Medicare. The savings they generate relative to a benchmark help private plans fund extra benefits, such as prescription drug coverage, reduced deductibles, and dental care—which together are worth an average of $1,284 per Medicare beneficiary a year. In other words, by saying “no” to wasteful claims more frequently, Medicare Advantage can offer better benefits overall.
In 2017 Americans spent $3.3 trillion on health-care services ($10,200 per capita), of which 34% was on hospitals, 28% on physician services, 13% on nursing care and 11% on prescription drugs. Because there is so much money to be made from claiming reimbursement for medical services, health-care spending is subject to enormous risk of fraud or waste. Private insurance regulates those claims closely. Dealing with insurer oversight is never fun, but few people would want to fork over more than $1,000 a year to avoid the nuisance.
The federal government verifies the legitimacy of only 0.3% of the 1.5 billion payments that Medicare makes every year. This keeps administrative expenses low but leads to higher costs overall. For instance, in April 2019, 24 people were charged with a $1.2 billion scam to claim reimbursement from Medicare for medical equipment. In 2018 the Centers for Medicare and Medicaid Services estimated that 8% of the program’s payments had been improperly made.
Some Democrats hope that eliminating or dramatically reducing patient cost-sharing under single-payer would save administrative costs. Yet a 2014 study of Medigap supplemental plans that eliminate Medicare coinsurance and deductibles found that they increased the program’s medical costs by 27% as patients increasingly visited costly specialist physicians.
Private insurers also manage costs by developing networks of preferred providers they trust and whom they can reward for delivering care in a cost-effective way. They can experiment with benefit designs uninhibited by political pushback from medical providers who stand to lose revenue. Private insurers also have a profit incentive to develop and provide additional preventive-care services to enrollees if these can help avoid costly hospitalizations.
Democrats depict private insurers as hugely profitable and grossly inefficient. Yet in 38 states the largest insurer on the individual market is a nonprofit organization. Profits of publicly traded insurers have averaged only 3% of revenues over recent decades, compared with the 9% average across the economy. Taxes imposed by state and federal governments constitute the largest element of health insurers’ administrative costs. Marketing and enrollment costs can be significant when people switch plans on the individual market, but are small for large employer groups in which most privately-insured Americans are enrolled.
Advocates of single-payer health insurance often point out that the U.S. spends more on health care than other nations. The U.S. has a higher rate of death from heart disease than Japan but that says more about the relative obesity rates in each country than it does about the merits of their respective health-care systems. Nor can the cost of employer-sponsored insurance be compared with the cost of Medicare—regulations and taxes are structured to make privately financed plans bear a disproportionate share of hospital overhead costs.
The clearest apples-to-apples comparison of public versus private management of American health care is within Medicare. And Medicare Advantage suggests private insurance oversight allows patients to get health care that has a meaningfully better value.
Yet even this cost gap fails to capture the extra burden of what single-payer proponents are demanding: Switching from a system where health insurance is a form of compensation for work to one where it is funded by an additional $4 trillion a year tax, which would likely significantly reduce economic output. Reformers should focus on expanding access to care without needlessly destroying so much value.
This piece originally appeared at The Wall Street Journal (paywall)