Health Insurance Companies Deliver Your Dollar

 

Over the last year I have seen several commercials by health insurance companies saying that the issues in health cost are not their fault. I tend to agree with them. It is the ineptness of our governing bodies or if you prefer, the desire for large campaign contributions from health insurance companies. If you search on the web anywhere for how your health insurance dollar is spent you will typically find something that looks like this:

”Most for-profit insurance companies spend 87 cents out of every dollar to pay physicians, hospitals, pharmaceutical companies and other medical providers for medical care. This number is disputed somewhat by some experts, who put it at 82 cents, leaving five more cents for overhead and profit, but in a typical scenario, here is how your insurance company spends each dollar of your premium.

  • 33 cents goes to paying physicians
  • 20 cents goes to paying for inpatient hospital costs
  • 15 cents goes to paying for outpatient facility costs
  • 14 cents goes to pharmaceutical companies for medications
  • 5 cents goes to other medical services (this is the disputed amount since it isn’t transparent as to how it is spent)
  • 6 cents goes to government payments, compliance, claims processing and other administrative costs
  • 4 cents goes to consumer services, provider support and marketing
  • 3 cents goes to insurer’s profits”See more at

After examining this, it appears that the health insurance company only gets about thirteen percent of every dollar for handling your money. I know this is not correct from my years of experience in business. Typically most businesses operate on forty percent internal cost, forty percent external cost, and twenty percent gross margin with General, Selling, and Administrative in the gross margin. This translates to about seven to eight percent profit, with about four percent of that going to the government in taxes. This looks like the last four lines of the above analysis.  I also noted that Nancy Pelosi made great claims of how at least eighty percent of your health care dollar is going to provider payments. It turns out that for large groups this number is calculated as 85% and 80% for small groups. But the question is; how is this calculated? After much sweat and tears in searching in the last six months, I found Uwe E. Reinhardt, Economist and Professor at Princeton. Here is his comment from his blog in the NY Times:

“Up to half the premium can go for these non-medical items. It is the reason why that market urgently needs to reform.” Uwe E. Reinhardt, Political Economist, “How much money do health insurance companies make? A Primer”

Reinhardt gives the formula for calculating the number that Ms. Pelosi was describing as:PP

This is not really a complicated formula. Having years of experience in math related to engineering, in particular ratios, it is easy to see how this formula can be manipulated to fit Ms. Pelosi’s requirements of 85% and in the Obamacare law. So, how is it that Reinhardt is right that as much as fifty percent goes to administrative cost or health insurance cost? This can be answered by determining what is OUTLAYS TO IMPROVE HEALTHCARE QUALITY? If this is truly part of the ratio, then I should be able to find it in the federal register. Sure enough: FR 158.150 Activities that Improve Healthcare Quality

Activities that improve healthcare quality – what an interesting definition. Are trips to the tropics for rest and relaxation by health insurance professionals in this number?  The answer is yes. Take some time and go look at what is listed. It is the internal cost of the insurance company that can be almost anything. So we are depending on the health insurance companies to determine healthcare quality and not based on our expectations. After all, quality is defined as meeting the customer’s expectations. I personally expect at least eighty percent of my insurance dollar to go to provider care as Ms. Nancy stated. So where is the rub? Let’s play with the numbers.

My expectation is that only the provider payments should be on top and the cost of the insurance companies to be under the line. Let’s take a typical insurance company in one state with the numbers shown in billions of dollars. Total premiums collected 18 billion. Let PP = 10 and on top with the rest on the bottom as QQ = 5, SG&A=2, Profits = 1 or 28%, 11%, and 6% respectively. This gives us a ratio of 55% or payments to medical providers. This is very typical of a business loss ratio. Let’s do it the way that Obamacare defines it: 10+5/10+5+2+1= 83% – Right in line with policy. But wait, what if we reversed provider payments versus the outlays to improve healthcare quality? The ratio is still the same but provider payments are cut in half and the health insurance company gets twice as much.  Delivering your money in the tropics with feet in the sand.  The government has decided that health insurance companies are concerned about your health, the quality of healthcare, and not their profit – yeah, right.  This explains why when compared to the rest of the world we spend twice as much for healthcare with low expectations for life.  Mary Meeker’s State of the USA.

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Ms. Pelosi, we passed it; we have seen what is in it; and we have determined that it is amazingly stupid to allow the people handling our money to have their way with us. – Pandemic Survivor

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