Apparently not content with merely “pressuring private insurance companies to charge more affordable rates and implement fairer policies” by introducing a government-run public option, some Democrats in Congress would like to dictate to insurers how they must spend their money. That is what Senator Al Franken wants, anyway, according to Wendell Potter at the Huffington Post (who himself is championing this):
Sen. Al Franken (D-Minn.) is now leading a group including Sens. Jay Rockefeller (D-W. Va.) and Blanche Lincoln (D-Ark.) to introduce an amendment that would go further by requiring that 90 percent of the money consumers spend on health insurance premiums go directly to health care costs.
The senators are proposing a reform that strikes at the heart of a health insurance system that puts profits first, and it would have a profound effect. When MLRs increase, that eats into profits, and Wall Street becomes very unhappy. A case in point is Aetna, the nation’s third largest publicly-traded health insurance plan. Three years ago, the company reported that its quarterly MLR had inched up from 77.9 percent to 79.4 percent in 12 months. On the day this was disclosed, Aetna’s share price plunged 20 percent as investors sold off their shares, reducing the company’s market value by billions of dollars.
According to Potter, the insurers were spending 95 cents of every revenue dollar on medical expenses in the early 90’s, but today it is closer to 81 cents. So Democrats would like to reverse that by forcing the companies to spend more on medical matters. Yet, it seems that Democrats still don’t understand the effect of unintended consequences.
There are many time I might say that a measure designed to “help the little guy” has good intentions, but that it had some unforeseen side effects.
Not so here.
This isn’t meant to help anyone, except perhaps Democrats’ egos. Why? Well, they don’t understand what would happen if such a bill were to pass. Lets start with administrative costs. According to a report released in 2008 by the American Medical Association, the National Health Expenditures report found that private insurers spent an average of 14.1% of their revenue in 2005 on just on administrative costs. Another report, conducted by a single-payer advocacy group, claims 31% was spent (take that number with discretion). Either way, to force the insurers to spend 90% on health insurance would force them to either cut costs or raise premiums even more.
The insurers could raise premiums, but I think a lot of their customers (especially the corporate clients) would cry foul. So, I think the more likely answer is that the insurers would cut costs to meet the required medical expense percentage. This will, of course, mean great things like loss of services (as in those that are not already imposed on them), more horror-story creating scenarios of rescission (legal or otherwise), and worst of all, the loss of jobs. You know, all the things Democrats are worried about, or should be worried about, right now.
“But look at Medicare’s low administrative overhead,” say the liberals. Well, the AMA has an answer to that:
Private insurers face administrative costs not imposed on public programs, such as the need to comply with multiple sets of state and federal regulations. Both overregulation and arbitrary differences in regulation create unnecessary administrative costs and prevent cost-savings from economies of scale. Private insurers also must pay premium taxes, usually counted as an administrative expense, driving up administrative costs as a percentage of total costs and creating the appearance of reduced efficiency.
Basically, it takes the extra resources and manpower to follow all the intricate regulations each and every state has. More time, more employees, more cost. Extra taxes must also be handled (doesn’t Obama want a new tax on “Cadillac plans”?). And even those who accept Potter’s figures on administrative costs from the ’90s can’t deny that things have gotten a lot more expensive since then.
Private insurers simply have extra costs, and the Democrats’ attempt to take control of their money isn’t going to change that. Instead, what it might do is negatively affect the little guys for whom they’re supposedly targeting the effects of this legislation. Something that Senator Franken and other supporters of this legislation should keep in mind.