Those who advocate government takeover of health care and the elimination of private insurance cite the “wasteful overhead” and “high profits” of health insurance companies.
There’s a lot in this argument that doesn’t make sense. For one, most companies that are trying to earn a profit seek to eliminate as much waste and overhead as possible. Competitive markets force them to do so.
It’s puzzling to me that those who rail against greed don’t acknowledge that it is a powerful motive for efficiency and cost reduction.
While the health insurance market isn’t as competitive as it could be, due to tight regulation by the states, it still exhibits some characteristics of a market. If we would eliminate the practice of nearly all health insurance being purchased by employers, the market would be even more competitive.
The weakest argument by those who advocate for government takeover is the high profits argument. Reporting in the Wall Street Journal indicates that profits in the health insurance industry are quite low.
“For every premium dollar that they take in, about 83 cents goes out in medical costs — doctors, hospitals, and drugs,” says Carl McDonald, health insurance analyst at Oppenheimer & Co. The rest is spent on overhead. Net income comes to just a few cents per dollar of premiums.
Consider WellPoint, the biggest private health insurer on Wall Street, which has about 35 million customers nationwide. Last year, it paid out 83.6% of revenues in expenses. Net, after-tax income as a percentage of total revenue came to a princely 4.1%.
In other words, simply eliminating profits would only allow the public option to undercut the private sector by 4% or so.
So much for profits being the cause of the high cost of health care.
Keep in mind that in free, competitive markets companies can earn profits only when they satisfy customers, and do that efficiently. For a health insurance company, that would mean paying the claims it has agreed to insure at the lowest possible premium cost to its customers.
The fact that so much insurance is bought by employers instead of the ultimate customers of the policies means that we don’t benefit from innovation and competition in this market.
For example, one legitimate concern is that if someone is insured through their job and they become sick for a long period, they’re probably going to lose their job and their insurance. This would be at the same time they’re trying to recover from an expensive and debilitating illness.
In the life insurance industry, policies may have an optional feature called “waiver of premium” or something like that. Under this provision, if an insured person isn’t able to pay their premiums for a covered reason, the policy remains in force.
Do health insurance policies have this feature? And if so, does my employer offer this?
This type of innovation is present in the life insurance market because it is relatively lightly regulated, and most people buy their own life insurance rather than relying on someone else to buy it for them.
We can also look to the automobile insurance market for examples of innovation that aren’t present in the health insurance market.