RSS Feed MenuWhen a healthcare bill lands on President Obama’s desk sometime after the New Year, it will almost certainly contain a provision that requires health insurers to spend a large percentage of total premiums (probably 80 percent) paying medical claims. This sounds like a common sense measure but, in fact, it will either discourage innovation or, more likely, do nothing at all.
The mandate won’t have significant consequences since it doesn’t actually impact that many insurers. The average insurer spends about 13 percent of premiums on marketing, care management and other general overhead. The most efficient, large ones spend 5-6 percent. Only a handful of smaller health insurers—many of which pride themselves on expensive practices like having actual people (rather than computers) answering their phones–spend more than 20 percent of premiums on “overhead.” Particularly at the margins, it would be reasonably easy for insurers to force some of these costs onto medical providers and, yes it’s possible, cut some executive perks and figure out ways to work smarter.
But even apparent “efficiencies” might come at a cost. Under a mandate to minimize “overhead spending” an insurer that develops a computer system to monitor care and make sure that all of its diabetic clients get the exams they need to avoid limb amputations has simply added to its “overhead” costs and might get dinged for it. On the other hand, doctors who recommend expensive, ineffective back surgery, on the other hand, will give insurers “credit” for providing reimbursed care. Likewise, if insurers simply transfer certain types of record-keeping and care management burdens to medical care providers, they can reduce their own “overhead” without increasing true medical care spending a penny.
In any case, a mandate that dictates how insurers spend their money might well squelch innovation. An insurer that wanted to make a large one year investment in a new computer system, increase size and realize new economies of scale through relentless advertising, or step up anti-fraud enforcement to lower long-term premiums for its clients might find itself forbidden from doing so. Even more likely, smaller insurers that don’t compete on price to start with, may find themselves in deep financial trouble if forced to cut “overhead” costs that are a source of competitive advantages.
It’s not desirable for insurers to spend enormous amounts of money on overhead. But not all overhead is waste. The “overhead” controls in the new healthcare legislation won’t do much. And they might do harm.
WillyP // Dec 24, 2009 at 9:49 am
sinz, are you willfully distorting everything I say? who has been louder calling for DEREGULATION than me, from decoupling the ties of insurance and employment than me?
Besides all that bullshit about peace of mind and security (which no matter how much you will it, can never be accomplished outside of productive work, which the private sector alone produces), you’ve read my last ~20 or so postings about further deregulating the industry, and claim i support the “status quo.” Dishonesty; no two ways about that!
canadianmoderate // Dec 24, 2009 at 10:04 am
WillyP, maybe you didn’t get what I was saying. I have no trouble distinguishing between those terms, rather it’s people I talk to – all of them on the left – that seem to have that problem.
canadianmoderate // Dec 24, 2009 at 10:12 am
Also, WillyP, I understand that you want free-market solutions for (just about) everything, and there’s nothing wrong with that. But what do you think your ideas are realistic? I can envision a world where things work like that, and it’s an attractive idea, but do you not agree that it’s unrealistic to expect to see anything like that in our lifetimes? Who’s going to get rid of the welfare state? I’m not trying to defend the welfare state here, but it’s probably going to be the status quo for a while. Don’t you think it would be more constructive not only to rail against the welfare state but to try and think about ways to make it better?
WillyP // Dec 24, 2009 at 10:13 am
canadian,
“How do I explain to people like this that we need more private health care delivery in Canada?”
You start by clearly explaining those terms. That’s why they’re listed, with plenty of reference – for your own edification, so that you may edify your doppelganger ringleader.
WillyP // Dec 24, 2009 at 10:25 am
canadian,
how do you square a circle? you don’t – you start the drawing over!
i am unsure of your age, but in pleading the case for “reforming” a hopelessly broken system (see the entitlement bomb) you sound like a resigned old cad. frum and his ideas for “reforming” the welfare state are ludicrous. if any of the ideas work, it will be very mildly, and for an extremely limited duration. at that point, all the energy spent on petty, purposeless reforms will be wasted, as a new crises emerges and the statists take more ground.
what we need is severe distinctions between principles and approaches. we need people who are conversant in classical political economy, and able to rebut their opponents with wit and fact. we need a populist who can deliver on the promises – liberty, after all, is popular.
the nature of interventionism is like the nature of whack-a-mole. you hit down one problem to prop up another, worse problem, until there is a legitimate political crisis. we’ve seen this in the 1930s and 1970s. while it is attractive to think of obama as carter, whomever as the eventual reagan, i don’t think hastening our decline into carterism or new dealism (like frum does, regularly) is particularly wise, intelligent, or benevolent. i think it’s imprudent, for precisely the reason stated in the title of this article: OBAMACARE. such programs never go away – we’re still stuck with social security, medicare, medicaid, schip, etc., all while the country has ~$60 trillion in unfunded liabilities.
what kind of nation does that to its youth? you may live in canada, and not care very much because you don’t pay into the tax system here, but millions upon millions of americans are going to see a massive cut to benefits. a government propagated lie that i can’t rightly support in any form.
the welfare state doesn’t work because it can’t work. it will collapse in on its own weight. i’d rather say what i can now than make meek, bland, and compromising suggestions that only obfuscate the problem.
canadianmoderate // Dec 24, 2009 at 10:28 am
Though I am not as laissez-faire as you obviously are, believe me, I do what I can to edify the lefties I know about economics. It works at times, too. I’ve let some people borrow ‘Basic Economics’ by Sowell, and it has gotten a pretty good response. That was one of the books that pulled me away from my former leftiness.
WillyP // Dec 24, 2009 at 10:37 am
and just to make sure that the creditors (read: savers) are totally wiped out, our brilliant Fed has doubled the monetary base:
http://www.drorism.com/blog/Monetary%20Base%20.png
this alone would be tremendously troubling to a more educated population.