Report: Making Health Care Work

More Bang for the Health Care Buck

Released by: U.S. PIRG Education Fund

The high cost of health care in the U.S. imposes an increasing burden on households, businesses, government, and our country’s economy – a burden made heavier by the current economic crisis.  

The money that insurance companies spend on inefficient administration, billing and marketing – instead of medical care for their enrollees – contributes to the high health care costs Americans must endure.  

To incentive efficiency and get costs under control, the U.S. should require health plans and insurers to spend at least 85 percent of revenue on health care.  Almost half of the nation’s health plans and insurers we surveyed already meet this efficiency standard, while a similar number could comply with the standard with only moderate effort.

Health care is enormously expensive in the U.S.  But a lot of the money Americans spend on health insurance goes toward things that have nothing to do with keeping us healthy, such as inefficient administration and billing practices, marketing, and profits.

•    In 2007, insurance companies, the state and federal government, individuals and other payers spent $2.2 trillion on health care, equal to 16 percent of the state’s gross domestic product.
•    Health plans and insurers have an incentive to keep the percentage of revenue they spend on health care low.  For example, Great-West Healthcare of California decreased the percentage of revenue it spent on medical costs every year from 2003 to 2007, from 85.8 percent to 69.1 percent. Over the same period of time the company’s profits increased from 0.5 percent to over 10 percent, while the portion spent on administration stayed essentially the same.

Health plans and insurance companies have an incentive to reduce the amount they spend on health care because the stock market favors companies that devote higher portions of their revenue to administration, marketing, and profit-taking.

To get rising health care costs under control, it is critical to encourage greater insurer efficiency and increase the value of coverage by requiring insurers to spend 85 cents of every revenue dollar on health care. Providing incentives for efficiency will reward insurers for finding ways to reduce administrative costs and deliver better value to consumers.  Further, data on current practices of American insurers shows that an 85 percent standard is both strong and achievable. 

Successful health plans and insurers can, and often do, spend more than 85 percent of revenue on health care.

•    While some health insurers spend too small a share of revenue on health care, many major HMOs achieve a proper balance. Nationally, many health insurers – including some of the nation’s largest and most respected health plans, such as Aetna’s plans in Washington and Michigan, and Anthem’s plan in New York – spend the bulk of revenue on health care.

•    Nearly half of 53 health plans surveyed nationwide spend at least 85 percent of their revenues on health care.

Requiring health insurance companies to spend at least 85 percent of their revenue on medical care would ensure that our health care dollars are being spent on health care and could save patients money.

•    Enforcing a minimum percentage of health care spending encourages insurance companies to increase their administrative efficiency.

The U.S. should require health plans and insurance companies to spend at least 85 percent of revenue dollars on health care, to encourage efficiency and ensure that the companies are spending health care money on patient health.  Furthermore, additional steps should also be taken to help insurance companies increase their efficiency, bring down costs, and ensure that money spent in the health care industry goes to improving our health.

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