Thursday, May 22, 2008

Administrative Costs and the Individual Health Insurance Platform for Health Care Reform

A new study by the "Center for American Progress Action Fund" says that Senator McCain's health reform plan based upon individually owned and controlled health insurance would increase administrative expenses by $20 billion.

The Center is an organization headed by former Clinton chief of staff, John Podesta. So, they clearly have an agenda.

But they also have a point.

As I have said many times before, an individual-based health care reform plan can work. But any such plan has to overcome the problems the individual health insurance market has today that include underwriting and expense ratio issues.

You can't just dump millions of Americans on the individual health insurance platform we have today.

It is true that Senator McCain would create a more efficient individual market by enabling insurers to sell across state lines and doing away with many benefit mandates. But the fundamental problem with individual health insurance is that it commonly has a 25% to 30% expense and profit margin--leaving 70% to 75% of premiums for medical costs. McCain's market improvements will make only a small dent on this expense level that is substantially higher than in the employer-based health insurance market that has an expense ratio that averages more like 12%.

But cutting lots of benefit mandates would dramatically reduce costs even further? Which benefit mandates? My experience is that when you take out the egregious benefit mandates what's left are the things most people would want in their policies anyway like regular mammogram screening or letting a new mother spend the night in the hospital. It's one thing to say these things would no longer be required and another to argue that eliminating them would cut insurance costs. You only cut costs if people wouldn't choose to buy them and would avoid the services.

It's interesting that when I am out in the country meeting with insurance execs in their conference rooms--people who do understand the market--it never fails that they all just roll their eyes at the lack of sophistication when we discuss McCain's market-based solution--specifically his individual health insurance product ideas.

McCain needs to address these very legitimate criticisms the likes of John Podesta and Elizabeth Edwards have made before this campaign goes into high gear.

Related posts:

John McCain's Health Care Plan and the Uninsurable--There Are Better Fixes Than the Ones He's Proposed

Elizabeth Edwards Criticizes John McCain's Health Plan--He Needs to Fill in Some Important Gaps
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