Insurance Expense Ratios

One of the arguments Democrats have made for nationalized health care is that government expenses will be much lower than private companies.  This is on its face absurd, given most people's experience with government agencies, but is nominally supported by low expense ratios in Medicare.  I won't go into this today, but this is more an artifact of the way government does accounting as well as operations decisions at Medicare which may be non-optimal (e.g. Medicare does much less claims verification and investigation than private companies, which is why we see huge fraud cases from time to time).

Anyway, we get a fresh example of private vs. public expenses on a very comparable basis in California workers comp.  The public State Fund acts as an insurer of last resort as well as a competitor to many private providers.  The fact that it is an insurer of last resort will increase its loss ratios, but its expense ratios of management or "claims adjustment" expenses should be similar.  But of course they are not.

State Fund's unallocated loss adjustment expense ratio was a whopping 51.4% last year compared to 8.9% for private carriers, while State Funds allocated loss adjustment expenses were 9.8% compared to the industry's 13.8% respectively.

This means the management expense ration of the state agency is 61.2% of premiums vs. 18.7% for private companies.  This just makes laughable the pious requirement in Obamacare that insurance companies keep their expense ratios under 20% -- or else the more efficient government agency will take over.

We are facing a huge 29.6% increase in workers comp rates in California, in part because the very high State Fund expense ratios are averaged into the calculation.

  • LoneSnark

    Are they going to impose the same cap on government run insurers? If so, then that might get interesting :-)

  • Dr. T

    The government's continually repeated false claim of low expense to payout ratios for health care insurance irks me. Here are the four main reasons why the claim is false.

    1. Comparing a watermelon to ten quarts of blueberries. Medicare spends most of its money on hospitalizations. A typical hospital bill for an elderly patient will be more than $50,000. But, it's just one big claim that doesn't require lots of review and requires only one electronic transfer payment. For most private health insurance companies, $50,000 in claims payouts represents hundreds of doctor's office visits and lab bills. Those hundreds of claims must be verified, reviewed, checked for fraud, and then paid out to scores of doctors and labs.

    2. Medicare's administration costs are never "fully loaded." The government considers only the direct costs of processing claims. It does not consider the costs of the buildings and the land, the utility and service costs to operate its buildings, or costs shared throughout the federal bureaucracy such as human resources and security. Private health insurers have to include all overhead and operating costs when calculating expense ratios.

    3. The federal government exempts itself from local property taxes and inventory taxes. It also doesn't pay state or local sales taxes when purchasing supplies or equipment. Private health insurers have no such exemptions, which increases their operating costs substantially.

    4. The federal government forces hospitals, physicians, and other health care providers to use electronic communications in specified formats for submitting claims and data. The costs for establishing and maintaining the computer hardware and software to file the claims falls entirely on the providers. Private insurance companies cannot make such mandates, and they bear the expenses of communicating with a wide variety of hospital and physician billing and claims systems and of dealing with paper claim submissions.

  • A Friend

    Dr. T, thanks for that post. Very informative.

  • Nate

    Not mentioned was the simple fact 5% of $7000 per member of annual claims is $350. 10% of $3500 in annual claims is also $350. Ratio is a terribly inaccurate way to compare like services with vastly skewed base cost.

    It is also important to remember 10% of $7000 is $700 a year they lose to fraud, far more then the entire administtrative cost of private insurance

  • Ian Random

    Let's see 46 million Medicare folks with $60 billion in fraud versus 136 million private insured with $80 billion in fraud. No matter how your measure the overhead, Medicare needs more fraud investigators and less annoying paperwork.

    http://www.mademan.com/mm/useful-insurance-fraud-statistics.html

    http://facts.kff.org/chart.aspx?ch=376

    http://www.census.gov/hhes/www/hlthins/data/incpovhlth/2008/tables.html

  • John David Galt

    I agree with your point that government run businesses are less efficient than private, but State Fund is not a good example to use for proving it. State Fund was created as an insurer of last resort, and is required to accept any applicant regardless of risk, so of course it winds up insuring all the employers that generate the most claims.

    The merits of having taxpayers provide an "insurer of last resort" are of course debatable, whether it's health insurance, auto, home, or worker's comp, but you can't really compare the financials of such an institution with those of a company that doesn't bear the same burden.

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  • caseyboy

    Another example of how numbers can be used to make almost any side of an argument. Forget the numbers and remember the post office, cash for clunkers, Fannie Mae & Freddie Mac. Government oversight at its best.