Insurers address healthcare costs


Not only does the cost shift from public programs increase premiums and costs in the private market, private plans pay taxes to boot.

The good news is that the rate of spending growth has slowed in recent years. However, outlays for healthcare continue to rise faster than inflation. Total health expenditures exceeded $2.3 trillion in 2007 and absorbed a larger portion of business revenues and personal income. The situation causes economic hardship across the country and poses serious challenges to public health programs.

Premiums tracked fairly closely, with a 6.1% rise in 2007 from the previous year, much less than the peak 13.9% growth in 2003.

The PwC analysis specifically refutes charges that private plans charge high premiums to cover hefty administrative costs and fat profits. The report acknowledges that 13% of total health insurance premiums support administrative costs, but explains that most of this is spent to provide services and information to consumers, to pay taxes, to comply with government regulations, and to process claims. Only 3% of premiums goes to capital investment and profits.

PwC's analysis supported a broader plan that was proposed by insurers for reducing costs to improve the nation's healthcare system. Administrative costs "are not a key driver of health insurance premiums," the analysis concludes. In fact, over the last 40 years, real outlays for benefits per capita have grown faster than administrative costs, which have been reduced by electronic claims processing and more efficient provider network management.

It's unfair to compare Medicare's supposed 5% administration costs with the 13% for private plans, according to PwC, because Medicare doesn't have to pay taxes or meet state capital requirements.


Insurers and providers also want to focus attention on the added costs shouldered by private plans and payers because of greater cost shifting from public programs and the uninsured. Underpayments by Medicare and Medicaid total almost $90 billion a year, according to a study by Milliman for AHIP, the BlueCross BlueShield Assn. (BCBSA), the American Hospital Assn. and Premera Blue Cross. That cost shift increased average premiums in 2006 by 10.6%, or $1,512 for a family of four. Employers absorbed most of the increase, but workers had to pay an extra $400 in premiums.

AHIP president Karen Ignagni termed the cost shift a "hidden tax" on families and employers. Payers and providers would like the legislators to boost funding to Medicare and Medicaid by $90 billion a year to cover the shortfall, but they realize that a more realistic objective is to head off further cuts in public health programs.

BCBSA CEO Scott Serota explained that plans operate in competitive markets and are under pressure from customers to keep premiums low. Hospitals need adequate reimbursement, so we have to "bend the cost curve" overall.

That will not be easy. Popular cost-control proposals emphasize better management of chronic conditions and implementing health IT.

But everybody avoids the idea "that real cost containment involves real sacrifice," Paul Ginsburg, president of the Center for Studying Health System Change, told the Senate Finance Committee in June. To cut healthcare spending, patients may have to go without some beneficial services, and providers may realize smaller incomes or profits, Ginsburg said. Implementing health IT may improve quality of care, he noted, but it's unlikely to contain costs.

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