In Sunday’s New York Times, Greg Mankiw, chairman of President Bush the Last’s Council of Economic Advisors, tells us that the public option is inherently unfair to corporate behemoths. He forgets to tell us how much cheaper it will be. I suspect that he didn’t examine the financial statements of any private insurance companies, like, say, Aetna. Here are the 2009 first quarter 10-Q, and the 2008 Annual Report.

Aetna is a fairly simple company, with three business segments: Health Care, Group Insurance, and Large Case Pensions, each reported separately in the 10-K. The following table shows several categories from the consolidated statements and the health care segment statements which would be different in a company set up as a public option.

Aetna ($ in millions) Fiscal 2008 total Fiscal 2008 Segment Public Option
Selling expense 1,149.60 1,055.20 211.04
Salaries and related benefits 2,619.80 2,436.41 1,827.31
Other administrative expenses 1,982.10 1,843.35 921.68
Interest expense 236.40 236.40 0.00
Amortization of acquired intangible assets 108.20 101.30 0.00
Stock-based compensation expense 95.70 89.00 0.00
Income before income taxes 2,174.20 2,551.20 0.00
Total 8,366.00 8,312.86 2,960.02
Reduction in expenses     5,352.84
Total revenues 30,950.70 28,775.00 ———
Savings as % of revenues     0.1860

The selling expense would be substantially lower. This is essentially commission income as opposed to pay to salaried workers. Let’s estimate it would drop by 80%.

Salaries and related benefits and other general and administrative costs are not separately stated in the segment data, but they are in the consolidated data. I took the general and administrative expense in the segment data and allocated it between salaries and other administrative pro rata with the data from the consolidated data to get the two numbers in the segment column. Salaries would drop, because we would be paying on a more rational basis for strictly administrative functions. Let’s guess it drops by 25%, mostly the bloated pay to executives.

We know that general and administrative expenses are lower in the public option, so let’s drop them 50%.

The stock-based compensation would disappear. There would be no interest expense. The income figure is unnecessary and can be eliminated for these purposes. I have left depreciation in the figures, which will permit replacement of existing equipment and furnishings. It will be necessary to have some profit to cover some expansion of services, but we can ignore that for this purpose.

These figures are given in the Adjusted column. It works out to a reduction of 18.6% of revenues which can cover either reduced premiums or a repayment to the government for any seed money, or necessary acquisitions.

What does Aetna do with the $5.35bn? About $1.8bn was paid to shareholders in dividends and stock repurchases. Aetna paid $924mn in federal income taxes from its profits, which will be a net loss to the Treasury. Much of the rest is still in the company and will eventually wind up with investors.

In 1996, when Aetna bought U.S. Healthcare for $8.8bn in cash and stock, the NYT did some excellent reporting:

[For] the Xerox Corporation, the amount of money involved in the Aetna purchase was worrisome. "As a purchaser I always get nervous when lots of money is shelled out by one organization that is acquiring another, say for $9 billion," said Helen Darling, manager of health care strategy at Xerox.

She added: "My worry is that the acquiring company will want to recoup their investment at a time when we are trying to control costs. I would watch them both like hawks, nervously worrying that this will fuel medical inflation, and that this might make everyone, including legislators, more cynical about managed care."

Helen Darling got that exactly right. Mr. Mankiw might want to think about her concerns. It won’t hurt: Xerox is a big company too.