(photo via Billionaires for Wealthcare)

(photo via Billionaires for Wealthcare)

Scarecrow explains the importance of the public option for the financial future of this Nation here. He points out that employer-based insurance is shrinking, and we need a transition to some other system. The public option is just such a transition. Scarecrow points to this report from the Economic Policy Institute, based on Census Bureau data up to 2008, which tells us that the number of people covered by employer-sponsored insurance dropped from 64.2% in 2000 to 59.5% in 2008.

The facts support this survey. Three of the five largest health care companies have seen enormous drops in their employer based coverage in the last year:

Cigna: 800 thousand
Wellpoint: 1.5 million
UnitedHealth: 1.71 million

The insurers blame the drops on unemployment, and they expect that trend to continue.

Decreased membership is not a financial problem for the insurance companies, which are raising prices faster than the drops in enrollment. Cigna reported earnings of $1.19 per share in the third quarter compared with $.62 for the same period last year. This is much higher than expected.

UNH reports revenues of $.89 per share, also much higher than the expected. Revenues for the insurance subs were only down 3.4%, less than the drop in enrollment, so policy rates increased substantially.

Humana reported $1.77, in line with expectations. That includes unrealized investment losses of $69mn. About 30% of its health insurance is Medicare and other senior markets, making it different from the other companies. It just shows the value of depending on government subsidies through Medicare Advantage.

Aetna (AET) reported $.75 in earnings, substantially higher than expected. Its enrollment was up 7.7% over 3Q 2008, but down over 2Q 2009, and AET expects the downward trend to continue. Revenues were up 14.4%, almost double the increase in enrollment. I reported on Wellpoint earlier.

Employers will pass some or all of the rising costs on to their employees. As the number of people covered by employer insurance drops, prices will rise. Administrative costs are significantly higher for individuals than for employer based insurance. A study by the Congressional Research Service says that administrative expenses for large groups, over 1,000, are in the range of 5 -11% of claims, and in small groups, the range is 33-37% of claims. The range is at least that high for individual policies. As people shift from employer based insurance to individual policies, prices will rise dramatically, based strictly on increased administrative costs.

Administrative expenses in the public option are expected to be in the range of Medicare administrative costs, which Ezra Klein estimates at 5-6% of claims. This figure is higher than the usual figure of 2% because it includes outsourcing of certain costs. Lower administrative costs are an enormous improvement. It may be that access to the public exchange will result in somewhat lower administrative costs, even without a public option. But it is perfectly clear that the public option is the one thing that will make a real difference.