American Private Health Insurance: A Very Bad Bargain

Medicare spends about 97 cents on every dollar it collects in premiums to provide care. The Senate bill, if enforced properly, would only require private insurance companies to spend 80 cents of every dollar on actual care. We are creating health care “reform” using a system that we know is dramatically more wasteful than public insurance, and then by forcing people to buy a product that is, frankly, a very bad bargain.

Let’s just assume the Senate bill is passed into law with the minimum medical loss ratio of 80% for the individual market. For it to work, we will need the Secretary of HHS to not unilaterally gut the regulation using the very big loophole in the bill. We also need the state you are in to have a regulator willing and able to enforce the MLR regulation. We will need the insurance companies to not find a way to game the system, or create another loophole allowing themselves to reclassify a bunch of administrative work as care. Finally, we will need some way to make sure the insurance companies don’t just jack up their pay to in-network providers to make the 20% margin big.

Assuming all these regulation elements work perfectly (which I highly doubt), the bill will still force people to buy insurance plans where 20 cents of every dollar they collect does not go to providing care. That is a massive amount of waste, and makes private insurance an incredibly bad bargain.

Insurance is meant to work by collecting premiums from everyone in the risk pool, equal to the potential risk for the whole pool, and than give that money to the few individuals who were unlikely. From the consumer’s perspective, the best possible insurance should pay out over 100 cents for every dollar it collects in premiums to claimants. The insurance fund that holds the money until it is needed should be earning interest, giving it, technically, more money to pay out than it collected.

Of course, it is impossible to find this truly perfect insurance because there must always be some overhead costs. Someone needs to collect and write the checks, there needs to be some kind of fraud detection, and some form of customer service, etc.

While prefect insurance is impossible, public health insurance in this country, and around much of the world, has gotten pretty close. Medicare has a MLR of roughly 97%. It is even possible to make highly regulated private insurance relatively cost-effective. In the Netherlands and Switzerland, two examples of extremely regulated private insurance systems, the average administrative overhead is about 5%. So those countries have the equivalent of roughly a 95% medical loss ratio.

With that high a percentage of premiums going to care health insurance is a good bargain. With only 80 cents on the dollar going to provide care, the private insurance that people are going to be forced to buy is a rip off. If you pay $10,000 a year in premiums, a whole $2,000 will not go to help someone in your risk pool get care. If you were buying into Medicare, or the Dutch or Swiss system, only $300-$500 of your premium is being wasted on profit or administrative overhead.

With such a low MLR, private individual insurance in America will become a money-making scam into which Americans are forced to pay. The vast majority of Americans would be better off taking all the money they would spend in premiums and putting it into a savings account, and paying cash for all treatments (that is if we could get rid of this terrible incentive of allowing providers to secretly negotiate different rates with different insurers). In fact, the orthodox Calvinists in the Netherlands are allowed to use such a system to exempt themselves from their mandatory insurance system.

I have repeatedly said I’m not ideologically opposed to the general idea of an individual mandate. I know there are systems around the world that use a highly regulated market, plus generous subsidies, and an individual mandate to provide affordable, high-quality health insurance for almost everyone. But, for the system to work, the government must first guarantee, through regulation, that every citizen will have access to affordable, high-quality, cost-effective insurance. The Senate bill completely fails to do this. It will force people to buy poorly regulated, expensive, wasteful private insurance. Progressives should never accept an individual mandate until the government is willing make sure the insurance Americans are forced to buy is worth the cost.

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