Targeting Health Insurance Companies Not the Answer to Healthcare Reform

The cost of insurance is merely a reflection of health care cost. Attacking health insurance companies misses the target.

Insurance companies are in the business of spreading the risk of health care expenses across a large population of premium payers. To establish premiums' rates, insurance companies estimate how much a given population of employees will use in health care and then set the rates for a year based upon a formula that will allow for claims to be paid, company expenses to be paid -- and then a profit. Once the expenses for the year are tallied, they will then make adjustments, if needed, in the premiums for the following year. The health insurance model looks something like this:

If the annual premiums for a group of people were $1,000,000, then the money from those premiums would be distributed as follows:

Claims Paid: $850,000

Administrative Costs: $90,000 (includes office lease, personnel, marketing, sales, commissions, taxes, etc.)

Net Profit: $60,000

Total: $1,000,000.

Thus, the insurance company hopes to make a 6% return. That would be a good year for the company. If health care costs rise in a given year, then rates go up the next year. In addition, if the claims experience (the actual cost of medical care for a given group of employees) is higher than expected, then premiums for that group will be adjusted accordingly.

Insurance does not drive the cost of health care; it is the cost of health care that drives the cost of insurance. Anyone in the health care or insurance industry understands this as absolute fact. For the Obama administration and other advocates of a public option to point blame on the insurance industry is a red herring and a deception.

Take a look at a few of the largest health care companies' 2008 net profits in percentage of sales and compare that to some other companies:

Tenet 2.63%
United Health Group 4.14%
Aetna 3.85%

And some non-health care companies:

Wal-Mart 3.31%
Microsoft 24.93%
Exxon 8.98%
Apple 14.97%
Google 20.56%
Pfizer 16.32%
Johnson & Johnson 20.76%
Merck 23.59%
Bristol-Myer Squibb 26.04%

In 2008, the average net profits for the health insurance industry were below 5% of sales. If the annual profits of the health insurance industry were 20 or 30 percent, then targeting the industry as one of the culprits would be appropriate, but that simply is not the case.

There are many issues driving up health care costs. Let's focus on a few and suggest some remedies.

First, there are many more solutions for illnesses now than there were just a few years ago. People that once died of heart attacks or cancer are now being cured with new procedures and drugs. Those things cost money, so they drive up health care costs. This is bad from a cost perspective, but it is clearly outweighed by better care and outcomes for everyone. Let's keep the research and innovations coming, as we all benefit.

Secondly, another issue involves unwarranted or frivolous lawsuits. As a society, we have become accustomed to technology solving all of our problems. Therefore, when something doesn't go right, many people have the mindset that someone must be to blame. The skilled hands of a good surgeon can perform identical procedures on one hundred patients, but there will be successes for some and disappointments for others, and we all know this to be the case. A poor outcome does not always mean that someone is at fault, as no human body is the same as another. It's called "practicing" medicine for a reason.

In order to prevent a lawsuit that could end a career, doctors do everything they can to protect themselves, including performing additional tests and procedures -- just so it can be said that everything was tried, which drives up the costs of treatment. Additionally, increased litigation drives up malpractice insurance, which often runs into the hundreds of thousands of dollars annually for a single practice.

A third issue is the unnecessary use of prescription drugs, and the demand-generation of those drugs through heavy advertising. Take for example the prescription eye drop Restasis, a product that could be classified as a "designer drug."

Restasis increases the production of natural tears, and therefore reduces dry eye (referred to by the makers of the product as "dry eye syndrome"). Not a bad thing, and one has to applaud the product innovation, but most of us got along fine with over-the-counter medications. Restasis is heavily advertised, and demand is up, so good for them. But this is bad news for an insurance company, since a thirty-day supply can cost the company as much as $250. In some cases, an individual's monthly insurance premium may not even cover that cost, let alone any other health issues.

Once more people begin using a drug like Restasis (Restasis is used here as an example only), one should not be surprised when premiums go up. Don't blame the insurance company! Remember, the cost of insurance is directly related to the cost of health care. Treatment and prescription costs go up, and insurance rates follow -- it's that simple.

Clearly, change is in order, and modifying the laws regarding frivolous lawsuits is a start. Another suggestion is to ban advertising for litigation services on television and radio, and ban advertising of prescription drugs on television and radio as well. This goes against the conservative mindset, as most conservatives would prefer to have market forces prevail. However, some type of framework is necessary to control costs while allowing private industry to flourish.

Advertising of legal services on television and radio is new to the American scene. In the U.S., law firms were not allowed to advertise on television and radio until the mid 1980s. Prescription drug advertising on television and radio is also a new phenomenon. In both industries, prior to this heavy advertising, laws firms had a robust business in our country, and prescription drug companies thrived as well. Limiting the demand advertising would not hurt either industry.

Litigation in the U.S. is out of control and undermining the fabric of our health care economy. In many cases, it is also undermining our common sense.

As for prescription drugs, suggestions to patients for the use of prescription medication should be made by their doctor, and not demand-created by advertising. Drug companies should continue to sell and educate the doctors on the benefits and side effects of their medicines, and then it should be the doctor's and patient's decision if a drug is needed.

In summary, private enterprise -- including health care providers, drug companies, and yes, even insurance companies -- has given us the best health care in the world. No government entity can give the quality of service and innovation that the private sector can. Costs will go up or the quality of services will go down -- or both, once the government steps in. Just compare the customer service experience at a UPS store or FedEx store to a visit at the U.S. Post Office. Enough said.  

Creighton Hill blogs at thenewconservative.com.
The cost of insurance is merely a reflection of health care cost. Attacking health insurance companies misses the target.

Insurance companies are in the business of spreading the risk of health care expenses across a large population of premium payers. To establish premiums' rates, insurance companies estimate how much a given population of employees will use in health care and then set the rates for a year based upon a formula that will allow for claims to be paid, company expenses to be paid -- and then a profit. Once the expenses for the year are tallied, they will then make adjustments, if needed, in the premiums for the following year. The health insurance model looks something like this:

If the annual premiums for a group of people were $1,000,000, then the money from those premiums would be distributed as follows:

Claims Paid: $850,000

Administrative Costs: $90,000 (includes office lease, personnel, marketing, sales, commissions, taxes, etc.)

Net Profit: $60,000

Total: $1,000,000.

Thus, the insurance company hopes to make a 6% return. That would be a good year for the company. If health care costs rise in a given year, then rates go up the next year. In addition, if the claims experience (the actual cost of medical care for a given group of employees) is higher than expected, then premiums for that group will be adjusted accordingly.

Insurance does not drive the cost of health care; it is the cost of health care that drives the cost of insurance. Anyone in the health care or insurance industry understands this as absolute fact. For the Obama administration and other advocates of a public option to point blame on the insurance industry is a red herring and a deception.

Take a look at a few of the largest health care companies' 2008 net profits in percentage of sales and compare that to some other companies:

Tenet 2.63%
United Health Group 4.14%
Aetna 3.85%

And some non-health care companies:

Wal-Mart 3.31%
Microsoft 24.93%
Exxon 8.98%
Apple 14.97%
Google 20.56%
Pfizer 16.32%
Johnson & Johnson 20.76%
Merck 23.59%
Bristol-Myer Squibb 26.04%

In 2008, the average net profits for the health insurance industry were below 5% of sales. If the annual profits of the health insurance industry were 20 or 30 percent, then targeting the industry as one of the culprits would be appropriate, but that simply is not the case.

There are many issues driving up health care costs. Let's focus on a few and suggest some remedies.

First, there are many more solutions for illnesses now than there were just a few years ago. People that once died of heart attacks or cancer are now being cured with new procedures and drugs. Those things cost money, so they drive up health care costs. This is bad from a cost perspective, but it is clearly outweighed by better care and outcomes for everyone. Let's keep the research and innovations coming, as we all benefit.

Secondly, another issue involves unwarranted or frivolous lawsuits. As a society, we have become accustomed to technology solving all of our problems. Therefore, when something doesn't go right, many people have the mindset that someone must be to blame. The skilled hands of a good surgeon can perform identical procedures on one hundred patients, but there will be successes for some and disappointments for others, and we all know this to be the case. A poor outcome does not always mean that someone is at fault, as no human body is the same as another. It's called "practicing" medicine for a reason.

In order to prevent a lawsuit that could end a career, doctors do everything they can to protect themselves, including performing additional tests and procedures -- just so it can be said that everything was tried, which drives up the costs of treatment. Additionally, increased litigation drives up malpractice insurance, which often runs into the hundreds of thousands of dollars annually for a single practice.

A third issue is the unnecessary use of prescription drugs, and the demand-generation of those drugs through heavy advertising. Take for example the prescription eye drop Restasis, a product that could be classified as a "designer drug."

Restasis increases the production of natural tears, and therefore reduces dry eye (referred to by the makers of the product as "dry eye syndrome"). Not a bad thing, and one has to applaud the product innovation, but most of us got along fine with over-the-counter medications. Restasis is heavily advertised, and demand is up, so good for them. But this is bad news for an insurance company, since a thirty-day supply can cost the company as much as $250. In some cases, an individual's monthly insurance premium may not even cover that cost, let alone any other health issues.

Once more people begin using a drug like Restasis (Restasis is used here as an example only), one should not be surprised when premiums go up. Don't blame the insurance company! Remember, the cost of insurance is directly related to the cost of health care. Treatment and prescription costs go up, and insurance rates follow -- it's that simple.

Clearly, change is in order, and modifying the laws regarding frivolous lawsuits is a start. Another suggestion is to ban advertising for litigation services on television and radio, and ban advertising of prescription drugs on television and radio as well. This goes against the conservative mindset, as most conservatives would prefer to have market forces prevail. However, some type of framework is necessary to control costs while allowing private industry to flourish.

Advertising of legal services on television and radio is new to the American scene. In the U.S., law firms were not allowed to advertise on television and radio until the mid 1980s. Prescription drug advertising on television and radio is also a new phenomenon. In both industries, prior to this heavy advertising, laws firms had a robust business in our country, and prescription drug companies thrived as well. Limiting the demand advertising would not hurt either industry.

Litigation in the U.S. is out of control and undermining the fabric of our health care economy. In many cases, it is also undermining our common sense.

As for prescription drugs, suggestions to patients for the use of prescription medication should be made by their doctor, and not demand-created by advertising. Drug companies should continue to sell and educate the doctors on the benefits and side effects of their medicines, and then it should be the doctor's and patient's decision if a drug is needed.

In summary, private enterprise -- including health care providers, drug companies, and yes, even insurance companies -- has given us the best health care in the world. No government entity can give the quality of service and innovation that the private sector can. Costs will go up or the quality of services will go down -- or both, once the government steps in. Just compare the customer service experience at a UPS store or FedEx store to a visit at the U.S. Post Office. Enough said.  

Creighton Hill blogs at thenewconservative.com.