Health Care & Prescription Drugs News

With Californians increasingly concerned about rising health care costs, CALPIRG Education Fund today released a report finding that health insurers can cut overhead and increase patient care.  The report, More Bang for the Health Care Buck: How an Efficiency Standard for Health Insurers Can Reduce Overhead and Deliver More Patient Care, examines how much health insurers spend on health care benefits, rather than administrative overhead.  It concludes that an efficiency standard requiring insurers to spend 85% of their revenues on patient care is a realistic, achievable standard that will reduce the cost of health care and provide higher-value coverage.

“We buy insurance so that medical care is there when we need it,” said Michael Russo, Health Care Advocate with CALPIRG. “But how many of our premium dollars go to care, and how many are wasted on endless paperwork and other administrative costs?  Some, like Kaiser and Western Health Advantage, do a good job of keeping overhead low.  But others, like Blue Cross and Great West Healthcare, don’t give consumers a good value for their health care dollar.”

When consumers buy health insurance, they have no guarantee of a fair return on their health care dollar.  Premiums should go primarily towards care, but they sometimes go disproportionately to administrative overhead instead.  While some administrative costs are inevitable, insurers also spend billions of dollars attempting to shift costs onto providers, and processing duplicative, overly-complex paperwork. To encourage efficiency and get costs under control, California has considered legislation that would require insurers to spend 85 percent of the premiums they take in on health care, rather than administrative costs, profits, and other expenses. 

“Our research surveyed health plans in California, and in the nation at large, to see how much spending was going to care and how much was being chewed up by overhead,” Russo continued.  “We found that insurers large and small, for-profit and non-profit, can spend 85% of premium dollars on patient care, by making achievable improvements in efficiency.  In fact, most California insurers already meet that requirement.”

Among the report’s findings:

• Many insurers, small and large, already meet the 85% standard, proving that it is an attainable, practical requirement.  Almost 70 percent of California HMOs spend 85% or more on patient care, as do 47 percent of nationwide insurers.
• Of surveyed California HMOs who do not meet the 85% standard, we found only one that spent less than 75 percent on patient care, suggesting that insurers will be able to make the moderate efficiency gains necessary to comply with an 85% requirement. 
• An 85% requirement would redirect at least $1 billion annually from administration and profits to efficiency savings and improved care.

“Setting an insurer efficiency standard just makes sense,” Russo concluded.  “Our research shows that the industry can comply with an 85% standard – in fact, most of it already does.  This simple policy change will make the outliers measure up.  It will bring down costs and improve our health at the same time.”

Click here for the full report.

CALPIRG (California Public Interest Research Group) Education Fund conducts research and public education on emerging public interest issues.