Attacking health plans is fashionable, but calling them the bogeyman detracts from real reform
In various cultures, a bogeyman is a shapeless monster used to scare children into good behavior. And there is little question that politicians – from Donald Trump to Democrats to Republicans — increasingly cast health plans as bogeymen in the debate over affordability.
For Democrats, health plans have always been the evildoer. Democrats and other critics argue that insurers are earning enormous profits, wasting huge amounts on administration, and essentially ripping off consumers.
But Republicans increasingly talk of health plans as responsible for the affordability crisis as well, frankly because they have done little to remedy the problem. Indeed, just as insurers were registering terrible margin numbers, President Trump repeatedly criticized insurers, saying they are making “billions and billions of dollars.” He argued that government healthcare money should go directly to individuals rather than insurers.
A new study in JAMA Health Forum suggests that casting health plans as the mythical being is wrong and diverts attention to the real problem. Researchers from Yale University and the University of Wisconsin-Madison examined commercial insurance data from 2011 through 2024. They found that average premiums increased 78.4%, or $3,143 per enrollee. But underlying healthcare spending increased $2,844. In all, 91% of premium growth was associated with growth in healthcare spending. That should be a wake-up call.
Health plan profits are not what many think
Are health insurers profitable? Certainly, many are.
But there is an enormous difference between billions of dollars of aggregate corporate earnings and the profit margin on each healthcare premium dollar.
Since implementation of the Affordable Care Act’s medical loss ratio (MLR) requirements, insurers generally must spend at least 80% of individual and small-group premiums and 85% of large-group, Medicaid managed care, and Medicare Advantage premiums on medical care and quality improvement. If they do not, money must be rebated to individuals, employer groups, or the government.
Actual health insurance profit margins are generally only a few percentage points of premium revenue. KFF recently characterized insurer profit margins as “generally modest” and typically no more than a few percent of premium revenue. And margins today are under considerable pressure as medical utilization and costs have risen.
The JAMA study makes an equally important point. What it calls the insurer “markup” includes both administrative expenses and profits. That combined amount actually fell from 18.6% of premiums in 2011 to 14.9% in 2024. In other words, while premiums exploded, the insurer share of those premiums declined.
Admin expense is not always wasteful
Critics also frequently contrast private-plan administrative expenses with the very low administrative expenses reported by traditional Medicare and other government healthcare programs. That comparison is worth examining, but it is incomplete.
Health plans build and manage provider networks, negotiate reimbursement, process claims, detect fraud, coordinate benefits, manage pharmacy programs, perform utilization management, provide member services, manage quality programs, engage members and increasingly support care management. Those functions cost money.
Traditional fee-for-service Medicare has much lower direct administrative costs, but it also operates differently. The government establishes provider prices administratively rather than negotiating networks and rates in the manner private insurers do. KFF notes that traditional Medicare spends less than two cents of each dollar on program administration, while roughly 10 cents of each Medicare Advantage dollar goes to overhead and profit. At the same time, it notes that eliminating insurers would not eliminate the major underlying cost drivers, including hospital prices, new drugs and technology.
I absolutely favor demanding efficiency and accountability from health plans and I think the advent of technology and AI will help with this. But assuming that approximately 10% or so spent administering a complex insurance and care-management system is inherently wasteful is too simplistic. The better question is: Are we receiving value for that money?
Follow the healthcare dollar
This gets us to the real affordability problem. It is healthcare costs themselves. Democratic policymakers have long criticized insurer profits and practices as well. The rhetoric now increasingly crosses party lines. But the new evidence is important because it tells policymakers where the overwhelming majority of premium growth is actually occurring.
It is underneath the insurance premium. The JAMA researchers conclude that efforts to control premium growth should focus on controlling healthcare spending. Again, their analysis found that healthcare spending growth explained 91% of premium growth from 2011 through 2024.
That is why I continue to argue for price reform. Hospital and physician consolidation has created enormous negotiating leverage. Vertical integration among hospitals, physicians, pharmacies, PBMs and insurers creates additional opportunities for conflicts and questionable pricing practices. Those arrangements deserve far greater scrutiny and, where they are anticompetitive or abusive, policymakers should act.
Health plans also need greater accountability on prior authorization, claims practices, network adequacy, transparency and member experience.
But those reforms should not distract us from the larger affordability problem.
Stop fighting the wrong war
Making health plans the villain may make for good politics. It does not make for good healthcare policy. If policymakers convince Americans that eliminating insurer profits or trimming administrative expenses will somehow solve healthcare affordability, we will lose another decade while prices continue rising underneath the system.
Real reform has to go deeper: as I note in The Healthcare Labyrinth and on my website often, that means price reform, a major pivot toward primary care and care management, and coverage reform that makes insurance genuinely affordable.
Hold insurers accountable. Attack abusive consolidation and vertical integration. Demand better administration. But follow the money. The overwhelming evidence from this study says the healthcare affordability crisis is primarily a healthcare cost crisis, not an insurer-profit crisis.
Until Washington recognizes that distinction, we will continue fighting the wrong war.
#healthcare #healthcarereform #healthplans
— Marc S. Ryan
