From the Weekly Standard
By by Stanley Goldfarb — The president’s plan to reduce health-care costs mostly depends on reducing the cost of the premiums of those “villainous” insurance companies. This plan is premised on the idea that insurance companies have large profits and administrative expenses that can be pared down without any real impact on the payments to those who provide health care. It also assumes that health-care costs have risen because of the rise in insurance premiums. Unfortunately, logic and data do not support either contention. If Obama’s plan passes, the country may spend the next five years vainly waiting for reduced insurance premiums to control health care costs.
The first obvious problem with this plan is that every incentive exists for for-profit insurance companies to maximize profits, hence their designation as for-profit companies. No publicly traded for-profit company can survive if it loads up on administrative costs to keep down profits. If the profits of health-care insurance companies were very high, then obviously an argument could be made to utilize those windfall profits to underwrite the cost of insuring the uninsured. In fact, the health insurance segment of the insurance business is just not terribly profitable.
The health-insurance industry ranked 86th among U.S. industrial sectors, according to Yahoo finance. The average profit margin for the industry as a whole was a mere 3.3 percent of revenues. Certainly there is some money to wring out of this margin, but to “bend the curve” of the growth of 17 percent of the U.S. economy, reducing these profits will not suffice. Reducing premiums will instead reduce the payment to physicians and hospitals, as that is the largest expense to these companies, somewhere between 80 to 95 percent depending on the particular firm. Reduce the premium and reduce the payment–or drive the company out of business. And perhaps this is the ultimate goal.
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