Stop Blaming The Insurers

Here's what's not in dispute: The United States spends 16 percent of its national income on health care, more than any other country in the world. In return, we get lower life expectancy than most other Western countries, uneven care, and enormous anxiety about how to pay for it.

Who's to blame? Not the hospitals and doctors, or the health care consumers (that is, us) who insist on expensive and questionable elective procedures. It's big health insurers—isn't it? Easy enough: Our interactions with them are impersonal, their political clout is substantial, and their names and logos look and sound like they came out of focus-group hell.

Alas, the slice of our enormous health care costs that can reasonably be laid at the insurers' doorstep is much, much smaller than most people believe. The debate about health care tends to be informed by three notions about health insurance:

* The profits of private insurers are so big that cutting them out would meaningfully lower costs.
* Private insurance clearly costs more than a government-run system such as Medicare.
* Mergers that have created a small number of huge and powerful insurers increase health care costs.

This is the most pervasive and most crowd-pleasing of the health care myths. The profits of the big health insurance companies are central to the rhetoric of the health care debate, figuring heavily in the Democratic primary campaign. Barack Obama's platform includes a promise to force insurers to spend enough on care "instead of keeping exorbitant amounts for profits and administration." Michael Moore, the director of Sicko, has hammered the point repeatedly, thundering about how insurers maximize profits by "providing as little care as possible."

The problem here is that between them the five biggest health insurers—UnitedHealthCare, Wellpoint, Aetna, Humana, and Cigna—which cover 105 million members, last year had profits between them of $11.8 billion. This is not a small number; these are very profitable companies. But total U.S. health care costs last year were in the area of $2.3 trillion.

So, with a membership that included a little more than half of the Americans covered by private insurance, these five insurers' profits came to 0.5 percent of total health care costs. (One interesting point of comparison: In 2006, the income earned by the 50 biggest nonprofit hospitals alone came out at $4 billion.)

Critics also argue that insurance companies pass along excessive administrative costs to their customers. Wellpoint, for instance, spends 18 percent of the premiums it takes in on sales and administrative costs. That represents a real concern but merely raises the next question: Can a government-run program that cuts out insurers do it for less?

Myth No. 2: Evidence from Medicare shows that a government program can provide the same services for less than the insurers.

A common argument raised in support of a national "single payer" health insurance system is the experience of Medicare Advantage, a program that gives seniors the option of replacing traditional Medicare with private insurers' HMO or "preferred provider" network plans. Nine million of the 44 million people Medicare covers have signed up. A well-publicized report by the Commonwealth Fund calculated the cost of these plans at 12 percent more than traditional Medicare. This number was picked up by the New York Times' Paul Krugman as an illustration of the excessive costs of private insurance. More recently, the Center on Budget and Policy Priorities, a liberal think tank, has estimated the greater cost of Medicare Advantage as more than $1,000 a year extra per beneficiary.

These accurate numbers miss the fact that Medicare Advantage's design virtually guarantees that it will be more expensive than traditional Medicare. The reason for this, however, is not the excessive cost of having private insurers administer the plans. It's the cost of inducements that government has offered seniors to join them.

The original idea behind Medicare Advantage was to reduce costs by pushing seniors into HMOs that would be able to rein in health care costs. The big incentive for seniors to join the plans is supplemental coverage similar to what's offered by Medigap plans.

The government pays insurers more than the costs of Medicare, but most of that money is (and must be, by mandate) returned to members in the form of lower deductibles and co-payments. Yes, Medicare Advantage HMO programs do cost the government more than standard Medicare.