Obamacare: More Regulation, Less Innovation
When a healthcare bill lands on President Obama’s desk sometime after the New Year, it will almost certainly contain a provision that requires health insurers to spend a large percentage of total premiums (probably 80 percent) paying medical claims. This sounds like a common sense measure but, in fact, it will either discourage innovation or, more likely, do nothing at all.
The mandate won’t have significant consequences since it doesn’t actually impact that many insurers. The average insurer spends about 13 percent of premiums on marketing, care management and other general overhead. The most efficient, large ones spend 5-6 percent. Only a handful of smaller health insurers—many of which pride themselves on expensive practices like having actual people (rather than computers) answering their phones--spend more than 20 percent of premiums on “overhead.” Particularly at the margins, it would be reasonably easy for insurers to force some of these costs onto medical providers and, yes it’s possible, cut some executive perks and figure out ways to work smarter.
But even apparent “efficiencies” might come at a cost. Under a mandate to minimize “overhead spending” an insurer that develops a computer system to monitor care and make sure that all of its diabetic clients get the exams they need to avoid limb amputations has simply added to its “overhead” costs and might get dinged for it. On the other hand, doctors who recommend expensive, ineffective back surgery, on the other hand, will give insurers “credit” for providing reimbursed care. Likewise, if insurers simply transfer certain types of record-keeping and care management burdens to medical care providers, they can reduce their own “overhead” without increasing true medical care spending a penny.
In any case, a mandate that dictates how insurers spend their money might well squelch innovation. An insurer that wanted to make a large one year investment in a new computer system, increase size and realize new economies of scale through relentless advertising, or step up anti-fraud enforcement to lower long-term premiums for its clients might find itself forbidden from doing so. Even more likely, smaller insurers that don’t compete on price to start with, may find themselves in deep financial trouble if forced to cut “overhead” costs that are a source of competitive advantages.
It’s not desirable for insurers to spend enormous amounts of money on overhead. But not all overhead is waste. The “overhead” controls in the new healthcare legislation won’t do much. And they might do harm.