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The ACA Increased, Rather Than Decreased, Administrative Costs Of Health Insurance
By Robert Book in Forbes.
"Anyone who’s worked with government agencies and regulatory bodies –
even just by filing taxes returned or getting a driver’s license – might
find this hard to believe, but during the “heath reform” debate that
produced the Affordable Care Act (ACA), many proponents argued that the
increased government involvement in health care would reduce
administrative costs for the entire industry. This would either reduce
premiums or get more health care for the same money.
Paul Krugman made this argument in the New York Times, and three single-payer advocates made a similar argument in the New England Journal of Medicine.
The argument was partly based on the assumption that government is
inherently superior at administration, and partly based on the idea that
having a single “exchange” would eliminate the need for insurers to
incur “wasteful” marketing expenses. Advocates also claimed that requiring a minimum Medical Loss Ratio (MLR) and reduction of executive paythrough limits on the deductibility of compensation (Section 9014) would limit the unrestrained pursuit of profit.
The predicted impact was that reducing administrative costs would lead
to lower premiums and lower national spending on health care without
having to reduce the quantity or quality of actual health care
delivered.
Now we know – from actual data – that this did not happen. The ACA
made administrative costs of private health insurance go up, not down.
While insurance companies did actually reduce administrative costs in
the individual market, the amount spent by the federal government to
establish and operate the exchanges vastly exceeded that savings. So,
the ACA ended up providing government-subsidized administrative services
to health insurance companies – surely the opposite result than the ACA
advocates (no friends of insurance companies) would have wanted. And
the “subsidy” was inefficient: The government spent, on average, $1,539
per person enrolled in exchange coverage, and saved the insurance
companies an average of $149 per enrollee by doing so. Overall, the
government spent $10.32 for every dollar they saved the insurance
companies. (If you average in off-exchange enrollment as well, the
government expenditure comes to $628 per covered person.)
Not only is that not “savings” – that’s about the most inefficient subsidy imaginable.
Overall, insurance companies had an average administrative cost of
$414 per covered person in 2013, before the exchange provisions of the
ACA when into effect. Insurers’ cost dropped to $265 per covered person
in 2014, but the government spent $9.75 billion to enroll 6.34 million
people on exchanges. The total administrative cost (government plus
insurers) works out to $893 per person for 2014 – a 215% increase.
Now, in principle, some of those costs for building the exchanges
ought not to have to be repeated in subsequent years. In reality, the
exchange was such a disaster that much of it ends up being rebuilt every
year. Furthermore, not all of the government administrative cost was
setting up the exchanges. Some it was, believe it or not – marketing.
The government ran a lot of ads and sent a lot of direct mail to promote
healthcare.gov. When the government does marketing it’s called “public
awareness,” but it’s basically the same thing. Those expenses continue
every year.
Still, suppose, for the sake of the argument, that we can separate
out some expenses that stand a chance of not being repeated. The easiest
part is the ACA’s grants to states to initiate their own exchanges or
their participation in the federal exchange. If we assume that those
grants will not be repeated and have effects spread over three years,
the government’s administrative cost per person in the exchanges is
reduced to $895. If we spread all of the first-year costs over
three years – something surely unrealistic (even though we don’t have
all the subsequent numbers yet, surely they exceed zero), the federal
cost is $513. Adding the $265 incurred by insurers, and the total is
$778 per person. That’s still 88% higher than the pre-ACA cost.
Anyway you look at it, the promise of reduced administrative cost by
involving the government was a total failure. It produced the opposite
result.
(For more details, see my study of administrative costs published in December by the American Action Forum.)"
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