Trump vowed to repeal and replace Obamacare. But many people are warning that it could be a disaster to repeal it or, amusingly, that it is too complex to change (if so, why was it enacted in the first place?) And many Obamacare supporters acknowledge that it has created serious problems (like tripling the cost of insurance) and needs to be fixed. Now Mr. Ryan has introduced a healthcare reform bill that is getting criticism from all sides, probably for very good reasons.
Liberal/Progressives and many healthcare professionals despise the health insurance industry, its profits, and the compensation of its executives. I believe their anger is mis-directed. To demonstrate why it is misdirected, I calculated an annual spend for healthcare insurance company profits, drug company profits, medical device company profits, excessive and unnecessary administrative costs, and fraud in government healthcare expenditures. Full disclosure my numbers are what the pros in the ivy league ivory towers call ‘qualitative’.
To calculate profits by these [evil] insurance company I totaled annual profit for all companies in the google finance list of related companies to Anthem(ANTM) which includes most the public US health insurance companies. This number does not include private health insurance companies and can be considered biased low for that. I don’t believe there are many of those, but I have not researched the issue extensively. Also to the extent any of these companies make profits on health insurance outside the US the number is biased high with respect to comparisons of US healthcare spending. Profit margins are in the range of 0 to 5% with an average of about 2.5%. Total Profit is about 15 billion USD annualized.
To calculate Drug and Medical Device company profits I did the same calculation for Glaxo (GSK) and Medtronic(MDT) respectively. The same biases apply here. For drug companies profit margins range from 7 to 25% and total profit was 64 billion USD. For device companies profit margins ranges from negative to 20% . Because of large losses at a couple of companies, total profit was only 786 million USD small in relation to other sums. That serves as a handy reminder that these companies take risks to make their profits.
As an aside I will note that the relation between profit margins for these industry groups seems about right. Drug companies are engaged in a riskier and more challenging tasks than health insurance companies. They “deserve” more profit. And one thing the profit numbers do not show for the drug and device companies is the losses by failed startups in their industries. Drug and device company profits grow from soil fertilized with the sweat, tears and dollars of venture capitalists.
Now let’s turn to some other costs that are part of US health care system. As customer or consumer, one can sense that you are dealing with a lot of administrative overheard with healthcare in USA. Pricing is opaque and almost impossible to get before service is rendered. Bills are paid months after service is rendered. System by which prices are discounted is opaque. Hyper regulation, exemplified by the skull-crushingly stupid requirement to fill out and sign the same stupid privacy disclosure form every time time one sees a new provider is just one of the many drivers of administrative bloat. All of this serves the interests of the administrati, embedded in insurance, government and provider service companies, like Charlie in the Mekong delta. These people work tirelessly making, following, not following, and massaging rules, terms, conditions, and cash flows. All while adding no value to the poor US healthcare consumer.
How can we quantify the unnecessary admin costs that US healthcare consumers are stuck paying? It’s widely accepted that US healthcare spending is about 19% of the US economy. I’ve seen estimate of the total administrative burden in healthcare costs at 25%. It sounds low to me, but I’ll take it. For a first pass say 10% of the 25% in costs are bloated and unnecessary costs that would not be there in a more efficient system. So 10% of 19% of the 18.85 trillion US GDP turns out to be 35 billion dollars, about 2.5 times our spend on profits at those wicked insurance companies.
Fraud in the Medicare and Medicaid program is, by the government own admission, 8% of Medicare and maybe something higher for Medicaid. The bar graph uses a 10% average for both programs to get a 95 billion dollars budget item for fraudulent healthcare services. Even at 8% it is still larger line item than drug company profit.
Total spend by government on healthcare for 2016 was projected at just under a trillion dollars in 2016. And there is clearly significant fraud going on, with some law firms are very interested in acquiring whistle blower plaintiffs. I gotta say I find the fraud number to be amazingly, incredulously high. And I am more than a little suspicious that some of the prosecutions amount to criminalizing behavior after the fact. Our 400 FBI agent task force uncovered less than 1% of the posited fraud. Still pulling in 712 million is a good return on the 100 million dollar investment in FBI agents, I guess.
If the government is, in fact, losing tens of billion of dollars every year to fraudsters, I will guarantee you this – government employees are in on the take and a chunk of it gets back to elected officials. Just ask Slim Pickens as Henry Biege in Rancho Deluxe – it’s always an inside job.
I did not put error bars on the graph but these numbers are +/- 50% for sure. But even with that level of uncertainty it gives clarity as to where the waste is in US healthcare. And it is not the drug companies. not the device companies and not the insurance companies. Working on a sequel to explain how to fix US healthcare system.