Where Does Your Health Insurance Dollar Go?

Health insurance is expensive; where does all that money go?  Milliman, the large actuarial firm, conducted a study of private health insurance data from 2014 to 2016 to answer that question.    (Milliman Study)   Not surprisingly,  physician services and hospital services are near the top, with 22.2% of premium dollars going for inpatient and outpatient physician services and hospital inpatient services account for 16.1% of the premium dollar.  But here are a couple of surprising results.  Prescription drugs, including those that are self-administered and those administered in a physician’s office or clinic, represent the single largest category, at 23.3% of the premium.  And this doesn’t even include inpatient stay drugs.  And non-physician related services during office and clinic visits account for 20.2% of the premium.  This category includes equipment, supplies, non-doctor staff costs and general overhead.  4.7% of the dollar goes to taxes; that is really worthwhile.    3.3% goes to broker commissions, regulatory fees, depreciation and debt service.  1.8% goes to “consumer engagement”, which appears to be a pathetic euphemism for marketing, only 1.6% goes to claims processing and associated processes, and 1.6% is spent on care management.  Cybersecurity, data gathering and analytics account for a further 1.6%.  Health plan administration, i.e. high-priced executives, are .7% and provider management is .5%.  After all that, 2.3% is left for profit.

So my brief comment is that it looks like about 82% of the premium dollar goes for healthcare.  If you don’t count taxes, it is a little higher.  That is a low amount.  Of the remaining 18%, about 7% is taxes and profits.  So 11% is the cost of administration.  The biggest chunk of that appears to be commissions.   I am surprised that health plans haven’t figured out how to be more efficient.  Administrative costs shouldn’t rise as fast as premiums, which are largely driven by medical costs.  In fact, with technology advances, true administrative costs should be declining and therefore becoming a smaller and smaller part of the premium dollar.  That isn’t happening.  I suspect some is due to consolidation in the health plan market, which should create scale that lowers both administrative costs and medical prices, but doesn’t seem to be.  Just as we see with providers, increases in market share just seem to result in higher premiums.  I think premiums could and should be at least 5% and potentially 10% lower.