Single payer supporters do a good job of setting forth the fairness argument: “everybody in, nobody out.” But on the economic argument, many miss the main point. They usually place blame for the huge markups charged by insurance companies on inefficiency and greed. But it's much worse. Those big markups are inherent in the nature of the private health insurance business itself. Even if all CEO's worked for $1 per year, if net profits of insurers were limited to 5% of sales, and if all operations were highly efficient, the big markups would still be there.
Healthcare insurers are not stupid and inefficient. They are smart and efficient. For private health insurance, alas, it pays to spend a lot of money denying care. The famous "invisible hand" pushes them to charge a big 45% markup over treatment cost..
Physicians for a National Health Plan did research that unearthed the often cited number of 31% for “overhead”. That is, 31% of policy prices are diverted from paying for actual medical treatments. They would better be called a markup of 45%, a markup over the cost of the medical treatments paid for by insurance. Single-payer Medicare shines by comparison, with a low markup of less than 5%.
Unfortunately, many follow PNHP in blaming the big disparity on inefficient administrative costs, or on greedy insurer profits and CEO salaries.
But that truly unconscionable 45% markup is not due to inefficiency or greed. Instead it follows inevitably from the nature of the private health insurance business. It is caused by the“invisible hand” so much admired by advocates of free markets. The market pushes insurers into minimizing their TOTAL costs, not just the medical treatments they pay for – i.e., not just their costs for “medical losses”. (As they were called until recently. That common industry term was dropped because people don't like their treatments being called “losses”. This is glaring evidence that health insurance is very different from all other kinds of insurance, where a loss is a loss, both to insurer and insured.)
Total cost for any insurer is the sum of loss cost plus loss prevention cost. For health insurers, loss cost is what they pay for treatments. Payment for treatment denials is a loss prevention cost they pay to prevent loss costs. And here's the rub: if insurers were to decrease that denial cost, the result would be an increase in treatment cost GREATER than the decrease in denial cost. Their total costs therefore already ARE at a minimum.
Sadly for us and for the health insurers themselves, to achieve minimum total cost, the famous invisible hand of the market forces insurers to spend a lot to prevent losses. So they spend a ton of money on armies of denial clerks. The full cost of those treatment denials is a whopping 45% of treatment costs.
Free marketers think competition will drive that “overhead” down. It won't. It is high because competition minimizes TOTAL costs, not just treatment costs. For health insurance, unfortunately, minimum total cost occurs when loss prevention costs (for denials) equal 45% of loss costs (for actual treatments).
What do the insureds get for that 45% markup, which is bundled into their policy prices? Treatment denials. And where does almost all the money paying for those costly treatment denials go, 45% of actual medical treatment costs? Out of state, never to return. Over $2,000 per year per insured is shipped off and lost forever, for treatment denials serving the policy holder no good purpose.
THAT is the economic argument for single payer. Private health insurers are impelled by the famous invisible hand of the market to incur denial costs of 45% of actual treatment costs. Money for that noxious markup goes down the drain forever. It is inevitable with private insurance. It can be cut substantially by moving to a single payer health insurance system.