Health Care, Part 2: Where Does All Our Money Go.
This week we will look at where our healthcare dollar is being spent and where our money goes. Be forewarned: this is tough stuff and can’t be presented in a sound bite. You are going to have to wade through the numbers and follow the money. Doing so, you will begin to understand how wasteful our healthcare financing is and will begin to formulate a broad outline of how the system can be redesigned to be effective and equitable. The bottom line: we can save between $350 - $450 billion by redesigning the system. That’s a lot of money – as much as the yearly military budget.
We’ve already established that we spend more, in both absolute and proportional dollars to our Gross Domestic Product (GDP), than any other country in the world. For that expenditure, we have some of the worst healthcare measures in all the industrialized world1.
So where does our money go? It is instructive to look at the Security and Exchange Commission (SEC) filling of UnitedHealth Group2 (open in a separate page so you can follow along). Through the purchase of Oxford Health Plans and Mid-Atlantic Medical Services, United HealthGroup is now the dominant health care insurance provider in New York. Note that the filings are expressed in millions of dollars, so that any of the four or greater digit numbers represent Billions.
United HealthGroup’s revenues come from direct premiums ($65,666 billion) and administrative health care services ($4,268 billion) that it sells in the open marketplace. These services are mostly to large corporations or government entities – including New York State. From these revenues it expends $53,308 Billion in health care coverage. Do the math and United HealthGroup retains nearly 25% of the health care dollar that it collects directly as a premium or an administrative service that it sells because the coverage plans are so complicated.
There are literally hundreds of plans that can be selected. All this proliferation of choice is of course a smokescreen for reducing coverage all the while appealing to our fantasy that we are being given the “freedom” to choose and determine our own destiny. United HealthGroup is so good at charging more and providing less that its corporate profits (net earnings) have increased a billion dollars each year, from $2.4 billion in 2004 to $3.1 billion in 2005 to $4.1 billion in 2006.
Net Earnings (profits) are reported after all expenses are paid, including the salaries and benefits to the corporate officers, most notably, the $1.6 Billion in stock options to the company’s CEO, William McGuire. To put this into perspective, the US spends $1.5 trillion on healthcare and therefore United HealthGroup’s CEO got more than 1/1000 of the entire US expenditure on health care (1012 – 109 = 103 = 1000) – but he thinks it’s enough! I’m ashamed to say that he’s a doctor.
Realizing the enormous profit involved, is it any wonder Empire Blue Cross/Blue Shield wanted to convert from a non-profit to for-profit organization. In 2002, New York under Gov. Pataki took the mantra of market efficiency and allowed the conversion. The price was a one time payment to the state. The deal is most succinctly related by Health Affairs3
“On 7 November 2002 Empire Blue Cross Blue Shield (BCBS) culminated a seven-year effort to convert from nonprofit to for-profit ownership, selling 20 percent of its stock and obtaining $417 million in one of the most successful initial public offerings (IPOs) in the history of the health insurance industry. The IPO proceeds and other corporate assets were not used to endow a charitable health care foundation, as is done in most other states, but were transferred to the New York State budget largely to finance wage increases for unionized hospital and nursing home workers. The quid pro quo was the endorsement of a conservative governor by a liberal labor union, contributing to a Republican electoral landslide in a Democratic state and to the governor’s commitment to sustain health care programs in what otherwise was a disastrous budgetary context. The big losers were the community organizations that would have received the largess of a charitable foundation and who instead were left to gnash their teeth, denounce the predatory state, and invoke constitutional objections to one of the most brilliant and sordid chapters in the annals of health policy.”
– some real insight into the sordid side of New York politics.
The same analysis can be applied to Empire Blue Cross/Blue Shield. The parent company is WellChoice, incorporated in Delaware. The SEC fillings of WellChoice shows that is not much better than United Healthcare and retains 23% of our healthcare premium.
Do this for any of the insurance companies in the healthcare arena (should I now call it a racket) and the long and the short of it is that 1/4 of our healthcare dollar does not go for healthcare but rather to insurance companies coffers.
A word about the concept of market efficiency. There is no doubt that successful companies in the private sector are very efficient. That means that they will turn the greatest profit for the least expense. Of course they will – they are there to make a profit. The question is: do we have the financial luxury to allow the insurance companies to make a profit off our healthcare?
No one wants to turn our healthcare mess into a government service mess – see the last post for the ills of making hospitals and healthcare providers into civil servants as is done in Great Britain4. Is there, however, another alternative to a private system of health insurance and the true socialized medicine of Great Britain?
The answer can be found in Medicare.
Medicare is essentially public insurance coverage for those over 65 and for the disabled. Its overhead – the cost of running the program – is 3.4%. Of the revenues that Medicare collects, as opposed to the 25% that the private insurance companies keep, Medicare only retains 3.4%. So when “efficiency” is applied to the peoples’ healthcare coverage and the amount of money available to pay for it, Medicare wins hands down.
Realizing the tremendous profits that are involved, is there any wonder why the insurance companies viciously oppose a national health insurance system and why they spend millions (which is really a drop in the bucket compared to their profits) in campaign contributions and on advertising campaigns – remember Harry and Louise of the 1990’s. (Let’s be very clear. Hillary Clinton’s healthcare plan utilizing “managed care” in the 1990’s was a disaster, and we are now left with its private form. So now instead of the government limiting your choice of medical treatment, it’s the insurance companies – they aren’t stupid and are very efficient at extracting profits for minimal performance).
Combine this with the added administrative costs of hospitals and providers, nearly one third, 31% of our healthcare dollar is eaten up – wasted – on administrative costs5.
That brings us to our congressman. Why would he oppose an efficient public national health insurance program calling it “socialized medicine”. Follow the money. Over the years he, along with most of our lawmakers, including Hillary, have been generously funded by the HMOs and insurance companies. This funding ensures that the insurance companies get their way. Some of Mr. McHugh’s contributors are:
America’s Health Insurance Plans the trade organization for the insurance companies. $2,000
The contributors to this PAC are all the insurance companies, including guess who: United HealthGroup.
What is also notable is the interlocking relationships between PACs. For instance, the Texas Freedom Fund is funded by insurance companies and pharmaceuticals among others, that gives to the CME Fund the gives our congressman $2,000. Follow the money.
I think you can see how corrupting it is, and why our representative, and for the matter, most of our politicians will not do what is best, least expensive and most effective for all of us. The only way to solve this problem is public campaign financing.
Next post: The pharmaceutical industry’s cut of our healthcare dollar.
1. Theophilus, Post 12/06/2007
2. Filing 10-K United HealthGroup, Annual Report 2006
3. Health Affairs 22(4):100-118, 2003
4. Theophilus, loc. cit.
5. Woodhandler, S., Campbell, T., Himmelstein, D., “Costs of Health Care Administration in the United States and Canada,” New England Journal of Medicine, 349:768-75, 2003.
John Kiechle on 17 Dec 2007 at 7:58 am #
Your 16 Dec 07 analysis is absolutely on target. It is not about the health; it is about the money. John Kiechle
PCS on 17 Dec 2007 at 9:09 am #
Would you address the local situation in the Adirondacks? Many Doctors are claiming they aren’t making enough money to pay property taxes on their lake front property. Some local Doctors also claim their malpractice insurance premiums are out of sight and unaffordable. I am definitely in favor of Medicare for all as soon as possible. But how do you address complaints of putting the health insurance businesses out of business by providing “socialized” medicine? Where will those jobs go? This is more of a political question of course.
Last question. The majority of malpractice comes from a very small percentage of physicians. Why aren’t their licenses taken away?
Theophilus on 17 Dec 2007 at 10:36 pm #
PCS –
Great questions. They are going to require more than a quick comment reply. They deserve a few complete posts. Please be patient as I develop the whole series. I will address the consequences a medical liability tort system out of control and the malpractice crisis.
You are absolutely right about putting health insurance business out of business. I often quipped during my congressional campaigns that I was not running against John McHugh but rather against Hartford Connecticut – the insurance capital of the US.
It is a matter of priorities. Do we support an industry (along with its jobs) that is not providing healthcare or use that money to provide healthcare. I certainly do realize that many in the insurance industry will loose their jobs, but we just can’t have 47,000,000 Americans without access to healthcare.
After I develop the reasons for redesigning our “sickcare” system into a healthcare system, I will provide roadmap for its reform.
As for paying property taxes, that is a problem that hits all of us and is forcing people out of their homes. Back in the 1970’s, Vail Colorado was a small modest town with a ski resort where the people who worked at the resort also lived in town. No more. Those locals were forced out of town because of rising property value assessments because of property inflation secondary to demand from the very wealthy from out of town.
Property taxes is not a national problem but a state and local problem. It can be fairly solved: cap the assessed value at the time of sale. The only time the home can be reassessed is at the market value paid at title transfer. Homeowners should not be penalized for living in their homes and certainly not for improving their property.
Californians took it into their own hands in 1978 with Proposition 13. It is still enshrined in California law and if I were involved in state politics, it would be my first priority.
Jeremy Barlow on 26 Dec 2007 at 7:42 pm #
Having just left California, Proposition 13 has its drawbacks as well as its benefits, but the drawbacks far outweigh the benefits.
Having said that, the bigger concern in terms of following the money is:
following the post-congressional/legislative lobbying jobs that most elected officials take once they leave office.
The Democrats took a good first step towards ending this revolving door, but a better step would be a permanent legislative injunction on individuals who have been members of Congress becoming lobbyists.
Billy Tauzin, of course is the prime example, he got the drug companies the very bad Medicare Prescription Drug Benefit Plan, more appropriately known as the Drug Company Profit Protection and Exponential Profit Growth Act passed in the House, then left Congress and took a $2 million per year salary as the head of Pharma, the Drug companies lobbying arm in Washington.
Campaign contributions are only the tip of the iceberg in terms of the money that buys off Members of Congress.