For-profit insurers: how big a problem are they?

Health insurance in the US is dominated by for-profit insurers (in contrast, the hospital sector is dominated by non-profits). Several people on the political left in the US have condemned the insurers for making billions of dollars in profits while denying care, retroactively cancelling policies (aka recission), and not doing anything to control costs.

However, a Wall Street Journal article notes that average profits at publicly traded US insurance companies average in the 4% range. That's very low. If you introduced a public option, the article says it would only be able to undercut premiums for the for profit insurers by 4% or so - assuming it can achieve the same scale as the largest ones.

You will hear that insurers spend only about 83% of every dollar they receive in premiums on medical care - that's known as the medical loss ratio. The medical loss ratio is a very, very rough gauge of an insurer's efficiency - in fact, it's such a rough gauge that we should consider ignoring it entirely. The medical loss ratio includes profits, but it also includes the expenses that insurers spend managing care, combating fraud, and other administrative expenses. Medicare and Medicaid perform very well on a loss ratio standard, but they need to do much more in managing care, and they need to do more in fraud prevention.

Of course, the nature of for-profit business has led the insurers to seek aggressive tactics to preserve their bottom lines. As said earlier, they've conducted recissions and denied necessary care. They've also sought to enroll healthier people at the expense of other plans. They've been too quick to offer skimpier benefit packages, excluding such services as cancer care, mental health treatments, inpatient care and others, instead of becoming more efficient.

While insurers have invested in wellness, disease management and other care management initiatives that produce a return, but these innovations are dwarfed by their antisocial behavior.

Regardless of whether a publicly sponsored insurance plan is enacted in the US, Congress must take care that the rules of the game are stringent. Delivering efficient care must be the only way that insurers can compete. The rules of the marketplace must prohibit them from discriminating against the sick and selectively marketing to healthier people. There must be an adequate minimum benefit standard. I think that the for-profit insurers have skills and infrastructure that could be used to the nation's benefit, but the market place must be set up so that the ONLY thing they can do is to be more efficient at delivering care.