In Part 1 of “Paying for Primary Care”, actuary Gayle Brekke (mis)computed the provider side administrative cost burden of paying for primary care insurance at about 28%; in a response, I showed it likely that the true number was less than 9%, indicting that Brekke had inflated by more than three fold. Now we turn to Brekke’s Part 2, in which she raised (and compounded) the stakes by factoring in an additional 17.5% of primary care costs for insurer-side profit and other administrative expenses. I argue here that Brekke’s Part 2 analysis rests on some apparently mistaken assumptions about the nature and practical effect of the Affordable Care Act’s rules on Medical Loss Ratio (MLR). For insurer-side profit and administrative costs associated with paying for primary care with private insurance, Ms Brekke has yet again inflated reality by about three fold.
The Affordable Care Act sets a maximum allowed amount that private insurers can pass on to consumers for profit and other administrative expenses. That maximum is measured in relation to the amounts the insurers spend for medical care, its “medical losses”. In the employer insurance market on which Brekke bases her computation, insurers are required to maintain an MLR of 85% or greater. This allows them profit and other administrative expenses up to to 17.5% of their medical spend. Since non-profit insurers like Medicare and employer self-insurance have low insurer-side administrative costs (about 3% for all Medicare administrative costs), it is highly likely that somewhere between 60% and 80% of the actually usable share of potentially allowable non-MLR expenses reflects profits.
But roughly half of the people paying for primary care with FFS insurance are in non-profit plans (over 90 million in self-insured employer sponsored plans, over 30 million in traditional Medicare and over 25 million in fee for service Medicaid and CHIP). With just the one misstep of ignoring the diminished role of profit for these insurers, Brekke inflates potential insurer-side savings for the non-profit half of the market by about three-fold. And that misstep is one of many Brekke mistakes.
Within the for-profit half of the market, Brekke’s computation inflates insurer-side costs of primary care by assuming that insurers can realize the full allowable non-MLR share on every dollar of medical costs. But health insurers are currently in profit-constraining competition, even in the individual market, where prices have fallen for four consecutive years. One fairly large player in the individual and small group markets, Oscar, has never turned a profit. More broadly, a 2018 report by the National Association of Insurance Commissioners indicated that average company profits percentages were in the low single digits, (3.3% for 2018, 2.4% for 2017). Even in regard to the for-profit sector, Brekke is in the ballpark of a three-fold plus level of exaggeration.
Brekke herself explains that health insurance for the “big things” is warranted, and all DPC clinics advise subscribers to keep or acquire wrap-around coverage. Many significant contributors to insurer-side non-medical administrative costs, such as advertising, licenses, and governmental relations, are incurred on an enterprise-wide basis; others, like enrollment costs, some membership services, billing for premiums, are on a a per member or per policy basis.
In fact, for the individual and small group markets, CMS makes insurer payment adjustments of about $1.5 billion annually based on its determination that 17.5 % of MLR are attributable to those administrative costs (including profits) which are independent of claims. See rule at 81 FR 94058, at 94099 et seq. In those markets, MLR rules allows administrative costs of up 25% of MLR, suggesting a maximum 6.5% for the claims dependent component of insurer side administrative costs. For these markets, then, Brekke’s factoring in 17.5% of MLR would be a 2.7-fold exaggeration.
Administrative components are baked into all health insurance policy premiums for all policy holders, will barely budge if, say, any given number of policy holders move between a plan with a low enough deductible to effectively insure primary care and a high deductible plan that effectively excludes some coverage for primary care. Whether in the profit sector or the non-profit sector, insurer-side administrative costs that are actually salvable when PCPs ditch insurers are more or less limited to claims processing costs. A conservative estimate is that Medicare accomplishes that task for less 2.0%. Medicare pays carriers less than one dollar per adjudicated claim.
For the half of the insured in the for-profit world, based on the NAIC pegging average health insurance profit at 3.3%, 4.4 % would be a reasonably conservative estimate of profit on primary care medical spend; for the half insured with non-profits, the corresponding number is zero. The average insured patient being equally likely have for-profit or non-profit insurance, the expected value of potential insurer-side profit savings is fairly estimated at less than 2.2%. Adding that to the 2.0% in salvable insurer-side administrative costs, brings average insurer-side non-MLR costs to about 4.2%. Tack on another 25% to provide an additional margin of error, yields 5.25% and is well less than a third of the 17.5% Brekke computes. Once again, Brekke’s calculation seems to exaggerates by more than three-fold.
For Part 1, I computed provider-side administrative costs of insurance at 8.8% when an actually reasonable value of provider insurance overhead was substituted for Brekke’s first 3X+ exaggeration. Performing the second adjustment of Brekke’s methodology, but again substituting a more reasonable value (5.25%) for Brekke’s second 3X+ exaggeration, yields a net result of less than 15%.
Through two parts of Brekke’s four part analysis, using insurance to pay for primary care would seem to add less than 15% to costs, far less than the 50% Brekke hypothesizes.
In none of her four parts, by the way, does Brekke contemplate that a 15% (or even 50%) “vigorish” might pay for itself through the power of insurance companies to negotiate lower primary care pricing. In her own part 4, Brekke decries the economic power that insurers can exert on providers. To my mind, that power goes most of the way toward explaining why the $900 annual cost of adult primary care delivered through subscription-based no-insurance direct primary care exceeds by more than 50% the $565 annual primary care cost average for an adult paying under the insurance system come to half . I return to these considerations in a Part 5 response to Brekke’s Paying for Primary Care. When ready, it should appear at this link.
By the end of Part 2, still oblivious to the reality that direct primary care has proven more expensive than insured primary care, Brekke was still not done theorizing the exact opposite. Looking ahead to Part 3, in which she would apply her actuarial acumen to behavioral economics in the medical context , she promised to show us even more ways that using insurance increases the cost of primary care when compared to direct pay. Here’s my response. (Preview: the very behavioral economics and actuarial principles Brekke invokes throughout Parts 1 through 3 apply with greater force to unlimited free visit direct primary care than they do to insured primary care.)